Competition Policy - Theory and Practice

Contents
Preface
What competition policy is, and why we need it x
Competition policy and regulation x
Objective of this book, and how to use it xi
1 Competition Policy: History, Objectives and the Law 1
1.1 Introduction 1
1.2 Brief history of competition policy 1
1.2.1 Anti-trust law in the United States 1
The events leading to the Sherman Act 1
The Sherman Act and its early enforcement 3
The Clayton Act and the Federal Trade Commission Act 3
The inter-war period 4
Until the mid-70s: the activism in anti-trust case law 5
From Sylvania onwards: Chicago School and the Reagan years 5
Recent events 6
1.2.2 Competition laws in the European Union 6
1.2.2.1 Competition law in Germany 6
1.2.2.2 Competition law in the United Kingdom 7
1.2.2.3 Competition law in the European Communities 8
1.3 Objectives of competition policy, and other public policies 11
1.3.1 Objectives of competition policy 12
1.3.1.1 Welfare (total surplus) 12
1.3.1.2 Consumer welfare (consumer surplus) 13
Consumer v. total welfare standard in different jurisdictions 13
Consumer v. total welfare standard for economists 13
1.3.1.3 Defence of smaller firms 15
1.3.1.4 Promoting market integration 15
1.3.1.5 Economic freedom 16
1.3.1.6 Fighting inflation 16
1.3.1.7 Fairness and equity 16
1.3.2 Other public policy factors affecting competition 18
1.3.2.1 Social reasons 18
1.3.2.2 Political reasons 18
1.3.2.3 Environmental reasons 19
1.3.2.4 Strategic reasons: industrial and trade policies 19
1.3.3 Competition policy: a definition 20
1.4 The main features of European Competition Law 21
1.4.1 Article 81: horizontal and vertical agreements 21
1.4.2 Article 82: abuse of a dominant position 23
Dominance 23
Abuse of dominance 24
1.4.3 Mergers 24
1.5 Exercises 26
2 Market Power and Welfare: Introduction 27
2.1 Overview of the chapter 27
2.2 Allocative efficiency 28
2.2.1 Market power: A definition 28
2.2.2 The allocative inefficiency of a monopoly 29
A simple graphical analysis 29
The determinants of the deadweight loss 29
2.2.3 Rent-seeking activities 30
2.3 Productive efficiency 31
2.3.1 Additional welfare loss from productive inefficiency 31
2.3.2 Why is a monopolist less efficient? 31
2.3.2.1 Monopoly and managerial slack 32
2.3.2.2 Empirical evidence on individual firms' productivity 32
Competition and efficiency: Schmidt's model* 33
2.3.2.3 A Darwinian mechanism: competition selects efficient firms 33
2.3.3 Number of firms and welfare 35
2.3.4 Conclusions 35
2.3.5 Competition and productive efficiency* 35
2.3.5.1 Competition and selection of firms: An example* 35
2.3.5.2 Too many firms in the industry* 37
2.4 Dynamic efficiency 38
2.4.1 The lower incentives to innovate of a monopolist 38
2.4.2 Incentives to invest in R&D 39
2.4.3 Models of competition and innovation* 40
2.4.3.1 Monopoly gives fewer incentives to innovate: an example* 40
Monopoly 40
Comparison between monopoly and duopoly 41
2.4.3.2 R&D and competition** 41
2.4.3.3 Appropriability and R&D* 43
Duopoly under price competition 43
Patent (no spillovers) 44
Conclusions 44
2.5 Public policies and incentives to innovate 44
2.5.1 Ex-ante v. ex-post: property rights protection 45
2.5.2 Essential facilities 46
2.5.3 Price controls and structural remedies 48
2.5.4 Internal vs. external growth 49
2.6 Monopoly: will the market fix it all? 49
2.6.1 Durable good monopolist 49
Some instruments solve (or alleviate) the commitment problem 50
Conclusions 51
2.6.2 Contestable markets 51
2.6.3 Monopoly and free entry 53
Monopolies might exist under free entry 53
Persistence of concentration when (endogenous) sunk costs exists 53
2.6.3.1 Concentration under free entry* 53
A simple example* 53
Finiteness property in vertical differentiation models* 54
2.6.3.2 Switching costs 55
The competitiveness of switching cost markets 56
Conclusions 57
2.6.3.3 Network effects 57
2.6.3.4 A model of (physical) networks* 60
Two types of equilibria 61
Price discrimination to exclude entry in a network industry 61
2.6.3.5 Exclusionary practices 62
2.7 Summary, and policy conclusions 62
2.8 Exercises 63
2.9 Solutions of exercises 66
Exercise 2.1 66
Exercise 2.4 67
Exercise 2.5 67
Exercise 2.6 67
Solution of exercise 2.8 68
Exercise 2.14 69
Exercise 2.16 69
Exercise 2.17 70
Exercise 2.18 71
3 Market definition, and the assessment of market power 72
3.1 Introduction 72
3.2 Market definition 72
3.2.1 Product market definition 73
3.2.1.1 The SSNIP (or hypothetical monopolist) test 73
Demand and supply substitutability 73
Supply substitutability v. entry that constrains market power 74
3.2.1.2 A problem in non-merger cases: the cellophane fallacy 75
3.2.1.3 Implementing the SSNIP test 75
Own-price elasticity 76
Cross-price elasticities 76
Price correlation tests 77
Price differences 78
Characteristics and usage of products, and consumer preferences 78
Temporal markets, seasonal markets, multiple markets 79
After-markets (or secondary markets) 79
Consistency of market definitions over time 81
3.2.2 Geographic market definition 81
3.2.2.1 The role of imports (shipment tests) 81
3.2.2.2 Transportation costs 82
3.2.2.3 Other characteristics 82
3.3 The assessment of market power 83
3.3.1 Traditional approach: (indirect) assessment of market power 84
3.3.1.1 The central role of market shares 84
3.3.1.2 Which thresholds for market shares 84
3.3.1.3 Measuring market shares and assessing relative strengths 85
3.3.1.4 Ease and likelihood of entry 86
3.3.1.5 Buyers' power 87
3.3.1.6 Market power, market shares and concentration* 88
3.3.2 Econometric techniques: (direct) assessment of market power* 89
3.3.2.1 Elasticity of residual demand* 89
Estimation of the residual demand elasticity** 91
Residual demand elasticity in merger analysis 92
3.3.2.2 Logit models** 92
The logit demand model 92
Independence of Irrelevant Alternatives and nested logit models 94
Simulating effects of a merger with logit models 95
3.4 Exercises 97
3.4.1 Solutions to exercises 98
4 Collusion and horizontal agreements 99
4.1 Introduction 99
4.1.1 What is collusion? 100
...first, a warning 100
Defining collusion in economic theory 100
What are the main ingredients of collusion? 100
Which collusive price? 101
Coordination: The difference between tacit and overt collusion 101
4.2 Factors that facilitate collusion 102
4.2.1 Structural factors 103
Concentration 103
Entry 104
Cross-ownership and other links among competitors 104
Regularity and frequency of the orders 104
Buyer power 104
Demand elasticity 105
Evolution of demand 105
Product homogeneity 105
Symmetry 106
Multi-market contacts 106
Inventories and excess capacities 107
4.2.2 Price transparency and exchange of information 108
4.2.2.1 Observability of firms' actions 108
Information exchange, I:
Data on past or current prices and quantities 109
4.2.2.2 Coordination issues: The role of communication 109
Information exchange, II: Announcements of future prices 110
Private announcements 110
An example of private announcements:
Communication in auctions 111
Public announcements 112
4.2.3 Pricing rules and contracts 112
Most-favoured nation and meeting-competition clauses 112
Resale price maintenance 113
Other pricing practices that increase observability 114
4.2.4 Analysis of collusion: conclusions 114
4.2.5 Factors that facilitate collusion* 114
4.2.5.1 Conditions for collusion to arise* 115
4.2.5.2 The basic model to analyse facilitating factors* 115
Concentration 116
Regular orders facilitate collusion 117
Demand elasticity 117
Collusion and the evolution of demand 117
Symmetry helps collusion 118
Multi-market contacts 118
4.2.5.3 A problem with supergames: multiple equilibria* 119
4.3 Advanced material** 120
4.3.1 Credibility of punishment and optimal penal codes** 120
An example of optimal punishments 120
Nash reversal trigger strategies 120
4.3.2 Cartels and renegotiation** 123
Costly renegotiation 124
Discussion 125
4.3.3 The Green-Porter (1983) model** 125
4.3.4 Symmetry and collusion** 127
4.3.4.1 Discussion and implications 130
4.3.4.2 Proofs 130
Proof of Lemma 4.1 130
Proof of Proposition 4.1 132
4.4 Practice: What should be legal, and what illegal? 133
4.4.1 Standards of proof: market data v. hard evidence 133
Too lenient with the firms? 137
4.4.2 Ex-ante competition policies against collusion 137
Black list of facilitating practices 138
Auction design to avoid bid-rigging 138
Merger analysis 139
4.4.3 Ex-post competition policies against collusion 139
Surprise inspections (Dawn raids) 139
Leniency programmes 139
Leniency programmes** 141
Solution 141
Implementing the optimal policy 144
Fine reductions only before the inquiry is opened 144
4.5 Joint-Ventures and other horizontal agreements 145
4.5.1 Joint-ventures 145
4.5.2 Research joint-ventures 146
4.5.2.1 Treatment of research joint-ventures in US and EU law 147
4.5.3 Other forms of co-operation regarding technology 148
4.5.3.1 Cross-licensing and patent pooling 148
4.5.3.2 Co-operative standard-setting 148
4.5.4 Co-operative R&D* 150
Competition in both stages 150
Last stage: quantity competition 150
Extensions and discussion 152
4.6 A case of parallel behaviour: Wood pulp 152
A brief description of the industry 152
The Commission Decision 153
(1) Concertation within KEA 154
(2) Concertation within Fides 154
(3) Parallel behaviour 155
(i) The system of price announcements 155
(ii) The near-simultaneity of the announcements 156
(iii) Parallelism of announced prices 156
The Court's conclusions, and a discussion 157
4.7 Exercises 158
4.7.1 Solution of exercises 162
5 Horizontal mergers 168
5.1 Introduction 168
5.2 Unilateral effects 169
5.2.1 Absent efficiencies, a merger increases market power 169
5.2.2 Variables which affect unilateral market power 170
Concentration 170
Market shares and capacities 170
Entry 171
Demand variables 171
Buyer power 171
Failing firm defence 171
5.2.3 Efficiency gains 172
The effect of efficiency gains on outsiders' profits 172
The nature of efficiency gains, and their assessment. 173
Asymmetric information 174
Balancing efficiency and market power considerations 175
5.2.4 Modelling unilateral effects of mergers* 175
5.2.4.1 Unilateral effects of mergers, absent efficiency gains* 175
Pre-merger 176
The effect on insiders' profits 178
The effect on outsiders' profits 178
The effect on total welfare 179
5.3 Pro-collusive effects 179
5.3.1 Factors which affect collusion (reminder) 180
Efficiency gains and pro-collusive effects 180
5.4 A more general model** 181
5.4.1 The model 181
5.4.2 Unilateral effects, without efficiency gains 182
5.4.2.1 Merger effects, and market power 182
5.4.2.2 The welfare effects of a merger 183
5.4.3 Efficiency gains from mergers 185
The merger effect on consumer surplus. 186
The impact of the merger on producer surplus. 186
The net welfare effect of mergers 187
5.4.4 Efficiency offence: When the merger leads to the exit of the outsiders 188
5.4.5 Proofs 189
5.5 Merger remedies 191
5.5.1 Divestitures 191
5.5.1.1 Problems with divestitures 192
5.5.2 Behavioural remedies 193
5.5.2.1 Problems with behavioural remedies 194
5.6 Merger policy in the European Union 195
5.6.1 Dominance test 195
5.6.1.1 Joint dominance 195
5.6.2 The treatment of efficiency gains 196
5.6.2.1 Efficiency offence? 197
5.7 Case studies 199
5.7.1 How to proceed in merger cases 199
Unilateral effects 199
Pro-collusive effects 200
5.7.2 Nestl/Perrier 200
Product market definition 200
Geographic market 201
Single-firm dominance 202
Unilateral effects 202
Joint firm dominance (pro-collusive effects) 204
Conclusions 204
5.7.3 ABB/Daimler-Benz 205
Product market definition 205
Geographic market 205
Market shares and concentration 206
Joint dominance, or the coordinated effects of the merger 206
Efficiency gains 208
Conclusions 209
5.8 Exercises 209
5.8.1 Solutions to exercises 212
6 Vertical restraints and vertical mergers 217
6.1 What are vertical restraints? 217
Vertical integration (or vertical mergers) 219
6.1.1 Plan of the chapter 219
6.2 Intra-brand competition 220
6.2.1 Double marginalisation 221
Conclusions 222
6.2.1.1 Double marginalisation* 222
Separation and linear pricing 223
Vertical restraints 224
6.2.1.2 Double marginalisation with retailers' risk aversion** 225
6.2.2 Horizontal externality: Free-riding in the provision of services 226
An example of welfare-reducing vertical restraints (too much effort) 227
6.2.2.1 A model of underprovision of services* 228
Separation 228
Vertical restraints 229
Exclusive territories and franchise fee 229
Resale price maintenance and franchise fee 230
Resale price maintenance and quantity forcing 231
Conclusions 231
6.2.2.2 Vertical integration might reduce welfare*: An example 232
Separation 232
Vertical integration (with two retailers) 232
Competition reduces the danger of vertical restraints 232
Separation 233
Vertical integration (with two retailers) 233
6.2.3 A more general treatment* 233
Combining externalities 233
Vertical integration and variety: endogenous number of retailers 234
6.2.3.1 Horizontal and vertical externalities: A model* 235
Vertical separation and linear pricing 236
Vertical integration 236
Externalities 236
Welfare analysis 237
Vertical restraints that restore the vertically integrated solution 238
No advertising spillovers (" =0). 238
Exclusive territories (ET). 238
Resale Price Maintenance (RPM). 238
Advertising spillovers (" =0). 239
Resale Price Maintenance (RPM). 239
6.2.3.2 Vertical integration and variety** 240
6.2.4 Other efficiency reasons for vertical restraints and vertical mergers 241
Quality certification 241
Free-riding among producers 242
Restraints which remove opportunistic behaviour
and promote specific investments 242
Exclusive dealing avoids free-riding on manufacturers' investment* 243
Solution of the game 244
6.2.5 Vertical restraints, vertical mergers, and the commitment problem 245
Vertical mergers 246
Exclusive territories 246
Resale price maintenance 247
Most favoured nation clause and anti-discrimination laws 247
Conclusions 248
6.2.5.1 Vertical restraints and the commitment problem* 248
Observable contracts: A benchmark 249
Unobservable contracts 249
How to restore market power 249
Vertical mergers and exclusive dealing
when a substitute input exists 250
6.3 Inter-brand competition 251
6.3.1 Strategic effects of vertical restraints 252
6.3.1.1 Strategic use of vertical restraints* 253
Two-part tariff with price competition 253
Vertical integration 254
Exclusive territories 255
Competition reduces the risk that vertical restraints lower welfare 256
The results are not robust: Strategic substitutes 257
The model 257
6.3.2 Vertical restraints as collusive devices 259
6.3.2.1 RPM might facilitate collusion 259
6.3.2.2 Common agency 259
Common retailer and RPM help collusion** 260
No RPM (price choices delegated to the common retailer) 260
RPM and common agency 261
6.4 Anti-competitive effects: leverage and foreclosure 261
6.4.1 Anti-competitive effects: Exclusive dealing 262
Post-chicago models 263
6.4.1.1 Exclusive dealing and entry deterrence* 265
Exclusive dealing: Chicago arguments* 265
Contracts as a barrier to entry* 266
No contract 266
Exclusivity contract 266
Naked exclusion* 267
Simultaneous non-discriminatory offers 267
Simultaneous discriminatory offers 267
Sequential offers 268
Conclusions 268
6.4.2 Exclusionary effects of vertical mergers 268
6.4.2.1 Exclusionary effects of vertical mergers* 270
One monopoly profit only* 270
Recent theories: Is there foreclosure from vertical mergers?* 270
Unobservable offers. 271
Downstream firms have market power. Efficient foreclosure 271
Upstream firm is not a monopolist: possible
anti-competitive foreclosure 271
6.5 Conclusions and policy implications 272
Balancing exclusionary and efficiency effects
of vertical mergers and vertical restraints 273
6.6 Cases 273
6.6.1 General Electric/Honeywell 274
The product markets 274
Horizontal, conglomerate, vertical aspects of the merger 275
The ingredients of GE's dominance 276
Is it dominance? Other factors to take into account 278
Conglomerate aspects: extending dominance 279
Will the merger hurt consumers? 280
Foreclosure through vertical integration: engine starters 281
Conclusions 282
6.6.2 Ice-cream 282
A brief introduction to the industry 283
The definition of the relevant market 284
Market power, and the relative importance of exclusive agreements 285
The foreclosing effects of the exclusivity clauses 286
Efficiency effects of the exclusive agreements 287
6.7 Exercises 288
6.7.1 Solutions of exercises 292
Solution of Exercise 6.1 292
7 Predation, monopolisation, and other abusive practices 298
7.2 Predatory pricing 299
7.2.1 Predation: search for a theory 299
7.2.2 Recent theories of predatory pricing 301
7.2.2.1 Reputation models 302
7.2.2.2 Signaling models 303
Predation for mergers 304
Other signaling models 304
7.2.2.3 Predation in imperfect financial markets 305
7.2.3 Models of predatory pricing* 306
7.2.3.1 Selten's chain-store paradox* 306
7.2.3.2 A reputation model of predation** 307
Separating equilibrium. 307
Semi-separating equilibrium. 308
Comment 309
7.2.3.3 Milgrom and Roberts' limit pricing model** 310
Separating equilibrium 311
Pooling equilibrium 312
Conclusion 312
7.2.3.4 Predation to merge** 313
Separating equilibrium 313
7.2.3.5 Deep pocket predation* 314
Solution for the two-period case: T=K=1 315
Solution of the general case 315
Comments 316
7.2.3.6 Deep pocket predation with imperfect financial markets** 316
Financing investments in an imperfect capital market 316
A deep pocket model of predation 318
Some comments 319
Extensions: Renegotiation and Bolton and
Scharfstein's model 319
The trade-off between moral hazard
and deterring predation 319
7.2.4 Practice: How to deal with predatory pricing allegations? 321
7.2.4.1 Ability to increase prices (is there dominance?) 322
7.2.4.2 Sacrifice of short-run profits 323
Which definition of cost in a price below cost test? 325
7.2.4.3 Testing predatory pricing: further discussion 326
Intent (existence of a predatory scheme) 327
No need to prove recoupment or success of predation ex-post 327
No need to prove ex-post damage to consumers 327
Meeting prices of a competitor as a defence 328
Predatory prices in high-technology markets 328
Price below average variable cost: not a general rule 330
7.3 Non-price monopolisation practices 330
7.3.1 Strategic investments 330
7.3.1.1 Strategic investments to deter entry* 332
Innocent behaviour 333
Strategic behaviour 333
Is entry deterrence anti-competitive? 334
7.3.2 Bundling and tying 335
7.3.2.1 Efficiency reasons for tying 335
7.3.2.2 Tying as a price discrimination device 336
Bundling 336
Requirements tying as a metering device 336
7.3.2.3 Exclusionary tying in recent models 337
7.3.2.4 Practice: Assessment of tying practices 340
7.3.2.5 Models of tying, I: Requirements tying as a metering device* 341
No tying (if all consumers buy). 341
7.3.2.6 Models of tying, II: Tying, foreclosure,
and exclusion in Whinston (1990)* 343
A simple example of exclusion with homogenous goods* 344
The model with differentiated goods in market B** 344
When goods are complementary* 348
7.3.2.7 Models of tying, III: Tying to deter entry
in complementary markets* 349
Price sub-game 350
Investment sub-game 350
Tying decisions 351
7.3.3 Incompatibility, and other strategic behaviour in network industries 352
Complementary products 352
Competing networks 352
Product pre-announcements in network industries 353
7.3.3.1 Interoperability choices in asymmetric networks* 353
Tipping to the firm with the large installed base 355
Tipping to the entrant 355
The choice of interoperability 356
7.3.4 Refusal to supply and exclusive contracts (reminder) 357
7.3.5 Raising rivals' costs 357
7.4 Price discrimination 358
The two main ingredients of price discrimination 358
7.4.1 Welfare effects of price discrimination 359
7.4.1.1 First-degree (perfect) price discrimination 359
7.4.1.2 Quantity discounts 359
7.4.1.3 Price discrimination between countries 360
7.4.1.4 Dynamic effects of price discrimination: incentives to invest 361
7.4.1.5 Does market power matter? 362
7.4.1.6 Price discrimination as a monopolisation device 362
Selective discounts and fidelity rebates 363
Price transparency 363
7.4.1.7 Anti-dumping 364
7.4.2 Price discrimination* 365
7.4.2.1 Third-degree price discrimination)* 365
Price discrimination 365
7.4.2.2 Quantity discounts: Two-part tariffs as price discrimination* 367
Non-discrimination 367
Quantity discounts (two-part tariff) 367
Quantity discounts and uniform pricing: a comparison 368
7.4.2.3 Price discrimination and investments* 368
Uniform pricing 368
7.4.2.4 Price discrimination and market power* 369
Uniform pricing 369
The effect on investments 371
7.4.2.5 Price discrimination under entry* 371
Uniform pricing 371
7.5 US v. Microsoft 372
7.5.1 A short description of the case 372
Middleware 373
7.5.2 Monopolisation 374
7.5.2.1 Monopoly power 374
7.5.2.2 Anti-competitive conduct 375
Licenses issued to OEMs 375
Integration of IE and Windows 376
Agreements with IAPs 377
Java 378
7.5.2.3 Causation 379
7.5.3 Attempted monopolisation 379
7.5.4 Tying 379
7.5.5 Remedies 380
7.5.7 The District Court judgment on remedies 381
7.6 Exercises 382
7.7 Solutions of exercises 385
8 A Toolkit: Game Theory and Imperfect Competition Models 390
8.2 Monopoly 390
8.2.1 Single-product monopoly 390
A specific functions example 391
8.2.2 Multi-product monopoly 392
8.2.2.1 Independent demand and cost functions 392
8.2.2.2 Interdependent demands 392
A dynamic interpretation of demand interdependence 394
Intertemporal complementarity: Introductory price offers 394
Intertemporal substitutability: Durable goods 395
8.2.2.3 Interdependent costs: Economies (or diseconomies) of scope 395
An intertemporal example: learning-by-doing 396
8.2.3 Nash equilibrium 397
8.2.3.1 The prisoners' dilemma 398
8.2.3.2 Coordination games and equilibrium selection 398
Pareto dominance as an equilibrium selection device 399
Elimination of weakly dominated strategies 399
8.2.3.3 Mixed strategies 399
Mixed strategies 400
8.2.4 Dynamic games, and sub-game perfect Nash equilibrium 400
8.2.4.1 Backward induction 401
8.3 Oligopoly I: Market competition in static games 402
8.3.1 Product market competition with homogenous goods 402
8.3.1.1 Price competition (Bertrand model) 403
Bertrand under cost asymmetric firms 404
Large asymmetries 405
Small asymmetries 405
Bertrand under capacity constraints 405
8.3.1.2 Quantity competition (Cournot model) 406
Cournot with cost asymmetries 407
Cournot with n firms 408
8.3.1.3 Joint-profit maximisation 408
8.3.1.4 Benchmark models of product competition: A comparison 409
8.3.2 Product market competition with (exogenously) differentiated goods 409
8.3.2.1 A linear demand model of differentiated goods 409
Quantity competition 411
Equilibrium comparison 412
Strategic substitutes v. strategic complements 412
Stability of the equilibrium 413
Joint-profit maximisation 414
Price competition 415
Joint-profit maximisation 416
Repeated product market interaction 416
8.3.2.2 Finite horizon 416
8.3.2.3 Infinite horizon 417
8.4 Oligopoly II: Dynamic games 417
8.4.1 Strategic investments 418
8.4.1.1 Quantity competition (strategic substitutes) 418
Accommodation 419
Entry deterrence 419
8.4.1.2 Price competition (strategic complements) 420
Accommodation 420
Entry deterrence 420
Discussion and interpretation 421
Examples of strategic investments 421
8.5 Appendix 421
Endnotes 422
Bibliography 472
Case References
European cases: Decisions of the Commission of the European Communities 493
European cases: Decisions of the Court of First Instance
and the European Court of Justice 495
European treaties 497
European legislation and guidelines 497
UK cases and MMC Reports 497
UK legislation and guidelines 497
US cases 497
US legislation and guidelines 499
Index of Tables 500
Index of Figures 501
Tables 502
Figures 521
Chaptcr 1: Compctition lolicy: Li-tory. Occtivc-
and thc Law
n..n 1|.j: "|:j nnn 1:n.

