M2 Choice – Economics and Competition Law (ECL)

M2ECL_CurrentstudentCurrent student- Luc Greiner

Which aspects of your chosen program were the most challenging?

The M2 Economics and Competition Law program is mostly about applying industrial organisation concepts to assess competition on current markets and industries. As it is more applied, it is not as challenging as, for example, the M1 Economics and Law, since most of the theoretical knowledge was acquired in M1 and during the previous years at TSE. What is challenging is the economics and law program as a whole, from the first year – L1 – on: Studying both economics and law can be difficult because the methods used and the required learning are very different between both fields.

Which was your favourite course(s) and why? 

My favourite course is « Topics and Cases in Competition Policy »  because it focuses on some of the European Union Commission’s landmark cases that shaped EU competition law. One of the purposes is to discuss the application of industrial organisation to real-world mergers and alleged anti-competitive behaviours, which is always very interesting. In this course, it is also great to welcome expert economic consultants to study hot topics in competition economics, and expert lawyers to review the intricacies of competition law. This year, we are even participating in a mock trial with respect to the Facebook-Instagram merger with a jury of professionals.

What do you plan to do next?

In a few months, I will be starting an internship in economic consulting in the field of competition economics. I look forward to continue applying industrial organisation to real-world cases. In my opinion, this is the most interesting part of economic science: figuring out what theories can explain the facts. And with digitisation, and the rise of platforms, economic consulting is the place to be to study the latest issues in economics!

Alumni – Frédéric Axisia M2ECL_Alumni (2)

What are you up to now?

I’ve been working for nine months at TERA Consultants, a consulting firm in Paris gathering both economists and engineers. TERA is specialised in telecommunications and deals with competition and regulation cases. As a result, the job can offer a large variety of missions. Since I arrived, I have been involved in several litigations before the French Competition Authority, a lot of trials before different commercial courts for unfair competition practices, but also in the design of a margin squeeze model for a European regulator. Most cases I work on are related to the telecom field, but not all. It is quite challenging at first to understand all the mechanisms involved in that field but also quite rewarding to develop an expertise in such an evolving domain of the economy.

Cases apart, as the firm only has around 15 employees, we obviously all know each other and go sometimes for an afterwork drink. You also won’t be home sick in Paris, as half – if not more – of TSE graduates live there! I only miss being an active member of a student association…

Which skills, acquired from studying at the TSE, have you found useful?

It might disappoint some people, but I would say that the most important right now is my writing skill. You of course need an economic understanding of the cases you work on. But as I have to write economics reports intended for courts on a daily basis, being able – thanks to my law cursus – to organise my arguments and present them in a proper way is essential. Essential, but not sufficient. When working on competition cases, I did some econometric analysis – using STATA – and used economic literature to back up my points. And when working on the margin squeeze case, I had to understand a quite complex Excel model. As for the rest, economic reasoning learned through different classes would be what most consulting firms look for.

Finally, as a former member of the association Say It Aloud, I cannot emphasise enough the importance of public speaking. That way, you can look like you know, even when you don’t.

Internship report: Kilian Heutte, European Commission

Internship report - Killian Heutte

Where did you do your internship and what was your role?

Last summer I did my internship in Brussels at the European Commission in the Directorate General for Competition, F4 Merger Unit, which is specialised in Post and Transport Services.

The European Commission is an EU institution with a power of investigation and intervention. The working languages are English, French and German. It is a big institution, counting more than 32,000 European civil servants. They are divided into departments called “Directorates-General” – DG – which are sub-divided into services – specialised in particular market sectors – which are also sub-divided into units – policy areas.

My work consisted in the treatment of companies’ merger cases. I had to draft legal documents, all following strict templates; some were internal to the European Commission, and some others were to be published to inform EU citizens and companies. I also helped to interpret outputs of market investigations that were specifically made for the cases I was working on.

 

How did your studies / courses at TSE help you during the internship?

The mathematical skills I gained at TSE enabled me to create a methodology to compute different market shares for many sub-segmentations of given markets.

 

How did you find your internship? What advice would you give to students to find a similar internship?

I heard from other TSE students that the European Commission was helping students by offering them the possibility to get an understanding of its work through some special programs. I was looking for hands-on experience in the competition sector to complement my theoretical knowledge. It was clear to me that I wanted to work for such an institution, so I applied. To students who would like to find a similar internship, I would suggest to send an e-mail as soon as possible to “comp-visitors-scheme@ec.europa.eu”. You should provide some details concerning your availability, your motivation, the service/unit you would be interested in working in, etc,  with a CV and a cover letter.

