Antitrust & Competition Policy Blog

Focality Advantage in Platform Competition

Hanna Halaburda, Bank of Canada; New York University (NYU); CESifo (Center for Economic Studies and Ifo Institute) and Yaron Yehezkel, Coller School of Management , Tel-Aviv University explain Advantage in Platform Competition.

ABSTRACT: We consider a methodology for studying how beliefs shape platform competition, based on the notion of a partial focality. The concept of focality is useful for modeling platform competition when the presence of network effects results in multiple equilibria for a certain set of prices. We illustrate how to implement this methodology in both static and dynamic competition between platforms that differ in their basic quality. The initial degree of focality affects the ability of the high-quality platform to win the market. Yet, dynamic considerations may have positive or negative effect on this ability.

A Preliminary Assessment of the European Commission’s Google Android Decision

Pinar Akman, Leeds offers A Preliminary Assessment of the European Commission’s Google Android Decision.

ABSTRACT: This article offers a preliminary overview of some of the pertinent aspects of the European Commission’s Google Android decision. It discusses the definition of the relevant market and competitive constraints in the case, including the potential constraint from Apple. It also offers thoughts on the theory of harm in the case and suggests that Google Android may be better perceived as a case concerning refusal to deal than tying. Finally, the article discusses some of the implications of the decision and notes the growing importance of objective, commercial justifications in the context of technology markets where services are monetised in very different ways by different providers.

A Look at Behavioral Antitrust from 2018

Max Huffman, IU Indianapolis offers A Look at Behavioral Antitrust from 2018.

ABSTRACT: Behavioral antitrust has proved to have staying power, with continued attention as an area of scholarly inquiry now two decades after the foundational work in behavioral law and economics was published. This short article revisits the origin and meaning of behavioral antitrust and highlights a few areas of its application. The article shows that nothing has been written that directly challenges the applications. It does address critiques of behavioral antitrust, which are several and in some cases strong, and shows how they do not engage the proponents of behavioral antitrust directly. Instead, while proponents identify areas of application, detractors rue the lack of a general theory. The paper concludes that the progress of antitrust law and economics accommodates new information whether from behavioral economics or any other source, and as that information becomes sufficiently well understood it may lead to an adjustment of standards.

Two Remarks on Consumer Surplus

Luis C. Corchón, Universidad Carlos III de Madrid - Department of Economics and Ramón J. Torregrosa, University of Salamanca - Department of Economics and Economic History offer Two Remarks on Consumer Surplus.

ABSTRACT: In this paper we investigate the use of consumer surplus in monopoly when the consumption of the outside good cannot be smaller than a certain number and when the weights given in the social welfare function to consumers and the firm are different. We assume quasi-linear utility and constant returns to scale. We find that when the constraint on the consumption of the outside good is binding, income effects arise in demand and profit maximizing output is below the profit maximizing output without this constraint. Moreover, standard change in consumer surplus overestimates welfare losses whenever optimal output is affected by such a constraint. When the weights given to consumers and the monopolist are not identical, first order condition of social welfare maximization does not necessarily characterize the maximum and when it does, profits might be negative. We find that a policy of offering the good at zero price might be optimal. We offer a formula to calculate welfare losses in this case.

Tacit Collusion of Partial Cross Ownership Under Cournot Model

Zheng Gong, Shanghai Academy of Social Sciences (SASS), Graduate School explores Tacit Collusion of Partial Cross Ownership Under Cournot Model.

ABSTRACT: Partial cross ownership (PCO) among firms affects their incentives to engage in tacit collusion. We analyze the market equilibrium of an n-firm industry which allows asymmetric cross ownership and establish a general framework to analyze the collusion behavior, under Cournot model. We find that in some ways increasing PCO hinders tacit collusion under traditional uniform output distribution scheme. However, this scheme is not always feasible for collusion. For a greater variety of situations, we examine different subgame perfect equilibriums and conclude that, tacit collusion can be facilitated when PCO increases.

Getting Pricing Right on Digital Music Copyright

Joshua S. Gans, University of Toronto - Rotman School of Management is Getting Pricing Right on Digital Music Copyright.

