Antitrust & Competition Policy Blog

China’s Antimonopoly Law—One Year Down

Posted by Wentong Zheng

Part 1: General Overview

First, I would like to thank Dan and Shubha for inviting me to guest blog here on the Chinese antitrust law.  It has been a year (or a little more than a year, to be accurate) since China’s new Antimonopoly Law (“AML”) went into effect on August 1, 2008.  Adopted in August 2007 after a nearly thirteen-year drafting process, the AML is China’s first comprehensive antitrust legislation and has been hailed as a milestone in China’s march towards a market economy.

So what does the first year of the AML tell us about the future of the Chinese antitrust law?  That will be the subject of my guest-blogging here.  In today’s post, I will provide an overview of the AML and a summary of the developments in the past year.  In the next five or six posts, which will be uploaded at approximately one to two week intervals, I will take up issues such as the direction of China’s merger and dominance law, the allegedly protectionist bent the AML has taken on, the “dual-track” antitrust regime that begins to emerge in China, the interaction between the AML and China’s industrial policies and economic development goals, the special problem of “administrative monopolies” (meaning anticompetitive conducts by government agencies), and the problems with the enforcement of the AML.

What’s in the AML?

Much has been written about the content of the AML elsewhere and I won’t be reinventing the wheel here.  To just give a quick summary, the AML has all major elements of the antitrust laws of the Western countries: prohibition of horizontal agreements, prohibition of abuse of market power, and a merger review regime.  In the meantime, the AML also has elements that are not typically found in the antitrust laws of the Western countries.  Those unusual elements include, inter alia, provisions on the special status of State-Owned Enterprises (“SOEs”) and provisions on the so-called “administrative monopolies” (anticompetitive conducts by government agencies). 

What Has Changed?

It is not an exaggeration to say that The AML has brought sweeping changes to China’s antitrust regime.  Prior to the AML, China had some laws and regulations that served certain antitrust functions.  Those laws and regulations were ad hoc in nature, and the antitrust functions they served were quite limited.  For instance, the 1993 Anti-Unfair Competition Law prohibits tying arrangements, predatory pricing, and bid rigging.  The 1997 Price Law prohibits price fixing, predatory pricing, and price discrimination.  But prior to the AML, there was not one law that banned all forms of horizontal agreements and all forms of abuse of market power.  The AML changed all that.  In addition, prior to the AML, China had a merger review regime that applied only to foreign companies acquiring Chinese companies.  Now under the AML, China’s merger review regime applies to both foreign and domestic companies.

What Has Not Changed?

Despite the accomplishments of the AML, there are certain things that the AML has not changed.  First, the AML remains ambivalent towards China’s SOEs.  Second, the AML does not provide an effective remedy for administrative monopolies, the most prevalent form of monopolies in China.  Finally, the AML has preserved China’s tripartite antitrust enforcement structure that predated the AML.  I will have more to say about each of these issues later.

What Has Happened Since Last Year?

The first year of the AML’s existence has seen a slew of regulations aimed at implementing the AML. On August 3, 2008, two days after the AML went into effect, the State Council (China’s cabinet) issued a decree on the thresholds that would trigger merger notification requirements under the AML. The three government agencies charged with enforcing the AML—the Ministry of Commerce (“MOFCOM”), the State Administration of Industry and Commerce (“SAIC”), and the National Development and Reform Commission (“NDRC”)—all issued regulations or proposed regulations in their respective enforcement areas.  In May 2009, the State Council’s Antimonopoly Commission, an inter-agency coordinative body on antitrust policies established under the AML, issued a guideline on how to define “relevant market” in cases brought under the AML.

