Antitrust & Competition Policy Blog

Interoperability in Digital Markets: Boon or Bane for Market Contestability?

Interoperability in Digital Markets: Boon or Bane for Market Contestability?

Marc Bourreau

Telecom ParisTech

Jan Kraemer

University of Passau; Center on Regulation in Europe (CERRE)

Date Written: July 25, 2022

Abstract

Policymakers worldwide discuss whether interoperability obligations are an appropriate regulatory tool to promote contestability and competition in digital markets where network effects are strong. In the EU, the Digital Markets Act imposes horizontal interoperability obligations on dominant messaging services, requiring them to allow rival services to connect to their network. The standard economic wisdom is that interoperability is pro-competitive in the presence of an incumbent with a large user base, because interoperability lowers the entry barriers constituted by network effects. However, we show that this logic is incomplete in the dynamic context of digital services, where only partial interoperability can be achieved and multihoming is economically feasible. Absent full interoperability some proprietary network effects remain and consumers still gravitate to the larger network in order to take advantage of the full richness of features. At the same time, horizontal interoperability lowers the incentives of consumers to multihome services, which is a powerful driver for contestability. We develop a dynamic multi-period model, which formalizes the trade-off between the (imperfect) sharing of network effects through interoperability and reduced incentives to multihome. We highlight that mandated interoperability can impede the ability of a more efficient entrant platform to contest the less efficient dominant platform. Hence, our results have immediate implications for the ongoing policy debate by demonstrating that horizontal interoperability obligations do not only have pro-competitive, but also anti-competitive effects and may thus not be an appropriate remedy for regulating dominant online platforms.

AI Adoption in a Competitive Market

AI Adoption in a Competitive Market

 

Joshua S. Gans

University of Toronto - Rotman School of Management; NBER

 

Abstract

Economists have often viewed the adoption of artificial intelligence (AI) as a standard process innovation where we expect that efficiency will drive adoption in competitive markets. This paper models AI based on recent advances in machine learning that allow firms to engage in better prediction. Using prediction of demand, it is demonstrated that AI adoption is a complement to variable inputs whose levels are directly altered by predictions and use is economised by them (that is, labour). It is shown that, in a competitive market, this increases the short-run elasticity of supply and may or may not increase average equilibrium prices. There are generically externalities in adoption with this reducing the profits of non-adoptees when variable inputs are important and increasing them otherwise. Thus, AI does not operate as a standard process innovation and its adoption may confer positive externalities on non-adopting firms. In the long-run, AI adoption is shown to generally lower prices and raise consumer surplus in competitive markets.

The Competitive Efficacy of Divestitures: An Empirical Analysis of Generic Drug Markets

The Competitive Efficacy of Divestitures: An Empirical Analysis of Generic Drug Markets

 

Viola Chen

Government of the United States of America - Federal Trade Commission

Christopher Garmon

Bloch School of Management

Kenneth Rios

Federal Trade Commission

David Schmidt

Federal Trade Commission

 

Abstract

One approach that antitrust enforcement authorities use to address potentially anticompetitive mergers is to seek divestitures in specific, competitively problematic overlap markets while allowing the rest of the merger to consummate. We evaluate the efficacy of this approach by studying divestitures in 230 generic drug markets ordered by the U.S. Federal Trade Commission to remedy 25 mergers of generic prescription drug manufacturers from 2005 to 2016. We evaluate the evolution of price, number of competitors, number of entrants, concentration, market shares, and exit via contemporaneous comparisons between markets experiencing divestitures to those that did not. We find that after two to four years, divestiture markets evolve to have fewer competitors (0.21 to 0.36 fewer relative to an initial average of 3.8 competitors), driven more by less entry (0.22 to 0.33 fewer relative to an average of approximately one entrant) rather than greater exit, and they exhibit higher concentration (420 to 532 points higher than the pre-divestiture average of 4525 on the 10,000 HHI scale). Average price changes in divestiture markets exceed those in non-divestiture markets by between 1.6% and 5.5% two to four years post-divestiture, although unlike the structural market characteristics, the price differences are not statistically significant. We also find that non-divested competitors more frequently experience market share growth compared to divested counterparts. Lastly, we find that differences in exit rates emerge at the five-year mark (about 9% of divested drugs exit compared to 5% of similar non-divested drugs).