ABSTRACT: This paper provides an overview of economic approaches to the pricing of mechanical royalties for copy-protected music works. It argues that principles for such pricing can be provided usefully from principles of pricing access to essential facilities. In particular, the structure of the royalty should be such that the royalty level does not change if the business model of downstream entities (notably, digital music streaming platforms) changes (i.e., neutrality) and the level of the royalty should ensure that the copyright holders receive a return in excess of their next best alternative in reaching consumers (i.e., opportunity cost). Ways of using benchmarking to derive the relevant opportunity cost are then discussed including the use of methods inspired by economic bargaining approaches such as the Shapley Value.

The Effects of Vertical Separation and Competition: Evidence from US Electric Utility Restructuring

Thomas Triebs, Loughborough University - School of Business and Economics and Michael G. Pollitt, University of Cambridge - Judge Business School study The Effects of Vertical Separation and Competition: Evidence from US Electric Utility Restructuring.

ABSTRACT: Competition increases firm productivity, but in network industries, effective competition requires the vertical separation of firms. Although not necessarily, separation can lead to a trade-off between technical efficiency gains from competition and losses from separation. We use the case of US electric industry restructuring to analyze the combined effect of competition and vertical separation, as well as the individual effects. We analyze the difference-in-difference in inefficient costs between divested units and non-divested units across restructuring or non-restructuring states. We estimate firm-level inefficiency using a non-parametric model of the technology. As the true production technology is unobserved and might differ across firms and time we repeat the analysis for different specifications of the technology. We find that in the worst case the positive competition effect is canceled by a negative separation effect. However, for most models of the technology, the overall effect is positive due to a positive separation effect. We also find that the effects depend on the length of the post-treatment period. Whereas the overall effect is negative right after restructuring it turns positive and grows over time.

DEVELOPING COMPETITION LAW FOR COLLUSION BY AUTONOMOUS ARTIFICIAL AGENTS

Patrick T Harker is DEVELOPING COMPETITION LAW FOR COLLUSION BY AUTONOMOUS ARTIFICIAL AGENTS.

ABSTRACT: After arguing that collusion by software programs which choose pricing rules without any human intervention is not a violation of Section 1 of the Sherman Act, the paper offers a path toward making collusion by autonomous artificial agents unlawful.

Airline Alliances and Service Quality

Jan K. Brueckner and Ricardo Flores-Fillol study Airline Alliances and Service Quality

Abstract: Convenient scheduling, characterized by adequate flight frequency, is the main quality attribute for airline services. However, the effect of airline alliances on this important dimension of service quality has received almost no attention in the literature. This paper fills this gap by providing such an analysis in a model where flight frequency affects schedule delay and connecting layover time. While an alliance raises service quality when layover time has zero cost, the reverse occurs when layover time is costly. The source of this surprising result is that costly layovers eliminate the additive structure of the full trip price, which consists of the sum of the subfares plus the weighted sum of the reciprocal flight frequencies when layover cost is zero. The paper also shows that nonaligned carriers adjust frequencies to suit passenger preferences in business and leisure markets, while an alliance is less responsive to such preference differences. With hub-airport congestion, greater internalization by allied carriers tends to reduce frequency, but this force is not enough to overturn the positive alliance effect in the low-cost layover case.

Managing Competition on a Two-Sided Platform

Paul Belleflamme (Aix-Marseille Univ., CNRS, EHESS, Centrale Marseille, AMSE); Martin Peitz (Department of Economics and MaCCI, University of Mannheim) are Managing Competition on a Two-Sided Platform.

Abstract: On many two-sided platforms, users on one side not only care about user participation and usage levels on the other side, but they also care about participation and usage of fellow users on the same side. Most prominent is the degree of seller competition on a platform catering to buyers and sellers. In this paper, we address how seller competition affects platform pricing, product variety, and the number of platforms that carry trade.

Oligopoly Price Discrimination: The Role of Inventory Controls

James D. Dana Jr. (Northwestern University); Kevin R. Williams (Cowles Foundation, Yale University) explain Oligopoly Price Discrimination: The Role of Inventory Controls.

