Showing papers in "Journal of Competition Law and Economics in 2010"
TL;DR: In this article, the authors 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.
Abstract: 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.
71 citations
TL;DR: The U.S. Department of Justice and the Federal Trade Commission are currently in the process of revising their Horizontal Merger Guidelines as discussed by the authors, including the sections on unilateral and coordinated effects, committed and uncommitted entry, and numerical concentration thresholds for safe harbors.
Abstract: The U.S. Department of Justice and the Federal Trade Commission are currently in the process of revising their Horizontal Merger Guidelines. I explain that if a revision is to occur, then there are certain parts of the Guidelines that are most in need of revision, including the sections on unilateral and coordinated effects, committed and uncommitted entry, numerical concentration thresholds for safe harbors, and fixed costs. I also explain what should not become part of any new Guidelines, such as replacing the market definition/market concentration starting point with a competitive effects framework such as “upward pricing pressure.” The proposed Guidelines were published in April 2010. I present my reactions to the proposed Guidelines and discuss several caveats that courts, foreign antitrust agencies, and the business community should be aware of as they try to interpret what the proposed Guidelines suggest about appropriate antitrust policy.
44 citations
TL;DR: In this paper, the authors address the competitive concerns motivating net neutrality rules and address the potential impact of the proposed rules on consumer welfare, concluding that there is significant and growing competition among broadband access providers and that few significant competitive problems have been observed to date.
Abstract: The Federal Communications Commission's proposed net neutrality rules would, among other things, prohibit broadband access providers from prioritizing traffic, charging differential prices based on the priority status, imposing congestion-related charges, and adopting business models that offer exclusive content or that establish exclusive relationships with particular content providers. The proposed regulations are motivated in part by the concern that the broadband access providers will adopt economically inefficient business models and network management practices due to a lack of sufficient competition in the provision of broadband access services. This paper addresses the competitive concerns motivating net neutrality rules and addresses the potential impact of the proposed rules on consumer welfare. We show that there is significant and growing competition among broadband access providers and that few significant competitive problems have been observed to date. We also evaluate claims by net neutrality proponents that regulation is justified by the existence of externalities between the demand for Internet access and content services. We show that such interrelationships are more complex than claimed by net neutrality proponents and do not provide a compelling rationale for regulation. We conclude that antitrust enforcement and/or more limited regulatory mechanisms provide a better framework for addressing competitive concerns raised by proponents of net neutrality.
40 citations
TL;DR: In this article, the authors discuss the historical relationship between antitrust error and innovation and argue that the error-cost approach implies that the rule of reason should apply to most forms of business conduct.
Abstract: Frank Easterbrook's seminal analysis of error-cost minimization in The Limits of Antitrust has special relevance to antitrust intervention in markets where innovation is a critical dimension of competition. Both product and business innovations involve novel practices. Historically, the economics profession has tended initially to rely upon monopoly explanations for such practices. Courts have reacted with similar hostility. But almost always there has followed a more nuanced economic understanding of the business practice that recognized its procompetitive virtues. Antitrust standards have adjusted occasionally to reflect that new economic learning. This sequence has produced a fundamental link between innovation and antitrust error that transcends the uncontroversial point that the probability of false positives and their social costs are both higher in the case of innovation and innovative business practices. We discuss some principles for applying Easterbrook's error-cost framework to innovation. We then discuss the historical relationship between antitrust error and innovation. We conclude by challenging the conventional wisdom that the error-cost approach implies that the rule of reason, rather than per se rules, should apply to most forms of business conduct. We instead identify simple filters to harness existing economic knowledge to design simple rules that minimize error costs. We make five such proposals.
35 citations
TL;DR: In this paper, the authors provide an overview of the development of Internet advertising and the economic models that allow one to evaluate competition among advertisers, focusing on the extent to which various types of online advertising compete with one another and with offline advertising.
Abstract: This paper provides an overview of the development of Internet advertising. We offer a broad overview of both online and offline advertising and the economic models that allow one to evaluate competition among advertisers. We focus on the extent to which various types of online advertising compete with one another and with offline advertising. We also ask whether various types of online ads are competitive with each other.
30 citations
TL;DR: The European Commission Recommendation 2007/879/EC has become known as an important innovation towards phasing out sector-specific regulation of electronic communications as mentioned in this paper, and the analytical concept of a disaggregated regulatory approach is applied.
