Competition Policy at Universität zu Köln

Flashcards and summaries for Competition Policy in the degree program Economics at Universität zu Köln in Köln

CityCITY: Köln

CountryCOUNTRY: Germany

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Exemplary flashcards for Competition Policy at the Universität zu Köln on StudySmarter:

Welfare theorems
Recap

Exemplary flashcards for Competition Policy at the Universität zu Köln on StudySmarter:

Recap consumer vs. total surplus

Exemplary flashcards for Competition Policy at the Universität zu Köln on StudySmarter:

Market definition
Dimensions

Exemplary flashcards for Competition Policy at the Universität zu Köln on StudySmarter:

SSNIP test for market definition - product dimension
Interpretation and assumptions

Exemplary flashcards for Competition Policy at the Universität zu Köln on StudySmarter:

SSNIP operational
Price analysis

Exemplary flashcards for Competition Policy at the Universität zu Köln on StudySmarter:

Market power in theory vs. practical measure difficulties

Exemplary flashcards for Competition Policy at the Universität zu Köln on StudySmarter:

Defining relevant market from empirical evidence

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Three types of efficiency

Exemplary flashcards for Competition Policy at the Universität zu Köln on StudySmarter:

Single vs. Multi-firm dominance

Exemplary flashcards for Competition Policy at the Universität zu Köln on StudySmarter:

Evaluate market power

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Pivot analysis

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Perspectives of competition policy

Exemplary flashcards for Competition Policy at the Universität zu Köln on StudySmarter:

Competition Policy

Welfare theorems
Recap
  1. Walrasian equilibrium always Pareto-optimal
    • Competitive equilibrium is efficient
    • Utility non-satiated, firms and consumers price takers, symmetric information (only weak assumptions on preferences necessary)
  2. Every Pareto-optimal equilibrium can be achieved by competition
    • Allocative efficiency can be separated from distributive issues
    • Stronger preference assumptions necessary (+convex), technology convex (non-increasing returns to scale) + requirements from above

Competition Policy

Recap consumer vs. total surplus

• There are obvious examples where the consumer surplus can be very small while the
allocation is efficient (example: perfect price discrimination of a monopolist).
• Using consumer surplus instead of total surplus might reflect a specific social welfare
function, namely, one in which more emphasis is put on “consumers” than on “firms”
• This is not, however, good economics:
 Firms are owned by somebody – namely, consumers
 Reducing firm profits thus makes (some) consumers worse of (because they get
less dividend and therefore can consume less)
 Consumers can consume a product (e.g. broadband) and suffer from too high
prices and at the same time benefit from it (if they hold shares of DTAG)
• Thus, distributional effects of favoring consumer surplus are not clear as such
(although one suspects that those holding shares are those with above average
wealth – i.e. favoring consumer surplus might favor low wealth consumers in the end).
• Some economists argue that in most applications it does not make a big difference
whether to use consumer or producer surplus, since usually both move in the same
direction in practice and thus yield the same policy recommendation.

Competition Policy

Market definition
Dimensions
  • Product market
    • Product of interest and its substitutes
    • What is not substitutable?
      • Demand-side substitution: consumers would consider switching
      • Supply-side substitution: similar technology, input factors so that supply can
        increase
  • Geographic market
    • location of
      • supplier: multiple competing firms, outlets in the same area
      • customer: similar, aggregated customers with similar purchasing interest and options
  • Temporal dimension
    • Seasonality, peak & peak-off services
    • e.g. commuters and leisure travellers in trains or planes

Competition Policy

SSNIP test for market definition - product dimension
Interpretation and assumptions
  • Only market definition regarding substitution possibilities
  • NO CHECK for low prices

  •  No application in monopolistic markets
  • Cellophane fallacy
    • Monopolist price is implmeneted, cellophane and paper wrapping are stated as substitutes by the US Supreme Court
    • BUT SSNIP would ask for wider market definition
    • prices and quality are not comparable and therefore substitution relevant

Competition Policy

SSNIP operational
Price analysis
  • Own-price elasticity: profitability of price-increase, econometric estimation
  • Cross-price elasticities: Competitive specifications and constraints by other products, econometric estimation
  • Price correlation test: Positive correlation over time to another product
    • optional external demand/supply shock analysis
    • Spurious correlation vs. separate markets
  • Price differences: cf. price correlation test, not sufficient on its own

Competition Policy

Market power in theory vs. practical measure difficulties
  1. Abuse of dominance vs: circular argumentation
  2. Raise of prices above marginal cost vs. no large market power for revenue over fixed costs
  3. Super-normal economics profits vs. difficult measure (in comparison to inefficiency)
  4. Large market share alone, contradiction to a combination of high quality and low cost

Competition Policy

Defining relevant market from empirical evidence
  1. Qualitative assessment
    • What characteristics are relevant (for new products)?
    • Overlapping target groups by advertising
  2. Existing market reports/research from third parties
  3. Internal documents/ public/ press statements
    • BUT: biased or wrong information from competition law perspective
  4. Survey, direct approach to customers
    • BUT: Diversion between stated and true preferences, biases (like framing) might be present
  5. Simple quantitative techniques
    • e.g. entry analysis or price correlation analysis
  6. Advanced quantitative techniques
    • Cross-elasticities for demand-modelling (substitutability)
    • Performance-concentration analysis: 

Competition Policy

Three types of efficiency
  • Allocative effciency
    • high margins and prices
    • under-consumption
    • unmet potential gaines from trades
  • Productive efficiency
    • in production technology
    • over- vs. under-investment
  • Dynamic efficiency: lack of innovation

Competition Policy

Single vs. Multi-firm dominance
  • Single
    • Cournot-Monopoly
    • Stackelberg (price taker)
  • Multi
    • Oligopoly: Cournot or Bertrand
    • Supply function equilibira
    • Plus: stability and sovereignty inside oligopoly, no buyer power

Competition Policy

Evaluate market power
  • Market Structure -> Concentration ratios
    • market concentration/shares
    • Buyer power
    • potential competition
  • Increasing consideration conduct
    • Raise prices
    • withhold capacity
    • lower quality
    • Hirschmann-Herfindahl Index (HHI), Pivot analysis: Pivotal/residual supply index (PSI/RSI)
  • Expected conduct/ performance -> Game-theoretical simulation
    • price mark-ups (Lerner Index)
    • Price differences geograph./time
    • Capacity

Competition Policy

Pivot analysis
  • Pivotal: unavoidable trading partner
    • market power by withholding capacity
    • monopoly over some residual demand
  • Ability to raise price over competitive price

Measures

  • Residual Supply Index (RSI): (Difference of own capacity and) competitors capacity divided by demand
    • Example: german power producers -> not pivotal even at high residual demand
  • Pivotal Supply Index (PSI): time span of pivotal power

Competition Policy

Perspectives of competition policy
  • Business
    • Avoid sanctions: cost for fines, prison due to fraud
    • Protect yourself: make use of antitrust authorities in case of unfair competition
    • New business opportunities: divestitures as acquisition opportunities
  • Consumer
    • Protection: no extensive prices, e.g. electricity prices for industry companies due to German integrated electricity concerns
    • Broader procurement opportunities, options: improve variety and encourage innovation
  • Social
    • Economics: efficient competitive equilibria (cf. welfare theorems), but competition only for efficiency?
    • Politics: Political (due to economic) power may undermine democracy (Ordoliberalism WWII)
    • Ethics: fairness (of outcomes and competition rule set), inequalities justified by competitive markets?, 
Gradient

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