Journal of Competition Law and Economics - Advance Access

DYNAMIC COMPETITION IN ANTITRUST LAW

Sidak, J. G., Teece, D. J. — Fri, 20 Nov 2009 05:29:00 PST

How would competition policy be shaped if it were to explicitly favor Schumpeterian (dynamic) competition over neoclassical (static) competition? Schumpeterian competition is the kind of competition that is engendered by product and process innovation. Such competition does not merely bring price competition. It tends to overturn the existing order. A "neo-Schumpeterian" framework for antitrust analysis that favors dynamic competition over static competition would put less weight on market share and concentration in the assessment of market power and more weight on assessing potential competition and enterprise-level capabilities. By embedding recent developments in evolutionary economics, the behavioral theory of the firm, and strategic management into antitrust analysis, one can develop a more robust framework for antitrust economics. Such a framework is likely to ease remaining tensions between antitrust and intellectual property. It is also likely to reduce confidence in the standard tools of antitrust economics when the business environment manifests rapid technological change. It appears that the Antitrust Division of the U.S. Department of Justice (DOJ) has attempted to incorporate more dynamic analysis, but the result has been inconsistent across different mergers and different doctrinal areas of antitrust law. Moreover, a complicating factor in the transformation of the law is the fact that the federal courts have, by embracing the reasoning in the Merger Guidelines promulgated several decades ago by the Antitrust Division and the Federal Trade Commission (FTC), caused antitrust case law to ossify around a decidedly static view of antitrust. Put differently, in the years since 1980, the Division and the FTC have successfully persuaded the courts to adopt a more explicit economic approach to merger analysis, yet one that has a static view of competition. The result is not a mere policy preference. It is law. To change that law to have a more dynamic view of competition will therefore require a sustained intellectual effort by the enforcement agencies (as well as by scholars and practitioners) that, once more, engages the courts to re-examine antitrust law, as they did in the late 1970s during the ascendancy of the Chicago School, when antitrust law became infused with its current, static understanding of competition. A necessary but not sufficient condition for that effort is a public process by which the Division and the FTC revisit and restate the Merger Guidelines in a manner that clarifies and defends the role of dynamic competition in antitrust analysis. We therefore applaud the announcement of the antitrust agencies in September 2009 to solicit public comment on the possibility of updating the Merger Guidelines. Assuming that the Division and the FTC decide to revise the existing Merger Guidelines, those revised guidelines (and useful complementary undertakings, such as generalized guidelines on market power and remedies) then will require leadership by the enforcement agencies to persuade the courts that antitrust doctrine should evolve accordingly. That neo-Schumpeterian process may take a decade or longer to accomplish, but it is a path that we believe the Roberts Court is willing to travel.

ANTICOMPETITIVE VERSUS COMPETITIVE EXPLANATIONS OF UNILATERAL PRACTICES: THE IDENTIFICATION PROBLEM

Polo, M. — Thu, 19 Nov 2009 04:59:10 PST

I consider the application of Article 82 using an economic approach. I argue that proving a given practice anticompetitive or efficient can be usefully framed as an identification problem. I need to spell out in detail not only the anticompetitive story, related to the type of alleged anticompetitive strategy, but also the alternative competitive explanation, extracting the empirical predictions of the two. Comparing the latter, I can identify the factual elements that, occurring under both circumstances, are admissible under both of them, and those that instead, being specific to one of the stories, allow for discriminating between them. I apply this approach to a recent Italian case [Mercato del Calcestruzzo Cellulare Autoclavato, No. A372 (Autorità Garante della Concorrenza a del Mercato, 24 October 2007)] of selective price cuts, an example of predation where the dominant firm tries to eliminate a competitor by selectively offering discounts to the clients of the target. On the basis of a rich empirical analysis, the Authority condemned RDB, a medium-sized firm active in the market for construction materials. I show that, once the two stories are properly described, the evidence provided in the decision of the Antitrust Authority is consistent with a competitive strategy of decentralized price negotiation, whereas it is in sharp contrast with the empirical predictions derived from a predatory model of selective price cuts.