Partial Vertical Ownership, Capacity Investment and Information Exchange in a Supply Chain

Partial Vertical Ownership, Capacity Investment and Information Exchange in a Supply Chain

 

Tal Avinadav

Bar-Ilan University

Noam Shamir

Tel-Aviv University

 

Abstract

Partial vertical ownership describes a situation in which a firm holds financial shares in either its supplier (referred to as partial backward integration) or its customer (partial forward integration). We study the effect of such financial interconnectedness on two operational decisions: capacity investment and information exchange. In our model, a retailer, who has superior information about the future market demand, has passive financial holdings in the supplier. Although this passive financial investment does not enable the retailer to directly influence the supplier’s operational decisions, it does affect the market equilibrium. Specifically, financial interconnectedness between the firms can result in the retailer financing the entire capacity in the market. In addition, we characterize the conditions that ensure that information between the retailer and the supplier can be exchanged via cheap-talk communication. Interestingly, high level of information asymmetry facilitates the exchange of information via cheap-talk in the presence of these financial links. When cheap talk is not possible, we study the separating equilibrium that is achieved through the retailer’s commitment to order in advance. In this case, the separating quantity can either increase or decrease with the level partial vertical ownership, and this trend does not depend the actual level of the financial holdings. We further analyze the incentive of the retailer to conceal demand information by choosing a pooling equilibrium, and conclude with discussing the effect of the financial interconnectedness on the parties’ operational payoffs.

Measuring Deterrence Motives in Dynamic Oligopoly Games

Measuring Deterrence Motives in Dynamic Oligopoly Games

 

Limin Fang

University of British Columbia

Nathan Yang

Cornell University

 

Abstract

This paper presents a new decomposition approach for measuring deterrence motives in dynamic oligopoly games. Our approach yields a scale-free and interpretable measure of deterrence motives that informs researchers about the proportion for which deterrence motives account of all entry motives. We illustrate the use of our new approach by conducting an empirical case study about the dynamics of coffee chain stores in Toronto, Canada from 1989 to 2005. Under this empirical context, our measure of deterrence motives, quantified based on the estimates of structural primitives, suggests that a noticeable proportion of entry motives can be attributed to deterrence, and is as high as 32% for the increasingly dominant coffee chain Starbucks in certain types of markets. In summary, the empirical study demonstrates that our method has the capabilities to establish the "who" and "when" dimensions of deterrence.

Limiting Algorithmic Cartels

Limiting Algorithmic Cartels

 

 

Michal Gal

University of Haifa - Faculty of Law

 

Abstract

Recent studies have proven that pricing algorithms can autonomously learn to coordinate prices, and set them at supra-competitive levels. The growing use of such algorithms mandates the creation of solutions that limit the negative welfare effects of algorithmic coordination. Unfortunately, to date, no good means exist to limit such conduct. While this challenge has recently prompted scholars from around the world propose different solutions, many suggestions are inefficient or impractical, and some might even strengthen coordination.

This challenge requires thinking outside the box. Accordingly, this article suggests four (partial) solutions. The first is market-based, and entails using consumer algorithms to counteract at least some of the negative effects of algorithmic coordination. By creating buyer power, such algorithms can also enable offline transactions, eliminating the online transparency that strengthens coordination. The second suggestion is to change merger review so as to limit mergers that are likely to increase algorithmic coordination. The next two are more radical, yet can capture more cases of such conduct. The third involves the introduction of a disruptive algorithm, which would disrupt algorithmic coordination by creating noise on the supply side. The final suggestion entails freezing the price of one competitor, in line with prior suggestions to address predatory pricing suggested by Edlin and others. The advantages and risks of each solution are discussed. As antitrust agencies around the world are just starting to experiment with different ways to limit algorithmic coordination, there is no better time to explore how best to achieve this important task.

Common Ownership and Relative Performance Evaluation

Common Ownership and Relative Performance Evaluation

 

Miguel Anton

University of Navarra, IESE Business School

Florian Ederer

Yale School of Management; Yale University - Cowles Foundation

Mireia Gine

IESE Business School, University of Navarra ; The University of Pennsylvania

Martin C. Schmalz

CEPR; University of Oxford - Finance; CESifo; European Corporate Governance Institute (ECGI)

Date Written: August 15, 2016

Abstract

We show theoretically and empirically that executives are paid less for their own firm’s performance and more for their rivals’ performance if an industry’s firms are more commonly owned by the same set of investors. Higher common ownership also leads to higher unconditional total pay. We exploit quasi-exogenous variation in common ownership from a mutual fund trading scandal to support a causal interpretation. These findings challenge conventional assumptions in the corporate finance literature about the objective function of the firm.

