Quantitative Techniques for Competition and Antitrust Analysis

593 Pages·2009·2.43 MB·English

Quantitative Techniques for
Competition and Antitrust Analysis
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Quantitative Techniques for
Competition and Antitrust Analysis
PeterDavisandElianaGarce´s
PrincetonUniversityPress
PrincetonandOxford
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LibraryofCongressCataloging-in-PublicationData
Davis,PeterJ.(PeterJohn),1970–
Quantitativetechniquesforcompetitionandantitrustanalysis/PeterDavis,ElianaGarce´s.
p.cm.
Includesbibliographicalreferencesandindex.
ISBN978-0-691-14257-9(alk.paper)
1.Consolidationandmergerofcorporations.2.Antitrustlaw.
3.Econometrics.I.Garce´s,Eliana,1968– II.Title.
HD2746.5.D3852010
338.802015195–dc22 2009005675
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ThisbookhasbeencomposedinTimesusingTEX
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Contents
Preface ix
Acknowledgments xii
1 TheDeterminantsofMarketOutcomes 1
1.1 DemandFunctionsandDemandElasticities 1
1.2 TechnologicalDeterminantsofMarketStructure 19
1.3 CompetitiveEnvironments:PerfectCompetition,Oligopoly,and
Monopoly 37
1.4 Conclusions 61
2 EconometricsReview 62
2.1 MultipleRegression 63
2.2 IdentificationofCausalEffects 89
2.3 BestPracticeinEconometricExercises 113
2.4 Conclusions 119
2.5 Annex:IntroductiontotheTheoryofIdentification 121
3 EstimationofCostFunctions 123
3.1 AccountingandEconomicRevenue,Costs,andProfits 125
3.2 EstimationofProductionandCostFunctions 131
3.3 AlternativeApproaches 149
3.4 CostsandMarketStructure 158
3.5 Conclusions 160
4 MarketDefinition 161
4.1 BasicConceptsinMarketDefinition 162
4.2 PriceLevelDifferencesandPriceCorrelations 169
4.3 NaturalExperiments 185
4.4 DirectlyEstimatingtheSubstitutionEffect 191
4.5 UsingShipmentDataforGeographicMarketDefinition 198
4.6 MeasuringPricingConstraints 201
4.7 Conclusions 227
viii Contents
5 TheRelationshipbetweenMarketStructureandPrice 230
5.1 FrameworkforAnalyzingtheEffectofMarketStructureonPrices 231
5.2 Entry,Exit,andPricingPower 256
5.3 Conclusions 282
6 IdentificationofConduct 284
6.1 TheRoleofStructuralIndicators 285
6.2 DirectlyIdentifyingtheNatureofCompetition 300
6.3 Conclusions 341
6.4 Annex:IdentificationofConductinDifferentiatedMarkets 343
7 DamageEstimation 347
7.1 QuantifyingDamagesofaCartel 347
7.2 QuantifyingDamagesinAbuseofDominantPositionCases 377
7.3 Conclusions 380
8 MergerSimulation 382
8.1 BestPracticeinMergerSimulation 383
8.2 IntroductiontoUnilateralEffects 386
8.3 GeneralModelforMergerSimulation 401
8.4 MergerSimulation:CoordinatedEffects 426
8.5 Conclusions 434
9 DemandSystemEstimation 436
9.1 DemandSystemEstimation:ModelsofContinuousChoice 437
9.2 DemandSystemEstimation:DiscreteChoiceModels 462
9.3 DemandEstimationinMergerAnalysis 491
9.4 Conclusions 499
10 QuantitativeAssessmentofVerticalRestraintsandIntegration 502
10.1 RationalesforVerticalRestraintsandIntegration 503
10.2 MeasuringtheEffectofVerticalRestraints 518
10.3 Conclusions 553
Conclusion 555
References 557
Index 577
Preface
Theuseofquantitativeanalysisbycompetitionauthoritiesisincreasingaroundthe
globe.Whetherthequantitativeanalysisissubmittedbyexternalexperts,orthecom-
petitionauthorityitselfundertakestheanalysis,empiricalanalysisisnowavitally
importantcomponentofthecompetitioneconomist’stoolkit.Muchoftheempiri-
calanalysissubmittedto,orcarriedoutby,investigatorsisfairlystraightforward.
Thisispartlybecausesimpletoolsareoftenverypowerfulandpartlybecausethe
needtocommunicatewithnonexpertssometimesplacesanaturalboundaryonthe
degree of sophistication which can comfortably be used. Of course, one person’s
“cutting-edge”methodisanother’sbasictoolandthisdifferencedrivesthenormal
processofdiffusionofnewmethodsfrombasicresearchtoappliedwork.Thetools
wediscussinthisbookarebroadlytheresultoftheideasandmethodswhichhave
developedoverthepasttwentyyearsintheempiricalindustrialorganizationliter-
atureandwhichareeithergraduallydiffusingintopracticeor,nodoubtinasmall
numberofcases,graduallydiffusingintoobscurity.
Whiletheaimofthisbookistoexamineempiricaltechniques,wecannotstress
enoughthatanyempiricalanalysisinacompetitioninvestigationneedstobeeval-
uated together with the factual, documentary, and qualitative evidence collected
duringthecase.Anempiricalanalysiswillusuallybeonealbeitimportantelement
inabroaderevidencebase.Onlyinasmallminorityofcaseswillquantitativeanaly-
sisalonebesufficientlyclear-cut,precise,androbustenoughtosupportafinding,
though it will provide one important plank of evidence in a wider range of cases.
Evenincaseswherequantitativeanalysisisimportant,asolidqualitativeanalysis
and a good factual knowledge of the industry will provide both a necessary basis
forquantitativeworkandasourceforvitalrealitychecksregardingtheconclusions
emergingfromempiricalwork.
Withthosecaveatsfirmlyinmind,inthisbookwediscussthemostusefulandmost
promisingempiricalstrategiesavailabletoantitrustandmergerinvestigators.Some
ofthesetechniquesaretriedandtested,othersaremoresophisticatedandnotyet
widelyembracedbypractitioners.Throughoutwetrytotakeacarefulpractitioner’s
eye to tools that have often been proposed by the academic community. The fact
is that practitioners need to understand both the potential uses and the important
limitations of the available methods before they will, indeed before they should,
choosetoapplythem.Wedothatbycloselytyingtheempiricalmodelsandempirical
strategyusedtoanswerourcompetitionpolicyquestionstotheunderlyingeconomic
theory.Specifically,economictheoryallowsustodefinetheassumptionsrequiredfor
agivenpieceofempiricalworktobemeaningful.Indeed,nosolidempiricalanalysis