Tuesday, August 25, 2015
Roberto Burguet, Instituto de Analisis Economico, CSIC and Ramon Caminal, Universitat Autonoma de Barcelona - Institut d'Analisi Economica, CSIC; Centre for Economic Policy Research (CEPR) explain Bargaining Failures and Merger Policy.
ABSTRACT: We study approval rules in a model where horizontal merger proposals arise endogenously as the outcome of negotiations among the firms in the industry. We make two main points. First, relatively inefficient merger proposals succeed with positive probability. That is, the negotiation process may result in a particular merger agreement despite the existence of an alternative one that would generate higher profits and higher consumer surplus. Second, the antitrust authority should optimally commit to an approval rule that is more stringent for all mergers than the optimal ex post rule.
Andrew Acito, Michigan State University, David Folsom, Lehigh University, and Rong Zhao, University of Calgary explore Management Sales Forecasts and Firm Market Power.
ABSTRACT: Managers deciding whether to issue sales forecasts face a different cost-benefit trade-off than when deciding to issue the more commonly studied earnings forecasts because sales forecasts provide investors and competitors with a more transparent signal of a firm’s short-term demand information and the actions it will take in the product market. We provide evidence demonstrating that sales forecasts contain information about future sales that is incremental to earnings forecasts. We then investigate whether a firm’s market power relative to competitors within its product market affects managers’ decisions to issue sales forecasts and what effect market power has on the accuracy of these forecasts. We proxy for market power using market share and excess price-cost margin, two measures that directly relate to the sales forecasts we study. Controlling for industry-level effects, we find evidence that higher firm market power, as measured by excess margin, is associated with a higher likelihood of issuing sales forecasts. Higher excess margin is also associated with better forecast accuracy on average. Overall, our findings are consistent with higher-market-power firms being more willing to provide sales forecast information to investors through public disclosures.
Monday, August 24, 2015
Yusuke Zennyo, Osaka University of Economics addresses Competition between Vertically Differentiated Platforms.
ABSTRACT: This paper investigates the competition between vertically differentiated platforms in two-sided markets. We assume the presence of two competing platforms producing either higher- or lower-quality devices for consumers. Each platform decides the price of its hardware device for consumers and the royalty rate for software developers. We find that, despite the existence of quality differences, the decisions by the platforms about royalty rates are symmetric and only hardware pricing is asymmetric. We also demonstrate that an equilibrium may exist in which a lower-quality platform can enjoy greater profit than a higher-quality rival when there are higher development costs associated with creating software to meet the needs of higher-quality devices.
Shilpi Bhattacharya, Erasmus University Rotterdam and Roger Van den Bergh, Erasmus University Rotterdam (EUR) - Erasmus School of Law have a review of The Contribution of Management Studies to Understanding Firm Behaviour and Competition Law.
ABSTRACT: Notwithstanding criticisms, behavioural economics has found a place in competition policy discussions. This paper explores how contributions from the field of management studies may strengthen behavioural theories of the firm and competition law. Various linkages may be drawn between management studies and the behavioural theory of the firm, which can inform existing debates within behavioural antitrust. Both disciplines relate a firm’s internal processes to its competitive position in the market. Further, both disciplines emphasize the cognitive limitations of managers and the effect of organizational structures on firm behaviour. The empirical findings of management studies supplement behavioural theories of the firm. This paper examines the insights from management studies and behavioural theories of the firm with the objective of determining whether these insights can lead to a better understanding of firm behaviour, which in turn may be able to inform the normative debate in competition law.
Gregory Dolin, University of Baltimore - School of Law describes Nonprice Competition in 'Substitute' Drugs: The FTC's Blind Spot.
ABSTRACT: As the recent case of United States v. Lundbeck illustrates, the Federal Trade Commission’s lack of knowledge in medical and pharmacological sciences affects its evaluation of transactions between medical and pharmaceutical companies that involve transfers of rights to manufacture or sell drugs, causing the agency to object to such transactions without solid basis for doing so. This article argues that in order to properly define a pharmaceutical market, one must not just consider the condition that competing drugs are meant to treat, but also take into account whether there are “off-label” drugs that are used to treat a relevant condition, whether drugs actually compete with each other on price or whether they are selected based on their side-effects (or lack thereof), mechanism of action, physician knowledge, and other noneconomic considerations, and finally whether the drugs in question enjoy any patent or nonpatent-based exclusivity that prevents generic manufacturers from entering the market.
