Antitrust & Competition Policy Blog

Do Merger Efficiencies Always Mitigate Price Increases?

Zhiqi Chen, Carleton University - Department of Economics and Gang Li, Nanjing University - Department of Economics ask Do Merger Efficiencies Always Mitigate Price Increases?

ABSTRACT: In a Cournot model with differentiated products, we demonstrate that merger efficiencies in the form of lower marginal costs for the merging firms (the insiders) lead to higher post‐merger prices under certain conditions. Specifically, when the degree of substitutability between the two insiders is not too high relative to that between an insider and an outsider, increased efficiencies may exert upward rather than downward pressure on the prices of the merging firms. Our results suggest that in cases where firms engage in quantity competition, antitrust authorities should not presume that efficiencies will necessarily mitigate the anticompetitive effects of the merger.

GCR Live Merger Control - Tuesday, 23 October 2018, Hotel Amigo, Brussels

Register now   View all events | Latest news | Contact us GCR Live Merger Control Tuesday, 23 October 2018, Hotel Amigo, Brussels Chaired by   Philippe Chappatte Slaughter and May, London and Brussels     Ilene Knable Gotts Wachtell, Lipton, Rosen & Katz, New York   Register now to save over 20% Speakers Oliver Bethell, Director, EMEA Competition, Google, London Andrea Coscelli, Chief Executive, Competition and Markets Authority (CMA), London Laurent Garzaniti, Freshfields Bruckhaus Deringer, Brussels Calvin Goldman QC, Goodmans, Toronto Ronan Harty, Davis Polk & Wardwell, New York Bojana Ignjatovic, RBB Economics, London Nicole Kar, Linklaters, London Suyong Kim, Hogan Lovells, London and Brussels Timothy Lamb, Associate General Counsel, Competition and Regulatory, Facebook, London Valérie Meunier, Compass Lexecon, Paris Carles Esteva Mosso, Acting Deputy Director General for Mergers, DG Competition, European Commission, Brussels Vassili Moussis, Anderson Mōri & Tomotsune, Tokyo Barry Nigro Jr., Deputy Assistant Attorney General, Antitrust Division, US Department of Justice, Washington DC Anna Numerova, Egorov Puginsky Afanasiev & Partners, Moscow Amilcar Peredo, Basham, Ringe and Correa, Mexico City Martha Samuelson, Analysis Group, Boston Shweta Shroff Chopra, Shardul Amarchand Mangaldas, New Delhi Isabelle de Silva, President, French Competition Authority, Paris  Robbert Snelders, Cleary Gottlieb Steen & Hamilton, Brussels Marc Williamson, Latham & Watkins, Washington, DC Natalie Yeung, Slaughter and May, Hong Kong Further speakers to be announced Programme 8.30: Welcome coffee and registration 9.00: Chairs’ morning welcome Philippe Chappatte, Slaughter and May, London and Brussels Ilene Knable Gotts, Wachtell, Lipton, Rosen & Katz, New York 9.15: Enforcers roundtable An international panel of enforcers exploring global perspectives on merger control enforcement Moderator:  Philippe Chappatte, Slaughter and May, London and Brussels Panel:  Carles Esteva Mosso, Acting Deputy Director General for Mergers, DG Competition, European Commission, Brussels Isabelle de Silva, President, French Competition Authority, Paris Andrea Coscelli, Chief Executive, Competition and Markets Authority (CMA), London Barry Nigro Jr., Deputy Assistant Attorney General, Antitrust Division, US Department of Justice, Washington DC 10.25: Coffee break 10.50: Merger control in Europe Implications of Brexit for EU merger control Vertical restraints and conglomerate effects Development of EU and member state FDI regimes Innovation and data aggregation Moderator:  Laurent Garzaniti, Freshfields Bruckhaus Deringer, Brussels Panel: Robbert Snelders, Cleary Gottlieb Steen & Hamilton, Brussels Bojana Ignjatovic, RBB Economics, London Nicole Kar, Linklaters, London Timothy Lamb, Associate General Counsel, Competition and Regulatory, Facebook, London 12.00: Networking lunch  13.00: Merger control in the Americas Antitrust under Trump CFIUS and developments in FDI Vertical restraints and conglomerate effects Innovation and data aggregation Remedies Moderator:  Ilene Knable Gotts, Wachtell, Lipton, Rosen & Katz, New York Panel: Marc Williamson, Latham & Watkins, Washington DC Calvin Goldman QC, Goodmans, Toronto Amilcar Peredo, Basham, Ringe and Correa, Mexico City Martha Samuelson, Analysis Group, Boston 14.10: Coffee break 14.35: Merger control in BRICs How long are procedures taking? Are non-competition issues being raised? Is the approach to remedies different from the EU and US? Moderator:  Vassili Moussis, Anderson Mōri & Tomotsune, Tokyo Panel: Shweta Shroff Chopra, Shardul Amarchand Mangaldas, New Delhi Natalie Yeung, Slaughter and May, Hong Kong Anna Numerova, Egorov Puginsky Afanasiev & Partners, Moscow 15.45: Theories of harm: have authorities allowed too many mergers to go through? Should antitrust objectives be broadened to include other considerations, such as; Impact on employment Impact on SME’s Should we be looking at the impact on innovation and consumer protection? Moderator:  Suyong Kim, Hogan Lovells, London and Brussels Panel: Oliver Bethell, Director, EMEA Competition, Google, London Barry Nigro Jr., Deputy Assistant Attorney General, Antitrust Division, US Department of Justice, Washington DC Ronan Harty, Davis Polk & Wardwell, New York Valérie Meunier, Compass Lexecon, Paris 16.55: Chairs' closing remarks Philippe Chappatte, Slaughter and May, London and Brussels Ilene Knable Gotts, Wachtell, Lipton, Rosen & Katz, New York 17.00 onwards: All delegates are invited to attend a drinks reception kindly hosted by RBB Economics Sponsors Drinks reception host Conference supporters Associate sponsors Conference fees  Private Practitioner Type  Price  Until   Super Early €750 7 Sep 2018 Early  €850 5 Oct 2018 Standard  €950 23 Oct 2018  In-house Counsel/Government Agency Type  Price   Standard Complimentary Discounted rates are available for GCR premium subscribers, contact us for further information. Register now to save over 20% Forthcoming events in 2018   20 Sep, Rue de Loxum 25, Brussels

