Antitrust & Competition Policy Blog

Manufacturer collusion: Strategic implications of the channel structure

Reisinger, Markus ; Thomes, Tim Paul discuss Manufacturer collusion: Strategic implications of the channel structure.

ABSTRACT: We investigate how the structure of the distribution channel affects tacit collusion between manufacturers. When selling through a common retailer, we find - in contrast to the conventional understanding of tacit collusion that firms act to maximize industry profits - that colluding manufacturers strategically induce double marginalization so that retail prices are above the monopoly level. This lowers industry profits but increases the profit share that manufacturers appropriate from the retailer. Comparing common distribution with independent (exclusive) distribution, we show that the latter facilitates collusion. Despite this result, common retailing leads to lower welfare because a common retailer monopolizes the downstream market. For the case of independent retailing, we also demonstrate that contract offers that are observable to the rival retailer are not necessarily beneficial for collusive purposes.

Capital Structure Under Collusion

Ferrés, Daniel ; Ormazabal, Gaizka ; Povel, Paul ; Sertsios, Giorgio study Capital Structure Under Collusion.

ABSTRACT: We study the financial leverage of firms that collude by forming a cartel. We find that cartel firms have lower leverage ratios during collusion periods, consistent with the idea that reductions in leverage help increase cartel stability. Cartel firms have a surprisingly large economic footprint (they represent more than 20% of the total market capitalization in the U.S.), so understanding their decisions is relevant. Our findings show that anti-competitive behavior has a significant effect on capital structure choices. They also shed new light on the relation between profitability and financial leverage.

The Legality of Bailouts and Buy Nationals

Kamala Dawar has a book on The Legality of Bailouts and Buy Nationals.

BOOK ABSTRACT: This book examines the international regulation of crises bailouts and buy national policies. It undertakes this research with specific reference to the crisis years 2008–2012. The book includes a comparative analysis of the regulation of public procurement and subsidies aid at both multilateral and regional levels, identifying the strengths and weakness in the WTO legal framework and selected regional trade agreements (RTAs). Ultimately, the aim of this work is to provide options for improving the consistency of these laws and the regulation of these markets. This is of immediate relevance for good economic governance, as well as for managing future systemic financial crises in the interests of citizens: as tax payers and consumers.

Competition Law, IP and Regulation in the Pharmaceutical Sector, November 9, 2017

Competition Law, IP and Regulation in the Pharmaceutical Sector

November 9, 2017.

Program

14,30 - Welcome address: Antonietta Di Blase (Vice Dean, Department of Law, University of Roma Tre)

 

Introduction: Giovanni Pitruzzella (President, Italian Competition Authority) 

 

15,00 - First session

Chair: Margherita Colangelo (University of Roma Tre)

Keynote speaker: Michal Gal (University of Haifa)

Pay-for-Delay and No-Contest Clauses in the Pharmaceutical Sector

Speakers:

Emanuela Arezzo (University of Teramo)

Patents between incentive towards innovation and strategic gaming

Claudia Desogus (Italian Competition Authority)

Competition authorities’ recent experience on excessive prices in pharmaceuticals

Second session

16,00 - Roundtable

Chair: Giandonato Caggiano (University of Roma Tre)

Speakers:

Ginevra Bruzzone (Assonime)

Francesco Mazza (Farmindustria)

Francesca Mastroianni (Italian Medicines Agency – AIFA)

Pietro Merlino (Cleary Gottlieb Steen & Hamilton LLP)

Gabriella Muscolo (Italian Competition Authority)

Serena Sileoni (Istituto Bruno Leoni)

Conclusions: Vincenzo Zeno-Zencovich (University of Roma Tre)

 

Location: Law Department, Sala del Consiglio – First floor

Rome, Via Ostiense 163

 

Contact: [email protected]

Market Power, Production (Mis)Allocation and OPEC

John Asker, New York University - Leonard N. School of Business - Department of Economics Allan Collard-Wexler, Duke University and Jan De Loecker, Princeton University - Department of Economics; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR) examine Market Power, Production (Mis)Allocation and OPEC. 

Abstract: This paper estimates the extent to which market power is a source of production misallocation. Productive inefficiency occurs through more production being allocated to higher-cost units of production, and less production to lower-cost production units, conditional on a fixed aggregate quantity. We rely on rich micro-data covering the global market for crude oil, from 1970 to 2014, to quantify the extent of productive misallocation attributable to market power exerted by the OPEC. We find substantial productive inefficiency attributable to market power, ranging from 14.1 percent to 21.9 percent of the total productive inefficiency, or 105 to 163 billion USD.

