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 24, 2014

The Strength of the Waterbed Effect Depends on Tariff Type

Steffen Hoernig, Nova School of Business and Economics, Universidade Nova de Lisboa discusses The Strength of the Waterbed Effect Depends on Tariff Type .

ABSTRACT: We show that the waterbed effect, i.e. the pass-through of a change in one price of a firm to its other prices, is much stronger if the latter include subscription rather than only usage fees. In particular, in mobile network competition with a fixed number of customers, the waterbed effect is full under two-part tariffs, while it is only partial under linear tariffs.

July 24, 2014 | Permalink | Comments (0) | TrackBack (0)

Wednesday, July 23, 2014

Institutional Authority and Collusion

Axel Sonntag (University of East Anglia) and Daniel John Zizzo (University of East Anglia) discuss Institutional Authority and Collusion.

ABSTRACT: A 'collusion puzzle' exists by which, even though increasing the number of firms reduces the ability to tacitly collude, and leads to a collapse in collusion in experimental markets with four or more firms, in natural markets there are such numbers of firms colluding successfully. We present an experiment showing that, if managers are deferential towards an authority, firms can induce more collusion by delegating production decisions to middle managers and providing suitable informal nudges. This holds not only with two but also with four firms. We are also able to distinguish compliance effects from coordination effects from the nudges.

July 23, 2014 | Permalink | Comments (0) | TrackBack (0)

Mergers between regulated firms with unknown efficiency gains

Raffaele Fiocco, University of Mannheim and Gongyu Guo, Humboldt University of Berlin discuss Mergers between regulated firms with unknown efficiency gains.

ABSTRACT:  In an industry where regulated firms interact with unregulated suppliers, we investigate the welfare effects of a merger between regulated firms when cost synergies are uncertain before the merger and their realization becomes private information of the merged firm. The optimal merger policy trades off potential cost savings against regulatory distortions from informational problems. We show that, as a consequence of this trade-off, more intense competition in unregulated segments of the market induces a more lenient merger policy. The regulated firms' diversification into a competitive segment of the market can lead to a softer merger policy when competition is weaker.

July 23, 2014 | Permalink | Comments (0) | TrackBack (0)

Fight Cartels or Control Mergers? On the Optimal Allocation of enforcement Efforts within Competition Policy

Andreea Cosnita (Universite Paris X) and Jean-Philippe Tropeano (Sorbonne) ask Fight Cartels or Control Mergers? On the Optimal Allocation of enforcement Efforts within Competition Policy.

ABSTRACT: This paper deals with the optimal enforcement of competition law between merger and anti-cartel policies. We examine the interaction between these two branches of antitrust, given the budget constraint of the public agency, and taking into account the ensuing incentives for firms in terms of choice between cartels and mergers. To the extent that a tougher anti-cartel action triggers more mergers and vice-versa, we show that the two antitrust branches are complementary. However, if the merger's coordinated effect is taken into account, then for a sufficiently large such effect the agency may optimally have to refrain from controlling mergers and instead spend all resources on fighting cartels.

July 23, 2014 | Permalink | Comments (0) | TrackBack (0)

Internal versus External Growth in Industries with Scale Economies: A Computational Model of Optimal Merger Policy

Ben Mermelstein, Volker Nocke, University of Mannheim, Mark Satterthwaite, and Michael Whinston, MIT offer Internal versus External Growth in Industries with Scale Economies: A Computational Model of Optimal Merger Policy.

ABSTRACT: We study optimal merger policy in a dynamic model in which the presence of scale economies implies that firms can reduce costs through either internal investment in building capital or through mergers. The model, which we solve computationally, allows firms to invest or propose mergers according to the relative profitability of these strategies. An antitrust authority is able to block mergers at some cost. We examine the optimal policy when the antitrust authority can commit to a policy rule and when it cannot commit, and consider both consumer value and aggregate value as possible objectives of the antitrust authority. We find that optimal policy can differ substantially from what would be best considering only welfare in the period the merger is proposed. We also find that the ability to commit can lead to a significant welfare improvement. In general, antitrust policy can greatly affect firms' optimal investment behavior, and firms' investment behavior can in turn greatly affect the antitrust authority's optimal policy.