With the exception of MOFCOM, which is tasked with merger review, the antimonopoly enforcement agencies seem to be taking a leisurely pace when it comes to carrying out specific enforcement actions.  Since the AML went into effect, there has not been one single enforcement action against any individual or entity for engaging in horizontal agreements or abuses of market power.  MOFCOM is the only enforcement agency that seems to maintain a busy schedule.  In August 2009, MOFCOM released official statistics showing that as of the end of June 2009, MOFCOM received more than one hundred merger notifications under the AML and accepted fifty-eight of them for official review.  Of the cases for which review had been concluded, forty-three were approved without any conditions, two were approved with conditions, and one was blocked.  The only one case blocked by MOFCOM, the proposed acquisition of Huiyuan Juice Group by Coca-Cola, caused a great amount of stir  both in China and in the international community.  I will have more to say about the Coca-Cola/Huiyuan case later.

Since the AML went into effect, private citizens of China have been more aggressive than the antimonopoly enforcement agencies in seeking remedies against what they perceive as monopolies banned by the AML.  On the very first day of the AML becoming effective, three lawsuits were filed against the telecommunication giant China Netcom, the General Administration of Quality Supervision, Inspection and Quarantine, and the municipal government of Yuyao City, Zhejiang Province respectively.  Many more lawsuits were subsequently brought against state-owned companies such as China Mobile and China Construction Bank.  The courts, however, have been a bit reluctant to take up antimonopoly cases.  Many antimonopoly cases were dismissed by the courts, and of those that were accepted, none has reached a conclusion so far.  I will have more to say about the enforcement of the AML later.

In my next post, I will discuss China’s new merger review regime under the AML.  Stay tuned.

Introducing Guest Blogger Wentog Zheng

Posted by D. Daniel Sokol

Joining us for a serious of guest blogs will be Wentong Zheng.  Wentong is a newly minted Associate Professor of Law at University at Buffalo Law School, The State University of New York.  He holds a a JD and PhD (econ) from Stanford.

The Puzzling Persistence of the Single Entity Argument for Sports Leagues: American Needle and the Supreme Court's Opportunity to Reject a Flawed Defense

Posted by D. Daniel Sokol

Gabe Feldman (Tulane Law) has just posted The Puzzling Persistence of the Single Entity Argument for Sports Leagues: American Needle and the Supreme Court's Opportunity to Reject a Flawed Defense.

ABSTRACT: This Article argues that a single entity classification for sports leagues divorces antitrust immunity from the fundamental purpose of the antitrust laws and is theoretically unsupportable. Antitrust law is designed to act as a gatekeeper, filtering out net anticompetitive conduct. The Seventh Circuit’s single entity approach ignores the competitive effects of league conduct and distorts the basic rationale for distinguishing between single and multiple entity conduct. In doing so, it vests sports leagues with virtually free rein to engage in anticompetitive behavior. This Article also brings to light evidence of actual economic competition between NFL teams that proves that the Seventh Circuit’s single entity analysis in American Needle is factually unsupportable. This Article thus concludes that the Supreme Court should definitively put an end to the single entity defense for professional sports leagues. The Article also proposes a model for streamlining the rule of reason analysis and reducing the litigation burden on sports leagues.

Price and promotion effects of supermarket mergers

Posted by D. Daniel Sokol

David E. Davis (Department of Economics, South Dakota State University) provides his thoughts on Price and promotion effects of supermarket mergers.

ABSTRACT: I use a unique data set of retail food prices to analyze mergers between supermarket chains. The data allow for an examination of the effects of mergers on prices, the frequency of promotions, and the depth of promotions. I find that increases in a chain’s share of the total US food sales are associated with price decreases, suggesting that supermarkets enjoy economies of scale and/or benefit from an improved bargaining position relative to their suppliers after a merger. I also find that mergers are associated with decreases in the frequency and depth of price-promotions.

Empirical Assessment of Merger and its Remedies: the Yawata-Fuji Case

Posted by D. Daniel Sokol

Hiroshi Ohashi (Faculty of Economics, University of Tokyo), Tsuyoshi Nakamura (Faculty of Economics, Tokyo Keizai University) and  Satoshi Myojo (National Institute of Science and Technology Policy (NISTEP)) provide an Empirical Assessment of Merger and its Remedies: the Yawata-Fuji Case.

