Luke Garrod

Price Transparency and Consumer Naivety in a Competitive Market

Despite intense price competition firms obfuscate product information when it is relatively costless to reveal, contrary to neoclassical predictions. This paper considers whether firms can profitably conceal (part of) their prices for a homogeneous product when consumers differ in their ability to form expectations of market prices. The model shows that the ability to conceal prices but still attract naive consumers dampens competition and allows prices to be set above marginal cost. This suggests that the European Commission was correct to pass regulations that require airlines to set prices inclusive of taxes, fees and charges, because alternative policies of educating a proportion of naive consumers to become sophisticated or assisting consumers to search the market more effectively could increase prices in some situations.

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.

Collusion Under Imperfect Monitoring with Asymmetric Firms

We explore the effects of asymmetries in capacity constraints on collusion where market demand is uncertain and where firms’ sales and prices are private information. We show that all firms can infer when at least one firms sales are below some firm‐specific ‘trigger level.’ When firms use this public information to monitor the collusive agreement, price wars may occur on the equilibrium path. Symmetry facilitates collusion but, if price wars are sufficiently long, then the optimal collusive prices of symmetric capacity distributions are lower on average than the competitive prices of asymmetric capacity distributions. We draw conclusions for merger policy.

Early Settlement in European Merger Control

We analyse the determinants of early settlement between merging parties and the European Commission over remedies that remove concerns of anticompetitive effects. This extends the previously narrow range of econometric literature on early settlement. Consistent with the theory of early settlement, our results confirm the importance of delay costs and of uncertainty, measured by the complexity of the economic analysis required for each merger. We also find a non-monotonic effect of agency resourcing, which raises questions about the Commissions efficiency in times of high case load. Econometrically, we select a sample of merger decisions in which the European Commission intervened due to concerns of anticompetitive effects, and our selection model provides estimates of the factors determining intervention by the Commission. Conclusions are drawn for public policy.

Investigating Motives Behind Punishment and Sacrifice: A Within-Subject Analysis

We analyse an experiment that observes each subject’s behaviour for both roles in the ultimatum and dictator game, and two modified ultimatum games where in the event of a decline the proposer and responder receive a λ- and (1-λ)-share of their proposed payoffs, respectively, where in our games λ=1 (impunity game) and λ=0 (guarantor game). It is shown that inequality aversion or self-interest cannot describe the behaviour of over 60% of subjects across a number of roles given reasonable levels of error, because many subjects sacrifice material payoffs without a pecuniary punishment motive and some punish when the proposal is not unfavourable to them. The within-subject analysis suggests that many of the former may be motivated by a willingness to avoid ‘unfair’ bargains whereas a proportion of the latter may be motivated by spite.

Surcharging as a Facilitating Practice

This paper shows how separately itemised surcharges potentially facilitate collussion during a temporary cost shock if firms commit to their duration. A duopoly model with price-matching punishments shows that if firms set higher prices they only receive punishment during the shock because they expect prices to fall in the future regardless of a deviation. When it is likely that costs will fall in the future, the price-matching punishment is too small to increase prices, so firms maintain rigid prices. When it is unlikely that costs will fall the punishment is harsh enough to sustain marginally higher supracompetitive prices. However, if firms commit to surcharges for the shocks duration they are able to set even higher prices, because surcharges effectively commit firms to a price decrease and so threaten a harsher punishment after the cost shock has ended.