Antitrust & Competition Policy Blog

Optimal Access Regulation with Downstream Competition

Posted by D. Daniel Sokol

Flavio Menezes (School of Economics, The University of Queensland), John Quiggin (School of Economics, The University of Queensland) and Tina Kao theorize Optimal Access Regulation with Downstream Competition.

ABSTRACT: We analyze the setting of access prices for a bottleneck facility where the facility owner also competes in the deregulated downstream market. We consider a continuum of market structures from Cournot to Bertrand. These market structures are fully characterized by a single parameter representing the intensity of competition. We first show how the efficient component pricing rule (ECPR) should be modified as the downstream competitive intensity changes. We then analyse the optimal access price where a regulator trades off production efficiency and pro-competitive effects to maximize total surplus.

Price Response, Asymmetric Information, and Competition

Posted by D. Daniel Sokol

Joshua Sherman and Avi Weiss (Bar-Ilan University) offer thoughts on Price Response, Asymmetric Information, and Competition.

ABSTRACT: We compare predictions from a theoretical model based on the structure of the main outdoor retail market in Jerusalem with the results of an empirical analysis of price response to changes in cost. We find that firms without adjacent competition exhibit both upward and downward price rigidity, an outcome we ascribe to asymmetric information between the consumer and the firm. Given that previous studies have focused on downward price rigidities of firms with market power, our findings highlight the importance of accounting for transitory information asymmetries between the consumer and the firm when studying price rigidity.

Collusion through joint R&D: An empirical assessment

Posted by D. Daniel Sokol

Tomaso Duso Duesseldorf Institute for Competition Economics, Heinrich-Heine University, Lars-Hendrik Roller, European School of Management and Technology (ESMT) and Jo Seldeslachts, University of Amsterdam and KU Leuven have an interesting paper on Collusion through joint R&D: An empirical assessment.

ABSTRACT: This paper tests whether upstream R&D cooperation leads to downstream collusion. We consider an oligopolistic setting where firms enter in research joint ventures (RJVs) to lower production costs or coordinate on collusion in the product market. We show that a sufficient condition for identifying collusive behavior is a decline in the market share of RJV-participating firms, which is also necessary and sufficient for a decrease in consumer welfare. Using information from the U.S. National Cooperation Research Act, we estimate a market share equation correcting for the endogeneity of RJV participation and R&D expenditures. We find robust evidence that large networks between direct competitors - created through firms being members in several RJVs at the same time - are conducive to collusive outcomes in the product market which reduce consumer welfare. By contrast, RJVs among non-competitors are efficiency enhancing.

On the Optimal Number of Firms in the Commons: Cournot vs Bertrand

Posted by D. Daniel Sokol

Davide Dragone, University of Bologna, Luca Lambertini, University of Bologna, Arsen Palestini, University of Rome La Sapienza and Alessandro Tampieri, University of Bologna provide thoughts On the Optimal Number of Firms in the Commons: Cournot vs Bertrand.

ABSTRACT: We revisit the debate on the optimal number of firms in the commons in a differential oligopoly game in which firms are either quantity- or price-setting agents. Production exploits a natural resource and involves a negative externality. We calculate the number of firms maximising industry profits, finding that it is larger in the Cournot case. While industry structure is always inefficient under Bertrand behaviour, it may or may not be so under Cournot behaviour, depending on parameter values. The comparison of private industry optima reveals that the Cournot steady state welfare level exceeds the corresponding Bertrand magnitude if the weight of the stock of pollution is large enough.

Productivity and the Product Scope of Multi-product Firms: A Test of Feenstra-Ma

Posted by D. Daniel Sokol

Horst Raff (University of Kiel, Germany) and Joachim Wagner (Leuphana University Lueneburg, Germany) analyze Productivity and the Product Scope of Multi-product Firms: A Test of Feenstra-Ma.

