Nova workboard

a blog from young economists at Nova SBE


Can Google finally get the Commission off their back this time?

Over the past few years Google has faced accusations across the globe for taking advantage of its leading, monopolist role in the generalist Web search market – it owns over 70% of the world market, with the number being closer to 80% with China removed – to compete unfairly in markets for specialized search websites, such as travel or shopping search.

In fact, a host of competing companies in these markets – including Microsoft, Oracle and Tripadvisor – have joined efforts in a group called FairSearch.org, who has lobbied with political entities, and tried to raise public awareness against Google in this domain.

In Europe, these companies presented formal complaints to the Commission, who, in November 2010, decided to open an investigation into possible abuse of dominant position by Google. After an extensive period of investigative proceedings, Joaquin Almunía set forth the four main concerns distinguished by the Commission.

After a lengthy negotiation sequence involving Google proposing two proposals of remedies which were assessed, market-tested, and rejected by the Commission, a third proposal of “commitments” was finally announced, last month, to be seen as adequate by the Commission. After a final round of feedback involving the complainants and third-parties, the Commission may decide to accept Google’s proposal, turn those “commitments” legally binding, and close the investigation.

From a market analysis perspective, the more interesting issue is that related to the first concern stated by the Commission, which has to do with «the way Google displays [its own] specialised search services (such as hotel, restaurant or flight search engines) [more favourably than competing services] on its own web search results pages». The basic problem here is that Google is using its dominant position in general web search to restrict the ability of other firms to compete in the specialized search market, guiding the user to its own offers in that market and preventing the user to freely access information about the existence of competing platforms.

What Google proposes to eliminate this issue is to continue to display more attractively its own specialised search services, but in a way that makes it clear to the viewer that those are specially promoted elements, instead of seeming to be normal (“organic”) web results (e.g. Google Shopping links would appear in a box clearly stating the word “Sponsored”) However, in the cases where Google charges fees to firms that use its specialised search service to advertise their product – the most important services such as shopping and travel search are among these cases – it will be allowed, under the proposal, to charge rivals for their specialised search results to appear in web searches in the same conditions. This was, of course, met with much controversy when made public by the Commission.

FairSearch.org has already reacted to this, claiming, quite reasonably, that this would not solve the problem at hand, as this would essentially maintain an uneven playing field between Google, which would obviously not pay to have its specialised links appear in its own web results, and its rivals.

The Commission is yet to make a public statement on the feedback received related to Google’s latest proposal. In any case, considering how quickly trends in Internet tools use can shift, the question is still very much open as to whether or not people will still be using traditional web search engines by the time the Commission makes a final decision on the matter…

From my perspective, FairSearch.org’s issue with Google’s latest proposal seems justified. Even that the proposed way to charge rivals for their specialized search results to be displayed is very reasonable, as it is based in an auction mechanism in which Google is forced to display those results no matter the price level that comes out of that auction, this still enables Google to benefit from its dominant position in the general web search market to gain an upper hand against its competitors in specialized search. I would think that this will be a major focal point of FairSearch.org companies in the feedback round that the Commission is now receiving.

Luís Teles Morais (#747, MSc Finance)

Advertisements


Should Sprint acquire T-Mobile?

Since last December, a possible merger in the US telecommunications market is being discussed. Sprint, the third largest firm (18% market share) in the US mobile industry, has plans to acquire T-Mobile, the fourth largest (12%). The resulting firm would be of a similar size than the two market leaders, AT&T and Verizon, which have a combined market share of about 60%.

According to the Financial Times, in February antitrust officials stated that this move would not be desired. However, this does not seem enough to demote the firm from its intents: Masayoshi Son, the chief executive of SoftBank (the owner of Sprint), keeps determined in making the merger happen. He argues that this merger would allow the resulting company to exploit economies of scale, leading the firm to engage in a price-war. Economies of scale, which are significant in this market, can in fact allow a firm to reduce its costs and lower final prices. However, we need to consider whether this threat of a price war is credible. While there may be an incentive to overstate the price-reduction motives that the merger may allow, in terms of consumer perception and approval by authorities’ purposes, what we should discuss is how the firm will behave after the merger. Even if economies of scale verify and the firm turns out to have a lower cost structure after the merger, it may not have an incentive to cut prices and compete with rivals, due to coordinated effects that will favor collusion. In this case, the efficiency gains from the merger, even if present, would be captured by the firm.

 In general, the fact that firms are not symmetric tends to make collusion less likely. The rationale is that firms with different cost structures will have different optimal points where they would like to set a price, as well as different incentives to cooperate and punish, so that coordination is harder. In this case, a merger that results in a market with three similar firms tends to harm competition, and reduce consumer welfare. In the particular case of the telecommunications market, where network effects are strong, a small firm may have a great incentive to cut prices and expand its customer base, since this increased number of consumers may lead to future gains, since more people will make more people want to join. A larger player would have more to lose from a similar price-cut, as lowering prices would imply a larger infra-marginal cost, since it would also be reducing what they charged to the less price-sensitive consumers. In fact, Bill Baer, from the US Justice Department used the aggressive market behavior of T-Mobile in his argument that the merger should not be allowed.