ABSTRACT: This paper estimates a dynamic oligopoly model to assess the economic consequences of a horizontal merger that took place in 1970 to create the second largest global producer of steel. The paper solves a Markov perfect Nash equilibrium for the model and simulates the welfare effects of the horizontal merger. Estimates reveal that the merger enhanced the production efficiency of the merging party by a magnitude of 4.1 %, while the exercise of market power was restrained primarily by the presence of fringe competitors. Our simulation result also indicates that structural remedies endorsed by the competition authority failed to promote competition.

Breaking Up Is Hard to Do: Determinants of Cartel Duration

Posted by D. Daniel Sokol

Maggie Levenstein (Michigan - Ross School of Business) and Val Suslow (Michigan - Ross School of Business) explain that Breaking Up Is Hard to Do: Determinants of Cartel Duration.

ABSTRACT: Economic theory identifies uncertainty as the primary cause of cartel instability. The lure of collusive profits, however, provides firms with a strong incentive to reduce that uncertainty. Cartels respond to imperfect or noisy information by trying to create governance and compensation systems that raise the quality and credibility of information and better align individual firm incentives with those of the group. Cartels that endure are cartels that manage to do exactly this. We estimate the impact of these organizational mechanisms, as well as macroeconomic fluctuations and industry structure, on cartel duration using a new dataset created from detailed descriptions of contemporary international cartels. We estimate a proportional hazards model with competing risks, distinguishing those factors which increase the risk of “death by antitrust” from those that affect “natural death,” including defection, dissension or entry. Our analysis indicates that the probability of cartel death from any cause increased significantly after 1995 when competition authorities expanded their enforcement efforts toward international cartels. We also find that fluctuations in firm-specific discount rates have a significant impact on cartel duration. Cartels that have a compensation scheme – a plan for how the cartel will handle variations in demand – are significantly less likely to break up. In contrast, retaliatory punishments in response to perceived cheating significantly increase the likelihood of natural death. Cartels that have to punish are not stable cartels.

Horizontal mergers, firm heterogeneity, and R&D investments

Posted by D. Daniel Sokol

Noriaki Matsushima, Yasuhiro Sato, and Kazuhiro Yamamoto (all Osaka University - Economics) address Horizontal mergers, firm heterogeneity, and R&D investments.

ABSTRACT: We investigate the incentive and the welfare implications of a merger when heterogeneous oligopolists compete both in process R&D and on the product market. We examine how a merger affects the output, investment, and profits of firms, whether firms have merger incentives, and, if so, whether such mergers are desirable from the viewpoint of social welfare. We also derive equilibrium configurations and explore their welfare properties.

Consumers Win-back as Exclusionary Conduct. Some Insights for Antitrust Law

Posted by D. Daniel Sokol

 Antonio Nicita (Political Economy- Università di Siena) discusses Consumers Win-back as Exclusionary Conduct. Some Insights for Antitrust Law.

ABSTRACT: Incumbents' winback actions recently received a growing antitrust scrutiny in network industries. These actions refer to incumbents’ strategies aimed at regaining, through targeted marketing and selective discounts, former customers who switched to a new entrant. We analyze the impact of winback actions on competition and discuss pros and cons of a temporarily ban on incumbent's side, through the so-called 'winback rules'.

Antitrust, Multi-Dimensional Competition, and Innovation: Do We Have an Antitrust-Relevant Theory of Competition Now?

Posted by D. Daniel Sokol

Josh Wright (George Mason -  Law) has posted Antitrust, Multi-Dimensional Competition, and Innovation: Do We Have an Antitrust-Relevant Theory of Competition Now?

