Antitrust & Competition Policy Blog

Pharmaceutical Patents, Settlements, "Reverse Payments," and Exclusion

Posted by D. Daniel Sokol

John P. Bigelow (Princeton Economics Group) discusses Pharmaceutical Patents, Settlements, "Reverse Payments," and Exclusion.

ABSTRACT: Cases involving pharmaceuticals settlements to patent litigation with so called "reverse payments" or, as the FTC now prefers to call them, "exclusion payments" have been a source of controversy for some time. The FTC has been fighting these agreements since 2000 on the antitrust grounds that they are agreements between horizontal competitors not to compete. Although the FTC had some early successes, the issue is likely to be an increasing source of frustration to the commission as the trend in appellate decisions has turned against them. The most recent rebuke came in April in the Eleventh Circuit's decision in the Androgel case, where the court articulated (or rearticulated) a rule that protects these settlements from challenge so long as the terms of the settlement are confined to the nominal life of the patent.

Resale price maintenance and manufacturer competition for retail services

Posted by D. Daniel Sokol

Matthias Hunold (ZEW) and Johannes Muthers (Wurzburg) discuss Resale price maintenance and manufacturer competition for retail services.

ABSTRACT: We investigate the incentives of manufacturers to use resale price maintenance (RPM) when selling products through common retailers. In our model retailers provide product specific pre-sales services. If the competitive retail margins are low, each manufacturer fixes a minimum price to induce favorable retail services. With symmetric manufacturers, products are equally profitable in equilibrium and no product is favored as without RPM, but retail prices are higher. We show that minimum RPM can create a prisoner's dilemma for manufacturers without increasing, and possibly even decreasing the overall service quality. This challenges the service argument as an efficiency defense for RPM.

NY State Bar Association Antitrust Section Summer program for summer associates, law students and young lawyers July 9

Posted by D. Daniel Sokol

Every summer, the New York State Bar Association Antitrust Section hosts an informative program for summer associates, law students and young lawyers. The program assembles a panel of practitioners who graduated in the last ten years, including junior attorneys from law firms and antitrust enforcement agencies, who discuss what led them to antitrust law; provide details on the types of cases, transactions or other antitrust work they have handled; and offer insight into optimal positioning to capture a job in the field. A portion of the program is allotted for questions and comments. All summer and junior associates currently or interested in working in New York are invited. This year's program is July 9 at the offices of Sullivan & Cromwell, 125 Broad Street in Manhattan. Breakfast will be served at 9 am and the panel discussion will begin at 9:30. The program is free of charge.

Leaving the Door Ajar: Nonlinear Pricing by a Dominant Firm

Posted by D. Daniel Sokol

Philippe Chone (CREST) and Laurent Linnemer (CREST) describe Leaving the Door Ajar: Nonlinear Pricing by a Dominant Firm.

ABSTRACT: An incumbent firm and a buyer agree on a price-quantity schedule before the buyer negotiates with a rival firm. The rival’s efficiency and the share of the buyer’s demand he can address are unknown when the schedule is chosen. Incomplete information yields inefficient exclusion. We link the slope and the curvature of the optimal tariff to the distribution of the uncertainty, and investigate whether foreclosure is complete or partial. When the buyer’s disposal costs are finite, she might buy more than needed with the sole purpose of qualifying for rebates, which limits the extent of inefficient exclusion. Conditional tariffs make it possible for the incumbent to overcome the opportunism problem and to exclude very efficient competitors.

Market Power: How Does it Arise? How is it Measured?

Posted by D. Daniel Sokol

Lawrence J. White (NYU) asks Market Power: How Does it Arise? How is it Measured?

ABSTRACT: Market power – how it arises, and how it is measured – is an important topic for the economics field of “industrial organization” (IO). It is also an important topic for managers and for managerial economics, since it can be related to sustainable advantage for a company and it is usually at the center of antitrust cases in which a company may be involved. This chapter defines market power, discusses how it arises, and describes the various methods that have been used for empirically detecting and measuring it. Attention is also given to the role and measurement of market power in important antitrust contexts.

DESIGNING APPROPRIATE REMEDIES FOR COMPETITION LAW ENFORCEMENT: THE PIONEER FOODS SETTLEMENT AGREEMENT

Posted by D. Daniel Sokol

Tembinkosi Bonakele and Liberty Mncube, SA Competition Commission & UJ) describe DESIGNING APPROPRIATE REMEDIES FOR COMPETITION LAW ENFORCEMENT: THE PIONEER FOODS SETTLEMENT AGREEMENT.

