Antitrust & Competition Policy Blog

Tying, Vertical Integration and Pareto-Improving Foreclosure

Tying, Vertical Integration and Pareto-Improving Foreclosure

 

Yong Chao

University of Louisville - College of Business - Department of Economics

Babu Nahata

University of Louisville

 

Abstract

This paper examines the relationship between tying and vertical integration when an input monopolist can require its downstream buyer to purchase a competitively supplied input from it, or integrate forward in the downstream market. Both practices would result in foreclosure of independent suppliers of the other input. We show tying is an imperfect substitute for vertical integration and provide the necessary and sufficient condition when the two practices are equivalent. When they are not equivalent, the total welfare under tying is higher than that under vertical integration, though both are anticompetitive. This raises the question of whether a harsher treatment of tying than vertical integration in our current antitrust enforcement is economically sound. More interestingly, compared with the no tying/no VI case, both tying and VI can be Pareto improving, despite they do exclude rivals. Both the input monopolist and consumers are strictly better off when no other firms are worse off. Further, we offer the necessary and sufficient condition for Pareto improvement.

Assessing the Antitrust Liability of Vertical Restraints

Assessing the Antitrust Liability of Vertical Restraints

Anthony J. Dukes

University of Southern California - Marshall School of Business

Aishwarya Joshi

University of Michigan

D. Daniel Sokol

USC Gould School of Law; USC Marshall School of Business

Date Written: September 07, 2024

Abstract

This research examines trends in the antitrust liability for managers employing vertical restraints in marketing channels of distribution. We consider five vertical restraints: Minimum RPM, Maximum RPM, Primary-Line and Secondary-Line forms of Price Discrimination (Robinson-Patman), as well as Non-Price (Territorial) Restraints. Compiling data from all cases decided in U.S. federal courts since 1980, we empirically demonstrate that over time, Max RPM and Primary-Line are subject to significantly less litigation. For disputes involving the other three restraints, our analysis indicates a more judicious interpretation by courts. Using the theory of case selection, we posit that five landmark rulings over the past 40 years have established a legal regime that gives marketers flexibility in implementing efficient, pro-consumer practices yet still protects the market against anticompetitive conduct. Importantly, case outcomes do not suggest a laissez faire approach to vertical restraints. Rather, the current judicial climate balances anti-competitive effects against non-price customer benefits. Through a detailed analysis of individual cases, we draw lessons for marketers who operate in marketing channels and conclude that they be guided by the principle of customer value creation.

Preserving the Institutional Value of the FTC in the Digital Era

Preserving the Institutional Value of the FTC in the Digital Era

 

Ginger Zhe Jin

University of Maryland - Department of Economics; National Bureau of Economic Research (NBER)

Liad Wagman

Rensselaer Polytechnic Institute (RPI) - Lally School of Management & Technology

 

Abstract

We examine several ways in which the U.S. Federal Trade Commission’s antitrust enforcement has changed under Lina Khan, including policy changes and proposed technology-related rulemakings, and relevant recent court cases and academic research. We comment on the potential consequences of these changes for both the market and for the Commission’s reputation as a public institution.

Semi-collusion and Innovation: Friends or Foes?

Semi-collusion and Innovation: Friends or Foes?

 

Debasmita Basak

University of Nottingham

Arijit Mukherjee

University of Nottingham

Date Written: January 17, 2024

Abstract

The commonly held view is that when firms engage in collusive activities, it adversely affects firms’ R&D incentives and social welfare. With a stochastic non-tournament R&D competition, we argue that this pessimistic view does not necessarily hold true when firms collude in production but compete in other non-production activities, such as R&D. This phenomenon is commonly known as semi-collusion. Adopting a unified R&D model that encompasses both product and process R&D, we show that if the probability of success in R&D is relatively high (low), semi-collusion may provide higher (lower) innovation incentives when the firms invest in process innovation; whereas innovation incentives are strictly higher under semi-collusion when the firms invest in product innovation. Additionally, we find that regardless of the type of innovation, semi-collusion may improve social welfare when the firms compete in prices and the goods are close substitutes.

