Antitrust & Competition Policy Blog

Optimal Sales Schemes for Network Goods

Alexei Parakhonyak (National Research University Higher School of Economics, Moscow) and Nick Vikander (University of Copenhagen, Department of Economics) explore Optimal Sales Schemes for Network Goods.

ABSTRACT: This paper examines the optimal sequencing of sales in the presence of network externalities. A firm sells a good to a group of consumers whose payoff from buying is increasing in total quantity sold. The firm selects the order to serve consumers so as to maximize expected sales. It can serve all consumers simultaneously, serve them all sequentially, or employ any intermediate scheme. We show that the optimal sales scheme is purely sequential, where each consumer observes all previous sales before choosing whether to buy himself. A sequential scheme maximizes the amount of information available to consumers, allowing success to breed success. Failure can also breed failure, but this is made less likely by consumers’ desire to influence one another’s behavior. We show that when consumers differ in the weight they place on the network externality, the firm would like to serve consumers with lower weights first. Our results suggests that a firm launching a new product should first target independent-minded consumers who can serve as opinion leaders for those who follow.

New Indicators of Competition Law and Policy in 2013 for OECD and non-OECD Countries

Enrico Alemani, Caroline Klein, Isabell Koske, Cristiana Vitale, Isabelle Wanner (all OECD) discuss New Indicators of Competition Law and Policy in 2013 for OECD and non-OECD Countries.

ABSTRACT: This paper presents the new OECD competition law and policies (CLP) indicators which measure the strength and scope of competition regimes in 49 jurisdictions (OECD and non-OECD). The indicators cover areas for which there is a broad consensus among member countries on what constitutes ‘good’ practice for competition regimes. The results suggest that competition regimes are broadly similar across countries in these areas because most countries have adopted all or a large number of the ‘good’ policy settings captured by the indicators. On average, the design of competition laws and policies appears to be closer to best practice in OECD countries than in non-OECD countries. Jurisdictions differ relatively more on the enforcement of competition law than on the competition law itself.

Antitrust and Religion - Judge Orders God To Break Up Into Smaller Deities (classic Onion)

See this great Onion story.

Conflicts of Interest, Ethical Rules and Impartiality in EU Competition Policy - Fondation universitaire, 24 April 2014

Conflicts of Interest, Ethical Rules and Impartiality in EU Competition Policy

Fondation universitaire, 24 April 2014

Download Conference programme on Conflicts of interests in EU Antitrust Policy(27 3 2014)

Merger regulation, firms, and the co‐evolutionary process: An empirical study of internationalisation in the UK alcoholic beverages industry 1985‐2005

Julie Bower, Birmingham Business School and Howard Cox, Queen Mary are brewing Merger regulation, firms, and the co‐evolutionary process: An empirical study of internationalisation in the UK alcoholic beverages industry 1985‐2005.

ABSTRACT: We present an historic industry study of the consolidation of the UK alcoholic beverages firms to inform debates in organisation studies relating to co‐evolution and the dynamics of internationalisation. Given the constraints imposed on merger strategies by competition policy, once merger opportunities are exhausted at home firms are motivated to embark on international consolidation in order to continue a growth trajectory. This brings them into contact with unfamiliar and more complex institutional interactions. The ability to interact successfully with key agents in the institutional environment is likely to be an important source of firm competitive advantage. Our article conceptualises this process with reference to co‐evolutionary theory. We distinguish behavioural and structural co‐evolutionary factors in firms’ strategic intent, mirroring the two types of remedies that competition authorities can impose on merging firms. We test this theoretical construct in an empirical investigation of the consolidating UK alcoholic beverages firms between 1985 and 2005. In this era Diageo was formed from the landmark merger of Grand Metropolitan and Guinness. Subsequently Diageo acquired the former international spirits empire of Seagram in partnership with a major competitor. Successful implementation of Diageo’s merger strategy owed much to an ability to navigate the evolving multi‐jurisdictional co‐ordinated oversight of cross‐border mergers and acquisitions. The formation of novel deal structures as well as cooperation with competitors to circumvent policy intervention were significant co‐evolutionary mechanisms that have featured more generally in subsequent international mergers as others have copied these deal structures to achieve similar regulatory outcomes.

Concurrences Antitrust Writing Awards 2014 (Articles)

Last week Concurrences announced winners of its 2014 writing awards at a gala dinner.

