Friday, July 29, 2016
Denise Scheld (University of Giessen); Johannes Paha (University of Giessen) and Nicolas Fandrey (Protiviti GmbH) offer A risk governance approach to managing antitrust risks in the banking industry.
ABSTRACT: Competition law compliance has become increasingly important in the banking industry as the number of infringements and the associated fines imposed by the European Commission are rising. This article shows that not only governments and regulators, but also shareholders and managers, should be interested in managing antitrust risks in banks in order to avoid competition law infringements. Therefore, this article sets out an approach to assessing the residual risk of antitrust non-compliance as well as the costs associated with such conduct, in order to be able to identify the required intensity of risk management activities. It also shows how antitrust risk management can be implemented in banks’ governance structures using the Three Lines of Defence model and the COSO ERM framework. As a result, it demonstrates how to integrate antitrust risk management activities into existing structures and processes, thus improving the efficiency and effectiveness o! f overall risk management, in particular antitrust risk management.
Gugler, Klaus ; Heim, Sven and Liebensteiner, Mario examine Non-sequential search, competition and price dispersion in retail electricity.
ABSTRACT: We investigate the impact of consumer search and competition on pricing strategies in Germany's electricity retail. We utilize a unique panel dataset on spatially varying search requests at major online price comparison websites to construct a direct measure of search intensity and combine this information with zip code level data on electricity tariffs between 2011 and 2014. The paper stands out by explaining price dispersion by differing pricing strategies of former incumbents and entrant firms, which are distinct in their attributable shares in informed versus uninformed consumers. Our empirical results suggest causal evidence for an inverted U-shape effect of consumer search intensity on price dispersion in a clearinghouse environment as in Stahl (1989). The dispersion is caused by opposite pricing strategies of incumbents and entrants, with incumbents initially increasing and entrants initially decreasing tariffs as a reaction to more consumer search! . We also find an inverted U-shape effect of competition on price dispersion, consistent with theoretical findings by Janssen and Moraga-González (2004). Again, the effect can be explained by opposing pricing strategies of incumbents and entrants.
Substitution between Online and Offline Advertising: Evidence from the Carbonated Soft Drink Industry
He, Xi (University of Connecticut); Lopez, Rigoberto A. (University of Connecticut); Liu, Yizao (University of Connecticut) explore Substitution between Online and Offline Advertising: Evidence from the Carbonated Soft Drink Industry.
ABSTRACT: This paper uses data collected from hypothetical and non-hypothetical choice-based conjoint survey instruments to estimate willingness to pay for distance-based local food products. The survey was administered to three different groups of respondents: members of a consumer buying club with local and grass-fed market experience, a random sample of Maryland residents, and shoppers at a non-specialty suburban Maryland grocery store. We find that both the random sample of Maryland residents and the grocery store shoppers are willing to pay a premium for local products, but view local and grass-fed production as substitutes. Conversely, members of the consumer buying club are willing to pay significantly less for local than their counterparts, but do not conflate local with other premium attributes, such as grass-fed production.
Thursday, July 28, 2016
Lynne Pepall and Joseph Reiff analyze The "Veblen" Effect, Targeted Advertising and Consumer Welfare.
ABSTRACT: The technology of advertising in the twenty-first century allows for better targeting of consumers and better identification of consumer subgroups in the population. This makes it easier for firms to create in their advertising a desire to belong to the group identified with a product. We explore this kind of advertising in a monopoly model. The firm has an incentive to target this kind of advertising to the most lucrative segment of a particular social grouping and while advertising does create value for the consumer, it leads to an outcome where less output is sold at a higher price in a narrower or more segmented market than in the standard monopoly model. As a result even though consumers value the identification effect they are worse off. This is because the firm uses advertising to exploit a form of price discrimination and appropriate more surplus.
Alberto F. Cavallo asks Are Online and Offine Prices Similar? Evidence from Large Multi-Channel Retailers.
