Key findings of the literature on innovation and horizontal mergers

According to Kokkoris and Valletti (2020), the key takeaways from the economics literature on innovation considerations in horizontal mergers are the following:

  1. It is untenable to say that the prospect of higher prices is enough to conclude that effects of merger on innovation will be positive. Price effects on innovation are ambiguous.
  2. Innovation effects assessment should not be avoided simply because of uncertainty. The competition authority does not need to predict winners or successful products. Rather, an assessment of the impact of innovative efforts on expected profits should be conducted. This is enough to have a meaningful analysis. The agency can do this by assigning a likelihood of success to innovation efforts and estimating expected profits on this basis, as well as incentives on ex ante innovation competition.
  3. Two channels through which mergers affect innovation: internalizing within the merged entity the innovation externalities produced by the merging firms (R&D by one competitor decreases expected profits of other competitors, therefore merger leads to lower R&D by avoiding this externality) and price coordination in the market (which has ambiguous effects on innovation because it can increase expected profits of both innovation and non-innovation activities relative to each other)
  4. Focus should be on overall welfare and not just on innovation effects because ultimately what matters is the consumer. Therefore, dynamic and static effects should be balanced. It should be taken into account how much of the innovation enhanced welfare will accrue to consumers.
  5. It is important to recognize that there can be a scenario where R&D by a single firm may have an impact on aggregate demand not just its own. Thus, R&D by one firm could actually have positive externalities on competitors. This determines which model should be used to assess the effects of the merger.
  6. The agency has to analyze the merger-specific efficiencies (discarding efficiencies that could be otherwise achieved, for example, by licensing technologies) on the merged entity R&D capabilities. This depends on the assumptions made on the R&D cost function, specifically on how fast R&D costs rise to produce a given increased likelihood of success.

You can find the full paper here.

What do you think?

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Antitrust in non-democratic regimes

Emerging Trend in Competition Law in Southeast Asia: Perspectives from Myanmar and Thailand

Ploykaew Porananond, Po Ma Ma Aung. World Competition (2019)

Abstract

Establishing a new competition law regime is never an easy task, especially for developing countries. The current literature of competition law is rich with suggestions on the best political economy preconditions conducive to an effective competition law regime. It is generally believed that countries with a democratic political regime and a stable rule of law are more inclined to enact national competition law. Moreover, countries that embrace the principle of trade liberalization, privatization, and market economy are a fertile ground to the growth of competition law.

Yet, the enactments of Myanmar competition law in 2015 and Thailand new competition law in 2017 deviate from this general understanding. Naturally, it is assumed that competition laws adopted in these countries would be starkly different from pre-existing competition laws. It hints towards an emerging trend of competition law, one which manages to enact and enforce competition law regardless of the reality of the local political economy. This article explains the cause and consequence of this deviation, without immaturely evaluating the effectiveness of such young regimes. It concludes with investigating the likely source behind it, specifically whether the ASEAN, in which both Myanmar and Thailand are Member States, is behind such phenomenon.

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On the use of quantitative methods in Brazil’s merger control

Quantitative Methods and Mergers Effects in Competition Policy: The Brazilian Case

Camila C. Pires-Alves, Marcos Puccioni de Oliveira Lyra, Marina Maria Gutierrez Bonfatti. World Competition (2019)

Abstract

The article aims to discuss the use of quantitative methods in quantifying merger effects as evidence, taking the particularities of the Brazilian experience and considering both technical, institutional and policy issues. Therefore, the article investigates evolution and patterns in the Brazilian institutional framework and jurisprudence in terms of technical aspects and adequacy of implementation, policy issues regarding the acceptance within the administrative tribunal and the main challenges imposed. The information collected considered all the merger cases, as far as we know, in which quantitative methods were applied by Administrative Council of Economic Defense (CADE) in order to measure, estimate or imply the merger’s potential anticompetitive effect on prices. Among the conclusions we find that the models are employed in few complex cases and mostly to sustain some restriction by the authority. We also note that the authority seems concerned about sensibility analysis, in some cases revealed by the combination of the use of different methods and/or competitive models.

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Adam Smith, the Competitive Process, and the Flawed Consumer Welfare Standard

On consumer welfare v. aggregate welfare, Warren Grimes writes:

‘Scottish economist Adam Smith wrote in 1776 that the collective buying and selling of individuals would result in the preferred allocation of society’s resources. That insight has endured and is the basis for the competition law goal of fostering and protecting the competitive process. That goal, with venerable roots on both sides of the Atlantic, has been sidetracked by emergence of the consumer welfare standard, which is now preeminent in competition law analysis. The narrow focus of the consumer welfare standard has led to confusion and misdirected decisions that do not adequately protect the competitive process. I point to confusion about who is the buyer and who is the seller in many transactions, and describe why that classification should, in any event, be irrelevant in applying competition law. When competition is distorted, the central goal of protecting the process and ensuring a preferred allocation of resources is undermined, regardless of the impact on the consumer.

The proper welfare standard is unconcerned with where the harm occurs. The standard focuses on anticompetitive conduct at any level of the distribution chain and regardless of whether the anticompetitive effects are directed upstream at sellers or downstream at buyers. The symmetric standard is rooted in competition law decisions on both sides of the Atlantic; it is sound in theory and, compared to the consumer welfare standard, is easier to explain and apply. It more comfortably honors the broader goals of competition, including promoting entry, innovation, and choices for both entrepreneurs and consumers. I assess how this symmetric welfare standard would apply to mergers and classic predatory or exclusionary conduct. The standard offers hope of simplifying analysis and better serving ancillary goals of competition. Fostering and preserving efficiency, enhancing output, and maintaining low consumer prices are among the highly valued benefits of the competitive process, but they are not determinative. The focus must remain on the central goal of preserving the competitive process.’

