Monday, July 27, 2015
On 22-23 October 2015, the Portuguese Competition Authority will host the IV Lisbon Conference, a unique opportunity to stay up-to-date on the latest trends and debates. Pre register to keep updated on the Conference.
Managing Director, Global Economics Group and Adjunct Professor, NYU Stern School of Business, New York
Joaquim Nunes de Almeida
Director, DG GROW, European Commission
Partner, Berwin Leighton Paisner LLP, Brussels
Gilvandro Vasconcelos Coelho de Araújo
Commissioner, Administrative Council for Economic Defence, Brazil
Head, Competition Division, OECD
Chairman of the OECD’s Competition Law and Policy Committee and Professor of Economics at the ESSEC Business School, Paris
Eduardo Prieto Kessler
Competition Director, National Commission for Markets and Competition, Spain
Director, Institute of Prices and Competition, Ministry of Finance, Angola
Senior Director, Research, Intelligence and Advocacy, Competition and Markets Authority, UK
Global Competition Professor of Law and Policy at George Washington University Law School, Washington, D.C., and Non-Executive Director of the Board, Competition and Markets Authority (CMA), UK
President, Autorité de la concurrence, France
Helena Abreu Lopes
Judge, Court of Auditors, Portugal
Director, DG COMP, European Commission
Head of Public Policy EMEA, Uber, Amsterdam
Guilherme d’Oliveira Martins
President of the Court of Auditors, Portugal
Amilcar Aristides Monteiro
Director General for Industry and Trade, Ministry of Tourism, Investments and Business Development, Cabo Verde
Director-General for Consumer, Portugal
Senior Managing Director and Head of Compass Lexecon Europe, Madrid
Principal Expert in Antitrust Policy, DG COMP, European Commission
Andrea Gomes da Silva
Senior Legal Director, Markets, Mergers and Sector Regulation, Competition and Markets Authority, UK
Professor of Economics, SITE –Stockholm School of Economics & University of ‘Tor Vergata’ – DEF and Research Fellow, C.E.P.R., London & E.N.C.O.R.E, Amsterdam
Director General, Austrian Competition Authority, Austria
Chief Economist, Google, and Emeritus Professor at the University of California, Berkeley, California
Chief Executive Officer, Competition Commission, Hong Kong
Jeroen Hinloopen (University of Amsterdam); Wieland Mueller (Vienna University); and Hans-Theo Normann (Heinrich-Heine University) describe Output Commitment through Product Bundling: Experimental Evidence.
ABSTRACT: This discussion paper resulted in a publication in <I>European Economic Review</I> (2014), 164-180.<P> We analyze the impact of product bundling in experimental markets. One firm has monopoly power in a first market but competes with another firm in a second market. We compare treatments where the multiproduct firm (i) always bundles, (ii) never bundles, and (iii) chooses whether or not to bundle. We also contrast the simultaneous and the sequential order of moves in the duopoly market. Our data indicate support for the theory of product bundling: with bundling and simultaneous moves, the multiproduct firm offers the predicted number of units. When the multiproduct firm is the Stackelberg leader, the predicted equilibrium is better attained with bundling, especially when it chooses to bundle, even though in theory bundling should not make a difference here. In sum, bundling works as a commitment device that enables the transfer of market! power from one market to another.
Jeroen Hinloopen (University of Amsterdam); Grega Smrkolj (University of Amsterdam) and Florian Wagener (University of Amsterdam) have written In Defense of Trusts: R&D Cooperation in Global Perspective.
ABSTRACT: We present a continuous-time generalization of the seminal R&D model of d’Aspremont and Jacquemin (American Economic Review, Vol. 78, No. 5) to examine the trade-off between the benefits of allowing firms to cooperate in R&D and the corresponding increased potential for product market collusion. We consider all trajectories that are candidates for an optimal solution as well as initial marginal cost levels that exceed the choke price. Firms that collude develop further a wider range of initial technologies, pursue innovations more quickly, and are less likely to abandon a technology. Product market collusion could thus yield higher total surplus.
