Jeffrey H. Fischer

The Economics of Price Zones and Territorial Restrictions in Gasoline Marketing

We review explanations for two controversial vertical restraints commonly used in gasoline marketing: price zones and territorial restrictions. After a discussion of the relevant empirical and theoretical economics literature, we consider procompetitive and anticompetitive theories behind the practices. Price zones may be one part of a complicated relationship between gasoline marketers and retailers that facilitates efficient risk-sharing, provides optimal incentives for marketers and retailers, and allows marketers to react more quickly to changes in localized retail competition. Alternatively, if gasoline marketers have substantial market power, price zones may facilitate coordination or help deter entry. Territorial restrictions may prevent inefficiencies in distribution and reduce free-riding on investments marketers make in developing networks of retail stations. At the same time, territorial restrictions help marketers maintain price zones (with the same welfare implications), and may, if marketers have substantial market power, facilitate coordination.

Market Definition - Still Needed after All These Years

The 2010 Merger Guidelines appear to elevate game theoretic models of competitive concerns to the primary concern of merger policy, while reducing the importance of market definition. Although situations in which this change makes some sense exist, we observe that, as a practical matter, market definition is still required. Some basic understanding of the market’s contours is necessary to aid the decision maker in the choice among the relevant competitive effects models. Simply assuming that a specific theoretical analysis is correct is not scientific. Proponents of the view that markets are unnecessary rely on game-theoretic models that implicitly presume a particular competitive algorithm to create a viable alternative. Yet to displace the standard model of competitive analysis, a game theoretic model of competition requires both parameterization (estimation of the relevant coefficients) and testing (analysis of the implications of the model). Once a game theoretic model is tested, it becomes just one more Chicago-based analysis of the likely effects of a merger. Thus, theoretical considerations alone cannot eliminate the desirability of defining an antitrust market. Our review of the empirical data from Federal Trade Commission (FTC) merger investigations substantiates the potential for different market modeling structures to be applied to evaluate competition. Support for three different modeling structures (homogeneous product, static differentiation, and dynamic differentiation) is found in both a review of the court records and the FTC case studies. Choice among these modeling structures requires case-by-case analysis.

Why Can’t We All Just Get Along: Structural Modeling and Natural Experiments in Merger Analysis

Economists have two basic methodologies: structuralism, in which formal economic models control the analysis, and experimentalism, in which economic theory guides the analysis, but data from experiments determines the policy recommendation. The choice between the two approaches is often quite controversial, although each approach has its own strengths and limitations. Under either approach, the scientific method requires testing and, when choosing between models with comparable empirical support, verification. We describe how these approaches play out in merger analysis; where Cournot and Bertrand models of competition are the standard Structuralist tools. In contrast, Experimentalists generally search for some type of evidence of a relationship between structure and market performance. Which methodology is superior for merger analysis depends first on empirical testing of the relevant theories and then on how closely the facts of the market match the assumptions of the relevant economic theory and how much precision the analysis requires to generate a useful conclusion. We illustrate these tradeoffs with examples from three recently-litigated cases.

Do Private Income Transfers Increase Labor Market Risk

Previous work on the effects of private income transfers has been confined to intra-family interactions. One implication of this work is that such transfers benefit recipients by insuring against labor market risks. Allowing for equilibrium labor market responses, however, one would expect the aggregate level of transfers to affect the distribution of wages across states of nature. In a two-state model of private income transfers with a labor market, we find that such transfers increase the volatility of wages. As a result, the equilibrium level of transfers exceeds the socially optimum level of transfers.

Daubert, Science, and Modern Game Theory: Implications for Merger Analysis

To be admissible in federal court under the Daubert standard, expert economic testimony must (1) be based on scientific analysis and (2) aid the dispute resolution process. Expert evidence should be considered scientific when (1) it meets Karl Poppers falsification standard and (2) some evidence compatible with the scientific proposition is provided. Standard competitive and monopoly models are well supported in the literature and therefore would generally meet this standard, while structuralism clearly fails the test. Modern game-theoretic analysis focuses on either collusion (coordinated interaction) or unilateral effects but only raises the possibility of a merger-related competitive problem and thus must be supported with case-specific evidence to be considered scientific. Economic evidence underpinning game-theoretic analysis can involve either a “systematic” study of competition in a market or a narrow “shock” analysis of a specific economic event. When both parties to a merger dispute provide evid...