ABSTRACT: Online prices are increasingly being used for a variety of inflation measurement and research applications, yet little is know about their relation to prices collected offline, where most retail transactions take place. This paper presents the results of the first large-scale comparison of online and offline prices simultaneously collected from the websites and physical stores of 56 large multi-channel retailers in 10 countries. I find that price levels are identical about 72% of the time for the products sold in both locations, with significant heterogeneity across countries, sectors, and retailers. The similarity is highest in electronics and clothing and lowest for drugstores and office-supply retailers. There is no evidence of prices varying with the location of the ip address or persistent browsing habits. Price changes are un-synchronized but have similar frequencies and average sizes. These results have implications for National Statistical Offices! and researchers using online data, as well as those interested in the effect of the internet on retail prices in different countries and sectors.
Bogdan Genchev (Boston College) and Julie Holland Mortimer (Boston College) offer Empirical Evidence on Conditional Pricing Practices.
ABSTRACT: Conditional pricing practices allow the terms of sale between a producer and a downstream distributor to vary with the ability of the downstream firm to meet a set of conditions put forward by the producer. The conditions may require a downstream firm to accept minimum quantities or multiple products, to adhere to minimum market-share requirements, or even to deal exclusively with one producer. The form of payment from the producer to the downstream firm may take the form of a rebate, marketing support, or simply the willingness to supply inventory. The use of conditional pricing practices is widespread throughout many industries, and the variety of contractual forms used in these arrangements is nearly as extensive as the number of contracts.
Wednesday, July 27, 2016
Yuanzhu Lu (China Economics and Management Academy, Central University of Finance and Economics, Beijing, China) and Sougata Poddar (Department of Economics, Faculty of Business and Law, Auckland University of Technology) explore Strategic Choice of Network Externality.
ABSTRACT: In many product markets, impact of network externality plays an important role to affect the overall quality of a product. However, the degree or the strength of network externality is assumed as a parameter in most of the literature. We propose a model of vertical product differentiation with two competing firms where the strength of network externality is endogenized as a strategic choice of the high quality firm. We show how the equilibrium market structure and market coverage depend on the cost of choosing the network strength and on the relative quality difference of the competing products. We also show that the relationship between the optimal level of network externalities and the relative quality differences of the products can be monotonic or non-monotonic.
Emmanuel LORENZON studies Collusion with a Greedy Center in Position Auctions.
ABSTRACT: In this paper we aim at studying the sensitivity of the Generalized Second-Price auction to bidder collusion when monetary transfers are allowed. We propose a model of position auction that incorporates third-parties as agents facilitating collusion in complete information. We show that the first-best collusive outcome can be achieved under any Nash condition. Under the locally envy-free criterion, we find that if the collusive gain is uniformly redistributed among members, the best that can be achieved is Vickrey-Clarkes-Groves outcome. Bidders do not have sufficient incentives to reduce even more their expressed demand. We then provide elements upon which an incentive compatible fee can be set by the center. We provide conditions under which bidders can enhance efficient collusion. Doing so we also contribute to the literature on collusion in multiple-objects simultaneous auctions.
Eleftheriou, Konstantinos and Polemis, Michael explore Gasoline Price Wars: Spatial Dependence Awakens.
ABSTRACT: We build an Asymmetric Spatial Error Correction Model (ASpECM) to investigate the role of spatial dependence at the retail gasoline price adjustment mechanism. We find evidence that the symmetric price pattern is fully reversed when we account for spatial spillover effects, indicating that retail prices adjust more rapidly in an upward than a downward direction. This finding raises the possibility that retailers are more likely to engage in anti-competitive practices which may be ignored when the regulators bypass the role of spatial dependence.
Tuesday, July 26, 2016
Harrington, Joseph E. ; Hüschelrath, Kai ; and Laitenberger, Ulrich examine Rent sharing to control non-cartel supply in the German cement market.
ABSTRACT: A challenge for many cartels is avoiding a destabilizing increase in non-cartel supply in response to having raised price. In the case of the German cement cartel that operated over 1991-2002, the primary source of non-cartel supply was imports from Eastern European cement manufacturers. Industry sources have claimed that the cartel sought to control imports by sharing rents with intermediaries in order to discourage them from sourcing foreign supply. Specifically, cartel members would allow an intermediary to issue the invoice for a transaction and charge a fee even though the output went directly from the cartel member's plant to the customer. We investigate this claim by first developing a theory of collusive pricing that takes account of the option of bribing intermediaries. The theory predicts that the cement cartel members are more likely to share rents with an intermediary when the nearest Eastern European plant is closer and there is more Eastern ! European capacity outside of the control of the cartel. Estimating a logit model that predicts when a cartel member sells through an intermediary, the empirical analysis supports both predictions.
