Antitrust & Competition Policy Blog

Signaling the Strength of a Market Entrant

Posted by D. Daniel Sokol

Karel Janda (Charles University - Econ) provides us an understanding of Signaling the Strength of a Market Entrant.

ABSTRACT: This article belongs to the game theoretic and information economics literature dealing with the problem of signaling in the context of game theoretical models of entry into the industry. As opposed to the majority of literature we consider the situation of asymmetric information where the private information belongs to the entrant. We model the capacity decision of the entrant as a signal of his strength. We show that in the Stackelberg model of market entry for some values of underlying parameters the entrant fully utilizes his capacity while for other parameter values he builds excess capacity. The model may be empirically relevant for industrial organization analysis of the entry of a new supplier to the existing supply chain.

Screening and Merger Activity

Posted by D. Daniel Sokol

Albert Banal-Estanol (City University of London and Universitat Pompeu Fabra), Paul Heidhues (University of Bonn), Rainer Nitsche (European School of Management and Technology), and Jo Seldeslachts (University of Amsterdam and WZB) analyze Screening and Merger Activity.

ABSTRACT: In our paper targets, by setting a reserve price, screen acquirers on their (expected) ability to generate merger-specific synergies. Both empirical evidence and many common merger models suggest that the difference between high- and low-synergy mergers becomes smaller during booms. This implies that the target’s opportunity cost for sorting out relatively less fitting acquirers increases and, hence, targets screen less tightly during booms, which leads to a hike in merger activity. Our screening mechanism not only predicts that merger activity is intense during economic booms and subdued during recessions but is also consistent with other stylized facts about takeovers and generates novel testable predictions.

Credit Market Competition and the Nature of Firms

Posted by D. Daniel Sokol

Nicola Cetorelli (Federal Reserve Bank of New York) has a working paper on Credit Market Competition and the Nature of Firms.

ABSTRACT: Empirical studies show that competition in the credit markets has important effects on the entry and growth of firms in nonfinancial industries. This paper explores the hypothesis that the availability of credit at the time of a firm’s founding has a profound effect on that firm’s nature. I conjecture that in times when financial capital is difficult to obtain, firms will need to be built as relatively solid organizations. However, in an environment of easily available financial capital, firms can be constituted with an intrinsically weaker structure. To test this conjecture, I use confidential data from the U.S. Census Bureau on the entire universe of business establishments in existence over a thirty-year period; I follow the life cycles of those same establishments through a period of regulatory reform during which U.S. states were allowed to remove barriers to entry in the banking industry, a development that resulted in significantly improved credit competition. The evidence confirms my conjecture. Firms constituted in post-reform years are intrinsically frailer than those founded in a more financially constrained environment, while firms of pre-reform vintage do not seem to adapt their nature to an easier credit environment. Credit market competition does lead to more entry and growth of firms, but also to complex dynamics experienced by the population of business organizations.

Trends in Regional Industrial Concentration in the United States

Posted by D. Daniel Sokol

Joshua Drucker writes on Trends in Regional Industrial Concentration in the United States.

ABSTRACT: In a seminal article, Benjamin Chinitz (1961) raises the question of the effects that industry size, structure, and economic diversification may have on firm performance and regional economies. His line of inquiry suggests a related but conceptually distinct issue: how does the extent to which a industry is regionally dominated—concentrated locally in a single or small number of firms—impact the local performance of that industry? This question has received little attention, principally because accurately measuring industrial concentration at the regional scale requires firm-level information. This paper makes use of confidential plant- and firm-level manufacturing data to explore patterns of industrial concentration in the United States at the regional scale. Regional analogues of concentration ratios and other measures commonly used in the aspatial industrial organization literature indicate the extent to which man! ufacturing activity is concentrated in a small number of firms. Both the manufacturing sector as a whole and major manufacturing industry sectors are examined in order to determine the extent of industrial concentration in the continental United States, to explore changes over time in geographic patterns of concentration, and to investigate associations between industrial concentration and employment growth at the regional scale. Implications for understanding regional growth and for devising regional economic development policy are discussed.