Winning Award Articles

I. ACADEMIC ARTICLES

1. General antitrust

 Antitrust’s Democracy Deficit, Harry First and Spencer Weber Waller, Fordham Law Review, Vol. 81, 2013.

2. Concerted Practices / Cartels

 Parallel Exclusion, C. Scott Hemphill and Tim Wu, Yale Law Journal, Vol. 122, 2013.

3. Dominance / Monopolization

 Predatory Pricing and Recoupment, Christopher R. Leslie, Columbia Law Review, Vol. 113, No. 7, 2013.

4. Mergers

 Merger Policy for Small and Micro Jurisdictions, Michal S. Gal, More Pros and Cons of Merger Policy, 2013.

5. Economics

 Snake-Oil with Mathematics is Still Snakeoil: Why Recent Trends in the Application of So-Called “Sophisticated” Economics is Hindering Good Competition Policy Enforcement, Simon Bishop, European Competition Journal, Volume 9, Number 1, May 2013 , pp. 67-77(11).

6. Private Enforcement

 Defying Conventional Wisdom: The Case for Private Antitrust Enforcement, Joshua P. Davis and Robert H. Lande, 48 Georgia Law Review 1, 2013.

7. Intellectual Property

 Missing the Forest for the Trolls, Mark A. Lemley and A. Douglas Melamed, Columbia Law Review, Forthcoming 2014.

8. Asian Antitrust

 Divergence Then and Now: What Does the U.S./EU Experience Tell Us About Convergence With MOFCOM?, George S. Cary, Elaine Ewing, article to be released in “William E. Kovacic – An Antitrust Tribute, Vol. II”, Institute of Competition Law.

II. BUSINESS ARTICLES

1. General Antitrust

 You Made a Pledge, Then Keep Your Promise: Article 9 Commitments Decisions in European Antitrust Law, Paul McGeown and Juliette Orologas, CPI Antitrust Chronicle March 2013.

2. Concerted Practices / Cartels

 Federal Appeals Court Reaffirms Flexible Legal Standard for Restraints in Competitor Collaborations, Thomas Demitrack, Michelle K. Fischer, Brian K. Grube, and Paula W. Render, Jones Day Antitrust Alert, January 2013.

3. Dominance / Monopolization

 Thoughts On Google’s FTC Settlement, Alec Y. Chang, Matthew P. Hendrickson, Sharis A. Pozen, Steven C. Sunshine, and Sean M. Tepe, Law360, January 04, 2013.

4. Mergers

 Mergers and bargaining power: back to the future? Insights from the Universal/EMI merger, Raphaël De Coninck, Damien Neven, and Hans Zenger, CRA Memo, September 23, 2013.

5. Economics

 RPM under EU Competition Law: Some Considerations from a Business and Economic Perspective, Andres Font Galarza, Frank P. Maier-Rigaud and Pablo Figueroa, CPI Antitrust Chronicle, November 2013 (1).

6. Private Enforcement

 European Commission adopts a package on private damages actions in antitrust cases, Ian S. Forrester QC, LLD, James R.M. Killick, Pontus Lindfelt, Jacquelyn F. MacLennan, Mark D. Powell, Axel P. Schulz, Dr. Assimakis Komninos, and Kai Struckmann, White & Case Antitrust Alert, June 13, 2013.

7. Intellectual Property

 Seeing the Forest Through the SEPs, John D. Harkrider, Antitrust Magazine, Vol. 27, No. 3, Summer 2013.

8. Asian Antitrust

 A Five Year Review of Merger Enforcement in China, Fei Deng and Cunzhen Huang, The Antitrust Source, October 2013.

 

Efficient Entry in Competitive Search with

James Albrecht (Georgetown University), Pieter Gautier (Free University of Amsterdam - VU) and Susan Vroman (Georgetown University) address Efficient Entry in Competitive Search with Nonrival Meetings and Asymmetric Information.

ABSTRACT: In this paper, we consider the efficiency of entry in a model of compet- itive search. By “competitive search”we mean that we analyze a large market in which buyers (or sellers) can direct their search based on the terms of trade that are posted (with commitment) by their counter- parts on the other side of the market. We consider in particular entry on the side of the market on which the terms of trade are advertised. We generalize this literature on efficiency entry on competitive search in two directions. First, we allow for many-on-one meetings; e.g., a seller may interact with two or more buyers at the same time. Second, we allow for asymmetric information; e.g., a seller may not know how much the buyers she is interacting with value her good.