 

 

Should we use new economic methods to assess the impact of collusion on welfare in vertical markets? The example of the “Yoghurt case”

 

bonnet
Céline Bonnet is a director of research at INRAE within TSE

 

If literature has widely covered collusion in horizontal markets, it has not given enough attention to collusion in vertical markets, and more precisely on how to properly evaluate the impact of cartels on total welfare. As we observe convictions for collusion among prominent manufacturers, economists try to advise authorities on new approaches to better consider the strategies of retailers, and better assess the impact of collusion on both manufacturers and retailers, as well as on consumers.

 

 

 

A concentrated market which has become the scene of anti-competitive practices

Over the past 30 years in France, the retail sector has known successive mergers that strengthened the bargaining power of big retailers against manufacturers. The food retail sector, for example, is dominated by eight major groups, including Carrefour and Leclerc, who represent about 40% of the total sales. To counteract this concentration trend, manufacturers of the food industry also decided to engage in a consolidation movement in the early 2000s. The increase of concentration among both retailers and manufacturers has led to higher prices for consumers.

Despite that trend, retailers have still searched for new innovative strategies to differentiate themselves and be more competitive on the market. Big retailers have played the strategy of Private Labels – PLs: they sell store-owned brands, such as, for example, la Marque Repère in Leclerc. PLs are then sold along with National Brands – NBs, established manufacturer brands – giving retailers advantages on both horizontal and vertical markets. They can differentiate from other retailers who might sell the same NBs, and they gain bargaining power against NBs manufacturers, which will lose market shares for the benefit of PLs manufacturers if they charge too high prices. Indeed, PLs products can be substitutes for NBs products, and are often sold at a relatively low price.

The concentration of manufacturers, along with increasing selling prices, also facilitated collusion and other anti-competitive practices. This can be illustrated by the “yoghurt case.

In 2015, French authorities charged 10 major PLs producers of the French dairy desserts sector – such as Yoplait and Lactalis – for having colluded from 2006 to 2012. Indeed, even though PLs are retailer-owned brands, one PL manufacturer may produce for several retailers at the same time. This gives PLs producers incentives to collude. If the price proposed by the retailer is too low, they can reduce their market share in the concerned retailer’s store and sell somewhere else. Retailers will suffer from this strategy, as they need PLs products to differentiate and bargain. Hence, the bargaining power of PLs producers increases with collusion.

 

A traditional estimation method of collusion effects has become outdated

To assess the variation in welfare caused by the collusion, the French competition authorities used a traditional economic approach, consisting in mainly focusing on the horizontal collusion, and fixing the retailers’ response. The flaw of this method is that it does not take into account vertical relations between PLs producers and retailers, and hence neglects the strategic response of the retailers. It also ignores the potential  “umbrella effect”, which arises when an increase in PLs products’ wholesale prices diverts demand to the substitute product (NBs) and thus distort NBs products’ wholesale prices and market share. A forthcoming paper  (C. Bonnet, Z. Bouamra-Mechemache, Empirical methodology for the evaluation of collusive behaviour in vertically-related markets: an application to the “yogurt cartel” in France) addresses this issue and applies this new methodology to the “Yoghurt case.

 

A new economic initiative to assess the impact of a cartel on welfare applied to the “Yoghurt case

The idea is to model a competitive setting – or non-collusive counterfactual – to obtain the prices and quantities that would have been observed in such environment, and then compare it with the prices and quantities we currently observe on the market. This new method differs from the traditional one in the sense that the negotiation of the choice of the wholesale prices is modelled as a Nash bargaining game, and not as a unilateral decision from the manufacturers that retailers have to accept. The results from this paper concluded that there was profitable collusion among PLs manufacturers. It also showed that the profit variation for retailers was quite ambiguous, and that PLs producers were not necessarily the only winners of the cartel.

Faculty article

In the competitive setting, by decreasing the wholesale price of PLs products, we would expect that the market share – and hence the wholesale and retail prices – of NBs products would decrease due to a drop in NBs demand. Indeed, in the yoghurt market, we observe an asymmetric substitution between the two types of products: NBs products are more sensitive to a change in the prices of PLs products than the other way around. Strangely, the simulation showed a decrease in market share and wholesale prices for NBs products, but not a decrease in retail prices. In fact, the « umbrella effect » causes a decrease in wholesale prices of NBs products following the decrease in the wholesale prices of PLs products. NBs and PLs manufacturers clearly lose profit in the competitive setting compared to collusion. The novelty then is to take into account the optimal strategy of the retailer, which is actually to slightly increase the retail price of the NBs products: clients will be attracted by the low prices of PLs products, and the retailers will extract a maximum of surplus from consumers who still want to buy NBs products. The retailer actually gains from PLs products but loses from the increase in NBs products’ prices because of the asymmetric substitution. The overall result varies from one retailer to another: for some, the negative effect of NBs products exceeds the positive effect of PLs products, but not for others.

