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Optimal Substantive Standards for Competition Authorities

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Abstract

Recent years have witnessed a significant resurgence in the debate concerning the optimal substantive standard to be used in the enforcement of competition law. One of the arguments proposed for using a Consumer Surplus standard, is that, when firms can choose from a number of mutually exclusive actions, it may induce firms to adopt actions that lead to a higher level of total welfare than would a Total Welfare standard. This important basic insight, initially due to Lyons (2002), has been discussed and extended in the recent literature always in the context of mergers. In this paper we generalise and re-examine this argument for any potentially anti-competitive action – we have in particular in mind actions often challenged as attempted monopolisation (abuse of dominance) or vertical restraints, taken by firms in different environments. We show that in the absence of any efficiencies the two standards lead to exactly the same outcomes but a choice between them becomes important in the presence of efficiencies. With positive marginal-cost reducing efficiencies we confirm the presence of what we term a Lyons effect in our more general setting. We then examine how the choice of standard depends on a number of relevant parameters. Most important in terms of their policy implications are the results that the Consumer Surplus standard will be the optimal choice, when the extant market power is significant, when the size of marginal cost-reducing efficiency effects is large and when the difference in the market power raising effects of mutually exclusive actions is large. These results are important since they suggest that in all cases where significant extant market power is a prerequisite for the enforcement of Competition Law it is best to use a Consumer Surplus standard.

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Notes

  1. See, for earlier contributions, Besanko and Spulber (1993); Neven and Röller (2005); Lyons (2002); and, more recently, Padilla (2005); Carlton (2007); Farrell and Katz (2006); Heyer (2006); Fridolsson (2007); Pittman (2007); Salop (2010); Armstrong and Vickers (2010); Kaplow (2011); Baker (2013); Hovenkamp (2013); Lianos (2013); Blair and Sokol (2013); Fox and Sullivan (1987), Farrell and Katz (2006), and other references in Baker and Salop (2015), footnote 52. The latter propose that the consumer surplus standard “also helps to address inequality” (p. 12). See also Werden (2014).

  2. Guidance on the Commission’s Enforcement Priorities in Applying Article 102 EC Treaty to Abusive Exclusionary Conduct by Dominant Undertakings, Commission of the European Communities, Brussels, 3 December 2008.

  3. U.S. Department of Justice and the Federal Trade Commission, Horizontal Merger Guidelines, (last version issued in August 19, 2010) available at: http://www.justice.gov/atr/public/guidelines/horiz_book/hmg1.html.

  4. Including mergers, horizontal agreements, predatory pricing, monopsony conduct, and harm to competitors (from mergers or exclusionary conduct).

  5. The recent Canadian Supreme Court merger decision on Tervito puts efficiencies even more front and center in merger enforcement procedures in Canada.

  6. Other than issues relating to administrability that could favor a CS standard - Hovenkamp (2013).

  7. Often modelled in the presence of information asymmetries.

  8. Other excellent reviews of the main arguments discussing the pros and cons without in the end taking a clear stance in favour of one of the standards are contained in Farrell and Katz (2006) and in Kaplow (2011). Also Motta (2004) and Pittman (2007)

  9. By reviewing also the papers by Lyons (2002); Besanko and Spulber (1993) and Neven and Röller (2005).

  10. Farrell and Katz (2006), p. 32.

  11. Apart from Farrell and Katz (2006) mentioned above see also Nocke and Whinston (2010, 2011); Armstrong and Vickers (2010).

  12. See for example O’Donoghue and Padilla (2007) and Whinston (2006).

  13. Thus, our analysis does not support Motta’s contention that “consumer and total welfare standards would not often imply very different decisions” (Motta 2004, p.20) unless one assumes that efficiency effects are indeed rare, an assumption not supported by received wisdom about the effects of mergers, vertical restraints or indeed of many of the practices that can be used for attempted monopolisation.

  14. Characterized by the elasticity in the competitive counterfactual and the extant market power.

  15. When these are symmetric across actions and the latter differ only in terms of their market power enhancing effects.

  16. These include essentially all cases other than the cases of horizontal collusive agreements or cartels for which, our analysis suggests that, the choice of standard is not important since they are not going to be associated with marginal cost-reducing efficiencies.

  17. For a recent paper discussing optimal antitrust enforcement in the presence of imperfect detection, decision errors and delays, see Katsoulacos and Ulph (2015).

  18. In this paper we only consider the profit of the firm that takes the action and not the loss/benefit of other firms’ (e.g competitors or firms that produce supplementary products) that might be affected by the action. In a sequel paper we deal with this extension.

