Democratic Party “Better Deal” Antitrust Proposals Would be a “Worse Deal” for the American Economy and Consumers

Last week we shared with you news about the Democratic Party’s plan in the US to revamp antitrust law and include considerations other than consumer welfare in the analysis of cases (e.g. wage stagnation due to increased comcentration). This post by Alden Abbott says it’s all nonsense. On the other hand, this Vox article takes a more favorable view: https://www.vox.com/policy-and-politics/2017/7/31/16021844/antitrust-better-deal. The US debate will definitely have global repercussions and we’re sure there’s still more to be said. We will keep you updated.

Truth on the Market

On July 24, as part of their newly-announced “Better Deal” campaign, congressional Democrats released an antitrust proposal (“Better Deal Antitrust Proposal” or BDAP) entitled “Cracking Down on Corporate Monopolies and the Abuse of Economic and Political Power.”  Unfortunately, this antitrust tract is really an “Old Deal” screed that rehashes long-discredited ideas about “bigness is badness” and “corporate abuses,” untethered from serious economic analysis.  (In spirit it echoes the proposal for a renewed emphasis on “fairness” in antitrust made by then Acting Assistant Attorney General Renata Hesse in 2016 – a recommendation that ran counter to sound economics, as I explained in a September 2016 Truth on the Market commentary.)  Implementation of the BDAP’s recommendations would be a “worse deal” for American consumers and for American economic vitality and growth.

The BDAP’s Portrayal of the State of Antitrust Enforcement is Factually Inaccurate, and it Ignores the Real Problems of…

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U.S.: It looks like Democrats want a public interest clause in merger control

Public interest clauses are somewhat controversial. They introduce non-competition considerations into the evaluation of the desirability of a merger and, therefore, give a queasy feeling to the neoclassical orthodoxy. In short, such clauses allow the competition authority or another regulator to evaluate the effects that the merger will have in aspects of the economy other than market power––for example, employment. In practice, these clauses can introduce uncertainty to the merging parties as to what they can expect in a final decision and can make the proceedings susceptible to political calculations.

Public interest clauses can be found in legislations of many a developed and developing country. Recent prominent examples where such a consideration played a key role are the SAB Miller-AB InBev merger in South Africa and the takeover of Tengelmann by Edeka in Germany (in this latter case, the approval of the merger by the Finance Minister led the chief of the Monopolies Commission to resign).

Now, Democrats in the United States are giving competition law a prominent position in their economic policy plans. According to an article in Bloomberg Law, the antitrust part of the plan says that “large mergers that would harm consumers, workers, and competition via higher prices and lower wages should be blocked.” (emphasis added) For this, Democrats want to establish “new merger standards that require regulators to review how the deal may impact wages and jobs, among other criteria”. This would arguably need an amendment to introduce a public interest clause, at least to be on the safe side (courts would in all likelihood strike down any agencies’ attempt to introduce such considerations based only on the Clayton Act).

The US has always been a champion of convergence of competition law around the world. An important part of this convergence effort is the urge to use an economic approach to enforce the law. What scholars and practitioners mean by economic approach is to focus on consumer welfare or efficiency as the sole concern. Hence the economic part of the term is somewhat confusing because this discipline is so much broader. But putting this discussion aside, it is somewhat ironic to see that convergence may ultimately go the other way around, with the US converging to other countries.

What are the driving forces behind this political movement? As I shared with you last week, some academics are increasingly worried with the effects of concentration on equitable growth, which has led them to start exploring their association. This will be perhaps one of the most crucial areas of research in antitrust analysis. It is of course a highly ideological subject but let’s hope that the availability of data in more and more countries around the world and the empirical research that they allow will ground the debate on more objective terms.

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Your guide to the Google Shopping decision

The Google Shopping case has shaken the competition law community to its core. Here is your guide to what the Commission has disclosed and what influential commentators have had to say about it.

