ESNIE 2005 ANTI-TRUST: from theories to practices Competition & Transaction Costs ANTONIO NICITA (UNIVERSITY OF SIENA, FACULTY OF ECONOMICS)

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

Anti-trust at the intersection of many theories/1 Evolutionary process Original effort from politics Evolution of the economic meaning of markets/competition From perfect to workable competition From economic market to relevant market Who is protected?: consumers, competitors, small firms, welfare, the market… Economic agents (and judges) as rational maximizers OIE, NIE, TCE, IO

The first revolution in Antitrust A contract is per se a limitation of economic liberty, freedom to exchange and to renegotiate. Restrictive agreement (both vertical and horizontal) This limitation is per se inefficient since it reduces the fundamental mechanism of market efficiency which is freedom to search for better opportunities Monopolization, Attempt to Monopolize (leveraging, bundling, discrimination, excessive prices, raising rivals’ costs…) Structural remedies Protection of small firms against trust in US

Anti-trust at the intersection of many theories/2 OIE NIE IO TCE FIVE AGENTS TRANSACTIONS VERTICAL INTEGRATION, FIRMS MAKE/BUY, TRANSACTION COSTS MARKET STRATEGY MARKET STRUCTURE INCOMPLETE CONTRACTS SPECIFIC INVESTMENT GOVERNANCE

The second revolution: Chicago Coase’s influence (1937) A. Director, R. Posner, R. Bork……….O. Williamson Dominance, Market power, market share The economic efficiency of (i) horizontal/vertical restraints-mergers (ii) ‘leveraging’ strategies by dominant firm (iii) monopoly for public good production (iv) monopoly against rent-seeking (v) oligopolistic collusion vs forced competition

Chicago/1: vertical restraints/mergers Vertical restraints/mergers are mainly motivated by efficiency reasons Abuse against consumers (a)Two monopolies (upstream-downstream): double mark-up (b)One monopoly and one competitive market: just one monopoly profit Abuse against competitors (strategic barriers to entry) (a)Blocking downstream efficient entry is irrational and inefficient (b)Intra-brand vs inter-brand competition (private orderings against post-contractual opportunism with asset specificity)

Chicago/2: efficiency defense in horizontal mergers Ex-post Market Concentration ratio should be compared with ex-post improvement in efficiency Williamson: efficiency defense in mergers Posner/Bork: two is enough in order to have competition Horizontal agreement/parallelism: clear distinction between oligopolistic collusion/concerted behavior

Chicago/3: efficiency of bundling A bundle of two products is effectively a way of offering discount to customers who buy one of your product, since customers can buy the other product at a lower price than the stand-alone price. Do you want to offer a discount on the other product to customers who buy one product? Why? Price discrimination/efficiency, allocation of common costs

Chicago 4: efficiency of tying Tied Sales: Tying is the practice of requiring the purchaser of one product to also purchase a second product. In the static tied-sale, the customer who wants to buy A must also buy B. It is possible to buy B without A which explains why this is a tie and not a bundle. Thus, the items for sale are B alone or an A-B package. There are many legitimate reasons why firms resort to tied sales. One motivation that leads to an antitrust concern is when the tied sale is used as a device to facilitate price discrimination.

Chicago/3: irrationality of excessive/predatory pricing Excessive pricing: What is that? Should we inhibit monopolistic pricing? Discrimination: it may improve economic efficiency Predatory pricing: you will pay tomorrow today’s policy (the rational agent always accommodate efficient entry) The rational monopolist will never have any incentive to start those actions

Chicago/4: market vs regulations Rent-seeking/1, Posner (monopoly as a positional good): Increase in dead-weight loss. Forced competition may actually reduce social welfare Rent-seeking/2 Tullock: Antitrust authority are not automatically managed but they are the result of ‘hidden’ influences Rent-seeking/3 Peltzman: Politicians divert economic efficiency towards political aims ANTITRUST PARADOX: A LAW AT WAR WITH ITSELF (Bork, 1978) Anti-trust should focus on ex-post analysis in specific cases and only by applying a rule of reason

The second revolution: Post-Chicago Efficiency of vertical separation (accounting, proprietary) Creation of new markets for access to Essential Facilities Strategic Barriers to entry (defensive leveraging) Dynamic (in)efficiency

Post-Chicago/1 Efficiency of vertical separation (accounting, proprietary) even if it increases transaction costs Incumbent operators in network industries are owners of essential facilities Essential facility: essential, not substitutable, easy to share (a test should be very careful: Magill, Oskar Bronner, FS/GWG, IMS ) Essential facility doctrine (property rights ex-post re-definition, creation of a market for access priced on avoidable costs) Internal/External discrimination (Telecommunications, Electricity, Railways)

Owner of the Asset Essential Asset consumers Downstream Competitors Regulation Access price Accounting monitoring Price squeeze test Antitrust Costs / Benefits

Post Chicago/2 Defensive leveraging: bundling, tying, target rebates are strategies aimed at increasing rivals’ costs in downstream markets in order to defend upstream monopolies (Microsof US, EU) The case of Bork Generally speaking NIE&TCE assume exogenous outside options, while firms can affect market dynamics in order to change the rule of the game and contractual power at the renegotiation stage TC should include the costs to compete (to affect market conditions)

Practices: the methodology of antitrust investigation- step 1 Relevant Market (the smallest economic context in which it is possible to raise a market power, p>cm) Cross elasticity between products and geographical areas SNTRP test (or the virtual monopolist test) Cellophane Fallacy

Practices: the methodology of antitrust investigation- step 2 ABUSE Action against consumers Action against competitors Discrimination Excessive pricing Inefficient entry Defensive leveraging

Practices: the methodology of antitrust investigation- step 2 ANTICOMPETITIVE AGREEMENT CARTELS PARALLELISM EFFECTS? Is there any economic reasons for oligopolistic equilibria on FOCAL POINTS?

Practices: the methodology of antitrust investigation- step 2 ANTICOMPETITIVE MERGERS EX-ANTE VS EX-POST REMEDIES SINGLE DOMINANCE COLLECTIVE DOMINANCE DIVESTITURE SHARED ACCESS BEHAVIORAL UNDERTAKINGS

Practices: the methodology of antitrust investigation- step 3 REMEDIES AND SANCTIONS REMEDIES SANCTIONS FUTURE ACTIONS PUNISHMENT DETERRENCE LENIENCY PROGRAMS

New challenges Behavioural L&E recently has challenged some of the basic assumptions of IO Sunk costs are not perceived as sunk Incumbents and competitors simply ignore if entry is efficient Demand is discontinuous in price and time

A possible research agenda Introducing endogenous outside options in the standard TCE approach Back to Coase/Commons: introducing competition dynamics within the notion of transaction costs Antitrust as a rule of reason for re-defining incomplete property rights What do incumbent do? Sanctions/Deterrence Strategic barriers to entry Thank you