Thursday, November 21, 2019
|By:||Marius Schwartz (Department of Economics, Georgetown University); Daniel R. Vincent (Department of Economics, University of Maryland)|
|Abstract:||We analyze competing strategic platforms setting fees to a local monopolist merchant and cash-back rebates to end users, when the merchant may not surcharge platforms’ customers, a rule imposed by some credit card networks. Each platform has an incentive to gain transactions by increasing the spread between its merchant fee and user rebate above its rival’s spread. This incentive yields non-existence of pure strategy equilibrium in many natural environments. In some circumstances, there is a mixed strategy equilibrium where platforms choose fee structures that induce the merchant to accept only one platform with equal probability, a form of monopolistic market allocation.|
Wednesday, November 20, 2019
|Abstract:||This article analyses how consumers' habit formation affects firms' pricing policies. We consider both sophisticated consumers, who realize that their current consumption will affect future consumption, and naive consumers, who do not. The optimal contract for sophisticated consumers is a two-part tariff. The main result is that under naive habit formation, the optimal pricing pattern is a three-part tariff; namely a fixed fee, with some units priced below cost --- and after their end --- pricing above marginal cost. This holds both under symmetric and asymmetric information.|
ABSTRACT: This article summarises the most significant competition law developments in the postal services sector in 2018, at EU level and at national level in France, Germany, and the UK.
Yafit Lev Aretz, City University of New York - Department of Law and Katherine J. Strandburg, New York University School of Law explore Regulation and Innovation: Approaching Market Failure from Both Sides.
ABSTRACT: Across markets and disciplines, regulation is often claimed to be the enemy of socially desirable innovation because of factors including innovation’s unpredictability and regulation’s compliance costs. In this essay, we bring an intellectual property scholars’ perspective to bear on the question of regulation’s impact on innovation. We offer a novel, yet intuitive analytical framework that takes both market demand failures and failures of supplier appropriability into account. Traditionally, regulation seeks to mitigate market failures that create deviations between the demand portfolio perceived by suppliers and the socially optimal demand portfolio. Studies of the interplay between regulation and innovation have mostly taken this perspective, considering the impact of various regulatory transaction and compliance costs on innovation. Intellectual property law and competition law target a different sort of problem, where markets fail to supply products and services at competitive prices or to undertake innovative activities because of supplier appropriability issues.
We argue that these demand misalignment and appropriability failures, though analytically distinct and commonly treated separately, work in parallel and in combination to determine the extent to which the market’s portfolio of innovative activity is socially sub-optimal. Discussing the relationship between regulation and innovation in terms of demand misalignment, appropriability failures, and the mutual influence they bear on each other, opens up a new way of understanding this years-long debate. The analysis shows the futility of sweeping general pronouncements about the relationship between regulation and innovation and highlights the crucial role of regulatory design.
Dennis McWeeny, Bates White Economic Consulting identifies Spatial Competition in the Airline Industry.
ABSTRACT: Airline passengers consider flights departing from airports in different cities to be substitutes and sometimes travel large distances to board a flight with lower fares. While this “airport leakage” phenomenon is a major concern for airport administrators, the industrial organization literature has assumed that flights departing from airports in different cities are in totally separate markets. This assumption rules out these substitution patterns altogether and could yield biased estimates of elasticities and markups. Using an airline passenger survey conducted annually at San Francisco International Airport, I estimate a structural model of air travel demand that allows consumers to choose among flights departing from airports in different cities. I then compare the results from my model to those from the conventional model that defines markets as origin-destination airport pairs. I find that leisure passengers are willing to travel up to 69 miles to save $100 on airfare. As a result, demand is 74 percent more elastic and markups are 41 percent lower when spatial competition is accounted for. These results suggest that airlines face substantial competition from flights departing from nearby airports and that the origin-destination airport pair definition of airline markets overstates market power.