Abstract: The European Commission Recommendation 2007/879/EC has become known as an important innovation towards phasing out sector-specific regulation of electronic communications. Eleven of the eighteen markets are no longer regarded as needing to be subject to sector-specific ex ante regulation. Although the important role of active and potential competition in telecommunications markets has been mentioned, the economically founded implications of the “three-criteria-test” in the Commission Recommendation 2003/311/EC have not yet been implemented. As a consequence, the relevance of regulation in the remaining seven markets remains vague. To provide a superior alternative, the analytical concept of a disaggregated regulatory approach is applied. Sector-specific regulatory interventions are to be limited to network-specific market power. As a consequence, only two of the seven remaining markets in the European Commission Recommendation 2007/879/EC are possible candidates for regulation.
27 citations
TL;DR: In this paper, the authors show that none of these three theories of harm is plausible and that none justifies the proposed across-the-board ban on optional business-to-business QoS transactions between ISPs and content providers.
Abstract: In October 2009, the Federal Communications Commission proposed “net neutrality” regulations, including a new rule that would have the effect of banning optional business-to-business transactions between broadband Internet service providers (ISPs) and content providers for enhanced delivery of packets over the Internet. The proposed “nondiscrimination” rule would have the ironic effect of actively discriminating against any kind of content or application that is differentiated by its need for greater assurance of higher quality transmission across the Internet (known as quality of service, or QoS) than undifferentiated best-effort delivery can offer. This result not only would reduce static efficiency by encouraging higher consumer prices, but also would reduce dynamic efficiency by retarding innovation. The proposed rule manifests an inverse relationship between means and ends, for it would actively thwart the Commission's stated purpose of promoting innovation both in and at the edges of the network. These economic considerations set the bar very high for those who claim that the new regulation is needed to prevent theoretical harms that have not materialized in more than a decade of real-world experience. By now, the economic arguments in favor of network neutrality regulation have coalesced around three principal theories. The first is the theory that, if permitted to charge suppliers of content or applications for optional higher quality delivery, network operators will ignore positive spillover effects and set charges at higher than socially optimal levels. The second is the theory that vertically integrated network operators will foreclose independent providers of Internet content and applications. A third and less clearly articulated theory is that the broadband ISP will degrade the quality of best-effort delivery of Internet packets—reducing the quality of best-effort delivery to that of a “dirt road”—as a means of coercing suppliers of content or applications into purchasing superior QoS. We show that none of these three theories of harm is plausible. Certainly, none justifies the proposed across-the-board ban on optional business-to-business QoS transactions between ISPs and content providers—transactions that could prove particularly valuable to smaller content providers looking to differentiate their offerings from and compete with larger content rivals that have the scale and resources to meet their QoS needs with third-party or self-deployed content delivery networks.
22 citations
TL;DR: In this article, the authors argue that empirical economic analysis in court proceedings is subject to important economic and legal restrictions, cumulating in a fundamental trade-off between accuracy and practicality.
Abstract: This paper argues that empirical economic analysis in court proceedings is subject to important economic and legal restrictions, cumulating in a fundamental trade-off between accuracy and practicality. We draw lessons from two influential German court cases the paper wholesaler cartel decision of 2007 and the cement cartel decision of 2009. We characterise the trade-offs arguing that they need to be well understood, made transparent, and that decisions on how to proceed in light of these trade-offs have to be taken upfront by the court. In this respect, we believe that the three-step procedure (design, application, and robustness checks) followed by the German court in the cement case is well suited to meet the appropriate legal standard and requirements, both with respect to accuracy and practicality.
20 citations
TL;DR: The U.S. Supreme Court decision in linkLine as mentioned in this paper states that if a vertically integrated company is not subject to an obligation to supply, there cannot be a margin-squeeze case.
Abstract: Margin squeezes can be evaluated under a predation or a refusal-to-deal standard. Both Carlton and Sidak argue in favor of using the predation standard. However, should the conditions for an abusive refusal to deal be satisfied, then margin squeezes should be prohibited even when prices are not predatory. It is sufficient that they are exclusionary. According to the U.S. Supreme Court decision in linkLine, when a vertically integrated company is not subject to an obligation to supply, there cannot be a margin-squeeze case. However, the Court does not establish how to define a margin squeeze when there is an antitrust duty to supply. In those circumstances, the EC approach in the Deutsche Telekom case helps to identify a standard. In any event, remedies in margin-squeeze cases should make sure that incentives to eliminate double-marginalization are maintained.
19 citations
TL;DR: In this article, the authors pointed 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.
Abstract: 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.
15 citations
TL;DR: In this paper, the authors elaborate the background of each case and provide in-depth analysis of each decision, exploring the common characteristics of the cases, the economic theories on which the merger control authority has relied in its merger decisions, and the patterns regarding China's merger policy.