How Efficient is Dynamic Competition? The Case of Price as Investment

David Besanko, Northwestern University - Kellogg School of Management, Ulrich Doraszelski, Harvard University - Department of Economics; University of Pennsylvania - Business & Public Policy Department, and Yaroslav Kryukov, University of Pittsburgh - University of Pittsburgh Medical Center (UPMC) ask How Efficient is Dynamic Competition? The Case of Price as Investment.

ABSTRACT: We study industries where the price that a firm sets serves as an investment into lower cost or higher demand. We assess the welfare implications of the ensuing competition for the market using analytical and numerical approaches to compare the equilibria of a learning-by-doing model to the first-best planner solution. We show that dynamic competition leads to low deadweight loss. This cannot be attributed to similarity between the equilibria and the planner solution. Instead, we show how learning-by-doing causes the various contributions to deadweight loss to either be small or partly offset each other.

The Impact of Airline Mergers on Quality: Why Do Different Mergers Have Such Different Effects?

Daniel Rijken, VU University Amsterdam and Vincent van der Berg, VU University Amsterdam ask The Impact of Airline Mergers on Quality: Why Do Different Mergers Have Such Different Effects?

ABSTRACT: We investigate the impacts of five airline mergers on one quality dimension, namely route frequency. We use monthly data on routes between the largest 64 US cities from 1999 to 2016. On average, the mergers decrease the frequency, but there are large differences between the five mergers. We hypothesize that these differences resulted from differences in the market and network structures. Our estimations indicate that, if a destination has more connecting flights of the merging airlines, the merger is less detrimental to the frequency, possibly because the merger removes serial marginalization in the quality and price setting.

For the market structure effect, we use two distinct set-ups. In the first set-up, the effects of mergers depend on a lagged variable measuring the current market structure. On routes with stronger competition, mergers decrease the frequency more, possibly due to a larger effect on the market structure. When the merging airlines control all the flights, mergers have almost no impact on the frequency. The second set-up uses the market structure before the merger.

When one of the merging partners controlled all the flights between two airports, the merger does not directly affect the market structure and seems to have little to no impact on the frequency. Surprisingly, if both partners were flying between two airports before the merger, this merger does not seem to be more harmful to the frequency than when only one partner was operating on the route.

Assistant Attorney General Makan Delrahim Delivers Remarks at New York University School of Law

Assistant Attorney General Makan Delrahim Delivers Remarks at New York University School of Law.

The Transposition of the Antitrust Damages Directive in Belgium

Caroline Cauffman, Maastricht University explores The Transposition of the Antitrust Damages Directive in Belgium.

ABSTRACT: The Antitrust Damages Directive was transposed in Belgian law by Act of 6 June 2017 inserting a Title 3 “The action for damages for infringements of competition law” in Book XVII of the Code of economic law, inserting definitions specific to Book XVII, Title 3 in Book I and modifying several provisions of the Code of Economic law.

The implementation of the Directive significantly facilitates access to documents in particular where documents in the file of the competition authority. Also the presumption that cartels cause damage will facilitate the position of claimants. It is noteworthy that the Belgian definition of a cartel is wider than that included in the Directive.

Even more remarkable is the fact that the Belgian legislator, when implementing the exception to the solidary liability for small and medium sized enterprises does not limit their liability to that towards their own direct and indirect purchasers as provided by Article 11(2) of the Directive, but he also holds them liable towards other injured parties where full compensation cannot be obtained from the other undertakings that were involved in the same infringement of competition law, similar to the rules of the Directive concerning immunity recipients. It is not entirely clear whether the Directive allows for such an extension of the liability of SMEs.

Finally, difficulties are expected to result from the use of the concept of the undertaking when indicating the infringer of the competition rules and seemingly the entity liability for damage caused thereby.

Five Actions to Stop Citizen Petition Abuse

Michael A. Carrier , Rutgers Law School discusses Five Actions to Stop Citizen Petition Abuse.

ABSTRACT: High drug prices are in the news. In some cases, such as AIDS-treating Daraprim and the life-saving EpiPen, the price increases dramatically. In other cases, which have received less attention, the price stays high longer than it should. In either case, anticompetitive behavior often lurks behind inflated prices.

Brand drug companies have engaged in an array of conduct to delay generic entry. They have entered into agreements by which they pay generics to settle patent litigation and delay entering the market. They have engaged in “product hopping,” switching from one version of a drug to another, often to delay generic entry. And they have restricted their distribution systems to prevent generics from obtaining needed samples. 

One of these tools, which has flown under the radar until recently, involves “citizen petitions” filed with the FDA. Although intended to serve the public interest by bringing safety concerns to the agency’s attention, nearly all petitions today that target generic drugs are denied. Despite the low success rate, however, petitions are still able to delay generic entry and hamstring the FDA. 

