Antitrust & Competition Policy Blog

Tethering Vertical Merger Analysis

Tethering Vertical Merger Analysis

 

Daniel P. O'Brien

Microfoundations

Abstract

Antitrust practitioners are mis-applying simple vertical merger screening techniques (e.g., vertical foreclosure arithmetic, price pressure analysis) to reach flawed and internally inconsistent conclusions about vertical mergers. Specifically, practitioners have struck on a formula for claiming harm from vertical mergers: They argue that relatively low upstream margins mean that, post-merger, the merged firm has an incentive to disadvantage rivals’ access to the upstream product thus driving more sales to the merged firm’s relatively more profitable downstream product. This reasoning is backwards in the same way that standard critical loss analysis was backwards when it concluded that large pre-merger margins make harm from horizontal mergers less likely. A low upstream profit share implies that the upstream firm faces significant competition and likely lacks the ability to foreclose competition, whereas a high upstream profit share admits foreclosure as a possibility (though by no means a certainty). This paper discusses the issues and touches on how to fix them, a topic addressed in more detail in a forthcoming companion paper.

Customer Data Access and Fintech Entry: Early Evidence from Open Banking

Customer Data Access and Fintech Entry: Early Evidence from Open Banking

 

 

Tania Babina

Columbia University - Columbia Business School, Finance

Greg Buchak

Stanford University Graduate School of Business

Will Gornall

University of British Columbia (UBC) - Sauder School of Business

 

Abstract

Open banking is the trend of empowering customers to share their banking data with fintechs and other banks. We compile a novel dataset documenting that governments in 49 countries have implemented open banking policies and 31 more are in active discussions. Following adoption, fintech venture capital investment increases by 50%, with more comprehensive policies showing larger effects. We examine the policy tradeoffs with a quantitative model of consumer data production and usage. Our calibrations show that customer-directed data sharing increases entry by improving entrant screening ability and product offerings, but harms some customers and can reduce ex-ante information production.

Horizontal Mergers and Innovation with Knowledge Spillovers

Horizontal Mergers and Innovation with Knowledge Spillovers

 

Changwoo Hwangbo

Seoul National University

Jihong Lee

Seoul National University

Abstract

We introduce knowledge spillovers in a model of innovation competition a la Federico et al. (2017) and Denicolo and Polo (2018), which otherwise features horizontal mergers that harm innovation due to the business stealing effect. With knowledge spillovers, competition discourages investment in R&D due to free-riding, and by internalizing such externalities, a merger can improve the incentives for innovation. Horizontal mergers raise (reduce) innovation if the spillover effect is large (small).

The Twin Transition to a Green and Digital Economy: The Role for EU Competition Law

The Twin Transition to a Green and Digital Economy: The Role for EU Competition Law

 

 

Klaudia Majcher

Vienna University of Economics and Business, Competition Law and Digitalization Group; Vrije Universiteit Brussel, Institute for European Studies

Viktoria H.S.E. Robertson

Vienna University of Economics and Business; University of Graz; The Competition Law Hub

 

Abstract

The EU’s economic strategy is currently centered on two key pillars: environmental sustainability and digitalisation. While a range of policies need to be implemented and updated to match the challenges of real-world developments, EU competition law is one area that must play its part in achieving the Union’s ambitious objectives. The aim of this paper is to discuss digital and green competition law, and how the two might interact to more effectively contribute to the EU’s green and digital transition. To this aim, we first review the evolution of the discourses on digital and green competition law, specifically how competition law policy-makers, enforcers, and commentators conceptualised the role of competition law in delivering more digitalised and greener market solutions. Building on this, the paper offers insights into common problems and opportunities that competition law might encounter while transitioning into a law that more aptly responds to these major challenges of our times. This discussion is clustered around four central themes, which explore (i) how to integrate public policy goals (in particular, data protection and environmental sustainability) into competition law, (ii) how to measure non-economic harms and benefits, (iii) when competition law should be more permissive and when prohibitive, and (iv) how competition law could assist in creating a digital and green economy. This latter challenge sits right at the heart of the EU’s transition to a digital and green economy, and could require a careful recalibration of competition policy.

