Author Archives: Paco Beneke

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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The bigger picture and meaningful policy goals

Income per capita varies wildly across countries. Adjusted for purchasing power, the average resident in Luxemburg has an annual gross income of over USD 100 thousand while the average Bangladeshi makes do with USD 3.5 thousand. Let that sink in for a second. Where you were born determines, to a great extent, your experience on this planet.

This phenomenon has captured a great deal of attention from economists for close to a century. From what we have been able to observe since the Industrial Revolution, there are times at which some poor countries have been able to grow fast for a long period of time and catch up with the income levels of the developed world. Many economists have tried to identify what was Japan’s, South Corea’s or Singapore’s secret. Parallels have been drawn to how the US or Western Europe experienced growth at an earlier stage. One point of focus has been the policies that were responsible for the successes observed. Investments in education have been a common pattern as well as a well-articulated industrial policy. Countries like the US, and later Japan and South Corea, changed their competitive advantage. They protected their industries at first so that they could develop and reach the technological progress of their international rivals.

The same path was tried around the world with a mixed bag of results. The import substitution industrialization model (in other words, favoring domestic production over foreign imports) failed tremendously in Latin America. Many poor countries were never able to leave behind meager investment rates to create the wealth and mimic the knowledge of the production means of other countries.

Efforts to identify the determinants of this situation have been numerous. There are many empirical studies that attempt to identify the main causes of growth. The results surprise very few people. A mix of political and macroeconomic stability, strong institutions, higher levels of education, and so on have been identified to have a strong causal link with higher per capita incomes. In principle, then, we do know why some countries are poor and some are rich. Those that wisely prioritize the use of public funds to take care of their uneducated and vulnerable citizens and create stable and sustainable forms of government can escape the trap.

The Economist, however, has recently claimed that “[e]conomists understand little about the causes of growth”. The assertion is to a great extent on point. Even if economists know that differences in growth and prosperity are due to differences in technological progress and the factors that determine this (such as low levels of education and higher country risk), they have not come up with a satisfactory answer regarding as to why certain developing countries have been able to overcome these problems and others have not.

Economists are frequently criticized for how they approach these questions. The classic accusation is that they over-rely on mathematical and statistical tools. On the other hand, at a general level, abstractions do allow observers to obtain a manageable framework to analyze a set of facts. Indeed, some degree of abstraction is not only helpful but imposed by the complexity of the phenomena studied by economics. However, equations and mathematical theorems, as helpful as they are, should be complemented with other economic approaches such as historical studies.

I mentioned Bangladesh at the beginning of the post because it is a perfect example of the shortcomings of our current understanding of economic growth. As pointed out by many experts, Bangladesh appears to be solving its problems and is poised to surpass Pakistan in terms of GDP per capita very soon, but no one could have predicted that before the country entered into this path. In other words, any economist’s prediction on which will be the next poor country to start growing fast and in a sustainable manner can be regarded as an educated guess, at best.

Since this blog is focused on antitrust law, I am obliged to explain why this paragraph is the first place where I mention the term. It is a way of making an important point. Competition policy does not exist in a vacuum. What we make of it should be dictated by a meaningful context. We have to understand the big picture before we can decide what to do with antitrust law enforcement. Competition law is sometimes said to be the economic constitution of a country or economic region. However, since most competition laws are applied with a specific purpose—improving consumer welfare—such an assertion is completely off the mark. My point is that, although we increasingly understand more about how the economy works, there is still a big shadow over many (economic, social, political, psychological) relationships that we have yet to discover. The role of competition policy within different socio-economic contexts does not escape this reality.

To wrap it up, as we improve our measures of competition policy performance, we will be more able to test their effects on economic performance. There will also be natural experiments that will help us to estimate how deviations from the consumer welfare criterion affect law enforcement and other economic policy objectives. However, none of this will be meaningful until we gain more knowledge on what moves the poorer parts of the world to a path of sustained economic growth. Little by little, we will understand the role competition policy has to play in a wider economic context. Some of the questions that I hope we will be able to answer are the following: if economic growth is about getting the political economy right, is there a relationship between the latter and antitrust law? Can we develop manageable legal standards to create a consistent case law if we depart from consumer welfare considerations? If development into an innovation-oriented economy requires at a first stage protectionist policies, what room does that leave for competition policy? What role does market concentration play in income inequality?

These are challenging topics. However, to paraphrase what  Christopher Edley, Jr. said at my LLM graduation (or what I think I understood): although we need to have the confidence to know that we can tackle any complex task that is before us, we need to be humble enough to recognize that to reach the answer we always need to go deeper.