Gianpaolo Parise identifies Threat of entry and debt maturity: evidence from airlines.
ABSTRACT: I explore the effect of the threat posed by low-cost competitors on debt structure in the airline industry. I use the route network expansion of low-cost airlines to identify routes where the probability of future entry increases dramatically. I find that when strategic routes are threatened, incumbents significantly increase debt maturity before entry occurs. Overall, the main findings suggest that airlines respond to entry threats trading off financial flexibility for lower rollover risk. The results are consistent with models in which firms set their optimal debt structure in the presence of costly rollover failure.
Anne Marie Knott and Carl Vieregger are Reconciling the Firm Size and Innovation Puzzle.
ABSTRACT: Since Schumpeter, there has been a long-standing debate regarding the optimal firm size for innovation. Empirical results have settled into a puzzle: R&D spending increasing with scale while R&D productivity decreases with scale. Thus large firms appear irrational. We propose the puzzle stems from the fact that product and patent counts undercount large firm innovation. To test that proposition we use recently available NSF BRDIS survey data of firms R&D practices as well as a broader measure of R&D productivity. Using the broader measure, we find that both R&D spending and R&D productivity increase with scale—thus resolving the puzzle. We further find that while large firms and small firms differ in the types of R&D they conduct, there is no type whose returns decrease in scale—there are merely types for which the small firm penalty is less severe.
Monday, July 25, 2016
Arnildo da Silva Correa ; Myrian Beatriz S. Petrassi ; and Rafael Santos have posted Price-Setting Behavior in Brazil: survey evidence.
ABSTRACT: Price surveys became popular after the seminal work of Blinder (1991) exploring the price-setting practices of the US firms, which filled some blanks left by the simple observation of prices charged by firms. The present paper reports the findings of a survey conducted by the Central Bank of Brazil with local firms. The sample covered 7,002 firms, the entire country and 3 economic sectors: manufacturing, services and commerce. The collected answers suggest important features about price-setting behavior in Brazil, such as: (i) the cost of reviewing price are low, but there is important nominal rigidity – firms report that change prices 3.6 times per year –, (ii) state-dependent rules seem to be more frequent than time-dependent behavior, (iii) markup pricing appears to be the dominant strategy, and (iv) the two most important factors driving price changes are the cost of intermediate goods and the inflation rate. A complete description of the results ! is found throughout the paper and summarized in the final section. The paper also discusses some policy implications from the results
Ariel Pakes (Harvard) describes Empirical Tools and Competition Analysis: Past Progress and Current Problems.
ABSTRACT: I review a subset of the empirical tools available for competition analysis. The tools discussed are those needed for the empirical analysis of; demand, production efficiency, product repositioning, and the evolution of market structure. Where relevant I start with a brief review of tools developed in the 1990’s that have recently been incorporated into the analysis of actual policy. The focus is on providing an overview of new developments; both those that are easy to implement, and those that are not quite at that stage yet show promise.
Bronwyn H. Hall (Institute for Fiscal Studies); Christian Helmers (Institute for Fiscal Studies and Santa Clara University); Georg von Graevenitz (Institute for Fiscal Studies and Queen Mary University of London) explore Technology entry in the presence of patent thickets.
ABSTRACT: We analyze the effect of patent thickets on entry into technology areas by firms in the UK. We present a model that describes incentives to enter technology areas characterized by varying technological opportunity, complexity of technology, and the potential for hold-up in patent thickets. We show empirically that our measure of patent thickets is associated with a reduction of first time patenting in a given technology area controlling for the level of technological complexity and opportunity. Technological areas characterized by more technological complexity and opportunity, in contrast, see more entry. Our evidence indicates that patent thickets raise entry costs, which leads to less entry into technologies regardless of a firm’s size.
Pedro Bento (Texas A&M University, Department of Economics) looks at Competition, Innovation, and the Number of Firms.
