Tuesday, January 18, 2022

What Creates Abnormal Profits: Collusion, Efficiency or Strategy?

What Creates Abnormal Profits: Collusion, Efficiency or Strategy?

 

 

Elizabeth Webster

Swinburne University of Technology; University of Melbourne - Melbourne Institute: Applied Economic & Social Research

William E. Griffiths

University of Melbourne - Department of Economics

Paul H. Jensen

University of Melbourne - Melbourne Institute of Applied Economic and Social Research

 

Abstract

The debate regarding the determinants of persistent abnormal profits is re-examined using a new approach to the measurement of profits which explicitly accounts for intangible capital. Abnormal profits are estimated using data on tangible and intangible capital for 2800 Australian firms over a 18-year period. The determinants of abnormal profits are then estimated using variables collated from separate accounting and administrative company records data as well as an in-house survey of innovation and management practices. Our results imply that firm-specific factors relating to efficiency and strategy are much larger than the industry-specific effects of collusion

January 18, 2022 | Permalink | Comments (0)

Monday, January 17, 2022

The Application of Antitrust Law to Labor Markets — Then and Now

The Application of Antitrust Law to Labor Markets — Then and Now

 

 

Richard A. Epstein

New York University School of Law; Stanford University - Hoover Institution on War, Revolution and Peace; University of Chicago - Law School

 

Abstract

As of late, there has been a concerted push in the Biden administration, backed by prominent academics, to expand the application of antitrust law against major employers who exercise monopsony power that reduces aggregate demand and thus leaves too many workers on the sidelines. The effort chiefly occurs in two major areas: stricter attacks on covenants not to compete and more intense review of mergers under the Clayton Act. This paper begins with an historical account of the law in both areas, from which it concludes that there is no good reason to alter the status quo ante. The modern claims of antitrust violations are said to rest on the traditional consumer welfare standard. But the theoretical and empirical evidence on this point is thin. Turnover rates in labor markets are high, labor shortages are now common; wage growth varies by presidential administration that changes, and not antitrust law, which has been constant. Other labor policies like anti-discrimination laws, paid leave policies, and minimum wage and overtime laws exert a more direct power. No systematic evidence suggests the current (cautious) acceptance of non-compete clauses allows large numbers of major employers to extract monopsony profits. The only employers with market power work in markets (like hospitals subject to certificates of need), where these formal barriers to entry make these mergers suspect for excessive concentration in product markets, leaving it utterly unwise to pore over concentration ratios in thousands of discrete labor markets. Any concern with monopoly influence in labor markets should seek to weaken the hold of public and private unions, consistent with the consumer welfare standard.

January 17, 2022 | Permalink | Comments (0)

Friday, January 14, 2022

Preemptive Entry and Technology Diffusion: The Market for Drive-in Theaters

Preemptive Entry and Technology Diffusion: The Market for Drive-in Theaters

Ricard Gil (rg73@queensu.ca), Jean-François HoudeShilong Sun and Yuya Takahashi

 

Abstract: This paper studies the role and incidence of entry preemption strategic motives on the dynamics of new industries, while providing an empirical test for entry preemption, and quantifying its impact on market structure. The empirical context is the evolution of the U.S. drive-in theater market between 1945 and 1957. We exploit a robust prediction of dynamic entry games to test for preemption incentives: the deterrence effect of entering early is only relevant for firms in markets of intermediate size. Potential entrants in small and large markets face little uncertainty about the actual number of firms that will eventually enter. This leads to a non-monotonic relationship between market size and the probability of observing an early entrant. We find robust empirical support for this prediction using a large cross-section of markets. We then estimate the parameters of a dynamic entry game that matches the reduced-form prediction and quantify the strength of the preemption incentive. Our counterfactual analysis shows that strategic motives can increase the number of early entrants by as much as 50 percent in mid-size markets without affecting the number of firms in the long run. By causing firms to enter the market too early, we show that strategic entry preemption leads on average to a 5% increase in entry costs and a 1% decrease in firms' expected value (relative to an environment without strategic investments).

