Vertical integration,foreclosure, and productive efficiency

We analyze the consequences of vertical integration by a monopoly producer dealing with two retailers (downstream firms) of varying efficiency via secret two‐part tariffs. When integrated with the inefficient retailer, the monopoly producer does not foreclose the rival retailer due to an output‐shifting effect. This effect can induce the integrated firm to engage in below‐cost pricing at the wholesale level, thereby rendering integration procompetitive. Output shifting arises with homogeneous and differentiated products. Moreover, we show that integration with an inefficient retailer emerges in a model with uncertainty over retailers' costs, and this merger can be procompetitive in expectation.     

Price‐matching guarantees

Are price‐matching guarantees anticompetitive? We examine the incentives for price‐matching guarantees in markets where information about prices is costly. The conventional explanation of price matching as facilitating cartel pricing finds some theoretical support, but our model provides an additional explanation. A price‐matching guarantee may be a credible and easily understood means of communicating to uninformed consumers that a firm is low priced. The credibility of the signal is assured by the behavior of informed consumers. We contrast the testable implications of our model with those arising from two theories of price matching as anticompetitive, and show that available evidence supports the signalling theory.     

Vertical integration,exclusive dealing,and expost cartelization

This article uncovers an unnoticed connection between exclusive contracts and vertical organization. A vertically integrated firm can use exclusive dealing to foreclose an equally efficient upstream competitor and to cartelize the downstream industry. Neither vertical integration nor exclusive dealing alone achieves these anticompetitive effects. The cartelization effect of these two practices may be limited when downstream firms are heterogeneous and supply contracts are not contingent on uncertain market conditions. The extent of cartelization also depends on the degree of downstream market concentration and on the degree to which downstream competition is localized.     

Market structure and the competitive effects of vertical integration

We analyze the competitive effects of backward vertical integration when firms exert market power upstream and compete in quantities downstream. Contrasting with previous literature, a small degree of vertical integration is always procompetitive because efficiency gains dominate foreclosure effects, and vertical integration even to full foreclosure can be procompetitive. Interestingly, vertical integration is more likely to be procompetitive if the industry is otherwise more concentrated. Extensions analyze welfare effects of integration and the incentives to integrate. Our analysis suggests that antitrust authorities should be wary of vertical integration when the integrating firm faces many competitors and should be permissive otherwise.     

The Age of the Dragon: The Effect of Imports from China on Firm‐Level Prices

We analyze the impact of increased import penetration from China on the dynamics of firm‐level output prices in Italy. Accounting for potential endogeneity biases we find a significant and negative causal relationship: a 0.1 percentage point higher Chinese import penetration restrains price growth by 0.17 percentage points per year. This relationship reflects a procompetitive effect induced by cheaper imports, and, thanks to the firm‐level dimension of our data, we show that it is driven by low‐productivity firms within less skill‐intensive sectors. Finally, we show that Chinese import competition also had a dampening effect on Italian overall inflation.     

Patent pools,litigation, and innovation

This article analyzes patent pools and their effects on litigation incentives, overall royalty rates, and social welfare when patent rights are probabilistic and can be invalidated in court. With probabilistic patents, the license fees reflect the strength of the patents. We show that patent pools of complementary patents can be used to discourage infringement by depriving potential licensees of the ability to selectively challenge patents and making them committed to a proposition of all‐or‐nothing in patent litigation. If patents are sufficiently weak, patent pools with complementary patents reduce social welfare as they charge higher licensing fees and chill subsequent innovation incentives.     

Termination fees in a 'bright line' jurisdiction

We seek to statistically inform the debate regarding the Australian Takeovers Panel's ‘bright line’ policy towards break fees. Based on 313 takeovers from 2002 to 2006, 85 involving break fees, we find post‐bid competition to be unrelated to break fee usage and inversely related to bid success. We also find that break fee usage has a detrimental effect on shareholder wealth as measured by both the final bid premium and abnormal returns. Therefore, although break fees appear to be neither anticompetitive nor coercive within the Australian context, they do appear to have had a deleterious effect on shareholder wealth.     

Inference on vertical contracts between manufacturers and retailers allowing for nonlinear pricing and resale price maintenance

We present a model of vertical contracts between manufacturers and retailers with nonlinear pricing strategies. Using home‐scan data on bottled water produced by manufacturers and sold by retail chains in France, we estimate a structural demand and supply model allowing for two‐part tariff contracts between manufacturers and retailers. Using price‐cost margins recovered from estimates of demand parameters, we select the best supply model by performing nonnested tests, and find that manufacturers use two‐part tariff contracts with resale price maintenance. We then perform counterfactual policy simulations that restrict the use of these vertical contracts and assess welfare effects under alternative scenarios.     

Upfront payments and exclusion in downstream markets

Although upfront payments are often observed in contracts between manufacturers and retailers, little is known about their competitive effects or the role retailers play in securing them. In this article, we consider a model in which two competing retailers make take‐it‐or‐leave‐it offers to a common manufacturer. We find that upfront payments are a feature of equilibrium contracts, and in all equilibria, only one retailer buys from the manufacturer. These findings support the claims of small manufacturers who argue that they are often unable to obtain widespread distribution for their products because of upfront payments.     

Who Finances Durable Goods and Why It Matters: Captive Finance and the Coase Conjecture

We propose that, by financing their own product sales through captive finance subsidiaries, durable goods manufacturers commit to higher resale values for their products in future periods. Using data on captive financing by the manufacturers of heavy equipment, we find that captive‐backed models have lower price depreciation. The evidence is consistent with captive finance helping manufacturers commit to ex‐post actions that support used machine prices. This, in turn, conveys higher pledgeability for captive‐backed products, even for individual machines financed by banks. Although motivated as a rent‐seeking device, captive financing generates positive spillovers by relaxing credit constraints.     