Abstract: China's Anti-Monopoly Law went into effect on August 1, 2008. Even though enforcement authorities tend to build their capacity progressively, China has already seen three milestone case decisions in the past year: InBev/Anheuser-Busch, Coca-Cola/Huiyuan, and Mitsubishi Rayon/Lucite. In this article, we elaborate the background of each case and provide in-depth analysis of each decision. In particular, we explore the common characteristics of the cases, the economic theories on which the merger control authority has relied in its merger decisions, and the patterns regarding China's merger policy.
TL;DR: In this article, the authors describe the case and explain why the judgment by the Competition Appeal Court is sound from an economic perspective and why it sets an important precedent in this area of competition law.
Abstract: One of the thorniest areas of antitrust enforcement is whether, and how, to deal with excessive pricing allegations. Even in jurisdictions that have laws against excessive pricing, there has been little case law on the issue. A recent dispute over the pricing of flat steel in South Africa provides helpful guidance on the correct approach to excessive pricing cases. The Competition Tribunal took a structural approach and deduced the existence of excessive pricing on the basis of super-dominance and market segmentation. The Competition Appeal Court overturned this decision and clearly stated that (1) an empirical exercise comparing prices with cost benchmarks is required in assessing these cases, and (2) excessive prices need to be judged against the long-run average costs of an efficient firm. A purely structural approach was not deemed adequate. In this article, we describe the case and explain why the judgment by the Competition Appeal Court is sound from an economic perspective and why it sets an important precedent in this area of competition law.
TL;DR: In this paper, the authors discuss Frank Easterbrook's article, The Limits of Antitrust, and demonstrate the link between the article and the works of Aaron Director and Ronald Coase, in particular their emphasis on the superior effect of markets to government attempts to correct monopoly behavior.
Abstract: I situate Frank Easterbrook's article, The Limits of Antitrust, within the Chicago School antitrust tradition. I demonstrate the link between the article and the works of Aaron Director and Ronald Coase, in particular their emphasis (1) on the superior effect of markets to government attempts to correct monopoly behavior and (2) the expectation of judicial error. The Easterbrook article is shown to have extended the Director–Coase antitrust program.
TL;DR: In New Zealand's light-handed regulation, the pursuit of efficiency was enshrine into statute, first by relying solely upon competition law and contractual undertakings and subsequently creating a regulatory body with an explicit legislated efficiency directive as discussed by the authors.
Abstract: 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.
TL;DR: In this article, the authors review the economics literature on price discrimination in traditional markets for goods and services and on licensing IP outside of standard setting to identify lessons that can be applied to licensing within standards.
Abstract: The debate surrounding a RAND licensing promise (for reasonable and nondiscriminatory licensing) made within standard setting has focused on what the “R” means; far less attention has been given to what is implied by the “ND.” The goal of this paper is to offer courts and competition agencies guidance on evaluating when differing intellectual property (IP) licensing within standard setting rises to the level of anticompetitive behavior. The paper reviews the economics literature on price discrimination in traditional markets for goods and services and on licensing IP outside of standard setting to identify lessons that can be applied to licensing within standards. There are a number of important teachings relevant for competition policy. Price discrimination is not necessarily harmful, and can even increase consumer welfare. Most IP licensing is characterized by “discrimination” in that rates and terms differ across licensees, making the task of disentangling anticompetitive practices difficult. Proof of market power must remain the first step in any inquiry on allegations of anticompetitive IP licensing. Moreover, as of yet, no widely applicable benchmarks or rules for distinguishing harmful from beneficial or nonharmful licensing discrimination have emerged, meaning that a careful, quantitative effects-based analysis remains the best approach.
TL;DR: In this paper, the authors consider the application of Article 82 using an economic approach and argue that proving a given practice anticompetitive or efficient can be usefully framed as an identification problem.
Abstract: 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 (Autorita 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.
TL;DR: The 1984 article by Frank Easterbrook, The Limits of Antitrust, has had considerable influence on antitrust enforcement and adjudication as mentioned in this paper, focusing on the things that antitrust could not do well.
Abstract: The 1984 article by Frank Easterbrook, The Limits of Antitrust, has had considerable influence on antitrust enforcement and adjudication. Principally, Easterbrook focused on the things that antitrust could not do well. When antitrust's reach exceeds its grasp, it creates type I and type II errors. But Easterbrook points out that, in antitrust matters, type II errors are largely self-correcting. Letting price-fixers go free may be a mistake, but cartels are prisoner's dilemmas, so the mistake is corrected in the market. Letting monopolizers continue to raise prices may be an error, but new-firm entry will solve that problem as well. Easterbrook provides a taxonomy of the sources of antitrust errors, including the difficulty that antitrust defendants have in explaining procompetitive rationales and the difficulty that judges and juries have in understanding the theory and empirics involved in antitrust cases.
