Antitrust & Competition Policy Blog

Editor: D. Daniel Sokol
University of Florida
Levin College of Law

Friday, August 16, 2019

OECD-Inspired Reform: The Case of Corporate Fines for Cartel Conduct

Caron Beaton-Wells, Melbourne Law School and Julie N. Clarke, Melbourne Law School describe OECD-Inspired Reform: The Case of Corporate Fines for Cartel Conduct.

ABSTRACT: One of the legacies of Frederic Jenny’s outstanding stewardship of the Organisation for Economic Cooperation and Development’s (OECD) competition program over almost three decades will be the impact it has had on strengthening the approach taken to anti-cartel enforcement around the world. Within four years of his taking the helm, the OECD issued its influential recommendation calling on member countries to “halt and deter hard core cartels” by ensuring that their laws provide for “effective sanctions, of a kind and at a level adequate to deter firms and individuals” from cartel participation.

August 16, 2019 | Permalink | Comments (0)

Posner on Vertical Restraints

Scott Hemphill (NYU) writes on Posner on Vertical Restraints.

ABSTRACT: This Essay, part of a symposium honoring Richard Posner’s thirty-six years on the bench, considers the influence of Judge Posner’s opinions about antitrust law. I focus on vertical restraints on distribution, an area of doctrine that was transformed over thirty years from a flat (per se) prohibition to a more lenient evaluation under the rule of reason. I identify several strategies that Judge Posner employed in support of this transformation. Some were drawn from his academic work, including a sustained effort to harmonize the legal treatment of restraints whose economic effects suggest they should be treated alike.

A further, less appreciated tactic was to focus attention upon the question of antitrust injury — whether a plaintiff has suffered an injury of the type the antitrust laws are intended to prevent. One of Posner’s first antitrust opinions, Jack Walters & Sons Corp. v. Morton Building, Inc., considered an allegation of unlawful maximum resale price maintenance, which at the time was subject to per se liability. In concluding that plaintiffs had suffered no antitrust injury, Posner opened up a new avenue for criticizing per se liability on economic grounds and a new form of inconsistency between the scope of recovery (narrow) and the scope of liability (broad). Jack Walters paved the way for the eventual demise of per se liability and the use of similar tactics elsewhere in the law.

August 16, 2019 | Permalink | Comments (0)

Hospital-Physician Integration and Hospital Ownership

Robert G. Hansen, Tuck School of Business at Dartmouth and Anant K. Sundaram, Tuck School of Business at Dartmouth study Hospital-Physician Integration and Hospital Ownership.

ABSTRACT: Employment of physicians by hospitals – typically referred to as vertical integration – has increased significantly. Received theories fail to explain a key fact: The extent of vertical integration in not-for-profit (NFP) hospitals is substantially higher than in for-profit (FP) hospitals. We develop a model in which vertical externalities in the joint provision of complementary health care services by independent hospitals and physicians cause total prices and cost to be higher, and quantity, quality and profits to be lower, relative to a vertically integrated organization. This establishes an incentive for hospitals to integrate. We show that these externalities impact NFP hospitals more than they do FPs, so that NFPs have stronger incentives to integrate. Using data on US hospitals from 2000-2015 and with controls for other covariates including state-level “corporate-practice-of-medicine” regulations, we find support for our predictions. Our model not only explains patterns of vertical integration observed in the US hospital industry, but also has surprising implications for the effects of such integration on hospital and physician prices, and hence, for antitrust policy and empirical studies of pricing.

August 16, 2019 | Permalink | Comments (0)

Thursday, August 15, 2019

Do Increasing Markups Matter? Lessons from Empirical Industrial Organization

Steven T. Berry, Martin Gaynor, and Fiona Scott Morton ask Do Increasing Markups Matter? Lessons from Empirical Industrial Organization.