As seen, there are strong arguments against a merger that would lead to higher symmetry among firms, even if (or precisely because) this means that the two largest firms in the market would face a rival with similar market power. While a deeper investigation will be required, in case Sprint decides to pursue the acquisition of T-Mobile, it is likely that it will not be approved by authorities.

João Araújo no.638


Comment on “Punished for Being Too Small?”

Almost one year after this analysis was done, it is possible to update it with additional information regarding the outcome of the case, as well as discussing other underlying economic concepts that are at stake here. In fact, in July 2013, Apple was found liable, under the scope of the Sherman act, of the concerted practices to maintain high prices (the publishers had previously reached a settlement). More recently, Apple appealed the decision, so we cannot be certain on what the final outcome of this case will be.

To start, it is important to discuss why the wholesalers accepted to engage in a most favored nation clause with Apple: since they can, in principle, benefit from competition in the downstream market, this strategy has to be justified. For any given wholesale price they set, producers in general benefit from competition at the retail market: more competition will imply higher sales and larger demand for them, at that wholesale price. This means that they would have to gain from the low price set by Amazon. Apart from the possible exclusionary effects that would affect competition in the long-run, discussed by my colleague, there are two possible reasons that may explain why they accepted the agreement with Apple. First, Apple’s proposal of high prices might have worked as a coordination mechanism that was missing, allowing them to start a concerted practice in the wholesale market, since most favored nation clauses tend to enhance collusive behavior. Secondly, they may fear that the low prices for e-books may lead consumers to substitute hardcover books for e-books. Since the publishers are also present in the hardcover book market, this could decrease their profits.

One of Apple’s arguments against the ruling is that they did, in fact, increase competition, since before they entered Amazon had a market share of about 90% in the e-book market. The fact that a firm with a market share this high is setting such low prices may seem, at first, an indication of predatory behavior. However, it is important to notice that this is a two-sided market: Amazon may want to set low prices for the e-books and compensate this by charging a higher price for Kindle, its e-book reader. In this case, the low prices by Amazon can be the optimal behavior of the firm in this market, even without implying that they want to deter entry or exclude rivals. This brings an additional point to the analysis, since authorities may want to weight the effects of their decision on two markets. If they keep the decision against Apple and the publishers, they may be increasing competition in the e-books market, while strengthening Amazon’s position in the e-book readers’ market. On the other hand, if they let the companies keep the “most favored nation” kind of agreement, this will favor collusion in the e-books market, but may allow other companies (like Apple), to effectively compete with Amazon in the e-book readers’ market.

Given all of the above, it will be of interest to follow the outcome of this case, due to its complexity, since there are many economic effects involved, pointing in different directions.

João Araújo no.638


In reply to “Franchising – Not that bad after all?!”

The 1986 Pronuptia case presents itself indeed as a landmark in European competition policy history as there had been the urgent need to deal with franchise agreements given the rising importance of such business practices. Rest assured, the decision of the court paved the ground for the growth of franchising in Europe.

As the European Court ruled, franchise agreements were from then on to be evaluated on a case-by-case basis and not by general rule, and would fall under the vertical restraint legislation. But why is it necessary to assess each individual case alone, and why do practices within franchise contracts have such ambiguous effects on competition?

It is important to notice that franchising is not merely a contract bearing a set of vertical restraints – it works a vertical restraint by itself. Setting up a franchise can be understood as a vertical integration process or a method of selective distribution. Hence, as other vertical devices, the negative effects on competition it entails can be overruled by the gains in efficiency, which makes theme legible for exemption.

Moreover, vertical restraints are deemed necessary for the franchisor to protect the brand reputation. While franchises provide better alternative relatively to chain stores, it is still the manufacturer’s brand that is at stake; the franchisor should then be entitled to set restraints on the franchisee as rules of conduct for the better functioning of the business. The same goes for intellectual property; as stated in the aforementioned post, the franchisor incurs in a significant transfer of know-how without the risk of benefiting competitors, meaning that it will have to protect its intellectual rights somehow and may chose to do so by vertical restraints.

There are, of course, ambiguous effects resulting from the establishment of franchise agreements. When affecting intra-brand competition (that can be taken as competition between franchisees), the restraints of franchise contracts aim at solving externalities and improve efficiency of the businesses. Regarding intra-brand competition, however, there can be an eroding effect; franchises can erect significant barriers to entry or decrease competition in the market the same way a vertical merger would. That is why these agreements need to be evaluated on a case basis, assessing all the possible consequences of the installment and verifying if the actions are indeed justifiable given the context.

As the original post concludes, anti-competitive restrictions are inherent to a franchise contract as they guarantee a proper functioning of the settlement. The effects of the agreement, however, need to be properly assessed as any other vertical restraint would be, but are justifiable when the benefits of efficiency outweigh the losses in competitiveness.

 

Carla #636


1 Comment

Promoting competition between pharmacies – Portuguese example

The market for pharmaceutical products has the inherent need for a higher-than-usual regulation regarding prescription drugs essential to meet the medical needs arising from several medical conditions. While there is the need to protect the developers of the drug wishing to collect the return on their investment, there is a major concern with consumer welfare in this market due to the aforementioned importance of a fairly wide range of drugs. The scope of this regulation, however, needs to be further extended beyond the pharmaceutical companies [the manufacturers] and fall on local pharmacies [the distributors/retailers], due to the importance of drug dispense to outpatients.

