CCP Research Bulletin, Issue 27 – Now available

The Summer 2014 edition of the CCP Research Bulletin is now available for download [PDF, 332KB].

Research Bulletin (Summer 2014)

Articles in Issue 27 include:

‘At last, a competition inquiry for energy – will it bring relief or disappointment?’ (Catherine Waddams)

‘Differentiated tax on differentiated products markets’ (Anna Rita Bennato and Franco Mariuzzo)

‘The processes for regulatory appeals: One size does not fit all’ (Despoina Mantzari)

‘Do small business customers need more buyer protection?’             (Amelia Fletcher, Antonios Karatzas and Antje Kreutzmann-Gallasch)

‘What happens when collusive firms try to avoid antitrust punishment?’ (Subhasish M. Chowdhury and Frederick Wandschneider)

‘The use of general merger control in English healthcare’ (Mary Guy)

Plus: News from CCP, upcoming events and our book launch.

Live comments from the CCP Summer Conference 2014 – Day 2 close

Steve Davies, Amelia Fletcher and Morten Hviid closed the conference with thanks to the speakers and the audience, and with a preview of some of the themes for 2015’s conference on “Competition in the Digital Age”: internet platforms, roles and structures, effect of social media on search and information flows, impact of social media on consumer behaviour and discovery processes in the digital age.

This brings us to the end of this year’s CCP Summer Conference. It has been an exciting two days discussing important issues relating to problem markets.

We hope that you have enjoyed it and join us for 2015’s theme of competition in the digital age.

Live comments from the CCP Summer Conference 2014 – Session 9

Session 9: Debate:

“This house believes that interventions which go beyond standard antitrust and consumer law have a valuable role to play in tackling problem markets”

The motion was debated by an eminent mix of consultants and practitioners in economics (Mike Walker (Competition and Markets Authority) and Adrian Majumdar (RBB Economics)) and law (Anneli Howard (Monckton Chambers) and Niamh Dunne (Fitzwilliam College, Cambridge))

The debate opened with the clarification that “going beyond standard antitrust and consumer law” involved three specific areas:

  1. Market investigations (including remedies);
  2. Antitrust settlements short of decision;
  3. Advocacy to discourage anticompetitive political announcements.

The arguments in favour of non-standard intervention in problem markets include the great importance of these markets to ordinary consumers. According to estimates of the net benefits of competition policy in the UK, the net benefits of market investigations dwarf those of standard competition law. From a legal perspective, concerns arise because the focus of antitrust law is individual conduct, not whole markets. Furthermore, although a binary choice existed between ex ante price regulation and ex post antitrust, the latter became the default option. However, there are now more sophisticated regulatory mechanisms. The question of which tool is most suitable therefore arises.

Opponents of the motion were concerned that such tools gave policymakers extremely wide-ranging powers to redesign markets, potentially causing catastrophic damage. Audience members were warned to “beware the tinkering of deranged economists.” The severe consequences associated with certain types of behaviour which firms may not know to be problematic may lead to the overdeterrence of socially beneficial behaviour. From a legal perspective, concerns about compliance with the rule of law, legitimacy and legal certainty arise.

Debate

Live comments from the CCP Summer Conference 2014 – Session 8

Session 8: Competition with Divergent Public Policy Concerns:

Rachel Griffith (Institute of Fiscal Studies and University of Manchester) discussed government intervention in food markets, which deliver what consumers demand but nevertheless raise public policy concerns. These concerns typically focus on obesity and diet-related disease, such as poor nutrition for both adults and children. Rachel elaborated the role for government intervention based on externalities (which can be small), information failures (both in terms of information availability and consumers’ willingness or ability to process information) and market power. She then discussed possible policy options, from education and fiscal measures to “nudge” policies, which try to alter incentives and choices presented to consumers. The effectiveness of these policies, however, depends on aims and the resulting market equilibrium. In a study conducted in cooperation with the IFS of bans on advertising junk food, Rachel estimates demand and supply in the UK crisps market with structural parameters that simulate counterfactual situations. She finds that banned advertising would lead to tougher price competition but the crucial welfare condition can be vague as the effect of advertising is not clear.

Session 8 - Rachel 2

 

Live comments from the CCP Summer Conference 2014 – Session 7

Session 7: Thin Markets and Market Manipulation:

Rosa Abrantes-Metz (Global Economics Group and NYU Stern School of Business) examines market manipulation in the financial services industries, with focuses on financial benchmark and credit ratings. Evidence has been found on individual quotes for undisclosed financial benchmark, which indicates flawed benchmark structure LIBOR and some other structure concerns. With examples of gold and silver, Rosa suggests that the problem of manipulation is worsen with a lack of independent monitoring. According to her, the signs of structure failure are obvious, and possible solutions include appropriate structure targeting specific flaws and market screening.

