Antitrust & Competition Policy Blog

On Noncooperative Oligopoly Equilibrium in the Multiple Leader-Follower Game

Ludovic Alexandre Julien has thoughts On Noncooperative Oligopoly Equilibrium in the Multiple Leader-Follower Game.

ABSTRACT: In this paper, we provide new proofs of existence and uniqueness of a Stackelberg market equilibrium for a multiple leader-follower noncooperative oligopoly model in which heterogeneous firms compete on quantities. To this end, we consider a two-step game of perfect and complete information in which many leaders interact strategically with many followers. The Stackelberg market equilibrium constitutes a pure strategy subgame perfect Nash equilibrium of this game. The existence (and uniqueness) problem is complexified in this framework since strategic interactions occur within each partial game but also between both partial games through sequential decisions. Then, to prove existence, we notably provide a new procedure to determine (the conditions under which) the optimal behavior of the followers (may be written) as functions of the leaders'strategy profile only. Some examples outline our procedure and discuss our assumptions. 

The dynamics of leniency application and the knock-on effect of cartel enforcement

Eric van Damme and Jun Zhou study The dynamics of leniency application and the knock-on effect of cartel enforcement.

ABSTRACT: The authors study the timing of leniency applications using a novel application of multi-spell discrete-time survival analysis for a sample of cartels prosecuted by the European Commission between 1996 and 2014. The start of a Commission investigation does not affect the rate by which conspirators apply for leniency in the market investigated, but increases the rate of application in separate markets in which a conspirator in the investigated market also engaged in collusion. The revision of the Commission’s leniency programme in 2002 increased the rate of pre-investigation applications. Our results shed light on enforcement efforts against cartels and other forms of

Cournot, Bertrand or Chamberlin: Toward a reconciliation

Parenti, Mathieu ; Sidorov, Alexander ; Thisse, Jacques-Francois ; Zhelobodko, Evgeny examine Cournot, Bertrand or Chamberlin: Toward a reconciliation.

ABSTRACT: The purpose of this paper is to provide a comparison of three types of competition in a differentiated industry: Cournot, Bertrand, and monopolistic competition. This is accomplished in an economy involving one sector and a population of consumers endowed with separable preferences and a given number of labor units. When firms are free to enter the market, monopolistically competitive firms charge lower prices than oligopolistic firms, while the mass of varieties provided by the market is smaller under the former than the latter. If the economy is sufficiently large, Cournot, Bertrand and Chamberlin solutions converge toward the same market outcome, which may be a competitive or a monopolistically competitive equilibrium, depending on the nature of preferences

Competition and corporate control in partial ownership acquisitions

Torben Stuhmeier explores Competition and corporate control in partial ownership acquisitions.

ABSTRACT: Competition authorities have a growing interest in assessing the effects of partial ownership arrangements. We show that the effects of such agreements on competition and welfare depend on the intensity of competition in the market and on the firms' governance structure. When assessing the effects of partial ownership, competition policy has to consider both the financial interest and level of control of the acquiring firm in the target firm.

Measuring Competition Intensity; An Application to Air/HSR Transport Markets

Christiaan Behrens (VU University Amsterdam) and Mark Leijsen (VU University Amsterdam) are Measuring Competition Intensity; An Application to Air/HSR Transport Markets.

ABSTRACT: We develop a method to measure the intensity of competition between firms. Our method, which we call the Best Response Measure (BRM), is related to the conduct parameter method, but avoids the main problems associated with that method. The BRM relies on a very general framework and limited data requirements. Moreover, we show that it provides valuable information in determining the relevant market. We illustrate how the BRM can be used in markets with imperfect substitutes and apply the method to aviation markets in the North Sea area. This also enables us to establish to what extent the high speed rail link between London and the European mainland affects the supply by air carriers.

Airline Price Discrimination

Brian Stacey explores Airline Price Discrimination.

ABSTRACT: Price discrimination enjoys a long history in the airline industry. Borenstein (1989) discusses price discrimination through frequent flyer programs from 1985 as related to the Piedmont-US Air merger, price discrimination strategies have grown in size and scope since then. From Saturday stay over requirements to varying costs based on time of purchase, the airline industry is uniquely situated to enjoy the fruits of price discrimination.