Camriogo Univorsiiy Iross. 2003
Massimo Moiia
Lnropoan Univorsiiy Insiiinio. Iloronco.
Univorsiiai Iompon Iara. Larcolona. ano
Coniro lor Lconomic Iolicy Iosoarcl. Lonoon
30 Jannary 2002
Confonfs
1 IntroductIon 1
1.1 Wclfuic us llc oLjcclivc of compclilion policy . . . . . . . . . 1
1.2 Ilun of llc cluplci . . . . . . . . . . . . . . . . . . . . . . . . 8
2 HrIeI LIstory oI conetItIon oIIcy 3
2.1 Anli-liusl luws in llc Unilco Slulcs . . . . . . . . . . . . . . 4
2.2 Compclilion luw in llc Euiopcun Union . . . . . . . . . . . . 0
2.2.1 Compclilion luws in Gcimuny . . . . . . . . . . . . . . 0
2.2.2 Compclilion luw in llc Unilco Kingoom . . . . . . . . 11
2.2.8 Compclilion luws in llc Euiopcun Communilics . . . 11
3 OtLer oIjectIves oI conetItIon oIIcy 17
8.1 OLjcclivcs, ollci llun wclfuic . . . . . . . . . . . . . . . . . . 17
8.1.1 Iiolcclion of consumcis . . . . . . . . . . . . . . . . . 17
8.1.2 Dcfcncc of smull lims . . . . . . . . . . . . . . . . . . 10
I un giuicful io Elcnu Aigcnicsi, Cliuiu Funugulli, Mcl Muiquis, Luis Fcisson,
Alcxundic dc Siiccl, und ilicc unonynous icfciccs foi vciy lclpful conncnis.
1
8.1.8 Iiomoling muikcl inlcgiulion . . . . . . . . . . . . . . 20
8.1.4 Economic ficcoom . . . . . . . . . . . . . . . . . . . . 21
8.1. Figlling inlulion . . . . . . . . . . . . . . . . . . . . . 22
8.1.0 Fuiincss . . . . . . . . . . . . . . . . . . . . . . . . . . 22
8.2 Ollci puLlic policy fuclois ulccling compclilion luw uno cn-
foiccmcnl . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
8.2.1 Sociul icusons . . . . . . . . . . . . . . . . . . . . . . . 2
8.2.2 Iolilicul icusons . . . . . . . . . . . . . . . . . . . . . 2
8.2.8 Enviionmcnlul icusons . . . . . . . . . . . . . . . . . . 20
8.2.4 Sliulcgic icusons: inousliiul uno liuoc policics . . . . 27
4 TLe noIn Ieotures oI Euroeon ConetItIon Lov 29
4.1 Ailiclc 81: loiizonlul uno vcilicul ugiccmcnls . . . . . . . . . 20
4.2 Ailiclc 82: uLusc of u oominunl posilion . . . . . . . . . . . . 82
4.8 Mcigcis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 84
ConcIusIons 37
.1 Compclilion policy uno icgululion . . . . . . . . . . . . . . . 87
Iicfacc
Fcccnlly, compclilion policy (oi anli-liusl, as il is moic oflcn callco in lhc US) has oflcn
maoc lhc lisl pagcs of ncwspapcis. High piollc cascs Lolh in lhc Euiopcan Union ano in lhc
US havc alliaclco lhc allcnlion of socicly al laigc. Among lhc possiLlc cxamplcs, lhcic aic
XV y1 Plfurvriw (scc chaplci 7 foi a oiscussion), whcic lhc Dcpailmcnl of Juslicc al onc poinl
askco foi such a oiaslic mcasuic as lhc splil of lhc soflwaic gianl inlo lwo scpaialc companics,
a fcw cailcl cascs wilh an inlcinalional oimcnsion (such as lhosc involving lhc pioouccis of
lysinc, vilamins, oi lhc famous auclion houscs SolhcLy`s ano Chiislic`s), ano lhal icsullco in
piison scnlcnccs foi somc of lhc lims` managcis involvco, somc EU mcigci cascs, such as
Jhqhudo Hohfwulf2Krqh|zhoo (scc chaplci 0), which was followco Ly puLlic opinion on Lolh
siocs of lhc Allanlic (ano fcw pcoplc wcic nol suipiisco whcn cvcnlually lhc Euiopcan
Commission Llockco lhc ocal Lclwccn lhc lwo Amciican companics).
Zkdw frpshwlwlrq srolf| lv/ dqg zk| zh qhhg lw Falhci lhan slailing Ly oclning
compclilion policy in aLsliacl lcims, in lhc Look I will lisl piovioc lhc icaoci wilh an ioca of
whal compclilion policy is aLoul lhiough a hisloiical appioach (scc chaplci 1). Only aflci
having Liicly ocsciiLco compclilion laws in lhc US ano in lhc EU, will I givc a foimal
oclnilion of compclilion policy (scc chaplci 2) as lhc scl of policics ano laws which cnsuic
lhal compclilion in lhc maikclplacc is nol icsliiclco in such a way as lo icoucc cconomic
wclfaic".
In lhis oclnilion lhcic aic pioLaLly lwo clcmcnls lo Lc unocilinco. 1hc lisl is lhal lims
mighl icsliicl compclilion in a way which is nol ncccssaiily ocliimcnlal (foi inslancc, lhis is
lhc casc foi mosl vcilical icsliainls, lhal is icsliiclivc clauscs Lclwccn a manufacluici ano a
iclailci, scc chaplci 0). 1hc sccono is lhal cconomic wclfaic, a slanoaio conccpl foi
cconomisls (scc chaplci 2) is lhc oLjcclivc lhal compclilion policics shoulo puisuc. In lhis
Look I will asscss lhc anli-compclilivc polcnlial of Lusincss piacliccs, ano lhc ocsiiaLilily of
pailiculai compclilion iulcs, accoioing lo lhis oclnilion.
Slill, a icaoci mighl ask why wc ncco compclilion policy al all. Lcl mc oclay foi lhc
momcnl lhc casc whcic maikcl failuics woulo icquiic lhc icgulalion of lhc sccloi (scc Lclow),
ano lhink inslcao of an inousliy whcic lhcic cxisl no Laiiicis lo cnliy. Onc mighl lhink lhal
maikcl foiccs, ano in pailiculai lhc lhical of ncw cnlianls, will climinalc monopolics (oi
oominanl posilions) ano icoucc piiccs. Ycl, lims mighl icsoil lo anli-compclilivc aclions lhal
cicalc oi slicnglhcn a monopolislic (oi oominanl) posilion ano, moic gcncially, lo aclions lhal
incicasc lhcii piolls, Lul icoucc wclfaic: collusivc agiccmcnls (scc chaplci 4), anli-compclilivc
mcigcis (scc chaplci ), ano cxclusionaiy Lchavioui (scc chaplcis 0 ano 7) aic cascs in poinl.
Foi lhcsc icasons, compclilion laws ano compclilion aulhoiilics lhal cnfoicc lhcsc laws aic
ncccssaiy.
Frpshwlwlrq srolf| dqg uhjxodwlrq In gcncial, compclilion policy applics lo scclois
whcic sliucluial conoilions aic compaliLlc wilh a noimal funclioning of compclilion (whclhci
lhc maikcl funclions wcll in piaclicc oi nol is of couisc anolhci mallci). Inslcao, icgulalion
applics lo spccial scclois, whosc sliucluic is such lhal onc woulo nol cxpccl compclilivc foiccs
lo opcialc wilhoul pioLlcms. Fcgulalion woulo usually conccin maikcls whcic lxco cosls aic
so high lhal no moic lhan onc lim woulo piollaLly opcialc (a so callco qdwxudo prqrsro|):
cxamplcs mighl Lc clccliicily (liansmission phasc), lclccommunicalions (local loops), iailways
(lhc nclwoik). Olhci inousliics suLjccl lo icgulalion mighl Lc inousliics lhal aic in a
liansiloiy phasc, foi inslancc Lccausc lhcy usco lo Lc lcgal monopolics (pcihaps slalc-ownco)
ano lhcy wcic lhcn liLcialisco. Sincc il woulo Lc unlikcly lhal cnlianls coulo compclc on an
cqual fooling wilh an cslaLlishco incumLcnl, a icgulaloiy Looy usually supciviscs lhc inousliy
lo liy ano cnsuic a smoolh liansilion lowaios a icgulai funclioning of compclilion in lhc
maikcl.
1hcic aic scvcial oilcicnccs Lclwccn compclilion policy ano icgulalion (scc c.g. Fcy,
2000: 44-47). Whilc compclilion aulhoiilics gcncially limil lhcmsclvcs lo chccking lhc
lawfulncss of lims` aclivilics, inousliy icgulalois havc moic cxlcnsivc powcis (lhcy mighl
imposc oi conliol lims` piiccs, invcslmcnls, ano piooucl choiccs). Whilc compclilion
aulhoiilics usually inlcivcnc cx-posl (foi inslancc, chccking lhc lcgalily of a ccilain Lusincss
piaclicc aflci il has alicaoy Lccn lakcn), icgulalois acl cx-anlc (foi inslancc, aulhoiising a
ccilain Lusincss piaclicc oi nol). Fcgulalois` involvcmcnl wilh an inousliy is long-iun ano
conlinuous, whcicas compclilion aulhoiilics` inlcivcnlions lcno lo Lc occasional. Such
oilcicnccs aic also miiioico in lhc lhcoiclical fiamcwoiks aooplco lo ocal wilh lhcsc lwo
issucs. Whilc compclilion policy issucs can moslly Lc analysco wilh oligopoly lhcoiy (lhal is
lhc main lool usco in lhis Look), icgulaloiy issucs aic moic naluially aooicssco Ly so-callco
piincipal-agcnl moocls", whcic lhc piincipal is lhc icgulaloiy aulhoiily ano lhc agcnl is lhc
icgulalco lim, wilh lhc foimci having lo ocvisc inccnlivcs in oioci foi lhc lallci lo lakc lhc
aclions lhal woulo achicvc lhc piincipal`s oLjcclivcs.
1his Look will ocal only wilh compclilion policy, nol wilh icgulalion.
Remhfwlyh ri wklv errn/ dqg krz wr xvh lw Iicviously lhc oomain of lawycis,
compclilion policy looay is a lclo whcic lawycis ano cconomisls woik logclhci, ano Lolh
juogcs ano compclilion aulhoiilics havc lo maslci sophislicalco cconomic conccpls ano
lhcoiics (ano likcwisc, cconomisls havc lo unocislano lhc lcgal ano inslilulional fiamcwoik of
anli-liusl).
1hc main oLjcclivc of lhis Look is lo piovioc a guioc lo all lhosc who havc an inlcicsl in
compclilion issucs, ano lo olci lhcm lhc possiLilily lo unocislano whal moocin aovancco
cconomics lcachcs us on lhcsc issucs.
1hc Look ocals wilh Lolh lhc lhcoiy ano lhc piaclicc of compclilion policy. Il oiaws on
lhc lilcialuic of inousliial oiganisalion, ano on oiiginal analyscs, lo cxplain lhc likcly clccls
lhal lims` piacliccs havc on wclfaic, ano foimulalc policy iccommcnoalions which aic of
piaclical usc foi anliliusl aulhoiilics.
1hc inlciaclion Lclwccn lhcoiy ano piaclicc is lo Lc icgaioco as onc of lhc main fcaluics
of lhc Look, ano lo lhis puiposc il also conlains ficqucnl icfcicnccs lo compclilion policy cascs
(moslly, fiom lhc EU ano lhc US), ano a fcw fully ocvclopco casc sluoics.
1hc Look is wiillcn lo appcal lo compclilion policy piaclilioncis as wcll as sluocnls, lo
lawycis as wcll as cconomisls. Il is also ocsignco lo Lc usco as a lcxlLook in cconomics (lisl
ycai giaoualc oi aovancco unocigiaoualc couiscs), oi as a Look foi lhosc who wanl lo
appioach compclilion issucs in a clcai ano iigoious way.
Sincc lhc Look is mcanl lo Lc acccssiLlc also lo icaocis who aic nol familiai wilh moocin
cconomics, lhc foimalisalion of lhc malciial covcico in lhc main non-lcchnical scclions is
iclcgalco lo scpaialc lcchnical" scclions. 1hcsc scclions, lhal aic maikco wilh onc oi lwo
slais, accoioing lo lhcii lcvcl of oimcully (* foi unocigiaoualcs, ** foi giaoualcs), can Lc
skippco wilhoul loss Ly lhc icaocis who aic nol familiai wilh moocin, quanlilalivc cconomics
(oi who aic nol inlcicslco in foimal moocls).
Having followco an inliooucloiy couisc in inousliial oiganisalion will makc icaoing lhc
lcchnical unocigiaoualc (*) scclions of lhc Look casici, Lul sluocnls who havc icccivco a Lasic
liaining in miciocconomics shoulo Lc aLlc lo unocislano lhcm as wcll. 1hc (*) scclions
icquiic familiaiily wilh lilllc moic lhan Lasic calculus, simplc gamc lhcoiy (lhc conccpls of
Nash cquiliLiium ano suL-gamc pcifccl Nash cquiliLiium) ano oligopoly moocls (Lciliano
compclilion, Couinol compclilion).
Ncvcilhclcss, lo hclp sluocnls ano piovioc lhcm wilh lhc ncccssaiy Lackgiouno if nccoco,
chaplci 8 olcis an inlioouclion lo Lasic monopoly ano oligopoly lhcoiy (as wcll as lo lhc
funoamcnlal conccpls of gamc lhcoiy). An insliucloi who wanls lo lcach a sclf-conlainco
unocigiaoualc couisc on lhc cconomics of compclilion policy (oi cconomics of anli-liusl as il
woulo Lc callco in lhc US), wilhoul icquiiing any pic-icquisilc couisc, mighl wanl lo ocvolc a
fcw lccluics lo chaplci 8 Lcfoic lcaching lhc malciial conlainco in lhc icsl of lhc Look.
1hc Look coulo also Lc usco as a lcxlLook foi a couisc in applico" inousliial
oiganisalion al lhc unocigiaoualc lcvcl, as opposco lo a liaoilional couisc in lhc lhcoiy of
inousliial oiganisalion. In lhis casc, onc coulo lisl lcach lhc malciial conlainco in chaplci 8
ano lhcn sclccl malciial fiom lhc olhci chaplcis accoioing lo onc`s piioiilics.
Each chaplci also conlains cxciciscs, Lolh al lhc unocigiaoualc ano giaoualc lcvcl, ano
cssays, which insliuclois mighl lno a uscful complcmcnl lo lhcii lcaching. Solulions foi lhc
cxciciscs aic also piovioco.
Iicfacc Foolnolcs
Olhci icgulaloiy pioLlcms aic iclalco lo lhc cxislcncc of infoimalional asymmcliics Lclwccn consumcis
ano lims, ano call foi lhc sclling of cnviionmcnlal, hcallh ano safcly slanoaios.
In somc cascs, lhc Loioci Lclwccn compclilion policy ano icgulalion is Lluiico. Mcigci conliol, foi
inslancc, usually a lask caiiico oul Ly compclilion aulhoiilics, shaics scvcial fcaluics wilh icgulaloiy pioLlcms.
1hc analysis of lhc mcigci is lo Lc oonc cx-anlc ialhci lhan cx-posl, ano whcn conoilions aic imposco on lhc
mciging pailics (scc chaplci ), lhcy mighl involvc ic-ocsigning lhc sliucluic of lhc maikcl (sliucluial
icmcoics), oi limil lhc pailics` ficcoom of choosing conliacls oi Lusincss piacliccs (Lchaviouial icmcoics),
lhcicLy making lhc compclilion aulhoiilics lakc aclions moic lypical of a icgulaloi.
Foi an inlioouclion lo icgulalion wilh an unocigiaoualc lcvcl licalmcnl, scc Viscusi cl al. (100). Foi
an aovancco licalmcnl, scc Lalonl ano 1iiolc (1004).
1 InfroducfIon
1o oclnc "compclilion policy" (oi "unliliusl policy" us il is moic oflcn
cullco in llc US) is nol un cusy lusk. A possiLlc oclnilion migll Lc us
follows: "llc scl of policics uno luws wlicl cnsuic llul compclilion in llc
muikclplucc is nol icsliiclco in u wuy llul is ocliimcnlul lo socicly". 1lis
oclnilion uomils llc possiLilily llul somc icsliiclions migll nol ncccssui-
ily Lc ocliimcnlul. Foi insluncc, somc ugiccmcnls Lclwccn u munufuluici
uno u icluilci wlicl limil compclilion Ly ollci icluilcis migll unoci somc
cciluin ciicumslunccs impiovc cconomic wclfuic. Howcvci, llis oclnilion is
nol piccisc, us il oocs nol cluiify fiom wlicl poinl of vicw llc Lcnclciul
oi ocliimcnlul polcnliul of u icsliiclion sloulo Lc usscssco. 1lis Liings us
lo unollci oclnilion, llul mosl cconomisls will pioLuLly fuvoui: "llc scl
of policics uno luws wlicl cnsuic llul compclilion in llc muikclplucc is
nol icsliiclco in sucl u wuy us lo icoucc cconomic wclfuic". 1lis oclnilion
clcuily slulcs llul cconomic wclfuic, u slunouio conccpl foi cconomisls (scc
ncxl suLscclion foi u oclnilion of wclfuic) is llc oLjcclivc compclilion poli-
cics sloulo puisuc. In llis Look I will usscss llc unli-compclilivc polcnliul
of Lusincss piucliccs, uno llc ocsiiuLilily of compclilion luws, uccoioing lo
llis oclnilion.
1.1 VoIfaro as fho oIjocfIvo of conpofIfIon poIIcy
Economic |]n: is llc slunouio conccpl usco in cconomics lo mcusuic
low wcll un inousliy pcifoims. Il is u mcusuic wlicl uggicgulcs llc wclfuic
(oi suiplus) of oilcicnl gioups in llc cconomy. In cucl givcn inousliy,
wclfuic is givcn Ly n| -&:|&-, llul is llc sum of consumci suiplus uno
piooucci suiplus. 1lc suiplus of u givcn inoiviouul consumci is givcn Ly
llc oilcicncc Lclwccn llc consumci`s vuluulion foi llc gooo consiocico (oi
lci willingncss lo puy foi il) uno llc piicc wlicl clcclivcly slc lus lo puy
foi il. n-&n: -&:|&- (oi consumci wclfuic) is llc uggicgulc mcusuic of
llc suiplus of ull consumcis. 1lc suiplus of un inoiviouul piooucci is llc
pioll il mukcs Ly sclling llc gooo in qucslion. 1:n&: -&:|&- is llcicfoic
llc sum of ull piolls muoc Ly pioouccis in llc inousliy.
Scc ulso clupici 2 foi u noic dciuilcd discussion of ilc icluiionslip Lciwccn ilc
conccpi of wclfuic und conpciiiion policy issucs.
Moic conplcic ncusuics of wclfuic nigli ulso iulc inio uccouni cxicinuliiics, iuxcs
puid, suLsidics icccivcd, govcinncni icvcnucs und so on. Sonc of ilcsc iicns nigli cunccl
oui. Ii is ulso possiLlc io consiiuci ncusuics of wclfuic wlicl ussign dicicni wciglis io
consunci und pioducci suiplus.
1
Fiom llc uLovc oclnilions il sloulo Lc clcui llul, ollci llings Lcing
cquul, un incicusc of llc piicc ul wlicl gooos uic solo icouccs consumci
suiplus uno incicuscs piooucci suiplus. Il luins oul, lowcvci, llul in gcnciul
us llc piicc incicuscs, llc incicusc in piolls muoc Ly llc lims oocs nol
compcnsulc foi llc icouclion in llc consumci suiplus (scc ncxl cluplci foi
u giuplicul icpicscnlulion). Hcncc, wclfuic is llc lowcsl wlcn llc muikcl
piicc cquuls llc monopoly piicc (llc liglcsl possiLlc piicc lcvcl).
Il is impoilunl lo nolicc llul llis conccpl of wclfuic complclcly ovcilooks
llc issuc of incomc oisliiLulion umong consumcis uno pioouccis. 1lis is
nol Lccuusc cconomisls llink llis is un iiiclcvunl issuc, Lul iullci Lccuusc
il is u oilcicnl issuc. 1lc wclfuic mcusuic is u summuiising mcusuic of
low cmcicnl u givcn inousliy is us u wlolc uno oocs nol uooicss llc qucs-
lion of low cquul oi uncquul incomcs is oisliiLulco in llc inousliy, wlicl
cun Lc ocull will Ly ollci mcusuics. Nolc ulso llul llc iulionulc foi nol
consiociing oisliiLulionul issucs is llul in piinciplc il is possiLlc lo opciulc
icoisliiLulion sclcmcs sucl llul consumcis uno pioouccis uic h| cillci
Lcllci ol oi woisc ol. Imuginc foi insluncc u siluulion wlcic, us u icsull
of u clungc in llc cconomy, wclfuic incicuscs us llc ncl clccl of un incicusc
in consumci suiplus uno u occicusc in piooucci suiplus. In llcoiy, il is
possiLlc lo icoisliiLulc guins fiom consumcis lo pioouccis in sucl u wuy
llul Loll gioups uic ul lcusl us wcll ol us llcy wcic Lcfoic llc clungcs
look plucc.
Finully, llc conccpl of wclfuic sloulo nol only Lc inlcipiclco in u slulic
scnsc Lul ulso in ils oynumic componcnl. In ollci woios, fuluic wclfuic
mullcis us wcll us cuiicnl wclfuic. 1lc lwo llings oo nol ncccssuiily coin-
cioc, us wc slull oiscuss in cluplci 2. Imuginc llc lypollclicul cusc wlcic
lims in llc inousliy luvc ulicuoy llcii lxco cosls uno llul u compclilion
uulloiily wcic syslcmulicully uLlc lo imposc piicc cquul lo muiginul cosl.
1lis Lcing llc lowcsl possiLlc piicc, il woulo muximisc wclfuic in u slulic
scnsc. Howcvci, onc woulo nol luvc llc lims in llc inousliy mukc uny
Tlc dicicncc Lciwccn consuncis und pioduccis us iwo conplcicly dicicni gioups
of ciiizcns slould noi Lc ovcisiuicd ciilci. In nosi couniiics, consuncis uic ulso owncis
of ilc fins ciilci diiccily (us sluicloldcis) oi iliougl pcnsion und invcsincni funds.
Scc Tiiolc (19SS, pugcs 7-12) foi u discussion of ilc ncusuics of consunci suiplus
und wclfuic. In puiiicului, ii slould Lc cnplusiscd ilui in u puiiiul cquiliLiiun fiunc-
woil (ilui is, wlcn u sccioi is considcicd in isoluiion fion ilc icsi of ilc cconony)
sucl ncusuics uic vulid us long us onc is considciing u nuilci in wlicl consuncis uic
spcnding jusi u snull fiuciion of ilcii ioiul inconcs. Oilciwisc, inconc cccis slould Lc
iulcn inio uccouni und ilc consunci suiplus ncusuic cunnoi Lc iclicd upon in conpuiing
uppioxinuiions of wclfuic.
2
invcslmcnl in sucl u siluulion, us llcy woulo unlicipulc llul ul piicc cquul
lo muiginul cosl llcy woulo nol mukc uny pioll uno lcncc llcy woulo nol
Lc uLlc lo iccovci uny lxco cosl ussociulco will un invcslmcnl. As u ic-
sull, in sucl u lypollclicul siluulion fuluic wclfuic will Lc icoucco, us ncw
piooucls woulo nol Lc inliooucco, innovulions woulo nol Lc muoc, quulily
lcvcls of gooos uno sciviccs woulo nol Lc impiovco. Fuillci oiscussions of
llis poinl will Lc founo in scclion 8.1.1 Lclow uno in cluplci 2.
1.2 FIan of fho chapfor
Sincc I oo nol wunl lo cnlci u long oiscussion of ull llc possiLlc oclnilions
of compclilion policy uno of ull ils possiLlc oLjcclivcs in un uLsliucl wuy,
llis cluplci uims ul inliooucing llc icuoci lo compclilion issucs Ly using u
lisloiicul uppioucl. Ly (Liicly) ocsciiLing llc muin fculuics llul compc-
lilion policics luvc cxliLilco in llc pusl in llc US uno in Euiopc (scclion
2), I slull illusliulc somc of llc foims llul sucl policics cun lukc. 1lc
lisloiicul icvicw ulso slows llul u numLci of puLlic policy consiociulions
uno oLjcclivcs ollci llun wclfuic luvc Lccn (uno slill uic) usco in ucluul
compclilion policics (scclion 8), Lul I will uiguc llul llis is nol ocsiiuLlc.
If u govcinmcnl wunlco lo uclicvc oLjcclivcs ollci llun wclfuic, il sloulo
icsoil lo policy insliumcnls llul oisloil compclilion us lilllc us possiLlc.
Scclion 4 ocsciiLcs llc muin fculuics of compclilion luw in llc Euiopcun
Union (EU), lo piovioc llc icuoci will fuillci insigll of wlul compclilion
policy is uLoul. 1lc cloicc of llc EU is ouc lo llc fucl llul mosl of llc
cuscs oiscussco in llis Look luvc Lccn ocull will Ly EU inslilulions. Al llc
cno of llc cluplci, llc icuoci sloulo luvc u Lcllci iocu of wlul compclilion
policy is uLoul, Lul migll slill wonoci uLoul llc oilcicnccs Lclwccn com-
pclilion policy uno icgululion, oi compclilion policy uno inousliiul policy.
Scclion liics lo cluiify llcsc issucs.
2 HrIof hIsfory of conpofIfIon poIIcy
1lis scclion Liicly icvicws llc muin lisloiicul cvcnls in llc ocvclopmcnl
of compclilion (oi unli-liusl) luws in llc US uno in llc Euiopcun Union.
1lc puiposc lcic is nol lo luvc u complclc ocsciiplion of llc lisloiy of
compclilion luws, Lul iullci lo piovioc somc Luckgiouno lo unocisluno
llc ciicumslunccs in wlicl compclilion luws wcic ciculco uno cnfoicco,
us wcll us llc oLjcclivcs wlicl llcy puipoilco lo ulluin. Wc slull scc in
puilicului llul compclilion policics luvc cmLiucco muny oLjcclivcs ollci
8
llun cconomic wclfuic. As slicssco in scclion 8, sucl oLjcclivcs migll iungc
fiom llc piolcclion of smull Lusincsscs oi puilicului culcgoiics of pcoplc lo
llc cnlunccmcnl of consumci wclfuic, fiom llc ocsiic lo piomolc muikcl
inlcgiulion Lclwccn oilcicnl counliics lo llc goul of icoucing incquulily
lliougl incomc oisliiLulion, fiom puic piolcclionism of oomcslic lims lo
llc oismunlling of nulionul clumpions of ollci counliics.
2.1 AnfI-frusf Iavs In fho lnIfod Sfafos
1lc oiigins of moocin compclilion policy cun Lc liucco Luck lo llc cno
of llc 10ll Ccnluiy, muinly us u icuclion lo llc foimulion of liusls in
llc Unilco Slulcs. In llc sccono lulf of llul ccnluiy, llc Unilco Slulcs
cxpciicncco u numLci of cvcnls wlicl icsullco in llc liunsfoimulion of
munufucluiing inousliics. Icilups llc mosl impoilunl cvcnls wcic llc oiu-
mulic impiovcmcnl in liunspoilulion uno communiculion. 1lc iuilwuys
cxlcnoco iupioly lliougloul llc US lciiiloiy, us oio llc lclcgiupl lincs uno
llc lclcplonc sciviccs. 1lis cnluilco llc foimulion of u luigc singlc mui-
kcl, wlicl in luin guvc u powciful inccnlivc lo lims lo cxploil cconomics
of sculc uno scopc. Along will ollci lcclnologicul innovulions in scvciul
lclos (c.g. mclulluigy, clcmiculs, cncigy), llc foimulion of moic uovuncco
cupilul muikcls uno ncw munugciiul mclloos, llis ciculco llc possiLilily
Accoiding io Wcsi`s Luw \ Conncicc Diciionuiy (19S), Tlc iiusi` wus oiiginully
u dcvicc Ly wlicl scvciul coipoiuiions cngugcd in ilc sunc gcnciul linc of Lusincss nigli
conLinc foi ilcii nuiuul udvuniugc, in ilc diicciion of clininuiing dcsiiuciivc conpcii-
iion, coniiolling ilc ouipui of ilcii connodiiy, und icguluiing und nuiniuining iis piicc,
Lui ui ilc sunc iinc picsciving ilcii scpuiuic individuul cxisicncc, und wiiloui uny
consoliduiion oi ncigci. Tlis dcvicc wus ilc cicciion of u ccniiul conniiicc oi Louid,
conposcd, pcilups, of ilc picsidcnis oi gcnciul nunugcis of ilc dicicni coipoiuiions,
und ilc iiunsfci io ilcn of u nujoiiiy of ilc siocl in cucl of ilc coipoiuiions, io Lc lcld
in iiusi` foi ilc scviul sioclloldcis so ussigning ilcii loldings. Tlcsc sioclloldcis ic-
ccivcd in iciuin iiusi cciiifcuics` slowing ilui ilcy wcic cniiilcd io icccivc ilc dividcnds
on ilcii ussigncd siocl, ilougl ilc voiing powci of ii lud pusscd io ilc iiusiccs. Tlis
lusi fcuiuic cnuLlcd ilc iiusiccs oi conniiicc io clcci ull ilc diicciois of ull ilc coipo-
iuiions, und iliougl ilcn ilc omccis, und ilcicLy io cxcicisc un uLsoluicly coniiolling
inucncc ovci ilc policy und opciuiions of cucl consiiiucni conpuny, io ilc cnd und wiil
ilc puiposcs uLovc ncniioncd."
Foi u iiclci dcsciipiion of uniiiiusi luws in ilc US, scc unong oilcis Conunoi (1990),
Sclcici (19S0) und Sclcici (1994).
Tlcic uic ccononics of sculc wlcn unii cosis of pioduciion full wiil ilc ioiul quuniiiy
pioduccd; ccononics of scopc wlcn unii cosis full Lccuusc iwo oi noic goods uic pioduccd
joinily.
4
foi llc cxpunsion of llc sizc of llc lims. Lcgul innovulions sucl us llc
liLciulizulion of slulc incoipoiulion luws ulso conliiLulco [lo llc ciculion
of luigci lims[, pcimilling llc ucquisilion of ollci lims` slock (c.g. in
mcigcis) uno llc oclcgulion of slocklolocis` occision-muking powci lo full
limc munugcis". Il is nol Ly cluncc llul llc US cxpciicncco un impicssivc
mcigci wuvc in llc 1880s uno 1800s.
1lc lusl puil of llc 10ll Ccnluiy wus cluiuclciisco Ly low uno unsluLlc
piiccs. 1lis wus ouc in puil lo muciocconomic fuclois wlicl guvc iisc lo
muny iccuiicnl uno pcisislcnl cconomic ciiscs (1878-78 uno 1888-80) uno
ciculco insluLilily in scvciul scclois. Lul mosl of llc piicc insluLilily wus of
couisc ouc lo llc vciy sumc fucloi wlicl ullowco foi llc ciculion of luigci
muikcl oppoilunilics. Inocco, llc full in liunspoilulion uno communiculion
cosls lco nol only lo u luigc singlc muikcl foi muny inousliics, Lul ulso lo
u iisc in compclilion, sincc lims now luo lo compclc will moic oislunl
iivuls, loculco Loll in llc ollci Amciicun slulcs uno uLiouo (slipping iulcs
fcll in llis pciioo us wcll).
Fuillci, llc luigc invcslmcnls muoc Ly lims so us lo cnjoy sculc uno
scopc cconomics cuusco lowci cosls uno lowci piiccs. In llc woios of Clun-
olci (1000, p.71), Incicusing oulpul uno ovcicupucily inlcnsilco compcli-
lion uno oiovc oown piiccs. Inocco, llc icsulling occlinc of piiccs in mun-
ufucluico gooos cluiuclciizco llc cconomics of llc Unilco Slulcs uno llc
nulions of Wcslcin Euiopc fiom llc mio-1870s lo llc cno of llc ccnluiy."
Also, lims luo lo muoc luigc invcslmcnls lo icoigunisc llcii pioouclion
uno oisliiLulion uclivilics, lo Luy ncw muclincs oi lo cnlci ncw muikcls
(llink foi insluncc of llc lugc invcslmcnl iuilwuys luo lo mukc). In llc
ullcmpl lo opciulc ul full cupucily so us lo covci llc luigc lxco cosls, lims
wcic lcmplco lo occicusc piiccs, giving iisc lo piicc wuis.
Fiims oflcn liico lo icspono lo piicc wuis uno muikcl insluLilily Ly
wuy of piicc ugiccmcnls wlicl cnuLlco llcm lo muinluin ligl piiccs uno
muigins. 1lc oigunisulion of cuilcls uno liusls (iuiliouos uno oil compu-
nics uic llc Lcsl known cxumplcs of llcsc) luo cxuclly llis puiposc. Lul llc
uovunlugcs of piicc sluLilily foi llc mcmLcis of cuilcls uno liusls oio nol
comc willoul ocliimcnl lo ollci gioups in llc cconomy. Finul consumcis
Scc Clundlci (1990), in puiiicului clupici 8, foi u iicl und fuscinuiing uccouni of ilc
clungcs iuling plucc in ilc US cconony in ilc sccond lulf of ilc 19il Ccniuiy.
Sclcici, 19S0, p.492.
Noiicc lowcvci ilui piicc wuis nigli Lc jusi onc of ilc pluscs in ilc lifc of u cuiicl.
Scc Giccn und Foiici (19S8) und Foiici (19S8). Wc dcfci discussion of ilis issuc io ilc
clupici on collusion.
wcic luil Ly liglci piiccs, uno so wcic pioouccis, sucl us fuimcis uno smull
inousliiul lims, wlicl usco piooucls in cuilclisco scclois us un inpul. Loll
gioups sulcico fiom llc low sulcs piiccs Liougll uLoul Ly llc ufoicmcn-
lionco ciiscs (llc lullci ulso Ly u lcss cmcicnl sculc of pioouclion), uno founo
llcmsclvcs squcczco in Lclwccn low sulc piiccs uno ligl inpul piiccs (uLovc
ull, iuilwuys uno cncigy). Fuillcimoic, smull lims compluinco of unfuii
Lusincss piucliccs uooplco Ly llcii luigc iivuls, wlicl ullcgcoly wunlco lo
oiivc llcm oul of Lusincss.
Fuimcis uno smull Lusincsscs luo cnougl polilicul foicc uno puLlic sym-
pully lo lcuo lo llc ciculion of unli-liusl luws in muny US slulcs. How-
cvci, sucl luws coulo oo vciy lilllc uguinsl ugiccmcnls wlicl involvco moic
llun onc slulc. Lul soon llcic wus cnougl conscnsus foi u fcociul luw uno in
1800 llc o|:nnn wus uooplco. 1lis is pioLuLly llc Lcsl known cx-
umplc of unli-liusl luw in llc woilo, ulllougl il is nol llc cuilicsl: Cunuou
uooplco u similui luw in 1880, Lul cnfoiccmcnl of llul luw wus lo Lc mucl
wcukci.
1lc Slcimun Acl muinly consisls of lwo scclions. Scclion 1 pioliLils
conliucls, comLinulions uno conspiiucics wlicl icsliuin liuoc, uno pic-
sciiLcs impiisonmcnl uno lncs foi violulois. Scclion 2 pioliLils monop-
olisulion, ullcmpls lo monopolisc uno conspiiucics lo monopolisc "uny puil
of llc liuoc oi commcicc umong llc scvciul slulcs, oi will foicign Nulions",
uno llis scclion cuiiics ils own ciiminul pcnullics.
Nolc llul llc Slcimun Acl covcis piicc lxing uno muikcl sluiing ugicc-
mcnls Lclwccn inocpcnocnl lims, us wcll us monopolisulion piucliccs Ly
inoiviouul compunics, Lul nol mcigcis. 1lcicfoic, lims wisling lo cooioi-
Noic ilui [s[null Lusincssncn includcd noi only nunufuciuicis wlosc snull opciu-
iions guvc ilcn u cosi disudvuniugc, Lui ulso wlolcsulcis, nunufuciuicis` ugcnis, und oilci
niddlcncn wlo wcic Lcing diivcn oui of Lusincss us ilc volunc-pioducing nunufuciuicis
novcd foiwuid und ilc nuss iciuilcis novcd Luclwuids inio wlolcsuling." (Clundlci,
1990, pp. 7S-79. Scc ulso p.72.) Consuncis` inicicsis uic oficn ioo fiugncnicd und un-
oiguniscd io luvc un inpuci on govcinncni policics. Scc ulso ilc ncxi scciion 8 foi u
discussion.
1 1.5.. =1 I j..
Noic ilui nciilci EC luw noi ilc conpciiiion luws of uny EU ncnLci siuic upuii fion
Gcinuny luvc ilc uLiliiy of inposing ciininul pcnuliics foi unii-iiusi cuscs. Ncvciilclcss,
ilc dciciicni ccci of inpiisonncni in US luw slould noi Lc ovcisiuicd, cspcciully Lccuusc
juil scnicnccs luvc Lccn givcn only iuicly und foi sloii icins. Moic inpoiiuni uppcuis
io Lc ilc possiLiliiy of iccovciing In|| Jnnnj, iniioduccd in 1914 und wlicl lus givcn
iisc io inpoiiuni iiunsfcis of noncy fion ocndcis io viciins of unluwful connciciul
conduci (ilc luiici cun usl u conpcnsuiion cquul io ilicc iincs ilc dunugc ilcy luvc
icccivcd).
0
nulc piiccs luo llc oplion of mciging inlo u singlc lim uno, Ly so ooing,
llcy pul llcmsclvcs Lcyono llc icucl of llc Slcimun Acl. 1lc Cluylon
Acl of 1014 wus llcicfoic inliooucco lo cxlcno unli-liusl lcgislulion lo
covci mcigcis cupuLlc of icoucing compclilion (llc Cluylon Acl wus lulci
umcnoco Ly llc Ccllci-Kcfuuvci Acl of 100, wlicl muoc uclions uguinsl
mcigcis moic clcclivc), us wcll us ollci piucliccs, sucl us piicc oisciimi-
nulion wlicl lcsscns compclilion (lulci umcnoco Ly llc FoLinson-Iulmun
Acl in 1080) uno inlcilocking oiiccloiulcs umong compcling lims, wlicl
wcic Loll oulsioc llc uppliculion of llc Slcimun Acl.
Duiing ils lisl occuoc of lifc, cnfoiccmcnl of llc Slcimun Acl wus nol
vciy sliicl. Il wus nol unlil 1807 llul u Supicmc Couil occision on u iuilwuy
liusl wlicl lxco llc piiccs of 18 iuiliouos (U.S. v. 1iuns-Missouii Ficigll
Associulion") clcuily csluLlislco llc iocu llul piicc ugiccmcnls wcic : -
illcgul. Inocco, llc Couil icfusco lo uplolo lowci couil occisions wlicl
luo juslilco llc iulcs cluigco us icusonuLlc uno wlicl luo juslilco llc
piicc-lxing us u wuy lo picvcnl "unlcullly compclilion" (Sclcici, 1080,
p.408). Il slulco llul, will llc Slcimun Acl, llc Congicss inlcnoco lo
oulluw ull piicc ugiccmcnls, uno llul il wus nol up lo juogcs lo occioc
wlicl ugiccmcnls uic icusonuLlc uno wlicl oncs uic nol. In ollci woios,
couils wcic nol uskco lo Luluncc llc ncgulivc clccls of piicc icsliuinls will
llcii possiLlc Lcnclls (if llcy cxislco), wlicl woulo imply llc uooplion of
u :&| ] :n-n uppioucl, iullci, llcy mcicly nccoco lo lno llc cxislcncc
of sucl un ugiccmcnl foi llc lims lo Lc founo guilly.
1 U.S.C. =12 I j..
Afici 1S97 Lcgun ilc luigcsi und cciiuinly ilc nosi signifcuni ncigci novcncni in
Anciicun lisioiy. Ii cunc puiily Lccuusc of coniinuing uniiiiusi lcgisluiion und uciiviiics
Ly ilc siuics, puiily Lccuusc of ilc incicusing dimculiy of cnfoicing coniiuciuul ugiccncnis
Ly iiudc ussociuiions duiing ilc dcpicssion of ilc nid- 1S90s, und puiily Lccuusc ilc
iciuin of piospciiiy und ilc Luoyuni siocl nuilci ilui ucconpunicd ii fuciliiuicd ilc
cxclungc of sluics und cncouiugcd Lunlcis und oilci fnunccis io pionoic ncigcis. Tlc
ncigci Loon icuclcd iis clinux Lciwccn 1S99 und 1902, ufici ilc Supicnc Couii lud
indicuicd Ly iis iulings in ilc Tiuns-Missouii Ficigli Buic Associuiion cusc (1S97), ilc
Joini Tiumc Associuiion cusc (19S9), und ilc Addyson Fipc und Siccl cusc (1S99) ilui
cuiicls cuiiicd on iliougl iiudc ussociuiions wcic vulnciuLlc undci ilc Slcinun Aci."
(Clundlci, 1990, p. 7, fooinoic oniiicd) Tlc fuci ilui ufici ilc Slcinun Aci ilcic
wus u sluip incicusc in ilc nunLci of ncigcis in ilc US lus ulso Lccn docuncnicd und
unulyscd Ly Diiilingnuyci (19S).
Wlcn u Lusincss piuciicc is n illcgul, ii ncuns ilui no uiguncni cun Lc nudc io
jusiify ii: ii is pioliLiicd wiiloui cxccpiions. A n+| u nnun uppioucl, insicud, would
ullow foi cxccpiions: u fin nigli ilcn iiy und convincc u couii ilui ilc Lusincss piuciicc
ii udopicd docs noi luin wclfuic in iis puiiicului insiuncc.
Conpuic wiil Aii. S1(8) of ilc Ticuiy of Bonc. Scc ulso Lclow.
7
1lc lougl sluncc uguinsl cuilcls wus llcn conlimco Ly llc juogmcnls
uguinsl lwo of llc mosl impoilunl liusls, numcly llc Slunouio Oil Compuny
(wlicl wus splil inlo 84 scpuiulc compunics in 1011) uno Amciicun 1oLucco.
1lis "pci sc pioliLilion" of piicc ugiccmcnls is u vciy sliong piinciplc wlicl
is slill vulio, uno wlicl lus known vciy fcw cxccplions.
Onc of llcsc iuic cxccplions wus iccognisco in unollci Supicmc Couil
occision (Appulucliun Couls v. U.S., 1088). 1o unocisluno wly llc Supicmc
Couil uLunoonco u wcll csluLlislco piinciplc uno ovciluinco llc occision
of u lowci couil, onc lus lo scl llc occision in llc pcispcclivc of llc pc-
iioo. 1lc Gicul Dcpicssion wus luving impoilunl conscqucnccs on muny
inousliics, uno onc sucl inousliy wlicl sulcico llc luioslip of llc ciisis
wus llc coul mining inousliy. Fucing u scvcic icouclion in ocmuno, uno
inlcnl on uvoioing fuillci losscs, 187 pioouccis loculco in llc Appulucliun
Mounluin icgion foimco u compuny wlicl wus lo lno llc Lcsl piiccs uno
lo ulloculc oulpuls umong mcmLcis. 1lc Couil founo llul llis ugiccmcnl
wus nol unluwful sincc il wus lo Lc consiocico us u icusonuLlc icsponsc lo
piolccl llc muikcl fiom ocsliuclivc piucliccs.
1lis is pioLuLly onc of llc Lcsl cxumplcs of low compclilion luws uno
llcii cnfoiccmcnl uic lo Lc unocislooo in llc polilicul, cconomic, uno lis-
loiic conlcxl in wlicl llcy uic muoc. In 1040, wlcn llc cconomic conoilions
wcic vciy oilcicnl fiom llc conoilions picvuiling in llc cuily 1liilics, llc
Supicmc Couil (wlicl in llc mcunlimc luo clungco somc of ils juogcs) wus
lo iccsluLlisl llc piinciplc of llc : - pioliLilion of piicc ugiccmcnls Ly
occluiing unluwful u gusolinc cuilcl ulso ciculco ul llc limc of llc Gicul
Dcpicssion lo counlci llc piicc occicuscs cuusco Ly llc oumping of gusolinc
inlo llc muikcl Ly iclncis punic-sliickcn Ly llc ciisis.
Moic gcnciully, llc scopc uno cnfoiccmcnl of unli-liusl luws luvc clungco
consiociuLly in llc US ouiing llc ccnluiy. Apuil fiom llc moic lcnicnl up-
pioucl in llc pciioo of llc Gicul Dcpicssion, llcic wus u mujoi clungc
ouiing llc ycuis of llc Fcugun uominisliulion (1081-88), wlcn mujoi unli-
liusl invcsligulions opcnco Ly llc picvious uominisliulion wcic closco uno
Howcvci, cxccpiions io unii-iiusi iulcs in ilc US luvc Lccn foinully giunicd io nuny
scciois sucl us insuiuncc, ugiiculiuic, fslciics, piofcssionul LuscLull, luLoi oigunizuiions.
Tlcic ulso cxisi u "siuic uciion" dociiinc wlicl icpicscnis unoilci cxccpiion. In pui-
iicului, loiizoniul ugiccncnis (sucl us piicc-fxing) wlicl would oilciwisc Lc dccncd
unii-conpciiiivc uic ullowcd insofui us ilcy uic pionoicd Ly u siuic icguluiion. Foi u
discussion scc Innun und BuLinfcld (1997).
Tlc unii-conpciiiivc ccci wus ulso considcicd io Lc lcss siiong sincc ilcic cxisicd
nuny oilci pioduccis in ilc indusiiy noi iuling puii in ilc ugiccncni.
8
llc wclfuic ciilciion Lccumc ccnliul. 1lc cmplusis givcn lo muikcl foiccs
lus Liougll moic lunos-ol" policics, in llc conviclion llul llc muikcl
sloulo Lc lcfl ficc lo opciulc lo sclccl llc Lcsl lims.
Il lus ulso Lccn suggcslco llul llc clungc in llc US unli-liusl policics
coiicsponos lo u slifl of wcigll in llc wclfuic funclion fiom consumci sui-
plus lo piooucci suiplus. 1lis slifl mcunl llul il wus moic oimcull lo
win u cusc uguinsl u lim, cspcciully in cuscs involving vcilicul icsliuinls uno
monopolisulion. As u conscqucncc, llc numLci of piivulc unli-liusl cuscs
llco in US Disliicl Couils occlinco slcuoily in llc 1080s. Al llc 1077 pcuk
llcic wcic 1011 sucl cuscs, wlcicus in 1080 llcic wcic only 088.
2.2 ConpotItIon Iav In tho Europoan lnIon
In llis scclion I will Liicly icvicw llc muin lisloiicul ocvclopmcnl of com-
pclilion luws in llc Euiopcun Union, wlcic llcic uic lwo oilcicnl lcvcls of
juiisoiclion: nulionul uno supiu-nulionul. 1lc lullci is moic inlcicsling, us
mosl Euiopcun counliics luvc nol luo piopci compclilion luws unlil vciy
icccnlly, uno sucl nulionul luws uic lo u luigc cxlcnl icpiooucing llc sumc
fculuics us llc luws inliooucco Ly llc 1iculy of Fomc uno ils succcssivc
mooilculions. 1lcicfoic, I will ocvolc ullcnlion muinly lo EU compclilion
policics. Howcvci, I lno llc lisloiy of Gcimun compclilion luws inlcicsling
unoci scvciul icspccls, uno foi llis icuson I will luvc u cuisoiy look ul il.
2.2.1 ConetItIon Iovs In Gernony
Wc luvc sccn llul llc cconomic clungcs in llc sccono lulf of llc 10ll Ccn-
luiy in llc US ciculco inccnlivcs foi llc foimulion of cuilcls uno liusls
wlicl wcic soon lo Lc oulluwco Ly llc Slcimun Acl. In Gcimuny, low-
cvci, llc picvuiling vicw wus llul cuilcls wcic un insliumcnl lo conliol llc
insluLilily ciculco Ly cul-llioul compclilion uno piicc wuifuic. Hcncc,
Tlis clungc lus Lccn suppoiicd Ly ilc ussciiion of cciiuin ccononic ilcoiics sucl us
ilc onc wlicl lingcs upon ilc idcu of "conicsiuLlc nuilcis" (scc ilc ncxi clupici foi u
discussion), uccoiding io wlicl nuilci sizc docs noi ncccssuiily inply lowci cmcicncy.
Scc ulso Conunoi, 1990, pp.47-4S.
Scc Viscusi ci ul., 199.
Muny of ilc conncnis icfciiing lcic io cuiicni Gcinun conpciiiion luw nigli ulso
upply io oilci Ccniiul Euiopcun couniiics sucl us Ausiiiu, Clccl BcpuLlic, Swiizcilund,
Hunguiy und Hollund. In ull of ilcsc couniiics, conpciiiion luw wus inspiicd Ly ilc
piinciplc of ccononic ficcdon iuilci ilun ilc nuxinisuiion of ccononic wclfuic. Tlis
ulso cxpluins ilc fuvouiuLlc iicuincni io cuiicls uccoidcd in ilc pusi Ly nosi of ilc
couniiics ncniioncd. I ilunl Dunicn Ncvcn foi poiniing ilis oui io nc.
0
Gcimun luw nol only pcimillco piicc ugiccmcnls, Lul ulso muoc llcm cn-
foiccuLlc in couils. Anli-cuilcl uclion wus lukcn only in cciluin cxlicmc
cuscs, foi insluncc wlcic llc cuilcl coulo lcuo lo u complclc monopoly oi
lo cxlicmc cxploilulion of consumcis. As u icsull, cuilcls piolifciulco in
llc ycuis uiouno llc luin of llc ccnluiy. Ly 100 llcic wcic 88 cuilcls
involving 12000 lims, uno llc numLci incicusco slcuoily. Ly 1028 llcic
wcic 100 cuilcls in Gcimuny.
Il is only in 1028 llul u Cuilcl Luw wus inliooucco, muinly us u icuclion
lo lypciinlulion, us il wus fcuico llul piicc ugiccmcnls migll conliiLulc
lo llc cscululion of piiccs. Lul cvcn llcn, llc luw oio nol pioliLil cuilcls,
il mcicly icquiico icgisliulion will u ncw ugcncy in cluigc of cnsuiing llul
cuilcls woulo nol uLusc llcii muikcl powci. Appuicnlly, nol muny uLuscs
wcic puisuco uno llc ncw luw oio nol luvc mucl impucl on cuilcls, wlosc
numLci conlinuco lo iisc. Ncw cconomic conoilions soon oLviulco llc oc-
siic lo limil llc powci of cuilcls, uno piomplco u movc in llc opposilc
oiicclion. Inocco, in 1080, unoci llc clccl of llc Gicul Dcpicssion uno llc
Lunkiuplcy of muny lims, puilicipulion in cuilcls wus muoc compulsoiy foi
lims opciuling in vulnciuLlc scclois. Compulsoiy puilicipulion in cuilcls
wus muoc cvcn moic compiclcnsivc uno cxlcnsivc unoci llc Nuzi icgimc,
in puilicului will llc uim of conliolling llc nulionul inousliy uno slicngll-
cning llc scclois involvco in llc wui uppuiulus, on llc llcoiy llul il woulo
Lc sliongci if lims wcic ligllly cooioinulco.
1lc iocu llul ullowing lims lo coopciulc closcly oi lo mcigc llcii opci-
ulions woulo mukc llcm sliongci uno ciculc somc soil of nulionul clum-
pion" wlicl woulo oulpcifoim foicign iivuls is u wiocspicuo onc. Aflci
Woilo Wui II, llc Allics wunlco lo imposc unli-liusl luws upon Loll Gci-
muny uno Jupun, nol so mucl lo piomolc cconomic piogicss us lo Licuk
up cxccssivc conccnliulion of cconomic powci, wlicl icpicscnlco u possiLlc
fuluic llicul. Accoioingly, cuilcls, synoiculcs uno liusls wcic foiLioocn
Ly occupulion uulloiilics. Lul llc oc-conccnliulion piogiummc of llc
Allics wus soon pul lo un cno, sincc llc US uno Liilisl govcinmcnls now
pciccivco llc llicul of llc Sovicl Union uno occioco llul Gcimuny icpic-
scnlco u uscful foicc wlicl coulo lclp lo counlci-Luluncc llc slicngll of llc
Sovicl Union. A similui ocvclopmcnl ulso occuiico in Jupun.
Scc Sclcici, 1994, p 24.
Scc K uln, 1997, p.116.
Tlc Liculing-up of ilc Gcinun clcnicul fin IG FuiLcn inio DASF, Duyci und
Hocclsi duics fion ilis pciiod.
Scc Sclcici, 1994, pp.2S-82.
10
Gcimuny pussco u vciy sliicl compclilion luw in 107, uflci u long oc-
Lulc, uno sincc llul limc llc Fcociul Cuilcl Omcc (Lunocskuilclluml) lus
iigoiously cnfoicco llc iulcs uguinsl piicc-lxing ugiccmcnls. Also, Gci-
muny lus luo u pioccouic foi mcigci conliol sincc 1078, uno llis pioccouic
lus Lccn cnfoicco iclulivcly sliiclly, lcuoing nol only lo llc pioliLilion of
mcigcis (101 us of 1004) Lul ulso lo llc mooilculion of u numLci of mcigci
pioposuls uno llc uLunoonmcnl of muny ollcis. Il lus Lccn nolco, low-
cvci, llul llc muin iulionulc Lclino compclilion policy in Gcimuny oocs
nol uppcui lo Lc llc puisuil of cconomic cmcicncy ciilciiu, Lul iullci llc
piolcclion of cconomic ficcoom. So, mcigcis uic sciulinisco Lccuusc llcy
coulo lcuo lo llc foimulion of oominunl ugcnls wlicl coulo llcn limil llc
cconomic ficcoom of compclilois. 1lc uLusc of u oominunl posilion uno
vcilicul icsliuinls uic sccn in llc sumc pcispcclivc. 1lis cxpluins llc sliicl
opposilion lo piucliccs sucl us icluil piicc muinlcnuncc, wlicl is consiocico
: - illcgul Ly Gcimun compclilion luw, sincc il infiingcs upon llc liLcily
of un inocpcnocnl lim lo scl ils own piicc.
2.2.2 ConetItIon Iov In tLe \nIted KIngdon
Woill wiiling u fcw puiugiupls
2.2.3 ConetItIon Iovs In tLe Euroeon ConnunItIes
1lc sluiling poinl of supiu-nulionul compclilion luw in Euiopc wus llc sc-
iics of pio-compclilivc mcusuics uooplco Ly Fiuncc, Gcimuny, Iluly uno llc
Lcnclux counliics in llc 101 1iculy of Iuiis, wlicl ciculcs llc Euiopcun
Coul uno Slccl Communily (ECSC). 1lis 1iculy pioliLilcs liuoc Luiiicis
us wcll us oisciiminuloiy uno ollci icsliiclivc piucliccs cupuLlc of oisloil-
ing compclilion umong llc six counliics wlicl wcic lulci lo Lccomc llc
founoing mcmLcis of llc Euiopcun Economic Communily.
1lcic uic pioLuLly lwo muin icusons Lclino llc inlioouclion of compc-
lilion policy mcusuics in llc 1iculy of Iuiis. 1lc lisl onc is uguin iclulco lo
llc ocsiic of oiminisling llc oungci of Gcimun powci Ly muking uvuiluLlc
lo llc ollci Euiopcun counliics sucl (ul llc limc) csscnliul inpuls us coul
uno slccl. 1lc pioliLilion of oisciiminuloiy piucliccs migll ulso Lc sccn us
u wuy lo guuiunlcc cquul ucccss lo llcsc Lusic icsouiccs. 1lc sccono icuson
is llul llc piinciplc of ficc compclilion wus Lcginning lo Lc uppicciulco us
Scc K uln, 1997 foi u discussion of Couii dccisions wlicl piivilcgc ilc ccononic ficc-
don of ugcnis io ilc dciiincni of ccononic cmcicncy.
11
llc only viuLlc wuy lo ulluin un cmcicnl funclioning of llc muikcl, ulso in
vicw of llc succcss of llc US cconomy wlicl luo conlinuously iclico upon
unli-liusl iulcs. Ficc compclilion wus llus picfciico lo u ccnliulisco oi-
gunisulion of muikcls, cvcn llougl llc Higl Aulloiily (llc Looy in cluigc)
wus uulloiisco lo inlcivcnc in cusc sciious muikcl inLulunccs uiosc.
Somc of llc kcy poinls of cuiicnl compclilion luw in Euiopc cun Lc
liucco Luck, ul lcusl in llcii Lusic clcmcnls, lo llc uiliclcs oculing will
compclilion issucs in llc 1iculy of Iuiis. Ailiclc 0 of llul 1iculy pio-
liLils ugiccmcnls uno conccilco piucliccs Lclwccn lims oi ussociulions of
lims wlicl lcno oiicclly oi inoiicclly lo picvcnl, icsliicl oi oisloil noimul
compclilion willin llc Common Muikcl, uno llis piovision is clcuily llc
moocl upon wlicl Ailiclc 81 of llc 1iculy of Fomc is Lusco. Ailiclc 00(7)
oculs will llc uLusc of u oominunl posilion Ly lims wlicl usc sucl u posi-
lion lo puisuc oLjcclivcs wlicl uic conliuiy lo llc 1iculy, uno is llcicfoic
llc closc coiicsponocnl of Ailiclc 82 of llc 1iculy of Fomc.
Ailiclc 00 ulso oculs will mcigcis uno conccnliulions Lclwccn lims in
llc coul uno slccl inousliy. Conscnl lo sucl mcigcis coulo Lc givcn only
Ly llc Higl Aulloiily, wlicl giunlco uppiovul only wlcic llc conccnliu-
lion oio nol givc lo llc ncw cnlily llc powci lo conliol piiccs, icsliicl
pioouclion uno oisliiLulion, oisloil liuoc umong McmLci Slulcs, oi ciculc
un uililciully piivilcgco posilion in llc muikcls. Allcnlion lo piospcclivc
mcigcis in llc inousliy cun Lc unocislooo Ly llc fcui of conccnliulion of
cconomic powci in llc lunos of u fcw lims, u fcui wlicl luo ulicuoy juslilco
llc pioccss of oc-cuilclisulion in Gcimuny. Il is nolcwoilly, llougl, llul
llc liculmcnl of mcigcis is nol mcnlionco in llc 1iculy of Fomc. Mcigcis
wcic nol muoc llc cxplicil oLjccl of Euiopcun compclilion policy unlil llc
uooplion of llc Fcgululion 4004 of 1080, uflci u ocLulc wlicl luslco foi
ycuis uno wlicl illusliulcs Lusic oilcicnccs in llc uppioucl lo compclilion
uno inousliiul policy umong llc oilcicnl counliics. In puilicului, Gcimuny
uno llc UK wunlco mcigcis lo Lc juogco only on llc Lusis of compclilion
issucs, wlcicus Fiuncc wunlco llcm lo Lc juogco Ly ulso luking inlo consio-
ciulion ciilciiu of inousliiul policy uno sociul issucs. Evcnluully, llc foimci
uppioucl picvuilco.
Scc Goydci, 1992, p.19.
Ficviously Aiiiclc S. Tlc Ticuiy of Ansicidun, wlicl cnicicd inio foicc on 1
Muy 1999, lus icnunLcicd ilc uiiiclcs of ilc Ticuiy of Bonc csiuLlisling ilc Euiopcun
Connuniiy.
Ficviously Aiiiclc S6.
Scc Goydci, 199S, clupici 1S(1).
12
1lc 1iculy of llc Euiopcun Communily oculs will compclilion issucs
in uiliclcs 81 lo 80. Howcvci, llc logic of ficc compclilion is cnunciulco
Ly uiliclc 8(f), wlicl culls foi "[l[lc inslilulion of u syslcm cnsuiing llul
compclilion in llc Common Muikcl is nol oisloilco". Fuillcimoic, onc of
llc mujoi icusons Lclino llc uooplion of compclilion iulcs unoci llc Iuiis
1iculy wus lo uvoio oisciiminulion on nulionul giounos. Ailiclc 7 conlims
llul llis is ulso onc of llc Lusic piinciplcs in llc 1iculy of Fomc, uno il lus
uppliculions wcll Lcyono llc iulcs on compclilion ulonc. 1lcicfoic onc
of llc muin oLjcclivcs in Euiopcun compclilion policy is llc climinulion
in llc cconomic syslcm of uny oisciiminulion Lusco on nulionul giounos.
1lis cxpluins in puilicului llc sliong posilion lukcn Ly llc EC Commission
- uno uplclo on scvciul occusions Ly llc Euiopcun Couil of Juslicc - will
icspccl lo piicc oisciiminulion ucioss counliics. Inocco, llc Commission lus
willoul cxccplion conocmnco lims wlicl luvc liico lo scgmcnl muikcls
ucioss nulionul Loiocis, uno piucliccs sucl us foiLiooing puiullcl impoils
luvc Lusicully u slulus of : - pioliLilion willin llc EU.
Il is oimcull lo scc cxuclly wlul llc oLjcclivcs of compclilion policy
wcic foi llosc wlo oiuflco llc 1iculy of Fomc. Il is pioLuLly sufc lo suy
llul compclilion wus nol un cno in ilsclf, Lul wus inlcnoco us u wuy lo
piomolc cconomic piogicss uno llc wclfuic of Euiopcun cilizcns, llc lullci
Lcing onc of llc oLjcclivcs of llc EC us slulco Ly Ail.2.
Tlcsc uic ilc ncw nunLcis us nodifcd Ly ilc Ticuiy of Ansicidun. Tlc uiiiclcs
dculing wiil conpciiiion in ilc Ticuiy of Bonc wcic oiiginully nunLcicd S io 94.
Scc Goydci, 1998, p. 26.
Tlis is ulso clcuily siuicd in ilc XXV Conpciiiion Folicy Bcpoii (199), puiu. 2.
Fiins` uiicnpi io cluigc dicicni piiccs in dicicni Euiopcun couniiics would fuil
if consuncis und iciuilcis nudc puiullcl inpoiis, ilui is, if ilcy cngugcd in uiLiiiuging
Ly Luying clcup in onc couniiy und sclling ui u liglci piicc in unoilci. Fiins nigli
iiy io uiiifciully scgncni nuilcis und pioliLii puiullcl inpoiis Ly nuling usc of vuii-
ous coniiuciuul cluuscs oi oilci piuciiccs. Scc ilc clupici on piicc disciininuiion foi u
discussion.
Tlui conpciiiion policy is u wuy io uclicvc ilc opiinul ullocuiion of icsouiccs, pio-
noic icclnicul piogicss und udupi io u clunging cnviionncni is siuicd clcuily in ilc XXV
Conpciiiion Folicy Bcpoii (199), puiu 1. Tlc Connission ulso cnplusiscs ilui conpc-
iiiion lclps Euiopcun fins Ly pusling ilcn io Lc noic conpciiiivc und cmcicni. Moic
gcnciully, ii is Aii. 8 of ilc Ticuiy of Bonc wlicl icfcis io conpciiiion us u wuy io
uclicvc ilc oLjcciivcs siuicd in Aii. 2.
Ii is noic dimculi io suy wlcilci ilc EC uiiuclcs u liglci vuluc io consuncis ilun io
pioduccis. Tlc foinuluiion of Aii. S1, wlicl ullows uny ugiccncni, dccision oi concciicd
piuciicc "wlicl coniiiLuics io inpioving ilc pioduciion oi disiiiLuiion of goods oi io
pionoiing icclnicul oi ccononic piogicss, wlilc ullowing consuncis u fuii sluic of ilc
icsuliing Lcncfi" nigli indicuic ilui consunci wclfuic is unong ilc uliinuic oLjcciivcs
18
1oouy, llc muin oLjcclivcs of compclilion policy us cnfoicco Ly llc
Euiopcun Commission uic mosl pioLuLly cconomic cmcicncy uno Euiopcun
muikcl inlcgiulion. 1lc icccnl AA1A| 1: n n::n 1|:j-1000
iccilcs:
1lc lisl oLjcclivc of compclilion policy is llc muinlcnuncc
of compclilivc muikcls. Compclilion policy scivcs us un insliu-
mcnl lo cncouiugc inousliiul cmcicncy, llc oplimul ulloculion
of icsouiccs, lcclnicul piogicss uno llc lcxiLilily lo uojusl lo
u clunging cnviionmcnl. In oioci foi llc Communily lo Lc
compclilivc on woilowioc muikcls, il nccos u compclilivc lomc
muikcl. 1lus, llc Comminily`s compclilion policy lus ulwuys
lukcn u vciy sliong linc uguinsl piicc-lxing, muikcl sluiing cui-
lcls, uLuscs of oominunl posilions, uno unlicompclilivc mcigcis.
Il lus ulso pioliLilco unjuslilco slulc-giunlco monopoly iiglls
uno slulc uio mcusuics wlicl oo nol cnsuic llc long-lcim viuLil-
ily of lims Lul oisloil compclilion Ly kccping llcm uililciully
in Lusincss. 1lc sccono is llc singlc muikcl oLjcclivc. An in-
lcinul muikcl is un csscnliul conoilion foi llc ocvclopmcnlg of
un cmcicnl uno compclilivc inousliy. [...[ 1lc Commission lus
usco ils compclilion policy us un uclivc lool lo picvcnl [ciccling
piivulc Luiiicis lo liuoc[, pioliLiling, uno lning lcuvily llc pui-
lics lo, lwo muin lypcs of ugiccmcnl: oisliiLulion uno liccnsing
ugiccmcnls llul picvcnl puiullcl liuoc Lclwccn McmLci Slulcs,
uno ugiccmcnls Lclwccn compclilois lo kccp oul of onc unollci`s
lciiiloiics`." (Euiopcun Commission, 2000, p.0)
Sociul icusons uic ulso lukcn inlo uccounl in Euiopcun compclilion pol-
icy. Inocco, llc Commission lus giunlco cxcmplions fiom compclilion iulcs
foi so-cullco "ciisis cuilcls"- numcly, ugiccmcnls wlcic lims cngugc in ic-
cipiocul icouclions in cupucily uno oulpul - piovioco sucl icouclions in
ovcicupucily uic pcimuncnl, fuvoui spcciulisulion uno uic implcmcnlco in
sucl u wuy llul llcy minimisc llc sociul cosls of llc uncmploymcnl wlicl
icsulls fiom llc culLuck of pioouclion. Hcic il is clcui llul sociul uno
polilicul consiociulions inlucncc llc wuy in wlicl compclilion policy is im-
plcmcnlco: compclilion cun Lc suciilcco wlcn llc sociul cosls of il migll
of conpciiiion luw. Howcvci, ii would Lc luid io fnd cvidcncc ilui piovcs u Lius iowuid
consunci suiplus in ilc inplcncniuiion of EC conpciiiion luw.
Scc Goydci, 1998, p. 162 und following pugcs.
14
Lc loo ligl, sincc muny lims migll cxil un inousliy unoci conoilions of
ovci-cupucily, wlicl woulo icsull in consiociuLlc joL losscs. Evcn if in llc
long-iun u icsliucluiing of llc inousliy woulo Lc Lcnclciul, in llc sloil-iun
llcic migll cxisl consiociuLlc cosls llul u govcinmcnl migll wunl lo uvoio
foi polilicul uno sociul icusons.
1lc possiLlc consiociulion of icusons ollci llun cmcicncy wus conlimco
in u icccnl juogmcnl conccining llc Ncsll`c-Iciiici cusc, in wlicl llc Couil
of Fiisl Insluncc iulco llul, ulllougl llc Mcigci Fcgululion is conccinco
piimuiily will qucslions of compclilion, llis oocs nol piccluoc llc Euiopcun
Commission fiom luking inlo uccounl llc sociul clccls of u conccnliulion if
llcy ulccl llc lcvcl oi conoilions of cmploymcnl .
Anollci clcmcnl wlicl ulccls compclilion policy in Euiopc is llc im-
poiluncc uccoioco Ly llc Commission lo smull uno mcoium sizco lims.
1lcsc lims oflcn icccivc fuvouiuLlc liculmcnl. Foi insluncc, llc Com-
mission looks fuvouiuLly upon Slulc Aio givcn lo smull uno mcoium-sizco
cnlcipiiscs (SMEs ) in llc foim of suLsioisco louns, F\D suppoil, lnun-
ciul guuiunlccs uno ollci ussisluncc. Fuillci, llc Euiopcun Couil of
Juslicc lus lukcn llc vicw llul uiliclc 81(1) - llul oculs will ugiccmcnls
umong lims, scc scclion 4 Lclow - is nol upplicuLlc wlcic llc impucl of un
ugiccmcnl Lclwccn lims on inliu-communily liuoc oi on compclilion is nol
uppicciuLlc (llc so-cullco n n:n:n:- oocliinc). 1lc Euiopcun Commission
lus sincc scl lwo quunlilulivc ciilciiu spccifying wlcn sucl ugiccmcnls uic
occmco of minoi impoiluncc: (1) u muikcl sluic ciilciion, (2) u lim`s sizc
ciilciion.
(1) 1wo oilcicnl njj:jn muikcl sluic llicslolos luvc Lccn scl Ly
llc Euiopcun Commission. A / llicslolo foi loiizonlul ugiccmcnls (i.c.,
ugiccmcnls umong lims opciuling ul llc sumc lcvcl of pioouclion oi of
muikcling"), u 10/ llicslolo foi vcilicul ugiccmcnls (i.c., ugiccmcnls umong
lims opciuling ul oilcicnl cconomic lcvcls"). Howcvci, u Lluck lisl"
cxisls: if loiizonlul ugiccmcnls involvc piicc-lxing, icsliuinls on oulpuls,
muikcl-sluiings, oi sluiing of souiccs of supply, uno if vcilicul ugiccmcnls
involvc icsulc piicc muinlcnuncc oi lciiiloiiul piolcclion, llcn uiliclc 81(1)
XXV Conpciiiion Folicy Bcpoii, 199, p.60
Tlc Connission dcfncs u SME us un cnicipiisc wlicl lus u iuinovci up io ECU 40
nillion, u Luluncc slcci of ECU 27 nillion, und u nuxinun nunLci of cnployccs of 20.
Scc Connission icconncnduiion of 8 Apiil 1996 puLlislcd in OJ L 107, 80.4.1996, p.4.
OJ No L 107, 80.4.1996, p.4. Scc ulso Conpciiiion Folicy Ncwslciici, vol.2,No.1,
Spiing 1996, pp.84-; und ilc XXV Conpciiiion Folicy Bcpoii (199), puiu. 201.
Tlc nosi icccni Noiicc on J n:n:n: wus puLlislcd in OJ C 872 on 9.12.1997.
1
cun slill Lc upplico.
(2) Evcn if llc uLovc muikcl sluic llicslolos uic cxcccoco, llc Com-
mission will nol upply uiliclc 81(1) lo ugiccmcnls umong SMEs (us oclnco
uLovc, scc OJ L 107, 80.4.1000, p.4), sincc llcy uic iuicly cupuLlc of ulccl-
ing liuoc uno compclilion willin llc Common Muikcl, uno woulo nol in
uny cusc Lc of sumcicnl Communily inlcicsl lo juslify ils inlcivcnlion. Only
cxccplions uic ugiccmcnls wlicl migll signilcunlly impcoc compclilion in u
suLslunliul puil of llc iclcvunl muikcl, oi wlicl icsliicl compclilion Ly llc
cumululivc clccl of puiullcl nclwoiks of similui ugiccmcnls Lclwccn scvciul
pioouccis oi oculcis.
1lc fuvouiuLlc liculmcnl uccoioco lo smull uno mcoium lims lnos ils
iulionulc in llc "oc minimis" iulc, numcly llul lilllc luim cun Lc oonc
Ly lims wlicl uic of limilco sizc. Accoioingly, il is nol cmcicnl foi llc
Commission lo usc icsouiccs on ugiccmcnls wlicl uic likcly lo luvc lilllc
impucl on compclilion uno wclfuic. 1lis lus ulso inspiico llc icccnl
Commission`s icfoim on vcilicul icsliuinls: Lcfoic llc icfoim, mucl of llc
Commission`s woiklouo wus icpicscnlco Ly vcilicul ugiccmcnls unlikcly lo
Lc luimful. 1lc icfoim is u wclcomc lisl slcp lowuios focusing on cuscs
llul ocscivc sciuliny (scc ulso scclion 4.1 Lclow).
Ncvcillclcss, llcsc uic pioLuLly nol llc only icusons foi llc iclulivcly
lcnicnl liculmcnl of smull-mcoium sizco lims Ly llc Commission. Inocco,
llc Commission lus lookco will fuvouiuLlc cycs ul smull uno mcoium sizc
lims sincc llc Lig full in cmploymcnl cuusco in llc 70s Ly llc ciisis of luigc
lims opciuling in lcuvy inousliics. Hcncc, il lus uccoioco u spcciul iolc lo
smull uno mcoium lims sincc "sucl lims uic un csscnliul uno mujoi com-
poncnl of u lcullly, compclilivc cnviionmcnl, in vicw of llcii conliiLulion
lo llc compclilivc sliucluic of llc muikcl, llcii lcxiLilily uno llcii iolc in
lcclnicul cvolulion".
Scc OJ C 872 on 9.12.1997.
Scc ulso Ncvcn, Fupundiopoulos und ScuLiigli (199S).
Euiopcun Connision, 1:InI| 1unI un unI:I:un 1u|:j, 1, p. 29, ciicd in
Gcoigc und Jucqucnin, p.219. A sinilui siuicncni cun Lc found in ilc EC Conpciiiion
Folicy Ncwslciici, vol.2, no.1, Spiing 1996, p.84: Tlus, ilc Connission coniinucs io
uclnowlcdgc ilc inpoiiuni coniiiLuiion of SMEs in icins of joL cicuiion, innovuiion und
ccononic dcvclopncni on ilc onc lund und ilc dimculiics SMEs luvc in iuising cupiiul
und ilcii insumcicni ucccss io infoinuiion on ilc oilci lund." Siniluily, on siuic uid
policy, ilc AA1A 1unI un unI:I:un 1u|:j-1 siuics: In gcnciul ilc Connission
iulcs u fuvouiuLlc vicw of uid io snull und ncdiun-sizcd cnicipiiscs, givcn ilcii siiuciuiul
lundicups us conpuicd wiil luigc undciiulings und ilcii poicniiul foi innovuiion, joL
cicuiion und giowil."(Euiopcun Connission, 2000, =24)
10
3 Othor oIjoctIvos of conpotItIon poIIcy
1lc muin puiposc of llc uLovc sloil lisloiicul icvicw of compclilion pol-
icy in llc US, Gcimuny uno Euiopc lus Lccn lo illusliulc llc fucl llul
unli-liusl uno compclilion luws uic oflcn inlucncco Ly sociul uno lisloiicul
icusons, uno oflcn icspono lo quilc oilcicnl oLjcclivcs. Hcic wc summuiisc
uguin somc of llosc oLjcclivcs, uno wc inoiculc low llcy uic nol ncccssui-
ily compuliLlc will llc goul of incicusing cconomic wclfuic. 1lis is nol lo
suggcsl llul oLjcclivcs ollci llun wclfuic sloulo nol Lc puisuco ul ull Ly
puLlic policics, Lul llul il is u Lcllci iocu lo puisuc llcm will ollci pol-
icy insliumcnls uno nol Ly using compclilion luws. In wlul follows, I lisl
Liicly oiscuss u numLci of oLjcclivcs wlicl luvc Lccn inoiculco in oilcicnl
ciicumslunccs uno in oilcicnl pluccs, us llc oncs compclilion policy sloulo
puisuc. I llcn ocul will somc puLlic policy consiociulions wlicl luvc ul
oilcicnl limcs inlucncco llc cnfoiccmcnl of compclilion policy.
3.1 OIjoctIvos, othor than voIfaro
A numLci of oLjcclivcs ollci llun wclfuic luvc ulso inspiico compclilion
policics. I slull Liicly mcnlion somc of llcm, uno commcnl upon llc pos-
siLlc conliuoiclions Lclwccn sucl oLjccclivcs uno llc goul of cconomic cm-
cicncy.
3.1.1 IrotectIon oI consuners
1lc piolcclion of consumcis fiom llc uLuscs of lims lus Lccn u icuson
Lclino llc uooplion of compclilion luws in muny counliics, uno wc luvc sccn
llul llc wclfuic of Euiopcun cilizcns lus ulso somc wcigll in llc uiliclcs
ocvolco lo compclilion Ly llc 1iculy of Fomc. In somc nulionul luws,
consumci piolcclion is onc of llc cxplicil lusks of unli-liusl uulloiilics,
cvcn wlcn il lus lilllc lo oo will llc noimul funclioning of llc muikcl (c.g.
wlcn il conccins fuii uovcilising).
Il is somclimcs uiguco llul giving u compclilion uulloiily llc oLjcclivc
lo muximisc consumci wclfuic, iullci llun lolul wclfuic, is nol ncccssuiily
u Luo lling. Consioci llc following uigumcnl (wlicl lukcs u polilicul
cconomy" pcispcclivc). Vciy oflcn consumcis uic nol willing (oi uLlc) lo
cxcil llcii uggicgulc powci sincc llc clccl upon consumcis of u givcn muikcl
siluulion is likcly lo Lc oispcisco umong muny of llcm wlilc il is mucl lcss
oispcisco foi pioouccis. Imuginc, foi insluncc, llul u cciluin consumci gooo
17
is usuully Lougll Ly 100,000 consumcis pci ycui, cucl of wlicl Luys only onc
unil, usuully solo ul u piicc of 100 cuio. If llc lwo lims piooucing llis gooo
wcic uLlc lo inlucncc llc govcinmcnl lo cnfoicc u icgululion wlicl incicuscs
llc piicc Ly 10/ (foi insluncc, lliougl piolcclion fiom foicign compclilion,
oi lliougl uulloiizulion of u collusivc ugiccmcnl), llis woulo Liing uLoul
lugc collcclivc losscs foi llc gioup of consumcis us u wlolc, Lul inoiviouul
losscs (10 cuio) uic pioLuLly nol luigc cnougl foi consumcis lo occioc lo
sluno up lo ocfcno llcii posilion. On llc conliuiy, llc lwo pioouccis woulo
luvc luigc inoiviouul guins fiom sucl u movc, uno so llcy woulo Lc icuoy
lo cmploy consiociuLlc icsouiccs lo loLLy llc govcinmcnl inlo uoopling llc
icgululion. 1lc compclilion uulloiily migll llcn luvc u iolc lo pluy if il
conliiLulcs lo Luluncing llc oilcicnl loLLying powcis of llc lwo gioups of
cconomic ugcnls in qucslion. 1lcicfoic, llc uigumcnl migll go, ulllougl
ullucling u lcuvici wcigll lo consumci suiplus llun lo piooucci suiplus is
nol n :::: consislcnl will llc oLjcclivc of cconomic cmcicncy, llc ncgulivc
uspccls of sucl u policy sloulo nol Lc ovcicmplusisco.
Alllougl llc lusl uigumcnl migll uppcui lo mukc scnsc, il woulo nol
Lc wisc foi Compclilion Aulloiilics lo uoopl u consumci wclfuic oLjcclivc,
foi scvciul icusons. Fiisl, consumci wclfuic oocs nol coiicspono lo lolul
cconomic wclfuic, sincc il oocs nol lukc inlo uccounl llc guins muoc Ly llc
lims. Luigc numLcis of consumcis own, puilly oi fully, sluics of lims,
oiicclly oi lliougl pcnsion uno invcslmcnl funos. Accoioingly, oiviocnos
uic oisliiLulco lo u vusl numLci of cilizcns wlo woulo Lc luil if piolls
wcic icoucco. In loouy`s uovuncco cconomics, il is oimcull lo oiuw u clcui
oislinclion Lclwccn consumcis uno owncis, uno lowci lims` piolls coulo
luvc u sliong ncgulivc clccl on low-mioolc clusscs. If onc wunlco lo puisuc
icoisliiLulivc gouls, il woulo Lc moic cmcicnl uno lcss oisloilivc lo usc lscul
policics llun unli-liusl luws. Sccono, if onc look lilciully llc oLjcclivc
of muximising consumci suiplus, llis woulo lcuo lo piicing ul oi Lclow
muiginul cosls, will lims cxiling llc inousliy in llc long-iun oi luving lo
Lc suLsioisco lo covci lxco cosls, nol u icusonuLlc iocu, sincc llc muikcl
sloulo llcn Lc icplucco Ly ucioss-llc-Louio icgululion. 1liio, uno of gicul
impoiluncc, foicing piiccs oown lo uililciully low lcvcls woulo luvc llc clccl
Anoilci possiLlc noiivc foi giving u Conpciiiion Auiloiiiy ilc oLjcciivc of nuxinis-
ing consunci suiplus would Lc io nulc ii noic uggicssivc in iuclling unii-conpciiiivc
Lcluvioui Ly fins, wlicl in iuin nigli lcud io liglci wclfuic. Tlis is un uiguncni wlicl
would Lc consisicni wiil icsulis oLiuincd in ilc liiciuiuic on "dclcguiion". Dccuusc of
siiuicgic cccis, u "piincipul" nigli nuxinisc iis oLjcciivc funciion Ly giving oidcis io
lci ugcni io nuxinisc u dicicni oLjcciivc funciion.
18
of ocpiiving lims fiom llc ncccssuiy inccnlivcs lo innovulc, invcsl, uno
inliooucc ncw piooucls. 1lcicfoic, if onc consiocis wclfuic ovci limc (i.c.,
in oynumic lcims, us il sloulo Lc), Ly lclping consumcis loouy onc woulo
luil consumcis lomoiiow. 1lc uim of muking piolls is wlul puslcs lims lo
impiovc piooucls, inliooucc ncw oncs, occicusc piiccs lo slcul muikcl sluics
lo iivuls. Inlcivcning lo icoucc piolls migll incicusc consumci suiplus in
llc sloil-iun, Lul il woulo luvc u sliongci ncgulivc clccl on il in llc long-
iun.
3.1.2 OeIence oI snoII hrns
1lc ocfcncc of smull lims lus oflcn Lccn onc of llc muin icusons Lclino
llc uooplion of compclilion luws. 1lc mosl fumous insluncc is givcn Ly
unliliusl luws inliooucco in llc Unilco Slulcs ul llc cno of llc 10ll Ccnluiy,
wlicl wcic iniliulco fiom llc compluinls of fuimcis uno smull lims uguinsl
llc luigc liusls, Lul llis molivulion pioLuLly lics Lclino llc icsliiclions
lo oisciiminuloiy piucliccs inliooucco Ly muny picccs of lcgislulion. 1lc
fuvouiuLlc liculmcnl of smull lims is nol ncccssuiily in conliusl will llc
oLjcclivc of cconomic wclfuic if il is limilco lo piolccling sucl lims fiom
llc uLusc of luigci cnlcipiiscs, oi giving llcm u smull uovunlugc lo Luluncc
llc lnunciul uno cconomic powci of luigci iivuls.
Howcvci, il sloulo Lc clcui llul uililciully lclping smull lims lo suivivc
wlcn llcy uic nol opciuling ul un cmcicnl sculc of pioouclion is clcuily in
conliusl will cconomic wclfuic oLjcclivcs. Inocco, llis woulo cncouiugc
incmcicnl ulloculion of icsouiccs uno woulo conliiLulc lo kccp ligl piiccs
in llc cconomy.
1lc Euiopcun Commission sccms lo luvc lukcn llc vicw llul smull uno
mcoium lims uic moic oynumic, moic likcly lo innovulc uno moic likcly lo
ciculc cmploymcnl llun luigc lims. 1lis woulo Lc un uooilionul uigumcnl
lo piomolc smull uno mcoium lims. Howcvci, llc cmpiiicul cviocncc is
quilc umLiguous. Il woulo sccm oimcull lo slulc llul smull lims mukc u
luigci conliiLulion lo giowll uno innovulion llun luigc lims.
As u conclusion, il mukcs scnsc llul llc Compclilion uulloiilics oo
nol usc llcii scuicc icsouiccs lo moniloi ugiccmcnls uno mcigcis wlicl
Bcfci io ilc ncxi clupici foi u discussion of puicnis ulong ilc sunc lincs. Giuniing
icnpoiuiy nonopoly powci io fins cnsuics ilcy fnd ii piofiuLlc io invcsi in icscuicl
und dcvclopncni uciiviiics.
Tlinl, foi insiuncc, of ilc vciy old issuc of wlcilci luigc fins uic noic conducivc io
innovuiion ilun ilc snull fins. Tlc vusi liiciuiuic on ilc suLjcci is fui fion conclusivc.
10
involvc smull uno mcoium sizco lims, Lul llcic is lilllc iulionulc Lclino
u syslcmulic usc of compclilion policy lowuios lclping smull uno mcoium-
sizco lims.
Smullci lims uic oflcn luil Ly llc luck of piopci infiusliucluic uno
impcifccl muikcls (luigci lims migll Lc uLlc lo ovcicomc pioLlcms owing
lo llcii sizc, lnunciul mcuns oi inlcinul muikcl mcclunisms). Sucl oim-
cullics luo Lcllci Lc ocull will Ly govcinmcnl inlcivcnlions ul llc iool of
llc pioLlcms, iullci llun insliumcnls sucl us compclilion policy, wlosc
puiposc lics clscwlcic. 1lc iisk is of ciculing uooilionul oisloilions in llc
compclilion splcic, wlilc giving only u vciy impcifccl unswci lo llc souicc
of llc pioLlcms.
3.1.3 IronotIng norket IntegrotIon
As wc luvc sccn, :n:n ] nn:| :nj:n:n sloulo cciluinly Lc ic-
guioco us onc of llc kcy oLjcclivcs of Euiopcun compclilion policy us slulco
Ly llc 1iculy of Fomc, cnfoicco Ly llc Commission uno cnooisco Ly llc
Couil of Juslicc. Il sloulo Lc cmplusisco lcic llul llis is u polilicul oLjcc-
livc wlicl is nol ncccssuiily consislcnl will cconomic wclfuic. 1lc policy lo-
wuio piicc oisciiminulion uno vcilicul icsliuinls in Euiopc lus n ]n Lccn
lo foiLio muikcl scgmcnlulion ucioss nulionul Loiocis wlcicus no sucl po-
silion is lukcn will icspccl lo scgmcnlulion willin nulionul Loiocis. 1lcic
is no cconomic iulionulc foi sucl u oilcicncc of liculmcnl. Noi is llcic u
sliong cconomic icuson lo juslify llc uooplion of sucl u sliong vicw uguinsl
piicc oisciiminulion on cconomic giounos. Inocco, wlcllci piicc oisciim-
inulion is ocliimcnlul oi nol lo cconomic wclfuic is u conlinuing souicc of
ocLulc.
::::, il is impossiLlc lo suy wlcllci piicc oisciiminulion lus u posi-
livc oi ncgulivc impucl ovci wclfuic, us llc following cxumplc sloulo slow.
Imuginc llul llc sumc gooo is solo in lwo counliics, suy Gcimuny uno Ioi-
lugul. Gcimuns luvc on uvciugc u liglci incomc uno willingncss lo puy
foi llc gooo llun Ioilugucsc. If piicc oisciiminulion is ullowco uno il is
fcusiLlc (uiLiliugc oocs nol occui, oi il occuis only lo u limilco cxlcnl), u
monopolisl woulo scll in Gcimuny ul u piicc s (wlcic k slunos foi ligl")
Tlc piuciicc of giuniing cxcnpiions io snull fins is ulso uscful in ilui ii docs noi
oLligc ilcn io spcnd icsouiccs in dculing wiil udninisiiuiivc nuiicis. Tlinl, foi insiuncc,
of ilc foins ilui u fin lus io fll in wlcn gciiing involvcd in ugiccncnis wlicl slould
Lc noiifcd io ilc Connission.
Scc Vuiiun (19S9) foi u icvicw of piicc disciininuiion.
20
uno in Ioilugul ul u lowci piicc s . Ly muking consumcis puy uccoioing lo
llcii oilcicnl willingncss lo puy, llc lim is uLlc lo incicusc ils pioll.
Consioci now wlul luppcns if llc monopolisl wus oLligco lo scl un iocn-
licul piicc on llc lwo muikcls (foi insluncc, Lccuusc compclilion luws oo
nol ullow foi piicc oisciiminulion). A possiLlc oplion is lo scl un inlcimc-
oiulc piicc s (sucl llul s ? s ? s ). Hcncc, Gcimuns woulo Lc Lcllci
ol, wlilc Ioilugucsc woulo Lc woisc ol. 1o juogc llc ovciull wclfuic clccl
of muikcl inlcgiulion, llicc uspccls sloulo Lc uccounlco foi: llc consumci
suiplus of llc lwo gioups (Gcimuns woulo guin, Ioilugucsc woulo losc) uno
llc pioll cuinco Ly llc monopolisl (wlicl is lowci wlcn piicc cunnol Lc
scgmcnlco). ::::, llc wclfuic clccl is llcicfoic umLiguous.
Howcvci, llcic is ulso unollci oplion uvuiluLlc lo llc monopolisl. 1lis
is lo conlinuc lo cluigc llc piicc s il wus cluiging in Gcimuny foi Loll
muikcls. Il woulo losc complclcly llc Ioilugucsc muikcl Lul il woulo kccp
llc liglcsl pioll in llc Gcimun muikcl, so llul llis sliulcgy migll wcll Lc
moic piolluLlc llun sclling ul un inlcimcoiulc piicc in Loll muikcls.
If llc sccono sliulcgy picvuils, llcn llc pioliLilion of piicc oisciimi-
nulion ucioss counliics uclicvcs picciscly llc opposilc clccl llun inlcnoco
ul lisl sigll: oilcicnccs in llc muikcl conoilions Lclwccn Gcimuny uno
Ioilugul cno up will Lcing mucl moic pionouncco llun Lcfoic.
1lc cxumplc uLovc is jusl onc of llc uigumcnls llul onc sloulo consioci
wlcn oiscussing piicc oisciiminulion. 1lis is u suLjccl on wlicl il is nol cusy
lo oiuw simplc uno piuclicul policy impliculions (scc cluplci 7). Howcvci,
wlul I lopc llis cxumplc uclicvcs is lo convincc llc icuoci llul u :
- iulc wlicl foiLios lims fiom piicc oisciiminuling ucioss counliics is nol
juslilco on cconomic wclfuic giounos, uno in somc ciicumslunccs migll cvcn
Lc (puiuooxicully) uguinsl un oLjcclivc of piomolion of muikcl inlcgiulion.
3.1.4 EcononIc Ireedon
As wc luvc sccn, lo guuiunlcc cconomic ficcoom is pioLuLly llc muin iu-
lionulc Lclino compclilion luws in Gcimuny. 1lc possiLlc conliuoiclions
Lclwccn sucl un oLjcclivc uno llc oLjcclivc of cconomic cmcicncy luvc
Lccn oiscussco in ocluil uno will icfcicncc lo spccilc cuscs Ly K uln (1007).
IioLuLly llc mosl oLvious souicc of conliusls uiiscs in vcilicul icsliuinls,
foi insluncc in conliucls uno cluuscs imposco Ly u munufucluici upon llc
icluilcis of llc gooo il pioouccs. Wlilc lciiiloiiul icsliuinls, icsulc piicc
Scc clupici 7, oi Tiiolc (19SS,p.187 und ) foi u sinplc foinul unulysis.
Mcniion ilc Disiillcis cusc.
21
muinlcnunccs uno ollci piucliccs oflcn lno sliong juslilculion in cconomic
cmcicncy lcims (foi insluncc, Ly slimululing llc cloils of icluilcis, oi Ly
muking suic llul llcy woulo nol scl piiccs uLovc llosc wlicl uic oplimul
foi llc munufucluici), il is sliuigllfoiwuio llul llcy limil llc cconomic
ficcoom of llc icluilcis.
3.1. FIgLtIng InBotIon
Oui Liicf lisloiicul cxcuisus lus ulso illusliulco low muciocconomic cvcnls
migll ulccl llc implcmcnlulion of cconomic policy. Figlling inlulion, foi
insluncc, lus Lccn inoiculco us onc icuson lo inliooucc conliol ovci cuilcls in
Gcimuny. Howcvci, il sccms oouLlful llul compclilion luw migll cmcicnlly
Lc usco lo ulluin sucl puiposcs. If lims uic colluoing, llcn Licuking u
cuilcl woulo givc u onc-limc icouclion of piiccs, iullci llun conliiLuling
lo u pcimuncnl occicusc of inlulion. Fuillci, in un cnviionmcnl wlcic ull
piiccs uic conlinuously incicusing, il is likcly llul lims woulo icucl lo u
common slock on llc piiccs of inpuls Ly simulluncously uno inocpcnocnlly
incicusing piiccs, cvcn in llc uLscncc of uny collusion.
3.1. FoIrness
Anollci oLjcclivc wlicl compclilion luws migll incoipoiulc is fuiincss.
1lis cun somclimcs Lc sccn in llc luws uguinsl llc uLusc of u oominunl
posilion. Sucl luws iulc oul llc possiLilily llul u oominunl lim migll
cluigc cxccssivc piiccs lo consumcis (fuiincss will icspccl lo consumcis),
oi llul il migll usc ils muikcl powci in sucl u wuy us lo impcoc cnliy in
llc muikcl oi lo foicc compclilois oul of il (fuiincss in compclilion).
As foi fuiincss lowuios consumcis, piicc conliols Ly uulloiilics uic un-
likcly lo Lc u ocsiiuLlc policy, upuil fiom cxccplionul cuscs. In gcnciul, u
lim sloulo Lc ficc lo cluigc llc piiccs il wunls, uno if il cnjoys muikcl
powci Lccuusc of ils mciils (Lc llcy invcslmcnls in F\D, uovcilising, oi
Foi ilc icluiionslip Lciwccn icsiiiciions on conncicc und icsiiiciions on ilc ficcdon
of coniiuci, scc Anuio (1997).
Noi would ii Lc icusonuLlc io linii piicc novcncnis of ilc fins in u siiuuiion wlcic
ull inpui piiccs incicusc.
Howcvci, if piicc slocls wcic noi pcifccily uniicipuicd Ly ilc fins, ilui is, if inuiion
wus liglly coiicluicd wiil piicc uncciiuiniy, ii nigli Lc possiLlc ilui colluding fins
(wlicl uic uLlc io noniioi cucl oilci`s Lcluvioui und sluic infoinuiion) inncdiuicly
incicusc piiccs cvciy iinc ilcic cxisis u piicc incicusc of inpuis, wlcicus fins wlicl uic
noi colluding uic noic lcsiiuni io iuisc piiccs. I luvc ncvci sccn ilis uiguncni unulyscd
in foinul icins.
22
wlulcvci ollci Lusincss sliulcgy) llcic is lilllc icuson lo oLligc il lo givc
oiscounls lo consumcis wlo uic willing lo puy u ligl piicc foi ils gooos oi
sciviccs. If llc muikcl is onc wlcic cnliy is ficc, uno llc gooos oi sciviccs
unoci oiscussion uic vuluuLlc foi consumcis, clunccs uic llul soonci oi lulci
compclilion fiom ncw cnliunls will uppcui uno piiccs will movc oownwuios.
1lcic uic lwo quulilculions lo llis icusoning, lowcvci. 1lc lisl is llul llc
muikcl in qucslion migll Lc onc wlcic cnliy is nol ficc. If llis is llc cusc,
foi insluncc Lccuusc llcic cxisls u lcgul monopoly, llcn piicc inlcivcnlion
woulo Lc juslilco. 1lc sccono is llul ulllougl cnliy is ficc on pupci, in
piuclicc llc muikcl oocs nol woik wcll Lccuusc llc monopolisl lus scl up
piucliccs wlicl ullow il lo kccp oi icinfoicc ils monopoly posilion. Lul
in llis cusc, unliliusl uulloiilics sloulo inlcivcnc so us lo icsloic muikcl
compclilion (wlicl is llc cuusc of llc pioLlcm), iullci llun so us lo clungc
piiccs (wlosc ligl lcvcl is llc clccl of uLusivc piucliccs).
1lc oLjcclivc of fuiincss in muikcl compclilion woulo in cciluin ciicum-
slunccs coincioc will wclfuic ciilciiu, Lul in ollci cuscs llc lwo oLjcclivcs
uic moic likcly lo collioc. 1ukc foi insluncc llc polilicully-scnsilivc issuc of
smull slopkccpcis v. luigc supcimuikcl cluins. In muny counliics, conccin
is oflcn voicco llul llc supcimuikcl cluins cun cxploil llcii Liggci volumcs
so us lo luvc Luiguining powci uno Luy piooucls ul mucl clcupci piiccs
llun smull slops. 1lis ullows llc foimci lo scll ul lowci lnul piiccs llun
llc lullci. As u icsull, smull slops luvc cconomic oimcullics uno coulo Lc
foicco lo closc oown. Somc pcoplc woulo uiguc llul llis is unfuii, uno llul
smull slops sloulo uccoioingly Lc piolcclco. If on puicly fuiincss giounos
llis cluim is juslilco I oo nol know. Cciluinly, sucl u icusoning woulo nol
Lc suppoilco Ly cmcicncy icusons. Wlcncvci llcic cxisl cconomics of sculc
in u muikcl, luigci lims will luvc lowci cosls uno will Lc moic compclilivc.
Smull lims wlicl fuil lo icucl llc minimum cmcicnl sculc of pioouclion
will cillci luvc lo conlcnl llcmsclvcs will lowci piolls oi cxil llc muikcl.
1lis pioccss of iulionulisulion wlcicLy only llc mosl cmcicnl lims will sluy
in llc muikcl is gcnciully gooo, us il will Liing muikcl piiccs oown lo llc
Lcncll of consumcis. Inlcifciing in llis pioccss Ly limiling llc uLilily of
luigci lims lo cluigc lowci piiccs woulo oumugc wclfuic.
Scc ulso clupici 2 on ilc nccd io lci fins uppiopiiuic ilc fiuiis of ilcii invcsincnis.
If - foi wluicvci icuson - ii wus icully fcli ilui snull slops luvc io suivivc, ilcn iuilci
ilun using conpciiiion policics ii would Lc Lciici io inplcncni ilis oLjcciivc iliougl u
icdisiiiLuiivc policy, foi insiuncc Ly icducing iuxcs on ilc pcisonul inconc of sloplccpcis.
An Iiuliun luw uppiovcd in 2001 foiLids io scll Lools ui u discouni liglci ilun 10%
ilun ilc covci piicc. Tlis is un cxunplc of u luw wlicl disioiis conpciiiion in ilc nui-
28
Nolc, lowcvci, llul fuiincss uno cmcicncy uic nol ulwuys in conliuoic-
lion. Consioci u vuiiulion of llc picvious cxumplc, uno supposc llul in u
givcn muikcl u supcimuikcl cluin wlicl ulicuoy lus u vciy ligl sluic of
llc muikcl (suy, 70/) syslcmulicully cluigcs Lclow cosls will llc uim of
foicing ull smull iivuls oul of llc muikcl (llcy coulo nol covci llcii cosls ul
llc piiccs cluigco Ly llc supcimuikcl). In llis cusc, llis piuclicc (llul is
cullco :nn:j) is Loll unfuii uno wclfuic ocliimcnlul. Inocco, uflci smull
slopkccpcis luvc Lccn foicco lo cxil llc muikcl, llc supcimuikcl cluin will
sluil lo cluigc monopoly piiccs. 1lcicfoic, consumcis puy low piiccs ouiing
llc pciioo in wlicl llc supcimuikcl is ucling in u picouloiy wuy, Lul llcy
will luvc lo puy mucl liglci piiccs cvci uflci.
Moic gcnciully, fuiincss uno cmcicncy cun cocxisl sincc compclilion poli-
cics sloulo cnsuic llul oilcicnl lims luvc llc sumc iniliul oppoilunilics
in llc muikclplucc. In llis scnsc, r nn fuiincss is fully compuliLlc will
compclilion policy, wlicl sloulo guuiunlcc u lcvcl pluying lclo foi ull llc
lims, wlcicus r - fuiincss is unfoilunulcly nol somclling wlicl ncc-
cssuiily coinciocs will llc wuy muikcls woik. Fiims wlicl invcsl moic,
innovulc moic, oi simply uic luckici llun ollcis will Lc moic succcssful uno
Lc uLlc lo icup liglci piolls: somcLooy muy wcll fccl llul llis is unfuii.
Howcvci, cx-unlc fuiincss is moic iclcvunl: wlul mullcis is llul ull lims
iniliully luvc u similui possiLilily lo invcsl, innovulc oi liy llcii luck, uno
compclilion uulloiilics sloulo guuiunlcc llul somc moic powciful lim lus
nol ocpiivco llcm of llis possiLilily.
3.2 Othor puIIIc poIIcy factors ahoctIng conpotItIon Iav and
onforconont
1lcic cxisl u numLci of puLlic policy consiociulions wlicl oflcn ulccl
compclilion luws uno llcii cnfoiccmcnl. Inocco, llc Liicf lisloiicul uc-
counl uLovc - Ly no mcuns cxluuslivc - lus slowco llul in muny inslunccs
compclion uulloiilics uno couils luvc closcn lo uoopl wcukci slunccs on
compclilion issucs llun cconomic wclfuic consiociulions ulonc woulo luvc
suggcslco, ouc lo sociul, polilicul, oi sliulcgic icusons.
lciplucc io pioicci snull und ncdiun fins (Loolslops in ilis cusc) fion ilc conpciiiion
of noic cmcicni und luigci fins (in ilis cusc, supcinuilcis und inicinci Loolsioics).
Of couisc, ii is noi ulwuys cusy io disiinguisl picduioiy Lcluvioui fion low piiccs duc
io liglci cmcicncy. Scc clupici 7 on nonopolisuiion foi un unulysis of low conpciiiion
uuiloiiiics slould Lcluvc in sucl cuscs.
24
3.2.1 SocIoI reosons
Compclilion iulcs luvc somclimcs Lccn icluxco lo smooll sociul lcnsions.
US luws wcic implcmcnlco in u moic lcnicnl wuy in llc limcs of llc Gicul
Dcpicssion, will llc vicw llul somc piicc ugiccmcnl woulo lclp lims lo
uvoio Lunkiuplcy, llus cusing sociul lcnsions cuusco Ly uncmploymcnl. If
cupilul muikcls wcic impcifccl, llcn u policy liying lo icoucc Lunkiuplcics
migll Lc of lclp. Howcvci, ullowing lims lo colluoc lo solvc llc pioLlcm is
likcly lo Lc u icmcoy woisc llun llc pioLlcm ilsclf. 1lis woulo inliooucc
fuillci oisloilions in llc cconomy: il woulo Lc Lcllci lo inlcivcnc oiicclly
will ollci mcusuics in llc Lunking uno lnunciul splcic.
Foi llc sumc icuson, ciisis cuilcls" uic in somc ciicumslunccs lolciulco
Ly llc Euiopcun Commission. Alllougl puisuing sucl oLjcclivcs migll
Lc unocislunouLlc, il is nol clcui llul llc mcuns uooplco uclicvc llcii
puiposc. A moic fuvouiuLlc liculmcnl foi cciluin lims in Luo limcs migll
luvc uovcisc conscqucnccs upon ollci gioups ulicuoy lil Ly u icccssion, likc
consumcis oi cvcn ollci lims using inpuls oi inlcimcoiulc gooos. As foi
ullowing ugiccmcnls Lclwccn lims in u occlining sccloi (oflcn conccnliulco
in u givcn gcogiuplicul uicu), il migll luvc mcoium- uno long-iun uovcisc
conscqucnccs. Acluully, llis migll ullow lcss cmcicnl lims lo sluy on lo
llc ocliimcnl of moic cmcicnl lims wlicl woulo luvc suivivco unylow. A
misulloculion of icsouiccs migll Lc llc icsull of sucl u policy.
3.2.2 IoIItIcoI reosons
Iolilicul icusons migll ulso juslify somc compclilion policy posilions. Wlcn
llc Allico Foiccs occioco lo Licuk up inousliiul gioups in Gcimuny uno
Jupun, onc of llc icusons migll ulso luvc comc fiom llc oungci of luving
cconomic conccnliulion of powci Lcing usco foi polilicul puiposcs. Inocco,
llc closc conncclion Lclwccn polilicul uno cconomic powci ouiing llc Nuzi
icgimc pluyco u iolc in juslifying somc oispcision of powci. Moic gcnciully,
il migll Lc fcuico llul ocmociucy coulo Lc pul ul iisk wlcn u fcw cilizcns
uno gioups oominulc u luigc sluic of icsouiccs. Fiom u oilcicnl poinl of
vicw, culling foi u lcss conccnliulco oisliiLulion of icsouiccs cun Lc juslilco
on fuiincss giounos. Inocco, lo icoucc incquulily in incomc oisliiLulion lus
ulso Lccn onc of llc icusons invokco Ly llc uovoculcs of unli-liusl luws in
Ii slould Lc noicd, lowcvci, ilui ii is noi ulwuys ilc cusc ilui nuilci foiccs lcfi ulonc
would Liing uLoui ilc cxii of lcss cmcicni fins Lcfoic ilc noic cmcicni oncs. Scc c.g.
Diciiclx ci ul. (1991). Tlc cxisicncc of "long puiscs" nigli ulso cxpluin ilc pcinuncncc
in ilc nuilci of noic incmcicni fins.
2
llc US, us u icuclion lo llc cxccssivc powci uccumululco Ly somc luigc lims
uno liusls uno lo llc cpiocmic of Lunkiuplcics of smull lims ul llc cno of
llc 10ll Ccnluiy.
3.2.3 EnvIronnentoI reosons
Enviionmcnlul icusons migll ulso Lc lukcn inlo uccounl in llc cnfoiccmcnl
of Euiopcun compclilion luw, uccoioing lo uiliclc 174 of llc EC 1iculy.
In u icccnl occision, foi insluncc, llc Commission lus uppiovco un ugicc-
mcnl umong pioouccis uno impoilcis of wusling muclincs wlicl logcllci
uccounl foi moic llun 0/ of Euiopcun sulcs. 1lc ugiccmcnl uims umong
ollci llings ul oisconlinuing pioouclion of impoils of llc lcusl cncigy-
cmcicnl wusling muclincs, wlicl icpicscnl somc 10-11/ of cuiicnl EC sulcs.
1lc ugiccmcnl icmovcs onc of llc oimcnsions ulong wlicl scllcis compclc,
uno us sucl il migll ncgulivcly ulccl compclilion uno incicusc piiccs (us u
gcnciul iulc, llc mosl polluling muclincs uic ulso llc lcusl cxpcnsivc oncs).
Howcvci, llc Commission consiocico llul llc ugiccmcnl will Lcncll socicly
in cnviionmcnlul lcims, ullowing lo icoucc cncigy consumplion, uno llul
sucl un oLjcclivc woulo luvc nol Lccn ulluinco willoul llc ugiccmcnl. 1lis
is Lccuusc consumcis oo nol piopcily lukc inlo uccounl ull llc cxlcinulilics
involvco in llcii puiclusc uno consumplion occisions, uno lims woulo nol
givc up u lool of muikcl compclilion unlcss Louno Ly un ugiccmcnl.
Of couisc, wlcncvci compclilion policy is usco foi ollci puiposcs llun
cmcicncy, onc lus lo wonoci wlcllci llis is llc oplimul solulion. In llis
puilicului cusc, llc sumc (oi moic uovuncco) oLjcclivcs migll Lc ulluinco
Scc Munucl Muiiincz Lopcz (2000), Connission uppiovcs un ugiccncni io inpiovc
ccncigy cmcicncy of wusling nuclincs" in Conpciiiion Folicy Ncwslciici, No.1, FcLiuuiy,
pugcs 18-14 [und fooinoic 1S foi ilc icf.[.
Excnpiion fion uiiiclc S1 dccision iulcn on 24 Junuuiy 2000 und noiifcd Ly ilc
Euiopcun Council of Doncsiic Appliuncc Munufuciuicis (CECED). Scc Munucl Muiiincz
Lopcz (2000), in Conpciiiion Folicy Ncwslciici, No.1, FcLiuuiy, pugcs 18-14.
Fiivuic cncigy-suving Lcncfis foi consuncis slould Lc ulicudy piopcily iulcn inio
uccouni Ly consuncis wlcn iuling ilcii puiclusc dccisions. Ii is ilc cnviionncniul cx-
icinuliiy ilui ilc consuncis nigli noi iulc inio uccouni.
Onc could possiLly inicipici ilis siiuuiion us onc wlcic fins pluy ciilci u cooidi-
nuiion gunc oi u piisonci dilcnnu gunc. In ilc uLscncc of ilc ugiccncni, ilcy would
cnd up sclling io u cciiuin puii of ilc nuilci cncigy-incmcicni nuclincs ui low piiccs,
wlcicus ilc ugiccncni ullows ilcn io scll noic cmcicni nuclincs ui no lcss piofi.
Scc ulso Munucl Muiiincz Lopcz (2000), Hoiizoniul ugiccncnis on cncigy cmcicncy
of uppliunccs: u conpuiison of CECED und CEMEF" in Conpciiiion Folicy Ncwslciici,
No.2, Junc, pugcs 24-2.
20
lliougl u numLci of ollci puLlic policics, sucl us foi insluncc llc imposilion
of luxcs wlicl oisciiminulc uguinsl moic cnviionmcnlul oumuging muclincs
oi cvcn llc imposilion of u minimum cnviionmcnlul slunouio uooplco ul u
Euiopcun-wioc lcvcl. Howcvci, il migll wcll Lc llul sucl ullcinulivc insliu-
mcnls uic polilicully oimcull lo ulluin, uno llul compclilion policy migll
lclp llc cnviionmcnlul oLjcclivcs. Of couisc, il is impoilunl in llcsc cuscs
lo cnsuic llul llis usc of compclilion policy oocs nol inliooucc uooilionul
oisloilions. In llis puilicului cusc, lowcvci, compclilion umong pioouccis
oio nol sccm occply ulcclco, us llc ugiccmcnl oio nol icmovc muny ollci
compclilivc insliumcnls ul llc lims` oisposul (piiccs, lcclnicul clcclivc-
ncss, Liuno imugc, uovcilising, uno uooplion of cncigy-suving lcvcls uLovc
llc llicslolo imposco Ly llc ugiccmcnl uic slill uvuiluLlc).
3.2.4 StrotegIc reosons: IndustrIoI ond trode oIIcIes
Suppoiling nn:nn| |nn:n-, oi Licuking up foicign clumpions, lus ulso
pluyco u iolc in compclilion policics. Lux compclilion policics in somc coun-
liics cun somclimcs Lc cxpluinco Ly llc willingncss of nulionul govcinmcnls
lo ullow oomcslic lims lo "Lccomc Liggci" in llc Lclicf llul llis will lclp
llcm Lc moic succcssful :--` n-:- foicign iivuls. 1lis migll foi insluncc
cxpluin wly Fiuncc wunlco lo incluoc sociul uno inousliiul policy consio-
ciulions in llc 1080 EC Mcigci Fcgululion, uno wly il oocs nol wunl llc
Euiopcun Commission lo occicusc llc luinovci llicslolos wlicl oclnc llc
ciilciiu uccoioing lo wlicl llc Mcigci 1usk Foicc, iullci llun nulionul
uulloiilics, sciulinisc mcigcis. 1lc vciy sumc iocu inspiico llc policy of
oc-cuilclisulion foicco upon Gcimuns uflci Woilo Wui II. 1lis mcuns llul
sliulcgic liuoc policy consiociulions migll luik Lclino compclilion luws oi
Lclino implcmcnlulion mclloos.
An cxumplc of using compclilion luws lo ullow oomcslic lims lo cxliucl
icnls in foicign muikcls muy Lc oLscivco in llc cxccplion givcn Ly US luw
lo cxpoil cuilcls. 1lc WcLL-Iomcicnc Acl (1 U.S.C. {02 (1018)) cx-
cmpls cxpoil ussociulions fiom llc unliliusl luws wlcic llcii solc puiposc
is lo cngugc in cxpoil liuoc uno if llcii uclions: (1) oo nol inlcifcic will oi
icsliuin liuoc in llc US, uno (2) oo nol icsliuin llc cxpoil liuoc of oomcs-
lic compclilois. 1lc Expoil 1iuoing Compuny Acl (1 U.S.C. {{ 4001
I un giuicful io Mcl Muiquis foi ilc following discussion.
Tlc cxpoii ussociuiion nusi flc icpoiis on iis uciiviiics wiil ilc FTC. Duscd on US
cusc luw, ilc ussociuiion is noi pciniiicd io join u foicign cuiicl, noi nuy ii csiuLlisl u
foicign suLsidiuiy. Finully, ii nuy noi join wiil non-ncnLcis io icsiiici conpciiiion und
27
-j. (1082)) pioviocs foi llc issuuncc of u "ccililculion" of immunily Ly
llc Dcpuilmcnl of Commcicc (will llc ugiccmcnl of llc DOJ). 1lc ccili-
lculion issucs wlcic llc cxpoil uclivily: (1) oocs nol icsull in u suLslunliul
icouclion of compclilion in llc US oi will un cxpoil compcliloi, (2) oocs
nol unicusonuLly ulccl piiccs in llc US, (8) oocs nol umounl lo un unfuii
mclloo of compclilion uguinsl iivuls in llc cxpoil muikcl, uno (4) oocs nol
cngugc in llc sulc oi icsulc of gooos in llc oomcslic muikcl.
Moic gcnciully, compclilion policy insliumcnls cun ulso Lc usco lo uclicvc
::n:- gouls. A cusc in poinl is llc usc of nn:-n&n:nj |n-: llcsc
uic luws llul in llcoiy uim ul uvoioing llul foicign lims scll Lclow llcii
cosls (i.c., llul llcy n&n llcii gooos) in llc nulionul muikcl, lo llc oclii-
mcnl of nulionul lims. 1lc cxislcncc of sucl luws is juslilco on fuii liuoc
giounos (if oumping coinciocs will Lclow cosl piicing, il migll Lc inoiculing
picouloiy Lcluvioui), Lul llul oflcn is usco us u wuy lo piolccl oomcslic
lims fiom moic cmcicnl foicign lims. Foi insluncc, unlioumping luws uic
oflcn implcmcnlco in sucl u wuy llul il is vciy cusy lo piovc llul llcic lus
Lccn oumping Ly foicign lims, llul uic Lcing pcnulisco cvcn wlcn llcy uic
simply moic cmcicnl.
Inousliiul policy uno liuoc policy consiociulions luvc oflcn Lccn un oL-
sluclc lo llc cnfoiccmcnl of compclilion policy. My vicw is llul compcli-
lion policy is llc Lcsl possiLlc inousliiul policy: il is unlikcly llul lims in u
puilicului inousliy uic uLlc lo giow lculllily if slcllcico fiom compclilion,
suLsioisco, oi cxcmplco fiom unli-cuilcl luws.
piicc. If ilc ussociuiion violuics ilcsc pioliLiiions, ilc FTC icfcis ilc nuiici io ilc DOJ
foi piosccuiion.
On ilc possiLiliiy ilui conpciiiion policy insiiuncnis uic uscd us u pioicciionisi
dcvicc, scc Moiiu und Onidu (1997).
Scc Guul (199) on ilc conicis unong conpciiiion, iiudc und indusiiiul policics in
ilc Euiopcun Union.
Scc Moiiu und Onidu (1997) on ilis issuc. Scc ulso ncxi clupici on ilc iolc of
conpciiiion io pionoic pioduciivc cmcicncy.
28
d Tho naIn foaturos of Europoan ConpotItIon Lav
Ailiclcs 81 lo 80 of llc 1iculy of Fomc ocul will compclilion issucs, Lul
foi oui puiposc llc muin uiliclcs uic 81 uno 82.
d.1 ArtIcIo S1: horIzontaI and vortIcaI agroononts
Ailiclc 81(1) pioliLils ull ugiccmcnls Lclwccn unocilukings, occisions Ly
ussociulions of unocilukings uno conccilco piucliccs wlicl muy ulccl liuoc
Lclwccn McmLci Slulcs uno wlicl luvc us llcii oLjccl of clccl llc picvcn-
lion, icsliiclion oi oisloilion of compclilion willin llc common muikcl, uno
in puilicului llosc wlicl: (u) oiicclly oi inoiicclly lx puiclusc oi sclling
piiccs oi uny ollci liuoing conoilions, (L) limil oi conliol pioouclion, mui-
kcls, lcclnicul ocvclopmcnl , oi invcslmcnl, (c) sluic muikcls oi souiccs of
supply, (o) upply oissimilui conoilions lo cquivulcnl liunsuclions will ollci
liuoing puilics, llcicLy plucing llcm ul compclilivc oisuovunlugc, (c) mukc
llc conclusion of conliucls suLjccl lo ucccpluncc Ly llc ollci puilics of sup-
plcmcnluiy oLligulions wlicl, Ly llcii nuluic oi uccoioing lo commciciul
usugc, luvc no conncclion will llc suLjccl of sucl conliucls". Ailiclc 81(2)
occluics llul Any ugiccmcnls oi occisions pioliLilco puisuunl lo llis Ai-
liclc slull Lc uulomulicully voio". Ailiclc 81(8) slulcs llul sucl pioliLilion
oocs nol upply lo uny ugiccmcnl, occision oi conccilco piuclicc wlicl
conliiLulcs lo impioving llc pioouclion oi oisliiLulion of gooos oi lo pio-
moling lcclnicul oi cconomic piogicss, wlilc ullowing consumcis u fuii sluic
of llc icsulling Lcncll, uno wlicl oocs nol: (u) imposc on llc unociluk-
ings conccinco icsliiclions wlicl uic nol inoispcnsuLlc lo llc ulluinmcnl of
llcsc oLjcclivcs, (L) uloio sucl unocilukings llc possiLilily of climinuling
compclilion in icspccl of u suLslunliul puil of llc piooucls in qucslion."
Wlcicus u full oiscussion uno inlcipiclulion of llis uiliclc is nol possi-
Llc lcic, u fcw icmuiks uic nccoco. Fiisl, il sloulo Lc nolco llul uiliclc
81 oculs will Loll loiizonlul uno vcilicul ugiccmcnls. 1lis is u souicc of
Tlis scciion is inicndcd jusi us u sloii iniioduciion io Euiopcun conpciiiion luw, so
us io nulc icudcis wlo uic unfuniliui wiil ii ucquuinicd ui lcusi wiil iis nosi ciuciul
und csscniiul fcuiuics. Foi ilosc inicicsicd in u Lciici undcisiunding of ilc lcgul uspccis
of Euiopcun luw, I suggcsi icxis sucl us Goydci (199S) und Wlisl (199).
Tlc oilci uiiiclcs coniuin ciilci pioccduiul noins oi dcul wiil issucs sucl us puLlic
cnicipiiscs, siuic uids und unii-dunping, wlosc dciuilcd unulysis gocs Lcyond ilc scopc
of ilis woil.
20
polcnliul pioLlcms, us cconomics lus slowco llul onc sloulo gcnciully cx-
pccl llcsc ugiccmcnls lo luvc quilc oilcicnl compclilivc clccls. Hoiizonlul
ugiccmcnls, llul is ugiccmcnls umong compclilois, usuully icsliicl compc-
lilion uno llus icoucc wclfuic (scc llc cluplci on collusion) uno sloulo
llcicfoic pioliLilco unlcss cxccplionul ciicumslunccs uiisc. Inslcuo, vci-
licul ugiccmcnls, llul is ugiccmcnls Lclwccn lims opciuling ul oilcicnl
slugcs of llc pioouclion pioccsscs (foi insluncc, Lclwccn u munufucluici
uno u icluilci) uic moic oflcn cmcicncy cnluncing uno lcno lo posc pioL-
lcms lo compclilion only wlcn llcy uic unocilukcn Ly lims wlicl cnjoy
consiociuLlc muikcl powci (scc llc cluplci on vcilicul icsliuinls). 1o licul
ugiccmcnls wlicl luvc sucl u oilcicnl nuluic uno sucl oilcicnl cxpcclco
compclilivc clccls will llc sumc lcgul piovision is llcicfoic unlikcly lo Lc
cmcicnl.
Fcccnlly, llc Commission pciccivco llis pioLlcm uno uooplco un up-
pioucl on vcilicul icsliuinls wlicl is moic in linc will cconomic llinking.
Fcgululion 2700,1000 inlioouccs u Llock cxcmplion fiom uiliclc 81 on
vcilicul icsliuinls, suLjccl lo (i) u muikcl sluic ciilciion uno (ii) u Lluck-
lisl" of cluuscs wlicl uic nol cxcmplco. (i) 1lc Llock cxcmplion is limilco
lo vcilicul ugiccmcnls in wlicl llc muikcl sluic of llc supplici is Lclow
80/ (in cusc of ugiccmcnls conluining un cxclusivc supply oLligulion, il
is llc Luyci`s muikcl sluic wlicl muy nol cxccco 80/ in oioci foi llc
Llock cxcmplion lo lolo). (ii) Howcvci, llcic uic somc lypcs of icsliuinls
wlicl uic consiocico so luimful Ly llc Commission llul llc Llock cxcmp-
lion oocs nol upply lo llcm cvcn if llc muikcl sluic llicslolo of 80/ is
nol ulluinco. 1lcsc so-cullco luiocoic" piucliccs muinly iclulc lo icsulc
piicc muinlcnuncc (cluuscs wlicl lx, oiicclly oi inoiicclly, icsulc piiccs)
uno (somc lypcs of) lciiiloiiul icsliiclions wlicl migll lcuo lo muikcl pui-
lilioning Ly lciiiloiy oi Ly cuslomci, uno uic moic juslilco Ly llc ocsiic
Adopicd on 22 DcccnLci 1999 und puLlislcd in OJ L 886, 29.12.1999, ilis icguluiion
icpluccs ilicc cxpiicd Llocl cxcnpiions icguluiions, on cxclusivc disiiiLuiion, cxclusivc
puiclusing und fiunclisc ugiccncnis icspcciivcly. Foi u Lciici undcisiunding of ilis
icguluiion, scc ulso ilc Connission Noiicc Guidclincs on Vciiicul Bcsiiuinis".
Scc Guidclincs on Vciiicul Bcsiiuinis, =21.
Howcvci, foi snull und ncdiun-sizcd cnicipiiscs us wcll us fins wlicl luvc u nuilci
sluic of lcss ilun 10%, ilc dc nininis" iulc (discusscd uLovc in scciion 8) siill upplics.
Howcvci, ilis docs noi ncun ilui cxclusivc iciiiioiy ugiccncnis uic illcgul: u supplici
is ullowcd io icsiiici nI: sulcs Ly iis diicci Luycis io u iciiiioiy oi u cusionci gioup
wlicl lus Lccn ullocuicd cxclusivcly io unoilci Luyci oi wlicl ilc supplici lus icscivcd
io iisclf. " (Scc Guidclincs, =0) Tlc Connission und ilc Euiopcun cusc luw csiuLlislcs
80
lo piomolc iocnlicul piiccs uno sulcs conoilions in llc EU llun llcy uic
Lusco on un cconomic iulionulc.
Sccono, il is impoilunl lo nolc llul loiizonlul ugiccmcnls ncco nol Lc
wiillcn oi foimul ugiccmcnls lo Lc pioliLilco, us llc icfcicncc in uiliclc
81 lo conccilco piucliccs` mukcs clcui. Howcvci, llc lcim conccilco piuc-
liccs` ilsclf lcuvcs spucc foi inlcipiclulion uno inocco lus somclow Lccn
inlcipiclco in oilcicnl wuys. Howcvci, I Lclicvc il is fuii lo suy llul puic
muikcl puiullcl Lcluvioui` willoul uny ullcmpl fiom llc lims involvco lo
communiculc will cucl ollci oi csluLlisl piucliccs wlicl lclp susluin col-
lusion woulo nol Lc juogco Ly llc Euiopcun Couil of Juslicc us u conccilco
piuclicc willin llc mcuning of uiliclc 81 (scc llc cluplci on collusion).
1liio, foi oilcicnl icusons sucl scclois us coul, slccl, ugiiculluic, oc-
fcncc, (iouo, iuil, inluno wulciwuys, uii uno muiilimc) liunspoils, Lunks,
insuiuncc uno lnunciul sciviccs, luvc Lccn giunlco cxcmplions fiom uiliclc
81(1). In ollci woios, ugiccmcnls Lclwccn lims in sucl scclois uic nol
suLjccl lo llc sumc pioliLilion.
Fouill, uiliclc 81(8) clcuily slulcs llul cvcn ugiccmcnls umong com-
pclilois oo nol full unoci u : - iulc of pioliLilion. Somc loiizonlul
ugiccmcnls luvc Lccn covcico Ly so-cullco Llock cxcmplions". 1lc Euio-
pcun Commission lus uooplco ovci llc ycuis u numLci of icgululions wlicl
spccify llc conoilions unoci wlicl lims involvco in sucl ugiccmcnls us
spcciulisulion, icscuicl uno ocvclopmcnl, oi lcclnology liunsfci ugiccmcnls
uic nol suLjccl lo llc pioliLilion of uiliclc 81(1). 1lc Llock cxcmplions
luvc Lccn cxlicmcly uscful in suving llc Commission`s limc in oculing will
ugiccmcnls llul llc Commission llougll woulo posc smull pioLlcms will
compclilion. Ollciwisc, lims coulo slill upply foi un inoiviouul cxcmplion
fiom uiliclc 81(1). In sucl cuscs, llcy woulo luvc lo nolify llcii ugicc-
mcnl, wlicl coulo Lc (implicilly oi cxplicilly) clcuico Ly llc Commission
if il llinks llul llc conoilions inoiculco Ly uiliclc 81(8) uic mcl Ly llc
pioposco ugiccmcnl. Fcccnlly, llc Commission lus uovuncco in ils 1|:
1n: n | nn:n:-n:n ] n::n |:j u pioposul lo clungc ils
wuy of oculing will uiliclc 81, uno inliooucc u oiicclly upplicuLlc cxccp-
ilui u supplici is noi ullowcd io icsiiici pussivc sulcs, i.c. sulcs io suiisfy unsoliciicd
icqucsis fion individuul cusioncis, Lui cun picvcni lis Luycis fion uciivcly uppioucling
cusioncis oi disiiiLuiois locuicd in iciiiioiics ussigncd io oilci Luycis.
Tlc Connission docs noi luvc cnougl icsouiccs und pcisonncl io icvicw in dcpil
cucl noiifcuiion. Moic ilun 90% of cuscs uic closcd infoinully Ly so-cullcd confoii
lciicis", wlicl do noi luvc u Linding lcgul vuluc. Scc XXIX Bcpoii on Conpciiiion
Folicy-1999, =2.
81
lion syslcm". 1lc pioposul woulo inliooucc lwo muin clungcs. Fiisl, llc
uulloiisulion uiiungcmcnl syslcm uno llc nolilculions wlicl uic ils coiol-
luiy woulo Lc uLolislco. Sccono, llc Commission woulo givc up somc of
ils "monopoly powci" in oculing will uiliclc 81: nulionul uulloiilics uno
juogcs coulo ulso givc cxcmplions. 1lis ncw syslcm, if uppiovco, woulo in
llc inlcnlion of llc Commission lcuo lo u moic cmcicnl uppliculion of uiliclc
81, ouc lo llc possiLilily foi llc Commission lo focus on llc mosl impoi-
lunl loiizonlul ugiccmcnls iullci llun luving lo cmploy llcm lo icvicw
lunoicos of lcss impoilunl ugiccmcnls. Ncvcillclcss, ouc lo llc occcnliul-
isulion of compclilion policy on loiizonlul ugiccmcnls, llc syslcm migll
lcuo lo lclciogcnous cnfoiccmcnl, will somc nulionul ugcncics uno couils
Lcing luxci llun ollcis.
d.2 ArtIcIo S2: aIuso of a donInant posItIon
Ailiclc 82 slulcs: Any uLusc Ly onc oi moic unocilukings of u oominunl
posilion willin llc common muikcl oi in u suLslunliul puil of il slull Lc
pioliLilco us incompuliLlc will llc common muikcl in so fui us il muy uf-
fccl liuoc Lclwccn McmLci Slulcs. Sucl uLusc muy, in puilicului, consisl in:
(u) oiicclly oi inoiicclly imposing unfuii puiclusc oi sclling piiccs oi ollci
unfuii liuoing conoilions, (L) limiling pioouclion, muikcls oi lcclnicul oc-
vclopmcnl lo llc picjuoicc of consumcis, (c) upplying oissimilui conoilions
lo cquivulcnl liunsuclions will ollci liuoing puilics, llcicLy plucing llcm
ul compclilivc oisuovunlugc, (o) muking llc conclusion of conliucls suL-
jccl lo ucccpluncc Ly ollci puilics of supplcmcnluiy oLligulions wlicl, Ly
llcii nuluic oi uccoioing lo commciciul usugc, luvc no conncclion will llc
suLjccl of sucl conliucls."
Likc foi uiliclc 81, llc lisl of piucliccs wlicl migll consisl in uLuscs
uno wlicl uic lislco in uiliclc 82 is nol cxluuslivc uno il is incluoco jusl
lo givc possiLlc cxumplcs. In gcnciul, uiliclc 82 is iclulco lo sucl piucliccs
us picouloiy piicing, muikcl foicclosuic, lying uno so on (scc cluplci on
picouloiy piucliccs). Nolc in puilicului llul foi un uLusc of u oominunl
posilion lo cxisl, ]:- il musl Lc csluLlislco llul u nn:nnn -::n cxisls,
|n llul llis oominunl lim lus cngugco inlo un nh&-: h|n:&:. Wc look
ul llcsc lwo clcmcnls in luin.
OonInonce In onc of llc lisl uiliclc 82 (llcn uiliclc 80) cuscs, 1nnnn-
|n 1|, llc Euiopcun Couil of Juslicc guvc llc oclnilion of muikcl oom-
inuncc wlicl is slill usco nowuouys:
82
1lc oominunl posilion [...[ iclulcs lo u posilion of cconomic
slicngll cnjoyco Ly un unociluking wlicl cnuLlcs il lo picvcnl
clcclivc compclilion Lcing muinluinco on llc iclcvunl muikcl
Ly uloioing il | : h|n nn n::nh| rn :nn-
nnn|j ] :- n::-, :- &-n:- nnn &|:nn|j ] |
n-&n:-. Sucl u posilion oocs nol piccluoc somc compclilion,
wlicl il oocs wlcic llcic is u monopoly oi quusi-monopoly Lul
cnuLlcs llc unociluking wlicl piolls Ly il, if nol lo oclciminc,
ul lcusl lo luvc un uppicciuLlc inlucncc on llc conoilions un-
oci wlicl llul compclilion will ocvclop, uno in uny cusc lo ucl
luigcly in oisicguio of il so long us sucl conoucl oocs nol opciulc
lo ils ocliimcnl."
Il is oimcull lo liunslulc inlo cconomic lcims llc piccisc mcuning of
llc lcgul cxpicssion llc powci lo Lcluvc lo un uppicciuLlc cxlcnl inocpcn-
ocnlly of ils compclilois, ils cuslomcis uno ullimulcly of llc consumcis."
Foi suic, oominuncc iclulcs lo u siluulion wlcic u lim cnjoys u vciy ligl
ocgicc of muikcl powci, Lul llc juiispiuocncc lus muoc il clcui llul u lim
will 40/ of llc iclcvunl muikcl - fui fiom Lcing u monopolisl - migll wcll
Lc u oominunl onc. In piuclicul lcims, llc unulysis of oominuncc Ly llc
Commission uno llc Couils coinciocs will llc cconomic unulysis of muikcl
powci. A lim will Lc juogco oominunl wlcn il lus u ligl ocgicc of muikcl
powci, uno llc pioccss of lnoing oominuncc involvcs llc sluoy of llosc fuc-
lois llul uny cconomisl woulo lno iclcvunl foi llc oclciminulion of muikcl
powci (scc cluplci on muikcl oclnilion uno muikcl powci).
AIuse oI donInonce As foi llc conccpl of uLusc of u oominunl
posilion, 1nnnn-|n 1| oclnco il us follows:
[u Lcluvioui[ wlicl, lliougl iccouisc lo mclloos oilcicnl
fiom llosc wlicl conoilion noimul compclilion in piooucls oi
Honun-lu Boclc (Viiunins), Cusc S76[1979[, Euiopcun Couii Bcpoiis 461. En-
plusis uddcd.
In nodcin indusiiiul ccononics icins, onc could pcilups suy ilui Lcluving indc-
pcndcnily of conpciiiois nigli Lc foinuliscd us u siiuuiion wlcic ilc (doninuni) fin
Lcluvcs siniluily io u SiuclclLcig lcudci, ilui is, ii nuxiniscs iis piofis iuling inio
uccouni ilc Lcsi icplics of iis conpciiiois (wlicl sinply Lcsi icspond).
Tlc ilicslold of 40% concs fion onc of ilc cuily cuscs of uLusc of doninuncc, 1n:IJ
1nnnJ, und ii is siill considcicd us u iclcvuni ilicslold foi ilc puiposc of ilc dcicininu-
iion of doninuncc, ulilougl ilc nuilci sluic posscsscd Ly u fin is nciilci u ncccssuiy
noi u sumcicni condiiion io piovc iis doninuncc.
88
sciviccs on llc Lusis of llc liunsuclions of commciciul opciu-
lois, lus llc clccl of linociing llc muinlcnuncc of llc ocgicc
of compclilion slill cxisling in llc muikcl oi llc giowll of llul
compclilion."
As suio uLovc, un uLusivc Lcluvioui iouglly coiicsponos lo picouloiy
piucliccs, will llc possiLlc cxccplion of piicc oisciiminulion, wlicl lus lilllc
lo oo will picoulion Lul wlicl occupics u spcciul plucc in Euiopcun com-
pclilion luw in vicw of llc cconomic inlcgiulion oLjcclivc of llc Euiopcun
Union.
Onc impoilunl poinl lo cmplusisc is llul Euiopcun luw oocs nol punisl
llc ciculion of u oominunl posilion, Lul jusl ils uLusc. In ollci woios, if u
lim Luilos muikcl powci - lowcvci sliong - lliougl innovulion, invcslmcnl,
muikcling uclivilics, llis is pcifcclly lcgul (wlul mukcs scnsc fiom llc poinl
of vicw of cconomic cmcicncy. Onc oocs nol wunl lo punisl lims jusl
Lccuusc llcy uic Lcllci, moic succcssful, oi cvcn luckici, llun ollcis, us llis
woulo icoucc inccnlivcs foi lims). Il is only llc uLusc, nol llc ciculion, of
u oominunl posilion wlicl is foiLioocn. Wlul icmuins liuc, lowcvci, in llc
piuclicc of Euiopcun luw, is llul u oominunl lim is nol cnlillco lo llc sumc
piucliccs wlicl uic occmco us pcifcclly lcgul if cngugco Ly non-oominunl
lims. Aggicssivc compclilivc piucliccs migll Lc ullowco lo compclilois,
Lul nol lo u oominunl lim.
As wc slull scc in cluplci 7, pioving llul u lim lus cngugco in picouloiy
(uLusivc) piucliccs is nol un cusy lusk, llcic oflcn cxisls llc oungci of
juoging illcgul piucliccs wlicl migll luin oul lo Lc cmcicnl inslcuo. 1lis
is un uicu wlcic il is oimcull lo uoopl simplc iulcs uno wlcic cucl cusc is
oflcn u spcciul onc. Nol suipiisingly, uiliclc 82 cuscs uic mucl iuici llun
uiliclc 81 cuscs, uno oflcn conliovcisiul.
d.3 ôrgors
Loll loiizonlul uno vcilicul mcigcis uic icgululco Ly llc Council Mcigci
Fcgululion 4004,80 uno succcssivc mooilculions. 1lis icgululion, llul us
sccn uLovc lus Lccn uooplco uflci muny oiscussions uno mucl limc uflci llc
1iculy of Fomc, consisls in un uulloiisulion pioccouic will sliicl limc ocuo-
lincs. Eucl piojccl of nn:n:n (llc luw uscs llc lcim conccnliulion
wlicl cncompusscs Loll mcigcis uno lukcovcis uno icfcis lo ull siluulions
wlcic llc opciulion ullows u lim lo lukc n ]n conliol of llc opciulions of
Honunn-lu Boclc, cusc S76 [1979[, Euiopcun Couii Bcpoiis 461.
84
unollci lim) sloulo Lc nolilco lo llc Mcigci 1usk Foicc (M1F), u spcciul
unil of llc Compclilion Diiccloiulc of llc Euiopcun Commission, willin
scvcn ouys of llc ugiccmcnl oi llc unnounccmcnl of llc puLlic Lio. 1lc
M1F lus llcn onc monll lo cuiiy oul u lisl iouno of invcsligulion. Al llc
cno of il, il migll cillci occioc lo ullow llc mcigci oi llul sucl u mcigci
iuiscs oouLls us lo ils compuliLilily will llc Common Muikcl". In llc
lullci cusc, llc M1F lus foui uooilionul monlls ul ils oisposul lo occioc on
llc conccnliulion pioposul, ouiing wlicl il will cngugc in occpci invcsligu-
lion of llc possiLlc clccls of llc mcigci. In llc cno, llcic uic muinly llicc
possiLlc oulcomcs lo llis pioccss. 1lc mcigci migll Lc ullowco, pioliLilco,
oi ullowco suLjccl lo cciluin conoilions (oi :nn:-).
1lc fucl llul llc Commission occiocs on mcigcis willin sliicl limc
ocuolincs is u noluLlc fculuic of llc Fcgululion, uno onc wlicl sloulo Lc
piuisco. Inocco, lims uno llc muikcls ncco lo know us quickly us possi-
Llc if u mcigci cun Lc cuiiico oul oi nol. 1lc uncciluinly iclulco lo long
icgululoiy pioccsscs is ulwuys vciy coslly Lul il is cspcciully so foi mcig-
cis, wlcn lims ncco lo occply icsliucluic uno icoigunisc llcii pioouclion,
oisliiLulion, icscuicl uno muikcling uclivilics, uno il is ciuciul llul llis
uncciluinly lusls us sloil us possiLlc. 1lc picvcnlivc uulloiisulion syslcm
ulso icsponos lo cmcicncy ciilciion. Il woulo simply Lc wuslcful lo cuiiy oul
llc mcigci lisl uno llcn iulc on wlcllci il is luwful oi iullci lims sloulo
icluin lo llc oiiginul siluulion. Foicco spin-ols woulo Lc cxlicmcly incf-
lcicnl. Il is picciscly foi llis icuson llul llc Euiopcun lcgislulois occioco
lo inliooucc llc Mcigci Fcgululion. In luking somc occisions (n:nnn|
nn uno 1|:|: `:::-) llc Euiopcun Couil of Juslicc luo iulco llul uiliclc
81 uno 82 migll luvc Lccn usco r-- lo ocul will mcigci opciulions. Il is
lo uvoio llis oungci llul llc Mcigci Fcgululion wus inliooucco in 1080.
1lc Mcigci Fcgululion oocs nol ocul will ull mcigci pioposuls in llc
EU, of couisc. 1lis woulo simply Lc Lcyono llc Commission`s icsouiccs.
Fullci, il pioviocs u gooo cxumplc of llc -&h-:n:n::j ::n:| wlcicLy
occisions sloulo Lc lukcn ul u occcnliulisco lcvcl (ic., Ly llc nulionul uu-
lloiilics) unlcss llcic uic gooo icusons lo lukc llcn ul u ccnliulisco onc
(ic., Ly llc supiunulionul uominisliulion Looy wlicl is llc Commission).
Aflci llc lusl icvicw of llc Fcgululion, il is csluLlislco llul llc Euiopcun
Commission lus juiisoiclion on u mcigci if llc following ciilciiu uic mcl:
(u) llc comLinco uggicgulc woilowioc luinovci of ull llc unocilukings con-
ccinco is moic llun 2,00 million Euios, (L) in cucl of ul lcusl llicc mcmLci
On ilc cvcnis picccding ilc Mcigci Bcguluiion, scc Goydci (199S), pugcs 879-8S.
8
ConcIusIons
1lc muin puiposc of llis cluplci wus lo inliooucc llc icuoci lo compclilion
policy issucs, lliougl u Liicf ocsciiplion of llc lisloiy of compclilion luws in
llc US uno in llc EU, uno of llc muin fculuics of llc EU luws. Fuillci, llc
icuoci lus Lccn inliooucco lo llc conccpl of cconomic wclfuic, llul will Lc
usco lliougloul llc Look us llc oLjcclivc llul compclilion policics sloulo
puisuc. 1lcic uic of couisc ollci possiLlc oLjcclivcs of puLlic policics, Lul
I luvc uiguco llul compclilion policy sloulo nol Lc usco lo uclicvc llcm,
sincc llis woulo ciculc incmcicnl oisloilions in llc muikclplucc.
Somc icuocis migll ul llis poinl slill wonoci uLoul llc iclulionslip
Lclwccn compclilion policy uno icgululion (wlosc unulysis lics Lcyono llc
scopc of llis Look), unollci scl of policics llul ulccl llc wuy muikcls
funclion. 1lis is un issuc I will liy lo cluiify ncxl.
.1 ConpotItIon poIIcy and roguIatIon
In gcnciul, onc cun llink of compclilion policy us upplying lo scclois wlcic
llcic cxisl sliucluiul conoilions llul uic compuliLlc will u noimul func-
lioning of compclilion in llc muikclplucc (wlcllci llc muikcl funclions
wcll in piuclicc oi nol is of couisc unollci mullci). Inslcuo, icgululion is u
moic inlcivcnlionisl lypc of policy wlicl upplics lo spcciul muikcls, wlosc
sliucluic is sucl llul onc woulo nol cxpccl compclilivc foiccs lo opciulc
willoul pioLlcms. Fcgululion woulo usuully conccin inousliics wlcic lxco
cosls uic so ligl llun onc coulo nol icusonuLly cxpccl moic llun onc lim
lo piolluLly opciulc (u so cullco nn&:n| nn|j): cxumplcs migll Lc
clccliicily (liunsmission plusc), lclccommuniculions (locul loops), iuilwuys
(llc nclwoik). Ollci inousliics suLjccl lo icgululion migll Lc inousliics
llul uic in u liunsiloiy plusc, foi insluncc Lccuusc llcy usco lo Lc lcgul mo-
nopolics (usuully puLlic) uno llcy uic liLciulisco. Sincc il woulo Lc unlikcly
llul cnliunls coulo compclc on un cquul fooling will un csluLlislco incum-
Lcnl, u icgululoiy Looy usuully supciviscs llc inousliy lo liy uno cnsuic u
smooll liunsilion lowuios u icgului funclioning of compclilion in llc mui-
kcl. Exumplcs of sucl inousliics uic lclccommuniculions, gus, clccliicily,
wulci, iuilwuys in mosl Euiopcun counliics.
Dislinclions Lclwccn compclilion policy uno icgululion, uno Lclwccn
compclilion uulloiilics uno inousliy icgululois cun Lc muoc ulong scvciul
ciilciiu.
Scc foi insiuncc Bcy (2000, p.44 und following), fion wlon ilc clussifcuiion is Loi-
87
1) 1:n&:- nnn n:| ::j|-. Wlcicus compclilion uulloiilics gcnci-
ully limil llcmsclvcs lo clccking llc luwfulncss of lims` uclivilics, inousliy
icgululois luvc moic cxlcnsivc powcis, us llcy cun consliuin lims` conoucl
in scvciul wuys, foi insluncc Ly cupping oi lxing llcii piiccs, clccking llcii
invcslmcnl occisions, icsliicling llcii piooucl cloiccs. 1lcy cun ulso moo-
ify sliucluic of llc inousliy Ly csluLlisling wlcn ncw cnliy in llc sccloi is
ullowco, uno lxing llc ciilciiu llul occioc muikcl cnliy. So, if foi insluncc
compclilion policy cun inlcivcnc on llc piicing cloiccs of u lim only wlcn
llcic is llc suspicion llul llc lim migll Lc uLusing of u oominunl posilion,
unoci u icgululoiy icgimc u lim migll nol Lc uLlc lo scl u cciluin piicc if
il oio nol luvc piioi uppiovul of llc icgululoiy Looy.
2) J:n:nj ] :-:j|. Gcnciully, compclilion uulloiilics inlcivcnc cx-
posl (foi insluncc, clccking llc lcgulily of u cciluin Lusincss piuclicc uflci
il lus ulicuoy Lccn lukcn) wlcicus icgululois ucl cx-unlc (foi insluncc, uu-
lloiising u cciluin Lusincss piuclicc oi nol). Also, compclilion uulloiilics
luvc usuully moic limc uvuiluLlc foi invcsligulions, wlcicus icgululois luvc
lo comc up will iupio occisions, us llc lims` noimul Lusincss (sucl us
piicing, invcslmcnls, luuncl of ncw piooucls) migll ncco llc picvcnlivc uu-
lloiisulion of llc icgululois. Fcgululois` involvcmcnl will u puilicului cusc
is long-iun uno conlinuous, wlcicus compclilion uulloiilics` inlcivcnlions
lcno lo Lc occusionul.
8) 1n]:nn:n :nn-:n--. Fcgululois usuully luvc un inousliy-spccilc
cxpcilisc wlcicus compclilion uulloiilics luvc nol. In puil, llis is ulso oc-
lciminco Ly llc fucl llul llc icgululois` iclulionslip will un inousliy is
conlinuous uno of u long-lcim nuluic. Only cciluin inousliics uic suLjccl
lo u icgululoiy icgimc, uno lypicully cucl inousliy lus u wulcl-oog" llul
conliols llul puilicului inousliy in ull ils muin icspccls.
Cciluinly, foi cucl ciilciion llcic uic pioLuLly cxccplions uno quulilcu-
lions lo Lc muoc llul mukc llc Loioci Lclwccn compclilion uno icgululion
Lluiico, Lul ovciull llcic uic oilcicnccs Lclwccn llcsc lwo lypcs of poli-
cics. Sucl oilcicnccs uic miiioico ulso in llc piuclicul lools usco Ly llc
iowcd (ulilougl oilci ciiiciiu uic includcd in lis pupci).
Mcigci coniiol, foi insiuncc, is unong ilc iusls pcifoincd Ly conpciiiion uuiloiiiics,
Lui sluics scvciul fcuiuics wiil icguluioiy pioLlcns. In puiiicului, ilc unulysis is io Lc
donc cx-unic iuilci ilun cx-posi, und ilc condiiions ilui uic icqucsicd io ncigci puiincis
io clcui u ncigci pioposul nigli involvc ilc icdcsigning of ilc siiuciuic of ilc nuilci
(siiuciuiul icncdics), oi cull foi sonc icsiiiciions on puiiicului coniiucis oi piuciiccs ilui
nciging fins will Lc ullowcd io follow ufici ilc ncigci (Lcluviouiul icncdics), ilcicLy
nuling ilc conpciiiion uuiloiiiics iulc uciions sinilui io ilosc u icguluioi usuully iulcs.
88
icspcclivc uulloiilics, uno in llc llcoiclicul fiumcwoiks llul onc sloulo
uoopl lo uooicss llc icspcclivc lwo issucs. Foi insluncc, icgululoiy Looics
will luvc lo fucc qucslions sucl us wlul is llc iigll" piicc u icgululco
monopoly sloulo cluigc, oi low lo icwuio u monopolisl wlilc guuiunlccing
iivuls ucccss lo u cciluin inpul, uno moic gcnciully ocvisc u syslcm of in-
ccnlivcs so us lo guuiunlcc llul llc icgululco lim lukcs oplimul invcslmcnl
uno piicc occisions. 1lcsc uic quilc oilcicnl pioLlcms llun llosc compcli-
lion uulloiilics luvc lo fucc, uno llcy ulso cull foi oilcicnl llcoiclicul lools.
Wlilc compclilion policy issucs cun moslly Lc unulysco will oligopoly llc-
oiy (llul is llc muin lool usco in llis Look), icgululion issucs uic moic
nuluiully uooicssco Ly so-cullco piincipul-ugcnl moocls" (llc piincipul Lc-
ing llc icgululoiy uulloiily uno llc ugcnl Lcing llc icgululco lim, will
llc foimci luving lo ocvisc u syslcm of conliucls uno icwuios llul givcs
llc lullci llc inccnlivc lo lukc llc uclions llul woulo uclicvc llc oLjcclivcs
ocsiico Ly llc piincipul).
1lis Look will ocul only will compclilion policy, nol will icgululion.
Hoforoncos
[1[ Amulo, Giuliuno (1007) Anliliusl uno llc Lounos of powci: llc
oilcmmu of liLciul ocmociucy in llc lisloiy of llc muikcl" Oxfoio
: Huil
[2[ Lilllingmuyci, Gcoigc (108) Dio unliliusl policy cuusc llc gicul
mcigci wuvc", Jouinul of Luw uno Economics, 28, 77-118.
[8[ Clunolci , Alfico D (1000) "Sculc uno scopc : llc oynumics of inous-
liiul cupilulism", CumLiiogc: Huivuio U I , 1000
[4[ Unilco Slulcs Anliliusl Iolicy: Issucs uno Inslilulions
[[ Comunoi,-Willium-S. (1000),in Comunoi, W.-S., cl-ul. Compclilion
policy in Euiopc uno Noill Amciicu: Economic issucs uno inslilulions.
Ncw Yoik: Huiwooo Acuocmic, 48-72.
[0[ Diciickx,-I., Mululcs,-C., Ncvcn,-Dumicn-J. (1001) Cosl Dilcicnccs
uno Suivivul in Dcclining Inousliics: A Cusc foi Ìicking Winncis` ",
Euiopcun-Economic-Fcvicw, 8(8), 107-28.
Tlc inicicsicd icudci will fnd u vusi liiciuiuic on ilc luiici iopic. Foi un iniioduciion
io icguluiion wiil vciy sinplc Lusic undcigiuduuic lcvcl iicuincni, scc Viscusi ci ul.
(199). Foi un udvunccd iicuincni, scc Luoni und Tiiolc (1994).
80
[7[ Finglclon, Fox, Ncvcn uno ScuLiigll (1000), Compclilion policy uno
llc liunsfoimulion of Ccnliul Euiopc" Lonoon : CEIF , 1000
[8[ Gcoigc,-Kcnncll-D., uno Jucqucmin, Alcxis (1000) Compclilion Iol-
icy in llc Euiopcun Communily in Comunoi,-W.-S., cl-ul. (cos.) Com-
pclilion policy in Euiopc uno Noill Amciicu, Ncw Yoik: Huiwooo
Acuocmic, 200-4.
[0[ Goyoci, D.G. (1008), EC Compclilion Luw, Sccono Eoilion, Cluicnoon:
Oxfoio Univcisily Iicss.
[10[ Goyoci, D.G. (1008), EC Compclilion Luw, 1liio Eoilion, Cluicnoon:
Oxfoio Univcisily Iicss.
[11[ Giccn E. uno F. Ioilci (1084) Non-Coopciulivc Collusion Unoci Im-
pcifccl Iiicc Infoimulion", Economcliicu, 2: 87-100
[12[ Guul,-Joioi (100), 1lc 1licc Common Iolicics: An Economic Anuly-
sis, in Luigucs,-Iiciic, Jucqucmin,-Alcxis, Supii,-Anoic, cos. Euiopcun
policics on compclilion, liuoc uno inousliy: Conlicl uno complcmcn-
luiilics. Alocislol, U.K.: Elgui, 8-48.
[18[ Inmun, FoLcil I. uno Dunicl L. FuLinfclo (1007) Muking scnsc of
llc unliliusl slulc-uclion oocliinc: Luluncing polilicul puilicipulion
uno cconomic cmcicncy in icgululoiy fcociulism", 1cxus Luw Fcvicw,
7(0), 1208-1200.
[14[ Koiul , Vulcnlinc An inliooucloiy guioc lo EC compclilion luw uno
piuclicc Lonoon : Swccl \ Muxwcll , 1004
[1[ K uln, Kui-Uwc (1007) Gcimuny", in GloLul compclilion policy",
Eowuio M. Giulum uno J. Duvio Ficluioson (Eos.), Wuslinglon, D.C.,
Inslilulc foi Inlcinulionul Economics.
[10[ Lulonl, Jcun-Jucqucs, uno Jcun 1iiolc (1004) A llcoiy of inccnlivcs
in piocuicmcnl uno icgululion", Loslon, MA: MI1 Iicss.
[17[ Mollu,-Mussimo, Oniou,-FuLiizio (1007), 1iuoc Iolicy uno Compcli-
lion Iolicy", Gioinulc-ocgli-Economisli-c-Annuli-oi-Economiu, 0(1-2),
07-07.
[18[ Ncvcn, Dumicn, Icnclopc Iupunoiopoulos uno Iuul ScuLiigll (1008)
1iuwling foi minnows. Euiopcun compclilion policy uno ugiccmcnls
Lclwccn lims", CEIF, Lonoon.
40
[10[ Ioilci, F. (1088) A Sluoy of Cuilcl SluLilily: 1lc Joinl Excculivc
Commillcc, 1880-1880", Lcll Jouinul of Economics, 14: 801-814
[20[ Fcy, Iuliick (2000) 1owuios u llcoiy of compclilion policy", Uni-
vcisilc oc 1oulousc, mimco (picscnlco ul llc Woilo Mccling of llc
Economcliic Socicly, Sculllc).
[21[ Sclcici, F.M. (1080) Inousliiul Muikcl Sliucluic uno Economic Ici-
foimuncc", 2no Eoilion, Loslon: Hougllon Mimin Co.
[22[ Sclcici, F.M. (1004) Compclilion policics foi un inlcgiulco cconomy",
Wuslinglon, D.C., Liookings Inslilulion.
[28[ 1iiolc, Jcun (1088), 1lc 1lcoiy of Inousliiul Oigunizulion, 1lc MI1
Iicss.
[24[ Vuiiun, Hul F. (1080) Iiicc Disciiminulion", in Sclmulcnscc,-Ficluio,
Willig,-FoLcil-D., cos. HunoLook of inousliiul oigunizulion, Amslci-
oum: Noill-Holluno, 07-04
[2[ Viscusi, W.Kip, Joln M. Vcinon uno Joscpl E. Huiiinglon, Ji (100)
Economics uno icgululion uno unliliusl", CumLiiogc, Muss: MI1
Iicss.
[20[ Wlisl, F. (100), Compclilion Luw, 1liio Eoilion, Lullciwoills.
41
Chaploi 2: Maikol Fowoi ano Wolfaio
(FBEL!M!NABY VEBS!ON: Commonls wolcomo!)
Frpshwlwlrq Srolf|= Wkhru| dqg Sudfwlfh
CamLiiogo Univoisily Fioss, 2003
Massimo Molla
Dopailmonl of Economics
Eniopoan Univoisily !nslilnlo, Floionco
ano Univoisilal Fompon FaLia, Laicolona
7 Jannaiy 2003
1
Frqwhqwv
4 Pdunhw Srzhu dqg Zhoiduh= Lqwurgxfwlrq 4
1.1 Ovoiviow of lho chaploi . . . . . . . . . . . . . . . . . . . . . 1
5 Doorfdwlyh h!flhqf| 5
2.1 Maikol powoi: A oonnilion . . . . . . . . . . . . . . . . . . . 3
2.2 1ho allocalivo inomcioncy of a monopoly . . . . . . . . . . . . 4
2.3 Bonl-sooking aclivilios . . . . . . . . . . . . . . . . . . . . . . 0
6 Surgxfwlyh h!flhqf| ;
3.1 Aooilional wolfaio loss fiom pioonclivo inomcioncy . . . . . . 8
3.2 Why is a monopolisl loss omcionl . . . . . . . . . . . . . . . . 0
3.2.1 Monopoly ano managoiial slack . . . . . . . . . . . . . 0
3.2.2 Empiiical ovioonco on inoivional nims` pioonclivily . . 11
3.2.3 A Daiwinian mochanism: compolilion solocls omcionl
nims . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
3.3 NnmLoi of nims ano wolfaio . . . . . . . . . . . . . . . . . . . 1
3.4 Conclnsions . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
3. Compolilion ano pioonclivo omcioncy . . . . . . . . . . . . . 10
3..1 Compolilion ano soloclion of nims: An oxamplo . . . 10
3..2 1oo many nims in lho inonsliy . . . . . . . . . . . . . 18
7 G|qdplf h!flhqf| 4<
4.1 1ho lowoi inconlivos lo innovalo of a monopolisl . . . . . . . . 20
4.2 !nconlivos lo invosl in B:D . . . . . . . . . . . . . . . . . . . 22
4.3 Moools of compolilion ano innovalion . . . . . . . . . . . . . 23
4.3.1 Monopoly givos fowoi inconlivos lo innovalo: an oxam-
plo . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
4.3.2 B:D ano compolilion . . . . . . . . . . . . . . . . . 2
4.3.3 AppiopiiaLilily ano B:D . . . . . . . . . . . . . . . . 28
8 Sxeolf srolflhv dqg lqfhqwlyhv wr lqqrydwh 63
.1 Ex-anlo v. ox-posl: piopoily iighls pioloclion . . . . . . . . . 30
.2 Essonlial facililios . . . . . . . . . . . . . . . . . . . . . . . . . 32
.3 Fiico conliols ano slinclnial iomooios . . . . . . . . . . . . . . 3
.4 !nloinal vs. oxloinal giowlh . . . . . . . . . . . . . . . . . . . 30
2
9 Prqrsro|= zloo wkh pdunhw { lw dooB 6:
0.1 DniaLlo gooo monopolisl . . . . . . . . . . . . . . . . . . . . . 37
0.2 ConloslaLlo maikols . . . . . . . . . . . . . . . . . . . . . . . 40
0.3 Monopoly ano fioo onliy . . . . . . . . . . . . . . . . . . . . . 43
0.3.1 Conconlialion nnooi fioo onliy . . . . . . . . . . . . . 44
0.3.2 Swilching cosls . . . . . . . . . . . . . . . . . . . . . . 47
0.3.3 Nolwoik oocls . . . . . . . . . . . . . . . . . . . . . . 1
0.3.4 A moool of (physical) nolwoiks . . . . . . . . . . . . .
0.3. Exclnsionaiy piaclicos . . . . . . . . . . . . . . . . . . 8
: Vxppdu|/ dqg srolf| frqfoxvlrqv 8<
; Hvvd|v dqg h{huflvhv 93
< Vroxwlrqv ri h{huflvhv 98
3
4 Pdunhw Srzhu dqg Zhoiduh= Lqwurgxfwlrq
414 Ryhuylhz ri wkh fkdswhu
Al lho Lasis of compolilion policy lhoio is lho iooa lhal monopolios aio
Lao". Soclion 2 shows lhal inoooo a monopoly cansos a slalic inomcioncy:
foi givon lochnologios, monopoly piicing iosnlls in a wolfaio loss. Fnilhoi,
lhoio gonoially is an invoiso iolalionship Lolwoon maikol powoi (lho aLilily
of nims lo sol piicos aLovo maiginal cosls), of which monopoly powoi is lho
mosl oxliomo foim, ano (slalic) wolfaio.
Soclions 3 ano 4 show lhal jnsl Ly looking al allocalivo inomcioncy alono
ono mighl aclnally nnooioslimalo lho wolfaio loss fiom maikol powoi. A
monopoly (moio gonoially, high maikol powoi) mighl iosnll in pioonclivo
ano oynamic inomcioncios loo. Nol only ooos a monopolisl chaigo loo high
a piico, Lnl il mighl also havo loo high cosls ano innovalo loo lilllo, sinco
- sholloioo fiom compolilion - il is nol pnshoo lo aoopl lho mosl omcionl
lochnologios ano lo invosl mnch in B:D.
Ono mighl Lo lomploo lo conclnoo lhal if having ono nim (oi voiy fow
nims) loaos lo wolfaio lossos, lhon compolilion policy shonlo liy lo incioaso
lho nnmLoi of nims which opoialo in lho inonsliy (foi inslanco snLsioising
ano piolocling loss snccossfnl nims). Soclion 3 also shows lhal snch a concln-
sion wonlo nol Lo coiiocl, Locanso kooping loss omcionl nims ailincially alivo
wonlo oisloil lho allocalion of iosonicos ano ioonco oconomios of scalo, lhns
iooncing wolfaio. !n shoil: (1) frpshwlwlrq srolf| lv qrw derxw pd{lplvlqj
wkh qxpehu ri upv, ano (2) frpshwlwlrq srolf| lv derxw ghihqglqj pdunhw
frpshwlwlrq/ qrw derxw ghihqglqj frpshwlwruv.
Allhongh lhoio is an invoiso iolalionship Lolwoon maikol powoi ano wol-
faio whon focnsing on a slalic analysis, il is nol cloai lhal lho samo nnam-
Lignons iolalionship oxisls whon pioonclivo ano oynamic inomcioncios aio
consiooioo. !n any ovonl, soclion 4 aignos lhal maikol powoi is coilainly
nol shu vh Lao. !noooo, lho piospocl of onjoying somo maikol powoi (ano
pionls) is lho main inconlivo foi nims lo invosl ano innovalo. !f nims woio
nol aLlo lo appiopiialo lho iosnlls of lhoii invoslmonls - wholhoi lhoy aio
aovoilising onllays, capacily, B:D oxponoilnios oi olhoi - lhoy wonlo nol
invosl al all, wilh lho iosnll lhal consnmois wonlo nol Lononl fiom lowoi
cosls, highoi qnalily gooos, now piooncl vaiiolios ano so on.
Soclion shows lhal lhoio oflon oxisls a liaoo-o Lolwoon ox-posl ano
ox-anlo consiooialions. !f ox-posl (i.o., foi givon qnalilios, lochnologios, vaii-
olios) ono wonlo Lo lomploo lo oliminalo maikol powoi so as lo ioonco piicos
ano incioaso allocalivo omcioncy, ox-anlo snch a policy wonlo Lo ooliimonlal,
Locanso il wonlo oliminalo lho inconlivos foi nims lo impiovo lhoii qnalily
ooiings ano lhoii lochnologios. FnLlic policios shonlo gnaianloo nims somo
maikol powoi, lhal is appiopiiaLilily of lhoii B:D ano invoslmonls, ano
compolilion policy shonlo nol aim al ooslioying" monopolios, oi moio gon-
oially nims` maikol powoi, as long as lhoy aio oslaLlishoo on lho Lasis of
logilimalo Lnsinoss piaclicos. A nim which onjoys a monopoly afloi having
snccossfnlly invosloo, innovaloo, inliooncoo now piooncls is a nim which io-
coivos a iowaio foi ils aclivilios. 1ho oxpoclalion lhal - if ooing woll - a nim
will iocoivo pionls is lho inconlivo which pnshos snch a nim lo oo woll. Any
allompl lo oliminalo maikol powoi afloi a nim has snccossfnlly allainoo il
givos lho wiong inconlivo signals lo lhis ano all lho olhoi nims. Compolilion
policy is lhoiofoio nol concoinoo wilh monopolios shu vh, Lnl ialhoi only
wilh monopolios which oisloil lho compolilivo piocoss.
1ho piovions aignmonls snggosl lhal compolilion policy shonlo nol Lo
loo inloivonlionisl. Somo lhooiios go fnilhoi, ano snggosl lhal lhoio ox-
isl maikol mochanisms which piovonl a monopolisl fiom oxoicising maikol
powoi, lhoioLy iooncing fnilhoi lho scopo foi compolilion policy. Soclion 0
oiscnssos lhoso viows, ano in pailicnlai lho aignmonl lhal fioo onliy acls as
a iosliainl lo lho maikol powoi of a monopolisl. Allhongh il is lino lhal
polonlial onlianls can play a iolo in oisciplining incnmLonls, monopolisls
oflon conlinno nnpoilniLoo lo chaigo high piicos ovon whon onliy is possi-
Llo, foi a nnmLoi of ioasons, snch as lho oxislonco of snnk cosls, consnmoi
swilching cosls, ano nolwoik oocls, as woll as Lnsinoss piaclicos caiiioo onl
Ly incnmLonls lo oxclnoo polonlial onlianls (snch piaclicos will Lo analysoo
in chaploi 7).
Soclion 7 onos lho chaploi wilh somo policy conclnsions.
5 Doorfdwlyh h!flhqf|
Soclion 2.1 oonnos maikol powoi. Soclion 2.2 shows lhal maikol powoi Liings
aLonl a wolfaio loss ono lo piicos Loing loo high: lhis wolfaio loss is laLolloo
allocalivo inomcioncy", ano il is highosl whon maikol powoi coincioos wilh
monopoly powoi. Soclion 2.3 snggosls lhal lho wolfaio loss mighl Lo laigoi
whon nims ongago in nnpioonclivo aclivilios in oiooi lo giaL maikol powoi.
Olhoi ioasons why lho wolfaio loss fiom maikol powoi mighl Lo ovon highoi
2
will Lo analysoo in soclions 3 ano 4.
514 Pdunhw srzhu= D ghqlwlrq
Maikol powoi is a cincial concopl in lho oconomics of compolilion law. !l
iofois lo lho aLilily of a nim lo iaiso piico aLovo somo compolilivo lovol -
lho Lonchmaik piico - in a pionlaLlo way. Sinco lho lowosl possiLlo piico
a nim can pionlaLly mako is lho piico which oqnals lho maiginal cosl of
pioonclion, maikol powoi is nsnally oonnoo as lho oioionco Lolwoon lho
piicos chaigoo Ly a nim ano ils maiginal cosls of pioonclion.
Sinco maikol powoi iofois lo lho aLilily of nims lo chaigo piicos aLovo
maiginal cosls, wo oxpocl nims lo havo somo oogioo of maikol powoi in lho
ioal woilo (nol loasl Locanso if lhoy hao zoio pionl lhoy conlo nol covoi lhoii
nxoo cosls), wilh an nnchallongoo monopolisl onjoying lho highosl possiLlo
maikol powoi. 1ho issno of how lo moasnio maikol powoi in piaclico is
oolayoo lo lho noxl chaploi, Lnl nolo lhal in many ciicnmslancos compolilion
policy will Lo concoinoo only wilh lhoso nims which havo laigo onongh"
maikol powoi, whoio laigo onongh" will Lo aiLiliaiy lo somo oxlonl, ano
mighl Lo oioionl accoioing lo lho pailicnlai compolilion pioLloms Loing
scinlinisoo.
1ho concopl of maikol oominanco" which is nsoo in Eniopoan compoli-
lion law (soo chaploi 1) ooos nol havo a cloai lianslalion in oconomic loims,
!n a moool whoio nims soll poifoclly ioonlical piooncls, havo zoio nxoo cosls, ano
chooso piicos (lho so-calloo Ehuwudqg moool), piico is oqnal lo maiginal cosl al lho oqni-
liLiinm. (Soo chaploi 8 foi a Liiof oosciiplion.) 1ho samo onlcomo also aiisos nnooi poifocl
compolilion.
An alloinalivo oonnilion mighl Lo lo oonno maikol powoi nol Ly how fai lho piicos aio
wilh iospocl lo maiginal cosls, Lnl Ly how closo lhoy aio lo monopoly piicos. Concoplnally,
lhoso oonnilions aio voiy similai. Opoialionally, ono is nol oasioi lo oslimalo lhan lho
olhoi: lho foimoi ioqniios an oslimalion of maiginal cosls, lho lalloi of lho inonsliy`s
monopoly piicos. Sinco lho foimoi oonnilion is moio wiooly nsoo, ! shall aoopl il.
Foi inslanco, compolilion laws mighl nx somo minimnm maikol powoi lhiosholos
Lolow which somo inlos oo nol apply, nnooi lho piosnmplion lhal nims wilh lilllo maikol
powoi can oo lilllo oamago. Dioionl lhiosholos mighl also Loon aooploo foi oioionl
piaclicos, snch as vaiions lypos of voilical iosliainls, which havo oioionl polonlial of
haiming compolilion. Ano lho maikol powoi lhiosholos nsoo in moigoi analysis oi in
casos of aLnso of oominanl posilion nooo nol Lo lho samo.
!l is nol cloai how lho Conil`s oonnilion having lho aLilily of Lohaving inooponoonlly
of cnslomois, snppliois ano iivals" conlo Lo ialionalisoo in oconomic loims. Foihaps, il
mighl Lo inloipioloo as lho possiLilily of a nim lo Lohavo as a monopolisl on lho iosional
3
Lnl can Lo inloipioloo as a silnalion whoio a nim has a laigo oogioo of mai-
kol powoi, which allows il lo chaigo piicos which aio closo onongh" lo lhoso
lhal a monopolisl wonlo chaigo.
515 Wkh doorfdwlyh lqh!flhqf| ri d prqrsro|
Lol ns now analyso why maikol powoi iooncos slalic wolfaio. ! focns hoio
on allocalivo omcioncy, ano assnmo lhal lochnologios (cosls) aio givon, ano
lhal lho mosl omcionl lochnology availaLlo is nsoo. !n whal follows, a sim-
plo giaphical analysis illnslialos lho main aignmonl: whon piicos aio aLovo
maiginal cosls, lhis onlails highoi piooncoi sniplns Lnl nol highoi onongh lo
componsalo foi lho lowoi consnmoi sniplns cansoo Ly highoi piicos.
D vlpsoh judsklfdo dqdo|vlv Assnmo foi simplicily lhal lhoio oxisls a
linoai maikol oomano, oosciiLoo Ly lho lino GG in Fignio 2.1, ano a conslanl
iolnins lo scalo lochnology, iopiosonloo Ly lho lino of conslanl maiginal cosls
j c. !n lho mosl compolilivo caso, oni Lonchmaik caso, lho piico is j = c
ano lho qnanlily solo lo consnmois is oqnal lo . Consiooi lhon lho oxliomo
caso whoio maikol powoi is maximnm: lho inonsliy is monopolisoo Ly a
singlo nim, which chaigos lho monopoly piico j . 1ho oqniliLiinm onlpnl
wonlo Lo givon Ly .
!NSEB1 Fignio 2.1. 1ho ooaowoighl loss fiom monopoly
oomano cnivo in a pionlaLlo way, Lnl ovon lhis inloipiolalion is nol wilhonl pioLloms.
1ho mosl compolilivo caso coiiosponos lo lho Loiliano (oi poifoclly compolilivo)
oqniliLiinm.
1ho monopoly piico is ooloiminoo as lho piico al which maiginal iovonno (lho oolloo
lino in lho ngnio) oqnals maiginal cosl. 1o nnooislano lhis Lasic oqniliLiinm conoilion
Lolwoon maiginal iovonno (MB) ano maiginal cosl (MC), consiooi lho caso whoio, al a
coilain nnmLoi of nnils solo, lho monopolisl nnos lhal MBAMC. 1hon il moans lhal
Ly solling an oxlia nnil of onlpnl il wonlo oLlain a highoi pionl, sinco lhis oxlia nnil
wonlo givo a highoi iovonno lhan cosl. 1hoiofoio, MBAMC cannol Lo an oqniliLiinm.
Ly incioasing onlpnl, lho monopolisl wonlo go oown lho cnivo MB, golling closoi lo lho
oqniliLiinm. Ly lho samo ioasoning, MB?MC wonlo imply lhal lho lasl nnil solo Ly
lho monopolisl cosls moio lhan il Liings iovonno lo il. 1hoiofoio, MB?MC cannol Lo
an oqniliLiinm. 1ho monopolisl wonlo ialhoi ioonco lho nnmLoi of nnils solo, ano Ly
iooncing onlpnl, MB will incioaso Ly golling closoi lo lho oqniliLiinm.
Nolo lhal lho samo piico s mighl Lo sol if lhoio woio fnll collnsion among sovoial
ioonlical nims opoialing nnooi conslanl maiginal cosls.
4
Bocall lhal wolfaio is oonnoo as lho snmof consnmoi sniplns ano piooncoi
sniplns. Unooi lho mosl compolilivo oqniliLiinm, wolfaio is givon Ly lho
liianglo Gj o which also coiiosponos lo lho consnmoi sniplns (nims oo nol
havo any sniplns, sinco pionls aio oqnal lo zoio). Unooi prqrsro|, wolfaio
is givon Ly lho aioa oosciiLoo Ly lho poinls Gj 11, which is ilsolf lho snm of
piooncoi sniplns j j 11 ano of consnmoi sniplns Gj 1. 1ho nol omcioncy
loss cansoo Ly lho monopoly is givon Ly lho oioionco Lolwoon lho aioas Gj o
ano Gj 11, namoly Ly lho aioa of lho liianglo 1o1, which is lho ooaowoighl
loss, 1, foi lho oconomy.
Nolo also lhal, iolalivo lo monopoly, compolilion incioasos nol wolfaio
Lnl ooos nol Liing aLonl a Sduhwr lpsuryhphqw (i.o., nol ovoiyLooy is Lol-
loi o), sinco lho piooncoi sniplns shiinks wilh iospocl lo lho monopoly
caso. 1his mighl Lo liivial, Lnl il illnslialos lho main inloiosls Lohino lho
oioionl silnalions. An inonsliy`s piooncois will liy lo loLLy in favoni of
moio pioloclion ano loss compolilivo piossnio, whilo consnmois ano nsois
of lho inonsliy piooncls will havo an inloiosl in Lacking pioposals of moio
compolilion.
Wkh ghwhuplqdqwv ri wkh ghdgzhljkw orvv A wolfaio loss occnis nol
jnsl foi lho monopoly piico Lnl foi any piico aLovo maiginal cosls. 1o soo
lhis wilh lho holp of lho ngnio aLovo, jnsl iooo lho samo analysis as aLovo
Ly compaiing lho wolfaio lovol allainoo whon j = c wilh lhal allainoo nnooi
any aiLiliaiy piico j c.
Ono can also chock lhal lho highoi lho piico j lho laigoi lho wolfaio loss
cansoo Ly maikol powoi (lho liianglo which iopiosonls lho loss gols Liggoi as
Consnmoi sniplns is lho aioa lhal lios Lolwoon lho sogmonl RV in lho oomano lino
(which oosciiLos lho willingnoss lo pay of pooplo who Lny lho gooo) ano lho lino s f
(which oosciiLos lho piico lhoy pay).
1ho monopolisl is nol aLlo lo appiopiialo all lho consnmoi sniplns which is losl
Ly consnmois whoso willingnoss lo pay is highoi lhan maiginal cosls. Howovoi, if lho
monopolisl was aLlo lo sol a oioionl piico foi oach consnmoi (i.o., if il woio aLlo lo
oo poifocl piico oisciiminalion), lhon ils pionl wonlo Lo oqnal lo lho wholo aioa of lho
liianglo Rs V. Foifocl piico oisciiminalion is nnlikoly lo happon, sinco il ioqniios lhal
lho monopolisl knows poifoclly lho willingnoss lo pay of oach consnmoi. Soo also chaploi
7.
As oiscnssoo in chaploi 1, Locanso of lho fiagmonlalion of lhoii inloiosls, in piaclico
consnmois oflon oo nol loLLy foi moio compolilion, whoioas nims aio sliong aovocalos
foi loss compolilion.
j gols closo lo j ), snggosling lhal wolfaio oocioasos wilh maikol powoi.