First, let’s deal with the information that has come out of the Commission. The case concerns a leveraging of dominance from the search engine market to price-comparison services. Regarding dominance, the Commission relies on high market shares in all EEA markets (mostly of 90 percent) and on indirect network effects as the main barrier to entry (the more users who use Google’s browser the more attractive it is for advertisers and the more data Google has to improve search results and targeted advertising).

The comparison-shopping market, where the harm is alleged to have occurred, has been separated from merchant websites such as eBay and Amazon. The main difference is that comparison sites do not offer the option to buy the product of interest as the two mentioned companies do. In any case, the Commission argues that if one includes merchant platforms, Google’s conduct has caused harm in a substantial part of this joint market.

Now to the more complex point. The ruling on the conduct has been described by the Commission, in my opinion, in very confusing terms. The Commission insists that it is not meddling with how Google designs its results page or writes its algorithm. The conduct, however, concerns precisely how the company presents its own comparison-shopping results (at the top of the page with pictures of the products and their price) as well as the demotion of competitor services. The issue here is indeed the product design.

Regarding the harm in the market, the Commission states it has evidence that traffic to rival comparison sites has decreased significantly and that this can be traced directly to the demotion to subsequent pages of the results.

The commentary on the decision has concentrated on the harm part and the conduct. Some do argue that Google’s dominance is overstated but the harshest criticism has been directed at the conduct-harm analysis of the Commission. I will give you a review on five articles written by the following five influential commentators: Alfonso Lamadrid, Nicolas Petit, Alden Abbott, Geoffrey Manne, and Pinar Akman. As you will see, my conclusion will be in most cases that we have to wait to see the decision to make a final judgment on the merits of the case. It might not be the most exciting assertion but I think is the more sensible one. Let me explain to you why.

Product improvement or exclusionary conduct?

One of the arguments made in all the articles is that we are in the presence of a product improvement that the Commission has wrongly labeled as anticompetitive. Nicolas Petit used a more cautious language, though. I do agree that the universal search results, as the informative boxes in the results page are called, cannot be considered harmful to consumers. They provide valuable information in an improved format. The mentioned articles, however, overlook at least two important points. First, the boxes could include non-proprietary information, that is, content from other comparison-shopping sites. If such content is more relevant, then there could be harm to consumers if Google systematically favors its content. Second, the conduct that has been punished, as stated by the Commission, is not only the display of the box but also the simultaneous demotion of competing websites to the fourth page in the search results. This second part has been completely bypassed by the mentioned articles. It will be an important issue to make an assessment of the decision. There could be one hundred thousand business justifications for the demotions so I guess we’ll have to wait and see what the decision and Google said in more detail about it.

In this respect Pinar Akman makes a slight distinction. She argues that Google’s favoring of its own content in the universal search results (the box) can be seen as advertisement of its own products, which then makes the Commission decision incomprehensible. This is perhaps one of the best business justifications that Google could offer. However, one weakness of this argument is that across categories of queries Google does use third party content in the box—content from Wikipedia, for example.

Lots and lots of choices

Another popular criticism of the decision is that consumers have lots of choices when it comes to this type of content (comparing product prices). That is certainly true. Consumers can compare prices not only on the websites that Google allegedly excluded but also on Amazon and eBay, who in addition offer the option of buying the product through their own website (which may arguably make them a better choice than googling the product). All the scholars mentioned before make this point. What they do not address is the Commission’s statement that even taking these choices into account Google has significantly distorted competition because comparison-shopping websites are still closer competitors in the relevant market that was defined. My guess is that no one commented on this because everyone considers it a wild assertion.

What I would have to see to make an assessment is data on how consumers look for product information. The main issue would be to see if they favor comparison-shopping sites, and whether these are mainly reached through search engines (where Google is alleged to be dominant). Geoffrey Manne points that in the US more than half of product searches start at Amazon. If that were the case in the EU as well, then the Commission’s position would be weaker. We will have to wait and see the information on which the Commission based its conclusions.

