Friday, October 25, 2013
Claudio Agostini (Universidad Adolfo Ibanez), Eduardo Saavedra (Universidad Alberto Hurtado), and Manuel Willington (Universidad Adolfo Ibanez) analyze ECONOMIES OF SCALE AND MERGER EFFICIENCIES IN THE CHILEAN PENSION FUNDS MARKET.
ABSTRACT: Over the last twenty years there has been a significant concentration process in the pension fund manager industry in Chile (the number of firms has dropped from 21 in 1994 to only 6 in 2012). A major concern about the concentration of this industry is that firms might be able to exercise market power. However, significant efficiency gains could result from this concentration process, especially if there are economies of scale present in the industry. The welfare effect of a merger is, therefore, ambiguous. In this article, we estimate the welfare implications of a merger between two medium-sized pension fund managers in Chile. For this purpose, we estimate the size of the economies of scale in this industry and use the results to simulate the merger using a simple imperfect competition model. The estimations, based on quarterly financial information about the Chilean Pension Funds system for the last eight years, show robustly the presence of significant economies of scale in operating costs. The merger simulation indicates that, despite the cost savings, the merger would induce a small price increase. This effect reduces consumer welfare, but aggregate welfare increases because of the efficiency gains from the economies of scale. Since aggregate elasticity in this industry is zero (because affiliation is compulsory), the price increase does not generate any efficiency loss.
Raimundo Soto, Universidad Catolica de Chile discusses COLLUSION IN PRIVATE HEALTH INSURANCE COVERAGE IN CHILE: A COMMENT.
ABSTRACT: In an article published in 2011 by the Journal of Competition Law & Economics entitled “Collusion on Private Health Insurance Coverage in Chile,” Claudio Agostini, Eduardo Saavedra, and Manuel Willington presented a critical analysis of the 2007 pronouncement by the Chilean antitrust authority rejecting an accusation of collusion against the five largest health insurance companies in Chile. Given the lack of direct evidence of collusion, the accusation against the health insurance providers was based mainly on economic and econometric evidence provided by these authors during the trial. This article shows that, when properly assessed, such empirical evidence does not support the claim of collusion. This article concludes that the Chilean antitrust authority did not make a mistake in rejecting the accusation.
The Emperor’s Clothes Laid Bare: Commitments Creating the Appearance of Law, While Denying Access to Law
Philip Marsden (College of Europe, Bruges & British Institute of International and Comparative Law) describes The Emperor’s Clothes Laid Bare: Commitments Creating the Appearance of Law, While Denying Access to Law.
ABSTRACT: This article examines how the Article 9 commitments procedure under EC Regulation 1/2003 is increasingly being used to create policy under the guise of law and, in practice, to prevent courts from effectively providing review of, and guidance on, new areas of law. This problem is particularly acute in fast-moving high technology markets and is perfectly illustrated by the current standard-essential patent cases: Do commitments given to a competition agency by an individual company on the basis of a particular fact-pattern create a new abuse for SEP holders to seek injunctive relief? Are we seeing over-reaching by the executive branch based on an as-yet unproven and controversial theory of harm? Does denying litigants their day in court, albeit in very particular circumstances, violate the rule of law?
Posted by William E. Kovacic, Marianela Lopez-Galdos & Elisa Ramundo, GW Competition
The George Washington Law School Competition Law Center has created a Worldwide Competition Database containing a unique compilation of data on existing competition systems. The database is user friendly supported by an interactive map.
To date, the database compiles the relevant legislation for each of the competition systems approximately 120). More interestingly, the database contains an institutional profile summarizing the characteristics of existing competition authorities. Soon, GW CLC will add a competition enforcement profile for each competition system to complete the database.
This database is the result of a Benchmarking exercise that has focused on the major institutional
characteristics of competition systems. Most of the information published refers to 2012 data and has been reviewed by each of the relevant competition authorities. GW expects to update the available data on a regular basis to incorporate the changes that have already occurred in 2013.
Stay tuned since GW CLC plans to publish for comments the results of the Benchmarking exercise that identifies the existing trends relating to institutional building in competition systems. This report is based on the 2012 data and will be broken down on a global, regional and GDP basis. If the antitrust community welcomes the study new versions will be out on an annual basis.
Tom Bjorkroth, Finnish Competition and Consumer Authority asks LOYAL OR LOCKED-IN—AND WHY SHOULD WE CARE?