Navigating the New Matchmaker Economy: The Role of Antitrust and Regulation - July 28, 2016

Navigating the New Matchmaker Economy: The Role of Antitrust and Regulation July 28 - 12pm-2pm George Washington Competition Law Center George Washington Law School- FCC Room 2000 H Street, N.W, Washington, DC 20052 Keynote Speakers David S. Evans Co-Author of Matchmakers: The New Economics of Multisided Platforms, Harvard Business Review Press, May 2016 Terrell McSweeny Commissioner, Federal Trade Commission   Jonathan Sallet General Counsel, Federal Communications Commission Edward Black President, Computer and Communications Industry Association   Scott Sher Partner, Wilson Sonsini Goodrich & Rosati Moderated by: William Kovacic Professor, George Washington Law School and Non-Executive Director, Competition and Markets Authority Many of the most dynamic public companies, from Alibaba to Facebook to Visa, and the most valuable start-ups, such as Airbnb and Uber, are matchmakers that connect one group of customers with another group of customers. Economists call matchmakers multisided platforms because they provide physical or virtual platforms for multiple groups to get together. Dating sites connect people with potential matches, for example, and ride-sharing apps do the same for drivers and riders.   Although matchmakers have been around for millennia, they’re becoming more and more popular—and profitable—due to dramatic advances in technology, and a lot of companies that have managed to crack the code of this business model have become today’s power brokers.  Three of the fifth largest firms by market cap are matchmakers as are 7 of the 10 largest unicorns. And so are all of the “gig” and “sharing” companies.   Today, we are increasingly living in the Matchmaker Economy.    So are antitrust authorities and sectoral regulators.  They increasingly encounter matters involving matchmakers.  Some of these matters involve new business models, disruptive innovation, and the collision of new and old industries?  Some also involve platforms tat have quickly achieved massive reach and influence. What—if any—issues do these multisided platforms raise and what—in any—changes in analytical approaches do they require?    At this luncheon event, Dr. Evans, who has done pioneering work on the new economic science of multisided platforms will provide an overview of the new matchmaker economy based on his recent book, coauthored with Richard Schmalensee, Matchmakers: The New Economics of Multisided Platforms.  The book has been featured in The New York Times, the Wall Street Journal and theEconomist, and as a Hot New Release and Best Seller on Amazon.    Four leading experts on antirust and regulation will then give brief presentations: Terrell McSweeny, Commissioner, Federal Trade Commission Jonathan Sallet, General Counsel, Federal Communications Commission Edward Black, President, Computer & Communications Industry Association Scott Sher, Partner, Wilson Sonsini Goodrich & Rosati   Following the four presentations, Professor William Kovacic, Former Chairman of the Federal Trade Commission will moderate a panel discussion with the presenters. Supported by:

Have Customers Benefited from Electricity Retail Competition?

Xuejuan Su (University of Alberta, Department of Economics) asks Have Customers Benefited from Electricity Retail Competition?

ABSTRACT: Compared to traditional cost-of-service (COS) regulation, electricity retail competition may lead to lower costs but higher markups. Thus, the net effect on electricity retail prices is ambiguous. This paper uses a difference-in-difference approach to estimate the impact. The results suggest that in restructured states, only residental customers have benefited from significantly lower prices but not commercial or industrial customers. Furthermore, this benefit is transitory and disappears in the long run. Overall, retail compettion does not seem to deliver lower electricity prices to retail customers across the board or over time.

Upstream Competition and Open Access Regimes: Experimental Evidence

Horstmann, Niklas ; Kramer, Jan ; Schnurr, Daniel offer Upstream Competition and Open Access Regimes: Experimental Evidence.

ABSTRACT: We investigate the effects of alternative open access regimes on market performance. In particular, by means of an economic laboratory experiment we compare the market outcomes under unregulated wholesale competition, under a price-fixing rule (where firms must maintain their wholesale price for a fixed period of time), and under a margin squeeze rule (where the retail price of integrated firms must exceed their wholesale price). Our analysis suggests that wholesale and retail prices are substantially reduced by the introduction of a price-fixing rule at the upstream level compared to the unregulated scenario. In contrast, we do not find evidence that a margin squeeze regulation reduces retail market prices. In fact, while such a rule benefits the reselling firm by allowing for a viable profit margin, prices for consumers tend to be even higher than in the unregulated case.

Endogenous firm competition and the cyclicality of markups

Hassan Afrouzi (The University of Texas at Austin) analyzes Endogenous firm competition and the cyclicality of markups.

ABSTRACT: The cyclicality of markups is crucial to understanding the propagation of shocks and the size of multipliers. I show that the degree of inertia in the response of output to shocks can reverse the cyclicality of markups within implicit collusion and customer-base models. In both classes of models, markups follow a forward looking law of motion in which they depend on firms' conditional expectations over stochastic discount rates and changes in output, implying that auxiliary assumptions that affect the inertia of output can potentially reverse cyclicality of markups in each of these models. I test this common law of motion with data for firms' expectations from New Zealand and find that firms' markup setting behavior is more consistent with implicit collusion models than customer base models. Calibrating an implicit collusion model to the U.S. data, I find that markups are procyclical if there is inertia in the response of output to shocks, as commonly fou! nd in the data.

