Policy Briefing: Retail Price MFNs: Are they RPM ‘at its worst’?

Policy Briefing of CCP Working Paper 14-5:

Amelia Fletcher and Morten Hviid, ‘Retail Price MFNs: Are they RPM ‘at its worst’?’. (Available to download from our Working Papers pages on the CCP website).

KEYWORDS: Retain Price Most Favoured Nation clauses, Retail Price Maintenance, anti-competitive effects, competition law

BACKGROUND

  • A number of recent competition cases have involved a hitherto rarely observed form of Most Favoured Nation (MFN) clause in which sellers through an internet retail platform explicitly agree not to sell at a lower price elsewhere, including through other retail platforms. These are sometimes known as platform MFNs or platform parities.

  • The economics literature on this topic is still nascent and the effects of these clauses have not yet been fully explored.

  • Competition authorities in a number of jurisdictions including the EU, Germany, the UK and the US have been willing to take on such cases and push them to successful conclusions, with the parties either agreeing, or being required, to drop Retail Price MFN clauses.

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Policy Briefing: Is the Korean Innovation of Individual Informant Rewards a Viable Cartel Detection Tool?

Policy Briefing of CCP Working Paper 14-3:

Stephan A, ‘Is the Korean Innovation of Individual Informant Rewards a Viable Cartel Detection Tool?’. (Available to download from our Working Papers pages on the CCP website).

BACKGROUND

  • The defining characteristic of modern cartel enforcement is the use of leniency programmes. This innovation, first employed by the US in the late 1970s, has been emulated by the vast majority of competition law enforcement regimes around the world.

  • The basic principle of these programmes is to offer immunity to the first firm to report a cartel infringement to the competition authority.

  • It is thought leniency programmes have been instrumental in destabilising and uncovering cartel infringements, thereby undermining the trust that exists between cartel members and increasing the rate at which cartels are detected.

  • Despite the offer of leniency and the increasing levels of fines imposed on cartels, competition authorities continue to uncover a high volume of infringements. This might suggest that more could be done to strengthen deterrence in cartel enforcement. It has been suggested that the next logical step in advancing antitrust enforcement may be the use of rewards or bounties to individual whistle-blowers.

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Policy Briefing: Consumer behaviour in the British retail electricity market

Policy Briefing of CCP Working Paper 13-10:

Flores M and Waddams Price C, ‘Consumer behaviour in the British retail electricity market’ (PDF, 759KB).

BACKGROUND

  • Consumer activity plays a crucial role in securing effective markets. Understanding what determines consumer activity, and how this varies between customers, is essential to maximise the effectiveness of policies targeting consumer searching and switching.

  • Despite government efforts to promote consumer activity, the European Commission finds that consumers often fail to take advantage of the potential gains available from switching suppliers in liberalised energy markets.

  • In the UK there is growing concern that the competition process has not worked well, despite the energy regulator’s promotion of consumer empowerment and activity.

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Collusion in Industrial Economics and Optimally Designed Leniency Programmes – A Survey

Panayiotis Agisilaou is a PhD student in the School of Economics and the ESRC Centre for Competition Policy – here is a summary of his recent working paper which draws on his thesis. The full working  paper is here 

BACKGROUND

  • Collusion among firms is one example of a situation in which free markets fail to efficiently allocate the scarce resources of an economy.
  • The negative effect of collusion on the welfare of consumers calls for government intervention.
  • The goals of antitrust policy are to dissolve existing cartels and to deter new cartels from forming in the future.
  • Leniency programmes are a powerful tool at the disposal of antitrust authorities. These aim to incentivise colluding firms to come forward and denounce their unlawful conduct.

 METHODOLOGY

  • The aim of this paper is to enhance our understanding of how leniency policies impact on cartel formation and sustainability.
  • The author provides a critical and systematic overview of the most influential contributions to the economics literature on collusion and leniency programmes in antitrust.
  • Also provided is a review of the literature on the economics of generic law enforcement, with a focus on self-reporting schemes, for crimes committed either by individuals or groups of individuals.

 KEY FINDINGS

  • Post-investigation leniency may provide colluding firms with incentives to reveal evidence of significant added value to the antitrust authority. As a result, the judicial procedure accelerates and the costs of investigation diminish.
  • The deterrence effects of a leniency programme may be indirectly amplified to the extent that the savings made by the authority are used to conduct further market investigations.
  • The punishment strategy adopted by colluding firms to enforce their illegal agreement influences the deterrence effects of leniency programmes.
  • The restriction of eligibility to the first reporting firm curbs the ability of colluding firms to exploit the leniency programme.
  • The offer of a reward to the first self-reporting firm provides a powerful incentive to firms to self-report.
  • When colluding firms retain asymmetric evidence, the extension of eligibility for leniency to more than one firm facilitates the procedure for prosecuting cartels.
  • A more transparent leniency programme allows firms to accurately estimate the benefits accruing from a leniency application.
  • More severe punishment for repeat offenders enhances the efficacy of a leniency programme.
  • A confidential application procedure restricts firms’ abilities and scope to exploit the leniency programme.
  • A leniency programme for individuals is more effective than a corporate leniency programme.
  • Reduced fines (because of lenient treatment) make collusion less costly ex-ante (a pro-collusive effect).
  • Wrongly designed leniency programmes may provide firms with a credible mechanism to curb the opportunism which is inherent to illegal cartel agreements. Thus, contrary to policy objectives, a poor leniency programme may exacerbate cartel formation and/or render an existing cartel more robust.
  • A poorly designed leniency programme for individuals may have adverse effects on intra-firm hiring strategies and inter-firm benign cooperation.

