After years of debate, Hong Kong’s new competition law, the Competition Ordinance (CO), took effect in December 2015. Laying out rules to support competitive markets and creating the institutions to administer and enforce those rules, the CO is a modern competition law in many respects, following many best-practices and respecting recent learning in competition economics. This article argues, however, that—at least from an economist’s perspective—in its drafting a series of decisions were made that weaken the law. None is that unusual or critical on its own, however collectively they leave the law less powerful than competition enthusiasts might desire in a modern market economy. We discuss the implications of these decisions and go on to consider some other more unique aspects of the law that might need reconsideration at some point. Finally, we document and discuss the early activities of the Competition Commission of Hong Kong. We conclude that Hong Kong is off to a good start with its new law and its enforcement but that several reforms have the potential to bring a more robust competition policy regime.
Wednesday, September 30, 2020
Are large digital platforms that deal directly with consumers “winner take all,” or natural monopoly, firms? That question is surprisingly complex and does not produce the same answer for every platform. The closer one looks at digital platforms the less they seem to be winner-take-all. We can assume that competition can be made to work in most of them.
Second, assuming that an antitrust violation is found, what should be the appropriate remedy? Breaking up large firms subject to extensive scale economies or positive network effects is generally unwise. The resulting entities will be unable to behave competitively. Inevitably, they will either merge or collude, or else one will drive the others out of business. Even if a platform is not a natural monopoly but does experience significant economies of scale in production or consumption, a breakup will be socially costly. In the past, structural relief of this type has led to lower output and higher prices or business firm failure. Two likely exceptions are acquisitions of small firms that threaten to grow into substantial rivals, and spinoffs of proven natural monopoly assets that may be necessary to assure competition in adjacent markets.
If breakup is not the answer, then what are the best antitrust remedies? Often the best way to deal with platform monopoly is to break up ownership and management rather than assets. Leaving the platforms intact as production entities but making ownership more competitive could actually increase output, benefitting consumers, labor, and suppliers. The history of antitrust law is replete with firms, including the Chicago Board of Trade, the NCAA, the NFL, and numerous real estate boards that are organized as single entities for many legal purposes but that also function as combinations and can be treated that way by antitrust law.
Finally, this paper examines the problem of platform acquisition of nascent firms, where the biggest threat is not from horizontal mergers but rather from acquisitions of complements or differentiated technologies. For these, the tools we currently use in merger law are poorly suited. Here I offer some suggestions.
Using a horizontally differentiated three‐firm model, we consider horizontal mergers and antitrust policy in a network products market, where network externalities and compatibilities between products and services are observed. In particular, we focus on the role of merger‐related network compatibility. That is, if the degree of the net degree of merger‐related network compatibility is larger than the degree of product substitutability, consumer surplus is higher than in the premerger case. In this case, the proposed merger is allowed by antitrust authorities based on a consumer welfare standard. Furthermore, relating to a merger externality on an outsider, we examine the American Online and Time Warner case.
Certificates of Public Advantage and Hospital Mergers: Evidence from Maine, Montana and South Carolina
Certificates of Public Advantage and Hospital Mergers: Evidence from Maine, Montana and South Carolina
Certificates of Public Advantage (COPAs) grant antitrust immunity to merging hospitals conditional on active state regulation. We investigate the effects of three mergers shielded with COPAs: Benefis in Great Falls, Montana, Palmetto in Columbia, South Carolina, and MaineHealth’s acquisition of Southern Maine Medical Center (SMMC). We find that Benefis’s and SMMC’s prices during the COPA period closely tracked controls, but the removal of each COPA led to a price increase. Most of SMMC’s quality measures also declined significantly after its COPA expired. Palmetto’s price closely tracked the average price of control hospitals in the initial COPA period and after the state renegotiated the COPA. The results illustrate that the removal of COPA regulation can lead to higher prices and reduced quality from unconstrained provider market power.