The Portuguese pharmacy market has had a history of low competition regulation and ownership restrictions when setting up new pharmacies, which made the drug dispensing business a fairly profitable one. However, it has been visible that over the last decade that restraints aiming at protecting the drug market profits have been gradually removed to ensure fair competition and higher consumer welfare. From this pool, three restraints can be said to have been eliminated: the exclusive ownership of pharmacies by pharmacists, the exclusive distribution of non-prescription drugs, and the territorial exclusivity of pharmacies.

Up until recently, the ownership of Portuguese pharmacies followed some rules that dated back to the decades where the apothecaries served as manufacturers and retailers. Hence, only licensed pharmacists were allowed to own pharmacies. This changed in 2007, when the liberalization of pharmacies allowed the latter facilities to be owned by commercial parties other than pharmacists [Decree-Law nº 307/2007]. The efficiency gains are indeed easy to see: not only does it aim at decreasing the market concentration, it may also allow the business to be run by proficient parties with more developed management skills. Setting up a pharmacy becomes accessible to a broader number of agents, which promotes entry, and management can be more efficient, which is welfare enhancing on its own.

Another measure aiming at promoting competition and increasing consumer welfare was the 2005 law [Decree-Law n.º 134/2005] establishing the conditions for the sale of non-prescription drugs outside pharmacies. The aim was to create stronger competition for this sort of product, promoting entry of new competitors, which is prone to result in lower prices for the final consumers (taking also into account that stores selling those products will also compete amongst themselves).

Finally, exclusive territorial business practice had been one of the major profit drivers in the pharmacy sector. With exclusive territories, pharmacies were allowed some freedom in price setting and had the ability to attain higher margins. This ability, however, has been cut short over the last decade, with the minimum distance between pharmacies being shortened from 2 kilometers to 350 meters [Portaria n.º 352/2012]. In a simpler way, this means that there can be now two pharmacies in a small street – should we multiply that by the amount of streets in a somewhat large town and the consequent fragmentation of the market is clear. Alongside with increased price competition, making territorial boundaries less binding avoids welfare decreasing market concentration and some consequent market dominance that may arise.

At a first glance, however, the effect of the three practices combined is somewhat ambiguous. There has been some convergence in the prices of non-prescription drugs both in pharmacies and other stores (namely parapharmacies) towards a lower level, as well as an increase in the number of such stores, which signals a competitive improvement in the drug market. On the other hand, there has been no significant variation in the number of inhabitants per pharmacy [Source: INE/PORDATA], indicating that competition may have not been normalized through this channel. All in all, it is still too soon to see the long-run effects of these policies and further investigation will be needed in the future.

 

Carla #636


Professional associations (Ordens): ensuring standards or ensuring earnings?

 

            There are some professions where unions are the most common form of collective bargaining and lobbying and they are widely seen as having a perverse lobbying effect, in some of their forms of negotiation. However, professional associations, called “ordens” in Portugal, are often seen as benign entities that preserve standards of services provided and allow for their associates to share their expertise. Yet, in the opinion of some, like Friedman, they can be much more harmful, namely for competition.

            A point in favor of these institutions is that, through the promotion of discussion and innovation, by the way of seminars, conferences and other events like these. It is true that most of these professions (like economists or psychologists) work in a trade where techniques evolve rapidly and sharing experiences and new approaches can increase their productivity and be welfare-increasing for both professionals and consumers. Moreover, another field where these associations can do an important job is in the preservation of ethical standards. Lawyers are to be disbarred if they do not abide by their Code and it is important for the system to work that there is trust in that lawyers will indeed abide by it.

            Still, there is always a difference between theory and intentions and the actual practice of institutions, and the latter is the one that we have to evaluate. Despite being true that these professional associations promote ethical codes for their professions, it seems that not always are they completely interested in enforcing them. In Portugal, it has been the case that professionals are only investigated after they are prosecuted or even convicted of crimes in a court of law, as happened for example to medical doctors or the famous case of the lawyer Vale e Azevedo.

            Thus, what are professional associations also interested in doing? An answer could lie in anti-competitive activity: these organizations represent the interests of those already established on one of these trades and they have a lot to gain in restricting competition and entry of others. In Portugal, it is known that the Lawyers association wishes to restrict entry. As for doctors, there have always been suspicions that the insufficient supply of medical degrees is upheld by their lobbying. So far, the Portuguese competition authorities have not gone as far as to prove these claims, but several others, regarding control of prices, have been the object of fines by the AdC. Nevertheless, is it that ensuring standards somewhat seems to require restricting boundless competition, or that restricting competition is best disguised as ensuring standards? For the moment, it seems like there is no clear-cut answer.

#628 , José Miguel Cerdeira


In reply to: An Unsuccessful Merger

The case described in the post (https://novaworkboard.wordpress.com/2014/03/10/an-unsuccessful-merger/) is the example of following the principle of not decreasing the welfare of the society. And I totally agree with the author that the benefit for the end-customer in case of merger between Volvo and Scania was at least doubtful.

As far as I’m concerned the critical issue in this story was the defining of the geographical market. And as it was described in the post the major role in truck sales plays the after-sales service. It creates several cons for defining the market as the global European one. The main is the necessity to use this service in the place of the truck exploitation, which leads to higher prices for the truck charged by the foreign dealer if you buy it abroad, as the dealer loses profit from after-sales service. So nothing stops the future JV in such countries as Sweden having 90% of total market share from increasing prices to the level of the near-by countries.

