Maarten Pieter Schinkel

Quantifying the Scope for Efficiency Defense in Merger Control: The Werden-Froeb-Index

This paper introduces the Werden-Froeb Index (WFI) to assist in evaluating merger-specific efficiencies in horizontal mergers. The index measures the weighted average reduction in marginal costs required to restore pre-merger equilibrium prices and quantities after the (full or partial) merger is consummated. The WFI is well defined, objective and robust, and it has relatively low information requirements. We propose to use the index as a natural complement to concentration measures such as the Hirschmann-Herfindahl Index in the assessment of horizontal mergers.

Convergence of Bayesian learning to general equilibrium in mis-specified models

Abstract A central unanswered question in economic theory is that of price formation in disequilibrium. This paper lays the groundwork for a model that has been suggested as an answer to this question in, particularly, Arrow [Toward a theory of price adjustment, in: M. Abramovitz, et al. (Ed.), The Allocation of Economic Resources, Stanford University Press, Stanford, 1959], Fisher [Disequilibrium Foundations of Equilibrium Economics, Cambridge University Press, Cambridge, 1983] and Hahn [Information dynamics and equilibrium, in: F. Hahn (Ed.), The Economics of Missing Markets, Information, and Games, Clarendon Press, Oxford, 1989]. We consider sellers that monopolistically compete in prices but have incomplete information about the structure of the market they face. They each entertain a simple demand conjecture in which sales are perceived to depend on the own price only, and set prices to maximize expected profits. Prior beliefs on the parameters of conjectured demand are updated into posterior beliefs upon each observation of sales at proposed prices, using Bayes’ rule. The rational learning process, thus, constructed drives the price dynamics of the model. Its properties are analysed. Moreover, a sufficient condition is provided, relating objectively possible events and subjective beliefs, under which the price process is globally stable on a conjectural equilibrium for almost all objectively possible developments of history.

The Overcharge as a Measure for Antitrust Damages

Victims of antitrust violations can recover damages in court. Yet, the quantification of antitrust damages and to whom they accrue is often complex. An illegal price increase somewhere in the chain of production percolates through to the other layers in a ripple of partial pass-ons. The resulting reductions in sales and input demands lead to additional harm to both downstream (in)direct purchasers and upstream suppliers. Nevertheless, U.S. civil antitrust litigation is almost exclusively concerned with direct purchaser claims for (treble) damages calculated on the basis of the overcharge. Similar best practice rules are emerging in Europe. In this paper, we show that there is no structural relationship between the direct purchaser overcharge and the true harm inflicted by an antitrust violation on all of the direct and indirect purchasers and sellers in the chain of production.

Continental Drift in the Treatment of Dominant Firms: Article 102 TFEU in Contrast to § 2 Sherman Act

In this paper we compare the concepts of monopolization and abuse of dominance as in §2 of the Sherman Act and Article 102 of the TFEU, respectively. After identifying a number of distinctive features in wording and interpretation – including the special responsibility of the dominant firm, competition of the merits and protection of the competitive process – we discuss three lines of argument to explain these differences. The first builds on ordo-liberalism, with its concern for the absence of market power and for the resilience of competitive markets, which influenced EU competition law from the very beginning. The second line of argument derives from the observation that public competition law enforcement is fallible, which self-enforcement could remedy. The third argument explains some of these differences via innovation, whereby Article 102 would reflect a European perspective on innovation. We subsequently return to the underutilized EU category of exploitative abuses and argue that economic techniques developed in the context of damages litigation could open it up for future enforcement in a way that would be in line with ordo-liberal principles, properly understood.

Law and economics of criminal antitrust enforcement: an introduction

Competition laws are set to maintain and protect the competitive process and allow society to reap its fruits in the form of high quality goods and services at low prices. A working competitive process is a precious public benefi t that should be safeguarded, as it is well-established that attempts by fi rms to pervert competition cause greater overall harm than individual gain. When fi rms charge ‘supra-competitive’ prices and reduce output instead of competing on the market, consumers and economic effi ciency will suffer serious damage.1 Therefore, the primary objective of competition law enforcement is to keep market parties from being tempted to collude. It can be met both by facilitating an economic and legal structure that encourages competition and by actively policing the market for those who behave anticompetitively regardless. In particular, competition authorities seek to effi ciently deter anticompetitive behaviour through a tuned mix of enforcement mechanisms. In merger control, a trajectory of ex ante assessment and licensing serves to prevent the build-up of undesirable concentrations. Parties report their intentions to merge at their own initiative, as it is unlikely that a major merger consummated without being notifi ed and approved will go unnoticed. Little active policing or sanctioning is required to secure truthful reporting of relevant information in the required formats.2 However, anticompetitive agreements and abuses of dominance escape by their very nature the attention of the competition authorities unless actively detected. Ex post remedies and sanctions provide the mechanism to prevent such breaches of law. It is here that desk-top and ex offi cio detective work and evidence gathering is to be combined with tough punishments for violations detected.