ABSTRACT: This article critically discusses the use of remedies in pursuing distributive justice through the restoration of competition, deterrence, and disgorgement. We address more specifically the design and objectives of the Pioneer Foods settlement agreement. The remedies that were concluded with Pioneer Foods constitute a major measure of “success” in the enforcement of competition law in developing countries. They included, among others, an administrative fine, part of which by agreement was set aside for the creation of an Agro-processing Competitiveness Fund aimed at lowering the barriers to entry, as well as a commitment to reduce prices on the sale of flour and bread over an agreed period designed to stimulate rivalry while at the same time enabling smaller non-vertically integrated participants to compete in bread. We also demonstrate the impact of the discount remedy, using a comparative approach.

PRIVATE ANTITRUST LITIGATION IN GERMANY FROM 2005 TO 2007: EMPIRICAL EVIDENCE

Posted by D. Daniel Sokol

Sebastian Peyer (University of East Anglia) has an interesting new article on PRIVATE ANTITRUST LITIGATION IN GERMANY FROM 2005 TO 2007: EMPIRICAL EVIDENCE.

ABSTRACT: The European Commission seeks to reform antitrust damages actions for the violation of EU competition law to remove obstacles that prevent successful compensation claims. The policy and adjacent debate are based on the assumptions that very few successful private antitrust actions exist in Europe and that the present obstacles to successful damages litigation necessitate changes in the legal frameworks of the Member States. However, empirical evidence for the assumptions about the nature and magnitude of competition litigation is rare and, with respect to civil law jurisdictions, virtually non-existent. In this article, I contrast some of the main beliefs that underpin European private antitrust policy with findings from an empirical study of private antitrust litigation in Germany. The article demonstrates that the propositions as to the state and nature of private antitrust litigation only partially hold true. Antitrust litigation is more complex than the focus on one single remedy—antitrust damages actions—suggests.

VERTICAL PRICE TRANSMISSION IN DIFFERENTIATED PRODUCT MARKETS: A DISAGGREGATED STUDY FOR MILK AND BUTTER

Posted by D. Daniel Sokol

THORE HOLM, JENS-PETER LOY and CARSTEN STEINHAGEN (all Department of Agricultural Economics, University of Kiel) examine VERTICAL PRICE TRANSMISSION IN DIFFERENTIATED PRODUCT MARKETS: A DISAGGREGATED STUDY FOR MILK AND BUTTER.

ABSTRACT: The retail business is often blamed for employing market power to enforce higher margins. Since 2007 milk markets worldwide have been in turmoil and this public debate flared up again. Only very few papers have addressed the issue by investigating the dynamic pricing process of individual retailers. In this paper variations in vertical price adjustment (cost pass through) between retail and whole sale prices for differentiated milk and butter products (brands) for different (individual) retail outlets in the German market from 2005 to 2008 are analyzed on a weekly basis. The results indicate significant asymmetric price adjustments; however, the starting hypothesis that asymmetric price adjustments are used more excessively by/for stronger brands has to be reconsidered.

On the LIBOR cartel front and Why and How Should the Libor Be Reformed?

Posted by D. Daniel Sokol

News on LIBOR is that Barclays has agreed to pay $450 million. See here for the CFTC Order.

There is a very good new working paper on LIBOR. Rosa M. Abrantes-Metz Global Economics Group, LLC; New York University - Leonard N. Stern School of Business - Department of Economics has written Why and How Should the Libor Be Reformed?

ABSTRACT: Over the last year, large-scale investigations have been launched around the world on allegations of possible collusion and manipulation of the London Interbank Offered Rate (“Libor”). The Libor has been called “the world’s most important number.” It is a primary benchmark for global short-term interest rates; the Libor is used as the basis for settlement of interest rate contracts on many of the world’s major futures and options exchanges as well as most over-the-counter and lending transactions with an estimated value of U.S. $350-$400 trillion contracts, instruments and transactions referencing it. The Libor is supposed to measure the rate at which large banks can borrow unsecured funds from other banks at various short-term maturities, and for a variety of currencies. The U.S. dollar-denominated Libor, for example, was set as follows until recently: On a daily basis, the 16 participating banks are surveyed by the British Bankers Association (BBA) and submit sealed quotes which answer: “[a]t what rate could you borrow funds, were you to do so by asking for and then accepting interbank offers in a reasonable market size just prior to 11:00 a.m. London time?” The Libor is then computed by averaging over the middle eight quotes and disregarding the four highest and the four lowest. Following the launch of these investigations and the discovery of documents which suggest that manipulation and collusion may have taken place, some are now calling for a comprehensive reform of the Libor. Still others, however, are reluctant to reform the Libor system, arguing that it is not fundamentally broken and reforms may prove more disruptive than helpful. In this article I review what I believe are the inherent problems in the structure of the Libor process and put forward a proposal for its reform.

