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Industrial Organization economists devote considerable attention to analyzing the competitive impact of various types of business conduct, and the antitrust laws of the United States and the E.U. make the legality of various types of business conduct depend (sometimes inter alia) on their competitive impact. Surprisingly, neither Industrial Organization economists, nor the antitrust laws in question, nor the lawyers and judges that interpret and apply these laws have satisfactorily defined the concepts of the intensity of competition they use. The definitions that have been proposed for (1) the impact of conduct on price competition have been incomplete, inconsistent, and/or inappropriate and (2) the concepts of the impact of conduct on QV-investment competition and the impact of conduct on price and QV-investment competition combined have been totally ignored. Chapter 4 will offer a definition of “the impact of a choice on competition” that I think correctly operationalizes this concept in both the U.S. antitrust-law context and the E.C./E.U. competition-law context.
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See, e.g., (1) the Clayton Act, whose specific provisions make the legality of the conduct they cover depend on whether their “effect…may be to substantially lessen competition or tend to create a monopoly,” (2) Article 101 of the 2009 Lisbon Treaty, which makes the legality of “agreements between undertakings, decisions by associations of undertakings and concerted practices” depend on whether they “have as their object or effect the prevention, restriction or distortion of competition,” (3) one branch of Article 102 of the 2009 Lisbon Treaty, which (as interpreted and applied) makes the legality of the conduct of a dominant firm or a collectively-dominant set of firms depend on whether the conduct “has the effect of hindering the maintenance of the degree of competition still existing in the market or the growth of that competition,” and (4) the European Merger Control Regulation (EMCR), which makes the legality of the mergers, acquisitions, and full-function joint ventures it covers depend on whether they “significantly imped[e] effective competition.” See Manufacture Française des Pneumatiques Michelin v. Commission (Michelin II), Case T-203/01, ECR-II 4071 § 54 (2003). For a more detailed discussion of the conduct-coverage, the tests of illegality promulgated by, and the defenses recognized by the Clayton Act, the Sherman Act, Articles 101 and 102 of the 2009 Lisbon Treaty, and the E.C./E.U. Merger Control Regulation (EMCR) as written, interpreted, and applied, see Chap. 4.
For a detailed analysis of the various ways in which economists and lawyers who are conversant with economics have assumed that the Clayton Act concept of “lessening competition” should be operationalized, see Richard S. Markovits, Some Preliminary Notes on the U.S. Antitrust Laws’ Tests of Illegality, 27 stan. l. rev. 841-844-50 (1975) and the summary of this discussion in Subsection 1B(2) of Chap. 4.
Economists have never explicitly defined the concept “oligopolistic conduct”— i.e., have defined it only implicitly through usage (by developing pricing models they denominate “oligopolistic”). My definition is narrower than its standard counterpart, which defines a choice to be oligopolistic when the actor realizes that its pay-off will be affected either by the choices that identifiable rivals have already made or (somewhat more narrowly) by the responses the choice elicits from one or more identifiable rivals— i.e., to be oligopolistic when it manifests simple, two-stage recognized interdependence rather than the more-complex, three-stage type of recognized interdependence that is the identifying characteristic of the conduct I call “oligopolistic.” Thus, the interdependence that is the basis of the leading conjectural-variations models of oligopolistic pricing is backward-looking: in the Cournot model, each firm assumes that its output-decision will not affect its rivals’ output choices; in the Bertrand model, each firm assumes that its price decision will not affect its rivals’ price decisions; and in the Stackelberg model, a leader-firm profits from the fact that its followers behave in the way that the Cournot model assumes. The interdependence that many of the more modern, game-theoretic, “oligopolistic-pricing” models posit, though forward-looking, is also two-stage (simple) recognized interdependence. For a discussion of several of these game-theoretic models that substantiates this conclusion, see david carlton and jeffrey perloff, modern industrial organization 380–903 (Harper Collins Pub., 1990). I hasten to add that some oligopolistic-pricing models do focus on the kind of three-stage interdependence that makes conduct oligopolistic in my sense. See, e.g., George Stigler, A Theory of Oligopoly, 72 j. pol. econ. 44 (1964). In my judgment, my definition of “oligopolistic” is superior to (more useful than) its broader standard counterpart for two reasons. First, because (1) the standard definition labels as “oligopolistic” all pricing and advertising choices made by sellers that do not face perfect price competition and all QV-investment decisions made by sellers that do not face perfect QV-investment competition and (2) virtually no sellers face perfect price or QV-investment competition, the standard definition is too inclusive to be useful. Second, because the standard definition covers behaviors that manifest simple recognized interdependence as well as other, more-complicated kinds of interdependence, it is deficient in that it fails to capture the characteristics of particular pricing sequences that make them illegal under U.S. antitrust law or appropriate targets for prohibitory legislation.
