Daniel P. O'Brien

Vertical Antitrust Policy as a Problem of Inference

The legality of nonprice vertical practices in the U.S. is determined by their likely competitive effects. An optimal enforcement rule combines evidence with theory to update prior beliefs, and specifies a decision that minimizes the expected loss. Because the welfare effects of vertical practices are theoretically ambiguous, optimal decisions depend heavily on prior beliefs, which should be guided by empirical evidence. Empirically, vertical restraints appear to reduce price and/or increase output. Thus, absent a good natural experiment to evaluate a particular restraint’s effect, an optimal policy places a heavy burden on plaintiffs to show that a restraint is anticompetitive.

Bargaining, Bundling, and Clout: The Portfolio Effects of Horizontal Mergers

We examine the output and profit effects of horizontal mergers between differentiated upstream firms in an intermediate-goods market served by a downstream monopolist. If the merged firm can bundle, transfer pricing is efficient before and after the merger. Absent cost efficiencies, consumer and total welfare do not change. If the merged firm cannot bundle and its bargaining power is sufficiently high, transfer pricing is inefficient after the merger. Absent cost efficiencies, welfare typically falls. We evaluate the profit effects of mergers for the case of two-part tariff contracts. Rival firms gain (lose) from mergers that raise (lower) downstream prices. Contrary to conventional wisdom, a merger that harms the retailer may increase welfare.

On the Dampening-of-Competition Effect of Exclusive Dealing

The authors compare and contrast the profit and welfare effects of exclusive dealing, sales through a common retailer, and vertical integration. As did Y. J. Lin (1990), the authors find that imperfectly competitive manufacturers prefer to impose exclusive dealing on their retailers. Unlike Lin, the authors find that welfare is higher under exclusive dealing than when products are sold through a common retailer. This finding suggests a new interpretation of the Standard Stations v. United States 1949 antitrust case. Copyright 1993 by Blackwell Publishing Ltd.

A Critical Analysis of Critical Loss Analysis

Critical loss analysis is often used to argue that firms with large margins have more to lose from a reduction in sales and hence are less likely to increase prices. This argument ignores the fact that profit-maximizing competitors who do not coordinate their pricing only have large margins if their customers are not very price sensitive. In this paper, we explore the implications of critical loss analysis using an internally consistent model of oligopoly. We show that, under the assumptions made in the standard critical loss analysis, firms with larger pre-merger margins are more likely to raise prices than are firms with smaller margins, other things equal. This reinforces the traditional view that mergers are more likely to harm consumers when the merging firms have greater market power, as measured by their margins. We also derive internally consistent formulas for evaluating the profitability of price increases when defining markets and evaluating unilateral effects.

All-Units Discounts and Double Moral Hazard

An all-units discount is a price reduction applied to all units purchased if the customers total purchases equal or exceed a given quantity threshold. Since the discount is paid on all units rather than marginal units, the tariff is discontinuous and exhibits a negative marginal price (“cliff”) at the threshold that triggers the discount. This paper shows that all-units discounts arise in optimal agency contracts between upstream and downstream firms that face double moral hazard. I present conditions under which all-units discounts dominate two-part tariffs and other continuous tariffs. I also examine these tariffs when the upstream market faces a threat of entry. In the case considered, all-units discounts deter entry by less efficient rivals without distorting price and investment, whereas continuous tariffs either accommodate such entry or deter it by distorting price and investment.

A Paradox in Measuring Corporate Control

The Shapley value has been proposed as a measure of the control exercised by various shareholders of the firm. Measuring control is important in the analysis of competition in industries with significant cross ownership of shares. Unfortunately, we show that the Shapley value can generate paradoxical results when ownership interests in a corporation can be held indirectly through layered corporate entities. We illustrate the problem with a couple of simple examples based on patterns of corporate ownership in the cable industry where both layered corporate entitities and cross ownership are common.

The Competitive Effects of Common Ownership: We Know Less than We Think

Recent empirical research purports to show that common ownership by institutional investors harms competition even when all financial holdings are minority interests. This research has received a great deal of attention, leading to both calls for and actual changes in antitrust policy. This paper examines the research on this subject to date and finds that its conclusions regarding the effects of minority shareholdings on competition are not well established. Without prejudging what more rigorous empirical work might show, we conclude that researchers and policy authorities are getting well ahead of themselves in drawing policy conclusions from the research to date. The theory of partial ownership does not yield a specific relationship between price and the MHHI. In addition, the key explanatory variable in the emerging research – the MHHI – is an endogenous measure of concentration that depends on both common ownership and market shares. Factors other than common ownership affect both price and the MHHI, so the relationship between price and the MHHI need not reflect the relationship between price and common ownership. Thus, regressions of price on the MHHI are likely to show a relationship even if common ownership has no actual causal effect on price. The instrumental variable approaches employed in this literature are not sufficient to remedy this issue. We explain these points with reference to the economic theory of partial ownership and suggest avenues for further research.

Conditional Pricing Practices – A Short Primer

Conditional pricing practices are pricing strategies in which a seller conditions its prices on factors such as volume, the set of products purchased, or the buyer’s share of purchases from the seller. This short primer provides a unifying overview of the economic literature that addresses these practices.

Price-Concentration Analysis: Ending the Myth, and Moving Forward

Price-concentration studies have a long history empirical industrial organization, including prominent recent examples. Although their robustness has been questioned for many years, a casual review of the literature leaves the impression that the main issue is the endogeneity of the concentration measure, and that once this is addressed, the problem is solved. This perspective ignores the bigger issue: the equations estimated in most price-concentration studies lack an economic foundation. Critiques in Economic Handbooks allude to the foundational issue, but the IO literature has not explored it in depth or discussed the implications for interpreting empirical results. This paper boils the problem down to the core issue, tackles interpretation, and discusses the way forward.