The Impact of Dollar Store Expansion on Local Market Structure and Food Access

The Impact of Dollar Store Expansion on Local Market Structure and Food Access

 

El Hadi Caoui

Rotman School of Management; University of Toronto at Mississauga - Department of Management

Brett Hollenbeck

University of California, Los Angeles (UCLA) - Anderson School of Management

Matthew Osborne

University of Toronto at Mississauga - Department of Management

Date Written: June 22, 2022

Abstract

This paper studies the expansion of dollar store chains in the U.S. retail landscape following the Great Recession (2008–2019). This expansion has been accompanied by growing public concern over the impact on local retail markets and food accessibility in local communities. We develop an empirical framework to evaluate this impact and the role of entry regulation policies. A dynamic game of entry, exit and investment into spatially differentiated locations is specified, allowing for chain-level economies of density. Reduced-form evidence and counterfactual simulations reveal that dollar store chains compete strongly with the grocery and convenience segments and that dollar store expansion has led to a large decline in the number of grocery stores, and modest but significant reduction in fresh produce consumption.

The Distortive Effects of Antitrust Fines Based on Revenue

The Distortive Effects of Antitrust Fines Based on Revenue

 

 

Yannis Katsoulacos

Athens University of Economics and Business

Vasiliki Bageri

Athens University of Economics and Business

Giancarlo Spagnolo

Stockholm School of Economics (SITE); Centre for Economic Policy Research (CEPR); University of Rome 'Tor Vergata'; EIEF

Abstract

In most jurisdictions, antitrust fines are based on affected commerce rather than on collusive profits, and in some others, caps on fines are introduced based on total firm sales rather than on affected commerce. We uncover a number of distortions that these policies generate, propose simple models to characterize their comparative static properties, and quantify them with simulations based on market data. We conclude by discussing the obvious need to depart from these distortive rules-of-thumb that appear to have the potential to substantially reduce social welfare.

Common Ownership and Relative Performance Evaluation

Common Ownership and Relative Performance Evaluation

 

Miguel Anton

University of Navarra, IESE Business School

Florian Ederer

Yale School of Management; Yale University - Cowles Foundation

Mireia Gine

IESE Business School, University of Navarra ; The University of Pennsylvania

Martin C. Schmalz

CEPR; University of Oxford - Finance; CESifo; European Corporate Governance Institute (ECGI)

Abstract

We show theoretically and empirically that executives are paid less for their own firm’s performance and more for their rivals’ performance if an industry’s firms are more commonly owned by the same set of investors. Higher common ownership also leads to higher unconditional total pay. We exploit quasi-exogenous variation in common ownership from a mutual fund trading scandal to support a causal interpretation. These findings challenge conventional assumptions in the corporate finance literature about the objective function of the firm.

Price Spillovers and Specialization in health Care: The Case of Children's Hospitals

Price Spillovers and Specialization in health Care: The Case of Children's Hospitals

Ian McCarthy & Mehul V. Raval

Specialty hospitals tend to negotiate higher commercial insurance payments, even for relatively routine procedures with comparable clinical quality across hospital types. How specialty hospitals can maintain such a price premium remains an open question. In this paper, we examine a potential (horizontal) differentiation effect in which patients perceive specialty hospitals as sufficiently distinct from other hospitals, so that specialty hospitals effectively compete in a separate market from general acute care hospitals. We estimate this effect in the context of routine pediatric procedures offered by both specialty children’s hospitals as well as general acute care hospitals, and we find strong empirical evidence of a differentiation effect in which specialty children’s hospitals appear largely immune to competitive forces from non-children’s hospitals.

Antitrust and Consumer Protection State Legislation Monitoring Project

Antitrust and Consumer Protection State Legislation Monitoring Project: The ABA Antitrust Section’s Legislation Committee is seeking student and young lawyer volunteers who are interested in contributing to the Antitrust Section by monitoring states’ legislative developments relating to antitrust, privacy, and consumer protection.  Each student will monitor legislative developments in two or three states and prepare blog posts or articles on developments of interest to the antitrust community.  The blog posts are widely distributed to antitrust practitioners and FTC and DOJ officials. This project is a great way to start gaining exposure within the antitrust community.  If interested, please contact Alex Kandalaft at [email protected].

