Antitrust & Competition Policy Blog

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

A Member of the Law Professor Blogs Network

Thursday, July 17, 2014

Measuring bank competition in China: A comparison of new versus conventional approaches applied to loan markets

Bing Xu (Universidad Carlos III), Adrian van Rixtel (Bank for international settlements) and Michiel van Leuvensteijn (All pensions group) are Measuring bank competition in China: A comparison of new versus conventional approaches applied to loan markets.

ABSTRACT: Since the 1980s, important and progressive reforms have profoundly reshaped the structure of the Chinese banking system. Many empirical studies suggest that financial reform promoted bank competition in most mature and emerging economies. However, some earlier studies that adopted conventional approaches to measure competition concluded that bank competition in China declined during the past decade, despite these reforms. In this paper, we show both empirically and theoretically that this apparent contradiction is the result of flawed measurement. Conventional indicators such as the Lerner index and Panzar- Rosse H-statistic fail to measure competition in Chinese loan markets properly due to the system of interest rate regulation. By contrast, the relatively new Profit Elasticity (PE) approach that was introduced in Boone (2008) as Relative Profit Differences (RPD) does not evidence these shortcomings. Using balance sheet information for a large sample of banks operating in China during 1996-2008, we show that competition actually increased in the past decade when the PE indicator is used. We provide additional empirical evidence that supports our results. We find that these, firstly, are in line with the process of financial reform, as measured by several indices, and secondly are robust for a large number of alternative specifications and estimation methods. All in all, our analysis suggests that bank lending markets in China have been more competitive than previously assumed.

July 17, 2014 | Permalink | Comments (0) | TrackBack (0)

Uncertain Costs and Vertical Differentiation in an Insurance Duopoly

Radoslav S. Raykov, Bank of Canada explores Uncertain Costs and Vertical Differentiation in an Insurance Duopoly.

ABSTRACT: Classical oligopoly models predict that firms differentiate vertically as a way of softening price competition, but some metrics suggest very little quality differentiation in the U.S. auto insurance market. I explain this phenomenon using the fact that risk-averse insurance companies with uncertain costs face incentives to converge to a homogeneous quality. Quality changes are capable of boosting as well as reducing profits, since quality differentiation softens price competition, but also undermines the lower-end firm’s ability to charge the markup commanded by risk aversion. This can make differentiation suboptimal, leading to a homogeneous quality; the outcome depends on consumers’ quality tastes and on how costly quality is. Additional trade-offs between quality costs, profits and profit variances compound this effect, resulting in equilibria at very low quality levels. I argue that this provides one explanation! of how insurer competition drove quality down in the nineteenth-century U.S. market for fire insurance.

July 17, 2014 | Permalink | Comments (0) | TrackBack (0)

The Economics of Margin Squeeze

Bruno Jullien, Toulouse, Patrick Rey, Toulouse, and Claudia Saavedra describe The Economics of Margin Squeeze.

ABSTRACT: The paper discusses economic theories of harm for anti-competitive margin squeeze by unregulated and regulated vertically integrated firms. We review both predation and foreclosure theories, as well as the mere exploitation of upstream market power. We show that foreclosure provides an appropriate framework in the case of an unregulated firm, whereas a firm under tight wholesale regulation should be evaluated under the predation paradigm, with an adequate test that we characterize. Finally, although non-exclusionary exploitation of upstream market power may also induce a margin squeeze, banning such a squeeze has ambiguous effects on the competitive outcome; hence, alternative measures, such as a cap on the access price, may provide a better policy.

July 17, 2014 | Permalink | Comments (0) | TrackBack (0)

Price leadership and unequal market sharing: Collusion in experimental markets

P.T. Dijkstra (Groningen University) addresses Price leadership and unequal market sharing: Collusion in experimental markets.