ABSTRACT: Consumer switching costs confer market power on firms. This is verified by the strands of theoretical and empirical research in economics. However, switching costs arise from a number of different sources. This article shows that the composition of the total switching costs, although acknowledged, has been of secondary importance to economic research when it comes to the use of the concept as a hypernym. This is a challenge to antitrust analysis, in which the origin of switching costs may be decisive with respect to whether observed rigidity in market dynamics needs to be dealt with in the first place. A recognition and evaluation of the different sources of switching costs matter in antitrust analysis, and may reveal the adherence to specific doctrines of economics. This article proposes a typology of switching costs that enables a systematic and eclectic approach to analyzing the role of switching costs as a source of market power or as an impediment to consumer choice. The approach can gain antitrust enforcement, competition advocacy, and the implementation of consumer protection policies.
Thursday, October 24, 2013
'Worse Than the Tower of Babel'?: Remedying Antitrust's False Dichotomy Through De Novo Appellate Review
Steven Semeraro, Thomas Jefferson School of Law has written on 'Worse Than the Tower of Babel'?: Remedying Antitrust's False Dichotomy Through De Novo Appellate Review.
ABSTRACT: Modern antitrust analysis rests on a strange perch. Its paradigmatic method – pretentiously entitled the Rule of Reason – appears (but only appears) to be a dichotomous analytic. At the first stage, a court supposedly defines the relevant market and determines, as a matter of fact, whether marketplace forces constrain the defendant from profitably raising price above the level that would prevail in a competitive market. Only when market forces are inadequate to protect consumers, i.e. the defendant has market power, does the court proceed to stage two where it assesses, as a matter of law, whether the defendant used its power improperly.
Nothing approaching this dichotomous analytic paradigm is true. The ostensibly separate inquiries into market power and competitive effects are really a unitary assessment of the industry’s best competitive makeup, that is the allocation of business realms into those requiring rivalry and those in which cooperation or foreclosure are permitted. For example, rivalry is usually required in the realm of short-run price competition. But in some cases, such as when a firm holds a valuable patent, courts permit foreclosure in that short-term realm in order to foster competition to innovate new products over the longer term.
Although the "competitive makeup" term of art is foreign to the antitrust vocabulary, it captures actual antitrust practice in the courts. Everybody knows that pure competition is a fiction; all industries involve an amalgam of competitive, cooperative, and foreclosed realms. And antitrust law requires competition only where it serves consumer interests.
Although many experts question whether federal judges can effectively assess business conduct as the competitive makeup approach requires, Austrian economics provides a theoretical justification for concluding that thoughtful judges can do a better job of resolving antitrust cases than would mindless, automaton courts applying necessarily over- and under-inclusive bright-line prophylactic rules. Most importantly, the Supreme Court has to date, including its most recent 2013 decision, demanded that federal judges engage theory and make thoughtful antitrust decisions.
Although much of this article is interpretive, attempting to explain what courts actually do when they say they are applying the antitrust dichotomy, it recognizes a significant problem that requires a remedy. Trial judges have the power to dictate the level of scrutiny that appellate courts will apply to their decisions. The false dichotomy can be manipulated so that most decisions can be framed as either issues of market definition, reviewed under the clearly erroneous standard, or competitive effect, reviewed de novo. Given the complexity and social import of many antitrust cases, a single federal judge should not have this power.
Appellate courts should thus abandon the clearly erroneous standard of review for market definition. The Supreme Court requires independent appellate scrutiny of fact-findings controlling important issues of public policy that are indistinguishable from the antitrust laws. It would thus be a small, but important, step to impose a de novo review standard for all antitrust issues.
Reed E. Hundt, McKinsey & Company Inc. and Gregory L. Rosston, Stanford Institute for Economic Policy Research are Articulating a Modern Approach to FCC Competition Policy.
ABSTRACT: The FCC has taken three different competition policy approaches: the classic role of regulating terms and conditions of sale, the modern role of using various tools to create largely deregulated, multi-firm, competitive markets, and the laissez-faire approach of believing that unregulated markets, even if monopolized, will produce the best outcome. For the most part, a light-handed modern role has proven successful. The FCC should adopt such an approach going forward with a classic regulatory role as a backstop, and it should articulate clearly its competition policy framework so that firms can understand the rules and compete to provide service to customers in a procompetitive manner.
Alberto Heimler, Government of the Italian Republic (Italy) - National School of Administration and Kirtikumar Mehta, University of Fribourg discuss Monopolization in Developing Countries.