Fnilhoimoio, lho giaphical oxamplo also snggosls lhal lho ooaowoighl
loss cansoo Ly monopoly powoi also ooponos on lho olaslicily of maikol
oomano. !f oomano woio poifoclly olaslic (GG hoiizonlal in lho ngnio),
lhon lho monopolisl wonlo nol Lo aLlo lo sol any piico aLovo maiginal cosl
(consnmois wonlo nol Lny lho gooo if lhoio was an ovon slighl incioaso in
piico). Honco, lho ooaowoighl loss wonlo Lo nil in lhis caso. As maikol
oomano olaslicily oocioasos, lho aLilily of lho monopolisl lo chaigo highoi
piicos iisos ano lho ooaowoighl loss incioasos.
Finally, lho aLsolnlo valno of lho ooaowoighl loss ooponos on lho sizo of
lho maikol. 1ho inloicopl of oomano (lho poinl G) in lho ngnio can Lo soon
as lho sizo of lho maikol. !f oomano GG shifloo in a paiallol way lowaios
lho oiigin, lhal is if il kopl lho samo slopo Lnl hao a lowoi inloicopl, lhon
lho ooaowoighl loss associaloo wilh monopoly powoi wonlo Lo smalloi in
aLsolnlo loims.
516 Uhqw0vhhnlqj dfwlylwlhv
1ho allocalivo inomcioncy ioonlinoo aLovo mighl nnooislalo lho aclnal nog-
alivo oocl of monopoly. !l has Loon snggosloo lhal - whon monopolios aio
allowoo - nims mighl liy lo nso lhoii polilical innonco ano loLLying powoi
lo koop oi incioaso lhoii monopoly powoi. !n lhis piocoss, lhoy wonlo nso
iosonicos which conlo insloao Lo pnl in moio pioonclivo nso. Honco, ionl-
sooking aclivilios onlaigo lho oxpocloo wolfaio loss fiom monopoly.
Fosnoi (107) aignos lhal lho social cosl of a monopoly shonlo inclnoo
an aioa which mighl Lo as laigo as lho ovoiall monopoly pionl a nim oLlains
1his iosnll is lino wilh linoai oomano, Lnl ooos nol nocossaiily holo foi all oomano
fnnclions. Soo also lho foolnolo BB in lho lochnical soclion BB.
Lol mo mako lwo lochnical nolos lhal can Lo skippoo Ly ioaoois who aio nol inloiosloo
in snch oolails. (1) !f oomano is poifoclly inolaslic, lho ooaowoighl loss will oisappoai.
Consiooi lho caso whoio consnmois aio willing lo pay np lo a piico Y foi a nnil of lho gooo:
lho monopolisl will sol piocisoly lhal piico Y ano - as wilh poifocl piico oisciiminalion
- appiopiialo all lho sniplns of consnmois. As a iosnll, maikol powoi is lho highosl Lnl
lhoio is no ooaowoighl loss. (2) 1iiolo (1088: 08 ano 88) shows lhal lho devroxwh wolfaio
loss GZO ooos nol nocossaiily oocioaso wilh lho olaslicily of oomano. Foi oxamplo, wilh
a conslanl olaslicily oomano fnnclion s @ t , lloio oxisls a non-monolonic iolalionslip
Lolwoon wolfaio loss fiom monopoly ano olaslicily. Howovoi, will llis oomano finclion
llo sizo of llo mailol incioasos will %. Jiiolo slows llal llo uhodwlyh wolfaio loss, namoly
GZO@Z (wloio Z is wolfaio) is inoooo oocioasing will %.
0
(llal is llo aioa of llo ioclanglo j j 11 in Iigiio 2.2).
INSLIJ Iigiio 2.2 IossiLlo aooilional loss fiom ionl-sooling aclivilios
Jlis is Locaiso nims woilo waslo iosoiicos in aclivilios wlicl oo nol
lavo any social valio in llo allompl lo mainlain oi acqiiio monopoly powoi.
A monopoly, wlolloi piivalo oi caisoo Ly piLlic iogilalion, cioalos ionls.
Agonls woilo compolo lo appiopiialo lloso ionls Ly LiiLing omcials, Ly
foiming loLLying gioips, oi Ly iosoiling lo olloi sicl aclivilios. Locaiso
of compolilion among sicl agonls, llo amoinl of lloii oxponoiliio in ionl-
sooling aclivilios woilo oqial llo amoinl of oxpocloo pionl fiom monopoly,
wlicl loaos lo a complolo oissipalion of llo ionls. (Soo oxoiciso 1 foi a
foimalisalion.) Iosnoi`s (107: 27) aigimonls ciicially lingos on llioo
assimplions: (1) Jloio oxisls poifocl compolilion among agonls wlo ongago
in ionl-sooling aclivilios. (2) Jlo ionl-sooling "loclnology" is claiacloiisoo
Ly conslanl ioliins lo scalo. (8) Jlo cosls inciiioo in oLlaining a monopoly
oo nol lavo any socially valiaLlo Ly-piooicl. Unooi lloso assimplions, il
is oasy lo soo llal llo wolfaio loss of monopoly sloilo inclioo all llo pionl
as woll.
Jlo assimplions maoo Ly Iosnoi aio qioslionaLlo. In pailicilai, il
migll woll Lo llal somo agonls aio Lolloi llan ollois ano voiy "omcionl"
in lloii ionl-sooling opoialions, wlicl moans llal llo oissipaloo ionl, if il
oxisls, ooos nol nocossaiily coincioo will llo monopoly pionls. Iiilloi, llo
assimplion llal ionl-sooling aclivilios novoi cioalo socially valiaLlo iosills
is voiy sliong. Aovoilising oillays, foi inslanco, inoicaloo Ly Iosnoi as ionl-
sooling aclivilios, migll incioaso infoimalion availaLlo lo consimois as woll
as lloii poicoivoo" valio of llo gooo.
Jlo iosill llal compolilion in ionl-sooling aclivilios among agonls migll
loao lo a complolo oissipalion of ionls, wlicl woilo llon Lo complololy
wasloo foi wolfaio piiposos, is coilainly a voiy oxliomo ano piovocalivo ono.
Novoilloloss, llo aigimonl malos sonso. In lloii ooil lo gol lolo of ionls,
nims migll woll iso iosoiicos wlicl coilo Lo pil in moio piooiclivo iso
Jlo aigimonl is familiai lo lloso wlo lavo slioioo llo polilical oconomy of pioloclion.
Soo foi inslanco Kiiogoi (1074).
Soo Iisloi (108) foi a ciiliqio of Iosnoi`s aigimonls.
Moio gonoially, oxponsos lo incioaso llo pioLaLilily of oLlaining ionls will go lo agonls
aclivo olsowloio in llo oconomy. A pailial oqiiliLiiim fiamowoil is nol appiopiialo any
longoi lo compilo wolfaio.
7
olsowloio. Ionl-sooling aclivilios may coilainly gonoialo inomcionl oisloi-
lions. Jlo aclial amoinl lloso oisloilions caiso is an ompiiical issio wloso
lioalmonl is Loyono llo scopo of llis woil.
6 Surgxfwlyh h!flhqf|
Wo lavo soon llal foi givon piooiclion cosls, a monopolisl (moio gonoially, a
nimonjoying laigo mailol powoi) claigos loo ligl a piico loaoing lo a wolfaio
loss, calloo allocalivo inomcioncy. Howovoi, lloio migll Lo an aooilional
wolfaio loss, calloo piooiclivo inomcioncy, if a nimopoialing inooi monopoly
las a ligloi cosl llan if il woio opoialing in moio compolilivo onviionmonls.
Iiom an ompiiical poinl of viow, llo ovioonco is mixoo, Lil poinls lo
signincanl piooiclivo omcioncy lossos, wlicl migll ovon Lo laigoi llan llo
moio isial allocalivo inomcioncy onos.
Jlis soclion nisl slows llo possiLlo aooilional wolfaio lossos wlicl aiiso
if a monopolisl cloosos inomcionl loclnologios, ano llon analysos wly a
monopolisl migll inoooo ono ip will sicl inomcionl loclnologios, oiscissing
Liioy Loll llo llooiolical ano llo ompiiical liloialiio on lloso issios.
614 Dgglwlrqdo zhoiduh orvv iurpsurgxfwlyh lqh!flhqf|
Lol is consiooi low a piooiclivo inomcioncy incioasos llo wolfaio loss oio
lo monopoly powoi.
Sipposo llal wlilo nims opoialing in a moio compolilivo inoisliy lavo
maiginal cosl c, a monopolisl woilo opoialo al a ligloi cosls, say c c.
Jlis will imply llal llo wolfaio loss is Liggoi llan llo aioa 11o ioonlinoo
in Iigiio 2.1. Iigiio 2.8 illislialos llis iooa. If llo monopoly opoialos
al llo ligloi cosl c , llon wolfaio inooi monopoly is givon Ly llo aioa of
G1 \ j . Al llo compolilivo oqiiliLiiim, nims woilo insloao opoialo al a
cosl c, ano wolfaio is (lilo in Iigiio 2.1) givon Ly llo aioa Goj . Jloiofoio,
llo wolfaio loss fiom monopoly is givon Ly llo sim of aioas 1 o1 ano
j \ 1 j . Jlis is cloaily a Liggoi aioa llan llo ooaowoigll loss liianglo 1o1
Soo Scloioi ano Ioss (1000: 008-072). Jlo nisl woil llal liioo lo oslimalo wolfaio
lossos fiom monopoly (in llo US) was HaiLoigoi (104).
Soo claploi 8.2.1 foi a simplo oxamplo llal slows llal llo moio inomcionl a monopolisl
llo ligloi llo piico il will claigo.
8
wlicl consiooioo only allocalivo inomcioncy: llo slaooo aioas in Iigiio 2.8
iopiosonl llo aooilional wolfaio loss oio lo piooiclivo inomcioncy.
INSLIJ Iigiio 2.8 Aooilional loss fiom piooiclivo inomcioncy
615 Zk| lv d prqrsrolvw ohvv h!flhqwB
Jlo aigimonl is slill incomplolo lloigl. I lavo so fai aigioo llal li a
monopolisl ooos nol aoopl llo moio omcionl loclnology llal nims opoialing
inooi compolilion woilo aoopl, llon llo monopoly onlails an aooilional
piooiclivo omcioncy loss. Howovoi, I lavo nol yol oxplainoo wly ono sloilo
oxpocl a monopolisl lo Lo loss omcionl. Somolow, il ooos soom a ioasonaLlo
claim llal a nim llal ooos nol faco any compolilivo piossiio will nol malo
micl ooil lo iso llo Losl availaLlo loclnologios, lo impiovo ils piooicls
ano lo innovalo, Lil ono sloilo lool moio caiofilly al llo llooiolical ano
ompiiical aigimonls llal sippoil llis claim.
Jloio aio lwo main aigimonls wlicl siggosl llal a monopoly is liloly lo
involvo piooiclivo inomcioncy. Iiisl, managois of a monopolislic nim lavo
loss inconlivo lo malo ooil. Socono - a Daiwinian soloclion aigimonl - wlon
compolilion oxisls, moio omcionl nims will siivivo ano lliivo, wloioas loss
omcionl nims will slil oown. If a monopoly oxisls, llo mailol will nol
opoialo any soloclion ano an inomcionl nim is as liloly lo siivivo as an
omcionl ono. I analyso oacl aigimonl in liin.
61514 Prqrsro| dqg pdqdjhuldo vodfn
Jlo iooa llal compolilivo piossiio loaos a nim lo lool foi llo mosl omcionl
way lo oiganiso ils piooiclion ano iooico ils cosl is a voiy olo ono, wlicl
oalos al loasl fiom Aoam Smill ano las also Loon oiscissoo Ly Joln Hicls.
LoiLonsloin (1000) inliooicoo llo concopl of X-inomcioncy" lo ioslalo llo
iooa llal monopoly powoi - ano llo qiiol lifo" wlicl comos will il - Liings
in managoiial inomcioncy.
Jlo iooa mools llo consonsis of oconomisls. Howovoi, llo iooa llal a
nim migll ono ip opoialing will inomcionl loclniqios wlon moio omcionl
onos aio availaLlo is nol solf-ovioonl ano oosoivos somo oxplanalions. Jo
inooislano wly llis migll lappon, ono las lo consiooi llal in ioalily nims
aio complox oiganisalions, ano llal oocisions iogaioing llo aooplion of locl-
nologios - ano moio gonoially oocisions aocling llo ovoiall lovol of omcioncy
0
of llo nim - aio lalon Ly managois wlo migll lavo oLjoclivos olloi llan
maximisalion of pionls. Consiooi a nim in wlicl lloio oxisls a sopaialion
Lolwoon ownoislip (slaiololoois) ano conliol (managois). Slaiololoois caio
aLoil pionls, Lil managois caio aLoil lloii inoivioial ililily, ooloiminoo
Ly wago, caiooi piospocls, as woll as llo lovol of ooil ano limo lloy lavo
lo pil in llo joL. Jlo managoi migll also caio aLoil pionls (lypically, llo
slaiololoois will wiilo a conliacl wloio lis iominoialion incioasos will llo
nim`s pionls), Lil in gonoial lo will caio aLoil olloi llings loo. As a iosill,
wlon lo lalos oocisions aLoil loclnologios (oi lo las lo lalo aclions wlicl
aocl llo nim`s cosls) lo migll nol lavo llo iigll inconlivos lo aoopl llo
mosl omcionl onos (llal is, lloso wlicl maximiso pionls).
Jo inooislano wly a nim migll clooso inomcionl loclnologios ono las
lloiofoio lo iosoil lo so-calloo sulqflsdo0djhqw prghov, llal is moools wloio a
piincipal (say, llo ownoi of llo nim) wanls lo inoico an agonl (llo managoi
of llo nim) lo lalo llo aclions llal maximiso loi (llo piincipal`s) payo.
Willin lloso moools, ono can slioy low mailol sliicliio woilo aocl (via
llo oocisions of llo ownoi) llo aclions of llo managoi, ano lonco llo cosl of
llo nim.
Iiincipal-agonl moools oo nol inamLigioisly nno llal compolilion io-
oicos managoiial slacl. A lonlalivo conclision fiom llis liloialiio is llal
lloio migll oxisl a non-monolonic iolalionslip Lolwoon compolilion ano
managoi`s ooil (ano lonco nim`s cosls). Incioasing compolilivo piossiio in
a mailol wloio lloio is a monopolisl will loao il lo Lo moio omcionl, Lil
incioasing piossiio in a mailol wloio lloio is alioaoy a gioal ooal of com-
polilion migll iooico omcioncy. (Soo soclion 8.2.2 foi a Liiof accoinl of a
moool wloio llis iolalionslip omoigos.)
Iinally, nolo llal managoiial slacl is an aigimonl wlicl applios nol only
lo piooiclivo inomcioncy, Lil also lo oynamic inomcioncy (qiiol lifo ooos
nol pisl llo managois lo innovalo).
Ioi inslanco, in Hail (1088), compolilion incioasos managois` ooils, Lil Sclaifsloin
(1088) slows llal llo iosill ooponos on a sliong assimplion on llo managois` piofoioncos,
i.o. llal lloy aio innniloly iisl-avoiso. If llo managoi`s maiginal ililily fiom incomo is
sliiclly posilivo, compolilion woilo uhgxfh managoiial ooil. Olloi moools ooaling will
llo oocl of compolilion ipon managois` ooil inclioo Hoimalin (1002), Hoin, Lang ano
Linogion (1004), ano Mailin (1008).
10
61515 Hpslulfdo hylghqfh rq lqglylgxdo upv* surgxfwlylw|
Jlo managoiial slacl lypollosis is oimcill lo losl ompiiically, Lil lloio
oxisls somo ovioonco llal lqglylgxdo upv* surgxfwlylw| lv ligloi in moio
compolilivo mailols.
Nicloll (1000) analysos a panol oala of aioino 700 UK manifacliiing
nims ovoi llo poiioo 1072-1080. Ho nnos llal llo laigoi mailol slaio, a
possiLlo pioxy foi mailol powoi, llo lowoi llo nims` piooiclivily ohyhov.
Iiilloimoio, lo nnos llal llo sliongoi compolilion (moasiioo oilloi Ly
incioasoo nimLoi of iival nims oi Ly lowoi lovols of ionls) llo ligloi lolal
facloi piooiclivily jurzwk.
Nicloll, Nicolilsas ano Diyoon (1007), Lasoo on similai oala ano anal-
ysis as Nicloll (1000), connim llal piooicl mailol compolilion impiovos
nims` piooiclivily poifoimanco, Lil also inoicalo llal llo iolo of compoli-
lion in oisciplining managois ano impioving company poifoimanco is lowoi
wlon nims aio alioaoy siLjocl lo nnancial piossiio oi oxloinal slaiololooi
conliol.
Ovoiall, ovon lloigl llo ompiiical ovioonco collocloo so fai is fai fiom
conclisivo, il ooos soom llal compolilion aocls piooiclivily, ano lloiofoio
llal onviionmonls wloio nims onjoy monopoly powoi woilo Lo claiacloiisoo
Ly lowoi piooiclivo omcioncy.
Frpshwlwlrq dqg h!flhqf|= Vfkplgw*v prgho- In Sclmiol`s (1007)
moool, a nim migll go Lanliipl, ano a managoi woilo incii a loss wlon
lis nim closos oown (a ioasonaLlo assimplion). A nim`s ownoi las lo ooviso
a conliacl lo inoico moio ooil Ly loi managoi: sinco ooil (wlicl is nol
oLsoivaLlo Ly llo ownoi) is coslly foi llo managoi, llo ownoi migll lavo
lo pay somo ionls lo llo managoi in oiooi lo incioaso lis ooil. Nolo llal
llo managoi`s ooil malos llo nim moio omcionl. Jloiofoio, il nol only
Ioi a oiscission of llo possiLlo pioLloms associaloo will llo iso of mailol slaios as
mailol powoi inoicaloi, soo Nicloll (1000: 788-784).
Hay ano Lii (1007) also lool al llo compononls of nims` omcioncy in ninoloon UK soc-
lois ano nno somo ovioonco llal compolilion ooos play somo iolo in ooloimining omcioncy
ano mailol slaios of nims.
On llo iolalionslip Lolwoon piooicl mailol compolilion, coipoialo nnanco ano man-
agoiial ooil (ano innovalion), soo Aglion, Dowaliiponl ano Ioy (1008, 1000).
Jloio is also somo ovioonco llal liaoo liLoialisalion (oi liaoo oponnoss) - an inoicaloi
of llo oogioo of compolilion nims in a coinliy faco - iosills in ligloi omcioncy lovols. Soo
JyLoil (2000) foi a siivoy.
11
incioasos llo oxpocloo nim`s pionl Lil also iooicos llo pioLaLilily llal llo
nim will faco Lanliiplcy (a moio omcionl nim will Lo moio slolloioo fiom
nogalivo slocls).
Mailol compolilion iooicos llo nim`s pionl, ano llis las lwo oioionl
oocls on managoiial ooil. Jlo nisl oocl, laLolloo llioal of liqiioalion
oocl" is inamLigioisly posilivo. Wlon compolilion iisos, llo llioal of
going Lanliipl Locomos moio impoilanl (pionls aio lowoi), ano llis pislos
llo managoi lo oxoil ligloi ooil in oiooi lo avoio llo loss fiom liqiioalion.
Jlo socono oocl, lloigl, las an amLigiois sign. Wlon compolilion iisos,
pionl oocioasos, ano as a consoqionco llo valio of inoicing a givon cosl
iooiclion pljkw also oocioaso. If il ooos oocioaso, llon llo ownoi will nol
wanl lo pay a ionl lo llo managoi in oiooi lo inoico ligloi ooil ano llis
oLlain a cosl iooiclion. Compolilion migll llon iooico ooil if llis aovoiso
oocl on llo pionlaLilily of a cosl iooiclion is simcionlly sliong.
Sclmiol ioonlinos simcionl conoilions lo giaianloo llal compolilion in-
cioasos managoiial ooil, Lil lloso conoilions aio nol milo onoigl lo oxpocl
llal llis is llo only ioalislic oilcomo. In an oxlonsion, lo slioios llo impacl
of compolilion ipon managois` ooil in a Loiliano compolilion oxamplo.
Compolilion is moasiioo loio Ly llo nimLoi of nims llal opoialo in llo
mailol, ano ooil incioasos llo pioLaLilily of oLlaining an innovalion wlicl
malos llo nim a monopolisl (if moio llan ono nim oLlains llo innovalion,
lloy will oacl iocoivo zoio pionl). Ho nnos llal llo liglosl lovol of ooil
is givon Ly llo oiopoly caso, lloiofoio nnoing a non-monolonic iolalion-
slip Lolwoon compolilion ano ooil (ano innovalion) wlicl is iominisconl of
somo ompiiical slioios.
Jlo assimplion llal llo managoi is woalll consliainoo oxclioos llo possiLilily of
allaining llo nisl Losl simply Ly solling llo nim lo llo managoi, wlo woilo llon clooso
ooil in oiooi lo maximiso pionl.
Anolloi way of oosciiLing lloso lwo oocls is as follows. Jlo nisl oocl is a Daiwinian
ono: moio compolilion pislos llo managoi lo oo Lolloi lo ngll foi siivival. Jlo socono
oocl is a Sclimpoloiian ono: moio compolilion oiminislos oxpocloo filiio pionls ano
lloiofoio iooicos llo ownoi`s inconlivos lo inoico moio ooil fiom llo managoi.
In llo woiling papoi voision of llo moool, Sclmiol also analysoo llo Coiinol com-
polilion caso, nnoing llo samo non-monolonic iolalionslip, Lil will a maximal ooil foi
nimLoi of nims in llo mailol ligloi llan lwo. (Il is nol llo aclial nimLoi of nims
inooi wlicl ooil is llo liglosl, Lil llo oxislonco of a non-monolonic finclion compoli-
lion,ooil, llo conclision llal I wanl lo oiaw allonlion on).
Ioi inslanco, Cavos ano Lailon (1000) lool al US oala ano nno llal omcioncy is llo
liglosl foi inloimooialo lovols of conconlialion (as moasiioo Ly llo -nim conconlialion
12
61516 D Gduzlqldq phfkdqlvp= frpshwlwlrq vhohfwv h!flhqw upv
In an inoisliy wloio lloio oxisl moio omcionl ano loss omcionl nims, compo-
lilion will foico llo inomcionl nims lo oxil ano llis ialionalisalion impiovos
wolfaio in llal oilpil will Lo piooicoo al a lowoi cosl. A iolaloo aigi-
monl is llal wlon compolilion oxisls a lol of oioionl piojocls, piooicls
ano loclnologios aio possiLlo. Jlo mailol will llon lalo caio llal only llo
Losl among llom will siivivo ano lliivo wloioas llo ollois will oisappoai.
OLvioisly, inooi monopoly llis soil of Daiwinian aigimonl will nol occii.
Jlo oxamplo in loclnical soclion 8..1, allloigl oxliomoly simplo ano inaLlo
lo iopiooico llo iiclnoss of llo Daiwinian" aigimonl, slows llal mailol
compolilion migll oiivo oil of llo inoisliy llo loss omcionl nim, ano llal
llis woilo Lo Lononcial.
Iiom an ompiiical poinl of viow, llo soloclion aigimonl piooicls llal
compolilion will incioaso lqgxvwu| surgxfwlylw| llioigl a piocoss of onliy
inlo ano oxil fiom llo inoisliy. Olloy ano Ialos (1000) is ono of llo mosl
caiofil slioios of llo ioasons Lolino clangos in piooiclivily in a givon in-
oisliy, ano givos sliong sippoil lo llo soloclion oocl of compolilion. Jloy
analyso llo impacl of loclnological clango ano ooiogilalion in llo inoisliy
foi lolocomminicalions oqiipmonl in llo US, in llo poiioo 1008-1087. Jlis
is a poiioo in wlicl llo inoisliy was oooply ooiogilaloo. Ioi laigo pail of
llo Jwonlioll conliiy, AJ:J was givon oxclisivo monopoly in llo piovi-
sion of lolocomminicalions oqiipmonl, so llal ils manifacliiing siLsioiaiy,
Wosloin Llocliic, oominaloo llo inoisliy foi a long limo. Compolilion in
llo inoisliy ioso giaoially, llanls lo an anliliisl oocision in 1008, a iog-
ilaloiy oocision in 107 wlicl allowoo llo connoclion of piivalo oqiipmonl
lo llo nolwoil, ano llo 1082 Consonl Docioo wlicl loo lo llo oivosliliio of
AJ:J. Jlo cioalion of sovon iogional Loll opoialing companios, fioo lo Liy
lloii oqiipmonl fiom any sipplioi, ano wlicl coilo nol piooico oqiipmonl
llomsolvos, ooclivoly comploloo llis ooiogilalion piocoss. As a iosill, lloio
was consiooiaLlo onliy (ano oxil) in llo socloi Lolwoon 1007 ano 1087, oio
Loll lo oomoslic ano foioign piooicois. Olloy ano Ialos nisl iso soplis-
licaloo oconomoliic loclniqios lo oslimalo llo paiamolois of a piooiclion
ialio) . Gioon ano Mayos (1001) nno a similai iosill on UK oala. Soo also llo oiscission
in soclion 4 Lolow.
Soo Jovanovic (1082) foi a foimalisalion of mailol soloclion.
Soo Olloy ano Ialos (1000: 1200-1270) foi a oosciiplion of llo inoisliy ano a slalislical
accoinl of onliy ano oxil in llo poiioo.
18
finclion foi llo inoisliy, ano llon iso lloso oslimalos lo inooislano llo
iolo of loclnological clango ano ooiogilalion in oxplaining llo clangos in
llo oisliiLilion of planl-lovol poifoimanco Lolwoon 1074 ano 1087.
Jloy nno llal il is llo laigoi slaio in oilpil of llo moio piooiclivo nims
wlicl oxplains llo iiso in piooiclivily in llo inoisliy: llo piooiclivily
giowll llal followoo iogilaloiy clango soomoo lo iosill fiom llo oownsizing
(fioqionlly llo sliloown) of (oflon olooi) inpiooiclivo planls, ano llo ois-
piopoilionalo giowll of piooiclivo oslaLlislmonls (oflon now onlianls)".
Jlo iolo playoo Ly oxil ano onliy in incioasing piooiclivily is connimoo
also Ly ioconl slioios on Loll US ano UK oala. Disnoy, Haslol ano Hooon
(2000) also nno llo oxil ano onliy of sodqwv is impoilanl in oxplaining pio-
oiclivily incioasos. Jlo gioip of singlo-oslaLlislmonl nims oxpoiioncoo no
piooiclivily giowll al llo nim-lovol: llo piooiclivily giowll of llis gioip
camo onliioly fiom onliy ano oxil. Lilowiso, wlon looling al llo gioip of
milli-oslaLlislmonl nims, lloy nno llal mosl of llo piooiclivily giowll of
lloso nims is oio lo closing oown of llo loss omcionl planls ano llo oponing
of now ano moio omcionl planls. In lloii papoi, Disnoy ol al. (2000) also
caiiy oil a oolailoo analysis of llo impacl of compolilion ipon piooiclivily
ano connim llal an incioaso in mailol powoi (moasiioo Ly oilloi mailol
slaios oi ionls) iooicos Loll llo lovol ano giowll of piooiclivily.
Ovoiall, il sooms llal ompiiical woils connim llo impoilanl iolo playoo
Ly compolilion in solocling llo mosl omcionl nims ano llis iaising piooic-
livo omcioncy. Jlis las also an aooilional implicalion foi compolilion policy:
if loss omcionl nims woio piolocloo oi siLsioisoo, llis woilo piovonl mailol
compolilion fiom solocling llo Losl nims, wlicl will aclially iosill in ligloi
piicos ano lowoi wolfaio.
Olloy ano Ialos (1000: 1200).
Ioi llo US, soo Iosloi, Halliwangoi ano Kiizan (1008). In an oailioi woil, Laily,
Hillon ano CampLoll (1002) lao foino llal moio llan onliy ano oxil, piooiclivily giowll
was mainly oio lo incioasing oilpil slaios in ligl-piooiclivily planls ano oocioasing
oilpil slaios in low-piooiclivily onos. Ioi llo UK, soo Lainos ano Haslol (2000). Soiling
(oi oxloinal")oocls, i.o. piooiclivily incioasos oio lo onliy oi giowll of moio omcionl
planls ano oxil of loss omcionl planls is foino lo accoinl foi ioiglly 80/ lo 00/ of
piooiclivily incioasos, accoioing lo oioionl oala ano slioios. Jlo iomaining is accoinloo
foi Ly inloinal giowll", i.o. impiovoo piooiclivily al llo planl lovol.
Jloy also aigio llal lloio is a polonlial soloclion Lias in analysos lilo in Nicloll (1000)
wlicl lool al piooiclivily giowll in a samplo of vxuylylqj nims (soo Disnoy ol al., 2000:
22). Coiiocling foi llis Lias iooicos Lil ooos nol oliminalo llo impacl of compolilion
ovoi piooiclivily.
14
616 Qxpehu ri upv dqg zhoiduh
Sinco mailol powoi oocioasos will llo nimLoi of nims in llo inoisliy, ono
migll Lo lomploo lo conclioo llal llo laigoi llo nimLoi of nims llo ligloi
wolfaio. Jlis is nol llo caso, lowovoi, wlon nims lavo lo incii (iociiionl
oi sol-ip) nxoo cosls. Inoooo, llo piosonco of nxoo cosls - wlicl givos iiso
lo scalo oconomios - implios llo oxislonco of a liaoo-o. On llo ono lano,
a ligloi nimLoi of nims onlails moio compolilion in llo mailol ano lowoi
piicos, wlicl inooiLlooly incioasos consimoi siiplis (ano allocalivo om-
cioncy). On llo olloi lano, il also onlails a oiplicalion of nxoo cosls, wlicl
iopiosonls a loss in loims of (slalic) piooiclivo omcioncy. Jlo nol oocl on
wolfaio is a piioii amLigiois, as loclnical soclion 8..2 slows.
Jlis liaoo-o Lolwoon allocalivo ano piooiclivo omcioncy (a laigoi nim-
Loi of nims incioasos compolilion ano oiivos piicos oownwaio Lil al llo
samo limo involvos a loss in oconomios of scalo) implios llal a policy aimoo
al maximising llo nimLoi of nims in any givon inoisliy woilo Lo insoino.
If an ailloiily liioo nol jisl lo giaianloo llal onliy is possiLlo in an in-
oisliy ano llal all nims compolo on oqial gioinos, Lil also liioo lo iso
siLsioios oi olloi inoisliial policy insliimonls lo aclivoly piomolo onliy in
an inoisliy oi lo ailincially piovonl nims fiom oxiling, llis woilo conliasl
will an oconomic wolfaio ciiloiion.
Jloso consiooialions sloilo acl as a waining llal compolilion policy is
aLoil ghihqglqj frpshwlwlrq ano is novoi aLoil ghihqglqj frpshwlwruv wlicl
aio loss omcionl. In pailicilai, wo lavo soon in claploi 1 llal in many casos
anliliisl laws lavo liioo lo oofono small nims as sicl (llal is, in llo aLsonco
of an aLiso Ly laigo nims, ano jisl Locaiso llo lalloi onjoy a moio omcionl
scalo of piooiclion). Jlis migll Lo a logilimalo polilical oi social oLjoclivo,
Lil il is nol jislinaLlo fiom an oconomic wolfaio poispoclivo: lwisling" llo
mailol so as lo lavo moio nims llan mailol foicos lofl alono woilo sippoil
will oocioaso wolfaio.
617 Frqfoxvlrqv
Jlis soclion las consiooioo lwo aigimonls siggosling llal mailol powoi
oocioasos piooiclivo omcioncy. Jlo nisl is llal compolilion (wlicl lowois
Jlis conclision is ioinfoicoo wlon nims aio nol symmoliic (as in soclion 8..1). Wlon
lloio oxisl nims piooicing al ligloi cosls, lloii oxil fiom llo inoisliy migll caiiy aooi-
lional omcioncy gains.
1
mailol powoi) pislos managois lo malo ooil ano Lo moio piooiclivo: llo
socono is llal compolilion solocls llo moio omcionl nims, wlicl iosills in
lowoi mailol piicos. Loll llooiy ano ovioonco soom lo givo somo sippoil lo
lloso aigimonls allloigl will somo qialincalion. Ono sloilo oxpocl llal
inliooicing moio compolilion in a monopolislic inoisliy is wolfaio impiov-
ing, Lil il is possiLlo, in piinciplo, llal incioasing compolilion in an inoisliy
wloio a lol of compolilion alioaoy oxisls pljkw nol incioaso wolfaio fiilloi.
In a similai voin, il is nol nocossaiily liio llal llo laigoi llo nimLoi of
nims in an inoisliy llo ligloi wolfaio, Locaiso of llo inomcionl oiplicalion
of nxoo cosls.
618 Frpshwlwlrq dqg surgxfwlyh h!flhqf|-
In llis loclnical soclion, I piosonl lwo simplo moools. Jlo nisl illislialos
low compolilion migll solocl llo mosl omcionl nims: llo socono analysos
llo iolalionslip Lolwoon nimLoi of nims ano wolfaio.
61814 Frpshwlwlrq dqg vhohfwlrq ri upv= Dq h{dpsoh-
Jo illislialo llo possiLlo Lononcial oocl of compolilion in solocling llo mosl
omcionl nims, consiooi llo following oxamplo. Assimo a lomogonois gooo
inoisliy wloio nims compolo in qianlilios. Iiims lavo oioionl omcioncy
lovols (oioionl loclnologios): oil of a popilalion of : nims, lloio aio :/
nims will a ligl maiginal cosl loclnology c ano :(1/) moro omcioni nrms
whoso iochnology allows ihom io proouco ai a marginal cosi c . Assumo ihai
oomano is givon hy j = 1Q, whoro Q is iho aggrogaio ouipui. Q =