GCR Award Winners 2014

See full coverage for the Global Competition Review winners here including links to award photos (spoiler: Bruce McDonald of Jones Day looks good in a tuxedo).

Full list of winners

MATTERS

Matter of the Year

US Airways/American Airlines

Counsel to American Airlines

Jones Day

Partners John Majoras, Joe Sims and J Bruce McDonald in Washington, DC

Paul Hastings

Partner MJ Moltenbrey in Washington, DC, assisted by Timothy Longman

Counsel to US Airways

O’Melveny & Myers LLP

Partner Richard G Parker in Washington, DC

Cadwalader, Wickersham & Taft LLP

Partners Charles F Rule and Andrew Forman in Washington, DC

Dechert LLP

Partner Paul T Denis in Washington, DC

Latham & Watkins LLP

Partners John Kallaugher and Jean Paul Poitras in Brussels

Counsel to American Airlines and US Airways

Compass Lexecon

Partners Dennis Carlton, Janusz Ordover, Daniel Kasper, and Rajiv Gokhale

Merger Control Matter of the Year – Americas

Office Depot/Office Max - US

Counsel to Office Max

Dechert LLP

Partners Paul T Denis and James Fishkin in Washington, DC, assisted by David Stanoch and Rani Habash

Compass Lexecon

Partners Jonathan Orszag, Eugene Orlov, Daniel Stone, Neal Lenhoff, Joseph Goodman and Jonathan Williams

Counsel to Office Depot

Simpson Thacher & Bartlett LLP

Partners Kevin J Arquit in New York and Matthew J Reilly in Washington, DC, are assisted by Andy Lacy

Charles River Associates

Vice-presidents Peter Boberg and Andrew Dick, associate principals Courtney Stoddard and Josh Lustig and principal Spencer Graf

Merger Control Matter of the Year – Asia-Pacific, Middle East & Africa

Virgin Australia/Tiger Airways - Australia

Counsel to Virgin Australia and Tiger Airways

Gilbert + Tobin

Partner Luke Woodward and Senior Lawyers Charles Coorey and Louise Klamka.

Merger Control Matter of the Year – Europe

Aer Lingus/RyanAir

Counsel to Aer Lingus

Cadwalader, Wickersham & Taft

Partner Alec J Burnside and counsel Anne MacGregor in Brussels, assisted by Marjolein De Backer, Christian Lorenz, David Boyle and Evan Flowers

Charles River Associates

Vice president Cristina Caffarra

Brick Court Chambers

James Flynn QC and Daniel Piccinin

Behavioural Matter of the Year – Americas

Defence of Visa/Mastercard before Competition Tribunal

Counsel to Visa Canada

Blake, Cassels & Graydon LLP

Partners Robert E Kwinter, Randall Hofley and Navin Joneja in Toronto

Counsel to MasterCard

McMillan

Partners Jeffrey Simpson, James B Musgrove and David W Kent assisted by Adam Chisholm in Toronto

Counsel to Visa and Mastercard

University of Calgary

Jeffrey Church

Compass Lexecon

Kenneth Elzinga

Behavioural Matter of the Year – Asia-Pacific, Middle East & Africa

ArcelorMittal/Cape Gate access to file success - South Africa

Counsel to Arcelor Mittal

Fasken Martineau DuMoulin

Partner Stephen Langbridge in Sandton

Counsel to Cape Gate

Bowman Gilfillan

Robert Legh & Lucinda Verster

Behavioural Matter of the Year – Europe

Libor - Defence of Barclays and UBS

Libor - Defence of Barclays

Clifford Chance

Elizabeth Morony

Libor - Defence of UBS

Gibson, Dunn & Crutcher LLP

David Wood

Litigation of the Year

German Rail Cartel - Follow-on Damages Litigation

Counsel to Deutsche Bahn

Wilmer Cutler Pickering Hale and Dorr

Partners Ulrich Quack, Stefan Ohlhoff and Jan Heithecker, assisted by Oliver Fleischmann, Julia Schwalm, Patrick Späth, Natalie Achenbach, Regina Klostermann and Johannes Ylinen.