Abstract: Inventory controls, used most notably by airlines, are sales limits assigned to individual prices. While typically viewed as a tool to manage demand uncertainty, we argue that inventory controls can also facilitate intertemporal price discrimination in oligopoly. In our model, competing firms first choose quantity and then choose prices in a series of advance-purchase markets. When demand becomes less elastic over time, as is the case in airline markets, a monopolist can easily price discriminate; however, we show that oligopoly firms generally cannot. We also show that using inventory controls allows oligopoly firms to set increasing prices, regardless of whether or not demand is uncertain.

Vertical Contracting with Endogenous Market Structure

Marco Pagnozzi (Università di Napoli Federico II and CSEF); Salvatore Piccolo (Università di Bergamo and CSEF); and Markus Reisinger (Frankfurt School of Finance & Management) explore Vertical Contracting with Endogenous Market Structure.

ABSTRACT: A manufacturer chooses the optimal retail market structure and bilaterally and secretly contracts with each (homogeneous) retailer. In a classic framework without asymmetric information, the manufacturer sells through a single exclusive retailer in order to eliminate the opportunism problem. When retailers are privately informed about their (common) marginal cost, however, the number of competing retailers also affects their information rents and the manufacturer may prefer an oligopolistic market structure. We characterize how the manufacturer’s production technology, the elasticity of final demand, and the size of the market affect the optimal number of retailers. Our results arise both with price and quantity competition, and also when retailers’ costs are imperfectly correlated.

Bertrand Competition in Oligopsonistic Market Structures - the Case of the Indonesian Rubber Processing Sector

Thomas Kopp describes Bertrand Competition in Oligopsonistic Market Structures - the Case of the Indonesian Rubber Processing Sector. Abstract: Violations of the law of one price (LOP) appear to be more the rule than the exception in various markets.This paper models the interface between agricultural supply and processing to explain violations of the LOP due to a fixed cost component of changing buyers. The model is applied to the raw rubber market in the Jambi province in Indonesia and employs a unique dataset of spatially and temporally disaggregated data. Methods to test for and explain violations of the LOP are suggested. An emphasis is set on the implications of aggregation over time.

Competition and Regulation with Smart Grids

Marina Bertolini (University of Padova); Marco Buso (University of Padova); Luciano Greco (University of Padova) discuss Competition and Regulation with Smart Grids.

Abstract: In the last few decades, liberalization and energy transition have deeply reshaped crucial segments of the electric industry (e.g., power generation, energy trading and retail supply) in several countries around the world posing. The development of smart grids is considered a solution to face the new challenges that arise by such dynamics. Our critical analysis of interdisciplinary literature and governmental documents highlights that input-based or outputbased regulation is not implementable in the case of smart grids because of unclear deï¬ nition of smart performance. Thus, we introduce a new deï¬ nition of grid smartness that is based on the volatility of market energy prices and flows and we develop a simple industrial-organization model of the electric market to analyze the impact of smart grids on competition and to assess the incentives of distribution system operators to invest in smart grids. We ï¬ nd that smartgrid investments foster the aggregate supply of energy, though with controversial effects on suppliers’ proï¬ ts. We also ï¬ nd that the investments in smart grids implemented by the distribution system operators is suboptimal because they fail to internalize positive externalities on energy consumers and producers. URL: 

Clear and Close Competitors? : On the Causes and Consequences of Bilateral Competition between Banks

de Haas, Ralph (Tilburg University, Center For Economic Research); Lu, Liping (Tilburg University, Center For Economic Research); Ongena, S.R.G. (Tilburg University, Center For Economic Research) ask Clear and Close Competitors? : On the Causes and Consequences of Bilateral Competition between Banks.

Abstract: We interview 361 European bank CEOs to identify their banks’ main competitors. We then provide evidence on the drivers of bilateral bank competition, construct a novel competition measure at the locality level, and assess how well it explains variation in firms’ credit constraints. We find that banks identify another bank as a main competitor in small-business lending when their branch networks overlap, when both are foreign owned or relationship oriented, or when the potential competitor has fewer hierarchical layers. Intense bilateral bank competition increases local credit constraints, especially for small firms, as competition may impede the formation of lending relationships.

