Reduce Consumer Welfare Research Articles

Creating Global Alliance for Effective Mechanism Against Cartels

The term “cartel” refers to the worst kind of such communication, as it deals with the creation of agreements to fix prices of goods and services at an artificially high level. Cartels are universally established as being the most pernicious form of agreement for competition regulators. The OECD refers to them as “the most egregious violations of competition law,” and has repeatedly found that one of the most important goals of Competition Policy must be to root out cartels. The European Union has repeatedly stated the harms caused by them in terms of reducing consumer welfare and distorting allocative efficiency. Small number of firms in an industry, high concentration, barriers to entry, low technological advancement, homogeneous product, strong ability of competing firms to exchange information on price and other terms of sale, uniformity in cost or efficiency, severe punishment which can be inflicted on the cheater, and effective trade association etc. make it conducive for firms to cartelize and to continue as such on a long term basis. The less fear of detection and punishment also encourages firms to cartelize.

Competition in the New Jersey Communications Market: Implications for Reform

In general, economists agree that public-utility-style regulation is not only unnecessary but undesirable in competitive markets, where it inevitably distorts prices, slows innovation, discourages entry, and reduces consumer welfare. Thus, once competition develops in an industry, the appropriate policy response is to reduce regulation and allow consumers to benefit from the forces of competition.This study examines telecommunications competition in the state of New Jersey, and concludes that competition has developed to the point where the regulatory reforms being considered by the state legislature would benefit consumers. Other states, including California, Virginia, Indiana, Rhode Island and many others, have already reformed telecommunications regulation. Dire predictions that such reforms would lead to higher prices and other problems have not been borne out by experience. To the contrary, the results have been overwhelmingly positive, with higher rates of deployment of advanced services (especially in rural areas), increased rates of investment, and significant job creation.

Incomplete Contracts and the Impact of Globalization on Consumer Welfare

We embed a North-South trade model into an incomplete contracts setting where the production of heterogeneous firms can be geographically separated. When a Northern headquarter contracts with a Southern supplier instead of a Northern supplier, the presence of international incomplete contracts may lead to a higher price. As a result, trade liberalization, that induces offshoring, is not necessarily welfare-enhancing for consumers, despite the lower cost of labor in the South. In addition, firms which use the supplier’s component intensively, offshore their supplier in the South using outsourcing. As trade costs fall, less component-intensive firms also offshore, but by vertically integrating their supplier. We argue that this organizational change increases production-shifting in the South, implying that a larger number of varieties will be produced in the South where contracts are incomplete. We show that, this may reduce consumer welfare in both countries.

Incomplete Contracts and the Impact of Globalization on Consumer Welfare

We embed a North-South trade model into an incomplete contracts setting where the production of heterogeneous firms can be geographically separated. When a Northern headquarter contracts with a Southern supplier instead of a Northern supplier, the presence of international incomplete contracts may lead to a higher price. As a result, trade liberalization, that induces offshoring, is not necessarily welfare-enhancing for consumers, despite the lower cost of labor in the South. In addition, firms which use the supplier's component intensively, offshore their supplier in the South using outsourcing. As trade costs fall, less componentintensive firms also offshore, but by vertically integrating their supplier. We argue that this organizational change increases production-shifting in the South, implying that a larger number of varieties will be produced in the South where contracts are incomplete. We show that, this may reduce consumer welfare in both countries.

Collusion Through Joint R&D: An Empirical Assessment

This paper tests whether upstream R&D cooperation leads to downstream collusion. We consider an oligopolistic setting where firms enter in research joint ventures (RJVs) to lower production costs or coordinate on collusion in the product market. We show that a sufficient condition for identifying collusive behavior is a decline in the market share of RJV-participating firms, which is also necessary and sufficient for a decrease in consumer welfare. Using information from the US National Cooperation Research Act, we estimate a market share equation correcting for the endogeneity of RJV participation and R&D expenditures. We find robust evidence that large networks between direct competitors - created through firms being members in several RJVs at the same time - are conducive to collusive outcomes in the product market which reduce consumer welfare. By contrast, RJVs among non-competitors are efficiency enhancing.

Product Differentiation Through Exclusivity: Is There a One-Market-Power-Rent Theorem?