MONOPSONY ABUSE OR EFFICIENT PURCHASING? QUALITY MEASUREMENT IN THE TOBACCO LEAF MARKET

Hanssen, F. A. — Mon, 16 Nov 2009 00:34:37 PST

In the recent case of Deloach v. Philip Morris, plaintiff tobacco growers accused the major cigarette manufacturers of using unusually structured tobacco auctions to engage in monopsony collusion. The DeLoach case produced one of the largest antitrust settlements ever. The objective of this paper is to evaluate the claims of exercise of monopsony power by exploring why tobacco wholesaling systems (which have evolved dramatically over time) have taken the various forms they have. The paper concludes that the ways in which tobacco leaf has been sold—including the allegedly collusive auctions—developed to combat the fundamental problem that the quality of tobacco leaf is very costly to measure.

THE EVOLUTION OF THE BABY FOOD INDUSTRY, 2000-2008

Chen, V. — Mon, 16 Nov 2009 00:34:18 PST

In 2000, the Federal Trade Commission (FTC) prevented the merger of the second and third largest baby food manufacturers in the United States. Since the blocked merger, the landscape of the baby food industry has evolved significantly. All of the major brands of jarred baby food have undergone changes in ownership. The relevant product market may have slightly broadened beyond jarred baby food. Market concentration has increased, although prices have not. Gerber increased its market share from 71–72 to 73–80 percent. Beech-Nut's market share slightly declined from 13 to 11–12 percent, whereas Heinz's former brand, Nature's Goodness, declined from 13 to 2 percent. With no substantial entry, only Gerber and Beech-Nut currently have double-digit market shares. Also, although the average price of baby food has fluctuated over the years, prices in 2008 were the same as prices in 2000, after adjusting for inflation and changes in the composition of consumption. In terms of pricing, the market does not appear to be much different in 2008 than it was in 2000.

TRANSITORINESS OF MARKET POWER AND ANTITRUST ACTIVITY

Kato, M. — Sun, 15 Nov 2009 22:56:14 PST

The economic rationale for how much market power is tolerable has so far been based mainly on static considerations; ideally, however, it should discriminate between persistent and transitory market power. I propose a dynamic dominant-firm type of model where the firm's use of market power, when it is discovered by an antitrust agency, will be penalized. Equilibrium entails a threshold market share above which the market tends toward monopoly and below which the market tends to competition. One may propose the region below this threshold to be the safety zone. The size of this region depends on how fast market power depreciates. In industries in which this depreciation is fast and where, as a result, monopoly power is more transitory, the safety zone should be wider, and there should be less policy intervention.

BUYER POWER IN HEALTH PLAN MERGERS

Capps, C. S. — Fri, 13 Nov 2009 05:06:16 PST

In light of recent increased policy attention directed toward health insurance, the next significant health plan merger is almost certain to receive close scrutiny from many quarters, including representatives of providers, such as the American Medical Association and the American Hospital Association, and the U.S. Department of Justice. In this paper, I review the key buy-side economic questions and analytic frameworks that are likely to be at the forefront in future investigations of health plan mergers. In particular, I explain how industry structure implies that shares of purchases from individual providers as well as area-wide shares of purchases are likely to inform antitrust analysis of potential monopsony harm in health plan mergers. I also discuss the appropriate treatment of government payers in calculating and assessing buy-side market shares. I conclude with a discussion of how competition and market power in downstream markets for the sale of commercial insurance interact with the potential exercise of monopsony power in upstream markets for the purchase of provider services.

ASSESSING THE EFFECTS OF A ROAD-SURFACING CARTEL IN SWITZERLAND

Huschelrath, K., Leheyda, N., Beschorner, P. — Wed, 07 Oct 2009 22:43:04 PDT

The paper assesses the impact of the detection of a hard-core cartel in the Swiss market for road surfacing on post-cartel competition. In addition to an investigation of supply-side factors, demand-side factors, and market prices, the paper also derives estimates of the economic effects of the Swiss Competition Commission's decision in the road-surfacing cartel case. The results indicate that the detection of the cartel may have led to short-term price reductions; however, the persistent collusion-friendly industry structure forecloses larger and durable gains for the customers.

THE CONCEPT OF CRITICAL LOSS FOR A GROUP OF DIFFERENTIATED PRODUCTS

ten Kate, A., Niels, G. — Fri, 11 Sep 2009 21:35:55 PDT

In a recent article, Daljord, Sørgard, and Thomassen criticize Katz and Shapiro for applying the standard formula for critical loss to the case in which the price of only one product of the candidate market is increased. They argue that the standard formula does not hold in that case and suggest another expression. We show that this argument is correct, but that the formula proposed by Daljord, Sørgard, and Thomassen does not capture the essence of what critical loss really is. We propose another formula that does. Daljord, Sørgard, and Thomassen also modify the Katz–Shapiro aggregate diversion ratio rule for deciding whether a candidate market is an antitrust market. We show that their rule happens to be correct for the single-price-increase case and that the Katz–Shapiro rule remains valid for uniform price increases, but that in both cases this is for different reasons than mentioned by the authors. We believe that the confusion is due to the fact that the critical-loss concept, which was originally designed for a single homogeneous product, needs some further explanation before it can be applied in a setting of multiple differentiated products. Such explanation is given in this article.