Demand Shaping Through Bundling and Product Configuration: A Dynamic Multiproduct Inventory-Pricing Model

Jing-Sheng Jeannette Song, Duke University - Fuqua School of Business and Zhengliang Xue Song, IBM - T. J. Watson Research Center explores Demand Shaping Through Bundling and Product Configuration: A Dynamic Multiproduct Inventory-Pricing Model.

ABSTRACT: We present a dynamic, multi-item model to analyze the optimal joint inventory, pricing, and bundling decisions for a firm over a finite horizon. We develop a novel demand model that transfers the discrete bundling decision and the corresponding pricing decision into a market share decision. We show that the optimal policy is dictated by a no-order set. For items in this set, we do not place replenishment orders, because these items are overstocked. The rest of the policy parameters -- the order-up-to-levels for the items that we do order, the bundling and pricing decisions, and the bundle assembly quantity -- all depend on the overstock levels. Exploring the optimal policy features, we devise a branching algorithm that significantly simplifies the computation of the optimal policy. We also characterize how the optimal bundling decision depends on item complementarity, cost structure, inventory status, demand uncertainty, and supply responsiveness.

Monopolistic Behaviour and the Good Society; An Empirical Analysis of Monopoly Power and Social Good

Eric Tichbourne, University of Western Ontario - Department of Economics examines Monopolistic Behaviour and the Good Society; An Empirical Analysis of Monopoly Power and Social Good.

ABSTRACT: There is an overwhelming body of Economic theory that studies monopolies and for a good reason: a monopoly is prone to taking advantage of consumers. With the proliferation of information on a global scale, bad societal outcomes are more difficult to hide, arguably keeping in check firms with monopoly power. Theoretical analogy between economic value added and excess profits, assuming CAPM holds allows us to find a reasonable proxy for realized monopoly power profits by computing the difference the return on invested capital and the weighted-average cost of capital. In combination with the proven measurements of accounting profitability, market shares and concentration ratios, this paper argues that constrained monopoly power (given the visibility into firms in the Internet Age) is good for society. Results show that firms with monopoly power tend to be more socially responsible but in aggregate across industries and industry group the net benefit for society is marginal.

The Implications of Public Interest Considerations in the Interpretation and Application of the Failing-Firm Doctrine in South African Merger Analysis

Ignatious Nzero, University of Pretoria explores The Implications of Public Interest Considerations in the Interpretation and Application of the Failing-Firm Doctrine in South African Merger Analysis.

