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.

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.

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.

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:

• Frode Steen
• Severin Borenstein
• Mike Waterson
• Rosa Abrantes-Metz
• Rachel Griffith
• Carol Propper

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