No duty to cooperate with rivals

A related point to the previous two is that if Google is not the only or most important choice for consumers, then there is no duty to cooperate with rivals. The Commission’s argument is that the company has to apply the same algorithm to its own content, even when it chooses what to display in the box. Lamadrid argues that since Google has not been labeled as an essential facility, such an obligation is unwarranted for. He uses a supermarket analogy to portrait how, in his view, the Commission’s decision makes little sense. One should not expect a grocery store to not treat its proprietary brands favorably over those of competitors and such a conduct does not harm competition because consumers can go somewhere else. Abbott uses the same analogy. What both miss is the inadequacy of comparing a supermarket with a search engine. The latter is a multi-sided platform to which different economic principles apply in order to establish dominance. Google has different incentives in promoting its own content than a supermarket does in placing its own brands on a strategic shelf position. The latter makes some profit when it sells other brands. Google does not make a cent when providing a user with product-price information. Google’s interest is in increasing its traffic to monetize the other sides of the market (vendors who may be charged a fee per click on the product or advertisers who wish to target a given audience).

Although the supermarket analogy is wrong, what is still true is that the Commission has omitted the use of the term essential facility. That makes the case, as Lamadrid points out, unprecedented. As a matter of EU law this makes the Commission’s position peculiar but is not, in my view, fatal to it. From an exclusively EU law perspective the case is, as Petit points out, on strong grounds because the standard for exclusion is too low. As a matter of economic policy, the law as well as the case may be wrong. This point is closely related to the conclusion I reached in the previous point regarding the choices consumers have. If the Commission failed to prove harm beyond the exclusion of a small group of firms then it might have caused a great deal of harm from a consumer-welfare perspective. Receiving a pat on the back from the General Court and the Court of Justice would not change that.

Hard to trace rival’s traffic loss to Google’s conduct

One point that Pinar Akman and Alfonso Lamadrid make in their respective articles is that it is hard to trace the loss of traffic from the affected comparison-shopping sites to Google’s conduct. In addition, they argue that there are more plausible explanations for that (for example, changes in consumer preferences). Although it is true that there may be many reasons why these websites experienced fewer visits, there are statistical tools that can be used to elucidate the causal flow. The Commission may have had all the information it needed at its disposal to make such an inference. We’ll know this in due time.

The fine

It is the factor that has come as the biggest surprise. As Lamadrid and Petit point out in their articles, the Commission attempted to settle in the past, which implies a consideration that the case was not eligible for a fine (recital 13 of Regulation 1/2003). Both of them put too much weight on this consideration. First, the recital does not prohibit the Commission from pursuing the case if a settlement cannot be reached. It is a longshot, at best, to argue that once the Commission attempts to solve the case via commitments it falls into a trap. What kind of leverage would it have in negotiating if the prospect of a future fine is removed from the picture? As Jones and Sufrin point out, on the other side of the coin, the Commission has accepted commitments when the allegations concerned serious violations to article 102 of the TFEU.[1]

As an additional point of surprise, Akman points out that the decision goes against previous practice. The Commission does not usually impose a fine when it is unfamiliar with the conduct. As a matter of law this is of no relevance. As a matter of policy it might be the sensible approach and it is indeed surprising that the Commission decided to set a world record under such circumstances and in a market where the existence of such a magnitude of harm does sound a bit odd. 2.4 billion euros is a lot of money. I am looking forward to see where this magic number came from.

Google is one of the most innovative companies on earth

Akman and Petit point out that Google has the 4th largest R&D expenditure in the world. From a legal perspective, it doesn’t matter how good a monopoly is if it indeed committed a competition law violation. From an economic policy perspective it is of some importance only if the fines and order have the ability to reduce Google’s incentives to innovate. In the case at hand, this could be true if indeed the decision sends the wrong signal, even if it is in accordance with EU case law. If there is not enough evidence in the decision to support the competitive harm, for example, then companies in the EU will be left under an uncertainty cloud. Google may have technical reasons to prefer its own content where comparison-shopping is concerned, and if the Commission did not give them due weight, innovation in Internet platforms may indeed be affected.