Source: Adam Smith, the Competitive Process, and the Flawed Consumer Welfare Standard

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Mobile payments, antitrust and socio-economic development

Digital Markets, Mobile Payments Systems, and Development – Competition Policy Implications in Developing Countries in Light of the EU Experience

Abstract

The digitization of economic activity has important socio-economic development implications and at the same time creates challenges for antitrust analysis. These implications and challenges have been met differently in jurisdictions around the world. In this paper we analyze the different experiences in the EU and developing countries, focusing on mobile payments. We find that this market exhibits special characteristics that need to be taken into account in the analysis of competition conditions. First, it is enabled by mobile telecommunications infrastructure and is offered by network operators, which causes competition in both markets to be closely linked. Second, there are factors, such as the lack of interoperability and geographical reach, that make network effects in this industry different from those present in other platforms. Third, since mobile payments in developing countries serve a niche—the population underserved by mainstream banking—the definition of the relevant market is not straightforward. We propose the criteria to be applied when making such a definition. Finally, since mobile payments have associated financial services, there is an interaction between competition and financial stability that needs to be considered.”

You can download the paper here

A contribution to the empirics of algorithmic pricing

An Empirical Analysis of Algorithmic Pricing on Amazon Marketplace

Abstract

The rise of e-commerce has unlocked practical applications for algorithmic pricing (also called dynamic pricing algorithms), where sellers set prices using computer algorithms. Travel websites and large, well known e-retailers have already adopted algorithmic pricing strategies, but the tools and techniques are now available to small-scale sellers as well. While algorithmic pricing can make merchants more competitive, it also creates new challenges. Examples have emerged of cases where competing pieces of algorithmic pricing software interacted in unexpected ways and produced unpredictable prices, as well as cases where algorithms were intentionally designed to implement price fixing. Unfortunately, the public currently lack comprehensive knowledge about the prevalence and behavior of algorithmic pricing algorithms in-the-wild. In this study, we develop a methodology for detecting algorithmic pricing, and use it empirically to analyze their prevalence and behavior on Amazon Marketplace. We gather four months of data covering all merchants selling any of 1,641 best-seller products. Using this dataset, we are able to uncover the algorithmic pricing strategies adopted by over 500 sellers. We explore the characteristics of these sellers and characterize the impact of these strategies on the dynamics of the marketplace.”

You can download the paper here

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What do computer scientists have to say about algorithmic collusion?

The importance of talking to computer scientists before making assumptions about what pricing algorithms can do:

Algorithms, Machine Learning, and Collusion

“Abstract

This paper discusses the question whether self-learning price-setting algorithms are able to coordinate their pricing behaviour to achieve a collusive outcome that maximizes the joint profits of the firms using these algorithms. While the legal literature generally as- sumes that algorithmic collusion is indeed possible and in fact very easy, the computer science literature on cooperation between algorithms as well as the economics literature on collusion in experimental oligopolies indicate that a coordinated and in particular tac- itly collusive behaviour is in general rather difficult to achieve. Many studies have shown that some form of communication is of vital importance for collusion if there are more than two firms in a market. Communication between algorithms is also a topic in ar- tificial intelligence research and some recent contributions indicate that algorithms may learn to communicate, albeit in a rather limited way. This leads to the conclusion that algorithmic collusion is currently much more difficult to achieve than often assumed in the legal literature and is therefore currently not a particularly important competitive concern. In addition, there are also several legal problems associated with algorithmic collusion, for example questions of liability, of auditing and monitoring algorithms as well as enforcement. The limited resources of competition authorities should rather be de- voted to more pressing problems as, for example, the abuse of dominant positions by large online-platforms.”

Download the paper at https://mikro.uni-hohenheim.de/please-change-url-alias-757369458/publikation/algorithmus-machine-learning-and-collusion

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Smarter solutions than breaking up Facebook

It’s time for Identity Portability

By Digitopoly

“You want people to be able to communicate across networks.

. . .

The solution . . . is to allow individuals to port their identity to other networks, With that identity comes a set of permissions associated with that identity and it is that which creates value here. A competitor to Facebook — call it, for the sake of argument, NoRussiaBook — could come in, offer a different ad policy and you could move there. Your friends and connections need not know the difference although I would not recommend that be hidden — just that defaults be set for ubiquity which can then be seen and adjusted at the discretion of individual users. To be sure, privacy is complicated here but that is because privacy is complicated, not because there is anything really special or risky about this proposal.

. . .

All of the other solutions — namely, breaking up Facebook — do nothing to resolve the underlying issue — network effects become barriers to entry. We need to start taking that seriously if we want to do something here.”

More at Digitopoly

Alternatives to market concentration as a measure of competition

Measuring Competition

By Chris Dillow

“[C]ompetition economists have known for some time – that you cannot necessarily measure competition by the number of firms in an industry: the Herfindahl index, for example, can be a bad measure.

. . .

But if you cannot measure competition by the number of firms, how can you?

One alternative, proposed (pdf) by Jan Boone, is profits elasticity. The idea here is that if profits fall sharply in response to a rise in marginal costs then the industry is competitive but if they don’t then it isn’t. A competitive market is one which punishes inefficiency.”

More at Stumbling and Mumbling

More on market concentration and wage levels

From the NBER:

“Stagnant wages and a declining share of labor income in GDP in recent decades have spawned a number of explanations. These include outsourcing, foreign competition, automation, and the decline of unions.

Two new studies focus on another factor that may have affected the relative bargaining position of workers and firms: employer domination of local job markets. One shows that wage growth slowed as industrial consolidation increased over the past 40 years; the other shows that in many job markets across the country there is little competition for workers in specific job categories.”

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