ABSTRACT: Feenstra and Ma (2008) develop a monopolistic competition model where firms choose their optimal product scope by balancing the profits from a new variety against the costs of “cannibalizing” sales of existing varieties. While more productive firms always have a higher market share, there is no monotonic relationship between firms’ productivity level and their choices of product scope. In the model having a higher market share means that firms are hurt more by the “cannibalization effect”. Therefore, the incentive to add more products weakens as productivity rises. This leads to Lemma 3 in Feenstra and Ma (2008): There is an inverted U-shaped relationship between firms’ productivities and the range of varieties they choose to produce. This empirical note takes this Lemma to the data for firms from German manufacturing industries. Empirical evidence is in line with the results from the theoretical model.

The Robustness of Exclusion in Multi-dimensional Screening

Posted by D. Daniel Sokol

Paulo Barelli (University of Rochester), Suren Basov (La Trobe University), Mauricio Bugarin (Insper Institute) and Ian King (University of Melbourne) explore The Robustness of Exclusion in Multi-dimensional Screening.

ABSTRACT: We extend Armstrong’s result on exclusion in multi-dimensional screening models in two key ways, providing support for the view that this result holds true in a large class of models and is applicable to many different markets. First, we relax the strong technical assumptions he imposed on preferences and consumer types. Second, we extend the result beyond the monopolistic market structure to some oligopoly settings. We illustrate the results with several examples and applications.

Why Some Platform Businesses Face Many Frivolous Antitrust Complaints and What to Do About It

Posted by D. Daniel Sokol

David Evans (Global Economics Group, U Chicago, UCL) explains Why Some Platform Businesses Face Many Frivolous Antitrust Complaints and What to Do About It.

ABSTRACT: In the last decade a number of internet-based multi-sided platforms have emerged that provide free services to, in some cases, millions of businesses. This article argues that under current norms in adversarial proceedings these platforms are likely to face large numbers of complaints in multiple jurisdictions, a substantial likelihood that at least one of these complaints will result in a false-positive decision against the platform, and material risk of a false-positive decision that results in catastrophic consequences. These effects result from a combination of business users of free services receiving a free litigation option they can pursue if they have any complaints; an adverse-selection problem that results from free services being particularly attractive to start-ups that do not have or want to invest capital in their businesses; and the sheer number of free-business users resulting in a high cumulative probability of at least one false-positive decision. After documenting these phenomena, this article argues that government policymakers, including competition authorities and courts, should adopt a heightened level of scrutiny concerning complaints from free business users. This heightened level of scrutiny is necessary to counteract the impact of excessive litigation on innovation by multi-sided platforms.

Plurality Regulations – Still a Wise Market Intervention?

Posted by D. Daniel Sokol

Robert Kenney (Communications Chambers) asks Plurality Regulations – Still a Wise Market Intervention?

ABSTRACT: Plurality rules have long been used to ensure diverse ownership of media, with the expectation that this leads to the availability of diverse news coverage to citizens, which in turn supports democratic discourse. In several countries there is current debate as to whether plurality rules need to be strengthened, and particularly so in the United Kingdom, where News' bid for Sky and the subsequent phone-hacking scandal have brought plurality issues to the fore. However, fundamental developments in the market mean that the costs of plurality interventions are rising, and the benefits are falling. This paper examines how the costs and benefits of plurality regulation are changing, using the United Kingdom as a case study.

Media Plurality: Under the Skin of Control - Concept, Context, and Reform

Posted by D. Daniel Sokol

Antonio Bavasso (A&O) discusses Media Plurality: Under the Skin of Control - Concept, Context, and Reform.

ABSTRACT: The concept of media plurality has achieved a remarkable degree of prominence recently, particularly in the United Kingdom and more generally in Europe. This article looks at the U.K. experience and, on that basis, it aims to illustrate how the legal concept and policy aims have been affected by transformational effects of new media forms. The first section considers the current regulatory regime applicable to traditional media and the concept of media plurality the regime aims to protect, and illustrates the wide range of interventions already in place. The second section argues for the importance of judging the plurality of media, and thus the need for any further intervention, on the basis of a cross-media assessment, rather than taking individual types of media in isolation. The third section considers how technological developments are shaping the outlook for media plurality today. Based on this analysis, I question whether the regulatory regime relating to plurality requires either a major overhaul and/or the emphasis that it currently attracts in the regulatory reform agenda. On the other hand, it seems clear that we need to remain vigilant about new and more subtle forms of influence on public discourse that flow from the evolving methods of news distribution and consumption.