This Essay offers five solutions to address the problem posed by abusive citizen petitions: (1) increasing transparency; (2) shedding light on simultaneous decisions on petitions and generic approval; (3) facilitating the FDA’s summary dispositions of petitions; (4) addressing resource waste; and (5) promoting timely-filed petitions.

The Competitive Effects of Common Ownership: Economic Foundations and Empirical Evidence: Reply

José Azar, University of Navarra, IESE Business School, Martin C. Schmalz, University of Michigan, Stephen M. Ross School of Business, and Isabel Tecu, Charles River Associates (CRA) discuss The Competitive Effects of Common Ownership: Economic Foundations and Empirical Evidence: Reply.

ABSTRACT: Kennedy, O’Brien, Song, and Waehrer (2017) replicate the panel results of Azar, Schmalz and Tecu (forthcoming), but argue on theoretical grounds that the estimates should not be interpreted as anti-competitive effects of common ownership. They then develop and estimate alternative models and find no significant positive effects of common ownership on airline ticket prices. This note points out features of their empirical analysis that cast doubt on the reliability of their method and results. Their conclusion that the data do not support AST’s interpretation seems unwarranted.

Comment on ‘The Empirical Basis for Antitrust: Cartels, Mergers, and Remedies’

John M. Connor, American Antitrust Institute (AAI) and Robert H. Lande, University of Baltimore - School of Law offer Comment on ‘The Empirical Basis for Antitrust: Cartels, Mergers, and Remedies’.

ABSTRACT: In this journal, James Langenfeld critically reviewed four of the present authors’ articles that analyze the size of cartel overcharges and their antitrust policy implications. In this comment, we explain why we believe Langenfeld errs in his criticism of our work. In particular, this comment discusses the variation in research quality of the sources used to compile a large sample of historical cartel overcharges; the advisability of trimming outliers or large estimates from the sample; alleged publication bias; why our 25% median estimate is much more likely to be correct than the US Sentencing Guideline’s 10% presumption; and the implications of the average cartel overcharges results for optimal deterrence and antitrust policy.

The Opinion of AG Wahl in the Intel Rebates Case: A Triumph of Substance over Form?

Julie N. Clarke, Melbourne Law School asks The Opinion of AG Wahl in the Intel Rebates Case: A Triumph of Substance over Form?

ABSTRACT: Rebates are a ubiquitous form of price competition which can be utilized either to intensify or to harm competition. Distinguishing pro-competitive from anti-competitive rebates and translating this into effective and administrable legal rules, remains a key challenge for competition law. The recent Opinion by Advocate General Wahl in the Intel appeal has identified deficiencies in the legal approach to dominant firm rebates under Article 102 TFEU and has proposed a ‘more economic’ case-by-case approach to their assessment. The proposed approach and the attempt by AG Wahl to reconcile it with existing case-law, raises a number of important questions for consideration by the European Court of Justice. This article examines AG Wahl’s Opinion and suggests that, while the substance of the proposed approach has merit, the form proposed is deficient in a number of respects.

Four Cases in Sports Competition Policy: Baseball, Judo, Football, and Motor Racing

Oliver Budzinski, Ilmenau University of Technology offers Four Cases in Sports Competition Policy: Baseball, Judo, Football, and Motor Racing.

ABSTRACT: Practices and conducts in professional and even amateur sports can be subject to competition laws as soon as commercial activities are involved. From an economic perspective, this implies that both directly commercial activities like the sale of broadcasting/media rights and indirectly commercial activities like defining and enforcing the rules of the games can be hit by competition policy interventions. Setting and enforcing the rules of the game is an activity with commercial effects because it influences attractiveness and marketability of the sports in question. After discussing fundamental issues, this contributions reviews selected landmark cases in sports competition policy from an economic perspective. This includes the U.S. baseball antitrust exemption, access rules to Judo tournaments, sale systems of media rights in European football as well as a unique combination of long-run exclusivity contracts, skewed allocation of common revenues, and special influences on rule-setting by some competitors in Formula One motor racing. Eventually, the areas of state aid to football clubs and mergers in Danish football are sketched.

Intellectual Property and Competition

Herb Hovenkamp offers an overview of Intellectual Property and Competition.

ABSTRACT: A legal system that relies on private property rights to promote economic development must consider that profits can come from two different sources. First, both competition under constant technology and innovation promote economic growth by granting many of the returns to the successful developer. Competition and innovation both increase output, whether measured by quantity or quality. Second, however, profits can come from practices that reduce output, in some cases by reducing quantity, or in others by reducing innovation.

