Markets regulations and law (behavioural economics)

SECONDA PARTE: ANTITRUST

Competition as a process:

Competition focusing on dynamic activities and not considering the equilibrium status. It is a price determining force which, by equating prices and marginal costs and starting from a disequilibrium starting point, assures allocative efficiency using resources.

Competition as a market structure:

Competition refers to an idealized market structure, guaranteeing the fact that perfect competition is existing. Once reached the equilibrium, no further market activities are possible.

Equilibrium approach for perfect competition (market as a structure):

In a perfect competition model, there are no monopolies. The products are all the same. Firms are price takers (no market power to influence the prices). Market shares have no influence on prices. Buyers have complete or perfect information. Capital resources and labor are perfectly mobile (no entry/exit barriers). Firms can enter or exit the market without costs. The perfect competition approach comes from the Gilded Age.

Age where there were two ideologies confronting: freedom of contract and freedom to trade.

Contractual freedom: individuals or groups form contracts without government restrictions. individual freedom of choosing with whom doing contracts, weather doing them or not.

Freedom to trade: also seen as freedom to compete. Individuals should be free to pursue any kind of market activity without external interferences. It is bound up with economic theory: it can happen if the market structure will allow you to do that (no big powers and many people at the same level all with freedom to trade).

Competitive forces may stop functioning in 2 cases:

• When the state obstacles the freedom to trade by interfering (giving out privileges and constraints)
• When within the market itself a business becomes so powerful that competition (both actual and potential) can't contrast it

This view sees the trading among independent actors unconstrained in pursuing their economic interests (horizontal view).

The other view is the one which focuses more on the vertical dimension of contract and exchange. Free competition means that each individual has the possibility to bargain about his own property rights (buyer-seller agents placed in the supply-demand chain vertical view). Collision between freedom to trade and freedom of contract. The clash happens when freedom of contract lead businesses building contractual relationships and gaining market power (cartels). This way they become that powerful because of the freedom to trade that the basic elements of free competition are deleted. The bottom line is to avoid that market power becomes economic power (economic, social, political power) short circuit for the supporter of freedom to trade (the State intervention would be needed there). Sticking to the 'perfect competition' approach, freedom of contract views have been seen with fear as the fear of drifting toward a cartel was great. CO-OPETITION (cooperative)

1. Your complementor (if customers value your product more when they have also other player's product, than alone)
2. Your competitor (if customers value your product less when they have the other player's product, than alone)
3. Your complementor (if supplier sees more attractive giving you resources when it is also supplying another player, than alone)
4. Your competitor (if supplier sees less attractive giving you resources when it is also supplying another player, than alone)

It helps understanding the tendencies.

Coopetition comes in hands when businesses gain advantage by cooperating with suppliers, customers and firms producing complementary or related products.

Competition and monopoly

Monopoly: complete control of the entire supply of goods or of a service in a certain area or market.

To get to a monopoly situation one way can be successful

Innovation as a source of temporary market power (getting replaced later by new inventions by competing entrants). Creative Destruction: it explains the transition from a competitive to a monopolistic market.

COMPETITION LAWS (main models and common assumptions)

Competition laws have roots in a populistic approach to economic relationships. These laws are the result of their contemporary societies (sharing that society's values from constitutional to ethical). Competition laws always serve the ideal of protecting market-oriented societies from the excesses of private power gained through the development of economic activities.

Competition laws (in the US antitrust) aim at control: price levels and monopoly power.

Assumptions on why we do need competition laws:

Competition is a market mechanism which makes companies offer goods and prices at the best terms for consumers (consumer's welfare presumption)

The more competitive the markets are, the lower the prices and better

1. Market failures bring the need to challenge the accumulation of market power
2. Public intervention can correct this failure

Competition for the market and in the market: for the market means that you are competing for the control of the market (need for regulation, for consumers regulate a natural monopoly) and in the market the normal competition between companies in the same market.