ABSTRACT: We consider experimental markets of repeated homogeneous price setting duopolies. We investigate the effect on collusion of sequential versus simultaneous price setting. We also examine the effect on collusion of changes in the size of each subject's market share in case both subjects set the same price. Our results show that sequential price setting compared with simultaneous price setting facilitates collusion, if subjects have equal market shares or if the follower has the larger market share. With sequential price setting, we find more collusion if subjects have equal market shares rather than unequal market shares. We observe more collusion if the follower has the larger market share than if the follower has the smaller market share.

July 17, 2014 | Permalink | Comments (0) | TrackBack (0)

Wednesday, July 16, 2014

A note on consumer flexibility, data quality and collusion

Irina Hasnas, Heinrich Heine University of Dusseldorf provides A note on consumer flexibility, data quality and collusion.

ABSTRACT: In this note we analyze the sustainability of collusion in a game of repeated interaction where firms can price discriminate among consumers based on two types of customer data. This work is related to Liu and Serfes (2007) and Sapi and Suleymanova (2013). Following Sapi and Suleymanova we assume that consumers are differentiated both with respect to their addresses and transportation cost parameters (flexibility). While firms have perfect data on consumer addresses, data on their flexibility is imperfect. We use three collusive schemes to analyze the impact of the improvement in the quality of customer flexibility data on the incentives to collude. In contrast to Liu and Serfes in our model it is the customer flexibility data which is imperfect and not the data on consumer addresses. However, our results support their findings that with the improvement in data quality it is more difficult to sustain collusion. --

July 16, 2014 | Permalink | Comments (0) | TrackBack (0)

Comparing Mobile Communication Service Prices Among Providers: A Hedonic Approach

Olivier Schoni (Friburg) and Lukas Seger (Friburg) are Comparing Mobile Communication Service Prices Among Providers: A Hedonic Approach.

ABSTRACT: The present article proposes a new approach to compare mobile communication service prices among different communications service providers. To this end, a hedonic model based on monthly phone bills is employed that relates billed amounts and the quantities of consumed mobile communication services. A linear hedonic regression model is separately estimated for each provider and then used to estimate prices. Laspeyres, Paasche, and Fisher double-imputed price indices are then used to compare prices across communications service providers on an aggregate level. The sensitivity of these indices in relation to the estimated hedonic functions is investigated using a generalized additive model.

July 16, 2014 | Permalink | Comments (0) | TrackBack (0)

Postal-Sector Policy: From Monopoly to Regulated Competition and Beyond

Christian Jaag, Swiss Economics SE AG explores Postal-Sector Policy: From Monopoly to Regulated Competition and Beyond.

ABSTRACT: This paper discusses the main aspects of the competitive and regulatory state of the postal sector. It presents the different models for postal competition and regulation in the EU and the US and their history, together with their implications on regulation, with a focus on universal services and network access. While postal monopolies used to be the main source of funding for universal service obligations, the need for alternative funding sources after full liberalization has increased the interest of regulators and the public in knowing the cost of these obligations. In parallel, new means of electronic communication and consumer needs call the traditional scope of universal services into question. This paper outlines the economic rationale of current policies and directions for future postal regulation to strengthen the postal services’ commercial viability in a competitive age, while safeguarding their relevant cha! racteristics for the economy.

July 16, 2014 | Permalink | Comments (0) | TrackBack (0)

Provider competition and over-utilization in health care

Jan Boone, Tilburg and Rudy Douven, CPB Netherlands Bureau for Economic Policy Analysis, Erasmus University Rotterdam and Harvard Medical School explain Provider competition and over-utilization in health care.

ABSTRACT: This paper compares the welfare effects of three ways in which health care can be organized: no competition (NC), competition for the market (CfM) and competition on the market (CoM) where the payer offers the optimal contract to providers in each case. We show that CfM is optimal if the payer either has contractible information on provider quality or can enforce cost efficient protocols. If such contractible information is not available NC or CoM can be optimal depending on whether patients react to decentralized information on quality differences between providers and whether payer’s and patients’ preferences are aligned.