Leveraging the Experience: Exploration and Exploitation in Gig Worker Learning Process

Leveraging the Experience: Exploration and Exploitation in Gig Worker Learning Process

 

Hongyan Dai

Central University of Finance and Economics

Jayashankar M. Swaminathan

University of North Carolina (UNC) at Chapel Hill - Operations Area

Yuqian Xu

University of North Carolina (UNC) at Chapel Hill - Kenan-Flagler Business School

Date Written: May 11, 2022

Abstract

The advent of on-demand delivery facilitated by gig platforms is ushering in a new era of business operations, workforce management, and customer experiences. Leveraging data from a prominent on-demand delivery platform in Asia, this study aims to explore the impact of experience on gig worker productivity and service quality within this emerging business context. First, in line with existing literature, we find that experience plays a crucial role in enhancing worker productivity, particularly when experience is not overly high. However, we also observe an interesting pattern in service quality, which initially declines with accumulating experience but eventually improves.
To understand these findings, we first show that experience leads to improvement in order processing times, resulting in increased productivity. Additionally, gig workers tend to strategically choose higher-earning orders to enhance their earnings per hour, particularly when they have limited experience. Next, to further explain the initial decrease in service quality and how workers subsequently achieve a better balance between productivity and quality, we propose an exploration-exploitation behavioral mechanism. We find that in the initial exploration phase, gig workers prioritize delivering individual (non-batched) orders to explore new stores and recipient regions and acquire delivery knowledge to improve productivity. However, this exploratory approach, especially at lower experience levels, can lead to a decrease in service quality due to visits to unfamiliar places. As gig workers accumulate experience during this exploration phase, they tend to transition towards batching more orders and concentrating their efforts on familiar recipient regions and stores. This shift marks the exploitation stage, during which experience plays a crucial role in improving service quality.

Antitrust in the Edgeworth Box: Monopoly

Antitrust in the Edgeworth Box: Monopoly

 

Francesca Busetto

affiliation not provided to SSRN

Giulio Codognato

affiliation not provided to SSRN

Sayantan Ghosal

University of Warwick - Department of Economics; University of Glasgow - Adam Smith Business School

Damiano Truchet

University of Warwick

 

Abstract

What is the appropriate economic welfare standard for antitrust in general equilibrium? In this paper, we address this question in an Edgeworth box economy model of monopoly where one commodity is held only by the monopolist, represented as an atom, and the other is held only by small traders, represented by an atomless part. In this framework, we reconcile the different approaches characterizing the so-called Chicago School, on one hand, and the so-called New Brandeis School, on the other. Moreover, we readapt to our context a paradox, first formulated by Shitovitz (1997), which shows that the Brandeisian “curse of bigness” overwhelms the direct exercise of market power by the monopolist.

An Experiment on Partial Cross-Ownership in Oligopolistic Markets

An Experiment on Partial Cross-Ownership in Oligopolistic Markets

 

 

Volker Benndorf

Goethe University Frankfurt

Johannes J. Odenkirchen

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

 

Abstract

We examine coordinated and unilateral effects of horizontal partial cross-ownership (PCO) in a laboratory experiment. Firms have symmetric, non-controlling shares of each other in a repeated and a static Bertrand setting. The data of the repeated game confirm the predictions and show that firms are more (tacitly) collusive with PCO than without. In the static game, average prices are increasing with higher degrees of PCO. This is inconsistent with standard Nash predictions. We show that in a Quantal Response Equilibrium firms’ incentives to compete are reduced with passive PCO. QRE predictions explain the data well.