TL;DR: In this paper, the UK Competition Commission's recent inquiry into the Groceries sector made the unusual recommendation that organic growth by large incumbents in concentrated areas be prohibited, and the key support for this recommendation came from an econometric analysis of the relationship between margins and concentration.
Abstract: The UK Competition Commission's recent inquiry into the Groceries sector made the unusual recommendation that organic growth by large incumbents in concentrated areas be prohibited. The key support for this recommendation came from an econometric analysis of the relationship between margins and concentration. We describe the analysis and demonstrate that it suffers from material flaws that cast doubt on the validity of the conclusions drawn from it, and thus on the remedy itself. We identify issues around the nature of debate between investigated parties and the UK authorities on technical issues and make some suggestions for changes to processes.
TL;DR: It is explained 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, and 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 a provider services.
Abstract: 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.
TL;DR: In this paper, the authors develop a set of competition and regulatory principles, grounded in the law and economics literature, that can serve to inform the design of the optimal public policy for the telecommunications sector.
Abstract: The Obama administration came into power championing a philosophical shift in regulatory and antitrust policy. The telecommunications industry was singled out by the administration as a case where past regulatory or antitrust policies may have been too permissive. Prominent policy issues slated for (re)examination include forbearance from network unbundling obligations, net neutrality regulation, and prospective market failures in the provision of broadband. The principal objective of this article is to develop a set of competition and regulatory principles, firmly grounded in the law and economics literature, that can serve to inform the design of the optimal public policy for the telecommunications sector.
TL;DR: In this paper, the authors 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.
Abstract: 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
TL;DR: In this paper, the authors assess the impact of the detection of a hard-core cartel in the Swiss market for road surfacing on post-cartel competition and derive estimates of the economic effects of the decision.
Abstract: 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 decision. 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.
TL;DR: In this article, the authors identify reasons for supporting a more limited deployment of antitrust (competition) law, describes ways in which law in the United States has evolved toward greater congruence with that approach, and explores the forces that are now pulling the law in a different direction.
Abstract: Twenty-five years ago, Frank Easterbrook published his essay The Limits of Antitrust, in which he argued for a set of filters that government enforcement authorities and judges could use to test the propriety of a given action under the antitrust laws. That essay aptly exposed serious concerns about expansive use of antitrust laws, especially at the behest of lagging competitors of the enforcement target, contributing to a movement toward less ambitious use of antitrust law in the United States. More recently, changes in academic theories coupled with developments in the law outside the United States have set the stage for a reversal of the forces aligned with Judge Easterbrook's arguments. This article identifies reasons for supporting a more limited deployment of antitrust (competition) law, describes ways in which law in the United States has evolved toward greater congruence with that approach, and explores the forces that are now pulling the law in the opposite direction. Critically, the increased availability of alternative enforcement regimes with relatively low jurisdictional thresholds has created forum-shopping incentives for complainants. At the same time, antitrust regulators frequently will have incentives to behave in ways that encourage forum-shopping. This behavior will threaten to undermine results in line with Judge Easterbrook's work, creating special risks to competition in markets with a dominant firm.
TL;DR: In this paper, the International Competiti on Network surveyed its member antitrust agencies on antitrust technical assistance and found that those agencies with a strong power base seem well positioned to receive the current formatted technical assistance involving LTAs and STIs.
Abstract: With a significant increase in the number of countries with antitrust laws, technical assistance 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 technical assistance to raise the capacity and effectiveness of younger agencies. However, quantitative analysis of the impact of this technical assistance remains limited at best. In this article we focus on what appears to be a particularly important part of technical assistance and capacity building—the use of long term advisors (LTA) and short term interventions (STI). In a year-long project, the International Competiti on Network surveyed its member antitrust agencies on antitrust technical assistance. The questionnaire contained over 1,000 questions on various aspects of technical assistance. 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/or when agencies had prosecutorial discretion. At the heart of these agency features is the relative power position of the agency in the domestic political and economic structure of the country. Those agencies with a strong power base seem well positioned to receive the current formatted technical assistance involving LTAs and STIs. Second, bilateral donor relationshi ps did remarkably better in helping the agencies with their strategic mission.
TL;DR: The Competition Act, 2002, radically altered merger control in Ireland, removing political involvement and assigning responsibility for reviewing mergers to an independent agency, the Competition Authority as mentioned in this paper, which has tended to rely on qualitative rather than quantitative evidence.
