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Quantitative Techniques for Competition and Antitrust Analysis

Quantitative Techniques for Competition and Antitrust Analysis

Peter Davis
Eliana Garcés
Copyright Date: 2010
Pages: 560
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  • Book Info
    Quantitative Techniques for Competition and Antitrust Analysis
    Book Description:

    This book combines practical guidance and theoretical background for analysts using empirical techniques in competition and antitrust investigations. Peter Davis and Eliana Garcés show how to integrate empirical methods, economic theory, and broad evidence about industry in order to provide high-quality, robust empirical work that is tailored to the nature and quality of data available and that can withstand expert and judicial scrutiny. Davis and Garcés describe the toolbox of empirical techniques currently available, explain how to establish the weight of pieces of empirical work, and make some new theoretical contributions.

    The book consistently evaluates empirical techniques in light of the challenge faced by competition analysts and academics--to provide evidence that can stand up to the review of experts and judges. The book's integrated approach will help analysts clarify the assumptions underlying pieces of empirical work, evaluate those assumptions in light of industry knowledge, and guide future work aimed at understanding whether the assumptions are valid. Throughout, Davis and Garcés work to expand the common ground between practitioners and academics.

    eISBN: 978-1-4008-3186-9
    Subjects: Economics, Political Science, Law

Table of Contents

  1. Front Matter
    (pp. i-vi)
  2. Table of Contents
    (pp. vii-viii)
  3. Preface
    (pp. ix-xi)
  4. Acknowledgments
    (pp. xii-xii)
  5. 1 The Determinants of Market Outcomes
    (pp. 1-61)

    Asolid knowledge of both econometric and economic theory is crucial when designing and implementing empirical work in economics. Econometric theory provides a framework for evaluating whether data can distinguish between hypotheses of interest. Economic theory provides guidance and discipline in empirical investigations. In this chapter, we first review the basic principles underlying the analysis of demand, supply, and pricing functions, as well as the concept and application of Nash equilibrium. We then review elementary oligopoly theory, which is the foundation of many of the empirical strategies discussed in this book. Continuing to develop the foundations for high-quality empirical work, in...

  6. 2 Econometrics Review
    (pp. 62-122)

    Throughout this book we discuss the merits of various empirical tools that can be used by competition authorities. This chapter aims to provide important background material for much of that discussion. Our aim in this chapter is not to replicate the content of an econometrics text. Rather we give an informal introduction to the tools most commonly used in competition cases and then go on to discuss the often practical difficulties that arise in the application of econometrics in a competition context. Particular emphasis is given to the issue of identification of causality. Where appropriate, we refer the reader to...

  7. 3 Estimation of Cost Functions
    (pp. 123-160)

    Costs are a key component of profitability, and as such it should perhaps not be surprising that knowledge of an industry’s or a firm’s cost function is often very important for competition analysis. While theoretical cost functions will be familiar from introductory economics courses, the aim of this chapter is to describe the tools available for determining the shape of real-world cost functions in order that estimates of them can be used in practical settings.

    Before we progress to such practicalities, it is useful to pause briefly to recall Viner’s (1931) theory, which may usefully be described as the “cost...

  8. 4 Market Definition
    (pp. 161-229)

    In both EU and U.S. jurisdictions, the courts have stated that competition authorities must define markets before progressing to evaluate competitive effects.¹ In addition, legal statute in numerous jurisdictions uses either market share or concentration thresholds to define safe harbors. Each of these external forces acts to push competition agencies to define markets. These are by no means the only forces at work. Internally, competition agencies often undertake a market definition exercise as the first step in an investigation since firms’ market shares are used as a first screening device to give the investigator a first hint of the likelihood...

  9. 5 The Relationship between Market Structure and Price
    (pp. 230-283)

    Merger investigations usually seek to determine whether the change in market structure caused by a merger will have a significant impact on the market outcomes for consumers. The outcome of most direct concern will be price although quality or choice effects may also be important though typically longer term and usually more difficult to assess. At the core of merger assessment then is the expected relationship between the number and size of firms operating in the market, market structure, and the prices or qualities that result from the competitive process.

    Economic theory predicts that market structure affects prices. Under reasonably...

  10. 6 Identification of Conduct
    (pp. 284-346)

    In the previous chapter, we discussed two major methods available for assessing the effect of market structure on pricing and market power, the question at the heart of merger investigations. The broader arena of competition policy is also concerned with collusion by existing firms or the abuse of market power by a dominant firm. For example, the U.S. Sherman Act (1890) is concerned with monopolization.¹ In Europe, since the Treaty of Rome (1957) contains a reference to “dominant” firms, collusion is known as the exercise of joint or collective dominance while the latter is known as “single” dominance.² Any such...

  11. 7 Damage Estimation
    (pp. 347-381)

    The estimation of damages has been one field within antitrust economics where quantitative analysis has been used profusely. Most of the work has been done in countries where courts set fines or award compensation payments that are based on the estimated damages caused by infringing firms. Effective deterrence using fines, as distinct from, say, criminal conviction of individuals, requires that imposed fines be at least as high as the expected additional profits of firms that would emanate from the behavior to be deterred. Expected profits can be difficult to measure and in cartel cases they are currently often approximated by...

  12. 8 Merger Simulation
    (pp. 382-435)

    Simulating markets in order to predict the unilateral effect of mergers on prices has seen considerable growth in popularity since the method was refined during the 1990s in a series of papers including the famous papers by Farrell and Shapiro (1990), Werden and Froeb (1993b), and Hausman et al. (1994). Such exercises, called merger simulations, are used for two purposes. First, they can serve as a screening device. In that case a standard model is usually taken as an admittedly very rough approximation to theworld with the expectation that the merger simulated with that model provides at least as good...

  13. 9 Demand System Estimation
    (pp. 436-501)

    The previous chapters in this book have provided numerous illustrations of the importance of firm and market demand for understanding competition. For example, we have seen that demand is important in determining firm behavior such as pricing decisions and we have also seen that demand is a central determinant of the effect of changes in market structure—such as those that occur from merger and acquisition activity—on market outcomes such as prices. Relatedly, we have seen that demand elasticities are a fundamental element of the tools of competition policy such as the hypothetical monopolist test for market definition. Company...

  14. 10 Quantitative Assessment of Vertical Restraints and Integration
    (pp. 502-554)

    In previous chapters we have discussed estimation and identification of the main determinants of market outcomes, in particular demand estimation, cost estimation, and estimation of strategic choice equations such as pricing equations. We also discussed the effects of changes in market structure or in the form of competition on firms’ prices and output, both using reduced- and structural-form equations. In this chapter, we examine firms’ decisions relating to issues beyond just their own prices and output. In particular, we look at the restraints that firms may sometimes impose on their commercial customers downstream. We discuss when we can empirically determine the...

  15. Conclusion
    (pp. 555-556)

    Since competition policy is now largely “effects” based, it is vital that the competition policy and economics communities continue to develop ways in which we can empirically evaluate the actual effect of potentially anticompetitive but also potentially desirable practices. Throughout this book, we have attempted to carefully examine both of the two main approaches to undertaking such empirical work in economics. Along the way, and equally importantly, we have tried to provide a clear statement of the basis for each of the approaches that emerges from economic theory.

    The first general method we have looked at involves the estimation of...

  16. References
    (pp. 557-576)
  17. Index
    (pp. 577-580)