ABSTRACT: This paper considers the recent literature on firm markups in light of both new and classic work in the field of Industrial Organization. We detail the shortcomings of papers that rely on discredited approaches from the “structure-conduct-performance” literature. In contrast, papers based on production function estimation have made useful progress in measuring broad trends in markups. However, industries are so heterogeneous that careful industry specific studies are also required, and sorely needed. Examples of such studies illustrate differing explanations for rising markups, including endogenous increases in fixed cost associated with lower marginal costs. In some industries there is evidence of price increases driven by mergers. To fully understand markups, we must eventually recover the key economic primitives of demand, marginal cost, and fixed and sunk costs. We end by discussing the various aspects of antitrust enforcement that may be of increasing importance regardless of the cause of increased markups.

August 15, 2019 | Permalink | Comments (0)

Why Don't Retail Prices Vary Seasonally with Demand?

R. Butters, Indiana University, Daniel W. Sacks, Indiana University - Kelley School of Business - Department of Business Economics & Public Policy, and Boyoung Seo, Indiana University - Kelley School of Business - Department of Business Economics & Public Policy ask Why Don't Retail Prices Vary Seasonally with Demand?

ABSTRACT: A growing literature suggests that uniform pricing in the face of large demand fluctuations represents a substantial deviation from profit maximization -- a puzzle for economists. We show that this need not be the case, through an investigation of quantity and pricing fluctuations at seasonal frequencies. Focusing on canned soup and light beer, we use scanner data from 17,000 stores to show that seasonal fluctuations in quantities are an order of magnitude larger than prices. Although observed prices fluctuate less than optimal prices in a simple benchmark model, retailers lose little profit from seasonally uniform prices, because demand never approaches becoming inelastic.

August 15, 2019 | Permalink | Comments (0)

The Market for Data Privacy

By: Ramadorai, TarunUettwiller, AntoineWalther, Ansgar
Abstract: We scrape a comprehensive set of US firms' privacy policies to facilitate research on the supply of data privacy. We analyze these data with the help of expert legal evaluations, and also acquire data on firms' web tracking activities. We find considerable and systematic variation in privacy policies along multiple dimensions including ease of access, length, readability, and quality, both within and between industries. Motivated by a simple theory of big data acquisition and usage, we analyze the relationship between firm size, knowledge capital intensity, and privacy supply. We find that large firms with intermediate data intensity have longer, legally watertight policies, but are more likely to share user data with third parties.
   
   
   
URL: http://d.repec.org/n?u=RePEc:cpr:ceprdp:13588&r=com

August 15, 2019 | Permalink | Comments (0)

Leveraging Loyalty Programs Using Competitor Based Targeting

By: Hollenbeck, BrettTaylor, Wayne
Abstract: Loyalty programs are widely used by firms but their effectiveness is subject to debate. These programs provide discounts and perks to loyal customers and are costly to administer, and with uncertain effectiveness at increasing spending or stealing business from rivals. We use a large new dataset on retail purchases before and after joining a loyalty program (LP) at the customer level to evaluate what determines LP effectiveness. We exploit detailed spatial data on customer and store locations, including locations of competing firms. A simple analysis shows that location relative to competitors is the strongest predictor of LP effectiveness, suggesting that LPs work primarily through business stealing and not through other demand expansion. We next estimate what variables best predict LP effectiveness using high-dimensional data on spatial relationships between customers, the focal firm’s stores, and competing stores as well as customers’ historical spending patterns. We use LASSO regularization to show that spatial relationships are more predictive of LP effects than are past sales data. Finally, we show how firms can use this type of predictive analytics model to leverage customer and competitor location data to substantially increase the performance of their LP through spatially driven targeting rules.
   