Democracy and prosperity: What can antitrust do to maintain or create an open economy?

“Why Nations Fail: The Origins of Power, Prosperity and Poverty” is quite an ambitious book. The authors, Daron Acemoglu and James A. Robinson, attempt to put forth a global theory that explains the cause of the differences in prosperity across countries. Granted, there is already substantial work on how many factors, such as low levels of education and corruption, affect income per capita levels and growth rates. The book in question goes, however, to a more fundamental level. Why have some nations been able to overcome these problems and others not? That is the trillion dollar question.

The differences that we see today in income levels across the globe were historically unprecedented before the industrial revolution started in Great Britain. Before that, the whole world was roughly equally poor. After this fateful development, some countries became substantially wealthier than others by adopting the latest production technologies and becoming themselves fertile ground for later frontier innovations. According to the book, at that time, the industrial revolution could only have happened in a country like Great Britain. Why? Because it had generated a virtuous circle of inclusive political and economic institutions. Here, inclusiveness means a regime that allows and encourages the participation of a broad cross-section of society as opposed to a small powerful elite (both in economic and political terms). The more inclusive the participation in political life became, the more inclusive the economic rules of the game, which in turn empowered more people who acquired a saying in what the government did. In the authors’ words, Great Britain broke the mold. Before then, the historical rule had been that of extractive regimes or relatively short-lived, imperfect attempts at inclusiveness (such as the Roman Republic and Venice between the 11th and 13th century). Was the benevolence of British rulers the cause of such a drastic departure from history? According to the book, no.

The explanation is of course somewhat complicated. It all starts with the Black Death, goes through the instauration of the Transatlantic trade, and ends up with the Glorious Revolution. I want to keep it short and also do not want to spoil more of the book so I will not go into much detail on this. The principle behind it all is that these shocks (or critical junctures, as the book calls them) provided an opportunity for some parts of the population who were historically neglected (peasants and merchants) to demand greater rights and representation from the crown. In all of these developments, there is one important element that the authors do not neglect: chance. Great Britain had some luck in coming out of these shocks as a more inclusive society than before.

I think this is enough explanation of the book to set the mood. The point that is worth highlighting in this blog is the part of the book that talks about antitrust. According to the authors, the US antitrust laws played an important role in the time of Standard Oil and the Robber Barons. The prosecution of anticompetitive behavior and monopolization of markets was key in maintaining the US economy open to the entrepreneurial efforts of a broader cross section of society. The book also talks about competition policy matters when it analyzes how the abolition of monopolies in many markets and trade routes in Great Britain in the years leading up to and after the Glorious Revolution allowed it to keep developing a more inclusive and prosperous society.

The point has important implications for what we consider competition law’s role in a society to be. The US antitrust laws were conceived as a tool to halt the rising tide of concentration in the American economy because such a trend was incompatible with democratic values. Later on, these views largely disappeared from antitrust scholarship and case law, though not from other fields of the economics profession. The predominant view now is that consumer welfare (or sometimes overall efficiency), both from a static and dynamic point of view, should guide enforcement activities.

Under the current paradigm, market concentration can be tolerable to the extent that it incentivizes creative destruction, or in other words, innovation efforts to become the next monopoly. To be sure, such a consideration does not always trump static concerns in many important cases. However, and here is where the theory developed in the book comes into play, the incentive of other firms to innovate in order to achieve a dominant position is not the only dynamic effect of market concentration. In addition, monopolies and oligopolies have an incentive to stop or delay innovation through their political influence. In other words, the dynamic effects of monopolies (at least the largest ones) are theoretically ambiguous. On one side we have eager firms who will spend considerable resources to innovate in order to achieve the same profitability of current dominant firms (or current dominant firms trying to maintain their lead); on the other, we have the obstacles that incumbent players could erect thanks to their political power.

The book is full of examples of how regimes in extractive societies explicitly opposed innovation and the adoption of the latest technologies based on the fear of social unrest and, therefore, their hold on power. Russian and Austrian monarchies were reluctant to allow the construction of railroads and the adoption of manufacturing technologies because these led to urban development, and cities made it easier for the people to organize and take action against social injustices.

In most countries with a competition law, it is hard to imagine that politicians can oppose innovation explicitly based on such considerations. The arguments have changed. However, organized interest groups are still able to exert their political influence to shield themselves from competitive pressures.  There is vast theoretical and empirical work that explores how policy is thus shaped.

