Journal of Competition Law and Economics - Advance Access

SEQUENTIAL VERSUS SIMULTANEOUS MARKET DELINEATION: THE RELEVANT ANTITRUST MARKET FOR SALMON

Haldrup, N., Mollgaard, P., Nielsen, C. K. — 2008-06-21

Delineation of the relevant market constitutes a pivotal part of most antitrust cases. The standard analysis utilizes a sequential approach. First, the product market is delineated; then the geographical market is defined. Demand and supply substitution in both the product dimension and the geographical dimension will normally be stronger than substitution in either dimension. By ignoring this, one might decide first to define products narrowly and then define the geographical extent narrowly, ignoring the possibility of a diagonal substitution. These reflections are important in the empirical delineation of product and geographical markets. Using a unique dataset for prices of Norwegian and Scottish salmon, we propose a methodology that allows for simultaneous market delineation. We then show that market delineation may depend on the choice of method: a simultaneous method reverses the conclusions of a sequential approach as regards the delineation of the market for Atlantic salmon in Europe.

EVALUATING MARKET POWER WITH TWO-SIDED DEMAND AND PREEMPTIVE OFFERS TO DISSIPATE MONOPOLY RENT: LESSONS FOR HIGH-TECHNOLOGY INDUSTRIES FROM THE ANTITRUST DIVISION'S APPROVAL OF THE XM-SIRIUS SATELLITE RADIO MERGER

Sidak, J. G., Singer, H. J. — 2008-06-20

Can the standard merger analysis of the Department of Justice's and Federal Trade Commission's Horizontal Merger Guidelines accommodate mergers in high-technology industries? In its April 2007 report to Congress, the Antitrust Modernization Commission (AMC) answered that question in the affirmative. Still, some antitrust lawyers and economists advocate exceptions to the rules for particular transactions. In the proposed XM–Sirius merger, for example, proponents argue that the Merger Guidelines be relaxed to accommodate their transaction because satellite radio is a nascent, high-technology industry characterized by "dynamic demand." We argue that the AMC correctly refrained from recommending high-tech exceptions for defining markets in merger proceedings. Merger proponents naturally seek to expand the relevant product market as much as possible. But if alternative products are included in the relevant market without a showing of significant cross-price elasticities—that is, without evidence of buyer substitution between the two products in response to a relative change in prices—then market definition is unbounded. The XM–Sirius merger also follows a recent trend of prosecutorial inaction in merger reviews. The Antitrust Division's use of a higher standard for intervention than the incipiency standard in Section 7 of the Clayton Act increases the risk of false negatives. Finally, the XM–Sirius merger exemplifies the use of preemptive offers of merger conditions by the merger parties to gain political favor and to allocate postmerger rents to influential third-party intervenors. The most significant preemptive concessions were XM's and Sirius's offer to freeze the monthly subscription price at the premerger monthly rate of $12.95 and to offer a variety of new tiered program packages that XM and Sirius characterized as "à-la-carte." These offers presumably were intended to neutralize the traditional antitrust concerns that a merger among direct competitors leads to higher prices and to win the support of certain vital constituencies. To the contrary, we argue that the offer to freeze prices could reduce welfare and that the Federal Communications Commission and the Department of Justice lack the authority to create a rate-regulated monopoly for satellite radio. Furthermore, because the "à-la-carte" offering would not hold constant other nonprice factors, consumer surplus could fall.

CAN LOBBYING PREVENT ANTICOMPETITIVE OUTCOMES? EVIDENCE ON CONSUMER MONOPSONY IN TELECOMMUNICATIONS

Falaschetti, D. — 2008-06-04

When basic competition rules cannot stop market power abuses, industry-specific regulations can improve economic performance. But regulations are also more immediately exposed to political pressures than are judicially administered antitrust laws, and this exposure can cause regulations to serve distributional rather than efficiency goals. Instead of supporting a Chicago School hypothesis where distributional forces tend to favor producers, however, I find evidence that regulations can inefficiently expand consumer surplus when producers lack a political voice. In particular, local exchange carriers maintain significantly smaller capital stocks in states that restrict campaign contributions from regulated utilities. This relationship is difficult to rationalize as either a statistical artifact or evidence that campaign finance laws discourage producers from restraining trade. Indeed, rather than endowing producers with political currency to capture regulators, allowances for campaign contributions appear to have strengthened competition by discouraging regulatory takings and balancing monopsonistic pressures from consumer-voters. These results highlight an empirically important potential for regulations to favor consumers overly, and strengthen arguments against consumer surplus as an objective for competition policies.