The Competition Effect in a Public Procurement Model: An error-in-variables approach

David Sundstrom (Department of Economics, Umea University) theorizes about The Competition Effect in a Public Procurement Model: An error-in-variables approach.

ABSTRACT: Auction theory suggests that as the number of bidders (competition) increases, the sizes of the participants’ bids decrease. An issue in the empirical literature on auctions is which measurement(s) of competition to use. Utilizing a dataset on public procurements containing measurements on both the actual and potential number of bidders I find that a workhorse model of public procurements is best fitted to data using only actual bidders as measurement for competition. Acknowledging that all measurements of competition may be erroneous, I propose an instrumental variable estimator that (given my data) brings about a competition effect bounded by those generated from models using the actual and potential number of bidders, respectively. Also, some asymptotic results are provided for non-linear least squares estimators obtained from a dependent variable transformation model.

Margin squeeze: An above-cost predatory pricing approach

Gaudin, Germain ; Mantzari, Despoina offer 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 US and EU antitrust stances on margin squeeze.

Market Power in the Poultry Sector in Turkey

Gokhan Ozertan (Bogazici University); Sayed H. Saghaian (University of Kentucky) and Hasan Tekguc (Mardin Artuklu Univeristy) study Market Power in the Poultry Sector in Turkey.

ABSTRACT: In 2009, the Competition Authority (CA) in Turkey penalized 27 broiler chicken producers for agreeing to restrict supply and controlling prices, hence, forming a cartel. The CA based its punishment decision on communication records among major broiler chicken producers, using raw price series and without any statistical or econometric analysis. In this research, time-series methods are employed to test directly for the presence of market power along the supply chain in the poultry sector for both demand and supply sides. The findings show that the retail price behavior in the poultry supply chain in Turkey is consistent with an oligopolistic market structure. Classification JEL: Q11, Q13

OPTIMAL VALUE OF A PATENT IN AN ASYMMETRIC COURNOT DUOPOLY MARKET

Uday Bhanu Sinha (Departments of Economics, Delhi School of Economics, University of Delhi, India) theorizes as to the OPTIMAL VALUE OF A PATENT IN AN ASYMMETRIC COURNOT DUOPOLY MARKET.

ABSTRACT: We consider a mechanism for optimizing the value of a patent owned by an independent patent holder who is not a producer in the market. We consider two kinds of cost reducing innovations: “common innovation” and “new technology innovation” in a homogeneous good Cournot market with ex-ante asymmetric costs of production. We show that the value of the patent is maximized when the patent holder sells the patent to the efficient firm at a fixed payment who would further license the innovation to its rival. This patent sale dominates all other licensing mechanisms for both kinds of innovations.

Market Structure and Competition in the Health-care Industry: Results from a Transition Economy

Martin Labaj (Institute of Economic Research SAS); Alzbeta Siskovicova; Barbora Skalicanova; Peter Silanic; Christoph Weiss; and Biliana Yontcheva evaluate Market Structure and Competition in the Health-care Industry: Results from a Transition Economy.

ABSTRACT: The present paper provides first empirical evidence on the relationship between market size and the number of firms in the health-care industry for a transition economy. We estimate market size thresholds required to support different numbers of suppliers (firms) for three occupations in the health-care industry in a large number of distinct geographic markets in Slovakia, taking into account the spatial interaction between local markets. The empirical analysis is carried out for three time periods (1995, 2001 and 2010) characterizing different stages of the transition process. Our results suggest that the relationship between market size and the number of firms differs both across industries, and across periods. Furthermore, we find evidence for correlation in entry decisions across administrative borders.

Reference pricing with endogenous generic entry

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) study Reference pricing with endogenous generic entry.

ABSTRACT: In this paper we study the effect of reference pricing on pharmaceutical prices and expenditures when generic entry is endogenously determined. We develop a Salop-type model where a brand-name producer competes with generic producers in terms of prices. In the market there are two types of consumers: (i) brand biased consumers who choose between brand-name and generic drugs, and (ii) brand neutral consumers who choose between the different generic drugs. We find that, for a given number of firms, reference pricing leads to lower prices of all products and higher brand-name market shares compared with a reimbursement scheme based on simple coinsurance. Thus, in a free entry equilibrium, the number of generics is lower under reference pricing than under coinsurance, implying that the net effects of reference pricing on prices and expenditures are ambiguous. Allowing for price cap regulation, we show that the negative effect on generic entry can be reversed! , and that reference pricing is more likely to result in cost savings than under free pricing. Our results shed light on the mixed empirical evidence on the effects of reference pricing on generic entry.

