Chiara Fumagalli

On the Welfare Effects of Competition for Foreign Direct Investments

This paper studies the effects of subsidy competition for the location of a multinational enterprise (MNE). We assume that a (poorer) region enjoys larger gains from the positive externalities associated with the inward investment but that the MNE would find it more profitable to locate to the other (richer) region, subsidies being equal. In this setting, subsidy competition can improve aggregate welfare relative to a policy that bans grants because it gives the chance to the region that needs it more to attract the investment. The paper analyses under which conditions this is the case, assuming either that the multinational a priori decided to invest abroad or that exports are a feasible alternative to FDI. The welfare effects of subsidy competition can, accordingly, be extremely different.

A Simple Theory of Predation

We propose a simple theory of predatory pricing, based on scale economies and sequential buyers (or markets). The entrant (or prey) needs to reach a critical scale to be successful. The incumbent (or predator) is ready to make losses on earlier buyers so as to deprive the prey of the scale it needs, thus making monopoly profits on later buyers. Several extensions are considered, including markets where scale economies exist because of demand externalities or two-sided market effects, and where markets are characterised by common costs. Conditions under which predation may take place in actual cases are also discussed.

Buyer power and quality improvements

This paper analyses the sources of buyer power and its effect on sellers’ investment in quality improvements. In our model retailers make take-it-or-leave-it offers to a producer and each of them obtains its marginal contribution to total profits (gross of sunk costs). In turn, this depends on the rivalry between retailers in the bargaining process. Rivalry increases when retailers are less differentiated and when decreasing returns to scale in production are larger. The allocation of total surplus affects the incentives of the producer to invest in product quality, an instance of the hold-up problem. An increase in buyer power not only makes the supplier and consumers worse off, but it may even harm retailers, that obtain a larger share of a smaller surplus. A repeated game argument shows that efficient quality improvements can be supported as an equilibrium outcome if the producer and retailers are involved in a long-term relationship.

On the Anticompetitive Effect of Exclusive Dealing When Entry by Merger is Possible

We extend the literature on exclusive dealing by allowing the incumbent and the potential entrant to merge. This uncovers new effects. First, exclusive dealing can be used to improve the incumbents bargaining position in the merger negotiation. Second, the incumbent finds it easier to elicit the buyers acceptance of exclusivity. Third, despite allowing the more efficient technology to find its way into the industry, exclusive dealing reduces welfare because (i) it may trigger entry through merger whereas independent entry would be socially optimal and (ii) it may deter entry altogether.

Exclusive Dealing: Investment Promotion May Facilitate Inefficient Foreclosure

This paper studies a model whereby exclusive dealing (ED) can both promote investment and foreclose a more efficient supplier. Since ED promotes the incumbent sellers investment, the seller and the buyer realize a greater surplus from bilateral trade under exclusivity. Hence, the parties involved may sign an ED contract that excludes a more efficient entrant in circumstances where ED would not arise absent investment. The paper therefore invites a more cautious attitude towards accepting possible investment promotion arguments as a defense for ED.

Exclusive Dealing: The Interaction between Foreclosure and Investment Promotion

This paper studies a model where exclusive dealing (ED) can both promote investment and foreclose a more efficient supplier. While investment promotion is usually regarded as a pro-competitive effect of ED, our paper shows that it may be the very reason why a contract that forecloses a more efficient supplier is signed. Absent the effect on investment, the contract would not be signed and foreclosure would not be a concern. For this reason, considering potential foreclosure and investment promotion in isolation and then summing them up may not be a suitable approach to assess the net effect of ED. The paper therefore invites a more cautious attitude towards accepting possible investment promotion arguments as a defence for ED.

Insurance Between Firms: The Role of Internal Labor Markets

Exploiting matched employer-employee data allowing us to follow individual job-to-job transitions, merged with information on the ownership structure of business groups, we document that French groups actively operate Internal Labor Markets (ILMs). For the average group-affiliated firm, the probability to absorb a worker from the group’s internal labor market exceeds by 9 percentage points the probability to hire a worker employed outside the group. This average figure hides substantial heterogeneity: ILM activity is higher in more diversified groups, in groups experiencing plant/firm closures and is highest for high-skill occupations. We also find that closure events boost the proportion of separating workers redeployed to group affiliated partners (as opposed to external labor market partners) relative to normal times, spurring ILM activity mainly for blue collar occupations. Overall, these findings suggest that groups respond to idiosyncratic shocks disproportionately relying on ILMs because they allow to save on search costs for human capital intensive occupations, while reducing firing costs for the more unionized occupational categories. Finally, we find that upon closure events the ILM reallocates displaced employees more intensely to larger and healthier groups units, and less intensely to highly levered and financially distressed units.