January 14, 2022 | Permalink | Comments (0)

Thursday, January 13, 2022

Organizational Structure and Pricing: Evidence from a Large U.S. Airline

Organizational Structure and Pricing: Evidence from a Large U.S. Airline

 
ABSTRACT:

January 13, 2022 | Permalink | Comments (0)

Wednesday, January 12, 2022

Can the FTC Turn Back the Clock?

Can the FTC Turn Back the Clock?

 

Gregory J. Werden

Luke M. Froeb

Vanderbilt University - Owen Graduate School of Management

 

Abstract

Eager to shed constraints imposed by Sherman Act precedent, New FTC Chair Lina M. Khan issued a statement declaring her intention to attack “unfair methods of competition even if they do not violate a separate antitrust statute.” She has sought to distance herself from the Sherman Act’s rule of reason and find shelter in the incipiency concept. We argue that she misconstrues both concepts and that she will fail if she makes departure from Sherman Act precedent her rallying cry. But she can succeed by acting on fact-based, forward-looking assessments of competitive effects.

January 12, 2022 | Permalink | Comments (0)

Tuesday, January 11, 2022

Consolidation on Aisle Five: Effects of Mergers in Consumer Packaged Goods

Consolidation on Aisle Five: Effects of Mergers in Consumer Packaged Goods

 

Jeremy Majerovitz

Massachusetts Institute of Technology (MIT) - Department of Economics

Anthony Yu

Harvard University, Department of Economics

Abstract

We study the effects of mergers in the consumer packaged goods industry, a sector that comprises approximately one-tenth of GDP in the United States. We match data on all recorded mergers between 2006 and 2017 with retail scanner data. In comparison to prior work, which focuses on case studies of large mergers, our approach allows us to estimate the effect of a typical merger. Most mergers we study are highly asymmetric (a large firm acquires a much smaller firm) and rarely challenged. By studying these mergers, we provide new evidence on the effects of mergers on prices, quantities, product availability, and exit. On average, mergers lead to a short-run price effect at the target of 1% and declines in total revenue of 7%. These average effects hide substantial heterogeneity across different groups of mergers. Our results highlight the importance of effects not captured in the canonical model, such as effects on consumer surplus through changes in product availability, and through inefficient firms' capital being repurposed by more productive acquirors.

January 11, 2022 | Permalink | Comments (0)

Monday, January 10, 2022

EU Competition Law Volume II: Mergers and Acquisitions 3rd edition

EU Competition Law Volume II: Mergers and Acquisitions 3rd edition

Edited by Christopher Jones, Principal, Energy Regulatory and Antitrust, Baker McKenzie, Brussels, Part-time Professor, Energy Law and Policy, European University Institute, Italy and Lisa Weinert, Associate, European and Competition Law Practice, Baker McKenzie, Brussels, Belgium
Publication Date: January 2022 ISBN: 978 1 80220 345 5 Extent: 1680 pp
This book is a Claeys and Casteels title, now formally part of Edward Elgar Publishing.

With extensive updating in the decade since the publication of the second edition, and written by the key Commission and European Court officials in this area, as well as leading practitioners, the third edition of this unique title provides meticulous and exhaustive coverage of EU Merger Law.

January 10, 2022 | Permalink | Comments (0)

A Retrospective Study of Recent U.S. Airline Mergers: What Can We Learn from Production Data?

A Retrospective Study of Recent U.S. Airline Mergers: What Can We Learn from Production Data?