July 23, 2014 | Permalink | Comments (0) | TrackBack (0)

Tuesday, July 22, 2014

Cartel Size and Collusive Stability with Non-Capitalistic Players

Flavio Delbono, Bologna and Luca Lambertini, Bologna explore Cartel Size and Collusive Stability with Non-Capitalistic Players.

ABSTRACT: A well established belief both in the game-theoretic IO and in policy debates is that market concentration facilitates collusion. We show that this piece of conventional wisdom relies upon the assumption of profit-seeking behaviour, for it may be reversed when firms pursue other plausible goals. To illustrate our intuition, we investigate the incentives to tacit collusion in an industry formed by Labor-Managed (LM) enterprises. We characterize the perfect equilibrium of a supergame in which LM firms play an infinitely repeated Cournot game. We show that the critical threshold of the discount factor above which collusion is stable (i) is lower in the LM industry than in the capitalistic one; (ii) monotonically decreases with the number of firms.

July 22, 2014 | Permalink | Comments (0) | TrackBack (0)

Heterogenous switching costs

Gary Biglaiser, Jacques Cremer, Gergely Dobos have written on Heterogenous switching costs.

ABSTRACT: We consider a simple two period model where consumers have different switching costs. Before the market opens, there was an incumbent who sold to all consumers. We identify the equilibrium both with Stackelberg and Bertrand competition and show how the presence of low switching cost consumers benefits the incumbent, despite the fact that it never sells to any of them.

July 22, 2014 | Permalink | Comments (0) | TrackBack (0)

Global Antitrust Challenges for the Pharmaceutical Industry Tuesday, September 23, 2014

Global Antitrust Challenges for the Pharmaceutical Industry


  • Tuesday, September 23, 2014
  8:00 AM                                                           -   8:30 AM
J.W. Marriott Hotel, Salon II
  8:30 AM                                                           -   8:40 AM
Welcome and Introduction
J.W. Marriott Hotel, Salon I
  • Damien Geradin                                    
  8:40 AM                                                           -   9:20 AM
Keynote Address
J.W. Marriott Hotel, Salon I
Keynote Speaker:                               
  • Edith Ramirez                                    
  9:20 AM                                                           -  10:40 AM
Panel 1: Competition Policy and Life-Cycle Management Strategies
J.W. Marriott Hotel, Salon I
  • Michael A. Carrier,                                    
  • Ingrid Vandenborre                                    
  • Eric J. Stock,                                    
  • Aaron Gal,                                    
  • Heather M. Johnson                                    
  • James M. Spears                                    
11:00 AM                                                           -  12:20 PM
Panel 2: Antitrust and Reverse Settlements: Unsettled Issues
J.W. Marriott Hotel, Salon I
  • Markus H. Meier,                                    
  • Henri Piffaut                                    
  • Yoonhwan Hwang,                                    
  • Marc E. Levin,                                    
  • Sumanth Addanki                                    
  • Henry N. Butler                                    
12:20 PM                                                           -   1:30 PM
J.W. Marriott Hotel, Salon II
Keynote Speaker:                               
  • John Pecman                                    
  1:30 PM                                                           -   2:40 PM
Panel 3: Antitrust in Pharmaceutical Markets: When the Government is the Consumer
J.W. Marriott Hotel, Salon I
  • Herbert Hovenkamp,                                    
  • Giovanni Pitruzzela                                    
  • Claudia Berg,                                    
  • Kees Hellingman,                                    
  • John D. Graubert                                    
  • Jonathan B. Baker                                    
  3:00 PM                                                           -   4:10 PM
Panel 4: Rebates and Tying: Implications for Pharmaceutical Competition
J.W. Marriott Hotel, Salon I
  • Joshua D. Wright,                                    
  • Damien Geradin                                    
  • Abbott B. Lipsky, Jr.,                                    
  • Hal J. Singer,                                    
  • D. Daniel Sokol                                    
  4:10 PM                                                           -   5:30 PM
Panel 5: Merger Control in the Pharmaceutical Industry
J.W. Marriott Hotel, Salon I
  • Michael R. Moiseyev,                                    
  • Paul Csiczár                                    
  • Ilene K. Gotts,                                    
  • Monica Noether,                                    
  • George S. Cary                                    
  • Timothy J. Muris                                    
  5:30 PM                                                           -   6:30 PM
J.W. Marriott Hotel, Lounge
  6:30 PM                            

July 22, 2014 | Permalink | Comments (0) | TrackBack (0)

More on University of Arkansas and Antitrust

Jim Fiskin notes that the most important person to teach antitrust at Arkansas was Bill Clinton. See here.

