Antitrust & Competition Policy Blog

Energy Prices, Pass-Through, and Incidence in U.S. Manufacturing

Sharat Ganapati; Joseph S. Shapiro and Reed Walker explore Energy Prices, Pass-Through, and Incidence in U.S. Manufacturing.

ABSTRACT: This paper studies how increases in energy input costs for production are split between consumers and producers via changes in product prices (i.e., pass-through). We show that in markets characterized by imperfect competition, marginal cost pass-through, a demand elasticity, and a price-cost markup are sufficient to characterize the relative change in welfare between producers and consumers due to a change in input costs. We find that increases in energy prices lead to higher plant-level marginal costs and output prices but lower markups. This suggests that marginal cost pass-through is incomplete, with estimates centered around 0.7. Our confidence intervals reject both zero pass-through and complete pass-through. We find heterogeneous incidence of changes in input prices across industries, with consumers bearing a smaller share of the burden than standards methods suggest.

Communication in Vertical Markets: Experimental Evidence

Claudia Mollers; Hans-Theo Normann and Christopher M. Snyder describe Communication in Vertical Markets: Experimental Evidence.

ABSTRACT: When an upstream monopolist supplies several competing downstream firms, it may fail to monopolize the market because it is unable to commit not to behave opportunistically. We build on previous experimental studies of this well-known commitment problem by introducing communication. Allowing the upstream firm to chat privately with each downstream firm reduces total offered quantity from near the Cournot level (observed in the absence of communication) halfway toward the monopoly level. Allowing all three firms to chat together openly results in complete monopolization. Downstream firms obtain such a bargaining advantage from open communication that all of the gains from monopolizing the market accrue to them. A simple structural model of Nash bargaining fits the pattern of shifting surpluses well. We conclude with a discussion of the antitrust implications of open communication in vertical markets.

Why Gene Wilder Was Special

This week we morn the passing of Gene Wilder.  I always thought Gene Wilder was funny - really funny.  Though I didn't really enjoy the film version of The Producers, Young Frankenstein and Blazing Saddles are great movies. In the case of Blazing Saddles, I do not think that this movie could be made today - it attacks bigotry so directly as to offend every person and group.  Wilder is simply hilarious.

Although not great movies, I really also enjoyed Silver Streak (with Richard Pryor) and The Frisco Kid (with Harrison Ford).  Buddy movies seemed to really bring out the best in Gene Wilder.  Also, both movies are travel comedies.  Silver Streak is a train movie and The Frisco Kid is a movie about a Rabbi from Poland (Wilder) who teams up with a bandit (Ford) who needs to get from Philadelphia to San Francisco to join his new congregation.

Scoping the Sharing Economy: Origins, Definitions, Impact and Regulatory Issues

Cristiano Codagnone (European Commission – JRC - IPTS) and Bertin Martens (European Commission – JRC - IPTS) provide an overview of Scoping the Sharing Economy: Origins, Definitions, Impact and Regulatory Issues.

ABSTRACT: This report selectively draws on the systematic review of a large set of data sources, which is presented elsewhere, and comprises 430 secondary sources (Codagnone, 2016). The report also provides a critical overview of key analytical, empirical, and normative dimensions of the ‘sharing economy’. It reviews both the rhetorical and controversial debates currently surrounding the topics and the available empirical evidence in order to sharpen our understanding of relevant policy and regulatory issues. The broad umbrella term 'sharing economy' is critically assessed and a typology developed that identifies the commercial 'peer to peer' sharing economy as the main focus of both controversies and policy-relevant issues. Empirical evidence of the benefits and costs of the sharing economy and its implications for sustainability and employment is very limited and inconclusive, particularly as regards the European landscape. This critical review, hence, shows ! that, as yet, there are no unambiguous answers to some of the fundamental questions about the ‘sharing economy’. The available research is too limited and patchy to give us a comprehensive and coherent picture. This report’s main contribution is to clear some of the conceptual and empirical fog around the ‘sharing economy’ and to identify where possible answers might be found in the future. It is suggested that the definition of sharing platforms should focus on P2P activities, as most of the policy concerns are found there. These include regulatory and consumer protection issues resulting from the informal production of services, potentially unfair competition with formal B2C service providers, and questions related to dominance and market power of P2P platform operators as commercial businesses.

Does bank competition reduce cost of credit? Cross-country evidence from Europe

Zuzana Fungacova, Bank of Finland Institute for Economies in Transition (BOFIT), Anastasiya Shamshur, Norwich Business School, University of East Anglia, and Laurent Weill, EM Strasbourg Business School, ask Does bank competition reduce cost of credit? Cross-country evidence from Europe.

