Bruce Lyons

Specific investment, economies of scale, and the make-or-buy decision: A test of transaction cost theory

This paper develops empirical tests of three hypotheses arising from transaction cost theory, as developed by Oliver Williamson. Evidence is provided from a new dataset on 178 inputs gathered from UK engineering firms. The probability of buying-in specialised inputs is higher if the production technology is non-specific, but only if there are economies of scale or scope. Furthermore, the economies of scale/scope effect is much reduced in the presence of specific assets. This interactive hypothesis has not been formally tested before. We also believe this to be the first cross-section empirical test of transaction cost make-or-buy theory using European data.

A New Measure of Minimum Efficient Plant Size in UK Manufacturing Industry

factor in studies of industrial economics since Bains seminal work on barriers to new competition (Bain, 1956). The weight of empirical evidence (see the studies cited in Section II below) indicates that long-run average cost curves are horizontal over large ranges of output; in which case the point at which they are first minimized becomes important in determining, among other things, the barriers to entry into an industry. Four deterrent effects of minimum efficient size on entry may be identified. (a) The larger the minimum efficient plant size (henceforth, MESP) in relation to the size of the market, the greater are the difficulties of attracting enough customers away from their existing suppliers to reap full production economies. (b) For any given price elasticity of demand, an entrant will reduce the price of the product more, and/or provoke greater retaliation by existing firms, the greater is the size of his addition to productive capacity (as determined by the MESP in industry).

Industrial Concentration and Market Integration in the European Union

Unlike previous cross-section studies which test predictions from the theory of industrial structure, we do not make an ex ante assumption about the geographical market at which competition takes place. We develop an econometric technique that endogenously determines whether the EU or member state is the appropriate market level for each industry, while also estimating a structural model of concentration and market size. Another novelty is that we use European national as well as aggregate EU data. Strong support is found for the importance of endogenous fixed costs in the theory of market structure. Copyright 2001 by The London School of Economics and Political Science

Small Subcontractors in UK Engineering: Competitiveness, Dependence and Problems

This paper reports the results of a new survey of small subcontractors in UK engineering. We are able to characterise the main source of competitive advantage as being experience with a particular technology. Labour flexibility, but not cheap labour, is also a necessary condition for success. There is a clear trend towards limited concentration of one third of all output with the single most important customer. More negatively, there is evidence for substantial avoidance of ideal, relationship specific investments, and for lack of communication and trust. This is despite the fact that most subcontractors are located close to their customers and have been serving them for many years.

Cases in European Competition Policy: the Economic Analysis

List of figures List of tables List of contributors Preface Introduction: the transformation of competition policy in Europe Bruce Lyons Part I. Anticompetitive Behaviour by Firms with Market Power: Introduction Section 1. Abuse of a Dominant Position: 1. Michelin II: the treatment of rebates Massimo Motta 2. Interoperability and market foreclosure in the European Microsoft case Kai-Uwe Kuhn and John Van Reenen Section 2. Market Investigations: 3. Mobile call termination in the UK: a competitive bottleneck? Mark Armstrong and Julian Wright 4. Relationship between buyer and seller power in retailing: UK supermarkets (2000) Paul Dobson Part II. Agreements Between Firms: Introduction Section 1. Cartels: 5. The graphite electrodes cartel: fines which deter? Morten Hviid and Andreas Stephan 6. Assessment of damages in the district heating pipe cartel Peter Mollgaard Section 2. Other Horizontal Agreements: 7. Interchange fees in payment card systems: price remedies in a two-sided market Jean-Charles Rochet 8. The orders and rules of British horseracing: anticompetitive agreements or good governance of a multi-sided sport? Bruce Lyons Section 3. Vertical Agreements: 9. Efficiency enhancing or anticompetitive vertical restraints? Selective and exclusive car distribution in Europe Frank Verboven 10. Beer - the ties that bind Michael Waterson 11. Parallel trade of prescription medicines: the Glaxo dual pricing case Patrick Rey and James Venit Part III. Mergers: Introduction Section 1. Measurement of Unilateral Effects: 12. A merger in the insurance industry: much easier to measure unilateral effects than expected Christian Gollier and Marc Ivaldi 13. Merger simulations of unilateral effects: what can we learn from the UK brewing industry? Margaret Slade Section 2. Coordinated Effects: 14. The ups and downs of the doctrine of collective dominance: sing game theory for merger policy Eliana Garces-Tolon, Damien Neven and Paul Seabright 15. Capacity constraints and irreversible investments: defending against collective dominance in UPM Kymmene/Norske Skog/Haindl Kai-Uwe Kuhn and John Van Reenen Section 3. Vertical and Conglomerate Effects: 16. Vertical effects between natural gas and electricity production: the Neste/IVO merger in Finland Rune Stenbacka 17. Horizontal, vertical and conglomerate effects: the GE/Honeywell merger in the EU Xavier Vives and Gianandrea Staffiero Index.