Jon Potter, president of the App Developers Alliance has an op-ed on Don’t Reverse Mobile-Platform Improvements That Benefit App Developers And Consumers. As I get ready to teach my Law and Entrepreneurship class this morning, the importance of understanding the economic drivers in the tech community (and how not to regulate) is something that cannot be underemphasized. My own recent op-ed on Indian tech and innovation (with my friend and co-author Professor Chirantan Chatterjee of IIM Bangalore) is here.
Itai Ater Tel Aviv University - The Leon Recanati Graduate School of Business Administration examines Vertical Foreclosure Using Exclusivity Clauses: Evidence from Shopping Malls. Recommended!
ABSTRACT: Exclusive contracts are one of the most controversial topics in the economic analysis of antitrust. Yet, very few empirical papers analyze the determinants and the consequences of exclusive contracts. In this paper, I study exclusive contracts between hamburger restaurants and Israeli shopping malls, in which mall owners commit to prohibiting additional hamburger restaurants from entering their malls. I investigate the determinants of these exclusive contracts and examine how such contracts affect the number of hamburger restaurants and their sales. I show that exclusive contracts are less likely to be adopted in larger malls, in malls that face more competition from other malls, and in malls that opened before 1993, when McDonald's and Burger King entered the Israeli market. I then use the mall's opening year - before or after 1993 - as an instrumental variable to estimate a negative effect of exclusive contracts on the number of restaurants and on total mall hamburger sales. My findings are generally consistent with anti‐competitive vertical foreclosure models.
Deven R. Desai (Geogria Tech), Ioannis Lianos (UCL) and Spencer Waller (Chicago Loyola) discuss Brands, Competition Law and IP.
BOOK ABSTRACT: Brands and brand management have become a central feature of the modern economy and a staple of business theory and business practice. Contrary to the law's conception of trademarks, brands are used to indicate far more than source and/or quality. This volume begins the process of broadening the legal understanding of brands by explaining what brands are and how they function, how trademark and antitrust/competition law have misunderstood brands, and the implications of continuing to ignore the role brands play in business competition. This is the first book to engage with the topic from an interdisciplinary perspective, hence it will be a must-have for all those interested in the phenomenon of brands and how their function is recognized by the legal system. The book integrates both a competition and an intellectual property law dimension and explores the regulatory environment and case law in both Europe and the United States.
Friday, August 21, 2015
Dov Rothman (Analysis Group) and Aaron Yeater (Analysis Group) have a new paper on The Fallacy of Inferring Collusion from Countercyclical Prices.
ABSTRACT: In cartel matters, plaintiffs often claim that higher prices during periods of weak demand is evidence of collusion. In a recent article, "The Fallacy of Inferring Collusion from Countercyclical Prices" (American Bar Association Section of Antitrust Law, The Economics Committee Newsletter, Spring 2015), Analysis Group Vice Presidents Dov Rothman and Aaron Yeater explain that this claim is based on an oversimplified economic framework. In actual markets, prices may go up or down when demand changes. An important implication is that one cannot infer collusion from the mere observation of higher prices during periods of weak demand.
J. Gregory Sidak, Criterion Economics, L.L.C. examines Bargaining Power and Patent Damages.
ABSTRACT: In patent-infringement litigation, if no established royalty for the patent in suit has emerged from multiple market transactions at a readily observable price, then the finder of fact needs to infer a reasonable royalty from the many factors identified in the Georgia-Pacific framework. The well-recognized problem with the Georgia-Pacific framework is that it poses many potentially relevant questions but does not say how the finder of fact should weight the answers. The case law offers no algorithm or decision tree for the finder of fact to follow. Courts find expert testimony inadmissible if it does not apply intellectually rigorous economic methods and principles to the facts and data of the case to produce results that are replicable and falsifiable. With modest effort, and without repudiating existing precedent, the courts can make the Georgia-Pacific framework far more coherent, predictable, and intellectually rigorous. From an economic perspective, that framework ultimately leads the finder of fact, first, to determine the gains from trade — which economists call “surplus” — arising from a hypothetical, voluntary negotiation between a willing licensor and a willing licensee just before the moment of first infringement and, second, to divide that surplus between the licensor and licensee according to their relative bargaining power. For brevity and clarity, I call these two culminating steps the surplus-division principle. This principle is more reliable than purporting to set a reasonable royalty on the basis of a mathematical theory (such as the Nash bargaining solution) that is too abstract to fit the facts and data of the case. It is also more reliable than an expert’s idiosyncratic and nonfalsifiable claim to have balanced the totality of the circumstances in light of his professional experience. In contrast to both a theoretical black box and an expert’s ipse dixit, the surplus-division principle uses elementary principles of microeconomics to give coherence to the Georgia-Pacific factors that courts have already defined and applied. The result enables the finder of fact to determine a licensor’s minimum willingness to accept and a licensee’s maximum willingness to pay for the patented technology, and thereby to define the bargaining range for a hypothetical negotiation. This method is robust across different factual scenarios and multiple defendants.
