Antitrust & Competition Policy Blog

Market Power and Innovation in the Intangible Economy

Market Power and Innovation in the Intangible Economy

By:	Maarten de Ridder (Centre for Macroeconomics (CFM); University of Cambridge)
Abstract:	Productivity growth has stagnated over the past decade. This paper argues that the rise of intangible inputs (such as information technology) can cause a slowdown of growth through the effect it has on production and competition. I hypothesize that intangibles cause a shift from variable costs to endogenous fixed costs, and use a new measure to show that the share of fixed costs in total costs rises when firms increase ICT and software investments. I then develop a quantitative framework in which intangibles reduce marginal costs and endogenously raise fixed costs, which gives firms with low adoption costs a competitive advantage. This advantage can be used to deter other firms from entering new markets and from developing higher quality products. Paradoxically, the presence of firms with high levels of intangibles can therefore reduce the rate of creative destruction and innovation. I calibrate the model using administrative data on the universe of French firms and find that, after initially boosting productivity, the rise of intangibles causes a 0.6 percentage point decline in long-term productivity growth. The model further predicts a decline in business dynamism, a fall in the labor share and an increase in markups, though markups overstate the increase in firm profits.
URL:	http://d.repec.org/n?u=RePEc:cfm:wpaper:1907&r=com

Hospital Competition in the National Health Service: Evidence from a Patient Choice Reform

Hospital Competition in the National Health Service: Evidence from a Patient Choice Reform

By:	Kurt R. Brekke (Norwegian School of Economics (NHH)); Chiara Canta (Toulouse Business School); Luigi Siciliani (University of York, Department of Economics and Related Studies); Odd Rune Straume (University of Minho, Department of Economics/NIPE)
Abstract:	We study the impact of exposing hospitals in a National Health Service (NHS) to non-price competition by exploiting a patient choice reform in Norway in 2001. The reform facilitates a dfference-in-difference research design due to geographical variation in the scope for competition. Using rich administrative data covering the universe of NHS hospital admissions from 1998 to 2005, we find that hospitals in more competitive areas have a sharper reduction in AMI mortality, readmissions, and length of stay than hospitals in less competitive areas. These results indicate that competition improves patient health outcomes and hospital cost efficiency, even in the Norwegian NHS with large distances, low fixed treatment prices, and mainly public hospitals.
URL:	http://d.repec.org/n?u=RePEc:nip:nipewp:19/2018&r=com

Antitrust Analysis with Upward Pricing Pressure and Cost Efficiencies

Antitrust Analysis with Upward Pricing Pressure and Cost Efficiencies

By:	Jessica Dutra (Department of Economics, The University of Kansas); Tarun Sabarwal (Department of Economics, University of Kansas)
Abstract:	We investigate the accuracy of UPP as a tool in antitrust analysis when there are cost efficiencies from a horizontal merger. We include model-based, merger-specific cost efficiencies in a tractable manner and extend the standard UPP formulation to account for these efficiencies. The efficacy of the new UPP formulations is analyzed using Monte Carlo simulation of 40,000 mergers (8 scenarios, 5,000 mergers in each scenario). We find that the new UPP formulations yield substantial gains in prediction of post-merger prices, and there are substantial gains in merger screening accuracy as well. Moreover, the new UPP formulations outperform the standard UPP formulation at higher thresholds for all the standard cases in the paper. The results support the inclusion of model-based cost efficiencies in the standard UPP formulation for more accurate antitrust decision-making.
URL:	http://d.repec.org/n?u=RePEc:kan:wpaper:201907&r=com

25 Years of European Merger Control

25 Years of European Merger Control

By:	Pauline Affeldt; Tomaso Duso; Florian Szücs
Abstract:	We study the evolution of the EC’s merger decision procedure over the first 25 years of European competition policy. Using a novel dataset constructed at the level of the relevant markets and containing all merger cases over the 1990-2014 period, we evaluate how consistently arguments related to structural market parameters were applied over time. Using non-parametric machine learning techniques, we find that the importance of market shares and concentration measures has declined while the importance of barriers to entry and the risk of foreclosure has increased in the EC’s merger assessment following the 2004 merger policy reform.
URL:	http://d.repec.org/n?u=RePEc:diw:diwwpp:dp1797&r=com

Public-Private Competition in Regulated Markets

Public-Private Competition in Regulated Markets

By:	Ziad R. Ghandour (Department of Economics / NIPE, University of Minho)
Abstract:	We analyse the effect of competition on quality provision in mixed markets, such as healthcare and education, where public and private providers coexist. We draw two key assumptions about the public provider in such markets, namely in that it faces a regulated price and is (partly) motivated. We also explore the effects of changes in the state subsidy and co-payment fees. Our main contribution is that, under certain circumstances, more competition leads to lower average quality in equilibrium. Similarly, the effects of higher co-payment fees or larger state subsidies on average quality are also a priori ambiguous. These conclusions hold regardless of whether providers seek profit maximisation or the public provider has altruistic preferences. Furthermore, we characterise the incentives for the private provider to unilaterally relocate towards the public provider.
URL:	http://d.repec.org/n?u=RePEc:nip:nipewp:02/2019&r=com

Assistant Attorney General Makan Delrahim Delivers Remarks at the Public Workshop on Competition in Labor Markets

See the speech here.