Tuesday, November 19, 2019
Iris Grant, KU Leuven - Department of Economics, Iris Kesternich, KU Leuven - Department of Economics; Ludwig Maximilian University of Munich (LMU) - Faculty of Economics, Heiner Schumacher, KU Leuven, and Johannes Van Biesebroeck, K.U.Leuven; Centre for Economic Policy Research (CEPR) has written on Market Size and Competition: A 'Hump-Shaped' Result.
ABSTRACT: An active empirical literature estimates entry threshold ratios, introduced by Bresnahan and Reiss (1991), to learn about the impact of firm entry on the strength of competition. These ratios measure the increase in minimum market size needed per firm to sustain one additional firm in the market. We show that there is no monotonic relationship between a change in the entry threshold ratio and a change in the strength of competition or in the price-cost margin. In the standard homogenous goods oligopoly model with linear or constant elasticity demand, the ratio is hump-shaped in the number of active firms, increasing at first and only when additional firms enter it gradually decreases and converges to one. Empirical applications should use caution and interpret changes in the entry threshold ratios as indicative of changes in competition only from the third entrant onwards.
Yossi Spiegel, Tel Aviv University discusses The Herfindahl-Hirschman Index and the Distribution of Social Surplus.
ABSTRACT: I show that in a broad range of oligopoly models where firms have (not necessarily identical) constant marginal cost, HHI is an increasing function of the ratio of producers' surplus and consumers' surplus and therefore reflects the division of surplus between firms' owners and consumers.
Yukihiko Funaki, Waseda University, School of Political Science and Economics, Harold Houba, VU University Amsterdam, Department of Econometrics; VU University Amsterdam, Tinbergen Institute, and Evgenia Motchenkova, VU University Amsterdam - Department of Economics; TILEC describe Market Power in Bilateral Oligopoly Markets With Non-expandable Infrastructures.
ABSTRACT: We develop a novel model of price-fee competition in bilateral oligopoly markets with non-expandable infrastructures and costly transportation. The model captures a variety of real market situations and it is the continuous quantity version of the assignment game with indivisible goods on a fixed network. We define and characterize stable market outcomes. Buyers exclusively trade with the supplier with whom they achieve maximal bilateral joint welfare at prices equal to marginal costs. Maximal fees and the suppliers' market power are restricted by the buyers' credible threats to switch suppliers. Maximal fees also arise from a negotiation model that extends price competition to price-fee competition. Competition in both prices and fees necessarily emerges. It improves welfare compared to price competition, but buyers will not be better off. The minimal infrastructure achieving maximal aggregate welfare differs from the minimal network that protects buyers most.
Entry Decisions and Asymmetric Competition between Non-Profit and For-Profit Homes in the Long-Term Care Market
Iris Grant KU Leuven - Department of Economics, Iris Kesternich KU Leuven - Department of Economics; Ludwig Maximilian University of Munich (LMU) - Faculty of Economics, and Johannes Van Biesebroeck K.U.Leuven; Centre for Economic Policy Research (CEPR) explore Entry Decisions and Asymmetric Competition between Non-Profit and For-Profit Homes in the Long-Term Care Market.
ABSTRACT: The demand for long-term care (LTC) services is growing strongly, mostly due to population aging. Historically, the German LTC market was dominated by non-profit nursing homes, but the recent entry wave was tilted towards for-profit competitors. Using a rich administrative dataset on all LTC facilities in Germany, we examine strategic interaction between these two ownership types in a static entry model. The estimates of competitive effects imply that non-profit and for-profit homes are substitutes, but competition is much stronger within-type, suggesting that they provide differentiated products. For-profit homes in particular act as if they operate in a different market segment, but over time their entry behavior has converged to that of the more established non-profits. Counterfactual simulations of proposed changes in government policy suggest that even small changes favoring either type could have a large impact on the fraction of markets that remain unserved or only served by a single type.
Monday, November 18, 2019
Alessandro Ferrari, European University Institute - Economics Department and Francisco Queiros, European University Institute identify Low Competition Traps.