Market Expanding or Market Stealing? Platform Competition in Bike-Sharing

Guangyu Cao; Ginger Zhe Jin; Li-An Zhou ask Market Expanding or Market Stealing? Platform Competition in Bike-Sharing.

Abstract: The recent rise of dockless bike-sharing is dominated by two platforms: one started first in 82 Chinese cities, 59 of which were subsequently entered by the second platform. Using these variations, we study how the entrant affects the incumbent’s market performance. To our surprise, the entry expands the market for the incumbent, not only boosting its total number of trips but also allowing the incumbent to achieve higher revenue per trip, improve bike utilization rate, and form a wider and more evenly distributed network. These market expansion effects dominate a significant market-stealing effect on the incumbent’s old users. Our findings suggest that platform entry can divert the perceived path to winners-take-all in a market with positive network effects, and competition with the outside goods is at least as important as the competition between platforms, especially when users multi-home across compatible networks.

Asset Bubbles and Product Market Competition

Francisco Queiros (Universitat Pompeu Fabra) identifies Asset Bubbles and Product Market Competition.

Abstract: This paper studies the effects of rational bubbles in an economy characterized by imperfect competition in product markets. It provides two main insights. The first is that imperfect competition relaxes the conditions for the existence of rational bubbles. When they have market power, firms restrict output and investment to enjoy supernormal profits. This depresses the interest rate, making rational bubbles possible even when capital accumulation is dynamically efficient. The second is that by providing a production or entry subsidy, asset bubbles may have a pro-competitive effect and force firms to expand and cut profit margins. However, once they get too large they can lead to overinvestment and sustain corporate losses. I use anecdotal evidence from the British railway mania of the 1840s and the dotcom bubble of the late 1990s to support the model's hypotheses and predictions. Date: 2018 URL:

Private information, price discrimination, and collusion

Peiseler, Florian; Rasch, Alexander; Shekhar, Shiva theorize Private information, price discrimination, and collusion.

Abstract: We analyze firms' ability to sustain collusion in a setting in which horizontally differentiated firms can price-discriminate based on private information regarding consumers' preferences. In particular, firms receive private signals which can be noisy (e.g., big data predictions). We find that there is a non-monotone relationship between signal quality and sustainability of collusion. Starting from a low level, an increase in signal precision first facilitates collusion. However, there is a turning point from which on any further increase renders collusion less sustainable. Our analysis provides important insights for competition policy. In particular, a ban on price discrimination can help to prevent collusive behavior as long as signals are sufficiently noisy.

Pricing behavior in partial cartels

Johannes Odenkirchen, Pricing behavior in partial cartels.

Abstract: We analyze the pricing behavior of firms when explicit partial cartels have formed in experimental markets through communication. Using a repeated, asymmetric capacity constraint price game, we show that, in line with theory, a partial cartel is sufficient to increase market prices for all firms. Moreover, we find that prices of cartel insiders and outsiders are not necessarily on the same level what contradicts common theoretical predictions. This is because communication allows cartel members to overcome a potential coordination problem and enables an equilibrium in (joint) mixed strategies to emerge. The results therefore underline the importance of communication in explicit cartels and the resulting market outcomes.

Let's lock them in: Collusion under consumer switching costs

Niklas Fourberg suggests Let's lock them in: Collusion under consumer switching costs.

ABSTRACT: Consumer switching costs cause the market demand of consumers who already bought a supplier's product to be less elastic while they simultaneously increase competition for new consumers. I study the effect of this twofold pricing incentive on firms' price setting behavior in a 2x2 factorial design experiment with and without communication and under present and absent switching costs. For Bertrand duopolies consumer switching costs reduce the price level vis-à-vis new consumers but do not affect price levels towards old consumers. Markets are overall less tacitly collusive which translates into higher incentives to collude explicitly. Text-mining procedures reveal linguistic characteristics of the communicated content which correlate with market outcomes and communication's effectiveness. The results have implications for antitrust policy, especially for the focus of cartel screening.