Antitrust and Nonexcluding Ties

Posted by D. Daniel Sokol

Herb Hovenkamp has written on Antitrust and Nonexcluding Ties.

ABSTRACT: Notwithstanding hundreds of court decisions and scholarly articles, tying arrangements remain enigmatic. Conclusions that go to either extreme, per se legality or per se illegality, invariably make simplifying assumptions that frequently do not obtain. For example, by ignoring double marginalization or tying product price cuts it becomes very easy to prove that a wide-range of ties are anticompetitive. At the other extreme, by ignoring foreclosure possibilities one can readily conclude that ties are invariably benign. Even when one considers consumer welfare alone, the great majority of ties very likely are competitively benign, with a few exceptions that involve realistic threats of anticompetitive foreclosure.

Tying–Still a Competitive Evil

Posted D. Daniel Sokol

Peter Carstensen (Wisconsin) argues Tying–Still a Competitive Evil.

ABSTRACT: This article examines the unavoidable adverse effects on consumer choice, consumer prices, and competition in the market for the tied (as well as the tying good) that necessarily result from unjustified tying by any firm with any appreciable capacity to affect competition in the markets for either good. My thesis is not that all tying is or should be absolutely illegal, but rather it ought to remain presumptively illegal and should be condemned after only a "quick look" unless the defendant can plead and prove a legitimate justification, i.e., one that does not involve primarily exploiting customers or excluding competitors.

Brantley Versus NBC Universal: Where’s the Beef?

Posted by D. Daniel Sokol

Dennis Carlton (U Chicago) and Michael Waldman (Cornell) ask Brantley Versus NBC Universal: Where’s the Beef?

ABSTRACT: As with other important cases involving firms such as Kodak and Microsoft, the recent Brantley case raises interesting questions concerning appropriate antitrust policy in situations where firms practice a form of tying. Such cases are particularly difficult from an antitrust perspective because tying is pervasive in the economy and in many cases-actually probably most-the tying behavior has an efficiency justification. Even in cases where the justification may not be efficiency, as might occur in some instances where tying enables price discrimination, the practice may have nothing to do with harming competition. So the difficult issue faced by the courts in analyzing tying under the antitrust laws is to prohibit tying which harms competition and welfare without prohibiting tying that has an efficiency justification and thus improves welfare or where tying has a justification that is unrelated to harming competition. In this short paper we discuss the specific issues raised by the Brantley case. We begin by describing the case in more detail and then discuss the relevant economic theories that have been developed to understand the type of tying behavior practiced in the case. We then discuss appropriate antitrust policy and end with a concluding discussion.

Broadband Internet and Firm Entry: Evidence from Rural Iowa

Posted by D. Daniel Sokol

Younjun Kim and Peter Orazem (Iowa State) examine Broadband Internet and Firm Entry: Evidence from Rural Iowa.

ABSTRACT: The availability of broadband Internet service should have increased firm productivity and lowered firm entry costs. However, validating the broadband effect is complicated by the rapid deployment of broadband Internet service across metropolitan areas, removing meaningful variation in broadband availability. Deployment in rural markets was much more uneven, suggesting that the presence or absence of broadband service may have altered the site selection of firms targeting rural markets. We investigate the effect of broadband availability on firm location decision in rural Iowa. We establish a counterfactual baseline firm entry rate for each zip code area in rural counties by showing how the presence of broadband service in a ZIP code in 2001 affected firm entry in 1990-1992 before Broadband was available. We then measure how the actual presence of broadband service in the same ZIP code affected firm entry in 20! 00-2002. We show that the difference in estimated probability of entry between the counterfactual baseline and the actual response ten years later is the Difference-in-Differences estimate of the effect of broadband deployment on firm start-ups. We find that broadband availability in a rural ZIP code has a positive and significant effect on firm entry in the ZIP code but only in rural markets adjacent to a metropolitan area or with a larger urban population. Broadband access does not affect new firm entry in more remote rural markets.