Amazon’s Three Major Lines of Business

Amazon’s Three Major Lines of Business

Edward A. Snyder
Yale University

Jason Canaday
Bates College

Marley Hughes
Yale College

 

ABSTRACT

 

Since its founding in 1995 Amazon has become a leader in eCommerce, cloud computing services, and interactive devices for individuals and homes. In this study, we document the critical steps in Amazon’s development in each line of business. Our review yields insights on (i) how Amazon responded to changes in demand, (ii) the importance of economies of scale, economies of scope, and network effects in Amazon’s efforts to build out its lines of business, and (iii) interrelationships among these three apparently distinct commercial operations. This case study thereby provides insights how Amazon’s Firm Specific Advantages (FSAs) contributed to its successes within and across lines of business. Our analysis further suggests that Amazon developed Dynamic Capabilities (DCs) capabilities that contributed to Amazon’s superior performance. Our analysis is, however, necessarily interim in nature. Given changing market and regulatory conditions, whether Amazon will be able to sustain its performance in which lines of business and in which countries is uncertain.

Interlocking Directorates and Competition in Banking

Interlocking Directorates and Competition in Banking

 

 

Guglielmo Barone

University of Bologna - Department of Economics

Fabiano Schivardi

Luiss Guido Carli - Department of Economics and Finance; Einaudi Institute for Economics and Finance (EIEF); Centre for Economic Policy Research (CEPR)

Enrico Sette

Bank of Italy

 

Abstract

We study the effects on corporate loan rates of an unexpected change in the Italian legislation which forbade interlocking directorates between banks. Exploiting multiple firm-bank relationships to fully account for all unobserved heterogeneity, we find that prohibiting interlocks decreased the interest rates of previously interlocked banks by 16 basis points relative to other banks. The effect is stronger for high quality firms and for loans extended by interlocked banks with a large joint market share. Interest rates on loans from previously interlocked banks become more dispersed. Finally, firms borrowing more from previously interlocked banks expand investment, employment and sales.

Value in Digital Platforms: The Choice of Tradeoffs in the Digital Markets Act

Value in Digital Platforms: The Choice of Tradeoffs in the Digital Markets Act

 

Carmelo Cennamo

Copenhagen Business School - Department of Strategy and Innovation; SDA Bocconi

Juan Santaló

Fundación Instituto de Empresa, S.L. - IE Business School

 

Abstract

The Digital Markets Act makes clear choices about important tradeoffs in value to constrain the arbitrary power and dominance of gatekeepers over digital markets and guarantee a more equitable distribution of value with business users. We argue that the extent those objectives will be realized depend largely on the nature of competition, both the type of competition (within vs. across platforms) and the competition dynamics (Winner-Take-All vs. differentiation). We anticipate that the choices about the tradeoffs in value taken in the DMA will prevent gatekeepers to monopolize the focal market but in very limited cases. This is because the DMA seems to protect specific competitors (some large business users against gatekeepers) rather than competition, as well as protecting only one type of competition (within platform) instead of also, and the more salient for contestability in digital markets, cross platform competition. We discuss these tradeoffs and the implications for competition, value distribution and welfare.

Personalised Pricing, Competition and Welfare

Personalised Pricing, Competition and Welfare

 

 

Harold Houba

VU University Amsterdam, Department of Econometrics; VU University Amsterdam, Tinbergen Institute

Evgenia Motchenkova

VU University Amsterdam - Department of Economics; TILEC

Hui Wang

Beijing Zhengjiang Science and Technology Co., Ltd - Department of Economics

 

Abstract

Data-driven AI pricing algorithms in on-line markets collect consumer information and use it in their pricing technologies. In the simplest symmetric Hotelling's model such technologies reduce prices and profits. We extend Hotelling's model with vertically diferentiated products, cost asymmetries and arbitrary adjustment costs. We provide a characterization of competition in personalized pricing: Sellers compete in offering consumer surplus, personalized prices are constrained monopoly prices and social welfare is maximal. For linear adjustment costs, adopting personalized pricing technology is a dominant strategy for both sellers. We derive conditions under which the most efficient seller increases her profit through personalized pricing. While aggregate consumer surplus increases, consumers with high switching costs may be hurt. Finally, we discuss several extensions of our approach such as oligopoly.

Should private exchanges of list price information be presumed to be anticompetitiv

Should private exchanges of list price information be presumed to be anticompetitive?