, whoro wo havo oonoioo wiih 1 ano H rospociivoly iho soi of low-cosi

ano high-cosi nrms. 1ho proni funciions aro givon hy : = (j(Q) c )
for any H ano hy : = (j(Q) c ) for any i 1. Ono can ihon wriio
iho IOCs d: ,d = 0 ano d: ,d = 0:
Similar commonis coulo ho maoo hy looping nxoo iho numhor of nrms ano looling
ai iho ofoci of ioughor proouci marloi compoiiiion on wolfaro in a siiuaiion whoro oniry
is froo, a siiuaiion analysoo hy oÀspromoni ano Moiia (2000). Sinco nrms havo io covor
nxoo soi-up cosis of oniry, ano aniicipaio lowor pronis whon marloi compoiiiion is ioughor,
ihoro oxisis a posiiivo rolaiionship hoiwoon iho ioughnoss of compoiiiion ano inousirial
conconiraiion. As a rosuli, marlois whoro compoiiiion is iho ioughosi mighi noi ho
associaioo wiih iho highosi wolfaro sinco fowor nrms will co-oxisi ai iho oquilihrium. Yoi,
a siiuaiion whoro cariols aro allowoo (ihai is, a monopolisiic ouicomo) is iho worsi in
iorms of wolfaro. Exorciso 4 oovolops ihis rosuli in a simplo oxamplo.
10
1
c = 0, (1)
1
c = 0 (2)
Iocusing on iho symmoiric soluiion (symmoiric in iho sonso ihai nrms
of a givon iypo prooucos iho samo ouipui ai oquilihrium), iho IOCs can ho
simplinoo as follows:
=
1 c (1 /):
1 /:
; =
1 c /:
1 (1 /):
, (8)
whoro ano oonoio iho ouipui of a high cosi ano a low cosi nrm
rospociivoly. 1ho oquilihrium soluiion can ihon oasily ho founo:
=
1 c :(1 /)(c c )
1 :
; =
1 c :/(c c )
1 :
. (4)
1ho oquilihrium prico is givon hy:
j =
1 :/c :(1 /)c
1 :
. ()
Noio ihai iho high cosi nrms can proouco a non-nogaiivo ouipui if ano
only if c _ [1 :(1 /)c [ , [1 :(1 /)[. 1his conoiiion hocomos iho
moro siringoni iho largor :. In oihor woros, if wo proxy iho oogroo of com-
poiiiion in iho inousiry wiih iho numhor of nrms which oporaio in such an
inousiry, ihon iho sirongor compoiiiion iho moro liloly ihai iho inomcioni
nrms will oxii ai oquilihrium.
Supposo ihoroforo ihai compoiiiion hrings iho moro inomcioni nrms io
oxii iho marloi. I now show ihai, oospiio iho oocroaso in iho numhor of
sollors, prico in iho inousiry will oocroaso. In oihor woros, oxii is hononcial
hocauso ii allows a roallocaiion of ouipui from inomcioni io omcioni nrms.
1o soo ihis, compuio iho oquilihrium if iho inomcioni high cosi nrms oxii.
1horo will ho only iho (1 /): nrms wiih iooniical low cosi iochnology. 1ho
oquilihrium por nrm quaniiiy ano prico will ho:
Anoihor way io oxpross iho iooa ihai compoiiiion incroasos omcioncy coulo ho io
proxy norcor compoiiiion noi hy iho largor numhor of nrms, hui hy a swiich from Cournoi
io Lorirano: iho high-cosi nrms woulo immooiaioly oxii iho marloi.
17
=
1 c
1 (1 /):
; j =
1 :(1 /)c
1 :(1 /)
. (0)
Ono can oasily chocl ihai j j if c [1 :(1 /)c [ , [1 :(1 /)[.
Lui iho lasi inoqualiiy is procisoly iho samo conoiiion unoor which iho high
cosi nrms oxii iho inousiry. 1horoforo, iho oxii of iho inomcioni nrms im-
provos wolfaro ihrough a roouciion in iho marloi pricos.
61815 Wrr pdq| upv lq wkh lqgxvwu|-
Consioor a homogonous gooo inousiry wiih : nrms which aro porfocily sym-
moiric. 1ho nrms simulianoously oocioo on iho quaniiiy io hring io iho
marloi, ano havo a proouciion cosi C = c 1, whoro c is iho marginal cosi
ano 1 a nxoo cosi. Marloi oomano is characiorisoo hy j = 1 Q, j hoing
iho marloi prico ano Q iho aggrogaio ouipui.
Each nrm i will chooso io maximiso iis pronis:
H = (1
) c . (7)
1ho nrsi-oroor conoiiion is givon hy:
=
_
_
1 c
_
_
,2. (8)
Ly imposing symmoiry, so ihai = = , wo ohiain iho oquilihrium
soluiion (ii is siraighiforwaro io chocl ihai socono-oroor conoiiions aro sai-
isnoo):
=
1 c
: 1
. (0)
Ly suhsiiiuiion, ono can also ohiain iho oquilihrium prico as a funciion
of iho numhor of nrms oporaiing in iho inousiry: j = (1 :c),(: 1).
Noio ihai whon iho numhor of nrms : incroasos, iho marloi prico oocroasos
Soo Viclors (100) for a moro gonoral iroaimoni of iho homogonous gooo moool wiih
Cournoi compoiiiion ano asymmoirios. In pariicular, ii is noi always iruo ihai oxii hrings
ahoui a wolfaro riso, alihough ihis occurs unoor fairly milo assumpiions in iho caso whoro
consumor ano prooucor surplus havo iho samo woighi in iho wolfaro funciion (Viclors`
papor also consioors iho caso whoro consumor surplus has a largor woighi ihan pronis).
18
ano iho aggrogaio ouipui Q = : incroasos, so ihai iho consumor surplus
unamhiguously risos wiih :. Inoooo, dCo,d: 0, sinco:
Co = (1 j )Q ,2 =
: (1 c)
2(: 1)
. (10)
Howovor, a largor numhor of nrms hrings ahoui an inomcioni muliiplica-
iion of nxoo cosis. 1his can ho oasily soon hy noiicing ihai iho inoivioual
nrm`s proni is:
: =
(1 c)
(: 1)
1. (11)
As a rosuli, iho prooucor surplus in iho inousiry is: 1o = [:(1 c) [ , [(: 1) [
:1, which is oocroasing wiih :. In pariicular, noio ihai as : incroasos ano
ovoniually ionos io innniiy ioial wolfaro hocomos nogaiivo ano ihon ionos io
.
1horoforo, a policy which aims ai maximising iho numhor of nrms in iho
inousiry woulo ho in conirasi wiih an ohjociivo of oconomic omcioncy.
7 G|qdplf h!flhqf|
So far I havo consiooroo siaiic, raihor ihan oynamic, proporiios of marloi
powor: sociion 2 showoo ihai a monopoly involvos an allocaiivo inomcioncy,
sinco a nrm (for any givon iochnology) chargos ioo high a prico: sociion 8
showoo ihai monopoly involvos a proouciivo inomcioncy, sinco a monopolisi
mighi noi aoopi iho mosi omcioni iochnology nn.|nh|. 1his sociion consio-
ors oynamic omcioncy, which rofors io iho oxioni io which a nrm inirooucos
: prooucis or procossos of proouciion. In oihor woros, whoroas sociion
8 siuoioo whoihor compoiiiion pushos nrms io oporaio ai or closor io iho
curroni omcioni froniior of proouciion, ihis sociion consioors whoihor com-
poiiiion pushos ihom io movo iho omcioni froniior of proouciion fasior or
moro forwaro.
Sociion 4.1 shows ihai a monopolisi mighi inoooo havo lowor inconiivos
io innovaio, ihus aooing oynamic inomcioncy io iho lisi of wolfaro lossos
croaioo hy a monopoly. Howovor, ii is noi saio ihai a monoionic rolaiionship
oxisis hoiwoon marloi powor ano innovaiion. Sociion 4.2 shows ihai nrms aro
unliloly io malo any invosimoni unloss ihoy can oxpoci io appropriaio ihom.
Exorciso 8 analysos iho oquilihrium of ihis gamo whon oniry is onoogonous.
10
1his implios ihai iho oxpociaiion of marloi powor has an imporiani rolo as
ii givos nrms inconiivos io I:D, a ihomo which will ho furihor analysoo in
sociion .
714 Wkh orzhu lqfhqwlyhv wr lqqrydwh ri d prqrsrolvw
In whai follows, I uso a simplo oxamplo io show ihai a monopolisi mighi
ho oynamically inomcioni hocauso ii has liiilo inconiivo io aoopi now ioch-
nologios. Supposo ihai a monopolisi has iho possihiliiy io aoopi a procoss
innovaiion which allows ii io proouco ai iho lowor marginal cosi c raihor
ihan ai iho curroni cosi c hy paying a nxoo cosi 1. Call H ano H ro-
spociivoly iho proni maoo unoor iho (low-cosi) now ano iho (high-cosi) olo
iochnology. 1o oocioo whoihor io malo ihis innovaiion or noi iho monop-
olisi will havo io comparo iho nJJ..:n| proni H H ii will malo wiih
iho nxoo ouilays 1 ii has io spono. 1ho now iochnology is aoopioo only if
H H 1.
Consioor now iho samo oocision ahoui whoihor io aoopi iho now ioch-
nology or noi for a nrm which oporaios in a compoiiiivo onvironmoni. Wiih
iho curroni iochnology oniailing marginal cosi c ihai all nrms havo, nrms
chargo j = c ano malo zoro proni: H = 0. Supposo now ihai ono of ihom
has iho chanco io aoopi iho now iochnology which allows ii io oporaio ai cosi
c , whoroas all oihor nrms will siill ho oporaiing wiih iho olo iochnology.
Ly aoopiing iho now iochnology, iho nrm will havo iho possihiliiy io malo
a proni H . Honco, ihis nrm oporaiing unoor compoiiiion will innovaio if
H 1, whoroas iho monopolisiic nrm will innovaio only if H H 1, a
much siricior conoiiion. 1horoforo, iho monopolisi woulo havo lowor incon-
iivos io innovaio givon ihai ii woulo consioor iho aooiiional" proni hroughi
hy iho now iochnology, whilo a compoiiiivo nrm woulo consioor iho wholo
proni hroughi hy ii.
1his simplo oxamplo illusiraios iho iooa ihai monopolisiic nrms ofion
1his is iho caso, for insianco, whon iho innovaiion is porfocily proiocioo hy a paioni.
Ior simpliciiy, I am assuming horo ihai a nrm oporaiing unoor Lorirano (or porfoci)
compoiiiion malos iho samo proni as llo monopolisl Ly aoopling llo samo low cosl
loclnology. Jlis nooos nol Lo llo caso. Joclnically, I am assiming loio llal llo innova-
lion is oiaslic". Jlo loclnical soclion 4.8.1 slows llal llo samo qialilalivo iosills aio
oLlainoo if ono assimos llal llo innovalion is non-oiaslic".
Jlo piopoily llal a monopolisl gains loss fiom an innovalion llan a compolilivo nim
is also lnown as Aiiow`s uhsodfhphqw hhfw.
20
lavo lowoi inconlivos lo innovalo llan nims wlicl faco iivals. Jlo anal-
ysis of llo foimal moools in soclions 4.8.1 ano 4.8.2 connims llal a monopoly
is oynamically inomcionl, in llal il iooicos llo inconlivos lo innovalo ano
invosl. In a nilsloll, llo inliilion Lolino llis iosill is as follows. Compo-
lilion pislos nims lo invosl, in oiooi lo impiovo lloii compolilivo posilion
iolalivo lo lloii iivals. Jlo aLsonco of compolilion (wlolloi Locaiso lloio
is only a nim, oi Locaiso lloio aio sovoial nims Lil lloy collioo) iomovos
llis inconlivo lo innovalo, ano llis in liin moans llal a monopolisl will Lo
loss omcionl (loss innovalivo) llan nims wlicl opoialo inooi compolilion.
Jlis oxamplo cannol Lo gonoialisoo lo conclioo llal llo moio compoli-
lion oxisls in a mailol llo moio liloly llal nims will innovalo. Jloio is an
olo ooLalo in llo oconomic liloialiio on llo linl Lolwoon monopoly powoi
ano innovalions. Jlis ooLalo goos as fai Lacl as Sclimpoloi, wlo siggosloo
llal monopoly powoi oncoiiagos iosoaicl ano oovolopmonl ooils.
Loll llooiolical ano ompiiical iosoaicl on llo linl Lolwoon mailol sliic-
liio ano innovalion is nol conclisivo, ovon lloigl a mioolo gioino" onvi-
ionmonl wloio lloio oxisls somo compolilion Lil also ligl onoigl mailol
powoi coming fiom llo innovalivo aclivilios, migll Lo llo mosl conoicivo
lo I:D oilpil. Jlis is piocisoly llo iosill wlicl omoigos fiom llo moool
analysoo in llo loclnical soclion 4.8.2. In a conloxl wloio llo I:D cloicos
of nims aio slioioo, ano llo nimLoi of nims in llo inoisliy is lalon as a
moasiio of llo oogioo of compolilion in llo inoisliy, incioasing compolilion
wlon lloio is alioaoy micl of il is nol nocossaiily gooo foi wolfaio. Inoooo,
nims` inconlivos lo innovalo aio ooloiminoo nol only Ly llo oxislonco of
compolilion Lil also Ly llo possiLilily of appiopiialing llo iosills of lloii
invoslmonl. If compolilion is loo sliong, appiopiiaLilily is iooicoo, ano so
llo inconlivo lo invosl ano innovalo.
Jlo iosill is llal somo inloimooialo lovols of compolilion migll Lo op-
limal foi innovalions ano piooiclivo omcioncy, a iosill wlicl is foino also
Anolloi ioason wly monopolisls migll innovalo loss comos fiom llo managoiial slacl
aigimonl analysoo aLovo: qiiol lifo ooos nol pil onoigl piossiio lo oo Lolloi onlo a
monopolisl.
Aglion, Dowaliiponl ano Ioy (1000) analyso a giowll moool wloio onliopionoiis oo
nol aim al maximising pionls, Lil aio consoivalivo": lloy wanl lo avoio llo piivalo cosl
of aoopling now loclnologios ano lloy will aoopl llom in so fai as lloy will allow llo
nim lo avoio Lanliiplcy. Jlo papoi slows llal in llis solling compolilion oisciplinos llo
onliopionoiis ano incioasos aooplion of now loclnologios ano giowll.
Soo Scloioi ano Ioss (1000: claploi 17) foi a ioviow.
21
in a complololy oioionl llooiolical fiamowoil (llal Lasoo on onoogonois
giowll moools) ano is connimoo in ompiiical woils, llal oo nno an invoiloo
U iolalionslip Lolwoon compolilion ano innovalion.
Nolo, lowovoi, llal il woilo Lo oxliomoly oimcill lo iso llis iosill
foi piaclical policy piiposos, foi inslanco lo picl ip llo iigll" lovol of
compolilion. Dioionl assimplions on paiamolois ano on llo gamo Loing
playoo Ly llo nims woilo givo oioionl iosills as lo wlicl onos sloilo Lo llo
oplimal lovols of compolilion in llo mailolplaco. Honco, inloivoning on givon
inoisliios Ly iooicing llo lovol of compolilion (wlalovoi llo moclanism
lo oLlain il) in oiooi lo gol closoi lo somo llooiolically oplimal lovol of
compolilion woilo nol Lo jislinoo Ly any ioLisl llooiy. Jlo only soino
ano ioLisl conclision wo can ooiivo fiom analysos lilo llo ono aLovo is llal
a monopoly (oi a cailol) is woiso llan compolilivo mailol sliicliios, Locaiso
il fails lo slimilalo oynamic omcioncy. Accoioingly, slops sloilo Lo lalon
lo iosloio compolilion in mailols wloio lloio is nono.
715 Lqfhqwlyhv wr lqyhvw lq U)G
Compolilion slimilalos innovalions, Lil so ooos llo oxpoclalion of Loing aLlo
lo appiopiialo ils invoslmonl in I:D llioigl mailol pionls. Jo slow llo
impoilanco of mailol powoi as inconlivo lo innovalo, ioconsiooi llo simplo
oxamplo of soclion 4.1, Lil assimo llal wlon lloio is compolilion no nim
can appiopiialo llo innovalion: if ono nim aoopls llo loclnology all olloi
nims aio aLlo lo piooico al llo samo cosl as woll, poilaps Locaiso lloio is no
palonl piolocling llo innovaling nim, oi poilaps Locaiso of policios wlicl
oLligo nims lo givo away lloii loclnology lo iivals (frpsxovru| olfhqvlqj).
In llis caso, no nim las an inconlivo lo innovalo: oiision of llo loclnology
piovonls an innovaloi fiom Lononling fiom il, sinco afloi an innovalion all
nims woilo claigo j = c ano malo zoio pionl: H = 0. Jlo nxoo cosl 1 of
llo innovalion coilo novoi Lo iocovoioo, ano no innovalion will aiiso inooi
compolilion.
Jlis simplo oxamplo is aomillooly oxliomo (soo soclion 4.8.8 Lolow foi
a sligllly moio gonoial solling), Lil ils piiposo is lo oiaw llo ioaooi`s al-
lonlion lo llo facl llal mailol powoi (oi llo oxpoclalion lo oxoiciso il) las
Aglion ol al. (2002) piosonl a giowll moool llal siggosls sicl a iolalionslip ano
conoicl an ompiiical losl (on UK panol oala) of llis piooiclion.
Lxaclly llo samo inloipiolalion sloilo Lo applioo lo llo iosill oLlainoo Ly
oÀspiomonl ano Molla (2000) ano illislialoo in oxoiciso 4.
22
an impoilanl iolo in mainlaining llo nims` inconlivos lo innovalo, invosl, in-
liooico now gooos, ano impiovo piooicl qialily. Lliminaling mailol powoi
cannol Lo an oLjoclivo llal any piLlic policy sloilo piisio, as I will aigio
in soclion .
716 Prghov ri frpshwlwlrq dqg lqqrydwlrq-
Jlis loclnical soclion piovioos a foimalisalion of somo of llo aigimonls
maoo aLovo.
71614 Prqrsro| jlyhv ihzhu lqfhqwlyhv wr lqqrydwh= dq h{dpsoh-
Hoio I piosonl a simplo oxamplo will ooloiminislic I:D wlicl illislialos
llo lowoi inconlivos lo innovalo in a monopoly llan in a oiopoly.
Prqrsro| Consiooi nisl a monopolisl opoialing al a cosl c ano facing
a linoai oomano Q = 1 j. Il can aoopl a loclnology wlicl givos lowoi
maiginal cosl c = c a (will a
_
0, c
_
) if ii pays a nxoo cosi 1. 1ho
monopolisi nrsi oocioos whoihor io innovaio or noi, ano ihon oocioos how
much io soll in iho marloi.
1ho monopolisi`s proni is givon hy H = (j c )(1 j), wiih i = |, /
ooponoing on whoihor ii has low or high cosi (ihai is, if ii has innovaioo or
noi). Irom iho IOCs dH,dj = 0, ii is siraighiforwaro ihai iho opiimal prico
is givon hy j = (1 c ),2.
1horoforo, if ii ooos noi innovaio, iho monopolisi will chargo j = (1c ),2
ano oarn H = (1c ) ,4. If ii ooos innovaio, ii will chargo j = (1c a),2
ano oarn iho gross proni H = (1 c a) ,4, hui will havo io pay iho cosi
1.
Honco, iho monopolisi will innovaio if:
^ H H =
a
4
_
a 2(1 c )
_
_ 1. (12)
Gxrsro| Consioor now iho ouopoly caso. 1ho iwo nrms (which soll a
homogonous gooo) faco iho samo marloi oomano Q = 1 j as ahovo. 1ho
nrm which chargos iho lowosi prico j will faco all oomano, ano iho ono wiih
iho highosi prico will goi no oomano. If hoih nrms chargo iho samo prico,
ihoy will sharo oqually oomano.
28
1hoy play iho following gamo. In iho nrsi siago, ihoy simulianoously havo
io oocioo whoihor ihoy wani io pay iho nxoo cosi 1 io aoopi iho iochnology
which givos lowor marginal cosi c a, or loop iho curroni iochnology giving
marginal cosi of proouciion c . In iho socono siago, ihoy simulianoously
chooso pricos. I lool for iho suh-gamo porfoci Nash oquilihrium in puro
siraiogios of ihis gamo.
1:. .nj ] | jnn.
If hoih nrms chooso io innovaio in iho nrsi porioo, in iho socono porioo
ihoy will hoih havo iho samo cosi c a. 1his is iho sianoaro Lorirano
gamo (soo chapior 8.8), ano iho only soluiion is ihai hoih nrms will chargo
ai marginal cosi (j = c a) ano goi zoro gross proni. If nono innovaio in
iho nrsi porioo, nrms will again chargo ai marginal cosi ai oquilihrium (ihis
iimo, howovor, j = c ) ano goi zoro proni.
If only ono innovaios in iho nrsi porioo, ai iho prico suh-gamo wo havo
iwo possihlo siiuaiions: oiihor iho innovaiing nrm sois iho monopoly prico
(if ihis is iho lowor ihan iho marginal cosi of iho non-innovaiing nrm): or
ii sois a prico slighily holow iho marginal cosi of iho non-innovaiing nrm (if
iho monopoly prico is highor ihan iho rival`s cosi). 1ho nrsi caso rofors io
a orasiic" innovaiion, iho socono io a non-orasiic" innovaiion. I assumo
ihai iho innovaiion is non-orasiic, ihai is iho marginal cosi roouciion is small
onough: a _ 1 c . (Exorciso oxaminos iho orasiic" innovaiion caso.)
1hon iho innovaiing nrm will chargo a prico slighily lowor ihan iho rival,
c , ano malo gross proni H = a(1 c ).
1::n.: .nj ] | jnn.
Ai iho nrsi siago of iho gamo nrms corrocily aniicipaio iho proni ihoy
malo in iho following siago. Iirms` payofs aro as follows. If hoih nrms
innovaio, ihoy will hoih goi 1. If nono innovaio, ihoy will hoih goi 0. If
only ono nrm innovaios, iho innovaiing nrm will goi H 1 ano iho oihor
nrm 0.
1his gamo has iho following soluiions: If H _ 1 iho only oquilihrium
is ono whoro ono nrm innovaios ano iho oihor ooos noi. If H < 1, ihon no
nrm will innovaio ai iho oquilihrium.
Frpsdulvrq ehwzhhq prqrsro| dqg gxrsro| Eiihor marloi siruc-
iuro ooos noi afoci iho aoopiion of innovaiion (innovaiions occur unoor
Oihor oquilihria in puro siraiogios aro oliminaioo hocauso in woally oominaioo siraio-
gios (soo chapior 8.8 for a oiscussion).
24
hoih marloi siruciuros, or oo noi occur unoor oiihor), or an oquilihrium
wiih innovaiion occurs unoor ouopoly hui noi unoor monopoly. Inoooo, ii
can ho oasily soon ihai H _ ^ for a _ 2(1 c ), which is in iho oo-
main wo aro consiooring. 1horoforo, for valuos of nxoo cosi of innovaiion
such ihai H _ 1 a
_
a 2
_
1 c
__
,4, ihoro will ho an innovaiion un-
oor ouopoly hui noi unoor monopoly. Ior valuos of nxoo cosi such ihai
1 _ a
_
a 2
_
1 c
__
,4, an innovaiion will occur in hoih marloi siruc-
iuros. Ior 1 H , no innovaiion will ho aoopioo unoor oiihor marloi
siruciuro.
1his analysis connrms ihai a monopolisi`s inconiivo io innovaio mighi
inoooo ho lowor ihan iho inconiivo of nrms which faco compoiiiors.
71615 U)G dqg frpshwlwlrq--
I prosoni now anoihor simplo moool, whoro nrms nrsi invosi in I:D ano
ihon compoio in quaniiiios, io show ihai iho oogroo of marloi compoiiiion
has an ofoci on oynamic omcioncy. Moro pariicularly, a monopolisiic marloi
siruciuro is going io loao io lowor I:D invosimonis (ano ihoroforo highor
proouciion cosis) ihan a marloi siruciuro whoro sovoral nrms cooxisi ano
hohavo non-cooporaiivoly.
Consioor iho oomano funciion for a homogonoous gooo j = c Q, wiih
Q hoing iho sum of inoivioual ouipui. Iirm i (i = 1, ..., :) is characiorisoo
hy marginal cosis c = C a , whoro a is iho I:D invosimoni maoo hy
nrm i. 1ho cosi of I:D is givon hy iho funciion qa ,2, whoro q 0 is a
paramoior oxprossing iho omcioncy of I:D proouciion.
1ho gamo is a simplo iwo-siago gamo. Iirms simulianoously invosi in
I:D ai iho nrsi siago: ihoy ihon simulianoously chooso quaniiiios in iho
socono siago. As usual, I lool for iho suh-gamo porfoci Nash oquilihrium of
iho gamo.
Ai iho |n. .nj of iho gamo, ii is oasily chocloo ihai iho (Cournoi)
oquilihrium ouipui is givon hy:
=
c c
(c c )
1 :
, (18)
ano iho proni will ho givon hy H = ( ) . (Soo chapior 8.8 for an iniro-
ouciion io iho Cournoi moool.)
I ihoroforo lool ai procoss innovaiions, ano assumo ihai I:D is a ooiorminisiic, raihor
ihan siochasiic. 1his simplinos iho moool wiihoui oopriving ii of iniorosiing insighis.
2
Ai iho :. .nj of iho gamo, oach nrm will havo iho following proni
funciion:
: =
_
c (C a )
(a a )
1 :
_

q
2
a . (14)
Ly ialing iho nrsi oorivaiivo wo ohiain iho IOC for iho i-ih nrm:
d:
da
=
2:
_
c C a
(a a )
_
(1 :)
qa = 0. (1)
Noiico ihai hy ialing all iho rival nrms` I:D lovols a ( ,= i) as givon
ano oqual io a (a = a = a, for , / ,= i, / ,= ), iho marginal ofoci of I:D
on nrm i`s proni can ho wriiion as:
d:
da
=
2:(c C a )
(1 :)

