Antitrust & Competition Policy Blog

Exploitative abuse and abuse of economic dependence: What can we learn from the industrial organization approach?

Bougette, Patrice ; Budzinski, Oliver and Marty, Frédéric ask Exploitative abuse and abuse of economic dependence: What can we learn from the industrial organization approach?

ABSTRACT: This article aims to provide a detailed analysis of the concept of economic dependence and exploitative abuse through their evolution in competition law and economics and in European case law. First, while the theoretical roots of these concepts may be found in economic theory, we show that the issue has long been ignored or only reluctantly considered in competition law enforcement, mainly because of a lack of available and reliable economic criteria. Second, although its primary objective was to measure market power in an oligopoly context, we examine how current empirical industrial organization methodology allows a sophisticated measure of the economic dependence among suppliers and distributors. Third, we discuss the possibility of relying on the industrial organization approach to address these issues.

Assistant Attorney General Makan Delrahim Delivers Remarks at Bocconi University in Milan

See here for the speech.

 

Speech Highlights

In all markets, and especially in innovative markets, we must wield the antitrust laws with thought and care, guided by economics. In a platform market characterized by network effects, for example, competition enforcers may need to take a close look to see whether competition is suffering or competitors are losing out as a result of misdeeds by an incumbent. But especially in fast-moving innovative markets, an incumbent’s monopoly may be fragile, and prone to being toppled by new entrants offering something better and more exciting.

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As enforcers, we are careful not to treat consumer welfare as merely a static measure of effects. Instead, it is necessary to analyze both the immediate and future effects that a practice might create. This dynamic approach is consistent with the basic insight of economics that individuals may be willing to trade off an immediate gain for a long run benefit.

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Our evidence-based approach requires enforcement to be built on credible evidence that a practice harms competition and consumers, or in the case of merger enforcement, that it creates an unacceptable risk of doing so. Importantly, an evidence-based approach also means being open to persuasion to theories grounded in well-accepted economic principles and evidence that may show harm to competition and consumers. Where such evidence exists, it is the duty of enforcers promptly and vigorously to prosecute the antitrust laws.

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I am concerned, however, of any perceptions by the public that antitrust actions are used or, more appropriately termed, “misused,” in an effort to protect a so-called “domestic champion.” If this did occur, these actions not only would harm valid business activities, but also domestic consumers. In international trade discussions, we have long recognized that regulatory protectionism may be a common form of non-tariff barrier that goes counter to efficiency-enhancing free and fair trade. Some economists have observed that existing trade commitments can “tempt political officials to employ regulatory protectionism due to constraints on their ability to use other preferred protectionist instruments.” Such potential regulatory protectionism would wrongly aim to protect local competitors, often at the cost of local consumers.
Discrimination through regulatory protectionism in competition enforcement may be de jure. That is, the preference is on its face discriminatory. It may also be de facto. That is, as applied it has a discriminatory impact on foreign competitors. In the antitrust context, I don’t believe there is any de jure discrimination. I am more concerned, however, about any perception of de facto discrimination, in which competition authorities employ standards that have the practical result of advantaging domestic over foreign competitors.
I don’t want to suggest that any has occurred yet, but we must be vigilant to prevent even its temptations. To avoid the risk that antitrust laws are enforced in an improper manner, each antitrust enforcement agency should redouble its commitment to the core purpose of competition law: that antitrust law favors competition regardless of whether the source of that competition is foreign or domestic. The international network of competition agencies has had significant success in fostering this approach, but we must remain focused on continued progress, especially with new, inexperienced agencies.

Patent licensing in the presence of a differentiated good

Jiyun Cao (The School of Economics, Nankai University and Collaborative Innovation Center for China Economy, Tianjin, China) and Uday Bhanu Sinha (Department of Economics, Delhi School of Economics) analyze Patent licensing in the presence of a differentiated good.

ABSTRACT: The existing literature has considered licensing of a patented innovation either in a homogenous good industry or in a differentiated goods industry. We consider the licensing problem between two firms i.e., licensor and licensee producing the homogenous goods when there is a third firm producing a differentiated good in the market. We find that when the costs of non-innovators are not high, the optimal licensing contract depends on the degree of product differentiation and the innovator has more incentive for innovation when it is an insider than when it is an outsider of this market.