Regarding credit rating, she argues with identification of the underlying causes that the problem is “rating shopping,” where issuers seek out credit rating agencies (CRAs) which rate their products well. Effective policies should be addressed to solve this problem, and calls for “market share caps” would not be part of them. There are worries on the quality of ratings especially in structured finance. Structure finance ratings have been “inflated” as a result of monopsony power that clearly affects the ratings by CRAs. A unanimity of opinion at a more liberal level would encourage CRAs to reveal truthful ratings.

A main message that Rosa tries to deliver is that in both markets discussed, there seems to be a misdiagnosis to the weakness of the structure. If this misdiagnosis problem is not fixed, proper policies could not be addressed and problems would be worsen.

CCP Session 7 - Rosa

Mike Waterson (University of Warwick) gives a very critical view of regulation in the UK electricity market. While viewing the original 1990 vision of privatisation as “pioneering,” the response to problems has been delayed, piecemeal and performed without regard to the wider effects of changes. Waterson argues that through this process the design of the market has been distorted beyond recognition.

The main four conflicting priorities are controlling the environmental impact of generation, supplying electricity to all consumers, keeping the price of electricity low, and ensuring sufficient investment in capacity. These problems exist at the supply level but are most acute in generation.

The 1990 blueprint for the industry was to vertically disintegrate the market, allow trading in a main “pool,” and allowing competition in both generation and supply. The first two of these no longer apply, since all major firms are vertically integrated and there is no longer central trading pool. The consolidation of firms to six major suppliers has threatened competition at all levels.

Vertical integration was permitted in an attempt to encourage competition in generation. Large subsidies at the expense of customers were used to increase capacity when needed, such as the large payment to EdF for the construction of a new nuclear power plant, and for renewable power sources. The wholesale market suffers from a lack of liquidity as a result of the elimination of the general trading pool which came with vertical integration, seen as necessary in order to spur investment in generation. Each of these changes in policy were made to tackle a single problem, without much regard for the effects on the other policy priorities.

There is a recognition among policymakers of these problems but apparent confusion in how to solve them. Subsidies for power storage and for holding flexible generating capacity have been suggested but the current Feed In Tariff system, which gives constant payments to generators, means the economics of this system are presently unworkable.

A solution must involve a new recognition of the need to optimise across the whole market rather than focusing on individual fuels. Supernormal profits are necessary to induce private investment and the subsidisation of environmentally damaging fuels is an ever-present problem.

 

CCP Session 7 - Mike

Live comments from the CCP Summer Conference 2014 – Session 6

Session 6: Supply-side issues that fall outside of standard antitrust law:

Frode Steen (Norwegian School of Economics (NHH), Oslo) raises the concern of semicollusion, where firms are able to coordinate parts of their strategy while they compete in others, in markets with large buyers. Large customers frequently use their buyer power to negotiate large rebates. Combined with price discrimination by sellers this can lead to groups of buyers paying non-optimal prices. For example, in the Swedish petrol market the erosion of profits by increasing rebates led to firms colluding in order to preserve profits, while maintaining competitive prices.

The Norwegian airline market provides another example which shows the harm of this type of behaviour. Airlines charged extremely high prices to individual customers, aided by very easy coordination, transparent prices and a strong recognition of mutual interdependence, but could not operate profitably because of the extremely low prices offered to large customers, for whom the airlines sharply competed. The airlines ultimately merged to monopoly to prevent the failure of both firms.

A detailed dataset of this case, including to prices offered to large customers, is used to estimate an econometric model of this behaviour. The results indicate that larger quantities of larger customers lead to higher prices for individual customers. The welfare losses of this semicollusion are worse even than the welfare losses which would be associated with full collusion. This outcome amounts to a prisoners’ dilemma on the part of the firms’ strategies, where each would prefer another equilibrium but cannot reach it.

CCP Session 6- Frode Steen

Severin Borenstein (University of California, Berkeley) estimates how critical changes following deregulation in the airline industry have resulted in price reductions. The history since the deregulation in 1958 have been conflicted. There has been lots of entry and exit, declining real fares and significant losses for airlines in the 1980s and 2000s, small profits in the 1990s but also high concentration on many routes. High-cost firms have also been able to maintain high market shares and increasing national concentration due to increase mergers. Moreover, since 1980 there has been an expansion and contraction of the business model of hub-and-spoke networks, steadily increasing load factors and the expansion of the market share of low cost carriers. The high concentration of the industry in terms of air prices 1990 was due to the very strong market power of the firms through the strong loyalty programme, directed both at individual travellers and at large business customers.

Airline prices were began rising before the most recent mergers took effect. The phenomenon of the “share gap,” where customers are disproportionately likely to use airlines which have high market shares in the originating airport persists in the modern airline market. Econometric analysis of these share gaps suggests that they play an important role in maintaining the market shares of incumbent airlines. The presence of loyalty programmes is the most compelling explanation for the persistence of the share gap effect. Loyalty programs seem to be an important part of the strategy of the major airlines in terms of raising barriers to new entrants and dividing markets, possibly softening competition.