In systems industries, combinations of components are consumed together to generate user benefits. Arrangements among component providers sometimes limit consumers’ ability to mix and match components, and such exclusive arrangements have been highly controversial. We examine the competitive and welfare effects of exclusive arrangements among system components in a model of relatively differentiated applications that run on relatively undifferentiated platforms. For a given set of components and prices, exclusive arrangements reduce consumer welfare by limiting consumer choice and raising equilibrium prices. In some cases, however, exclusivity raises consumer welfare by increasing the equilibrium number of platforms, which leads to lower prices relative to the monopoly outcome that would prevail absent exclusivity. We also show that there is no “One-Market-Power-Rent Theorem.” That is to say, exclusive deals with providers of differentiated applications can raise platforms’ margins without reducing application margins, so that overall industry profits rise.

Advertising Collusion in Retail Markets

Abstract We analyze non-price advertising by retail firms, when the firms are privately informed about their respective costs of production. In a static advertising game, an advertising equilibrium exists in which lower-cost firms select higher advertising levels. In this equilibrium, informed consumers rationally employ an advertising search rule in which they buy from the highest-advertising firm since lower-cost firms also select lower prices. In a repeated advertising game, colluding firms face a trade-off: the use of advertising can promote productive efficiency, but only if sufficient current or future advertising expenses are incurred. At one extreme, if firms pool at zero advertising, they sacrifice productive efficiency but also eliminate current and future advertising expenses. Focusing on symmetric perfect public equilibria for the repeated advertising game, we establish conditions under which optimal collusion entails pooling at zero advertising. More generally, full or partial pooling is observed in optimal collusion. Such collusive agreements reduce consumer welfare, since they restrict informed consumers' ability to locate the lowest available price in the market.

Net Neutrality Regulation: The Economic Evidence

In the authors' shared opinion, the economic evidence does not support the regulations proposed in the Commission’s Notice of Proposed Rulemaking Regarding Preserving the Open Internet and Broadband Industry Practices (the “NPRM”). To the contrary, the economic evidence provides no support for the existence of market failure sufficient to warrant ex ante regulation of the type proposed by the Commission, and strongly suggests that the regulations, if adopted, would reduce consumer welfare in both the short and long run. To the extent the types of conduct addressed in the NPRM may, in isolated circumstances, have the potential to harm competition or consumers, the Commission and other regulatory bodies have the ability to deter or prohibit such conduct on a case-by-case basis, through the application of existing doctrines and procedures. Hence, the approach advocated in the NPRM is not necessary to achieve whatever economic benefits may be associated with prohibiting harmful discrimination on the Internet.

Price Discrimination, Two-Sided Markets, and Net Neutrality Regulation

In an October 22, 2009 Notice of Proposed Rulemaking, the Federal Communications Commission posed a number of questions regarding the merits of price discrimination given the two-sided structure of broadband markets. The law and economics literature finds that price discrimination is presumptively welfare-enhancing, that it is frequently a response to competitive market forces rather than the absence of such forces, and that the merits of price discrimination are likely enhanced in a two-sided markets framework. This is the case because the platform provider must use prices to solve the “chicken and egg” problem - both sides of the market must be brought on board under conditions in which the relative valuations placed on the transaction can vary markedly across the two sides of the market. Hence, price discrimination is necessary to unleash the full potential of broadband markets. Another form of conduct of concern to the Commission is access tiering, in which broadband providers market different levels of service quality to content providers. Access tiering is an example of differential pricing rather than discriminatory pricing. Prohibitions on such practices would likely serve to reduce consumer welfare, suppress competition, and discourage investment in network infrastructure.

Optimal Referral Bonuses with Asymmetric Information: Firm-Offered and Interpersonal Incentives

Referral bonuses, in which an existing customer gets an in-kind or cash reward for referring a new customer, are a popular way to stimulate word of mouth. In this paper, we examine key firm decisions about such bonuses. Others have studied referral bonus programs; a key difference is that we study the role of recommendations not just in spreading awareness (as they do) but also in providing assessments. We start with the idea that people have a variety of reasons for making product recommendations, including placing a value on a friend's outcome with a product they recommend. We apply that idea in a context of asymmetric information: A customer combines his knowledge about the product and his familiarity with friends' tastes, making him more informed than the friends. Thus, the recommendation is a signal about the value of the product to the friend. In this setting, we consistently find that the greater the concern for others' outcomes, the higher the referral bonus should be, as long as the firm cannot more efficiently motivate recommendations with a lower price. Moreover, if price is the more efficient lever, the optimal bonus is zero, and the optimal price is low. We also show that greater concern tends to reduce firm profit and, in some cases, actually reduces consumer welfare as well.