Germán Bet

University of Florida

Abstract

I assess the effect of recent U.S. airline mergers on productive efficiency and market power. I recover productivity, markup, and marginal cost estimates for each airline using production and cost data. I then employ these estimates, a panel event study design, and synthetic control methods to estimate the effects of mergers on these outcomes. I find that in most cases, mergers have not significantly affected merging parties’ productive efficiency, and in a few cases, have increased marginal costs. Some mergers, such as the American-US Airways merger, have substantially increased the markups charged. The increase in markups is not explained by efficiencies, proportionally higher fixed costs, or changes in technology (i.e., a larger scale elasticity). Instead, the net profit rate has increased for these carriers after the mergers. Indirect evidence suggests that quality effects cannot account fully for the observed markup changes. Taken together, these findings point to an increase in market power.

January 10, 2022 | Permalink | Comments (0)

Friday, January 7, 2022

Two-Sided Matching between Fashion Firms and Publishers: When Firms Strategically Target Consumers for Brand Image

Two-Sided Matching between Fashion Firms and Publishers: When Firms Strategically Target Consumers for Brand Image

 

 

Alex Yao Yao

Fowler College of Business, San Diego State University

Sha Yang

University of Southern California - Marshall School of Business

K. Sudhir

Yale School of Management; Yale University-Department of Economics; Yale University - Cowles Foundation

 

Abstract

Many fashion companies strategically choose publishers for advertising to target preferred consumers, because such consumers not only generate revenue, they also influence the companies’ brand image. Meanwhile, publishers also select companies because the ads posted by companies affect publishers’ image as well. It is important to jointly model the preferences of firms and publishers in this scenario, because observed advertising is an outcome of mutual selection from both sides. We develop a two-sided matching framework to model advertising as realized from such a two-sided selection process. The preference of a third party (consumers) is embedded in this framework through a consumer product choice model. Applying the proposed model to two unique datasets of fashion brand purchases, magazine readership, and advertising record, we are able to detect magazines and watch brands’ preferences separately. More expensive magazines also prefer more luxurious fashion watch brands. Watch brands prefer magazines with a potential consumer network with more male, well-educated and wealthy readers. Advertising effect is more prominent in terms of consumers’ awareness set formation compared to the brand purchase persuasion in general, but Asian brands can benefit more from advertising at the brand choice stage instead of the awareness formation stage.

January 7, 2022 | Permalink | Comments (0)

Thursday, January 6, 2022

Common Ownership Reduces Wages and Employment

Common Ownership Reduces Wages and Employment

 

José Azar

University of Navarra, IESE Business School; CEPR

Yue Qiu

Temple University

Aaron Sojourner

University of Minnesota; IZA Institute of Labor Economics

 

Abstract

In this study, we examine the effects of common ownership on labor market outcomes. We find that an increase in common ownership in a labor market is associated with decreases in both wages per employee and the employment-to-population ratio. We conduct an event study based on the acquisition of Barclays Global Investors by BlackRock in 2009. Using a synthetic control method, we find that markets that were more affected by the acquisition experienced post-acquisition decreases in annual wages per employee and employment-to-population ratio relative to the counterfactual of no acquisition. The estimated treatment effects of the acquisition were stronger in markets with higher unemployment rates, lower personal income per capita, lower population density, and stricter enforcement of noncompete clauses.

January 6, 2022 | Permalink | Comments (0)

Wednesday, January 5, 2022

Rising Markups and the Role of Consumer Preferences

Rising Markups and the Role of Consumer Preferences

 

Hendrik Döpper

Heinrich Heine University Dusseldorf - Duesseldorf Institute for Competition Economics (DICE)

Alexander MacKay

Harvard University - Business School (HBS)

Nathan Miller

Georgetown University - Robert Emmett McDonough School of Business

Joel Stiebale

Heinrich Heine University Dusseldorf - Duesseldorf Institute for Competition Economics (DICE)

 

Abstract

We characterize the evolution of markups for consumer products in the United States from 2006 to 2019. We use detailed data on prices and quantities for products in more than 100 distinct product categories to estimate demand systems with flexible consumer preferences. We recover markups under an assumption that firms set prices to maximize profit. Within each product category, we recover separate yearly estimates for consumer preferences and marginal costs. We find that markups increase by about 25 percent on average over the sample period. The change is attributable to decreases in marginal costs that are not passed through to consumers in the form of lower prices. Our estimates indicate that consumers have become less price sensitive over time.