July 22, 2014 | Permalink | Comments (0) | TrackBack (0)

Can competition reduce quality?

Kurt Richard Brekke, Luigi Siciliani, and Odd Rune Straume ask Can competition reduce quality?

ABSTRACT: In a spatial competition setting there is usually a non-negative relationship between competition and quality. In this paper we offer a novel mechanism whereby competition leads to lower quality. This mechanism relies on two key assumptions, namely that the providers are motivated and risk-averse. We show that the negative relationship between competition and quality is robust to any given number of firms in the market and whether quality and price decisions are simultaneous or sequential. We also show that competition may improve social welfare despite the adverse effect on quality. Our proposed mechanism can help explain empirical findings of a negative effect of competition on quality in markets such as health care, long-term care, and higher education.

July 22, 2014 | Permalink | Comments (0) | TrackBack (0)

Complexity, Efficiency, and Fairness of Multi-Product Monopoly Pricing

Eugenio J. Miravete, University of Texas at Austin; Centre for Economic Policy Research (CEPR), Katja Seim, University of Pennsylvania - Business & Public Policy Department, and Jeff Thurk, University of Notre Dame explore Complexity, Efficiency, and Fairness of Multi-Product Monopoly Pricing.

ABSTRACT: The Pennsylvania Liquor Control Board administers the purchase and sale of wine and spirits and is mandated to charge a uniform 30% markup on all products. We use an estimated discrete choice model of demand for spirits, together with information on wholesale prices, to assess the implications of this policy. We find that failure to account for the correlation between demographics and consumption patterns leads to lower prices than those charged by a profit-maximizing, multi-product monopolist. Using product-specific markups leads to higher prices on average, less quantity consumed, an 11% increase in total profits, and greater welfare. The current one-size-fits-all pricing rule ignores variations in demand elasticities resulting in the implicit taxation of high-income and educated households by raising the prices of spirits they prefer (vodka and whiskey) while lowering the price of products favored by low-income and minority households (gin and rum).

July 22, 2014 | Permalink | Comments (0) | TrackBack (0)

Monday, July 21, 2014

Arkansas hiring announcement - antitrust law professors needed

The UNIVERSITY OF ARKANSAS SCHOOL OF LAW, Fayetteville, seeks to fill one tenure-track position to begin in the 2015-2016 academic year at the rank of assistant or associate professor.
Our curricular needs are diverse and may include but are not limited to Professional Responsibility, ADR, upper level writing courses, Professional Skills, International Law, Intellectual Property, Jurisprudence, Family Law, Juvenile Justice, Bankruptcy, Remedies, Antitrust.
Candidates for the position should have a distinguished academic record and experience in the areas of teaching, scholarship and service.  Preferred qualifications include two or more years of practical legal experience and experience as a visiting law professor or fellow.
Applicants should submit a letter of application indicating teaching and scholarly interests, and attach a current resume or curriculum vitae together with three professional references to Professor Ann Killenbeck, Chair, Faculty Appointments Committee at or through regular mail to: The University of Arkansas School of Law, Fayetteville, AR 72701.
The University of Arkansas is an equal opportunity, affirmative action institution. The University welcomes applications without regard to age, race, gender (including pregnancy), national origin, disability, religion, marital or parental status, protected veteran status, military service, genetic information or sexual orientation. Persons must have proof of legal authority to work in the United States on the first day of employment. All applicant information is subject to public disclosure under the Arkansas Freedom of Information Act.

