Antitrust & Competition Policy Blog

Corporate M&As and labor market concentration: Efficiency gains or power grabs?

Corporate M&As and labor market concentration: Efficiency gains or power grabs?

 

David C. Cicero

Harbert College of Business, Auburn University

Mo Shen

Harbert College of Business, Auburn University

Jaideep Shenoy

University of Connecticut

 

Abstract

Mergers that increase labor market concentration can enhance firms’ labor market power or promote efficiency through post-merger labor reorganization. Using establishment-level employment data, we create a novel measure of the change in labor market concentration due to a merger. We find that the deal-related increase in this measure predicts merger firm pair formation. Furthermore, the merger-related increase in labor market concentration is positively related to the combined returns to merging firms, negatively related to the returns to rival firms, and positively related to the returns to supplier and customer firms. We also document a decrease in total employment and an increase in IT spending in establishments of merging firms that experience a greater increase in labor market concentration. Overall, our evidence suggests that firms with overlapping labor markets merge to benefit from labor efficiencies rather than from the enhancement of labor market power.

Noncompete Agreements, Training, and Wage Competition

Noncompete Agreements, Training, and Wage Competition

 

Oz Shy

Federal Reserve Banks - Federal Reserve Bank of Atlanta

Rune Stenbacka

Hanken School of Economics

 

Abstract

We study the effects of noncompete contracts in an environment where firms invest in training junior workers. After obtaining employer-provided training, trained workers can choose whether to remain loyal to their initial employer or switch to the competing employer. We evaluate the effects of noncompete agreements on wages, employment, investment in training, production, profits, and total welfare.

Noncompete Agreements and the Welfare of Consumers

Noncompete Agreements and the Welfare of Consumers

 

Michael Lipsitz

Federal Trade Commission Bureau of Economics

Mark J. Tremblay

Miami University

 

Abstract

Employee spinoffs may harm incumbent firm owners for two reasons: first, they increase competition in relevant product markets, potentially decreasing rents associated with market power. Second, the threat of an employee spinoff may prevent a firm owner from making costly, productivity-enhancing investments in their workers. Noncompete agreements (NCAs) solve both problems. From the perspective of a consumer, NCAs may increase prices by decreasing competition, but the investments made by firm owners have the potential to mitigate competitive harms. We develop a model which formally demonstrates this tradeoff to assess the impacts of NCA policy on consumers, and discuss when a ban on NCAs is most likely to be beneficial for consumers. We show that the competitive environment, the nature of investment pass-through, and the benefits of investment play large roles. Counterintuitively, increased benefits of costly investments have the potential to harm consumers, such that industries where NCAs are most important to firms may also be those where harm is greater. Finally, we draw two analogies between NCAs and antitrust (merger analysis and pay-for-delay agreements) and show how insights in those areas may inform NCA policy.

Common Ownership and Innovation Efficiency

Common Ownership and Innovation Efficiency

Xuelin Li, University of South Carolina (Darla Moore), Tong Liu, University of Pennsylvania (Wharton), Luke A. Taylor, University of Pennsylvania (Wharton)

ABSTRACT: How does common ownership affect innovation? We study this question using project-level data on pharmaceutical startups and their venture capital (VC) investors. We find that common VC ownership reduces duplication of R&D across competing projects. Specifically, common ownership leads VCs to shut down lagging drug projects, withhold funding from lagging startups, and redirect those startups’ innovation. These results support theories dating back to Loury (1979): By coordinating R&D efforts across competing firms, a common owner can reduce excess R&D. Consistent with common ownership improving innovation efficiency, common ownership rates are positively correlated with the ratio of R&D output to funding.