ABSTRACT: Despite the extensive debate on the effects of bank competition, only a handful of single-country studies deal with the impact of bank competition on the cost of credit. We contribute to the literature by investigating the impact of bank competition on the cost of credit in a cross-country setting. Using a panel of firms from 20 European countries covering the period 2001–2011, we consider a broad set of measures of bank competition, including two structural measures (Herfindahl-Hirschman index and CR5), and two non-structural indicators (Lerner index and H-statistic). We find that bank competition increases the cost of credit and observe that the positive influence of bank competition is stronger for smaller companies. Our findings accord with the information hypothesis, whereby a lack of competition incentivizes banks to invest in soft information and conversely increased competition raises the cost of credit. This positive impact of bank competition ! is however influenced by the institutional and economic framework, as well as by the crisis.

Retail Alcohol Availability and Product Diversity

Shuay-Tsyr Ho, Cornell, Mingyang Qu, Cornell, Bradley J. Rickard Cornell, Marco Costanigro, Colorado State University, and Edward McLaughlin, Cornell examine Retail Alcohol Availability and Product Diversity.

ABSTRACT: The repeal of the Prohibition Act in 1933 introduced many state-specific regulations in alcohol markets. As one example of this, several states currently have laws that restrict specific alcoholic beverages in grocery stores, and some states have recently considered lifting these restrictions. Some opponents of such legislative changes claim that allowing alcohol to be more widely distributed would put smaller liquor stores out of business and eventually lead to a narrower set of product choices available to consumers. Here we use the Nielsen Homescan dataset that describes alcoholic beverage purchasing patterns for approximately 70,000 households between 2004 and 2012 to examine this issue empirically. Our results show that, even when controlling for preferences for variety, consumers in states that allow beer and wine sales in grocery stores have greater diversity in their purchases of beer and wine. Overall, the findings suggest that expanding the retail availability of beer and wine may actually increase the diversity of alcoholic beverage products purchased by consumers in those states.

The economic impact of removing geo-blocking restrictions in the EU Digital Single Market

Nestor Duch-Brown (European Commission - JRC - IPTS) ; Bertin Martens (European Commission – JRC - IPTS) analyze The economic impact of removing geo-blocking restrictions in the EU Digital Single Market.

ABSTRACT:  This study investigates the welfare impact of lifting geo-blocking restrictions to cross-border e-commerce in the EU, using a dataset for consumer electronics products in ten European countries for the period 2012-2105. We simulated two counterfactual scenarios where geo-blocking is either fully or only indirectly removed. This would allow consumers to arbitrage, taking advantage of price differences, and to expand product variety through imports. We computed the welfare effects, as changes in both consumer and producer surpluses. Finally, we extrapolated these partial results to all online sales in the EU28. The results indicate that both consumers and producers would gain from removing geo-blocking restrictions. Smaller countries would benefit comparatively more than larger countries.

Investigating the US Consumer Response to the Chinese Acquisition of a US Firm

Yu Yvette ZHANG, Texas A&M University, Shaosheng Jin, Zhejiang University, and Xiaotong Yuan, Texas A&M are Investigating the US Consumer Response to the Chinese Acquisition of a US Firm.

ABSTRACT: In 2013, Smithfield Foods Inc., the world’s largest pork processor, was acquired by Shuanghui International Holdings Ltd, China’s largest pork producer. The $4.7 billion acquisition marks the largest Chinese takeover of a U.S. company in history. After the acquisition, Virginia-based Smithfield became a subsidiary of Shuanghui International Holdings. In this study, we investigated how US consumers responded to the Chinese acquisition of Smithfield. We found that US consumers are willing to pay significantly more for the US brands compared to the Chinese brands. The US consumers’ willingness to pay for Smithfield products decreased significantly after they learned about the Smithfield-Shuanghui acquisition, especially for risk averse consumers and those with higher education level. Furthermore, contrasting to the results in the Chinese market, we did not find a negative spillover effect of this acquisition on other US products in the US market.

How does renewables competition affect forward contracting in electricity markets?

Robert Ritz asks How does renewables competition affect forward contracting in electricity markets?

ABSTRACT:  Higher renewables penetration reduces the incentive of conventional electricity generators to make forward commitments via forward- or retail-market contracts. This can undermine the role of forward contracting in mitigating market power. More renewables raise wholesale electricity prices in states of the world where their capacity utilizaton is low due to intermittency.

Multisided markets and the challenge of incorporating multisided considerations into competition law analysis

Gonenç Gurkaynak, Oznur İnanılır, Sinan Diniz and Ayse Gizem Yasar (all ELIG Law) explore Multisided markets and the challenge of incorporating multisided considerations into competition law analysis.