IP rights and competition policy were traditionally regarded as in conflict. IP rights create monopoly, which was thought to be inimical to competition. By contrast, competition policy values free entry and asset mobility, which IP rights limit in order to create incentives. Today our view of this relationship is more complex. First, most IP rights are insufficient to produce durable monopoly, although they do facilitate product differentiation. Second, we tend to see IP rules as creating a property rights system in which competition exists for the property rights themselves. Firms compete by innovating and appropriating whatever payoffs they are able to capture, including IPRs. Third, we define competition in terms of output or welfare rather than simple rivalry. A market structure or practice that increases output is more "competitive" than a lower output alternative, even though the amount of daily rivalry among firms is less. For example, output in the cellular phone market is much higher because hardware, software, and telecommunications links are all networked by cooperative agreements and standard setting.

Under conventional neoclassical assumptions, both innovation and competition increase output, whether measured by the number of units or their quality.

At the same time, however, excessive IP protection limits competition by reducing asset mobility further than necessary to facilitate innovation. Excessive antitrust enforcement can also limit asset mobility by benefiting select businesses at the expense of consumers. The policy trick is to find the "sweet spot" where the aggregate effects of IP and competition policy are optimized.

Horizontal Mergers, Market Structure, and Burdens of Proof

Herbert J. Hovenkamp, Univ. of Pennsylvania Law and Wharton Business and Carl Shapiro, University of California, Berkeley - Haas School of Busines work through Horizontal Mergers, Market Structure, and Burdens of Proof.

ABSTRACT: Since the Supreme Court’s landmark 1963 decision in Philadelphia National Bank, antitrust challengers have mounted prima facie cases against horizontal mergers that rested on the level and increase in market concentration caused by the merger, with proponents of the merger then permitted to rebut by providing evidence that the merger will not have the feared anticompetitive effects. Although the way that concentration is measured and the triggering levels have changed over the last half century, the basic approach has remained intact. This longstanding structural presumption, which is well supported by economic theory and evidence, has been critical to effective merger enforcement. We suggest some ways to strengthen it further.

One critical assumption in this burden shifting framework is that the goal of merger policy is to protect consumers against high prices or reduced output, product variety, product quality, or innovation (“consumer welfare”). If the goal is something else, such as deterring industrial concentration to control corporate political power, or protecting small firms from larger competitors, then the structural presumption must be viewed differently. The bulk of this essay examines and defends the role of structural presumptions in the present legal world where protection of consumer welfare is the point of merger enforcement. We also briefly consider a legislative proposal that could be seen as departing from this norm, offering some guidance concerning how this proposal could be improved so as to strengthen merger enforcement, in part by making it easier for the government to establish its prima facie case.

Horizontal Shareholding and Antitrust Policy

Fiona M. Scott Morton, Yale School of Management; National Bureau of Economic Research (NBER) and Herbert J. Hovenkamp, Univ. of Pennsylvania Law and Wharton Business discuss Horizontal Shareholding and Antitrust Policy.

ABSTRACT: “Horizontal shareholding” occurs when one or more equity funds own shares of competitors operating in a concentrated product market. For example, the four largest mutual fund companies might be large shareholders of all the major United States air carriers. A growing body of empirical literature concludes that under these conditions market output in the product market is lower and prices higher than they would otherwise be. 
Here we consider how the antitrust laws might be applied to this practice, identifying the issues that courts are likely to encounter and attempting to anticipate litigation problems. We assume that neither the mutual fund managers nor the firms in the product or service market are fixing prices in a way that would subject them to antitrust liability. Section 1 of the Sherman Act and §7 of the Clayton Act take quite different approaches to this problem, but each could be brought to bear. While the current literature on horizontal shareholding does not offer a single robust explanation of how the price increase mechanism works, we show that the “effects” test expressed in the Clayton Act does not require proof of the precise mechanism. Further, §7’s “solely for investment” exception typically will not apply. We also briefly discuss special problems of private plaintiff challenges. Finally, we elaborate the two ways that efficiencies are relevant to analysis of such mergers. First, we show why the efficiency defense as currently formulated will seldom or never save such a merger. Secondly we discuss the problem of remedial efficiencies, or mechanisms for ensuring that judicial relief will not impose its own consumer harm.

The Hart-Scott-Rodino Act’s First Amendment Problem

Scott E. Gant, Andrew Z. Michaelson & Edward J. Normand (all at Boies Schiller Flexner) have a fascinating paper on The Hart-Scott-Rodino Act’s First Amendment Problem.