  19. Easy to see that ε measures the rate at which the firm’s profits would increase if it raised price above c 0 = 1

  20. However, for clarity, whenever below we refer to a firm’s “environment” but keeping extant market power constant we will be using ε (rather than e).

  21. At some points in the later discussion we will want to allow for the possibility that these anti-competitive actions could have other cost-reducing efficiency effects, ΔF ≥ 0 which have no effect on marginal costs - and hence no effects on prices and consumer surplus – but lower fixed costs and so increase both profits and total welfare. However since our focus is on the effects of anti-competitive actions on market power and any associated efficiencies affecting marginal costs, we will not explicitly include the parameter ΔF in our description of an action.

  22. The associated output is Q 1 = (1 − μ)(Δc + ε) > 0

  23. Though this is obvious, it is often seemingly forgotten, as when making unqualified statements that a pre-requisite for investigating a firm is that it has significant extant market power but for a liability finding we also require a significant increment in the market power.

  24. This is what we should expect as when the firm has extant market power the original product price will be high and this will lower the possibilities for raising prices even further.

  25. Unless of course the other, profit-enhancing efficiencies are large.

  26. In this section we concentrate on the effects of ε. The influence of the extant market power (μ 0) on ΔCS and ΔW is discussed in detail in Section 3 below.

  27. The reason for this is because as we have seen from eq. (8) as the extant market power increases it dampens a price rise and magnifies a price reduction.

  28. The significance of this result is of course best understood when the simplifying assumptions of perfect detection and no errors by the CA are relaxed. Under these assumptions, in the absence of any efficiencies firms will not take any action, irrespective of the substantive standard used by the CA.

  29. Τhe latter is negative because the reduction in consumer surplus in (11) outweighs the increase in profit in (12).

  30. Till now ε was the only parameter that characterised the different environments from which a firm would come from.

  31. One issue is of course, that we by-pass here, is that it is not at all clear how to interpret the term “significant” here as has been stressed, for example, by Kaplow and Shapiro (2007).

  32. Since it is not affected by μ 2.

  33. The results of numerical simulations undertaken in this section are available from the authors on request.

  34. At the competitive equilibrium.

  35. Essentially, all cases other than horizontal agreements or cartels. For an excellent detailed discussion of the justifications for setting the high existing market power prerequisite see Kaplow and Shapiro (2007).

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Acknowledgments

A first version of this paper appeared in May 2011. Since then we had the opportunity to present the paper in various fora and have benefitted from many comments and discussions. We would like to thank in particular the participants of the 2nd ESRC Workshop on “Optimal Enforcement Procedures” (CRESSE, Rhodes, July 3rd 2011) and especially Joe Harringtion, Bruce Lyons, Peter Møllgard, Martin Peitz, Patrick Rey, Mike Whinston and Valanta Milliou, the participants of the 10th CRETE Conference (Milos, 10 – 14 July 2011), the participants of the Microeconomics Workshop of the Dept. of Economics, AUEB (Athens, March 20th 2013), the participants of seminars in DICE, Düsseldorf Institute for Competition Economics (May 20th 2014), the Higher School of Economics and Lomonosov Moscow State University (Moscow and St. Petersburg, May-June 2014) and the participants of the MaCCI Annual Conference (March 2015) and especially Andreea Cosnita-Langais, for their very useful comments. Of course all errors, omissions and inaccuracies remain our sole responsibility. Initial research was funded by an ESRC grant RES-052-23-221I “Optimal Enforcement and Decision Structures for Competition Policy” and subsequently it has been co-financed by the European Union (European Social Fund – ESF) and Greek National funds through the Operational Program “Education and Lifelong Learning” of the National Strategic reference Framework (NSRF) – Research funding program: ARISTEIA – Competition, Law Enforcement and Growth.

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Authors and Affiliations

  1. Department of Economics, Athens University of Economics and Business, 76 Patission str, 104 34, Athens, Greece

    Yannis Katsoulacos

  2. Department of Economics, Athens University of Economics and Business, Athens, Greece

    Eleni Metsiou

  3. School of Economics and Finance, Scottish Institute for Research in Economics (SIRE), University of St. Andrews, St. Andrews, Scotland

    David Ulph

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  1. Yannis Katsoulacos
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Correspondence to Yannis Katsoulacos.

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Katsoulacos, Y., Metsiou, E. & Ulph, D. Optimal Substantive Standards for Competition Authorities. J Ind Compet Trade 16, 273–295 (2016). https://doi.org/10.1007/s10842-015-0214-8

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