The seller that is privately-best-placed to supply a buyer in an individualized-pricing context is the seller that would find it inherently profitable to supply that buyer on terms contained in an offer that no rival would find inherently profitable to beat. For the definition of “inherently profitable,” see the paragraph of the text that immediately precedes the paragraph that contains footnote-number 3.
A seller is properly said to be engaging in (conventional single-product) “promotional pricing” at time t(0) when it lowers the price of its product X at t(0) to a level that would not otherwise be profitable because it expects the additional sales of product X that the price‐reduction enables it to make at t(0) to increase the profits it makes at t(1…n) by increasing the demand it will face in relation to product X at t(1…n) for any or all of the following three reasons: (1) because it increases the demand that the additional buyer(s) the price‐reduction enables it to sell X to at t(0) will have for product X at t(1…n)—“try it, you’ll like it”; (2) because it increases the demand that other buyers will have for product X at t(1…n) by increasing the positive information they receive about X from the additional buyer(s) to which its price‐reduction enabled it to sell X to at t(0) or from someone with whom these buyers talked or who observed these buyers using X or by observing themselves the way in which X performed for these additional buyers; and/or (3) because it increases the demand that other buyers will have for X at t(1…n) because they want to be identified with the additional buyers its price‐reduction induced to buy X at t(0) or with particular attributes of these buyers. A seller is properly said to be engaging in product-line promotional pricing of product X1 at time t(0) when it charges a lower price for X1 because it expects that the additional sales of X1 that the reduction in X1’s price will enable it to make of X1 at time t(0) will increase the demand curve it faces for products X2…n at time t(0) and subsequently because buyers have a preference for multiple members of the same product-line (1) because they find a matching set more aesthetically attractive than an unmatched collection, (2) because the proper way to use each member of a given product-line is the same while the proper method of using different product-lines varies from product-line to product-line and it is costly to learn how to use the products in a product-line whose products one has not yet used, and/or (3) because the members of any given product-line have the same strengths and weaknesses and such strengths and weaknesses differ among rival product-lines and it is costly to learn the strengths and weaknesses of a product-line whose products one has not yet used. I should add that the benefits of product-line promotional pricing will tend to be higher to the extent that the additional purchases of X2…n made by a buyer of X1 that has been induced to purchase X1 by a reduction in its price induces other buyers to purchase a member of the product-line X1…n. A seller is properly said to be engaging in institutional promotional pricing if it charges a lower price for product X at time t(0) than it otherwise would have found profitable because it expects that the extra sales the price‐reduction will enable it to make of X will increase the demand it faces for all its products (regardless of whether they are in the same product-line as X) because product X is a good product and any buyer that consumes it will revise upward its estimate of the quality of all of the seller’s products as will anyone that is told of its performance by its actual consumer or that observes its performance by its actual consumer in circumstances that enable the observer to evaluate its performance. A seller is properly said to be engaging in network-building pricing of product X when it charges a lower price for product X than it would otherwise find profitable because the objective value of product X to an individual buyer increases with the number of other buyers ( i.e., users) of the product. A seller is properly said to be engaging in “learning-by-doing” pricing when it lowers its price at t(0) because it expects the additional sales that the price‐reduction enables it to make at t(0) will increase the profits it makes at t(1…n) by reducing the costs it will have to incur to produce various relevant outputs of its product at t(1…n) or by enabling it to discover a somewhat-different product variant that it could produce at t(1…n) on which it would face a more attractive DD/MC combination. A competitive inferior is properly said to be engaging in “keeping-in-touch” pricing if it incurs the cost of making a bid that it knows will not be accepted to secure the advertising-like benefits such a bid will generate by making it more likely that the buyer will solicit bids from it in the future and/or to pay more attention to its bids in the future by inducing the buyer to have a better opinion of it than it otherwise would have.
Throughout this text, the expressions “rate-of-return” or “profit-rate” are being defined in the way that lawyers use them— viz., to refer to rates that are gross of capital costs. The expressions “supernormal” rate-of-return or “supernormal” profit-rate refer to rates whose calculation takes capital costs into consideration (to rates that economists would use the expression “rate-of-return” or “profit-rate” to signify).
In my terminology, the most-profitable QV-investment projects in any area of product-space are those with the highest, identical supernormal rate-of-return. For expositional reasons, I will assume (often counterfactually) that all these projects have the same weighted-average-expected rates-of-return (gross of capital costs) and the same normal rate-of-return.
This assumption is admittedly unrealistic. Indeed, the fact that projects in a given area of product-space will have different effects on the rates-of-return generated by the various other projects in that area of product-space plays a significant role in my argument for the inevitable arbitrariness of market definitions and underlies my claim that, in some circumstances, potential expanders have monopolistic QV-investment incentives to make a particular QV investment.