But I want to show the very different situation regarding competition on the truck market. 15 years after unsuccessful merger with Volvo Scania is being a newsmaker for one more time. Now VW, which already owns 75% of German truck producer MAN controls 62.6 percent of Scania via a direct holding and an additional stake, is owned by MAN. The VW started buying stock in the Swedish manufacturer in 2000 and acquired majority voting control in 2008. Though both companies have 27.4 percent of the market share in total making them the biggest player (compared with 22.9 percent for Daimler and 22 percent for Volvo) they are not as concentrated on any specific European market as possible JV between Volvo and Scania could be on the Swedish market.[1] So VW won the permission from European Union regulators to buy the controlling stake, with the EU saying that it had no antitrust concerns.[2] And transforming BIG 7 of truck producers to BIG 6 doesn’t seem to worsen the level of competition.

VW according to Swedish law needs to exceed 90% threshold in Scania shareholding to force the remaining owners to sell their holdings and delist the company. It is necessary for achieving synergy between the companies via integration processes as at the moment the minority shareholders of Scania refuse to share know-hows with VW and MAN preventing them from cost savings of about 200 mln EUR annually. [3] But doing this could increase the profit of the company and shareholders’ welfare, potentially decrease the prices for the end-customers for the product and increase the overall welfare of the society. But the minority shareholders do not do it waiting for the best price.

And till now VW hasn’t managed to reach this 90% of shareholding, which indicates that not having the ability to merger can also, bring the negative effect to the society welfare as sometimes having this ability does.


1 Comment

In reply to “TFEU competition policy – are we forgetting something?”

Dear Alan, I would say we have it all under control.

From your blog post, I highlighted the issue of market segmentation and its implications to applied antitrust economics as the main concern, with political economy considerations in between. I here present my view on the matter.

First of all, one cannot speak of “the market” when performing an antitrust analysis, as different products will lead to markets with the most variable sizes. While some markets embody all the characteristics go be contestable internationally, others simply cannot go beyond a local setting, let alone national. It is hard to imagine that hairdresser on the other side of the street complaining of the bureaucracies to open up a saloon in Warsaw or in Barcelona when it wouldn’t even expand to Oporto.

This does not mean that there are no markets which could potentially integrate at the European level. What one can see is that, indeed as pointed out in the original post, economic integration has come short of what politicians made believe upon signing the treaties; whether this is because of the lack of conditions for greater integration (which I disregard) or because markets are in a somewhat natural way segmented (a phenomenon which will tend to dissipate in time) seems like an open discussion.

Being it as it may, one should remember that the ground floor of antitrust investigations is market definition, not only in the product but also in the geographical dimension. The SSNIP test seems capable of embodying the concerns regarding the feasibility of market analysis continent-wide.  If the Commission gets to consider the European market as the relevant one when assessing the antitrust effects of a merger between two Eastern Europe television operators or when assessing predation by Millennium BCP, it would probably be performing a large mistake.

Moreover, economics has come a long way beyond SSNIP to address issues of market segmentation (which is no more than having a set of markets for a given good instead of just one market). One example comes from Frank Verboven – who, interestingly  enough, is a member of the Economic Advisory Group on Competition Policy for the European Commission –, who did an empirical research in 1996 on why were car prices so different across Europe. He constructs and estimates an oligopoly model to analyze whether price discrimination, caused precisely by market segmentation, was responsible for it. He was able to estimate demands for each European country, identifying “foreign firm disadvantage” and “country of origin effect” in the process, and he could even test for collusion in each market.

As for the concerns expressed with the enlargement of the EU, to the extent that the vast majority of European OECD-member States had to rely on the European Community to build their own competition policy framework, I am skeptical on whether the newest EU members, most of which new even to market economy itself, have anything to lose with some homogenization of competition policy at the European level. Moreover, one should not forget that the goals of competition policy are everywhere independent from considerations like income per capita or the Gini Index, as the principles governing competition should be more or less the same in every country.

Another concern that I would like to comment is that with legal uncertainty. It is because of such issues that there should be a legal body on the matter, like the TFEU or other regulations regarding vertical restraints or mergers. Moreover, the defined thresholds for public intervention are usually sensible enough to avoid that firms fear the actions of competition authorities (unless for obvious reasons which only they know). Besides, to the extent that the first stages of any litigation process can be (and should be) done at the national level (as it should be recognized in all European countries’ constitutions), I also doubt that litigation costs would increase, not to mention the relatively small economic weight that new EU members have, making it difficult for a case to even reach the Commission.

This said, I restate my view that having a single European competition policy framework is far from being the greatest challenge to the economics of antitrust. Perhaps more important than that, and unfortunately, competition law is far from being a big issue in the European Political Economy.

João Garcia, 618

 

Sources:

Verboven, Frank, International Price Discrimination in the European Car Market, RAND 1996.