Excess Capacity and Effectiveness of Policy Interventions: Evidence from the Cement Industry

Tetsuji Okazaki (Faculty of Economics, The University of Tokyo) ; Ken Onishi (School of Economics, Singapore Management University) ; Naoki Wakamori (Faculty of Economics, The University of Tokyo) study Excess Capacity and Effectiveness of Policy Interventions: Evidence from the Cement Industry.

ABSTRACT: Excess production capacity has been a major concern in many countries, in particular, when an industry faces declining demand. Strategic interaction among firms might delay efficient scrappages of production capacity and policy interventions that eliminate such strategic incentives may improve efficiency. This paper empirically studies the effectiveness of policy interventions in such an environment, using plant-level data on the Japanese cement industry. Our estimation results show that a capacity coordination policy that forces firms to reduce their excessive production capacity simultaneously can effectively reduce excess capacity without distorting firms' scrappage decisions or increasing the market power of the firms.

AdC Competition Policy Award - Applications must be submitted by 4 June 2018

 

In marking its 15th anniversary, the AdC has established an award for academic papers on competition law and economics, in the scope of its mission to promote a competition culture. The selection committee will be presided over by Margarida Matos Rosa, President of the AdC, and composed of competition experts renowned internationally for their standing in the field of competition policy.

Applications to the 2018 edition of the AdC Competition Policy Award, on competition economics, must be submitted to [email protected] until  4 June.

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Associated Documents

Title	Tipo	Tamanho
AdC Award - Rules of Procedure	.pdf	327 Kb
AdC Award - Application form	.pdf	407 Kb
AdC Award - Flyer	.pdf	504 Kb

 

 

 

 

 

Does hospital competition improve efficiency? The effect of the patient choice reform in England

Francesco Longo (Centre for Health Economics, University of York, York, UK.) ; Luigi Siciliani (Department of Economics and Related Studies, University of York, York, UK.) ; Giuseppe Moscelli (Centre for Health Economics, University of York, York, UK.) ; Hugh Gravelle (Centre for Health Economics, University of York, York, UK.) ask Does hospital competition improve efficiency? The effect of the patient choice reform in England.

ABSTRACT:  We use the 2006 relaxation of constraints on patient choice of hospital in the English NHS to investigate the effect of hospital competition on dimensions of efficiency including indicators of resource management (admissions per bed, bed occupancy rate, proportion of day cases, cancelled elective operations, proportion of untouched meals) and costs (cleaning services costs, laundry and linen costs, reference cost index for overall and elective activity). We employ a quasi difference-indifference approach and estimate seemingly unrelated regressions and unconditional quantile regressions with data on hospital trusts from 2002/03 to 2010/11. Our findings suggest that increased competition had mixed effects on efficiency. An additional equivalent rival increased admissions per bed and the proportion of day cases by 1.1 and 3.8 percentage points, and reduced the proportion of untouched meals by 3.5 percentage points, but it also increased the number of cancelled elective operations by 2.6%. Unconditional quantile regression results indicate that hospitals with low efficiency, as measured by few

Deputy Assistant Attorney General Roger Alford Delivers Remarks at the National Autonomous University of Mexico (UNAM) Event Sponsored by the Federal Commission of Economic Competition (COFECE) in Mexico

See here.

Speech highlights:

Privilege issues in cross-border antitrust investigations do not exist in a vacuum and one must consider the legal framework that gives rise to discovery practices in the first place. In this regard, common law jurisdictions vary from civil law jurisdictions. And there is a considerable diversity of discovery protocols within each type of jurisdiction. Moreover, agencies may vary in their approach to privilege based on the underlying legal issue (e.g., a merger, civil non-merger, or criminal antitrust claim).

As competition agencies are converging with respect to sound antitrust enforcement, one of the important questions will be how to address questions of privilege going forward. This presents difficult issues of bridging civil and common law traditions.

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But in a world of electronic communication and global business, this is a fundamental gap in privilege protections. 