Oligopoly Price Discrimination: The Role of Inventory Controls

Oligopoly Price Discrimination: The Role of Inventory Controls

By:	James D. Dana Jr. (Northwestern University); Kevin R. Williams (Cowles Foundation, Yale University)
Abstract:	When ?rms ?rst choose capacity and then compete on prices in a series of advance-purchase markets, we show that strong competitive forces prevent firms from utilizing intertemporal price discrimination. We then enrich the model by allowing ?rms to use inventory controls, or sales limits assigned to individual prices. We show that ?rms will choose to set inventory controls in order to engage in intertemporal price discrimination, but only if demand becomes more inelastic over time. Thus, although typically viewed as a tool to manage demand uncertainty, we show that inventory controls can also facilitate price discrimination in oligopoly.
URL:	http://d.repec.org/n?u=RePEc:cwl:cwldpp:2136r2&r=com

Ensuring innovation through participative antitrust

Oliver J Bethell, Gavin N Baird, Alexander M Waksman suggest Ensuring innovation through participative antitrust.

ABSTRACT: Innovation is fundamental to economic growth, competition, and consumer welfare. It involves five core elements: Creativity, risk-taking, value-addition, adoption, and destruction. When these elements are combined, they produce powerful new technologies that revolutionize the way we work, travel, interact and more. Politicians, regulators, and consumers are asking whether antitrust can adequately promote and protect competition and innovation in the digital sector. Can it ensure access to competitively important data? Can it prevent mergers that eliminate future rivals? And can it address foreclosure by incumbent service providers? This article argues that the solution does not lie in overly broad changes to legal duties, burdens and standards of proof, which could have adverse consequences. Instead, governments, agencies, and industry should cooperate to produce rules that promote innovation by digital platforms and new entrants alike. This model of participative antitrust offers a promising path forward.

A duty of care to prevent online exploitation of consumers? Digital dominance and special responsibility in EU competition law

Wolf Sauter asks A duty of care to prevent online exploitation of consumers? Digital dominance and special responsibility in EU competition law.

ABSTRACT: Article 102 Treaty on the Functioning of the European Union imposes a special responsibility on undertakings with a dominant position. Digital dominance based on data but also on network effects, platforms, and first user advantage can lead to extreme inequality in bargaining positions with regard to online services, which can result in unfair treatment of competitors, suppliers, and consumers—such as exploitation and discrimination. Online consumers are the focus of this article. In order to tackle competition issues regarding online consumers, I propose interpreting the special responsibility of digitally dominant undertakings as a duty of care in their regard. Digitally dominant undertakings may not just be burdened by but also benefit from this approach, which increases predictability and trust in online markets. It resembles treating online undertakings as information fiduciaries as has been proposed in the USA, but is different because privacy is not the driving concern here and the context is that of antitrust. I look at standards for triggering the duty of care and make proposals for the application of this norm, but both remain to be specified further.

 

Market Power and Consumer Welfare: Evidence from Home Rental Markets

Steven Chong Xiao, University of Texas at Dallas - Naveen Jindal School of Management and Serena Wenjing Xiao, University of Texas at Dallas find Market Power and Consumer Welfare: Evidence from Home Rental Markets.

ABSTRACT: This paper examines the recent rise of institutional investment in the single-family home-rental market and its implication to renters' welfare. Using institutional mergers to identify local exogenous variation in corporate landlords' market power, we show that rent increased in neighborhoods where both of the merging firms owned properties (i.e. overlapping neighborhoods) relative to other non-overlapping neighborhoods. Interestingly, crime rate also decreased significantly in the overlapping neighborhoods after mergers. Our findings suggest that while corporate landlords leverage market power to extract greater surplus from renters, they also improve the quality of rental service by internalizing the cost of public goods.

Unfair Disruption

Mark A. Lemley, Stanford Law School and Mark P. McKenna, Notre Dame Law School describe Unfair Disruption.

ABSTRACT: New technologies disrupt existing industries. They always have, and they probably always will. Incumbents don’t like their industries to be disrupted. And they often rely on intellectual property (IP), unfair competition, or related legal doctrines as tools to prevent disruptive entry. What that means is that many of the cases in these areas are really about whether competition from new players can force incumbents to change their business models, generally to the advantage of particular players and the detriment of others. These cases are, in an important sense, all unfair competition cases; they are about the ways in which the law permits new entrants to compete with incumbents.