ABSTRACT: In developing countries, legal provisions that prohibit abusive behavior often have a wider application than in the EU or in the US. China ‘s law is also concerned with abuse of administrative power, Russia’s law overstresses unequal contracts conditions, India’s law takes over the idea of “unfair” pricing and often considers leveraging an abuse. These wider in scope provisions are meant to discipline dominant firms that are strong and connected. However also an independent enforcer is necessary. Independence may be strengthened by introducing binding presumptions for opening a proceeding. The chapter ends with enforcement examples from China, India , Russia, South Africa and a number of other developing countries from Africa and Latin America.
What a Difference a Year Makes: An Emerging Consensus on the Treatment of Standard-Essential Patents
Jonathan Kanter (Cadwalader) notes What a Difference a Year Makes: An Emerging Consensus on the Treatment of Standard-Essential Patents.
ABSTRACT: These days, it is difficult to identify an antitrust issue that is generating more discussion than standard-essential patents. To some, SEPs are to antitrust what Breaking Bad is to television: a complex and important subject worthy of discussion. To others, SEPs are to antitrust what Miley Cyrus is to pop culture: a fad that consumes way too much attention and distracts from other more important subjects. In either case, antitrust lawyers and economists cannot stop scrutinizing the issue with vigor, fascination, and (sometimes) an admirable level of obsession. Even just a year ago, the role of SEPs in litigation and the scope of commitments to license SEPs on fair, reasonable, and non-discriminatory terms seemed so divisive and controversial that one could not imagine any resolution in the fore. As the so-called "smartphone wars" reached a fever pitch, antitrust emerged at the center of the controversy. The U.S. Department of Justice's Antitrust Division was in the midst of reviewing two major transactions involving large patent portfolios: Google's acquisition of Motorola Mobility, along with MMI's patent portfolio, and the Rockstar Consortium's acquisition of certain patents auctioned off by then-defunct Nortel Networks.Shortly thereafter, complaints began flowing into enforcement authorities on both sides of the Atlantic about the conduct of individual companies. The European Commission, DOJ, and Federal Trade Commission responded by opening their own conduct investigations. These events led commentators and regulators alike to grapple with two important but controversial questions: Do SEPs warrant special antitrust consideration? And, if so, how should antitrust laws address concerns inherent in the defensive use of SEPs? Quite remarkably, antitrust enforcement authorities and courts have begun to converge around answers to some of these questions. In the last year alone we have seen two FTC consent decrees, two EC Statements of Objections, and four District Court opinions all suggesting that SEPs warrant a certain degree of special treatment under U.S. and European law. Setting aside the rhetoric of interested parties on all sides of the issue-which remains as divisive as ever-one can see a consensus beginning to emerge around certain key principles. Courts, agencies, and policy makers all appear to agree that SEP holders should abide by their F/RAND commitments and refrain from obtaining injunctive relief against willing licensees. This is not to suggest that either enforcement authorities or standards bodies broadly agree on all issues related to SEPs. To the contrary, these issues remain quite contentious. Still, the emerging alignment among key decision makers is somewhat remarkable considering the intense level of attention and controversy.
Markus Dertwinkel-Kalt, Heinrich Heine Universitat Dusseldorf - Duesseldorf Institute for Competition Economics (DICE) and Christian Wey, University of Dusseldorf - Dusseldorf Institute for Competition Economics (DICE) describe The Effects of Remedies on Merger Activity in Oligopoly.
ABSTRACT: We analyze the effects of structural remedies on merger activity in a Cournot oligopoly when the antitrust agency applies a consumer surplus standard. Remedies increase the scope for profitable and acceptable mergers, while divestitures to an entrant firm are most effective in this regard. Concerning social welfare, it is most attractive when the merging parties can extract the asset sale's entire gains. Merging firms have strong incentives to search for the most efficient buyer. Under incomplete information, an efficient merger type is doomed to over-fix with its divestiture proposal in a pooling equilibrium, which is also possible under separation.
Wednesday, October 23, 2013
The OECD has released Vertical Restraints for On-line Sales.
ABSTRACT: The OECD Competition Committee discussed vertical restraints for on-line sales in February 2013. This document includes an executive summary of that debate, a detailed summary of discussion and the documents from the meeting: written submissions from Australia, Austria, Canada, Czech Republic, European Union, France, Germany, Japan, Korea, Norway, Chinese Taipei, Turkey, United Kingdom, United States and BIAC, a background paper prepared by Paolo Buccirossi as well as a contribution by Michael Baye.