The Commission's E-Commerce Sector Inquiry: Analysis of Legal Issues and Suggested Practical Approach
Lars Kjolbye, Alessio Aresu and Sophia Stephanou, describe The Commission's E-Commerce Sector Inquiry: Analysis of Legal Issues and Suggested Practical Approach.
ABSTRACT: The Commission has recently launched a sector inquiry into e-commerce, focussing on restrictions in on-line sales of consumer goods and on-line distribution of content. On-line sales models raise issues as to the applicability of Article 101, specifically in relation to the existence of an agreement between separate undertakings, the presence of an agreement (as opposed to unilateral action), and the existence of an agency arrangement. Competition authorities have recently considered the application of competition rules to on-line sectors, but enforcement activity has been inconsistent. Article 102 could also be used as an enforcement instrument against unilateral behaviour by on-line platforms, although its application would entail complexities.
The E-Commerce Sector Inquiry: Can It Stop National Competition Authorities from Adopting an Overly Restrictive Approach?
Francesco Carloni, Scott S. Megregian and Melanie Bruneau, DLA ask The E-Commerce Sector Inquiry: Can It Stop National Competition Authorities from Adopting an Overly Restrictive Approach?
ABSTRACT: In the past years, some national competition authorities have adopted a restrictive approach as regards on-line practices in the distribution of goods and services in the European Union. As a result of that approach, companies are facing increasing uncertainty as to the legality and enforceability of their distribution agreements. A question is to what extend the situation will be changed with the e-commerce sector inquiry launched by the European Commission on 6 May 2015.
Thursday, August 20, 2015
Losses from Horizontal Merger: An Extension to a Successive Oligopoly Model with Product Differentiation
Ramon Fauli‐Oller, Universidad de Alicante and Borja Mesa‐Sanchez, Universidad Carlos III de Madrid discuss Losses from Horizontal Merger: An Extension to a Successive Oligopoly Model with Product Differentiation.
ABSTRACT: This paper generalizes the model of Salant et al. (1983; Quarterly Journal of Economics, Vol. 98, pp. 185–199) to a successive oligopoly model with product differentiation. Upstream firms produce differentiated goods, retailers compete in quantities, and supply contracts are linear. We show that if retailers buy from all producers, downstream mergers do not affect wholesale prices. Our result replicates that of Salant's, where mergers are not profitable unless the size of the merged firm exceeds 80 per cent of the industry. This result is robust to the type of competition.
Rich Gilbert, Berkeley explains E-Books: A Tale of Digital Disruption.
ABSTRACT: E-book sales surged after Amazon introduced the Kindle e-reader at the end of 2007 and accounted for about one quarter of all trade book sales by the end of 2013. Amazon’s aggressive pricing led to allegations that e-books were bankrupting brick-and-mortar book booksellers. Amazon’s commanding position as a bookseller also raises concerns about monopoly power and publishers are concerned about Amazon’s power to displace them in the book value chain. I find little evidence that e-books are primarily responsible for the decline of independent booksellers. I also conclude that entry barriers are not sufficient to allow Amazon to set monopoly prices. Publishers are at risk from Amazon’s monopsony (buyer) power and they adopted agency pricing in an effort to promote retail competition and reduce Amazon’s influence as an e-retailer. Although challenged by the Department of Justice, agency pricing may yet prevail in some form as an equilibrium pricing model for e-book sales.
Leonardo J. Basso, Universidad de Chile - Civil Engineering Department, Nicolas Figueroa, Pontificia Universidad Catolica de Chile, and Jorge Vasquez, University of Wisconsin at Madison - Department of Economics analyze Monopoly Regulation Under Asymmetric Information: Prices vs. Quantities.
ABSTRACT: We compare two instruments to regulate a monopoly that has private information about its demand or costs: fixing the price or the quantity. For each instrument we consider two mechanisms: sophisticated (screening menus) and simple (single menus). We characterize the optimal mechanisms for every instrument, and make between and within comparisons. The two instruments are equivalent when costs are unknown. When demand is unknown and marginal costs are increasing, the sophisticated price mechanism dominates that of quantity, whereas the simple price mechanism dominates that of quantity when marginal costs are decreasing. In the remaining cases each instrument can dominate.