July 16, 2014 | Permalink | Comments (0) | TrackBack (0)

Tuesday, July 15, 2014

Why are product prices in online markets not converging?

Takayuki Mizuno, University of Tokyo and Tsutomu Watanabe, University of Tokyo ask Why are product prices in online markets not converging?

ABSTRACT: Why are product prices in online markets dispersed in spite of very small search costs? To address this question, we construct a unique dataset from a Japanese price comparison site, which records price quotes offered by e-retailers as well as customers' clicks on products, which occur when they proceed to purchase the product. We find that the distribution of prices retailers quote for a particular product at a particular point in time (divided by the lowest price) follows an exponential distribution, showing the presence of substantial price dispersion. For example, 20 percent of all retailers quote prices that are more than 50 percent higher than the lowest price. Next, comparing the probability that customers click on a retailer with a particular rank and the probability that retailers post prices at a particular rank, we show that both decline exponentially with price rank and that the exponents associated with the ! probabilities are quite close. This suggests that the reason why some retailers set prices at a level substantially higher than the lowest price is that they know that some customers will choose them even at that high price. Based on these findings, we hypothesize that price dispersion in online markets stems from heterogeneity in customers' preferences over retailers; that is, customers choose a set of candidate retailers based on their preferences, which are heterogeneous across customers, and then pick a particular retailer among the candidates based on the price ranking.

July 15, 2014 | Permalink | Comments (0) | TrackBack (0)

Behaviour-Based Price Discrimination under Advertising and Imperfectly Informed Consumers

Rosa-Branca Esteves (Universidade do Minho - NIPE) and Sofia Cerqueira (Universidade do Minho) analyze Behaviour-Based Price Discrimination under Advertising and Imperfectly Informed Consumers.

ABSTRACT:  This paper is a first look at the dynamic effects of BBPD in a horizontally differentiation product market, where firms need to invest in advertising to generate awareness. When a firm is able to recognize customers with different purchasing histories, it may send them targeted advertisements with different prices. In comparison to no discrimination, it is shown that firms reduce their advertising efforts, charge higher first period prices and lower second period prices. In comparison to no discrimination, in contrast to the profit and consumer welfare results obtained under full informed consumers, it is shown that BBPD boosts industry profits and harms consumers.

July 15, 2014 | Permalink | Comments (0) | TrackBack (0)

The Air Cargo Cartel: Lessons for Compliance

How can you find a good compliance program?  I spent hours (along with Howard Bergman) intervieiwing the Lufthansa team that uncovered the air cargo cartel.  This is a very capable group that believes in compliance and ethics and created an effective program that caught the air cargo cartel (leading to a rush to leniency in a number of jursidictions). We wrote this up as a case study of an anatomy of cartel compliance and detection. We think that it will have appeal to both practitioner and academic audiences.

Howard Bergman (George Mason) and D. Daniel Sokol (University of Florida) offer The Air Cargo Cartel: Lessons for Compliance.

ABSTRACT: Cartel enforcement and leniency are issues of increased academic attention. Most of the academic work in this area focuses on scholarship regarding formal modeling of leniency, empirical work, and analyses of broader legal theories, analytical trends and specific decisions. Scholarship has not focused on how leniency works in practice to detect wrongdoing and how robust and effective compliance programs may be used as a tool to take advantage of leniency. This chapter fills in the gap by offering a case study of an effective compliance program that uncovered what was at the time the largest ever international cartel. To do so, the authors undertook interviews with the legal team of Lufthansa, the leniency applicant in the air cargo conspiracy.

July 15, 2014 | Permalink | Comments (0) | TrackBack (0)

Product Upgrades and Posted Prices

Mustafa Dogan (Department of Economics, University of Pennsylvania) discusses Product Upgrades and Posted Prices.