MERGER SIMULATION IN COMPETITION POLICY: A SURVEY

Budzinski, O., Ruhmer, I. — Fri, 11 Sep 2009 19:53:01 PDT

Advances in competition economics as well as in computational and empirical methods have offered the scope for the employment of merger simulation models (MSMs) in merger-control procedures during the past almost 15 years. Merger simulation is, nevertheless, still a very young and innovative instrument of antitrust, and, therefore, its "technical" potential is far from being comprehensively exploited, and teething problems in its practical use in the antitrust environment prevail. We provide a classification of state-of-the-art MSMs and review their previous employment in merger cases as well as the problems and limitations currently associated with their use in merger control. In summary, MSMs represent an important and valuable extension of the toolbox of merger policy. However, they do not qualify as a magic bullet and must be combined with other more traditional instruments of competition policy to comprehensively unfold its beneficial effects.

POLITICS AND THE PURSUIT OF TELECOMMUNICATIONS SECTOR EFFICIENCY IN NEW ZEALAND

Howell, B. — Wed, 09 Sep 2009 04:16:15 PDT

Economic analysis takes as its defining performance benchmark the pursuit of increases in efficiency. Competition law and industry-specific regulation provide two competing means of intervention whereby the pursuit of efficiency can be enhanced. Ultimately, legislators decide how governance of industry interaction will be allocated between these two institutional forms. Whereas competition law can govern interaction in most industries, where the underlying economic conditions are sufficiently different, industry-specific regulation offers advantages. However, its weakness is the risk of capture, leading to the subjugation of the efficiency end to the pursuit of other objectives. But if the regulatory institution could be bound in some way to pursue an efficiency objective, could the risk of capture be averted? New Zealand's "light-handed" regulation, instituted in 1987, attempted to enshrine the pursuit of efficiency into statute, first by relying solely upon competition law and contractual undertakings and subsequently creating a regulatory body with an explicit legislated efficiency directive. In practice, however, the inability of a government prioritizing efficiency to bind its successors to pursue the same objective renders sector strategy, and hence the efficiency objective, subject to political capture. Consequently, inherent systemic instability attends the pursuit of the efficiency objective and the institutions overseeing its enforcement.

THE MAP OF COMMERCE: INTERNET SEARCH, COMPETITION, AND THE CIRCULAR FLOW OF INFORMATION

Spulber, D. F. — Mon, 24 Aug 2009 00:14:48 PDT

Search firms provide matchmaking services between consumers and suppliers that are central to the efficiency of the economy. The significant economic contributions of search firms as commercial intermediaries have important implications for antitrust policy towards search markets. As search firms generate more information about buyers and sellers, they become intermediaries for an increasing proportion of economic transactions. This article introduces the concept of the "map of commerce" to describe the extensive directory of business constructed by search firms. This article also introduces the concept of the "circular flow of information" to represent the comprehensive nature of the economic information managed by search firms. These firms induce information revelation through self-selection both by consumers and by advertisers. Consumers reveal personal information through the use of keywords and through their online behavior. Advertisers reveal company information by bidding on positions on the search page. Search firms employ information to match buyers with sellers more effectively and to increase earnings from advertising. The analysis shows that economic efficiencies generated by the circular flow of information depend on the strength of competition among search firms. The discussion considers antitrust policy towards Internet search markets, including issues of privacy, competition, and cooperative agreements.

ORGANIZATION, CONTROL, AND THE SINGLE ENTITY DEFENSE IN ANTITRUST

Williamson, D. V. — Mon, 03 Aug 2009 22:30:28 PDT

Since at least the 1930s, economists have puzzled over how to delineate the boundaries of a firm. With the advent of antitrust legislation in 1890, American courts have been pressed to consider what constitutes conspiracies between corporate entities to restrain commerce. By the 1980s, courts started to characterize conspiracies by negation—that is, by extending the status of "single entity" to certain types of agglomerations. Efforts both in economics and in the law to sort out what constitutes a "firm" or "single entity" have focused on "control." A difficulty is that neither the law nor economics offers an operationally significant concept of control. Even so, both the law and economics contribute concepts other than control that provide a way of understanding economic organization. These concepts—adaptation and control rights—suggest how one can subsume the sometimes confusing array of single entity tests proposed in the case law within a two-stage sequence of tests.