ABSTRACT: Harold Demsetz once claimed that 'economics has no antitrust relevant theory of competition.' Demsetz offered this provocative statement as an introduction to an economic concept with critical implications for the antitrust enterprise: the multi-dimensional nature of competition. Competition does not take place upon a single margin, such as price competition, but several dimensions that are often inversely correlated such that a liability rule deterring one form of competition will result in more of another. This insight has important implications for the current policy debate concerning how to design antitrust liability standards for conduct involving both static product market competition and dynamic innovative activity. The primary purpose of this essay is to revisit Demsetz’s broader challenge to antitrust regulation in the context of the frequently discussed tradeoffs between innovation and price competition. I summarize recent developments in our knowledge of the relationship between competition and innovation, highlighting the deficiencies that significantly constrain antitrust enforcers’ abilities to confidently calculate inevitable welfare tradeoffs. I conclude by discussing policy implications that follow from these limitations.

Mergers in Imperfectly Segmented Markets

Posted by D. Daniel Sokol

Pio Baake and Christian Wey (both Deutsches Institut für Wirtschaftsforschung (DIW) Berlin and Technische Universität Berlin) investigate Mergers in Imperfectly Segmented Markets.

ABSTRACT: We present a model with firms selling (homogeneous) products in two imperfectly segmented markets (a "high-demand" and a "low-demand" market). Buyers are mobile but restricted by transportation costs, so that imperfect arbitrage occurs when prices differ in both markets. We show that equilibria are distorted away from Cournot outcomes to prevent consumer arbitrage. Furthermore, a merger can lead to an equilibrium in which only the "high-demand" market is served. This is more likely (i) the lower consumers' transportation costs and (ii) the higher the concentration of the industry. Therefore, merger incentives are much larger than standard analysis suggests.

Getting Linkedin to Antitrust and Competition Issues

Posted by D. Daniel Sokol

Ever wonder who the other readers of the blog are and your potential opportunities to network with them?  I have created a Linkedin site for readers of the blog to network and post announcements on substantive issues and also on any job announcements and tenders.  Click here to join.  If anyone can create a logo for the site, please let me know.

Still time to Register for the Best Vertical Restraints Conference of the Year

Posted by D. Daniel Sokol

Vertical Restraints in EC Competition Law: New Dynamics

Tuesday, October 13, 2009 at 9:00 AM - Wednesday, October 14, 2009 at 1:30 PM (GMT)

Event Details

University College London's (UCL) is pleased to invite you to a 2 day-Conference

Vertical Restraints in EC Competition Law: New Dynamics

Tuesday 13 & Wednesday 14 October 2009
9:00 - 19:30 (day one), 9:00 - 13.30 (day two)
in the UCL Central Campus, Gower Street, London WC1

The reform of EC competition law on vertical restraints has marked the beginning of the process of transformation of EC competition law in the late 1990s, in particular because of the adoption of a more compatible to neoclassical economic theory approach. Almost ten years since the adoption of Regulation 2790/99 and the vertical restraints guidelines, the European Commission has initiated a revision process and has published some proposals at this respect. The aim of this conference would be (a) to understand the process of the reform of EC competition law on verticals, (b) to provide some useful comparative insights, by looking to the most recent developments in US antitrust law on verticals as well as the most recent competition law practice in some Member States’ and selected jurisdictions and (c) to critically assess the proposals of the European Commission, by confronting them to recent economic theory and to legal practice.

The conference is of particular importance to the UCL community as it will honour Valentine Korah, professor emeritus of competition law at UCL and visiting professor to a number of leading academic institutions around the world. Professor Korah is an authority in EC competition law on vertical restraints and has published the leading monographs and commentaries on this topic.
Read about Professor Valentine Korah

The conference will explore the topics of:

• General aspects of the reform of Vertical Restraints   
• A retrospective and prospective of the vertical restraints reform
• Internet distribution and vertical restraints
• Tying/bundling
• Resale Price Maintenance
• Exclusive territories and parallel trade
• Vertical restraints and the rise of retailer power: competition law and alternatives
• Vertical restraints in national competition laws and international convergence

The conference gathers leading competition law academics and practitioners in the field of vertical restraints and, more generally, distribution practices from different jurisdictions. It would be particularly appealing to in house lawyers, private practitioners, academics, competition authorities’ officials and post-graduate students.

The conference is accredited with 12 CPD hours.