Big-Box Store Expansion and Consumer Welfare

Big-Box Store Expansion and Consumer Welfare

 

Justin Leung

National University of Singapore (NUS)

Zhonglin Li

University of Chicago - Booth School of Business

 

Abstract

Supercenters and warehouse clubs have grown rapidly in the US in recent decades. These big-box retail establishments are physically large to enable one-stop shopping, offering a broad range of product categories with relatively low prices. In this paper, we study how the entry of these big-box stores affect household consumption and welfare. We first present an event study of the store entries of four major big-box retail chains to provide empirical evidence that households change various dimensions of their shopping behavior, such as product varieties per shopping trip and prices paid, in ways that are strongly consistent with store characteristics. We then develop a novel multi-store multi-category choice model to quantify and disentangle the effects of product variety, prices, and other store characteristics on consumer welfare. We show that households benefit substantially from consuming in supercenters relative to competing retailers, highlighting the importance of the store format.

Concentration and Competition: Evidence from Europe and Implications for Policy

Concentration and Competition: Evidence from Europe and Implications for Policy

 

Gabor Koltay

European Union - Directorate General for Competition

Szabolcs Lorincz

European Commission, DG Competition, Chief Economist's Team

Tommaso M. Valletti

Imperial College Business School; Centre for Economic Policy Research (CEPR)

 

Abstract

The paper provides new evidence on proxy indicators of market power for major European countries. The data shows moderately increasing average industry concentration over the last two decades, a considerably increasing proportion of high concentration industries, and an overall tendency towards oligopolistic structure. Estimates of aggregate profitability also show a sustained increase over the recent decades coupled with decreasing or stagnating investment rates. While the academic and policy debate is not settled as to whether the causes of these trends are policy driven or reflect technological improvement, our findings suggest that competition policy is likely to face more challenges as large companies are becoming more common in more and more industries.

How Do Antitrust Regimes Impact on Cartel Formation and Managers’ Labor Market? An Experiment

How Do Antitrust Regimes Impact on Cartel Formation and Managers’ Labor Market? An Experiment

 

Miguel A Fonseca

University of Exeter Business School - Department of Economics

Ricardo Gonçalves

affiliation not provided to SSRN

Joana Pinho

Catholic University of Portugal (UCP) - Católica Porto Business School

Giovanni Tabacco

affiliation not provided to SSRN

Abstract

We explore the impacts of different antitrust regimes on managers’ labor contracts, when shareholders are intent on their managers engaging in price fixing activities. We compare legal regimes that fine firms to regimes that prosecute managers. We build a simple theoretical model, which we take to the laboratory. We observe contract choices of shareholders for a given legal regime, as well as the likelihood of managers forming explicit cartels and coordinating on prices in a repeated Bertrand oligopoly, taking contract and legal regime as given. Our results suggest that there is less collusion when the legal regime prosecutes managers. High-powered contracts do not incentivize cartel formation or price coordination effectively, irrespective of legal regime. Nevertheless, high-powered contracts were most frequently chosen by shareholders, often with collusive intents.

Algorithmic Predation and Exclusion

Algorithmic Predation and Exclusion

 

 

Thomas K. Cheng

The University of Hong Kong - Faculty of Law

Julian Nowag

Lund University - Faculty of Law; Oxford Centre for Competition Law and Policy

 

Abstract

The debate about the implications of algorithms on competition law enforcement has so far focused on multi-firm conduct in general and collusion in particular. The implications of algorithms on abuse of dominance have been largely neglected. This article seeks to fill the gap in the existing literature by exploring how the increasingly precise practice of individualized targeting by algorithms can facilitate the practice of a range of abuses of dominance, including predatory pricing, rebates, and tying and bundling. The ability to target disparate groups of consumers with different prices helps a predator to minimize the losses it sustains during predation and maximize its ability to recoup its losses. This changes how recoupment should be understood and ascertained and may even undermine the rationale for requiring a proof of likelihood of recoupment under US antitrust law. This increased ability to price discriminate also enhances a dominant firm’s ability to offer exclusionary rebates. Finally, algorithms allow dominant firms to target their tying and bundling practices to loyal customers, hence avoiding the risk of alienating marginal customers with an unwelcome tie. This renders tying and bundling more feasible and effective for dominant firms.