ABSTRACT: The Hart-Scott-Rodino Antitrust Improvements Act (“HSR Act”) is a centerpiece of federal antitrust law. Designed to aid enforcement of Clayton Act Section 7, which prohibits mergers and acquisitions that “may . . . substantially . . . lessen competition” or “tend to create a monopoly,” the statute requires purchasers of an issuer’s voting securities exceeding a certain amount to notify the Federal Trade Commission (“FTC”) and the Antitrust Division of the Department of Justice (“DOJ”) of the potential acquisition, pay a filing fee, and observe a thirty-day waiting period before proceeding. The FTC or DOJ may thereafter issue to the proposed acquirer a “second request” for additional information about the acquisition, and then conduct an investigation, take testimony, and seek to prevent the acquisition. Investors that have acquired shares without complying with these requirements are subject to civil penalties up to $40,000 per day. Because the HSR Act is supposed to concern itself only with transactions which may lessen competition, when Congress enacted the statute in 1976 it exempted eleven types of transactions from its filing requirement, and also authorized the FTC to exempt other acquisitions “not likely to violate the antitrust laws.” The most prevalent and important exemption is the “Investment-Only” carve-out, which applies to “acquisitions, solely for the purpose of investment, of voting securities, if, as a result of such acquisition, the securities acquired or held do not exceed 10 [percent] of the outstanding voting securities of the issuer.”

Congress created these exemptions intending that the filing requirement would apply only to “the very largest corporate mergers—about the 150 largest out of the thousands that take place every year.” But things have turned out quite differently. Even with the numerous exemptions, in recent years the HSR Act’s filing requirement has applied to more than ten times the number of transactions originally envisioned. This is in part due to the fact that the FTC has consistently advanced and enforced an unduly restrictive view of the Investment Only (“I-O”) Exemption. While the antitrust laws are unquestionably important for well-functioning markets and a vibrant economy, the government’s enforcement of them is subject to constitutional constraints. The enforcement agencies have veered off course by effectively coercing large numbers of speakers qualifying for the I-O Exemption to abstain from engaging in otherwise permissible speech in order to avoid the HSR filing fee and waiting-period (and by coercing others to pay the filing fee and observe the thirty-day waiting period so that they can engage in permissible speech), thereby effecting a widespread infringement of the First Amendment which cannot be justified by legitimate antitrust enforcement objectives.

Oligopolies, Prices, and Quantities: Has Industry Concentration Increased Price and Restricted Output?

Sharat Ganapati, Dartmouth College, Department of Economics asks Oligopolies, Prices, and Quantities: Has Industry Concentration Increased Price and Restricted Output?

ABSTRACT: American industries have grown more concentrated over the last few decades, driven primarily by the growth of the very largest firms. Classical economics implies that this should lead to hikes in prices, reduction in output, and decreases in consumer welfare. I investigate forty years of data from 1972-2012 using publicly available market shares and price indices for both the manufacturing and non-manufacturing sectors and find mixed evidence. Manufacturing concentration increases are indeed correlated with slightly higher prices, but not lower output. However concentration increases are correlated with increases in productivity, offsetting a large portion of the price increase. In contrast, non-manufacturing concentration increases over the last twenty years are not correlated with observable price changes, but are correlated with increases in output.

An Empirical Analysis of Platform Regulation in the Sharing Economy

Zhijie Lin, Nanjing University - School of Business and Yong Tan, University of Washington - Michael G. Foster School of Business offer An Empirical Analysis of Platform Regulation in the Sharing Economy.

ABSTRACT: The sharing economy, enabled by digital platforms which connect suppliers and consumers for peer-to-peer exchanges, has experienced a rapid growth recently. Although researchers have attempted to explore the societal or business aspects in the sharing economy, regulatory issues have been surprisingly overlooked. We thus analyze how a platform’s self-regulation on suppliers affects suppliers’ sales performance, and the role of four contingent factors, i.e., regulation recency, market competition intensity, product diversity and product price. Using a rich and proprietary data set from a large sharing economy platform which facilitates the exchanges of home-cooked meals in China, and employing multiple identification strategies and estimation methods (i.e., traditional propensity score matching, look-ahead propensity score matching, and difference-in-differences approach), we find robust evidence that a platform’s regulation on a supplier (i.e., a home kitchen/cook) increases the supplier’s sales revenue by 20.7%. Our additional investigations of the contingent factors find that the impact of regulation on sales would be weaker with higher market competition intensity, but stronger with higher product diversity. However, the regulation impact does not vary across different recency or price levels. Our study serves as the first attempt to empirically examine regulatory issues in the sharing economy, and offers important practical implications to platform operators and suppliers.