Download the brochure for this conference

PROGRAMME:

DAY ONE

8:30	Registration
9:00	Welcome: Ioannis Lianos, UCL SESSION I: ARTICLE 81 AND GENERAL ASPECTS OF THE REFORM Chair: Philip Collins (OFT) Speakers: The Scope of Article 81(1) Ioannis Lianos (UCL) The Scope of Article 81(3) Giorgio Monti (LSE) The other verticals: relation with Article 82 jurisprudence John Kallaugher (Latham & Watkins, UCL) The other verticals: motor vehicle regulation Gregory Pelecanos (Ballas, Pelecanos & Associates)
10:40	BREAK
11:00	SESSION II: ROUNDTABLE A RETROSPECTIVE AND PROSPECTIVE OF THE VERTICAL RESTRAINTS REFORM Chair: Sir Christopher Bellamy (Linklaters LLP) Participants: Valentine Korah (UCL) Lucas Peeperkorn (European Commission, DG Competition) Ian Forrester QC (White & Case) Bill Kovacic (US Federal Trade Commission) Richard Whish (King’s College London)
12:30	SESSION III: INTERNET DISTRIBUTION AND VERTICAL RESTRAINTS Chair: Richard Whish (King’s College London) Speakers: Denis Waelbroeck (Ashurst, Free University of Brussels) Stephen Kinsella (Sidley Austin) Discussant: Andrea Appella (News Corp.) Antonio Bavasso (Allen & Overy, UCL)
13:30	LUNCH
	Announcement of the Valentine Korah Prize in Competition Law Ioannis Lianos (UCL) Ian Forrester QC (White & Case LLP)
14:15	SESSION IV: TYING / BUNDLING Chair: Judge Nicholas Forwood (European Court of First Instance) Speakers: Einer Elhauge (Harvard University) Jorge Padilla (LECG) Damien Neven (Chief Economist, European Commission) Discussants: Cristina Caffarra (CRA International) Daniel Crane (University of Michigan School of Law, Ann Arbor)
16:00	BREAK
16:15	SESSION V: ROUNDTABLE: RESALE PRICE MAINTENANCE Chair: Valentine Korah (UCL) Participants: Lucas Peeperkorn (European Commission, DG Comp.) Warren Grimes (Southwestern University) Alison Jones (Kings College London) Discussants: Aidan Robertson QC (Brick Court Chambers) Thibaud Vergé (CREST-LEI (Paris))
17:45	SESSION VI: ROUNDTABLE EXCLUSIVE TERRITORIES AND PARALLEL TRADE Chair: Professor Brenda Sufrin (University of Bristol) Speakers: Eric Gippini Fournier (European Commission, Legal Service) tbc Assimakis Komninos (Hellenic Competition Commission / UCL) Jose Luis Buendia (Garrigues LLP) Discussants: Christopher Stothers (Milbank, Tweed, Hadley and McCloy LLP & UCL) Okeoghene Odudu (University of Cambridge)
19:15	DRINKS RECEPTION
DAY TWO
9:30	SESSION VII: ROUNDTABLE VERTICAL RESTRAINTS AND THE RISE OF RETAILER POWER: COMPETITION LAW AND ALTERNATIVES Chair: Peter Freeman (UK Competition Commission) Participants: Michael Waterson (Warwick University) Irving Scher (Greenberg Traurig, LLP) Ariel Ezrachi (Oxford) Discussant: Ioannis Lianos (UCL)
11:00	BREAK
11:15	SESSION VIII: VERTICAL RESTRAINTS IN COMPARATIVE COMPETITION LAW AND INTERNATIONAL CONVERGENCE Chair: Dr Philip Marsden (BIICL, OFT) Participants: UK experience on verticals Mark Clough QC (Addleshaw Goddard) Vertical restraints in France Laurence Idot (University of Paris II Panthéon Assas) Vertical restraints in Germany Florian Wagner von Papp (UCL) Vertical restraints around the world: A comparative perspective Daniel Sokol (University of Florida Levin College of Law) International aspects on vertical restraints Maher Dabbah (Queen Mary, University of London)
13:15	END OF CONFERENCE