In response to: Coffee war “what else” – in defence of Nespresso

The case deals with several concepts that are often debatable within competition policy. Most significant for the case at this point, is the revoke of European Patent Office of Nestle’s patent for the function of the food processing giant’s coffee brand Nespresso. In this regard, as the recent blog elaborates on, there is a dispute on the inter-brand level competition because of competitors copying similar processes of Nespresso and its capsules. This however, has created less of a problem for Nestle due to the high quality position of the products of Nespresso. Moreover, with the revoke of patent, the case stipulates the issues revolving around free riding Nestle’s advertising and promotion of Nespresso capsules in particularly intra-brand spill over to competitors. These competitors are taking advantage of the distribution channels of Nespresso by creating capsules that fit in the actual machines of Nespresso.

For years the protection by intellectual property rights for the intra-brand to secure the R&D of Nestle, has enabled Nestle to pick the berries off the tree whilst sitting safely in their own nest. In general, Neslte’s large market share and control of value chain for in this case coffee, as a producer, retailer and distributor thereof, does not help them in their argumentations to remain control of their capsule distribution. Being such a significant player is more likely to fall under dominant position article and the abuse of attempting to protect what essentially is tying consumers to a product purchase.

Whereas the central idea of internalising business activities through a company’s own distribution channel, and in this case the brand of Nespresso, may be welfare generating it may in the lack of competition also be welfare deteriorating. The internalisation process essentially aims at reducing transaction cost for the firm in reducing the marginal cost of activities and coordination across the value chain. The positive notion of this from the consumer perspective is that this may reduce the end price in the market. Albeit, insofar as there is a patent involved for the given product, this creates a strong vertical restraint for the supply chain of in this case coffee in capsules. In this circumstance, it includes internal exclusive distribution of the brand and for the potential of Nestle to drive up its end prices for consumers. This in turn may have a negative impact on consumer surplus. Initially the critical point of this effect is considering the relevant market and its alternatives of coffee supply for which creates the demand substitution rate for the consumer.

Arguing for Nestle, the protection through patent and internal distribution has been control of their own brand in what is a related product tie and therefore per-se not an illegal process. Accordingly, due to consumers having had and do have sufficient inter-brand alternatives to enjoy, the process does not have a negative impact on consumer welfare. Thus, the product of Nespresso is one of many options consuming and preparing coffee. The sole argumentation that there exist adequate inter-brand competition makes the lack intra-brand competition for capsules for Nestle’s own Nespresso machines a marginal problem and more so rather irrelevant in conceptualising welfare losses. A consumer is completely free to choose from alternative ways to purchase and brew their coffee. Hence, the Nespresso capsules are a unique feature of the product quality for the machine. More so, the revocation of Nestle’s patent on capsules for its own Nespresso machines is a reduction of production surplus. It incentivises the company to one hand, very well decrease prices for capsules, – but on the other increase prices of Nespresso machines and possibly reduce the quality of end product and thereby potentially consumers’ rent and thereof consumer welfare.

Sources: Financial Times (2013) Competition hots up for coffee capsule market smooth operators [internet] Available from: http://www.ft.com/intl/cms/s/0/d8c237a4-489c-11e3-8237-00144feabdc0.html#axzz2wg8lEqks. Accessed: [March, 21st, 2014]

Alan Brejnholt  #381


In reply to: “Cartels, Trade Unions and the right to strike”

In most countries competition policy plays a role in fighting the problems that arose from the characteristics of our economies. Indeed, the history tells us that each economic system has its specific features and, thus, its own problems (besides the existence of some common features): in what is commonly referred to as “market economies”, characterized by the role of competition, the problem of markets behaving in an anti-competitive manner seems to be intrinsic to the economic structure. Authorities seem to admit this reality and make legislation for avoiding it.

Cartels are one of the key areas of intervention of competition authorities. These are fought by the fact that firms join themselves to charge higher prices to consumers: society seems to loose with the existence of cartels. However, the criterion in competition policy is that the key aim of interventions is supposed to be enhancing society’s welfare (the key concern is, in several countries, such as Portugal, consumers). When we aim at solving the problem of double marginalization with a mechanism such vertical integration, we are admitting implicitly that the advantages that the elimination of this externality imply compensate for the fact that it creates risks of market foreclosure (surely, the UE may forbid them if a great risk of market foreclosure is created). The problem that competition policy addresses is, in this sense, the abuse of market power that puts welfare at stake.

Unions are organizations of workers aiming at defending their collective rights and interests. When you say that, necessarily, “if they [workers] decide to disagree with employment contract, they may submit a notice of termination of contract, let a feed by husband/wife, find another job or start a business”[i], your reasoning can also be used to defend that if you consider to be a victim of a cartel, you are able to stop consuming its products or build your own. The problem of abuse of dominant position exists in a cartel and it seems to be wiser – or at least fairer -, to admit the issue than ignoring it. In an equivalent way, as the law (up to me, properly) considers that employers might abuse of their dominant position, it makes sense that it predict that workers can organize themselves to fight these abuses.

The power of the buyers seems to be a way of fighting the abuses on the supply side of the economy in what concerns trade of goods. In this relation, the “real power” is on the supply side, and thus the risk of its abuse is on there. In the labor market, the power is on the demand side, i.e., on firms’ owners: these are the ones having the power to make the decisions, and workers submit to them. It seems logical that the supply side (workers) does something to combat, at least partially, abuses from the firms.