Combined Effects of Load Factors and Booking Time on Fares: Insights from the Yield Management of a Low-Cost Airline

Posted by D. Daniel Sokol

Marco Alderighi (University of Valle d’Aosta), Marcella Nicolini (Department of Economics and Business, University of Pavia and Fondazione Eni Enrico Mattei, Milan),and Claudio A. Piga (Department of Economics, Loughborough University and Rimini Centre Economic Analysis) discuss Combined Effects of Load Factors and Booking Time on Fares: Insights from the Yield Management of a Low-Cost Airline.

ABSTRACT: Based on two strands of theoretical research, this paper provides new evidence on how fares are jointly affected by in-flight seat availability and purchasing date. As capacity-driven theories predict, it emerges that fares monotonically and substantially increase with the flights occupancy rate. Moreover, as suggested in the literature on intertemporal price discrimination, the adoption of advance purchase discounts is widespread as the departure date nears, but it may be part of a U-shaped temporal profile, where discounts are preceded by periods of relatively higher fares. Finally, the intervention of yield management analysts appears to play a substantial role.

A Competition Law for Hong Kong

Posted by D. Daniel Sokol

Marc Waha & Julienne Chang (Norton Rose) have posted A Competition Law for Hong Kong.

ABSTRACT: The Competition Ordinance 2012 was adopted by the Hong Kong Legislative Council on June 14 and signed into law by the Chief Executive on June 21.[1] The Ordinance represents a major milestone on the way towards comprehensive competition policy reform in Hong Kong. It establishes a Competition Commission with wide-ranging investigative powers and a Competition Tribunal that can apply severe sanctions. Many forms of competition restrictions that were hitherto tolerated are prohibited under the law.

But the adoption of the Ordinance, while a significant step, is not the last one. The Ordinance will enter into force at a date to be set by the Secretary for Commerce. The Administration has indicated that the institutional provisions would take effect first to allow for the establishment of the new authorities, with the substantive provisions of the Ordinance becoming effective later, presumably after initial enforcement guidelines are issued by the Competition Commission. The Commission is required to consult the public on proposed guidelines. As a result, it would be surprising if the new competition regime were to become effective before 2014.

A brief description of the tortuous legislative history may shed some light on the challenges ahead for the Competition Commission. This is the focus of our first section. The following sections describe the scope of the Ordinance and its enforcement mechanisms.

Competing for Customers in a Social Network

Posted by D. Daniel Sokol

Pradeep Dubey (Center for Game Theory, Stony Brook University), Rahul Garg (Opera Solutions, India) and Bernard De Meyer (CERMSEM, Universite Paris 1) address Competing for Customers in a Social Network.

ABSTRACT: There are many situations in which a customer’s proclivity to buy the product of any firm depends not only on the classical attributes of the product such as its price and quality, but also on who else is buying the same product. Under quite general circumstances, it turns out that customers’ influence on each other dynamically converges to a steady state. Thus we can model these situations as games in which firms compete for customers located in a "social network." A canonical example is provided by competition for advertisement on the web. Nash Equilibrium (NE) in pure strategies exist in general. In the quasi-linear version of the model, NE turn out to be unique and can be precisely characterized. If there are no a priori biases between customers and firms, then there is a cut-off level above which high cost firms are blockaded at an NE, while the rest compete uniformly throughout the network. Otherwise there is a! tendency towards regionalization, with firms dominating disjoint territories. We also explore the relation between the connectivity of a customer and the money firms spend on him. This relation becomes particularly transparent when externalities are dominant: NE can be characterized in terms of the invariant measures on the recurrent classes of the Markov chain underlying the social network. Finally we consider convex (instead of linear) cost functions for the firms. Here NE need not be unique as we show via an example. But uniqueness is restored if there is enough competition between firms or if their valations of clients are anonymous.

Antitrust in Innovative Industries: the Optimal Legal Standards

Posted by D. Daniel Sokol

Giovanni Immordino (Salerno) and Michele Polo )Bocconi) theorize on Antitrust in Innovative Industries: the Optimal Legal Standards.