January 5, 2022 | Permalink | Comments (0)

Tuesday, January 4, 2022

Merger efficiencies and price effects in differentiated Cournot oligopoly

Merger efficiencies and price effects in differentiated Cournot oligopoly

Jeremy Sandford

Compass Lexecon

Abstract

Suppose differentiated firms compete in quantities. This paper derives a formula for the minimum cost savings that would offset the incentive to increase price created by a merger. The formula depends only on pre-merger information on margins and demand slopes, and is invariant to demand and cost curvature. The paper then develops an algorithm to infer demand slopes -- and thus allow calibration of parameterized demand and cost curves -- from pre-merger data. While the Cournot model of quantity competition is commonly accompanied by an assumption that rivals' products are interchangeable, the inflexibility of this assumption and its implications opens the model to criticisms. The paper examines the advantages of relaxing the assumption of interchangeability, in particular greater consistency with pre-merger data and greater scope for profitable mergers. An extended numerical example illustrates the application of a differentiated Cournot model to a hypothetical industry.

January 4, 2022 | Permalink | Comments (0)

Monday, January 3, 2022

What Should We Do About The Big Tech Monopolies?

Randy Picker (Chicago) shares his thoughts on What Should We Do About The Big Tech Monopolies?

January 3, 2022 | Permalink | Comments (0)

Towards Efficient Information Sharing in Network Markets

Towards Efficient Information Sharing in Network Markets

 

 

Bertin Martens

Joint Research Centre; Tilburg Law and Economics Center (TILEC)

Geoffrey Parker

Dartmouth College

Georgios Petropoulos

Massachusetts Institute of Technology (MIT); Bruegel; Stanford University

Marshall W. Van Alstyne

Boston University – Questrom School of Business; Massachusetts Institute of Technology (MIT) - Sloan School

Abstract

Digital platforms facilitate interactions between consumers and merchants that allow collection of profiling information which drives innovation and welfare. Private incentives, however, lead to information asymmetries resulting in market failures both on-platform, among merchants, and off-platform, among competing platforms. This paper develops two product differentiation models to study private and social incentives to share information within and between platforms. We show that there is scope for ex-ante regulation of mandatory data sharing that improves social welfare better than competing interventions such as barring entry, break-up, forced divestiture, or limiting recommendation steering. These alternate proposals do not make efficient use of information. We argue that the location of data access matters and develop a regulatory framework that introduces a new data right for platform users, the in-situ data right, which is associated with positive welfare gains. By construction, this right enables effective information sharing, together with its context, without reducing the value created by network effects. It also enables regulatory oversight but limits data privacy leakages. We discuss crucial elements of its implementation in order to achieve innovation friendly and competitive digital markets.

January 3, 2022 | Permalink | Comments (0)

Friday, December 31, 2021

Retail Markups and Discount-Store Entry

Retail Markups and Discount-Store Entry

 

Lauren Chenarides

Arizona State University

Miguel Ignacio Gomez

Cornell University - Food Industry Management Program

Timothy J. Richards

Arizona State University W. P. Carey School of Business

Koichi Yonezawa

Cornell University - Dyson School of Applied Economics and Management

 

Abstract

"Hard discounters" are retail formats that set retail food prices even lower than existing discount formats, such as Walmart and Target. Offering limited assortments and focusing on store-brands, these formats promise to change the competitive landscape of food retailing. In this paper, we study the effect of entry of one hard-discount format on markups earned by existing retail stores, focusing on several important grocery markets across the Eastern U.S. Focusing on establishment-level profitability, we estimate store-level markups using the production-side approach of De Loecker and Warzynski (2012). We find that hard-discounter entry had the expected effect of reducing margins from similar stores, but did not affect markups earned by stores in the same market that are likely to appeal to a different market segment. In general, hard-discounter entry reduced markups for incumbent retailers by 7:3% relative to markups in non-entry markets. These results indicate that the net effect of hard-discounter entry reduces the overall level of store profitability, regardless of higher sales realized by incumbent retailers.