The impact of network competition in the mobile industry

Houpis, George ; Rodriguez, Jose Maria ; Ovington, Thomas ; Serdarevic, Goran explore The impact of network competition in the mobile industry.

ABSTRACT: In 2000, there were as many countries served by a single mobile network as by network competition. Today, only 30 countries, representing less than 3% of the world’s population, are served by a single network. There has been considerable discussion about the optimal number of network operators in the mobile industry. More recently, some regulators and governments have considered implementing a single wholesale network to deliver next generation mobile services due to concerns around low coverage, inefficient duplication of costs and lack of competition. To date, the authors are not aware of such single wholesale networks fully implemented in mobile industry. What is clear is that single wholesale networks represent a U-turn with respect the way in which the mobile industry has developed worldwide. Therefore, it is important to carefully examine the available evidence on the performance of mobile markets in countries with a single mobile networks, as thi! s is could shed some light on the expected performance of single wholesale networks. The key result is that countries with network competition have higher coverage, higher take-up and greater innovation than countries with a single mobile network, controlling for other relevant factors. This paper represents a significant contribution to the literature, as the authors are not aware of any other papers that have considered the impact of network competition compared to single networks on outcomes such as coverage. The results of the paper have significant policy implications, as they imply that moving away from the network competition model into the world of single wholesale networks could cause considerable consumer harm, which may be difficult to reverse once there has been a move away from network competition.

Optimal Number of Firms in the Wireless Markets

Francois Jeanjean and Georges Vivien Houngbonon theorize about Optimal Number of Firms in the Wireless Markets.

ABSTRACT: In this paper, we design a theoretical model to analyze the impact of the number of firms on investment in the wireless communications industry. Our model extends the Salop’s framework by introducing investment in quality that either reduces the marginal cost of production or shifts the consumers’ valuation upward. We find that an increase in the number of firms reduces their incentives to invest in quality. The impact on the aggregate industry investment can be non-monotone. These theoretical findings are supported by empirical evidence from the mobile telecommunications industry. More specifically, we find that mobile operators’ investment in network infrastructure is not affected when going from two to three firms; but decreases above three firms. In addition, there is an inverted-U relationship between the industry investment and the number of mobile operators; the maximum being reached at three or four mobile operators.

Competition and market strategies in the Swiss fixed telephony market

Roberto E. Balmer analyzes Competition and market strategies in the Swiss fixed telephony market.

ABSTRACT: Fixed telephony has long been a fundamentally important market for European telecommunications operators. The liberalisation and the introduction of regulation in the end of the 1990s, however, allowed new entrants to compete with incumbents at the retail level. A rapid price decline and a decline in revenues followed. Increased retail competition eventually led a number of national regulators to deregulate this market. In 2013, however, many European countries (including Switzerland) continued to have partially binding retail price regulation in this market. More than a decade after liberalisation and the introduction of wholesale and retail price regulation, sufficient data is available to empirically measure the success of regulation and assess its continued necessity. This paper develops a market model based on a generalised version of the traditional dominant firm – competitive fringe model allowing for the incumbent a more competitive conduct than! that of a dominant firm. A system of simultaneous equations is developed and direct estimation of the incumbent’s residual demand function is performed by instrumenting the market price by incumbent-specific cost shifting variables as well as other variables. Unlike earlier papers that assess market power in this market, this paper also adjusts the market model to ensure a sufficient level of cointegration and avoid spurious regression results. This necessitates the introduction of intertemporal effects. While the incumbent’s conduct cannot be directly estimated using this framework, the concrete estimates show that its residual demand is inelastic (long run price elasticity of residual demand of -0.12). Such a level of elasticity is shown to be only compatible with a profit maximising incumbent in the case of largely competitive conduct (conduct parameter below 0.12 and therefore close to zero). It is consequently found that the Swiss incumbent acted rather competitiv! ely in the fixed telephony retail market in the period under review (2004-2012) and that the (partial) retail price caps in place can no longer be justified on the basis of a lack of competition.

To Regulate or to Deregulate? The Role of Downstream Competition in Upstream Monopoly Vertically Linked Markets

Polemis, Michael ; Eleftheriou, Konstantinos ask To Regulate or to Deregulate? The Role of Downstream Competition in Upstream Monopoly Vertically Linked Markets.

ABSTRACT: This paper attempts to cast light to the relationship between Cournot-Bertrand controversy and monopoly regulation. To this purpose, we use a simple model of a vertically linked market, where an upstream regulated natural monopoly is trading via two-part tariff contracts with a downstream duopoly. Combining our results to those of the existing literature on deregulated markets, we argue that when the downstream competition is in prices, efficiency dictates regulating the monopoly with a marginal cost based pricing scheme. However, this type of regulation leads to significant welfare loss, when the downstream market is characterized by Cournot competition.