Regional Restriction, Strategic Delegation, and Welfare

We investigate the effects of restricting locations of firms into Hotelling duopoly models. In the standard location-price models, the equilibrium distance between firms is too large from the viewpoint of consumer welfare. Thus, restricting locations of firms and reducing the distance between firms improve consumer welfare, through lower prices and smaller transportation costs for consumers. We introduce strategic reward contracts into the location-price models. We find that in contrast to the above existing result, restriction of the locations of firms reduces consumer welfare. Restricting locations of the firms reduces transportation costs but increases the prices through the change of strategic commitments by the firms, and it yields a counterintuitive result.

Effects of distribution channel structure in markets with vertically differentiated products

This study examines how the structure of distribution channels may influence firms’ quality and price strategies and how they may in turn affect consumer welfare. It treats product quality as a decision variable so that the degree of product substitution becomes endogenous rather than exogenous as in previous studies. We find that, with vertically differentiated firms, the changes in channel structure have asymmetric effects depending on whether they occur in the high-quality channel or in the low-quality channel. The product quality of the high-quality channel decreases when it decentralizes unilaterally. However, product quality of the low-quality channel would increase when it decentralizes. The high-quality manufacturer and its channel suffer more from decentralization in comparison with their low-quality counterparts, and the low-quality manufacturer actually receives greater profits when both channels are decentralized. An important driver behind these asymmetries is the interaction between firms’ pricing incentives in integrated versus decentralized channels and what consumer segments they serve. Our analysis indicates that decentralization may reduce consumer welfare, but decentralization in the high-quality channel hurts consumers more than that in the low-quality channel. Therefore in a competitive environment where firms make both quality and price decisions, channel integration would have significant welfare enhancement effects through the elimination of double marginalization, especially if it happens in the high-quality channel. Moreover, we demonstrate that once quality is endogenized, integration is the only equilibrium of channel structure choices. This suggests that the private incentives of firms may actually benefit consumers but do not have to be in line with the general preference of industry regulation for decentralization.

Capacity Investments, Exclusionary Behavior, and Welfare: A Dynamic Model of Competition in the Airline Industry

This paper uses unique data on access to airport facilities to study the strategic entry, exit, and capacity decisions of firms in the US airline industry. I estimate a dynamic equilibrium model in which forward-looking firms invest in seating capacity and play a capacity-constrained pricing game. I find that the intensity of competition depends directly on the characteristics and identity of the incumbent fi rm. In particular, dominant hub carriers aggressively invest in capacity following entry by low-cost carriers, providing a commitment to price aggressively in future periods. In doing so, the hub carrier can substantially increase the likelihood of exit by the targeted rm. The resulting reduction in the level of competition reduces consumer welfare relative to an environment in which anti-trust authorities can eliminate such exclusionary behavior.

Moonlighting: public service and private practice

We study job incentives in moonlighting, when public‐service physicians may refer patients to their private practices. Some doctors in the public system are dedicated, and behave sincerely, but others—the moonlighters—are utility maximizers. Allowing moonlighting always enhances aggregate consumer welfare, but equilibrium public‐care quality may increase or decrease; if quality increases, moonlighting improves each consumer's expected utility. Unregulated moonlighting may reduce consumer welfare as a result of adverse behavioral reactions, such as moonlighters shirking more and dedicated doctors abandoning their sincere behavior. Price regulation in the private market limits such adverse behaviors in the public system and improves consumer welfare.

Supplemental Declaration of J. Gregory Sidak Concerning the Competitive Consequences of the Proposed Merger of Sirius Satellite Radio, Inc. and XM Satellite Radio, Inc.

Supplemental Declaration of J. Gregory Sidak Concerning the Competitive Consequences of the Proposed Merger of Sirius Satellite Radio, Inc. and XM Satellite Radio, Inc.

Antitrust Implications of Aftermarkets

Firms which sell or lease a product or service often want to extend their sales into a second market – often called the aftermarket. Thus, a manufacturer of razors also wants to sell replacement blades; a manufacturer of automobiles also wants to sell replacement parts; and the manufacturer of a photocopying machine also wants to provide repair or maintenance services for its machines. While many of these attempts to extend upstream market power into the secondary product market may have pro-competitive justifications and effects, other instances of this behavior may reduce consumer welfare by raising prices, reducing innovation or limiting consumer choice. Several of the categories of potentially anti-competitive behavior, which are used generally to analyze conduct under the antitrust laws – tying arrangements, monopolization and attempts to monopolize – are applicable to the analysis of aftermarkets. This paper identifies a variety of examples of aftermarket restraints; considers their competitive impact; and then discusses the application of traditional antitrust analysis to this phenomenon.