Friday, July 24, 2015
ABSTRACT: We study antitrust enforcement that channels price-fixing incentives through setting fines and allocating resources to detection activities. Antitrust fines obey four legal principles: punishments should fit the crime, proportionality, bankruptcy considerations, and minimum fines. Bankruptcy considerations limit maximum fines, ensure abnormal cartel profits and impose a challenge for optimal antitrust enforcement. We integrate the mentioned legal principles into an infinitely-repeated oligopoly model. We derive the optimal level of detection activities and the optimal fine schedule that achieves maximal social welfare under these legal principles. The optimal fine schedule remains below the maximum fine and induces collusion on a lower price by making it more attractive than collusion on higher prices. For a range of low cartel prices, the fine is set to the legal minimum. Raising minimum fines will enable the cartel to raise its price and is better avoid! ed. Our analysis and results relate to the marginal deterrence literature.
Marc Möller (University of Bern, Switzerland) and Makoto Watanabe (VU University Amsterdam) explore Competition in the Presence of Individual Demand Uncertainty.
ABSTRACT: This paper sheds light on a recent empirical controversy about the effect of competition on price discrimination in airline markets (Borenstein and Rose (1994), Gerardi and Shapiro, (2009)). We introduce individual demand uncertainty into Hotelling’s model of horizontal product differentiation and show that in equilibrium, firms offer advance purchase discounts. Consumers trade–off an early (uninformed) purchase at a low price against a late (informed) purchase at a high price. Relative to a (multi-product) monopolist, competing firms offer larger discounts, leading to an intertemporal distribution of sales that is more skewed towards low prices. We show that whether competition has a positive or a negative effect on the Gini coefficient of price dispersion depends on the degree of product differentiation and the level of demand uncertainty.
ABSTRACT: We analyze how leniency affects cartel pricing in an infinitely-repeated oligopoly model where the fine rates are linked to illegal gains and detection probabilities depend on the degree of collusion. A novel aspect of this study is that we focus on the worst possible outcome. We investigate the maximal cartel price, the largest price for which the conditions for sustainability hold. We analyze how the maximal cartel price supported by different cartel strategies adjusts in response to the introduction of (ex-ante and ex-post) leniency programs. We disentangle the effects of traditional antitrust enforcement, leniency, and cartel strategies on the maximal cartel price. Ex-ante leniency cannot reduce the maximal cartel price below the price under antitrust without leniency. On the other hand, for ex-post leniency, improvement is possible and granting full immunity to single-reporting firms achieves the largest reduction in the maximal cartel price. To redu! ce adverse effects under both leniency programs, fine reductions to multiple-reporting firms should be moderate or absent. Finally, ex-post leniency should provide less generous fine reductions to multiple-reporting firms, which is supported by the current practice in the US and the EU.
Thursday, July 23, 2015
José L. Moraga-González (VU University Amsterdam, the Netherlands); Zsolt Sándor (Sapientia University, Rumania); and Matthijs R. Wildenbeest (Indiana University, United States) examine Prices, Product Differentiation, and Heterogeneous Search Costs.
ABSTRACT: We study price formation in the standard model of consumer search for differentiated products but allow for search cost heterogeneity. In doing so, we dispense with the usual assumption that all consumers search at least once in equilibrium. This allows us to analyze the manner in which prices affect the decision to search rather than to not search at all, which is an important but often neglected aspect of the price mechanism. Recognizing the role the equilibrium price plays in consumers' participation decisions turns out to be critical for understanding how search costs affect market power. This is because the two margins that determine prices the intensive search margin, or search intensity, and the extensive search margin, or search participation may be affected in opposing directions by a change in search costs. When search costs go up, fewer consumers decide to search, which modifies the search composition of demand such that demand can become more ! elastic. At the same time, the consumers who choose to search reduce their search intensity, which makes demand less elastic. Whether the effect on the extensive or the intensive search margin dominates depends on the range and shape of the search cost density. We identify conditions for higher search costs to result in higher, constant, or lower prices. Similar results are obtained when the marginal gains from search vary across consumers
Sylvia Bleker (VU University Amsterdam, the Netherlands); Christiaan Behrens (VU University Amsterdam, the Netherlands) ; Paul Koster (VU University Amsterdam, the Netherlands); and Erik T. Verhoef (VU University Amsterdam, the Netherlands) describe Market Structure and the Pricing of New Products: A Nested Logit Approach with Asymmetric Firms.
