Tenth Annual Conference on Antitrust Economics and Competition Policy: Conference Summary

By TAP Guest Blogger

Posted on October 2, 2017


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This conference summary was written by Nicholas Vreugdenhil.

 

On September 15th and 16th, 2017, the Searle Center at Northwestern hosted its Tenth Annual Conference on Antitrust Economics and Competition Policy. The conference brought together a wide range of participants including academics, judges, public servants, and economists in the private sector. The topics covered included patent policy, how contracts can be a barrier to entry, how investment and prices are related to market power in mobile telecommunications, recoupment and predatory power analysis, a proposal to deal with the anti-competitive effects of institutional investors, how price caps affect competition, the competitive effects of minimum advertised price restrictions, and how vertical integration affects markets.

 

Erik Hovenkamp (Harvard Law School, Proportional Restraints and the Patent System) proposed a theoretical framework that sheds light on how patents should be designed. The tradeoff in the model is that an optimal patent should strike a ‘proportional’ balance between the probability that a patent is valid (which depends on how innovative the invention is) and how much the patent restricts competition. Deciding whether a patent is proportional could be a complicated problem because it may require estimating patent quality and competitive effects. However, the authors show that optimal patents can be implemented simply by policing the manner in which competition is restrained and by prohibiting certain side-deals.

 

Gary Biglaiser (University of North Carolina, Contracts as a Barrier to Entry in Markets with Non-Pivotal Buyers) presented a theoretical analysis to determine under what conditions breakup fees by an incumbent are anti-competitive. Breakup fees by an incumbent firm may hurt consumers if they prevent entry of a more efficient firm in the future. The model has two periods. In the first period the incumbent offers the consumer a two period long-term contract. In the second period consumers learn their switching cost and both incumbent and entrant offer a spot contract. The main finding is that when consumers have switching costs banning breakup fees is always beneficial to consumers and will increase total surplus unless the efficiency of the entrant and incumbent is similar. The policy implication is to use a `rule of reason’ approach towards breakup fees.

 

Christos Genakos (Cambridge Judge Business School, Evaluating Market Consolidation in Mobile Communication) presented an empirical analysis of the mobile telecommunications market. Theory has ambiguous predictions about how consolidation affects prices and investment. The authors analyze how a recent wave of consolidation in European telecommunications changed prices and investment. They document that increases in concentration were associated with higher consumer prices and increased investment for each mobile operator, but had no effect on investment at the market level.

 

The keynote address at lunch was delivered by Joshua D. Wright (Antonin Scalia Law School, George Mason University, Here We Go Again: Examining the Empirical Foundations of the `New’ Progressive Antitrust Movement). Recently it has been proposed that antitrust enforcement should be expanded to include considerations of how market consolidation will affect inequality, political power, and wages and employment. The speaker argued that antitrust policy should instead remain focused only on the consumer welfare standard.

 

Louis Kaplow (Harvard Law School, Recoupment and Predatory Pricing Analysis) presented a framework to investigate how predatory pricing enforcement should be implemented in practice. Firms may engage in predatory behavior if the short run costs to the firm are less than the long-run benefits to the firm of less competition (`recoupment’). However, there are many other reasons why firms may lower prices beyond predation. A key contribution of the paper is a decision framework to determine how to assign liability in predatory pricing cases. The framework suggests that liability should be assigned if the benefits (deterrence of predation) outweigh the costs (chilling of beneficial conduct to consumers such as lower prices).

 

Fiona Scott Morton (Yale School of Management, A Proposal to Limit the Anti-Competitive Power of Institutional Investors) presented a policy proposal designed to limit the market power of institutional investors. The proposal is motivated by a growing empirical literature that finds that common ownership of firms by Institutional investors increases product market prices. The authors investigate the main tradeoff that policymakers face: consumers save using mutual funds (which are institutional investors) and value diversification, but too much diversification may result in market power and higher consumer prices. Under the proposed policy, an owner may hold either below 1% of a firm’s equity or hold only one effective firm (a firm with an HHI of > 1000) in an oligopoly industry. The authors provide simulations that suggest that the benefits of the policy far outweigh the cost of lower diversification.

