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BIICL: The Seventh Annual Trans-Atlantic Antitrust Dialogue

BIICL: The Seventh Annual Trans-Atlantic Antitrust Dialogue. Empirical Evaluation of Coordinated Effects Dr Peter Davis 1 May 2007. CC Coordinated Effect Cases. Since the Enterprise Act came into effect (June 2003) the CC has considered coordinated effects in three merger inquiries

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BIICL: The Seventh Annual Trans-Atlantic Antitrust Dialogue

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  1. BIICL: The Seventh Annual Trans-Atlantic Antitrust Dialogue Empirical Evaluation of Coordinated Effects Dr Peter Davis 1 May 2007

  2. CC Coordinated Effect Cases • Since the Enterprise Act came into effect (June 2003) the CC has considered coordinated effects in three merger inquiries • DS Smith/LINPAC Containers • James Budgett Sugars/Napier Brown Food • Wienerberger Finance Service BV/Baggeridge Brick plc (live case – provisional findings just issued) • Another case, Wiseman/SMD, was referred by the OFT to the CC but was abandoned

  3. Framework for Analysis

  4. Empirical Tests of Collusion versus Competition • Can we use data to test whether market participants are competing or colluding? • Bresnahan (1982, Economics Letters) says YES • But requires a model of behaviour under competition which you test against one under coordination • Idea: Use information on exogenous ‘rotations’ of demand • Subsequently a large economic empirical literature tests whether data were generated from competitive environments or via coordination. • Eg., (1) Differentiated products and (2) Auction data

  5. Framework for Evaluating Coordination • AGREEMENT • Tacit colluders must know what it means to coordinate • Eg hundreds of products and hence prices may be complex to coordinate and require a system for simplification, Eg., price books or per-mile pricing • MONITORING • Aware of behaviour of competitors • Able to spot deviations from prevailing behaviour • ENFORCEMENT • Internal stability – main focus of current work • External stability – barriers to supply expansion from non-coordinating firms (Eg., entry barriers)

  6. Ability to Support Tacit Collusion • The theoretical explanation of (tacit) collusion is based on the theory of non-coordinated repeated games (dynamic oligopoly models) • Firms meet repeatedly • Firms individual maximise stream of profits • But firms reach a tacit understanding of a mutually beneficial conduct • Many models but generic one says a firm is willing to collude if NPV of payoffs to tacit collusion > payoffs to cheating + NPV of payoffs under ‘punishment’ + NPV of payoffs under competition • Collusion and Competition payoffs normally calculated in a unilateral effects simulation model

  7. Internal Stability • To sustain tacit collusion, each firm must find it: • sufficiently rewarding to tacitly collude • insufficiently rewarding to cheat when others are coordinating • sufficiently costly to cheat and then get caught • We can model each element of the incentive to collude • Return to collusion • Return to cheating • Costs of cheating • And putting them all together will tell us about one element of the ability to collude: • A collection of firms will be able to sustain collusion only when they each find it worthwhile

  8. The Return to, or incentive for, Tacit Collusion (1) Unilateral effect of merger A to B. Is B>A? • (2) Coordinated effect of merger • Strengthening of coordination: C to D • Newly coordinate: A to D Equilibrium Outcome (prices or profits) A B C D Competitive outcome A = pre-merger B = post-merger Monopoly (perfect cartel) outcome

  9. Incentives For Coordination - If you can coordinate, what does it do for you? • Impact of merger • If strengthening coordination = D–C • If results in newly coordinating = D–A • Profit Incentive to Newly Coordinate • Pre-merger = C–A • Post-merger =D–B • Notice we currently sometimes get A and B from unilateral effects simulation models

  10. Ability to Collude Results from simulation models • Some mergers will reduce or even entirely remove firms ability to ‘fully’ collude • These tend to be mergers that generate additional asymmetry • If partial collusion is possible then less dramatic effect – continuum between competition and collusive outcomes using the maximal sustainable profit level

  11. Two different 3 to 2 mergers with 6 products, eg (4,1,1) to (5,1) merger D (5,1) B (5,1) C A (4,1,1) An Example of Incentives to Collude. NB: discount factor is in each of the ‘NPV’ calculations

  12. Conclusions • Mergers that introduce asymmetries in market structures can hinder coordination • Pre-merger Coordination can be explicitly tested for against Competition • We can attempt to measure the impact of a merger on: • The three elements that drive the internal incentives to coordinate • The ability of a market structure to support coordination • However, as with unilateral effects simulation, formal empirical analysis requires that we settle on a particular model of competition and also a particular model of collusion for analysis

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