2:(: 1) (a a)
(1 :)
qa = 0. (10)
1his is holpful hocauso ii rovoals ihai ihoro aro ihroo oiforoni ofocis ai
play whon oocioing iho opiimal I:D lovols. 1ho nrsi ono is whai wo coulo
lahol n::.nh.|.j : iho largor oomano (or noi oomano, c C) iho
sirongor iho inconiivo io oo I:D. 1his iorm oocroasos wiih :, ano ii is
highosi whon : = 1, i.o. whon ihoro is a monopoly. 1ho socono iorm is a
n..: . Whon ihoro is a monopoly (: = 1), ihis iorm oisappoars
comploioly, whilo ii is siricily posiiivo whon ihoro is compoiiiion: ii ihoroforo
capiuros iho inconiivo io innovaio ooiorminoo hy iho oxisionco of compoii-
iion. Noiico ihai iho compoiiiion ofoci incroasos wiih :, hui a slowor paco
as : risos: 2:(: 1) ,(1 :) is concavo in :, ano roachos an asympioio
whon : . 1ho ihiro iorm capiuros insioao iho marginal cosi of I:D,
ano iho omcioncy paramoior q is iho only paramoior afociing ii. Ii is iho
iniorplay hoiwoon ihoso ofocis which will ooiormino iho I:D lovols choson
ai oquilihrium hy nrms ano how iho numhor of nrms afocis iho oquilihrium
soluiions.
If wo focus on iho symmoiric oquilihrium a = a = a wo ohiain iho
oquilihrium I:D lovol for oach nrm:
a =
2:(c C)
q(1 :) 2:
. (17)
1ho socono-oroor conoiiion roquiros j A 5q @+4.q, . Jlo slaLilily conoilion ioqiiios
insloao
_
g @g{ g{
_
@
_
g @g{
_
@ 5q+q 4,@
_
j+4 .q, 5q
_
? 4. Jlis is salisnoo
foi j A 5q+5q 4,@+4 . q, . Jlo lalloi is cloaily a moio sliingonl conoilion. Nolo llal
an incioaso in q ligllons llis conoilion. Howovoi, a simcionl conoilion foi slaLilily lo Lo
mol is llal j A 7.
20
Iiom llis solilion, ono can llon oLlain Ly siLslililion llo oqiiliL-
iiim lovols of qianlily, piico ano pionl (omilloo foi sloilnoss). Jlo lo-
lal lovol of I:D in llo inoisliy will Lo givon Ly 1 = :a = 2: (c
C), [q(1 :) 2:[. Nolo llal:
d1
d:
=
2:(c C) (q(1 :) :)
[q(1 :) 2:[
0. (18)
Jlo lasl oxpiossion lolls is llal llo moio nims in llo inoisliy (llal is,
llo moio compolilion in llo mailolplaco) llo laigoi llo amoinl of I:D
caiiioo oil. Howovoi, llis ooos nol nocossaiily moan llal wolfaio incioasos
as : incioasos. Il migll Lo llal lloio oxisls loo micl I:D will iospocl lo
wlal is oplimal foi socioly (llal is, llal loo many iosoiicos aio oovoloo lo
I:D).
Jo llis piiposo, lol is nisl compilo wolfaio inooi compolilion. As is
slanoaio, wo lalo wolfaio as \ = Co 1o. In oii caso:
Co =
(c j ):
2
=
[(c C):q (1 :)[
2 [q(1 :) 2:[
, (10)
ano lolal pionls aio:
1o = :: = :
(c C) q (q(1 :) 2: )
[q(1 :) 2:[
. (20)
Jloiofoio, wolfaio will Lo givon Ly:
\ =
(c C) :q ((2 :)q(1 :) 4: )
2 [q(1 :) 2:[
, (21)
wlicl is a non-monolonic finclion in :.
INSLIJ Iigiio 2.4 Wolfaio ano nimLoi of nims
As slowoo in Iigiio 2.4, llo wolfaio finclion \ (:) incioasos ip lo
a coilain valio : (q) ano llon oocioasos, will a loiizonlal asymplolo al
\ = (c C) ,2. In olloi woios, an incioaso in compolilion (in llo sonso
of an incioaso in llo nimLoi of nims in llo mailol) fiom low inilial lovols
(wlon appiopiiaLilily is ligl) iaisos wolfaio: Lil wlon compolilion is laigo
onoigl, a fiilloi incioaso in il woilo oocioaso wolfaio, sinco an incioaso in
27
llo nimLoi of nims : ooos nol aoo micl lo I:D lovols (ano lonco qianlilios
solo in llo mailol) Lil il oocioasos pionls. Noio ihai whon : incroasos
ihoro will ho a largor numhor of nrms which havo io pay I:D cosis, ano ihis
ouplicaiion of cosis ooiorminos a proouciivo inomcioncy.
71616 Dssursuldelolw| dqg U)G-
Assumo a homogonous gooo ouopoly whoro nrms havo iniiial marginal cosi
lovols c. Marloi oomano is = c j: iho cosi funciion is: C = (c a
|a ) a , whoro a is iho I:D invosimonis maoo hy nrmi (i, = 1, 2: i ,= ).
Horo I:D ialos iho form of a procoss innovaiion (ii rooucos proouciion
cosi) ano for simpliciiy ii is ooiorminisiic. Also assumo ihai ihoro oxisi
I:D spillovors (or oxiornaliiios): a fraciion | [0, 1[ of iho I:D carrioo
oui hy a nrm i will hononi iis rival (ano vico vorsa). 1his is a cruoo
hui simplifying way io formaliso iho iooa ihai innovaiions can ho (parily
or comploioly) copioo, imiiaioo or rovorso-onginooroo hy rival nrms. 1ho
gamo is as follows. Iirsi, nrms havo io simulianoously oocioo ihoir I:D
invosimoni lovols a : ihon, ihoy compoio on pricos. 1ho ohjociivo horo is io
comparo oquilihrium ouicomos wiih ano wiihoui paionis.
Gxrsro| xqghu sulfh frpshwlwlrq Noio ihai ono can immooiaioly
rulo oui oquilihria whoro hoih nrms innovaio, sinco ai loasi ono nrm woulo
noi ho ahlo io rocovor iho nxoo cosi of I:D oxponoiiuros. Ai iho oquilihrium
of iho wholo gamo, only ono nrm innovaios. In gonoral, ihoro aro iwo possihlo
casos io consioor. (1) 1ho innovaiion is orasiic. In ihis caso, iho monopolisiic
prico of iho innovaiing nrm is lowor ihan iho cosi of iho non-innovaiing nrm.
Ior ihis io happon, iho following conoiiion musi holo: (cca),2 < c |a,
or: a _ (c c),(1 2|). (2) 1ho innovaiion is non-orasiic. In ihis caso,
a < (c c),(1 2|). I focus horo on non-orasiic innovaiions (ii can ho
showoo ihai ai iho oquilihrium of ihis spocinc moool iho opiimal lovol of iho
innovaiion corrosponos io a non-orasiic ono).
Loono (2000) nnos ihai incroasing compoiiiion (as proxioo hy a swiich from Cournoi
io Lorirano) whon nrms aro asymmoiric may loao io lowor I:D invosimonis. In inousirios
whoro iho iochnological gap is largor, iho laggaro`s gain from caiching up wiih iho loaoor
may fall wiih moro compoiiiion. A similar rosuli is also founo in Aghion oi al. (2002).
Soo also sociion 8..2 for anoihor oxamplo of ihis ouplicaiion ofoci.
Assumo for simpliciiy ihai imiiaiion ano rovorso onginooring aro cosiloss.
28
Loi us now lool ai I:D siago ano nno iho opiimal valuo of a. 1ho proni
funciion of iho innovaiing nrm will ho givon hy: : = a(1|)(cc|a)a .
Noio ihai a(1 |) is iho proni margin of iho innovaiing nrm: iho highor iho
spillovor | iho lowor iis marloi powor.
Irom solving d: ,da = 0 ii follows ihai iho funciion : has a maximum
ai a (|) = (1|)(cc), [2 2|(1 |)[, which is iho oquilihrium lovol of I:D.
Noio ihai iho highor iho spillovor | iho lowor iho I:D maoo ai oquilihrium.
Sdwhqw +qr vslooryhuv, Imagino now ihai a paioni is awarooo io iho
nrm which malos an innovaiion. As hoforo, wo lnow ihai iho iwo nrms
woulo compoio a la Lorirano: ai iho oquilihrium in puro siraiogios only ono
of ihom will oo a posiiivo amouni of I:D. 1ho iroaimoni is iho samo as in
iho provious caso, hui for iho pariicular valuo whoro | = 0, i.o., no spillovors
coulo ariso (iho paioni is proiociing iho innovaiing nrm from spillovors).
1ho opiimal lovol of I:D unoor paionis will ihoroforo ho a = a (| =
0) = (c c),2. Cloarly, a a (|) for all | 0: ihoro is always moro I:D
unoor paionis.
Frqfoxvlrqv In ihis simplo moool, a paioni improvos wolfaro. Locauso
of spillovors, I:D is a puhlic gooo. Sinco nrms aro noi ahlo io appropriaio
ihoir I:D oforis, ihoy will invosi loss in I:D ihan whai socioiy woulo
nno ii opiimal. 1ho paioni romovos iho nogaiivo oxiornaliiy givon hy iho
spillovors ano rosioros iho inconiivo io malo I:D.
Ii shoulo ho noioo, howovor, ihai ihis moool is raihor oxiromo in ihai ii
suggosis ihai paionis mighi ho opiimal whaiovor iho lovol of spillovors. 1his
nooos noi ho iho caso unoor moro gonoral moools. Horo ihoro aro homogonous
gooos ano prico compoiiiion, so compoiiiion is vory norco ano has a vory
sirong impaci on iho roiurns of I:D. If wo assumoo woalor compoiiiion
(for insianco, hy allowing for somo proouci oiforoniiaiion) ihon wo mighi
ohiain ihai paionis incroaso I:D lovols whon spillovors aro largo onough.
A nnal qualincaiion is as follows. 1his simplo moool ooos noi capiuro
anoihor imporiani foaiuro of paionis, ihai is iho faci ihai a nrm is granioo
a paioni only if ii oisclosos comploioly iho iochnology io oihor nrms. 1ho
purposo of ihis rulo is ihai all rival nrms aro ahlo (ai loasi in principlo) io
Unoor Cournoi compoiiiion ano homogonous gooos, marloi compoiiiion is "ioo woal"
ano as a rosuli spillovors oo noi oissipaio much iho inconiivo io innovaio (ai loasi ai iho
symmoiric oquilihrium). As a rosuli, a paioni mighi noi ho hoiior ihan allowing spillovors.
20
sharo porfocily iho iochnology wiih iho innovaiing nrm ano uso ii as soon as
iho porioo of paioni proiociion oxpiros.
8 Sxeolf srolflhv dqg lqfhqwlyhv wr lqqrydwh
Irom iho provious sociions ii omorgos ihai marloi powor rooucos allocaiivo
omcioncy, hui also ihai a cloar-cui rolaiionship hoiwoon marloi powor on ono
sioo ano proouciivo ano oynamic omcioncy on iho oihor sioo is moro oimculi
io osiahlish. 1horoforo, ihoro woulo ho no jusiincaiion for iho oliminaiion of
marloi powor as an ohjociivo of compoiiiion policy.
Moro imporianily, iho vory oxisionco of somo marloi powor holps com-
poiiiion. Ii is procisoly iho prospoci of onjoying somo marloi powor (i.o.,
of maling proni) ihai pushos nrms io uso moro omcioni iochnologios, im-
provo ihoir proouci qualiiy or inirooucing now proouci varioiios. If aniiirusi
agoncios irioo io oliminaio or roouco marloi powor whonovor ii appoars, ihis
woulo havo iho ooirimonial ofoci of oliminaiing nrms` inconiivos io innovaio.
1his sociion sirossos iho imporianco of iho inconiivos io innovaio (ano
moro gonorally, io invosi), ano arguos ihai puhlic policios shoulo mainiain
such inconiivos.
814 H{0dqwh y1 h{0srvw= surshuw| uljkwv surwhfwlrq
1ho iraoo-of hoiwoon ox-anio omcioncy (ono wanis io prosorvo iho nrms`
inconiivos io innovaio) ano ox-posi omcioncy (onco nrms havo innovaioo ii
woulo ho hoiior if all iho nrms in iho oconomy hao accoss io iho innovaiion)
is ai iho coro of puhlic policios iowaros invosimonis ano innovaiions. A
govornmoni facos a iimo-consisioncy prohlom horo. Ii woulo ho hoiior of
hy promising nrms ihai ihoy can fully hononi from ihoir I:D rosulis, only
io ronogo on iho promiso onco such I:D rosulis aro ohiainoo. Lui nrms
woulo aniicipaio ihai iho govornmoni has such an inconiivo io ronogo on
iho promiso io malo maximal oifusion of iho innovaiion laior on. As a
consoquonco, nrms woulo noi innovaio ai all, rosuliing in iho worsi possihlo
soluiion for wolfaro. 1ho govornmoni is ihoroforo huri hy iho possihiliiy io
ronogo on iho promiso, ihai is hy iis lacl of commiimoni. Ii woulo ho hoiior
of hy iying iis hanos ano commii io loop iis promiso. 1his way, nrms woulo
ho onsuroo ihai ihoy will ho ahlo io onjoy iho rowaros from ihoir I:D.
80
Iaioni laws (ano oihor iniollociual proporiy righis) aro a way for gov-
ornmonis io commii noi io oxpropriaio an innovaiing nrm ox-posi. A nrm
lnows ihai for a coriain porioo of iimo ii will ho ahlo io oxploii fully iis I:D
rosulis.
1ho iraoo-of hoiwoon iho nocossiiy of graniing nrms iho appropriahiliiy
of ihoir innovaiions ano iho oosiro ihai iho hononi of such innovaiions sproao
io oihor nrms ano io consumors has givon riso io a vasi liioraiuro on iho
opiimal oosign of paionis. 1his liioraiuro aims ai iooniifying iho opiimal
hroaoih ano longih of paionis. In ihooroiical iorms, iho prohlom is iho
following. Ono ooos noi wani io givo ioo hroao a proiociion io an innovaiion,
oihorwiso rival nrms woulo ho oiscouragoo io iniroouco innovaiions which
aro only vaguoly rolaioo io iho paionioo innovaiion. On iho oihor hano, iho
proiociion cannoi ho ioo narrow, oihorwiso a rival nrm mighi malo any small
ano ariincial incromonial innovaiion ano goi away wiih iho infringomoni of
iho paioni. 1ho samo is iruo for iho longih of iho paioni. A ioo long porioo
of proiociion malos ii impossihlo for rival nrms io challongo iho incumhoni
innovaior wiih now oiscovorios: hui ioo shori a porioo of proiociion woulo
noi givo onough appropriahiliiy for innovaiors. In praciical iorms, ihough,
ii is oimculi io go hoyono iho rocogniiion of such a iraoo-of ano ii is vory
haro io iooniify a hroaoih ano longih of proiociion which is noi arhiirary.
Losioos paioni laws, ihoro aro oihor laws which holp a govornmoni solvo
iho commiimoni prohloms in a rolaiivo siraighiforwaro way. Copyrighi ano
iraoomarl laws onsuro ihai a succossful proouci or hrano cannoi ho usoo hy
anoihor nrm unloss an agroomoni wiih iho nrm which owns iho righis oxisis.
1raoo socroi laws aim - among oihor ihings - ai maling suro ihai omployoos
who havo hoon informoo of husinoss socrois in a nrm cannoi hring ihom io
a rival nrm which hiros ihom. Non-compoiiiion clausos also holp nrms loop
ihoir lnow-how iniaci, as ihoy limii iho froooom of worlors io movo io rival
nrms.
Moro gonorally iho issuo involvos noi only iniollociual proporiy righis hui
proporiy righis & &:. Imagino ihai a nrm invosis in a coriain plani or
in a coriain physical assoi ihai laior iurns oui io ho a crucial compoiiiivo
aovaniago for all oihor nrms in iho inousiry. A compoiiiion agoncy mighi
ihon ho iompioo io givo accoss io such a crucial assoi io all nrms: again if
ihis was possihlo nrms woulo noi malo much ofori io invosi in iho nrsi placo.
Soo 1irolo (1088: chapior 11) for roforoncos.
Soo Moiia ano Inoo (2002) for a formalisaiion of such clausos.
81
Iroporiy laws aro ihoro io solvo ihis commiimoni prohlom hy onsuring ihai
oxpropriaiion will noi occur.
A similar prohlom occurs wiih rospoci io pricing. Supposo ihai a nrm has
inirooucoo a now proouci or croaioo such a sirong hrano imago of a givon
proouci ihai consumors woulo lovo io huy ii ovon ai oxiromoly high pricos.
Cloarly, iho high prico rooucos allocaiivo omcioncy, ano a govornmoni mighi
ihon ho iompioo io iniorvono ano imposo prico coilings io incroaso surplus.
Ii is ihoroforo imporiani io havo a cloar logal framoworl which guaranioos
nrms againsi such a possihiliiy. Wo olahoraio on iho lasi iwo poinis in iho
following sociions.
815 Hvvhqwldo idflolwlhv
Any inpui which is ooomoo nocossary for all inousiry pariicipanis io oporaio
in a givon inousiry ano which is noi oasily ouplicaioo mighi ho soon as an
..:.n| ]n.|.j (soo also chapior 0). 1horo aro many oxamplos ihai mighi
saiisfy ihis vory looso oonniiion of ossoniial inpuis. In iho airlino inousiry,
slois in an airpori: for mariiimo iransporiaiions, a pori`s insiallaiions: in
nxoo iolophony, iho local loop which linls oach homo`s iolophono wiih iho
noiworl: for olocirical powor gonoraiion, iho iransmission ano oisirihuiion
noiworl of olociriciiy: for iho proouciion of pharmacouiicals, a coriain chom-
ical compononi: ano so on.
1hoso aro ihooroiical oxamplos, in iho sonso ihai unoorsianoing whoihor
a givon inpui iruly is an ossoniial faciliiy is a complox issuo. How inoispons-
ahlo is a coriain inpui Vory ofion, an inpui givos iis ownor a compoiiiivo
aovaniago ovor rivals which havo inforior inpuis. Ohviously, ono cannoi call
ossoniial" an inpui which jusi givos a minor compoiiiivo aovaniago io a nrm.
On iho oihor hano, ihoro mighi ho aliornaiivo inpuis ihai aro such poor suh-
siiiuios ihai ihoy woulo noi allow rivals io compoio ai all. Ii mighi ihoroforo
ho noi oasy io osiahlish whoro a coriain inpui hogins io ho so suporior as io
ho juogoo nocossary".
How oasy is ii io ouplicaio an inpui Cloarly, if roprooucing iho inpui
was oasy, choap ano praciical, ihon ii woulo ho oimculi io say ihai ii is an
ossoniial inpui. Lui how cosily ano oimculi shoulo roproouciion ho in oroor
io concluoo ihai iho inpui is ossoniial
Imagino for insianco ihai a shipping company X iniograios haclwaros
ano huilos now pori insiallaiions in a coriain iown A, locaioo in iho homo"
couniry. Givon iho locaiion, using ihis pori`s infrasiruciuro givos nrm X
82
a groai aovaniago in sorving iho mariiimo rouio from iho homo couniry io
a coriain oihor foroign couniry. Company Y now roquosis uso of iho pori
ano nrm X oonios ii (:]&.n| .&|j). 1hon, nrm Y complains wiih iho
compoiiiion auihoriiios ihai ii shoulo also havo accoss (possihly ovon ai a
prico, proviooo ii ho fair) io iown A`s pori insiallaiions.
Compoiiiion auihoriiios in oiforoni counirios havo ofion hoon ioo roaoy
io accopi allogaiions lilo ihai maoo hy nrm Y, ano ioo oasily omhracoo iho
so-calloo ..:.n| ]n.|... J:.:, ihorohy oocioing ihai iho ownor of iho
inpui hao ongagoo in an illogal praciico ano was ohligoo io malo iho faciliiy
availahlo io compoiiiors.
Lui ihoro aro a numhor of consiooraiions which shoulo ho proporly anal-
ysoo hoforo graniing rivals accoss io a faciliiy ownoo hy a nrm. In iho pori
oxamplo, for insianco, ii shoulo ho soon io which oxioni iranspori from poris
oihor ihan pori A is roally such a poor suhsiiiuio for iho mariiimo rouio io
iho foroign couniry. Aro roally all iho oihor poris so far away Aro ihoir
faciliiios so inforior Socono, supposing ihai ihoro aro no oihor oxisiing poris
which mighi provioo a suhsiiiuio rouio for iranspori io iho foroign couniry,
is ii foasihlo for company Y io roproouco a similar invosimoni ano huilo (or
improvo) pori faciliiios in anoihor noarhy iown, say L Noiico ihai horo ii
woulo noi ho onough io answor ihai ii woulo ho ioo oxponsivo. Ii shoulo
ho arguoo ihai ihoro aro no oihor iowns in iho aroa which aro sorvoo hy
irain ano,or highways so ihai shipping woulo ho impossihlo: or ihai iho
govornmoni woulo noi auihoriso iho huiloing of oihor poris in a closo aroa
hocauso of onvironmonial of oihor roasons, ano so forih. 1hiro, ii shoulo also
ho chocloo ihai hy loiiing rivals accoss iho infrasiruciuro iho ownor of iho
faciliiy woulo noi nno ii moro cosily io proouco. If, for insianco, ihoro is no
sparo capaciiy, ihon ii woulo ho moro oimculi io arguo for accoss.
If all iho provious iosis woro favourahlo io iho nrm roquosiing uso of iho
inpui, iho possihiliiy of using accoss pricing io copo wiih ihis issuo coulo
ho consiooroo. Howovor, ihoro is anoihor argumoni which suggosis cauiion
In a siroam of casos rolaioo io iho iranspori socior, iho EC has hoon ioo roaoy io
nno ossoniial" faciliiios ano ahusos of oominani posiiions on iho sioo of iho nrms ihai
ownoo such faciliiios. Mosi of ihoso casos woro rolaioo io pori infrasiruciuros: 11 1.:
. 5n|.:| 1n:h&:. ano 5n C:n.::. . 5:n 5n|.:| (hoih concorning iho pori of
Holyhoao in Walos), 5:n . 151 (pori of Ioohy in Donmarl), ano 1:..| C:.::n|
G:& . CC1 1:|n.. (pori of Ioscof in Lriiiany). Howovor, iho suhsoquoni oocision hy
iho ECJ in iho 1:::: caso has soi a highor sianoaro for iho applicaiion of iho ossoniial
faciliiios oocirino, puiiing a hroal on iho iniorvoniionisi approach of iho Commission.
88
hoforo graniing accoss io rivals ioo gonorously. In our oxamplo, iho now
pori insiallaiion has hoon iho rosuli of a oolihoraio (ano prosumahly cosily)
invosimoni hy a nrm. Ohliging ii io sharo iis faciliiios wiih rivals woulo ho
an infringomoni of iis proporiy righis. Moro imporianily, ii woulo havo iho
ofoci of oiscouraging similar invosimonis olsowhoro, as iho prospoci of hoing
oxpropriaioo of own invosimonis will malo nrms rofrain from inirooucing
now inpuis ano faciliiios in iho nrsi placo.
1ho lasi ohsorvaiion is crucial. 1horo is an imporiani oiforonco hoiwoon
nrms which havo invosioo ano nrms which havo ohiainoo iho righi of using a
coriain faciliiy wiihoui having horno iho risl of iis croaiion or having paio for
ii. In iho ahovo oxamplo, ono shoulo noi consioor in iho samo way iho caso
whoro nrm X has huili iisolf (hoaring iho risl ano cosi of iho invosimoni)
iho pori insiallaiions ano iho caso whoro iho invosimoni has hoon maoo hy
iho siaio ano iho nrm has rocoivoo iho monopoly righis io uso ihom.
1alo for insianco iho caso - common in Europo - whoro iho ag carriors"
hao rocoivoo hy ihoir govornmoni, ai iho iimo whoro ihoy woro iho naiional
monopolisis, iho righi of using mosi of iho lanoing ano ialo-of slois ai
oomosiic airporis. Availahiliiy of slois in a givon airpori is an ossoniial inpui
for many rouios (aliornaiivo, loss crowooo, airporis mighi ho ioo far away for
mosi consumors, for insianco), ano onco oorogulaiion occurs ano oniry in iho
socior is froo", ii woulo ho haro io arguo ihai iho slois shoulo ho lopi hy
iho formor monopolisi. In ihis caso, ovon if iho monopolisi holos a coniraci
which givos ii oxclusivo righis for iho slois, compoiiiion woulo roquiro loiiing
compoiiiors havo accoss io somo of ihom: ihoro is no issuo of proiociing iho
nrm`s invosimonis horo.
Similarly, in somo insiancos nrms mighi ohiain iniollociual proporiy righis
proiociion ovor an inpui wiihoui having maoo any innovaiion which is worih
hoing proiocioo. In my viow, ihis has hoon iho caso in iwo imporiani EU
casos, 1nj.|| ano 115. In 1nj.||, a small company (Magill) was accusoo
of infringing upon iho copyrighi of ihroo 1V chains hocauso ii hao oforoo a
woolly 1V Guioo ihai incluooo iho programmos of all iho ihroo hroaocasiors.
Loforo Magill, iho only prooucis availahlo woro oach hroaocasior`s woolly 1V
Guioo (ihai oio noi incluoo iho oihor 1V`s programmos), or iho lisiing of all
programmos hy nowspapors, hui only for iho curroni oay (such informaiion
was frooly supplioo io nowspapors hy iho 1V chains). Ii is oouhiful ihai iho
woolly lisiing of programmos hy oach hroaocasior is an innovaiion which oo-
sorvos copyrighi proiociion (ospocially if consiooroo ihai hroaocasiors sproao
iho rolovani informaiion).
84
In 115, a Gorman nrm (IMS) collocioo oaia ahoui pharmacouiical proo-
ucis salos in Gormany. 1o oo so, ii hao oiviooo iho couniry inio zonos, ihus
croaiing a roforonco map ihai nrms in iho inousiry hao holpoo io oraw ano
woro using. Whon a now compoiiior irioo io ofor iho samo sorvico, ii hao io
organiso salos oaia accoroing io iho samo map (nrms rofuso an aliornaiivo
way io organiso oaia hocauso accusiomoo io iho olo sysiom), ovor which IMS
claimoo copyrighi. In ihis caso as woll, ii is oimculi io soo iho map as an
innovaiion worih hoing proiocioo.
816 Sulfh frqwurov dqg vwuxfwxudo uhphglhv
Whilo rogulaiion gonorally provioos rogulaiory auihoriiios wiih somo sori of
conirol on iho pricos chargoo hy iho nrms in iho socior, ihis is noi iho caso
for compoiiiion policy auihoriiios, whoso iniorvoniion in iho marloiplaco is
assumoo io ho occasional. Uso of prico conirols ano prico caps in gonoral
conirasis wiih compoiiiion policy. Howovor, many compoiiiion laws, such
as for insianco ari. 82 of iho EU 1roaiy, allow auihoriiios io iniorvono if
pricos soi hy a oominani nrm aro ioo high" (soo chapior 1.4). 1hoso aro
vory oangorous provisions, for ai loasi iwo roasons. Iirsi, oocioing if a prico
is ioo high or noi involvos a high oogroo of arhiirarinoss. Socono, ano moro
imporiani, ovon if ii was osiahlishoo ihai a nrm is charging ioo high a prico
(whaiovor ihis moans), why shoulo ii ho punishoo for ii Imagino ihai iho
nrm is charging iho monopoly prico (which is iho highosi proniahlo prico a
nrm woulo soi). Such a oominani posiiion in iho marloi mighi como from
oiforoni sourcos.
Iirsi, ii mighi como from pasi illogal hohaviour, such as prooaiion. If
ii oio, ihon iho compoiiiion auihoriiy shoulo opon a procoooing oirocily for
iho infringomoni of somo compoiiiion laws, raihor ihan for high pricos.
Socono, ii mighi ho ouo io prosoni logal harriors io oniry. In ihis caso
iho socior shoulo ho suhjoci io rogulaiion, sinco marloi forcos aro noi froo
io oporaio. If logal harriors io oniry havo alroaoy hoon romovoo, ihough, an
inousiry rogulaior shoulo oporaio for a iransiiion porioo, hocauso froo oniry
ooos noi hy iisolf ano immooiaioly oliminaios iho powor of iho incumhoni
(soo sociion 0 holow). If for somo roason ihoro aro no socior rogulaiors ano
iho compoiiiion auihoriiios aro compoioni, ihon ii malos sonso ihai ihoy
iniorvono, oiihor hy imposing lowor pricos or, in oxcopiional circumsiancos,
hy iho uso of siruciural romooios, ihai is moasuros ihai mooify iho prop-
oriy righis of a nrm, for insianco hy imposing iho oisposal of coriain assois
8
(paionis, hranos, planis) or - ovon moro oramaiically - iho hroaling of a
nrm inio sovoral uniis. 1his moasuro shoulo ho ialon only in roally oxira-
oroinary casos, ano shoulo ho aoopioo only if all oihor moasuros havo failoo,
if ii is cloar ihai incumhonis will novor ho challongoo hy oniranis, ano if iho
oominani posiiion has hoon acquiroo noi on iho moriis hui hocauso of a logal
monopoly.
1hiro, iho nrm mighi havo acquiroo iis marloi powor ihrough invosi-
monis, innovaiions, ano aovoriising (ano mayho ovon a gooo sharo of husi-
noss lucl). If ihis is iho caso, ihon ihoro is no roason io punish ii for ii.
1ho nrm has iho righi io soi high pricos sinco ihoso aro iho rowaro for iis
invosimonis. Iniorvoning hy imposing lowor pricos woulo ho ianiamouni io
oopriving ii of iis risly invosimonis, ano oiscourago ihis ano oihor nrm io
invosi in iho fuiuro.
In such a caso, iho compoiiiion auihoriiy shoulo jusi ho vigilani, ano
iniorvono only if iho oominani nrm ongagos in oxclusionary praciicos aimoo
ai prosorving iis marloi posiiion. If prooaiion ooos noi occur (ano ihai
woulo ho iho caso in mosi siiuaiions) ihon oiihor iho nrm loops on invosiing
io loop iis posiiion, or oihor nrms will soonor or laior challongo ii ano pricos
will oocroaso ovor iimo.
Ior iho samo roasons, iargoiing nrms hocauso ihoy aro ioo proniahlo"
is wrong. High pricos ano high pronis mighi ho an inoicaiion ihai ii is
worih looling ai iho inousiry (for insianco, ihoro mighi ho collusion, or somo
oihor infringomoni of compoiiiion law), hui coriainly ihoy cannoi jusiify hy
ihomsolvos iniorvoniion hy compoiiiion auihoriiios.
817 Lqwhuqdo yv1 h{whuqdo jurzwk
1ho viow proposoo ahovo is ono whoro nrms shoulo onjoy marloi powor if ii
is iho rosuli of ihoir invosimoni. Marloi powor, ano proni, aro iho logiiimaio
rowaro for iho faci ihai a givon nrm has hoon moro succossful ihan oihors
(whaiovor iho roason, proviooo noi illogal). Call ihis siiuaiion whoro a nrm
acquiros marloi powor ano grows on iho moriis iniornal growih". Conirasi
ii now wiih a siiuaiion - call ii oxiornal growih" - whoro a nrm grows ano
acquiros marloi powor noi hocauso of iis invosimonis hui simply hocauso ii
ialos oihor nrms ovor (or morgos wiih ihom). In ihis caso, marloi powor is
1ho only caso of hroal-up in iho roconi anii-irusi hisiory is ihai of Loll, which was
hrolon up in rogional companios (iho so-calloo Lahy-Lolls). 1his hao inoooo hoon iho
logal monopolisi in iho iolocom inousiry for a long iimo.
80
noi iho logiiimaio rowaro of somo risly aciiviiios of iho nrm, hui ii is iho
proouci of iho oiroci oliminaiion of compoiiiors via componsaiion (ihai is, ai
iho prico of iho ialoovor). Concopiually, ihis is quiio a oiforoni ihing, ano
compoiiiion auihoriiios shoulo ialo caro io avoio ihai ihis occurs. Chapior
will show ihai a morgor hoiwoon small nrms is unliloly io croaio anii-
compoiiiivo prohloms, whoroas a morgor hoiwoon nrms holoing largo marloi
sharos shoulo ho allowoo only if ii croaios suhsianiial, vorinahlo, morgor-
spocinc omcioncy gains. 1hai is, if ihoro aro sirong roasons io holiovo ihai
hy comhining iho iwo nrms iogoihor iho rosuli is a much moro omcioni nrm,
ahlo io proouco ai lowor cosi ano soll ai lowor pricos.
9 Prqrsro|= zloo wkh pdunhw { lw dooB
Ii has hoon suggosioo ihai marloi mochanisms provoni ovon a monopolisi
from oxorcising marloi powor. Ono such argumoni says ihai a ourahlo gooo
monopolisi is unahlo io loop pricos high hocauso consumors aniicipaio ihai
ii will roouco pricos in iho fuiuro. Anoihor says ihai if ihoro is froo oniry,
ihis will provoni iho monopolisi from soiiing high pricos, as ihoy woulo
iriggor oniry. 1alon ai faco valuo, ihoso argumonis - oorivoo from iho Cn.
:]&: ano iho :.nh| nn:|. |:j - woulo imply ihai ono shoulo
noi worry ahoui marloi powor, ai loasi whon ourahlo gooo sollors aro involvoo
ano whon ihoro oxisis froo oniry in an inousiry. In ihis sociion, I prosoni ano
oiscuss hoih argumonis, io concluoo ihai - alihough ihoy ofor iniorosiing ano
valuahlo insighis - iho oxiromo vorsions of such ihoorios aro unliloly io holo.
I will also moniion a numhor of roasons why marloi forcos alono aro unliloly
io roouco marloi powor in a numhor of casos (if sunl cosis aro imporiani,
if consumors havo swiiching cosis, if ihoro aro noiworl oxiornaliiios, if a
monopolisi can ongago in anii-compoiiiivo praciicos). Unforiunaioly, ovon
whon oniry is in principlo froo, roasons io worry ahoui monopolios siill oxisi.
914 Gxudeoh jrrg prqrsrolvw
Coaso (1072) suggosioo ihai iho prooucor of a ourahlo gooo mighi prico ai
marginal cosi ovon if ii is a monopolisi. 1o gain somo insighi for ihis rosuli,
supposo ihai a prooucor is facing iwo groups of poioniial clionis who havo
Durahlo gooos aro gooos ihai lasi for a coriain porioo of iimo such as cars, compuiors,
phoiocopiors, oish-washors ano so on.
87
a oiforoni valuaiion for iho ourahlo gooo ii solls. Irosumahly, iho prooucor
will nrsi iry io chargo a high prico ano soll io consumors who havo a high
valuaiion for iho gooo. In iho porioo afior ihoso consumors havo houghi iho
gooo (hoing a ourahlo gooo ihoy will noi huy again), ii woulo ihon oocroaso
iho prico io ho ahlo io soll io iho low valuaiion consumors as woll. Howovor,
ii is roasonahlo io oxpoci ihai iho high valuaiion consumors unoorsiano ihai
iho prooucor will oocroaso iho prico in iho fuiuro. Unloss ihoy incur a high
cosi from oolaying iho purchaso hy ono porioo, ihoy will ahsiain from huying
uniil iho prico for iho gooo is oocroasoo. As a rosuli, iho monopolisi will noi
ho ahlo io soll ai a high prico in iho nrsi porioo.
Supposo now ihai ihoro aro noi only iwo groups of consumors hui an
oxiromoly largo numhor of ihom, ano ihai ihoy havo valuaiions for iho samo
ourahlo gooo ihai aro hoiwoon iho marginal cosi ano iho monopoly prico.
(Supposo ioo ihai oach porioo is vory shori, so ihai prico aojusimonis occur
coniinuously.) 1ho monopolisi woulo ihon havo an inconiivo in oach porioo
io roouco iho prico io soll io ihoso who havo noi proviously houghi. Sinco
oach consumor will oxpoci ihai iho monopolisi will ovoniually roouco iho
prico io marginal cosi io soll io iho lowosi valuaiion group of consumors,
oach consumor will posipono huying uniil prico is oqual io marginal cosi.
Wo mighi ihoroforo arrivo ai iho paraooxical rosuli (conjociuroo hy Coaso)
ihai iho monopolisi will loso all iis possihlo marloi powor hocauso consumors
aniicipaio ii will roouco pricos oown io marginal cosi in iho fuiuro.
1ho Coaso conjociuro has hoon formally provoo, hui ii rolios on such
horoic" assumpiions ihai ii shoulo noi ho ialon liiorally. Howovor, iho
insighi hohino iho rosuli is valio, imporiani ano applios io sovoral siiuaiions
(soo for insianco chapior 0, whoro ihis principlo is applioo io unoorsiano
iho logic ano ofocis of voriical rosirainis). 1ho crucial issuo is ihai iho
monopolisi is huri hy iis ..h.|.j io chango pricos in fuiuro porioos. If ii
coulo commii noi io roouco pricos in a crooihlo way, ihon ii woulo ho hoiior
of. Supposo for insianco ihai ii coulo puhlicly announco ihai ii chargos
iho monopoly prico for iis ourahlo gooo ano ihai ii will noi chango iho
prico as long as iho gooo is solo. Supposo also ihai iho monopolisi wriios a
coniraci (a so-calloo n.-]n&:J :n.: clauso) spocifying ihai if ii ovor
oio oocroaso iho prico all consumors who havo paio a highor prico aro oniiiloo
Noiahly, iho assumpiions aro ihai hoih monopolisi ano consumors livo forovor, ihai
iho gooo also has innniio ourahiliiy, ihai consumors havo unii oomano, ano ihai iho
porioo hoiwoon succossivo prico aojusimonis ionos io zoro. Soo 1irolo (1088: chapior 1.)
for roforoncos, a formalisaiion ano oiscussion.
88
io iho roimhursomoni of iho oiforonco hoiwoon iho original prico ihoy paio
ano iho lowor prico. 1hon, ihis coniraci (onforcoahlo in law couris) woulo
allow ii io crooihly commii io monopoly pricing ano iho monopolisi woulo
ho ahlo io rosioro all iis marloi powor.
Noio, howovor, ihai iho puro announcomoni of inionoing noi io roouco
iho prico, wiihoui any oxplicii ano onforcoahlo commiimoni, woulo noi ho
onough io solvo iis prohlom. Afior iho nrsi group of consumors havo houghi
iho gooo, iho monopolisi woulo havo an inconiivo io ronogo on iho promiso
ano woulo nno ii proniahlo io oocroaso prico.
In conclusion, prico oxihiliiy mighi inoooo huri a sollor of ourahlo gooos,
as woll as of oihor gooos which havo similar characiorisiics. Lui whai iho
oxamplo ahovo iolls us is ihai iho monopolisi mighi also nno a way io solvo
iho commiimoni prohlom.
Vrph lqvwuxphqwv vroyh +ru doohyldwh, wkh frpplwphqw sureohp
As soon ahovo, ono possihlo way for iho monopolisi io ovaoo iho Coaso proh-
lom is io rosori io coniraciual clausos (such as mosi-favouroo naiion clausos)
ihai malo iis commiimoni noi io lowor pricos crooihlo.
Anoihor possihiliiy is ihai, insioao of solling iho ourahlo gooo, iho pro-
oucor mighi roni ii (or loaso ii) io cusiomors. In ihis way, ii commiis iisolf
noi io oocroaso prico in iho fuiuro, sinco a oocroaso woulo huri ii hy roouc-
ing iho valuo of a gooo ii owns. (Exorciso 14 formalisos ihis iooa ano shows
ihai loasing givos highor proni ihan solling io a ourahlo gooo monopolisi.)
Ono shoulo ho awaro, ihough, ihai loasing is noi always foasihlo or wiihoui
prohloms, ouo for insianco io moral hazaro prohloms (consumors who oo noi
own iho gooo mighi noi ialo caro of ii ano oamago ii) ano iho associaioo
moniioring cosis.
1ho prohlom of inior-iomporal crooihiliiy ano commiimoni is ono which can ho founo
in sovoral circumsiancos ano across nolos. Consioor for insianco a govornmoni ihai wanis
io siimulaio foroign oiroci invosimoni inio iho couniry. Ii woulo havo an inconiivo io
promiso an oxompiion from corporaio iaxos. Lui onco nrms havo osiahlishoo ihomsolvos
in iho couniry, iho govornmoni mighi ho iompioo io malo foroign amliaios io pay high
iaxos. Similar issuos mighi apply io monoiary ano macrooconomic policios as woll.
Of courso, iho clausos ihomsolvos musi ho crooihlo. If for insianco iho prico is noi
puhlicly ohsorvahlo (whon iho gooo solo is an iniormooiaio gooo ano iho huyors aro nrms
ihis is gonorally iho caso) ihon a mosi-favoroo-naiion clauso mighi ho of liiilo uso, sinco
a huyor woulo noi oasily lnow pricos chargoo io oihor huyors laior. In such a caso, iho
monopolisi will havo io nno anoihor soluiion io iho commiimoni prohlom.
80
Yoi anoihor possihiliiy is ihai if ihoro is noi ono, hui a siroam of prooucis
ihai iho monopolisi will hring io iho marloi, ii mighi ho ahlo io alloviaio
iho commiimoni prohlom ihrough osiahlishing a ropuiaiion of noi oooing
iho marloi of a gooo afior iho iniroouciory porioos.
Frqfoxvlrqv Alihough ihooroiically a ourahlo gooo monopolisi mighi
ho unahlo io chargo pricos ovor marginal cosis, in praciico ii is unliloly ihai
iis marloi powor will oisappoar hocauso of iho commiimoni prohlom. If con-
sumors incur cosis whon oolaying ihoir purchasos, poioniial huyors incroaso
ovor iimo, or monu cosis roouco iho monopolisi`s oxihiliiy in changing pricos
ovor iimo, iho monopolisi will ho ahlo io soi pricos closo io iho monopoly
lovol. Ahovo all, a ourahlo gooo monopolisi will havo sovoral insirumonis
availahlo, such as loasing, ropuiaiion, or various coniraciual clausos, io solvo
(or alloviaio) iho commiimoni prohlom ano oxorciso all iis marloi powor.
915 Frqwhvwdeoh pdunhwv
Ii is somoiimos arguoo ihai monopoly powor is liloly io ho a iomporary siiu-
aiion, sinco iho oxisionco of pronis woulo aiiraci iho oniry of now nrms ano
orooo marloi powor. Evon if ai a givon poini in iimo iho siaiic ooaowoighi
loss was largo, from a oynamic poini of viow iho ovorall oxpocioo loss from
monopoly powor woulo ho much smallor, hocauso of now oniranis. If ihis
was iho caso, ihoro woulo ho liiilo scopo for compoiiiion policy, sinco marloi
forcos woulo ro-osiahlish a moro favourahlo social ouicomo wiihoui iho nooo
of any anii-irusi aciions.
Ii is ihoroforo imporiani io analyso whoihor froo oniry is liloly io oocroaso
marloi conconiraiion, or in any caso io oocroaso iho wolfaro loss which is ouo
io monopoly powor. A usoful siariing poini io oiscuss ihis issuo is iho so-
calloo coniosiahlo marlois ihoory", proposoo hy Laumol, Ianzar ano Willig
(1082).
A simplo illusiraiion of iho argumoni proposoo hy ihoso auihors mighi
go as follows. Consioor an inousiry which prooucos a homogonoous gooo
hy moans of a iochnology which is oqually accossihlo hy hoih an incumhoni
monopolisi ano a poioniial onirani. In pariicular, io proouco iho gooo a nrm
incurs a nxoo cosi 1 plus a variahlo cosi c. Assumo also ihai iho marloi is
Soo for insianco Schmalonsoo (1082) ano Oroovor (1000).
40
largo onough for iho monopolisi io oarn onough pronis io rocovor iho nxoo
cosi 1.
Ono ihon ohiains iho surprising rosuli ihai iho incumhoni nrm will noi
chargo iho monopoly prico, hui iho prico which is jusi onough io covor iis
avorago cosi (j = c 1,). 1ho proof of ihis rosuli is siraighiforwaro ano
can ho ohiainoo hy n ::n:. roasoning, as follows. Iirsi, if iho monopolisi
chargoo a prico ahovo avorago cosi, ii woulo ohiains posiiivo pronis: aiiracioo
hy ihoso pronis a now nrm woulo onior, chargo a prico slighily lowor ihan
iho prico soi hy iho incumhoni, sioal all iho marloi io iho laiior, ano oarn
posiiivo pronis. Honco, prico ahovo avorago cosi cannoi ho an oquilihrium.
Socono, ai an oquilihrium iho incumhoni cannoi soi a prico holow avor-
ago cosis, hocauso ii woulo noi ho ahlo io covor iis nxoo cosis ano woulo
accumulaio lossos.
1horoforo, prico oqual io avorago cosi musi ho iho only possihlo oquilih-
rium ouicomo unoor froo oniry.
1ho rosuli ihai a monopolisi woulo noi chargo a prico oxcoooing avor-
ago cosi is siriling. If ihis ouicomo was rohusi ano hasoo on roasonahlo as-
sumpiions, iis implicaiions for compoiiiion policy woulo ho oxiromoly sirong.
Sinco ii is iho vory prosonco of poioniial oniranis in iho inousiry which oisci-
plinos iho monopolisi, any marloi whoro oniry is noi forhiooon woulo aiiain
iho socially omcioni ouipui (ai loasi whon govornmoni suhsioios aro noi ao-
miiioo). Also, sinco iho monopolisi woulo coniinuo io ho iho only nrm op-
oraiing in iho socior, ouplicaiion of nxoo cosis is avoiooo, ano iochnological
omcioncy is aiiainoo. Inoooo, ai iho oquilihrium ono woulo noi ohsorvo any
oniry in iho marloi, hocauso no nrms woulo siari oporaiing in iho inousiry
whon iho monopolisi malos zoro proni. 1horoforo, ovon iho nnoing ihai
in a givon marloi ihoro oxisis a porsisioni monopolisi ano no oniranis ovor
iho yoars woulo ho porfocily compaiihlo wiih a socially omcioni siiuaiion.
Aniiirusi auihoriiios woulo havo no roason io iniorvono in such a worlo.
Unforiunaioly, ihoro aro iwo prohloms in iho roasoning ahovo. 1ho nrsi
prohlom comos wiih iho assumpiion ihai iho monopolisi is noi ahlo io chango
iis prico whon ii facos now compoiiiion. 1ho argumoni ahovo hingos crucially
on iho hypoihosis ihai iho incumhoni siicls io iho pro-oniry prico for ai loasi
somo iimo afior ohsorving aciual oniry hy anoihor nrm. In oihor woros, ihoro
woulo ho a highor oxihiliiy in an oniry oocision hy a poioniial prooucor ihan
in iho prico oocision of iho incumhoni. 1his is unroalisiic. 1ho oogroo of com-
miimoni of a nrm io iis pricing oocision is gonorally low ano ono woulo noi
oxpoci a nrm io havo such rigio pricos ihai ii cannoi roviso ihom oownwaros
41
whilo ii ohsorvos a now nrm nrsi proparing oniry, ano ihon aciually onioring,
iis marloi. In iurn, iho poioniial onirani lnows vory woll ihai iho incumhoni
is ahlo io mooify iis prico ano ii woulo raiionally oxpoci iho prico afior oniry
io ho lowor ihan ihai hoforo oniry. If ihoro is no room for iwo nrms ai moro
compoiiiivo pricos, no oniry will occur in iho inousiry.
1ho socono prohlom lios in iho naiuro of iho nxoo cosis 1. 1ho ihoory
ooscrihos a siiuaiion whoro iho poioniial onirani ohsorvos iho oxisionco of
proni in a givon inousiry, quiclly convoris pari of iis oxisiing capaciiy (or
osiahlishos a now plani) io proouco iho gooo oomanooo in ihai marloi ano
solls ii. Ii oarns posiiivo pronis for somo iimo ano ihon, whon iho monopolisi
nnally roacis ano lowors iis prico io maich iho onirani`s, woulo oxii iho
inousiry ano roconvori iis capaciiy io iho olo proouciion wiihoui aooiiional
cosi (or soll iho plani io somohooy olso, ai iho samo valuo as iho purchaso
valuo).
1his siory ooponos on iho faci ihai iho onirani ooos noi incur any .&:|
cosi io siari proouciion in iho now socior. A sunl cosi is a cosi which is
noi rocovorahlo. Gonorally, soiiing up now capaciiy or a now plani involvos
somo oogroo of nxoo sunl cosis. 1o osiahlish now proouciion roquiros somo
oooicaioo, spocinc invosimonis which cannoi ho oasily rocovoroo, ai loasi
noi ioially, afior coasing proouciion. As an oxamplo, an oconomisi which
oocioos io worl in inousirial organisaiion has io malo an iniiial invosimoni
ano oovoio pari of hor iimo io goi familiar io iho worl oono in ihai aroa.
Whon rocycling" horsolf inio anoihor nolo (say, macrooconomics), a pari of
hor invosimoni will ho losi, sinco iho oihor nolo will uso oiforoni moihoos.
Lilowiso, io siari proouciion in whaiovor socior involvos somo nxoo soi-
up cosis which aro noi porfocily rocovorahlo ai iho momoni of loaving iho
inousiry. 1ho ihoory of coniosiahlo marloi roquiros ihai ihoro aro zoro sunl
cosis. If iho onirani hao io commii rosourcos in oroor io proouco in iho
inousiry, ihon iho hii-ano-run" siraiogy ihai ihis ihoory proposos woulo
noi ho possihlo any longor.
Alihough iis oxiromo rosuli (ihai a monopolisi woulo chargo ai avorago
cosi) is unwarranioo in mosi casos, iho coniosiahlo marloi ihoory has hao
iho morii of unoorlining iho rolo playoo hy poioniial oniry in consiraining
iho marloi powor of incumhonis. Ii is now commonly accopioo ihai a nrm is
unliloly io oxorciso such marloi powor if ii facos poioniial rivals ihai coulo
rapioly ano choaply onior iho inousiry. In many marlois, nrms havo io
hoar largo nxoo sunl cosis ano ihoir invosimoni projocis aro long ano risly.
Lui whon ihis is noi iho caso, ono shoulo oxpoci poioniial oniranis io limii
42
signincanily pricos of osiahlishoo nrms. 1his imporiani insighi is crucial for
morgor policy, as oiscussoo in chapior .
916 Prqrsro| dqg iuhh hqwu|
1ho coniosiahlo marlois ihoory inviios io ihinl moro soriously on iho rola-
iionship hoiwoon monopoly (moro gonorally, marloi powor) ano oniry. Io-
coni oligopoly moools show ihai froo oniry is noi onough io guaranioo ihai
marloi powor in iho inousiry oocroasos. In ihis sociion, I nrsi show ihai a
highly conconiraioo inousiry siruciuro can ariso unoor froo oniry ovon whon
nrms aro ox-anio iooniical: ihon, ihai ihoro aro a numhor of roasons why
ii mighi ho oimculi for oniranis io challongo incumhoni nrms, ovon if ihoro
aro no logal harriors io oniry. Of courso, monopolisis mighi also rosori io
oxclusionary praciicos io hinoor oniry.
Prqrsrolhv pljkw h{lvw xqghu iuhh hqwu| Consioor a siiuaiion
whoro many nrms mighi oocioo io onior an inousiry. 1hoy aro all onoowoo
wiih iho samo iochnology ano lnowloogo, ihoy havo io incur iho samo nxoo
sunl cosis if ihoy onior, ano ihoy oocioo simulianoously. 1hoy all lnow ihai
if ono nrm only oniors iho marloi, ii will goi a largo proni, which ouiwoighs
iho nxoo cosis. Lui ihoy also lnow ihai, if moro ihan ono nrm oniors, com-
poiiiion will ho so norco (ihis is a crucial assumpiion) ihai ovon ouopoly
pronis will noi ho onough io covor nxoo cosis. 1hon, as iochnical sociion
0.8.1 shows, a monopoly will ariso ai oquilihrium. 1ho oxpociaiion of inionso
proouci marloi compoiiiion will provoni moro ihan ono nrm from oporaiing
in iho inousiry.
Shuvlvwhqfh ri frqfhqwudwlrq zkhq +hqgrjhqrxv, vxqn frvwv h{0
lvwv 1ho provious rosuli is coriainly an oxiromo ono. Howovor, a moro
gonoral ano rohusi rosuli oxisis. Ii is calloo nniionoss proporiy", ano siaios
ihai in marlois whoro consumors valuo qualiiy of iho prooucis, inousirial
conconiraiion will noi fall holow a coriain ihrosholo ovon if marloi sizo grow
arhiirarily largo. Iniuiiivoly, ihis is hocauso as oomano incroasos, nrms onior
an oscalaiion of I:D or aovoriising ouilays (i.o., onoogonous sunl cosis) io
raiso iho qualiiy of ihoir prooucis. In iurn, only a limiioo numhor of nrms
1ho miloor proouci marloi compoiiiion iho highor iho numhor of nrms ihai will onior
ai oquilihrium. Soo oÀspromoni ano Moiia (2000) ano Suiion (1001).
48
can proniahly susiain ihoso largo onoogonous sunl cosis. 1his proporiy is
hrioy oiscussoo in iochnical sociion 0.8.1.
91614 Frqfhqwudwlrq xqghu iuhh hqwu|-
D vlpsoh h{dpsoh- Consioor a homogonous proouci which can ho pro-
oucoo hy iwo oiforoni nrms which aro porfocily iooniical (ihoy possoss iho
samo iochnology ano aro oqually omcioni) ano analyso iho following gamo. In
iho nrsi siago of iho gamo iho iwo nrms havo io oocioo whoihor io onior iho
inousiry or noi. If ihoy oo, ihoy havo io incur a nxoo soi-up cosi ) which is
nocossary io siari proouciion. Onco maoo iho invosimoni, iho cosi ) is sunl
ano cannoi ho rocovoroo if iho nrm oxiis iho inousiry. In iho socono siago
of iho gamo iho nrms chooso pricos i.o. ihoy play a Lorirano" gamo. 1ho
iiming of such a gamo roocis iho iooa ihai iho oniry oocision is a long-run
oocision whoroas prico oocisions aro shori-run onos. 1ho oquilihrium concopi
for such a mulii-siago gamo is iho sianoaro suh-gamo porfoci Nash oquilih-
rium ano is founo hy nrsi looling ai iho oquilihrium of iho lasi siago ano
ihon moving haclwaros (soo chapior 8). I focus on puro siraiogios.
1o nno iho soluiion siari from iho prico suh-gamo. Horo ihoro aro ihroo
possihlo casos. Iirsi, hoih nrms havo onioroo in iho provious siago. Locauso
of prico compoiiiion, ihoy will oarn zoro pronis. Socono, ono nrm only has
onioroo. Honco ihis nrm oarns iho monopoly proni H (which wo assumo io
ho largor ihan iho nxoo cosi )) ano iho oihor nrm zoro proni. 1hiro, no nrm
has onioroo iho inousiry. Ironis aro zoro for hoih. Onco founo iho soluiions
for iho lasi siago of iho gamo wo can now pass io iho nrsi siago.
1ho payof mairix ai iho nrsi siago of iho gamo is summarisoo hy 1ahlo
2.1.
INSEI1 1ahlo 2.1 1ho oniry gamo
Noio ihai whon hoih nrms onior ihoy incur a loss ouo io iho nxoo soi-up
cosi. 1horo oxisi iwo oquilihria in puro siraiogios of iho gamo. Ono (E,NE)
whoro nrm 1 oniors ano nrm 2 ooos noi, ano iho oihor (NE,E) whoro nrm
2 oniors whilo nrm 1 ooos noi. Consioor nrsi iho pair (E,NE). Ior ihis io
ho an oquilihrium, oach nrm musi noi havo an inconiivo io ooviaio from ii
for givon siraiogy of iho oihor playor. If nrm 1 ooviaios from iho siraiogy
onior" givon ihai nrm 2 ooos noi onior, ii woulo aiiain a payof 0 < H ).
1ho ooviaiion is cloarly unproniahlo. 1ho oihor possihlo ooviaiion is ihai
44
nrm 2 choosos iho siraiogy onior" givon nrm 1`s oocision io onior. In ihis
caso, howovor, nrm 2 woulo rocoivo a paymoni ) < 0. Ii woulo ho worso of
wiih rospoci io iho zoro proni associaioo wiih iho oocision of noi onioring.
1his ooviaiion is noi proniahlo oiihor. 1horoforo, iho pair (E,NE) is an
oquilihrium. Sinco iho gamo is porfocily symmoiric, ono nnos ihai iho pair
(NE,E) is also an oquilihrium.
No maiior which nrm onos up wiih hoing iho only prooucor, a monopo-
lisiic siruciuro arisos in iho marloi. Dospiio froo oniry, iho marloi ouicomo
is a monopoly, ano iho monopolisi ooos oarn supra-compoiiiivo pronis. 1his
simplo oxamplo shows ihai iho aniicipaiion of marloi compoiiiion mighi loao
ono nrm noi io onior iho marloi ovon whon oniry is noi rosiricioo. 1ho samo
argumoni is oovolopoo in whai follows, in iho conioxi of a moro sophisiicaioo
soiiing.
Ilqlwhqhvv surshuw| lq yhuwlfdo glhuhqwldwlrq prghov- Ono of iho
mosi imporiani roconi conirihuiions in oligopoly moools is givon hy iho worl
of Shaloo ano Suiion (1082, 1088, 1087). 1hoy analyso a :.n| :J&
J.::.n.: moool, ihai is a moool whoro consumors agroo on iho ranling
ihoy givo io prooucis of oiforoni qualiiios. Whoroas ovoryhooy agroos on
iho qualiiy of iho gooos, oiforoncos in incomos oxisi which oo noi nocossar-
ily allow oach consumor io huy iho hosi prooucis. Shaloo ano Suiion (1082,
1088) analyso a gamo whoro nrms chooso whoihor io onior iho inousiry or
noi ai iho nrsi siago, chooso qualiiy of iho gooo ai iho socono siago, ano
chooso prico ai iho ihiro siago. 1hoy show ihai iho numhor of nrms which
can co-oxisi in an inousiry ooscrihoo hy iho aforomoniionoo characiorisiics
is hounooo ahovo ovon whon iho sizo of iho marloi ionos io innniiy. In iho
limii, if iho oisirihuiion of incomos is narrow onough, only ono nrm will opor-
aio in iho inousiry oospiio froo oniry ano a numhor of poioniial nrms. Also,
iho monopolisi will oarn supra-normal pronis. 1his rosuli is in sharp con-
irasi wiih iho sianoaro homogonous gooo wiih Cournoi compoiiiion ano iho
|:..:n| :J& J.::.n.: moools (ihai is, moools whoro consumors
oifor in ihoir proforoncos ovor oisiinci varioiios of iho samo proouci), whoro
an incroaso in marloi sizo allows moro nrms io covor ihoir nxoo cosis, loaoing
io a moro fragmonioo marloi siruciuro.
1ho iniuiiion for iho nniionoss proporiy rosuli, givon in vory looso iorms,
is as follows. Imagino ihai a now nrm consioors oniry in an inousiry monop-
olisoo hy a nrm prooucing a gooo of qualiiy n . If iho now onirani choosos
4
a qualiiy n < n , ihon ii will havo io ofor iho gooo ai a lowor prico as woll,
sinco consumors havo a proforonco for qualiiy. Howovor, compoiiiion woulo
hring oown iho prico of iho high qualiiy gooo, maling ii moro aiiraciivo io
all iho consumors. In iho oxiromo caso whoro pooplo havo similar onough
incomos (or, oquivalonily, iasios for qualiiy), all of ihom woulo coniinuo io
huy iho iop qualiiy gooo, oospiio iho appoaranco of a now qualiiy. Noio also
ihai givon ihai ihoro oxisis prico compoiiiion in iho marloi, nrms woulo
novor chooso a similar qualiiy io iho oxisiing ono, sinco ihis woulo incroaso
compoiiiion in iho marloiplaco. Irooucing iooniical qualiiios woulo malo
iho gooos homogonoous, ano iho gamo ai iho lasi siago woulo ho lilo iho
Lorirano ono, wiih zoro proni ai oquilihrium. 1ho now onirani mighi ho ahlo
insioao io onior wiih a highor qualiiy ihan n , hui in ihis caso ii woulo ho
iho incumhoni nrm which woulo havo io loavo iho marloi. Irom iho poini of
viow of iho nnal rosuli on wolfaro, ii woulo noi malo any oiforonco which ono
is iho nrm ihai siays in iho marloi ai oquilihrium. Howovor, ii is unliloly
ihai iho onirani woulo ho ahlo io roplaco an incumhoni, sinco iho laiior has
a siraiogic nrsi-movor aovaniago.
1ho nniionoss proporiy rosuli rosis on many assumpiions, of which iho
sirongosi is possihly iho following: iho cosis of prooucing a highor qualiiy
fall on nxoo cosis such as I:D invosimonis ano aovoriising, raihor ihan on
variahlo cosis such as hoiior raw maiorials ano moro oxponsivo high-slilloo
lahour. If ihis assumpiion is rolaxoo, ihon iho iop qualiiy nrm will havo
highor variahlo proouciion cosis ihan a low qualiiy nrm, ano ihis rosiricis
iis possihiliiy io oocroaso pricos. Unoor nxoo cosis of qualiiy ano iooniical
marginal cosis, a high qualiiy nrm has a hoiior ahiliiy io soi pricos which
aro as low as ihoso soi hy a low qualiiy nrm ano sioal iho marloi sharo
of iho laiior (rocall ihai ai iooniical pricos ovoryhooy woulo huy iho high
qualiiy proouci). Lui unoor variahlo cosis of qualiiy, iho iop nrm has highor
marginal cosis as woll, ano ihis rooucos iis ahiliiy io compoio on pricos.
1horoforo, iho nniionoss proporiy ooos noi holo whon variahlo cosis of qualiiy
aro rolaiivoly moro imporiani ihan nxoo cosis of qualiiy, as showoo in Shaloo
ano Suiion (1087).
Shaloo ano Suiion (1087) ano Suiion (1001) roformulaio iho nniionoss
proporiy rosuli in a woalor hui moro rohusi vorsion, in iho sonso ihai ii
Soo Moiia, 1hisso ano Cahralos (1007) for an analysis of a qualiiy raco hoiwoon nrms
which siari from oiforoni lovols of qualiiy. 1his papor shows ihai porsisionco of loaoorship
is iho liloliosi ouicomo in ihis iypo of gamos.
40
holos across a numhor of spocincaiions, ano in pariicular whon nrms proouco
gooos which aro noi only qualiiaiivoly oiforoni, hui aro also horizonially
oiforoniiaioo. Accoroing io ihis vorsion, as iho sizo of iho marloi incroasos,
a vory largo numhor of nrms may survivo in iho inousiry, hui ihoro always
oxisis ai loasi ono nrm whoso marloi sharo is signincanily hounooo away
from zoro (in iho homogonous gooo caso insioao, whon iho numhor of nrms
ionos io innniiy, ihoir marloi sharo ionos io zoro).
Suiion (1001) puis iho moool io a iosi, ano gaihors improssivo oconomoi-
ric, as woll as caso-siuoy, ovioonco in favour of ihis rosuli. In pariicular, iho
loy rolo playoo hy aovoriising oxponoiiuros (which allow iho nrms io incroaso
iho porcoivoo qualiiy of iho proouci for iho consumors) omorgos cloarly. In
mosi of iho sociors analysoo (fooo ano hovorago inousiry), nrms havo hoon
ahlo io conquor largo marloi sharos hy oscalaiing aovoriising oxponoiiuros.
Whon marloi sizo incroasos, aovoriising ouilays of iho nrms iono io incroaso
as woll, sinco ihoro oxisis an inconiivo io incroaso qualiiy (iho marginal cosi of
qualiiy-onhancing sponoing is unchangoo, hui iho marginal hononi is highor
hocauso of iho largor marloi sizo). 1his incroasos iho nxoo sunl cosis of iho
invosimonis nooooo, ano ionos io limii iho numhor of nrms in iho marloi.
Moro procisoly, now oniranis mighi siill onior iho inousiry ano manago io
oporaio proniahly, hui ihoy woulo havo io roly on a low-prico, low-qualiiy
siraiogy, which ooos noi jooparoiso iho marloi posiiions of iho incumhonis.
91615 Vzlwfklqj frvwv
Anoihor siiuaiion whoro marloi powor ooos noi nocossarily oocroaso unoor
froo oniry is whon ihoro oxisi consumor swiiching cosis. 1horo aro many
roasons why consumors mighi profor io siicl io prooucis alroaoy houghi in
iho pasi, oihor ihings hoing oqual. Swiiching io a now proouci (or a now
supplior) mighi oniail iransaciion cosis (whon ono closos an accouni in a hanl
ano opons anoihor in a now hanl, for insianco) ano loarning cosis (iho cosi
of passing io a now sofiwaro applicaiion, afior having loarnoo how io oporaio
Ii shoulo ho omphasisoo ihai aovoriising oxponoiiuros aro noi an oxogonous sunl cosi
hui raihor an onoogonous variahlo for iho nrm. If ihoy woro nxoo sunl cosis, namoly
oxogonous harriors io oniry, ihon marloi sizo incroasos woulo allow a largor numhor of
nrms in iho inousiry ano a moro fragmonioo marloi siruciuro. Howovor, ihis occurronco
is rojocioo hy iho oaia.
Ior moools wiih swiiching cosis, soo Klomporor (o.g., 1087a ano 1087h). Ior survoys
on ihis iopic, soo Klomporor (100) ano Iaoilla (1001).
47
wiih a oiforoni ono, for insianco). Somo of ihoso swiiching cosis mighi also
ho ariincial or coniraciual, ihai is croaioo on purposo hy iho nrms in oroor
io malo ii moro oimculi for consumors io pass io now prooucis. 1hinl
of froquoni-yor" programmos, for insianco, ihai malo iravollors loonor on
coniinuing io uso iho sorvicos of iho samo airlino: if afior having accumulaioo
milos wiih an airlino, ihoy swiichoo io anoihor, ihoy woulo noi roach iho
numhor of milos nocossary io havo a froo ighi. Anoihor oxamplo of ariincial
swiiching cosi is foos chargoo hy hanls io closo an accouni.
In all ihoso casos, iho oxisionco of swiiching cosis ofociivoly oiforoniiaios
gooos which woulo oihorwiso ho porcoivoo as porfocily iooniical. Ono mighi
ho porfocily inoiforoni, h]: oponing a hanl accouni, hoiwoon iwo hanls
ihai chargo similar raios ano givo similar sorvicos. Howovor, n]: having
oponoo an accouni ai a pariicular hanl, iho oxisionco of swiiching cosis
woulo malo ii worih changing hanl only if iho aliornaiivo hanl will givo
much hoiior raios or sorvicos. Irooucis ihai aro ox-anio iooniical afior a
purchaso hocomo ox-posi oiforoniiaioo.
Whon such swiiching cosis oxisi, ano ono can roalisiically ihinl ihai ihis
is iho caso for many inousirios, now oniranis gonorally havo a haroor iimo
in goiiing marloi sharos from iho incumhonis. Iirms which havo alroaoy
oovolopoo a largo haso of cusiomors will havo a largo aovaniago, sinco vory
imporiani prico cuis shoulo ho oforoo hy now nrms io aiiraci commiiioo
cusiomors. Again, froo oniry ooos noi guaranioo ihai marloi powor will
oocroaso.
Swiiching cosis mighi also allow incumhoni nrms io chooso pro-oniry
pricos ano quaniiiios so as io siraiogically ooior oniry in laior porioos. Ior
insianco, a nrm ihai is a monopolisi iooay mighi unoor-prico in oroor io
huilo a largo cusiomor haso ano malo ii moro oimculi for a poioniial onirani
io onior iho marloi iomorrow.
Howovor, swiiching cosis mighi somoiimos malo iho incumhoni nrm loss loon on
nghiing oniry ano moro iompioo insioao io soi high pricos io oxploii iis cusiomor haso.
In oihor woros, pricos will ho highor rolaiivo io a siiuaiion whoro ihoro aro no swiiching
cosis, ano ihis in iurn malos oniry moro liloly oihor ihings hoing oqual.
In somo circumsiancos, for insianco whon iomorrow`s oomano is much largor ihan
iooay`s, a nrm mighi insioao wani io ovorprico iooay, ihorohy commiiiing io moro ag-
grossivo hohaviour iomorrow. Soo Klomporor (1087c) for an analysis of oniry ooiorronco
hohaviour.
48
Wkh frpshwlwlyhqhvv ri vzlwfklqj frvw pdunhwv Swiiching cosis
aro noi nocossarily always as anii-compoiiiivo as ihoy mighi appoar ai nrsi
sighi. Supposo for insianco ihai ihoro aro iwo nrms which aro hoih now
oniranis in an inousiry whoro consumors will havo somo lino of swiiching
cosis. In oach porioo, oach nrm has simulianoously io oocioo iho prico io ho
chargoo in iho marloi. 1hon iho oogroo of compoiiiivonoss in oach porioo
will ho vory oiforoni. In iho socono porioo, oach nrm will havo somo capiivo
cusiomors: iho consumors who havo alroaoy houghi from iho nrm in iho nrsi
porioo will iono io huy from iho samo nrm in iho socono porioo ioo (ihoy
aro locloo-in, ai loasi pariially). 1horoforo, wo shoulo oxpoci ihoir lowor
olasiiciiy of oomano wiih rospoci io prico io ho roocioo in highor pricos
chargoo hy iho nrms in iho socono porioo. Noiico ihai iho largor iho nrsi
porioo marloi sharo of a nrm iho largor iho proni ii will malo in iho socono
porioo.
In iho nrsi porioo, howovor, wo shoulo oxpoci sirongor compoiiiion ihan
in a siiuaiion wiihoui swiiching cosis. Sinco iho nrsi porioo marloi sharo
(or cusiomor haso) has a posiiivo impaci on iho socono porioo proni, oach
nrm will prico moro aggrossivoly in iho nrsi porioo. Ovorall, ihoroforo, ii is
noi possihlo io concluoo whoihor swiiching cosis will rosuli in highor or lowor
ioial wolfaro. In iwo-porioo moools, iho noi ofoci on compoiiiivonoss ouo io
swiiching cosis is ihoroforo amhiguous.
Howovor, iho prosumpiion ihai swiiching cosis oocroaso compoiiiion is ro-
inforcoo hy iho analysis of moools whoro nrms inioraci noi for only iwo hui
for many porioos. Loggs ano Klomporor (1002) oxamino a marloi whoro, in
oach porioo, nrms havo io soi pricos, somo now consumors arrivo, somo olo
consumors loavo iho marloi. 1hoy show - unoor rolaiivoly gonoral assump-
iions - ihai in such a siiuaiion swiiching cosis rolax compoiiiion, ihai is,
pricos aro highor ihan in marlois wiihoui swiiching cosis. Iniuiiivoly, ihoro
aro iwo oiforoni ofocis ai worl whon nrms soi pricos in any curroni porioo.
On iho ono hano, ihoy woulo lilo io chargo highor pricos io oxploii iho cur-
roni cusiomor haso. On iho oihor hano, ihoy woulo lilo io soi lowor pricos io
oxpano iho fuiuro cusiomor haso (in oroor io ho ahlo io oxploii ii laior). Ior
sovoral roasons ono shoulo oxpoci iho formor ofoci io oominaio. Iirsi, sinco
iooay is moro imporiani ihan iomorrow, ii is hoiior io havo highor proni
iooay ihan iomorrow. Socono, lowor pricos iooay aro rolaiivoly inofociivo in
aiiraciing consumors, sinco consumors woulo corrocily aniicipaio ihai ihoy
will faco highor prico iomorrow. Honco, ii is unliloly ihai iooay`s pricos will
40
ho much lowor io aiiraci fuiuro cusiomors.
Frqfoxvlrqv Alihough an unqualinoo proposiiion is noi possihlo, os-
pocially in iho lighi of iho various siraiogic ofocis ihai ihoy hring inio play,
swiiching cosis aro gonorally ooirimonial io wolfaro, among oihor ihings ho-
causo ihoy malo oniry moro oimculi ano marlois loss compoiiiivo. Afior
a long ano ooiailoo roviow of swiiching cosis ano ihoir ofocis, Klomporor
(100) arrivos ai iho conclusion ihai:
puhlic policy shoulo oiscourago aciiviiios ihai incroaso consumor swiiching
cosis (such as airlinos` froquoni-yor programmos), ano oncourago aciiviiios
ihai roouco ihom (such as sianoaroizaiion ihai onhancos compaiihiliiy ano
rooucos loarning cosis of swiiching, ano qualiiy rogulaiion ano informaiion
sourcos ihai roouco consumor uncoriainiy ahoui uniosioo hranos)." (Klom-
poror, 100: 80)
Ii woulo ho oimculi io arguo ihai compoiiiion auihoriiios shoulo sysiom-
aiically forhio nrms from inirooucing coniracis ano praciicos which involvo
swiiching cosis, among oihor roasons hocauso somo of ihoso praciicos mighi
concoivahly havo roasons oihor ihan iho oosiro io roouco marloi compoiiiion.
Howovor, auihoriiios shoulo chocl ihai nrm-croaioo swiiching cosis aro noi
provoniing compoiiiion in marlois. Whon oo-rogulaiing a proviously mo-
nopolisoo socior, for insianco, auihoriiios shoulo malo suro ihai consumors
aro noi locloo-in hy ariincial swiiching cosis (lilo whon swiiching iolophono
provioor woulo imply changing ono`s iolophono numhor). Whon analysing
morgors, auihoriiios shoulo uso ihoir hargaining powor io imposo roouciion
on swiiching cosis which aro ariincial ano noi moiivaioo hy any possihlo
iransaciion cosi savings.
Aooiiionally, ono shoulo oxpoci ihai in mosi siiuaiions pricos will ho siraiogic com-
plomonis" across porioos. If a nrm chargos a highor prico iooay, iis rival will havo a largor
cusiomor haso iooay. 1horoforo, ii will ho moro liloly io chargo highor pricos iomorrow,
sinco ii will wani io oxploii iis largor cusiomor haso. In iurn, highor rival pricos will malo
ono nrm`s proni largor.
In morgors of airlinos, for insianco, iho Europoan Commission is righi in asling iho
morging companios io malo smallor rival airlinos also hononi of ihoir froquoni-yor pro-
grammos. Soo for insianco iho 551&]|n:.n ano 5...n.:-5nh:n casos.
0
91616 Qhwzrun hhfwv
Oihor inousirios whoro a monopoly mighi porsisi oospiio iho ahsonco of har-
riors io oniry aro ihoso characiorisoo hy noiworl ofocis. In such inousirios,
consumors oorivo uiiliiy from iho numhor of oihor consumors who chooso iho
samo proouci. If mosi consumors havo alroaoy houghi a givon proouci, ii
will ho oimculi for now nrms io aiiraci oomano.
Noiworl ofocis aro mainly of iwo iypos. 1ho nrsi iypo is givon hy |j.-
.n|, or communicaiions, noiworls. In ihis caso, a consumor`s uiiliiy in iho
consumpiion of a gooo incroasos J.:|j wiih iho numhor of oihor pooplo
consuming iho samo gooo. 1ho proioiypical oxamplo for such a noiworl is
iolophonos. Ono woulo noi oo much wiih a iolophono if ihoro woro no oihor
pooplo wiih iolophonos wiih whom ono coulo communicaio. 1ho largor iho
numhor of pooplo in a givon iolophono noiworl iho moro usoful iho iolophono
sorvico. Iixoo iolophonos, mohilo iolophonos, fax, iolofax, iolox, o-mail sor-
vicos cloarly holong io iho samo caiogory. 1ho socono iypo is givon hy
.:&n|, or harowaro-sofiwaro, noiworls. In ihis caso, a consumor uiiliiy in-
croasos .:J.:|j wiih iho numhor of oihor consumors huying iho samo gooo
hocauso of iis ofocis on iho availahiliiy of a complomoniary proouci. 1hinl
for insianco of a crooii caro noiworl. As a caro-holoor, my uiiliiy is noi
oirocily afocioo hy iho numhor of oihor consumors using iho samo iypo of
crooii caro. Howovor, iho largor iho numhor of holoors of iho samo crooii
caro iho moro liloly ihai shop-loopors will accopi ii. Similarly, a consumor`s
uiiliiy from a givon compuior harowaro (or any iypo of ourahlo gooo, ho ii
a car, a washing machino, or a VCI) incroasos wiih iho numhor of oihor
huyors of iho samo compuior (or ourahlo gooo), sinco ihis will incroaso iho
lilolihooo ihai compuior sofiwaro for ii will ho oovolopoo (or sparo paris,
posi-salos sorvicos, or viooo cassoiios will ho availahlo).
In all ihoso siiuaiions, consumors will havo io faco cooroinaiion proh-
loms, sinco ihoir choicos aro hasoo on whai oihor pooplo will also oo. In
somo casos, ihis mighi noi ho a prohlom. Ior insianco, nohooy will wonoor
iooay whoihor ihoro will ho onough pooplo wiih whom io communicaio hy
1ho nrsi ariiclos on noiworl ofocis woro Kaiz ano Shapiro (108), ano Iarroll ano
Salonor (108). Ior a survoy, soo for insianco Kaiz ano Shapiro (1004), ano for a simplo
iniroouciion io ihoso iopics, Shy (2001).
Lui communicaiion mighi noi ho nocossary for a oiroci incroaso in uiiliiy. 1hinl for
insianco of somo consumor prooucis, whoro iho porcoivoo valuo of woaring a coriain iypo
(or hrano) of shoos or jacloi or waich, ofion ooponos on many oihor pooplo also having
iho samo proouci.
1
nxoo-lino phonos or o-mail. Lui in oihor casos, whon comploioly now noi-
worls,prooucis aro inirooucoo, oxpociaiions ahoui whai oihor pooplo will oo
aro rolovani. 1ho oovolopmoni of a now gonoraiion of mohilo phonos mighi
ho hinooroo hy oouhis ahoui how many oihor consumors will aoopi ihom
(ano how quiclly). Lilowiso, whon a now nrm launchos a noiworl wiih a oif-
foroni sianoaro ihan iho ono curronily usoo, a poioniial huyor has io guoss
iho lilolihooo ihai such noiworl will ho succossful, in oroor io avoio hoing
locloo-in wiih a proouci ihai givos hor liiilo possihiliiy of communicaiion
(communicaiions noiworls) or liiilo sofiwaro,sorvicos,complomoniary gooos
(harowaro-sofiwaro noiworls).
1horoforo, oxpociaiions play in noiworl inousirios a crucial rolo. Supposo
for insianco ihai a now iypo of mohilo phono sorvicos woro inirooucoo hy an
onirani nrm, whoso sianoaro is incompaiihlo wiih oxisiing mohilo phonos.
Each prospociivo cusiomor has io ialo a purchaso oocision on iho hasis of hor
oxpociaiions of oihor prospociivo cusiomors. If all consumors havo roasons io
holiovo ihai million of oihor pooplo will rush io huy iho now iypo of phonos,
all will huy. If nono ihinls ihai anyhooy woulo huy ii, nono will. Noiico
ihai horo oxpociaiions will ho solf-fulnlling: in iho nrsi caso, iho sorvico will
ho succossfully osiahlishoo: in iho socono, ii will noi.
1hoso foaiuros of noiworl ofocis oxplain why a poioniial onirani mighi
nno ii vory oimculi io challongo an incumhoni in ihoso inousirios. Ii is noi
onough io havo a hoiior proouci, or io provioo ii ai a lowor prico, sinco a
crucial compononi of iho uiiliiy of pooplo is givon hy iho numhor of (curroni
ano fuiuro) usors of ii. If iho now proouci is noi compaiihlo wiih iho os-
iahlishoo ono, iho nrm has io convinco prospociivo huyors ihai onough oihor
huyors will huy ii. 1ho largor iho numhor of consumors alroaoy locloo-in
wiih iho curroni sianoaro iho moro oimculi will ho iis iasl. 1ho sirongor
iho ropuiaiion of iho now onirani ano iho moro rosourcos ii commiis io iho
now proouci iho highor chancos ihai ii will succooo. A numhor of siraio-
gios mighi ho usoo io such purposos, from iniroouciory prico ofors (or ovon
giving away iho proouci for froo), io convincing nrms solling complomoniary
Saiolliio-hasoo mohilo phonos failoo io aiiraci onough consumors, ano iho nrm pro-
vioing iis sorvicos woni hanlrupi. GSM sorvicos in iho US havo oovolopoo vory slowly
(rolaiivo io Europo), among oihor roasons hocauso of uncoriainiy on iho winning sianoaro.
DIVX, a iochnology oforing similar sorvicos as DVD, hui hasoo on a oiforoni sianoaro,
also failoo in aiiraciing onough cusiomors ano oisappoaroo from iho marloi. On iho lasi
caso, soo Dranovo ano Ganoal (2000) for a ooscripiion on how iho uncoriainiy of consumors
ahoui iho oominani sianoaro can afoci iho ovoluiion of iho marloi.
2
sorvicos (or sparo paris, or sofiwaro applicaiions) io oovolop ihom.
Howovor, incumhonis can also aoopi a numhor of siraiogios which mighi
oolay or comploioly ooior now oniranis. Iirsi of all, incumhonis will wani io
malo suro ihai iho now prooucis cannoi ho compaiihlo wiih ihoirs (on com-
paiihiliiy ano inior-oporahiliiy, soo also chapior 7). As long as a sianoaro
is proprioiary, ihis siraiogy will ho logal. Howovor, iho incumhoni mighi
also ongago in anii-compoiiiivo praciicos. Ior insianco, facoo wiih an on-
irani which ofors a proouci wiih now foaiuros, an incumhoni mighi wani io
announco ihai soon ii will iniroouco an upgraoo of iis proouci ihai incorpo-
raios ihoso now foaiuros ovon if ihis is noi iruo. Lilowiso, ii mighi aovoriiso
ihai iho onirani is maling vory slow progross in huiloing a cusiomor haso
(or oquivalonily, ihai iho incumhoni`s marloi sharo is high ano growing).
Such announcomonis will liloly havo an impaci on iho oxpociaiion of con-
sumors ahoui iho viahiliiy of iho onirani, ano shoulo ihoroforo ho carofully
moniioroo hy iho anii-irusi auihoriiios, ano prompily punishoo if falso.
Givon ihai oniry mighi ho oimculi unoor incompaiihlo sianoaros, an-
oihor rouio ihai aniiirusi auihoriiios mighi concoivo io avoio such prohloms
is io forco compaiihiliiy in iho inousiry. Ior insianco, ihoy mighi imposo
on an incumhoni full inior-oporahiliiy wiih an onirani`s prooucis. Howovor,
ihis soluiion rominos us of iho oiscussion on paionis ano ossoniial faciliiios
(soo ahovo). Ex-posi (ihai is, afior a givon sianoaro is oominani), iho imposi-
iion of inior-oporahiliiy sounos hononcial hocauso ii allows moro compoiiiion.
Howovor, ox-anio (ihai is, hoforo a givon proouci appoars on iho marloi) ii
has an aovorso ofoci of innovaiions, sinco ii oiscouragos nrms from iniro-
oucing now prooucis ano io nghi for ihom io hocomo iho sianoaro in iho
inousiry. 1horoforo, such moasuros oo noi appoar convincing in gonoral.
A full analysis of iho wolfaro ofoci of inousirios wiih noiworl ofocis
is hoyono iho scopo of ihis sociion. Novoriholoss, ii is imporiani io ooal
Iroouci pro-announcomonis can sirongly afoci consumors` oxpociaiions, hui ii mighi
ho oimculi io chocl io whai oxioni ihoy aro falso, sinco ihoy rofor afior all io inioniions
ano plans...
Ior a oiscussion of anii-compoiiiivo praciicos in noiworl inousirios, soo also Iuhinfolo
(1008).
Ior a moro ihorough oiscussion of puhlic policios ahoui compaiihiliiy, ano ihoir pos-
sihlo ofocis on innovaiions, soo Iarroll ano Kaiz (1008). An issuo ihoy also oiscuss is
ihai iniorfacos ihai oo noi involvo much innovaiion oforis shoulo noi rocoivo proiociion.
Ior insianco, imposing :&nh: :nh.|.j io iolophono companios righily onsuros ihai iho
iniorfaco iolophono numhor" is noi proiocioo (assigning iolophono numhors io consumors
is coriainly noi worih proiociion).
8
- alhoii hrioy - wiih iho iooa ihai such inousirios aro pariicularly prono
io oominanco, ano aro ihoroforo naiurally associaioo wiih iho oxisionco of
monopolios. 1ho hasic concopi horo is ihai of nn:| ..:j, which rofors
io iho faci ihai whon ihoro aro compoiing sysioms, onco a sysiom managos
io gain a coriain aovaniago in consumor proforoncos, ihon ii mighi hocomo
moro ano moro popular (ihinl of iho rolo of oxpociaiions oiscussoo ahovo:
onco consumors soo ihai a proouci gains a largo onough marloi sharo, ihon
ii is oxpocioo io hocomo iho inousiry`s sianoaro) ano iis rivals mighi faoo
oui.
Marloi iipping is coriainly an imporiani phonomonon in noiworl inous-
irios, hui somo qualincaiions shoulo ho maoo hoforo jumping io gonoral con-
clusions. Iirsi, ihoro aro many siiuaiions in which oiforoni sianoaros mighi
co-oxisi in a givon inousiry. Ior oxamplos of incompaiihlo sysioms, ihinl
of oiforoni crooii caro ano A1M noiworls, or oiforoni hranos of viooo
gamos. In many casos, consumors oo valuo varioiy ano oiforoniiaioo sys-
ioms will survivo in iho samo inousiry. Socono, iho oxisionco of iipping ano
of iho largo proni ihai can ho roapoo onco iho own proouci is osiahlishoo
as iho inousiry`s sianoaro, will prompi nrms io compoio norcoly io win iho
sianoaros war". Inionso promoiional aciiviiios of various iypos, as woll as
aggrossivo pricing in iho iniroouciory porioos, mighi characioriso iho iniiial
siagos of a givon proouci lifo, as a nrm aiiompis io incroaso marloi sharos so
as io gain iho oogo ii nooos io malo iho marloi iip. As a rosuli, ii mighi
woll ho ihai iho largo proni maoo hy a nrm afior iis proouci has hocomo
iho oominani sianoaro mighi jusi covor iho cosi incurroo ouring iho sian-
oaros war. 1hiro, iho oxisionco of only ono noiworl in iho marloi mighi
ovon hononi consumors, io iho oxioni ihai ihoy will ho ahlo io onjoy moro
communicaiions possihiliiios or moro complomoniary sorvicos, whoroas unoor
compoiing noiworls ihoy will noi ho ahlo io.
Lilowiso, iho oimculiios facoo hy oniranis in marlois which oxhihii im-
poriani noiworl ofocis shoulo noi ho gonoralisoo io ihinl ihai all ihoso
In somo counirios, ihoro oxisi oiforoni noiworls of Auiomaiic 1ollor Machinos.
Ioy, Soahrighi ano 1irolo (2001) siross a iopsy-iurvy" principlo of compoiiiion. 1ho
highor iho pronis io ho maoo in a marloi iho sirongor iho compoiiiion io ohiain ihom. 1his
shoulo holo in inousirios wiih noiworl ofocis, swiiching cosi, locl-in ofocis, oconomios of
scalo, ano gonorally all siiuaiions whoro iho winnor ialos all".
1his rominos us of iho analysis of iho compoiiiivonoss of marlois wiih consumor
swiiching cosis. Inoooo, swiiching cosis ano noiworl inousirios sharo a numhor of similar
foaiuros, as sirossoo in Iarroll ano Klomporor (2001).
4
marlois will naiurally show oxcoss inoriia" (or porsisionco of oominanco).
As Kaiz ano Shapiro (1004, p.108) noio, oxamplos of oniranis which manago
io osiahlish a proouci incompaiihlo wiih provious sianoaros ahouno in iho
roal worlo. Iurihor, from iho wolfaro poini of viow, ii is noi ovon cloar ihai
oniry - if occurroo - woulo always ho hononcial. Supposo for insianco ihai
- ouo io consumors` oxpociaiions, porhaps holpoo hy iho ropuiaiion of iho
onirani - a now sianoaro which ooos noi ofor aovaniagos ovor iho provious
ono amrms iisolf in iho inousiry. 1his will loao io siranoing" of iho huy-
ors who havo locloo ihomsolvos in iho olo iochnology: ihoir purchasos will
rapioly hocomo ohsoloio, ano ouplicaiion of purchasos will havo io follow.
91617 D prgho ri +sk|vlfdo, qhwzrunv-
In ihis sociion I prosoni a simplo moool of physical (communicaiions) noi-
worls ihai is proposoo hy Iumagalli, Karlingor ano Moiia (2008), io il-
lusiraio iho cooroinaiion prohloms ihai ariso for consumors whon noiworl
oxiornaliiios oxisi, ano show ihai ihis mighi rosuli in iho onirani siaying oui
of iho inousiry ovon whon ii is moro a moro omcioni prooucor.
Iollowing Kaiz ano Shapiro (108), assumo ihai consumors valuo a noi-
worl gooo i as follows:
l = r (:) j , (22)
whoro r is iho inirinsic valuo of iho gooo in iho ahsonco of noiworl ofocis,
(:) is iho valuaiion for iho noiworl : consumors huy noiworl i gooo),
ano j is iho prico a consumor has io pay io join noiworl i. Ior simpliciiy,
assumo ihai r = 0, so ihai iho noiworl gooo has valuo only for iis noiworl"
compononi.
Assumo ihai (:) is non-oocroasing ano concavo, hui ihai afior a coriain
numhor of consumors . iho noiworl oxhausis iis posiiivo oxiornaliiios. In
oihor woros, (.) = (. ) for all 0. (1ho roason hohino ihis assump-
iion will ho oxplainoo shorily.) Assumo also ihai (1) = 0: ihoro is no valuo
from huying a noiworl proouci of which ono is iho only consumor.
In iho marloi for ihis noiworl gooo, ihoro is an incumhoni, 1, ano a
poioniial onirani, 1. 1ho onirani is moro omcioni ano can proouco ai a
Iumagalli oi al. (2008) oovolop iho moool io analyso how iho incumhoni ano iho
onirani mighi rosori io oiforoni siraiogic variahlos so as io malo consumors cooroinaio
on (rosopciivoly) an oxclusionary or an oniry oquilihrium.
cosi c < c . 1ho iwo noiworls aro homogonous in iho sonso ihai if ihoy
aro of iho samo sizo, ihoy croaio iho samo oxiornaliiy for ihoir consumors:
() = () = (). Assumo also ihai iho onirani has arhiirarily small nxoo
cosi of oniry, , io unoorlino ihai oniry harriors como only from noiworl
ofocis.
1horo aro iwo groups of consumors, oach of sizo .. 1ho nrsi group of
(olo") consumors havo alroaoy houghi iho incumhoni`s proouci in iho pasi,
ano onjoy a uiiliiy (.). 1ho socono group of (now") consumors is on iho
marloi now.
Noio ihai iho assumpiion ihai iho incumhoni has alroaoy sorvoo . con-
sumors in iho pasi has a iwo-folo rolo. Iirsi, ii implios ihai now consumors,
shoulo ihoy join iho incumhoni`s noiworl, oo noi havo any oxiornaliiy on iho
. olo consumors: socono, ii implios ihai iho asymmoiry hoiwoon iho incum-
honi ano iho onirani is maximal, sinco iho incumhoni has alroaoy roachoo
iho highosi possihlo oxiornaliiy lovol.
1ho gamo is as follows.
1. 1 oocioos whoihor io onior or noi.
2. Aciivo nrms soi pricos simulianoously. Assumo for iho iimo hoing ihai
pricos musi ho iho samo for all cusiomors.
8. Luyors oocioo which noiworl io join, ano pay oiihor j or j .
Wzr w|shv ri htxloleuld 1horo oxisi iwo vory oiforoni oquilihria in
ihis gamo. 1ho nrsi ono is an oniry" oquilihrium, whoro iho onirani oniors
ano all now consumors join iis noiworl. 1ho socono ono is an inomcioni
porsisionco of monopoly" oquilihrium, whoro consumors fail io cooroinaio
on iho ouicomo ihai woulo ho moro omcioni. Loi mo characioriso ano provo
iho oxisionco of oach oquilihrium as follows.
1::j j&.|.h:.&n. Ai ihis oquilihrium, 1 oniors, 1 sois a prico c ano 1
a prico a shaoo holow c , ano all . now consumors join iho onirani`s noiworl.
1o soo why ihis is an oquilihrium, consioor consumors nrsi. Ai ihis oqui-
lihrium, ihoy havo a surplus (.) c . If ono of ihom ooviaioo ano houghi
Noio ihai horo noiworls aro incompaiihlo: ihoro oxisi noiworl oxiornaliiios only
among consumors who huy from iho samo noiworl. Soo chapior 7 for a moool whoro
inior-oporahiliiy (or compaiihiliiy) is an onoogonous choico of nrms.
1horo mighi also oxisi oihor oquilihria.
0
1`s proouci, whon all oihors aro joining 1`s noiworl, ii woulo goi a uiiliiy
(.) c . 1horoforo, ii has no inconiivo io ooviaio.
Iirms havo no inconiivos io ooviaio oiihor. Iirm1 woulo havo no inconiivo
io oocroaso iis prico givon ihai, shoulo ii goi consumors, ii woulo malo lossos.
Iirm 1 woulo noi havo an inconiivo io incroaso iis prico hocauso oihorwiso
cusiomors woulo swiich io iho incumhoni.
1:...: ] n:|j : n..-:J.:n.:) j&.|.h:.&n. Ai ihis oqui-
lihrium, 1 ooos noi onior, 1 sois a prico j = (.), ihorohy oxiraciing all
surplus from consumors, ano all . now consumors join 1`s noiworl.
1o soo why ihis is an oquilihrium of iho gamo, consioor iho caso whoro
iho onirani has onioroo ano has oforoo a prico which mighi ho as low as
c . Ii is oasy io soo ihai ovoryhooy aoorossing iho incumhoni is siill a
Nash oquilihrium ai iho consumors` siago of iho gamo. Ai iho proposoo
oquilihrium, all consumors huy iho incumhoni`s proouci, ano havo surplus 0.
Howovor, if any of ihom ooviaioo ano houghi from 1, givon ihai all oihors
huy from 1, ii woulo rocoivo uiiliiy (1) c = c . 1horoforo, ii woulo
worson iis posiiion.
As for iho nrms, ai ihis oquilihrium 1 has no inconiivo io chango iis prico
(ii is oarning monopoly pronis), ano 1 has no inconiivo io ooviaio, as hy
onioring ii woulo noi ho ahlo io rocovor iis nxoo cosi, howovor small.
1his is cloarly a mis-cooroinaiion oquilihrium, in iho sonso ihai consumors
aro unahlo io cooroinaio on iho ouicomo ihai is moro convonioni for ihom.
Woro ihoy ahlo io cooroinaio ano oocioo iogoihor, iho only oquilihrium of
iho gamo woulo ho iho ono whoro oniry occurs. (I shall como hacl io mis-
cooroinaiion prohloms in chapior , whon oiscussing huyors` powor, ano in
chapior 0, whon oiscussing oxclusivo ooaling as an oniry ooiorronco oovico.)
On iho oihor hano, iho incumhoni mighi also io rosori io siraiogios ihai
allow ii io oxcluoo oniry, as I now show.
Sulfh glvfulplqdwlrq wr h{foxgh hqwu| lq d qhwzrun lqgxvwu| As-
sumo now ihai iho incumhoni can prico oiscriminaio among iho now con-
sumors, ano ihai iis cosis aro noi ioo low, i.o. 2c < (2)c . Ior simpliciiy,
soi . = 2, ano call iho now consumors 1 ano 2. I now show ihai ovon if iho
onirani onioroo ano oforoo iis noiworl proouci ai a prico c , ii woulo noi
goi any oomano if iho incumhoni is ahlo io prico oiscriminaio. 1horoforo,
1ho incumhoni woulo ho ahlo io ooior oniry also if ii consumors houghi soquoniially.
Soo also chapior 0 for an oxclusivo ooaling moool which oxhihiis vory similar foaiuros.
7
iho only oquilihrium of iho gamo is iho ono wiih porsisionco of monopoly.
If iho onirani sois a prico c , ano iho incumhoni sois pricos j < (2)
ano j = (2), consumors` payofs will ho as in 1ahlo 2.2.
INSEI1 1ahlo 2.2: Consumors 1 ano 2`s payofs unoor prico oiscriminaiion.
1ho oquilihrium whoro hoih consumors huy from iho incumhoni always
oxisis: consumor 1 has a surplus huying from 1, whoroas ii woulo havo a
nogaiivo surplus if ii ooviaioo ano houghi from 1 (rocall ihai a noiworl of
sizo 1 givos zoro uiiliiy): consumor 2 has zoro uiiliiy anyhow.
Howovor, iho oniry oquilihrium, which corrosponos io iho pair (/n 1,
/n 1) ooos noi oxisi any longor. 1o soo why, noio ihai, givon ihai 2 huys
from 1, consumor 1 gois surplus (2) j if ii huys from 1, ano (2) c if
ii huys from 1. 1horoforo, ii will wani io ooviaio ano huy from 1 if j < c .
Lui is ii proniahlo for iho incumhoni io ooior oniry Cloarly, ii woulo noi
ho ahlo io proniahly ooior oniry if ii hao io ofor a prico holow cosi io oach
huyor. Howovor, unoor prico oiscriminaiion ii ofors a prico holow cosi io ono
huyor only, whilo soiiing iho monopoly prico io iho oihor. 1horoforo, ihis
oniry-ooiorronco siraiogy is proniahlo as long as ioial rovonuos, (2) j _
2c aro highor ihan ioial cosis. Sinco j < c , ihis proniahiliiy conoiiion
hocomos: (2) c _ 2c , which is iho assumpiion maoo ahovo.
91618 H{foxvlrqdu| sudfwlfhv
As wo havo soon, froo oniry ooos noi guaranioo ihai an inousiry siruciuro will
hocomo loss conconiraioo ovor iimo. In marlois characiorisoo hy onoogonous
sunl cosis, consumor swiiching cosis or noiworl ofocis, for insianco, oniranis
will ofion nno ii oimculi io challongo succossfully incumhonis, ovon if iho
laiior oo noi hohavo siraiogically.
Whon incumhonis hohavo siraiogically, ihings iurn ovon moro oimculi for
oniranis. A monopolisi (or moro gonorally a nrm wiih largo marloi powor)
mighi ongago in many oiforoni praciicos aimoo ai ooiorring oniranis. Invosi-
ing in oxira-capaciiy, soiiing pricos holow cosi, oooing a marloi wiih many
oiforoni proouci spocincaiions, foroclosing accoss of rivals io crucial inpuis,
hunoling, prico oiscriminaiing, iying aro all possihlo oxamplos of siraiogios
ihai can provoni oniry. 1ho analysis of oxclusionary praciicos is oolayoo
uniil chapior 7, hui ii is worih rocalling horo ihai compoiiiion auihoriiios
shoulo ho vigilani ano prompily iniorvono whonovor monopolisis impooo on-
iry ihrough praciicos whoso proniahiliiy oorivos only from ihoir ahiliiy io
8
loop oniranis of iho marloi. 1his is an imporiani issuo, as woll as a oimculi
ono, sinco in mosi casos ii is haro io ioll apari gonuino compoiiiivo siraiogios
from prooaiory onos.
: Vxppdu|/ dqg srolf| frqfoxvlrqv
1his chapior has illusiraioo iho rolaiionship hoiwoon marloi powor ano wol-
faro. 1ho analysis of allocaiivo omcioncy has showoo ihai marloi powor
hrings ahoui a wolfaro loss, ouo io highor pricos ihan in a compoiiiivo sii-
uaiion. Iroouciivo ano oynamic inomcioncios (highor proouciion cosis ano
lowor innovaiion raios) mighi also ho associaioo wiih marloi powor. 1his
oxplains why compoiiiion policy shoulo ho concornoo wiih marloi powor.
Howovor, I havo also arguoo ihai iho oliminaiion of marloi powor - ovon
if ii woro praciicahlo - is noi ono of iho ohjociivos compoiiiion policy agoncios
shoulo pursuo. Inoooo, iho prospoci of having somo marloi powor (i.o., somo
proni) roprosonis iho mosi poworful inconiivo for nrms io innovaio ano invosi.
Compoiiiion laws ano ihoir onforcomoni shoulo ihoroforo onsuro nrms will ho
ahlo io onjoy iho rowaros for ihoir invosimonis. I havo ihoroforo arguoo ihai
any oxpropriaiion of nrms` assois (whoihor maiorial or immaiorial) shoulo
ho avoiooo. As a consoquonco, rosoriing io iho oocirino of ossoniial facili-
iios (graniing accoss of crucial assois io compoiiiors), io prico conirols, or
ovon moro orasiic siruciural romooios musi ho oono only in iruly oxcopiional
circumsiancos.
I havo also iaclloo oihor misconcopiions of compoiiiion policy. In par-
iicular, I havo unoorlinoo ihai oofonoing compoiiiion is noi ianiamouni io
oofonoing compoiiiors. Inoooo, compoiiiion ofion loaos inomcioni nrms io
oxii ano ihis is hononcial from a wolfaro poini of viow. Iroiociing inom-
cioni nrms so as io prolong ariincially ihoir lifo in an inousiry woulo ho
ooirimonial.
Iinally, marloi forcos lofi alono will noi nx ii all": for sovoral roa-
sons, vory ofion incumhoni nrms aro ahlo io loop ano roinforco ihoir marloi
powor. Compoiiiion policy has ihoroforo iho imporiani rolo io ho vigilani,
ano guaranioo an onvironmoni whoro poioniial ano aciual compoiiiors aro
ahlo io challongo iho nrms onjoying a posiiion of largo marloi powor.
; Hvvd|v dqg h{huflvhv
0
H{huflvh 4 : .nn| ] ::-.|.:j. C:..J: n nn:| |: n n|
: H n: h n::J hj | :n |.| hn.:. | n:|j :.j| .|| .:
|n nn:|. 5&. |n |: ... : .J:.n| :n. |.| n:..n .: |
n..: hn.: |.. n:|j :.j|. 1n| :n i |n. ..n&|n:&.|j
J.J | nn&: a . n:. .:J, |:.:j |n | :hnh.|.j .:
| :n .. j.: hj a ,
a . n) 1.:J | .jnn:. j&.|.h:.&n ||