   
   
URL: http://d.repec.org/n?u=RePEc:pra:mprapa:92900&r=com

August 15, 2019 | Permalink | Comments (0)

Wednesday, August 14, 2019

Milking the Milkers: A Study on Buyer Power in the Dairy Market of Peru

By: José A. Tavera (Departamento de Economía de la Pontificia Universidad Católica del Perú); Tilsa Oré Mónago
Abstract: The literature on imperfect competition suggests the existence of two conditions facilitating the exercise of buyer market power: the existence of an inelastic and upward-sloping supply, and the existence of high concentration in purchases. In this study, we use monthly aggregate data (from 1999-2014) of the raw milk market in Peru. We test whether those conditions hold, by analyzing the market and estimating the supply elasticity. Our findings suggest the existence of buyer power in raw milk market since an inelastic raw milk supply and a highly concentrated market is verified. Our assessment is reinforced with the role played by the existing market power of the firms at the downstream segment and the existence of entry barriers in that market segment. JEL Classification-JEL: L11, L12, L13, L41, L42
   
   
URL: http://d.repec.org/n?u=RePEc:pcp:pucwps:wp00470&r=com

August 14, 2019 | Permalink | Comments (0)

What is the Impact of Increased Business Competition?

By: Sónia FélixChiara Maggi
Abstract: This paper studies the impact of a structural reform that reduces entry costs for firms. We provide novel empirical evidence on the response of firms’ entry, employment, and exit behavior. To do so, we use as a natural experiment a reform in Portugal that significantly reduced entry time and costs. We find that the reform had an expansionary impact: firm entry and employment increased by 25% and 4% per year, respectively. Moreover, around 60% of the increase in employment came from incumbent firms expanding their size, with most of the rise occurring among the firms that were the most productive before the reform. Standard models of entry, exit, and firm dynamics, which assume a constant elasticity of substitution, are inconsistent with our findings about the heterogeneous response of incumbents to the reform. We show that a model with heterogeneous firms and variable markups accounts for our evidence. In this framework, the most productive firms face a lower demand elasticity and increase their employment in response to the entry of new firms.
   
   
URL: http://d.repec.org/n?u=RePEc:ptu:wpaper:w201904&r=com

August 14, 2019 | Permalink | Comments (0)

What is the Impact of Increased Business Competition?

By: Sónia FélixChiara Maggi
Abstract: This paper studies the impact of a structural reform that reduces entry costs for firms. We provide novel empirical evidence on the response of firms’ entry, employment, and exit behavior. To do so, we use as a natural experiment a reform in Portugal that significantly reduced entry time and costs. We find that the reform had an expansionary impact: firm entry and employment increased by 25% and 4% per year, respectively. Moreover, around 60% of the increase in employment came from incumbent firms expanding their size, with most of the rise occurring among the firms that were the most productive before the reform. Standard models of entry, exit, and firm dynamics, which assume a constant elasticity of substitution, are inconsistent with our findings about the heterogeneous response of incumbents to the reform. We show that a model with heterogeneous firms and variable markups accounts for our evidence. In this framework, the most productive firms face a lower demand elasticity and increase their employment in response to the entry of new firms.
   
   
URL: http://d.repec.org/n?u=RePEc:ptu:wpaper:w201904&r=com

August 14, 2019 | Permalink | Comments (0)

Uncertainty and Risk-aversion in a Dynamic Oligopoly with Sticky Prices

By: Edilio Valentini (Department of Economics, University of Chieti-Pescara); Paolo Vitale (Department of Economics, University of Chieti-Pescara)
Abstract: In this paper we present a dynamic discrete-time model that allows to investigate the impact of risk-aversion in an oligopoly characterized by a homogeneous non-storable good, sticky prices and uncertainty. Our model nests the classical dynamic oligopoly model with sticky prices by Fershtman and Kamien (Fershtman and Kamien, 1987), which can be viewed as the continuous-time limit of our model with no uncertainty and no risk-aversion. Focusing on the continuous-time limit of the infinite horizon formulation we show that the optimal production strategy and the consequent equilibrium price are, respectively, directly and inversely related to the degrees of uncertainty and risk-aversion. However, the effect of uncertainty and risk-aversion crucially depends on price stickiness since, when prices can adjust instantaneously, the steady state equilibrium in our model with uncertainty and risk aversion collapses to Fershtman and Kamien’s analogue.
   