Sustainability and Net Zero Climate Agreements – A Transatlantic Antitrust Perspective

Sustainability and Net Zero Climate Agreements – A Transatlantic Antitrust Perspective

 

Maurits Dolmans

Cleary Gottlieb Steen & Hamilton LLP

Wanjie Lin

Cleary Gottlieb Steen & Hamilton LLP

Jessica Hollis

Cleary Gottlieb Steen & Hamilton LLP

Date Written: September 8, 2023

Abstract

The climate crisis requires a transition to a net zero economy. Such a transition is possible only through concerted public and private action. While a number of financial institutions and insurance companies had agreed to align their activities with net zero targets, reconsidering support for new coals and fossil fuel projects, these initiatives have come under attack under antitrust law from political groups in the US, who have labelled such agreements “collective boycotts.” Such accusations hinder private sector cooperation.

This article discusses the background to Net Zero Agreements, and the antitrust criticisms launched by anti-ESG partisans under US, EU and UK antitrust law and precedent. Net Zero Agreements can alleviate market failures, resolve collective action problems, and improve consumer welfare by lowering the potentially huge costs to consumers of an unmitigated climate crisis. Under a rule of reason, antitrust authorities and courts in the US, EU, and UK can and should give room for private sector cooperation between companies pursuing an effective transition to a clean economy, where these agreements correct market failures and resolve collective action problems.

Moderating Monopolies

Moderating Monopolies

 

 

Nikolas Guggenberger

University of Houston Law Center

Date Written: September 8, 2023

Abstract

Industrial organization predetermines content moderation online. At the core of today’s dysfunctions in the digital public sphere is a market power problem. Meta, Google, Apple, and a few other digital platforms control the infrastructure of the digital public sphere. A tiny group of corporations governs online speech, causing systemic problems to public discourse and individual harm to stakeholders. Current approaches to content moderation build on a deeply flawed market structure, addressing symptoms of systemic failures at best and cementing ailments at worst.

Market concentration creates monocultures for communication susceptible to systemic failures and raises the stakes for individual content moderation decisions, like takedowns of posts or bans of individuals. As these decisions are inherently prone to errors, those errors are magnified by the platforms’ scale and market power. Platform monopolies also harm individual stakeholders: persisting monopolies lead to higher prices, lower quality, or less innovation. As platforms’ services include content moderation, degraded services may increase the error rate of takedown decisions and over-expose users to toxic content, misinformation, or harassment. Platform monopolies can also get away with discriminatory and exclusionary conduct more easily because users lack voice and exit opportunities.

Stricter antitrust enforcement is imperative, but contemporary antitrust doctrine alone cannot hope to provide sufficient relief to the digital public sphere. First, a narrowly understood consumer welfare standard overemphasizes easily quantifiable, short-term price effects. Second, the levels of concentration necessary to trigger antitrust scrutiny far exceed those of a market conducive to pluralistic discourse. Third, requiring specific anticompetitive conduct, the focal point of current antitrust doctrine, ignores structural dysfunction mighty bottlenecks create in public discourse, irrespective of the origins or even benevolent exercise of their power.

In this Article, I suggest three types of remedies to address the market power problem behind the dysfunctions in the digital public sphere. First, mandating active interoperability between platforms would drastically reduce lock-in effects. Second, scaling back quasi-property exclusivity online would spur follow-on innovation. Third, no-fault liability and broader objectives in antitrust doctrine would establish more effective counterweights to concentrating effects in the digital public sphere. While these pro-competitive measures cannot provide a panacea to all online woes, they would lower the stakes of inevitable content moderation decisions, incentivize investments in better decision-making processes, and contribute to healthier pluralistic discourse.

Algorithms, Artificial Intelligence and Simple Rule Based Pricing

Algorithms, Artificial Intelligence and Simple Rule Based Pricing

 

Qiaochu Wang

Carnegie Mellon University - David A. Tepper School of Business

Yan Huang

Carnegie Mellon University - David A. Tepper School of Business

Param Vir Singh

Carnegie Mellon University - David A. Tepper School of Business

Kannan Srinivasan

 

Abstract

Automated pricing strategies in e-commerce can be broadly categorized into two forms - simple rule-based such as undercutting the lowest price, and more sophisticated artificial intelligence (AI) powered algorithms, such as reinforcement learning (RL) algorithms. Although simple rule-based pricing remains the most widely used strategy, a few retailers have adopted pricing algorithms powered by AI. RL algorithms are particularly appealing for pricing due to their abilities to autonomously learn an optimal policy and adapt to changes in competitors' pricing strategies and market environment. Despite the common belief that RL algorithms hold a significant advantage over rule-based strategies, our extensive pricing experiments demonstrate that when competing against RL pricing algorithms, simple rule-based algorithms may result in higher prices and benefit all sellers, compared to scenarios where multiple RL algorithms compete against each other.