ABSTRACT: This article investigates competition in a market with an emerging technology using a discrete choice model to analyze demand and welfare. We focus on industry structure and investigate the impact of different market structures on demand for the new technology and on welfare. The car market serves as a prime example of such a market, where electric vehicles (EV’s) represent the new technology competing with standard cars with internal combustion engines (ICV’s). To analyze such a market, we use a nested logit model. In contrast to earlier literature, we allow firms to be asymmetric and active in multiple nests, with different numbers of variants in each nest, which can add up to any market share. Additionally, we add to existing literature by considering the case where substitutability between firms is stronger than between technologies, by nesting products by technology instead of by firm. We find implicit analytical solutions for the equilibrium mar! k-ups which can be used when there are two nests in the market; within that restriction firms can be asymmetric. Numerically, we find that EV sales are higher if offered by a new entrant only selling EV’s as opposed to when it is supplied by a firm selling variants of both types. We present an index based on mark-up differences between variants in the market, which can be used to a priori determine whether a change in market structure would increase or decrease welfare. These results are general to the nested logit model, and the index can thus be used in any market, as long as the market is sufficiently accurately described by the nested logit model.
I have just returned from Australia where I taught a short course on comparative cartels with Caron Beaton-Wells at the University of Melbourne. The University of Melbourne is a marvelous university and the competition law LLM is a well structured program and one that I recommend highly based on the Melbourne and global faculty.
Above is a photo of Andy McBride (BHP Billiton), myself and Caron Beaton-Wells (University of Melbourne). I gave a talk on my cartel research at the Competition Law & Economics Network. A number of practitioners, econ profs and law professors from Melbourne and other Australian universities attended the talk and provided thoughtful feedback. Andy gave an amazing guest lecture on the BHP compliance program, a program that other companies may want to emulate.
ABSTRACT: This paper extends Hotelling's model of price competition with quadratic transportation costs from a line to graphs. We derive an algorithm to calculate firm-level demand for any given graph, conditional on prices and firm locations. These graph models of price competition may lead to spatial discontinuities in firm-level demand. We show that the existence result of D'Aspremont et al. (1979) does not extend to simple star graphs and conjecture that this non-existence result holds more generally for all graph models with two or more firms that cannot be reduced to a line or circle.
ABSTRACT: We introduce a cost of location into Hotelling’s (1929) spatial duopoly. We derive the general conditions on the cost-of-location function under which a pure strategy price-location Nash equilibrium exists. With linear transportation cost and a suitably specified cost of location that rises toward the center of the Hotelling line, symmetric equilibrium locations are in the outer quartiles of the line, ensuring the existence of pure strategy equilibrium prices. With quadratic transportation cost and a suitably specified cost of location that falls toward the center of the line, symmetric equilibrium locations range from the center to the end of the line.
Wednesday, July 22, 2015
On endogenous Stackelberg leadership: The case of horizontally differentiated duopoly and asymmetric net work compatibility effects
Tsuyoshi Toshimitsu (School of Economics, Kwansei Gakuin University) provides comments On endogenous Stackelberg leadership: The case of horizontally differentiated duopoly and asymmetric net work compatibility effects.
ABSTRACT: Introducing product compatibility associated with network externalities (hereafter, network compatibility effects) into a horizontally differentiated duopoly model, we consider how network compatibility effects and the level of product substitutability affect endogenous timing decisions in the cases of quantity- and price-setting competition. In particular, we demonstrate the following. First, given asymmetric network compatibility effects between the products of the firms, there is Stackelberg equilibrium where the firm providing a product with a larger network compatibility effect than some certain level of product substitutability emerges as a leader (follower), whereas the firm providing a product with a smaller network compatibility effect than some certain level of product substitutability emerges as a follower (leader) in the case of quantity (price)-setting competition. Second, the Stackelberg equilibrium is Pareto-superior for both firms compared! with other equilibria. However, with alternative formulation determining network size, with respect to the endogenous Stackelberg leader−follower relationship, the revers holds.