 

Timo Klein

Utrecht University School of Economics; Oxera Consulting LLP

Bertram Neurohr

Abstract

Harrington (2021) considers whether—based on economic theory—an agreement between competitors to exchange list price information can be presumed to harm competition. In support of the affirmative, he provides a novel narrative and supporting theoretical analysis based on the premise that, once list prices are set, adjusting them is difficult but not too difficult. Taking into account the novelty of this theory and its relevance for recent competition cases, we consider it useful to explore its potential limitations. We show that both the scope for and magnitude of harm are sensitive to key modelling parameters such as the number of firms, the degree of product substitutability, and the level of marginal cost—sometimes in opposite directions. We also show that there may be no scope for the anticompetitive effect when firms are capacity constrained. Finally, we discuss several qualitative aspects that may undermine the theory of harm: the adaptability of internal pricing processes over time, the lack of verifiability of exchanged list price information, and possible procompetitive or competitively neutral explanations for the conduct. Overall, we consider that, although Harrington provides an insightful new theory of the anticompetitive potential of list price exchanges, their effects are not sufficiently unambiguous to justify a legal presumption of competitive harm.

Bargaining and International Reference Pricing in the Pharmaceutical Industry

Bargaining and International Reference Pricing in the Pharmaceutical Industry

By:

Dubois, Pierre; Gandhi, Ashvin; Vasserman, Shoshana

Abstract:

The United States spends twice as much per person on pharmaceuticals as European countries, in large part because prices are much higher in the US. This fact has led policymakers to consider legislation for price controls. This paper assesses the effects of a US international reference pricing policy that would cap prices in US markets by those offered in reference countries. We estimate a structural model of demand and supply for pharmaceuticals in the US and reference countries like Canada where prices are set through a negotiation process between pharmaceutical companies and the government. We then simulate the counterfactual equilibrium under such international reference pricing rules, allowing firms to internalize the cross-country externalities introduced by these policies. We find that in general, these policies would result in much smaller price decreases in the US than price increases in reference countries. The magnitude of these effects depends on the number, size and market structure of references countries. We compare these policies with a direct bargaining on prices in the US.

Third-Party Sale of Information

Third-Party Sale of Information

By:

Evans, R., Park, I-U.; Park, I-U.

Abstract:

We study design and pricing of information by a monopoly information provider for a buyer in a trading relationship with a seller. The profit-maximizing information structure has a binary threshold character. This structure is inefficient when seller production cost is low. Compared with a situation of no information, the information provider increases welfare if cost is high but reduces it if cost is low. A monopoly provider creates higher welfare than a competitive market in information if the prior distribution of buyer valuations is not too concentrated. Giving the seller a veto over the information contract generates full efficiency.

Pricing with algorithms

Pricing with algorithms

By:

Rohit Lamba; Sergey Zhuk

Abstract:

This paper studies Markov perfect equilibria in a repeated duopoly model where sellers choose algorithms. An algorithm is a mapping from the competitor's price to own price. Once set, algorithms respond quickly. Customers arrive randomly and so do opportunities to revise the algorithm. In the simple game with two possible prices, monopoly outcome is the unique equilibrium for standard functional forms of the profit function. More generally, with multiple prices, exercise of market power is the rule -- in all equilibria, the expected payoff of both sellers is above the competitive outcome, and that of at least one seller is close to or above the monopoly outcome. Sustenance of such collusion seems outside the scope of standard antitrust laws for it does not involve any direct communication.

Data and Market Power

Data and Market Power

By:

Jan Eeckhout; Laura Veldkamp

Abstract:

Might firms' use of data create market power? To explore this hypothesis, we craft a model in which economies of scale in data induce a data-rich firm to invest in producing at a lower marginal cost and larger scale. However, the model uncovers much richer interactions between data, welfare and market power. Data affects risk, firm size and the composition of the goods firms produce, all of which affect markups. The tradeoff between these forces depends on the level of aggregation at which markups are measured. Empirical researchers who measure markups at the product level, firm level or industry level come to different conclusions about trends and cyclical fluctuations in markups. Our results reconcile and re-interpret these facts. The divergence between product, firm and industry markups can be a sign that firms are using data to reallocate production to the goods consumers want most.

Network Externalities, Dominant Value Margins, and Equilibrium Uniqueness

Network Externalities, Dominant Value Margins, and Equilibrium Uniqueness

By:

Jay Pil Choi; Christodoulos Stefanadis

Abstract:

We examine tippy network markets that accommodate price discrimination. The analysis shows that when a mild equilibrium refinement, the monotonicity criterion, is adopted, network competition may have a unique subgame-perfect equilibrium regarding the winner’s identity; the prevailing brand may be fully determined by its product features. We bring out the concept of the dominant value margin, which is a metric of the effectiveness of divide-and-conquer strategies. The supplier with the larger dominant value margin may always sell to all customers in equilibrium. Such a market outcome is not always socially efficient since a socially inferior supplier may prevail if has a stand-alone-benefit advantage and only a modest network-benefit disadvantage.