Conclusions 

The commentary that I have analyzed has some good criticism of the Commission decision, at least based on what has been disclosed so far. However, it cannot be stressed enough that we can only make our final judgment once the decision itself is published. The main point will be that of harm. It is difficult, though not impossible, to prove that Google’s conduct is indeed welfare reducing, as Geoffrey Maine has pointed out in his criticism to a study regarding other types of search queries (local coffee shops). Other than that, I have nothing more to say than I am looking very much forward to see the decision in full.

[1] Jones, A. & Sufrin B. (2014). EU Competition Law: Text, Cases, and Materials, p. 982. Oxford University Press.

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The relationship between antitrust and equitable growth

By Francisco Beneke*

The title of this post describes, according to the Washington Center for Equitable Growth, an under-researched area of economic policy. Therefore, the Center is opening a conversation on the subject “through a series of essays, reports, and future events that lay the groundwork for debate and informed solutions”.

The latest publication is “A communications oligopoly on steroids: Why antitrust enforcement and regulatory oversight in digital communications matter“. I highly recommend that you check it out as well as the other publications that can be found under the series entitled “Making antitrust work in the 21st century“. Commentary on each publication to follow.

*Co-editor, Developing World Antitrust

Interesting links for this week

Global cartel enforcement report – Key findings: Mid-year 2017: http://www.lexology.com/library/detail.aspx?g=4b99f432-eab4-4b46-9244-dc54af20801c

China will amend its merger control regime: http://www.jdsupra.com/legalnews/china-to-amend-the-merger-control-regime-16815/

The Commission is only a part of Google’s problems. The company has faced and faces antitrust investigations around the globe: https://www.bloombergquint.com/business/2017/07/11/googles-anti-trust-woes-whats-next-in-europe-and-india

According to the Washington Post, Google finances scholarship favorable to it as part of a sophisticated lobbying operation: https://www.wsj.com/articles/paying-professors-inside-googles-academic-influence-campaign-1499785286 To which Google responds: http://www.zdnet.com/article/google-no-we-dont-fund-biased-research-and-just-look-whos-paying-our-accusers/

Yandex, the “Google of Russia,” and Uber have agreed to merge their ride-sharing businesses in Russia and five neighboring markets with Yandex as leading partner: http://fortune.com/2017/07/13/uber-yandex-russia/ and the competition authority may not like it: http://tass.com/economy/956203 

The shipping industry’s competitive landscape is going to change substantially with this mega merger: https://www.worldfinance.com/markets/chinas-cosco-to-buy-rival-shipper-orient-overseas-for-6-3bn

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Why We Need Antitrust Law to Work: Some Thoughts on South Africa and El Salvador

By Francisco Beneke*

South Africans appear to be enraged by the prospect of having had to pay a higher price for cancer drugs. The Competition Commission of South Africa is currently undertaking three separate investigations on excessive pricing by three drug manufacturers: Aspen, Pfizer, and Roche. In El Salvador, the final word from the Supreme Court is finally out on the proceedings regarding a cartel of two wheat flour producers who conspired to raise the price of this product. In these two countries, which have a relatively high poverty rate (as defined by local authorities), antitrust cases that involve access to health and nutrition have an extra component that makes them special. Indeed, cases like this have the potential of generating social unrest. Why? The image of a cancer patient who cannot afford a needed drug or a malnourished child evokes a feeling that other cases do not.

