‘The Incidence of Fines on Cartel Dynamic Pricing’

Friday 27th November sees the long-awaited return of our delightful former colleague Anna Rita Bennato (Oxford Brookes University) who will be presenting ‘The Incidence of Fines on Cartel Dynamic Pricing‘, which she has co-researched with Franco Mariuzzo (ECO and CCP). An abstract for her seminar can be found below.

Abstract

With Regulation 1/2003 the European Commission D-G for Competition has introduced administrative fines on corporation turnover to punish any breach of Article 101 and 102 of the Treaty. To confine obvious adverse effects of a too harsh punishment fines have been limited to a thirty per cent cap of the undertaking’s worldwide turnover (Guidelines 2006/C 210/02). However, the assessment of the gravity is made on a case-by-case basis for all types of infringement. As a general rule, fines are calculated as a proportion of the value of sales.

In this paper we study the distortion in pricing that stems from the application of fines on turnover in an environment where cartels choose their optimal pricing under uncertainty and business cycles. Our model shows how in a dynamic setting fines may resemble the effect of an ad-valorem taxation. The effect of fines on prices varies depending on the position on the cycle (expected demand growing or falling).

We test our model using 328 weekly data on the Joint Executive Committee (JEC) and the econometric methodology suggested by Borenstein and Shepard (1996). While JEC was a legal cartel, in a counterfactual exercise we simulate the effect of the cartel being detected and fined on turnover.

 

Anna’s presentation takes place from 13:00-14:00 in the Thomas Paine Study Centre, Room 1.03. 

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.

‘Differentiated Taxation in Imperfectly Competitive Markets’

On Friday 28th February, CCP stalwarts Anna Rita Bennato (CCP) and Franco Mariuzzo (CCP, ECO) present their research at the Spring seminar series. They will be presenting their research on ‘Differentiated Taxation in Imperfectly Competitive Markets. Evidence from the Irish Automobile Industry‘, which they have undertaken alongside Paul Walsh (University College Dublin). An abstract for their seminar can be found below.

Abstract

Vehicle Registration Tax (VRT) is an ad-valorem tax charged on the registration of all new cars in Ireland, which is differentiated according to the engine size of a car. Accounting for this type of taxation we develop a simple theoretical model looking at the interaction of the taxation system with the product quality in an oligopolistic market. In particular, we study its incidence on producers and consumers, and using a panel dataset on new cars sold in Ireland for the period 2004-2008, we test our predictions estimating the primitives of demand and pricing. Then, a counterfactual simulation is used to numerically assess the impact of a differentiated ad-valorem taxation and the possibility of tax over-shifting. We show how a low degree of market power yields a higher incidence of taxation on consumers buying low-quality products.

The seminar takes place from 13:00-14:00 in the Thomas Paine Study Centre, Room 0.1.

CCP Seminar: Timing in Broadcasting Advertising

The CCP’s weekly seminar series continues on Friday 23rd November with our resident post doctoral research fellow Anna Rita Bennato (CCP) presenting her research into ‘Timing in Broadcasting Advertising‘ which she is carrying out collaboratively with Berardino Cesi and Alberto Iozzi of the “Tor Vergata” University of Rome. A copy of her abstract can be found below.

Abstract

We develop a model of competing platforms by which we aim to study the welfare loss resulting from a timing game between TV channels, which define their optimal advertisement allocation in their programmes. The goal of this analysis is to pin down how the regulatory restrictions condition the strategies of the broadcasting industry. In particular, we incorporate the bargaining process between channels and advertisers who, being multi-homing, are able to sign contracts with more than one TV channel, advertising their commercials simultaneously on different channels.

€2,500 award for CCP Researcher

Anna Rita BennatoWe are delighted that one of our post doctoral research fellows, Anna Rita Bennato, has been awarded a prize of €2,500 (first place ex aequo) by Area Science Park, a multi-sectoral academic science and technology research centre in Trieste, Italy. The award was made for her PhD work, “Essay on Intellectual Property Rights”.

You can read more about this award (in Italian!) here.

Policy Brief: Pharmaceutical Innovation and Parallel Trade

BACKGROUND

Parallel imports are genuine goods produced under the protection of a patent, a trademark or copyright and then imported into a second market without the authorization of the owner of the intellectual property right.

Parallel trade exists when there are significant price differences between countries making this trade attractive.

International price differences can be sustained only if intellectual property rights are fully protected, making the creator the exclusive owner of her innovation: the patent holder may be expected to exert market power by charging a different price in different markets for the same or similar goods.

This form of third-degree price discrimination yields ambiguous welfare effects.

METHODOLOGY

  • The authors focus on the pharmaceutical sector in examining how different regimes of intellectual property rights interact with specific features of government intervention, namely price cap regulation.
  • The analysis is based on the strategic interaction between a single innovative firm located in the unregulated North, and a foreign government located in the South.
  • A complete welfare analysis is provided that accounts for both global investment decisions in R&D as well as the local costly distribution of drugs.
  • The patent holder’s decisions are examined when a foreign government can introduce a direct price control to lower the price of patented drugs.

KEY FINDINGS

  • The authors clarify the circumstances under which parallel trade, despite weakening intellectual property rights, can actually create higher incentives to conduct R&D. This higher investment also translates into higher global welfare.
  • It is shown that, under parallel trade, investment can rise only when the foreign government takes into full account its impact both on investment and on the firm’s decision to supply the regulated country. This occurs because of a complete withdrawal from price regulation.
  • However, the regulated country is better off under an intermediate form of commitment whereby the foreign government anticipates its effect only on local distribution and delivery but not on global R&D investment. In this case, the government resorts to some price regulation which reduces investment, in particular, under parallel trade.

POLICY ISSUES

Parallel trade makes government policies interdependent and forces every government to consider the consequences of its actions on global incentives to invest. Therefore, a balanced approach towards evaluation of the costs and benefits of allowing parallel imports should fully incorporate the strategic effects of the regulatory regime on the level of both the price and quality of drugs.

ABOUT THE AUTHORS

Anna Rita Bennato is a Post Doctoral Researcher at the CCP, Tommaso Valletti is a Professor at Imperial College London.

 

The original Policy Briefing is available for download here, the Working Paper on which this Briefing is based is available here.

New Working Paper: Pharmaceutical Innovation and Parallel Trade

Anna Rita Bennato, a CCP Post Doctoral Researcher and Tommaso Valletti of Imperial College London, University of Rome “Tor Vergata” and CEPR, have published their new working paper (12-9) on pharmaceutical innovation and parallel trade:

This paper investigates the effects yielded by the interaction between government regulation policies and parallel trade, with a particular focus on the pharmaceutical sector. We provide a complete welfare analysis that accounts for both global investment decisions in R&D as well as local costly distribution of drugs. We study the patent holder’s decisions when a foreign government can introduce a direct price control to lower the price of patented drugs. We show that, under parallel trade, investment can rise only when the foreign government takes into full account its impact both on investment and on the firm’s decision to supply the regulated country. This arises because of a complete withdrawal from price regulation. The regulated country is however better off under an intermediate form of commitment whereby the foreign government anticipates its effect only on local distribution and delivery, but not on global R&D investment. In this case, the government resorts to some price regulation, which reduces investment in particular under parallel trade.

You can download the paper here.

The 2012 series of working papers is here.