Mergers and Product Repositioning: Theory and Empirical Evidence

Mergers and Product Repositioning: Theory and Empirical Evidence

 

Soo-Haeng Cho

Carnegie Mellon University - Tepper School of Business

Zijun (June) Shi

Hong Kong University of Science & Technology (HKUST)

Xin Wang

Hong Kong University of Science & Technology (HKUST) - Dept. of Industrial Engineering and Decision Analytics

yushu zeng

Hong Kong University of Science and Technology

Abstract

Mergers often induce firms to modify both product quality and variety. The impact of such changes has received scant attention in merger literature, which mostly focuses on price changes. We develop a game-theoretical model to investigate the changes of quality, variety, and price after a merger and their impacts on firms and consumers. In the case when the merged firm continues to offer the same number of products, we find that the merged firm reduces both product qualities and prices. Although consumers benefit from the lower prices, they are still worse off because of the lower qualities. In the case when the merged firm consolidates product offerings to achieve cost savings, the product quality and price may also be reduced. Due to the reduced quality, consumers can be hurt by such a merger even though they pay a lower price after the merger. These findings are in sharp contrast to the merger literature that studies price alone, which predicts that consumers benefit from a merger if price is reduced after a merger. By comparing the two cases with different numbers of products provided by the merged firm, we find that cost savings from consolidating the products benefit the merged firm, but might hurt consumers. We then find empirical evidence by employing a multi-period difference-in-differences model to investigate the quality and price changes after mergers, using observational data from the airline industry. The empirical findings are consistent with our theoretical results on the merging firms' quality and price changes, which further confirm that a merger must be evaluated in an integrated way by examining its impact on product quality and variety as well as price.

Transaction Costs in Common Ownership

Transaction Costs in Common Ownership

 

Kenneth Khoo

National University of Singapore (NUS) - Faculty of Law

Abstract

A phenomenon known as “Common Ownership” arises when shareholders hold substantial stakes in competing firms. Although recent empirical evidence has illustrated how common concentrated owners are associated with higher product market prices and lower output, scholars remain divided as to the precise mechanism through which common ownership can induce anti-competitive outcomes. In this article, I propose a novel framework to evaluate the plausibility of candidate mechanisms of anti-competitive harm in common ownership. I argue that all disagreements over the anti-competitive mechanisms of common ownership hinge on a central determinant: the transaction costs of internalizing pecuniary externalities between portfolio firms. I define two broad categories of transaction costs: information costs and coordination costs. Information costs relate to costs involved in implementing mechanisms of anticompetitive harm that rely on unilateral effects, while coordination costs relate to costs involved in implementing mechanisms that rely on coordinated effects. Where the transaction costs of internalizing such externalities are positive, common owners will tradeoff the gains from internalizing these externalities with the costs involved in doing so. I characterize this tradeoff by introducing a new parameter – “tailoring”. The degree of tailoring reflects the extent to which a common owner would rationally exert actual control. Highly tailored mechanisms internalize more pecuniary externalities, but incur more transaction costs. On the other hand, untailored mechanisms internalize fewer pecuniary externalities, but incur less transaction costs.

In the context of institutional investing, my analytical framework suggests that institutional investors who are also common owners face large transaction costs in implementing highly tailored mechanisms. These investors are far more likely to pursue relatively untailored mechanisms effects instead. Similarly, institutional investors face relatively large transaction costs in implementing mechanisms which induce unilateral effects, and are thus likely to prefer mechanisms that induce coordinated effects. I contend that optimal policy responses to the anti-competitive effects of common ownership should focus on mechanisms which institutional investors are likely to harness in reducing competition between their portfolio firms. Here, legal reforms can play a critical role in changing the incentives of common owners by increasing the transaction costs of implementing particular mechanisms of anti-competitive harm and in changing the incentives of non-common owners by decreasing the transaction costs of implementing pro-competitive mechanisms. These mechanism specific remedies have significant advantages when compared to competing proposals in the literature.

