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Presentation ACLE – 14 March 2011 – N Petit PDF

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The « Oligopoly Problem »: Beyond Merger Law? 1 NNIICCOOLLAASS PPEETTIITT,, UUNNIIVVEERRSSIITTYY OOFF LLIIEEGGEE ((UULLGG)) ACLE SEMINAR, 14 MARCH 2011 [email protected] HTTP://CHILLINGCOMPETITION.COM Objectives 2 (cid:1) Circumscribe the scope of the so-called « oligopoly problem » (cid:1) Review remedies applied in modern competition law against tacit collusion (cid:1) DDiissccuussss wwhheetthheerr tthhee ccuurrrreenntt aapppprrooaacchh ((ii)) ddeelliivveerrss;; and (ii) could be improved? Outline 3 The « Oligopoly Problem » 1. Prevailing Approach in Modern EU Competition 2. Law Beyond Merger Law? 3. Ex post enforcement as the way forward? 4. Conclusions 5. 11.. TThhee «« OOlliiggooppoollyy PPrroobblleemm »» 4 Introduction 5 (cid:1) Rise of giant oligopolies over the XXth century (cid:1) Early interest from economists (cid:1) Identification of a specific market failure (cid:1)(cid:1) DDiissttiinncctt ffrroomm ssuupprraa--ccoommppeettiittiivvee oouuttccoommeess iinn ccllaassssiicc oligopolistic interdependence models (Cournot, Edgeworth, Von Stackelberg) Epistemological Overview 6 Monopoly Oligopoly Single Firm Monopolistic Oligopolistic Collusion Dominance Competition Interdependence Tacit Explicit SSttaattiicc mmooddeellss CCoolllluussiioonn CCoolllluussiioonn Cournot Chamberlin Harvard v. Edgeworth Chicago Von Post Chicago Stackelberg The oligopoly problem Overview of the Literature 7 (cid:1) Chamberlin, « Value where sellers are few » (1929) Quarterly Journal of Economics, 63 (cid:1) In certain oligopolies, price cuts are useless (cid:1) Oligopolists mimic each other’s conduct (cid:2)(cid:2) PPrriicceess rreemmaaiinn aabbnnoorrmmaallyy ssttaabbllee (cid:2) Prices increase in parallel (cid:1) Outcome similar to collusion / process different (no agreement) (cid:1) « Tacit collusion », « conscious parallelism », « parallel conduct » F1-33% F2-33% F3-33% Initial Price Level -10% -10% -10% PL2 -10% -10% -10% PL3 -10% -10% -10% PL4 F1-33% F2-33% F3-33% After four interactions on the market, the price drops by 30% and the oligopolists’ MS remain stable: price competition is a loss- making strategy 8 Overview of the Literature 9 (cid:1) Harvard => Structural issue (cid:1) Bain, Industrial Organization, John Wiley & Sons, New York, 1968 (cid:1) Kaysen & Turner, Rahl, etc. (cid:1) Structural presumptions of unreasonable market power (cid:1) Neal Report (1967) and Industrial Reorganisation Act (1972) (cid:1) Chicago => Behavioral issue (cid:1) Stigler, « Theory of Oligopoly », (1964), 72 Journal of Political Economy, 44 (cid:1) Structure is not sufficient to presume market failure (cid:1) Tacit collusion is unstable, with constant incentives to deviate (cid:1) Strict conditions must be met for oligopolists to coordinate=> monitoring mechanism Overview of the Literature 10 (cid:1) Post Chicago school and game theory (cid:1) Formally explains how oligopolists can tacitly collude (cid:2) In a one shot game, competition is the Nash equilibrium. Oligopolists will compete, even though cooperation would bring more profits (cid:2) In a repeated game, cooperation (absent communication) is the Nash equilibrium. Oligopolists will cooperate tacitly, because with repeated games, they can (i) indirectly communicate; (ii) profits from deviation ddeeccrreeaassee//pprrooffiittss ffrroomm ccoooorrddiinnaattiioonn iinnccrreeaassee ((ddiissccoouunntt ffaaccttoorr iissssuuee)) (cid:1) Identifies 4 conditions for tacit collusion to happen C1 – Mutual understanding of the « terms of collusion » (focal point, signalling strategies, etc.) C2 – Punishment mechanism (credible, timely and deterrent) C3 – Monitoring mechanism C4 – Obstacles to entry (cid:1) Conditions are influenced by market features (market structure, transparency, elasticity of demand, etc.) (cid:1) Tacit collusion may occur in relation to prices, output, but also investments, product launch, etc.)

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2. Prevailing Approach in Modern EU Competition. Law. 3. Beyond Merger Law? 3. 4. Ex post enforcement Oligopolists mimic each other's conduct.
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