Antitrust and the Dynamics of Competition in High-Tech Industries

Posted by D. Daniel Sokol

Antitrust and the Dynamics of Competition in High-Tech Industries

Date: Friday, October 16, 2009
Time: 12 Noon - 2:00 PM
Location: Rayburn House Office Building, B369

The way the government applies antitrust laws can significantly affect innovation and investment, for good or ill.  IT firms have characteristics that make antitrust enforcement more complex, including significant amounts of intangible capital, supply- and demand-side economies of scale, and rapidly changing markets characterized by continuous innovation.  The new administration has signaled a more proactive approach to antitrust enforcement, particularly with respect to high-tech and Internet-based markets.  This Congressional Seminar will examine the proper application of antitrust policy to the IT sector and the direction the new administration is taking.  The conference will focus on the following issues:

• The effects of antitrust policy on innovation and whether pro-competitive, pro-consumer behavior in high-tech may differ from such behavior in more traditional industries.
• How antitrust enforcement balances the risks of failing to stop potentially anticompetitive activities against the risks of stifling potentially pro-competitive activities, with specific reference to IT, and whether this balance is changing over time.
• The evolving role of economics in antitrust enforcement.
• The effects of multiple antitrust regimes on global companies.

12 noon

Registration and Buffet Lunch

12:20 PM

Panel Discussion   David S. Evans, University of Chicago and University College London Douglas Melamed, WilmerHale, former Acting Assistant Attorney General, Antitrust Division Philip J. Weiser, Deputy Assistant Attorney General for International, Policy and Appellate Matters, Antitrust Division Joshua Wright, George Mason University School of Law Jonathan Zuck, Association for Competitive Technology Thomas M. Lenard, Technology Policy Institute (moderator)

To Register: Please use the online form for Antitrust and the Dynamics of Competition in High-Tech Industries, contact Ashley Creel at 202-828-4405 or events@techpolicyinstitute.org to register. The Technology Policy Institute The Technology Policy Institute is a think tank that focuses on the economics of innovation, technological change, and related regulation in the United States and around the world. TPI produces independent, rigorous research and sponsors educational programs and conferences on major issues affecting information technology and communications policy. TPI is a 501(c)(3) research and educational organization.  More information is available at http://www.techpolicyinstitute.org/

Empirical Evidence on the Role of Non Linear Wholesale Pricing and Vertical Restraints on Cost Pass-Through

Posted by D. Daniel Sokol

Celine Bonnet (Toulouse School of Economics), Pierre Dubois (Toulouse School of Economics) and Sofia B. Villas Boas (Berkeley) address Empirical Evidence on the Role of Non Linear Wholesale Pricing and Vertical Restraints on Cost Pass-Through.

ABSTRACT: How a cost shock is passed through into final consumer prices may relate to nominal price stickiness and rigidities, the existence of non adjustable cost components, strategic mark-up adjustments, or other contract terms along the supply distribution chain. This paper presents a simple framework to assess the potential role of non linear pricing contracts and vertical restraints such as resale price maintenance or wholesale price discrimination in the supply chain in explaining the degree of pass-through from upstream cost shocks in the ground coffee category to downstream retail prices. We do so in the German coffee market where both upstream and downstream firms make pricing decisions allowing for non linear pricing and vertical restraints. Using counterfactual simulations of an upstream coffee cost shock, we find that the existence of resale price maintenance between manufacturers and retailers increases pass through rate by more than 10 points relative to the case when this assumption is not allowed with non linear pricing or when double marginalization along the distribution chain is present. The intuition for our findings is that resale price maintenance restrictions make it less possible for retailers to perform strategic mark-up adjustments when faced with a cost shock. We also find that the larger the simulated cost shocks or the less concentrated upstream sector, and also when faced with less elastic demands, the larger the role of vertical restraints in preventing retailers to perform strategic mark-up adjustments, and thus the higher the pass-through increases.