ABSTRACT: We study the interaction between a firm that invests in research and, if successful, undertakes a practice to exploit the innovation, and an enforcer that sets legal standards, fines and accuracy. In innovative industries deterrence on actions interacts with deterrence on research. A per-se legality rule prevails when the practice increases expected welfare, moving to a discriminating rule combined with type-I accuracy for higher probabilities of social harm. Moreover, discriminating rules should be adopted more frequently in traditional industries than in innovative environments; patent and antitrust policies are substitutes; additional room for per-se (illegality) rules emerges when fines are bounded.

Vulnerable Markets

Posted by D. Daniel Sokol

David Mayer-Foulkes (CIDE, Mexico) identifies Vulnerable Markets.

ABSTRACT: A production market with given preferences, technology and competition technology is vulnerable if it admits both perfect competition and monopoly or oligopoly. Under decreasing returns, the combination of sunk costs and a potential for monopoly profits can be sufficient basis for vulnerability, allowing a large agent to establish monopoly by installing enough productive capacity. The monopolist deters entry by threatening to oversupply the market. The threat is credible if the future discount rate is low enough and if reputation dynamics do not invite a slow loss of market power. Vulnerable markets allow financial institutions to concentrate ownership for profit.

Salience and Consumer Choice

Posted by D. Daniel Sokol

Pedro Bordalo (Royal Holloway), Nicola Gennaioli (CREI and Universitat Pompeu Fabra) and Andrei Shleifer (Harvard) explain Salience and Consumer Choice.

ABSTRACT: We present a theory of context-dependent choice in which a consumer's attention is drawn to salient attributes of goods, such as quality or price. An attribute is salient for a good when it stands out among the good's characteristics, in the precise sense of being furthest away in that good from its average level in the choice set (or more generally, an evoked set). A local thinker chooses among goods by attaching disproportionately high weights to their salient attributes. When goods are characterized by only one quality attribute and price, salience tilts choices toward goods with higher ratios of quality to price. We use the model to account for a variety of disparate bits of evidence, including decoy effects in consumer choice, context-dependent willingness to pay, balance of qualities in desirable goods, and shifts in demand toward low quality goods when all prices in a category rise. We then apply the model to study discounts and sales, and to explain demand for low deductible insurance.

Vertical integration, knowledge disclosure and decreasing rival's cost

Posted by D. Daniel Sokol

Chrysovalantou Liou (Athens University of Economics) and Emmanuel Petrakis (University of Crete) analyze Vertical integration, knowledge disclosure and decreasing rival's cost.

ABSTRACT: We study vertical integration incorporating the fact that it creates the possibility of knowledge disclosure. We consider a setting where, through integrating, an upstream monopolist learns its downstream partner’s innovation, and can disclose it to its downstream rival. We show that a vertically integrated firm chooses to fully disclose its knowledge to its downstream rival. Knowledge disclosure intensifies downstream competition but, at the same time, expands the downstream market size. We also show that, due to knowledge disclosure, vertical integration increases firms’ innovation incentives, consumer and total welfare, and decreases, instead of raises, the rival’s cost.

Switching Costs and Equilibrium Prices

Posted by D. Daniel Sokol

Luis Cabral (NYU) explores Switching Costs and Equilibrium Prices.

ABSTRACT: In a competitive environment, switching costs have two effects. First, they increase the market power of a seller with locked-in customers. Second, they increase com- petition for new customers. I provide conditions under which switching costs decrease or increase equilibrium prices. Taken together, the suggest that, if markets are very com- petitive to begin with, then switching costs make them even more competitive; whereas if markets are not very competitive to begin with, then switching costs make them even less competitive. In the above statements, by "competitive" I mean a market that is close to a symmetric duopoly or one where the sellers' discount factor is very high.

Reinvigorated Merger Enforcement in the Obama Administration

Guest Post by Jonathan B. Baker & Carl Shapiro

In a book chapter we presented at a 2007 conference and published in 2008, and a subsequent
article responding to criticism, we discussed trends in agency merger enforcement based on enforcement data, a practitioner survey, and public information on selected individual merger investigations.  We are writing now to update the enforcement data and analyze its recent trends.