Economic Analysis Group Antitrust Division, US Department of Justice Fall 2009 Seminar Schedule

Posted by D. Daniel Sokol

Economic Analysis Group
Antitrust Division, US Department of Justice
Fall 2009 Seminar Schedule

September 15
(Tues 2–3:30pm)
Xavier Vives
Navarra
Strategic Supply Function Competition with Private Information

October 6
(Tues 2–3:30pm)
Leemore Dafny
Northwestern
Paying a Premium on Your Premium? Consolidation in the U.S. Health Insurance Industry (with Mark Duggan and Subramaniam Ramanarayanan)

October 13
(Tues 2-3:30pm)
Jake Gramlich
Georgetown
Gas Prices and Endogenous Product Selection in the U.S. Automobile Industry

October 20
(Tues 2-3:30pm)
Fiona Scott Morton
Yale
Differentiated to Death (with Judith Chevalier and David Harrington)

October 27
(Tues 2-3:30pm)
Nathan Miller
EAG
An Empirical Model of Spatial Competition with an
Application to Cement (with Matthew Osborne)
November 3

(Tues 2-3:30pm)
Chuck Romeo
EAG
Robust Inference in Mixed Logit Demand Systems for Aggregate Data
November 10

(Tues 2-3:30pm)
Joe Farrell
FTC and UC-Berkeley
Some Welfare Analytics of Aftermarkets

November 18
(Wed 2-3:30pm)
Louis Kaplow
Harvard Law
Why (Ever) Define Markets?
[Note this is a Wednesday.]

December 1
(Tues 2-3:30pm)
Tim Brennan
UMD-Baltimore County
Exclusion vs. Predation: Drawing Lines Between Easy and Hard Abuse Cases

December 8
(Tues 2-3:30pm)
Ron Goettler
Chicago
Competition and Innovation in the Microprocessor Industry: Does AMD Spur Intel to Innovate More? (with Brett Gordon)

Seminars take place in Room 9429 of the Liberty Square Building at 450 Fifth Street NW, Washington DC. For further information, contact Patrick Greenlee at (202) 307-3745 or patrick.greenlee@usdoj.gov. Schedule also available at http://www.usdoj.gov/atr/public/eag/seminars.htm

Entry, Exit, and the Determinants of Market Structure

Posted by D. Daniel Sokol

Timothy Dunne (University of Oklahoma), Shawn Klimek (U.S. Bureau of the Census), Mark Roberts (Pennsylvania State), and Daniel Yi Xu (NYU) explain Entry, Exit, and the Determinants of Market Structure.

ABSTRACT: Market structure is determined by the entry and exit decisions of individual producers. These decisions are driven by expectations of future profits which, in turn, depend on the nature of competition within the market. In this paper we estimate a dynamic, structural model of entry and exit in an oligopolistic industry and use it to quantify the determinants of market structure and long-run firm values for two U.S. service industries, dentists and chiropractors. We find that entry costs faced by potential entrants, fixed costs faced by incumbent producers, and the toughness of short-run price competition are all important determinants of long run firm values and market structure. As the number of firms in the market increases, the value of continuing in the market and the value of entering the market both decline, the probability of exit rises, and the probability of entry declines. The magnitude of these effects differ ! substantially across markets due to differences in exogenous cost and demand factors and across the dentist and chiropractor industries. Simulations using the estimated model for the dentist industry show that pressure from both potential entrants and incumbent firms discipline long-run profits. We calculate that a seven percent reduction in the mean sunk entry cost would reduce a monopolist's long-run profits by the same amount as if the firm operated in a duopoly.

Government in Markets

Posted by D. Daniel Sokol

John Fingleton (OFT) has a great new speech on Government in Markets.