ABSTRACT: There are two main reasons why the article focuses on the regulation of corporate mergers and acquisitions. Firstly, merger control is central to South African competition law and policy. Secondly, the impact of public interest considerations on the South African competition system is defined more clearly in merger regulation. The Competition Act provides in section 12A(3) an elaborate list of factors that must be taken into account when assessing the public interest component of mergers. Furthermore, provision is made for interventions by interested parties in merger proceedings, which are primarily on public interest grounds. Public interest issues feature more prominently in merger proceedings than any other competition matters.

Extempore Observations on Bid-Rigging in Public Procurement: Towards a Virtuous Circle of Detection, Punishment and Compliance

Renato Nazzini, King's College London – The Dickson Poon School of Law offers Extempore Observations on Bid-Rigging in Public Procurement: Towards a Virtuous Circle of Detection, Punishment and Compliance.

ABSTRACT: Bid-rigging in public procurement is a particularly serious infringement of competition law. New economic and algorithmic tools can effectively complement the existing enforcement mechanisms to ensure that a virtuous circle of detection, enforcement and compliance is triggered. This short paper sets out a few propositions for further reflection and research in this area.

Oligopoly, Macroeconomic Performance, and Competition Policy

José Azar, University of Navarra, IESE Business School and Xavier Vives, University of Navarra - IESE Business School; Universitat Pompeu Fabra (UPF); Centre for Economic Policy Research (CEPR); CESifo (Center for Economic Studies and Ifo Institute for Economic Research) research Oligopoly, Macroeconomic Performance, and Competition Policy.

ABSTRACT: We develop a macroeconomic framework in which firms are large and have market power with respect to both products and factors. Each firm maximizes a share-weighted average of shareholder utilities, which makes the equilibrium independent of price normalization. In a one sector economy, if returns to scale are non-increasing, then an increase in effective market concentration (which accounts for overlapping ownership) leads to declines in employment, real wages, and the labor share. Moreover, if the goal is to foster employment then (i) controlling common ownership and reducing concentration are complements and (ii) government jobs are a substitute for either policy. Yet when there are multiple sectors, due to an intersectoral pecuniary externality, an increase in common ownership can stimulate the economy when labor market oligopsony power is low relative to product market oligopoly power. We find that neither the monopolistically competitive limit of Dixit and Stiglitz nor the oligopolistic one of Neary (when firms become small relative to the economy) are attained unless there is incomplete portfolio diversification.

Vertical Mergers and Entrepreneurial Exit

D. Daniel Sokol, University of Florida has written on Vertical Mergers and Entrepreneurial Exit.

ABSTRACT: The idea that tech companies should be permitted to acquire nascent start-ups is under attack from antitrust populists. Yet, this debate on vertical mergers has overlooked important empirical contributions regarding innovation related mergers in the strategic management literature. This Essay explores the extant empirical management literature, which identifies a pro-competitive basis that supports vertical mergers as efficiency enhancing. This literature solidifies the current general vertical merger presumption that favors a a pro-competitive vertical merger policy for purposes of government merger enforcement. However, the pro-competitive benefit for a presumption of merger approval for most vertical mergers does not end with the synthesis of an under-explored literature. Rather, the broader implications of vertical mergers and presumptions of legality have another overlooked implication – a change of policy may dampen entrepreneurial investment and innovation. Entrepreneurial exit is critical to a well-functioning entrepreneurial ecosystem, as the possibility of entrepreneurial exit via vertical merger is now the most usual form of liquidity event/exit for founders and venture capitalists. Vertical merger policy that would unduly restrict large tech firms from undertaking acquisitions in industries as diverse as finance, pharmaceuticals, medical devices, technology hardware, and internet platforms, would hurt incentives for innovation in the economy by chilling business formation in startups. Increased difficulty in the exit for founders and ventures capitalists makes investment in such ventures less likely, since the purpose of such investment is to reap the rewards of scaling a venture to exit. Thus, a general inference that makes vertical acquisitions, particularly in tech, more difficult to undertake leads to precisely the opposite of the purpose of the role of antitrust in promoting competition and innovation. This Essay explores how entrepreneurial exit for founders and venture capitalists is best served by promoting a robust vertical merger policy, though one that intervenes in cases of specific anti-competitive harm.

The Rule of Reason in the Post-Actavis World

Michael A. Carrier, Rutgers Law School describes The Rule of Reason in the Post-Actavis World.

