Patrick DeGraba

Downstream integration by a bottleneck input supplier whose regulated wholesale prices are above costs

We examine the consequences of allowing a bottleneck input supplier to vertically integrate downstream and compete with users of the input when the input has a regulated price above cost. If the supplier maximizes the sum of short-run profits from the downstream market and input market, then allowing the vertical integration will increase social surplus, even if it causes sellers of competing differentiated products to exit the market. If the bottleneck supplier wishes to engage in predatory pricing, increasing the regulated price of the input above cost reduces the incentive to engage in predation. These questions are motivated primarily by assertions made in the public record that allowing Bell Operating Companies into long distance can be harmful if access rates are above cost. Copyright 2001 by the RAND Corporation.

Intertemporal Mixed Bundling and Buying Frenzies

By initially selling goods only in bundles and subsequently selling unsold units individually, a multiproduct seller can create a buying frenzy in which his profit is higher than it would be if he sold all units individually at their market clearing prices. In this frenzy, high-valuation customers buy a bundle because they expect quantity rationing when units are sold individually. Their purchases reduce the quantity to be sold individually, causing the shortages that result in rationing. The bundles price exceeds the sum of the individual prices, a fact observed in markets for rock concert tickets.

Ideological Persuasion in the Media

Media outlet owners can modify their outlets content so as to persuade audiences to adopt positions consistent with their preferred ideologies. In this paper, we assume that outlet owners value such persuasion, and therefore will engage in it at the cost of some reduction in profits. We compare the level and diversity of persuasion that occur under two regimes: one in which common ownership of media outlets is prohibited and the other in which it is permitted. We show that mergers between outlets whose owners have identical ideologies increase the level of persuasion, and mergers between outlets whose owners have different ideologies can increase or decrease the level of persuasion. We also show that unrestricted market competition does not necessarily generate diversity, that prohibiting monopoly control over the media does not guarantee diversity, and that, while rules prohibiting monopolization can sometimes promote diversity, in some circumstances these rules can also reduce diversity. This can occur because potential owners care about who will acquire an outlet if they do not.

Volume Discounts, Loss Leaders and Competition for More Profitable Customers

When some customers are more profitable to serve than others, one might expect sellers to compete more vigorously for the more profitable customers. One way sellers might do this is to sell goods that are purchased primarily by the most profitable customers using a lower mark-up than on other goods. This allows the firms to give discounts to more profitable customers without offering them to less profitable customers. This paper presents a model in which competing multi-product firms facing customers that purchase different quantities of goods, set prices in this manner. This model suggests a theory of multi-product pricing in which the mark up on any particular product is inversely related to the average profitability of the customer that purchases the good. One interesting implication of this paper is that loss leader pricing might be viewed as a way for firms to compete more vigorously for more profitable customers. Such an explanation offers another characteristic of products that should be used as loss leaders. This explanation provides potentially testable implications about the types of goods that can (or ought to) be used as loss leaders and can explain why grocery stores sell turkeys as loss leaders at Thanksgiving and lower the price of eggs at Easter, but not flowers on Mothers Day, or candy on Valentines Day.

A Bottleneck Input Supplier's Opportunity Cost of Competing Downstream

Should the supplier of a bottleneck input be prevented from vertically integrating downstream unless the (perhaps regulated) price of the input is set equal to costs? This issue has arisen with respect to the entry of incumbent local exchange carriers into the provision of long distance services. While competitors (and likely society) would prefer the bottleneck facility to be priced at marginal cost, this paper shows that entry by the bottleneck supplier when its price exceeds marginal cost will typically be welfare improving. The intuition is that the integrated firm behaves as if its marginal cost of the bottleneck input is lower than the price of the input, which results in lower prices, and increased welfare. This effect outweighs the potential distortions in the market caused by the artificial cost difference between the integrated firm and its competitors, and under plausible conditions can outweigh the effects of a competing firm exiting the market as a result of the integration.

Theories of Harm in the Intel Case

Over the past several years, government competition agencies and private plaintiffs have sued Intel challenging the legality of its relationships with original equipment computer manufacturers (“OEMs”). These lawsuits have combined to produce a detailed account describing Intel’s relationships with OEMs and analyzing the competitive effects of these relationships. This paper uses the public evidence in this account as a starting point for further analysis of both competition in downstream markets and the structure of Intel’s contracts with OEMs. By presenting this additional analysis, this paper seeks to better identify the circumstances under which exclusive contracts can lead to anticompetitive harm.

Reviewing Wireless Mergers Providing Clarity on How to Evaluate Competition, Efficiency, and the “Public Interest”

The Federal Communications Commission can improve the transparency of its decision process by establishing a set of guidelines for its review of mergers. Its current process is opaque, and parties cannot discern the weights that it places on “public interest” goals in some areas and how those balance against harms in other areas. The antitrust agencies’ Merger Guidelines provide an example of how the Commission could signal more clearly its analytical process and push for more efficient remedies and lessen political pressure to undertake inefficient trade-offs such as requiring build out to areas unaffected by changes in competition due to a merger.

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.