 

A panel session discussed the topic: The Proposed Aetna/Humana and Anthem/Cigna Transactions. The moderator was Nancy Rose (MIT Department of Economics) and the panelists were Cory Capps (Bates White), David Dranove (Kellogg School of Management), Mark A. Israel (Compass Lexecon), and Aviv Nevo (University of Pennsylvania Wharton School of Business and Department of Economics). Panelists spoke about their experiences working on these recent antitrust cases. It was argued that some of the decisive factors in the Aetna/Humana case were the use of institutional details to build a foundation for more complicated econometric analysis, using simple measures based on the data, and surveying the academic literature to argue that the results were robust. Some panelists suggested that in future mergers there should be a more nuanced treatment of mitigating factors. In the Anthem/Cigna case the main disputes were about market shares, competitive effects, and the magnitude of the efficiencies. Innovation was an important issue in this case and a key question was whether a merged firm would be as innovative as the individual firms. Panelists argued that more empirical evidence is needed to understand the relationship between innovation and concentration.

 

At dinner the keynote address was delivered by Tommaso Valletti (Chief Competition Economist, Directorate General for Competition, European Commission) on the topic Horizontal Mergers and Innovation. He described recent antitrust cases in Europe and the approach regulators have taken to challenge mergers based on the effects on innovation. He argued that regulators have been successful in preventing mergers that threatened to reduce innovation by using empirical evidence (for example, the impact of consolidation on measures of innovation like citation weighted patents), simple theoretical models, and internal firm documents.

 

Patrick Rey (Toulouse School of Economics, Price Caps as Welfare Enhancing Coopetition) presented a theoretical analysis of how price cap agreements between firms affect welfare. The authors first consider a simple static model. The main result is that if products are complements then price caps solve the double marginalization problem and improve welfare. Alternatively, if products are substitutes then price caps do not stifle competition. The authors then analyze a dynamic model of repeated interaction and find that price caps increase consumer surplus. One challenge to assessing the effects of price caps is that they may require information unavailable to regulators. A feature of the model is that it is ‘information free’ and the results are robust to general specifications of demand and cost functions.

 

John Asker (UCLA, Vertical Information Restraints: Pro- and Anti-Competitive Impacts of Minimum Advertised Price Restrictions) presented a theoretical model to analyze the antitrust implications of minimum advertised price (MAP) restrictions, which are agreements between firms to not advertise a product for less than a certain price. The model features informational/search frictions for consumers. The main results are that MAPs can enable industry level consumer price discrimination, MAPs can encourage service provision from heterogeneous retailers, and that MAPs can facilitate collusion by making it easier for cartels to monitor behavior. Overall MAPs can be pro- or anti-competitive relative to no restrictions or resale price maintenance.

 

Fernando Luco (Texas A&M University, Vertical Information and Multiproduct Firms: When Eliminating Double Marginalization May Hurt Consumers) presented an empirical retrospective analysis of the effects of vertical integration in the carbonated beverage industry. The motivation for the paper is that vertical mergers are typically evaluated based on the trade-off between efficiencies and market foreclosure. In addition, when there are multiproduct firms the partial elimination of double margins changes pricing incentives and may lead to price increases which is known as the `Edgeworth-Salinger effect’. The authors find that vertical integration caused a 1-2% decrease in the price of vertically integrated products which suggests the elimination of double marginalization. For non-vertically integrated products prices increased by 3-4% which is consistent with the Edgeworth-Salinger effect. Overall the results suggest that the Edgeworth-Salinger effect is empirically important and should be taken into account in merger analysis.

 

Nicholas Vreugdenhil is a PhD student in Economics at Northwestern University.

 


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