The role of antitrust in developing countries could then be to support the development of inclusive social and economic institutions. In developed countries, antitrust can be a powerful tool to keep the economy open. How can antitrust authorities achieve this? Certainly not alone but they can do their part. Inclusive political and economic institutions depend on other important areas such as tax policy, social investments (e.g. education, public health, transport, and communications infrastructure), and IP rights.

Some highly complex questions that must be answered based on this are whether it should be anticompetitive that firms lobby to close markets and how much market concentration should be tolerated to keep dynamic incentives to innovate. The answer to neither of them has been uniform across jurisdictions.

The book’s theory is indeed compelling. It will go through a very important test in the medium to long term, namely, through the developments in China. Currently, this nation has been taking steps toward a more central and authoritarian rule. It is possible again for a president to hold power for his entire life. According to the Economist, Xi Jinping is the most powerful ruler since Mao Zedong. If the political situation does not change and China is still able to achieve the levels of prosperity in per capita terms as those experienced in Western Europe and the US, then the book’s hypothesis will suffer a fatal blow. If not, China might still be able to contest the technological supremacy of other nations in some fields (as it also happened in the times of the Soviet Union) but a wealthy society depends on a broader reach of innovative efforts.

I personally think it is highly unlikely that China will achieve, let alone sustain, a high level of prosperity under a ruler that faces little constraints. Even if we assume that Xi Jinping is an enlightened and benevolent statesman, the situation will still be fragile for three reasons (the first two taken from the book): first, there will be strong incentives to overthrow him since getting your hands on such a powerful economy will be incredibly attractive to his detractors, who may not show the same hypothetical restraint; second, even if the first does not happen, there is a high likelihood that an appointed successor, who will be subject to ever fewer restrictions regarding the exercise of power, will start to steer the economy to the benefit of its supporters, which normally has destructive consequences to economic welfare; and third, open dissent and public debate, which are necessary conditions of effective policy making, are utterly incompatible with authoritarian rule. On another level, I think it is still tricky to argue that it is good to live in a prosper society even if most civil liberties are abolished. Though I do not think it will come to that.

The purpose of this discussion is to open a fundamental debate regarding the role of antitrust. Should we go back to basics? i.e. should we apply the antitrust laws so that the functioning of the economy is not incompatible with democratic values (taking into account the positive feedback loop that may exist between both)? or should we leave it to other areas of public policy to guard the gates?

The way the two questions are formulated above implies that there should be some, at least academic, consensus on the need for limiting corporate influence on economic policy. If we assume this, then the question is which is the right policy approach to achieve this result. The book seems to lean toward interventions that aim at market structure. However, a legitimate question is whether other policy options could serve this purpose better. Direct regulation of campaign donations and lobbying activities are a choice. Whether these and structural measures should be substitutes or complements should also be explored. These could be some starting points. The matter is rather complex for one blog post but I leave you with the promise of future analysis.

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Standard economic thinking does not capture consumer behavior quite well

The understanding of complex social problems requires interdisciplinary approaches. In a Project Syndicate article, Ricardo Hausmann describes recent research on how moral psychology can improve current economic models of consumer behavior. This branch of psychology can give better insights on how to predict our economic choices, since we carry out transactions not only with the aim of maximizing our utility but also driven by social norms that are specific to the groups to which we belong or want to belong.[1]

For example, our aspirations and those of our peers may cause our demand to be significantly inelastic to price, which has an important implication for antitrust analysis. Different groups that share common values may constitute different relevant markets. If authorities are able to identify such groups, the information would be useful to know where to look for different price elasticities. This could expand current criteria used to segment relevat markets. Relevant market segmentation is of course a common concept, but the innovative insight would be to look for social norms that determine purchasing behavior across different customer groups.

This line of thinking might also lead us to better understand the potential of a new entrant that offers a product with great social identity appeal (e.g., electric cars). A good reason to buy a Tesla instead of a diesel engine luxury car may not only be our genuine concern for the environment but also our desire to be seen as progressive. In the same way, small shops may be able to survive the onslaught of giants and their economies of scale because a significant group of people may not want to be seen in a Walmart but rather at a local farmers market. Some people may use Uber not only because it is cheaper and convenient but also because they want to be seen as supporters of innovation and technological progress.

In addition, other consumer behavior theories can help us understand advertising within antitrust cases in a different way. If, contrary to standard economic theory, we do not assume stable preferences, advertising can also be regarded as a powerful force that can sway consumer spending (a Don Draper-approved statement) toward a given firm’s output. The effect would not only be due to awareness of a product and its characteristics but because the advertising campaign may be successful in making consumers perceive a brand as compatible with the group that they want to be a part of.