ABSTRACT: Since the seminal paper of Rochet and the Nobel Prize laureate Tirole in 2003, the theory of multisided markets has garnered considerable academic attention. The practical application of the theory remains, however, challenging. This article seeks to bring together the key features of multisided market economics and identify the key principles, which can affect practical enforcement. Following a consideration of the economic and legal challenges involved in the analysis of multisided platforms, the article reviews two case studies—the European Court of Justice’s recent MasterCard decision concerning multilateral interchange fees and the Dutch Competition Authority’s review of the European Directories—Truvo Nederland merger—and showcases the associated enforcement challenges.

On Prices' Cyclical Behaviour in Oligopolistic Markets

L. Lambertini and L. Marattin have a paper on On Prices' Cyclical Behaviour in Oligopolistic Markets.

ABSTRACT: We revisit the discussion about the relationship between price’s cyclical features, implicit collusion and the demand level in an oligopoly supergame where a positive shock may hit demand and disrupt collusion. The novel feature of our model consists in characterising the post-shock noncooperative price and comparing it against the cartel price played in the last period of the collusive path, to single out the conditions for procyclicality to arise both in the short and in the long-run.

Competition in Retail Electricity Markets: An Assessment of Ten Year Dutch Experience

Machiel Mulder, University of Groningen - Faculty of Economics and Business and Bert Willems, Tilburg University - Department of Economics - CentER & TILEC offer Competition in Retail Electricity Markets: An Assessment of Ten Year Dutch Experience.

ABSTRACT: This paper examines a decade of retail competition in the Dutch electricity market and discusses market structure, regulation, and market performance. We find a proliferation of product variety, in particular by the introduction of quality-differentiated green-energy products. Product innovation could be a sign of a well-functioning market that caters to customer’s preferences, but it can also indicate a strategic product differentiation to soften price competition. Although slightly downward trending, gross retail margins remain relatively high, especially for green products. Price dispersion across retailers for identical products remains high, as also across products for a single retailer. We do not find evidence of asymmetric pass-through of wholesale costs. Overall, the retail market matured as evidenced by fewer consumer complaints and higher switching rates. A fairly intensive regulation of mature energy retail markets appears to be needed to create benefits for consumers.

Assessing Firm Behavior in Carve-out Markets: Evidence on the Impact of Carve-out Policy

Philip Gayle and Tyson Thomas are Assessing Firm Behavior in Carve-out Markets: Evidence on the Impact of Carve-out Policy.

ABSTRACT: Airlines wanting to cooperatively set prices for their international air travel service must apply to the relevant authorities for antitrust immunity (ATI). While cooperation may yield benefits, it can also have anti-competitive effects in markets where partners competed prior to receiving ATI. A carve-out policy forbids ATI partners from cooperating in markets policymakers believe will be most harmed by anti-competitive effects. We examine carve-out policy applications to three ATI partner pairings, and find evidence more consistent with cooperative pricing in carve-out markets in spite of the policy, calling into question the effectiveness of the policy in achieving intended market outcomes.

The impact of the market transparency unit for fuels on gasoline prices in Germany

Ralf Dewenter, Ulrich Heimeshoff, and Hendrik Luth estimate The impact of the market transparency unit for fuels on gasoline prices in Germany.

ABSTRACT: Increasing horizontal as well as vertical transparency in oligopolistic markets can be advantageous for consumers, due to reduced search costs. However, market transparency can also affect incentives to deviate from collusive agreements and the punishment by rival firms in the market. Using a panel of 27 European countries, we analyze the impact of increased market transparency via the introduction of a market transparency unit for fuels in Germany. Applying a difference-in-differences approach, we find evidence that both gasoline and diesel prices have increased. While consumers may be better off using a retail price app for fuels, gas stations are also able to compare prices at almost no cost.

The welfare impacts of discriminatory price tariffs

Nikolaos Danias (Department of Economics, University of Strathclyde) and J Kim Swales (Department of Economics, University of Strathclyde) review The welfare impacts of discriminatory price tariffs.

ABSTRACT: This paper looks at the use of asymmetric tariffs as a regulatory instrument. We use a monopolistic market setup with two markets and we introduce price controls in one of the two. The purpose of the regulator is to maximise consumer welfare through this price discriminatory practice. We consider cases where the welfare of the consumers in the two markets is weighted equally and cases where it is not. In some cases we allow for the two markets to be linked through a monopsonistic input market. The paper focuses on the welfare implications of this regulatory approach, with the firm operating under a profit restriction. Results suggest that having only one price-controlled market is in certain cases a good option from a welfare perspective.