July 21, 2014 | Permalink | Comments (0) | TrackBack (0)

Interpersonal Bundling

Yongmin Chen, University of Colorado at Boulder and Tianle Zhang, Lingnan University describe Interpersonal Bundling.

ABSTRACT: This paper studies a model of interpersonal bundling, in which a monopolist offers a good for sale under a regular price and a group purchase discount if the number of consumers in a group---the bundle size---belongs to some menu of intervals. We find that this is often a profitable selling strategy in response to demand uncertainty, and it can achieve the highest profit among all possible selling mechanisms. We explain how the profitability of interpersonal bundling with a minimum or maximum group size may depend on the nature of uncertainty and on parameters of the market environment, and discuss strategic issues related to the optimal design and implementation of these bundling schemes. Our analysis sheds light on popular marketing practices such as group purchase discounts, and offers insights on potential new marketing innovation.

July 21, 2014 | Permalink | Comments (0) | TrackBack (0)

Tesla and the Car Dealers’ Lobby

Dan Crane (Michigan) has written on Tesla and the Car Dealers’ Lobby.

ABSTRACT: Tesla Motors, the offspring of the South African-American entrepreneur Elon Musk who also brought us Pay-Pal and SpaceX, is the most exciting automotive development in many decades and a marquee story of American technological dynamism and innovation. The company’s luxury electric cars have caused a sensation in the auto industry, including a review by Consumer Reports calling Tesla’s Model S the best car it ever tested.

Tesla faces enormous challenges in penetrating an automotive market that has been dominated for a century by internal combustion engines. Not only must it build cars that customers want to drive (and, ultimately, produce them cost effectively), but it must build the battery swapping and charging infrastructure that make charging as easy and reliable as pumping gas. These are tall orders.

But Tesla’s R&D, technological, and infrastructure challenges seem to be dwarfed these days by political challenges mounted by the powerful car dealers’ lobby. Tesla has chosen a direct-to-consumer distribution model, one that bypasses traditional franchised dealer networks and has Tesla operating its own showrooms and interacting with consumers directly over the Internet. Not surprisingly, this model has struck a deeply negative chord with the car dealers. They prefer not to be cut out. The dealers have responded by invoking decades old laws aimed at curbing direct distribution by car manufacturers and seeking new legislative or regulatory decisions aimed at closing any loopholes that might allow Tesla to distribute directly. Thus far, the dealers have succeeded in blocking Tesla in states like Texas, South Carolina, and New Jersey and are continuing to mount their campaign on a state-by-state level as Tesla’s footprint grows.

The dealers have been successful largely on the backs of their political clout in local elections, where they make significant campaign contributions. They have attempted to justify the direct distribution bans as a form of consumer protection and public safety regulation. Slowly, consumers are waking up to the fact that the dealers’ arguments are completely unfounded. Consumer protection and public safety have nothing to do with these restrictions. They are protectionism for car dealers, pure and simple.

July 21, 2014 | Permalink | Comments (0) | TrackBack (0)

Competition Law in China and Hong Kong: Understanding the Law and How to Comply

Competition Law in China and Hong Kong: Understanding the Law and How to Comply

This practical 4-day program will be presented by Professor Mark Williams.


Dates: Friday 24 and Saturday 25 October, Friday 21 and Saturday 22 November, 2014.

Course outline

The PRC has been enforcing the Anti-Monopoly Law (AML) for the last 5 years and in that time the merger control rules have become very important to multinational firms that have business interests in China or are active in markets that can affect China. MOFCOM has now become one of the most watched competition agencies globally as if China blocks or places conditions on a merger transaction whether this involves firms in China or firms outside China but affect a Chinese market, MOFCOM has the power to derail the deal. The reach of the AML has become very important to technology and raw material suppliers as well as a host of other industries internationally and to China or Hong Kong-based firms.

In purely domestic markets, not only are the merger provisions increasingly actively enforced but so too are the general antitrust provisions relating to the abuse of market power and ‘monopoly agreements’ – horizontal or vertical agreements between firms that may adversely affect competition. The National Development and Reform Commission and State Administration of Industry and Commerce are the state agencies tasked with enforcing these rules and they too have been flexing their muscles, imposing large penalties on infringing firms and sending shock waves through the domestic and international business communities.