Charles River Associates

Matthias Pflanz Agency awards

 

FIRMS

Regional Firm of the Year – Europe

Uría Menéndez

Regional Firm of the Year – Asia-Pacific, Middle East & Africa

Kim & Chang

Regional Firm of the Year - Americas

Wachtell, Lipton, Rosen & Katz

 

ENFORCEMENT

Agency of the Year – Americas

The United States Department of Justice - Antitrust Division

Agency of the Year – Asia-Pacific, Middle East & Africa

Australian Competition & Consumer Commission

Agency of the Year – Europe

European Commission - Directorate General of Competition

 

INDIVIDUALS

Lawyer of the Year

Christine Varney

Cravath, Swaine & Moore LLP

Lawyer of the Year - 40 and under

Ana Paula Martinez

Levy & Salomão Advogados

Economist of the Year

Dennis Carlton

Compass Lexecon

Corporate Counsel of the Year

Howard Kass

US Airways (American Airlines)

 Academic Excellence Award

Daniel Sokol

University of Florida Levin College of Law

 Article of the Year

Joshua D. Wright

"The Goals of Antitrust: Welfare Trumps Choice"

Judge Douglas H. Ginsburg

"The Goals of Antitrust: Welfare Trumps Choice"

ESRC Centre for Competition Policy 10th Annual Conference: PROBLEM MARKETS June 12 - 13, 2014

ESRC Centre for Competition Policy
10th Annual Conference
PROBLEM MARKETS
June 12 - 13, 2014

Sometimes markets appear not to be working for the consumer and can seem a bit ‘too hot’ for regulators to handle, with nobody quite sure why or what should be done about it. Often it is not clear if illegal activity is taking place and these ‘problem markets’ attract widespread attention amongst the public, politicians, academics and the media.

 

With a range of leading international academics and speakers from the competition agencies, Which? and Ofcom, the conference will explore the issues surrounding ‘problem markets’, examining possible root causes as well as the potential for intervention to improve matters.

TOPICS INCLUDE What is a problem market? I Experience to date: UK & EU I Legal Framework I Competition & the demand side I Experience to date: US & Worldwide I Supply-side issues outside standard antitrust law I Identifying problem markets I Competition with divergent public policy concerns I

SPEAKERS INCLUDE

Stephen Davies CCP & School of Economics, UEA Ashleye Gunn Which? Amelia Fletcher CCP & Norwich Business School, UEA Andrea Coscelli Competition and Markets Authority (CMA) Fabienne Ilzkovitz & Adriaan Dierx DG COMP, European Commission Mike Walker Competition and Markets Authority (CMA)   Ariel Ezrachi Faculty of Law, University of Oxford Joe Farrell University of California, Berkeley, USA Geoff Myers & Katie Curry Ofcom Bill Kovacic George Washington University, USA & Competition and Markets Authority (CMA) Hilary Jennings CCP & Independent Competition Consultant Hussein Kassim CCP & School of Political, Social and International Studies, UEA   Frode Steen Norwegian School of Economics, Norway (NHH)   Severin Borenstein University of California, Berkeley, USA Rosa Abrantes-Metz Global Economics Group & NYU’s Stern School of Business, USA Rachel Griffith Institute for Fiscal Studies (IFS) & University of Manchester Carol Propper University of Bristol & Imperial College Business School Nicolas Petit University of Liège, Belgium Anneli Howard Monckton Chambers   Adrian Majumdar RBB Economics Bruce Lyons CCP & School of Economics, UEA

Generic-branded drug competition and the price for pharmaceuticals in procurement auctions

Paulo Arvate (School of Business - FGV), Klenio Barbosa, Sao Paulo School of Economics - FGV and Dante Gambardella, Samaritano Hospital discuss Generic-branded drug competition and the price for pharmaceuticals in procurement auctions.

ABSTRACT: This paper studies the effects of generic drug’s entry on bidding behavior and participation of drug suppliers in procurement auctions for pharmaceuticals, and the consequences on procurers’ price paid for drugs. Using an unique data set on procurement auctions for off-patent drugs organized by Brazilian public bodies, we find that some branded drug suppliers leave the auctions in which there exists a supplier of generics. However, the remaining ones lower their bidding price in a presence of generics in an auction. Due to a fierce price competition between generic and branded suppliers, the price paid for pharmaceuticals reduces by 7 percent in auctions in which a generic’s supplier participates vis-à-vis auctions without generics. As a result of such generic-branded competition, we find no statistical difference between bids and prices paid for generic and branded drugs. To overcome potential estimation bias due to generic’s entry endogeneity, we exploit variation in the number of days between drug’s patent expiration date and the tendering session. The two-stage estimations document the same pattern as the generalized least square estimations find. This evidence indicates that generic competition affects branded supplier’s behavior in procurement auctions differently from other markets.