In the EU: competition rules apply only to 'undertakings' (so every entity engaged in economic activity regardless of legal status of entity and way it is financed). They focus on economic activities. Including in the undertaking category also non-profit-making organizations and public bodies.

In the US: competition rules also apply to individuals (also with possible criminal law's consequences). heritage from the Gilded Age. Competition policies aim at controlling the abusive exercise of market power (by single or combined undertakings). They apply when there is:

presence or dangerous market power

Anticompetitive conduct (creating, retaining, enlarging that market power)

In fact, natural monopolies are legal, the abusive dominant position is illegal.

Market power P-MCL=Index for market power: (learner index) 0 < L < 1. Where market power P= 0 the firm is perfectly competitive. However, it is nearly impossible to calculate it in real practice (because of lack of info), it has limited relevance to understand real-world competition.

'Significant market power': for EU: a position of economic strength by an undertaking that prevents effective competition, during a precise time, behaving independently from its competitors. Or the power to behave independently of competitors or to gain a relevant influence on the determination of price without losing market shares.

Jurisdictions struggle to find reliable proof of market power (ex: presence of entry barriers, exclusion of competition, control over prices, price discrimination).

Generally used the ‘market shares’ within a relevant market as indicator for market power. Market definition categorized by: dimension of the relevant market (by product/service or geographic) or competitive constraints (demand substitution, supply substitution, potential competition). Relevant market We always need a relevant market definition, in order to assess the damage of the conduct (framing the space in order to interpret the conduct). It is not needed in the case of price fixing (no need of finding a relevant market, as the conduct has already been assessed as anticompetitive). Relevant market definition: a set of products or services considered substitutable so that they exert competitive pressure on each other (an intersection of relevant product market and relevant geographic market identifying boundaries of competition between firms) culture is fundamental defining the relevant market (ex: Saudi Arabia no alcohol, EU yes alcohol) Relevant product market: it comprises

All products or services that are interchangeable or substitutable by the consumer.

Relevant geographic market comprises the area in which firms are involved in the supply of products or services and in which the conditions of competition are sufficiently homogeneous.

Competitive constraints: demand substitution (demand elasticity), supply substitution (changing the production line from one product to another, its easiness to change or not) or potential competition.

The SSNIP test (small but significant and non-transitory increase in price): this test focuses on price increment. Increasing the price and looking at the reaction of consumers. If rising the price, the customer is moving to another product (a substitute product) it means that we are moving within the same relevant market. SSNIP test does not work with Veblenian goods (luxury good for which its demand increases as the price increase, showing your position or status).

Cellophane case: rising the price of cellophane, suppliers (that are

Now consumers are switching to another product that is maybe very different in its function. This means that there is a price level that when passed is going to drive the consumer to another product (not even considered as substitute).

Relevant market geographic: considering the product substitutability we always have to take into account the geographic position as it includes the transportation costs. Ex: retail stores where the consumer is purchasing a service not a one-shot purchase. The shopping malls are full of different services in the same place to decrease the transportation costs.

HHI (index): the sum of the squares of the market shares of the firm within the industry (a measure of the size of firms in relation to the industry and an indicator of the amount of competition among them). Market shares in relation with their industry. The highest it is: the lower the competition (so high market power), the lower it is: the highest the competition (so lower market power).

Potential

competition (competitive pressure can be exerted also by non-active undertakings). Firms still not active in a relevant market can decide to enter it (contestable market) and the already existing firms in there can adopt competitive prices even if they are alone in that market so far. It is another way of calling 'innovation' (most of the times) the solution is to buy the small new entrant (killer acquisition). The antitrust focus should move to protecting innovation (merger control). The situation changes when innovation start being seen as a public good (not only focusing on the entrepreneur that wants to be bought for the money). The problem with start-ups is that they do not have any market share, so it is difficult to assess an antitrust intervention. Market power: to assess it, it is difficult (Ex: highly innovative markets).