Christiaan Behrens (VU University Amsterdam) and Mark Lijesen (VU University Amsterdam) examine Capacity Choice under Uncertainty with Product Differentiation.
ABSTRACT: We explore the characteristics of a capacity-then-price game for a duopoly market with product differentiation and stochastic demand. The analysis shows that a minimum threshold value for the level of vertical product differentiation exists, relative to horizontal product differentiation, for which existence of a Nash equilibrium in pure strategies is guaranteed. We find that when the quality and cost differences between the firms exactly offset each other, demand uncertainty causes equilibrium outcomes in capacities to become asymmetric. Without demand uncertainty, only a symmetric equilibrium can be established. This difference between stochastic and deterministic demand is the main driver behind our finding that if the regulator ignores the stochastic nature of demand, regulation lowers welfare for a large range of parameters, that is for approximately 10 per cent of the plausible parameter space.
William H. Page, University of Florida - Fredric G. Levin College of Law describes Signaling and Agreement in Antitrust Law.
ABSTRACT: Oligopolists look for signals from one another in planning their strategies. Some signals solicit cooperation from rivals and a still smaller number succeed in achieving noncompetitive equilibria. But only a subset of these noncompetitive outcomes involve agreements under Section 1 of the Sherman Act. In this essay, I try to identify what sorts of signaling fall within this last and narrowest category: signaling that brings about agreement. Conventional signals are actions, like nods of the head, that a culture has recognized as having a specific meaning; prearranged signals are outwardly benign actions or events that parties have agreed to treat as having special significance for them. Both conventional and prearranged signals may form or implement an express agreement under Section 1 in the same way as words, although rivals sometimes prefer to use the signals rather than words in order to conceal a surreptitious conspiracy. Still more important for antitrust law in practice are implicit signals — actions with general, often benign meanings for more than one audience, but that rivals understand as conveying a special meaning for them. Where the action’s multiple meanings for multiple audiences have important efficiency consequences — like a bare public announcement about present or even future prices — courts do not treat the specialized meaning for rivals as triggering a Sherman Act agreement, even if the conduct facilitates noncompetitive pricing. On the other hand, even a formally public announcement may bring about an agreement, if its implicit meaning targets rivals without providing useful information to other audiences.
Aurelien Leroy, University of Orleans - Laboratoire d'economie d'Orleans and Yannick Lucotte, ESG Management School ask Is There a Competition-Stability Trade-Off in European Banking?
ABSTRACT: The trade-off between bank competition and financial stability has always been a widely and controversial issue, both among policymakers and academics. This paper empirically re-investigates the relationship between competition and bank risk across a sample of 54 European listed banks over the period 2004-2013. However, in contrast to most extant literature, we consider both individual and systemic dimension of risk. Bank-individual risk is measured by the Z-score and the Distance-to-default, while we consider the SRISK as a proxy for bank systemic risk. Using the Lerner index as an inverse measure of competition and after controlling for a variety of bank-specific and macroeconomic factors, our results suggest that competition encourages bank risk-taking and then increases individual bank fragility. This result is in line with the traditional "competition-fragility" view. Our most important findings concern the relationship between competition and systemic risk. Indeed, contrary to our previous results, we find that competition enhances financial stability by decreasing systemic risk. This result can be explained by the fact that competition encourages the banks to take on more diversified risks, and thus tends to reduce the correlation in the risk-taking behavior of banks.
Tuesday, July 21, 2015
Alexander Kihm, German Aerospace Center, Nolan Ritter, Rhine-Westphalia Institute for Economic Research (RWI-Essen), and Colin Vance , Rhine-Westphalia Institute for Economic Research (RWI-Essen) ask Is the German Retail Gas Market Competitive?