Finally, it is not true that “employees will not be punished for the strike”[ii]: so as if, for instance, oil consumers decide not to consume it to protest against its abusive prices are incurring in a sacrifice, workers are incurring in a sacrifice while being on strike, since they are not collecting a wage (it the days of strike are covered by the labor unions, through workers fees, it is a form of insurance, it does not change the big picture). With a difference: one can probably survive relatively easily without oil, while without a wage – if no other sources of income are available -, one can only survive temporarily.

 

Samuel, 624

 

Original blog post: “Cartels, Trade Unions and the right to strike”

Available at: https://novaworkboard.wordpress.com/2013/05/08/cartels-trade-unions-and-the-right-to-strike/


Fuel: make prices public or not?

In 2013 the German Competition authorities obliged oil companies and petrol station operators to report to the Market Transparency Unit any change in price of the fuel types Super E5, Super E10 and Diesel. The purpose of such as policy is to “enable consumers to gain information on current fuel prices at petrol stations”[i]. But we should ask: will the problem be solved this way? Is this the best solution?

Oil is one of the sectors for which collusion is more frequently claimed to exist. Even if, in most cases, collusion is not proved to exist, it appears to be a non-transparent sector. In this sense, it is not surprising that such a measure is found in here.

In basic economic models, we consider information is perfect. However, this assumption is far from being realistic. Searching for the most competitive prices is costly and, thus, gives room for the non-exhaustion of arbitrage opportunities.

In this sense, these costs are almost eliminated with such a measure: people just have the cost of searching on the internet (“the Market Transparency Unit for Fuels (…) receives the price data from the mineral oil companies and petrol station operators and passes these on to private consumer information service providers, which in turn inform the consumer”[ii]), that nevertheless is not null. Besides this, some associated costs (such as transport ones) are not removed. But, undoubtedly, consumers are now more capable of doing a “good” decision than before. I think this was the reason explaining this policy change, going along with the purpose of enabling “consumers to gain information on current fuel prices in Germany”[iii]. If we assume that this measure does not incentivize collusive behavior, consumers will unambiguously be better off.

However, the problem (and thus the origin of this post) lies on the fact that this last assumption does not fit reality. Indeed, price observability helps collusive behavior to be taken. The reasoning besides this is simpler than what it might seem: when prices are not observable, it becomes harder to detect deviations to a tacit agreement between firms, raising concerns of confounding deviations with shocks on demand. With observable prices, a firm deciding to deviate is detected very quickly, making punishment fast to impose. Firms have, therefore, larger incentives to continue colluding than before.

Given this concern, the effects of this policy shift may not be as bright as predicted. Although consumers are now better supplied of information concerning the fuel goods, this may not necessarily impose that they are better off, because even if choosing with a better information background than before, probably the prices amongst which they will choose are now higher. The policy can, indeed, have the opposite effect of the one it was intended to. The measure was not taken a lot of time ago, since “its normal operation [started] on 1 December 2013”[iv] (besides the fact that most information that is available is not in English, so it would be hard for me to collect it), so it is difficult to see accurately, at this point, the effects of the policy. When enough data is available, it would be worthwhile to compute a regression that would test for possible structural changes in prices with this measure, controlling for demand-side factors and international price fluctuations.

While not having a magic formula for, in a competitive framework, improving consumers’ welfare with such a scenario, I think competition authorities should think in alternative ways of improving consumers’ welfare, by imposing firms to behave competitively. A tougher control of firms’ practices and the creation of mechanisms that promote denunciations of these practices seem to be, although non-magic solutions, more suitable to this problem.

Samuel, 624


1 Comment

EU takes another step further in fight against cartels

The European Commission gave today another step in the fight against cartel activity in Europe by allowing companies that are affected by such “agreements” to gain access to crucial documents in order to help sue so they “can obtain the evidence necessary to prove their claims”. After fining automotive suppliers by a combined €953.3M (one of the largest until today) for colluding and fixing the prices of ball bearings, reflecting such fine “the economic importance of the cartelized sector as well as the scope and duration of infringement”[i], the EC seems to be on fire in tightening screws on cartel activity.

The new rules’ purpose is at making changes into member states’ legal systems to facilitate the victims of cartel activity in bringing claims for compensation. Particularly, they aim at empowering all courts to disclose evidence and will allow all several years of pursuit for compensation starting from the date of the publication of the conclusions of the case.

While having imposed fines totaling €1.83 billion in 2013, victims faced several problems in obtaining compensation such as the difficulty of obtaining evidence or the prohibitive costs of court case. According to the Financial Times, only 25% of EU anti-trust rulings issued between 2006 and 2012 resulted in claims for compensation. Most of which were carried out by large companies in the UK and Germany, whose national systems are known to be more victim-friendly on antitrust.

The documents being disclosed, under the new legislation, can be self-incriminating, in light of the leniency policy, under which companies that deliver information about a cartel in which they participated might receive full or partial immunity from fines. Such statements are often offered by whistleblowing companies who expose cartel activity.

