‘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. 

‘Private v public sanctions: the case of cartels’

On Friday 10th July, we rounded off our Summer Seminar Series in style with the dream pairing of Franco Mariuzzo (CCP and ECO) and Peter Ormosi (CCP and NBS) presenting ‘Private v public sanctions: the case of cartels‘, a joint project with Antonios Karatzas (Warwick). An abstract for their presentation can be found below.

Abstract

Economics literature on the relationship between private and public sanctions has led to a consensus that private (market-based) sanctions can act as an important deterrent to corporate misbehaviour inasmuch as they internalise the social costs of these offences. On the other hand public sanctions are needed where the harm caused by the offence is not internalised (for example because the damaged party remains oblivious to the offence); in these cases the amount of the sanction should equal the un-internalised social cost. We provide further empirical evidence to this literature by looking at cartels, using a novel methodology that enables us to directly control for the magnitude of the private sanction in our model. This allows us to empirically study the substitutability between fines and reputation for firms that have been found guilty of cartel illegal conduct.

We measure reputation with a composite of the frequency of media exposure and the intensity of the media content. Media exposure is captured by a count of sources that document a firm’s illegal behaviour in the cartel and intensity is measured by a sentiment analysis of the text of the published news. We employ an event study technique over a sample of about 300 public companies that belong to about 100 cartels detected by the Competition Commission during the period 1990-2012. Our results confirm that public and private sanctions are not perfect substitutes, and that the intensity of the media content has a larger punishment effect than exposure; we call this “quality for quantity” effect. In addition we find that the effect of reputation is larger for firms that belong to cartels with non-atomistic customers.

This is the final seminar of the Summer but we will return in September for another excellent series of interdisciplinary presentations on competition policy and regulation. We will be announcing the programme for the Autumn Seminar Series in due course and you can keep up-to-date by visiting our designated seminar pages on the CCP website.

‘Strategic Updates in Mobile Apps’

The Spring Seminar Series continues on Friday 13th February with the marvellous Franco Mariuzzo (CCP & ECO) presenting his latest research project, ‘Strategic Updates in Mobile Apps‘. Franco is a Lecturer in Econometrics in the School of Economics at UEA. He has conducted extensive research in the areas of Applied Econometrics and Industrial Organisation. An abstract for Franco’s paper can be found below.

Abstract

In September 2014, more than 1.3 million apps were available in the Apple and Android app stores. Despite this tremendous size, the characteristics and the functioning of app markets are still little known. App markets are characterized by very low entry barriers and extremely high degree of competition. In such environment one of the critical issues is how to attract the attention of users. In this paper we focus on a specific strategy that app developers may use to stimulate demand for their products: versions management. It is recognized by practitioners and developers that managing app updates (i.e., releasing new versions of an existing app) is critical to increase app visibility and to keep users engaged, disguising a hidden strategy to stimulate downloads. We develop a theoretical model to describe why and when major and minor updates should be released. We then use an unbalanced panel with characteristics on the top 1000 apps on Apple stores for 5 European countries to test empirically these theoretical predictions. Our results confirm that updates are more often released when the app is experiencing a decrease in downloads. We interpret this finding as evidence that app developers use updates as a “bet for resurrection” strategy.

The seminar 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.

Commodity Market Dynamics and the Joint Executive Committee (1880-1886)

Franco Mariuzzo (together with his joint author Patrick Paul Walsh) has had Commodity Market Dynamics and the Joint Executive Committee (1880-1886) accepted for publication in The Review of Economics and Statistics.

Commodity Market Dynamics and the Joint Executive Committee (1880-1886)

Abstract

Using weekly spot and future commodity prices in Chicago and New York, we construct expected transportation rates for grain between these two cities, expected inventory levels in New York, and realized errors in the expectations of such variables. We incorporate these exogenous commodity market dynamics into Porter’s (1983) structural modeling of the Joint Executive Committee Railroad Cartel. As in Porter, we model marginal cost as a parametric function of (instrumented) output, among other factors. Unlike Porter, we model pricing over marginal cost as a nonparametric function of a set of variables, which include expectations of deterministic demand cycles and Cartel stability. We estimate the pricing and demand equation simultaneously and semi-parametrically. Our estimated weekly mark-ups during periods of Cartel stability are shown to reect optimal collusive pricing over deterministic business cycles, as modeled in Haltiwanger and Harrington (1991). Periods of Cartel instability are proven to be triggered by realized mistakes in expectations of New York grain prices.

NIE Winter Conference

PharmaceuticalsOn 14th December CCP is hosting the Network of Industrial Economists‘ winter conference.

We’ll be at 10-11 Carlton House Terrace for a a one day academic conference on competition and health care from an industrial economics perspective. Colleagues from CCP taking part will be Franco Mariuzzo (who is organising the event), Farasat Bokhari, Bruce Lyons and Morten Hviid. You can view the programme on our website and make your booking online.

 
Photo by Sage Ross, CC by-sa