Hence, both PLs and NBs manufacturers are better off with collusion, while the results for retailers are mitigated. The study also found that consumers are worse off with collusion, but the loss is relatively low – less than 1% of the consumer surplus. Overall, total welfare has increased on the yoghurt market.

 

The “yoghurt case” is an example of how variations in welfare can be wrongly estimated when not taking into account all the strategies of all players of the game. With this new methodology, consisting in considering both inter and intra brand competition, as well as a supply model that includes vertical linkages between manufacturers and producers, competition authorities can better evaluate profit sharing between providers and sellers. In the “yoghurt case”, having more precise information on the providers of each seller would have allowed to estimate the exact impact of collusion on each provider.

 

By Céline Bonnet

 

 

The influence of Joan Robinson on Economic thinking

 

The influence of Joan Robinson on Economic thinking

From Adam Smith to nowadays, most contributors to economic theory were men. Now that gender equality is an important issue in society, diversity is more present. For instance, Elinor Ostrom was the first female economist who received the Nobel Memorial Prize in economics in 2009 for her work in economic governance. Despite a lack of women in the history of economic thought – at least independently from their husbands, it is possible to find some strong female figures who participated in the shape of today’s economics. Joan Robinson is one of them. She was one of the leading figures of the Post-Keynesian economists and one of the members of the Keynes’ advisor group.

She became famous when she published her book The Economics of Imperfect competition in 1933. With Edward Chamberlin, she is part of an economist generation who criticised the widespread view of perfect competition and developed an imperfect competition model. Robinson’s work, together with Chamberlin’s, shifted the traditional Smith’s perspective that monopoly is in opposition with competition, to a model in which each firm in an industry behaves like a monopolist. This way, it was possible to reconcile an idea of competition with increasing returns to scale in an industry.

Robinson and Chamberlin did not work together – Robinson was based in Cambridge
England, while Chamberlin was based in America, mainly in Harvard where he did his PhD – but their ideas were very similar. They both considered an individual firm as a monopolist for the good they produce in competition with firms producing close substitutes. Then, they thought that free entry in a market implied a decrease in prices until profits were equal to zero. Thus, they concluded that the equilibrium meant marginal revenue equals marginal cost, and average revenue equals average cost. However, Robinson made some original contributions compared to Chamberlin; she is particularly remembered for her concept of monopsony, which is a market with only one buyer. In this framework, she showed that a worker was earning a wage lower than the value of his marginal product. Furthermore, she studied the case where a monopolist sell the same good in two different markets. She demonstrated that when setting prices, the firm would put a higher price in the market with the most inelastic demand.

 

TheInfluenceOfJoanRobinson_2A monopsony is a market with only one buyer. For example, there may be only one firm offering employment in an area. In this case, the wage will be below the marginal cost for the supplier, i.e the worker.

 

Her work on imperfect competition is a major contribution to the history of economic thought. Moreover, in the 1930s, Robinson was part of the Keynes’ advisory group on the General Theory. It was a gathering of prominent economists – such as James Meade, who won the Nobel Memorial Prize in economics in 1977 – who criticised Keynes’ previous theories and discussed new ideas for the constitution of the General Theory. In addition to her participation in this group, Robinson published a lot of academic papers to explain ideas that she thought were not clear, despite the publication of her book. As such, she became one of the main figures of Post-Keynesian economists. Even in the 1940s when she started exploring Marx theories, she interpreted his work along the lines of Keynes’ ideas.

Nevertheless, at the end of her life, she developed controversial views, supporting Maoist
China and North Korea. It appears that these ideas are the main reason why she did not
receive a Nobel Memorial Prize in economics in 1975. Indeed, this year, she was considered by the selection committee of the Prize and several economists thought she would be chosen. It is interesting to notice that, in the case of Joan Robinson, the obtention of the Prize was not directly related to the fact that she was a woman, even though there was much speculation on why exactly she did not receive it.