Unfortunately, we lack any comprehensive way of thinking about market disruption in these settings. As a result, courts react quite differently to disruptive technology or business models in different cases. As one example, consider intellectual property (IP) cases brought against new technologies. Sometimes courts find the disruptive technology to infringe existing IP rights. New technology might fit within the legal definition of a prior invention, appropriately construed. Sometimes the technology might not itself infringe any prior invention, but makes it easier for third parties to infringe IP rights and is deemed illegal for that reason.

Other areas of law reflect similarly mixed feelings about market disruption. Business tort claims like unjust enrichment—and even nominally procompetitive laws like antitrust—are often asserted by companies with a vested interest in restricting a competitor’s new technology. We have seen similar variability in antitrust, unfair competition, and business tort cases. Antitrust and unfair competition cases are brought against incumbents that try to prevent competition, but they are also brought by incumbents upset that their markets are being disrupted. Whether those laws encourage or inhibit market disruption depends critically on what kinds of competition courts deem “unfair.”

Our goal in this paper is to address the broader question of when competition by market disruption is “unfair.” In our view, courts are often overly receptive to market disruption arguments because they tend to be concerned about upsetting the status quo and affecting the settled expectations of market players, particularly when presented with arguments that some new technology will radically alter the industry.

Courts should intervene to prevent market disruption only when they have very good reasons—reasons connected to the fundamental policy concerns of the legal systems called upon to prevent the disruption. To achieve that goal, we must know what the legitimate ends of the asserted law are. Sometimes the legal doctrine used to prevent market disruption is one like unjust enrichment, interference with economic advantage, or unfair competition that doesn’t have a clear animating principle. We think those doctrines should be disfavored, and courts should employ them only when they are tied to some independent metric for deciding whether the defendant’s conduct is unfair or unjust. Other doctrines, like antitrust and IP, have clearer purposes. There, we can evaluate legal challenges to market disruption by testing the fit between the goals of the statute and its use in a particular case.

Courts in many types of cases have recognized this problem and begun to develop tools for dealing with them. But IP law has lagged behind, rarely even recognizing that what seem to be cases of infringement are really challenges to market disruption. We suggest a test that helps separate legitimate cases of IP infringement from cases of pure market disruption. Drawn from the antitrust injury doctrine, our test would treat market disruption as relevant to an IP case only if the disruption is traceable to the act of infringement itself. If the plaintiff would suffer the same injury from a market intervention that is not infringing, that injury cannot be evidence of IP infringement.

Bigger than “Big Tech?” The Need to Reform Our Health Care System Using Choice and Competition

Christine Wilson, FTC has a great new speech up online - Bigger than “Big Tech?” The Need to Reform Our Health Care System Using Choice and Competition.  Download it here.

Sleepy Hollow and the Arrovian Legend: Is There a Generalizable Relationship Between Concentration and Innovation?

Chrstine Wilsaon, FTC has an interesting speech on Sleepy Hollow and the Arrovian Legend: Is There a Generalizable Relationship Between Concentration and Innovation?

Latest Competition Lore Podcast

Downunder’s Dive into Digital Platforms, with the ACCC’s Digital Platforms Inquiry Joint General Managers.

Statement of Assistant Attorney General Makan Delrahim Before the U.S. Senate Subcommittee on Antitrust, Competition Policy and Consumer Rights

See here.

Playing Both Sides: Branded Sales, Generic Drugs, and Antitrust Policy

Michael A. Carrier, Rutgers Law School, Mark A. Lemley, Stanford Law School, and Shawn P. Miller, Stanford Law School are Playing Both Sides: Branded Sales, Generic Drugs, and Antitrust Policy.

ABSTRACT: The issue of high drug prices has recently exploded into public consciousness. And while many potential explanations have been offered, one has avoided scrutiny. Why has the growth in generic drugs not resulted in lower drug prices?

In this article, we explore a phenomenon we call “playing both sides”: companies that participate in pharmaceutical markets as both brand owners and generics. We hypothesize that companies that earn a significant amount of their revenue from patented drugs may have less incentive to aggressively pursue a generic agenda, since patented drugs generate far more revenue for firms than generic drugs do.

To investigate this phenomenon, we built a comprehensive database of all major pharmaceutical companies, evaluating where their revenue comes from, how that has changed over time, and how it relates to their behavior in court. Despite broad industry trends toward specialization, about one third of the firms we study have opted for a mixed business model over time. And those firms behave differently than pure generic firms. Our data show that when companies with significant generic sales play both sides, they behave differently than firms with a purer generic revenue stream. Dollar for dollar, the pure generic firms in our study challenged more patents as invalid or not infringed than the mixed firms. Further, “mixed generic” companies with growing brand sales (or a growing share of their revenue from brand sales) are more likely to settle the patent challenges they bring; companies with growing generic share are less likely to settle and more likely to take those cases to judgment. And when they do go to judgment, patent challengers with a greater generic share are more likely to win those challenges while companies with higher brand sales are less likely to win.