The biggest concern regarding this matter is, precisely, related with the leniency programme, which has been proven successful in its short-run effects in inducing firms to reveal information about criminal activities and possibly reducing the agency’s investigation and prosecution costs (having been verified a sharp rise in the number of cartels convicted after adopting the leniency program) and long-run effects of deterrence of collusive behavior. Secrecy is vital. Even if in most cases there is a “opportunistic” self-reporting because cartels are already under scrutiny, the breaking down of such cartels is dependent on the companies that come forward, something that may be discouraged once the secrecy of such assistance, either because it can still suffer from retaliation of cartel members or by reputation matters so early in the process. Even though the EC is aware of such matter (promising the creation of a “black list” with information that cannot be disclosed at all) it is importance to take notion of the caution needed to apply these rules and that it should be strict limits on the circumstances in which victims can have access to such documents in order to not damage de success of the programme. The creation of a “black list” to prevent disclosure of whistleblower evidence is an important protection and it reflects the importance attached to the role played by such evidence in cartel enforcement.  However, the effectiveness of such protection will of course depend on what is included on the black list.

Nevertheless, the commissioner for competition, Joaquín Almunia, considerer this agreement a step forward because it “will remove the barriers that currently prevent the victims of antitrust infringements in the EU from obtaining effective compensation. At the same time, it will ensure an adequate and balanced interaction between actions for damages and the effective public enforcement of competition law by the Commission and national competition authorities.”

The progress made on the legislation shows the will of the EU to push through these reforms and seriously fight cartelization.

Rita Azevedo 625


[i] Commission Vice President in charge of competition policy, Joaquín Almunia


2 Comments

Play by the book?

Although still a tiny market in continental Europe, there is no doubt that e-books have a large potential when we consider their growth and share among total book sales in the US and the UK [1]. From its nature, sales of e-books depend on device penetration, with the most successful e-book reader being the aggressively marketed Amazon Kindle. Other competitors followed such as Apple which has also been selling e-books for its devices, including the iPad which has been launched across Europe by mid-2010. In its attempt to compete with Amazon, it entered in arrangements with several book publishers (Hachette Livre, Harper Collins, Simon & Schuster, Verlagsgruppe Georg von Holtzbrinck, and Penguin) which have been alleged to restrict competition and thus illegal, both, in the US and the EU [2][3].

Specifically, the publishers jointly switched from an independent distributor agreement to an agency agreement with Apple where publishers controlled the price of e-books that Apple, solely as an agent, sold via its online store. Additionally, a “most favoured nation” clause (MFN) among the publishers ensured that if an e-book was available at a lower price elsewhere, its publisher would have to match that price in Apple’s iBookstore. Both sides, Apple and the publishers, hoped to end the downward spiral of e-book prices mainly spurred by Amazon’s e-book store. Apple might also be able to gain competitiveness as a distributor against Amazon. From the publishers’ perspective, this would furthermore induce other retailers to enter into similar agency agreements. As the agent model allows the publishers to control the price on Apple’s and other participants’ stores, this would indirectly establish a resale price maintenance (RPM).

From an economic perspective, RPM is likely to increase welfare effects when it affects intra-brand competition [4]. More specifically, the horizontal externalities of services or promotion offered by a retailer could induce free riding. Retailers which do not invest have lower costs, but would still benefit from the additional services. RPM avoids that free-riding retailers cut prices and gives incentives for investments in non-price competition, especially additional services and marketing efforts.

Whether this is true or not for the e-book market, there are concerns that the MFN clause hinders price competition. Publishers are unlikely to reduce the price for other retailers because they would have to offer the same discount to Apple, implying a “double cost”. This would additionally support to overcome a commitment problem among the publishers by inducing them to prevent Amazon from continuing to sell cheaper e-books and finally to establish a similar agency model with Amazon.

The motivation of the RPM and the joint switch to an agency model increases the likelihood that the agreements have not been set merely bilaterally between each publisher and Apple, but rather indicates the existence of “horizontal” collusion. Based on this, a US District Court and the European Commission (EC) have started investigations in April 2011 and December 2011, respectively. In its preliminary assessment [5], “the [European] Commission took the preliminary view that to achieve such a joint switch, each of the four publishers disclosed to, and/or received information from, the other four publishers and/or Apple, regarding the four publishers’ future intentions”. Regarding the MFN, the EC expressed the concern that “the financial implications for publishers of the retail price MFN clause were such that this clause acted as a joint ‘commitment device’. Each of the four publishers was in a position to force Amazon to accept a change to the agency model or otherwise face the risk of being denied access to the e-books of each of the four publishers […]”. The fact that publishers coordinate the market conduct and the prices through Apple in order to increase retail prices of e-books, or at least limit retail price competition, would pose an infringement of EU competition law.

Subsequently, while Apple and four publishers (Hachette Livre, Harper Collins, Simon & Schuster, Verlagsgruppe Georg von Holtzbrinck) accepted the remedies and agreed to terminate the agency agreements already in December 2012, the last publisher in scope, Penguin, followed in July 2013.

Although agency agreements and MFN clauses are not unlawful per se, this case sheds light on how vertical agreements can be used to facilitate horizontal collusion. Apple, as a retailer, indirectly acts as a “hub” for the coordination of prices of the publishers that compete with each other and therefore facilitates the enforcement of the “horizontal” agreement.