   
   
URL: http://d.repec.org/n?u=RePEc:fem:femwpa:2019.03&r=com

August 14, 2019 | Permalink | Comments (0)

Tuesday, August 13, 2019

Exploitation of Labor? Classical Monopsony Power and Labor's Share

By: Wyatt J. BrooksJoseph P. KaboskiYao Amber LiWei Qian
Abstract: How important is the exercise of classical monopsony power against labor for the level of wages and labor's share? We examine this in the context of China and India – two large, rapidly-growing developing economies. Using theory, we develop a novel screen to quantify how wages are affected by market power exerted in labor markets, either by a single firm or a group of cooperating firms. The theory guides the measurement of labor “markdowns”, i.e., the gap between wage and the value of the marginal product of labor, and the screen examines how they comove with local labor market share and the share of cooperating firms. Applying this test, we find that markdowns substantially lower the labor share: by up to 10 percentage points in China and 15 percentage points in India. This impact has fallen over time in both countries as firm concentration in these labor markets has decreased.
   
   
URL: http://d.repec.org/n?u=RePEc:nbr:nberwo:25660&r=com

August 13, 2019 | Permalink | Comments (0)

Vertical Integration and Foreclosure: Evidence from Production Network Data

By: Johannes Boehm (Département d'économie); Jan Sonntag (Département d'économie)
Abstract: This paper studies the prevalence of vertical market foreclosure using a novel dataset on U.S. and international buyer-seller relationships, and across a large range of industries. We find that relationships are more likely to break when suppliers vertically integrate with one of the buyers’ competitors than when they vertically integrate with an unrelated firm. This relationship holds also, among other things, when conditioning on mergers that follow exogenous downward pressure on the supplier’s stock prices, suggesting that reverse causality is unlikely to explain the result. In contrast, the relationship vanishes when using rumored or announced but not completed integration events. Firms experience a substantial drop in sales when one of their suppliers integrates with one of their competitors. This sales drop is mitigated if the firm has alternative suppliers in place.
   
   
   
URL: http://d.repec.org/n?u=RePEc:spo:wpecon:info:hdl:2441/44gofgf80399mp5fq5q50vv5t6&r=com

August 13, 2019 | Permalink | Comments (0)

Price competition with uncertain quality and cost

By: Sander Heinsalu
Abstract: Consumers in many markets are uncertain about firms' qualities and costs, so buy based on both the price and the quality inferred from it. Optimal pricing depends on consumer heterogeneity only when firms with higher quality have higher costs, regardless of whether costs and qualities are private or public. If better quality firms have lower costs, then good quality is sold cheaper than bad under private costs and qualities, but not under public. However, if higher quality is costlier, then price weakly increases in quality under both informational environments, but with asymmetric information, full separation cannot occur.
   
URL: http://d.repec.org/n?u=RePEc:arx:papers:1903.03987&r=com

August 13, 2019 | Permalink | Comments (0)

Advertising strategy in the presence of reviews: An empirical analysis

By: Hollenbeck, BrettMoorthy, SridharProserpio, Davide
Abstract: We study the relationship between online reviews and advertising spending in the hotel industry. Combining a dataset of TripAdvisor reviews with other datasets describing these hotels’ advertising expenditures, we show, first, that online ratings have a causal demand-side effect on ad spending. Second, this effect is negative: hotels with higher ratings spend less on advertising than hotels with lower ratings. This suggests that hotels treat TripAdvisor ratings and advertising spending as substitutes, not complements. Third, the relationship is stronger for independent hotels than for chains, and stronger in less differentiated markets than in more differentiated markets. The former suggests that a strong brand name continues to provide some immunity to reviews and the latter that the advertising response is stronger when ratings are more likely to be pivotal. Finally, we show that the relationship between online ratings and advertising has strengthened over time, just as TripAdvisor has become more popular, implying that firms respond to online reviews if and only if consumers respond to them.
   
