Leading Scholars Discuss Antitrust Economics and Competition Policy – A Searle Center Conference Recap

By TAP Guest Blogger

Posted on November 1, 2016

 Ninth Annual Conference on Antitrust Economics and Competition Policy
 Conference Summary written by Nicholas Vreugdenhil.

On September 16-17, 2016, the Searle Center at Northwestern hosted its Ninth Annual Conference on Antitrust Economics and Competition Policy. The conference brought together a diverse range of participants including academics, government officials, industry economists, and legal professionals. The topics covered included patent policy, the competitive effects of loyalty rebates, how market structure disciplines poor firm performance, vertical restraints, the design of spectrum auctions, the role of information in cartels, and congestion externalities in broadband networks.
Carl Shapiro (UC Berkeley, Property Rules vs. Liability Rules for Patent Infringement) presented a framework to understand the tradeoffs between a property rule versus a liability rule when patents are infringed. Under a property rule an injunction is issued against the infringing party. Under a liability rule the infringing party is allowed to continue infringing the patent but must pay royalties. The analysis is motivated by the current hybrid system used by the courts where both remedies are used on a case-by-case basis. To understand how these rules perform the author constructs a simple theoretical model of patent infringement remedies. The tradeoff in the model is between switching costs that are incurred when a firm must redesign its products versus the uncertainty a court has about the size of damages. When redesign costs are low and uncertainty about the harm caused is high property rules are preferred. When redesign costs are high and uncertainty about the harm caused is low then liability rules should be preferred by courts.

Fiona M. Scott Morton (Yale School of Management, A Unifying Analytical Framework for Loyalty Rebates) presented a theoretical framework to analyze the welfare effects of loyalty rebates. Loyalty rebates may reduce welfare by deterring entry with the exclusion scheme shifting the inverse demand curve that a potential entrant faces. A key contribution of the model is to introduce a new metric called the 'Effective Entry Burden' (EEB) that can identify cases where loyalty rebates induce a high financial burden to entrants due to the rebate scheme's exclusion effect. Intuitively, the EEB measures how much a potential entrant must lower its prices to overcome the financial incentives of the rebate contract. The authors compute the EEB metric for recent loyalty rebate litigation cases and show that it can be useful measure for courts to determine if loyalty rebates are anticompetitive.

Joshua S. Gans (Rotman School of Management, Exit, Tweets, and Loyalty) looked at whether consumers exit the market or use 'voice' (complain) when faced with a negative quality shock and how this decision varies with market structure. He first presented a theoretical model of relational contracting between firms and consumers. As concentration increases (and therefore opportunities for exit by consumers decrease) consumers are more likely to use voice (complain) than exit. The authors then test key predictions of the model on a novel dataset of twitter data matched with airline delays. The authors first show that customers tweet more when there are airline delays. Next the authors verify the model's prediction that increased concentration in a market is correlated with an increase in consumer complaints.

Dennis W. Carlton (Booth) and Ralph A. Winter (Sauder School of Business) (Vertical MFN's and the Credit Card No-surcharge Rule) presented a theoretical analysis of the effects of vertical constraints in two-sided markets. Most Favored Nation (MFN) clauses can eliminate competition between duopolists because they prevent downstream suppliers from charging more for the supplier's product than for competing products. The authors show that in a price-setting duopoly MFNs change products from substitutes to complements. This effect can make market structure extremely uncompetitive with equilibrium prices higher than the collusive outcome. The model is then used to analyze the effect of a “no surcharge rule” in credit card markets and the authors argue that the rule would inhibit competition.

Michael Sinkinson (Wharton School, Ownership Concentration and Strategic Supply Reduction) presented an empirical analysis of a recent spectrum auction. The focus of the paper is on how the auction can be strategically gamed by multi-license ownership. The authors show that it is possible for firms to withhold broadcast licenses from the auction to raise market clearing prices. They then quantify empirically the efficiency losses from this behavior in a 2016 spectrum auction and find that strategic behavior from multi-license ownership resulted in an increase in spectrum acquisition costs of 22 percent. Finally, the authors propose a potential solution to improve the mechanism which is argued to reduce the strategic distortion by 80%.

