Leslie M. Marx

Nasdaq market structure and spread patterns

This paper argues that the standard competitive equilibrium result that prices will be driven down to the level of marginal cost cannot be routinely applied to the NASDAQ market without explicitly taking into account the institutional features of this market. We show that price competition among a large number of liquidity-providing dealers does not necessarily reduce spreads below the marginal cost of trading plus twice the exogenously set minimum tick size. We also discuss the existing explanations for the phenomenon of the odd-eighths avoidance documented in Christie and Schultz (1994) and provide an alternative explanation based on the concept of focal-point equilibria. The proposed explanation does not rule out the possibility of overt collusion, but shows that a simple coordination device may allow market makers to select the largest competitive equilibrium spread and thus attain profits similar to those possible with a formal collusive arrangement. We show that a different coordination device may be required for low-priced stocks because of their smaller tick size. Finally, we examine one month of data on NASDAQ quotes to illustrate the ideas of the paper. In particular we show that the frequency of odd-eighths avoidance increases dramatically as the minimum tick size declines. We also document that in our sample complete odd-eighths quotes avoidance tends to significantly increase the spread for otherwise comparable stocks.

Payments for Order Flow on Nasdaq

We present a model of Nasdaq that includes the two ways in which marketmakers compete for order flow: quotes and direct payments. Brokers in our model can execute small trades through a computerized system, preferencing arrangements with marketmakers, or vertical integration into market making. The comparative statics in our model differ from those of the traditional model of dealer markets, which does not capture important institutional features of Nasdaq. We also show that the empirical evidence is inconsistent with the traditional model, which suggests that preferencing and vertical integration are important components in understanding Nasdaq. Copyright The American Finance Association 1999.

Slotting Allowances and Scarce Shelf Space

Slotting allowances are payments made by manufacturers to obtain retail shelf space. They are widespread in the grocery industry and a concern to antitrust authorities. A popular view is that slotting allowances arise because there are more products than retailers can profitably carry given their shelf space. We show that the causality can also go the other way: the scarcity of shelf space may in part be due to the feasibility of slotting allowances. It follows that slotting allowances can be anticompetitive even if they have no effect on retail prices.

Predatory accommodation: below-cost pricing without exclusion in intermediate goods markets

We show that below-cost pricing can arise in intermediate goods markets when a monopolist retailer negotiates sequentially with two suppliers of substitute products. Below-cost pricing by one supplier allows the retailer to extract rents from the second supplier. Thus, the retailer and one supplier can increase their joint profit at the expense of the second supplier. We consider the welfare implications of below-cost pricing (welfare can increase or decrease as a result of below-cost pricing) and provide suggestions for when the courts should view below-cost pricing in intermediate goods markets as anticompetitive and when they should not.

Exploring Relations Between Decision Analysis and Game Theory

Many authors, including Cavusoglu and Raghunathan (2004. Configuration of detection software: A comparison of decision and game theory approaches. Decision Anal. 1(3) 131--148.) in this journal, have argued that proper modeling of the strategic interaction between players requires a game-theoretic approach as opposed to a decision-theoretic approach. We argue in this paper, however, that there are many environments in which decision analysis can deal with strategic interactions just as well, and we present equivalence results for such environments. These equivalence results allow the prescriptive decision analyst to use the standard tools that a sound decision analysis requires, including decision trees and sensitivity analysis, even when confronted with strategic settings. We further present two technical comments on the Cavusoglu and Raghunathan (2004) paper.

Carbon Allowance Auction Design: An Assessment of Options for the United States

Carbon allowance auctions are a component of existing and proposed regional cap-and-trade programs in the United States and are also included in recent proposed bills in the U.S. Congress that would establish a national cap-and-trade program to regulate greenhouse gases (“carbon”). We discuss and evaluate the two leading candidates for auction format: a uniform-price sealed-bid auction and an ascending-bid dynamic auction, either of which could be augmented with a “price collar” to ensure that the price of allowances is neither too high nor too low. We identify the primary trade-offs between these two formats as applied to carbon allowance auctions and suggest additional auction design features that address potential concerns about efficiency losses from collusion and other factors. We conclude that, based on currently available evidence, a uniform-price sealed-bid auction is more appropriate for the sale of carbon allowances than the other leading auction formats, in part because it offers increased robustness to collusion without significant sacrifice of price discovery.

Handbook of Procurement: Bidding rings and the design of anti-collusive measures for auctions and procurements

Since the mid-1990s, the enforcement of competition laws against cartels has drawn considerable attention to the means by which buyers or sellers establish and manage collusive schemes. High-profile lawsuits against cartels in the food additives and vitamins sectors have made public an unprecedented wealth of information about how cartels operate (Evenett et al. 2002). Complementing this stream of data is a modern body of scholarship that, working extensively with reported judicial decisions and other materials, has provided informative perspectives on the methods of cartel coordination.

Lessons for Competition Policy from the Vitamins Cartel

Mergers have the potential for negative social welfare consequences from increased likelihood or effectiveness of future collusion. This raises the question of whether there are meaningful thresholds for the post-merger industry that should trigger significant scrutiny by the Department of Justice or Federal Trade Commission. This paper provides empirical analysis relevant to this question. The data does not come from an industry in which there were mergers, but instead from an industry in which explicit collusion was admittedly rampant in the 1990s, the Vitamins Industry. Different vitamin products are produced by different numbers of firms, and for different vitamin products, different numbers of firms were involved in the conspiracy. In analyzing post-plea pricing, we find that duopolies continue as if the explicit conspiracy never stopped, while products with three or four cartel firms return to pre-conspiracy pricing, or lower, quite quickly. Although it is difficult to extrapolate to other industries, the evidence suggests that, by itself, a proposed reduction in the number of firms manufacturing a given product from four to three via a merger is not problematic in terms of conduct following explicit collusion. The danger of a three-firm industry is that it is close to duopoly, and the collusive benefits of duopoly appear to be sustainable well past intervention by enforcement authorities.

The ‘Google effect’ in the FCC’s 700 MHz auction

We describe and interpret bidding behavior in FCC Auction 73 for the C-block licenses. These licenses were initially offered subject to an open platform restriction, which was highly valued by firms such as Google. Google entered bids until its bids reached the C-block reserve price, thereby ensuring that the open platform restriction would be applied to the licenses. Later in the auction, other bidders outbid Google, so Google was able to trigger the open platform restriction without having to purchase any of the licenses.

Odd-eighth avoidance as a defense against SOES bandits

An earth boring bit having a cone rotatably secured to a cantilevered bearing shaft and a nozzle that discharges a jet stream of fluid having a high velocity core and a lower velocity skirt. The high velocity core is fully contained in a space bounded by the backside of the cone, bit leg, borehole wall and a radial plane tangent to the tips of the heel teeth and intermittently strikes the exposed ends of the erosion and wear resistant teeth when the cone rotates the teeth on the trailing side in and out of the jet stream. Less than half of the fluid in the lower velocity skirt strikes the surface of the cone, while the remainder continues on a path toward the wall and the borehole bottom. The centerline of the high velocity core is aimed no lower than the corner of the borehole. The jet stream is confined on more than about 75 percent of its periphery by either the cone, bit leg or the wall of the borehole, reducing undesirable recirculation and turbulence and opening a large return flow area unobstructed by a high velocity jet stream.