To validate our findings, we estimate a non-sequential search structural demand model using individual-level data from a large e-commerce platform and conduct counterfactual simulations. The results show that in a real-world demand environment, simple rule-based algorithms outperform RL algorithms when facing other RL competitors. Our research sheds new light on the effectiveness of automated pricing algorithms and their interactions in competitive markets, and provides practical insights for retailers in selecting the appropriate pricing strategies.

In The Light Of Dynamic Competition: Should We Make Merger Remedies More Flexible?

In The Light Of Dynamic Competition: Should We Make Merger Remedies More Flexible?

 

Patrice Bougette

Université Côte d'Azur, CNRS, GREDEG

Oliver Budzinski

Ilmenau University of Technology

Frédéric M. Marty

Research Group on Law, Economics and Management (UMR CNRS 7321 GREDEG) / Université Nice Sophia Antipolis; OFCE; Center for Interuniversity Research and Analysis on Organization (CIRANO)

Abstract

Mergers and acquisitions shape industry competition. Effective merger remedies are important for market efficiency and consumer welfare. This paper explores the need for more flexible remedies to address changing markets after mergers. While the EU permits some flexibility with less restrictive remedies, we conceptually advance the design elements of a dual-phase, bifurcated merger control system. This system integrates ex-ante processes with more systematic and comprehensive ex-post measures. Such an approach can address the shortcomings of the current system and, consequently, holds the potential to enhance merger control in dynamic markets.

Welfare-Optimal Rewards and Royalties for a Full Stack of Standard-Essential Patents

Welfare-Optimal Rewards and Royalties for a Full Stack of Standard-Essential Patents

 

John L. Turner

University of Georgia - C. Herman and Mary Virginia Terry College of Business - Department of Economics

 

Abstract

This paper studies the problem of determining the optimal size and structure of royalties for a full stack of standard-essential patents (SEPs). Conditioning on a full stack sidesteps many complicated and contested issues that typically arise when determining fair, reasonable and non-discriminatory (FRAND) royalties for SEPs. This focuses attention on an important question---what should be the total cost of licensing SEPs for a particular standard to incentivize both standard development and adoption? To study this problem, I adapt a workhorse general equilibrium model to capture the behavior of firms that invent and implement new technology standards, and derive the welfare-optimizing level and structure of royalty-based rewards for the full stack. This model shows that a new standard can emerge and yield higher welfare as long as the reward satisfies two "guardrail" conditions. As a fraction of income spent on standard-compliant goods, the reward: (1) must exceed the unrecovered invention cost margin; and (2) must be less than the welfare contribution margin of the standardized technology. If the first condition does not hold, invention of standardized technology is unprofitable; if the second does not hold, product variety and/or output per variety is so low that welfare would not improve. Multiple reward structures can optimize economic welfare. With an optimal reward structure, a one-percentage-point increase in reward size decreases product variety by one percentage point.

