‘A simple model of rank-based decision making (with implications for competition and consumer protection)’

Following on from last week’s excellent external speaker, we welcome two of CCP’s finest in the form of Bob Sugden (ECO, CCP) and Bruce Lyons (ECO, CCP) who are presenting their latest research entitled ‘A simple model of rank-based decision making (with implications for competition and consumer protection)‘. An abstract for their seminar can be found below.

Abstract

This is a sketch of a model of a market in which most but not all consumers use a rank-based decision rule to choose between products.  Various models of rank-based (or ‘relative standing’) decision-making, grounded on assumptions about mental processing, have been proposed by psychologists.  They have been offered as explanations of various phenomena in decision-making that appear as anomalous in the perspective of standard decision theory (e.g. asymmetric dominance and the compromise effect).  The novel feature of our model (which differentiates it from that of Prelec, Wernerfelt, and Zettelmeyer, 1997) is that consumers observe the market share of each product.  We explain why this assumption is plausible.  In the model, products are ranked by price (which is readily observable) and quality (which is not).  Each rank-choosing consumer has a ‘preferred’ rank by price (e.g. prefers to buy at the 25th percentile of price, defined in terms of market share).  Some proportion of consumers act on neoclassical preferences.  Under certain assumptions, the model has a unique equilibrium in which the ranking of products by price is the same as the ranking of them by quality, and all consumers act as if they had neoclassical preferences.  Thus, all results in the standard theory of oligopoly still apply.  On one interpretation, rank-choosing is an efficient heuristic for satisfying ‘true’ preferences when information is limited.  On another, it shows how regularities in behaviour at the market level can be induced even if individuals do not have well-articulated preferences.

Rank-choosing consumers are incorporated into the canonical IO model of vertical product differentiation.  We examine the conditions which would permit multiple equilibria, in some of which a ‘rogue’ high-price low-quality product may exist with positive market share of only rank-choosing buyers.  We identify competitive mechanisms that could eliminate such dominated equilibria and consider the need for consumer protection or the application of competition policy in the presence of this type of behavioural consumer.

The seminar will be taking place in the Thomas Paine Study Centre, Room 1.4 on Friday 27th September.

For further information on the CCP Seminar Series, including a programme of speakers for this semester, visit our website.

Responses to EC and BIS consultations

Two more responses to consultations were uploaded on CCP’s website at the end of last week:

Morten Hviid, Bruce Lyons, Andreas Stephan and Catherine Waddams responded to the Department for Business, Innovation and Skills, “Streamlining Regulatory and Competition Appeals: Consultation on Options for Reform”. Download this response (pdf 186KB)

Amelia Fletcher and Bruce Lyons responded to the European Commission Staff Working Document, “Towards More Effective EU Merger Control”, September 2013 Download this response (pdf 543KB)

All our consultation responses are available on our website. Find them here.

‘Unbundling the incumbent: Evidence from UK broadband’

On Friday 20th September, the CCP Seminar Series returns for the Autumn semester with another interdisciplinary line-up of presentations on competition policy and regulation.

To officially open proceedings, we are delighted to welcome Professor Tommaso Valletti (Imperial College London) who will be presenting his article on Unbundling the incumbent: Evidence from UK broadband‘ which he has written with Mattia Nardotto (University of Cologne) and Frank Verboven (University of Leuven). An abstract for his seminar can be found below.

Abstract

We consider the impact of a regulatory process forcing an incumbent telecom operator to make its local broadband network available to other companies (local loop unbundling, or LLU). Entrants are then able to upgrade their individual lines and offer Internet services directly to customers. Employing a very detailed dataset covering the whole of the UK, we find that over the course of time, many entrants have begun to take advantage of LLU. However, unbundling has little or no effect on broadband penetration, compared to those areas where the loops are not unbundled. LLU entry instead has a strongly positive impact on the quality of the service provided, as entrants successfully differentiate their products upwards compared to the incumbent. We also assess the impact of competition from an alternative form of technology (cable) which is not subject to regulation, and what we discover is that inter-platform competition has a positive impact on both penetration and quality.

For further information on the CCP Seminar Series, including a programme of speakers for this semester, visit our website.

Dr Peter Whelan publishes a case note on the CISAC judgment in the Journal of European Competition Law and Practice

In April 2013 the General Court partially annulled the Commission’s CISAC decision on the basis that there was a lack of sufficient evidence to prove a concerted practice involving copyright collecting societies. Dr Whelan‘s case note explains the judgment and analyses its future implications.

To access the case note, please click here.