Hong Kong enacted its first cross-sector competition law in 2012. A new competition Commission was established in 2013 and it is progressively preparing for full implementation of the Competition Ordinance in 2015.

The Hong Kong law is, in some aspects, similar to the PRC law but in other respects it is quite different. For example, only mergers in the telecommunications and broadcasting sectors will be subject to the Hong Kong law and the Competition Commission only has power to settle complaints of anticompetitive conduct or it must take an enforcement action before the Competition Tribunal, which alone can impose financial penalties and other remedies.

Course content

This 4 day executive education course will aim to:

  • Outline the structure and main legal prohibitions in both Chinese and Hong Kong law
  • Explain the instructional structure and powers of the competition agencies
  • Discuss a number of major case studies, in both jurisdictions, of unlawful conduct, the penalties or remedies imposed and the effect of private litigation
  • Consider the appropriate responses of both large and smaller firms to these new laws and, in particular, how firms can or should develop compliance procedures to keep out of trouble with authorities and to prevent litigation based on allegations of unlawful anticompetitive conduct

This course assumes no prior knowledge of competition law.

Mode of Delivery

The course will be conducted as a series of workshops that will encourage active participation and discussion of the most important and relevant issues and will seek to explain the law and appropriate corporate responses to it in a practical and focused way. Classes will run from 10am to 1pm and from 2pm to 5pm on each of the 4 days. The first two days (24 & 25 October 2014) will concentrate on China and the second two days (21 & 22 November 2014) will consider issues relevant to Hong Kong.

Who Should Attend?

The course will be useful to:

  • Non-specialist lawyers in private practice whose clients operate in China or Hong Kong
  • In-house counsel who may have to advise on the impact of competition law and appropriate complaisance procedures in China or Hong Kong
  • Company secretaries charged with overseeing corporate governance and compliance issues whose companies do business in China or Hong Kong
  • Trade or industry associations whose members carryon business in China or Hong Kong
  • Company directors or senior staff with responsibilities for corporate affairs or compliance issues
  • Government lawyers and enforcement agency staff

Accreditation for continuing professional development purposes has been applied for to the Law Society of Hong Kong and to the Hong Kong Institute of Companies Secretaries.


Admiralty Conference Centre (ACC)

1804, 18/F., Tower 1, Admiralty Centre,

18 Harcourt Road, Admiralty

Hong Kong

Further details

The course is $AUD 2,500.00 (plus a booking fee of $0.30). Click here for COURSE REGISTRATION AND PAYMENT.

We are currently seeking accreditation from the Law Society of Hong Kong and the Hong Kong Institute of Company Secretaries for continuing professional development purposes.

Further details regarding materials will be made available directly to registrants via email.

The couse flyer is available for download.

July 21, 2014 | Permalink | Comments (0) | TrackBack (0)

A New European Competition Policy for Growth Driven by Profitable Investments. The European Commission's Policy In Light of the Modern Economic Growth Theories

Stephane Ciriani, Orange, Regulatory Affairs and Marc Lebourges, France Telecom offer A New European Competition Policy for Growth Driven by Profitable Investments. The European Commission's Policy In Light of the Modern Economic Growth Theories.

ABSTRACT: 1. Although market dominance is not illegal in the European Union, European Commission’s doctrine regards exercise of market power as economically inefficient. Its economic policy is meant to push markets towards perfect competition, but ignores that investments required for dynamic efficiency are financed by the profits they create.

Although under the European law market power is not illegal by itself, the economic doctrine of the Commission considers, however, that the exercise of market power, i.e. charging supra-competitive prices, lead to inefficient market outcomes. The economic policy of the European Union is a competition policy which aims to make markets tend towards a perfectly competitive frame, where profit margins are eliminated and prices tend towards marginal costs. The Commission monitors and controls market structures to ensure that competition drives growth by selecting the most efficient companies and sectors. The Commission regards competition as the major driver of competitiveness and growth provided it is supported by competition policy which makes markets efficient under the criteria of a static economic analysis. Its purpose is to raise competition intensity in the intermediate markets to allow producers of final goods to benefit from lower input price to improve their efficiency. In addition, it aims at promoting the mobility of factors of production, transferring them from the less efficient to the most efficient and productive sectors.