Before going any further, one distinction between the situations in the two countries has to be made. In South Africa, we are talking about three ongoing investigations where guilt has not been yet established, while in El Salvador, the case that concerns us has already been decided. The two flour producers were found guilty and rightfully so. The case is the only instance where the Salvadoran authority has conducted a dawn raid, in which it found conclusive evidence of the agreement to allocate market shares. The point of this article is not to advance a judgment in the case of the South African investigations but to point out why a correct competition law enforcement policy is crucial in developing countries. Cartels and abusive dominant firms can be extra harmful in the sense that poor consumers do not simply forgo a part of their welfare but the harm extends to their daily struggle to survive.

I have picked these two examples as the basis of this post because they are recent developments. However, we can find similar situations in other countries in the past. When the farmacies cartel was uncovered in Chile, the population was so enraged by having had to pay more for their medicines that protests erupted and all of this served as a catalyst for reforms that strengthened the Chilean competition authorities.

Developing countries have a particular need for a working competition policy. They do not only have to ensure markets that promote productivity growth but also protect consumers in vulnerable situations. As a consequence, it is important to ensure that the deterrence effects are maximized in markets strategic to this purpose. I say this because it is a common problem in developing countries that competition authorities are underfunded and understaffed. As a result, their investigation and case-resolution capabilities are limited, which decreases the expectation of companies of being caught and punished for competition law infringements. In such a situation, the authority can nevertheless create such an expectation in important industries––for example, health and food products––by focusing its scarce resources on this industries. The deterrence effect of antitrust will not work in the whole economy but at least in an essential part.

The case of El Salvador also shows an important area where the advocacy efforts of the authority should be directed: judicial efficiency. The wheat flour cartel case spent almost nine years under judicial review after the date of the Competition Superintendence’s decision. Such prolonged court battles significantly hamper the deterrence effects of the competition law since the final payment of the fine and, perhaps more importantly, the enforceability of the injunction is postponed. Therefore, the companies can significantly discount the potential losses of an adverse judgment (though they have to pay substantial litigation costs, which nevertheless shows the value they place on delaying the final judgment). In addition, the lengthy proceedings tie up important personnel of the antitrust authority, which affects its enforcement activities.

Competition policy in developing countries faces more difficulties than in developed economies. But more is at stake. It is important that the policies achieve maturity and gain sufficient importance in the eyes of the public so that their funding can become a priority and the authorities can have a better chance of achieving their purpose.

*Co-editor, Developing World Antitrust

 

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Predatory pricing in India’s telecommunications market? The Competition Commission says no

By Francisco Beneke*

Some facts:[1]

  1. India is the second largest mobile telecommunications market in the world;
  2. Last September, it witnessed the entry of Reliance Jio Infocomm, which invested 20 billion USD to deploy a 4G network in India;
  3. This company is a part of a corporate group owned by India’s wealthiest individual—Mukesh Ambani;
  4. As part of its entry strategy, the company offered voice and data services for free until March this year, which allowed it to quickly capture just over 6 percent of the market in terms of users; and
  5. This led incumbent Bharti Airtel, number 1 operator in terms of both revenue and users, to sue Reliance Jio for abuse of dominance through predatory prices.

The Competition Commission of India (CCI) ruled last Friday that there was no prima facie case of predatory pricing,[2] which Bharti Airtel still has the opportunity to contest under article 26 (6) of the Competition Act. My guess is, however, that such efforts would be futile. Seeing the facts listed above it might be your guess too. After reading the short 17-page decision, one can clearly see that the CCI has a favorable view concerning the competition dynamics in India’s mobile telecommunications market, which may also foreshadow how it will decide the mergers under its review (it already okayed Bharti Airtel’s merger with Telenor India, but other transactions are still pending).

The decision may be summarized as follows: if winning a predatory pricing case against an incumbent is difficult, winning one against an entrant is next to impossible, considering that the complainant is arguably the dominant player. Bharti’s strategy was what one would expect. It tried to put forward a very narrow definition of the relevant market––4G services––where it argued Reliance Jio had, within less than a year, acquired a dominant position. The CCI did not buy it. It defined the market as the provision of wireless telecommunications services to end consumers, including 2nd, 3rd and 4th generation technologies. Jio’s 6 percent share in this broader market made it unnecessary to enter into the analysis on whether prices were predatory.