The Welfare Effects of Vertical Integration in Multichannel Television Markets

Gregory S. Crawford, Robin S. Lee, Michael Whinston, and Ali Yurukoglu investigate The Welfare Effects of Vertical Integration in Multichannel Television Markets.

ABSTRACT: We investigate the welfare effects of vertical integration of regional sports networks (RSNs) with programming distributors in U.S. multichannel television markets. Vertical integration can enhance efficiency by reducing double marginalization and increasing carriage of channels, but can also harm welfare due to foreclosure and raising rivals' costs incentives. We estimate a structural model of viewership, subscription, distributor pricing, and affiliate fee bargaining using a rich dataset on the U.S. cable and satellite television industry (2000-2010). We use these estimates to analyze the impact of simulated vertical mergers and de-mergers of RSNs on competition and welfare, and examine the efficacy of regulatory policies introduced by the U.S. Federal Communications Commission to address competition concerns in this industry.

When economics met antitrust: The second Chicago School and the economization of antitrust law

Patrice Bougette (Université Nice Sophia Antipolis (UNS)); Marc Deschamps (Universite de Lorraine (UL)) and Frederic Marty (OFCE) describe When economics met antitrust: The second Chicago School and the economization of antitrust law.

ABSTRACT: In this article, the authors interrogate legal and economic history to analyze the process by which the Chicago School of Antitrust emerged in the 1950s and became dominant in the United States. They show that the extent to which economic objectives and theoretical views shaped the inception of antitrust law. After establishing the minor influence of economics in the promulgation of U.S. competition law, they highlight U.S. economists’ caution toward antitrust until the Second New Deal and analyze the process by which the Chicago School developed a general and coherent framework for competition policy. They rely mainly on the seminal and programmatic work of Director and Levi (1956) and trace how this theoretical paradigm became collective—that is, the “economization” process in U.S. antitrust. Finally, the authors discuss the implications and possible pitfalls of such a conversion to economics-led antitrust enforcement.

Moral Hazard, Bertrand Competition, and Natural Monopoly

Brishti Guha notes Moral Hazard, Bertrand Competition, and Natural Monopoly.

ABSTRACT: In the traditional model of Bertrand price competition among symmetric firms, there is no restriction on the number of firms that are active in equilibrium. A symmetric equilibrium exists with the different firms sharing the market. I show that this does not hold if we preserve the symmetry between firms but introduce moral hazard with a customer-sensitive probability of exposure; competition necessarily results in a natural monopoly with only one active firm. Sequential price announcements and early adoption are some equilibrium selection mechanisms that help to pin down the identity of the natural monopolist. If we modify the standard Bertrand assumptions to introduce decreasing returns to scale, a natural oligopoly will emerge instead of a natural monopoly. The insights of the basic model are robust to many extensions.

Excessive Competition for Headline Prices

Roman Inderst and Martin Obradovits study Excessive Competition for Headline Prices.

ABSTRACT: When firms' shrouding of charges, as in Gabaix and Laibson (2006), meets with consumers' salient thinking, as in Bordalo et al. (2013), this can have severe welfare implications. The ensuing excessive competition for headline prices tends to inefficiently bias consumers' choice towards low-quality products, which is compounded when firms react and reduce quality beyond what would be cost efficient. As more intense shopping leads to a greater pass through of shrouded charges into lower headline prices, which aggravates the problem, competition policy is no substitute for consumer protection policy. While in our model all consumers are potential victims of salient thinking and shrouded charges, salient thinking becomes effective only for those who are attentive to different offers. Attentive consumers are likely to show ex-post regret and they can be ex-ante worse off, even though their choice set is larger. The combination of shrouding and salient thinking! can sufficiently disadvantage high-quality firms so as to make them willing to educate consumers and unshroud all charges. While there is no unshrouding on equilibrium, high-quality firms' threat of unshrouding may sufficiently discipline firms to make efficient product choices.

Entry Games and Free Entry Equilibria

Michele Polo, Boconni provides an overview of Entry Games and Free Entry Equilibria.

ABSTRACT: This Chapter reviews the theoretical literature on entry games and free entry equilibria. We show that a wide range of symmetric oligopoly models share common comparative statics properties. Individual profits and quantities decrease in the number of firms, and tend to competitive or monopolistic competitive equilibria when the number of firms increases indefinitely. The maximum number of firms sustainable in a symmetric long run equilibrium depends on technology (economies of scale), preferences (market size) and strategies (toughness of price competition). On the normative side, in homogeneous product markets the business stealing effect drives the result of excessive entry, whereas adding product differentiation and the utility from variety may revert the result. We then consider asymmetric free entry equilibria that exploit the aggregative nature of many oligopoly models. Finally, we discuss endogenous sunk costs and persistent concentration and frictionless entry and contestable markets.