ABSTRACT: We consider the dynamic pricing problem of a durable good monopolist with full commitment power, when a new version of the good is expected at some point in the future. The new version of the good is superior to the existing one, bringing a higher ow utility. If the arrival is a stationary stochastic process, then the corresponding optimal price path is shown to be constant for both versions of the good, hence there is no delay on purchases and time is not used to discriminate over buyers, which is in line with the literature. However, if the arrival of the new version occurs at a commonly known deterministic date, then the optimal price path may be decreasing over time, resulting in delayed purchases. For both stochastic and deterministic arrival processes, posted prices is not the optimal mechanism, which on the other hand, involves into bundling of both new and old versions of the good and selling them only together.

July 15, 2014 | Permalink | Comments (0) | TrackBack (0)

Dynamic Oligopoly Pricing: Evidence from the Airline Industry

Caspar Siegert (Munich) and Robert Ulbricht (Toulouse) offer Dynamic Oligopoly Pricing: Evidence from the Airline Industry.

ABSTRACT: We explore how pricing dynamics in the European airline industry vary with the competitive environment. Our results highlight substantial variations in pricing dynamics that are consistent with a theory of intertemporal price discrimination. First, the rate at which prices increase towards the scheduled travel date is decreasing in competition, supporting the idea that competition restrains the ability of airlines to price-discriminate. Second, the sensitivity to competition is substantially increasing in the heterogeneity of the customer base, reflecting further that restraints on price discrimination are only relevant if there is initial scope for price discrimination. These patterns are quantitatively important, explaining about 83 percent of the total within flight price dispersion, and explaining 17 percent of the observed cross-market variation of pricing dynamics.

July 15, 2014 | Permalink | Comments (0) | TrackBack (0)

Monday, July 14, 2014

Too much or too little? Price-discrimination in a market for credence goods

Uwe Dulleck, QUT, Rudolf Kerschbamer, University of Innsbruck and Alexander Konovalov, University of Gothenburg ask Too much or too little? Price-discrimination in a market for credence goods.

ABSTRACT: In markets for credence goods sellers are better informed than their customers about the quality that yields the highest surplus from trade. This paper studies second-degree price-discrimination in such markets. It shows that discrimination regards the amount of advice offered to customers and that it leads to a different distortion depending on the main source of heterogeneity among consumers. If the heterogeneity is mainly in the expected cost of efficient service, the distortion involves overprovision of quality. By contrast, if consumers differ mainly in the surplus generated whenever the consumer's needs are met, the inefficiency involves underprovision of quality.

July 14, 2014 | Permalink | Comments (0) | TrackBack (0)

The Effectiveness of Competition Policy: An Econometric Assessment in Developed and Developing Countries

Danilo Sama (LUISS) explores The Effectiveness of Competition Policy: An Econometric Assessment in Developed and Developing Countries.

ABSTRACT: The ultimate objective of the present paper is to empirically investigate the effectiveness of competition policy in developed and developing countries. Although its importance is continuously increasing, the effectiveness of competition policy still seems to lack the attention that it would deserve. At the present state of art, the number of academic contributions that attempts to estimate its impact on relevant economic variables appears very limited, in particular for the less developed countries. However, an empirical literature aimed at measuring in objective terms the effect of competition policy on economic growth is emerging, starting from narrow variables of interest, such as Gross Domestic Product and Total Factor Productivity. As a result, the principal aim of the current work is to contribute to this branch of research, focusing on broader indicators of market performance, in order to understand whether the presence of an antitrust authority has a significant impact, thus an effective utility, on the level of competition of a country.

July 14, 2014 | Permalink | Comments (0) | TrackBack (0)

Entry deterring effects of contractual relations in the dairy processing sector

Yvonne Zavelberg, Christine Wieck, Thomas Heckelei, all University of Bonn discuss Entry deterring effects of contractual relations in the dairy processing sector.

ABSTRACT: In 2010, the European (EU) High Level Expert Group on milk proposed the introduction of standard contracts between raw milk producers and processors to improve the bargaining position of producers and to stabilize the market by balancing dairy supply and demand. However, contracts may distort competition and deter market entry of rival dairies. We analyze competitive effects of contracts between dairy producers and processors by constructing a game theoretic model. We show that an incumbent dairy can deter a rival dairy’s market entry by offering an exclusive contract to a risk averse producer.