The accuracy of hospital merger screening methods

This article analyzes the accuracy of various prospective hospital merger screening methods used by antitrust agencies and the courts. The predictions of the screening methods calculated with pre‐merger data are compared with the actual post‐merger price changes of 28 hospital mergers measured relative to controls. The evaluated screening methods include traditional structural measures (e.g., Herfindahl‐Hirschman Index), measures derived from hospital competition models (e.g., diversion ratios, willingness‐to‐pay, and upward pricing pressure), and hospital merger simulation. Willingness‐to‐pay and upward pricing pressure are found to be more accurate at flagging potentially anticompetitive mergers for further investigation than traditional methods.     

The design of patent pools: the determinants of licensing rules

Patent pools are an important but little‐studied economic institution. In this article, we first make a set of predictions about the licensing terms associated with patent pools. The theoretical framework predicts that (i) pools consisting of complementary patents are more likely to allow members to engage in independent licensing and (ii) the requirement that firms license patents to the pool (grantbacks) should be associated with pools that consist of complements and allow independent licensing. We then examine the terms of 63 pools, and show that licensing rules are consistent with these hypotheses.     

Harmful Procompetitive Effects of Trade in Presence of Credit Market Frictions

We explore the consequences of international trade in an economy that encompasses technology choice and an endogenous distribution of mark-ups due to credit market frictions. We show that in such an environment a gradual opening of trade may—but not necessarily must—have a negative impact on productivity and overall output. The reason is that the procompetitive effects of trade reduce mark-ups and hence make access to credit more difficult for smaller firms. As a result, smaller firms—while not driven out of the market—may be forced to switch to less productive technologies.     

Competition among the big and the small

Many industries are made up of a few big firms, which are able to manipulate the market outcome, and of a host of small businesses, each of which has a negligible impact on the market. We provide a general equilibrium framework that encapsulates both market structures. Due to the higher toughness of competition, the entry of big firms leads them to sell more through a market expansion effect generated by the shrinking of the monopolistically competitive fringe. Furthermore, social welfare increases with the number of big firms because the procompetitive effect associated with entry dominates the resulting decrease in product diversity.     

Resale price maintenance and manufacturer competition for retail services

We investigate the incentives of two manufacturers with common retailers to use resale price maintenance (RPM). Retailers provide product‐specific services that increase demand and manufacturers use minimum RPM to compete for favorable retail services for their products. Minimum RPM increases consumer prices and can create a prisoner's dilemma for manufacturers without increasing, and possibly even reducing, the overall level of retail services. If manufacturer market power is asymmetric, minimum RPM may distort the allocation of services toward the high‐priced products of the manufacturer with more market power. These results challenge the service argument as an efficiency defense for minimum RPM.     

Liquidity in a Market for Unique Assets: Specified Pool and To‐Be‐Announced Trading in the Mortgage‐Backed Securities Market

Agency mortgage‐backed securities (MBS) trade simultaneously in a market for specified pools (SPs) and in the to‐be‐announced (TBA) forward market. TBA trading creates liquidity by allowing thousands of different MBS to be traded in a handful of TBA contracts. SPs that are eligible to be traded as TBAs have significantly lower trading costs than other SPs. We present evidence that TBA eligibility, in addition to characteristics of TBA‐eligible SPs, lowers trading costs. We show that dealers hedge SP inventory with TBA trades, and they are more likely to prearrange trades in SPs that are difficult to hedge.     

Interest Rates and the Market for New Light Vehicles

We study the impact of interest rate changes on the demand and supply of new light vehicles in an environment where consumers and manufacturers face their own interest rates. Interest rate changes impact the auto market through both households and manufacturers. For the impact of rate changes on price and output growth, the household channel is quantitatively more important. A 100 basis‐point increase in both interest rates causes annual growth rates of production to fall from 1.0% to ?11.0% and sales to fall from 1.0% to ?2.9% in the short run.     

The Politics of M&A Antitrust

Antitrust regulators play a critical role in protecting market competition. We examine whether the political process affects antitrust reviews of merger transactions. We find that acquirers and targets located in the political districts of powerful U.S. congressional members who serve on committees with antitrust regulatory oversight receive relatively favorable antitrust review outcomes. To establish causality, we use plausibly exogenous shocks to firm–politician links and a falsification test. Additional findings suggest congressional members’ incentives to influence antitrust reviews are affected by three channels: special interests, voter and constituent interests, and ideology. In aggregate, our findings suggest that the political process adversely interferes with the ability of antitrust regulators to provide independent recommendations about anticompetitive mergers.     

The theory of limit pricing: Some applications to the banking industry

This paper employs a probabilistic theory of limit pricing to examine a number of issues of bank behavior relevant to limit pricing. First, the circumtances under which an entry threat produces a procompetitive impact on prices are analyzed. In contrast to the single-product firm, unambiguous predictions are found to result only in rather special situations. Next, the theory is used to examine the conditions under which it is optimal for a bank to ration credit as a result of an entry threat, suggesting limit pricing as an alternative explanation for this phenomenon. Finally, the theory is employed to contrast the implications of limit pricing from that of a related concept (probable future competition) as they apply to bank merger policy.     

Information exchange in cartels

Antitrust authorities view the exchange of information among firms regarding costs, prices, or sales as anticompetitive. Such exchanges allow competitors to closely monitor each other, thereby facilitating collusion. But the exchange of aggregate information, perhaps via a third party, is legal. The logic is that collusion is difficult if the identity of a price-cutting firm cannot be ascertained. Here, we examine this logic using Stigler's model of secret price cuts. We first identify circumstances such that when no information exchange is possible, collusion is difficult. We then show that if firms' aggregate sales are made public, nearly perfect collusion is possible.