The Commission argues that under the guidance of competition authorities, competition leads to cost efficiency, raises the amount of resources available to leading sectors and at the same time promotes investment through the “escape from competition” effect.

This doctrine has, however, important shortcomings. It ignores the fact that lower profits can hamper investment and that companies with negative expectations on profitability will not invest. The European Commission is unclear about whether competition should be seen as a process or a steady state. When politically advocating its competition policy, the European Commission depicts competition as an evolutionary dynamic that promotes efficiency, investment and innovation. However, when actually implementing its policy, the European Commission aims to make markets tend towards a steady state of maximum level of static competitive intensity (with no technological progress) by eliminating market power and ensuring the most perfect competitive frame possible. The pursuit of the maximum level of static competitive intensity might then deter investment, which is the driver of dynamic efficiency, and eventually economic growth.

2. The European competition authorities’ policy is to prevent exercise of market power whereas the purpose of US competition authorities is to maintain undertakings’ incentives to invest in order to gain market power.

The European Commission intervenes ex-ante through policies promoting market entry in order to prevent the formation of a market power likely to be exercised and  relies on antitrust action to remove it ex-post. In their practical approach, the competition authorities ban mergers that bring market power arguing that intermediate and final consumers would face higher prices and lower innovation. They approve consolidations provided merged companies commit to transfer productive assets to direct competitors. They consider that temporary rents from investment and innovation efforts distort competition because they grant dominant positions and thus have to be tackled by the enactment of competition law. As the practical approach of competition authorities is to reach the maximum level of static competitive intensity, (where prices equal marginal production costs), their focus is on the upward price pressures that mergers would trigger in the short term.

The European competition authorities do not spontaneously consider the positive effects on investment and efficiency that could stem from a merger. They are sceptical about the arguments put forward by companies in support of these effects. Therefore, when evaluating mergers, the authorities do not consider the value that corporate investment in quality and quantity (stemming from higher expected profitability) can bring to the consumer. The same reasoning is applied to the analysis of abuse of dominant position. The appraisal of market dominance and of the exercise of market power by the European authorities might hamper the incentives of private companies to invest and innovate. The US competition authorities apply a different antitrust policy with regards to maintaining a competitive market structure. Contrary to the European competition authorities they do not consider that the dominant firm is liable for the competitive market structure or responsible for maintaining its competitors on the market. They give priority to returns on investment and incentives to invest over forcing companies to share their assets with their competitors to preserve static competition. They thus favour the growth of market players (hence to market power) over maintaining a perfectly competitive market structure.

The US competition authorities and policymakers consider market power in the form of mark-ups over competitive prices both a condition for returns on prior investment and a condition of future investments. As a result, they are more likely to foster incentives to invest and innovate, as investors do not necessarily expect both their assets and their returns to be transferred to competitors.

In Europe, the willingness of competition authorities to eliminate profit margins, to limit capital intensity favored by mergers, and to ban large companies from acquiring competitive advantages can deprive these companies of prospects which motivate their investments, as expectations regarding profitability become negative.  This has an overall deterrent effect on investment and innovation, and in turn undermines economic growth in the European Union. 

3. The European Commission acknowledges investment as a driver of macroeconomic growth undermined by poor profitability but ignores this point concerning the provision of intermediary goods by high technology industries in the internal market.

The European Commission acknowledges that the European Union’s macroeconomic weaknesses, although worsened by the financial crisis, have structural causes. The European Union has slower productivity growth than the United States, especially in high-tech sectors, and a weaker industrial sector. According to the Commission, Europe has been losing competitiveness because of high labour costs and companies’ difficulties in specialising in fast growing sectors, exporting their goods and services, and accessing sources of funding.