Latin American Competition Law and Policy

Posted by D. Daniel Sokol

Eleanor Fox (NYU - Law) and D. Daniel Sokol (University of Florida - Law, me) are editors of Latin American Competition Law and Policy.  The book is an excellent collection of work from top academics and practitioners and covers many critical issues involving competition law and policy in the region.  You can download the table of contents here.  To order the book, please download the pdf form.  Download Competition Law and Policy in Latin America

BOOK ABSTRACT: This book offers an unparalleled analysis of the emerging law and economics of competition policy in Latin America. Nearly all Latin American countries now have competition laws and agencies to enforce them. Yet these laws and agencies are relatively young. The relative youth of Latin American competition agencies and the institutional and political environment in which they operate limit the ability of agencies to address anti-competitive conduct effectively. Competition policy is a tool to overcome anti-market traditions in Latin America. Effective competition policy is critical to assisting in the growth of Latin American economies and their global competitiveness, and to improving the welfare of domestic consumers. This book provides new region-specific insights into how better to achieve these aims.

IBA 13th Annual Competition Conference - Fiesole, Italy

Posted by D. Daniel Sokol

Details for the program are available here.

Cross-shareholding in the Japanese Banking Sector, Tacit Collusion, and Market Power

Posted by D. Daniel Sokol

Umed Temurshoev, University of Groningen - Faculty of Economics and Business and Stanislav Stakhovych discuss Cross-shareholding in the Japanese Banking Sector, Tacit Collusion, and Market Power.

ABSTRACT:This paper modifies the well-known conjectural variation model of Clarke and Davis (1982) by taking into account partial cross ownership (PCO) links among firms. It is shown that, unlike in the no PCO case, the link between firms’ price-cost margins and the degree of tacit collusion is nonlinear in the presence of PCO. Thus, ignoring PCO in their presence would most likely lead to biased results due to model misspecification. The model is applied to the Japanese banking sector in 2003. We find that Japanese banks compete in a modest collusive environment, while neglecting PCO gives a different result indicating a Cournot oligopoly. It is further shown that banks with passive holdings in rivals exert a strictly larger market power than those without any PCO. In particular, city banks with many shareholdings are found to exercise a much larger market power than regional banks with none or few stockholdings.

Judging’ Economists: Economic Expertise in Competition Law Litigation - A European View

Posted by D. Daniel Sokol

Ioannis Lianos of UCL Law has posted the very interesting Judging’ Economists: Economic Expertise in Competition Law Litigation - A European View.

ABSTRACT: The study focuses on the admissibility and assessment of economic expertise in EC competition law litigation. I start by exploring the broader issues raised by the integration of economic expertise in litigation: in particular the risk of moral hazard and adverse selection because of the epistemic asymmetry between judges and experts and the risk of expert bias. The analysis of these problems will bring me to the question of the conception of science and of the relations between science and law that underpins the concept of scientific expertise and, more specifically, economic expertise. I will then identify the extent of the problem of epistemic asymmetry and expert bias by looking to the degree and the locus of the intrusion of economic analysis in competition cases. I will examine the instruments, procedural and substantive, employed by the legal system, in order to mitigate the risks flowing from the epistemic asymmetry and the expert bias claims. First, I will highlight the different institutional and procedural frameworks that were adopted at the European Union level and in some selected member states in order to integrate economic expertise in litigation. My objective will be to understand how these institutional solutions may address each of the identified problems. Second, I will look to 'substantive' law approaches in the adjudication of expertise, such as the development of specific standards for the admissibility and the sufficiency of economic expertise in courts, as an alternative or as an additional option to deal with the challenges raised by economic expertise. The paper will conclude that the possible adverse effects of the epistemic asymmetry and expert bias between judges and experts raise important concerns that the legal systems should tackle. The current procedural/institutional and substantive legal framework governing economic expertise does not however take sufficiently into account important concerns that are specific to economics and other social sciences, such as the preservation of the scientific 'competition' in the supply of economic theory and consequently methodological or assumptions-related pluralism in economic thought. In particular, I will argue against adopting specific standards of admissibility of economic expertise in Europe. This is a US context-specific solution which does not necessarily fit with the specific characteristics of the European legal system. It is also an approach that represents an outdated and partial view of the scientific as well as of the judicial adjudication process.