Interfirm Collaboration, Ownership Stakes and Hold-Up Costs: Evidence from the Pharmaceutical Industry

Interfirm Collaboration, Ownership Stakes and Hold-Up Costs: Evidence from the Pharmaceutical Industry

 

Matthew T. Billett

Indiana University - Kelley School of Business - Department of Finance

Ioannis V. Floros

University of Wisconsin - Milwaukee - Department of Finance

Xuan Tian

Tsinghua University - PBC School of Finance

Abstract

Theory shows that ownership stakes between firms can mitigate hold-up costs that would otherwise impede interfirm collaboration. We construct a model in the pharmaceutical industry that predicts hold-up costs are an inverted U-shaped function of the collaborative drug’s likelihood of approval. Using a sample of collaborations between pharmaceutical firms on specific drugs and detailed drug and firm level data, we find strong support for the model’s predictions: ownership stakes are a humped shaped function of the likelihood of drug approval. We conclude that ownership stakes extend the boundaries of the firm by enhancing their ability to collaborate with other firms.

Regulating Competition in Digital Platform Markets: A Critical Assessment of the Framework and Approach of the EU Digital Markets Act

Regulating Competition in Digital Platform Markets: A Critical Assessment of the Framework and Approach of the EU Digital Markets Act

 

 

Pinar Akman

School of Law, University of Leeds

 

Abstract

The European Union’s Digital Markets Act (DMA) initiative, which is set to introduce ex ante regulatory rules for “gatekeepers” in online platform markets, is one of the most important pieces of legislation to emanate from Brussels in recent decades. It not only has the potential to influence jurisdictions around the world in regulating digital markets, it also has the potential to change the business models of the wealthiest corporations on the planet and how they offer their products and services to their customers. Against that backdrop, this article provides an analysis of the aims of and principles underlying the DMA, the essential components of the DMA, and the core substantive framework, including the scope and structure of the main obligations and the implementation mechanisms envisaged by the DMA. Following this analysis, the article offers a critique of the central components of the DMA, such as its objectives, positioning in comparison to competition law rules, and substantive obligations. The article then provides recommendations and proposes ways in which the DMA – and other legislative initiatives around the world, which may take the DMA as an example – can be significantly improved by, inter alia, adopting a platform-driven substantive framework built upon self-executing, prescriptive obligations.

Procedural Rights and Obligations of Third Parties in Antitrust Investigations and Proceedings by the European Commission

Procedural Rights and Obligations of Third Parties in Antitrust Investigations and Proceedings by the European Commission

Wouter P. J. Wils

King's College London - The Dickson Poon School of Law; European Union - European Commission

Abstract

This paper provides a systematic overview of the procedural rights and obligations of third parties in investigations and proceedings conducted by the European Commission for the enforcement of Articles 101 and 102 TFEU. Third parties are all natural or legal persons, undertakings and associations of undertakings other than those under investigation. The paper examines the possibilities for third parties to inform the European Commission about a suspected infringement and to trigger an investigation by the European Commission; the obligations and rights of third parties when responding to requests for information sent to them by the European Commission, when participating in interviews, and when submitting to inspections conducted by the European Commission; the possibilities for third parties to obtain information about pending proceedings and to express their views in them; the rules on the use of languages; and the protection of business secrets and other confidential information, and the restrictions on the use of information obtained by third parties through their participation in the European Commission’s proceedings.

Retail Pricing Format and Rigidity of Regular Prices

Retail Pricing Format and Rigidity of Regular Prices

 

Sourav Ray

McMaster University - DeGroote School of Business

Avichai Snir

Netanya Academic College

Daniel Levy

Bar-Ilan University - Department of Economics; Emory University - Department of Economics; Rimini Centre for Economic Analysis; International Centre for Economic Analysis

 

Abstract

We study different notions of sale and regular prices, and their variability with store pricing-formats. We use data from three large stores with different pricing-formats (EDLP/Hi-Lo/Hybrid) that are located within 1-km radius. Importantly, the data contain both the actual transaction prices and the actual regular prices as displayed on the store shelves. We combine these data with two “generated” regular price series and study their rigidity. Regular-price rigidity varies with store-formats because different format stores define regular-prices differently. Correspondingly, the meaning of price-cuts varies across store-formats. To interpret the findings, we consider the store pricing format distribution across the US.