Consumer Myopia, Competition and the Incentives to Unshroud Add-on Information

Tobias Wenzel, Dusseldorf Institute for Competition Economics (DICE) explains Consumer Myopia, Competition and the Incentives to Unshroud Add-on Information.

ABSTRACT: This paper studies unshrouding decisions in a framework similar to Gabaix and Laibson (2006), but considers an alternative unshrouding mechanism where the impact of advertising add-on information depends on the number of unshrouding firms. We show that shrouding becomes less prevalent as the number of competing firms increases. With unshrouding costs a non-monotonic relationship between the number of firms and unshrouding may arise.

To Block or not to Block? Network Competition when Skype enters the Mobile Market

Bipasa Datta (University of York) and Yu-Shan Lo (xChung-Hua Institute for Economic Research) ask To Block or not to Block? Network Competition when Skype enters the Mobile Market.

ABSTRACT: Voice over Internet Protocol (VoIP) such as Skype that enables users to make free internet-based calls to other users has been seen as a threat to voice revenues by traditional network operators. While some mobile network operators (MNOs) attempt to block Skype's entry on their networks, some actually welcome it even if it apparently conflicts with their interests in making calling profits. In this paper we develop a Hotelling-style model of network competition between two MNOs to analyse their incentives to accommodate or block Skype. We find that accommodation is the dominant strategy of an MNO whenever its equilibrium voice market share is at least 29%. Furthermore, the overall Nash equilibrium of the game can be either symmetric (where Skype's entry is either accommodated or blocked by both MNOs) or asymmetric (where only one has the incentive to accommodate) depending upon the consumers' preference for a certain network and the quality of Skype-based interconnection. In a symmetric accommodation equilibrium, the MNO with a lower (higher) customer valuation is better-off (worse-off) relative to the one where entry is blocked.

EXPORT OR MERGE? PROXIMITY VS. CONCENTRATION IN PRODUCT SPACE

Marc-Andreas Muendler (UCSD) asks EXPORT OR MERGE? PROXIMITY VS. CONCENTRATION IN PRODUCT SPACE.

ABSTRACT: This paper proposes a proximity-concentration tradeoff in product space as a determinant of horizontal foreign direct investment (FDI). Firms that enter a foreign market by exporting are able to capture consumer surplus from introducing a differentiated product with characteristics that the incumbent cannot match. In relatively globalized product space, in contrast, consumers perceive an entrant's difference to existing products as less pronounced, so a consumer's virtual distance costs in product space are lower and a merger with an incumbent (horizontal FDI) offers pricing power that allows the entrant to extract consumer rent. Lower physical trade costs of shipping make Bertrand price competition fiercer in differentiated product space and can provide an additional incentive for a merger. A basic product space model with a linear Hotelling setup can therefore explain why FDI has become more frequent in recent periods in the presence of falling trade costs. Cross-border merger and acquisitions data support the model's prediction that horizontal FDI grows relatively faster than exports in differentiated goods industries, compared to homogeneous-goods industries.

A Model of Recommended Retail Prices

Dmitry Lubensky (Department of Business Economics and Public Policy, Indiana University Kelley School of Business) offers A Model of Recommended Retail Prices.

ABSTRACT: Consumers rely on a manufacturer's recommended price to help determine whether to accept a retailer's price or continue to search. This paper demonstrates that doing so can be rational even if the manufacturer's price recommendation is cheap talk. By incentivizing search, a manufacturer trades off reducing double marginalization and losing consumers to competitors. When the manufacturer's cost is low he induces low retail prices and benefits when consumers search more. When the manufacturer's cost is high he induces high retail prices and benefits when consumers search less. Since consumers prefer to search more when lower prices are available, their incentives are aligned with the manufacturer's and this allows informative cheap talk communication. Aside from costs, the manufacturer can inform consumers of other market parameters such as product quality.

Entry and Welfare in Search Markets

Yongmin Chen, University of Colorado at Boulder and Tianle Zhang, Lingnan University address Entry and Welfare in Search Markets.

ABSTRACT: The effects of entry on consumer and total welfare are studied in a model of consumer search. Potential entrants differ in quality, with high-quality sellers being more likely to meet consumer needs. Contrary to the standard view in economics that more entry bene…ts consumers, we …nd that consumer welfare has an inverted-U relationship with entry cost, and free entry is excessive for both consumer and total welfare when entry cost is relatively low. We explain why these results may arise naturally in search markets due to the variety and quality e¤ects of entry, and discuss their business and policy implications.