Converging Proposals for Platform Regulation in China, the EU and the U.S.: Comparison and Commentary

Converging Proposals for Platform Regulation in China, the EU and the U.S.: Comparison and Commentary

 

 

Liyang Hou

Shanghai Jiao Tong University (SJTU) - KoGuan Law School

Shuai Han

Shanghai Jiao Tong University (SJTU), KoGuan Law School

Abstract

China's State Administration for Market Regulation in China announced two guidelines in October 2021. The drafted Guidelines for Classification and Grading of Internet Platforms (互联网平台分类分级指南) (“Classification Guidelines”) categorize digital platforms into super, large and medium-to-small platforms by size, and the drafted Guidelines for Implementing Subject Responsibilities on Internet Platforms (互联网平台落实主体责任指南) (“Responsibilities Guidelines”) impose extra responsibilities and obligations when a platform falls into the category of “super” or “large”, with the purpose of securing fair competition, equal internal governance, and an open ecosystem. China is certainly not alone in doing so. The EU adopted the Digital Markets Act (“DMA”) on July 18 2022,. At the other side of the Atlantic, the U.S. House of Representatives, based on a similar idea, formed a set of five bills, trying to implement regulations on Big Tech companies to hold them accountable for a number of anti-competitive conduct. All these guidelines and proposed acts have one common goal that is to seek government regulation against big platform operators outside the box of competition law. What are the difference between these rules or proposals, and what should be the future for platform regulation?

A Systematic Review of Hospital Merger Control in the NHS: Once Upon a Time in England

A Systematic Review of Hospital Merger Control in the NHS: Once Upon a Time in England

 

Edith Loozen

Amsterdam Center for Law & Economics, University of Amsterdam

Abstract

Health systems that use market competition to increase efficiency rely on competition agencies to protect competition. The institutional expectation is that competition agencies protect the effective functioning of market-based health systems by carrying out the surveillance duties bestowed upon them by law. We study hospital merger control in the English NHS in the period 2012-2022. In the early 2000s the UK introduced a choice and competition model to drive delivery of high-quality public hospital services. To make this work, it also brought in external and binding merger control for mergers between NHS foundation trusts by the Competition and Markets Authority (CMA) in 2012. Our research examines the effectiveness of CMA surveillance through the lens of objective competition enforcement. It includes all decisions regarding horizontal mergers involving NHS foundation trusts in the period 2012-2020. We found that the CMA moved from evidence-based and strict law enforcement to biased and lax law enforcement. Rather than sticking to the evidential framework provided by the law, the agency created a fictitious contrast between collaboration and competition. In doing so, it disregarded that mergers are not about collaboration but about consolidation, and that objective merger control serves to protect efficient collaboration by prohibiting consolidation that leads to significant market power. The result was ineffective merger control: the disbenefits of NHS hospital mergers were irrationally underestimated; their benefits irrationally overestimated.

The Political Economy of the Decline in Antitrust Enforcement in the United States

The Political Economy of the Decline in Antitrust Enforcement in the United States

Filippo Lancieri

ETH Zurich Center For Law and Economics; Stigler Center

Eric A. Posner

University of Chicago - Law School

Luigi Zingales

University of Chicago - Booth School of Business; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)

Abstract

Antitrust enforcement in the United States has declined since the 1960s. Building on several new datasets, we argue that this decline did not reflect a popular demand for weaker enforcement or any other kind of democratic sanction. The decline was engineered by unelected regulators and judges who, with a few exceptions, did not express skepticism about antitrust law in confirmation hearings. We find little evidence that academic ideas played an important role in the decline of antitrust enforcement except where they coincided with the interests of big business, which appears to have exercised influence behind the scenes.

The Impact of Apple's App Tracking Transparency on App Monetization

The Impact of Apple's App Tracking Transparency on App Monetization

Reinhold Kesler

University of Zurich

Abstract

Recent years have been characterized by privacy regulations amid concerns of exploitative data collection and use, thereby also setting boundaries to the data economy that fuels today's ad-funded Internet. An example is Apple's App Tracking Transparency (ATT), which necessitates explicit consent for tracking users outside of an app and potentially undermines revenues from advertisements. This paper studies, whether and how app developers turn to payments as an alternative revenue source in response to a more privacy-preserving environment. Specifically, we use rich web-scraped data to compare the monetization of more than 580 thousand apps on Apple before and after the privacy change and across platforms with apps on Google in a difference-in-difference setting. The results suggest that ATT brings back paid apps and reinforces the industry trend towards in-app payments. Although the impact is small, it is more pronounced for apps relying on Apple as a platform and for apps that employ user tracking targeted by the privacy change.