The economics of two-sided payment card markets: pricing, adoption and usage

Posted by D. Daniel Sokol

James McAndrews (Federal Reserve Bank of New York) and Zhu Wang (Federal Reserve Bank of Richmond) describe The economics of two-sided payment card markets: pricing, adoption and usage.

ABSTRACT: This paper provides a new theory for two-sided payment card markets. Adopting payment cards requires consumers and merchants to pay a fixed cost, but yields a lower marginal cost of making payments. Analyzing adoption and usage externalities among heterogeneous consumers and merchants, our theory derives the equilibrium card adoption and usage pattern consistent with empirical evidence. Our analysis also helps explain the card pricing puzzles, particularly the high and rising merchant (interchange) fees. Based on the theoretical framework, we discuss socially desirable payment card fees as well as the interchange fee cap regulation.

Consumer confusion over the profusion of eco-labels: lessons from a double differentiation model

Posted by D. Daniel Sokol

Dorothee Brecard (LEMNA) presents Consumer confusion over the profusion of eco-labels: lessons from a double differentiation model.

ABSTRACT: How are eco-label strategies affected by consumer confusion arising from the profusion of eco-labels? This article provides a theoretical insight into this issue using a double differentiation framework. We assume that consumers perceive a label as a sign of quality compared to an unlabeled product, but that they can't distinguish the environmental quality associated with each label. They only perceive each label as a particular variety of the product. We deduce preferences for two types of label: a health label and an eco-label. We analyze pricing strategies of three firms each providing one product: a health labeled, eco-labeled or an unlabeled product. We infer lessons for eco-labeling policies, through effects of ecolabeling on welfare components, according to the identity of the certifying organization: the regulator, who aims at enhancing welfare, an NGO, which attempts to enhance the quality of the environment, an! d the firms, which seek to maximize their profits. We show that the firm supplying the eco-labeled product is weakened by consumer confusion while the firms selling the unlabeled product suffers from strict labels, to the benefit of the firm supplying the health labeled product. All label policies imply, whatever the certifying organization, high identical environmental quality of the labeled products, which leads to a reduction in the market share of the unlabeled product or even to its extinction.

Value-Based Differential Pricing: Efficient Prices for Drugs in a Global Context

Posted by D. Daniel Sokol

Patricia M. Danzon, University of Pennsylvania - Health Care Systems Department; National Bureau of Economic Research (NBER), Adrian Towse, Office of Health Economics and Jorge Mestre-Ferrandiz discuss Value-Based Differential Pricing: Efficient Prices for Drugs in a Global Context.

ABSTRACT: This paper analyzes pharmaceutical pricing between and within countries to achieve second best static and dynamic efficiency. We distinguish countries with and without universal insurance, because insurance undermines patients’ price sensitivity, potentially leading to prices above second-best efficient levels. In countries with universal insurance, if each payer unilaterally sets an incremental cost effectiveness ratio (ICER) threshold based on its citizens’ willingness to pay for health; manufacturers price to that ICER threshold; and payers limit reimbursement to patients for whom a drug is cost-effective at that price and ICER, then the resulting price levels and use within each country and price differentials across countries are roughly consistent with second best static and dynamic efficiency. These value-based prices are expected to differ cross-nationally with per capita income and be broadly consistent with Ramsey Optimal Prices. Countries without comprehensive insurance avoid its distorting effects on prices but also lack financial protection and affordability for the poor. Conditions for efficient pricing in these self-pay countries include that consumers are well-informed about product quality and firms can price discriminate between rich and poor subgroups within and between countries.

Merger Control Under China's Anti-Monopoly Law

Posted by D. Daniel Sokol

I have a new paper on merger control under the AML based on a unique empirical survey. Download D. Daniel Sokol (University of Florida, University of Minnesota) Merger Control Under China's Anti-Monopoly Law.