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One approach is to continue with the status quo and accept privilege pluralism among competition authorities. With this approach, antitrust counsel will continue their practice of recognizing the different types of privilege in different countries, and engage with their clients accordingly. That effectively means that agencies will continue with their current practices in gathering evidence and attorneys and clients will accommodate the privilege rules of each agency and communicate depending on the scope of the privilege in the relevant jurisdictions. 

In the case of a merger reviewed by multiple jurisdictions, this means that different privilege claims will be made to different agencies. When those agencies cooperate with another on merger investigations, certain agencies will have documents that other agencies might not.

A second approach is for competition agencies to recognize, formally or informally, the applicable privilege laws that naturally govern the relationship between the attorney and the client. This is the approach that the International Bar Association has recommended in a related context involving the transnational taking of evidence. Under this approach, the competition agency reviewing documents in a merger would exclude and not seek evidence or the production of any documents or oral testimony if there is a privilege under the legal or ethical rules the agency determines to be applicable to the attorney-client relationship. 

In the merger context, this might mean that even if an agency does not ordinarily recognize attorney-client privilege, it would nonetheless do so if the jurisdiction that has the closest nexus to the attorney-client relationship recognizes such a privilege. But it might also mean that even though an agency ordinarily does recognize privilege laws, it would nonetheless not recognize attorney-client privilege claims if the jurisdiction that has the closest nexus to the attorney-client relationship does not. As discussed above, this is not the approach the Antitrust Division has adopted or recommends.

A third approach is for competition agencies to apply the most protective of the possible privilege laws that might govern the relationship. Under this approach, when the parties are subject under applicable laws to different privilege rules, the agency should apply the same rule to all parties, giving preference to the rule that provides the highest level of protection. Obviously that is an easier solution for competition agencies in jurisdictions that already have robust attorney-client privilege laws, and more difficult for other jurisdictions. 

A fourth approach is for competition agencies to agree upon a uniform approach with respect to attorney-client privilege and adopt that approach as part of best practices in competition enforcement. There is some evidence of general support for this approach. 

Network Structure and Consolidation in the U.S. Airline Industry, 1990-2015

Ciliberto, Federico ; Cook, Emily ; Williams, Jonathan analyze Network Structure and Consolidation in the U.S. Airline Industry, 1990-2015.

ABSTRACT:  We study the effect of consolidation on airline network connectivity using three measures of centrality from graph theory: Degree, Closeness, and Betweenness. Changes in these measures from 1990 to 2015 imply: i) the average airport services a greater proportion of possible routes, ii) the average origin airport is fewer stops away from any given destination, and iii) the average hub is less often along the shortest route between two other airports. Yet, we find the trend toward greater connectivity in the national network structure is largely una ffected by consolidation, in the form of mergers and codeshare agreements, during this period.

Entry Deterrence and Strategic Alliances

Gayle, Philip and Xie, Xin write on Entry Deterrence and Strategic Alliances.

ABSTRACT: Researchers have written extensively on the impact that strategic alliances between airlines have on airfare, but little is known of the market entry deterrent impact of strategic alliances. Using a structural econometric model, this paper examines the market entry deterrent impact of codesharing, a form of strategic alliance, between incumbent carriers in domestic air travel markets. We find evidence of market entry deterrence, but deterrence impact depends on the specific type of codesharing between market incumbents as well as the identity of the potential entrant. We quantify the extent to which market incumbents’ codesharing influences potential entrants market entry cost and probability of market entry.

Exploitative Abuse and Abuse of Economic Dependence: What can we Learn from the Industrial Organization Approach?

Patrice Bougette (Université Côte d'Azur) ; Oliver Budzinski (Technische Universität Ilmenau) ; Frédéric Marty (Université Côte d'Azur, France) ask Exploitative Abuse and Abuse of Economic Dependence: What can we Learn from the Industrial Organization Approach?

ABSTRACT: This article aims to provide a detailed analysis of the concept of economic dependence and exploitative abuse through their evolution in competition law and economics and in European case law. First, while the theoretical roots of these concepts may be found in economic theory, we show that the issue has long been ignored or only reluctantly considered in competition law enforcement, mainly because of a lack of available and reliable economic criteria. Second, although its primary objective was to measure market power in an oligopoly context, we examine how current empirical industrial organization methodology allows a sophisticated measure of the economic dependence among suppliers and distributors. Third, we discuss the possibility of relying on the industrial organization approach to address these issues.