Find and Replace: R&D Investment Following the Erosion of Existing Products

Find and Replace: R&D Investment Following the Erosion of Existing Products

 

Joshua Krieger

Harvard University - Business School (HBS)

Xuelin Li

University of South Carolina - Darla Moore School of Business

Richard T. Thakor

University of Minnesota - Carlson School of Management; Massachusetts Institute of Technology (MIT) - Laboratory for Financial Engineering

 

Abstract

How do innovative firms react when existing products experience negative shocks? We explore this question with detailed project-level data from drug development firms. Using FDA Public Health Advisories as idiosyncratic negative shocks to approved drugs, we examine how drug makers react through investment decisions. Following these shocks, affected firms increase R&D expenditures, driven by a higher likelihood of acquiring external innovations, rather than developing novel projects internally. Such acquisition activities are concentrated in firms with weak research pipelines. We also find that competing developers move resources away from the affected therapeutic areas. Our results show how investments in specialized commercialization capital create path dependencies and alter the direction of R&D investments.

Broadband and Productivity: Structural Estimates for Germany

Broadband and Productivity: Structural Estimates for Germany

 

 

Tomaso Duso

German Institute for Economic Research (DIW Berlin); TU Berlin- Faculty of Economics and Management - Empirical Industrial Organization; Centre for Economic Policy Research (CEPR)

Mattia Nardotto

KU Leuven

Alexander Schiersch

German Institute for Economic Research (DIW Berlin)

 

Abstract

We study the impact of broadband availability on firms’ total factor productivity (TFP) using German firm-level data between 2010 and 2015. We adopt a control function approach to causally identify and separately estimate productivity for 46 two-digit manufacturing and service sectors. Over the sample period, broadband availability, measured by 16 Mbps transmission rates, more than doubled in German municipalities. While this increased broadband availability has almost no effect on firms’ productivity in manufacturing, it significantly increases TFP in most service sectors. Yet, the size of the effect is heterogenous across industries.

Fireside Chat with Carl Shapiro on Antitrust Merger Guidelines - Mar 14, 2022 09:00 AM Pacific Time/ 12:00 PM East Coast Time

See here to register.

Estimating Oligopoly with Shareholder Voting Models

Estimating Oligopoly with Shareholder Voting Models

 

 

José Azar

University of Navarra, IESE Business School; CEPR

Ricardo M. Ribeiro

Universidade Católica Portuguesa, Católica Porto Business School

 

Abstract

We develop an empirical model of overlapping ownership conduct. The model (i) links firm conduct parameters to deep parameters of the firm's process of shareholder preference aggregation through voting; (ii) can cope with ownership settings involving both intra- and inter-industry overlapping ownership; and (iii) yields an equilibrium flexible formulation for the management’s objective function that allows for no internalization, partial internalization and full internalization of shareholder objectives by managers. Using data for the U.S. airline industry in the 2015-2017 period, we find evidence for a partial internalization formulation in which managers put significant weight on shareholder objectives, but substantially less than in the full-internalization limiting case. We find also that inter-industry overlapping ownership is associated to lower inferred marginal costs, and that omitting inter-industry overlapping ownership leads to substantial bias towards zero in the parameters that drive how much intra-industry overlapping ownership is internalized by the firms. Finally, we find, focusing on the 2017Q4 period, that overlapping ownership overall (both intra- and inter-industry) seems to increase the average airline fare by 4.0%, increase industry profit by 24.4% and decrease consumer surplus by 1.8%, and that these effects are mostly due to overlapping ownership by shareholders other than the “Big Three” asset managers.

