On September 20-21, 2013, The Northwestern University School of Law hosted the Sixth Annual Searle Center Conference on Antitrust Economics and Competition Policy. The conference gathered leading scholars as well as members of major corporations and regulatory bodies, whose research and interests relate to antitrust and competition policy. Topics addressed during the conference included vertical integration, intellectual property, merger analysis and pricing strategies.
Luis Cabral (Staggered Contracts, Market Power, and Welfare) presented a model that explains how dynamic contracts can generate barriers to entry and harm price competition. The mechanism is through staggered contracts, which are contracts with desynchronized expiration dates for different consumers. Cabral showed that in industries in which economies of scale are important, if a first mover signs staggered contracts with a large fraction of consumers in the market, entrants will have a hard time exploiting the economies of scale in the industry. As a consequence, staggered contracts can effectively deter entry, even when potential entrants are more efficient.
Daniel P. O'Brien (All-Units Discounts and Double Moral Hazard) considered the effects of contracts that feature a price reduction on all units, if the total quantity purchased equals or exceeds a given quantity threshold. A concern of antitrust authorizes is that all-unit discount contracts can be used to exclude efficient suppliers with low capacity from the market. O’Brien develops a theoretical model to show that all-unit discount contracts may also have an efficiency rationale in situations where upstream firms must make lumpy investments. Thus a rule of reason analysis may be appropriate to evaluate the effects of such contracts in particular circumstances.
Joseph Farrell (Collusive Vertical Contracts) presented a framework to analyze collusive structures between subsets of upstream and downstream firms. He argued that vertical contracts between upstream firms and downstream firms may facilitate collusive pricing arrangements at the downstream level.
Robert Town (Mergers When Prices are Negotiated: Evidence from the Hospital Industry) presented an empirical study of the effect of vertical mergers in the hospital industry on prices. Unlike many markets where firms simply announce posted prices, prices in the hospital industry are determined by bilateral bargaining between hospitals and insurance providers. Town’s paper provides a method for estimating the price effects of mergers in markets where prices are determined by bilateral bargaining and applies this methodology to mergers in the hospital industry.
Nathan H. Miller (On the First Order Approximation of Counterfactual Price Effects in Oligopoly Models) presented another methodological contribution to the study of merger analysis. Miller illustrated, through Montecarlo simulations, how using first order approximation techniques for merger analysis can improve the estimation results.
Ali Yurukoglu (Channel 5 or 500: Vertical Integration, Favoritism, and Discrimination in Multichannel Television) presented results of an empirical study investigating the extent to which pay TV providers that are vertically integrated upstream into the programming industry discriminate against rival programmers. Using a much larger and richer dataset compared to previous studies, the main finding of the paper is that integrated operators favor their own channels by assigning them lower channel numbers than other operators assign the same channels.
Michael Katz delivered a keynote address on Competition Policy and Healthcare. Katz argued that while competition policy can play a useful role in controlling health care costs by preventing anticompetitive mergers, competition policy cannot address many of the most fundamental factors underlying inflated health care costs. These include the fact that consumers of health care are so insulated from prices and that it is difficult for consumers to evaluate the quality of the health care services they receive. Katz also suggested that antitrust authorities should be careful when blocking vertical integration or exclusive contracts, given that they can facilitate communication and sustain long term relationships, which can potentially reduce healthcare costs.
In recent years antitrust authorities have directed significant attention to the development of intellectual property markets. Patent litigation between large corporations has taken the spotlight in the media and there is an important ongoing debate about whether strategies for patent acquisition and litigation are anti-competitive and whether these practices promote or discourage innovation. A keynote address, two talks and a panel discussion all addressed different issues in competition policy and intellectual policy.
Aviv Nevo delivered a keynote address on Antitrust and IP, providing an overview of important institutions and current controversies. Standard setting organizations (SSOs) are groups of firms that cooperatively set technical standards. Patents that are essential to implementing the standard are referred to as standard essential patents (SEPs). To prevent ex-post hold-up problems, SSOs ask firms owning SEPs to commit in advance to license these patents to other firms at fair reasonable and nondiscriminatory (FRAND) rates. Patent assertion entities (PAEs) are entities that specialize in purchasing and asserting patents against firms that produce products rather than conducting innovation themselves that result in patents, or producing products themselves. Current controversies include how SSOs can be regulated so that they encourage innovation but do not facilitate collusion, how FRAND rates should be calculated, whether owners of SEPs should be allowed to ask for injunctive relief, and whether PAEs on balance promote or inhibit innovation.
It is well-understood that SSOs will generally be procompetitive if they involve complementary patents but anti-competitive if they involve patents that can substitute for one another. Patrick Rey (Cooperation vs. Collusion: How Essentiality Shapes Co-opetition) presented a model that demonstrates that this is a more complex issue than previously thought, by showing that whether patents are substitutes or complements can actually depend on the magnitude of the license fees that are charged.
Carl Shapiro (Strategic Patent Acquisitions) provided both empirical and theoretical perspectives on the issue of whether PAEs on balance promote or dampen incentives for innovation. He presented data which showed that a very small fraction of revenues earned by PAEs flow back to innovators and argued that this suggests that PAEs may on balance inhibit innovation.
The conference concluded with a lively panel discussion on Competition Policy and IP by Timothy Simcoe, Jeffrey Wilder, Dennis Carlton and Fiona Scott Morton that further explored many of the issues raised by earlier speakers.
This conference re-cap was written by Jorge Lemus. Mr. Lemus is a PhD student in the Department of Economics at Northwestern University.