Her controversial ideas are often highlighted, as well as her strong character; for instance, when she thought someone was wasting her time with useless ideas, she stopped listening and it was then really hard to convince her. Concerning the latter, there are two hypothetical consequences related to it. According to Assar Lindbeck, a member of the selection committee for the Prize in 1975, the committee was afraid that either she would reject the Prize, or she would accept it to use this legitimization as a tool to attack mainstream economics. A friend of Joan Robinson, Geoff Harcourt – an Australian economist – gave another point of view: he thought it was more a matter of “international” relationships. Indeed, for him, Sweden and Great Britain did not treat well their respective economists – he thought British academia did not receive very well the ideas of Wicksell, a Sweden economist from the end of XIXth century and beginning of XXth century – so the Nobel committee was not so prone to award a British economist. According to Harcourt, when analysing the typical profile of British economists honoured by the Economic Prize, discrimination became almost obvious. Awarded British had to be more widely recognised, praised and with easy-going personalities than required from others nationalities; Joan Robinson, with her strong ideas, did not fit these requirements. Another reason proposed to explain why Robinson did not won the Prize was that the committee wanted to reward her for her work on imperfect competition. However, she published her book in 1933, and in 1975 – the year her candidature was discussed – she had repudiated these ideas. As it was the main corpus on which the committee wanted to reward her for, they removed her from the list of potential candidates. Once again, this shows that her work on imperfect competition was one of the most recognised economic contributions.

This lack of Nobel Prize in her curriculum vitae does not seem to be a problem for her
recognition among her peers. Her work, especially on imperfect competition, is part of
today’s economics, as well as her contributions to Keynes ideas. Then, one can say that she was a great economist, and one of the most powerful female economists of her century.

 

by Louise Damade

Should we break-up Big Tech?

In recent years, digital technologies have profoundly changed many aspects of our daily lives, from e-commerce to internet search, travel, communication or entertainment consumption. While for the most part these changes have benefited consumers, certain voices have started to speak up against the power and influence of the Big Tech companies – Google, Amazon, Facebook, Apple in particular, accusing them of stifling innovation, dealing unfairly with their suppliers, and violating our privacy among others. Elizabeth Warren, one of the most prominent candidates to the Democratic investiture in the U.S., recently called for a much tougher policy approach towards Big Tech, proposing in particular to dismantle some of these companies, a call that has received a certain echo in the press and among politicians.

To understand whether we should break-up – some of – the big tech companies, it is important to understand why they have become so big, whether such a situation is actually harmful to consumers, and whether a break-up is an appropriate solution.

GAFA

Many digital markets are characterised by the existence of economies of scale and of network effects (see Shapiro, Carl and Varian, 1998). The former corresponds to the idea that the average cost goes down with the number of units sold, which is typical of information goods: their production entails a large fixed cost, but they can be reproduced for a small marginal cost. For instance, once a search engine algorithm has been developed – at a considerable cost, answering an individual query is virtually costless.

Network effects are the demand-side equivalent of economies of scale: a product is more valuable the more users it has. If a social network like Facebook is a natural example of direct network effects, other platforms may exhibit indirect network effects: Android users exert a positive externality on each other, not because communication is easier between Android devices, but rather because more Android users attract more application developers to the platform (see Caillaud, Bernard and Jullien, 2003).

The use of data by technology companies is a particularly important source of returns to scale and network effects: as firms get more data, they can offer better products or services, or produce them more cheaply. Big Data also allow firms to realise economies of scope, that is to enter new markets thanks to the insights generated on their primary market – having access to your email data allows to offer a better calendar app.

By giving an advantage to larger firms, economies of scale and network effects can result in market tipping, that is in one firm becoming dominant as a natural result of the competitive process. The perspective of monopoly is worrying, but two forces push in the opposite direction. First, while possible, tipping is not guaranteed even in the presence of network effects. When these effects are intermediate, they can even intensify competition, as the fight for additional users becomes more intense. Second, even when they lead to monopoly, network effects and economies of scale can induce firms to compete harder to be the early leader: competition for the market, rather than in the market.

Breaking-up a monopolist in such a market, by creating several smaller networks, could result in increased competition. For instance, competing social networks could be induced to offer better privacy protection in order to attract more consumers. But breaking-up a network results in the fragmentation of the market, with some groups of consumers being unable to interact with others. This could make consumers switch network in order to enjoy more interactions, and eventually lead back to market tipping, thereby undoing the break-up.

The big technology firms have not passively enjoyed the rents of their position of natural monopolists, but have instead used a variety of strategies to protect or extend it, some of which have been deemed anticompetitive. Google, for instance, has been fined three times by the European Commission. One set of practices consisted of imposing restrictive clauses – exclusivity, tying –  to its trading partners, thereby preventing its rivals from competing on the merits. For instance, a rival search engine would have had to develop its own application store – or to pay a lot of money – in order to convince a device manufacturer to choose it over Google – and its very popular app store Google Play (see De Cornière and Taylor, 2018).