Identifying the Degree of Collusion Under Proportional Reduction

Oleksandr Shcherbakov and Naoki Wakamori are Identifying the Degree of Collusion Under Proportional Reduction.

ABSTRACT: Proportional reduction is a common cartel practice in which cartel members reduce their output proportionately. We develop a method to quantify this reduction relative to a benchmark market equilibrium scenario and relate the reduction to the traditional conduct parameter. Our measure is continuous, allowing us to have an intuitive interpretation as the “degree of collusion” and nesting the earlier models in the existing literature. Furthermore, our methodology addresses Corts’ (1999) critique by estimating time-varying degree of collusion from a short panel of firm-level observations, exploiting firms’ ex post heterogeneity. We illustrate the method using the Joint Executive Committee railroad cartel data.

Incumbents' responses to innovative entrants: A multi-country dynamic analysis

Diekhof, Josefine and Cantner, Uwe measure Incumbents' responses to innovative entrants: A multi-country dynamic analysis.

ABSTRACT: The influence of innovative entrants on incumbents is considered important for technological change. We analyze this influence for the global transition towards alternative technology vehicles (ATVs). Our results indicate that entrants' ATV-related knowledge accumulation stimulates average incumbent's ATV-related research. Regarding global entrants, incumbents with higher ATV patent stocks increased patenting stronger; supporting previous literature on competitive reactions to entry. Responding to domestic entrants, however, incumbents with low ATV patent stocks increased whereas incumbents with high stocks decreased patenting; suggesting that advanced incumbents outsource research or overtake entrants. Further, certain characteristics and not merely the quantity of entrants drive incumbents' responses.

Self-Control in the Retailing Industry: Inducing Rejection of Loyalty Schemes

Foschi, Matteo (European University Institute) explores Self-Control in the Retailing Industry: Inducing Rejection of Loyalty Schemes.

ABSTRACT: When consumers register with loyalty schemes, or open a `customer account', offered by large retailers, they allow retailers to study their purchasing behaviour over time. Via personalised offers and discounts, retailers can then use this information to price discriminate. I study the effect on consumer welfare of this discrimination, assuming several different levels of informativeness within the schemes. When schemes are uninformative about consumer preferences they are certain to hurt consumer surplus. When they are fully or partially informative, an increase in aggregate consumer surplus can take place under some conditions. Pareto Improvements are never possible. The model studies groceries and online industries where temptation and self-control are an issue.

The Effects of a Day Off from Retail Price Competition: Evidence on Consumer Behavior and Firm Performance in Gasoline Retailing

Foros, Øystein ; Nguyen-Ones, Mai ; Steen, Frode explore The Effects of a Day Off from Retail Price Competition: Evidence on Consumer Behavior and Firm Performance in Gasoline Retailing.

ABSTRACT: First, we analyze how regular days off from competition and a time-dependent price pattern affect firm performance. Second, we examine the effects on firms' profitability from consumers' changing search- and timing behavior. We use microdata from gasoline retailing in Norway. Since 2004, firms have practiced an industry-wide day off from competition, starting on Mondays at noon, by increasing prices to a common level given by the recommended prices (decided and published in advance). In turn, a foreseeable low-price window is open before every restoration. During the data period, we observe an additional weekly restoration on Thursdays at noon. The additional day off from competition increases firm performance. As expected, a conventional price search of where to buy reduces firms' profitability. In contrast, consumers who are aware of the cycle and spend effort on when to buy have a positive impact on firms' profitability. If consumers spend effort on when to buy, they attempt to tank during low price windows. By its very nature, this shrink consumers' ability to compare prices at several outlets. Consequently, more attention to when to buy may soften price competition.

Intra-platform exclusion in software markets

Patrick F Todd analyzes Intra-platform exclusion in software markets.

