Tuesday, January 26, 2016
Chrysovalantou Miliou (Department of Economics, Universidad Carlos III de Madrid) and Emmanuel Petrakis (Department of Economics, University of Crete, Greece) ponder Vertical Integration, Knowledge Disclosure and Decreasing Rival's Cost.
ABSTRACT: We study vertical integration taking into account the fact that, by facilitating the exchange of information within the integrated firm, it allows its upstream unit to disclose to the non-integrated downstream customer-rival the knowledge that it acquires regarding its downstream partner's innovation. We show that a vertically integrated firm chooses to disclose its knowledge to its downstream rival. Knowledge disclosure intensifies downstream competition but, at the same time, expands the size of the downstream market. We also show that, due to knowledge disclosure, vertical integration increases firms' innovation incentives, consumer and total welfare, and decreases, instead of raises, the rival's cost.
Monday, January 25, 2016
Product Quality Effects of International Airline Alliances, Antitrust Immunity, and Domestic Mergers
Gayle, Philip and Thomas, Tyson discuss Product Quality Effects of International Airline Alliances, Antitrust Immunity, and Domestic Mergers.
ABSTRACT: Much of the literature on airline cooperation focuses on the price effects of cooperation. A key contribution of our paper is to empirically examine the product quality effects of airline cooperation. Two common types of cooperation among airlines involve international alliances and antitrust immunity (ATI), where ATI allows for more extensive cooperation. Additionally, this paper examines the extent to which domestic mergers affect the quality of international air travel products. The results suggest that increases in the membership of a carrier’s alliance or ATI partners and domestic mergers are associated with the carrier’s own products having more travel-convenient routing quality. Therefore, a complete welfare evaluation of airline cooperation and mergers should not ignore product quality effects.
Carlos Ruiz Mora; Francisco J. Nogales Martin and Francisco Javier Prieto Fernandez analyze Retail competition with switching consumers in electricity markets.
ABSTRACT: The ongoing transformations of power systems worldwide pose important challenges,both economic and technical, for their appropriate planning and operation. A key approach to improve the efficiency of these systems is through demand-side management, i.e., to promote the active involvement of consumers in the system. In particular, the current trend it to conceive systems where electricity consumers can vary their load according to real-time price incentives, offered by retailing companies.Under this setting, retail competition plays an important role as inadequate prices orservices may entail consumers switching to a rival retailer. In this work we consider a game theoretical model where asymmetric retailers compete in prices to increase their profits by accounting for the utility function of consumers. Consumer preferences for retailers are uncertain and distributed within a Hotelling line. We analytically characterize the equilibrium of a retailer duopol! y, establishing its existence and uniqueness conditions. Furthermore, sensitivities of the equilibrium prices with respect to relevant model parameters are also provided. The duopoly model is extended to a multiple retailer case for which we perform an empirical analysis via numerical simulations. Results indicate that, depending on the retailer costs, loyalty rewards and initial market shares, the resulting equilibrium can range from complete competition to one in which a retailer have a leading or even a dominant position in the market, decreasing the consumers' utility significantly. Moreover, the retailer network configuration also plays an important role in the competitiveness of the system.
Nicholas Bloom and John Van Reenen examine Healthcare: how competition can improve management quality and save lives.
ABSTRACT: NHS hospitals in England are rarely closed in constituencies where the governing party has a slender majority. This means that for near random reasons, those parts of the country have more competition in healthcare - which has allowed Nicholas Bloom and John Van Reenen to assess its impact on management quality and clinical performance.
Does Reference Pricing Drive Out Generic Competition in Pharmaceutical Markets? Evidence from a Policy Reform
Kurt R. Brekke (Department of Economics, Norwegian School of Economics); Chiara Canta (Department of Economics, Norwegian School of Economics) and Odd Rune Straume (Universidade do Minho - NIPE) ask Does Reference Pricing Drive Out Generic Competition in Pharmaceutical Markets? Evidence from a Policy Reform.