Return policies, market outcomes, and consumer welfare

Abstract. The effect of return policies on market outcomes is studied in a model where consumers differ in their valuations of time. Product reliability is identified with defect rates. Producers first choose reliability levels and then compete in prices. For given defect rates, allowing returns makes products closer substitutes, enhancing competition and reducing prices. Being closer substitutes makes higher reliability less worthwhile, which reduces reliability. While the decrease in reliability reduces consumer welfare, the decrease in prices raises it. The latter dominates, so that aggregate consumer welfare increases with return policy.

Product Line Design and Production Technology

In this paper we characterize the impact of production technology on the optimal product line design. We analyze a problem in which a manufacturer segments the market on quality attributes and offers products that are partial substitutes. Because consumers self-select from the product line, product cannibalization is an issue. In addition, the manufacturer sets a production schedule in order to balance production setups with accumulation of inventories in the presence of economies of scale. We show that simultaneous optimization of the product line design and production schedule leads to insights that differ significantly from the common intuition and assertions in the literature, which omits either the demand side or the supply side of the equation. In particular, we demonstrate that more expensive production technology always leads to lower product prices and may at the same time lead to higher quality products. Further, a less efficient production technology does not necessarily increase total production costs or reduce consumer welfare. We also demonstrate that in the presence of production technology, the demand cannibalization problem may distort product quality upward or the number of products upward, which is contrary to the standard result.

THE COMPETITIVE EFFECTS OF A CABLE TELEVISION OPERATOR'S REFUSAL TO CARRY DSL ADVERTISING

Many cable television operators routinely refuse to run local DSL advertising on their cable systems. Given that such conduct reduces the advertising profits of cable companies, a plausible purpose for such discriminatory refusals to deal is to limit their cable customers' information about competitive alternatives to their cable modem services. By banning local DSL advertisements placed on cable television, a cable television operator forecloses equally efficient rivals (DSL providers) in the broadband Internet access market from the most efficient form of advertising a broadband product (television advertising), as I prove here, and thereby impairs rivals' efficiency. To the extent that DSL providers cannot compete as effectively as they would in the absence of the ban, the ban allows cable television operators to raise the price of cable modem service and thereby reduce consumer welfare. Using a traditional antitrust analysis, I present evidence that local television advertising can be a separate product market (when it comes to marketing DSL), and that cable television providers have market power in that advertising market. I also present evidence that local television advertising on cable networks is the most efficient form of advertising for DSL providers. The potential anticompetitive effect of cable's ban on DSL advertising is to relegate DSL advertising to less efficient marketing channels, thereby allowing cable operators to charge higher prices for cable modem service. Such conduct thus raises obvious antitrust issues.

The Precompetitive Interest in Intellectual Property Law

The conventional wisdom that antitrust is less tolerant of monopoly than is intellectual property (IP) law is sometimes true, but there is another side of the coin that is less frequently commented upon and that deserves further scrutiny. On occasion, IP law condemns conduct on the part of IP owners - or excuses otherwise infringing activity on the part of IP defendants - expressly for the purpose of promoting competition, even though antitrust law (if it were to apply at all) would not find anticompetitive harm absent a more thorough analysis of whether the antitrust defendant possesses power over a well-defined market. Salient examples include the misuse doctrines in patent and copyright law; some applications of merger and fair use in copyright; and trademark law's functionality doctrine. In this paper, I develop an explanation for this divergence between antitrust and IP. Specifically, I argue that in some limited contexts the expected social costs (including error costs) of ruling for IP defendants are relatively low in comparison with the expected anticompetitive harm from ruling for IP plaintiffs. As a result, it is sometimes welfare-enhancing for IP courts to be less concerned than antitrust courts about the expected costs of false positives, that is, cases wrongly decided against the party defending the allegedly anticompetitive conduct. Thus, in an appropriate case courts should deploy IP doctrine to prevent harms that would be deemed unduly speculative, or not cognizable at all, in the analogous antitrust context, including (1) harms stemming from the exercise of small-scale, transitory, or localized market power; (2) harms that are individually of little competitive significance, but which in the aggregate threaten a substantial reduction in consumer welfare; (3) threats to dynamic efficiency stemming from the reduction of competition in innovation markets; and (4) potential reductions in expressive output that, for reasons rooted in the First Amendment, may be qualitatively, but not quantitatively, significant. I further contend, however, that such cases probably are more common in the copyright than in the patent law context, and that even in copyright contexts courts should be cautious about casually inferring anticompetitive harm; but that the analysis provides a rationale for a relatively expansive definition of trademark functionality.