Antitrust Without Competition

Antitrust Without Competition

 

 

Daniel Francis

New York University School of Law

 

Abstract

Competition is everywhere in antitrust. Courts, agencies, and scholars routinely insist that antitrust can, does, and should measure the legality of conduct by asking whether it has harmed or promoted "competition." The idea that competition is a coherent value that can be increased or reduced-and used to guide the development and application of antitrust rules-has dominated doctrine for a century, and is deployed freely by judges, enforcers, and writers across the political spectrum. This does more harm than good, and it should stop. There is no single value or quantity, in economics or antitrust law, that competition just is. It has long been essentialized, in both disciplines, in countless inconsistent ways. And its enduring dominance in antitrust doctrine causes real harms: indeterminacy and confusion, because the purported criterion cannot resolve concrete cases; utopianism, because it conceals antitrust's fundamental need for hard choices among desirable goals; and bluntness, because today's courts respond to antitrust's vague tests by erring in favor of defendants. Antitrust would be better off without competition as a purported orienting value or criterion. There are multiple meaningful and plausible evaluative criteria available to which doctrine might turn instead. One such measure, "harm-centric antitrust," would orient antitrust to guard against welfare harms resulting from the unprivileged suppression of rival incentive or ability to meet demand. This is not the only option: there are plenty of other plausible orientations for the antitrust project. But the "promotion of competition" is not among them. It is time to let it go.

The Influence of Labor Market Power in the Audit Profession

The Influence of Labor Market Power in the Audit Profession

 

Daniel Aobdia

Pennsylvania State University - Smeal College of Business

Qin Li

Hong Kong Polytechnic University

Ke Na

Cheung Kong Graduate School of Business

Hong Wu

Fudan University

 

Abstract

This paper examines the influence of labor market power in the audit profession. Using a dataset of online job postings, we confirm that audit offices in more concentrated labor markets have greater labor market power and exercise it in the form of higher skill requirements and greater required effort from their auditors, at similar or slightly lower wages. We then show that client firms of audit offices in more concentrated labor markets are less likely to restate their earnings and have lower absolute discretionary accruals. These findings are only present when employees have lower mobility across professions and geographies, consistent with audit offices’ power in the local labor market explaining the results. Collectively, our findings highlight the importance of labor market power in understanding audit quality.

Retail Pricing and Ownership Structure

Retail Pricing and Ownership Structure

 

 

Semyon Tabanakov

University of Chicago - Booth School of Business

Ali Goli

University of Washington - Michael G. Foster School of Business

Pradeep K. Chintagunta

University of Chicago

 

Abstract

Previous research has documented the prevalence of uniform pricing by U.S. food retail chains, but it has not accounted for multiple chains being owned by the same parent company. This could understate the extent of price discrimination, if e.g., parents vary prices across (i) chains they own, and/or (ii) geographies. This paper provides a comprehensive analysis of pricing strategies at the parent level. We first infer chain ownership using the NielsenIQ Retail Measurement Service (RMS) data. Next, by conducting cluster analysis on store-level product prices for 800 UPCs, we categorize parent companies into those relying on uniform, zone, and store-level pricing. We find that the majority of parent companies employ uniform pricing; however, these parents own only 19% of the total number of stores. Importantly, the majority of stores belong to parent companies using zone pricing. Further, the price zones we uncover align with the parent companies' geographical divisions, which is consistent with some degree of decentralization in pricing decisions. We then explore how parent companies set prices in chains with overlapping geographies. Prices are either uniform across chains or substantially lower in some of them, suggesting price discrimination across "traditional" and "discounter" banners within a parent. Finally, we examine a large merger between two parent companies and find that the "merged parent" adjusted the price zones over three years, aiming to restore the geographic contiguity of price zones. Our findings underscore the importance of accounting for ownership structure in the analysis of retailers' pricing strategies.

Retail Concentration and Wages

Retail Concentration and Wages

 

Timothy J. Richards

Arizona State University W. P. Carey School of Business

Keenan Marchesi

Arizona State University (ASU) - Morrison School of Agribusiness and Resource Management

Ujjwol Paudel

Arizona State University (ASU), W.P. Carey School of Business, Students

 

Abstract

Antitrust policy in the U.S. now explicitly includes labor-market outcomes as measures of interest when considering the potential anticompetitive effects of mergers or acquisitions. Concentration in the food retailing industry is of particular concern due to several recent high-profile mergers, and a troubling increase in concentration at the national and local levels. We study this problem using both causal reduced-form models and a structural model of search, match, and bargaining. Our reduced-form models show no relationship between concentration and wages, but our structural model finds that concentration is associated with substantial wage suppression.