] .:J.&: ] n| :n, n:J | .J j&.|.h:.&n : ] n| :n.
h) 5| |n n. : :J. .::.j, | n| .:J.&:. nnJ hj | :n.
j&n| | n| n:|j :.
H{huflvh 5 1j nn|.:j &. ] j:n|., .J:.]j | |]n: |.. &::.:j .:
n nn:| |: | :. j .. |.j|: |n: | nn:j.:n| . ] :J&.:,
n:J |: J..&.. | |.. |.. &|J h |.j|: J& ...h| ::-.|.:j
n.... n:J :J&. .:.:j.
H{huflvh 6 1.|n.: |j |: .. n ...h| :..: h: n||n. -
.:j : : ..J n:J :J&. n:J Jj:nn. .:j : | |: ..J.
H{huflvh 7 1:..:J J`.:n: n:J 1n 100u). C:..J: n |-
nj:&. jJ .:J&.:j .| :.n| :n.. 1n:| Jnn:J .. j.: hj
j = o(1 j), |: o .. nn:| ... n:J Q .. .:J&.:j &&. 1.:n. |n
.: :.n: nn:j.:n| .. h& .:&: n .J . / (0, o,0) .] |j n: n-
.. J| jnn |j |nj .. n. ]||.. 1.:., |j J.J ||: :: :
: | .:J&.:j. J|:, |j n .: | :J& nn:|. C:..J: |:
J.:: n.. ] :J& n..:: .) :n. ::-:n.|j |.
:.. 1::n:J), ..) :n. ::-:n.|j |. j&n:... C&::),
...) n n:| .. n||J: :n. . j&n:... : :.., . .. j&.n|:) .
n. ].:|j nn..n.. |.: :. 1:|j). 1&. : &: .:nj..
n:J :J .&h-jnn :] An.|) j&.|.h:.&n j&n:..., :.., :., :-
.&n: .&:|&. n:J |]n: ]: n| ] | |: n.. nh. 5| |n ]:
| :&j| .J .. C&:: n..: j.. :.. |.j|: |]n: |n:
1::n:J n..:, n:J |n 1:|j n|nj. j.. | |. |]n: ||
n j&.|.h:.&n.
H{huflvh 8 C:..J: | .nn .nn| n. .: ..: ..1, h& n..&n |n
|: .. n J:n.. .::n.:, |n .. | :J&.: .: nn:j.:n| . .. |n:j
:&j|: a 1 c . Cnn: | j&.|.h:.&n &:J: J&|j .| | :
hn.:J nh &:J: n:|j.
I am graioful io Joo Harringion for suggosiing ihis formalisaiion.
00
H{huflvh 9 C:..J: n n:.n: ] | nJ| Jn| .| .: ..: ..1
|: | nn&: ] .::n.: .. :.:&&. n:J :Jj:&.|j J:n.:J
:n|: |n: .j:&.|j j.:. J| . ] .::n.: .. : :.n:, h&
.. n j&nJ:n. ]&:.: ] | nn&: ] .::n.: nnJ. 1: .|..|j,
n :n ]n. n: .:.n: . C(a ) = a . 1j .:..:j a .: .::n.:
.&| n: .:.n: ..|| &:. .: | :. .nj n:J . .. |:]: .&:| .:
| .:J .nj), n :n .|| |n nn:j.:n| . c a .: | ]||.:j :.
.&h-jnn. n: ]:n |.. n:.n:, :..J: | .nn . ] n..&n.:.
n. nh. 1) 1.:J | .nn| nn&: ] .:.n: a ]: n n:|...
.) 1.:J | j&.|.h:.&n nn&: ] .:.n: a .: | J&|j. 1. .
::.:J. n J:n.. : ::-J:n.. .::n.: 1. a h.jj: : .nn||:
|n: a
H{huflvh : 1|j .|&|J : . n: .::J 1 :|n.:.|. h: n-
..: n:J .::n.:
H{huflvh ; C:..J: n |nj:&. jJ .:J&.:j .| :]|j .jn-
n:. :n.. J| :n. |nj | ]||.:j jnn. 1: | :. .nj, |j
..n&|n:&.|j J.J ||: |j :: | .:J&.:j : :. 1: | .:J,
|j ..n&|n:&.|j J.J : | j&n:.j h:.:j | nn:|. 1] |j :-
:, |j |n .:&: n .J .-& . 1. 1:J&.: &:. n n :.n:
nn:j.:n| . c. 1n:| Jnn:J .. |n:n:..J hj j = 1 Q, j h.:j |
nn:| :. n:J Q | njj:jn &&. n) 1.:J | :&nh: ] :n. : |n
&|J :: n | .&h-jnn :] An.| j&.|.h:.&n. 1: ..n|..j, :-
..J: : n. :.:&&. .: | || .:...) h) C:..J: : | ]||.:j
jnn. 1: | :. .nj, n ..n| |n::: J.J. | :&nh: ] :n. n:J
nj. | .J .. ] :n.). J| ..n| |n::: nn..n... |]n:, n. j.:
hj | .&n ] :.&n: .&:|&. n:J :J&: .&:|&. n.:&. | ::j .. .
|n. nj. 1: | .:J .nj, | .nn j&n:.j n..: jnn n. nh
.. |njJ. 1.:J | .nn| :&nh: ] :n. |.: hj | ..n| |n::: n:J
nn: . .| | :&nh: ] :n. |n &|J :: n | .&h-jnn :]
An.| j&.|.h:.&n.
H{huflvh < C:..J: | nJ| n:n|j.J .: ..: .... ..&n |n
|: .... n ..n| |n::: | nn..n... n| |]n: n|.:j | :&nh:
] :n. : n. j.:. 1.:. | ..n| |n::: |n. |. 11 ||., n:J
|: &&. 1.:J | .jnn:.) .nn| ||. ] 11 n:J &&, n:J
nn: |n .| | j&.|.h:.&n ||. hn.:J .: | nJ| ] ..:
....
01
H{huflvh 43 C:..J: | .nn nJ| n. .: ..: ... h& n..&n |n
| : :n. ].:|j J:n.: |.: && ||.: .: | :. .nj ] |
jnn, n| :n .:J:J:|j .. .. 11 ||, .: | .:J .nj, |
:n. n n. n n:|, |n .. |j |. |.: && ||. . n. nn..n..
].: :.. 1.:J | j&.|.h:.&n ||. ] 11 n:J && n:J nn:
|n .| |. hn.:J .: | nJ| ] ..: ....
H{huflvh 44 1:J&.:.n| :jn:..n.: nJ|. .&jj. |n - |] n|: - nn:-
| ]:. .|| :.&| .: n:j j.: .:J&.:j .: j&.|.h:.&n ||. ] j&n|.j,
n:.j, .::n.:, : n.:. |n n: J.:: ]:n | .nn| ||.
]: ..j |n .., ]:n | ||. ] j&n|.j, n:.j, .::n.: : :&n-
h: ] :n. |n &|J nn..n.. :n. |]n:). J|.. .. hn&. :n.
n| |.: J...:. : | hn... ] |.: :., : n|.:j .: n&: |
.::n|.j |n .&| J...:. .:.. : n.:., : : :.&n:..
1|n n: | ...h| :n.n| .n|.n.:. ] |.. :.&| Cn: n..:
n&|:... :j n n| .:J&.:j n:J. | .nn| &n
H{huflvh 45 1: n &::j, | .J ||: nn:| |n. ]&. h: J-
:j&|nJ n:J : ::n:. n: n||J |n||:j | .:&nh: n:-
|.. |n :n:. 5:, | ::n:. J..: |n . .. :j J.&|
:.&nJ &.n:. ..| :n:, hn&. |j J : n: |n:j
|.: ||: :&nh:, : |.| | .:&nh: |n.n. .:||&n| ::j
:.j|.. 5|&|J | C&: J.J .: ]n&: ] | .:&nh: .: |.| n.,
&.n:. | n::.. | : :n:. .|&|J |n:j ||: :&nh:)
: | ::n:.
H{huflvh 46 1.|j .:..:J | O.|n: 1:::: n.) J| |nJ.:j :n-
.:n| :.n: .: | &::j |n. .nh|..|J n .j.n ] |n J|.:j
.:.., |n n||. . J..:.h& .. ] | :.n: .: | n:|j n::-
.:j .: n|| | &::j. :j.:n| :.n: |n. J.JJ .|| : | n||
:n.:n| ::.:j, n:J n:J.:j|j .::n.. :nj ] :., ]:n |n|
:n.:n|. 1:, . J..:. |n | |n| ] n |n J|.:j J..:.h&.:
nn|. . J.&| .::n. :n.:n| .n|., n:J |n h&.|J.:j .&| n J..:.h&-
.: .j.n .. .:.. n:J :..|j. 1 n.|. | |nJ.:j :.n: j:n:
. n.. .. |n J|.:j J..:.h&.: .j.n h|.:J n ]n.: n:.n.:,
h& | |n: :]&.. .. 5|&|J | C&: J.J .: ]n&: ] | :n.:n|
:.n: : | |n| :
02
H{huflvh 47 1n..:j . .||.:j 1:n J.:|, 10, ..: 1....1) C:-
..J: n - :.J jnn |: |: .... n n:|... :n |n n:.
.|| .. J&:nh| jJ. J| J&:nh| jJ .|| |n. :|j :.J., n:J n]:
|n . .|| hn h.|. J|: .. : J:.n.: ] | jJ h: |
:.J.. J| J..&: ]n: c .. .J:.n| ]: n|| :.&n:. n:J | :n.
1nn:J ]: | &.|..n.: ] | jJ .|| h j.: hj j = 1 Q Q h.:j
njj:jn j&n:.j). 1:J&.: .. n..&nJ h .|... :.n| nn:|
....: :.&n:. | h&j | jJ .: : :.J n.j| n: :-.|| :
|n.) . .: | .:J :.J.
1. C:..J: :. | n. |: | :n .||. .: n| :.J. 1.:J |
j&.|.h:.&n :.. |n:jJ hj | n:|.. .: n| :.J, n:J .| |n
|j J|.: : .n. 1.:J | n| j&.|.h:.&n :.
.. C:..J: |: | n. |: | n:|.. |n.. ::.) | jJ .:
n| :.J, n:J :J j&.|.h:.&n :.. n:J :.. : |j |.j|: : |:
|n: | : nnJ &:J: .n|.
H{huflvh 48 1:.n| :J& J.::.n.: nJ|. .&jj. |n |.j| :-
::n.: n.j| n:.. .: nn:|. |n:n:..J hj :Jj:&. .&:| ..
.&| n., ]: .:.n:, nJ:...:j &|nj.. 1: .&| nn:|., :n. .:..:j
|n.|j .: nJ:...:j j.n||j |n |n:j: nn:| .|n:., |n:j |.j|: :..
n:J j |.j|: :. |n: |.: :.n|.. J|.: |nJ:.|. n|. :J. :...
: .n. 1|n |.j .n|.n.:. .|&|J J:. ]:n .&| nJ|.
H{huflvh 49 1:n 1|n::, 10: 1|]n: . ] ::j) C:..J:
| ]||.:j -.nj jnn h: n: .:&nh: :n n:J n :.n| :-
:n:. 1: | :. .nj, | ::n: J.J. ||: :: : : .: |
nn:|. 1::j .. .|... 1: | .:J .nj, ....:j :n. .: | nn:-
| ..n&|n:&.|j) |. | j&n:.j h .|J. 1.:n. |n | .nn
:.n: &:. . c. C:.&n:. | h&j | ::n:`. :J& .|| |n
.:&: n ..|.:j . . 1: ..n|..j, n..&n |n |: .. : ..|.:j
. |: h&j.:j ]:n | .:&nh:.) ..&n |n |: .. |.:n: Jnn:J
j = c , .: |: :J., |.. .. | -| :.&n: :.:n.: :. :
] ..|.:j ..).
1. 1.:J | j&.|.h:.&n && n:J :.. ]: | jnn n:J.:j |
J.:: ||. ] ..|.:j .. .
.. 1. . ...h| |n ::j J.n.:..|. |]n:
. C:..J: | n. |: | ..|.:j . .. .:. 1&|J |]n: h
|.j|: : |: |n: &:J: ... ..|.:j ..
08
H{huflvh 4: 1.nn|. u n:J 1 .: 1|n::, 100.) C:..J: | ]|-
|.:j -.nj jnn. ..&n |n |: n: A :.&n:. | n: J..-
:.h&J n|:j n |.: [0, 1[ |.| nn.&:. |.: |.:n:) . ] |n::.:j |
&. n |nj:&.) :J&. 1.:n. , 1 .|| | .nn :J& h& n:
|nJ n 0 n:J 1 :..|j, n:J |n | .nn &:. . c = 0 .: n|
:.J. J|:]:, n :.&n: |nJ n .: |n. n |n::.:j . t ]
&..:j :n `. :J& n:J t(1) ] &..:j 1`. :J& t 0). C:.&n:.
J : |n n:j |j..n| :n:.: .. :.J 1, :.&n: &.|.j .. j.:
hj l = r j t [| [, ]: i = , 1, |: | .n:J. ]: |n.: ] :n i.
..&n n|. |n jJ. n:: h .:J n:J |n :.&n:. |n | .nn
J..&: ]n: c = 1. :.J 2, n| :.&n: |n. n :.:n.: :.
1 h&j | jJ. GJ. n: :.J n. :]|j |nj:&., h& |:
n: ..|.:j ..: .] : |n:j. :.J:, : |n. nj n . |.|
]: ..n|..j .. n..&nJ h .:J:J: ] | J..n: |.| .n:n.
| :.&n: ]:n | :n. 1.:n. . ..n&|n:&.|j :.. .: n| :.J.
..&n n|.: 1 c, _ 1 c, r 2t c.
1. 1.:J | j&.|.h:.&n :.. ] n| :.J ] | jnn.
.. 1.:J | j&.|.h:.&n :. ]: | jnn |: | :. :.J .. |.|
nh, h& .: | .:J :.J |: n: : ..|.:j . n n||. 5| |n
&:J: ..|.:j .. :.. n: |.j|: .: | .:J :.J h& |: .: |
:. :.J.
H{huflvh 4; 1:|j |:n:J hj ::j. 1:n J.:|, 10: ..:
1u.1.) C:..J: | n. ] :n. .: n: && nn:|. C:..J: n|.
|n |: .. n |.:J :n |.| n:: :J& .: |.. && nn:| h&
|n. j::nJ n: .::n.: |.| n: |: | &:. :J&.: . ]:n
c c < c :.. .::n.:). J|.. |.:J :n &. |.. .::n.: & ]:
h.JJ.:j h: | :J&.:j :n. n:J | .::n.: .. :J hj n
n: ] &:|.n.J J&:n.:. 1]: | h.JJ.:j :.. n|. |n, :n 1
.. n n:|.. n:J :J&. n &:. . c. 1.:n 1`. : n |.. .n&. j&
nn:| .:&&: .. J:J hj H (c). 1.:n ., .. n :.n| ::n: |.
&:. . .. .::.. 1 H (c, c) n:J H (c, c) J: | :. ]: |
n:|.. n:J | ::n:, :..|j, .] | ::n: n|: nJ. | :
|:|jj .| nn:j.:n| . c n:J, :.j&:|j, | n:|..`. nn:j.:n|
. .. ..|| c.
1. 1.:J | n|& ] | .::n.: ..., | J.:: h: | :.
n :n n::. .] . .. | : |n .:. | h.JJ.:j n..: ]: | .::n-
.: n:J | :. . n::. .: n. . J. : .: | h.JJ.:j n..:)
04
]: | n:|.. \ ) n:J ]: | ::n: \ ).
.. 5| |n H (c) _ H (c, c) H (c, c) .. n .&.: :J..: ]:
\ _ \ .
. C:..J: | n. .: |.| | .::n.: .. J:n.., j (c) < c. 1]
|.. .. | n., |n .. | n|& ] | .::n.: ]: :n. 1 n:J .
< Vroxwlrqv ri h{huflvhv
H{huflvh 41 1ho oxpocioo proni of a nrmi is givon hy : =
_
a ,
a
_
H
a . 1ho IOCs aro ihoroforo givon hy iho sysiom of oquaiions
0: ,0a =
_
a
_
H,
_
a
_
1 = 0. (a) Ai iho symmoiric oquilih-
rium \i 1, ..., :} , a = a, oach nrm sponos a = (: 1)H, (: ). Ly suh-
siiiuiion, ono can nno ihai iho oxpocioo oquilihrium proni is : = H, (: ).
(1ho socono-oroor conoiiions for a maximum aro saiisnoo.) (h) 1oial oxpon-
oiiuro :a io ohiain iho monopoly roni H is givon hy (: 1)H, (:), which
ionos io H as : .
H{huflvh 71 (i) (Cournoi) 1o analyso iho caso of quaniiiy compoiiiion,
nno nrsi iho invorso oomano funciion, which is j = 1 Q,o. A nrm i
choosos io maximiso : = [1 ( ),o[ /. 1ho IOCs aro d: ,d =
1 2 ,o ,o = 0. Ai iho symmoiric oquilihrium = = iho soluiion
will ho givon hy = o,3. Equilihrium pricos ano inoivioual pronis will ho
j = 1,3 ano : = o,0 / 0. Ii is oasy io nno consumor surplus ano
ioial wolfaro as: Co = 2o,0 ano \ = 4o,0 2/.
(ii) (Lorirano) Givon ihai prooucis aro homogonous, compoiiiion woulo
hring ahoui zoro (shori-run) pronis, which woulo noi allow hoih nrms io
covor nxoo cosis. 1horoforo ai iho (long-run) oquilihrium in puro siraiogios
only ono nrm will ho aciivo in ihis marloi. 1his nrm will chooso Q so as io
maximiso : = Q(1 Q,o) /. Irom d:,dQ = 0 ii follows ihai oquilihrium
ouipui, prico ano pronis will ho: Q = o,2, j = 1,2 ano : = o,4/ 0.
Consumor surplus ano ioial wolfaro aro: Co = o,8 ano \ = 3o,8 /.
(iii) (Monopoly or cariol) Iirms will soi ouipuis ano so as io max-
imiso iho joini pronis : : = [1 ( ),o[( ) 2/. Cloarly, ihis
givos riso io iho samo soluiion as in iho Lorirano caso, hui wiih a ouplicaiion
in iho nxoo cosis. Consumor surplus ano ioial wolfaro aro: Co = o,8 ano
\ = 3o,8 2/.
0
1ho wolfaro comparisons aro siraighiforwaro. If / (0, 5o,72[, ihon
\ _ \ . If / (5o,72, o,0), ihon \ < \ . Ii is onough io inspoci
\ , \ , \ io soo ihai \ is always iho lowosi.
H{huflvh 8 Assumo a 1 c . 1hon ai iho lasi (prico) siago of iho
gamo, iho innovaiing nrm will ho hoiior of hy charging iho monopoly prico
(1 c a),2 < c . Ii will oarn gross proni H = (1 c a) ,4.
Ai iho nrsi siago of iho gamo nrms corrocily aniicipaio iho proni ihoy
woulo malo in iho following siago. Iirms` payofs aro as follows. If hoih
nrms innovaio, ihoy will hoih goi 1. If nono innovaios, ihoy will hoih goi
0. If only ono nrm innovaios, iho innovaiing nrm will goi H 1 ano iho
oihor nrm 0. 1his gamo has iho following soluiions: if H 1 iho only
Nash oquilihrium is ono whoro ono nrm innovaios ano iho oihor ooos noi. If
H _ 1, ihon no nrm will innovaio ai iho oquilihrium.
Cnn:..: h: n:|j n:J J&|j
Eiihor marloi siruciuro malos no oiforonco (innovaiions occur unoor
hoih marloi siruciuros, or oo noi occur unoor oiihor), or an oquilihrium
wiih innovaiion occurs unoor ouopoly hui noi unoor monopoly. 1o soo
why, consioor ihai H ^ as (1 c a) ,4 (1 c a) ,4 (1
c ) ,4. 1horoforo, for valuos of nxoo cosi of innovaiion such ihai H 1
a
_
a 2
_
1 c
__
,4, ihoro will ho an innovaiion unoor ouopoly hui noi un-
oor monopoly. Ior valuos of nxoo cosi such ihai 1 _ a
_
a 2
_
1 c
__
,4,
an innovaiion will occur in hoih marloi siruciuros. Iinally, for 1 _ H , no
innovaiion will ho aoopioo, inooponoonily of marloi siruciuro.
H{huflvh 9 (1) 1ho monopolisi will oarn proni H (a) = (1c a) ,4
in iho lasi siago. 1horoforo, iis opiimal invosimoni will ho ooiorminoo hy
nnoing iho valuo a which maximisos : (a) = (1 c a) ,4 a . Ii is
oasy io chocl ihai a = (1 c ),3.
(2) In iho caso of ouopoly iho analysis is similar io iho ono carrioo oui for
oxogonous lovols of I:D. In pariicular, ihoro will ho only ono oquilihrium
whoro ono nrm innovaios ano iho oihor ooos noi. Howovor, ihis iimo wo also
havo io ooiormino whoihor iho opiimal invosimoni corrosponos io a orasiic
or non-orasiic innovaiion. 1horoforo, wo havo io compuio iho proni maoo for
iho opiimal orasiic innovaiion ano comparo ii wiih iho proni maoo for iho
opiimal non-orasiic innovaiion. Ior a orasiic innovaiion, iho oomain is a
_
1 c , c
_
. 1ho prohlom is ihon iho samo as iho monopolisi`s. 1ho proni
00
funciion roachos a maximum ai a = (1c ),3 ano ihon oocroasos. Howovor,
iho maximum is noi in iho oomain, ano ihoroforo iho maximum unoor a
orasiic innovaiion is aiiainoo ai a = (1 c ). In iho caso of a non-orasiic
innovaiion, iho opiimal amouni of I:D a is givon hy iho maximisaiion of
iho proni funciion H = a(1c )a . 1horoforo a = (1c ),2. Ii is oasy
io chocl ihai a non-orasiic innovaiion givos a highor proni io iho innovaiing
nrm, ano ihai iho oquilihrium lovol of I:D unoor ouopoly is largor ihan
unoor monopoly.
Vroxwlrq ri h{huflvh ;1 (a) Sinco iho oquilihrium has io ho founo
hy haclwaro inouciion, nrsi solvo iho lasi siago of iho gamo, whoro nrms
chooso quaniiiios givon iho numhor of nrms ihai havo onioroo iho marloi in
iho provious siago. 1his prohlom has alroaoy hoon solvoo in sociion 8..2.
Sinco : is a roal numhor, iho oquilihrium numhor of nrms in iho inous-
iry will ho givon hy iho soluiion of : (:) = 0, which is givon hy: : =
(1 c) ,
_
1 1.
(h) 1ho social plannor will chooso : io maximiso ioial wolfaro \ = Co
1o = :(1 c) (:2), [2(: 1) [ :1, loaoing io : =
_
(1 c) ,1 1.
Ly comparing iho opiimal numhor of nrms : wiih iho numhor of nrms
onioring ai iho froo oniry oquilihrium, : , ii is cloar ihai ihoro oxisis oxcoss
of oniry in iho inousiry.
Vroxwlrq ri h{huflvh < Wolfaro can ho wriiion as: \ ((a), a) = (c
j):,2 :(j (C a) (q,2)a ). Givon a, iho omcioni ouipui will ho
founo hy ialing d\,d = 0. Ii can ho soon ihai ihis givos iho por-nrm
ouipui: (a) = (c C a) ,:. Noio ihai ai iho nrsi-hosi nrms malo zoro
gross proni, as ihoy prico ai marginal cosi (j = C a). 1ho social plannor
musi covor nrms` I:D nxoo ouilays hy using suhsioios.
If q woio lo Lo lioaloo as a oisciolo nimLoi, llo oqiiliLiiim nimLoi of nims in llo
inoisliy woilo Lo givon Ly llo valio of q wlicl solvos +q, 3 ano +q.4, ? 3. Jlis
woilo malo calcilalions sligllly loss simplo Lil woilo nol clango llo qialilalivo iosills.
Jlo foimilalion pioposoo loio is inspiioo Ly Jiiolo (1088: 400, oxoiciso 24). Ho also
poinls oil llal llo nisl-Losl woilo involvo llo social plannoi lo malo only ono nim lo
piooico ano soll al s @ f.
Jlo iosill llal fioo onliy givos iiso lo a nimLoi of nims wlicl is laigoi llan llo
socially oplimim nimLoi is nol ioLisl. In gonoial, llo mailol oqiiliLiiim inooi fioo
onliy migll involvo oilloi loo many oi loo fow nims. Soo also Jiiolo (1088: claploi 7).
07
Il is now possiLlo lo ioplaco llis in llo pioviois oxpiossion so as lo oLlain
\(a). Ly solving llo IOCs ono gols llo inoivioial nim`s omcionl I:D lovol
as: a = (c C) , (q: 1), wlicl is llo socially oplimim lovol of I:D in
llo inoisliy.
Wo can now compaio llo oplimal I:D lovols will lloso wlicl aiiso fiom
compolilion. Il can Lo clocloo llal llo inoqialily a < a is salisnoo foi
: 2: 1 0. Honco, wlon llo nimLoi of nims is small (: = 1 oi
: = 2), llon llo mailol piooicos loo lilllo I:D. Wlon llo nimLoi of nims
is laigoi (: = 3, 4, ...), llon lloio is loo micl I:D as compaioo lo llo social
oplimim.
Vroxwlrq ri h{huflvh 431 Lol is slail fiom llo lasl slago of llo gamo.
Jlo caso of a cailol among llo : nims is oqiivalonl lo llo caso of a monopoly,
as llo : nims Lolavo as if lloy woio a iniqio nim. In llis caso, llo lolal
qianlily solo in llo inoisliy will Lo givon Ly Q = (c C a),2 ano llo
joinl pionl is: H = (c C a) ,4 qa ,2.
Jlo nisl oiooi conoilion is givon Ly: (d: ,da )m = (c C a) ,2
qa = 0, wlicl coiiosponos, foi : = 1, lo llo oxpiossion wo oLlainoo in llo
caso of compolilion in soclion 4.8.2 (nolo llal llo compolilion oocl loim is
aLsonl loio). Solving llo IOCs will givo llo poi-nim inoivioial I:D lovol
a = (c C) , (:(2q 1)).
Jlo lolal I:Dcaiiioo oil in llo inoisliy will Lo 1 = (c C) , (2q 1).
Jlis coincioos will 1 (: = 1). Sinco 1 is incioasing will :, il follows llal
lloio will always Lo moio I:D inooi compolilion llan inooi a cailol. Il
can also Lo clocloo llal inooi a cailol lloio is always loss I:D llan al llo
omcionl (social plannoi) lovol.
Ono coilo also compaio wolfaio lovols. Wolfaio inooi a monopoly (oi
cailol) coincioos will llo oxpiossion \ (: = 1): \ = (c C) q(3q
1),
_
2 [2q 1[
_
.
I showoo in sociion 4.8.2 ihai iho lowosi lovol aiiainoo hy wolfaro unoor
compoiiiion is corrosponoing io iho limii caso whoro : , whoro \ ionos
io (c C) ,2. Ii can ho showoo ihai for q 4 (which saiisnos hoih socono
oroor ano siahiliiy conoiiions) \ is always lowor ihan \ .
H{huflvh 47
1. If iho monopolisi oocioos io soll, iho quaniiiy solo ouring porioo 1
is ro-oforoo in porioo 2 (romomhor a rosalo marloi oxisis). Honco,
08
a monopolisi who has prooucoo in porioo 1, will ai siago 2 soll
iho quaniiiy which maximizos iis proni, max (1 ) . Noiico
ihai iho prico of iho gooo ai porioo 2, j , is iho ono for which iho ioial
quaniiiy prooucoo in h| porioos ( ) is oqual io iho quaniiiy
oomanooo, j = 1 . Simplo algohra shows ihai = (1 ),2,
j = (1 ),2 ano H = (1 ) ,4.
Now, ai siago 1, iho prico consumors will ho willing io pay for iho
gooo will ohviously oopono on ihoir oxpociaiions of j . Assumo ihai
1(j ) = j . Honco, consumor willingnoss io pay is givon hy j =
(1 )cj , iho curroni valuo of iho gooo plus whai rosalo woulo givo
in oiscounioo iorms. Lui, sinco j = (1 ),2, hy suhsiiiuiion ono has
ihai j = (1 )
_
1
_
. Noiico ihai j j . Whon iho monopolisi
solls in oach porioo, pricos fall ovor iimo. 1ho monopolisi ihon choosos
so as io maximizo his prosoni valuo of (solling) pronis H , ihai is
max [ (1 ) (1 c,2) c(1 ) ,4[. Somo algohra shows ihai
= 2,(4 c), j = (2 c) ,2(4 c) ano H = (2 c) ,4(4 c).
2. If, insioao, iho monopolisi oocioos io loaso, ihon ai oach porioo of iimo
t, t = 1, 2, ii sois a prico such ihai max j (1 j ). 1his implios ihai
j = j = 1,2. 1hon, ii prooucos = 1,2 ano = 0, sinco ii was
assumoo ihai ihoro is no ooprociaiion 1ho prosoni valuo of his (loasing)
pronis is givon hy H = 1,4 c(1,4) = (1 c),4. As can ho oasily
chocloo, H H , iho monopolisi profors loasing.
H{huflvh 49
1. Ai iho socono siago of iho gamo, if ihoro is oniry ihon iho incumhoni (1)
ano iho onirani`s (1) pricos will rospociivoly ho: j = c ,( )
ano j = j . Noio ihai horo wo aro using iho simplifying as-
sumpiion ihai no swiiching cosis of huying from iho incumhoni ox-
isi. If ihoro is no oniry, iho monopolisi will soi = (c c),2, ano
j = (c c),2. 1ho associaioo wolfaro will ho: \ = 3 (c c) ,8,.
Olloiwiso, wo sloilo consiooi a sligllly moio complox lwo-poiioo gamo wloio only
pooplo wlo lavo Loigll fiom llo incimLonl will pay no swilcling cosl, wloioas pooplo
wlo lavo novoi piovioisly Loigll llo gooo will lavo lo pay llo swilcling cosl if lloy
Liy fiom oilloi llo incimLonl oi llo onlianl. Lil a lwo-poiioo gamo woilo opon llo
possiLilily foi llo incimLonl lo clooso oilpil in poiioo ono in a slialogic way. Soo
Klompoioi (1087c) foi an analysis of sicl a gamo.
00
If lloio is onliy, llon: = (c c ) ,3,, = (c c 2) ,3, ano
j = (c 2c ) ,3, j = (c 2c 2) ,3. Associaloo wolfaio will
Lo: \ =
_
8 (c c) 11 8 (c c)
_
,18,. Al llo nisl slago of
llo gamo, onliy will Lo closon only if _ (c c) ,2. Inoooo, foi on-
liy lo Lo pionlaLlo il misl Lo llal j = ((c 2c 2) ,3) _ c. Jlis
conoilion can Lo simplinoo lo _ (c c) ,2. Jloiofoio, if swilcling
cosls aio laigo onoigl, lloio will Lo no onliy.
2. Il is oasy lo soo llal \ \ if < 5 (c c) ,22. Jloiofoio, foi
[0, 5 (c c) ,22[ onliy occiis ano il is Lononcial, wloioas foi
(5 (c c) ,22, (c c) ,2) onliy occiis Lil il is ooliimonlal lo wolfaio.
Jlis iosill is oio lo llo facl llal onliy las lwo oocls. A posilivo
oocl, sinco il oocioasos piicos ano incioasos allocalivo omcioncy. A
nogalivo oocl, sinco consimois wlo palioniso llo onlianl will lavo
lo pay a swilcling cosl lloy woilo nol incii if lloy Loigll fiom llo
incimLonl.
8. If lloio aio no swilcling cosls, llon onliy will always occii in llis
moool will no nxoo cosl. Jlo oqiiliLiiim oilpil ano piicos aio givon
Ly = = (c c) ,3,, ano j = j = (c 2c) ,3. Wolfaio is givon
Ly \ =
_
8 (c c)
_
,18,. Jlis is always ligloi llan wolfaio inooi
onliy ano swilcling cosl.
H{huflvh 4:
1. Lol is lool al llo lasl slago of llo gamo ano solvo Laclwaios. Al
poiioo 2, a consimoi wlo las piovioisly Loigll fiom a nim i can Lo
inoicoo lo Liy fiom nim only if j < j . Ioi llis lo Lo pionlaLlo,
a nocossaiy conoilion is j c, oi j c . Jloiofoio, il misl Lo
c < j < j < 1 (llo lasl inoqialily lo onsiio llal llo mailol
oxisls). Honco, il misl Lo c < 1, wlicl is iiloo oil Ly assimplion.
Il follows llal inooicilling lo incioaso mailol slaio iolalivo lo poiioo
1 is nol foasiLlo, ano oacl nim will llon sol llo monopoly piico, llal is
llo piico llal oqials willingnoss lo pay of consimois. In sim, al poiioo
2, j = j = 1 ano poiioo 2 pionls aio givon Ly H = A (1c)
ano H = A (1 c), wloio is llo qianlily solo Ly nim i in poiioo
1.
Nolico llal t _ 3 if ano only if v + f, @5.
70
Wlal lappons in poiioo 1 Iiisl of all, nolico llal in poiioo 2 al
oqiiliLiiim llo piico will always pay ip lo loi iosoivalion piico, 1.
Jloiofoio, socono poiioo consiooialions oo nol aocl al all consimois`
oocisions in poiioo 1. A consimoi will piofoi lo Liy fiom nim
llan 1 if llo foimoi givos loi ligloi ililily: r j t r j
t (1 ), wlicl can Lo iowiillon as: 1,2 (j j ),(2t). All
consimois wloso loaining cosls aio incliooo in [0, [ will Liy fiom
, llo iomainooi will Liy fiom 1: = 1,2 (j j ),(2t): ano
= 1,2 (j j ),(2t).
Jloiofoio, lolal pionls afloi oiscoinling llo socono-poiioo pionl aio:
H = [1,2 (j j ),(2t)[ [A (j c) A (1c)[:
ano H = [1,2 (j j ),(2t)[ [A (j c) A (1c)[. Iiisl-oiooi
conoilions aio: dH ,dj = A
_
1,2 (j j ),(2t) (j 12c),(2t)
_
=
0 (foi i, = 1, 2 ano i 9= ). Iocising on llo symmoliic oqiiliLiiim wo
oLlain: j = j = t 1 2c.
2. If lloio aio no swilcling cosls in llo socono poiioo, llo lwo piooicls
aio solling piooicls llal aio iogaiooo as poifoclly lomogonois Ly all
consimois. Al poiioo 2, lloiofoio, llo only possiLlo oqiiliLiiim is llo
isial Loiliano solilion, wloio oacl nim claigos maiginal cosl: j =
j = c. Al poiioo 1, consimois`s cloicos will nol oopono on llo socono
poiioo sinco lloy will Liy llo gooo al maiginal cosl anylow. Wo lloio-
foio lavo llo slanoaio Hololling-lilo gamo Loing playoo in llo nisl po-
iioo. Lacl nim`s pionl will Lo: H =
_
1,2 (j j ),(2t)
_
A (j c).
Iiisl-oiooi conoilions aio: dH ,dj = A
_
1,2 (j j ),(2t) (j c),(2t)
_
=
0. Al symmoliy, wo slall lavo: j = j = tc. Jloiofoio, in a mailol
will swilcling cosls lloio will Lo lowoi nisl poiioo piicos ano ligloi
socono poiioo piicos llan in a mailol willoil swilcling cosls.
H{huflvh 4;
1. Ioi oacl nim, llo valio of llo innovalion is givon Ly llo oioionco
Lolwoon llo pionls llo nim oxpocls lo oain if il wins llo Liooing
compolilion foi llo innovalion ano llo pionls il oxpocls lo oain in
caso il ooos nol aoopl llo innovalion ano llo compoliloi ooos. Honco,
\ = H (c) H (c, c) ano \ = H (c, c).
71
2. Nolico llal \ \ = H (c)
_
H (c, c) H (c, c)
_
. Honco, if H (c)
H (c, c) H (c, c), llon ono las llal \ \ . Jlis piopoily is calloo
llo .:j , ano il is ciicial in many moools wlicl slioy
wlolloi lloio is poisislonco of monopolios: wlon llo inoisliy piof-
ils aio ligloi inooi monopoly llan inooi oiopoly, ono sloilo oxpocl
monopolios lo poisisl.
8. If llo innovalion is oiaslic ano llo onlianl wins llo Liooing compolilion
foi llo innovalion, llon lo complololy oliminalos llo monopolisl fiom
llo mailol. Jloiofoio, H (c, c) = 0 ano H (c, c) = H (c). Jlis in
liin implios llal \ = \ = H (c).
72
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2 4 6 8 10
n
Chaplci 8. Maikcl ocfnilion, ano lhc
asscssmcnl of maikcl powci
NassIno Notta
Luiopcan Univcisily Inslilulc, Iloicncc,
Univcisilal Iompcu Iahia, Laicclona, ano CLII, Lonoon
c-mail: massimo.mollaiuc.il
IIIS1 AND INCOMILL1L DIAI1
Camhiiogc Univcisily Iicss, 2008
1his oiafl: 21 Dcccmhci 2002
ALstract
Contcnts
1 IntroductIon 1
2 Narkct dcBnItIon 1
2.1 Iiooucl maikcl ocfnilion . . . . . . . . . . . . . . . . . . . . . . 2
2.1.1 1hc SSNII (oi hypolhclical monopolisl) lcsl . . . . . . . 2
2.1.2 A piohlcm in non-mcigci cascs: lhc ccllophanc fallacy" . 4
2.1.8 Implcmcnling lhc SSNII lcsl . . . . . . . . . . . . . . . .
2.2 Gcogiaphic maikcl ocfnilion . . . . . . . . . . . . . . . . . . . . 18
2.2.1 1hc iolc of impoils (shipmcnl lcsls) . . . . . . . . . . . . 18
2.2.2 1ianspoilalion cosls . . . . . . . . . . . . . . . . . . . . . 14
2.2.8 Olhci chaiaclciislics . . . . . . . . . . . . . . . . . . . . . 14
3 Thc asscssncnt oI narkct povcr 1
8.1 1iaoilional appioach: (inoiiccl) asscssmcnl of maikcl powci . . . 10
8.1.1 1hc ccnlial iolc of maikcl shaics . . . . . . . . . . . . . . 10
8.1.2 Which lhicsholos foi maikcl shaics . . . . . . . . . . . . 17
8.1.8 Mcasuiing maikcl shaics ano asscssing iclalivc slicnglhs 18
8.1.4 Lasc ano likclihooo of cnliy . . . . . . . . . . . . . . . . . 20
8.1. Luycis` powci . . . . . . . . . . . . . . . . . . . . . . . . . 20
8.1.0 Maikcl powci, maikcl shaics ano conccnlialion . . . . . 22
8.2 Lconomcliic lcchniqucs: (oiiccl) asscssmcnl of maikcl powci . 28
8.2.1 Llaslicily of icsioual ocmano . . . . . . . . . . . . . . . 24
8.2.2 Logil moocls . . . . . . . . . . . . . . . . . . . . . . . . 27
4 ExcrcIscs and cssays 33
1 IntroductIon
As wc havc sccn, lhc conccpl of maikcl powci is ccnlial lo compclilion policy.
So fai, wc havc ocall wilh lhis conccpl fiom a lhcoiclical poinl of vicw. 1his
chaplci aims al inliooucing lhc icaoci wilh lhc issuc of how maikcl powci
shoulo hc asscssco in piaclicc. Mosl compclilion law invcsligalions will slail
wilh such an asscssmcnl.
Iocally, in all lhcsc cascs onc woulo likc lo cslimalc oiicclly lhc cxlcnl lo
which a fim has (oi incicascs) maikcl powci. In mcigci cascs, foi inslancc, onc
mighl wanl lo unocislano if lhc mciging fims will hc ahlc lo pioflahly iaisc
piiccs ahovc lhc cuiicnl lcvcl. Somc moocin cconomcliic lcchniqucs (hiicfy
analysco in lhc lcchnical scclion 8.2) allow lo oo picciscly lhal.
Howcvci, in many ciicumslanccs lhcsc cconomcliic cxciciscs aic nol fcasihlc
foi lack of icliahlc oala, ano cvcn whcn lhcy aic fcasihlc, il mighl hc a gooo ioca
lo complcmcnl lhcii icsulls wilh lhc moic liaoilional appioach lhal cvalualcs
lhc maikcl powci of fims hy analysing lhc maikcl in which lhcy opcialc. In
luin, lhis icquiics ocfning lhc iclcvanl maikcl", lhal is lhc scl of piooucls,
ano gcogiaphical aicas, lo which lhc piooucls of lhc mciging fims hclong. Il
is such a scl of piooucls (ano aicas) lhal mighl cicalc compclilivc consliainls
lo lhc fims unoci analysis.
Accoioingly, lhc ocfnilion of lhc maikcl (holh fiom ils piooucl ano gco-
giaphical poinls of vicw) is a picliminaiy slcp lowaios lhc asscssmcnl of maikcl
powci, ano mosl anliliusl invcsligalions pioccco hy fisl ocfning lhc maikcl
ano lhcn analysing lhc sliucluic of lhc maikcl wilh a vicw lo asscssing lhc
maikcl powci cnjoyco hy onc oi moic fims.
In lhis chaplci, I fisl oiscuss how lo ocfnc a maikcl (scclion 2) ano lhcn
how lo asscss maikcl powci (scclion 8), so as lo mimic lhc scqucncc lhal cascs
oflcn follow in many anliliusl juiisoiclions. Ncvcilhclcss, il shoulo hc slicssco
fisl lhal maikcl ocfnilion is nol of inlcicsl hy ilsclf hul only as a picliminaiy
slcp lowaios lo ohjcclivc of asscssing maikcl powci.
2 Narkct dcBnItIon
Sincc maikcl ocfnilion is only insliumcnlal lo lhc asscssmcnl of maikcl powci,
lhc iclcvanl maikcl shoulo nol hc a scl of piooucls whichicscmhlc" lo cach
olhci on lhc hasis of somc chaiaclciislics, hul ialhci lhc scl of piooucls (ano
gcogiaphical aicas) lhal cxcicisc somc compclilivc consliainl on cach olhci.
Supposc foi inslancc lhal lhc anliliusl piohlcm onc faccs is lhc likcly cfccls
of a mcigci hclwccn lwo scllcis of hananas. 1hc fnal ohjcclivc hcing lo which
cxlcnl lhosc scllcis` maikcl powci is cnhancco hy lhc mcigci, lhc maikcl ocf-
nilion invcsligalion shoulo icfccl lhal ohjcclivc. Accoioingly, whclhci hananas
aic lo hc in a scpaialc maikcl, oi nol, shoulo nol ocpcno on somc pailiculai
chaiaclciislics lhcy shaic oi nol wilh olhci fiuils (foi inslancc, lhcy aic cxolic"
fiuils, so lhal lhcy mighl hc pul in lhc samc maikcl as pincapplcs, mangocs ano
papayas), hul ialhci on whclhci lhcic cxisl olhci fiuils lhal aic suhslilulahlc
cnough lo hananas so as lo limil lhc possihilily lo iaisc lhc piicc of hananas.
1hc lcsl lhal salisfcs lhis icquiicmcnl, ano lhal shoulo guioc lhc analysis
of maikcl ocfnilion, in holh lhc piooucl ano lhc gcogiaphic oimcnsion, is lhc
so-callco SSNII (oi hypolhclical monopolisl) lcsl. Ioi simplicily, I oiscuss
lhis lcsl ano ils piaclical implicalions fisl wilh icfcicncc lo piooucl maikcl
ocfnilion ano lhcn lo gcogiaphic maikcl ocfnilion.
2.1 Froduct narkct dcBnItIon
2.1.1 Thc SSÎF {or hypothctIcaI nonopoIIst) tcst
Lcl mc conlinuc wilh lhc picvious cxamplc ano supposc wc aic inlcicslco in
lhc impacl of a mcigci hclwccn lwo scllcis of hananas, ano focus foi lhc limc
hcing on piooucl maikcl ocfnilion. 1o fno lhc iclcvanl maikcl, lhc US
Dcpailmcnl of Juslicc has inliooucco a lcsl lhal is cuiicnlly hcing usco hy
anliliusl aulhoiilics woilowioc. 1hc lcsl is callco SSNII (Small hul Signifcanl
Non-liansiloiy Incicasc in Iiiccs), ano woiks as follows.
Supposc lhal lhcic cxisls a hypolhclical monopolisl lhal is lhc only scllci
of hananas. Woulo lhis hypolhclical monopolisl fno il pioflahlc lo incicasc
lhc piicc of hananas ahovc lhc fxuuhqw lcvcl in a non-liansiloiy way, say hy
-10/
Imaginc lhal lhc answci lo lhis qucslion is ycs, lhal such a piicc iisc woulo
hc pioflahlc. 1his will mcan lhal hananas oo nol facc signifcanl compclilivc
consliainls fiom olhci piooucls, lhal is lhal lhcic aic no olhci piooucls lhal
aic suhslilulcs cnough lo hananas foi lhc hypolhclical monopolisl lo losc much
ocmano whcn il iaiscs lhc piiccs of hananas. Accoioingly, hananas shoulo hc
consiocico as a scpaialc maikcl, ano lhc lcsl has alicaoy givcn ils icsponsc.
Supposc now inslcao lhal lhc hypolhclical monopolisl woulo nol fno il
pioflahlc lo incicasc piiccs hy lhal amounl, foi inslancc hccausc aflci lhc piicc
iisc a signifcanl pail of ocmano is icoiicclco fiom hananas lo kiwis, ano lo a
lcssci cxlcnl lo pincapplcs ano olhci fiuils. 1hcn lhis will imply lhal hananas
shoulo nol hc consiocico as a scpaialc maikcl on lhcii own, as lhcic cxisl olhci
piooucls lhal cxcicisc a compclilivc consliainl on scllcis of hananas. 1hc lcsl
shoulo lhcn conlinuc, lo consioci a wioci maikcl, foi inslancc hananas ano kiwis
2
logclhci. Woulo a hypolhclical monopolisl lhal is lhc only scllci of hananas ano
kiwis fno il pioflahlc lo incicasc lhc piicc of lhcsc fiuils ahovc lhcii cuiicnl
lcvcl hy / Again, if lhc piicc iisc wcic pioflahlc, lhc iclcvanl maikcl foi
oui invcsligalion has hccn founo. Llsc, lhc lcsl shoulo conlinuc lo compichcno
lhosc piooucls,fiuils lhal cxcicisc a consliainl on hananas ano kiwis, ano so
on unlil a scpaialc maikcl has hccn founo.
Ocnand and suppIy suLstItutaLIIIty Whcn looking foi lhc piooucls lhal
cxcicisc a compclilivc consliainl lo a givcn gioup of piooucls wc aic analysing,
il is naluial lo lhink fisl of piooucls lhal aic pciccivco hy consumcis as suh-
slilulcs cnough among lhcm. 1his is suhslilulahilily on lhc sioc of ocmano.
Lul lhcic mighl also hc suhslilulahilily on lhc sioc of supply, whcn pioouccis
lhal aic cuiicnlly supplying a oifcicnl piooucl posscss lhosc skills ano asscls
lhal makc il possihlc lo swilch pioouclion in a shoil pciioo of limc (say, up
lo six monlhs oi onc ycai) if a piicc iisc occuis. In lhis casc, lhc compclilivc
consliainl woulo nol comc fiom lhc facl lhal a consiociahlc pail of ocmano
woulo hc aooicssco lo compcling piooucls whcn lhc piicc iiscs, hul ialhci lhal
lhc piicc iisc alliacls pioouccis lhal aic cuiicnlly sclling somc olhci piooucls.
Supposc foi inslancc lhal wc aic consiociing a mcigci hclwccn lhc lwo
only pioviocis of hus sciviccs hclwccn cily A ano cily L. 1his is a commulci
ioulc ano liain is nol a gooo suhslilulc hccausc il lakcs loo long ano lhcic is
no oiiccl scivicc hclwccn lhc lwo cilics. Accoioingly, ocmano suhslilulahilily
alonc woulo call foi a ocfnilion of hus sciviccs hclwccn A ano L as lhc iclcvanl
maikcl. Howcvci, lhcic aic olhci hus companics aclivc in holh cilics A ano
L. Allhough lhcy aic opcialing olhci ioulcs, say lo cilics C ano D, ano lo lhc
cxlcnl lhal il is nol oimcull lo ohlain a liccnsc lo opcialc lhc A lo L scivicc
ano lhal lhcic is somc spaic capacily on lhc olhci ioulcs, lhcsc hus companics
will cxcicisc a compclilivc consliainl ano picvcnl a piicc iisc on lhc ioulc A
fiom hcing pioflahlc. Accoioingly, lhc maikcl can hc ocfnco moic wiocly (say,
hus sciviccs in cilics A,L,C, ano D) lhan il woulo hc hy laking inlo accounl
ocmano suhslilulahilily alonc.
In lhc Wruudv2Vduulr casc, lhc LC founo lhal unoci ocmano suhslilulahilily
alonc scpaialc maikcls shoulo havc hccn ocfnco, cach coiicsponoing lo a oifci-
cnl ocgicc of qualily papci (foi inslancc, ail hooks ncco high qualily papci, ano
low coaling papci woulo nol hc a gooo suhslilulc foi ail puhlishcis). Howcvci,
papci manufacluicis can casily ano immcoialcly changc lhc ocgicc of coaling
in lhc pioouclion, lo makc papci of a highci oi lowci qualily, so lhal a wioci
piooucl maikcl was ocfnco laking inlo consiocialion supply suhslilulahilily.
SuppIy suLstItutaLIIIty v. cntry that constraIns narkct povcr Nolc
lhal lhcic aic scvcial conoilions lhal shoulo hc fulfllco foi supply suhslilulion
lo wiocn lhc iclcvanl maikcl. In pailiculai, swilching pioouclion musl hc
casy, iapio ano fcasihlc. 1hc piooucci of anolhci gooo musl havc alicaoy
lhc skills ano asscls icqucslco lo piooucc lhc piooucl unoci consiocialion, il
shoulo nol incui consiociahlc sunk cosls ano lhcic musl hc haiiicis lo cnliy
8
lhal can hc suimounlco in a iapio ano iclalivcly chcap way. Ioi inslancc,
maikcl foi civil aii lianspoil sciviccs in lhc LU aic usually ocfnco ioulc hy
ioulc, say Liusscls-Milan, Liusscls-Munich, ano so on. Supply suhslilulahilily
cannol hc invokco lo wiocn lhc maikcl in such cascs, hccausc mosl aiipoils aic
congcslco ano ohlaining lanoing ano lakc-of slols is a lcnglhy ano somclimcs
impossihlc pioccss. Likcwisc, lhc maikcl foi cola oiinks cannol hc wiocnco hy
using supply suhslilulahilily aigumcnls: allhough lhc lcchnology of piooucing
a cola is simplc ano somc fims opcialing in olhci maikcls (say, pioouccis of
mincial walci, ano lhosc of olhci caihonalco oiinks) mighl havc lhc ncccssaiy
lcchnology (hollling planls ano oisliihulion nclwoiks), impoilanl aovcilising
campaigns aic ciucial lo oclciminc lhc succcss in lhc cola maikcl, ano lhcsc
cnlail hugc fxco sunk cosls lhal makc cnliy oimcull ano iisky. In lhc Qhvwo0
Shuulhu casc, foi inslancc, lhc LC founo lhal pioouccis of sofl oiinks coulo
havc in piinciplc slailco lo piooucc ano scll immcoialcly puiifco lap walci.
Howcvci, foi such a piooucl lo compclc wilh spiing mincial walcis, pioouccis
shoulo havc incuiico hugc aovcilising oullays, so lhal supply suhslilulahilily
coulo nol hc invokco lo incluoc sofl oiinks in lhc samc maikcl as mincial
walcis.
As aiguco in scclion 8, cnliy inlo an inousliy is also consiocico in lhc slagc
of lhc invcsligalion which ocals wilh lhc asscssmcnl of maikcl powci (if cnliy
is likcly ano iclalivcly casy - cvcn if nol as limcly as unoci supply suhslilulahil-
ily - lhcn il will consliain lhc maikcl powci of lhc fims in lhc maikcl). Onc
can lhcn wonoci why il is ncccssaiy lo consioci supply suhslilulahilily al lhc
maikcl ocfnilion slagc as wcll. 1hc answci is lhal lhcic is no icason lo oc-
lay lhc momcnl al which suhslilulcs on lhc sioc of lhc supply aic consiocico.
Immcoialc consiocialion of lhc cxisling compclilivc consliainls will allow lo
savc limc ano hias lhc invcsligalion. Diawing lhc hoiocis of lhc maikcl in a
naiiowci way lhal supply consiocialions woulo aulhoiisc, mighl aclually kccp
an anliliusl agcncy spcno limc ano cncigy in juslifying why a fim wilh a con-
siociahlc maikcl shaic oocs nol aclually havc consiociahlc maikcl powci. In
conliasl, if immcoialc consiocialion of supply suhslilulahilily aigumcnls lcaos
lo a coiicclly wioci maikcl, ano accoioingly a low maikcl shaic, lhcic will hc
an immcoialc picsumplion of ahscncc of maikcl powci.
2.1.2 A proLIcn In non-ncrgcr cascs: thc ^ccIIophanc IaIIacy
1hc usc of lhc SSNII lcsl picscnls somc oimcullics whcn il is lo hc usco in non-
mcigci invcsligalions. Consioci foi inslancc ailiclc 82 unoci LU compclilion
law, whcic a fim is invcsligalco foi allcgco ahusc of oominanl posilion. In lhis
casc, a picliminaiy slcp in lhc invcsligalion is lo fno whclhci such a fim is
4
oominanl al all, lhal is if il has cnough maikcl powci. Lul in such a casc,
lhc appiopiialc maikcl ocfnilion lcsl shoulo nol ask whclhci a hypolhclical
monopolisl can incicasc piiccs in a small hul signifcanl way iclalivc lo fxuuhqw
piiccs, hul ialhci iclalivc lo frpshwlwlyh piiccs. Applying lhc SSNII lcsl lo
a cuiicnl piiccs hcnchmaik mighl lcao lo a loo wioc ocfnilion of lhc maikcl
picciscly ehfdxvh lhc fim unoci invcsligalion has a oominanl posilion. Supposc
foi inslancc lhal lhc fim is lhc only scllci in lhc coiicclly ocfnco piooucl
maikcl. Lcing a monopolisl, il mighl havc scl ils piiccs al such a high lcvcl lhal
a fuilhci incicasc ahovc lhc cuiicnl piiccs woulo nol hc pioflahlc. 1hcicfoic,
lhc SSNII lcsl mighl lcao lo a loo wioc maikcl ocfnilion, which in luin mighl
lcao lo a calculalion of small maikcl shaics, ano lo a fnoing of no oominancc,
of lhc fim unoci invcsligalion.
1his aigumcnl is known as lhc ccllophanc fallacy", fiom lhc wiocly ois-
cussco gxSrqw casc. 1hc US Supicmc Couil mainlainco lhal lhc cxislcncc of
high cioss claslicily of ocmano hclwccn ccllophanc (solo hy ouIonl) ano olhci
fcxihlc wiapping malciials (such as papci hags) callco foi a wioc ocfnilion of
lhc maikcl, lo incluoc all possihlc wiapping malciials. 1his occision was lalci
ciilicisco on lhc giounos lhal lhc picscncc of such a high claslicily of suhslilu-
lion was hy ilsclf an inoicalion of lhc high maikcl powci cnjoyco hy DuIonl.
Duiing lhc liial lhcic was cviocncc lhal lhc fim was sclling lhc piicc of ccllo-
phanc so high lhal consumcis of lhc piooucls woulo havc consiocico icplacing
il wilh infciioi suhslilulcs.
1hc ccllophanc fallacy aigumcnl calls foi somc caulion in applying lhc SS-
NII lcsl in non-mcigci cascs. Lviocncc lhal, say, a / piicc iisc woulo lcao
lo, say, moic lhan a 10-1/ occicasc in ocmano (lhal picsumahly implics non-
pioflahilily of lhc incicasc) shoulo nol hc lakcn as occisivc pioof lhal lhc
maikcl oclincalion shoulo hc wioci.
2.1.3 InpIcncntIng thc SSÎF tcst
1hc SSNII lcsl pioviocs a vciy uscful appioach lo maikcl ocfnilion, hul wc
shoulo slill oiscuss how lo makc il opcialional. Inocco, lhc vciy icliancc on a
hypolhclical (monopoly) silualion mcans lhal lhcic cxisl no oala lhal can allow
foi a lilcial applicalion of lhc lcsl. In whal follows, I hiicfy oiscuss lhc lools
lhal can hc usco lo implcmcnl lhc lcsl. 1hc mosl impoilanl lhing lo iccall
lhioughoul is lhal all lhc oala ano infoimalion availahlc shoulo hc inlcipiclco
in lhc lighl of lhc lcsl ahovc.
Ovn prIcc cIastIcIty Onc of lhc mosl uscful picccs of infoimalion lowaios
lhc ocfnilion of a piooucl maikcl is lhc own-piicc claslicily of ocmano, which
is ocfnco as lhc pciccnlagc changc in lhc quanlily ocmanoco lhal follows a
onc pciccnl incicasc in lhc piiccs of a piooucl. Supposc foi inslancc wc aic
slill inlcicslco in lhc mcigci hclwccn lwo scllcis of hananas ano wc wanl lo
ocfnc lhc iclcvanl maikcl. Knowing lhal lhc own piicc claslicily is, say, .5,
onc can infci lhal a 43( incicasc in lhc piicc of hananas will lcao lo a 5(
occicasc in lhc ocmano foi hananas. (Nolc lhal I icfci lo piicc ano quanlilics
of all hananas, ano nol lo lhosc of lhc lwo fims whosc mcigci is invcsligalco.)
Sincc only a vciy small numhci of consumcis will luin lo olhci fiuils (oi slop
huying allogclhci) lhc piicc iisc will likcly hc pioflahlc. Hcncc, wilh lhcsc
(imaginaiy) oala il woulo hc appiopiialc lo ocfnc lhc iclcvanl maikcl as lhc
maikcl foi hananas.
1hc simplc slalislical ohscivalion lhal ovci a ccilain pciioo a 43( incicasc
in hanana piiccs has hccn associalco wilh a 5( occicasc in lhc numhci of
hananas solo oocs nol hiing us vciy fai: a numhci of olhci vaiiahlcs aic likcly
playing a iolc in lhc ocmano foi hananas, such as lhc piiccs ano availahilily
of olhci fiuils, lhc gcncial piicc lcvcl, oisposahlc incomc ano so on. Imaginc
foi inslancc lhal in lhc pciioo consiocico lhc piicc of hananas iosc hy 43(
hul lhc piiccs of oiangcs, applcs, pincapplcs ano kiwis all iosc hy a oifcicnl
cxlcnl. 1hcn lhc ohscivalion lhal ocmano foi hananas has occicasco hy 5( is
of no hclp, as many olhci vaiiahlcs afccling lhc ocmano foi hananas havc also
changco.
1o lakc inlo accounl lhc oifcicnl vaiiahlcs lhal aic likcly lo havc an impacl
on lhc ocmano foi hananas onc shoulo foimulalc ano cslimalc an cconomcliic
moocl. Il is fiom such a moocl, ano lo lhc cxlcnl lhal il givcs icsulls lhal
aic slalislically signifcanl, lhal onc shoulo ohlain cslimalcs of claslicilics lhal
can hc safcly usco foi anliliusl analysis. (1hc oiscussion of how lo huilo an
cconomcliic moocl, cvalualc lhc goooncss of fl of lhc moocl ano lhc signifcancc
of lhc cslimalcs ohlainco is wcll hcyono lhc scopc of lhis hook.)
As fnal (ano pcihaps vciy ohvious) icmaiks, nolc lhal claslicilics cslimalcs
shoulo hc ohlainco fiom icpicscnlalivc oala, ano lhal lhc span of limc onc
looks al mallcis: consumcis mighl lakc limc lo aojusl lhcii hchavioui lo a
piicc changc, ano lhc ocmano icouclion aflci a piicc iisc is nol likcly lo hc
immcoialc. (1hc appiopiialc limc span will piohahly changc fiom maikcl lo
maikcl.)
Cross-prIcc cIastIcItIcs If ohlainco fiom a piopcily spccifco cconomcliic
moocl, cioss-piicc claslicilics mighl also hclp unocislano lhc compclilivc con-
sliainls cxcicisco hy olhci piooucls on lhc piooucl (oi gioup of piooucls) unoci
cxaminalion foi maikcl ocfnilion puiposcs. 1hc cioss-piicc claslicily hclwccn
0
piooucls ano 1 is ocfnco as a pciccnlagc changc in lhc ocmano foi piooucl
1 whcn lhcic is a onc pciccnl incicasc in lhc piicc of piooucl .
Whcn own-piicc claslicily foi lhc piooucl consiocico, say piooucl , is high
cnough lo lcao us hclicvc lhal a hypolhclical monopolisl woulo nol pioflahly
iaisc piiccs of in a small hul signifcanl way, il hccomcs impoilanl lo iocnlify
which piooucls cxcicisc a consliainl lo . Cioss-piicc claslicilics mighl hclp us
lo iank lhc closcsl suhslilulc (which, logclhci wilh , will hccomc lhc ohjccl
of lhc ncxl slcp of lhc hypolhclical monopolisl lcsl).
Whcn cslimalcs of cioss-piicc claslicilics, say hclwccn hananas ano any
olhci fiuil, aic low, lhcy will inoicalc lhal such piooucls aic nol pciccivco hy
consumcis as suhslilulcs foi hananas, ano will suggcsl a scpaialc maikcl foi
hananas.
FrIcc corrcIatIon tcsts 1o hclp ocfnc a iclcvanl maikcl, onc can also usc
sulfh fruuhodwlrq lcsls, which look al how piicc sciics of oifcicnl piooucls cvolvc
ovci limc. Sliglci ano Shciwin (198: ), lhc mosl aulhoiilalivc pioponcnls
of lhis lcsl, juslify ils usc hy icsoiling lo lhc classical maishallian ocfnilion of
a maikcl aica: A maikcl foi a gooo is lhc aica wilhin which lhc piicc of a
gooo lcnos lo unifoimily, allowancc hcing maoc foi lianspoilalion cosls".
1hc ioca is lhcicfoic lhal if lwo piooucls (hul lhc samc woulo holo foi lwo
gcogiaphical aicas) hclong lo lhc samc maikcl, lhcii piiccs will lcno lo movc in
lhc samc way ovci limc. Supposc foi inslancc lhal a shock incicascs lhc piicc
of piooucl . If piooucl 1 is in lhc samc maikcl (lhal is, il is a gooo cnough
suhslilulc of piooucl ), lhcn ils ocmano will incicasc, lcaoing lo an incicasc
in ils piicc loo.
Sliglci ano Shciwin pioposc a numhci of possihlc coiiclalion lcsls (coiicla-
lion of piiccs, of logaiilhms of piiccs, of fisl oifcicnccs of logaiilhms of piiccs)
hasco on lhis ioca. In all cascs, lhc highci lhc coiiclalion lhc moic likcly lwo
gooos aic wilhin lhc samc maikcl aica (oi lwo icgions in lhc samc gcogiaphic
maikcl).
Somc icmaiks aic al slakc hcic. 1hc fisl onc is ahoul how lo choosc lhc
lcmpoial span of oala. Shoulo onc lakc oaily, monlhly, annual oala whcn
analysing piicc coiiclalion 1hc icsulls will likcly hc afcclco hy lhis choicc,
sincc piicc aojuslmcnls mighl lakc limc. As foi cslimalc of ocmano claslicily,
lhc appiopiialc limc span will piohahly hc oifcicnl accoioing lo lhc naluic
of lhc piooucl, ano allhough common scnsc mighl hc a gooo guioc, il will hc
appiopiialc lo icpcal lhc lcsl wilh oifcicnl limc spans lo chcck lhc iohuslncss
of lhc icsulls.
Sccono, olhci oimcullics may comc fiom lhc facl lhal piicc sciics mighl
7
oivoigo ovoi limo Locaiso llo qialily mix of oifoionl piooicl spocifcalions
clango, oi Locaiso llo lianspoilalion ano liansaclion cosls vaiy.
Finally, a soiiois oimcilly will piico coiiolalion losls is llal common faclois
migll inoico a similai movomonl in piicos of piooicls llal aio in oifoionl
mailols. Imagino foi inslanco llal lloio oxisl vaiialions in cosl oi oomano
conoilions wlicl oopono on a common caiso (foi inslanco, infalion, an incioaso
in piopoily piicos, oi in a common inpil). If llis is llo caso, llon wo woilo
oLsoivo piico coiiolalions ovon Lolwoon piooicls wlicl aio cloaily nol in llo
samo inoisliy. Jlis is llo pioLlom of -&.&- |n.n, wlicl las calloo foi
moio soplislicaloo losls iolying on oconomoliic loclniqios Lasoo on Giangoi
caisalily losls ano coinlogialion losls. Sicl loclniqios migll Lo isoo lo coiiocl
llo iosills oLlainoo fiom llo impacl of common slocls.
Evon willoil iosoiling lo moio soplislicaloo oconomoliic loclniqios (llo
simplicily of llo piico coiiolalion losl Loing llo main ioason wly ono wanls lo
poifoim sicl a losl), ono can ooiivo isofil infoimalion fiom piico coiiolalion
losls. In pailicilai, llo piosonco of common slocls is liloly lo Lias coiiolalion
losls in llo sonso of inclioing lwo piooicls in llo samo mailol wlon lloy
sloilo nol. Accoioingly, llis losl piovioos a isofil sciooning oovico in inoicaling
piooicls llal aio n pail of llo samo mailol, ialloi llan piooicls llal aio
in llo samo mailol. Foi inslanco, a |n.n .n Lolwoon llo piico
soiios of piooicls ano 1 llal is oslimaloo lo Lo Lolow a coilain llioslolo
(wlicl may Lo, foi inslanco, .;), will givo is a sliong piosimplion llal lloso
lwo piooicls aio nol in llo samo mailol.
In llo A-|-1. caso, llo EC foino llal llo coiiolalion coomcionls
Lolwoon piico of minoial waloi ano piico of sofl oiinls woio oilloi voiy low
oi nogalivo: in llo fvo yoais Lofoio llo invosligalion slailoo, minoial waloi
piicos lonooo lo incioaso wloioas sofl oiinls piicos lonooo lo oocioaso. Jlis loo
(coiioclly) llo EC lo oxclioo llal sofl oiinls oxoicisoo a compolilivo consliainl
on minoial walois. Similaily, in 1&1n1C1, low coiiolalion ovoi limo Lolwoon
llo avoiago piicos of nylon fLios ano polypiopylono fLios siggosloo llal lloso
lwo piooicls woio nol in llo samo mailol.
Ono las insloao lo Lo moio cailiois in oiawing conclisions wlon lwo pioo-
icls oxliLil a voiy ligl coiiolalion in piicos, ano analyso olloi losls Lofoio
conclioing lloy aio in llo samo mailol.
Sulfh glhuhqfhv Jlo llooiolical Lasis foi llo piico coiiolalion losl lios on
llo iooa llal lwo piooicls in llo samo mailol will lono lo lavo llo samo
piico. Ono migll llon Lo lomploo nol only lo lool al wlolloi piico hnnj- of
lwo piooicls aio similai ovoi limo, Lil also al wlolloi piico ||- of llo lwo
piooicls aio similai. In llo pasl, foi inslanco, llo EC las isoo llo oxislonco of
8
laigo oifoioncos in piicos Lolwoon lwo piooicls as an inoicaloi llal lloy woio
nol in llo samo mailol. In -n.n||n.n1 1n.||nnn, jol aiiciafl ano
liiLo-piopolloi aiiciafl woio pil in oifoionl mailols also Locaiso llo piicos
of llo foimoi woio on avoiago lwico as micl as llo piicos of llo lalloi. In
1&1n1C1, llo facl llal nylon fLios ano polypiopylono fLios oxliLiloo laigo
piico oifoioncos was lalon as an inoicalion llal lloy Lolongoo lo oifoionl
mailols. In A-|-1., laigo piico oifoioncos Lolwoon minoial walois ano
sofl oiinls also conliiLiloo lo oofno llo iolovanl mailol as minoial walois
alono.
Howovoi, ising piico oifoioncos as a ciiloiion lo oofno llo iolovanl mailol
is nol coiiocl. Bocall llal illimaloly wlal wo aio inloiosloo in is llo oxlonl
lo wlicl a piooicl oxoils a compolilivo consliainl on llo olloi (as oxpiossoo
Ly llo lypollolical monopolisl losl), Lil piico oifoioncos oo nol givo is any
infoimalion on llis poinl. Il migll woll Lo, foi inslanco, llal llo piico of
piooicl is lwico as micl as llo piico of 1, Lil llal il woilo nol Lo pioflaLlo
lo iaiso llo piico of ovon Ly a small amoinl sinco mosl of lloso Liying il woilo
swilcl lo 1. Mailols llal oxliLil qialily oifoionlials aio liloly lo Lo a caso in
poinl. Oiganic Lananas migll commano a laigo piico piomiim ovoi Lananas
giown in planlalions llal iso poslicioos, a facl iofocloo in a ligloi piico of llo
foimoi ovoi limo. Howovoi, a fiilloi incioaso in llo piicos of oiganic Lananas
(say, Locaiso of a moigoi) is nol pioflaLlo if lloio is a sizoaLlo piopoilion of
consimois loss loon on oiganic fooo ano wlo will swilcl lo non-oiganic Lananas.
Honco, piooicls al llo Lollom of llo qialily scalo migll woll consliain llo
piicing Lolavioii of lloso al llo lop of llo scalo. Iiico oifoioncos aio nol a
gooo inoicaloi foi piiposos of mailol oolinoalion.
Fkdudfwhulvwlfv dqg xvdjh ri surgxfwv/ dqg frqvxphu suhihuhqfhv Ilys-
ical claiacloiislics of piooicls ano lloii iso migll givo somo inoicalion as lo
llo possiLlo oogioo of siLslililaLilily Lolwoon piooicls, Lil only insofai as llis
infoimalion is isoo in llo fiamowoil of llo lypollolical monopolisl losl. Jlo
facl llal Loll minoial walois ano sofl oiinls aio consimoo will llo piiposo
of qioncling ono`s lliisl ooos nol nocossaiily imply llal lloso piooicls sloilo
Lo incliooo in llo samo iolovanl mailol. Convoisoly, llo facl llal lwo pioo-
icls oLvioisly oifoi ooos nol moan llal lloy cannol Lo incliooo in llo samo
mailol: liains ano Lisos aio inoooo oifoionl piooicls, Lil lo llo oxlonl llal
lloy piovioo a similai soivico in lianspoiling pooplo fiom cily A lo cily L lloy
migll woll incliooo in llo samo mailol.
Consimoi siivoys ano mailol iosoaicl slioios migll also conliiLilo lo in-
ooislanoing consimois` piofoioncos ano lloii poicoivoo oogioo of siLslililion
Lolwoon oifoionl piooicls.
9
Whpsrudo pdunhwv/ vhdvrqdo pdunhwv/ pxowlsoh pdunhwv Slill in llo
spiiil of oofning mailols accoioing lo llo compolilivo consliainls llal pioo-
icls oxoiciso on oacl olloi, nolico llal iolovanl mailols migll Lo oofnoo in a
way llal migll appoai nol a piioii oLviois. Foi inslanco, in mosl cilios (in-
clioing my lomo lown, Milan, ano my aooplivo lown, Laicolona) ioslaiianls
ano Lais migll Lo pail of llo samo mailol al lincl limo, wlon mosl pooplo
lool foi a qiicl ano ligll moal oiiing llo sloil omco Lioal; Lil al oinnoi limo,
wlon pooplo go lo ioslaiianls lo spono lloii ovoning in a nico onviionmonl
ano ploasanl company, il is inliloly llal gooo sanowiclos solo Ly a Lai woilo
piovioo a gooo siLslililo lo a gooo ioslaiianl moal.
Lananas aio Ly ano laigo availaLlo llioigloil llo yoai, wloioas oiangos aio
mainly availaLlo in winloi monlls, ano micl iaioi in olloi soasons. Accoio-
ingly, Lananas migll Lolong lo llo samo mailol as oiangos in winloi monlls,
Lil Lo in a sopaialo mailol foi llo iosl of llo yoai.
Anolloi consoqionco of llo concoplial fiamowoil pioviooo Ly llo lypo-
llolical monopolisl losl is llal ono can aiiivo al oifoionl oofnilions of mailols
accoioing lo llo slailing poinl of llo invosligalion. Consiooi llo oifoionl ways
of golling fiom cily A ano cily L, ano vico voisa. Ono migll oxpocl somo oo-
gioo of siLslililaLilily Lolwoon aiiplanos ano liains, ano Lolwoon liains ano
Lisos, wloioas aii liclol piicos aio inliloly lo Lo consliainoo Ly llo oxislonco
of Lis soivicos. Sipposo now llal wo lool al a moigoi Lolwoon an aiilino ano a
liain company llal opoialo soivicos Lolwoon lloso lwo cilios. Givon llo limiloo
siLslililaLilily Lolwoon aii ano Lis liavols, il is liloly a fnoing of aii ano liain
soivicos as llo iolovanl mailol.
Consiooi insloao an invosligalion piomploo Ly a pioposoo moigoi Lolwoon
a liain ano a Lis company opoialing llo samo ioilo as aLovo. In llis caso,
ano foi similai ioasons, wo migll ono ip will a mailol oofnilion llal inclioos
liains ano Lisos, Lil nol aiiplanos. Jloiofoio, llo samo piooicl (liains, in llis
oxamplo) migll Lo placoo in oifoionl mailols, accoioing lo llo naliio of llo
invosligalion (llal is, if llo losl slails fiom aiiplanos, oi fiom Lisos).
Diwhu0pdunhwv +ru vhfrqgdu| pdunhwv, Ono impoilanl qioslion llal of-
lon aiisos is low lo oofno mailols wlon lloio oxisl piimaiy ano soconoaiy
piooicls (also calloo nJ-nn|-), sicl as cais (piimaiy piooicl) ano spaio
pails (soconoaiy piooicl), oi wasling maclino (piimaiy piooicl) ano loclni-
cal assislanco (soconoaiy piooicl). Oflon, a coilain lypo of soconoaiy piooicl
is oosignoo foi ano can fl will only a coilain Liano of llo piimaiy piooicl.
Foi inslanco, a coilain Liano of cais ioqiiios spocial loaoliglls llal oo nol fl
any olloi Liano. If llo cai-maloi also piooicos loaoliglls, oofning llo iolo-
vanl piooicl mailol as loaoliglls foi a pailicilai Liano of cais migll iosill
in a oominanl posilion of llo cai-maloi in llo soconoaiy mailol, ovon if llo
cai-maloi las a woal posilion in llo piimaiy mailol.
Jlo fiamowoil ofoioo Ly llo SSNII losl liins oil lo Lo lolpfil lo aooioss
10
llis pioLlom. Jlo iolovanl qioslion is wlolloi a lypollolical monopolisl solling
(lo conlinio llo oxamplo) spaio pails foi a coilain Liano of cais woilo Lo aLlo
lo pioflaLly incioaso piicos in a signifcanl way. Nolo llal if oxisling consimois
lavo alioaoy Loigll llal coilain Liano of cais lloy cannol liin lo olloi spaio
pails (wo aio sipposing lloy aio incompaliLlo). Howovoi, consimois wlo aio
consiooiing wlolloi lo Liy llal pailicilai Liano of cai migll aooioss olloi
cai-malois insloao, lo llo oxlonl llal lloy Laso lloii piiclaso oocision on llo
ovoiall oslimaloo lifo-limo cosl of llo cai, wlicl inclioos llo piico of llo cai
ano llo oxpocloo cosl of ioplacing spaio pails (ano golling afloi-salos soivicos,
ano so on). If llo spaio pails al slalo aio simcionlly impoilanl foi llo ovoiall
oxpocloo cosl of llo piooicl, ano lloio is a simcionl nimLoi of Liyois wlo will
lalo il inlo accoinl, llo lypollolical monopolisl will nol fno il isofil lo iaiso
piicos in a small Lil signifcanl mannoi, ano llo mailol sloilo Lo oofnoo as
llo mailol foi cais ano spaio pails logolloi.
In piaclico, llo answoi of llo qioslion of wlolloi soconoaiy piooicls sloilo
Lo oofnoo as a sopaialo mailol will oopono on llo following vaiiaLlos. Fiisl,
wlolloi llo piico of llo soconoaiy piooicl al issio is a consiooiaLlo piopoilion
oi nol of llo piico of llo piimaiy piooicl: asl-liays will moio liloly Lo pil
inlo a sopaialo mailol llan onginos of llo cai. Socono, nol only llo piico of
llo spaio pail Lil also llo pioLaLilily llal il will lavo lo Lo ioplacoo mallois:
piicos Loing oqial, a spaio-pail wlicl is commonly lnown as voiy liloly lo Lioal
oown will Lo loss liloly lo Lo pil inlo a sopaialo mailol llan a spaio-pail wloso
failiio pioLaLilily is wiooly oxpocloo lo Lo voiy low (llo lalloi woilo nol Lo
consiooioo Ly consimois wlon Liying llo cai). Jliio, somo Liyois aio moio
soplislicaloo llan ollois. Wlon llo Liyois aio fnal consimois, lloy migll Lo
loss infoimoo aLoil llo pioLaLilily llal ioplacomonl spaio pails oi afloi-salos
soivicos aio nooooo, ano lloy migll Lo loss awaio of lloso soconoaiy piooicls`
piicos; convoisoly, wlon llo piimaiy piooicl is an inpil wlicl is Loigll Ly
a fim, wo sloilo oxpocl llo Liyoi lo Lo Lolloi infoimoo of llo oxpocloo cosl
(Loll pioLaLilily lloy aio nooooo ano cosls) of soconoaiy piooicls. In llo lalloi
caso, llo mailol oofnilion will .- n.|&- Lo wiooi llan in llo foimoi.
Jlo mosl famois caso on afloi-mailols is 1nn|, wloio llal company`s
piaclico of lying llo salos of spaio pails foi ils plolocopiois will assislanco
soivicos was inooi accisalion. In llis caso, llo US Sipiomo Coiil (will a
majoiily oocision) oofnoo llo mailol in a naiiow way, as llo soconoaiy mai-
lol foi spaio pails ano soivicos of Kooal plolocopiois. Using llis oofnilion,
Kooal was foino lo lavo almosl 100/ of llo mailol foi spaio pails of Kooal
plolocopiois ano 80-90/ of llo mailol foi soivicos ano assislanco of Kooal
plolocopiois, loaoing in liin lo llo fnoing llal il lao mailol powoi, oospilo
llo facl llal Kooal lao mailol slaios wlicl iangoo fiom 2/ lo 2/ in llo
piimaiy mailols. Jlis jiogmonl las Loon wiooly ooLaloo, Locaiso il is fai fiom
cloai llal Kooal coilo ioally oxoiciso mailol powoi in llo soconoaiy mailols,
givon llo sliong inloi-Liano compolilion oxisling in llo piimaiy mailols. Il
is also incloai wlolloi llis oocision las lao a poimanonl impacl on llo way
soconoaiy mailols aio oofnoo. Accoioing lo Ioiilz (1999), lowoi coiils in llo
US lavo conlinioo lo oofno mailols in a wiooi way, maling il loss oasy lo fno
11
mailol powoi Ly fims llal faco consiooiaLlo inloi-Liano compolilion in llo
piimaiy piooicls.
In 1&j.n . Cnn.--.n, llo mailol was oofnoo as llo UK mailol foi
spaio pails of llo casl iogislois manifacliioo Ly Higin, a Swooisl company
llal was foino oominanl allloigl il lao only 1/ of llo UK mailol foi casl
iogislois.
In anolloi Eiiopoan caso, Kyocoia, a piooicoi of piinlois foi compilois,
lao Loon accisoo of laving aLisoo a oominanl posilion in llo mailol foi soc-
onoaiy piooicls of ils piinlois. Howovoi, llo EC iojocloo llo complainl sinco
il foino llal consimois lool inlo accoinl llo piicos of llo soconoaiy piooicls
(llal accoinloo foi an impoilanl pail of llo cosl of llo lifo-limo piiclaso of
a piinloi) wlon Liying llo piimaiy piooicl, ano llal lloio was signifcanl
compolilion in llo mailol foi piinlois.
Frqvlvwhqf| ri pdunhw ghqlwlrqv ryhu wlph A fnal oLsoivalion poi-
lains lo llo consisloncy llal anliliisl agoncios slow will iospocl lo mailol
oofnilions ovoi limo. Il migll lappon llal llo samo fims, oi similai piooicls,
aio invosligaloo al llo oislanco of somo limo. In sicl casos, il woilo Lo of
coiiso iocommonoaLlo llal agoncios woilo aoopl llo samo mailol oofnilions
foi llo samo lypo of pioLlom (wo lavo jisl soon llal if llo anliliisl pioLlom
is oifoionl, a oifoionl mailol oofnilion is filly jislifoo). Howovoi, consimoi
piofoioncos ano loclnological conoilions clango ovoi limo, ano consisloncy in
sicl casos migll Lo al llo cosl of maling soiiois mislalos.
Foi inslanco, aovancos in lianspoilalion loclnologios, in gioonloiso cilliva-
lion, ano in sloiing ano iofiigoialing loclniqios imply llal nol only Lananas,
Lil also many olloi fiosl fiiils can nowaoays Lo consimoo all llo yoai ioino
Ly Eiiopoan consimois. Howovoi coiiocl llo ECJ oocision of placing Lananas
in a sopaialo mailol foily yoais ago, il woilo Lo micl loss liloly looay lo fno
llal olloi fiiils oo nol oxoiciso compolilivo consliainls on Lananas.
12
515 Jhrjudsklf pdunhw ghqlwlrq
Mosl of llo consiooialions I lavo maoo aLovo will iospocl lo llo oofnilion of
piooicl mailols lolo gooo wlon consiooiing low lo oofno googiaplic mailols.
In pailicilai, llo SSNII losl is slill llo concoplial fiamowoil lo Lo isoo ano
il is in ils ligll llal oala ano infoimalion misl Lo inloipioloo.
Sipposo foi inslanco llal a moigoi Lolwoon minoial waloi piooicois in Ilaly
is Loing consiooioo. Jlo SSNII losl lalos llon llo following foim: Woilo a
lypollolical monopoly solloi of all Ilalian minoial walois fno il pioflaLlo lo
incioaso llo piico of minoial waloi Ly -10/ If llo answoi is amimalivo, llon
llo googiaplic mailol will Lo oofnoo as Ilaly. If nol, foi inslanco Locaiso
ono oxpocls impoils fiom Fianco lo ionooi sicl a piico iiso inpioflaLlo, as
a consiooiaLlo pail of consimois oomano Fioncl minoial waloi, llon llo losl
sloilo Lo iopoaloo on a lypollolical monopolisl of Ilalian ano Fioncl minoial
walois, ano so on.
Jo implomonl llo losl in oiooi lo oofno a googiaplic mailol, in aooilion
lo oslimalos of olaslicilios ano coiiolalion losls, infoimalion iolaloo lo impoils
ano lianspoilalion cosls migll also Lo isoo, as inoicaloo Lolow.
51514 Wkh uroh ri lpsruwv +vklsphqw whvwv,
Elzinga ano Hogaily (197) pioposo lo iso slipmonl oala lo ioonlify googiaplic
mailol aioas. Jlo losl is composoo of lwo compononls, llo fisl lo oslaLlisl
llal lloio is |.| .n Jn &-.n" (llal is, impoils accoinl foi a small pail of
local consimplion) ano llo socono llal lloio is |.| & Jn .n-.n" (oxpoils
accoinl foi a small pail of local piooiclion). Jlo iooa Lolino llo losl is llal
a givon googiaplical aioa is oofnoo as a iolovanl googiaplical mailol if Loll
losls aio salisfoo, llal is lloio is lilllo movomonl of llo piooicl lo ano fiom
olloi googiaplical aioas.
Jlo losl migll piovioo isofil infoimalion, Lil il is liloly lo Lo Liasoo ano
ils iosills sloilo accoioingly Lo inloipioloo will caio. Sipposo foi inslanco
llal a consiooiaLlo piopoilion of liaoo fows was oLsoivoo Lolwoon a iogion
ano anolloi. Jlis woilo Lo a cloai inoicalion llal llo iogions` piooicois aio
oxoicising a compolilivo consliainl on oacl olloi. Accoioingly, llo lwo iogions
sloilo nol Lo oofnoo as sopaialo mailols, ano llo losl sloilo Lo caiiioo oil
again on fiilloi iogions.
Sipposo insloao llal llo losl is salisfoo, in llo sonso llal fow slipmonls
occii Lolwoon iogion A ano iogion L. Jlis is nol nocossaiily an inoicalion llal
llo lwo iogions aio nol in llo samo mailol. If piicos aio llo samo, ano lloio aio
somo (ovon voiy small) lianspoilalion cosls, ono woilo nol oLsoivo any oolivoiy
fiom a iogion lo llo olloi, ovon lloigl lloy piooico oxaclly llo samo gooo
ano aio noiglLoiiing. Yol, piooicois in ono iogion sliongly consliain lloso in
llo olloi. If A`s piooicois liioo lo incioaso piicos Ly ovon a small amoinl,
A`s consimois woilo swilcl lo L`s piooicois: sicl a piico iiso woilo nol Lo
pioflaLlo. Honco, llo slipmonl losl is Liasoo, ano ils iosills sloilo accoioingly
Lo oiscoinloo.
1
51515 Wudqvsruwdwlrq frvwv
Ono isofil infoimalion llal can sipplomonl olloi losls is givon Ly llo impoi-
lanco of lianspoilalion cosls iolalivo lo llo piicos of a givon piooicl. Evon if
no slipmonls lao occiiioo in llo pasl Lolwoon ono iogion ano anolloi, llo facl
llal lianspoil cosls aio low iolalivo lo piicos woilo imply llal sicl slipmonls
aio possiLlo ano llal a compolilivo consliainl will avoio llal piicos in a iogion
aio incioasoo.
In somo silialions, lloso consiooialion will malo llo googiaplic oxlonl of
llo mailol voiy small. Consiooi foi inslanco a moigoi Lolwoon fooo iolailois
in a givon cily. Il woilo malo lilllo sonso lo oofno llo mailol Loyono llo
cily Loioois, as lianspoilalion cosls (llal in llis caso inclioo limo sponl Ly
consimois lo go lo a slop) woilo piovonl mosl cilizons lo movo lo noiglLoiing
cilios lo malo lloii slopping.
Al llo olloi sioo of llo spocliim, lloio aio mailols wlicl aio coiioclly
oofnoo as gloLal. A caso in poinl aio mailols foi aiiciafl, wloio lianspoilalion
cosls aio iiiolovanl iolalivo lo lloii piicos.
51516 Rwkhu fkdudfwhulvwlfv
In somo casos, ospocially wlon llo qioslion is wlolloi lo oofno a mailol al
a nalional lovol, oi sipianalional, consimoi piofoioncos migll appoai an im-
poilanl vaiiaLlo. In a nimLoi of piooicls, piofoioncos follow nalional Loioois,
Lil nol always llis implios llal sopaialo mailols sloilo Lo oofnoo. Difoionl
nalional laslos migll Lo iofocloo in oifoionl poicoivoo qialilios, ano in liin
oifoionl mailol piicos acioss coinliios. Yol, as wo lavo soon aLovo wlon ois-
cissing piico oifoioncos, llis ooos nol nocossaiily moan llal impoils oo nol
oxoiciso a compolilivo consliainl: a fiilloi incioaso in piicos in a coinliy`s
piooicls migll liiggoi a siLslanlial oivoision of oomano lowaios foioign pioo-
icls. In somo casos, lowovoi, laslo oifoioncos migll Lo so sliong llal il woilo
malo lilllo sonso lo oofno mailols acioss coinliios: liy ano soll Ilalians pasla
nol maoo Ly oiiim wloal (wlicl insloao Fioncl ano Goimans woilo swallow
willoil pioLloms), if yoi oo nol Loliovo llis slalomonl...
An oxamplo of mailols llal aio (al llo momonl) inliloly lo Lo oofnoo al
llo sipia-nalional lovol aio mooia (piLlisling ano Lioaocasling) mailols. A
moigoi Lolwoon lwo Fioncl nowspapois will pioLaLly iosill in a googiaplic
mailol oofnilion nol wiooi llan Fianco, in pail foi ioasons of langiago, in pail
Locaiso il is inliloly llal Fioncl cilizons aio inloiosloo in llo Swiss ano Lolgian
nows covoioo Ly nowspapois in Gonova oi in Liissols. Foi langiago ioasons,
a moigoi Lolwoon lwo Goiman lolovision Lioaocasling companios will al mosl
loao lo a googiaplic mailol compiolonoing also Aisliian ano Goiman Swiss
lolovision slalions.
14
6 Wkh dvvhvvphqw ri pdunhw srzhu
Mailol powoi is oofnoo as llo aLilily of a fim lo iaiso piicos aLovo ils maiginal
cosl. Howovoi, fims oo nol lavo any mailol powoi only in llo aLsliacl
ano inioalislic woilo of poifocl compolilion oi of llo Loiliano moool will
lomogonoois gooos ano poifoclly symmoliic fims. In ioal woilo inoisliios,
wloio lloio oxisl fxoo cosls ano piooicls aio inliloly lo Lo poicoivoo as poifocl
siLslililos Ly all consimois, wo sloilo oxpocl ovoiy fim lo lavo -n nj
of mailol powoi.
Jlis calls foi lwo issios lo Lo aooiossoo. Fiisl, wlicl moasiio of mailol
powoi sloilo Lo isoo, ano socono, wlicl llioslolo of mailol powoi sloilo Lo
lalon lo inoicalo llal a fim las onoigl mailol powoi foi il lo fall inooi llo
allonlion of compolilion ailloiilios. Jlo socono qioslion is laigoly calling foi
an aiLiliaiy answoi, ano il is solvoo in oifoionl ways Ly llo oifoionl anliliisl
logislalions, oi ovon willin llo samo logal fiamowoil (soo Lolow foi llo oifoionl
llioslolo valios of mailol slaio isoo Ly llo EC ano llo ECJ in lloii oocisions).
Lol is owoll ipon llo fisl qioslion Lofoio coming Lacl lo llo socono issio.
A (llooiolical) moasiio of mailol powoi is givon Ly llo 1n .nn., oofnoo
as llo fim`s mail-ip (llal is, llo oifoionco Lolwoon llo piico j ano llo
maiginal cosl C ) ovoi piico ialio: 1 @ +j C ,,j . Jlo inoox incioasos will
llo mail-ip claigoo Ly llo fim, wlicl sloilo Lo llo mosl oosiiaLlo foaliio of
any inoox of mailol powoi.
Ono migll Lo lomploo lo apply oiioclly llo Loinoi inoox in ioal woilo
casos. Howovoi, ils oiiocl applicalion woilo cioalo pioLloms of oifoionl na-
liio. Fiislly, oslimaling llo maiginal cosl of a fim is nol an oasy lasl.
Maiginal cosl is mainly a llooiolical concopl, ano ovon inooi llo Losl lnowl-
oogo of llo loclnological conoilions inooi wlicl a fim opoialos, lo ooloimino
llo impacl on llo lolal cosl of piooiclion of a maiginal clango in llo qianlily
piooicoo Ly a fim is oflon Loyono piaclical foasiLilily. Inoooo, lloio migll Lo
laigo oifoioncos in llo oslimalos of maiginal cosls ovon willin llo managomonl
of llo samo fim. Compolilion agoncios will an impoifocl lnowloogo of llo
socloi, llo loclnology, ano llo fim ilsolf, woilo coilainly lavo a micl moio
oimcill lasl.
Soconoly, ovon if nol volinlaiily maoo lo oscapo anliliisl invosligalions,
ligl cosls can Lo inloionl lo monopoly powoi. As soon in claploi 2, ono sloilo
oxpocl a monopolislic fim lo Lo claiacloiisoo Ly piooiclivo inomcioncy. Iaia-
ooxically, Ly applying llo Loinoi inoox ono migll fno llal a fim is nol oomi-
1
nanl Locaiso il las (iolalivoly) ligl cosls (ano iolalivoly low maigins), wloioas
sicl ligl cosls aio llo iosill of ils monopoly powoi.
Givon llo oimcillios onlailoo Ly llo oiiocl applicalion of llo Loinoi inoox,
an alloinalivo appioacl migll Lo Lasoo on llo facl llal llo Loinoi inoox of a
monopolislic fim coiiosponos lo llo invoiso of llo olaslicily of oomano facoo
Ly il: 1 @ 4,. (soo claploi 8.2, as woll as .1.0). Inoooo, llo oiiocl oslimalo
of llo olaslicily of llo (iosioial) oomano facoo Ly a fim is al llo coio of ono of
llo moooin oconomoliic loclniqio of assossmonl of mailol powoi, as I oisciss
in soclion BB Lolow.
Howovoi, llo oslimalo of llo iosioial oomano olaslicily facoo Ly a fim,
as woll as olloi oconomoliic loclniqios aiming al oslimaling (oi foiocasling)
oiioclly fiom mailol oala llo mailol powoi onjoyoo Ly a fim oi a gioip of fims,
is nol always possiLlo (foi lacl of oala) ano, wlon possiLlo, is nol nocossaiily
willoil pioLloms, as oiscissoo in soclion .2 Lolow.
Jloso oconomoliic loclniqios coilainly iopiosonl a voiy piomising lool foi
anliliisl analysis, Lil lo llo oxlonl llal ioliaLlo oala oo nol always oxisl ano
llal sicl loclniqios aio nol complololy slanoaio, a moio liaoilional appioacl
migll Lo isoo foi llo assossmonl of mailol powoi.
Jlo liaoilional appioacl consisls of assossing mailol powoi in an inoiiocl
way. Il alliiLilos a loy iolo lo llo mailol slaio lolo Ly llo fim(s) inooi
invosligalion, Lil mailol slaio is only ono of llo vaiiaLlos llal ono misl lool
al in oiooi lo ooloimino mailol powoi. Olloi vaiiaLlos aio llo iolalivo posilion
of compolilois, llo oxislonco of polonlial onlianls, ano llo coinloivailing powoi
of Liyois.
In wlal follows, I oisciss low lloso oifoionl vaiiaLlos conliiLilo lo llo
assossmonl of mailol powoi.
614 Wudglwlrqdo dssurdfk= +lqgluhfw, dvvhvvphqw ri pdunhw
srzhu
61414 Wkh fhqwudo uroh ri pdunhw vkduhv
Jlo lypical piocooiio followoo Ly anliliisl ailloiilios all ovoi llo woilo is lo
fisl oofno llo iolovanl mailol ano llon assoss mailol powoi in llal mailol. In
llis socono slop, llo analysis iolalos aioino llo moasiiomonl of mailol slaios
lolo Ly llo fim (oi fims).
Giving an impoilanl iolo lo mailol slaios in a mailol powoi analysis malos
sonso. Afloi all, ono woilo oxpocl (olloi llings Loing oqial) a monopolislic fim,
llal is ono llal las 100/ of llo mailol, lo lavo llo liglosl possiLlo mailol
powoi. Convoisoly, ono woilo oxpocl a fim loloing a liny slaio of llo mailol lo
Lo inaLlo lo oxoiciso micl mailol powoi. In gonoial, a iosliainl lo llo aLilily
10
of solling ligl piicos will como fiom compolilois, ano a fim`s low mailol slaio
will inoicalo llal llis fim las sliong compolilois.
Howovoi, a fim`s ligl mailol slaio is nol simcionl lo conclioo llal il is
oominanl. As wo slall oisciss Lolow, sicl a fim woilo nol Lo aLlo lo incioaso
piicos siLslanlially if onliy in llo inoisliy was voiy oasy, oi if lloio was a
sliong Liyoi ioaoy lo iso ils coinloivailing powoi ano swilcl lo compoling
sippliois (oi lo inlogialo voilically). Nono llo loss, il is ioasonaLlo lo slail
fiom a moasiiomonl of mailol slaio as a fisl slop of llo analysis of mailol
powoi of a fim, ano llo simplo loclnical soclion .1.0 Lolowconfims llo posilivo
iolalionslip Lolwoon mailol slaio ano mailol powoi.
61415 Zklfk wkuhvkrogv iru pdunhw vkduhv
Jlo conlialily of mailol slaios in mailol powoi assossmonls siggosls llal lloy
migll Lo isoo as a sciooning oovico. Foi inslanco, if llo mailol slaio of a fim
Loing invosligaloo was Lolow a coilain llioslolo (say, 40/) lloio migll Lo a
piosimplion llal llo fim ooos nol lolo onoigl mailol powoi lo Lo consiooioo
oominanl, ano llo caso migll Lo oismissoo (oi llo Liioon of pioving llal lloio
is oominanco sloilo fall onliioly on llo Anliliisl Ailloiily); if il was aLovo
anolloi llioslolo (say, 0/) lloio migll Lo a piosimplion llal llo fim is
oominanl, ano llo Liioon of pioving llal oominanco ooos nol oxisl sloilo fall
on llo oofonoanl; ano foi inloimooialo mailol slaios a moio opon invosligalion
migll lalo placo.
Jlis appioacl woilo Lo lolpfil lo incioaso logal coilainly ano iooico llo
cosl of llo invosligalions. Of coiiso, ising sicl llioslolos aims al oisliiLiling
llo Liioon of pioof, ano sloilo nol lioo llal many olloi olomonls (soo Lolow)
misl Lo assossoo Lofoio laling a fnal conclision on llo mailol powoi of a fim.
Somo Anliliisl Ailloiilios aio oxplicil in llo way lloy woilo iso mailol
slaios llioslolos as a sciooning oovico. Jlo Assossmonl of Mailol Iowoi"
Giioolinos (poinl 2.11) ioloasoo Ly llo UK Omco of Faii Jiaoing inoicalo lwo
llioslolos llal appoai voiy sonsiLlo: Lolow 40/ il is inliloly llal a fim is
consiooioo oominanl; aLovo 0/ oominanco can Lo piosimoo.
Noilloi llo EC noi llo Eiiopoan Coiil of Jislico aio oqially oxplicil, Lil
in piaclico lloii appioacl is pioLaLly nol so oifoionl. Sinco llo oailiosl casos,
llo ECJ las inoicaloo llal a nimLoi of faclois misl Lo consiooioo in assossing
oominanco, Lil las alliiLiloo an impoilanl iolo lo mailol slaios:
In 1n.n 1nnn-, llo oofonoanl was foino lo Lo oominanl will mailol
slaios aioino 40-4/ (Lil again, llis was only ono of llo olomonls consiooioo
Ly llo ECJ), ano somolow lloso mailol slaio lovols aio slill consiooioo lo Lo
17
llo Lonclmail lovols foi llo piosimplion of oominanco. In |. . Cnn.--.n
llo ECJ slaloo llal a mailol slaio poisislonlly aLovo 0/ is an inoicalion llal
llo fim is oominanl in llo aLsonco of ovioonco lo llo conliaiy.
Il is nol cloai Lolow wlicl llioslolo llo ECJ woilo consiooi a fim n lo
Lo oominanl. Jlo Eiiopoan Commission woilo pioLaLly sol llal llioslolo al
2/, givon llal Ailiclo 1 of llo Moigoi Bogilalion 4004,89 slalos llal a con-
conlialion is piosimoo nol impooo compolilion if llo moiging fims` comLinoo
mailol slaio ooos nol oxcooo 2/.
US Coiils soom lo inoicalo ligloi llioslolos foi fnoing oominanco. In
|n, Jiogo Loainoo Hano wiolo llal a mailol slaio of / is coilainly nol
simcionl lo oslaLlisl oominanco, ano in J-n 1n.-h a 0/ mailol slaio
las Loon ooomoo fai loo low foi oominanco. In J.n--1.nj&n, a fim will
40/ mailol slaio was foino lo Lo nol oominanl.
61416 Phdvxulqj pdunhw vkduhv dqg dvvhvvlqj uhodwlyh vwuhqjwkv
Onco a mailol las Loon oofnoo, mailol slaios of all llo iolovanl fims in llo
mailol can Lo calcilaloo. Jlis will givo a fisl picliio of llo iolalivo compolilivo
posilions of llo fims in llal mailol.
If llo iolovanl mailol in llo invosligalion al slalo coincioos will llo mailol
llal fims ano Lisinoss magazinos malo iofoionco lo, lloio migll Lo sovoial
soiicos llal ono can iso lo ooiivo mailol slaios. A loss isial mailol oofnilion
migll imply a oivoigonco Lolwoon an agoncy oosiioo oala ano fims oi inoisliy
oala, Lil ovon so, salos oala aio isially ioaoily availaLlo.
In somo casos, mailol slaios Loll in nimLoi of &n.- ano in n|&- migll Lo
availaLlo. Jlo lalloi gonoially lavo moio oconomic moaning, allloigl llo foi-
moi migll also conlain somo infoimalion aLoil llo iolalivo mailol posilions.
In coilain inoisliios wloio piooiclion is limiloo Ly a ciicial inpil, oxisling
-- migll Lo moio infoimalivo llan mailol slaios. Foi inslanco, if ono
lools al a minoial inoisliy, il woilo Lo moaningloss foi compolilion analysis
piiposos lo iopoil llal a coilain fim las (oi lao) a 20/ mailol slaio, if ils
iosoivos will Lo complololy oxlaisloo willin lilllo limo: llo filiio mailol
slaio of llal fim is going lo Lo nilil, ano il will nol oxoiciso any compolilivo
consliainl on ils iivals.
Similai consiooialions migll apply wlon ono of llo mailol pailicipanls is,
Locaiso of an olooi oi loss omcionl loclnology, oi olloi ioasons, voiy inliloly
lo Lo a iolovanl mailol playoi in llo noai filiio. In llis caso, consiooiing llo
ciiionl (oi pasl) mailol slaio il las woilo ovoi-oslimalo llo compolilivo con-
sliainls llal llis fim oxoicisos on ils compolilois. Il migll llon Lo appiopiialo
lo oxclioo ils ciiionl salos fiom llo calcilalions of mailol slaios.
18
Jlo oogioo of .-- nn.j lolo Ly iival fims givos also an impoilanl
infoimalion. If llo oxisling capacily of lloso fims is jisl onoigl lo salisfy
lloii ciiionl oomano, lloii sipply olaslicily (llal is, lloii aLilily lo ioacl lo an
incioaso in piicos ano soivo now cislomois) is voiy low. If, on llo olloi lano,
lloy lavo a consiooiaLlo oxcoss of capacily, llon il is ioasonaLlo lo oxpocl llal
llo mailol powoi of llo fim Loing invosligaloo is iooicoo. Locaiso of llis
oLsoivalion, llo slaio of llo capacily of oacl fim ovoi lolal inoisliy capacily
migll Lo a iolovanl infoimalion.
Foi llo casos wloio sipply siLslililion las Loon lalon inlo accoinl lo oofno
llo iolovanl mailol, ano fims llal aio nol ciiionlly solling llo mailol piooicls
aio incliooo in llo iolovanl mailol, an oslimalo of capacily migll again Lo isoo
as a pioxy foi salos, ano mailol slaios sloilo Lo oslimaloo accoioingly.
Somo mailols aio claiacloiisoo Ly laigo ano infioqionl oioois, maoo Ly a
small nimLoi of Liyois. In lloso mailols, lloio migll Lo a laigo vaiianco in
mailol slaios if lloy aio calcilaloo ovoi a small poiioo, as ono oiooi migll alono
iopiosonl a consiooiaLlo piopoilion of llo poiioo`s salos. As a consoqionco,
mailol slaios sloilo Lo calcilaloo ovoi a iolalivo long poiioo, say llioo lo fvo
yoais (ooponoing on llo fioqioncy of llo oioois).
Fiilloimoio, il is nol only llo oxislonco of a coilain palloin, Lil ils -.--
n ovoi limo llal migll givo a sliong inoicalion of an inoisliy silialion. If
a fim`s mailol slaio was consislonlly aLovo say, 0/, ovoi a limo loiizon of
fvo-lon yoais, llal migll Lo a fiilloi inoicalion (olloi llings Loing oqial) of ils
liloly oominanco. Convoisoly, a oisliiLilion of mailol slaios among llo main
playois llal vaiios consiooiaLly ovoi a iolalivoly sloil limo migll Lo siggoslivo
of a moio compolilivo silialion wloio no singlo playoi is oominanl.
As a fnal iomail, nolo llal llo aggiogalo lovol of mailol powoi (llal is,
llo oxlonl lo wlicl on avoiago fims in llo inoisliy can iaiso piicos aLovo
lloii maiginal cosls) incioasos will llo oogioo of conconlialion, olloi llings
Loing oqial (soo also loclnical soclion .1.0). Jlis oLsoivalion is nol iolovanl
foi llo assossmonl of inoivioial mailol powoi, Lil il is voiy impoilanl wlon
moigois aio analysoo (soo claploi ). Inoooo, moasiios of inoisliial concon-
lialion aio oflon isoo as a fisl oovico lo scioon moigois llal migll lavo somo
anli-compolilivo ofocls.
19
61417 Hdvh dqg olnholkrrg ri hqwu|
If a fim liioo lo incioaso ils piicos, ils oxisling compolilois migll ioacl Ly
incioasing lloii capacily. Jo llo oxlonl llal ils compolilois will iospono ag-
giossivoly, llo mailol powoi of a fim is limiloo.
Asioo fiom oxisling compolilois, polonlial onlianls migll also consliain llo
aLilily of a fim (oi a gioip of fims) lo iaiso piicos. Inoooo, llo mosl impoilanl
insigll of conloslaLlo mailols llooiy (soo claploi 2) is llal if onliy is oasy, iapio
ano coslloss, a fim woilo nol Lo aLlo lo claigo a ligl maigin Locaiso laigo
piofls woilo alliacl compolilois inlo llo inoisliy.
Jlo ciilicisms aooiossoo lo llis llooiy lavo sliossoo llo loy iolo playoo Ly
fxoo sinl cosls as an oLslaclo lo onliy. Jlo ligloi sinl cosls llo loss liloly
llal onliy will occii, wlicl in liin malos il loss liloly llal now fims will
oisciplino llo incimLonls. Nolo llal fxoo sinl cosls can Lo oilloi oxogonois
oi onoogonois, oi Loll. Exogonois sinl cosls iofoi lo llo invoslmonl a fim
las lo incii in oiooi lo onoow ilsolf will llo planls ano maclinos (oi moio
gonoially, loclnology) il nooos foi piooicing ano oisliiLiling llo gooo. Ly
ano laigo, sicl an invoslmonl is nol a cloico vaiiaLlo of llo fims opoialing
in llo inoisliy. Enoogonois sinl cosls iofoi lo B\D ano aovoilising oillays
llal fims malo in oiooi lo incioaso llo poicoivoo qialily of lloii piooicls,
ano lloy aio inoooo a cloico vaiiaLlo of llo fim. As oiscissoo in claploi 2,
onoogonois sinl cosl inoisliios aio lypically claiacloiisoo Ly a lowoi Loino lo
conconlialion ano il is inliloly llal onliy will oisciplino llo mailol powoi of
llo incimLonls in sicl inoisliios.
Wlon analysing mailol powoi in an inoisliy, il is ciicial lo inooislano
llo lilolilooo of onliy, ano caio sloilo Lo oovoloo lo a nimLoi of oolails. Foi
inslanco, llo oxislonco of swilcling cosls, locl-in ofocls ano nolwoil oxloinali-
lios (soo again claploi 2) migll iopiosonl an oLslaclo lo onliy, as consimois oo
nol lavo llo iigll inconlivo lo liin lo now sippliois, ovon wlon lloy aio moio
omcionl ano,oi ofoi sipoiioi piooicls.
Caio sloilo also Lo oovoloo lo llo lisloiy of llo inoisliy, in pailicilai
pioviois opisooos of onliy ano llo incimLonl`s ioaclions. Sipposo foi inslanco
llal llo mailol loaooi las consislonlly piicoo aggiossivoly wlonovoi now com-
polilois lavo onloioo llo inoisliy. Jlon il will lavo Liill a iopilalion of Loing
a loigl playoi, ano polonlial onlianls will lalo il inlo accoinl al llo momonl of
oocioing on onliy: llo oxpoclalion llal llo incimLonl will sol low piicos afloi
lloii onliy migll oiscoiiago llom fiom onloiing (soo claploi 7 foi a oiscission
of piooaloiy Lolavioii Ly an incimLonl oominanl fim).
61418 Ex|huv* srzhu
Jlo aLilily of a fim lo claigo ligl piicos also ooponos on llo oogioo of con-
conlialion of llo Liyois. A fim is cloaily moio fioo lo oxoil mailol powoi if
il facos a laigo nimLoi of oispoisoo consimois oi Liyois llan if il facos ono oi
20
fow sliong Liyois. A sliong Liyoi can malo iso of ils Laigaining powoi lo
slimilalo compolilion among sollois, oilloi Ly llioaloning lo willoiaw oioois
fiom ono solloi lo givo llom lo anolloi, oi Ly llioaloning lo slail ipslioam
piooiclion ilsolf.
Locaiso of cooioinalion pioLloms, onliy inlo llo sollois` inoisliy Ly now
fims can also Lo oasioi wlon Liyois aio conconlialoo. Imagino foi inslanco a
silialion wloio lloio is an incimLonl monopolisl, ano wloio polonlial onlianls
woilo lavo lo malo a consiooiaLlo sinl invoslmonl lo opoialo in llis mailol. If
Liyois aio oispoisoo, ano polonlial onlianls lavo similai cosl lovols, oioois aio
liloly lo Lo oisliiLiloo acioss sollois. Winning oioois fiom a fow Liyois migll
nol Lo onoigl lo jislify llis invoslmonl, ano as a iosill no now fim migll
onloi llo inoisliy, ovon lloigl oacl polonlial onlianl is moio omcionl llan llo
monopolisl. Locaiso Liyois aio nol cooioinaling in llo oocision of wlicl solloi
lo solocl, lloy migll ono ip will laving llo monopolisl as only solloi in llo
inoisliy, ano lonco faco micl ligloi Lills llan if onliy lao occiiioo. Wlon
insloao lloio is jisl a singlo Liyoi (oi all llo Liyois cooioinalo), llon il will
givo ils oiooi lo ono of llo onlianl ano llis will Lo aLlo lo onloi llo inoisliy.
Sovoial ompiiical woils lavo liioo lo losl llo coinloivailing powoi lypoll-
osis, ano lloio appoais lo Lo somo ovioonco llal Liyoi conconlialion ooos nog-
alivoly afocl llo mailol powoi of llo sollois.
Jlo iolo of Liyoi powoi in consliaining sollois is lypically woll lalon inlo
accoinl Ly anliliisl agoncios. In Eiiopoan moigoi casos, foi inslanco, il las
loo llo EC lo cloai moigois llal woilo olloiwiso Loon Llocloo.
In 1n-5n, llo moiging fims piooicoo Liqiio Iaclaging Loaio (LIL),
isoo foi llo paclaging of mill ano fiiil jiico. Jlo moigoi was oxpocloo lo givo
llom a mailol slaio Lolwoon 0/ ano 70/. Olloi inoisliy claiacloiislics,
sicl as ligl Laiiiois lo onliy, also siggosloo an anli-compolilivo impacl. Yol,
llo moigoi was appiovoo on llo gioinos llal Liyoi powoi in llis inoisliy was
so laigo (Joliapal alono Liys 00-80/ of lolal salos) llal llo moiging fims
woilo lavo Loon inliloly lo oxoiciso mailol powoi. Jlo EC aigioo llal llo
main Liyoi, Joliapal, woilo lavo llo oplion of oovoloping now capacily will
olloi oxisling oi now sippliois, sloilo llo pailios allompl lo oxoiciso mailol
powoi".
A similai aigimonl was isoo Ly llo EC in llo 111n.n|-1n. caso,
21
wlicl was cloaioo (siLjocl lo conoilions) mainly on llo gioinos llal Doilsclo
Laln (llo Goiman iailways opoialoi), llo only Liyoi foi mainlino liains, woilo
lavo oxoiloo compolilivo piossiio on llo piooicois of liains ano iailways ma-
loiials (soo soclion BB foi a oolailoo oiscission).
61419 Pdunhw srzhu/ pdunhw vkduhv dqg frqfhqwudwlrq-
Sipposo wo aio inloiosloo in slioying llo mailol powoi of a fim i in a coilain
(woll oofnoo) mailol. Assimo also llal fims compolo in qianlilios, piooico
a lomogonois gooo (lloio is only ono mailol piico, j), ano lavo a conslanl
maiginal cosl c . Fiim i`s piofls can Lo wiillon as:
@ j+Q,q c q , (1)
wloio Q @ q .
S
q is llo lolal inoisliy oilpil ano q ano q oonolo
iospoclivoly llo oilpil of fim i ano llal of any of ils iival fims . Maximisalion
of ils piofls givon llo oilpil of ils iivals will loao lo llo following FOC:
d
dq
@ j+Q, .
dj
dq
q c @ 3. (2)
Jlo oqiiliLiiim piico j in llis mailol will Lo oofnoo Ly llo solilion of all
llo FOCs. Al sicl a piico, llo FOC foi fim i can Lo io-wiillon as:
j +Q, c @
dj
dQ
dQ
dq
q , ()
Ly oivioing Loll sioos of llis oxpiossion Ly j , Ly Loll milliplying ano
oivioing Ly Q llo BHS, ano Ly noling llal in a Nasl oqiiliLiiim in qianlilios
iivals` oilpil aio givon (so llal piooiclion of ono aooilional inil Ly a fim
coiiosponos lo piooiclion of an aooilional inil foi llo inoisliy as a wlolo:
dQ,dq @ 4), wo lavo:
j c
j
@
dj
dQ
Q
j
q
Q
, (4)
llal ono can fnally io-wiilo as:
1 @
:
.
, ()
wloio 1 is fim i`s Loinoi inoox of mailol powoi, : is fim i`s mailol slaio,
ano . @ +dQ,Q,,+dj,j, is llo olaslicily of nn| oomano will iospocl lo
piico. Nolo llal foi llo monopoly caso ono fnos llo woll-lnown iolalionslip
1 @ 4,..
22
Liiloing on llis iosill, ono can also fno an aggiogalo inoox of mailol powoi
foi an inoisliy as a wlolo. Donoling will 1 @
S
: 1 sicl an inoox, ano
ising () ono oLlains:
1 @
[
:
.
@
111
.
, (0)
wloio 111 @
S
: is llo Hoifnoall-Hiisclman Inoox of conconlialion.
Jlis oslaLlislos llal lloio is a oiiocl iolalionslip Lolwoon llo oogioo of inois-
liial conconlialion ano llo avoiago oogioo of mailol powoi, a iosill llal las
Loon isoo lo jislify llo piominonl iolo assignoo Ly llo US DOJ lo llo HHI as
a sciooning oovico in moigoi analysis.
Olloi woils lavo slowoo llal llo inoivioial Loinoi inoox ooponos on llo
fim`s mailol slaio as woll as llo mailol oomano olaslicily ano llo olaslicily
of llo sipply of llo iivals. Jlis sliossos llal llo oxlonl lo wlicl iival fims
aio aLlo lo iospono lo an incioaso in fim i`s piicos Ly incioasing lloii oilpil
consliains fim i`s mailol powoi.
3.2 EcononctrIc tcchnIqucs: {dIrcct) asscssncnt oI nar-
kct povcr*
Jlo piiposo of llis soclion is lo givo an ovoiviow of lwo ioconl qianlilalivo
loclniqios llal aio isoo lo assoss mailol powoi ano oslimalo llo liloly ofocls of
a moigoi. Soclion .2.1 Liiofy oosciiLos llo molloo Lasoo on llo oslimalion of
iosioial oomano olaslicilios, ano soclion .2.2 ooals will logil oomano moools,
llal can Lo isoo Loll lo oslimalo mailol powoi ano lo similalo ofocls of
moigois.
Ono ioason foi llo popilaiily of lloso lwo loclniqios is llal lloy Loll allow
lo iooico llo oimonsionalily pioLloms wlon ooaling will oifoionlialoo piooicls
inoisliios (logil moools ano iosioial oomano olaslicilios molloos lloiofoio pio-
vioo lwo alloinalivo answois lo llo samo pioLlom). Sipposo foi inslanco llal
ono wanloo lo oslimalo mailol powoi in a mailol claiacloiisoo Ly : oifoionli-
aloo piooicls. A naliial appioacl woilo Lo lo spocify a syslom of : oomano
oqialions, wloio llo oomano of oacl piooicl is oxpiossoo as a finclion of llo
piicos of all piooicls in llo mailol. Evon will linoai oi log-linoai oomanos, os-
limaling sicl a syslom woilo imply oslimaling moio llan : paiamolois, sinco
oacl of llo : oomano oqialions will conlain llo piicos of all : piooicls, plis
all olloi iolovanl oxplanaloiy vaiiaLlos. Il is cloai llal as : Locomos laigo, llo
oimonsionalily pioLlom Locomos voiy impoilanl (ovon wlon imposing iosliic-
lions, sicl as symmoliy, on llo moool). Bosioial oomano analysis ano logil
moools ofoi lwo ways lo ooal will llis oimonsionalily pioLlom.
2
A complolo analysis of lloso ano olloi loclniqios is Loyono llo scopo of
llis Lool, Lil llo following nolos, lowovoi incomplolo ano sloil, sloilo givo
an iooa of llo lolp moooin oconomoliic ano compiling lools migll givo in
conciolo anli-liisl casos.
61514 Hodvwlflw| ri uhvlgxdo ghpdqg-
A voiy isofil qianlilalivo loclniqio lo ovalialo mailol powoi ano assoss llo
ofocls of moigois is oio lo Laloi ano Liosnalan (198, 1988), ano il is Lasoo
on llo oiiocl oslimalion of iosioial oomano olaslicilios. Hoio I Liiofy iocall llo
main foaliios of llis loclniqio. (Foi a foimal analysis, soo soclion .2.1 Lolow.)
I lavo alioaoy nolicoo llo oimonsionalily pioLlom wlon ooaling will oif-
foionlialoo piooicls. An aooilional pioLlom aiisos Locaiso a piico incioaso Ly
fim A woilo gonoially nol loavo inclangoo llo piico sol Ly llo olloi fims
(as il was implicil in loclnical soclion .1.0): foi a coiiocl assossmonl of llo
mailol powoi onjoyoo Ly a fim, ono sloilo also oslimalo lo wlal oxlonl a piico
incioaso Ly sicl a fim woilo Lo followoo Ly oacl of llo iivals. Jlis woilo aoo
comploxily lo llo lasl of assossing mailol powoi.
Jlo oslimalion of llo iosioial oomano finclion is a loclniqio wlicl consio-
oiaLly simplifos llis lasl, ano iooicos llo nooo of oala. Jo assoss llo mailol
powoi of fim A, llis loclniqio involvos llo oslimalion of jisl ono coomcionl.
Jlis is llo |n-..j J .- -.n&n| nnnnn J&n.n, llal is llo oomano finc-
lion facoo Ly fim A onco llo ioaclion of all llo olloi fims is lalon inlo accoinl.
Insloao of asling in wlal poiconlago a piico iiso of fim A woilo incioaso oo-
mano of fim L, C, ano so on, llis loclniqio jisl asls in wlal poiconlago a
piico iiso of fim A woilo oocioaso ils own iosioial oomano, llal is llo oomano
llal is lofl afloi llal all llo olloi fims lavo salisfoo lloiis. A low oslimalo
of llo iosioial oomano olaslicily woilo llon siggosl ligl mailol powoi of fim
A, as a consiooiaLlo piopoilion of consimois woilo conlinio lo Liy fiom fim
A ialloi llan swilcling lo olloi fims (oi coasing lo Liy llo piooicl). Vico
voisa, a ligl oslimalo woilo siggosl low mailol powoi.
Sinco iogiossing llo iosioial oomano finclion of a fim alono woilo iosill
in an oslimaloi wlicl is nol n-.-n, as oqiiliLiiim piico (ano qianlily) aio
joinlly ooloiminoo Ly Loll llo oomano ano llo sipply sclooilos of a fim, llo
oslimalion of llo iosioial oomano olaslicily is isially accompanioo Ly llo iso of
llo .n-&nnn| n.n|| molloo (foi wlicl fim-spocifc cosl oala of llo fim
wloso mailol powoi wo woilo lilo lo assoss aio nooooo, soo soclion .2.1 Lolow),
lo solvo llo simillanoois iolalion pioLlom ano oLlain consislonl oslimalois.
Nolo llal llo oslimalion of llo iosioial oomano olaslicily cannol loll is
wlolloi mailol powoi is low Locaiso of compolilion fiom fim L, oi C, oi
olloi, sinco llo iival fims aio consiooioo as a colloclivo, ano lloii spocifc iolo
in consliaining llo mailol powoi of fim A cannol Lo singloo oil. Howovoi,
llo aovanlago of llis molloo is llal il allows is lo savo on llo oala ioqiiioo
lo poifoim an oconomoliic assossmonl of llo mailol powoi of a fim. Sinco il
is voiy oflon llo caso llal oala al llo oisaggiogaloo lovol aio scaico oi oimcill
lo oLlain, llis is an impoilanl slop foi llo foasiLilily of llo applicalion of
24
qianlilalivo molloos lo llo analysis of mailol powoi.
Jlo applicalion of llis molloo lo llo analysis of moigois is sliaigllfoiwaio.
Imagino llal ono is inloiosloo in lnowing llo liloly mailol powoi onjoyoo Ly
a fim wlicl iosills fiom llo moigoi of, say, fim A ano L. Ono coilo iso
llo loclniqio Liiofy oosciiLoo aLovo will a minoi mooifcalion, llal is Ly
compiling lwo (n.n| ) iosioial oomano olaslicilios foi oacl of llo lwo fims.
Foi inslanco, foi fim A, llo fisl is llo own olaslicily, c , wlicl oslimalos llo
poiconlago oocioaso in llo iosioial oomano of fim A of ono poiconl incioaso in
A`s piico; llo socono is llo cioss-olaslicily c , wlicl oslimalos llo poiconlago
incioaso in llo iosioial oomano of fim A of a ono poiconl incioaso in llo piico
of fim L. Jlis is lo inooislano low lloso lwo fims iosliain oacl olloi in llo
mailol. Ly siLliacling llo lwo olaslicily oslimalos llis oLlainoo, ono oLlains
llo valio (c c ) wlicl is an assossmonl of llo mailol powoi onjoyoo Ly
llo moiging fim. Jlis oifoionco oxpiossos llo iooa llal wlon llo insioois
cooioinalo lloii aclions ano incioaso lloii piicos simillanooisly, fim A will
loso all llo consimois going lo all llo olloi fims n.n&- llo consimois wlo
woilo lavo gono lo fim L if llo moigoi lao nol occiiioo (ano fim L lao
lloiofoio piicoo ils piooicl inooponoonlly of fim A).
Jlis way, will iolalivo small oala ioqiiiomonls, il is possiLlo lo oLlain an
oslimalo of llo liloly ofocls of a moigoi. Jlis loclniqio is incioasingly Loing
isoo Ly oconomic oxpoils ano in coiil piocoooings, ano allloigl il is inliloly
llal moigoi appiaisal will Lo Lasoo iniqioly on il, il coilainly isofilly com-
plomonls olloi infoimalion collocloo ano llo analysis of llo mailol wloio llo
moigoi lalos placo. Bosioial oomano oslimalion can also Lo isoo lo oofno llo
iolovanl mailol in moigoi casos, as oxplainoo in Sclofman ano Spilloi (1987).
Hvwlpdwlrq ri wkh uhvlgxdo ghpdqg hodvwlflw|-- Consiooi an inoisliy
will : singlo piooicl fims. Wo wanl fisl lo ooiivo llo iosioial oomano facoo
Ly ono sicl a fim, ano soo low il can Lo isoo lo oslimalo ils mailol powoi. Wo
llon oxlono llis appioacl lo oslimalo llo mailol powoi cioaloo Ly a moigoi.
Diiocl oomano facoo Ly a fim i @ 4, ..., : can Lo wiillon as:
q @ 1 +j , s , |, , (7)
wloio Lolo facoo lollois inoicalo voclois ano i iofois lo all olloi fims Lil i.
Jlo vocloi | oonolos a vocloi (of sizo 3) of oxogonois vaiiaLlos wlicl afocl
oomano. Foi oacl of llo fims, llo fisl oiooi conoilions of piofl maximisalion
oofno llo Losl-ioply finclions:
2
j @ 1 +s , |, z,c , , (8)
wloio z oonolos llo vocloi of sizo 1 wlicl conlains llo inoisliy-spocifc cosl
vaiiaLlos, ano c oonolos llo fim-spocifc cosl of fim i. Fiom llo pioviois
oxpiossion ono can oLlain llo vocloi of llo Losl ioply finclions of all fims Lil
i as:
s @ 1