ABSTRACT: In this paper we study the impact of reference pricing (RP) on entry of generic firms in the pharmaceutical market. For given prices, RP increases generic firms' expected profit, but since RP also stimulates price competition, the impact on generic entry is theoretically ambiguous. In order to empirically test the effects of RP, we exploit a policy reform in Norway in 2005 that exposed a subset of drugs to RP. Having detailed product-level data for a wide set of substances from 2003 to 2013, we find that RP increased the number of generic drugs. We also find that RP increased market shares of generic drugs, reduced the prices of both branded and generic drugs, and led to a (weakly significant) decrease in total drug expenditures. The reduction in total expenditures was relatively smaller than the reduction in average prices, reflecting the fact that lower prices stimulated total demand.
Germain Gaudin, Düsseldorf Institute for Competition Economics, Heinrich Heine University and Despoina Mantzari, School of Law, University of Reading examine MARGIN SQUEEZE: AN ABOVE-COST PREDATORY PRICING APPROACH.
ABSTRACT: We provide a new legal perspective for the antitrust analysis of margin squeeze conducts. Building on recent economic analysis, we explain why margin squeeze conducts should solely be evaluated under adjusted predatory pricing standards. The adjustment corresponds to an increase in the cost benchmark used in the predatory pricing test by including opportunity costs due to missed upstream sales. This can reduce both the risks of false positives and false negatives in margin squeeze cases. We justify this approach by explaining why classic arguments against above-cost predatory pricing typically do not hold in vertical structures where margin squeezes take place and by presenting case law evidence supporting this adjustment. Our approach can help to reconcile the divergent U.S. and EU antitrust stances on margin squeeze.
Sunday, January 24, 2016
Friday, January 22, 2016
Fiordelisi, Franco ; Mare, Davide Salvatore ; Molyneux, Philip analyze State-Aid, Stability and Competition in European Banking.
ABSTRACT: What is the relationship between bank fragility and competition during a period of market turmoil? Does market power in European banking involve extra-gains after discounting for the cost of government intervention? We answer these questions in the context of Eurozone banking over 2005-2012 and show that greater market power increases bank stability implying aggregate extra-gains of 57% of EU12 gross domestic product for the banking sector after discounting for the costs associated with government intervention. The negative influence of competition on bank stability is non-monotonic and reverses for lower degrees of competition. Capital injections, guarantees and asset relief measures elicit greater bank soundness.
Dean Corbae (University of Wisconsin) and Pablo D'Erasmo (FRB Philadelphia) discuss Foreign Competition and Banking Industry Dynamics.
ABSTRACT: We develop a simple general equilibrium framework to study the effects of global competition on banking industry dynamics and welfare. We apply the framework to the Mexican banking industry, which underwent a major structural change in the 1990s as a consequence of both government policy and external shocks. Given high concentration in the Mexican banking industry, domestic and foreign banks act strategically in our framework. After calibrating the model to Mexican data, we examine the welfare consequences of government policies which promote global competition. We find modest welfare gains for households and substantial gains for business.
Edmond Baranes; Stefan Behringer; and Jean-Christophe Poudou consider Mobile Access Charges and Collusion under Asymmetry.
ABSTRACT: This paper considers collusion between asymmetric networks in the telecommunications industry. Its primary purpose is to fill the gap between the literature on collusion between asymmetric firms and the literature on collusion in the telecommunications industry. Employing the standard Hotelling framework of horizontal product differentiation with non-linear tariffs and network based price discrimination we allow for differentiation in a second dimension. Modulo locations, the subscribers to each network operator face an asymmetry parameter that directly impacts their demands and can capture asymmetries in demand elasticities, in demand size, or even both. The implications of these asymmetries for the possibility of sustaining collusion are investigated under alternative access pricing regimes.
Thursday, January 21, 2016
Jakub Kastl (Princeton University); Marco Pagnozzi (Universita di Napoli Federico II and CSEF); and Salvatore Piccolo (Universita Cattolica del Sacro Cuore di Milano and CSEF) are Selling Information to Competitive Firmstion.