Trieu Pham #578

Sources:

[1] http://www.letsgoconnected.eu/files/Lets_go_connected-Full_report.pdf

[2] http://www.nortonrosefulbright.com/knowledge/publications/104551/competition-world-a-global-survey-of-recent-competition-and-antitrust-law-developments-with-practical-relevance

[3] http://www.lexology.com/library/detail.aspx?g=7d27a1ac-46c4-469a-aba2-242a75edb178

[3] http://nautadutilh.nl/PageFiles/9151/07-12-Resale-price-maintenance-economics-call-for-a-more-balanced-approach-kneepkens.pdf

[4] http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:C:2013:073:0017:01:EN:HTML


Inadequate competition is driving Finnish retail food prices up

Finnish retail food prices are one of the highest in the European Union. According to a comparison between 15 EU-countries with similar income levels made in 2012, Finland was the fourth most expensive country after Denmark, Sweden and Austria. Part of this can be explained by variation in value added taxes in different countries, but it can’t explain everything.

The most likely reason for this is the level of competition inside the business in each country. For example Dutch food retail prices are 24 percent lower than the Finnish ones.  There are eight strong competitive food retailers in the Netherlands, but only two can be found from Finland. Thus, it is most likely that there is more competition in the Dutch market.

In May 2012, European Commission recommended Finland to reform its regulations in the retail trade, because the market was seen highly concentrated. At that time, the two biggest players, S-Group (45%) and Kesko (35%) were together holding over 80 percent of the market. In 2012, the Finnish Government reformed the Finnish competition law and started a support program targeting to increase healthy competition in the retail trade.

Since then not much has changed. S-Group and Kesko are still holding dominant positions and there are no relevant changes in their market shares. Both vertical and horizontal constraints still exist and they’re preventing free competition to happen. S-Group and Kesko have too strong positions towards both food distributors and customers.

For example, if a food distributor wants to expand its business by selling to other retailers, it is very likely to lose its contract with both of the biggest ones. That makes it almost impossible for a distributor to sell to anyone else. A study made in January 2012 reveals that both of the retailers had been using “doubtful ways” to take advantage of their strong position towards the food distributors.

Customers are somewhat locked to these retailers as well. There is a public monopoly for a government owned company called Alko for selling beverages containing more than 4.7 percent of alcohol. This means that locations of these liquor stores are extremely important for food retailers, because customers prefer buying food and drinks from the same place. At the moment almost all of the Alko stores are located inside or next to the stores of S-Group and Kesko and the third biggest player Lidl actually has only one store which has Alko in it. There are many politicians in the boards of S-Group, Kesko and Alko, which may have an effect on who is getting those licenses and who is not.

The other problem from a customer’s perspective is bonus cards provided by the two biggest retailers. There is an investigation going on whether they have elements that are binding customers too much.

To solve the problem of too high retail food prices in Finland, the level of competition has to be increased. This could be done by reducing the power of the two big retailers towards both food distributors and customers. For example, there could be higher sanctions for selective buying and bonus card schemes could be restrained. Also, reducing the influence of politicians in the boards of these companies would reduce their incentives to favor them in the political decisions. Breaking the alcohol selling monopoly and bring wines to the supermarkets would also make entering the market easier. To get the Finnish retail food prices lower, more big players in the market are needed. 

Petri Lehtonen


1 Comment

Nestlé: Abusive Clauses

In 2006, the Portuguese Competition Authority sentenced Nestlé to pay a fee of one million euros as it was proved the practice of illegal clauses in the contracts of its supply of coffee.

Evidences showed that the contracts of Nestlé were violating the antitrust laws, due to the fact that it was restricting competition in the market of coffee consumption that was not at home.

These contracts were made between Nestlé and the Horeca distribution channel, the latter being the sector of food service industry, which consists of establishments that prepare and serve food and beverages.

In order to understand the case in question, it is necessary to understand the economics behind the violation of these antitrust laws. It is important to underline that Nestlé and the Horeca channel came in agreement between clauses that jeopardize the vertical structure of the sector when Nestlé applied vertical constraints in the contracts. These vertical constraints are denominated exclusive dealing, more specifically exclusive supply, due to the fact that the Horeca channel was restricted to buy its products to resell from one single supplier: Nestlé.

So, it is worth noting the importance of the vertical agreements and what are the impacts to the consumers that lay in the bottom part of the structure.

In this kind of vertical structure, the producers do not sell their products directly to the final consumers; instead they need to provide their goods to the retailers who are the ones responsible for the distribution to the public in general. Often, producers find it necessary to make agreements with the retailers in order to force the latter into behaving in a certain matter.

Returning to the case in study, Nestlé imposed certain clauses that forced Horeca channel to stay exclusively in business with them by an uncertain period of time, combined with a mandatory quantity of coffee purchased.  This meant that Horeca could not resort to other suppliers for an indeterminate period of time. Furthermore, Nestlé imposed that after 5 years of contract, if the distributors had not bought the minimum quantity agreed, they were forced to continue under contract, with the penalty of paying restitution.

These types of contracts lead to a lack of competition between producers of coffee, as the Horeca channel could not chose to buy from others suppliers. This led to a decrease in intrabrand competition. The investigation showed that the market for immediate consumption of coffee (the one in question) was provided by four big companies: Nestlé, Delta, Segafredo e Multicafés; and the distribution was made by Horeca. As such, the market for this immediate consumption of coffee was the distribution provided by Horeca and the geographical market was Portugal.

After the investigation provided by the Competition Authority, Nestlé was forced to pay a fee of one million euros and to eliminate all those clauses (contracts with duration above 5 years, as described above) for their contracts from that moment on. 

 

Maria Almeida #637

Competition Policy