CCP Session 6 - Severin Borenstein

Live comments from the CCP Summer Conference 2014 – Day 2 Opening

Welcome to the second day of CCP’s Summer Conference 2014 on problem markets!

We’re looking forward to a wide range of presentations this morning, and our debate this afternoon:

“This house believes that interventions which go beyond standard antitrust and consumer law have a valuable role to play in tackling problem markets”

The motion is proposed by Mike Walker and Anneli Howard. Opposing views will be given by Adrian Majumdar and Niamh Dunne and Bruce Lyons will give the final judgement.

Hope you enjoy it!

Live comments from the CCP Summer Conference 2014 – Day 1 close

This brings the first day of the CCP Summer Conference 2014 to an end. We will start again at 9am tomorrow morning with sessions on supply-side issues falling outside standard antitrust law, thin markets and market manipulation, and a health focus in competition with divergent public policy concerns, with presentations by:

So stay tuned to find out what they have to say…and to follow our debate in the afternoon!

Live comments from the CCP Summer Conference 2014 – Session 5

Session 5: The UK experience of Market Investigations:

Andrea Coscelli (Competition and Markets Authority) discussed the UK experience of Market Investigations. The market investigation regime was established in Enterprise Act 2002 which enables holistic examination of markets. Since 2002, 14 market investigations have been completed out of which 13 markets where adverse effects on competition were found and remedied and one was cleared. Market investigation remedies create benefits for customers (i) through the direct introduction of measures that address competition problems, (ii) affecting or influencing other regulations/regulators and (iii) the impact of the behaviour of the partied where the sector has been scrutinized. It is however not straightforward to evaluate MIR due to the difficulty of framing the counterfactual and gathering of relevant information for ex post evaluation.

The three main types of remedies discussed are market opening which aims at lowering barriers to entry/ expansion for competing suppliers, strengthening consumer response and divesture which changes the structure of the market. Competition Commission preferred to deal with the underlying problems rather than just “treat the symptoms” i.e. mitigate adverse effects.

Remedies therefore focus on promoting competition and making markets work better rather than regulatory approach of controlling outcomes. Remedies are flexible to the specific issues identifies in the MIR and have had substantial early impact in certain markets.

Coscelli

Live comments from the CCP Summer Conference 2014 – Session 4

Session 4: Competition and the Demand-side:

Joe Farrell (University of California, Berkeley) (via video link) presented on the demand side of problem markets. The antitrust concerns which the study of competition tends to focus upon are supply side matters. According to Joseph Farrell, scholars assume that firms tend to behave under the assumption that customer is choosing the best deal but this may not be the case in problem markets. He describes the three mechanisms by which the demand side of markets may fail: Consumers who behave irrationally, Agency problems which “compound” customers, such as firms or government face, and problems consumers have observing or evaluating complex pricing or product characteristics. These problems may eliminate competition, or may merely funnel it towards different arenas. According to him, wary customers can undermine cross-elasticity by enabling bad deals to retain substantial share or discourage anyone from offering good deals.

Session 4 - Je Farrell

Geoffrey Myers and Katie Curry (Ofcom) explored Ofcom’s fundamental review of the problem market of non-geographic calls. Non-geographic calls include calls to mobile phones or to services with numbers beginning “08” or premium rate numbers beginning “09.” There is poor consumer awareness of the prices and externalities associated with calling these number different operators (for example, calling numbers from a mobile phone).

Telephone calls are a two-sided market, where the caller and the call recipient are on opposite sides of the market. For calls on landline, geographical numbers the recipient never pays. For non-geographic calls, either the caller or the recipient may pay the telephone provider. The caller and the recipient may buy phone services from different operators. This provides many advantages, such as allowing business to use a single, national number to access their services or in order to offer their customers a free service number. Premium rate numbers provide a means by which firms may offer a service.

Market failures in this market arise from three sources: a lack of consumer knowledge of the cost of calling numbers, the lack of concern of callers’ operators for the welfare of call recipients and their operator, and the misuse and degradation of certain number “brands” by callers’ operators and recipients. The harms caused by these factors include harm to firms using these number, to public service providers who wish to provide a free number but cannot and costs to vulnerable consumers who unknowingly overpay for calls.

To alleviate these problems, Ofcom has announced changes in the regulatory regime such as mandating free mobile phone and landline calls when calling “080” numbers and unbundling the price paid by the caller for calls to “084”, “087” and “09” numbers into an access charge, paid to the callers’ telecoms provider, and a service charge, passed on to the call recipient. This allows providers of public services to operate a free phone service to callers, and allows firms to communicate the price of their own service to consumers clearly. The improved visibility of the fee paid to the operator may encourage competition between operators. Consumers’ confidence in the fees associated with calling non-geographic numbers may increase over time, leading to these numbers becoming trusted brands.

Session 4 Ofcom