ABSTRACT: Though known more as U.S. President and Supreme Court Chief Justice, William Howard Taft played an important role in the development of antitrust law. As Sixth Circuit judge, his ruling in the Addyston Pipe case can be linked to modern antitrust law, including the Supreme Court’s 2013 decision in FTC v. Actavis on drug patent settlements. This essay, which builds on a lecture given to the NY State Bar Association's Antitrust Section, draws lessons from Addyston Pipe for these settlements, explains how courts today apply the Rule of Reason, and explores the analysis of settlements after Actavis.

Reply to: 'Common Ownership Does Not Have Anti-Competitive Effects in the Airline Industry'

José Azar, University of Navarra, IESE Business School, Martin C. Schmalz, University of Michigan, Stephen M. Ross School of Business; CEPR; CESifo; European Corporate Governance Institute (ECGI), and Isabel Tecu, Charles River Associates (CRA)offer a Reply to: 'Common Ownership Does Not Have Anti-Competitive Effects in the Airline Industry'.

ABSTRACT: Dennis, Gerardi, and Schenone (2017) (DGS) claim to replicate the data construction and results of Azar, Schmalz, and Tecu (forthcoming) (AST). While their implementation of the main specifications in AST generates qualitatively similar results, they claim that AST’s baseline results are driven 1) by the use of passenger volume as regression weights and 2) largely by the top fifth percentile of markets in the passenger count distribution.

In this note, we show that these claims are factually incorrect. First, because DGS do not in fact replicate the data construction described in AST, their paper is of limited usefulness in showing the effect of deviations from AST’s empirical specifications. Second, we show that AST's results are qualitatively robust to not weighting regressions. Third, AST's results also hold on subsamples excluding the top fifth percentile of markets by passenger count. Additional evidence we present in this note suggests that DGS's erroneous conclusions are driven by an incorrect treatment of ownership data as well as other differences in their sample's characteristics compared to AST's.

Net Neutrality, Network Capacity, and Innovation at the Edges

Jay Pil Choi, Michigan State University - Department of Economics; CESifo (Center for Economic Studies and Ifo Institute), Doh-Shin Jeon, Toulouse School of Economics (TSE); Centre for Economic Policy Research (CEPR), and Byung‐Cheol Kim, University of Alabama - Department of Economics, Finance and Legal Studies examine Net Neutrality, Network Capacity, and Innovation at the Edges.

ABSTRACT: We study how net neutrality regulations affect a high‐bandwidth content provider (CP)'s investment incentives to enhance its quality of services in content delivery to end users. We find that the effects crucially depend on whether the CP's entry is constrained by the Internet service provider's network capacity. If the capacity is relatively large, the prioritization reduces the investment as CP's investment and prioritization form substitutes. With limited capacity, however, they become complements and the prioritization can facilitate the entry of congestion‐sensitive content. Our analysis suggests that the optimal policy may call for potentially asymmetric regulations across mobile and fixed networks.

Do Merger Efficiencies Always Mitigate Price Increases?

Zhiqi Chen, Carleton University - Department of Economics, and Gang Li, Nanjing University - Department of Economics ask Do Merger Efficiencies Always Mitigate Price Increases?

ABSTRACT: In a Cournot model with differentiated products, we demonstrate that merger efficiencies in the form of lower marginal costs for the merging firms (the insiders) lead to higher post‐merger prices under certain conditions. Specifically, when the degree of substitutability between the two insiders is not too high relative to that between an insider and an outsider, increased efficiencies may exert upward rather than downward pressure on the prices of the merging firms. Our results suggest that in cases where firms engage in quantity competition, antitrust authorities should not presume that efficiencies will necessarily mitigate the anticompetitive effects of the merger.

Is a Big Entrant a Threat to Incumbents? The Role of Demand Substitutability in Competition Among the Big and the Small

Makoto Hanazono, Nagoya University - Graduate School of Economics and Lijun Pan, Nanjing University - Department of Economics ask Is a Big Entrant a Threat to Incumbents? The Role of Demand Substitutability in Competition Among the Big and the Small.

ABSTRACT: We establish a model of market competition between large and small firms and investigate the way in which demand substitutability affects how the entry of big firms impacts incumbents. We focus on the relative strength of two opposing effects of entry on large incumbent firms’ demand: the direct substitution effect among large firms (negative) and the indirect feedback effect through the change in small firms’ aggregated behavior (positive). If the substitutability between large and small firms is sufficiently high, the indirect effect dominates the direct effect and large incumbents’ equilibrium prices and profits increase. We show that welfare effects are ambiguous, which calls for careful assessment when regulating large firms’ entry.