Mergers and Merger Remedies in the EU

Headlines are made when the European Commission prohibits a merger, but this is actually very rare. Clearances subject to conditions (i.e. remedies) happen ten times as frequently, but have received far less attention in academic literature. This book provides an empirical assessment of the effectiveness of merger remedies, employing a novel simulation methodology based on formal economic theory. The authors were given unprecedented access to data available to case handlers, concerning a range of remedied mergers covering 21 markets. Using this they have adapted simple simulation techniques to appraise the competitive effects of these mergers and the impact of potential and actual remedies. Ex-ante results are then compared with ex-post impact to examine the actual effectiveness of remedies. The results provide a critique of both simple market share analysis and remedy design. This research thus contributes to economics research and practical merger policy.

The Paradox of the Exclusion of Exploitative Abuse

Monopoly pricing is a textbook market failure that is taught in the first year of any economics course. The implied welfare loss (or ‘exploitative abuse’) justifies a whole range of competition policy towards cartels, mergers and regulated industries. Yet there is widespread hostility to prosecuting the same exploitative abuse in the textbook monopoly case (i.e. under Article 82EC)! This paper seeks to understand this paradox. I conclude that, while there are important problems with prosecuting Article 82 exploitation cases (because of problems relating to measurement, market dynamics, multi-sided markets and remedy issues), it is important to keep open the possibility of prosecution; for example, in the forthcoming Article 82 Guidelines.

Strategic bargaining and vertical separation

Current theories of the vertical limits to firm size emphasize the consequences of opportunistic behavior by managers. The authors introduce opportunistic wage setting by labor unions and trace the implications for profit and investment in specific assets. Although subcontracting to an independent supplier leaves the entrepreneur with a reduced share of the surplus, he is able to pass on the responsibility for making certain investments. Two significant results are that either subcontracting or vertical integration may be privately preferred yet socially inefficient; and there is no straightforward relationship between organizational choice and specific capital intensity. Copyright 1991 by Blackwell Publishing Ltd.

Early Settlements and Errors in Merger Control

We develop a model of remedy offers made to an expert agency which has powers to act before any harm is experienced and is required to decide on the basis of tangible evidence. The model provides a relationship between the factors determining the probability of delay and the type of error in early settlements (i.e. insufficient versus excessive remedy). We apply the model using data from European Commission merger settlements. Our econometric analysis confirms the importance of delay costs and the uncertainty associated with the agency’s findings. Our results are also consistent with the prediction that delay is not systematically related to the inherent competitive harm of the merger proposal. We use our results to identify specific cases of insufficient remedy in early settlements.

What Do We Conclude from the Success and Failure of Mergers

Tichys review of the evidence presents at best a very mixed picture of the “success” of mergers as a corporate strategy. However, care should be taken not to interpret this as a case for crudely prohibitive competition policy. A simple framework is developed to show that mergers anticipating market changes might not be inappropriate, even when ex post results will appear disappointing. We argue that the competition authorities should protect consumers, and not provide management consultancy on behalf of shareholders. We suggest a more limited reform of the EC Merger Regulation than that proposed by Tichy.