Chinese Standard Setting

Posted by Paul Jones

One of the major areas of tension between China and the other countries has been, and will likely continue to be, intellectual property rights in standards. For example when China wants to develop its own national standards, there are concerns form foreign businesses that they will be disadvantaged in the Chinese market, such as in mobile telephones. On the other hand Chinese manufacturers feel that all of their profit margin disappears in the license fees for patented standards in  products such as DVD players. Often China played no role in the development of these standards.

So where is China headed on this issue?

On Friday in Beijing there was a Forum on the Interface Between Standardization and Intellectual Property Rights:

Agenda (in English): http://www.chinaiprlaw.cn/file/2009090115639.html

Pictures: http://www.chinaiprlaw.cn/file/2009090415657.html

Dr. Jiang Zhipei, the former head of the IP Section of the Supreme People’s Court, prepared a paper for the Forum which he has now posted online (in Chinese): http://www.chinaiprlaw.cn/file/2009090615659.html

His paper is a good overview of the development of standard setting policies in China, with reference to earlier cases decided by the Chinese courts and the current development of policies. I recommend it to those wishing to better understand the Chinese approach to standard setting.

First he points out that there are different types of standards; national standards, industry standards, local standards, and enterprise standards. These were set out in the Standardization Law adopted in 1988 (in Chinese:

http://www.chinawater.net.cn/guifan/bzhf.htm ) While in China national and industrial standards have tended to be considered as public property, he recognizes that in the U.S. sometimes industrial standards can be proprietary , and can capture the market for the owner.

In 2007 the Supreme People’s Court decided a case (http://www.chinacourt.org/html/article/200811/17/330980.shtml )  in which Jiang was one of the Judges. Article 6 of the Standardization Law requires that enterprise product standards must be submitted to local government agencies for the record. Did such a submission constitute a disclosure under the Patent Law so that the invention lost its novelty? The court said that enterprise standards are generally corporate trade secrets and the recording did not mean that they had been publicly disclosed. However the other three categories, namely the national, industry and local standards are to be considered differently.

When asked for advice in a patent case in 2008 the Supreme People’s Court wrote that as standards had not yet been established by standard setting bodies with respect to the disclosure of proprietary rights in standards, that if proprietary information is included in a standard with the consent of the owner, the use of the standard without a specific license from the owner does not constitute infringement. The owner may demand the payment of fees for such use, but at a significantly lower rate.

With the adoption of the amendments to the Patent Law in December of 2008 a draft Interpretation was issued by the SPC in June 2009 (最高人民法院关于审理侵犯专利权纠纷案件 – Several Provisions of the Supreme People’s Court on Issues Concerning Rules Applicable to the Trial of Patent Rights Infringement Disputes. Available online in Chinese at: http://www.chinacourt.org/wsdc/) . Article 20 of the draft Interpretation deals with standard setting and patent infringement.

It provides that where the proprietary information in  a patent has been incorporated into a national, industry or local standard the royalty owing to the patent holder should be set by the court based on the degree of innovation in the patent, among other things. Where the patent owner has not disclosed its rights or where the obligation to disclose is unclear, the parties can request the court to determine the fee and the license terms. Otherwise the laws on standardization shall prevail.

The consultation period for the draft Interpretation ended in July, and the final form of Article 20 is not yet known. But in China it is clear that standard setting is something in which the public and the state have an interest, except with respect to enterprise standards.

Welcome Guest Blogger Paul Jones

Posted by D. Daniel Sokol

Paul Jones, a Canadian antitrust lawyer who has particular expertise on Chinese issues will guest blog for us to describe some recent Chinese developments.

