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Economics 348 - Competition Policy
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Competition Policy
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College 2Major areas:
- Horizontal agreements
- Vertical agreements
- Abuse of dominance
- Mergers & acquisitions
- State aid
College 3
In practice, markets not always well-defined because substitution patterns on the demand & supply
side are not always clear
Dimensions substitutability:
- Demand substitutability
- Supply substitutability
Sides to market definition
- Products
- Geographic areas
Types of evidence:
- Common sense/ introspection
- Qualitative evidence
- Quantitative evidence
o Signals, complaints
o Serious econometrics
Circumstantial evidence:
- Price correlation over time (0.85 to 1)
- Differences in price (large difference -> different markets)
- Nature of need satisfied
- Geographical market
Safe harbor (=conditions for escaping regulatory measure)
Firms want to have widely-defined markets, enforces want to have narrow-defined markets
SSNIP test: small, significant, non-transitory increase in price
-> find smallest set of products worth monopolizing
P−MC
Lerner Index=PCM = Between 0 and 1
P
n
FOC : max p ( Q ) qi−C ( qi ) where Q=∑ q j
qi j=1
, ∂p '
p (Q)+ −C ( qi ) =0
∂q i
¿ '
p −C ( q i ) s i
Li ≡ =
p
¿
ε
ε is the own-price elasticity of demand at p*; s i represents the market share of firm i
N
p−C mi
L=∑ s i
i =1 p
N
2
Herfindal-Hirschman Index of concentration: HHI =∑ ( s i )
i=1
HHI
Aggregate Lerner index related to HHI: L=∑ s i Li=
i ε
m
Coefficient Cm: sum of market shares of the m biggest firms C m=∑ si
i=1
q ri =α i + β i ln pi + ∑ γ is y s +¿ ∑ μil wl + ∑ δ ik c k + ε i ¿
s l k≠ i
π it c
Elasticity β given by ln ( )
π1t c1t ( )
=α −β ln it + ε it
Relevant market consists of a group of products with no close substitutes outside the group and good
substitutes in inside the group
Typical merger analysis steps:
1. Define relevant market
2. Identify competitors
3. Calculate pre-merger market shares and competition indices
4. Calculate post-merger market shares and competition indices
5. Consider any mitigating factors: entry, efficiencies, failing firm
Logit competition index (LOCI) method and Option demand method used at NZa
Gross upward pricing pressure index (GUPPI)
- Initial indicator if merger causes price to rise
- UPP caused by unilateral changes
[ diversion ratio ]∗[ profit margin A ]
- UPP=
[ Price B ]
LOCI mode: firms in differentiated Bertrand competition
V tj =U tj +ε tj Utility: structural and stochastic part
Structural part: U tj =γ tj −β d tj −α p j
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