In short, we find evidence to support the hypothesis that generic companies that make more of their revenue from patented drugs are less likely to pursue challenges to judgment and less likely to win when they do. Playing both sides may reduce the incentive of generic challengers to fight as hard as possible to win the case before them. That may be especially true of the sorts of challenges that affect not just the patent in the instant case but might change legal doctrines that may ultimately hurt the generic challenger’s brand business.

Our article’s findings suggest a more nuanced antitrust analysis of mergers involving generic companies and patent settlements in which generics delay entering the market. In challenging more patents, settling fewer cases by agreeing to delay entry, and winning more of the cases they do bring, pure generic companies promise to unleash the generic competition that they were intended to. In the wide-ranging effort to lower drug prices, we must pay attention not only to whether a drug is patented but also to who is, or is not, challenging that patent and why.

The Increasing Presence of Large Firms and the Decline in US Startup Rates

Niklas Garnadt, University of Mannheim Graduate School of Economic and Social Sciences identifies The Increasing Presence of Large Firms and the Decline in US Startup Rates.

ABSTRACT: While the significant decline in US firm formation rates over the past 30 years has raised concern about the health of the US economy, its causes are not yet fully understood. I argue that a significant part of this decline can be explained as an efficient response to size biased technological change. I document an increase in the size of large firms in the US since the mid-1980s contemporaneous to the decline in firm formation rates and show that large firms expanded by sharply increasing the number of establishments they operate. These changes in the organizational structure of large firms are consistent with improvements in information and communications technology which mainly benefited large firms by reducing monitoring, coordination and distribution costs. I construct a simple industry dynamics model in which an expansion by large firms due to reductions in the cost of managing many establishments crowds out smaller firms that are responsible for most of firm turnover. While generating a decrease in startup rates and an increase in the size of large firms through an increase in the number of establishments they operate, welfare improves. These results counter the popular opinion that declining firm formation rates are necessarily a bad sign.

Competitive Persuasive Advertising Under Consumer Loss Aversion

Oliver März, NERA Economic Consulting examines Competitive Persuasive Advertising Under Consumer Loss Aversion.

ABSTRACT: I present a model to describe the effects of persuasive advertising targeted at consumers with expectation-based reference-dependent preferences. Persuasive advertising is competitive and increases the salience of advertised products while decreasing the salience of competing products. Consumers’ gain-loss utility associated with the expectation to buy the most salient product is inflated, while gain-loss utility associated with the expectation to buy the least salient product is deflated. I show that under moderate levels of loss aversion and product differentiation persuasive advertising has strictly anti-competitive effects, whenever consumers are aware of prices but uncertain about their individual match value from a purchase.

Estimating Cartel Damages using Machine Learning

Oliver März, NERA Economic Consulting, Berlin is Estimating Cartel Damages using Machine Learning.

ABSTRACT: This paper argues that the widely applied practice of using OLS regression to predict “but-for” prices for cartel damage estimation is outdated. By replicating the dataset from a prominent Vitamins antitrust case of price-fixing, I show that a supervised machine learning algorithm is objectively better suited than the benchmark OLS model to predict “but-for” prices for the counterfactual scenario that no cartel existed, and to calculate damages based on those predictions. It follows that machine learning algorithms should be in the toolbox of practitioners attempting to derive the most accurate estimate of cartel-related damages.

The Increasing Presence of Large Firms and the Decline in US Startup Rates

Niklas Garnadt, University of Mannheim Graduate School of Economic and Social Sciences discusses The Increasing Presence of Large Firms and the Decline in US Startup Rates.

ABSTRACT: While the significant decline in US firm formation rates over the past 30 years has raised concern about the health of the US economy, its causes are not yet fully understood. I argue that a significant part of this decline can be explained as an efficient response to size biased technological change. I document an increase in the size of large firms in the US since the mid-1980s contemporaneous to the decline in firm formation rates and show that large firms expanded by sharply increasing the number of establishments they operate. These changes in the organizational structure of large firms are consistent with improvements in information and communications technology which mainly benefited large firms by reducing monitoring, coordination and distribution costs. I construct a simple industry dynamics model in which an expansion by large firms due to reductions in the cost of managing many establishments crowds out smaller firms that are responsible for most of firm turnover. While generating a decrease in startup rates and an increase in the size of large firms through an increase in the number of establishments they operate, welfare improves. These results counter the popular opinion that declining firm formation rates are necessarily a bad sign.