Carrier Collaboration with Endogenous Networks: Or, the Limits of What Carrier Collaboration Can Achieve Under Antitrust Immunity
Carrier Collaboration with Endogenous Networks: Or, the Limits of What Carrier Collaboration Can Achieve Under Antitrust Immunity
Airlines provide complex route networks that are to large extents complementary. Therefore, some passengers need to change aircraft and airlines to fly from their origin to their final destination. The present study captures pricing problems in terms of double marginalization but goes one step further by incorporating scheduling problems in the form of route developments and/or frequency choices. The model involves a two-stage game with two carriers who choose their complementary networks in the first stage and prices in the second stage. Each carrier's network involves one or two routes that are distributed geographically or distributed in time. If both carriers maintain two routes, then transfer passengers can choose between two alternative connections which they consider as imperfect substitutes. There are only transfer passengers, and maintaining a route is costly. The analysis reveals that carrier collaboration and antitrust immunity can eliminate double marginalization and create additional incentives to maintain two connections rather than one connection depending on the heterogeneity of connections. Our results indicate that the scope for the improvement of carrier networks via antitrust immunity can be rather limited relative to the social desirability of more complete carrier networks. A possible policy lesson is that airlines should be granted antitrust immunity conditional on network expansion.
Tuesday, September 29, 2020
In the European Union, the ne bis in idem principle restricts the ability of EU and national enforcement authorities to prosecute or punish the same defendant for the same criminal offence more than once. That protection applies to competition fines due to its punitive and deterrent natures and their high degree of severity.
In reviewing the ECJ jurisprudence, the article traces back the justification of the case law on the irrelevance of the legal interest protected as necessary requirement for the proper application of the ne bis in idem principle to specific situations where there was a duplication of penalty proceedings for formally distinct but materially overlapping offences, imputable the generalized lack of harmonization of penalty rules in the EU. The article argues that, in the area of EU competition law however, the unity of the legal interest is still a necessary requirement to apply the protection conferred by that principle. This is because, under the harmonized system of competition enforcement in the EU, unlike in other areas of EU law, the Commission and the national competition authorities share concurring competences on a clear differentiation based on the notion of affectation of EU trade, which makes the legal interest protected the critical element of the notion of same infringement.
It follows that the Commission and the national authorities can deal with separate aspects of a same anti-competitive material conduct by pursuing separate offences corresponding to different legal interests protected. Moreover, competition is a horizontal discipline that has general application in all areas of the economy and intersects with sectoral regulations. This entails that concurrent proceedings to sanction materially different offences other than competition are possible without this infringing the non bis in idem protection. An illustration of this can be found in the area of the new economy where a competition infringement can be based on the abuse of data collected in violation of privacy rules. A same material practice based on inappropriate handling of data by an internet platform could well constitute at the same time an anti-competitive abuse and violate data protection rules, which should be pursed as separate offences. Disregarding the interest protected would lead to sacrificing one interest over another and lead the authorities into unacceptable choices in pursuing offences.
This article examines the meaning and scope of the notion of anti-competitive effects in EU competition law. It does so by bringing together several strands of the case law (and this across all provisions, namely Articles 101 and 102 TFEU and merger control). The analysis is structured around a framework that considers the main variables that shape the notion in practice: the time variable (actual or potential effects); the dimensions of competition and the counterfactual; the meaning of effects and the probability threshold (plausibility, likelihood, certainty).
The exercise shows that it is possible to discern a concrete meaning to the notion of anti-competitive effects. Some central questions, including the role and operation of the counterfactual and the threshold of effects, have already been answered by the Court of Justice. In particular, it has long been clear that anti-competitive effects amount to more than a mere competitive disadvantage and/or a limitation of a firm’s freedom of action. The impact on equally efficient firms' ability and/or incentive to compete would need to be established.
At the same time, some open questions and some potential areas of friction (relating, inter alia, to stakeholders' tendency to conflate appreciability and effects) remain. These are also discussed.