July 14, 2014 | Permalink | Comments (0) | TrackBack (0)

Competition Law Enforcement in Malaysia: Some Recent Developments

Cassey LEE (University of Wollongong) describes Competition Law Enforcement in Malaysia: Some Recent Developments.

ABSTRACT: The enactment of the Competition Act 2010 represents a significant progress in the implementation of competition policy in Malaysia. The Malaysian Competition Commission has been fairly successful in its enforcement activities especially in price fixing cases involving trade associations. It has also investigated and issued proposed decisions in a number of high profile cases involving Malaysian Airlines, AirAsia, and Megasteel. Future challenges are likely to involve investigation of more complex anti-competitive cases, review of government regulations with impact on competition, possible introduction of merger controls and regional integration.

July 14, 2014 | Permalink | Comments (0) | TrackBack (0)

Friday, July 11, 2014

Cartel Detection and Collusion Screening: An Empirical Analysis of the London Metal Exchange

Danilo Sama, LUISS Guido Carli University of Rome discusses Cartel Detection and Collusion Screening: An Empirical Analysis of the London Metal Exchange.

ABSTRACT: In order to fight collusive behaviors, the best scenario for competition authorities would be the possibility to analyze detailed information on firms' costs and prices, being the price-cost margin a robust indicator of market power. However, information on firms' costs is rarely available. In this context, a fascinating technique to detect data manipulation and rigged prices is offered by an odd phenomenon called Benford's Law, otherwise known as First-Digit Law, which has been successfully employed to discover the "Libor Scandal'' much time before the opening of the cartel settlement procedure. Thus, the main objective of the present paper is to apply a such useful instrument to track the price of the aluminium traded on the London Metal Exchange, following the allegations according to which there would be an aluminium cartel behind. As a result, quick tests such as Benford's Law can only be helpful to inspect markets where price patterns show signs of collusion. Given the budget constraints to which antitrust watchdogs are commonly subject to, a such price screen could be set up, just exploiting the data available, as warning system to identify cases that require further investigations.

July 11, 2014 | Permalink | Comments (0) | TrackBack (0)

ABA Journal Blog Awards

The ABA Journal has begun the process of soliciting nominations for the 8th Annual Blawg 100 -- "the 100 best Web sites by lawyers, for lawyers, as chosen by the editors of the ABA Journal."

You may nominate your favorite blawg here.

July 11, 2014 | Permalink | Comments (0) | TrackBack (0)

Russian Competition Law In Light Of The Principles Of Ex Post And Ex Ante

Konstantin Yu. Totyev (National Research University Higher School of Economics) describes Russian Competition Law In Light Of The Principles Of Ex Post And Ex Ante.

ABSTRACT: This article is devoted to the legitimation and application of the standards of ex post and ex ante by courts and the executive authorities in the sphere of competition regulation. The postulates of ex post and ex ante are considered as legal principles. The principle of ex post is intended solely for judicial and administrative application; it has a deontological framework; it assumes that the legality of the activity of economic entities is assessed only on the basis of positive legal criteria in terms of the subjective rights violated; it is limited to a particular case. The traditional approach to the principle of ex post limits the scope of its application on the subjects and excessively expands its objects. The postulate of ex ante has a utilitarian basis which assumes the assessment of the application of relevant rules in the future. One of the main aims of the article is to refute the common view of lawyers and economists that a legislator applies principle of ex ante not being bound by principle of ex post, while it is the other way around for the courts and the executive authorities. The principle of ex ante may be applied not only in the process of the creation of new rules but also at the application stage for existing rules on economic competition. This is justified because the arguments of the courts and the executive authorities about a refusal to take into account the consequences of a decision in a particular case are not convincing.

July 11, 2014 | Permalink | Comments (0) | TrackBack (0)