The Competitive Effects of China’s Legal Data Regime

The Competitive Effects of China’s Legal Data Regime

 

Tamar Giladi Shtub

University of Haifa - Faculty of Law

Michal Gal

University of Haifa - Faculty of Law

Abstract

The global race for data-based technological superiority is on. In a world where “data is the new oil,” data-based comparative advantages may affect not only competition between firms but also the balance of power among jurisdictions. In the past two decades China has made important strides in gaining such advantages. Some of China’s comparative advantages are natural. For example, its population size creates unparalleled potential for harvesting data. Some are cultural, such as the traditionally low significance of Western-style privacy concerns. This research focuses on a third, often overlooked, source: comparative advantages created by China’s data regime - the system of policies, laws, regulations, and practices that govern or influence the data value chain. The article provides a detailed outline of China’s data regime, and offers analysis of its possible competitive effects on China and on other jurisdictions.

This analysis also provides a wider context for understanding China’s recent competition law actions against Chinese technology giants, after years of extremely lax policy. Indeed, as this article shows, in order to fully understand China’s actions, it is necessary to consider not only its competition law enforcement but also other ways in which the government is involved in the data value chain. Viewed as such, the article suggests that some of the limitations are simply the expected next stage in the evolution of data markets regulation.

Reforming Australia's Merger Regime

Reforming Australia's Merger Regime

‘Reforming Australia’s Merger Regime’ (2021) 29 Australian Journal of Competition and Consumer Law 285

Julie N. Clarke

Melbourne Law School

Abstract

Australia’s merger control regime recently returned to spotlight following recent statements by Chair of Australia’s Competition and Consumer Commission (ACCC), Rod Sims, that Australia’s current merger laws are ‘failing to adequately protect competition’. This note provides an overview of the development of Australia's current merger laws and an evaluation of the ACCCs 2021 proposals for merger reform, designed to 'begin a key a debate' about merger control in Australia.

Cellular Sep Royalties and 5G: What Should Competition Policy Be?

Cellular Sep Royalties and 5G: What Should Competition Policy Be?

Forthcoming in 5G and Beyond: Intellectual Property and Competition Policy in the Internet of Things (eds. Jonathan M. Barnett and Sean M. O’Connor, Cambridge University Press 2022)

Alexander Galetovic

Universidad Adolfo Ibáñez; Stanford University - The Hoover Institution on War, Revolution and Peace; University of Padua - CRIEP

Stephen Haber

Stanford University - Hoover Institution and Political Science

Lew Zaretzki

Hamilton IPV

Abstract

Over the last 15 years the cellular SEP market has achieved a long-run equilibrium spanning the development, deployment and use of 2G, 3G, 4G, and now 5G technologies. Cumulative royalties have converged to market values, and the market has apportioned them according to the incremental value generated by the intellectual property. In this competitive market, cellular technologies earn Ricardian rents, which are determined by the differential value that they create over alternatives.

The same specialized technology firms that previously helped to develop 3G and 4G are developing 5G in significant part. As with previous wireless generations, standardization, patents, and licensing support vertical specialization. As with prior cellular technologies consumers, enterprises, and implementers can choose among many alternatives to 5G for various tasks. Thus, 5G continues under the conditions underlying the functioning cellular SEP licensing market.

We are therefore not aware of a prima facie argument to justify the intervention of competition authorities to regulate 5G royalties. Competition authorities should instead be watchful over the equilibrium which has existed in the market for cellular SEPs over the past decade or more, ensuring that parties do not undermine it through tactics employed in their quest to maximize their own share of economic surplus. Should parties undermine the equilibrium in this manner, the results could be tragic for the associated technology, product, and service markets.

Doing the Math of Cartels: Unpuzzling Organized Corporate Crimes

Doing the Math of Cartels: Unpuzzling Organized Corporate Crimes

Amanda Athayde

University of Brasilia

Bruna Piazera

João Victor Freitas

Luiz Ros

Priscila Craveiro

Abstract

To assess whether one or more cartel violations have taken place in real life investigations is not an easy task. Are there any parameters to determine whether collusive behaviors are multiple or single infringements, when those organized corporate crimes seem intertwined like a puzzle? Based on the international literature and on a review of the experience of the United States and of the European Union, this paper aims to scrutinize the ten parameters developed by some scholars to unpuzzle those organized corporate crimes. The “Car Wash Operation”, which uncovered a large corruption and cartel scheme in Brazil, is a live example of difficulty to understand if the investigation concerns one single cartel or multiple separate cartels. By an empirical analysis of all public proceedings related to the Car Wash Operation at the Antitrust Authority in Brazil, it will be possible to understand if the ten parameters developed by the scholars were fulfilled or not in real life investigations.