ESNIE 2005

ANTI-TRUST: from theories to practices

Competition & Transaction Costs

ANTONIO NICITA

(UNIVERSITY OF SIENA, FACULTY OF ECONOMICS)

Summary

• Is there an Anti-trust theory?• Rise and decline of Sherman act• First revolution: Chicago L&E, NIE, TCE• Second revolution: post-Chicago approach• Regulation vs Competition in US and EU• The methodology of antitrust investigation• New challenges from Behavioural L&E• Antitrust and complex transactions

Anti-trust at the intersection of many theories/1• Evolutionary process• Original effort from politics• Evolution of the economic meaning of markets/competition• From perfect to workable competition• From economic market to relevant market• Who is protected?: consumers, competitors, small firms,

welfare, the market…• Economic agents (and judges) as rational maximizers• OIE, NIE, TCE, IO

The first revolution in Antitrust

• A contract is per se a limitation of economic liberty, freedom to exchange and to renegotiate. Restrictive agreement (both vertical and horizontal)

• This limitation is per se inefficient since it reduces the fundamental mechanism of market efficiency which is freedom to search for better opportunities

• Monopolization, Attempt to Monopolize (leveraging, bundling, discrimination, excessive prices, raising rivals’ costs…)

• Structural remedies

• Protection of small firms against trust in US

Anti-trust at the intersection of many theories/2

OIE

NIE

IO

TCE

FIVE AGENTS TRANSACTIONS

VERTICAL INTEGRATION, FIRMS

MAKE/BUY, TRANSACTION COSTS

MARKET STRATEGY

MARKET STRUCTURE

INCOMPLETE CONTRACTS

SPECIFIC INVESTMENT

GOVERNANCE

The second revolution: Chicago

• Coase’s influence (1937)• A. Director, R. Posner, R. Bork……….O. Williamson

• Dominance, Market power, market share• The economic efficiency of

(i) horizontal/vertical restraints-mergers

(ii) ‘leveraging’ strategies by dominant firm

(iii) monopoly for public good production

(iv) monopoly against rent-seeking

(v) oligopolistic collusion vs forced competition

Chicago/1: vertical restraints/mergers

• Vertical restraints/mergers are mainly motivated by efficiency reasons

Abuse against consumers

(a) Two monopolies (upstream-downstream): double mark-up

(b) One monopoly and one competitive market: just one monopoly profit

Abuse against competitors (strategic barriers to entry)

(a) Blocking downstream efficient entry is irrational and inefficient

(b) Intra-brand vs inter-brand competition (private orderings against post-contractual opportunism with asset specificity)

Chicago/2: efficiency defense in horizontal mergers

• Ex-post Market Concentration ratio should be compared with ex-post improvement in efficiency

• Williamson: efficiency defense in mergers

• Posner/Bork: two is enough in order to have competition

• Horizontal agreement/parallelism: clear distinction between oligopolistic collusion/concerted behavior

Chicago/3: efficiency of bundling

• A bundle of two products is effectively a way of offering discount to customers who buy one of your product, since customers can buy the other product at a lower price than the stand-alone price.

• Do you want to offer a discount on the other product to customers who buy one product?

• Why?

• Price discrimination/efficiency, allocation of common costs

Chicago 4: efficiency of tying• Tied Sales: Tying is the practice of requiring the purchaser of

one product to also purchase a second product.

• In the static tied-sale, the customer who wants to buy A must also buy B. It is possible to buy B without A which explains why this is a tie and not a bundle. Thus, the items for sale are B alone or an A-B package.

• There are many legitimate reasons why firms resort to tied sales. One motivation that leads to an antitrust concern is when the tied sale is used as a device to facilitate price discrimination.

Chicago/3: irrationality of excessive/predatory pricing

• Excessive pricing: What is that? Should we inhibit monopolistic pricing?

• Discrimination: it may improve economic efficiency

• Predatory pricing: you will pay tomorrow today’s policy (the rational agent always accommodate efficient entry)

The rational monopolist will never have

any incentive to start those actions

Chicago/4: market vs regulations

• Rent-seeking/1, Posner (monopoly as a positional good): Increase in dead-weight loss. Forced competition may actually reduce social welfare

• Rent-seeking/2 Tullock: Antitrust authority are not automatically managed but they are the result of ‘hidden’ influences

• Rent-seeking/3 Peltzman: Politicians divert economic efficiency towards political aims

ANTITRUST PARADOX: A LAW AT WAR WITH ITSELF (Bork, 1978)

Anti-trust should focus on ex-post analysis in specific cases

and only by applying a rule of reason

The second revolution: Post-Chicago

• Efficiency of vertical separation (accounting, proprietary)• Creation of new markets for access to Essential Facilities• Strategic Barriers to entry (defensive leveraging)• Dynamic (in)efficiency

Post-Chicago/1

• Efficiency of vertical separation (accounting, proprietary) even if it increases transaction costs

• Incumbent operators in network industries are owners of essential facilities

• Essential facility: essential, not substitutable, easy to share (a test should be very careful: Magill, Oskar Bronner, FS/GWG, IMS )

• Essential facility doctrine (property rights ex-post re-definition, creation of a market for access priced on avoidable costs)

• Internal/External discrimination (Telecommunications, Electricity, Railways)

Owner of the Asset

Essential Asset

consumers

DownstreamCompetitors

•Regulation

•Access price

• Accounting monitoring

•Price squeeze test

•Antitrust

Costs / Benefits

Post Chicago/2

• Defensive leveraging: bundling, tying, target rebates are strategies aimed at increasing rivals’ costs in downstream markets in order to defend upstream monopolies (Microsof US, EU)

• The case of Bork

• Generally speaking NIE&TCE assume exogenous outside options, while firms can affect market dynamics in order to change the rule of the game and contractual power at the renegotiation stage

• TC should include the costs to compete (to affect market conditions)

Practices: the methodology of antitrust investigation- step 1• Relevant Market (the smallest economic context in which it

is possible to raise a market power, p>cm)

• Cross elasticity between products and geographical areas

• SNTRP test (or the virtual monopolist test)

• Cellophane Fallacy

Practices: the methodology of antitrust investigation- step 2

ABUSE

• Action against consumers

• Action against competitors

Discrimination

Excessive pricing

Inefficient entry

Defensive leveraging

Practices: the methodology of antitrust investigation- step 2

ANTICOMPETITIVE AGREEMENT

• CARTELS

• PARALLELISM

EFFECTS?

Is there any economic reasons for oligopolistic equilibria on

FOCAL POINTS?

Practices: the methodology of antitrust investigation- step 2

ANTICOMPETITIVE MERGERS

• EX-ANTE VS EX-POST

• REMEDIES

SINGLE DOMINANCE

COLLECTIVE DOMINANCE

DIVESTITURE

SHARED ACCESS

BEHAVIORAL UNDERTAKINGS

Practices: the methodology of antitrust investigation- step 3

REMEDIES AND SANCTIONS

• REMEDIES

• SANCTIONS

FUTURE ACTIONS

PUNISHMENT

DETERRENCE

LENIENCY PROGRAMS

New challenges

• Behavioural L&E recently has challenged some of the basic assumptions of IO

• Sunk costs are not perceived as sunk

• Incumbents and competitors simply ignore if entry is efficient

• Demand is discontinuous in price and time

A possible research agenda

• Introducing endogenous outside options in the standard TCE approach

• Back to Coase/Commons: introducing competition dynamics within the notion of transaction costs

• Antitrust as a rule of reason for re-defining incomplete property rights

• What do incumbent do?

• Sanctions/Deterrence

• Strategic barriers to entry

Thank you