Although the identity of the projects that are most profitable may vary either with the equilibrium level of QV investment in the ARDEPPS or with changes in the ARDEPPS’ structure that do not alter its equilibrium QV-investment level, I will ignore this possibility in the text that follows.
Unless otherwise indicated, the analyses that follow assume (admittedly sometimes counterfactually) that QV investments will be introduced into an ARDEPPS in the order of their profitability.
Thus, one might also construct a “monopolistic” and a “competitive” H \( \Pi \) E curve for a particular ARDEPPS. The former would indicate the rate-of-return the ARDEPPS’ most-profitable projects would yield as its QV-investment level varied if prices in the ARDEPPS were always perfectly monopolistic (maximized the profits that the ARDEPPS’ constituent firms realized, given the ARDEPPS’ QV-investment level). The latter would indicate the rate-of-return the ARDEPPS’ most-profitable projects would yield as its QV-investment level varied if prices in the ARDEPPS were always perfectly competitive (equaled the respective products’ marginal costs). The monopolistic H \( \Pi \) E curve will tend to be higher to the extent that the monopolist is able to increase its returns on a given amount of QV investment (l) by charging supra-marginal-cost prices for its products and services and/or (2) by making a less-overlapping set of QV investments (by offering a set of products and services whose members’ appeal overlaps to a lesser extent than the appeal of its competitive counterparts). Obviously, all actual H \( \Pi \) E curves will start at the height of the monopolistic H \( \Pi \) E curve (since prices will be monopolistic when the ARDEPPS contains one QV investment) and progressively converge on the competitive HΠ E curve as one moves to the right.
In practice, the rate at which any given actual HΠ E curve converges on the lower, competitive HΠ E curve will increase inter alia with the percentage of any additional QV investments made by new entrants because a new entry will militate more against contrived oligopolistic pricing than an equally-large QV-investment expansion by a new entrant would (and because an expander will tend to choose a location in product-space that reduces BCAs less than they would be reduced by the equally-large but differently-located QV investment a new entrant would make).
Admittedly, since the presence of additional product variants or distributive outlets in the early stages of an ARDEPPS’ formation may increase the sales of their predecessors by making more consumers aware of the ARDEPPS’ product or by increasing consumer-confidence in the quality and reliability of all products produced by the ARDEPPS, the HΠ curves may slope upward over a low range of ARDEPPS QV investment. Diagram I ignores this possibility. The text that follows also ignores the fact that such new product variants may have different effects on the rates-of-return generated by what originally were the most-profitable QV investments in the ARDEPPS.
A “demand curve” is a diagrammatic representation of a schedule indicating the quantity of an indicated product that will be sold at different prices. Demand curves are usually constructed in diagrams whose vertical axis measures some monetary unit (say dollars—$) and whose horizontal axis measures the quantity of the good in question (Q). Economists distinguish between the demand curve a given seller of a particular product faces when selling that product—the “firm” demand curve—and the demand curve faced by an industry whose members produce identical physical products with identical images that they distribute from an identical location—so-called industry demand curves. The text enquotes the expression “ARDEPPS demand curve” because in all or virtually all cases the sellers in a given ARDEPPS will be producing physically-different products, will be producing products with different “images,” and/or will be distributing their products from different locations among which relevant buyers will not be indifferent. Since the “products” in the ARDEPPS are different, there will usually be no straightforward ARDEPPS counterpart for the traditional notion of an industry demand curve. My use of the concept of an “ARDEPPS demand curve” should therefore be regarded as purely heuristic.
I should note that one should not count as part of the scale barrier that would confront the established firm that was contemplating making a QV investment that would raise the total QV investment of the ARDEPPS in question from OY to OD the amount by which the R barrier to expansion at QV-investment level OD exceeds the R barrier to expansion at QV-investment level OY—PQ–εC—because on the assumptions of Diagram II the expansion in question will not raise the risk costs of any pre-existing QV investment. However PQ–εC is a component of the risk barrier R faced by the established firm that is best-placed to increase the ARDEPPS’ QV-investment level from OY to OD: the other component of that risk barrier is εC (the risk barrier to the execution of the expansion that would be best-placed to raise the ARDEPPS’ QV-investment level to OY). For convenience, however, I am classifying this component of the scale barrier to the relevant expansion to be a component of the risk barrier to that expansion.
In my terminology, a buyer’s “inferior suppliers” are the potential suppliers that are worse-than-best-placed to supply it.
- Chapter 2 The Components of the Difference Between a Firm’s Price and Conventional Marginal Costs and the Intermediate Determinants of the Intensity of Quality-and-Variety-Increasing-Investment Competition
Richard S. Markovits
- Springer Berlin Heidelberg
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