Pablo Ibanez Colomo (LSE) has posted State Aid Litigation before EU Courts (2004–2012): A Statistical Overview.
ABSTRACT: This article considers annulment actions and appeals brought by Member States, recipient, and sub-national entities since 2004. Where the Member States took part in the proceedings, Commission decisions were annulled more frequently by the Genral Court. Annulments were more likely where the ‘private investor test’ was raised as a ground. On appeal, selectivity-related issues are prominent but first instance judgments were rarely set aside
Michael Wohlgenant, North Carolina State University - College of Agriculture and Life Sciences writes Competition in the US Meatpacking Industry.
ABSTRACT: This article reviews and evaluates the recent literature on competition in the US meatpacking industry. Studies on market power in meatpacking indicate that concentration in procurement of livestock (cattle or hogs) has not adversely affected prices received by producers or prices paid by consumers. Indeed, there is evidence that producers may be better off because of lower processing costs due to the concentration and introduction of new technical innovations. Policies to restrict alternative marketing arrangements such as those proposed by GIPSA would make producers and consumers worse off. The beef and pork industries are quite complex and contain both spatial and temporal dimensions that can affect the level of competition. Fringe producers because of locational shift of industry and thin markets may be worse off. Establishment of niche enterprises may benefit these producers. In the future, incentives are to maintain steady long-run supplies of livestock to fully operate slaughtering and processing facilities.
A Response To Commissioner Wright’s Proposed Policy Statement Regarding Unfair Methods Of Competition
Maurice Stucke (Tennessee) addresses A Response To Commissioner Wright’s Proposed Policy Statement Regarding Unfair Methods Of Competition.
ABSTRACT: Federal Trade Commissioner Joshua Wright recently proposed a new legal standard to evaluate "unfair methods of competition" under Section 5 of the Federal Trade Commission ("FTC") Act, 15 U.S.C. § 45(a) (2012). The FTC must prove that the act or practice (1) harms or is likely to harm competition, significantly and (2) lacks cognizable efficiencies. The FTC currently prosecutes both traditional antitrust offenses and other conduct under Section 5's unfair methods of competition clause. Under Wright's proposal, the FTC would still apply the well-forged antitrust case law to orthodox Sherman and Clayton Act violations, but use his proposed standard for any remaining standalone violations of Section 5. Wright proposes that his standard be applied only to unfair methods of conduct, for which no "well‐forged case law under the traditional federal antitrust laws exists." Where that boundary lies, as this Essay discusses, is a far more difficult question.
Tuesday, October 22, 2013
Larry White (NYU) discusses Monopoly and Dominant Firms: Antitrust Economics and Policy Approaches.
ABSTRACT: This chapter addresses issues in antitrust economics that related to the exercise of market power by a monopoly or by a dominant firm. We start by presenting the standard textbook treatments of monopoly and the dominant firm and then discuss the non-trivial issues of what constitutes a real-world monopoly (or dominant firm) and how to identify it. With that as a basis, we discuss five categories of antitrust actions that can be used to limit the exercise of market power by a monopoly or dominant firm.
Turning the Page on Business Formats for Digital Platforms: Does Apple's Agency Model Soften Competition?
O. Foros, Norwegian School of Economics (NHH) - Department of Economics, Hans Jarle Kind, Norwegian School of Economics & Business Administration (NHH), CESifo (Center for Economic Studies and Ifo Institute for Economic Research), Norwegian School of Economics (NHH) - Department of Economics, and Greg Shaffer, University of Rochester - Simon Graduate School of Business ask Turning the Page on Business Formats for Digital Platforms: Does Apple's Agency Model Soften Competition?
ABSTRACT: The agency model used by Apple and other platform providers such as Google allows upstream firms (content providers like book publishers and developers of apps) to choose the retail prices of their products (RPM) subject to a fixed revenue-sharing rule. We show that (i) this leads to higher prices if the competitive pressure is higher downstream than upstream; (ii) upstream firms earn positive surplus even when platform providers have all the bargaining power; and (iii) with asymmetric business formats (where only some platform providers use the agency model), a retail most-favored-nation clause leads to retail prices that resemble the outcome under industry-wide RPM.