To restore competitiveness, productivity and growth in the Union, the Commission recommends strengthening high productivity industries and companies exposed to international competition. It posits that raising the share of the manufacturing sector in the aggregate added value should raise productivity gains in the global economy. The policy of the European Union consists in fostering transfers of inputs from the non-tradable sector (mainly services) to the tradable sector (industry). Structural reforms are thus designed to reduce labour costs through tax shifts and to decrease the prices of intermediate inputs in market services (sheltered from international competition) through stronger competitive pressure. The Commissions posits that exporting industrial companies would then be able to restore their profit margins and therefore the investment capacities needed to bring technological progress to the internal market. The Commission thereby recognises both the need for profit margins to finance current corporate investment and the need for sufficient expected returns to commit to new investments.

However, it still enforces the ban on the exercise of market power as the essential component of its competition policy, relying on the “escape-competition effect” to foster investment when competition is intense. The Commission thereby ignores that investment in market services can be slowed down due to negative expectations on revenues and profit margins which will limit the capacity of companies to finance themselves. The Commission suggests that increased competition in the banking sector might raise the credit supply and overcome the shortage of internal resources, but, by doing so, the Commission seems to confuse financing issues and profitability issues. For the Commission, internal resources to finance investment will not come from competitive advantages (as fair reward from investment) but from lower input costs due to increased competitive pressure.

4. Economic growth results from improved productivity due to investments incorporating technical progress in the production system. Investments decisions by market players are subject to expected profits and cannot be achieved when competition intensity exceeds its optimal threshold. A growth-supportive competition policy should adjust competitive intensities to maximise the contribution investments in each industry to maximise the contribution investments in each industry provide to productivity and growth.

The European competition authorities advocate monitoring markets to ensure that an evolutionary process leads companies to invest and innovate. But in the Commission’s doctrine, technological progress is regarded as exogenous to the market. The European doctrine focuses on static efficiency, making prices converge towards marginal costs, thereby eliminating mark-ups over steady state competitive prices. By doing so, it rejects the endogenous drivers of dynamic efficiency.

Endogenous growth theory has shown that technological progress is not brought to the market, but is instead created by the market. It is the result of private investment decisions. It stems from the accumulation of knowledge and capital goods by private companies. Mark-ups over competitive prices are both the result of past investment and the precondition for future investment. Private investors are willing to bear the cost of investment provided they are granted temporary rents to reward their capital expenditure. Investments cannot be made without a prospect of profit.  Internal resources can provide critical contribution to the financing of future investment. A certain degree of imperfect competition is thus needed to foster accumulation of fixed capital (which incorporates technological progress).
A competition policy pushing markets towards perfect competition is thus likely to hamper investment and growth. This is why the pursuit of “perfect” markets might not be the soundest policy choice when the objective is to promote growth through private investment.

Provisions to remove structural entry barriers and price-cost margins removes at the same time both the incentives and the internal resources needed to invest. Recent empirical studies have evidenced that competition might harm investment and innovation above an optimal threshold. Thus, when competition exceeds it, it is unlikely that proceeding with a competition policy that unconditionally attempts to eliminate all abilities to exercising market power remains the most suitable choice to promote investment and growth.

In Europe competition policy is applied uniformly irrespective of the specific rate of technological progress of industries. This practice is not consistent with the fact that corporate investment that embodies technological evolution is endogenous to market competition. Private investment can only be sustained over time, let alone increased, provided sufficient levels of cash flow are forecasted to justify capital expenditure. This requires sufficient expected profits and mark-ups over competitive prices. Some sectors, including services markets, are highly capital-intensive and evolve rapidly with technological change.  These sectors accumulate fixed capital which incorporates the technological progress and contribute to the growth of productivity. They do need sufficient profitability to fund their current investments and to consider future investments as well. Under the European Commission’s doctrine that aims to maximise static competitive intensity, such sectors will hardly be fully efficient and provide a full contribution to economic growth through the accumulation of technological progress.
The intensity of use of new technologies matters more for economic growth than the timing of their emergence. Thus a competition policy conducive to growth needs to attach at least as much importance to corporate investments in fixed capital goods that embody the new technologies as it does to investments in the creation of new technologies (i.e. R&D activities).