It strikes me as odd that Bharti would have considered pursuing this suit in the first place. It might have thought that the CCI could have been impressed with the fact that Jio is a part of a massive conglomerate with vast resources. Then again, it is hard to believe that the authority could have been persuaded that incumbents were in a disadvantageous position in this respect, as it rightfully was not.

From an economic standpoint, Bharti’s case was shaky, at best. It does not fit, at least with the information at hand, with the common assumptions that have to be made for a realistic price predation case.[3] It is hard to argue that Reliance Jio had such a cost advantage that it could have endured a lengthy price war to drive enough operators away from India’s market. The country is also experiencing fast growing incomes which will increase the size of the broadband markets, a trend that plays against a price predation strategy being effective. A growing market that can accommodate more entrants is not easy to monopolize. Being an entrant, it is also impossible to argue that Jio is in a position of having a low cost predator reputation that could keep companies away from the market once it becomes the dominant operator and raises its prices.

This is just a quick, though I hope illustrative, review of the case and its circumstances. The takeaways are: few incumbents like Jio’s strategy of giving away everything for free, the case was rightly decided, and it appears that Bharti’s legal advisers were either bored, not heard or have little clue on what a successful predatory pricing claim looks like. India’s telecommunications market is undergoing many changes, which I hope, will give us more interesting material to analyze in the future.

*Co-editor, Developing World Antitrust

@DWAntitrust

[1] See Competition Commission of India, Order under Section 26 (2) of the Competition Act, case No. 3 of 2017, available at http://www.cci.gov.in/sites/default/files/3%20of%202017.pdf; D’Monte, L (2017, April 30). It’s the survival of the biggest in India’s telecom industry. Live Mint. Available at http://www.livemint.com/Industry/n02lQV04A2ui4x37XKVzmL/Its-the-survival-of-the-biggest-in-Indias-telecom-industry.html; and Williams, C. (2017, January 14). How the Ambani family feud hit Vodafone’s Indian mobile empire. The Telegraph. Available at http://www.telegraph.co.uk/business/2017/01/14/ambani-family-fued-hit-vodafones-indian-mobile-empire/.

[2] Competition Commission of India, Order under Section 26 (2) of the Competition Act, case No. 3 of 2017, available at http://www.cci.gov.in/sites/default/files/3%20of%202017.pdf.

[3] See Carlton, D.W. & Perloff, J.M. (2005). Modern Industrial Organization, pp 352–357. United States of America: Pearson/Addison Wesley.

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Concrete Antitrust Economics

By Francisco Beneke*

Last week I read a book called Concrete Economics by two Berkeley professors, Stephen Cohen and Bradford DeLong. The general theme of the book is simple and straightforward: economic policy redesign throughout US history has been successful to the extent that it has been pragmatic, not based on abstract theories of how markets behave but on concrete thinking of what the economy needed. The authors argue that it had been that way until the last redesign of the 1980s when ideology prevailed and nobody had a good idea about the supposed benefits of moving the US away from manufacturing and toward what were believed to be higher value-added activities (finance, insurance, and real estate).

The point applies to the debate on some issues in antitrust analysis. Competition policy can take many shapes within the same country during different periods of times, as in the US, and also differ to a significant degree across important jurisdictions––say, the EU, US and China. The discussion of what is the right approach turns sometimes ideological. Take the debate surrounding digital markets for example. Some people advocate for a loose stance on big tech companies because of the fragility of their position. Google’s competition is one click away and Facebook took the field that was already dominated by other social networks. We can describe a position to be ideological if it’s based on a myopic view of the facts. What about the companies’ jaw-dropping share in online-advertising or the fact that true challengers only appear to succeed in certain niche markets? (think of the success of Snapchat with teenagers in the US). Some commentators like to oversimplify the discussion and throw general arguments such as that intervention dampens innovation. If only things were so simple. The question we should ask is which specific type of intervention we are talking about in order to make an educated guess on the effects we may expect to see.