j , |, z, f

, (9)
wloio f oonolos llo vocloi of all llo fim-spocifc cosl vaiiaLlos apail fiom
lloso spocifc lo fim i. Ly siLslililing Lacl inlo llo oiiocl oomano, wo oLlain
llo iosioial oomano finclion of a fim i, q @ 1

j , s

j , |, z, f

, |
oi,
moio simply:
q @ 1

j , z, f , |
. (10)
Jlo oqialion lo Lo oslimaloo woilo llon lalo llo foim:
oqq @ c . a oqj .
[
.
[
j n .
[
c c . , (11)
wloio c is a conslanl; a givos llo oslimalo of llo (opposilo of) iosioial oomano
olaslicily (Locaiso doqq ,doqj @ +dq ,q ,,+dj ,j , @ c ); llo coomcionls
, j , c , aio llo paiamolois of oomano, inoisliy-wioo cosls ano cosl olloi
llan fim i; ano is llo oiioi loim.
Howovoi, iogiossing (11) alono woilo nol givo a consislonl oslimaloi, as lloio
is a pioLlom of simillanoily Lolwoon j ano q wlicl aio joinlly ooloiminoo in
llo sipply-oomano syslom (lloy aio Loll onoogonois vaiiaLlos, ano j appoais
al llo iigll-lano sioo of oqialion (11)).
Jypically, llis pioLlom is solvoo Ly oslimaling oqialion (11) Ly ising llo
insliimonlal vaiiaLlo molloo. In llis caso, llo molloo implios ising c as an
insliimonl foi llo piico j , sinco c (llo fim-spocifc cosl of fim i) is coiiolaloo
will j , is nol coiiolaloo will llo iosioials ano is nol an oxplanaloiy vaiiaLlo
in (11).
Ly ooing so, wo oLlain an oslimalo of llo iosioial oomano olaslicily of fim
i wlicl in liin is an oslimalo of ils mailol powoi: llo lowoi llo oslimaloo valio
of c llo ligloi llo mailol powoi of llo fim.
20
Nolo llal llo only fim lovol oala nooooo foi llis molloo aio lloso on llo
piico, qianlily ano fim-spocifc cosl of llo fim wloso mailol powoi wo aio
inloiosloo in.
Uhvlgxdo ghpdqg hodvwlflw| lq phujhu dqdo|vlv Jlo samo molloo
can Lo applioo lo llo analysis of moigois, lo oslimalo llo joinl mailol powoi
possossoo Ly lwo moiging fims. Sipposo foi inslanco llal wo aio inloiosloo in
llo liloly impacl of a moigoi Lolwoon llo fisl lwo fims, call llom 4 ano 5, in
oii inoisliy of : fims. Ly piocoooing in a similai way as aLovo, ono oLlains
llo (pailial) iosioial oomano finclions foi fims 4, 5 as:
q @ 1

j , j , z, f , |
, i @ 4, 5, (12)
wlicl in logaiillm Locomos:
oqq @ c . a oqj . a oqj .
S
.
S
j n .
S
c c . , +i @ 4, 5> i 9@ ,
(1)
Ly ising llo fim spocifc cosl vaiiaLlos c ano c as insliimonls foi j ano
j , ano joinlly iogiossing llo lwo pailial iosioial oomano ciivos (1), llo co-
omcionls a , a givo an oslimalo of llo pailial iosioial oomano olaslicilios
c @ +dq ,q ,,+dj ,j , ano c @ +dq ,q ,,+dj ,j ,.
Jloso coomcionls piovioo an oslimalo nol only of llo mailol powoi of oacl
of llo lwo fims, Lil also of low micl llo mailol powoi of, say, fim 4, is
consliainoo Ly fim 5 (ano vico voisa). Nolo llal llo valio

a a

givos an
oslimalo of llo mailol powoi llal llo moiging fims will onjoy in llo mailol,
as llo oifoionco in lloso lwo coomcionls lolls is Ly low micl llo oomano facoo
Ly fim 4 oocioasos if Loll j ano j incioaso Ly llo samo poiconlago afloi llo
moigoi. Jlo lowoi llo oslimaloo valio of llis oifoionco, llo ligloi llo mailol
powoi llal llo moiging fims aio liloly lo onjoy, ano lonco llo moio aovoiso
ofocls of llo moigoi (olloi llings Loing oqial, of coiiso).
61515 Orjlw prghov--
In llis soclion I Liiofy inliooico llo main foaliios of a loclniqio wlicl is
Lasoo on a n&|.nn.n| |j. nnnnn, ilsolf ooiivoo fiom a oisciolo cloico moool
of consimois` Lolavioii. Logil moools, oio lo McFaooon (197), allow lo
slaiply iooico llo oimonsionalily pioLloms wlon ooaling will oifoionlialoo
27
piooicls. Jloy lavo Locomo voiy popilai in ioconl yoais, ano lavo Loon isoo
lo oslimalo mailol powoi of fims, lo losl wlolloi lloio is collision in an
inoisliy, ano lloy also piovioo llo Lasis foi similalions llal aims al piooicling
llo liloly ofocls of moigois, llal is llo oxlonl lo wlicl mailol powoi will Lo
oxoicisoo Ly moiging fims.
Wkh orjlw ghpdqg prgho Sipposo lloio oxisl : piooicls llal aio mili-
ally oxclisivo alloinalivos foi consimois ano llal oxlaisl llo sol C of possiLlo
cloicos. Assimo llal consimoi i las llo following ililily fiom consiming pioo-
icl :
l @ c aj . c , (14)
wloio llo oxplanaloiy vaiiaLlo, llo piico, is alloinalivo-spocifc (llal is, il iofois
lo llo piooicls) ano il las llo samo coomcionl foi all alloinalivos (a @ a @ a
foi all ano /), c is a piooicl-spocifc conslanl, ano wloio llo ianoom
compononl c can Lo oilloi inoLsoivaLlo piooicl claiacloiislics oi (oqially
inoLsoivaLlo) siLjoclivo piofoioncos of inoivioial i.
Maximisalion of llo inoivioial ililily givos llo pioLaLilily llal will Lo
closon foi llo popilalion of all consimois:
@ Su+l l ,, foi all / 5 C, / 9@ , (1)
wlicl can Lo io-wiillon as:
@ Su^+c c , < +c aj , +c aj ,`, foi all / 5 C, / 9@ . (10)
Nolo llal oacl +c c , is a ianoom vaiiaLlo. Ly spocifying llo oislii-
Lilion of all iosioials, ono can oLlain llo joinl cimilalivo oisliiLilion of llo
millivaiialo ianoom vaiiaLlo (of : 4 oimonsions) wlicl oxpiossos , llo
pioLaLilily of cloico of piooicl , as a finclion of piooicl claiacloiislics ano
paiamolois. Moio spocifcally, il is possiLlo lo piovo llal if all iosioials aio
inooponoonlly ano ioonlically oisliiLiloo accoioing lo llo .n n|& n.-.-
|&.n, ono oLlains llal lalos a logislic oisliiLilion finclion (Anooison ol
al., 1992: 9-40):
@
h{s+c aj ,
S
h{s+c aj ,
. (17)
28
Hvwlpdwlrq ri orjlw prghov Jlo paiamolois llal ono woilo lilo lo osli-
malo in llo logil moool aio lloso poilaining lo llo ililily finclions, llal is llo
c `s ano llo a. Now llal wo lnow llo pioLaLilily , ano givon llo availaLilily
of oala on inoivioial cloicos ano on piicos, llo Maximim Lilolilooo molloo
can Lo isoo lo oslimalo llo c `s ano llo a. Jo solvo llo pioLlom of inoo-
loiminacy inloionl lo llo logil moool, ono of llo c misl Lo sol oqial lo an
aiLiliaiy valio, ano llo :-ll piooicl is lalon as an oilsioo gooo, wloso piico
is assimoo lo Lo zoio. Call .n-.n jn- all gooos Lil llo :-ll.
Jloio is ono oimcilly will llis molloo, lloigl. Jlo pioLaLilily of cloosing
a coilain piooicl ooponos nol only on llo ililily of llal piooicl, Lil also - as
wo lavo soon fiom oqialion (1) - on llo ililily of llo olloi piooicls llal lavo
nol Loon closon. Jlis ioqiiios fisl lo ioonlify llo sol of llo possiLlo cloicos
availaLlo ano socono lo fno oala on llo claiacloiislics of all llo cloicos llal
lavo nol Loon maoo, wlicl migll woll Lo voiy oimcill ano coslly.
Alloinalivo ways of piocoooing is lo iso h.-|n-n -nn|.nj, llal is lo iso
oala only on inoivioials wlo malo coilain cloicos; oi oala on llo ianling of
cloicos llal pailicilai inoivioials woilo malo.
Eslimalion of logil moools will oala on inoivioials ano llo cloicos lloy
malo will piosonl nnjn.j pioLloms wlon oLsoivoo cloicos claiacloiislics
co-vaiy will inoLsoivoo cloico claiacloiislics. Jlis is llo caso, foi inslanco,
wlon llo inoLsoivoo qialily of a piooicl incioasos llo piico of llal piooicl
(llo ML oslimalo migll siggosl llal consimois will wanl lo Liy a piooicl will
ligloi piicos, wloioas il is llo inoLsoivoo qialily vaiiaLlo wlicl oiivos llom).
Jlo iso of insliimonlal vaiiaLlos oslimalion can lolp solvo llis pioLlom.
Jlo own-piico (loio oxpiossoo as a posilivo nimLoi) ano cioss-piico olaslic-
ilios of oomano aio givon Ly:
. @ aj +4 ,> (18)
. @ aj . (19)
Jlo oslimalos of llo c `s ano llo a oLlainoo aLovo aio lloiofoio isoo lo
compilo all llo iolovanl olaslicilios of llo moool (sinco fiom lloso oslimalos
ono can oLlain all pioLaLililios , as in oqialion (17)).
Lqghshqghqfh ri Luuhohydqw Dowhuqdwlyhv dqg qhvwhg orjlw prghov
A ciicial piopoily of llo logil moool is llo so-calloo piopoily of 1nnnnn
J 1|nn |nn.- (IIA), accoioing lo wlicl llo ooos ialio of any lwo
cloicos is inooponoonl of olloi availaLlo cloicos. In olloi woios, llo cloico
of a consimoi Lolwoon Liying piooicl A oi piooicl L misl Lo inooponoonl
of wlolloi any piooicl C is also availaLlo oi nol. An implicalion of llo IIA
29
piopoily is llal llo cioss-piico olaslicily Lolwoon a givon piooicl ano any
piooicl / 9@ is always llo samo (Anooison ol al., 1992: 44). Cloaily, llis
piopoily is Lasoo on assimplions on llo palloin of siLslililaLilily llal migll
Lo loo sliong. Consiooi foi inslanco llo cloico of an inoivioial wlo is inoifoionl
Lolwoon Liying a gonoial nowspapoi, call il C., ano a spoils nowspapois,
call il Gn..n n|| 5. If lloso lwo aio llo only nowspapois availaLlo, llon
llo pioLaLilily of Liying ono oi llo olloi will Lo ioonlical: Su+Corricrc, @
Su+Ga..ctta, @ 4,5.
Lil sipposo now llal llo samo consimoi is givon anolloi cloico, wlicl is
anolloi spoils nowspapoi, J&-, voiy similai lo Gn..n. Now llo con-
simoi sloilo Lo inoifoionl Lolwoon Liying llo gonoial nowspapoi ano ono of llo
lwo spoils nowspapois ano, conoilional on Liying a spoils nowspapoi, inoifoi-
onl Lolwoon Gazzolla ano Jillospoil. Jloiofoio, llo cloico pioLaLilily of oacl
nowspapoi will Lo: Su+Corricrc, @ 4,5 ano Su+Ga..ctta, @ Su+Tntto-jort, @
4,7. In llis oxamplo, llo IIA piopoily ooos nol lolo, Locaiso llo ooos ialio
of any lwo cloicos is nol inooponoonl of llo piosonco oi llo aLsonco of olloi
possiLlo cloicos. Inoooo, llo ialio Lolwoon llo pioLaLililios of Liying Coiiioio
ano Gazzolla is 4 if Jillospoil is nol an availaLlo cloico foi llo consimoi, Lil
5 if Jillospoil is availaLlo.
Jo soo wlolloi llo siLslililaLilily among llo piooicls in llo inoisliy is
compaliLlo will llo IIA piopoily oi nol, oconomoliic losls can Lo omployoo.
Jlo iooa Lolino sicl losls is as follows. Sipposo llal in llo mailol Loing
analysoo lloio oxisl siL-sols of piooicls llal migll Lo closoi siLslililos lo
oacl olloi, foi inslanco, in llo nowspapois mailols ono can sispocl llal gonoial
nowspapois aio closo siLslililos among oacl olloi ano pooioi siLslililos of
spoils nowspapois, ano llal spoils nowspapois aio closo siLslililos among oacl
olloi Lil pooioi siLslililos of gonoial onos. Ono coilo fisl iin oslimalos of
a moool wloio oLsoivalions on llo cloico of all nowspapois aio incliooo in llo
samplo, ano llon iin oslimalos will only a siLsol of oLsoivalion (foi inslanco,
oiopping llo oLsoivalions iolaloo lo Jillospoil in llo aLovo oxamplo). If llo
lwo oslimalos oLlainoo aio closo onoigl lo oacl olloi, llon llo palloin of
siLslililion implioo Ly llo oala is compaliLlo will llo IIA piopoily; olloiwiso,
il is nol. (Wlolloi llo coomcionls aio closo onoigl oi nol sloilo Lo assossoo
will a foimal losl, sicl as llo Haisman losl, llal piovioos a foimal losl of
llo nill lypollosis llal llo coomcionls oLlainoo fiom llo lwo oslimalion aio
ioonlical".)
If llo oconomoliic losls inoicalo llal llo IIA is nol consislonl will llo
oala, ono coilo aoopl a so-calloo n-n |j. moool, wloio cloicos of oifoionl
oioois aio assimoo. Will a singlo nosl, foi inslanco, llo sol C of all possiLlo
cloicos is oiviooo inlo lwo siL-sols: ono, llal gioips all piooicls incliooo
in llo nosl, ano llo olloi wlicl inclioos all llo iomaining piooicls. (Foi
inslanco, in llo oxamplo aLovo ono coilo pil all llo spoils nowspapois in a nosl.)
Jloio oxisl llon oxpiossions llal givo llo inconoilional cloico pioLaLililios foi
piooicls llal Lolong lo llo sol ano llo iomaining onos ano, slailing fiom lloso
pioLaLililios, ono can piocooo lowaios an oslimalo of llo moool.
Nosloo logil moools will Locomo moio complox as ono aoos moio nosls inlo
0
llo analysis. An alloinalivo appioacl, wlon llo palloin of siLslililaLilily
among piooicls is inliloly lo Lo iofocloo in a simplo nosloo moool, is lo iso
nnnn-.n- |j. moools. Sicl moools assimo llal consimoi piofoi-
oncos aio loloiogonois, ano oslimalo llo inlnown paiamolois of llo oisliiLi-
lion of consimois` loloiogonoily. Somo of llo mosl inloiosling conliiLilions
in llo oconomoliic oslimalos of mailol powoi ano collision malo iso of llis
loclniqio.
Vlpxodwlqj hhfwv ri d phujhu zlwk orjlw prghov So fai, I lavo pio-
sonloo llo logil moool as a moool isoo lo oslimalo will a maximim lilolilooo
appioacl llo olaslicilios of oomano of coilain piooicls. Jlo logil moool, low-
ovoi, inlonooo as a moool of consimoi cloico, can also Lo isoo lo similalo llo
ofocls of a moigoi. Jlis oifoionl appioacl is nol aimoo al piovioing ocono-
moliic oslimalos, Lil ialloi al piooicling llo afloi-moigoi piicos fiom somo
availaLlo oala.
Jlo mollooology llal follows is lalon fiom Woioon ano FiooL (1994) ano
Woioon ol al. (1990), wlo io-paiamoloiiso llo moool Ly ising as piimilivos an
aggiogalo oomano olaslicily (soo Lolow) ano mailol slaios.
Consiooi a voision of llo logil moool wloio llo :-ll piooicl is llo oilsioo
gooo wloso piico is sol oqial lo zoio. Woioon ano FiooL (1994) oofno an
njjjn |n-..j . J nnnnn J h .n-.n jn- as:
. ^0 +`s,,0`` ^j, +s,` @ aj , (20)
wloio s is llo vocloi of llo piicos of all insioo gooos, j is somo Lonclmail
woiglloo avoiago piico, 4 +s, is llo sim of llo cloico pioLaLililios of
llo insioo gooos ano ` is a scalai. Jlis inoisliy olaslicily Lasically moasiios
llo incioaso in llo oomano of llo sol of all insioo gooos wlon all insioo piicos
aio incioasoo Ly a facloi `. Woioon ano FiooL (1994) ano Woioon ol al. (1990)
lalo il as a piimilivo of llo moool. Jlo olloi piimilivo of lloii moool is givon
Ly inoivioial nn| -hn-, llal is llo cloico pioLaLililios foi llo insioo gooos
conoilional on an insioo gooo Loing closon. Jloy aio givon Ly:
- @

4 ., +aj,
. (21)
Ly ioplacing @ - +4 ., +aj,, in oqialions (18) ano (19) ano io-aiianging,
ono oLlains llo inoivioial own-piico ano cioss-piico olaslicilios (wlicl aio going
lo Lo isoo Lolow lo ooiivo llo piico-cosl maigins) as:
. @
j
j
âj+4 - , . .- ` > (22)
. @
j -
j
âj .` . (2)
1
Givon piicos ano mailol slaios, a ano . (wlicl aio inoisliy, ano nol in-
oivioial fim`s, vaiiaLlos, llal migll Lo availaLlo fiom pioviois slioios, migll
Lo oslimaloo, oi aio giossoo al) llo own- ano cioss-piico olaslicilios of oomano
can Lo iocovoioo.
Jlo cloico pioLaLilily of an insioo piooicl ano of llo oilsioo gooo aio
givon Ly oxpiossion (17), ano llo logaiillm of lloii ialio will Lo:
oq
@ oq
c
c
, (24)
wloio j @ 3 las Loon isoo. Ly simplifying ano io-aiianging llis Locomos:
c @ c . aj . oq oq , @ 4, 5, ..., : 4. (2)
Fiom(20) wo lnow llal @ .,+aj,, ano wo also lnow llal @ - +4 ., +aj,,,
wloio j is llo slaio-woiglloo avoiago pio-moigoi piico. Ly ioplacing llom inlo
llo pioviois oxpiossion (2) givos:
c @ c . aj . oq- oq+
aj
.
4,, @ 4, 5, ..., : 4. (20)
Jlis oqialion says llal llo c `s can all Lo foino analylically, givon llal llo
vaiiaLlos al llo BHS aio lnown (ano c is sol oqial lo an aiLiliaiy conslanl):
a ano . aio lnown; ano piicos ano mailol slaios aio llo oala llal aio assimoo
lo Lo availaLlo.
Jo complolo llo moool, assimo llal (1) oacl fim Lofoio llo moigoi pio-
oicos only ono oifoionlialoo piooicl; (2) oacl fim las no fxoo cosls ano a
conslanl maiginal cosl c ; () fims compolo in piicos; (4) all olloi piooicl
claiacloiislics aio fxoo (llal is, llo moigoi coilo noilloi loao lo onliy noi
piooicl io-posilioning Ly llo oxisling fims).
Unooi sicl assimplions, wo lnow llal llo FOCs foi piofl-maximisalion
can Lo io-wiillon as: +j c ,,j @ 4,. (llis is nolling olso llan llo Loinoi
inoox). Ly ising oxpiossion (22) wo can llon oLlain oacl fim`s maigin as:
j c @
j
aj+4 - , . .-
, @ 4, 5, ..., : 4, (27)
llal implios llal a fim`s maigin incioasos will ils mailol slaio (- ) ano
oocioasos will llo siLslililaLilily among llo insioo piooicls (a), ano oocioasos
will llo siLslililaLilily Lolwoon insioo ano oilsioo gooos (.). Eqialion (27)
allows is lo fno analylically llo maiginal cosls of oacl fim, sinco il oxpiossos
c as a finclion of j , j, a, - , ano ., wlicl aio all givon.
Jlo noxl slop is lo soo wlal lappons inooi a moigoi. Willoil loss of
gonoialily, sipposo llal fims 4 ano 5 moigo, ano call : llo iosilling fim. Jlo
FOCs of piico maximisalion foi fim : imply:
2
j c @ j c @
j
aj+4 - , . .-
, (28)
wloio - is llo pio-moigoi mailol slaio ano j is llo slaio-woiglloo avoi-
ago piico Lofoio llo moigoi. Sinco all paiamolois aio lnown (maiginal cosls
lavo Loon ooiivoo Ly ising llo FOCs ano aclial pio-moigoi piicos, as ox-
plainoo aLovo), ioplacing llom inlo oqialions (28) givos llo piooicloo posl-
moigoi piicos. Fiom lloso, ono coilo also piooicl llo ofocl of llo moigoi on
consimoi siiplis ano lolal wolfaio.
7 H{huflvhv dqg hvvd|v
H{huflvh 4 1.j n-.| h hjh.n| nn|.- - nnn .|n.n h
n.nn| J &-.nj . n- n nn| n]n..n -. Jhn n|j h - n]n
nn|- J jn- j& n Jnn.|.n .h. 1 .n-nn, ;n) .- h n -nn
nn| J ....n- .n j& n C -h&|n ....n- | .n|&nn .n n .n
nn| .n|&n.nj n|- Jn--Jn- nnn -n&nn- ;|) .- h n -nn nn|
J h |&- -. ; n.n, n.|nn -.-) |n j& hn n nnn
j& &n.-.j n ; nnj n- j& |n) C .- h n .n nn|
.n|&n.nj n|| j- J nn-n.n |n -&h n- ;) 1- h n
-nn |nn nn| J nn.-&- .||-
H{huflvh 5 Jh .n h.h n ]n nn ..- nn| .- |.n.n
|j h ..-n J n.n| nnn-, n jnn||j J ]n- hn nn -n
-&|j n n.nj n& nnn |j h.jh .- .n h nn|. 5h&|n
h- n-.nn.n- | n|n .n n&n hn n]n.nj h |nn nn|,
hn n----.nj nn|
H{huflvh 6 ||-|nn n.&n |nnn J nn.- -h- nnn n hn n.n
|nnn J nn.- -h- n n-.n.nj n nj, nnn j& hn nn.n h
|nn nn|. Cn . J .nJnn.n j& hn .- h h|-n| .- -
|j h n&- J h |n- ] jn-, nnn h.- -h- hn h n.&n |nnn`-
. .- n-.-n|j . n- n&h n- h n.n |nnn`- .. 1.|| j& n|&n
hn h n&- -h&|n | & .n h -nn, .n -nn nn|-
H{huflvh 7 1hn n-.nn.n- -h&|n | n|n .n n&n hn n]n.nj
n& nn|- nnn n----.nj nn| .n nJ-nn|-, -nnnj nn-
|- ;hn .-, h nn|- J -n n- -.- J n n.&|n |nnn J n
n&)
H{huflvh 8 1hn .- h n.nn| J &-.nj nn| -hn- n- n -n.nj n.
.n h n----nn J nn| -nj J .n-.jn.n- 1hn h n.n||-
&|n j& |.| |n |J n|&n.nj hh n ]n .h n j.n nn|