ABSTRACT: We develop a multi-industry growth model with oligopolistic competition, endogenous entry and variable markups. At the heart of our model is a complementarity between capital accumulation and competition, which may give rise to multiple steady-states – steady-states characterized by high output/competition can coexist with steady states featuring low output/competition (low competition traps). Negative transitory shocks can trigger a persistent transition from a high to a low steady-state, making the economy follow a path that resembles in many aspects the great recession. We show the likelihood that the economy enters a low competition trap can increase in the degree of firm heterogeneity.
Yucheng (John) Yang, University of Rochester - Simon Business School suggest Real Effects of Disclosure Regulation: Evidence from U.S. Import Competition.
ABSTRACT: This paper investigates the impact of disclosure regulation on import competition. Using the segment disclosure regulation (SFAS 131) as a plausibly exogenous shock to the supply of mandatory information about U.S. product markets, I uncover an increase in U.S. import competition at the industry level. Consistent with foreign competition, the effect is more pronounced in industries with high labor intensity and in industries of low competition, where foreign firms have a greater incentive to compete with U.S. firms. Consistent with learning from disclosures, the effect is stronger in industries with high demand uncertainty and in industries of high trade policy uncertainty, where learning to reduce uncertainty is more beneficial. In addition, I provide evidence that the effect on import competition spills over to U.S. firms that are not directly affected by the regulation.
ABSTRACT: Net neutrality broadly refers to the principle of equal treatment of online content1 by providers of internet access services (Internet Service Providers, ‘ISPs’). The role of competition and competition law in safeguarding this principle has been at the heart of the net neutrality debate since its nascence. For its opponents, net neutrality is a solution in search of a problem that could have been solved by existing tools, notably the competition law framework, if—and when—the market failed to deliver. For its proponents, net neutrality is about much more than addressing anticompetitive behaviour.
ABSTRACT: The Commission conditionally cleared the creation by subsidiaries of BMW and Daimler of six joint ventures in the field of new mobility and, in particular, in (free-floating) car-sharing services.
Friday, November 15, 2019
Hans-Markus Wagener, Heinrich-Heine-University, Düsseldorf (Germany) offers a Follow-up to Skanska – The 'Implementation' by National Courts So Far.
ABSTRACT: In its Skanska ruling, the European Court of Justice spelled out the liability of group companies for cartel damages. German courts have now handed down first rulings in respective cases. They reject a subsidiary’s or a sister company’s capability of being sued for cartel damages in civil court and thus, in principle their civil liability for infringements by other members of the same economic unit. Contrary to this assessment, Spanish courts of appeal did find subsidiaries to be liable for cartel damages in similar constellations. These opposite views are rooted in the contradictory premises of national liability laws on the one hand and European competition law on the other. However, only the synchronism of civil liability with the undertaking’s responsibility for fines fits in well reasonably with the framework of European competition law.
Margherita Colangelo, Roma Tre University - Department of Law examines Traditional and Platform MFN Clauses under Antitrust Law: Insights from Recent Practice.
ABSTRACT: Most Favoured Nation (MFN) clauses have long been a controversial issue in antitrust. Whereas there is established literature on traditional MFN clauses, the same cannot be said for platform MFNs. Despite the number of cases over recent years, no consensus has been reached either by competition agencies or by scholars on the competitive effects of platform MFNs. In particular, in the EU, where several investigations have been conducted, a clear indication on the approach guiding the enforcement on such clauses is still lacking and inconsistencies exist between Member States, thereby undermining legal and business certainty.
The Case against Antitrust Law: Ten Areas Where Antitrust Policy Can Move on from the Smokestack Era
Ryan Young, Competitive Enterprise Institute and Wayne Crews, Competitive Enterprise Institute (CEI) suggest The Case against Antitrust Law: Ten Areas Where Antitrust Policy Can Move on from the Smokestack Era.