THE ANALYSIS OF MERGERS THAT INVOLVE MULTISIDED PLATFORM BUSINESSES

Evans, D. S., Noel, M. D. — 2008-05-30

A multisided platform (MSP) serves as an intermediary for two or more groups of customers who are linked by indirect network effects. Recent research has found that MSPs are significant in many industries and that some standard economic results—such as the Lerner Index—do not apply to them, in material ways, without some significant modification to take linkages between the multiple sides into account. This article extends several key tools used for the analysis of mergers to situations in which one or more of the suppliers are MSPs. It shows that the application of traditional tools to mergers involving MSPs results in biases, the direction of which depends on the particular tool being used and other conditions. It also extends these tools to the analysis of the merger of MSPs. The techniques are illustrated with an application to an acquisition involving the multisided online advertising industry.

MARKET DEFINITION AND UNILATERAL COMPETITIVE EFFECTS IN ONLINE RETAIL MARKETS

Baye, M. R. — 2008-05-16

Although the basic principles used to define a relevant market or to analyze unilateral competitive effects in traditional retail settings also apply in online retail markets, several features of the online environment add complexities to the analysis. This paper examines some of the results in the economics and marketing literatures that can influence market definition and competitive effects analysis in online retail settings. I argue that a failure to account properly for certain aspects of online markets can lead to erroneous definitions of the relevant market and, more importantly, erroneous conclusions regarding the unilateral competitive effects of horizontal mergers.

THE STOCHASTIC RELATIONSHIP BETWEEN PATENTS AND ANTITRUST

Devlin, A. — 2008-05-15

This article develops a novel theory by which to construe the interaction between the patent and antitrust laws. The rules of these respective disciplines are often portrayed as conflicting in means, yet harmonious in purpose. Although the intellectual property and antitrust laws have ostensibly divergent views on the role of competition, their interaction is typically limited to one of constraint. More specifically, antitrust rules have been (poorly) designed to limit the exclusivity inherent in a patent grant to the claimed invention alone. This article, however, articulates a new vision for the role of antitrust: it posits that competition rules operate as a stochastic regulator of exclusionary patent rights. The Sherman Act constrains patentees' efforts to positively transform the probabilistic nature of their intellectual property rights through contract. Yet, because the empirical calculation of optimal innovation rates is an elusive, if not Sisyphean, task, the normative desirability of the foregoing fact is abstruse. Nevertheless, policymakers' inability to pinpoint precisely the ex post rewards required to trigger ideal levels of ex ante investment need not bind our hands to inaction. If contemporary rates of innovation are deemed acceptable (even if not necessarily perfect), there may be ways to trigger equivalent levels of ex ante investment with lower social cost. In this regard, it is clear that currently enacted competition rules significantly accentuate the uncertainty surrounding patents' apotropaic effect. Concluding that contracts securing otherwise stochastic rights may be highly desirable, the article calls for the incorporation of this concern into contemporary rules, with modest substantive effect, and further advocates a qualified antitrust immunity for "gold-plated" patents if and when they are introduced.

UNLOCKING TECHNOLOGY: ANTITRUST AND INNOVATION

Spulber, D. F. — 2008-05-08

Technology lock-in advocates argue that governments should step in to coordinate technology adoption decisions. Due to the presence of network effects, advocates warn that consumers may fail to adopt the best technology, thus missing out on potential benefits. Even worse, consumers may split, adopting multiple technologies and thus missing out on the benefits of network effects. Due to coordination problems, consumers cannot mitigate the effects of bad technology choices and the economy becomes stuck with inferior innovations. This article demonstrates that consumer coordination solves the underlying network effects problem, thus eliminating technology lock-in. Network effects are confined at most to the information and communications technology and selected electronics industries, which have developed mechanisms for interconnection and interoperability. Firms have incentives to provide interconnection and interoperability when it is efficient to do so. Rapid technological innovation is apparent whereas technology lock-in is a rare phenomenon. Antitrust policy founded on technology lock-in arguments is misguided and is likely to damage incentives for innovation.