Merger enforcement data must be interpreted with caution, since the mix of deals for which HSR filings are made changes over time, and since no analysis of overall enforcement data can speak to the merits of any specific merger.  With respect to the enforcement data, our key statistic was the ratio of agency enforcement actions to HSR filings. We interpreted a low figure as indicating an unanticipated recent decrease in merger enforcement, and a large and sustained dip to a level
below the historical norm as reflecting substantially more lax merger enforcement.  We concluded that merger enforcement at DOJ during the first term of the George W. Bush administration and the first half of the second term was surprisingly low, even after accounting for expectations that a new Republican administration would resolve close cases more in favor of permitting mergers than would the prior Democratic administration.  The depressed enforcement level at DOJ was comparable to the low rate observed at that same agency during the second term of the Reagan administration. By contrast, we described the FTC enforcement rate during the Bush administration as close to
the historical average during the first term and only somewhat depressed during the second term.

We now have data on merger enforcement during the first two years of the Obama administration, long enough to make a preliminary comparison. (For reasons discussed in our articles, FY 2009 is attributed to the Bush administration, just as FY 2001 was attributed to the Clinton administration.) The table below also updates the Bush second term data to include the last two years. Our article gives two benchmarks: the historical norm, with 1.8% of HSR filings leading to enforcement actions, and severely reduced enforcement at a 0.75% rate.

                                                            DOJ                 FTC    

Bush 1^st term (FY 2002-05)               0.75%              1.5%

Bush 2^nd term (FY 2006-09)               0.9%                1.25%

Obama 1^st term (FY 2010-11)^p           1.5%               1.5%

(p = preliminary; based on data from only two years)

These data show a clear change of course at DOJ, from severely lax merger enforcement during the Bush administration to a level during the Obama administration that we described as close to the historical average when previously discussing the Bush-era FTC figures. The higher DOJ enforcement
rate took place notwithstanding expectations that the Obama DOJ would be more enforcement-oriented than was the Bush DOJ.
 
In contrast, FTC enforcement rates remained on a relatively even keel. The main story here is at the DOJ, where the data provide clear evidence that the Obama administration reinvigorated merger enforcement, as it set out to do.

Disclosure: both authors worked in the government during the Obama administration. Baker was Chief Economist at the Federal Communications Commission from 2009-2011.  Shapiro was the Deputy Assistant Attorney General for Economics in the Antitrust Division of the DOJ from 2009-2011 and a Member of the President’s Council of Economic Advisors from 2011-12.

Determinants of Antimonopoly Policy Effectiveness in Transition Economies

Posted by D. Daniel Sokol

Aldash Aitzhanov, Agency of the Republic of Kazakhstan for Competition Protection discusses Determinants of Antimonopoly Policy Effectiveness in Transition Economies.

ABSTRACT: The paper explores what factors influence an effectiveness of antimonopoly policy in transition economies on a local (territorial) level. The empirical evidence on national level suggests that an effective implementation of antimonopoly policy depends mostly on a number of macroeconomic factors. However, an enforcement role of antimonopoly bodies and a specific of regional level are not studied. To investigate the relationship between, firstly, an antimonopoly authority’s activity output and, secondly, local economic factors and the effectiveness of antimonopoly policy a survey of 151 top officials of 89 local antimonopoly offices and an ordinary least-squares linear regression across 89 local regions in Russia and Kazakhstanare used. The results indicate that on local level an openness of local economy matters as on national, however, a size of local economy and an intensity of local competition do not matter. Furthermore, the effectiveness of antimonopoly policy in transitional economies is empirically associated with the active stance against anticompetitive agreements (positively) and an abuse of a dominant position of market power (negatively). Additionally, a size of fines administrated by antimonopoly authorities positively influences the effectiveness of the policy.

Is Pepsi Really a Substitute for Coke? Market Definition in Antitrust and IP

Posted by D. Daniel Sokol

Mark A. Lemley, Stanford Law School and Mark P. McKenna, Notre Dame Law School address Is Pepsi Really a Substitute for Coke? Market Definition in Antitrust and IP.

ABSTRACT: Antitrust law explicitly depends on market definition. Many issues in IP law also depend on market definition, though that definition is rarely explicit.

Applying antitrust's traditional market definition to IP goods leads to some startling results. Despite the received wisdom that IP rights don't necessarily confer market power, a wide array of IP rights do exactly that under traditional antitrust principles. This result requires us to rethink both the overly-rigid way we define markets in antitrust law and the competitive consequences of granting IP protection. Both antitrust and IP must begin to think realistically about those consequences, rather than falling back on rigid formulas or recitation of the mantra that there is no conflict between IP and antitrust.