Komninos to Greece

Posted by D. Daniel Sokol

Academic/Practitioner Assimakis (Makis) Komninos is leaving private practice for a government position in Greece. Makis has been appointed a Commissioner, member of the board and president of chamber at the Hellenic Competition Commission. A recent amendment of the Greek Competition Act reshuffled the Greek Competition Commission. The Board of the authority will now consist of nine members. There will be one Commission President, four full-time Commissioners and four part-time members. The Commissioners will preside over the four chambers that have now been created and will also supervise the cases investigated by the Directorate-General. The President and the four Commissioners were confirmed by the Greek Parliament last week and take up their duties as of today. The President of the Commission is Dimitrios Kyritsakis, a former Vice-President of the Greek Supreme Court. Makis is a visiting professor at IREA - Université Paul Cézanne Aix - Marseille III and a visiting lecturer at University College London (UCL). I had the chance to meet him at an academic conference this past summer and found him to be quite analytically sharp.  This is a big pick-up for the Greek competition system, perhaps the coolest Greek related news item since I found out that a remake is in the works of the early 1980s cult classic Clash of the Titans.

2009 OECD/IADB Latin American Competition Forum

Posted by D. Daniel Sokol

LATIN AMERICAN COMPETITION FORUM
SEVENTH ANNUAL MEETING
9-10 September 2009
Santiago (Chile)

Details are available here.

Price Squeezes and Vertical Discrimination on Next Generation Access Networks

Posted by D. Daniel Sokol

Henry Ergas, Concept Economics, Emma Lanigan, Concept Economics, and Eric Kodjo Ralph, EKonomics LLC have written on Price Squeezes and Vertical Discrimination on Next Generation Access Networks.

ABSTRACT: Next generation access networks (NGANs) are in many cases likely to be supplied by vertically integrated firms, that is, firms that both wholesale access and sell services downstream to end-users. A long standing concern of regulators is that such firms may engage in anti-competitive price squeezes. This paper examines this concern and reviews the difficulties associated with conventional imputation tests in an NGAN context. The paper is organised as follows. Section 2 of the paper provides an analytical framework for understanding vertical integration, vertical discrimination, including price squeezes, and the incentives to engage in such behaviour. Section 3 explains why the incentives for a NGAN provider to vertically discriminate are sharply reduced as compared with a traditional vertically integrated telecommunications carrier. Section 4 considers regulatory approaches to the price squeeze. Section 5 focuses on how regulators are also concerned with inefficiently high prices and derives implications for the efficient setting of NGAN access charges.

Regulating Innovation: Competition Policy and Patent Law under Uncertainty

Posted by D. Daniel Sokol

Geoffrey A. Manne, International Center for Law & Economics, Lewis & Clark Law School, LECG and Joshua D. Wright, George Mason University - School of Law have posted Regulating Innovation: Competition Policy and Patent Law under Uncertainty.

ABSTRACT: This essay is the introduction to a forthcoming volume entitled, Regulating Innovation: Competition Policy and Patent Law Under Uncertainty (Cambridge U. Press 2009 forthcoming).

In addition to introducing all of the papers in the volume, this essay introduces the organizing themes of the volume. Innovation is critical to economic growth. While it is well understood that legal institutions play an important role in fostering an environment conducive to innovation and its commercialization, much less is known about the optimal design of specific institutions. Regulatory design decisions, and in particular competition policy and intellectual property regimes, can have profoundly positive or negative consequences for economic growth and welfare. However, the ratio of what is known to unknown with respect to the relationship between innovation, competition, and regulatory policy is staggeringly low. In addition to this uncertainty concerning the relationships between regulation, innovation, and economic growth, the process of innovation itself is not well understood.