AN ANTITRUST LAW INDEX FOR EMPIRICAL ANALYSIS OF INTERNATIONAL COMPETITION POLICY

Nicholson, M. W. — 2008-04-22

This paper introduces means of quantifying the global proliferation in antitrust laws, particularly through measures to assess the presence of such laws across a large set of countries. The Antitrust Law Index maps the presence of "laws on the book" into a numerical measure of competition regimes by assigning binomial scores for the presence of particular laws in a jurisdiction, and then summing the individual components to yield a total score. The key result is that strong laws do not necessarily represent effective antitrust policy. There appears to be a nonlinear relationship between adaptation of antitrust laws and the size of national economies. The results suggest that the impetus for adopting antitrust laws appears to be related to the guidelines of "model" laws and highlights the gap between de jure legislation and de facto implementation.

A PRACTICAL GUIDE TO THE HYPOTHETICAL MONOPOLIST TEST FOR MARKET DEFINITION

Coate, M. B., Fischer, J. H. — 2008-04-22

The hypothetical monopolist test has been used to define antitrust markets for over 20 years. However, many of these applications occur within the enforcement agencies and thus the implementation process is not fully transparent to antitrust practitioners. This paper provides a study of 116 market definition decisions from the Federal Trade Commission's archives. We find that the agency rarely has trouble defining both product and geographic markets; in fact, the demand-side market definition process is relatively simple in over half of the cases reviewed. In many of the remaining matters, critical loss, analysis of natural experiments, and various studies of data patterns are undertaken to identify the relevant market. These studies show a remarkable variety in data requirements, sophistication, and analytical technique. Supply-side considerations affect a few markets and price discrimination supports more focused analysis in about 10 cases.

BUNDLES OF JOY: THE UBIQUITY AND EFFICIENCY OF BUNDLES IN NEW TECHNOLOGY MARKETS

Liebowitz, S. J., Margolis, S. E. — 2008-04-19

This paper examines the economic logic underlying bundles and tie-in sales and uses the lessons learned from that examination to analyze seven specific instances of bundling that have been the subject of antitrust scrutiny or other policy initiatives. Of particular interest are products that are nonrivalrous in consumption, making all-you-can-eat pricing a viable candidate for efficiency. The main economic points are the following: À-la-carte pricing may populate economic models, but most products are bundles. They are bundles because bundles are generally more efficient. Tie-in sales are much less common and often not properly understood in textbook discussions. Market foreclosure, the principal efficiency concern with tying and bundling, is likely to be exceedingly rare. The seven instances of bundling (ties) examined in the paper are: cable television; patent pools; blanket licenses; iPods and iTunes; telephones; music albums and songs; operating systems and component programs.

WHAT DO WE REALLY KNOW ABOUT EXPORT CARTELS AND WHAT IS THE APPROPRIATE SOLUTION?

Sokol, D. D. — 2008-04-05

This article responds to Florian Becker's article in this journal, "The Case of Export Cartel Exemptions: Between Competition and Protectionism." Professor Becker provides a number of insights into various approaches that battling export cartels may take. I take issue with three of Becker's main themes. First, Becker underplays the importance of political economy issues in the creation and perpetuation of export cartel exceptions from antitrust. A public choice understanding of export cartels is critical to formulating any effective remedy for export cartels. Second, Becker assumes that export cartels are hard-core cartels and that they are a serious problem in international antitrust. In fact, there is very little empirical data on export cartels and nearly all of it comes from the United States. Therefore, it is difficult to say with any great certainty whether export cartels are a problem and how serious a problem they are. Third, Becker ignores the role that international organizations such as the OECD and ICN can play to reduce the effects of export cartels. After surveying different possible solutions, I propose a WTO transparency regime to address export cartels more effectively.