Faull and Nikpay: The EU Law of Competition

Jonathan Faull and Ali Nikpay have published a new third edition of The EU Law of Competition. This is a massive expansion over the previous version, coming in at over 1.2 million words. If there is only one book you buy on EU law, it should be this one.

BOOK ABSTRACT: Offers uniquely in-depth working knowledge of EU competition law, written by current and former members of the Directorate General for Competition

• A practical reference tool that puts particular emphasis upon how law and policy apply in practice 
• New chapter on pharmaceuticals, covering dominance in abusive conduct cases, restrictive practices, competition between manufacturers of generic medicines, case law, and parallel trade in pharmaceuticals 
• New separate chapters on communications (telecoms and Internet) and media 
• Greatly expanded chapters on mergers and cartels 

Fully updated in this third edition, the work includes full coverage of the latest legislation, case law and guidance, giving competition lawyers a comprehensive commentary on recent developments. It includes new material on industries of growing importance in the competition field, including Pharma and High Tech. It also analyses the R&D and Specialisation Block Exemption Regulations, the revised Verticals Block Exemption Regulation, and the Technology Transfer Block Exemption. Key cases covered in this edition include Telefonica, Microsoft, Intel, Rambus, RWE, and GdF.

Horizontal mergers and uncertainty

Nicolas Le Pape, CREM, Universite de Caen and Kai Zhao, Huaqiao University, Xiemen, China explore Horizontal mergers and uncertainty.

ABSTRACT: Some path-breaking work on mergers takes efficiency gains for granted, or assumes that firms have perfect knowledge when taking merger decisions. In practice, firms and competition authorities cannot know exact future efficiency gains, prior to merger consummation. This paper analyzes horizontal mergers when the output decision-making process is sequential. A key assumption is that mergers create uncertainty on productivity and informational asymmetry between firms. The paper also studies whether the merged firm has interest to reveal the information about its own cost to competing firms. In terms of "Merger Approval", the paper emphasizes the timing of regulatory intervention and distinguishes two different merger control interventions (ex ante or ex post enforcement). Since prudent competition authorities (using ex ante intervention) should take the restrictive policy, the framework illustrates why US Horizontal Merger Guidelines and EC Merger Regulation are biased in favor of the consumers’ interests.

Spatial Price Differentiation and Regional Market Power. The Case of Food-Retailing in Austria

Dieter Pennerstorfer (WIFO) and Franz Sinabell (WIFO) discuss Spatial Price Differentiation and Regional Market Power. The Case of Food-Retailing in Austria.

ABSTRACT: A small number of firms have a large market share in the Austrian food retailing market. Market concentration has been growing over the last years which has raised concerns about market power. Previous studies on price setting behaviour in the food retailing market were at the national level and regional price setting has not yet been analysed. We use a panel data set of over 2,000 households with monthly food purchasing data and the number of outlets of the nine biggest food retailers in 120 districts to explore regional price setting behaviour. The analysis shows that only a small number of retailers seem to regionally differentiate prices extensively. It cannot be confirmed that spatial price differentiation is a way to exert market power in the Austrian food retailing market.

High growth firms, innovation and competition: the case of the US pharmaceutical industry

Mariana Mazzucato (SPRU, University of Sussex, UK) and Stuart Parris (Faculty of Economics, Open University, UK) examine High growth firms, innovation and competition: the case of the US pharmaceutical industry.

 

Flex Cars and Competition in Ethanol and Gasoline Retail Markets

Juliano Assuncao, Pontificia Universidade Catolica do Rio de Janeiro, Joao Paulo Pessoa, LSE and Leonardo Rezende, Pontificia Universidade Catolica do Rio de Janeiro discuss Flex Cars and Competition in Ethanol and Gasoline Retail Markets.

ABSTRACT: In Brazil, gasoline and ethanol coexist as automotive fuels and are becoming closer substitutes as flex cars become more widely adopted. We employ this source of variation in a large panel of weekly prices at the station level to show that fuel prices have fallen in response to this change. This finding is evidence of market power in fuel retail and indicates that innovations that increase consumer choice benefit even those who choose not to adopt them. We also propose a model of price competition in this market and use it to estimate demand from price response functions.