ABSTRACT: A large proportion of our online activity takes place through a handful of platforms. With increased hostility towards the prevalence of vertical integration in tech markets and calls for the breaking up of profitable technology companies such as Amazon, Apple, Google, and Microsoft, the time is ripe to devise antitrust rules that sensibly approach the relationship between platform operators and firms that compete within their ecosystems. This article analyses situations where platform operators design their platforms in such a way that is liable to exclude intra-platform competitors. There are certain intricacies of exclusion in intra-platform markets that existing theories of harm in antitrust law do not anticipate; thus, applying those theories unyieldingly is liable to cause confusion and result in judicial error. Existing cases reveal that some authorities and courts have been taking a sensible approach to intra-platform exclusion since the early 2000s whereas others, especially in the EU, have shown a tendency to protect excluded intra-platform firms at the expense of consumer welfare.

Price-Linked Subsidies and Health Insurance Markups

Sonia Jaffe (Becker Friedman Institute For Research in Economics) and Mark Shepard (Harvard University) investigate Price-Linked Subsidies and Health Insurance Markups.

ABSTRACT: Subsidies in many health insurance programs depend on prices set by competing insurers – as prices rise, so do subsidies. We study the economics of these “price-linked” subsidies compared to “fixed” subsidies set independently of market prices. We show that price-linked subsidies weaken competition, leading to higher markups and raising costs for the government or consumers. However, price-linked subsidies have advantages when insurance costs are uncertain and optimal subsidies increase as costs rise. We evaluate this tradeoff empirically using a model estimated with administrative data from Massachusetts’ health insurance exchange. Relative to fixed subsidies, price-linking increases prices by up to 6% in a market with four competitors, and about twice as much when we simulate markets with two insurers. For levels of cost uncertainty reasonable in a mature market, we find that the losses from higher markups outweigh the benefits of price-linking.

Strengthening competition and innovation in Canada: 2013-2018 (A Video in Honor of John Pecman)

John is highly deserving of the accolades.  He led a golden age of accomplishment at the Bureau, continuing a strong global role.

 

 

Market Power and Forward Prices

Ruddell, Keith (Research Institute of Industrial Economics (IFN)) ; Downward, Tony (University of Auckland) ; Philpott, Andy(University of Auckland) explore Market Power and Forward Prices.

ABSTRACT: We construct a model of strategic behavior in sequential markets which exhibits a persistent forward price premium. On the spot market, producers wield market power while purchasers are price takers. Producers with forward commitments have less incentive to raise prices on the spot market. Purchasers are thus willing to pay a premium to producers for forward contracts. We argue that this type of forward premium is not susceptible to arbitrage by speculators on the forward market, since purchasers prefer forward contracts backed by producers.

Cournot Competition in Wholesale Electricity Markets: The Nordic Power Exchange, Nord Pool

Lundin, Erik (Research Institute of Industrial Economics (IFN)) and Tangerås, Thomas (Research Institute of Industrial Economics (IFN)) explore Cournot Competition in Wholesale Electricity Markets: The Nordic Power Exchange, Nord Pool.

ABSTRACT: Horizontal shifts in bid curves observed in wholesale electricity markets are consistent with Cournot competition. Quantity competition reduces the informational requirements associated with evaluating market performance because the markups of all producers then depend on the same inverse residual demand curve instead of one for each firm. We apply the model to the day-ahead market of the Nordic power exchange, Nord Pool, for the years 2011–2013. Results suggest that mark-ups were 8–11 percent. We find some support for the hypothesis that the division of Sweden into price areas in 2011 increased the exercise of market power.

Technological Spillovers, Product Market Rivalry and R&D Investment

Thomas Grebel (Technische Universität Ilmenau, Germany) and Lionel Nesta (Université Côte d'Azur) examine Technological Spillovers, Product Market Rivalry and R&D Investment.

ABSTRACT: We investigate the determinants of the sign of R&D reaction functions of two rival firms. Using a two-stage Cournot competition game, we show that this sign depends on four types of environments in terms of product rivalry and technology spillovers. We test the predictions of the model on the world's largest manufacturing corporations. Assuming that firms make R&D investments based on the R&D effort of the representative rival company, we develop a dynamic panel data model that accounts for the endogeneity of the decision of the rival firm. Empirical results corroborate the validity of the theoretical model.