Private Monopoly and Restricted Entry - Evidence from the Notary Profession

Private Monopoly and Restricted Entry - Evidence from the Notary Profession

 

 

Frank Verboven

KU Leuven

Biliana Yontcheva

Vienna University of Economics and Business

Abstract

We study entry restrictions in a private monopoly: the Latin notary system. Under this widespread system, the state appoints notaries and grants them exclusive rights to certify various important economic transactions, including real estate, business registrations, and marriage and inheritance contracts. We develop an empirical entry model to uncover the current policy goals behind the geographic entry restrictions. The entry model incorporates a spatial demand model to infer the extent of market expansion versus business stealing from entry, and a multi-output production model to determine the markups for real estate and other transactions. We find that the entry restrictions primarily serve producer interests, and give only a small weight to consumer surplus, even conditional on the current high markups. We subsequently perform policy counterfactuals with welfare-maximizing and free entry. We show how reform would generate considerable welfare improvements, and imply a substantial redistribution towards consumers without threatening geographic coverage.

Cost-Price Relationships in a Concentrated Economy

Cost-Price Relationships in a Concentrated Economy

By:

Falk Bräuning; José Fillat; Gustavo Joaquim

Abstract:

The US economy is at least 50 percent more concentrated today than it was in 2005. In this paper, we estimate the effect of this increase on the pass-through of cost shocks into prices. Our estimates imply that the pass-through becomes about 25 percentage points greater when there is an increase in concentration similar to the one observed since the beginning of this century. The resulting above-trend price growth lasts for about four quarters. Our findings suggest that the increase in industry concentration over the past two decades could be amplifying the inflationary pressure from current supply-chain disruptions and a tight labor market.

Oligopoly under incomplete information: on the welfare effects of price discrimination

Oligopoly under incomplete information: on the welfare effects of price discrimination

By:

Daniel F. Garrett (TSE - Toulouse School of Economics - UT1 - Université Toulouse 1 Capitole - Université Fédérale Toulouse Midi-Pyrénées - EHESS - École des hautes études en sciences sociales - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement); Renato Gomes (TSE - Toulouse School of Economics - UT1 - Université Toulouse 1 Capitole - Université Fédérale Toulouse Midi-Pyrénées - EHESS - École des hautes études en sciences sociales - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement, CNRS - Centre National de la Recherche Scientifique); Lucas Maestri (FGV-EPGE - Universidad de Brazil)

Abstract:

We study competition by firms that simultaneously post (potentially nonlinear) tariffs to consumers who are privately informed about their tastes. Market power stems from informational frictions, in that consumers are heterogeneously informed about firms' offers. In the absence of regulation, all firms offer quantity discounts. As a result, relative to Bertrand pricing, imperfect competition benefits disproportionately more consumers whose willingness to pay is high, rather than low. Regulation imposing linear pricing hurts the former but benefits the latter consumers. While consumer surplus increases, firms' profits decrease, enough to drive down utilitarian welfare. By contrast, improvements in market transparency increase utilitarian welfare, and achieve similar gains on consumer surplus as imposing linear pricing, although with limited distributive impact. On normative grounds, our analysis suggests that banning price discrimination is warranted only if its distributive benefits have a weight on the societal objective.

Nonlinear Pricing in Oligopoly: How Brand Preferences Shape Market Outcomes

Nonlinear Pricing in Oligopoly: How Brand Preferences Shape Market Outcomes

By:

Renato Gomes (TSE - Toulouse School of Economics - UT1 - Université Toulouse 1 Capitole - Université Fédérale Toulouse Midi-Pyrénées - EHESS - École des hautes études en sciences sociales - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement, CNRS - Centre National de la Recherche Scientifique); Jean-Marie Lozachmeur (TSE - Toulouse School of Economics - UT1 - Université Toulouse 1 Capitole - Université Fédérale Toulouse Midi-Pyrénées - EHESS - École des hautes études en sciences sociales - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement, CNRS - Centre National de la Recherche Scientifique); Lucas Maestri (FGV-EPGE - Universidad de Brazil)

Abstract:

We study oligopolistic competition by firms practicing second-degree price discrimination. In line with the literature on demand estimation, our theory allows for comovements between consumers' taste for quality and propensity to switch brands. If low-type consumers are sufficiently less (more) brand loyal than high types, (i) quality provision is inefficiently low at the bottom (high at the top) of the product line, and (ii) informational rents are negative (positive) for high types, while positive (negative) for low types. We produce testable comparative statics on pricing and quality provision, and show that more competition (in that consumers become less brand-loyal) is welfare-decreasing whenever it tightens incentive constraints (so much so that monopoly may be welfare-superior to oligopoly). Interestingly, pure-strategy equilibria fail to exist whenever brand loyalty is sufficiently different across consumers types. Accordingly, price/quality dispersion ensues from the interplay between self-selection constraints and heterogeneity in brand loyalty.