ABSTRACT: A monopolistic information provider sells an informative experiment to a large number of perfectly competitive firms. Within each firm, a principal contracts with an exclusive agent who is privately informed about his production cost. Principals decide whether to acquire the experiment, that is informative about the agent’s production cost. While more accurate information reduces agency costs and allows firms to increase production, it also results in a lower market price, which reduces principals’ willingness to pay for information. We show that, even if information is costless for the provider, the optimal experiment is not fully informative when demand is price-inelastic and agents are likely to be inefficient. This result hinges on the assumption that firms are competitive and exacerbates when principals can coordinate vis-à-vis the information provider. In an imperfectly competitive information market, providers may restrict information by not s! elling the experiment to some of the principals.
TAMADA Dai has a new paper on Discriminatory Application of Competition Law and International Investment Agreements.
ABSTRACT: The relationship between competition law and investment law has been a topic of recent discussion. The former aims to establish fair competition conditions in the markets. The latter seeks to protect foreign investments in the State. The broader the regulation of international investment agreements (IIAs), the more visible is the tension between the two laws. For example, the monopoly of a sector by the host State's domestic companies can be regarded as a barrier for foreign investors' entry into the market. If a host State interprets and applies its domestic laws in favor of its domestic companies, then consequently, to the foreign investors' disadvantage, there is discrimination based on nationality. This should be regarded as a breach of national treatment as stipulated in the IIAs. The relationship between the two laws should be analyzed and discussed in greater detail in the future.
Andreea Cosnita-Langlais theorizes Enforcement of Merger Control : Theoretical insights for its Procedural Design.
ABSTRACT: This paper reviews the theoretical underpinnings of the main procedural choices for merger control enforcement. At each relevant stage we highlight the economic trade-offs behind the corresponding procedural choices: mandatory vs voluntary pre-merger notification, ex ante vs ex post merger review, and the type of decision eventually made, binary or not. The paper also identifies the missing debates that still need formal treatment. Our study provides insight for the optimal procedural design of merger control, and as such may be useful to understand the different choices made by the various jurisdictions for merger policy enforcement.
Mark Thatcher examines examines European Commission merger control: combining competition and the creation of larger European firms.
ABSTRACT: The article examines the European Commission's use of its legal powers over mergers. It discusses and tests two views. One is that the 'neoliberal' Commission has ended previous industrial policies of aiding 'national champion' firms to grow through mergers and instead pursues a 'merger-constraining' policy of vigorously using its legal powers to block mergers. The other is that the Commission follows an 'integrationist policy' of seeking the development of larger European firms to deepen economic integration. It examines Commission decisions under the 1989 EC Merger Regulation between 1990 and 2009. It selects three major sectors that are 'likely' for the 'merger-constraining' view - banking, energy and telecommunications - and analyses a dataset of almost 600 Commission decisions and then individual merger cases. It finds that the Commission has approved almost all mergers, including by former 'national champion' firms. There have been only two prohibit! ions over 20 years in the three sectors and the outcome has been the creation of larger European firms through mergers. It explains how the Commission can pursue an integrationist policy through the application of competition processes and criteria. The wider implication is that the Commission can combine competition policy with achieving the 'industrial policy' aim of aiding the development of larger European firms.
Wednesday, January 20, 2016
See here for the final (Portuguese version) of the Brazilian CADE compliance competition guidelines. They are well done and shows that Brazil is at the cutting edge of antitrust compliance. CADE’s compliance guidelines also have been nominated for the 2016 Antitrust Writing Awards of the Concurrences. You can vote for Concurrences awards here.
Liisa Laine (Boston University and Dand School of Business and Economics, University of Jyvaskyla) and Ching-To Albert Ma (Boston University) study Quality and Competition between Public and Private Firms.
ABSTRACT: We study a multi-stage, quality-price game between a public firm and a private firm. The market consists of a set of consumers who have different quality valuations. A public firm aims to maximize social surplus, whereas the private firm maximizes profit. In the first stage, both firms simultaneously choose qualities. In the second stage, both firms simultaneously choose prices. There are multiple equilibria. In some, the public firm chooses a low quality, and the private firm chooses a high quality. In others, the opposite is true. We characterize subgame perfect equilibria for general consumer valuation distributions and quality cost functions, and provide conditions for first-best equilibrium qualities. Various policy implications are drawn.