Entry, Exit, and the Determinants of Market Structure

Posted by D. Daniel Sokol

Timothy Dunne, Federal Reserve Bank of Cleveland, Shawn D. Klimek, U.S. Census Bureau , Mark J. Roberts, Pennsylvania State - Economics, and Daniel Xu, NYU - Economics, describe 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 firm’s long-run profits by the same amount as if the firm operated in a duopoly.

Reducing Efficiency through Communication in Competitive Coordination Games

Posted by D. Daniel Sokol

Timothy N. Cason (Purdue - Econ), Roman M. Sheremeta (Argyros School of Business and Economics,Chapman University), and Jingjing Zhang (McMaster - Econ) explain Reducing Efficiency through Communication in Competitive Coordination Games.

ABSTRACT: Costless pre-play communication has been found to effectively facilitate coordination and enhance efficiency by increasing individual payoffs in games with Pareto-ranked equilibria. We report an experiment in which two groups compete in a weakest-link contest by expending costly efforts. Allowing group members to communicate before choosing efforts leads to more aggressive competition and greater coordination, but also results in substantially lower payoffs than a control treatment without communication. Our experiment thus provides evidence that communication can reduce efficiency in competitive coordination games. This contrasts sharply with experimental findings from public goods and other coordination games, where communication enhances efficiency and often leads to socially optimal outcomes.

Trade, Competition, and Efficiency

Posted by D. Daniel Sokol

Kristian Behrens (Université du Québec à Montréal) and Yasusada Murata (Nihon University) write on Trade, Competition, and Efficiency.

ABSTRACT: We present a general equilibrium model of monopolistic competition featuring pro-competitive effects and a competitive limit, and investigate the impact of trade on welfare and efficiency. Contrary to the constant elasticity case, in which all gains from trade are due to product diversity, our model allows for a welfare decomposition between gains from product diversity and gains from pro-competition effects. We then show that the market outcome is not efficient because too many firms operate at an inefficiently small scale by charging prices above marginal costs. Using pro-competitive effects and the competitive limit, we finally illustrate that trade raises efficiency by narrowing the gap between the equilibrium utility and the optimal utility.

Petit on the Move (and with a new blog)

Posted by D. Daniel Sokol

Nicolas Petit (University of Liege - Law) has made the move to full time academia.  He also has a new blog Chilling Competition.

Price Competition and Consumer Confusion

Posted by D. Daniel Sokol

Ioana Chioveanu (UCL - Econ) Jidong Zhou (UCL - Econ) explain Price Competition and Consumer Confusion.

ABSTRACT: This paper proposes a model in which identical sellers of a homogenous product compete in both prices and price frames (i.e., ways to present price information). We model price framing by assuming that firms’ frame choices affect the comparability of their price offers: consumers may fail to compare prices due to frame differentiation, and due to frame complexity. In the symmetric equilibrium the firms randomize over both price frames and prices, and make positive profits. This result is consistent with the observed coexistence of price and price frame dispersion in the market. We also show that (i) the nature of equilibrium depends on which source of consumer confusion dominates, and (ii) an increase in the number of firms can increase industry profits and harm consumers.

Dynamic Competition with Consumer Inertia

Posted by D. Daniel Sokol

Erik Pot, János Flesch, Ronald Peeters, and Dries Vermeulen (all Maastricht University - Econ) describe Dynamic Competition with Consumer Inertia.

ABSTRACT: We study a framework where two duopolists compete repeatedly in prices and where cho-sen prices potentially affect future market shares, but certainly do not affect current sales.This assumption of consumer inertia causes (noncooperative) coordination on high prices only to be possible as an equilibrium for low values of the discount factor. In particular,high discount factors increase opportunism and aggressiveness of competition to such anextent that high prices are no longer sustainable as an equilibrium outcome (not even in trigger strategies). In addition, we find that both monopolization and enduring marketshare and price fluctuations (price wars) can be equilibrium path phenomena without requiring exogenous shocks in market or firm characteristics.