Another topic on which the debate is highly ideological concerns my main area of research: do we need to adjust competition policy and analysis to the different characteristics and needs of developing countries? A big point of the discussion is about keeping consumer welfare as the north of the compass and ditch other considerations that would make antitrust an instrument of industrial policy. There are good points on both sides, and I must confess that my own research does not depart from the consumer welfare paradigm. What is certainly true is that purists, as professor Ariel Ezrachi calls them, claim a higher intellectual ground. Theirs is the economic approach. In that way, the debate turns ideological too.

There are good questions to ask around the purpose of competition policy in countries ridden with poverty and weak institutions. They are not populist and they are grounded in economic concepts. The desirability of focusing on consumer welfare rests on assumptions that look shaky, to say the least, in the case of developing countries. One such assumption is the flexibility of the workforce. If imports take a market by storm, the displaced workers will have a harder time being relocated to new activities because of their lower average education and skills development. Does that mean that developing countries should close their borders to imports? The point of this post and the book I read is that this is the wrong question to ask. It sounds ideological, not concrete because it is formulated too generally.

Concrete Economics has some important lessons for moving away from this ideology trap. First, in applying the book’s approach to tech markets or adjusting competition policy to unique economic and social contexts requires us to borrow some techniques from the medical profession. We can’t prescribe a treatment without a diagnosis (a point advocated by Jeffrey Sachs in his book “The End of Poverty: Economic Possibilities of Our Time”). That means not only compiling information but the right kind of it. Second, we have to paint a clear picture of the results that we are aiming for––in the authors’ words, what you see is what you get. And third, Cohen and DeLong favor a pragmatic approach of trying the policies that seem to have the best chance of succeeding, observing their results, ditching what does not work and keeping what does. This is what they argue happened during Franklin Roosevelt’s administration amid the Great Depression.

Granted, all of this is easier said than done, but worth the effort. A good start is asking the right questions. In the case of developing countries, for example, an important one is the following: what are the most pressing matters for the well being of the population and on which competition policy can make a significant contribution? Poor countries have an urgent need of education reform, but it is hard for me to picture a way in which antitrust can have a significant impact on the subject. On the other hand, vital infrastructure such as energy and telecommunications have important competition components that determine their coverage rate. Finally, we should come up with good evaluation methods––a practice that is scarce in competition policy––to be able to see what works and what doesn’t. As Cohen and DeLong admit, no one has the right formula, but that does not mean that we should not do anything.

Co-editor, Developing World Antitrust

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Regional integration and antitrust policy: Bigger markets are harder to threat

By Francisco Beneke*

I was talking to a friend at the Max Planck Institute for Innovation and Competition with whom I share an office, and he pointed out to me a risk to which antitrust authorities in developing countries are exposed and a good way of protecting them from it. His point was simple but brilliant. Let me tell you briefly what our conversation was about.

Haris pointed out to me that in the course of the proceedings, a multinational could subtly (or not so subtly) make the threat that, should it be enjoined from a certain conduct and imposed a fine, it would find it necessary to cease operations in the country in question adducing any business justification, such as unprofitability. Let’s say a pharmaceutical company is being tried for impeding parallel imports in a country where this is perfectly legal. If it were enjoined from entering into contractual provisions that make these imports harder in order to sustain a higher price for its medicines, the company may say that it would be forced to leave the market. If operation with the lower price due to competing imports would still be profitable, this hardball tactic could still make sense if the size of the market is so small as to render any effects on global profits negligible. The purpose would be to send a message and actually carrying out the threat would signal that the company means business.

The practical implications could put the antitrust authority in an awkward situation. The central government may not be so happy with losing a source of tax revenue. Workers will certainly not like their sudden unemployment. To make things worse, consumers will lose some of their welfare because of the supply contraction. It is easy to see how the antitrust authority may have more at stake than the multinational corporation.