John (“Jay”) Jurata, Jr. & David B. Smith (Orrick, Herrington & Sutcliffe LLP) are Turning the Page: The Next Chapter of Disputes Involving Standard-Essential Patents.
ABSTRACT: A technology company is on the verge of introducing a cutting-edge device that builds on a widely adopted industry standard. To do so, it must use patented technology that is technically essential to the standard. The patent owner, despite committing to license its standard-essential patents on fair, reasonable, and non-discriminatory terms to all potential licensees, makes an extreme royalty demand. When the company refuses this offer, the patent owner threatens to seek an injunction in court. The potential licensee is at a crossroads-should it infringe the SEP and risk its product being excluded from further sale, or agree to pay what it believes is an excessive royalty and attempt to pass on the cost to its customers? In recent years, competition agencies, courts, and scholars have become increasingly alarmed over exactly this scenario. These concerns have been prompted by the ability of SEP owners, using the market power conferred upon them as a result of the standard-setting process and "lock in" nature of SEPs, to distort competition for downstream products implementing that standard.Although industry standards carry great benefits (consider WiFi, Bluetooth, or HDTV), they also pose risks. Companies owning SEPs might refuse to license them to competitors, or demand exorbitant or otherwise unreasonable license terms. This is known as "patent hold-up." To prevent hold-up and encourage widespread adoption of the standard, standard-setting organizations typically request participants to promise to license their SEPs on FRAND terms to anyone seeking to employ the standard. Thus, SEP owners voluntarily waive the usual patent-owner's right to seek to prevent others from practicing the patented technology, in return for that technology being incorporated within the standard. Court rulings, enforcement actions, and government policy statements over the past year suggest an emerging consensus on what this FRAND promise means: SEP owners cannot tie the licensing of their SEPs to the licensing of non-SEPs; the threat of injunctions leads to royalty rates in excess of FRAND; and, thus, injunctions for SEPs should be rare. While the court rulings, enforcement actions and policy statements issued over the last year place important limits on the ability to distort the competitive process, the potential for SEP abuse remains. This article analyzes several problems yet to be thoroughly addressed: (A) whether a patent owner can condition licensing a single SEP on also licensing other SEPs in the standard; (B) when is it appropriate to label a putative licensee as unwilling to enter into a FRAND license, thus arguably permitting a SEP owner to seek an injunction; and (C) to what extent should "royalty stacking"-piling royalties from multiple SEP owners onto each other-be considered when determining FRAND?
Benjamin R. Handel (Berkeley), Igal Hendel (Northwestern), and Michael D. Whinston (MIT) have written on Equilibria in Health Exchanges: Adverse Selection vs. Reclassification Risk.
ABSTRACT: This paper studies regulated health insurance markets known as exchanges, motivated by their inclusion in the Affordable Care Act (ACA). We use detailed health plan choice and utilization data to model individual-level projected health risk and risk preferences. We combine the estimated joint distribution of risk and risk preferences with a model of competitive insurance markets to predict outcomes under different regulations that govern insurers' ability to use health status information in pricing. We investigate the welfare implications of these regulations with an emphasis on two potential sources of inefficiency: (i) adverse selection and (ii) premium reclassification risk.We find that market unravelling from adverse selection is substantial under the proposed pricing rules in the Affordable Care Act (ACA), implying limited coverage for individuals beyond the lowest coverage (Bronze) health plan permitted. Although adverse selection can be attenuated by allowing (partial) pricing of health status, our estimated risk preferences imply that this would create a welfare loss from reclassification risk that is substantially larger than the gains from increasing within-year coverage, provided that consumers can borrow when young to smooth consumption or that age-based pricing is allowed. We extend the analysis to investigate some related issues, including (i) age-based pricing regulation (ii) exchange participation if the individual mandate is unenforceable and (iii) insurer risk-adjustment transfers.
Monday, October 21, 2013
Volker Nocke, University of Mannheim and CEPR and Stephen Yeaple, Pennsylvania State University discuss Globalization and Multiproduct Firms.
ABSTRACT: We present an international trade model with multiproduct firms. Firms are heterogeneously endowed with two types of capabilities that jointly determine the trade-off within firms between managing a large portfolio of products and producing at low marginal cost. The model can explain many of the documented cross-sectional correlations in firm performance measures, including why larger firms are more productive and more diversified, and yet more diversified firms trade at a discount. Globalization is shown to induce heterogeneous responses across firms in terms of scope and productivity, some of which are consistent with existing empirical work, while others are potentially testable.