A growing narrative in the popular press and among some academics has been that antitrust regulators have systematically relaxed existing antitrust law enforcement. This narrative has led to calls for reinvigorated enforcement and even the passage of new tougher antitrust legislation. The merits of this narrative and the corollary calls for antitrust reforms depend in part on whether the claim that antitrust regulators have become more relaxed in their enforcement efforts over time is correct. In this paper, we employ data from the United States antitrust agencies to examine one element of this claim. Specifically, we investigate whether antitrust regulators have become less likely to challenge proposed mergers over time. Our results indicate that, contrary to the popular narrative, the Agencies have become more likely to challenge proposed mergers over 1979-2017. Controlling for the number of merger proposals submitted to the antitrust agencies, we find that the likelihood of a merger challenge has more than doubled over this period. We explore reasons behind this increase, and find that increases in antitrust agencies’ budgets have led to enhanced merger enforcement intensity.
Standard-Essential Patents and FRAND Licensing—At the Crossroads of Economic Theory and Legal Practice
Monday, September 28, 2020
Judgment in Case C-265/17 P, Commission v UPS: the Form Matters—Due Process as a Necessary Condition to Efficient Decision-Making
We analyze how digital platforms can increase the survival rate of firms during a crisis by providing continuity in access to customers. Using order-level data from Uber Technologies, we study how the COVID-19 pandemic and the ensuing shutdown of businesses in the United States affected independent, small business restaurant supply and demand on the Uber Eats platform. We find evidence that small restaurants experience significant increases in total activity, orders per day, and orders per hour following the closure of the dine-in channel, and that these increases may be due to both demand-side and supply-side shocks. We document an increase in the intensity of competitive effects following the shock, showing that growth in the number of providers on a platform induces both market expansion and heightened inter-provider competition. Our findings underscore the critical role that digital will play in creating business resilience in the post-COVID economy, and provide new managerial insight into how supply-side and demand-side factors shape business performance on a platform.
Impediments to the Schumpeterian Process in the Replacement of Large Firms
Mara Faccio and John J. McConnell
Using newly-assembled data encompassing up to 75 countries and starting circa 1910, we find that the Schumpeterian process of creative destruction aptly describes the replacement of large firms by other firms, but exceptions to the norm of replacement are not rare and replacement is often not by new firms. Initial firm size and political connections represent the main obstacles to the Schumpeterian process while board interlocks and a corporate culture of innovation play modest roles. Consistent with a theory of political capture, when accompanied by regulations that restrict entry, political connections play a formidable role in abetting large firms remaining large.
The literature on voluntary disclosure in oligopolies concentrates either on Cournot markets where firms compete in quantities or on Bertrand markets where firms compete in prices. In this paper we study voluntary disclosure of managerial contract information in a Cournot-Bertrand duopoly where one firm sets quantities while the other firm sets prices. Such a hybrid structure frequently captures firm behavior in real-world markets. Accordingly, this paper contributes to our understanding of how firms' choices of strategic market variables influences firms' voluntary disclosure incentives. In a setting where firm owners provide strategic incentives to their managers and can either disclose the details of the managerial compensation contract or keep them secret, we find that the Cournot firm punishes its manager for sales and the Bertrand firm induces more aggressive market choices by rewarding sales. Firms' disclosure choices in equilibrium depend on the level of product substitution. A full disclosure equilibrium where both firms reveal the details of their managerial contract information occurs if the firms' products are sufficiently differentiated. In this case, voluntary disclosure leads to lower consumer welfare, but higher total welfare than if contract information is kept secret by both firms. If product differentiation is low, then we find two partial disclosure equilibria where either the Cournot firm or the Bertrand firm keeps contract information private. In this case, we argue that mandating disclosure can lead to an increase consumer and social welfare, but might decrease firm profits.
Sunday, September 27, 2020
FTC Commissioner Noah Phillips asks the question, Is antitrust the next stakeholder capitalism battleground?