As private incentives to invest are endogenous to the market structure, the intensity of investment needed to improve competitiveness could only be reached and maintained if capital-intensive industries restore their profit margins. The framework of analysis and the implementation rules of European competition policy need to be updated. The European economic policy could usefully update its views on the aims and practical implementation of its competition policy. It could do so by taking account of the specific industrial and financial constraints of companies that provide technological progress through the investments. Their expenditures on fixed capital need sufficient self-financing capacities and thus mark-ups over competitive prices.

July 21, 2014 | Permalink | Comments (0) | TrackBack (0)

Search Engines and Data Retention: Implications for Privacy and Antitrust

Lesley Chiou, Occidental College - Department of Economics and Catherine Tucker, Massachusetts Institute of Technology (MIT) analyze Search Engines and Data Retention: Implications for Privacy and Antitrust.

ABSTRACT: This paper investigates whether larger quantities of historical data confer a competitive advantage to firms that offer Internet search. We study how the length of time that search engines retained their server logs affected the apparent accuracy of subsequent searches. Our analysis exploits changes in these policies prompted by the actions of the European Commission. We find little empirical evidence that reducing the length of storage of past search engine searches affected the accuracy of search. Our results suggest that the possession of historical data confers less of a competitive advantage than is sometimes supposed. Our results also suggest that limits on data retention may impose fewer costs in instances where overly long data retention leads to privacy concerns such as an individual's "right to be forgotten."

July 21, 2014 | Permalink | Comments (0) | TrackBack (0)

Friday, July 18, 2014

The Current State of Mexico's Telecom Reform: A Clash between Reforms and Competition

Ramiro Tovar Landa, Instituto Tecnologico Autonomo de Mexico (ITAM) explains The Current State of Mexico's Telecom Reform: A Clash between Reforms and Competition.

ABSTRACT: Speech about Telecommunications Reform in México and their industrial policy elements which lie up in income transfers from the incumbent to its competitors and rules that rewards the lack of investment by new competitors and erase incentives to the incumbent reaching confiscatory measures. The reform is guided to service based competition rather than facilities based. Mexico is about to test a regulatory policy failure when the investment by both, incumbent and entrants, is needed to reach the higher grow to the Mexico' economy.

July 18, 2014 | Permalink | Comments (0) | TrackBack (0)

Weak versus Strong Net Neutrality

Joshua S. Gans, University of Toronto - Rotman School of Management describes Weak versus Strong Net Neutrality.

ABSTRACT: This paper provides a framework to classify and evaluate the impact of net neutrality regulations on the allocation of consumer attention and the distribution of surplus between consumers, ISPs and content providers. While the model provided largely nests other contributions in the literature, here the focus is on including direct payments from consumers to content providers. With this additional price it is demonstrated that the type of net neutrality regulation (i.e., weak versus strong net neutrality) matters for such regulations to have real effects. In addition, we provide support for the notion that strong net neutrality may stimulate content provider investment while the model concludes that there is unlikely to be any negative impact from such regulation on ISP investment. Counter to many claims, it is argued here that ISP competition may not be a substitute for net neutrality regulation in bringing about these effects.

July 18, 2014 | Permalink | Comments (0) | TrackBack (0)


Lapo Filistrucchi, University of Florence, Damien Geradin,Tilburg University, Eric van Damme, Tilburg University and Pauline Affeldt, E.CA Economics discuss MARKET DEFINITION IN TWO-SIDED MARKETS: THEORY AND PRACTICE.

ABSTRACT: Drawing from the economics of two-sided markets, we provide suggestions for the definition of the relevant market in cases involving two-sided platforms, such as media outlets, online intermediaries, payment cards companies, and auction houses. We also discuss when a one-sided approach may be harmless and when instead it can potentially lead to a wrong decision. We then show that the current practice of market definition in two-sided markets is only in part consistent with the above suggestions. Divergence between our suggestions and practice is due to the failure to fully incorporate the lessons from the economic theory of two-sided markets, to the desire to be consistent with previous practice, and to the higher data requirements and the higher complexity of empirical analysis in cases involving two-sided platforms. In particular, competition authorities have failed to recognize the crucial difference between two-sided transaction and non-transaction markets and have been misled by the traditional argument that where there is no price, there is no market.

July 18, 2014 | Permalink | Comments (0) | TrackBack (0)