Jorge M. Streb describes Nash’s interpretations of equilibrium: Solving the objections to Cournot.
ABSTRACT: A Nash equilibrium can also be seen as a Cournot-Nash equilibrium, though this is debated because Cournot provided a specific application, not a general formulation. In my view, another of Nash’s fundamental contributions stands out when contrasting him to Cournot. Cournot treated economic decisions as optimization problems, but his stability analysis of duopoly led to endless discussions because players did not use the available information. Nash solves this with his rational interpretation: when players know the structure of the game, they can use the solution to predict the equilibrium. He thus introduces rational expectations. Nash additionally offers an adaptive interpretation: when players do not know the structure of the game, they can adjust their strategies to maximize payoffs. These adaptive expectations were anticipated by Cournot in his analysis of monopoly. In brief, Nash was not only extraordinary as a mathematician; his deep insights allo! w solving decades-long debates in economics.
Cason, Timothy ; Sheremeta, Roman ; Zhang, Jingjing analyze Asymmetric and Endogenous Within-Group Communication in Competitive Coordination Games.
ABSTRACT: Within-group communication in competitive coordination games has been shown to increase competition between groups and lower efficiency. This study further explores potentially harmful effects of communication, by addressing the questions of (i) asymmetric communication and (ii) the endogenous emergence of communication. Our theoretical analysis provides testable hypotheses regarding the effect of communication on competitive behavior and efficiency. We test these predictions using a laboratory experiment. The experiment shows that although asymmetric communication is not as harmful as symmetric communication, it leads to more aggressive competition and lower efficiency relative to the case when neither group can communicate. Moreover, groups vote to endogenously open communication channels even though this leads to lower payoffs and efficiency.
ABSTRACT: Any organization should seek the efficiency maximization, namely the achievement of an effect/effort ratio as high as possible. In order to apply this economic ground rule, some companies use strategies based on gaining a competitive advantage over competitors. In contrast, other companies choose lighter options to increase profitability. They apply strategies focused on agreements with competitors that aim to maintain prices at a certain level regardless of economic factors governing the market mechanism. The purpose of this paper is to highlight the positive and negative effects of cartels as a management strategy. In this regard, the first part of the article summarizes the most important theories about cartels and their characteristics, while the second part presents some European and Romanian cartels, based on data provided by the European Commission and the Competition Council. The final part presents the most important findings and conclusions but ! also some recommendations for future research.
Tuesday, January 19, 2016
Shubha Ghosh (Syracuse University) and D. Daniel Sokol (University of Florida) address FRAND in India.
ABSTRACT: This paper examines FRAND issues in India. From an institutional perspective, India's FRAND cases do not effectively establish the appropriate role for antitrust in FRAND. On the one hand, there is the potential for hold-up and anti-competitive conduct in the FRAND setting. Such situations would be very fact specific but the CCI orders to date use sweeping language and analysis based on per se like rules of illegality. On the other hand, the creation of per se like rules of illegality create the possibility that CCI will act as a price regulator rather than antitrust enforcer. Over time and with greater use of economic analysis (and greater reliance on the economic staff at CCI), CCI may improve its institutional capabilities. However, the role of jurisdiction as between CCI and the judiciary remains unclear. How best to treat FRAND disputes will take time but the hope is that through greater experience and learning by doing, the Indian competition system will set out a set of economically informed principles for sound FRAND enforcement.
On the issue of institutional design and deference, one question that has not yet been reached (and may not for some time) is how the courts should handle deference when CCI has developed the necessary economic skills to undertake complex cases of antitrust and technology. Should the judiciary defer to agency as expert once expertise developed? This is potentially a chicken and egg problem on developing expertise and rules of deference in need of further study. Complicating matters further is that the economics on competition and patents is complex. Creating an administrable economic model that is coherent remains a work in progress.
Overall the Indian FRAND cases suggest that the current mix of Indian institutions may not yet be well suited to address complex issues of antitrust enforcement. Consequently, such cases should be approached cautiously with a mind on how to think through the economics of innovation, and the implications of enforcement on technology, IP and competition to yield optimal results and the right institutional structure for improved enforcement.