EXPORTING KNOWLEDGE THROUGH TECHNICAL ASSISTANCE AND CAPACITY BUILDING

Sokol, D. D., Stiegert, K. W. — Wed, 01 Jul 2009 00:08:24 PDT

With a significant increase in the number of countries with antitrust laws, technical assistance (TA) to improve the capacity of antitrust agencies has become a key priority for international antitrust aid efforts. Donors have assigned a significant amount of time and financial resources to TA to raise the capacity and effectiveness of younger agencies. However, quantitative analysis of the impact of this TA remains limited at best. In this article, we focus on what appears to be a particularly important part of TA and capacity building—the use of long-term advisors (LTAs) and short-term interventions (STIs). In a year-long project, the International Competition Network surveyed its member antitrust agencies on antitrust TA. The questionnaire contained over 1,000 questions on various aspects of TA. We provide an analysis of the data using formal modeling. The most important findings from the model relate to two structural features of recipient antitrust agencies. First, recipient agencies absorb LTA and STI services best when the agency head has a rank of minister or higher and when agencies have prosecutorial discretion. At the heart of this agency feature is the relative power position of the agency in the recipient country's domestic political and economic structure. Those agencies with a strong power base seem well positioned to receive the current formatted TA involving LTAs and STIs. Second, bilateral donor relationships did remarkably better than multilateral relationships in helping the agencies with their strategic mission.

REGULATION OF LIBERAL PROFESSIONS AND COMPETITION POLICY: DEVELOPMENTS IN THE EU AND CHINA

Philipsen, N. J. — Tue, 21 Apr 2009 07:54:24 PDT

The regulation of professional services has been high on the political agenda for years now in Europe. This paper points out the methods of working and the strategies used by the European Commission (Directorate General for Competition) and various national competition authorities to promote deregulation of the professions throughout the European Union. Central to this discussion are the so-called public interest and private interest approaches to regulation. On the one hand, the European Commission seems to have been influenced by developments in particular Member States (bottom-up effects), whereas on the other hand, there have been top-down effects in recent years, at least in some Member States. The European experience is used to study the recent developments in China, and in particular the regulation of lawyers. I find that the argument of information asymmetry may have more relevance in China than in Europe. In addition, the fact that liability rules may not yet be a good alternative for (or supplement to) quality regulation may also make a stronger case for regulation in China. However, economic theory and European practice have taught us that there is a general risk of disproportional regulation.

DETECTION OF ANTICOMPETITIVE HORIZONTAL MERGERS

Huschelrath, K. — Fri, 03 Apr 2009 01:42:45 PDT

This paper discusses possibilities to detect anticompetitive horizontal mergers. In particular, it develops a detection framework for antitrust authorities. The framework considers the potential welfare effects of mergers through changes in product prices and efficiencies, as well as product variety, marketing, and innovation incentives. The implementation of the framework is addressed through the derivation of back-of-the-envelope formulas.

COMPETITION VERSUS PROPERTY RIGHTS: AMERICAN ANTITRUST LAW, THE FREIBURG SCHOOL, AND THE EARLY YEARS OF EUROPEAN COMPETITION POLICY

Giocoli, N. — Wed, 18 Feb 2009 20:50:04 PST

This paper investigates the influence of the American antitrust tradition on the foundation and early years of European competition policy. Four main propositions summarize my argument made in this paper. First, when one takes the competition versus property rights dichotomy into account, it becomes evident that the economists' contribution to the historical evolution of U.S. antitrust law has been smaller than usually believed. Second, the American antitrust tradition has had less influence than is commonly claimed over the foundations of European Economic Community (EEC) competition policy. Third, a law and economics argument based on the constitutional standing of competition rules, an argument initially put forward by the highly influential Freiburg School of Ordoliberalism, played a crucial role in the birth of EEC antitrust policy. Fourth, the ordoliberal origin of EEC competition rules, when combined with the Community's integration goal, helps explain why the impact of the competition versus property rights dichotomy on European antitrust law has been limited and, contrary to the U.S. example, solved more favorably to competition than to property rights.