Tying, Bundling and Bundled Rebates

Introduction This chapter focuses on a relatively common business practice, that of selling two or more (different) products in combination. Products are often sold together in the marketplace. In fact, the distinction between a product and its components is often very blurred: cars come with a steering wheel (among many other features), wine bottles with a cork, smart phones with a battery. Firms can combine their sales in many different ways, as we describe next. Pure bundling refers to the case in which a firm only offers the bundle as a package. Think of a hard drive, a keyboard, a screen and a touch pad all embedded in a laptop. Think also of a pay-TV contract offering a number of pre-packaged bundles of channels. A firm, instead, engages in tying when it makes the sale of one of its products (the tying product) conditional upon the purchaser also buying some other products from it (the tied product(s)). A well-known example, that we will discuss in Section 4.7, has been Microsofts former practice of selling its Windows operating system (the tying product) only in combination with the Internet Explorer (the tied product). Note that, differently from pure bundling, users could buy Internet Explorer as a stand-alone product, but could not obtain Windows without Explorer. In this example, the two goods are sold in a fixed, one-to-one, proportion. In the case of variable proportions, sometimes known as requirement tying , it is left to the buyer to decide on the respective quantities. A frequent example is the requirement that purchasers of a firms machine, say a printer or a copier, buy also consumables (for example, ink cartridges and toners) or after-sale services from the same firm. Tying may be also equivalent to full-line forcing , that is, to the case in which a manufacturer supplies a product (or some products) to a buyer (say to a retailer) conditional on the retailer purchasing the whole range of products offered by that manufacturer. Mixed bundling refers to the situation where a firm, besides offering the package of products at a given price, also supplies the individual products separately. Examples abound across industries. In the telecommunications and media industry, for example, many firms offer bundled packages of voice, internet access and TV (sometimes known as ‘triple play’), but also sell these services independently.

Price Discrimination and Single-Product Rebates

Introduction Chapter 1 deals with predatory pricing, that is, typically, low prices offered by a dominant firm across the board , to all of the customers who are buying a certain product at a given point in time. In this chapter we discuss, instead, the possible exclusionary effects of price discrimination in its various forms (including different types of rebates and discounts).We also suggest, based on the economic theories reviewed, a possible approach that competition authorities may want to follow when considering instances of potentially anti-competitive rebate schemes. Differently from predation, in this chapter we focus on low prices offered to specific buyers, or for specific units demanded by buyers. Some forms of price discriminationmay also be conditional on buying different products, but we shall deal with bundled discounts in Chapter 4. This chapter proceeds as follows. In Section 2.2 we first define price discrimination and discuss its welfare effects in general, that is, when exclusion is not an issue. In Section 2.3 we study the circumstances under which a dominant incumbent firm may use price discrimination (in its different forms) to exclude a rival, and show that the more individualised and targeted the discrimination the more likely that it will have exclusionary effects all else equal. In technical Section 2.4 we formalise the analysis of exclusionary discrimination. In Section 2.5 we draw policy implications from the theory. In Section 2.6 we discuss key decisions by competition authorities and landmark case-law. Finally, in Section 2.7, we discuss a few antitrust cases investigated in different jurisdictions and seek to interpret them in light of some of the models reviewed in this chapter. Price Discrimination,Welfare and Efficiencies Forms of Price Discrimination Price discrimination consists of different consumers paying different unit prices for the same good, when it costs the firm the same amount to produce and serve these consumers (or, more generally, when prices are at different ratios to marginal costs). It is a very widespread phenomenon and in practice it may take different forms, as we shall discuss below. Economists typically distinguish three types of price discrimination. First-degree price discrimination refers to a theoretical situation in which a firm knows exactly each consumers valuation (or willingness to pay) for its product and charges her the price which equals her valuation, thereby extracting all her surplus.

On the Use of Price-Cost Tests in Loyalty Discounts and Exclusive Dealing Arrangements: Which Implications from Economic Theory?

Recent cases in the US (Meritor, Eisai) and in the EU (Intel ) have revived the debate on the use of price-cost tests in loyalty discount cases. We draw on existing recent economic theories of exclusion and develop new formal material to argue that economics alone does not justify applying a price-cost test to predation but not to loyalty discounts. Still, the latter contain features (they reference rivals and allow to discriminate across buyers and/or units bought) that have a higher exclusionary potential than the former, and this may well warrant closer scrutiny and more severe treatment from antitrust agencies and courts.