Abstract: The Competition Act, 2002, radically altered merger control in Ireland, removing political involvement and assigning responsibility for reviewing mergers to an independent agency, the Competition Authority. This paper reviews the first 5 years of this new regime. The reform has increased transparency and made competition the sole criteria for the evaluation of mergers. There is evidence that most mergers notified have no competitive effect within Ireland, suggesting that the legislation is too broad in scope. Although relatively few notified mergers raised any competition concerns, this paper identifies problems in the Competition Authority's analysis in a number of these cases. The Authority has tended to rely on qualitative rather than quantitative evidence. In some instances, its analysis is inconsistent with economic theory. This applies particularly to its analysis of efficiencies. This paper therefore recommends that the Authority urgently review its merger procedures and introduce additional checks and balances in the merger review process. In addition, it should review its approach to efficiencies. This paper also suggests possible legislative reforms to reduce the number of unnecessary notifications and provide third parties with a right of appeal against decisions by the Authority.
TL;DR: In this article, the authors show that allowing television mergers in small markets is very likely to increase diversity of the airwaves, and that the FCC should have a presumption in favor of the merger.
Abstract: “Diversity of the airwaves”—making sure that viewers have a varied mix of ideas and information available in the relevant media market—remains one of the central goals of broadcasting policy for the ownership of television stations. In an effort to protect diversity of the airwaves, the Federal Communications Commission (FCC) prevents one entity from owning more than one television station in small television markets. This paper shows that the FCC's policy is probably counterproductive; allowing television mergers in small markets is very likely to increase diversity of the airwaves. Hence, when regulating television mergers in small markets, the FCC should have a presumption in favor of the merger.
TL;DR: In this article, the authors present a review of the economic arguments favoring (or perhaps opposing) the primacy of dynamic efficiency in competition and regulatory policies, and an analytical framework based on adapting models typically used to evaluate market structure and performance is developed.
Abstract: In evaluating competition and regulatory policies, economists typically emphasize the extent to which such policies promote economic efficiency. The outcome of such evaluations—particularly in network industries conducive to competitive inroads and technological change—may involve ascertaining whether short-run sacrifices of static efficiency (allocative and technical) are justified by long-run gains in dynamic efficiency. This determination is complicated by the fact that short-run sacrifices are frequently known and measureable, whereas long-run gains are uncertain and less easily measured. Although a growing number of economists—generally relying on the writings of Joseph Schumpeter—conclude that dynamic efficiency is of substantially greater importance in such tradeoffs, in many cases the conclusion is not based on specific measurements of the tradeoffs encountered in particular policies. This article presents a review of the economic arguments favoring (or perhaps opposing) the primacy of dynamic efficiency. On the basis of this review, an analytical framework based on adapting models typically used to evaluate market structure and performance (for example, Cournot models) is developed. This framework can be used to evaluate the static/dynamic efficiency tradeoffs of competition and regulatory policies.
TL;DR: In this paper, the authors show that the Katz-Shapiro aggregate diversion ratio rule does not capture the essence of what critical loss really is, and propose another formula that does.
Abstract: In a recent article, Daljord, Sorgard, 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, Sorgard, and Thomassen does not capture the essence of what critical loss really is. We propose another formula that does. Daljord, Sorgard, 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.
TL;DR: 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.
Abstract: 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.
TL;DR: The authors show that applying the usual tools of market power analysis to firms in regulated industries can lead to predictably erroneous outcomes, such as the reverse cellophane fallacy, which causes other services to appear to be weaker substitutes than they would be at compensatory prices.
Abstract: A proper economic analysis of whether a regulated firm has—or, more accurately, would, in the absence of regulation, have—market power is a significantly different exercise from a typical market power analysis of an unregulated firm. We show that applying the usual tools of market power analysis to firms in regulated industries can lead to predictably erroneous outcomes. Prices set by regulatory fiat at below-cost levels would cause what we term the “reverse cellophane fallacy.” The uneconomically low prices cause other services to appear to be weaker substitutes than they would be at compensatory prices and therefore lead to improperly narrow market definitions and erroneous inferences of market power. This in turn leads to the self-perpetuation of regulation, in which regulators insist on finding that the incumbent lacks market power before deregulating prices, whereas the artificially restricted prices lead to an erroneous inference of market power. We test this hypothesis empirically by examining a sample of geographic “markets” (incumbent exchange service areas) in a single U.S. state in 2004. Our findings indicate that the relative absence of competition in rural areas should not be interpreted as evidence that the incumbent would be able to exercise market power absent price regulation.