ABSTRACT: Antitrust regulation harms both consumers, competition, and innovation and therefore should be repealed. From a legislative standpoint, this would involve repealing the Sherman Act of 1890, the Clayton Act of 1914, and the Federal Trade Commission Act of 1914, as amended, including the Celler-Kafauver Act of 1950 and the Hart-Scott-Rodino Act of 1976. In addition, the executive branch should decline to prosecute weak or spurious antitrust cases, and courts should reverse bad precedents. A market-based approach to competition would reduce the regulatory uncertainty and chilling of innovation that results from government antitrust regulation. It would also reduce opportunities for rent-seeking.
The issue has taken on greater urgency, as populist politicians from both left and right push for more aggressive antitrust enforcement. Regulators in the United States and the European Union have expressed an interest in pursuing antitrust actions against tech giants known as the FAANG companies—Facebook, Apple, Amazon, Netflix, and Google. President Trump has specifically singled out Facebook, Google, and Amazon as antitrust targets. Entire business models, such as franchising, are at risk from potential antitrust regulation.
Thursday, November 14, 2019
Micael Castanheira, Université Libre de Bruxelles (ULB) - European Center for Advanced Research in Economics and Statistics (ECARES); Centre for Economic Policy Research (CEPR), Carmine Ornaghi, University of Southampton, and Georges Siotis, Universidad Carlos III de Madrid - Department of Economics; Centre for Economic Policy Research (CEPR) ask Market Definition in the Pharmaceutical Industry: A Case of Drugs Hopping Antitrust Markets?
ABSTRACT: Delineating the boundaries of the relevant market plays a central role in the conduct of competition policy. In this paper, we focus on market definition in the pharmaceutical industry, where the introduction of generics represents a significant competitive shock for the molecule experiencing Loss of Exclusivity. We show that generic entry generates market-wide effects that shift the boundaries of the relevant antitrust market, but in unexpected ways. In a market where non-price competition is prevalent, entry may lead to a split of the (initial) relevant market. Hence, and paradoxically, entry may soften competitive constraints. We also highlight the importance of properly accounting for non-price instruments: ignoring them can easily lead to a flawed definition of the relevant antitrust market. We obtain these results by econometrically estimating time-varying substitution patterns in the pharmaceutical industry.
Application of the Domestic and EU Antitrust Prohibitions: an analysis of the UK competition authority's enforcement practice
ABSTRACT: This article makes a significant and original contribution to the literature on the enforcement practices of competition authorities by providing the first comprehensive account of the work of the UK National Competition Authority (The OFT and latterly the CMA) in its primary task of enforcing the EU and domestic antitrust prohibitions. A rigorous empirical study of the full 19 years of enforcement practice provides the only detailed analysis of this central pillar of UK competition law enforcement, based on a new data-set on the prohibition Case Outcomes in that period which provides information on the quantity of cases, competition law provisions applied and types of Case Outcome. The article identifies and explains the apparent focus to date on by-object agreement competition law infringements and reveals data on the fining record of the UK competition authority. The article also provides the first data and narrative on the enforcement of the EU antitrust prohibitions within the UK. Overall, the article reveals a disappointing track record by the UK competition authority in enforcing both the domestic and EU prohibitions, on an absolute and relative basis, in comparison with other leading EU MS NCAs, and provides an empirically-driven account which allows us to reflect on experience to date and inform enforcement practice for the future.
Mario Daniele Amore, Bocconi University - Department of Management and Technology and Riccardo Marzano, Politecnico di Milano address Family Ownership and Antitrust Violations.
ABSTRACT: We study how family ownership shapes the firms' likelihood of being involved in antitrust indictments. Using data from Italy, we show that family firms are significantly less likely than other firms to commit antitrust violations. To achieve identification, we exploit a law change that made it easier to transfer family control. Studying the mechanisms at play, we find that family firms are especially less likely to commit antitrust violations when they feature a more prominent size relative to the city where they are located, which magnifies reputational concerns. Next, we show that family firms involved in antitrust violations appoint more family members in top executive positions in the aftermath of the indictment. Moreover, these firms invest less and curb equity financing as compared to nonfamily firms. Collectively, our findings suggest that family control wards off reputational damages but, at the same time, it weakens the ability to expand in order to keep up with fiercer competition following the dismantlement of the anticompetitive practice.