Updated at 3:30pm
Law schools (and presumably companies and government agencies) are rethinking how structural bias might be identified and addressed. How might this work in antitrust and consumer protection?
- Lots of state action is structured in ways that create biased outcomes against disadvantaged groups. Some of the FTC state action related cases have helped to create economic opportunities for disadvantaged groups. I think in particular in healthcare, teeth whitening, and occupational licenses. These are cases that the FTC took to the Supreme Court in the past decade. I wish the FTC were to make a bigger deal about this sort of successful enforcement and to track some of the more problematic state action that impacts disadvantaged consumers.
- Many consumers from disadvantaged groups suffer from unfair practices (including and especially with regard to non English language based consumer protection). As a Latin American immigrant, some of what I hear on Spanish language radio or on Spanish language internet deeply troubles me from a consumer protection perspective. We need more FTC staff who can focus on Chinese, Spanish, Portuguese, Hindi, Tagalog, Vietnamese, etc. related consumer protection abuses.
- If products are differentiated, we might imagine that some mergers might have different effects across different classes of consumers. We might identify some of the various tradeoffs in mergers across various groups of consumers. This remains understudied both at the policy level and in the academic literature.
- More competition advocacy. The FTC in particular spent 2% of its budget on advocacy in the 1980s and only 1% since that time. That is literally the best 1% spent on antitrust and consumer protection - a series of research papers and advocacy work that has done more to reshape law and regulation to protect consumers than any similar amount spent on actual enforcement. Why not get Congress to give more money for these efforts? A little bit of extra money can go a long way.
- Workshops. One of the best workshops in recent years was the FTC workshop on Big Data, which led to a report on Big Data as a tool of inclusion or exclusion. One thing that the report identified, long before it was trendy in popular culture, was to note bias through data desserts.
- I give the FTC a lot of credit for focusing on Native American issues. See this workshop from 2014. I don't want to take away from the press on other disadvantaged groups but Native American issues have traditionally been marginalized, even as other groups push for racial justice. This is a national tragedy as many of the worst health and income inequality outcomes focus on Native American populations. Why aren't we doing more to highlight Native American issues in antitrust and consumer protection?
- Explaining that lower prices (our most basic aspect of consumer welfare) helps low income consumers. I live near a Super Wal-Mart (11 minutes from my house, less than 3 miles away). Most antitrust practitioners in NY, DC, and SF live nowhere near a Super Wal-Mart, don't regularly step foot in a Wal-Mart, and have no idea how important price is to people who spend a significant amount of their take home pay on food and related expenses. Wal-Mart is the number one grocer in the United States. Their operational efficiencies and supply chain management have revolutionized the ability to get all sorts of products to disadvantaged groups. Wal-Mart expansion in mergers has always been challenged by existing large supermarket incumbents, among others. Why don't we focus on this sort of story of inefficient incumbents trying to block entry of a disruptor based on lower prices? Overall, incumbent repositioning in understudied in both traditional markets and online markets (let me plug my empirical online incumbent repositioning paper here). Perhaps we should think more about entry and repositioning with regard to disadvantaged groups.
- Academics are smug. Tenured entitled professors who live in suburban school districts with great educational spending or who send their kids to private schools are the last people who should be against school choice for low income families to escape failing schools. The last set of Presidents with children who needed to be schooled in DC all chose private school options (Jenna and Barbara Bush attended a public school in Austin but attended college before their father took office). I'd love to see hearings by the antitrust agencies of what school choice/competition does to school communities for cost of education and quality based education outcomes. Most students who benefit from school choice in cities are Black and LatinX from low income families.