From Innovation to Market: A Competitive Analysis of R&D, Licensing, and Product Strategies

From Innovation to Market: A Competitive Analysis of R&D, Licensing, and Product Strategies

 

Weizhe Yang

School of Management, University of Science and Technology of China

Yaozhong Wu

National University of Singapore - Business School

 

Abstract

This paper uses a multi-stage game-theoretical model to examine the strategic interplay between research and development (R&D), licensing, and product strategies in competitive markets. Firms compete in the downstream product market as well as in upstream R&D activities related to new technologies used for developing new consumer products, and there are cooperation opportunities that derive from the interfirm licensing of those new technologies. We investigate how varying consumer preferences for uniqueness (the “snob effect”), different R&D efficiencies among firms, and the presence of older alternative technologies all influence strategic decisions concerning R&D investment, product pricing, and market entry. We identify diverse strategies that firms can adopt in licensing agreements and then explore their effects on competitive dynamics and firm profitability. Our findings suggest that licensing between competing firms can have a paradoxical effect on the market leader, potentially reducing its profitability despite enhancing a competitive advantage in R&D. This study highlights the nuanced trade-offs that firms face in multi-stage competition, and it offers insights into the optimal strategic paths for firms characterized by different product qualities and technological capabilities.

Antitrust Law and Coordination Through Al-Based Pricing Technologies

Antitrust Law and Coordination Through Al-Based Pricing Technologies

 

 

Maria José Schmidt-Kessen

Central European University (CEU) - Department of Legal Studies

Max Huffman

Indiana University Robert H. McKinney School of Law

 

Abstract

Price is the core element of commercial transactions and an important parameter of competition. One of antitrust law’s aims is to ensure that market prices form under the laws of supply and demand, and not after the whims of monopolists or cartelists. Innovations in computer and data science have brought about pricing technologies that rely on advanced analytics or machine learning (ML) techniques, which could strengthen existing bargaining power disparities in part by supporting price coordination among competitors.

Existing research establishes a theoretical framework for competitive harm through coordination, showing that pricing technologies can lead to near-cartel price levels while avoiding anti-cartel prohibitions. This contribution builds on that framework, taking into account up to date empirical, game-theoretic, and computer science literature on pricing technologies to produce a taxonomy of those technologies. We then employ a comparative approach to identify the legal effects of various pricing technologies at a more granular level under EU and US antitrust law. The contribution supports greater understanding between economists and policy- makers regarding the analysis and treatment of AI-based pricing technologies.

Learning From Online Ratings

Learning From Online Ratings

By:	Xiang Hui; Tobias J. Klein; Konrad Stahl
Abstract:	Online ratings play an important role in many markets. However, how fast they can reveal seller types remains unclear. We propose a simple model of rating behavior where learning about the seller type influences the rating decision. We calibrate the model to eBay data and find that ratings can be very informative. After 25 transactions, the likelihood of correctly predicting the seller type is above 95 percent.
URL:	http://d.repec.org/n?u=RePEc:bon:boncrc:crctr224_2024_532&r=ind

A Dynamic Model of Predation

 

A Dynamic Model of Predation

By:	Patrick Rey; Yossi Spiegel; Konrad Stahl
Abstract:	We study the feasibility and profitability of predation in a dynamic environment, using a parsimonious infinite-horizon, complete information setting in which an incumbent repeatedly faces potential entry. When a rival enters, the incumbent chooses whether to accommodate or predate it; the entrant then decides whether to stay or exit. We show that there always exists a Markov perfect equilibrium, which can be of three types: accommodation, monopolization, and recurrent predation. We then analyze and compare the welfare effects of different antitrust policies, accounting for the possibility that recurrent predtion may be welfare improving.
URL:	http://d.repec.org/n?u=RePEc:bon:boncrc:crctr224_2024_529&r=ind