Market Transparency, Information Exchange and Competition Topics ...

Topics and Outline Market Transparency, Information Exchange and Competition

1. Market Transparency 2. Information Exchange 3. Planning, Signaling, Coordination and Collusion 4. Regulation of Competitor Communication

Per Baltzer Overgaard Professor, School of Economics and Management

5. Cases

University of Aarhus Partner, Copenhagen Economics

6. The Internet and Online Trading Institutions 7. Wrap: Antitrust and Regulation

Helsinki, October 14, 2003 Slides available at: www.econ.au.dk/vip htm/povergaard/pbohome/pbohome.html

- The perspective of an economist

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1. MARKET TRANSPARENCY

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Market Transparency

(A) The Perfectly Competitive Ideal - Many buyers - many sellers

(B) Reality - Imperfect competition - Entry barriers - Product differentiation

- No entry barriers

- Proprietary technologies

- Homogenous goods - Access to identical technologies - Perfect and complete information

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- Imperfect and incomplete information Emphasize the latter!

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Lack of Market Transparency Imperfect and Incomplete Information

Transparency wrt prices, costs and product characteristics

- Asymmetric information: Market participants possess different pieces of information

- The firm side

- Buyers

- The consumer side

- Actual rivals

The effects of improving transparency?

- Potential competitors

- Good or bad? - How to systematically assess?

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2. INFORMATION EXCHANGE

2. INFORMATION EXCHANGE

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(A) Pure Competition

Information Exchange

(B) Static oligopoly Firm incentives to share information (C) Dynamic oligopoly Purpose of the information exchange - Information flows on the firm side The character of the information exchanged - Information flows on the buyer side Truthful revelation of information Institutions for sharing information

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OECD (2001) ← Stigler (1964), Stiglitz (1989), K¨ uhn & Vives (1995), K¨ uhn (2001)

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3. PLANNING, SIGNALING, COORDINATION AND COLLUSION

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Planning, Signaling, Coordination and Collusion Actual and past prices (and other relevant market variables)

3.1

Information flows on the firm side

Improved information flows between firms tend to facilitate coordination/collusion

- (quick and accurate) detection of chiseling - address of punishment - severity of punishment

- diminished information lags - improved accuracy in observing rival behavior

→ Improved deterrence → (Tacit) Collusion

- improved information about future intentions

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Signaling of future intentions

Information exchange/communication (generally)

- diminishes strategic uncertainty

- diminishes uncertainty

- facilitates coordination

- improves planning

→ (Tacit) Collusion

→ Efficiency enhancing

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3.2

Information flows on the buyer side

Improved information flows on the buyer side may or may not intensify competition


Dynamic perspective - reduced captivity may cut both ways - business stealing may be reversed

- buyers less captive (more price sensitive) - increased severity of punishment - decreases search costs → Possibly bad - “the Devil is in the detail”

→ Good

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4. REGULATION OF COMPETITOR COMMUNICATION

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Pulling things together

Improved firm information tends to facilitate coordination/collusion Improved buyer information likely (but not sure) to intensify competition

Regulation of Competitor Communication

Based on K¨ uhn (2001) - see also OECD (2001), Halliday & Seabright (2001), Møllgaard & Overgaard (2001) Change of focus in antitrust from (A) Ex post identification and intervention

Conclusion Both sides should be considered before concluding Static vs. dynamic perspective Case-by-case approach

to (B) Ex ante regulation of competitor communication/ information exchange. Pure form - hybrid approaches available when meaningful

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Types of communication Questions relating to both: (I) Communication about planned future behavior - Intentions - Soft, non-verifiable information → future prices, planned production, launch of new products, planned investments and capacity changes (II) Communication about past and actual behavior

(a) What is the potential of the communication wrt coordinating firm behavior? - If potential large, then candidate for a ban (b) What are the potential efficiency-enhancing effects of the communication, and could these be realized without the communication?

- Facts - Hard, verifiable information → past and actual prices, past sales, orders, stocks/ inventories, input prices and customer relations/client lists

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- If no possible (or likely) efficiency-enhancing effects, or if effects can be realized without the communication, then impose the ban

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A possible regime vis a vis competitor communication 1. Ban private communication between firms about future prices and production plans Private or public communication - Private means exclusive to firms - Public means available also to (potential) buyers Presumption that private communication between firms is more likely to facilitate coordination

- significant coordinating potential and few redeeming efficiency effects 2. Public communication concerning future prices and production plans is likely to have efficiency-enhancing effects that make general bans counterproductive - particularly if it commits firms vis a vis potential buyers - the potential competition-dampening effects should be assesses on a case-by-case basis (rule of reason)