Why Do Some New Products Fail? Evidence from the Entry and Exit of Vanilla Coke

Why Do Some New Products Fail? Evidence from the Entry and Exit of Vanilla Coke

By:

Robert Clark (Queen's University); Yiran Gong

Abstract:

The analysis of new product introduction using discrete-choice demand models has focused on successful products (e.g. the minivan) and their welfare impacts. Instead, we apply this approach to unsuccessful products to provide insight into the reasons for their failure. Our case study is the introduction and subsequent exit of Coca Cola's Vanilla Coke. Using IRI scanner data we estimate demand and supply and simulate counterfactual scenarios in which Vanilla Coke was not introduced. We then estimate Coca Cola's profit gains from the new brand and find they would not cover fixed costs. We analyze the importance of (i) overall demand for soft drinks, (ii) private label presence, (iii) rival promotion, and (iv) consumer preferences for explaining Vanilla Coke's failure, by investigating what the levels of each would have had to be for Vanilla Coke to at least cover its fixed costs. We then investigate the extent to which Coca Cola may have misjudged the levels for these variables by looking at their pre-introduction values. We find Coca Cola did anticipate part of rival reactions that made survival harder, but the actual changes were even beyond its anticipation and contributed to Vanilla Coke's exit.

Using Bid Rotation and Incumbency to Detect Collusion: A Regression Discontinuity Approach

Using Bid Rotation and Incumbency to Detect Collusion: A Regression Discontinuity Approach

Kei Kawai, Jun Nakabayashi, Juan M. Ortner & Sylvain Chassang

 

 

Cartels participating in procurement auctions frequently use bid rotation or prioritize incumbents to allocate contracts. However, establishing a link between observed allocation patterns and firm conduct has been difficult: there are cost-based competitive explanations for such patterns. We show that by focusing on auctions in which the winning and losing bids are very close, it is possible to distinguish allocation patterns reflecting cost differences across firms from patterns reflecting non-competitive environments. We apply our tests to two datasets: the sample of Ohio milk auctions studied in Porter and Zona (1999), and a sample of municipal procurement auctions from Japan.

Heterogeneous consumer preferences for product quality and uncertainty

Heterogeneous consumer preferences for product quality and uncertainty

By:

Wolfgang Maennig (Chair for Economic Policy, University of Hamburg); Steffen Q. Mueller (Chair for Economic Policy, University of Hamburg)

Abstract:

We provide evidence for heterogeneous consumer preferences for product quality and game outcome uncertainty (GOU) in Major League Baseball. Using attendance data from 2013 to 2019, we explore func-tional data clustering techniques to detect common patterns in predictive margins of team-specific win-ning probability. As a central result, we identify five groups of teams with similar GOU effects. However, only a few teams’ fans show GOU preferences that resemble the typical hump-shape that is postulated by the uncertainty of outcome hypothesis; the largest cluster is comprised of teams with fans whose at-tendance behavior is relatively insensitive to differences in GOU.

Algorithmic Pricing in Horizontal Merger Review: An Initial Assessment

Algorithmic Pricing in Horizontal Merger Review: An Initial Assessment

 

Ai Deng

Johns Hopkins University; Charles River Associates

Cristián Hernández

NERA Economic Consulting

 

Abstract

While the possibility of algorithmic price discrimination and algorithmic collusion has been extensively discussed in the global antitrust community in recent years, there has been much more limited discussion in the context of mergers. In this article, we aim to fill this gap by discussing some potential implications of algorithmic pricing on market definition, unilateral effects, coordinated effects, and remedies. Specifically, we discuss the following topics and related questions:

- Market definition. How to deal with algorithm-enhanced market/customer segmentation and how to identify relevant antitrust markets when prices are set by a “blackbox” algorithm.

- Unilateral effects. How to use merging parties’ pricing algorithms to conduct merger simulations and why there are important antitrust issues related to integrating merging parties’ pricing algorithms and their data.

- Coordinated effects. What some of the recent scholarship tells us about potentially coordinated effects in a merger context.

- Remedies. Why data compatibility and collusion risk are important considerations when “divesting” merging parties’ pricing algorithm.