In sum, consumers make decisions not only based on relative prices and qualities but also on who they are and who they want or not want to be. If we want to assess market conditions within antitrust cases more accurately, we should start taking all of this into consideration.

[1] Hausmann describes this as a quiet revolution, but such theories of consumer behavior have been around for a long time. For a brief review, see Swan, Peter (2009). The Economics of Innovation (pp. 187–197). United Kingdom: Edward Elgar Publishing.

 

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Competition Law and Economic Development – A Universal Solution?

This is the topic of a conference that will take place in El Salvador next November the 21st and 22nd, which is organized by the antitrust authority (Competition Superintendence). The event features two of the most influential academics on the topic: Prof. Eleanor Fox of NYU and Prof. Michal Gal of the University of Haifa. Other speakers include competition authority officials from South Africa, Kenya, Brazil, and the US; and researchers from the Max Planck Institute for Innovation and Competition in Munich.

As we have tried to report in this blog, many developing countries do not follow a conventional approach to the application of antitrust law. A part of the reason behind this is that the authorities share a feeling that their countries have pressing needs that are different from those in the economies in which competition law originated or where it has a longer track record. My home country shares now the same concerns—for which I sadly can’t take any credit—and is organizing the mentioned event in order to 1) obtain inputs on what adjustments it could make to its policy in order to have a greater impact on economic and social development; and 2) disseminate the ideas of researchers that have worked on topics regarding this general theme.

Given 1), the conference will also include roundtables in which practitioners, academics, and staff of various authorities will participate to refine the policy proposals that can come from the research discussed in the conference.

If you are interested in attending, here is the registration form. The audience so far includes attendants from many corners of the world. I will leave you with the event’s lineup.

Speaker Topic
Eleanor Fox Drafting Competition Law in Developing Countries: What Have We Learned (via Skype)
Michal S. Gal General Characteristics of Developing Economies and their Implications for Competition Law (via Skype)
Mor Bakhoum The Impact of Informal Economy on Competition Dynamics in Developing Countries”
Francisco Beneke Entry Analysis and Competition Law in Latin America: Why does Economic Development Matter?
Russel Pittman Competition Policy for Regulated Industries in Developing Countries
João Paulo de Resende Adapting Competition Law to Brazilian Context and its Contribution to BRICS Discussions
Liberty Mncube Beyond Economic Goals in the Application of Competition Law: South Africa’s Experience”
Raphael Mburu Enforcement of Competition Law in Kenya: A Contrasting Approach

 

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Hipster antitrust

Policy debate has an important rhetoric component. An appealing metaphor can be powerful in swaying the opinion of policy makers and the public (remember trickle-down economics?). That said, there is a recent trend in the US and other parts of the world to depart from certain aspects of conventional antitrust wisdom and some scholars are expressing concerns about how digital markets will look like in the future. Some commentators are calling these new/refurbished ideas and gloomy views of the digital landscape hipster antitrust because they depart from what is deemed to be the mainstream.

To the best of my knowledge, the term started to be used as a twitter hashtag, mostly with a pejorative connotation. The problem with that, seems to me, is that being a hipster is not necessarily a bad thing and, therefore, the rhetoric trick may not be the best tactic for the defenders of the antitrust status quo.

Let me give you a brief historical timeline, which I think has led us to the use of this term. Back in the 1950s, there was discontent among a small group of academics with how antitrust laws were applied, mainly to single-firm conduct and mergers. These scholars and their ideas gave birth to the most influential school of thought in modern competition law: the Chicago School (CS) of antitrust. In those days, George Stigler and his colleagues were the outcasts who proposed non-mainstream, hipster ideas. Fast forward to the 1980s, and the Chicago School became conventional wisdom. Current antitrust law in the US still reflects a great deal of influence from it. I will not discuss the relative merits and flaws of the CS. I will just point to one common theme in the rhetoric of its proponents. Practitioners and academics who defend CS points of view have always said that they use the economic approach to antitrust.

Since now most of the CS views are mainstream, that formulation is very powerful. It implies that someone who tries to approach antitrust analysis with frameworks other than price theory does not deserve to be called an economist. Now, the rhetoric was freshened up and the advocates of ideas that depart from the mainstream are dismissed as antitrust hipsters. Some are even trying to make #adultantitrust (the opposite of #hipsterantitrust) a thing. This is problematic for one fundamental reason. The way a society is organized in order to produce goods and services depends on a myriad of important factors studied across many fields of the economics profession and other disciplines. Saying that price theory alone holds all the answers is, to put it mildly, myopic.