On the other hand, what if this country suddenly becomes a part of an economic union with a common competition policy? The firm will be enjoined from sustaining price differences that are based solely on its market power and not in different costs in each country (in practice that would translate to the ones it can prove to the authority). Now the threat of leaving would have to involve a bigger market, and if such new market is large enough to offset the benefits of sending a message then the company cannot make a credible commitment to cease operations. It is simply not in its best interest. In short, Haris’ argument was that integration of markets and competition policy protects smaller member countries of such threats.

I am aware that the example raises some other issues, such as the desirability of addressing price discrimination within antitrust proceedings, but the point applies to any kind of anticompetitive behavior too. Less controversially, we could imagine the same kind of threat involving a cartel. Integration is not easy, but there are good reasons to pursue it.

*Co-editor, Developing World Antitrust

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Network Effects and the Assessment of Market Power in the Sharing Economy

By Francisco Beneke*

You may have heard of unicorns and venture capital in the Silicon Valley. Unicorns are startup companies that have not generated a single cent in revenue but are able to marshal multimillion-dollar amounts of capital from investors and cross the one-billion-dollars threshold in market value. Why? Their potential, of course. Venture capital firms don’t want to miss on the next Facebook. But in what exactly does this potential consist? In the particular case of platforms like the one just mentioned, the hope of the investors is that the company will have an exponential growth in consumers and providers, which in itself will make the product more attractive to other buyers and sellers, which in turn generates a virtuous circle in the company’s growth. That is, investors covet companies that can generate network effects or demand-side economies of scale, which makes them able not only to monetize customers but also to get their hands on the data they generate.

In some markets, sharing economy platforms like Uber and Airbnb have grown so much that they are attracting lawsuits of abuse of dominance. That is, plaintiffs consider that these firms have become the main players in their markets. If these companies have already generated a critical mass of providers and customers, their position may be entrenched just for the fact that they are big. Providers will choose a given platform because the potential demand is bigger and customers will rather buy services through it because there are more options (in the case of Uber, for example, more drivers means shorter wait times and wider geographical coverage for passengers within a city).

There is much to be said about network effects and market contestability. However, I will focus just on one aspect. An important point in the case of sharing economy platforms is the geographical scope of these effects.[1] More Lyft drivers in San Francisco mean nothing to a customer in Munich. More Airbnb listings, on the other hand, are a different story.

You may have already guessed the direction of the argument in this post. The global (or at least transnational) character of Airbnb’s network effects makes it a more powerful company against its competitors than Uber. The battle for passengers is fought city by city, which means that companies have to attain a lower critical mass of consumers and providers to contest Uber or Lyft’s foothold. There can still be, to a certain extent, an international component in ride-hailing apps’ network effects. A part of their demand is composed of tourists. However, if we expect the bulk of passengers to be city residents then network effects will tend to be more local.  If any of these companies is being scrutinized for monopolization/abuse of dominance, this factor has to be taken into account.

That is not the same as saying that the geographical location of the market has to be correctly assessed. I’ll give you an example. If you are analyzing a short-term accommodation market you may define the relevant geographical dimension as that of a city. The company in question, however, may have a global reach, which makes it likelier that a tourist or a business traveler will use its platform to search for a place to stay.

I admit that network effects are a complicated issue from an antitrust perspective. The source of concern is something that benefits consumers in the first place. If the platform is attractive, among other things, because of its size, then all the better for it. That should lead to view mergers in any such markets with less suspicion, right? My bet is that it will not be that way except in the cases when national champions, like Didi in China, buy foreign threats, like Uber.

*Co-editor, Developing World Antitrust

[1] Sundararajan, A. (2016). The Sharing Economy–The End of Employment and the Rise of Crowd-Based Capitalism, p. 20. Cambridge, MA: MIT Press.

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