Another practice consisted in systematically favoring Google Shopping at the expense of other comparison shopping services on Google’s search engine. This issue of “own-content bias” has taken a new dimension with the emergence of internet gatekeepers such as Google or Amazon, the latter having also been accused – but not yet fined – of favoring its own brands on its platform. Own-content bias may also take other forms, such as when Spotify is required to pay Apple a fee when consumers subscribe through iOS, which puts it at a disadvantage compared to Apple Music. Platforms leveraging their dominant position on complementary markets is a key motivation for the proponents of breaking-up these firms.

GAFA2

Despite these legitimate concerns over exclusionary practices by multiproduct incumbents, it is not clear that a break-up – say, separating the search and the shopping activities of Google – would be desirable. First, in the presence of complementary products, common ownership enables firms to better coordinate their production decisions and achieve superior outcomes, which is the reason why competition authorities view vertical mergers more favorably than horizontal ones. Second, being able to use the data acquired on their dominant market on another market gives these firms further incentives to improve their core product. Forcing, say, Amazon to divest its personal assistant business would probably marginally weaken its incentives to offer cheap products on its platform. Third, a break-up in itself would not be sufficient to ensure neutrality of the platform, since they could use other contracts with some of the participants ensuring preferential treatment in exchange for a commission, a common practice in many industries (see De Cornière and Taylor, forthcoming).

A more sensible course of action consists in monitoring more closely the behavior of dominant platforms, and to intervene more quickly. At the moment antitrust actions take too much time to be carried out, and by the time they are the markets have changed, usually to the detriment of smaller rivals. Several recent reports make related arguments,  advocating a more responsive competition policy or the creation of a sectoral regulator (see the UK report “Unlocking digital competition: report from the digital competition expert panel”, or Cremer, Montjoye and Schweitzer, 2019).

Tech giants have also been accused of using acquisitions to cement their market power, buying out the start-ups that could potentially represent a threat to their dominant position. The typical illustration of this phenomenon is Facebook, with its acquisitions of Instagram and WhatsApp – and failed bid for SnapChat.  Google and Amazon have also been very active acquiring start-ups: over the past ten years, these three firms have bought around 300 companies, often relatively young. Most of these acquisitions have not been reviewed by competition authorities because they do not meet the various turnover thresholds.

One concern is that some of these acquisitions are “killer acquisitions,” i.e. made only for the purpose of shutting down potential competition, a phenomenon recently studied in the pharmaceutical sector (see Cunningham et. al 2018). Things look different in the tech sector, as many of the targets offer products that are complementary to the incumbents, and the perspective of being bought out by a big firm is a strong incentive to innovate. At the same time, economies of scope might turn a firm that offers a complementary product today into a rival tomorrow, but it is hard to predict when this is the case.

In markets such as these, with young firms and rapidly evolving technologies, competition authorities are bound to make errors, either of type I – blocking a pro-competitive one – or type II – approving an anticompetitive merger. The current situation is very asymmetric, as none of the reviewed acquisitions by the Big Tech firms have been blocked. This is certainly suboptimal, especially given that the cost of a type II error, namely elimination of competition, is probably much larger than that of a type I error. While recognising that predicting the effects of a merger is especially difficult in innovative markets, moving the needle towards a stricter approach to mergers in the digital sector seems warranted.

As I tried to show in this brief essay, ensuring effective competition in the technological markets will require a more elaborate answer than a break-up, the efficacy of which is highly doubtful. Several approaches have been proposed, and the debate is still raging. These are exciting times to be an industrial economist!

By Alexandre de Corniere

 

References

Caillaud, Bernard, and Bruno Jullien. “Chicken & egg: Competition among intermediation service providers.” RAND Journal of Economics (2003): 309-328.

Crémer, Jacques, Yves-Alexandre de Montjoye and Heike Schweitzer, “Digital policy for the digital era”, 2019

Cunningham, Colleen, Florian Ederer, and Song Ma. “Killer acquisitions.” Working Paper (2018).

De Cornière, Alexandre and Greg Taylor. “Upstream Bundling and Leverage of Market Power”, CEPR working Paper, 2018

De Cornière, Alexandre and Greg Taylor. “A Model of Biased Intermediation”, Rand Journal of Economics, forthcoming

Shapiro, Carl, and Hal R. Varian. Information rules: a strategic guide to the network economy. Harvard Business Press, 1998.

UK report, “Unlocking digital competition: report from the digital competition expert panel”, 2019.