- Hispanics and LatinX Americans are over 16.7% of the national population, which is roughly 52 million people according to the Census Bureau. More than half of this population identifies as white. Our group is the largest non-Anglo community in the US and the fastest growing, which means that we are the largest minority group in the US. Yet, much of the discussion on race and class is binary - Black and White. This narrative is false and always has been false, starting from the first permanent settlements in what is now the United States, which predates 1619. We under-emphasize Latin and Native American related issues involving bias (and I note that the Latin American experience on race for both Native peoples and Blacks is not good either). With significant growth in Asian Americans, we also underemphasize Asian American issues. Why not discuss these issues at the ABA Antitrust Section or at the agencies on a regular basis? This is not to take away from historic racism that the Black community has faced. Such discrimination has been terrible and significant. Anti-Black discrimination is an issue that requires significant attention and action. However, turning a blind eye to other marginalized communities (including genocide against Native Americans) or relegating such communities to second tier status does not help our national reckoning on the importance of addressing structural inequities based on race, ethnicity, gender, sexual identity, religion, and other factors.
- I am troubled by those who are unwilling to recognize that Black Lives Matter and I worry a lot about pipeline issues. Fewer than two percent of the ABA Antitrust Section identifies as Black. This includes both antitrust and consumer/data protection. What are we doing collectively to increase the pipeline of Black lawyers and economists in the profession? My sense is not enough. It is collective failure on the part of professors, law firms, economic consulting firms, companies, state and federal government, and other stakeholders. Maybe we should be more like STEM fields, which push outreach in secondary education. Maybe we need more undergraduate mentoring with funded summer externships. Scholarships would help. As is often the case, we have high hopes but oftentimes do not operationalize how to create success. Maybe we can track such efforts over time to better understand what works and what does not. Up until this summer, the focus of diversity efforts in this field was on gender. We are correct to broaden our concern to other disadvantaged groups and I hope that this broader emphasis becomes permanent but that we also remember unique challenges that women and others face. Diversity of background and expertise whether race, ethnicity, religion, gender and sexual orientation, ideology, geographic origin, or other factors enhances creativity. There is decades of this type of research across fields. I want to highlight the work of my UF colleague in management, Dave Ross, who wrote this paper on gender diversity and firm level innovation. I also note this paper on the importance on racial diversity and innovation in banking, and this paper on ideological diversity, but note that there are countless others. Basically, if everyone looks like you, sounds like you, has all of the same life experiences as you, and thinks like you, you and your organization (government, private sector, academia) are missing out.
Saturday, September 26, 2020
She has shown considerable thought leadership. See:
Friday, September 25, 2020
In 1990, Egypt started in collaboration with the World Bank and International Monetary Fund structural economic reforms aiming at following the track of a market-oriented economy rather than its four-decade state-directed one. As a result, there was a need to reconsider the role of government in such an economic system; many questions were raised on the scope of government intervention and the mechanisms of such interventions. One of the most vital questions was how the government would be able to develop a competitive market where government-business policies are fair and just, access by new market players is not risky, exit from the market is not a source of distortion, and consumers rights of wide-located and diversified-based market products are maintained.
It seems that the final outcome of such a debate was the adoption of the Law No. 3 of 2005 on the Protection of Competition and the Prohibition of Antitrust Practices which first established The Competition Protection Authority known as The Egyptian Competition Authority “ECA” as an independent authority with financial autonomy.
Having said that, the political economy perspective of the competition law, governance, and policy is too extensive to be covered by one paper. Thus, this paper, after offering an overview of the Political Economy Constitutional Preferences and the Constitutional Framework of the Regulatory Agencies in Egypt, is mainly focusing on answering the following two questions:
1- What are the political economy circumstances in which the ECA evolved?
2- Where does the ECA stand from the financial autonomy?
An upstream firm with full commitment bilaterally contracts with two ex ante identical downstream firms. Each observes its own cost shock, and faces uncertainty from its competitor’s shock. When they are risk neutral and can absorb losses, the upstream firm contracts symmetric outputs for production efficiency. However, when they are risk averse, competition requires the payment of a risk premium due to revenue uncertainty. Moreover, when they enjoy limited liability, competition requires the upstream firm to share additional surplus. To resolve these trade‐offs, the upstream firm offers exclusive contracts in many cases.