December 31, 2021 | Permalink | Comments (0)

Thursday, December 30, 2021

Market Entry, Fighting Brands, and Tacit Collusion: Evidence from the French Mobile Telecommunications Market

Marc BourreauYutec Sun and Frank Verboven

Abstract

We study a major new entry in the French mobile telecommunications market, followed by the introduction of fighting brands by the three incumbents. Using an empirical oligopoly model, we find that the incumbents’ fighting brand strategies are difficult to rationalize as unilateral best responses. Instead, their strategies are consistent with a breakdown of tacit semi-collusion: before entry, the incumbents could successfully coordinate on restricting product variety to avoid cannibalization; after entry, this outcome became harder to sustain because of increased business stealing incentives. Consumers gained considerably from the added variety and, to a lesser extent, from the incumbents’ price responses

December 30, 2021 | Permalink | Comments (0)

Wednesday, December 29, 2021

Consolidation on Aisle Five: Effects of Mergers in Consumer Packaged Goods

Consolidation on Aisle Five: Effects of Mergers in Consumer Packaged Goods

 

Jeremy Majerovitz

Massachusetts Institute of Technology (MIT) - Department of Economics

Anthony Yu

Harvard University, Department of Economics

 

Abstract

We study the effects of mergers in the consumer packaged goods industry, a sector that comprises approximately one-tenth of GDP in the United States. We match data on all recorded mergers between 2006 and 2017 with retail scanner data. In comparison to prior work, which focuses on case studies of large mergers, our approach allows us to estimate the effect of a typical merger. Most mergers we study are highly asymmetric (a large firm acquires a much smaller firm) and rarely challenged. By studying these mergers, we provide new evidence on the effects of mergers on prices, quantities, product availability, and exit. On average, mergers lead to a short-run price effect at the target of 1% and declines in total revenue of 7%. These average effects hide substantial heterogeneity across different groups of mergers. Our results highlight the importance of effects not captured in the canonical model, such as effects on consumer surplus through changes in product availability, and through inefficient firms' capital being repurposed by more productive acquirors.

December 29, 2021 | Permalink | Comments (0)

Tuesday, December 28, 2021

App Stores, Aftermarkets & Antitrust

App Stores, Aftermarkets & Antitrust

 

 

John M. Yun

George Mason University - Antonin Scalia Law School, Faculty

 

Abstract

App stores have become the subject of controversy and criticism within antitrust. For instance, app developers such as Spotify and Epic Games (creator of Fortnite) allege that Apple’s 30 percent cut of all sales in the App Store violates the antitrust laws and is indicative of monopoly power. The idea is that iPhone users are locked into Apple’s walled garden iOS platform, which frees Apple to engage in misconduct in the App Store “aftermarket” to the detriment of users and app developers.

This Article challenges the recent economic and legal characterizations of app stores and the nature of the alleged harm. First, this Article builds an accessible, economic framework to illustrate how app stores do not represent the same type of aftermarkets that were condemned in the Supreme Court’s landmark Kodak case. Importantly, the differences between Kodak-like aftermarkets and app store aftermarkets raise serious questions whether the digital revival of the aftermarket doctrine conforms with the economic realities of these markets.