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3. Ban individualized information exchange concerning past prices and quantities - significant coordinating potential and few redeeming efficiency effects - “efficiency-defense” should be allowed (reverse burden of proof)

5. Exchange of aggregate data should be presumed benign

4. Individualized information exchange concerning costs and demands should be treated on a case-by-case basis

- authority must prove, in a given case, that effects on competition and efficiency of exchange are negative

- presumption that the exchange is efficiency-enhancing - authority carries the burden of proof if ban is to be imposed

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5. CASES

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Cases

Tractors - UK 3 seems particularly interesting in the wake of the Internet and online information exchange

Airline computer reservation systems (ATP) - US TACA - Europe and North America

Antitrust agencies and consumer protection agencies both seem eager to push for more exchange of information

Wood pulp - Europe Rail freight tariffs - US

[For more, see below] Ready-mixed concrete - Denmark Retail gasoline - Sweden Bid rigging in procurement auctions - Denmark

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6. THE INTERNET AND ONLINE TRADING INSTITUTIONS

7. WRAP: ANTITRUST AND REGULATION

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Wrap: Antitrust and Regulation

The Internet and Online Trading Institutions

Branches of Economics and how they relate to antitrust and regulation

“The coming of perfect competition” ???

1) Industrial Organization and Econometrics → Antitrust (ex post approach)

B2B, B2C and B2G Quick response and contingent strategies (computerized trading) Contents of online information exchanges

2) Mechanism Design and Experimental Methods → Regulation and Market Design (ex ante approach) Businesses and government agencies would do wisely to boost their investment in human capital relating to 2!

Proprietary vs. public access Creation and deletion of information

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Thank You!

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Suggested reading Albæk, S., H.P. Møllgaard & P.B. Overgaard, 1997, Government-Assisted Oligopoly Coordination? A Concrete Case, Journal of Industrial Economics 45: 429-443. DeSanti, S.S., & E.A. Nagata, 1994, Competitor Comminications: Facilitating Practices or Invitations to Collude? An Application of Theories to Proposed Horizontal Agreements Submitted for Antitrust Review, Antitrust Law Journal 63: 93-131. Federal Trade Commission, 2000, Entering the 21st Century: Competition Policy in the World of B2B Electronic Market Places, Federal Trade Commision, Staff Report (October), DC: Washington. (Available at http://www.ftc.gov/os/ 2000/10/ index.htm\#26) Frontier Economics, 2000, E-Commerce and Its Implications for Consumer Policy, Office of Fair Trading, Discussion Paper #1 (August), UK: London. (Available at http://www.oft.gov.uk/html/rsearch/reports/oft308.pdf) Fuller, S., F. Ruppel & D. Bessler, 1990, Effects of Contract Disclosure on Price: Railroad Grain Contracting in the Plains, Western Journal of Agricultural Economics 15: 265-271. Halliday, J., & P. Seabright, 2001, Networks Good, Cartels Bad: But How Could Anyone Tell the Difference?, ch. 5 in Fighting Cartels - Why and How? Proceedings of the 3rd Nordic Competition Policy Conference, Swedish Competition Authority, Sweden: Stockholm. Kühn, K.-U., 2001, Fighting Collusion: Regulation of Communication Between Firms, Economic Policy April: 1-37. Kühn, K.-U., & X. Vives, 1995, Information Exchanges Among Firms and Their Impact on Competition, Office of Official Publications of the Community, Luxemburg. Monti, M., 2001, Why Should we be Concerned with Cartels and Collusive Behaviour?, ch. 1 in Fighting Cartels - Why and How? Proceedings of the 3rd Nordic Competition Policy Conference, Swedish Competition Authority, Sweden: Stockholm. Møllgaard, H.P., & P.B. Overgaard, 2001, Market Transparency and Competition Policy, Rivista di Politica Economica 91: 11-58. Nilssen, A., 2000, Transparency and Competition, mimeo, Stockholm School of Economics. OECD, 2001, Price Transparency, OECD, France: Paris. (Available at http://www.oecd.org/dataoecd/52/63/2535975.pdf) Schmitz, J., & S. Fuller, 1995, Effects of Contract Disclosure on Railroad Grain Rates: An Analysis of Corn Belt Corridors, Logistics and Transportation Review 31: 97-124. 1

Shapiro, C., & H. Varian, 1999, Information Rules: A Strategic Guide to the Network Economy, Harvard Business School Press, Mass: Cambrige. Stigler, G., 1964, A Theory of Oligopoly, Journal of Political Economy 72: 44-61. Stiglitz, J., 1989, Imperfect Information in the Product Market, ch. 13 in R. Schmalensee and R. Willig (eds.), Handbook of Industrial Organization, NorthHolland, NY: New York

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