Caron Beaton-Wells introduces new podcast series Competition Lore

Competition in a digital economy is a new frontier

Join Caron Beaton-Wells, Professor in Competition Law at the University of Melbourne, to tackle what it means to participate as a competitor, consumer or citizen in a digital economy and society.

Featuring regular cut-through interviews with leading thinkers, movers and shakers, Competition Lore is a podcast series that engages us all in a debate about the transformative potential and risks of digitalised competition.

 

About Caron Beaton-Wells

I’m a Professor specialising in competition law at the University of Melbourne Law School, Director of the University’s Competition Law & Economics Network and Global Competition and Consumer Law program.

Over 15 years steeped in researching and teaching in competition law, I’ve become increasingly concerned by the exclusion or marginalisation of academic contributions in important public debates.

On average an academic journal article is “read completely by no more than ten people”.

With Competition Lore, one of my aims is to entice academics out of the ivory tower and into the public discourse to engage as broadly as possible on a set of issues that pose opportunities and challenges for us all.

Compliance Plus? Proposed Fine Reductions for Audited, Strengthened Compliance Programmes

Kevin Coates Andrea Zulli ask Compliance Plus? Proposed Fine Reductions for Audited, Strengthened Compliance Programmes.

ABSTRACT: Fire brigades have long since stopped seeing their job as simply putting out fires. They realised that one of the most effective ways that they can save lives and property is to spend time and money on fire prevention. This does not mean that they stop fighting fires; but it does reduce the number of fires they have to fight, which is better for society as a whole.

GCR Live 10th Annual Competition Litigation Thursday, 04 October 2018 08:30 - 18:00 (GMT)

GCR Live 10th Annual Competition Litigation

Thursday, 4 October 2018, Exchange House, London

Chaired by

Nicholas Heaton Hogan Lovells International, London    Anthony Maton Hausfeld, London and Brussels

Keynote speaker

The Honourable Mr Justice Marcus Smith High Court, Chancery Division and Chairman of the Competition Appeal Tribunal, London

Register now to save over 20%

Speakers

Paul Chaplin, Hogan Lovells International, London Peter Davis, Cornerstone Research, London Kim Dietzel, Herbert Smith Freehills, London Laurent Geelhand, Hausfeld, Brussels, London and Paris Camilla Sanger, Slaughter and May, London Mark Sansom, Freshfields Bruckhaus Deringer, London Peter Scott, Norton Rose Fulbright, London Further speakers to be announced

Programme

8.30: Welcome coffee and registration 9.00: Chairs' opening remarks Nicholas Heaton, Hogan Lovells International, London Anthony Maton, Hausfeld, London and Brussels 9.15: Keynote address The Honourable Mr Justice Marcus Smith, High Court, Chancery Division and Chair of the Competition Appeal Tribunal, London 9.50: Economics in action: BritNed and how the court assesses loss A panel of economists and lawyers will consider how the court has approached the subject of assessing loss in the first cartel damages case to reach a judgment. 11.15: Coffee break  11.45: Mass claims – approaches to the management, coordination and bundling of large numbers of related claims  In the light of recent and future cases such as the interchange fee litigation, Air Cargo and Trucks; an international panel discuss developments in mechanisms for bringing claims; The management by the courts and parties of multiple claims arising from a single infringement (e.g. Interchange cases) – what has gone wrong and how can this be made to work both domestically and internationally? Different approaches to claims consolidation – class actions, assignment/claims vehicles, and consolidation – what is effective and why? Will the trend of claim aggregation continue or will we see more individual claims? 13.00: Networking lunch 14.00: Geographical scope of damages claims revisited In light of the CJEU judgment in Intel and the Court of Appeal judgment in Illiyma v Schott, are there any practical territorial limits on claims for breach of EU competition law? 14.25: Court of appeal interchange case Following the Court of Appeal’s judgment in Interchange where do matters sit in relation to the hundreds of Interchange claims, and what are the wider consequences of the judgment in relation to important matters such a pass on? 15.55: Coffee break 16.15: Applicable law in light of Deutsche Bahn v MasterCard   Deutsche Bahn v MasterCard was the first decision directly to address the applicable law in relation to A101 infringement damages case. What have we learnt and how might it apply in other cases? 17.15: Closing speech 17.45: Chairs' closing remarks Nicholas Heaton, Hogan Lovells International, London Anthony Maton, Hausfeld, London and Brussels 18.00 onwards: All delegates are invited to attend a drinks reception kindly hosted by Norton Rose Fulbright

Digitalisation: An Opportunity or a Risk?