As I explained in a previous post, an intervention aimed to curtail market power can have detrimental/positive effects on other sources of market failure such as information asymmetries and externalities.[1] Therefore, the improvement of consumer welfare is too narrow a focus of antitrust enforcement policies. The first issue would, therefore, be to analyze the merits of including a holistic approach to efficiency.

In addition, there is the issue of whether to consider other policy objectives. In the US, Banks were allowed to merge and grow because it was thought that the financial system was going to become more efficient, which might have been true. However, as a result, too-big-to-fail institutions arose from this merger wave, which may have led to the reckless behavior that caused the global financial meltdown that started in 2007. The question in retrospect is whether such factors should have been taken into account by the antitrust authorities. One could say that other public entities are better suited to make such an evaluation of these peculiar issues. Even if that is true, policymakers still have to decide how the balancing of the interests will be carried out. Should financial stability, for instance, take precedence over consumer welfare?

The Chicago School of antitrust succeeded against the backdrop of the deep economic recession in the 1970s, which led to a change in economic thinking and the rise of Margaret Thatcher and Ronald Reagan. It comes, therefore, as little surprise that views of strong (though not blind) faith in market forces have come under attack after the Great Recession, with antitrust being no exception. The potential shift in competition policy could have deep repercussions at the global stage. Many countries in the world look to influential jurisdictions such as the US and the EU for guidance. If the consumer welfare paradigm falters in the former, the push for convergence toward the “economic approach” to antitrust could take a wild turn.

As a final consideration, it is important to keep in mind that each one of the new ideas and views in hipster antitrust analysis deserves its own individual trial. I, for one, do not question the merits of the law on vertical restrictions in the US compared to that in the EU. Another story is that of the relationship between political economy considerations and market dominance, topic on which I have already written before. Therefore, the doom of one hipster idea should not be taken to mean that all hipster points of views are baseless.

[1] See Markowitz, Richard (2014). Economics and the Interpretation and Application of U.S. and E.U. Antitrust Law (Vol. I). United States of America: Springer.

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How do you measure competition policy’s performance?

Some time ago, I wrote a post about the impact of competition policy on economic growth. I argued that it was an important question since competition authorities in developing countries have to struggle with where to assign financial resources and that they should do so based on the the potential of policies in solving the population’s more urgent problems (extreme poverty, for example). The conclusion was that, so far, there is no consensus on the effects of the policy on GDP growth, in part because differences in quality and performance of antitrust agencies is hard to measure.

In addition to the arguments in the mentioned post, there is an important issue that I did not address but that I came upon in a lecture given at the Munich’s Antitrust Law Forum (Münchner Kartellrechtsforum) by Prof. Richard S. Markovitz of the University of Texas. One of his points was that it is a mistake to focus competition policy on consumer welfare and his arguments were, surprisingly, very much grounded on neoclassical economics. His point, I find, is quite compelling. Market failures come not only in the form of market power but also externalities, information assymetries, and underprovision of public goods. Prof. Markovitz explained that there is no theoretical nor empirical support for assuming that a state intervention that reduces market power will be neutral in terms of the other sources of inefficiencies and that the effects on these can very well be negative.

The point can be illustrated with an example. If an antitrust agency uncovers a cartel in the munfacturing of cigarettes and manages to make the firms compete more aggressively in price, the negative externality that smokers impose on other people will increase and the net effect on efficiency will be ambiguous.

Another example with information assymetries can be the following. Higher margins may allow firms to invest more in advertising that, among other things, increases consumer awareness of different product traits. An antitrust intervention that reduces the market power of firms (say, by blocking a merger) will not necessarilly enhance consumer welfare since search costs will increase if firms start spendig less money on advertising.

The result is that even if competition policy in a given country succeeds in curtailing market power, its effects on efficiency and economic growth will not necessarily be positive. Since the net effects are in theory ambiguous, the matter is an empirical one. However, we go back to our first problem, which is how does one measure differences in the policy’s performance.

Last week, I read an interesting post based on research regarding the measurment of the deterrence effects of antitrust law. My first impression when reading the title was of wonder. One has to get creative in order to measure something that you can not see. However, the research mentioned in the post found a way by exploiting data on 500 legal and illegal cartels and their overcharges. This information allowed them to run simulations and provide conservative and upper-bound estimates. For more information on the research you can check out the post in question. The point I wanted to make is that if you can capture differences in deterrence effects across countries or through time, the data could serve to have a more appropriate measure to plot against other variables such as investment rate and GDP growth.

The authors themselves advise for further research on the topic. However, it might be that we are finally approaching a satisfactory measure of competition policy’s performance.

 

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