Disequilibrium Dynamics and Aggregate Excess Demand: On a Homunculus Fallacy in Economic Theory

Modern economic theory is predominantly a theory of equilibrium. The question of how such positions of rest, in which all individual plans and expectations match, come about in larger economies is rarely addressed. The discipline has little more to offer on it than the metaphor of the “invisible hand,” the imposed “law of supply and demand,” which says that the prices of goods and services rise when their demand exceeds their supply and fall otherwise until they are equal, or at best formalizations of such price adjustments, carried out by an auctioneer-like central institution with information on aggregate excess demand. The auctioneer model is hardly convincing as an explanation of the majority of market processes in which no such central coordinator is present. By appealing to an outside entity, an “auctioneer,” with no objectives of its own, existing disequilibrium theory is furthermore at odds with the microfoundations of economics. It presupposes a level of coordination, whereas economics’ original research question is whether and how order arises in an unorchestrated society of people making their own individual plans. Moreover, despite this considerable amount of structure, the approach was able to

Discretionary Authority and Prioritizing in Government Agencies

Government agencies typically have a certain freedom to choose among different possible courses of action. This paper studies agency decision-making on priorities in a principal-agent framework with multi-tasking. The agency head (the principal) has discretion over part of the agencys budget to incentivize his staff (agents) in the pick-up of cases. The head is concerned with societys benefits from the agencys overall performance, but also with the organizations public image as formed from its case record and various non-case specific activities. Based on their talent and the contracts offered by the head, staff officials choose which type of task to pursue: complex major, yet difficult to complete cases with an uncertain outcome, or basic minor and simple cases with a much higher probability of success. The size of the agencys discretionary budget influences no t only the scale, but also the type of tasks it will engage in. Social welfare is non-monotonic and discontinuous in the agencys budget. Small changes in the budget may cause extensive restructuring from major to minor tasks, or vice versa. A budget cut can improve welfare more than extra budget would, even if resources are below the welfare-maximizing level. For lower binding budgets, the head continues to suboptimally incentivize work on complex tasks, when the agency should have shifted down to simpler tasks. Yet a reluctant head may need to be nudged with more resources to pursue productive cases. In determining the discretionary space of the agency head, government can limit the extraction of resources, but thereby also benefits less from the heads expertise. Antitrust authorities serve as one illustration of policy implications for institutional design.

Bargaining in the Shadow of the European Settlement Procedure for Cartels

In its recently implemented settlement procedure for cartels, the European Commission pledges not to negotiate the appropriate sanction. The Commission offers a take-it-or-leave-it 10% reduction of the ultimate fine only in exchange for acknowledgment of the facts. Yet there are at least three dimensions open for bargaining in cartel cases. One is the determination of the fine base to which the 10% reduction is applied. A second is the additional percentages of fine reductions that are awarded to subsequent leniency applicants. A third is the phrasing that the Commission uses in its public communications about the case – including the eventually published formal decision. The Commission’s consistent negation of any negotiation space may well be part of its bargaining strategy. The door on fine discount discussions shut, talks are channeled to the other bargaining points, where the Commission has more leeway to find an agreement. By disabling the only hard bargaining point, however, the Commission may unintentionally have put itself in a weak bargaining position. To avoid detrimental effects on the overall deterrence of cartels in Europe, the European Commission should credibly commit itself to being a tough negotiator, if not by enabling individual percentage fine reductions after all, then by embedding a binding and full independent review of all settlement proposals in the procedure.

Forced Freebies: A Note on Partial Deregulation with Pro Bono Supply Requirements

The liberalization of many former state governed natural monopolies in sectors such as electricity, railroad and telecommunications is done by partial deregulation. Typically, entry is invited into elements of the production chain, yet under strict price and quality controls. This note considers some potential welfare effects of an unconventional type of conditional deregulation, used in the electricity market in Flanders, Belgium, where the utility companies are held to deliver the households they supply a complimentary basic electricity package free of charge. It is shown that, while decreasing the number of new entrants into the liberalized market, such pro bono supply requirements can nevertheless increase net total production. A general condition for a welfare maximizing level of “forced freebies” is derived.

Tracing the Base: A Topographic Test for Collusive Basing-Point Pricing

Basing-point pricing is known to have been abused by geographically dispersed firms in order to eliminate competition on transportation costs. This paper develops a topographic test for collusive basing-point pricing. The method uses transaction data (prices, quantities) and customer project site locations to recover the basing-point(s) from which delivered prices were calculated. These bases are compared to the locations of the production mills in a test that discriminates between competitive and collusive basing-point pricing. We define a measure for the likelihood of collusion that can be used to screen industries that traditionally apply delivered pricing for the presence of cartels. We operationalize this screen with a software. The test is hard to beat for cartels using this otherwise elusive form of price-fixing. When a cartel was found to have abused the basing-point system, our method can be used to estimate antitrust damages.