ABSTRACT: This paper explores the factors that drive merger outcomes under China's Anti-Monopoly Law (AML). The paper overcomes the problem of a small number of published merger decisions through a unique practitioner survey of antitrust lawyers across multiple jurisdictions. This survey captures transactions contemplated, but never undertaken (deterred by the merger regime), as well as mergers notified for approval under the AML. The survey allows for broader inferences to be drawn about the development of Chinese antitrust. These include: the welfare standard used in merger analysis, what industrial policy and other political factors may impact merger enforcement, as well as issues of institutional design, transparency, and delay.

Merger Policy for Small and Micro Jurisdictions

Posted by D. Daniel Sokol

Michal Gal (Haifa) has an interesting paper on Merger Policy for Small and Micro Jurisdictions.

ABSTRACT: The wide-spread adoption of merger regulations all around the globe raises the question of whether there is a one-size-fits-all merger policy, or whether some jurisdictions' economic characteristics affect their ability to effectively apply a merger policy in a way which requires some fine-tuning. This question, which generates interesting scholarly and practical debates, is addressed in this paper, focusing on small and on micro jurisdictions. The latter, in particular, bring some of the tradeoffs involved in the design of merger policy to an extreme and provide an interesting and under-explored case study.

Two forces push and pull merger policy. On the one hand, the "follower push" whereby jurisdictions- mostly small, developing or young- benefit from transplanting and following the laws of large, developed jurisdictions with efficient and effective merger regimes. The follower push is often comprised of both internal and external forces. On the other hand, the "unique characteristics pull" whereby the characteristics of a jurisdiction affect its ability to effectively enforce a transplanted law and pull towards adopting a merger policy that best fits its characteristics. Designing a merger law mandates each jurisdiction to find its optimal balance between these two forces and may vary from one jurisdiction to another, depending, inter alia, on the jurisdiction's trade ties and the effectiveness of its enforcement system. Yet these forces do not necessarily lead in different directions; Rather, many parts of a merger regime may fit both the follower and the followed jurisdictions (e.g., adopting a Significant Lessening of Competition test as a benchmark for merger illegality). The challenge is to identify those instances in which the unique characteristics pull leads in a different direction and is stronger than the follower push and to design rules accordingly.

Chapter I briefly explores the two forces noted above. The following chapters focus on the "unique characteristics pull." Chapter II introduces the methodology. Chapter III then explores the effects of the unique characteristics of small size on merger policy. This paper attempts to carry the analysis one step further than that previously performed by the author by proposing a methodological framework to assist in the analysis and by focusing on aspects not previously explored. Chapter IV performs such an analysis for micro economies, a subject which so far has been largely neglected in the literature. Of course, dealing with all aspects of merger policy in such jurisdictions is beyond the scope of a short paper, but some relevant observations and suggestions are offered, based on theoretical observations as well as real-world examples.

The Dynamics of Gasoline Prices: Evidence from Daily French Micro Data

Posted by D. Daniel Sokol

Erwan Gautier (LEMNA) and Ronan Le Saout (ENSAE) discuss The Dynamics of Gasoline Prices: Evidence from Daily French Micro Data.

ABSTRACT: Using millions of individual gasoline prices collected at a daily frequency, we examine the speed at which market refined oil prices are transmitted to consumer liquid fuel prices. We find that on average gasoline prices are modified once a week and the distribution of price changes displays a M-shape as predicted by an adjustment cost model. Using a reduced form statedependent pricing model with time-varying random thresholds, we find that the degree of pass through of wholesale prices to retail gasoline prices is on average 0:77 for diesel and 0:67 for petrol. The duration for a shock to be fully transmitted into prices is about 10 days. There is no significant asymmetry in the transmission of wholesale price to retail prices.

King's College Looking to Expand Competition Law Faculty

Posted by D. Daniel Sokol

See the details for the position (Reader/Senior Lecturer/Lecturer) at King's College Dickson Poon School of Law. Competition law candidates should contact Chris Townley or Alison Jones. Kings is among the strongest competition law faculties in the UK and this is a plumb position.