AN ANALYSIS OF PRICE-BASED TESTS OF ANTITRUST MARKET DELINEATION

Coe, P. J., Krause, D. — 2008-04-02

There are well-known theoretical concerns regarding the use of price correlations to determine antitrust markets. However, this has not deterred their use or the application of Granger causality, stationarity, and cointegration tests in the determination of antitrust markets. In this paper, we explore the empirical performance of these various tests. In particular, we want to know whether these tests are capable of generating the correct inference both when two products are in the same relevant market and when they are not. Our results imply that, in the absence of common shocks, simple price correlations may be capable of providing reliable evidence on market delineation. However, in samples sizes similar to those currently available, the performance of other commonly employed price-based tests suggests that they provide little economically meaningful information to antitrust practitioners.

ASSESSING EXCESSIVE PRICING: THE CASE OF FLAT STEEL IN SOUTH AFRICA

Roberts, S. — 2008-03-29

South Africa's Competition Tribunal recently ruled in favor of the complainant in the first case of excessive pricing to come before it since the 1998 Competition Act established new institutions in 1999. This article examines the standards that should be adopted in assessing excessive pricing in a small developing country such as South Africa, through a review of the complainee, Mittal Steel South Africa's, pricing practices. It is argued that entrenched dominance is central to a finding of excessive pricing, where that position has not been attained through innovation or product development, and that the excessiveness of the pricing ought to be assessed against a range of indicators of pricing under effectively competitive conditions. It is argued that in a country such as South Africa, the conditions for excessive pricing are much more prevalent than in large industrialized economies.

THE IMPLEMENTATION OF THE EUROPEAN COMMISSION'S MERGER REGULATION 2004: AN EMPIRICAL ANALYSIS

Fernandez, B. M., Hashi, I., Jegers, M. — 2008-03-26

The factors influencing the European Commission's decisions under the 2004 Merger Regulation are assessed on a sample of 50 cases. Probit analysis results in the finding that the probability of nonclearance in phase I of the procedure is significantly affected by the estimated market share increase due to the proposed merger, the contestability of the market, and the presence of barriers to entry. Furthermore, there is some evidence that the Commission's decisions are biased against market leaders involved in proposed mergers.

LESSONS FROM THE RECENT STOCK EXCHANGE MERGER ACTIVITY

Kokkoris, I., Olivares-Caminal, R. — 2008-03-20

Stock markets across the globe have been the subject of merger discussions following pressure to cut costs and become more competitive. Cross-border mergers trigger a series of different issues to be analyzed. From a transactional point of view, some of these aspects include the synergies that a merger creates, the complexities in achieving an optimal financial structure, protection of minority shareholders, etc. From a regulatory standpoint, there is an array of issues that should also be considered. This article provides an overview of competition issues affecting financial entities—because if there is a breach of competition laws the whole merger might not take place. This will be the pillar of our analysis in this paper.

EMPIRICAL APPROACHES FOR IDENTIFYING MAVERICK FIRMS: AN APPLICATION TO MORTGAGE PROVIDERS IN AUSTRALIA

Breunig, R., Menezes, F. — 2008-02-13

This paper develops an empirical strategy to identify maverick-like behavior. This strategy includes measuring two behavioral dimensions: (i) the extent to which particular suppliers underprice rivals; and (ii) the timing of the suppliers' responses to systemic cost changes. This strategy is applied to a dataset that contains interest rates charged by mortgage providers in Australia from January 2003 to October 2006. We then evaluate suppliers' behavior both in terms of the rates that they charge and the time it takes them to change their rates as a response to a systemic increase in costs that follows a change of the cash rate by the Reserve Bank of Australia (RBA). We find that systematic price discounts and the frequency and timing of price increases and decreases are both important, but distinct, components of maverick-like behavior. These empirical observations suggest that the development of a theory for maverick behavior be focused on dynamic, asymmetric models and informed by institutions and market dynamics that are relevant to the case at hand.