Bitten Thorgaard Sørensen asks Digitalisation: An Opportunity or a Risk? 

ABSTRACT: As with all other questions within competition law, the answer is: ‘it depends…’.

First and foremost, from the point of view of a competition enforcer I see digitalisation as a massive opportunity. In short, digitalisation can lead to new business models, the rise of new competitors, better, and/or lower-priced products and services. Often the most important role we as competition enforcers have to play in this area is that of being an advocate for digitalisation e.g. advocating for the abolishment of unnecessary legislation standing in the way of disruptive competition.

But, certainly, digitalisation and some of its key features such as network effects, big data and algorithms, raise a number of competition related risks.

One such risk is that digitalisation and the use of algorithms, price robots and artificial intelligence may facilitate both explicit and tacit collusion.

Risk and competitiveness in the Italian banking sector

Francesco Marchionne (Indiana University) ; Alberto Zazzaro (University of Naples Federico II; CSEF & MoFiR (Italy)) study Risk and competitiveness in the Italian banking sector.

ABSTRACT: In this paper, we analyse the relationship between risk and competition in the Italian banking sector over the period from 2006 to 2010. We employ OLS and panel estimators to estimate the impact of the Lerner index, a measure of bank market power, on the Altman Z-score, a proxy of the insolvency probability. Our results are consistent with the traditional charter value paradigm and reject the new risk-shifting paradigm proposed by Boyd-De Nicolo' (2005). We find that the relationship between bank risk and competition becomes more tightening during the financial crisis. Our results are robust to different definitions of crisis and different specifications.

The EC is undermining innovation: here's how to change it

Thibault Schrepel, shows Utrecht University School of Law; a Research Associate at the Sorbonne Business & Finance Institute, University of Paris I Panthéon Sorbonne explains The EC is undermining innovation: here's how to change it.

ABSTRACT: On July 18, 2018, the European Commission fined Alphabet (Google) 4.34 billion euros. This decision confirms the Commission’s willingness to deter companies from engaging in anticompetitive practices. It also confirms that the European competition authority is missing the big picture by imposing disproportionate fines with regard to the specifics of the digital economy.

According to Article 23(2) of Regulation No 1/2003, the fines imposed by competition authorities cannot exceed 10% of the overall annual turnover of the concerned company. This limit is intended to avoid disproportionate sanctions that would jeopardize the company’s future. In fact, however, while this turnover threshold is useful, it is insufficient. The digital economy requires companies to compete by innovating. R&D investments have become the lifeblood of the digital economy and the very essence of competition. The specific competitive dynamics of the industry should also be taken into account in considering the extent to which fines imposed by competition authorities can disrupt the investment capacity of companies.

This article introduces an empirical study conducted over the period 2004 to 2018 (Android included) on all the fines imposed by the European Commission on the basis of Article 102 TFEU. We show that the European Commission’s decisions may have the effect of slowing down R&D for numerous sanctioned companies. For this reason, an innovation protection mechanism should be incorporated into the calculation of the fine. We propose doing so by introducing a new limit that caps Article 102 fines at a certain percentage of companies’ investment in R&D.

What Level of Competition Intensity Maximises Investment in the Wireless Industry?

What Level of Competition Intensity Maximises Investment in the Wireless Industry?Georges Vivien Houngbonon (LGI - Laboratoire de Genie Industriel - CentraleSupélec) ; François Jeanjean (Orange Labs - Orange Labs [Belfort] - France Télécom) ask What Level of Competition Intensity Maximises Investment in the Wireless Industry?

ABSTRACT: This paper investigates the relationship between competition and investment in the wireless industry from a dynamic perspective. Using firm level data and instrumental variable estimation strategy, it finds that the relationship is inverted-U shaped. The investment maximising intensity of competition is reached when operators' gross profits represent 37 or 40 percent of their revenues, depending on whether capital expenditures are normalised by the number of subscribers. This finding means that investment increases with competition as long as operators' profits are above the thresholds of 37 or 40 percent of their revenues. Under these thresholds, there is a tradeoff between competition and investment. The paper also finds a significant long run effect of competition on investment which amplifies the short run effect by a factor of 3 to 4.