Second, the complexity of the commercial relationships found in app stores has raised questions regarding who has standing to seek antitrust damages in this type of market setting. This Article provides an overview of the development of the current doctrine of antitrust standing—focusing on Illinois Brick and Apple v. Pepper. Further, this Article contends that Justice Kavanaugh’s opinion in Pepper, which gave iPhone users the right to sue Apple over the 30 percent commission, was right for the wrong reason. Instead, Justice Gorsuch’s dissent offers a much more economically sound approach to antitrust standing—as his “proximate cause” standard does not artificially focus on identifying the “direct purchaser,” which is unnecessarily limiting for more complex commercial relationships. As the number of antitrust claims against various app stores proliferate, the consequences of faulty characterizations of app stores will only grow.

December 28, 2021 | Permalink | Comments (0)

Monday, December 27, 2021

A Web of Paradoxes: Empirical Evidence on Online Platform Users and Implications for Competition and Regulation in Digital Markets

A Web of Paradoxes: Empirical Evidence on Online Platform Users and Implications for Competition and Regulation in Digital Markets

 

 

Pinar Akman

School of Law, University of Leeds

 

Abstract

This article presents and analyses the results of a large-scale empirical study in which over 11,000 consumers from ten countries in five continents were surveyed about their use, perceptions and understanding of online platform services. To the author’s knowledge, this is the first cross-continental, multi-platform empirical study of users of online platform services of its kind. Amongst others, the study probed platform users about their multi-homing and switching behaviour; engagement with defaults; perceptions of quality, choice, and well-being; attitudes towards targeted advertising; understanding of basic platform operations and business models; and, valuations of “free” platform services. The empirical evidence from the consumer demand side of some of the most popular multi-sided platforms reveals a web of paradoxes that needs to be navigated by policymakers and legislatures to reach evidence-led solutions for better-functioning and more competitive digital markets. This article contributes to literature and policy by, first, providing a multitude of novel empirical findings and, second, analysing those findings and their policy implications, particularly regarding competition and regulation in digital markets. These contributions can inform policies, regulation, and enforcement choices in digital markets that involve services used daily by billions of consumers and are subjected to intense scrutiny, globally.

December 27, 2021 | Permalink | Comments (0)

Friday, December 24, 2021

Anticompetitive Merger Review

Anticompetitive Merger Review

 

 

Samuel Weinstein

Yeshiva University - Benjamin N. Cardozo School of Law

 

Abstract

U.S. antitrust law empowers enforcers to review pending mergers that might undermine competition. But there is growing evidence that the merger-review regime is failing to perform its core procompetitive function. Industry concentration and the power of dominant firms are increasing across key sectors of the economy. In response, progressive advocates of more aggressive antitrust interventions have critiqued the substantive merger-review standard, arguing that it is too friendly to merging firms. This Article traces the problem to a different source: the merger-review process itself. The growing length of reviews, the competitive restrictions merger agreements place on acquisition targets during review, and the targets’ resulting loss of strength harm competition and consumers. As a result, an enforcement regime designed to protect competition is damaging it instead. The rise of antitrust reverse termination fees (“ARTFs”)—payments from the acquirer to the target if the merger fails antitrust review—demonstrates the anticompetitive effect of the review process. This Article argues that these fees represent the parties’ negotiated prediction of the competitive costs to the target of entering the merger agreement (and therefore the competitive gains to the acquirer and other rivals in the relevant market). ARTFs also indicate the possibility of anticompetitive manipulation of the merger-review process. Knowing that reviews sometimes take over a year to resolve, acquirers can enter a merger agreement and use an ARTF to buy competitive peace—even when they expect the merger will be rejected—all the while harming consumers. Reform proponents have suggested several ways potentially to shorten merger investigations, such as limiting enforcement agencies’ discovery demands, but these modifications only reduce the problem at the margins. This Article proposes a more effective reform: a requirement that the antitrust enforcement agencies announce a group of highly concentrated markets in which they will challenge any proposed merger, unless one of the firms is failing. This strategy, which the antitrust agencies have employed in an ad hoc fashion in the past, will discourage anticompetitive mergers and eliminate lengthy reviews that harm consumers.

December 24, 2021 | Permalink | Comments (0)