   
   
URL: http://d.repec.org/n?u=RePEc:pra:mprapa:92753&r=com

August 13, 2019 | Permalink | Comments (0)

Monday, August 12, 2019

The impact of price adjustment costs on price dispersion in E-commerce

By: Böheim, RenéHackl, FranzHölzl-Leitner, Michael
Abstract: We analyze price dispersion using panel data from a large price comparison site. We use past pricing behavior to instrument for potential endogeneity that might result from the selection of firms to certain product markets. We find that greater price adjustment costs result in greater price dispersion. Although the impact of price adjustment costs on price dispersion became weaker over time, the causal effect of price adjustment costs on price dispersion is still present at the end of the period. Our results are robust to many alternative empirical speciffications. We also test a range of alternative explanations of price dispersion, such as search cost, service differentiation, obfuscation, vertical restraints, and market structure.
   
   
URL: http://d.repec.org/n?u=RePEc:wiw:wus005:6861&r=com

August 12, 2019 | Permalink | Comments (0)

Market size, product differentiation and bidding for new varities

By: Jie Ma (University of Business and Economics); Ian Wooton (Department of Economics, University of Strathclyde)
Abstract: We analyse a firm's investment in a regional economy composed of two countries. The firm already manufactures a horizontally differentiated good in the region and we determine the firm's equilibrium location choice for the new good and the welfare consequences of fiscal competition between the two countries. We find that the firm's location decision is efficient. Fiscal competition does not affect the location of production but redistributes rents between the firm and the taxpayers of the host country. The implications of endogenous product differentiation and the new good being produced by a competing firm are also considered. As far as we know the tax competition literature has not previously addressed the issue of product differentiation.
   
   
   
URL: http://d.repec.org/n?u=RePEc:str:wpaper:1903&r=com

August 12, 2019 | Permalink | Comments (0)

Reference pricing systems on the pharmaceutical market

By: Unsorg, Maximiliane
Abstract: Constantly rising expenditures for pharmaceuticals require government intervention in firms' pricing decisions. To this end, reference pricing systems are a frequently employed regulatory mechanism. This paper considers a duopoly market with vertically differentiated firms under different competition types. Starting from the existing literature it can be confirmed that the introduction of a reference price leads to lower equilibrium prices and induces fiercer competition between firms. Further, it can be shown that reference pricing promotes generic usage and leads to an increased market coverage. Hence, an improved provision of medical supply is achieved due to the lower prices and the stimulated demand for drugs. The paper demonstrates that even under the increased demand consumer and insurance expenditures are reduced. The model isolates the mechanisms of reference pricing and shows the effects on the consumer decisions. Lastly, consumer surplus increases when implementing the regulation.
   
   
   
URL: http://d.repec.org/n?u=RePEc:zbw:tuewef:115&r=com

August 12, 2019 | Permalink | Comments (0)

10 Things to Know About the ACCC’s Digital Platforms Inquiry

Caron Beaton-Wells, “10 Things to Know About the ACCC’s Digital Platforms Inquiry”, Competition Policy International, Oceania Column, August 2019, at https://www.competitionpolicyinternational.com/wp-content/uploads/2019/08/Oceania-Column-August-2019-Full.pdf.

August 12, 2019 | Permalink | Comments (0)

Superstars in two-sided markets: exclusives or not?

By: Elias CarroniLeonardo MadioShiva Shekhar
Abstract: This article studies incentives for a premium provider (Superstar) to offer exclusive contracts to competing platforms mediating the interactions between consumers and firms. When platform competition is intense, more consumers subscribe to the platform hosting the Superstar exclusively. This mechanism is self-reinforcing as firms follow consumer decisions and (some) join exclusively the platform with the Superstar. Exclusivity always benefits firms and may benefit consumers. Moreover, when the Superstar is integrated with a platform, non-exclusivity becomes more likely than if the Superstar was independent. This analysis provides several implications for managers and policy makers operating in digital and traditional markets.
   
   
   
URL: http://d.repec.org/n?u=RePEc:ces:ceswps:_7535&r=com

August 12, 2019 | Permalink | Comments (0)