ABSTRACT: We explore whether non-competitive pricing prevails in Germany’s retail gasoline market by examining the influence of the crude oil price on the retail gasoline price, focusing specifically on how this influence varies according to the brand and to the degree of competition in the vicinity of the station. Our analysis identifies several factors other than cost – including the absence of nearby competitors and regional market concentration – that play a significant role in mediating the influence of the oil price on the retail gas price, suggesting price setting power among stations.
José Luis Moraga-Gonzalez, VU University Amsterdam, Zsolt Sandor, Sapientia University; Sapientia-Hungarian University of Transylvania, and Matthijs R. Wildenbeest, Indiana University - Kelley School of Business - Department of Business Economics & Public Policy analyze Prices and Heterogeneous Search Costs.
ABSTRACT: We study price formation in a model of consumer search for differentiated products when consumers have heterogeneous marginal search costs. We provide conditions under which a symmetric Nash equilibrium exists and is unique. Search costs affect two margins the intensive search margin (or search intensity) and the extensive search margin (or the decision to search rather than to not search at all). These two margins affect the elasticity of demand in opposite directions and whether lower search costs result in higher or lower prices depends on the properties of the search cost density. When the search cost density has the increasing likelihood ratio property (ILRP), the effect of lowering search costs on the intensive search margin has a dominating influence and prices decrease. By contrast, when the search cost density has the decreasing likelihood ratio property (DLRP), the effect on the extensive search margin is dominant and lower search costs result in higher prices. We compare these results with those obtained when consumers have heterogeneous fixed search costs.
Merger Control in Times of Financial Crisis: An Expedient Instrument to Heal the Fledgling Economy or an Object of Abuse?
Kalpana Tyagi, Max Planck Institute for Innovation and Competition asks Merger Control in Times of Financial Crisis: An Expedient Instrument to Heal the Fledgling Economy or an Object of Abuse?
ABSTRACT: In times of crisis, there is reduced demand for consumer durables and the manufacturing industry tends to suffer from excess capacity. Due to liquidity problems, the banking sector too suffers critically. Generally, one observes an accelerated merger control activity across all the sectors, but banking and manufacturing, tend to be most active in terms of merger and acquisitions during times of economic and financial crisis. The present article discusses the substantive and procedural issues in merger control and how the competition authorities respond to crisis by showing flexibility in merger control. The present article presents a critical analysis of treatment of efficiencies and the failing firm defence, with examples of case laws from both sides of the Atlantic. The article concludes by contemplating how merger control can be a constructive instrument to drive the economy towards better macroeconomic fundamentals, without itself being a subject of abuse in the hands of opportunistic enterprises.
First Ever State Aid Sector Investigation: Electricity Producers Targeted by the European Commission
Philip Torbol and Alessandro Di Mario, both K&L Gates, describe the First Ever State Aid Sector Investigation: Electricity Producers Targeted by the European Commission.
ABSTRACT: On 29 April 2015, the European Commission (‘Commission’) launched its first ever sector inquiry under State aid rules, which will assess the measures put in place by the EU Member States to ensure an adequate production of electricity at all times (‘capacity mechanisms’). This could be the first step towards new rules on aid to electricity production. Another possible outcome is the opening of State aid proceedings against specific Member States’ subsidies to electricity producers.
Monday, July 20, 2015
Commissioner Vestager has a new op-ed on My competition philosophy In Europe, companies must play by Europe’s rules.
Some choice passages:
I find it only natural that competition policy is political: protecting consumers, creating jobs, and promoting economic growth is at the center of the goals we work toward...However, when it comes to the individual cases of competition enforcement, independence remains non-negotiable. There, the role of competition authorities is to enforce the law and serve the common interest. We are committed to the principles of fairness, good administration, transparency and due process. There is simply no room for political interference. Our actions have to be solely based on impartiality and rigor: On the facts, on the economics, and on the law.
Does rhetoric reflect reality? My sense is not always.