ABSTRACT: I look at manufacturing firms across countries and over time, and find that barriers to competition actually increase the number of firms. This finding contradicts a central feature of all current models of endogenous markups and free entry, that higher barriers should reduce competition and firm entry, thereby increasing markups. To rationalize this finding, I extend a standard model in two ways. First, I allow for multi-product firms. Second, I model barriers as increasing the cost of entering a product market, rather than the cost of forming a firm. Higher barriers to competition reduce the number of products per firm and per market, but increase markups and the total number of firms. Calibrating the model to U.S. data, I estimate cross-country differences in consumption as large as 65 percent from observed differences in barriers to competition. In addition, increasing barriers generates either a negative or inverted-U relationship between firm-level ! innovation and markups. While higher markups encourage product-level innovation through the usual Schumpeterian mechanism, firm-level innovation (at least eventually) drops as firms reduce their number of products. I provide new evidence supporting these two novel implications of the model - that product-level innovation increases with barriers to competition, while the number of products per firm decreases.
Aleksandar B. Todorov (Department of Economics, University of Economics - Varna) is Assessing Competition in the Bulgarian Insurance Industry: A Panzar-Rosse Approach.
ABSTRACT: The study assesses the competitive behavior in the Bulgarian general insurance industry by applying an empirical methodology developed by Panzar & Rosse (1987). Based on company data from insurers' balance sheets and profit and loss accounts for the period between 2005 and 2014 a reduced-form revenue equation is estimated. The information about the insurers' competitive behavior is provided by the sum of the estimated factor price elasticities, which constitute the so called H-statistic. The fixed effects panel estimation suggests that the hypotheses of monopoly or collusive behavior cannot be rejected. These findings suggest that the Bulgarian insurance market is far from being perfectly competitive and may require further actions to promote its competitive development.
Sunday, July 24, 2016
D. Daniel Sokol, University of Florida - Levin College of Law and Jingyuan Ma,Central University of Finance and Economics provide an Understanding Online Markets and Antitrust Analysis.
ABSTRACT: Antitrust analysis of online markets is a hot topic around the world. In a number of jurisdictions, online markets already have been subject to antitrust review in merger or conduct cases. In other jurisdictions, these issues are in a nascent stage of policy. A number of lessons can be learned from the cases to date involving online markets with regard to optimal antitrust policy. What these cases tend to share are some basic features as to how online markets work. Some jurisdictions understand the particular dynamics of multi-sided online markets. Other competition authorities sometimes may misidentify these markets. This essay outlines four areas in which online markets may be different from traditional markets for antitrust purposes. The essay also explores why such markets require a more careful consideration from antitrust authorities and courts in their respective antitrust analyses.
Friday, July 22, 2016
Leemore Dafny; Kate Ho and Robin S. Lee examine The Price Effects of Cross-Market Hospital Mergers.
ABSTRACT: So-called "horizontal mergers" of hospitals in the same geographic market have garnered significant attention from researchers and regulators alike. However, much of the recent hospital industry consolidation spans multiple markets serving distinct patient populations. We show that such combinations can reduce competition among the merging providers for inclusion in insurers' networks of providers, leading to higher prices. The result derives from the presence of "common customers” (i.e. purchasers of insurance plans) who value both providers, as well as (one or more) "common insurers" with which price and network status is negotiated. We test our theoretical predictions using two samples of cross-market hospital mergers, focusing exclusively on hospitals that are bystanders rather than the likely drivers of the transactions in order to address concerns about the endogeneity of merger activity. We find that hospitals gaining system members in-state (but! not in the same geographic market) experience price increases of 6-10 percent relative to control hospitals, while hospitals gaining system members out-of-state exhibit no statistically significant changes in price. The former group are likelier to share common customers and insurers. This effect remains sizeable even when the merging parties are located further than 90 minutes apart. The results suggest that cross-market, within-state hospital mergers appear to increase hospital systems' leverage when bargaining with insurers.
This book is designed as a working tool for the study and practice of European Competition Law. It is an enlarged and updated fifth edition of the highly practical guide to the leading cases of European Competition Law. This new edition also contains detailed coverage of State Aid law. Each chapter begins with an introduction which outlines the relevant laws, regulations and guidelines for each of the topics, setting the analytical foundations for the case entries. Within this framework, cases are reviewed in summary form, accompanied by analysis and commentary. This seminal text is essential reading for competition law students and practitioners.