The regulation of innovation and the optimal design of legal institutions in this environment of uncertainty are two of the most important policy challenges of the 21st century. Any legal regime must attempt to assess the tradeoffs associated with rules that will affect incentives to innovate, allocative efficiency, competition, and freedom of economic actors to commercialize the fruits of their innovative labors and foster economic growth. Unfortunately, as this essay describes, our tools for assessing these tradeoffs are limited.

Any coherent regulatory framework must take account of the low level of empirical knowledge surrounding the complex relationship between regulation - both through competition policy and patent law - and innovation, and the corresponding uncertainty caused by this absence of knowledge. The relationship between regulation and innovation has posed a significant challenge to antitrust economists at least since Schumpeter’s suggestion that dynamic competition would result in “creative destruction,” leading to a competitive process where one monopolist would replace another sequentially as new entrants developed a superior product.

Interfering in this dynamic process for the sake of static efficiency gains is perilous, but, of course, not impossible. But regulators and policy makers must take (more) seriously the condition of fundamental uncertainty in which they act, and the significant costs of their inevitable errors before justifying interventions on grounds of promoting competition or facilitating innovation.

This essay and the chapters in this book, approach this critical set of problems from an economic perspective, relying on the tools of microeconomics, quantitative analysis, and comparative institutional analysis to explore and begin to provide answers to the myriad challenges facing policymakers. The strength of this analysis - often described as the New Institutional Economic approach - is in its recognition that understanding economic performance requires not only economic modeling of narrow behavior, but also an understanding of that behavior in its legal, economic, social, and political institutional context.

The essay includes a table of contents for the book.

Developments in Pakistan's Competition Law and Policy

Posted by D. Daniel Sokol

According to news reports, Khalid Aziz Mirza is out from his job as chairman of the Competition Commission of Pakistan.

September 7 update: It looks like he is back, according to the latest news reports from Pakistan because the sacking went against proper procedure.  Also, he was actually doing a good job.

Google and the Proper Antitrust Scrutiny of Orphan Books

Posted by D. Daniel Sokol

Jerry A. Hausman, Massachusetts Institute of Technology (MIT) - Department of Economics, and J. Gregory Sidak, Tilburg University - Faculty of Law, Criterion Economics, L.L.C. analyze the major issues in Google and the Proper Antitrust Scrutiny of Orphan Books.

ABSTRACT: We examine the consumer-welfare implications of Google’s project to scan a large proportion of the world’s books into digital form and to make these works accessible to consumers through Google Book Search (GBS). In response to a class action alleging copyright infringement, Google has agreed to a settlement with the plaintiffs, which include the Authors Guild and the Association of American Publishers. A federal district court must approve the settlement for it to take effect. Various individuals and organizations have advocated modification or rejection of the settlement, based in part on concerns regarding Google’s claimed ability to exercise market power. The Antitrust Division has confirmed that it is investigating the settlement. We address concerns of Professor Randal Picker and others, especially concerns over the increased access to 'orphan books,' which are books that retain their copyright but for which the copyright holders are unknown or cannot be found. The increased accessibility of orphan books under GBS involves the creation of a new product, which entails large gains in consumer welfare. We consider it unlikely that Google could exercise market power over orphan books. We consider it remote that the static efficiency losses claimed by critics of the settlement could outweigh the consumer welfare gains from the creation of a valuable new service for expanding access to orphan books. We therefore conclude that neither antitrust intervention nor price regulation of access to orphan books under GBS would be justified on economic grounds.

The Changing Business Model of Law Firms - With Thoughts on Antitrust Practices

Posted by D. Daniel Sokol

With fewer offers emerging from US law firms and associate cuts still underway, is antitrust still a hot area area of practice?  On the one hand, merger activity is down.  On the other hand, there is a low threshold to trigger interest from DOJ and FTC as the new leadership teams figure out what to do (though no big cases yet on mergers or conduct have emerged).  Is antitrust doing relatively well relative to other fields?  Is follow on private class action cartel work keeping people busy or has Tombly had a big effect?  Feel free to post thoughts, even anonymously.