Policy Brief: What is the price of pay-to-delay deals?

BACKGROUND

  • A pay-to-delay deal (or ‘reverse payment’) involves a payment from a branded drug manufacturer to a generic manufacturer to delay market entry.
  • Pay-to-delay deals are on the rise on both sides of the Atlantic.
  • According to the Federal Trade Commission, pay-to-delay deals stifle competition from lower-cost generic medicines and have cost US consumers on average $3.5 billion per year. Read more of this post

Policy Brief: Trade Mark Cluttering – Evidence from EU Enlargement

BACKGROUND

  • Since the mid-1990s, medical regulators in the United States and Europe regulate the names of those drugs that are only available on prescription. The aim is to protect consumers from medication errors that result from drug name confusion.
  • The producers of these drugs may submit between three and four invented names per drug to medical regulators to reduce the chance of rejection. But unused registered trade marks clutter the trade mark register, raising search costs for other trade mark applicants who must establish whether trade marks on the register are in use.
  • Enlargement of the European Union increased regulatory uncertainty for pharmaceutical firms because the number of medical regulators that had to approve invented names for pharmaceutical products increased sharply at the time. Read more of this post

Policy Brief: Strategic Obfuscation and Consumer Protection Policy in Financial Markets: Theory and Experimental Evidence

Strategic Obfuscation and Consumer Protection Policy in Financial Markets: Theory and Experimental Evidence

BACKGROUND

  • There has been a surge of interest in recent years in the behaviour of retail financial markets and how to improve market outcomes given consumers’ incomplete understanding of these markets.
  • There is evidence that firms may deploy strategies designed to take advantage of consumers’ limitations: firms may choose to obfuscate, where ‘obfuscation’ refers to strategic actions designed to prevent some consumers from recognising the best offer.
  • Possible consumer protection policies include education programmes designed to improve the financial literacy of consumers, a disclosure policy that forces firms to disclose all possible fees, and a cap on obfuscation possibilities such as limiting the length of the footer section of a credit card contract. Read more of this post

Policy Brief: Complexity and Smart Nudges with Inattentive Consumers

Complexity and Smart Nudges with Inattentive Consumers

BACKGROUND

In a number of service markets where choice is possible, it has been observed that many consumers do not switch service providers even though the tariffs they are holding are suboptimal. Moreover, when choice is exercised, chosen tariffs are not always optimal.

The service markets at issue include: bank accounts, mobile telephony, internet services, consumer gas and electricity services, fixed telephony and multichannel TV services.

METHODOLOGY

• The authors draw on stylised features of UK gas and electricity retail markets to explore the psychological motivations to consumer behaviour.

• Through a series of experiments the authors seek to identify whether consumers are likely to stick to default options and achieve suboptimal outcomes, why they do this, and what can be done about it.

• Participants in the experiments took the role of consumers deciding upon tariffs, where a financial loss was incurred in the event that the best tariff was not chosen.

• The authors focus on the role of complexity and the part played by inattention in behaviour.

• Three forms of complexity are considered:

• the complexity arising from bundling two goods together, as in dual-fuel tariffs;

• complexity in the structure of tariffs; and

• complexity in the number of tariffs.

KEY FINDINGS

• Poor outcomes are realised by a significant proportion of people, either because of sticking to the default option or because of switching to a bad option.

• The complexity of the choice problem is found to matter. In particular, a reduction in the number of tariffs from 24 to 4 is found to improve consumer outcomes.

• However, the role of complexity in poor outcomes is overstated if the explanatory power of inattention is neglected: subjects who do not pay enough attention to the task in the first place tend to stick to the default option.

• By using ‘smart nudges’ and making the default option work for (instead of against) consumer welfare, optimal outcomes can be obtained approximately 85% of the time.

POLICY ISSUES

Simplification of the choice problem may help with the problem posed by complexity but does not help with the problem posed by consumer inattention.

A generic warning that a better energy tariff exists in the market does not help consumer choice. However, more research is needed on more tailored warnings.

A ‘smart nudge’ solution can be used to exploit consumer inertia grounded in inattention: when consumers are automatically switched to the best default energy tariff, better consumer outcomes can be achieved while leaving consumers free to choose an alternative tariff if they so wish.

ABOUT THE AUTHORS

Daniel Zizzo is Professor of Economics, Head of the School of Economics and Associate Dean (Research) for the Faculty of Social Sciences at UEA and a Faculty member of CCP, Stefania Sitzia is Lecturer in Economics at UEA and Jiwei Zheng is a PhD research student in Economics at UEA and a student member of CCP

Executive Briefing: Culling the Quangos: When is Delegation Revoked?

BACKGROUND

  • ‘Quangos’ are agencies at arm’s length from government and with delegated powers. Two common types of quango in the UK are:
  1. non-ministerial departments, for example, the Office of Fair Trading and the Food Standards Agency; and
  2. non-departmental public bodies, for example, the Advisory Council on the Misuse of Drugs.

Policy Brief: Who Manages Cartels? The Role of Sales and Marketing Managers within International Cartels: Evidence from the European Union 1990-2009

BACKGROUND

International cartels involve two or more independent firms from more than one country colluding on certain terms of trade, such as pricing, in one or more markets.

The actions of cartelists have a highly detrimental impact on consumers with international cartels commanding 25% in excess of the competitive price.

METHODOLOGY Read more of this post