Jason Furman (White House Council of Economic Advisors) delivered the keynote address at lunch on Beyond Antitrust: The Role of Competition Policy in Promoting Inclusive Growth. He spoke about the effect of competition on the macroeconomy: theory suggests that a decrease in competition can lead to less dynamism in the economy and lower productivity growth. To illustrate his argument Furman presented seven recent macroeconomic trends. These trends include suggestive evidence that the economy is becoming less dynamic in terms of the movement of workers between firms and the entry and exit of firms. At the same time, there has recently been an increase in concentration in several sectors. Motivated by these trends Furman then spoke about future areas in which policy may be useful in increasing competition including reforming occupational licensing laws.

A panel session then discussed the related topic: Has the American Economy Become Less Competitive? Carl Shapiro (UC Berkeley) moderated a discussion between the panelists Judy Chevalier (Yale School of Management), Jason Furman (White House Council of Economic Advisers), John E. Kwoka, Jr. (Northeastern University), Aviv Nevo (Wharton), and Martin Schmalz (University of Michigan). The two main questions addressed were:
  1. Has competition decreased recently in the American Economy and is it something to be concerned about?
  2. What policy tools are available to decision makers?

On the first question, several participants argued that although trends that show an increase in concentration and a decline in dynamism are interesting, more research needs to be done with micro-data in particular industries to understand the exact mechanisms at work. On the second question panel members argued that although there may be some policy areas where competition can easily be improved like occupational licensing, overall there is no easy way forward and it is not clear whether the Department of Justice and the FTC should be tougher on horizontal merger policy.
Howard Shelanski (Office of Information and Regulatory Affairs) delivered the keynote address at the dinner. He spoke about the importance of taking into account market power when designing government policy. For example, when setting standards, policies can sometime create monopolists which induces the additional cost of higher prices. Shelanski spoke about the work of the Office of Information and Regulatory Affairs and how they incorporate competition considerations when doing cost-benefit analyses of policy.

Daniel F. Spulber (Northwestern University, Standard Setting Organizations and Standard Essential Patents: Voting Power versus Market Power) presented a theoretical model of Standard Setting Organizations (SSOs) to analyze under what conditions they choose efficient standards. The model has two stages. In the first stage the SSO votes to adopt a certain standard. In the second stage the industry competes subject to the standard. The main result is that voting power in the SSO and market power exactly counterbalance each other in the model generating efficiency with SSO members voting unanimously for the optimal standard.
Alexander Wolitzky (MIT, Maintaining Privacy in Cartels) presented a theoretical analysis of how secrecy in cartels may facilitate collusion. The analysis is motivated by several recent cases of cartels choosing to maintain privacy of an individual member's actions which is at odds with conventional models of cartel behavior which predict that more transparency facilitates collusion. The authors look at the case where the cartel follow a 'home market principle' of allowing firms to be a local monopoly while not competing in foreign markets. They provide conditions under which privacy is optimal in this setting. They also provide conditions under which transparency is optimal under linear Cournot and Bertrand competition.

Jonathan W. Williams (University of North Carolina – Chapel Hill, The Tragedy of the Last Mile: Congestion Externalities in Broadband Networks) presented an empirical structural model of congestion in broadband networks. The authors first use a panel of high-frequency data at the subscriber level to document substantial heterogeneity in how consumers allocate usage throughout the day and in which sites are visited. The authors then estimate a structural model of internet usage that can flexibly recover heterogeneous preferences for speed and usage allowance. They use the model to quantify the value of eliminating congestion and also to test proposed solutions to congestion including peak use pricing and local caching of over-the-top-video content.

​Nicholas Vreugdenhil is a PhD student in economics at Northwestern University.