Roman Inderst – Market Definition & Incentives for Foreclosure EWS/Marcroft Market Definition and Incentives for Foreclosure Roman Inderst Universität.

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Presentation transcript:

Roman Inderst – Market Definition & Incentives for Foreclosure EWS/Marcroft Market Definition and Incentives for Foreclosure Roman Inderst Universität Frankfurt (IMFS) LSE

Roman Inderst – Market Definition & Incentives for Foreclosure 2 Roadmap Conceptual framework: Inderst/Valletti 2006/07 Two-stage market (Cournot plus conjectural variations) Presence of vertically integrated firm Steps: Application of framework Other case-related issues

Roman Inderst – Market Definition & Incentives for Foreclosure 3 Framework

Roman Inderst – Market Definition & Incentives for Foreclosure 4 Steps in Formal Analysis Key: Derived demand Retail competition Aggregate to obtain derived demand VI firms price/quantity is part of retail equilibrium Upstream-/Merchant Market Direct vs. Indirect Constraints

Roman Inderst – Market Definition & Incentives for Foreclosure 5 Elasticity of Derived Demand Affected by: Elasticity of retail demand (+) Intensity of downstream competition (+) (N, conduct ) Downstream product homogeneity (+)

Roman Inderst – Market Definition & Incentives for Foreclosure 6 Market Definition (Captive Sales) Legal side? Caveat 1: High market share of VI firm could mean strong indirect constraints; but also weak direct constraints. Caveat 2: Risk of double counting

Roman Inderst – Market Definition & Incentives for Foreclosure 7 The Use of Readily Available Information Decomposition of upstream elasticity: With no VI firm, simplifies to

Roman Inderst – Market Definition & Incentives for Foreclosure 8 Caveats Caution: All ingredients of this formula are endogenous. Example: Small dilution -> small elasticity -> high mark-up (and SMP)? No: Small dilution may be precisely due to lack of SMP!

Roman Inderst – Market Definition & Incentives for Foreclosure 9 Participation of VI Firm: Analysis (Structural) Analysis Forward integrated firm faces opportunity costs from selling on the merchant market Inadequate to treat as constant (akin to higher constant marginal costs)

Roman Inderst – Market Definition & Incentives for Foreclosure 10 Incentives to Participate? Again caveat on the use of readily available information on endogenous parameters DS/US market share, margins etc. Take change of primitives In upstream competition. Incentives higher if 1.Fewer competitors (provided pass-through is not above one) 2.More competitive conduct (= own sales replace rivals sales, without much affecting downstream market) How informative is, e.g., upstream margin?

Roman Inderst – Market Definition & Incentives for Foreclosure 11 Side Remarks Newly gained financial stability: makes it more likely that firm exploits the degree of market power it enjoyed Conglomerate merger doctrine? Countervailing Power Seems to only consider buyers outside options. Already taken into account through elasticity of demand? What about suppliers outside option? Note: In Inderst/Valletti more downstream competition increases indirect constraints (cf. opposite argument based on countervailing power in Schneider/Legrand)

Roman Inderst – Market Definition & Incentives for Foreclosure EWS/Marcroft Market Definition and Incentives for Foreclosure Roman Inderst Universität Frankfurt (IMFS) LSE