Barak Orbach, University of Arizona discusses The Durability of Formalism in Antitrust.
ABSTRACT: Antitrust formalism consists of commitments to interpretations of the antitrust laws that require courts to discount and even disregard relevant competitive effects. The phenomenon is more known as the use of rigid rules resting on premises that are correct under some circumstances but not all. Examples of antitrust formalism include per se rules, the analysis of collusion, the interpretation of the distinction between horizontal and vertical restraints, the “direct-purchaser” doctrine, and Twombly’s pleading standard. Competition-law rules that downplay competitive effects appear to run afoul of the goals of antitrust and, as such, antitrust formalism is counterintuitive. Antitrust formalism, however, has been a fixture in antitrust policy to which both liberal and conservative antitrust experts — lawyers and economists — have contributed since Congress enacted the Sherman Act. One way to describe antitrust formalism is that many individuals believe that their beliefs should define the law and that, in every generation, some individuals have the power or ability to promote such beliefs. This Article explains the durability of formalism in antitrust law and policy through some of the key facets of the phenomenon.
Wednesday, August 19, 2015
Marek Martyniszyn, Queen's University Belfast - School of Law provides thoughts On Extraterritoriality and the Gazprom Case.
ABSTRACT: The European Commission's (EC) investigation of Gazprom's business practices in the EU raises a number of questions. This article comments on the issue of the EC's jurisdiction in transnational cases in general and in particular—in the context of the Gazprom case, in light of another contribution dealing with this matter. It also sheds some light on the considerations which might have informed Russia's legislative response to the EC's investigation.
Jeffrey I. D. Lewis, Fried, Frank, Harris, Shriver & Jacobson LLP; Benjamin N. Cardozo School of Law and Maggie Wittlin, Columbia University - Law School have written Entering the Innovation Twilight Zone: How Patent and Antitrust Law Must Work Together.
ABSTRACT: Patent law and antitrust law have traded ascendancy over the last century, as courts and other institutions have tended to favor one at the expense of the other. In this Article, we take several steps toward stabilizing the doctrine surrounding these two branches of law. First, we argue that an optimal balance between patent rights and antitrust enforcement exists that will maximize consumer welfare, including promoting innovation and economic growth. Further, as Congress is the best institution to find this optimum, courts should enforce both statutes according to their literal text, which grants absolute patent rights but allows for more discretion in antitrust enforcement. Second, we propose three possible reasons for the historical conflict between these regimes: cultural cognition, political economy, and federal court structure. As a result, we propose two stabilizing solutions: research into culturally depolarizing communication techniques and a two-court “Innovation Circuit.”
Bjorn Lundqvist, Copenhagen Business School; Stockholm University - Faculty of Law and Helene Andersson, Stockholm University ask Access to Documents for Cartel Victims and Cartel Members – is the System Coherent?
ABSTRACT: In this paper we analyse the right to access documents for cartel victims and cartel members. We start with an analysis of the case law from the European Court of Justice and the General Court. The effects of the new Private Enforcement Directive will thereafter be scrutinized. These two sub-chapters are divided so that we analyse the requestors: (i) individuals or (ii) national courts, and the recipients of these requests: (iii) potential or real defendants, (iv) national competition authorities, or (v) the European Commission, separately. Different legal systems are triggered depending on who makes a request and who is the receiver of such a request, and the potential success of obtaining the documents varies considerably. Thereafter, we discuss the rights to the defence and access to documents while being subject to a cartel investigation by the Commission. Our finding is that different legal systems are triggered depending on who makes a request and who is the receiver of such a request, and the potential success of obtaining the documents varies considerably. In fact, the system is not coherent.
Kurt Richard Brekke, Norwegian School of Economics (NHH) - Department of Economics; CESifo (Center for Economic Studies and Ifo Institute), Luigi Siciliani, University of York, and Odd Rune Straume, University of Minho - Economic Policies Research Unit (NIPE); CESifo (Center for Economic Studies and Ifo Institute) discuss Hospital Competition with Soft Budgets.
ABSTRACT: We study the incentives for quality provision and cost efficiency for hospitals with soft budgets, where the payer can cover deficits or confiscate surpluses. While a higher bailout probability reduces cost efficiency, the effect on quality is ambiguous. Profit confiscation reduces both quality and cost efficiency. First‐best is achieved by a strict no‐bailout and no‐profit‐confiscation policy when the regulated price is optimally set. However, for suboptimal prices, a more lenient bailout policy can be welfare‐improving. When we allow for heterogeneity in costs and qualities, we also show that a softer budget can raise quality for high‐cost patients.