-hn .- nn.nnn
H{huflvh 9 1.j .|n.n h n.nn| J &-.nj h -.n&n| nnnnn |n--
..j nnn|j-.- nnn h |j. nn| J .n-.jn.n- n nn| .n n.-
n.nn n&- .nn&-.-.
4
Chaploi 4. Collusion ano hoiizonlal
agioomonls
Pdvvlpr Prwwd
Euiopoan Univoisily !nslilulo, Floionco,
Univoisilal Iompou FaLia, Laicolona, ano CEIB, Lonoon
o-mail: massimo.mollaîuo.il
!NCOMILE1E DBAF1
n..n 1|.j: J|:j nnn 1:n.
CamLiiogo Univoisily Iioss, 2003
1his oiafl: 21 DocomLoi 2002
Devwudfw
Frqwhqwv
4 Lqwurgxfwlrq 4
1.1 Whal is collusion . . . . . . . . . . . . . . . . . . . . . . . . 2
5 Idfwruv wkdw idflolwdwh frooxvlrq 9
2.1 Sliucluial faclois . . . . . . . . . . . . . . . . . . . . . . . . . 7
2.2 Iiico lianspaioncy ano oxchango of infoimalion . . . . . . . . 10
2.2.1 OLsoivaLilily of nims` aclions . . . . . . . . . . . . . . 10
2.2.2 Cooioinalion issuos: 1ho iolo of communicalion . . . . 10
2.3 Iiicing iulos ano conliacls . . . . . . . . . . . . . . . . . . . . 2
2.4 Analysis of collusion: conclusions . . . . . . . . . . . . . . . . 28
2. Faclois lhal facililalo collusion . . . . . . . . . . . . . . . . . 28
2..1 Conoilions foi collusion lo aiiso . . . . . . . . . . . . 28
2..2 1ho Lasic moool lo analyso facililaling faclois . . . . 30
2..3 A pioLlom wilh supoigamos: mulliplo oquiliLiia . . . 30
6 Dgydqfhg pdwhuldo-- 6:
3.1 CiooiLilily of punishmonl ano oplimal ponal cooos . . . . . 37
3.2 Cailols ano ionogolialion . . . . . . . . . . . . . . . . . . . 42
3.3 1ho Gioon-Ioiloi (1083) moool . . . . . . . . . . . . . . . . 40
7 Sudfwlfh= Zkdw vkrxog eh ohjdo/ dqg zkdw loohjdoB 7<
4.1 Slanoaios of pioof: maikol oala v. haio ovioonco . . . . . . . 40
4.2 Ex-anlo compolilion policios againsl collusion . . . . . . . . .
4.3 Ex-posl compolilion policios againsl collusion . . . . . . . . . 8
8 Mrlqw0Yhqwxuhv dqg rwkhu krul}rqwdo djuhhphqwv 9;
.1 Joinl vonluios . . . . . . . . . . . . . . . . . . . . . . . . . . . 08
.2 Bosoaich joinl vonluios . . . . . . . . . . . . . . . . . . . . . . 00
.2.1 1ioalmonl of iosoaich joinl vonluios in US ano EU law 72
.3 Olhoi foims of coopoialion iogaioing lochnology . . . . . . . . 72
.3.1 Cioss-liconsing ano palonl pooling . . . . . . . . . . . 72
.3.2 Coopoialivo slanoaio-solling . . . . . . . . . . . . . . 74
.4 Coopoialivo B:D . . . . . . . . . . . . . . . . . . . . . . . . 70
9 H{huflvhv ;3
0.1 Solulion of oxoicisos . . . . . . . . . . . . . . . . . . . . . . . 80
4 Lqwurgxfwlrq
Collusivo agioomonls can lako oioionl foims: nims mighl agioo on salos
piicos, allocalo quolas among lhomsolvos, oivioo maikols so lhal somo nims
oocioo nol lo Lo piosonl in coilain maikols in oxchango foi Loing lho solo
solloi in olhois, oi cooioinalo lhoii Lohavioui along somo olhoi oimonsions.
!nslilulional aiiangomonls lo suslain collusion mighl also oioi: fiom a voiy
woll oiganisoo cailol-liko sliucluio whoio a conlial omco (sociol, if anli-liusl
laws oxisl) lakos lho main oocisions, lo silualions whoio nims jusl nno somo
foim of communicalion lo suslain lho agioomonl. Fuilhoi, a collusivo oul-
como mighl Lo suslainoo ovon in a silualion whoio nims novoi mool lo oiscuss
piicos oi novoi oxchango sonsilivo infoimalion (Lul ! shall aiguo lhal in such
a caso, laLolloo lacil collusion", lho law shoulo nol inloivono.)
Collusivo piaclicos allow nims lo oxoil maikol powoi lhoy woulo nol olh-
oiwiso havo, ano ailincially iosliicl compolilion ano incioaso piicos, lhoioLy
iooucing wolfaio. Accoioingly, lhoy aio piohiLiloo Ly any anli-liusl law,
ano a laigo pail of lho anliliusl aulhoiilios` ooils aio oovoloo lo nghl such
piaclicos. Howovoi, if any soiious anli-liusl aulhoiily woulo coilainly allack
a cailol oi an oxplicil agioomonl among compolilois lo sol piicos, oi shaio
maikols, lhoio mighl Lo oivoigoncos as lo lho slanoaio of pioof ioquiioo in
loss Llalanl infiingomonls of lho law, ano as lo lho lioalmonl of casos whoio
nims manago lo koop piicos high wilhoul ovoilly colluoing.
1ho main puiposo of lhis chaploi is lo ioonlify lho main mochanisms
Lohino collusion, lo sluoy lho faclois which facililalo il, ano lo oxplain which
Lohavioui shoulo Lo lioaloo as an infiingomonl of lho law ano which ono
shoulo nol Lo. ! shall also analyso whal aclions anli-liusl aulhoiilios shoulo
lako in oiooi lo ooloi ano Lioak collusion.
1ho chaploi is sliucluioo in lho following way. Soclion 1.1 Liioy skolchos
lho main foaluios of collusion fiom an oconomic poinl of viow. Soclion 2 in-
vosligalos lho inousliy foaluios, conliaclual chaiacloiislics, ano olhoi faclois
lhal mako collusion moio likoly lo occui. 1hoso lwo soclions aio lhooiolical
in naluio, ano oiaw on lho oxisling ano woll-oovolopoo inousliial oiganisa-
lion liloialuio on collusion. Soclion 3 is also lhooiolical, Lul il ooals wilh
lochnical issuos ano is inlonooo foi aovancoo ioaoois only. Soclion 4 ooals
insloao wilh lho piaclico` of collusion: ! will inoicalo whal shoulo Lo lho
logal slanoaios foi nnoing nims guilly of collusion, ano whal aclions lo lako
Soo chaploi 2 on lho iolalionship Lolwoon maikol powoi ano wolfaio.
1
lo ooloi ano Lioak collusion. 1ho nnal soclion is oovoloo lo lho oiscussion
of olhoi hoiizonlal agioomonls, lhal is, agioomonls among compoling nims
which oo nol concoin lho nxing of piicos, oulpuls oi maikols. 1his is lho
caso, foi inslanco, whon nims collaLoialo in iosoaich ano oovolopmonl acliv-
ilios.
414 Zkdw lv frooxvlrqB
111uvw/ d zduqlqj !n lhis soclion ! will Liioy chaiacloiiso lho concopl
of collusion fiom lho poinl of viow of inousliial oconomics. Nolo lhal hoio !
will nol uso lho loim collusion" as synonymous of collusivo agioomonl lhal
shoulo Lo oullawoo". !noooo, ono of lho main lhomos of lhis chaploi is lhal
whoioas in oconomic lhooiy collusion is oonnoo as a maikol oulcomo (i.o.,
high piicos", in a sonso lo Lo spocinoo fuilhoi Lolow), anli-liusl aulhoii-
lios ano juogos shoulo consiooi as illogal all piaclicos whoio nims r|..|j
cooioinalo lhoii aclions lo achiovo a collusivo oulcomo.
1ho ioaooi shoulo lhon Lo awaio lhal in soclions 1.1 ano 2 ! will uso lho
loim collusion in a way lhal aohoios lo oconomic lhooiy Lul mighl Lo slighlly
misloaoing, as il compiohonos Lolh oxplicil ano lacil collusion, whoioas lho
law shoulo punish only oxplicil agioomonls (as soclion 4 will aiguo).
Ghqlqj frooxvlrq lq hfrqrplf wkhru| !n oconomics, collusion is a
silualion whoio nims` piicos aio highoi lhan somo compolilivo Lonchmaik.
A slighlly oioionl oonnilion woulo laLol collusion as a silualion whoio nims
sol piicos which aio closo onough lo monopoly piicos. !n any caso, in oco-
nomics collusion coincioos wilh an oulcomo (high onough piico), ano nol
wilh lho spocinc foim lhiough which lhal oulcomo is allainoo. !noooo, as !
! will aiguo lhal anliliusl aulhoiilios shoulo also ooal wilh lacil collusion, Lul in
a piovonlivo way, lhal is liying lo oliminaling Lusinoss piaclicos lhal mighl facililalo
collusion, ano lhiough moigoi conliol.
!n lochnical loims, lho Lonchmaik is usually lho oquiliLiium piico of a gamo whoio
nims mool only onco in lho maikolplaco (a silualion whoio collusion woulo nol aiiso).
Foi inslanco, in a homogonous gooos gamo whoio nims chooso piicos, a collusivo oulcomo
woulo oxisl whonovoi piicos aio highoi lhan lho ono-shol Loiliano oquiliLiium piico; whoio
nims chooso quanlilios, whonovoi lhoy aio lowoi lhan lho ono-shol Couinol oquiliLiium
quanlilios.
Soo K hn (2001). Monopoly, oi joinl-maximisalion piicos, aio lho piicos which woulo
Lo sol if all lho nims in lho inousliy woio amlialos of lho samo company, oi whoio managoo
Ly lho samo managoi.
2
oxplain Lolow, collusion can occui Lolh whon nims acl lhiough an oiganisoo
cailol (oxplicil collusion), oi whon lhoy acl in a puioly non-coopoialivo way
(lacil collusion).
Zkdw duh wkh pdlq lqjuhglhqwv ri frooxvlrqB !l is nol oasy foi nims
lo achiovo a collusivo oulcomo, ovon if lhoy aio fioo lo agioo on lhoy piicos
lhoy sol. !n pailiculai, ovoiy nim woulo havo lho lomplalion lo unilaloially
oovialo fiom a collusivo aclion, as Ly ooing so il woulo incioaso ils pionl.
Consiooi foi inslanco an imaginaiy inousliy consisling of lwo fiuil sollois
in a sliool maikol. !magino lhoy Lolh soll poais of ioonlical qualily, ano lhal
lhoy oach pay 1$ poi kilo lo lhoii suppliois. !magino also lhal oach solloi
lhinks lhal 2$ poi kilo is lho monopoly piico, ano Loliovos lho olhoi lhinks
in lho samo way. Whon a solloi aiiivos al his slall, ho has lo oocioo lho salos
piico. Supposo lhal ho lhinks lho iival is solling a piico of 2$. !f ho chaigos
2$ foi his poais, ho will gol ioughly half of lho Luyois, as pooplo who wanl lo
Luy poais aio inoioionl Lolwoon Luying fiom him oi fiom lho olhoi vonooi.
Lul ho will havo a sliong lomplalion lo n.n, lhal is lo chaigo a lowoi
piico lhan his iival: if ho sols a piico of, say, 1.0$, consumois will all Luy
fiom him (why paying moio foi an ioonlical piooucl). As a iosull, ho will
slill onjoy a high unil maigin Lul ho will soll moio unils: in a woio, ho will
mako moio pionls lhan if ho solo al lho collusivo" piico of 2$.
1ho acknowloogmonl lhal any collusivo silualion naluially Liings wilh
il lho lomplalion lo n.n fiom il ano lhoiofoio lo Lioak collusion, loaos
us lo lho ioonlincalion of lho lwo olomonls which musl oxisl foi collusion
lo aiiso. Fiisl, ils pailicipanls musl Lo aLlo lo n in a limoly way lhal
a oovialion (a nim solling lowoi piico oi piooucing highoi oulpul lhan lho
collusivo lovols agiooo upon) has occuiioo. Socono, ioonlifying lho oovialion
is nol onough: lhoio musl also Lo a &n..|nn, which mighl lako lho foim
of iivals piooucing much highoi quanlilios (oi solling al much lowoi piicos)
in lho poiioos afloi lho oovialion, lhus oopiossing lho pionl of lho oovialoi.
Of couiso, foi lhis simplo oxamplo lo holo il is nocossaiy lhal al lho collusivo piico of
2$ lho solloi ooos nol manago lo soll all lho poais ho comos lo lho maikol wilh. Olhoiwiso,
ho woulo nol havo an inconlivo lo cul his piico in oiooi lo incioaso salos.
Doloclion of a oovialion is nol always oasy: in many maikols, nims` piicos ano oulpuls
aio nol oiioclly oLsoivaLlo. Sligloi (1004) was pioLaLly lho nisl lo unooilino lhis pioLlom,
ano ils consoquoncos upon lho likolihooo of collusion.
Nolo lhal a punishmonl shoulo Lo lhoughl of as a moio aggiossivo maikol Lohavioui,
ano nol as a oiiocl monolaiy (oi physical!) punishmonl. Nolo also lhal gonoially a
3
Only if a nim knows Lolh lhal a oovialion will Lo ioonlinoo quickly ano
lhal il will Lo punishoo (i.o., il will havo lo foiogo onough pionls Locauso of
lho maikol ioaclion of lho cailol momLois), mighl il iofiain fiom oovialing,
so lhal lho collusivo oulcomo will aiiso.
1o conlinuo oui oxamplo, afloi having soon why a fiuil solloi has a lomp-
lalion lo cul piicos Lolow lho collusivo lovol of 2$, lol us soo unooi which
conoilions ho will oovialo. !f lho sliool maikol is small onough, ano if lho
sollois posl lho piicos of lho fiuil lhoy soll, ooloclion of lho piico cul will
Lo immooialo. Afloi lho piico cul has Loon ioonlinoo, ono can Lol lhal a
solloi who has so fai solo al lho piico of 2$ will immooialoly iolalialo, ano
likoly will slail lo soll al a piico lowoi lhan 1.0$ poi kilo. 1ho iosull will Lo
a piico wai which will ioouco lho pionl of Lolh. A solloi conlomplaling a
oovialion will coilainly oxpocl lhal lho iival will iolalialo. As a iosull, lho
piospocl of solling foi much of lho oay al voiy low piicos will ooloi him fiom
oovialing in lho nisl placo. !n olhoi woios, lho awaionoss lhal a oovialion
will Lo oasily oolocloo ano lhal a maikol punishmonl will onsuo, will mako
oach solloi iofiain fiom oovialing ano convinco him lo slick lo lho collusivo
piico insloao.
1o summaiiso, foi collusion lo occui, nislly, lhoio musl Lo lho possiLilily
lo n oovialions fiom a collusivo aclion in a limoly way. Soconoly, lhoio
musl Lo a ciooiLlo &n..|nn which follows a oovialion.
!l is impoilanl lo slioss lhal in lho oxamplo, lho lwo fiuil vonoois oo
nol lalk lo oach olhoi, noilhoi oiioclly noi lhiough inloimooiaiios: collusivo
piicos will aiiso lhiough puioly non-coopoialivo Lohavioui of lho sollois. !n
olhoi woios, if ooloclion of oovialions is iapio, ano if (maikol) punishmonls
of oovialions aio likoly ano ciooiLlo, lhon n. ||&..n can aiiso: nims oo
nol nocossaiily havo lo lalk lo oach olhoi, lol alono agioo on complicaloo
schomos, foi a collusivo oulcomo lo Lo suslainaLlo. All is nooooo is lho
awaionoss lhal a oovialion will Lo ioonlinoo, ano lhal a punishmonl" will
follow.
punishmonl also hils lho punishing nims, ano nol jusl lho oovialing nim, piocisoly Locauso
il has lo ioly on maikol mochanisms (a low piico aocls all lho nims` pionls). !l is lhoiofoio
ciucial lhal nims aio willing lo lako pail in lho punishmonl.
!n luin, lhis implios lhal collusion can Lo suslainoo only if nims mool iopoalooly in lho
maikolplaco. Olhoiwiso, a punishmonl cannol lako placo. !n lochnical loims, collusion
will novoi aiiso in a ono-shol gamo. 1his is why collusion shoulo Lo mooolloo lhiough
oynamic (iopoaloo) gamos.
4
Zklfk frooxvlyh sulfhB A oimcully in lho oxamplo aLovo is lhal il is
nol cloai how lho collusivo piico" is choson. !magino lhal, foi somo ioason,
oach solloi lhinks lhal lho olhoi woulo sol a piico of 1.$, ialhoi lhan a piico
of 2$. 1hon, again a collusivo silualion mighl occui in oquiliLiium, Lul lhis
limo wilh sollois solling a piico lowoi lhan lho monopoly piico. !n olhoi
woios, lho collusivo mochanism ! havo oosciiLoo woiks foi many oioionl
piicos ano iosulls in nims golling quilo oioionl lovols of pionls.
1his iosull iaisos lho impoilanl issuo of :n.nn.n. Fiims lhal aio
lacilly colluoing mighl aiiivo al lho fully collusivo piico, Lul lhis is jusl
ono of lho many possiLlo oquiliLiium oulcomos (ono of lhoso also Loing lho
compolilivo oulcomo, i.o., lho ono-shol gamo oquiliLiium piico). So, is lhoio
an oulcomo lhal is moio likoly lhan lho olhoi Ano, sinco nims havo an
inloiosl in cooioinaling on an oulcomo wilh lho highosl possiLlo piicos, how
can lhoy achiovo lhal oulcomo
Frruglqdwlrq= Wkh glhuhqfh ehwzhhq wdflw dqg ryhuw frooxvlrq
Unooi n. ||&..n, il is oimcull foi lho nims lo solvo lho cooioinalion
pioLlom. !f nims cannol communicalo wilh oach olhoi, lhoy can mako mis-
lakos, ano solocl a piico (oi a quanlily) which is nol joinlly oplimal foi lho
nims, ano which mighl Lo oimcull lo chango. Using lho maikol lo signal
inlonlions lo cooioinalo on a oioionl piico mighl Lo voiy coslly. !f a nim
Loliovos lho iighl" piico foi lho inousliy is highoi ano incioasos ils own
piico lo signal il, il will loso maikol shaio in lho aojuslmonl poiioo. !f a nim
oocioasos ils own piico lo liy ano cooioinalo on a lowoi oquiliLiium piico,
lhis movo mighl Lo unooislooo as a oovialion ano liiggoi a coslly piico
wai. 1hoiofoio, oxpoiimonling wilh piico changos lo cooioinalo on anolhoi
collusivo oquiliLiium mighl Lo loo coslly.
Unooi r|.. ||&..n, insloao, nims can lalk lo oach olhoi ano cooi-
oinalo on lhoii joinlly piofoiioo oquiliLiium wilhoul having lo coslly oxpoi-
imonl wilh lho maikol. Fuilhoimoio, if lhoio aio somo shocks which mooify
maikol conoilions, communicalion will allow lho nims lo chango lo a now
collusivo piico wilhoul lho iisk of liiggoiing a poiioo of punishmonl.
Supposo foi inslanco lhal, in lho oxamplo aLovo, ono solloi knows lhal
oomano foi poais has oocioasoo, so lhal ho lhinks lho oplimal piico is now
1ho folk lhooiom` (Fiiooman (1071)) says lhal in gamos wilh innnilo hoiizon if lho
oiscounl facloi is laigo onough, nims can havo any pionl Lolwoon zoio ano lho fully collu-
sivo pionl al lho collusivo" oquiliLiium). Soo soclion 2..3 foi a simplo foimal aigumonl.
lowoi, say 1.8$. ALsonl communicalion wilh lho olhoi vonooi, oui solloi
facos a pioLlom: if ho iooucos lho piico lo 1.8$, as now maikol conoilions
suggosl, collusion mighl Lioak. !noooo, lho iival vonooi mighl havo a oioionl
poicoplion of maikol oomano, ano,oi misinloipiol lho now low piico as a
oovialion", ano slail a piico wai as a punishmonl. Howovoi, if ho slicks
insloao lo lho usual piico of 2$, ho will mako lowoi pionls, Locauso oomano
is lowoi.
Explicil collusion avoios lhis pioLlom: oui vonooi coulo simply loll his
iival lhal ho lhinks il woulo Lo Lolloi lo oocioaso lho piico, ano communica-
lion will allow lhom lo oocioo on a now piico lhal suils lhom Lolh, wilhoul
iisking any piico wai oi a longlhy aojuslmonl poiioo.
Maikol allocalion (oi maikol-shaiing) schomos - accoioing lo which a nim
solls in a coilain iogion (oi soivos cuslomois of a coilain lypo), whoioas lho
iivals soll in olhoi iogions (oi soivo cuslomois of a oioionl lypo) - wholhoi
achiovoo Ly oxplicil collusion oi hisloiical accioonls, havo lho aovanlago of
allowing foi piicos lo aojusl lo now oomano oi cosl conoilions wilhoul liig-
goiing possiLlo piico wais. A maikol allocalion schomo avoios lho possiLilily
lhal, if a shock iooucos pioouclion cosls oi maikol oomano, a piico ioouclion
mighl liiggoi a piico wai. As long as oach nim ooos nol soivo sogmonls of
oomano (oxplicilly oi lacilly) allocaloo lo iivals, piicos can chango wilhoul
lho collusivo oulcomo lo Lioak. 1his pioLaLly oxplains why such collusivo
schomos aio oflon usoo.
! shall como Lack lo lho quoslion of communicalion ano cooioinalion
among nims in soclion 2.2.2, ano on why compolilion policy shoulo focus
on oxplicil collusivo piaclicos (lhal is, whon somo communicalion ano co-
oioinalion oxisl) in soclion 4. Lofoio ooing lhal, howovoi, il is appiopiialo
lo sluoy collusion moio oooply, ano in pailiculai lo sluoy lho faclois which
facililalo collusion. 1his is oono in lho following soclion 2.
5 Idfwruv wkdw idflolwdwh frooxvlrq
1ho analysis of collusion in moooin inousliial oconomics is Lasoo on lho so-
calloo .nn. n.:n.n foi collusion: oach nim compaios lho immooialo
gain il makos fiom a oovialion wilh lho pionl il givos up in lho fuluio, whon
iivals ioacl. Only if lho foimoi is lowoi lhan lho lalloi will lho nim chooso lho
collusivo slialogy. !n gonoial, collusion is moio likoly lo aiiso lho lowoi lho
! am gialoful lo Joo Haiiinglon foi sliossing lhis poinl.
0
pionl lhal a nim woulo oLlain fiom oovialing, lho lowoi lho oxpocloo pionls
il woulo mako onco lho punishmonl slails, lho moio woighl nims allach lo
lho fuluio (i.o., whon lho loss fiom oovialion" occuis). (Soo soclion 2..1
foi a foimal analysis.)
!n lhis soclion, ! Liioy ioviow lho faclois lhal aio moio oflon monlionoo
as lhoso which fosloi collusivo oulcomos, ano oxplain unooi which ciicum-
slancos ono shoulo oxpocl lhoy havo lhal iolo. 1ho oiscussion (soo soclion 2.
foi lho foimal analysis) is Lasoo on lho fiamowoik oolinoaloo aLovo (lhal is,
lho conoilion lhal says lhal a nim is Lolloi o colluoing lhan oovialing): if
a givon facloi iolaxos lho inconlivo consliainls of lho nims, lhon il facililalos
collusion; if il makos il moio Linoing, il hinoois il; if lho oocl is amLiguous,
lhon lho facloi ooos nol havo a cloai impacl on collusion.
1hoio aio lwo main piaclical ioasons Lohino lho oxoiciso maoo in lhis
soclion. Fiisl, il is impoilanl lo ioonlify lho faclois lhal facililalo collusion
so lhal anli-liusl aulhoiilios can inloivono so as lo oliminalo lhom whonovoi
possiLlo. Socono, in somo casos, ospocially in moigoi analysis, ono has lo
ovalualo wholhoi a pailiculai inousliy is piono lo a collusivo oulcomo oi
nol. Sluoying lho inousliy ano assossing wholhoi lhoio aio faclois likoly lo
loao lo collusion Locomos ciucial.
Somohow aiLiliaiily, ano mainly foi lho oaso of piosonlalion, ! oivioo lho
sluoy of facililaling faclois in oioionl calogoiios.
514 Vwuxfwxudo idfwruv
Frqfhqwudwlrq Olhoi lhings Loing oqual, collusion is lho moio likoly lho
smalloi lho numLoi of nims in lho inousliy. 1ho compaiison Lolwoon gains
ano lossos fiom oovialions illuslialos why lhis is lho caso. !magino lhal lhoio
aio many nims of ioonlical sizo ano of laigo capacily which co-oxisl in lho
inousliy. Al a collusivo silualion, oach of lhom will sol a high piico ano gol
a (small) shaio of lho lolal pionls. Howovoi, if ono of lhom oovialos ano sols
a piico lowoi lhan lho iivals, il mighl gol all lho maikol foi ilsolf. Evon if lho
punishmonl was haish, so lhal a voiy small slioam of oxpocloo pionls woulo
follow afloi a oovialion, lho gains fiom oovialing woulo Lo so oxliaoioinaiily
laigo in lho oovialion poiioo lhal lhoy woulo oulwoigh lho collusivo pionls
foiogono ouiing lho punishmonl poiioo. Compaio lhis silualion wilh lho
oxliomo ono whoio lhoio aio only lwo nims in lho inousliy. Al a collusivo
oquiliLiium, lhoy woulo gol half lho maikol, so lhal lho gains fiom oovialing
aio smalloi iolalivo lo lho lowoi pionls ouo lo lho punishmonl which follows.
7
!f nims aio symmoliic, a lowoi numLoi of nims is oquivalonl lo a highoi
oogioo of conconlialion, which is lhoiofoio associaloo - coloiis paiiLus - wilh
moio likoly (lacil oi oxplicil) collusion.
Howovoi, wo shall soo Lolow lhal lho moio nims aio asymmoliic (in ca-
pacilios, maikol shaios, cosls, oi piooucl iango) lho loss likoly collusion will
Lo. 1his qualinos lho nnoing lhal conconlialion facililalos collusion, in lho
following sonso. !f a moasuio of conconlialion iisos wilh lho asymmoliic
oisliiLulion of assols among lho nims - as is lho caso wilh lho Hoinnoahl-
Hiischman !noox (soo chaploi 3) - lhon ono shoulo oxpocl an amLiguous
iolalionship Lolwoon conconlialion ano collusion: such a moasuio confounos
lwo faclois - highoi avoiago maikol shaio ano asymmoliy - lhal aocl col-
lusion in opposilo ways. !f insloao lho moasuio of conconlialion usoo ooos
nol vaiy wilh asymmoliy - liko foi lho conconlialion ialios, C , lhal sum
lho maikol shaios of lho / laigosl nims in lho inousliy - lhon an incioaso in
moasuioo conconlialion shoulo coiiospono lo highoi likolihooo of collusion.
Finally, nolo lhal lho conconlialion also holps nims` cooioinalion on a
collusivo oulcomo, nol only ils onfoicomonl: lho lowoi lho numLoi of playois
in lho inousliy lho oasioi foi lhom lo cooioinalo lhoii Lohavioui.
Hqwu| 1ho oasioi onliy inlo an inousliy (lho lowoi onliy Laiiiois) lho moio
oimcull lo suslain collusivo piicos. Whon piicos ano pionls aio high, now
nims will Lo alliacloo inlo lho inousliy, ano lhis lonos lo oisiupl lho col-
lusivo oulcomo, Ly lwo possiLlo mochanisms. Supposo nisl lhal lho onlianl
ooos nol wanl lo puisuo a collusivo slialogy ano Lohavo aggiossivoly. 1his
will suLliacl maikol shaios lo lho incumLonl nims lhal will havo lo oocioaso
piicos lo koop lhoii cuslomois, lhoioLy Lioaking lho collusivo oquiliLiium.
Anlicipaling lhal onliy mighl occui, lho incumLonls will Lo foicoo lo koop
piicos low.
Supposo insloao lhal Lolh lho onlianl ano lho incumLonl nims follow
an accommooaling slialogy, wilh lho onlianl laking pail in lho (oxplicil oi
lacil) collusivo Lohavioui. Sinco lho laigoi lho numLoi of nims lho loss likoly
lhal collusion can Lo suslainoo, onliy mighl Lioak lho collusivo oulcomo. All
lho moio so sinco if a now nim ooos onloi ano lakos ils shaio of lho inousliy
Such a nim mighl Lo a so-calloo mavoiick". A mavoiick mighl also Lo a nim lhal is
suLslanlially oioionl fiom lho iivals (foi inslanco Locauso il has a smalloi oiscounl facloi,
a oioionl ulilisalion of capacily oi a smalloi poilfolio of Lianos). Soo lho oiscussion on
symmoliy ano collusion.
8
collusivo pionls, moio onlianls will Lo inoucoo lo follow lho samo slialogy,
ano soonoi oi laloi collusion will Lo unsuslainaLlo.
Ovoiall, lhoiofoio, ono shoulo oxpocl lhal lho lowoi onliy Laiiiois (as
ooloiminoo Ly nxoo onliy cosls lhal now nims woulo havo lo sunk inlo lho
inousliy) lho moio oimcull lo suslain collusion. Novoilholoss, lho oxislonco
of polonlial onlianls mighl nol always nocossaiily Lioak collusion. Supposo
foi inslanco lhal an onlianl oxpocls lho incumLonl nims lo ioacl voiy aggios-
sivoly lo onliy. !f lho lhioal of such a sliong ioaclion Ly lho incumLonls
is ciooiLlo, lho onlianls mighl oocioo nol lo onloi in lho nisl placo.
Furvv0rzqhuvkls dqg rwkhu olqnv dprqj frpshwlwruv !f a nim has
a pailicipalion in a compoliloi, ovon wilhoul conliolling il, lho scopo foi
collusion will Lo onhancoo. Fiisl ano moio oLvious, if a iopiosonlalivo of
a nim is silling in lho Loaio of oiioclois of a iival nim, il will Lo oasioi
lo cooioinalo piicing ano maikoling policios. !l mighl also Lo oasioi lo
oxchango infoimalion on lho maikoling ano piicing policios, which makos
il oasy moniloi iival`s Lohavioui ano - as ! oiscuss Lolow - is an impoilanl
facililaling facloi foi collusion. Socono, ovon if a nim oio nol havo any saying
in lho Lusinoss policios of lho olhoi, Lul jusl ownoo a shaio of il wilhoul
iopiosonlalion in lho Loaio, lho inconlivos lo compolo in lho maikolplaco
mighl Lo iooucoo. 1his is Locauso lho pionls of lho iival nim woulo aocl lho
nim`s own nnancial poifoimanco, composoo of maikol pionls ano nnancial
ioluins: an aggiossivo maikol slialogy (liko a oovialion fiom a collusivo piico)
woulo Lo loss pionlaLlo lhan if lhoio woio no slako in lho iival nim, Locauso
1hoio is no ioason lo Loliovo, a piioii, lhal incumLonls woulo always accommooalo,
oi always nghl, onliy. !n a nico ompiiical sluoy, Scoll Moilon (1000) analysos lho Liilish
shipping cailols al lho luin of lho lasl conluiy ano nnos lhal somo onlianls woio accoploo
ano joinoo lho cailol, whoioas olhois (lho woakoi onlianls) woio foughl.
GilLoil ano Vivos (1080) analyso lho caso whoio joinl piooalion occuis wilhoul lho
nooo foi piooalois lo cooioinalo. !n Haiiinglon (1080L), onliy liiggois lho samo (sliongosl
possiLlo) punishmonl as a oovialion fiom collusivo aclions Ly lho incumLonls, honco io-
acling sliongly lo onliy wilhoul moio cooioinalion lhan nooooo lo ooviso lho punishmonl
slialogios. Lul if incumLonls oio cooioinalo, lhon lhoy woulo Lioach Lolh ailiclo 81 ano
82 in lho EU, ano soclion 1 ano 2 of lho Shoiman Acl in lho US. 1ho EC`s 111 ooci-
sion piovioos an inloiosling ioconl caso sluoy whoio incumLonls (momLois of a maiilimo
shipping confoionco) pul in placo a sophislicaloo mochanism lo nghl onliy.
!f lhoio is conliol, lhon lhis will Lo a moigoi (soo chaploi ). A minoiily shaioholoing
of 10/ oi loss is nol suLjocl lo EU moigoi conliol.
0
il woulo oocioaso lho ioluins on nnancial invoslmonls.
Ovoiall, il woulo lhoiofoio soom wiso nol lo allow a nim lo havo minoiily
(a foilioii, conliolling) shaioholoing in a compoliloi.
Uhjxodulw| dqg iuhtxhqf| ri wkh rughuv 1j&|n: :n:. facililalo col-
lusion. !noooo, an unusually laigo oiooi woulo givo a voiy sliong lomplalion
lo oovialo: Ly oovialing, a nim woulo mako unusually laigo pionls, ano
lho poispoclivo of losing collusivo pionls oLlainoo unooi lho lypically small
oxpocloo oomano is nol onough lo ooloi lho oovialion. 1ho high ]:j&nj
] | :n:. also holps collusion Locauso il allows foi a limoly punishmonl.
!f oioois aiiivo only al voiy laigo oislanco Lolwoon lhom, ono has a highoi
inconlivo lo oovialo Locauso lho punishmonl will Lo slailoo only much laloi
in lho fuluio, ano will accoioingly Lo oiscounloo.
Ex|hu srzhu 1ho aLilily lo suslain collusivo piicos in a givon inousliy also
ooponos on lho oogioo of conconlialion of lho Luyois. A sliong Luyoi can
mako uso of ils Laigaining powoi lo slimulalo compolilion among lho sollois,
oilhoi Ly lhioaloning lo wilhoiaw oioois fiom a cuiionl solloi lo givo lhom
lo olhois oi lo polonlial onlianls (whoso onliy piospocls woulo Lo iosioi if
guaianlooo oomano Ly a laigo Luyoi), oi Ly lhioaloning lo slail upslioam
pioouclion ilsolf.
Ly conconlialing ils oioois, a powoiful Luyoi can also manago lo Lioak
collusion. Balhoi lhan kooping a sloaoy ow of small oioois, Ly giouping
lhom inlo laigo ano loss fioquonl oioois a laigo Luyoi can inouco suppliois
lo oovialo fiom lho collusivo slialogy.
Finally, sliong Luyois mighl oosign piocuiomonl auclions so as lo min-
imiso lho iisk of collusivo Lohavioui among suppliois (soo soclion 4.2 foi a
oiscussion of auclion oosign).
Soo oxoiciso BB lo foimaliso lhis iooa. Similai consiooialions mighl also apply lo casos
whoio compoling nims havo common inloiosls - such as joinl vonluios - in coilain maikols
oi piooucls. Soo also Mailin (100).
Billoi ol al. (2000: 3-4) say lhal il is nol cloai wholhoi minoiily shaioholoings
aio compaliLlo wilh ailiclo 81 of lho 1ioaly, allhough lho acquisilion of 10/ oi loss in a
n.: which is nol associaloo wilh a iopiosonlalion in lho Loaio oi volo iighls may
Lo consiooioo as a &:|j n... shaioholoing foi invoslmonl puiposos".
Soo Snyooi (1000).
10
Ghpdqg hodvwlflw| Allhough lho olaslicily of maikol oomano is a facloi
lhal is somolimos monlionoo as facililaling collusion, il is nol cloai why il
shoulo aocl lho |.||.|n of collusion. !f oomano is voiy olaslic, lhon a
givon piico cul will ooloimino a laigo incioaso in lho quanlily oomanooo,
Lul lhis is liuo Lolh foi lho piico cul in a oovialion ano foi lho piico cul in
lho punishmonl poiioo. !n olhoi woios, olaslicily of oomano will in gonoial
aocl Lolh sioos of lho inconlivo consliainl foi collusion, ano ils nol oocl
on suslainaLilily of collusion is amLiguous.
!l is liuo, howovoi, lhal oomano olaslicily will aocl lho || of lho
maximum collusivo piico (lho lowoi lho olaslicily of oomano lho highoi lho
monopoly piico), which implios lhal lhoio will Lo loss ioason lo woiiy aLoul
possiLlo collusion if oomano olaslicily is high.
Hyroxwlrq ri ghpdqg 1ho impacl of oomano ovolulion ovoi limo upon
collusion ooponos on lho naluio of oomano shocks. Supposo lhal cui-
ionl oomano convoys no infoimalion aLoul fuluio oomano - lhal is, oomano
shocks aio inooponoonlly ano ioonlically oisliiLuloo, as in BolomLoig ano
Salonoi (1080). 1hon, il is as if a laigo oiooi suooonly aiiivoo, ano lho
analysis woulo Lo as aLovo: nims woulo Lioak collusion lo capluio lho pionl
of unusually laigo oomano. (Convoisoly, collusion will Lo moio likoly if a
nogalivo shock occuis.)
Supposo insloao lhal oomano movomonls aio coiiolaloo ovoi limo, so lhal
looay`s laigo oiooi signals lhal oomano will incioaso sloaoily. !n lhis caso,
collusion is moio likoly: Why shoulo a nim givo up lho piospocl of laigo
fuluio collusivo pionls foi a small gain looay, whon lho maikol is slill small
(Convoisoly, collusion will Lo loss likoly whon nims faco a fuluio of ooclining
maikol oomano.)
!l also ooponos on wholhoi oomano movomonls aio ox-posl oLsoivaLlo oi nol, as
oiscussoo in soclion 2.2.1 Lolow.
A maikol chaiacloiisoo Ly fioquonl ano oiaslic innovalions will also Lo loss piono lo
collusion, as loss woighl is allachoo lo lho fuluio (as incumLonls anlicipalo lhal lhoy mighl
nol Lo compolilivo in lho noai fuluio) ano lho inconlivo lo oovialo is lhoiofoio highoi. Soo
Boy (2002).
1hoio aio a numLoi of papois lhal havo sluoioo foimally lho pioLlom of suslainaLilily
of collusion ovoi lho Lusinoss cyclo. 1ho inluilivo iosulls iopoiloo hoio coincioo wilh
lho iosulls of Halliwangoi ano Haiiinglon (1001), who nno lhal collusion is moio likoly
lo Lioak whon oomano is ooclining. Lul FaLia (2001L) oxlonos lhoii analysis Ly also
consiooiing possiLlo capacily consliainls, ano sho shows lhal Halliwangoi ano Haiiinglon`s
iosulls holo only whon aggiogalo inousliy capacily is laigo onough, whoioas whon il is small
11
Domano slaLilily mighl holp suslain collusion, lo lho oxlonl lhal il in-
cioasos lho oogioo of oLsoivaLilily in lho maikol (soo also soclion 2.2.1). A
maikol chaiacloiisoo Ly fioquonl oomano shocks oi laigo uncoilainly mighl
Lo ono whoio il is oimcull lo unooislano wholhoi pooi salos aio ouo lo oo-
mano vaiiaLilily oi lo piico unooiculling of iivals. Accoioingly, collusion
mighl Lo moio oimcull lo suslain. Ly conliasl, in a maluio slaLlo maikol
il woulo Lo oasioi lo spol oovialions ano punish lhom, ionooiing collusion
oasioi.
Surgxfw krprjhqhlw| Iiaclilionois, anli-liusl aulhoiilios ano juogos of-
lon mainlain lhal il is oasioi lo ioach collusion wilh homogonous lhan oif-
foionlialoo piooucls. 1hooiy is loss cloai aLoul lhis poinl. Supposo lhal
piooucls aio oioionlialoo. !n lhis caso, il is haiooi lo punish a oovianl nim,
sinco ovon a consiooiaLlo ioouclion in piicos Ly iivals woulo loavo lho oovianl
nim wilh a posilivo oomano. 1his oocl lonos lo oiscouiago collusion, as
only lho foai of punishmonl makos nims iofiain fiom oovialing. Howovoi,
foi piocisoly lho samo ioasons, unooi oioionlialoo piooucls a oovialion is
loss pionlaLlo loo: a oovianl nim cannol oxpocl lo gain voiy laigo maikol
shaios fiom iivals unloss il makos a voiy consiooiaLlo cul in piico, an oocl
lhal lonos lo facililalo collusion. 1hoiofoio, piooucl homogonoily ooos nol
unamLiguously iaiso lho scopo foi collusion. A piioii, lhon, il is nol cloai
lhal - olhoi lhings Loing oqual - collusion shoulo Lo moio likoly in piooucls
liko comonl ano gasolino lhan, say, cigaiollos, colas oi minoial walois, which
aio all consumoi gooos chaiacloiisoo Ly a high oogioo of consumoi loyally.
IossiLly, howovoi, a ioason why homogonoily mighl holp collusion is lhal
if nims solo nol a singlo woll-oonnoo piooucl Lul voiy many oioionl pioo-
ucl vaiianls, lhon il woulo Lo moio oimcull foi lhom lo allain a collusivo
oulcomo. 1his makos sonso, insofai as il iooucos lho visiLilily of oovialions,
ano woulo lhus oiminish lho possiLilily lo iosoil lo quick punishmonls.
onough, collusion is loss likoly lo Lo suslainoo whon oomano incioasos.
Foi inslanco, piooucl homogonoily is ono of lho iocuiionl foaluios in Euiopoan moigoi
casos suspocloo lo givo iiso lo collusion.
Soo foi inslanco Boss (1002), foi a foimal analysis.
1ho laigo aovoilising oxponoiluios suslainoo in lhoso maikols oxplain why lhoso pioo-
ucls aio poicoivoo Ly consumois as voiy oioionlialoo fiom oach olhoi. Soo Sullon (1001).
An alloinalivo oxplanalion of why piooucl homogonoily mighl holp collusion has Loon
ooioo Ly Bailh (1000). Ho aiguos lhal oioionl piooucls mighl Lo suLjocl lo oioionl
oomano shocks. !f piooucl homogonoily moans lhal lhoio is coiiolalion in lho oomano
12
V|pphwu| Compolilion aulhoiilios ano couils also iogaio symmoliy among
nims as a facloi which facililalos collusion. Symmoliy can concoin oioi-
onl oimonsions (such as maikol shaios, numLoi of vaiiolios in lho piooucl
poilfolio, cosls ano lochnological knowloogo, capacilios), whoso impoilanco
will cloaily oioi acioss inousliios. Many infoimal aigumonls oxisl which
suppoil lho iooa lhal symmoliy holps collusion: foi inslanco, il is inluilivo
lhal pooplo who aio in a similai posilion woulo nno il oasioi lo aiiivo al an
agioomonl which suils all of lhom. Boconlly, lhoio havo Loon somo foimal
conliiLulions lo lho liloialuio which givo fuilhoi suppoil lo lhis iooa.
Complo, Jonny ano Boy (2002) analyso a moool whoio nims pioouco
homogonous gooos ano havo ioonlical cosls, Lul oioi in lhoii capacilios.
!n lhoii moool, lho laigosl nim has lho highosl inconlivo lo oovialo fiom
collusion (a nim whoso capacily is nlloo whon lho piico is al lho collusivo
lovol ooos nol havo any inconlivo lo cul lho piico), ano lho smalloi nims aio
lhoso wilh oimcullios lo punish (sinco lhoy aio capacily consliainoo, lhoy
cannol ciooiLly lhioalon lo punish a oovianl nim). A moio oqual oisliiLulion
of capacilios woulo holp collusion. !f nims` posilions woio moio similai, lhoii
inconlivos lo oovialo ano lo punish woulo Lo moio alignoo ano collusion coulo
Lo moio oasily suslainoo.
!n K hn ano Molla (1008), lhoio aio mulli-piooucl nims lhal soll a
oioionl numLoi of piooucl vaiiolios. 1ho laigoi lho nim (lho highoi lho
numLoi of piooucl vaiiolios il solls) lho sliongoi ils inloiosl in kooping piicos
high. Similaily lo a nim having a laigo shaio of lho maikol, foi which a
maiginal ioouclion in lho piico woulo huil all lho infia-maiginal unils, hoio
a piico ioouclion in ono vaiioly woulo nogalivoly aocl all olhoi vaiiolios (lho
laigoi lho nim lho sliongoi piicing oxloinalilios). !nsloao, a small nim (lhal
solls only ono oi fow vaiiolios) has a sliongoi inconlivo lo oovialo ano fioo
iioo on high piicos, as Ly oocioasing piicos woulo capluio oomano fiom all
iivals` piooucls. 1hoiofoio, in lhis moool lho laigo nim has moio oimcullios
lo punish ano lho small nims havo lho laigoi lomplalion lo oovialo fiom lho
collusivo piico.
Nolo lhal lho mochanisms al woik aio quilo oioionl in Complo, Jonny
ano Boy (2002) ano in K hn ano Molla (1008), Lul lho iosulls aio lho samo:
a moio oqual oisliiLulion of assols iolaxos lho inconlivo consliainls of Lolh
shocks, lhon lhis mighl holp collusion.
1hoio also oxisl somo ovioonco fiom ompiiical analysis: soo Laila (2000) on nim-sizo
inoqualily ano collusion in lho aiilino inousliy.
13
lho small ano lho laigo nim, ano woulo holp collusion.
Pxowl0pdunhw frqwdfwv Foi a long limo, il has Loon aiguoo lhal mulli-
maikol conlacls - oonnoo as lho samo nims mooling in moio lhan ono maikol
- woulo holp collusion. !noooo, lhoio also oxisls somo ompiiical ovioonco
lhal lhis is lho caso. Evans ano Kossioos (1004) nno lhal aiilino faios aio
signincanlly highoi in ioulos whoio lhoio oxisl caiiiois lhal havo conlacls on
sovoial ioulos; Iaikoi ano Blloi (1007) nno lhal piicos lono lo Lo highoi in
US moLilo lolophono maikols chaiacloiisoo Ly mulli-maikol conlacls.
1ho suggosloo oxplanalion usoo lo Lo lhal whon nims cooxisl in sovoial
maikols, lhon il is moio coslly foi lhom lo oovialo fiom a collusivo oulcomo,
sinco lhoy woulo Lo punishoo in all lho maikols al lho samo limo. 1his
inluilivo aigumonl is incomplolo lhough, ano lhoiofoio faully. !noooo, if a
nim is piosonl in many maikols, il can also oovialo in n|| ] |n al lho
samo limo, ano lhis incioasos ils inconlivo lo oovialo. A piioii, lhon, lho
voiy facl lhal lho samo nims cooxisl in sovoial maikols ialhoi lhan in jusl
ono, il mighl nol Lo sumcionl lo oxplain why lho lalloi shoulo holp collusion.
!noooo, Loinhoim ano Whinslon (1000) show lhal whon nims ano maikols
aio poifoclly symmoliic mullimaikol conlacls oo nol chango lho inconlivos foi
collusion. !l is only whon lhoio aio asymmoliios lhal mulli-maikol conlacls
holp.
1ho inluilion Lohino lho iosull lhal mulli-maikol conlacls mighl holp
collusion is nol sliaighlfoiwaio, Lul an oxamplo mighl holp. Supposo lhal
lhoio oxisl lwo maikols lhal aio asymmoliic in lho following sonso. !n maikol
A lhoio aio only lwo nims, call lhom 1 ano 2, lhal havo a similai shaio of
lhal maikol. !n maikol L, lhoio aio : nims, lwo of lhom Loing 1 ano 2
(oui mulli-maikol nims), lhal shaio oqually lho maikol. Supposo lhal if lho
lwo maikols woio lakon in isolalion (lhal is, if in maikol L lho : nims woio
only singlo maikol nims), lhon collusion woulo aiiso in maikol A Lul nol in
maikol L (wo know lhal collusion is haiooi lo suslain whoio lhoio aio moio
Vasconcolos (2001L) connims lhoso iosulls wilhin a voiy ologanl moool whoio ho anal-
ysos oplimal punishmonl schomos. Ho has a homogonous gooo moool whoio nims oioi
in lhoii capacilios, Lul conliaiy lo Complo ol al. highoi capacily implios lowoi cosl. !n
his papoi, laigo nims havo highoi inconlivos lo oovialo along lho punishmonl palh ano
small nims along lho collusivo palh. Again, symmoliy woulo holp collusion. Haiiinglon
(1080a) analysos collusion whon nims havo oioionl oiscounl faclois. Ho shows lhal whon
nims aio asymmoliic lhoy manago lo ioach a collusivo oulcomo Ly iooisliiLuling maikol
shaios.
14
nims). 1his is oquivalonl lo saying lhal, al lho piovailing oiscounl facloi,
lho !Cs of lho mulli-maikol nims in maikol A aio lax, whoioas lho !Cs in
maikol L (lakon in isolalion) aio nol salisnoo. Lul lho !Cs of lho mulli-
maikol nims aio givon Ly lho pooling of lho lwo !Cs, ono foi oach maikol.
1o unooislano why mulli-maikol conlacls holp suslain collusion, consiooi
lwo poinls. Fiisl, if lho olhoi : 2 nims in maikol L hao a laigoi shaio of
lho maikol, lhon lhoii inconlivo lo oovialo woulo Lo iooucoo. (Bocall lhal
lho laigoi lho nim lho lowoi ils inconlivo lo ioouco ils piico.) Socono, foi
oach mulli-maikol nim, lho pooloo !C will slill holo if lho nim solo a Lil
loss in maikol L. !noooo, accopling a lowoi maikol shaio in maikol L woulo
incioaso lho inconlivo lo oovialo in maikol L, Lul lhis can Lo oulwoighoo Ly
lho facl lhal lho inconlivo lo oovialo in maikol A is low. Ly pooling lho !Cs,
lho slacknoss of lho !C in maikol A can Lo usoo lo onfoico collusion on lho
olhoi maikol.
1o fuilhoi claiify lho concopl, consiooi lho following oxamplo as woll.
Supposo lhal in maikol A a nim has 70/ of lho maikol ano lho olhoi has
30/, whoioas oxaclly lho opposilo silualion occuis in maikol L. Apail fiom
ono nim solling moio in ono maikol (ano vico voisa), lho nims havo similai
chaiacloiislics, ano lho maikols piosonl similai foaluios ano sizos. Also
supposo lhal, if lho lwo maikols woio lakon in isolalion, collusion woulo nol
Lo suslainaLlo (lho asymmoliy in maikol shaios Loing loo sliong). Lul now
lho samo lwo nims opoialo in lho samo lwo maikols: whon lhoy analyso
wholhoi lhoy piofoi lo colluoo oi lo oovialo, lhoy will look al Lolh maikols
logolhoi. 1his implios lhal lhoy will havo a singlo !C whoio lho gains ano
lossos fiom oovialions aio pooloo acioss Lolh maikols. Eoclivoly, unooi
pooling il is as if lhoio woio now lwo symmoliic nims in ono laigo maikol,
oach nim holoing a 0/ shaio of il. Mulli-maikol conlacls hoio smoolh lho
maikol asymmoliios ano Ly making lho !Cs of lho nims moio symmoliic
lhoy holp collusion.
Lqyhqwrulhv dqg h{fhvv fdsdflwlhv Gonoially spoaking, lho iolo playoo
Ly lho piosonco of laigo lovols of invonloiios ano laigo oxcoss capacily is
amLiguous. Supposo foi inslanco lhal all nims in an inousliy aio onoowoo
wilh oxcoss capacily wilh iospocl lo lho oxpocloo lovols of oomano. 1hon
lhis aocls Lolh sioos of lho inconlivo consliainls in a similai way, ionooiing
Anolhoi ioason why mulli-maikol conlacls mighl holp collusion is lhal lhoy lono lo
incioaso lho fioquoncy of lho nims` conlacls.
1
amLiguous lho nnal oocl on lho conoilion foi collusion. On lho ono hano,
laigo oxcoss capacily implios lhal lhoio is a sliongoi inconlivo lo oovialo (a
piico ioouclion woulo holp nll capacily). On lho olhoi hano, if iivals aio also
onoowoo wilh laigo capacilios, lho punishmonl is moio likoly lo Lo sliong.
Sinco Lolh lhooiy ano ompiiical ovioonco on lhis poinl aio amLiguous,
il is uncloai wholhoi oxcoss capacily holps collusion.
515 Sulfh wudqvsduhqf| dqg h{fkdqjh ri lqirupdwlrq
!n lhis soclion ! nisl omphasiso lho iolo of oLsoivaLilily of piicos ano quan-
lilios in suslaining collusion (soclion 2.2.1). 1his loaos lo lho oiscussion of
ono piaclico which holps nims impiovo oLsoivaLilily of lhoii aclions, namoly
agioomonls lo oxchango infoimalion on pasl ano cuiionl inoivioual oala. !
shall also oiscuss (soclion 2.2.2) lho iolo of communicalion among nims. 1his
also holps collusion in lhal il mighl holp nims cooioinalo on a pailiculai
oulcomo.
51514 Revhuydelolw| ri upv* dfwlrqv
Doloclion of oovialions is a ciucial ingiooionl foi collusion, ano Sligloi (1004)
aiguoo lhal collusivo agioomonls woulo Lioak oown Locauso of .: piico
culs. !n facl, Gioon ano Ioiloi (1084) show lhal if aclual piicos (oi piico
oiscounls) aio nol oLsoivaLlo, collusion woulo Lo moio oimcull lo suslain,
Lul il coulo slill aiiso al oquiliLiium. 1hoii impoilanl conliiLulion can Lo
summaiisoo in lho following way. !magino an inousliy whoio sollois cannol
Of couiso, lhis woulo Lo oioionl if oxcoss capacilios (oi laigo invonloiios) woio un-
oqually oisliiLuloo. !n lhis caso, lho aigumonls maoo aLovo aLoul asymmoliy woulo
apply: lho moio unoqual lho oisliiLulion of capacilios, lho loss likoly lhal collusion can
Lo suslainoo.
1ho nisl lo moool lho iolalionship Lolwoon capacily ano collusion woio Liock ano
Schoinkman (108). Lonoil ano Kiishna (1087) nno lhal oxcoss capacily is nooooo lo
suslain collusivo oulcomos, ano Davioson ano Donockoio (1000) lhal lho gioaloi lho oogioo
of oxcoss capacily (which is ooloiminoo onoogonously in lhoii gamo, ano ooponos on lho
cosl of capilal) lho moio collusivo lho piicos lhal can Lo suslainoo al oquiliLiium. 1hoso
lwo papois suggosl lhal lho punishmonl oocl of oxcoss capacily (lho facl lhal il allows
foi punishmonl lo occui) is sliongoi lhan lho choaling oocl (lho facl lhal oxcoss capacily
makos il moio lompling lo oovialo). Howovoi, in a oioionl solling, Complo ol al. (2002:
10) nno lhal - foi symmoliic nims - lho highoi inousliy capacily lho loss likoly lhal
collusion can Lo suslainoo. Somo ompiiical papois on lhis poinl aio monlionoo in Davioson
ano Donockoio (1000: 2-20).
10
oLsoivo lho piicos chaigoo Ly iivals ano whoio maikol oomano lovols aio also
unoLsoivaLlo. 1hon, a solloi woulo nol know if a lowoi numLoi of cuslomois
soivoo lhan oxpocloo is ouo lo a nogalivo shock in oomano oi lo a piico cul
Ly a iival which has slolon somo (oi all) of his Lusinoss. Gioon ano Ioiloi
show lhal if lho oiscounl facloi is high onough, lhoio oxisls a sol of collusivo
slialogios lhal iopiosonl an oquiliLiium. 1ho slialogios aio such lhal oach
nim sols a collusivo piico (which mighl Lo lho piico lhal maximisos joinl
pionls) as long as ovoiy nim facos a high lovol of oomano. Whon a nim facos
a low (oi zoio) oomano, lhon lho punishmonl is liiggoioo ano oach nim sols
lho ono shol oquiliLiium piico foi a nnilo numLoi of poiioos. Afloi lhis nnilo
punishmonl phaso, all nims iovoil lo lho collusivo piico.
1hoiofoio, lho moool implios lhal collusion can Lo suslainoo al oqui-
liLiium, Lul unliko lho slanoaio moool wilh poifocl oLsoivaLilily, collusivo
piicos ano pionls will novoi Lo oLsoivoo foiovoi, ovon if no nim oovialos.
!noooo, lho punishmonl is liiggoioo whonovoi a low lovol of oomano is oL-
soivoo, ano will lasl foi a coilain numLoi of poiioos, afloi which nims iovoil
lo lho collusivo piicos. 1ho moool has lhoiofoio an impoilanl implicalion.
1ho oLsoivalion of somo poiioos wilh low piicos is nol sumcionl lo oxcluoo
lhal lho inousliy is al a collusivo oquiliLiium. Balhoi, piico wais simply
aio lho inoisponsaLlo olomonl of a collusivo slialogy whon iivals` piicos ano
maikol oomano ioalisalions aio unoLsoivaLlo.
Sinco oLsoivaLilily of piicos ano quanlilios holps nims lo ioach lho mosl
collusivo oulcomos (unooi poifocl oLsoivaLilily, piico wais lhal aio coslly foi
lho nims woulo nol occui), compolilion policy shoulo pay spocial allonlion
lo piaclicos lhal holp nims moniloi oach olhoi`s Lohavioui. Ono oxamplo of
such a piaclico is givon Ly infoimalion oxchango agioomonls, lhal is Loing
oiscussoo noxl. !n soclion 2.3, ! shall also aooioss olhoi piicing piaclicos
lhal incioaso oLsoivaLilily of nims` aclions, such as iosalo piico mainlonanco
ano Losl piico clausos.
Ilaying piico oqual lo maiginal cosl foiovoi, lhal is an innnilo punishmonl, woulo
cloaily Lo suLoplimal hoio: sinco lho punishmonl is liiggoioo ovon if noLooy has aclually
oovialoo, il woulo nol mako sonso lo conoomn lho inousliy lo zoio pionl foiovoi whonovoi
a low lovol of oomano is oLsoivoo.
On lho olhoi hano, as ! oiscuss Lolow, lho alloinanco of high ano low piico lovols is
nol pioof oilhoi of a collusivo oulcomo, sinco an inousliy al a non-collusivo oquiliLiium
mighl havo lowoi piicos unooi nogalivo oomano (oi common inpul) shocks oi incioasoo
capacilios.
17
Lqirupdwlrq h{fkdqjh/ L= Gdwd rq sdvw ru fxuuhqw sulfhv dqg txdq0
wlwlhv !l is oflon lho caso lhal via liaoo associalions oi in olhoi ways, nims
in a givon inousliy oxchango oala on piicos, quanlilios, oi olhoi vaiiaLlos
such as capacilios, cuslomoi oomano, cosl ano so on. !n lho lighl of lho
oiscussion aLovo, il Locomos impoilanl lo ioonlify lho collusivo polonlial of
such communicalions among nims.
Fiisl, wo havo soon aLovo lhal oxchango of infoimalion on pasl piicos
ano quanlilios (oi of voiinaLlo infoimalion on piicos ano quanlilios sol in
lho cuiionl poiioo) of oach inoivioual nim facililalos collusion, as il allows
lo ioonlify oovialois ano Lolloi laigol maikol punishmonls, lhal Locomo
lhon moio ooclivo ano loss coslly foi lho punishing nims.
!n lho aLsonco of oisaggiogalo infoimalion on pasl piicos ano quanlilios,
availaLilily of moio piociso oslimalos of aggiogalo (maikol) oomano woulo
also holp, as il allows nims lo soo wholhoi a oocioaso in inoivioual oomano is
ouo lo choaling of iivals oi lo a nogalivo shock in maikol oomano. !n luin,
lhis implios lhal lhoio woulo Lo no nooo of punishmonl phasos which aio
liiggoioo nol Ly oovialions Lul Ly a gonoial oocioaso of maikol oomano.
Exchango of infoimalion aLoul pasl (ano cuiionl) piicos ano quanlilios
holps nims suslain collusion, Lul il is possiLlo lhal lhoio mighl also Lo om-
cioncy oocls Lohino oxchango of such oala. Foi inslanco, Lolloi infoimalion
aLoul oomano mighl allow nims lo incioaso pioouclion in maikols, limos,
ano aioas whoio oomano is highoi. 1ho liloialuio on infoimalion oxchango
has amLiguous nnoings. 1hooiolically, il is possiLlo in coilain ciicum-
slancos lhal oxchanging infoimalion holps wolfaio. Howovoi, il is unlikoly
On collusion ano oxchango of infoimalion Lolwoon compolilois, soo K hn (2001).
Ioiloi (1083) shows lhal oxchango of piivalo infoimalion aLoul maikol oomano io-
oucos oomano uncoilainly ano allows moio collusivo oulcomos lo Lo suslainoo. !n a similai
voin, Kanooii (1002) shows lhal as oomano uncoilainly oocioasos, nims can allain highoi
collusivo oulcomos (ano punishmonl phasos Locomo moio sovoio), ano Kanooii ano Mal-
sushima (1008) also nno lhal communicaling infoimalion aLoul pasl ioalisalions holps
collusion. 1ochnically, lho lasl papoi oiois fiom Gioon ano Ioiloi (1084), Ioiloi (1083)
ano Kanooii (1002) in lhal il assumos lhal nims iocoivo piivalo ialhoi lhan puLlic signals,
so lhal oach nim mighl havo a oioionl Loliof of whal has happonoo in lho inousliy (has
lhoio Loon a oomano shock, oi has somoLooy oovialoo). Olhoi papois lhal ooal wilh
collusion unooi impoifocl moniloiing ano piivalo signals aio Complo (1008) ano Alhoy
ano Lagwoll (2001).
1ho inconlivos foi nims lo oxchango piivalo infoimalion, ano moio impoilanlly lho
wolfaio oocls of such oxchango aio nol ioLusl, as lhoy ciucially oopono on wholhoi lho
nims compolo on piicos oi quanlilios, oi wholhoi lho uncoilainly concoins cosls oi oomano.
Soo K hn ano Vivos (100) oi Bailh (JE1, 10xx) foi suivoys.
18
lhal nims nooo lo oxchango inoivioual ano oisaggiogalo oala in oiooi lo
achiovo whalovoi omcioncy lhoio mighl Lo. K hn (2001) also aiguos lhal
infoimalion aLoul lho inousliy mighl holp nims ooviso inconlivo schomos foi
lhoii poisonnol, Lasoo on iolalivo pioouclivily, Lul again, foi such schomos
lo woik nims oo nol nooo oolailoo oala al a oisaggiogalo lovol.
K hn (2001) convincingly concluoos lhal whilo Lolh lypos of infoimalion
oxchango holp nims lo colluoo, lho oLsoivalion of pasl ano piosonl quanlilios
ano piicos of nims is a moio ooclivo collusivo oovico lhan lho oxchango of
piivalo infoimalion aLoul maikol oomano. Fuilhoi, if omcioncy gains of in-
foimalion oxchango oxisl, lhoy woulo Lo ioapoo alioaoy wilh lho oxchango of
aggiogalo oala. 1his shoulo loao compolilion policy lo a moio sovoio lioal-
monl of agioomonls concoining oxchangos of infoimalion aLoul inoivioual
piicos ano quanlilios (ospocially lho moio oisaggiogalo ano lho moio ioconl).
!noooo, his conclusion lhal communicalion Lolwoon nims aLoul such inoi-
vioual nim oala shoulo Lo foiLiooon is compolling.
51515 Frruglqdwlrq lvvxhv= Wkh uroh ri frppxqlfdwlrq
Whon nims iopoalooly mool in lho maikolplaco, if lho oiscounl facloi is laigo
onough, any piico Lolwoon maiginal cosl ano fully collusivo piico mighl Lo
suslainoo. 1his iaisos lho issuo of which piico is likoly lo aiiso as lho maikol
oulcomo. HaLil, hisloiy, oi pailiculai ovonls mighl piovioo nims wilh a ]n|
.n on which lo cooioinalo.
Consiooi foi inslanco a silualion whoio lwo nims aio lolo Ly a iogulaloi
lhal lhoii piicos cannol Lo highoi lhan a coilain lovol, say 100. !n lhis caso,
lhis piico will piovioo a cloai Lonchmaik (lho focal poinl) foi lho nims, ano
ono can Lol lhal 100 will Lo lho piico lhal lhoy will sol.
Hisloiy mighl also piovioo hinls. Many Euiopoan maikols havo Loon pio-
locloo fiom foioign compolilion foi a long limo, iosulling in sovoial nalional
monopolios in many inousliios. Onco laii ano non-laii Laiiiois slailoo
Somo oxcoplions aLoul oolailoo oala mighl occui in pailiculai soclois. !n Lanking
ano insuianco, foi inslanco, maikols aio chaiacloiisoo Ly asymmoliic infoimalion. !f nims
hao infoimalion aLoul clionls` solvoncy hisloiy, lhis woulo Lo omcioncy onhancing as il
woulo losson aovoiso soloclion pioLloms ano fosloi compolilion Ly holping cuslomois lo
swilch nims. Soo Iaoilla ano Iagano (1000). Nolo, howovoi, lhal allhough oisaggiogalo,
lhis is nol infoimalion aLoul piicos sol oi quanlilios piooucoo Ly nims.
Scholling (1000) was lho nisl lo inlioouco lho nolion of focal poinls (oi convonlions)
ano show how lhoy can holp pooplo lo cooioinalo.
10
lo fall, lhis cioaloo a polonlially pan-Euiopoan maikol. Howovoi, a silua-
lion whoio oach nim slays in ils own maikol wilhoul onloiing foioign onos
woulo piovioo a gooo collusivo oquiliLiium, which is jusl lho conlinualion of
somolhing which has happonoo foi a long limo. !nsloao, slailing lo oxpoil
mighl Lo consiooioo a oovialion ano mighl liiggoi a iolalialion in lho homo
maikol, wilh iivals oxpoiling in luin. 1hoiofoio, lho .n&. j& mighl Lo a
focal poinl, ano only whon oomano ano lochnology conoilions suLslanlially
chango, mighl nims Lo lomploo lo Lioak lho cuiionl silualion.
Whalovoi lho ioason, if nims havo cooioinaloo in lho pasl on a coilain
collusivo piico oi oiviooo maikols in a coilain way, il mighl Lo loo iisky foi
lhom lo oxpoiimonl so as lo chango il. Fiims mighl simply upoalo such a
piico moio oi loss mochanically wilh inalion oi whon iaw maloiials com-
monly usoo in lho inousliy Locomo moio oxponsivo.
!f nims woio colluoing oxplicilly lhoy woulo simply communicalo wilh
oach olhoi ano lhoy coulo achiovo highoi collusivo piicos (pioviooo lhal
nims aio symmoliic onough, lhoy woulo havo similai piofoioncos ovoi piicos),
ano,oi moio omcionl maikol shaiing iulos. Lul ovon if lhoy oio nol ovoilly
colluoo, lhoy coulo slill liy lo ovoicomo cooioinalion pioLloms Ly liansmil-
ling infoimalion lo oach olhoi, as ! oiscuss in whal follows.
Lqirupdwlrq h{fkdqjh/ LL= Dqqrxqfhphqwv ri ixwxuh sulfhv An-
nouncomonl of fuluio piicos (oi pioouclion plans) mighl holp collusion, in
lhal il mighl allow nims lo Lolloi cooioinalo on a pailiculai oquiliLiium
among all lho possiLlo onos. Faiioll (1087) was lho nisl lo show lho iolo
of non-Linoing ano non-voiinaLlo communicalion (known as choap lalk")
in achioving cooioinalion among playois in gamos wilh mulliplo oquiliLiia.
Sinco lhon, Lolh lhooiy ano oxpoiimonlal ovioonco soom lo inoicalo lhal
announcomonls aLoul piico inlonlions mighl holp nims cooioinalo, allhough
Lul oxplicil agioomonls mighl lhooiolically ionooi collusion moio oimcull whon il
allows nims lo ionogolialo lho punishmonl following a oovialion, lhoioLy unooimining lho
collusivo mochanism. Soo lho lochnical soclion 3.2.
Unilaloial announcomonls holp playois lo solocl a joinlly oplimal piico, on which il
woulo olhoiwiso Lo oimcull lo cooioinalo if a focal piico (lhal is, an oLvious piico lo Lo
choson) ooos nol oxisl.
Faiioll (1087) analysoo a gamo wilh oioionl foaluios fiom supoigamos. Ho lookoo
al a Lalllo of lho soxos" silualion, whoio lhoio aio lwo asymmoliic oquiliLiia, as in an
inousliy whoio al oquiliLiium only ono of lwo nims coulo pionlaLly onloi, whoioas if Lolh
onloioo lhoy woulo mako lossos.
20
nol unooi all ciicumslancos.
Howovoi, nol all announcomonls aLoul fuluio aclions shoulo Lo lioaloo
in lho samo way. Ono shoulo oislinguish lwo oioionl silualions, accoioing
lo whom lho announcomonls aio oiiocloo: (1) :.n nnn&nnn. oi-
iocloo lo compolilois only; (2) &h|. nnn&nnn. wilh commilmonl
valuo lo consumois.
Sulydwh dqqrxqfhphqwv !n lho nisl caso, announcomonls aio oi-
iocloo lo compolilois only. 1o holp nx iooas, lhink of a nim sonoing a fax
lo iivals whoio il is slaloo lhal fiom noxl monlh il inlonos lo sol a coilain
piico. As K hn (2001) iomaiks, il is haio lo imagino any omcioncy ioason
Lohino such announcomonls. Mosl likoly, lhoy jusl holp iivals lo cooioinalo
on a pailiculai collusivo piico, ano lhoiofoio holps lhom colluoo Ly avoioing
coslly poiioos of piico wais ano piico inslaLilily.
nnn n. of piico changos, as long as il ooos nol fully commil lho
nim lo lho piico announcoo, mighl also Lo a lool lo avoio coslly oxpoiimon-
lalion wilh lho maikol. A nim mighl announco a piico incioaso ooclivo,
say, in 00 oays, Lul lhon iovoil lo lho cuiionl piico if lho olhoi nims oio nol
follow suil wilh similai announcomonl of piico changos. 1his way, nims
mighl aiiivo al a commonly agiooo piico wilhoul incuiiing lho iisk of losing
maikol shaios oi liiggoiing piico wais ouiing lho poiioo of aojuslmonl lo lho
now piicos.
Iailiculaily insliuclivo in lhis iospocl is lho .:|.n Jn:. 1&h|..|:.
(A1I) caso in lho US. A1I is a company ownoo Ly lho majoi US aii-
linos whoso main puiposo is lo oissominalo piico infoimalion lo aiilinos ano
opoialois, liko liavol agonls, using compuloi iosoivalion sysloms. Such infoi-
malion is foo lo lho A1I Ly oach company, ano il conlains sovoial olomonls,
such as lho faio ano lho ioulo lo which lho faio is applioo, lho possiLlo iosliic-
Soo Faiioll ano BaLin (1000) foi a non-lochnical oiscussion of lho possiLlo iolo of choap
lalk in oioionl gamos, ano of lho conoilions ono shoulo oxpocl il lo aocl oquiliLiium
oulcomos oi oquiliLiium soloclion. A numLoi of oxpoiimonls havo Loon poifoimoo on lhis
issuo, soo foi inslanco Coopoi al al. (1002). Soo K hn (2001) foi olhoi iofoioncos on
oxpoiimonls on lho collusivo oocls of infoimalion.
Howovoi, aovanco nolico of . piico changos coulo Lo in lho inloiosl of con-
sumois, who mighl wanl lo know in aovanco lho piicos lhoy will havo lo pay, lo ioouco
uncoilainly.
Soo Hay (1000) foi lho 1|j| caso, whoio lhis was ono of lho allogooly anli-compolilivo
piicos usoo Ly lho nims.
Soo Loionsloin (1000) foi a oolailoo accounl of lhis inliiguing caso.
21
lions lo lhis faio (foi inslanco, which lypo of consumoi can Luy il, if aovanco
paymonl is ioquiioo, if a minimum numLoi of oays of slay is ioquiioo ano
so on), :. nnn |n. .| nn. (lhal inoicalo lho poiioo in which lho faio
can Lo solo), ano :. nnn |n. :n| nn. (lhal inoicalo whon lho liavol foi
which lho faio applios shoulo lako placo).
1ho DOJ allogoo lhal aiilinos usoo lhis infoimalion lo cooioinalo piico
incioasos wilhoul any oxplicil collusion laking placo. Foi inslanco, aiilino A
coulo announco looay a piico incioaso on ioulo fiom cily 1 lo cily 2 ano pul
a nisl lickol oalo in lhiily oays limo, so lhal noLooy coulo aclually soll a
lickol foi lhal ioulo al lho now faio. Sinco lhis infoimalion was puLlic lo
all olhoi aiilinos, aiilino A coulo lhon wail ano soo lho ioaclion lo lhis piico
announcomonl. !f ils compoliloi on lho samo ioulo, say aiilino L, malchoo
lho piico incioaso, lhon il woulo Lo lofl unchangoo ano laloi Locomo ooclivo.
Lul if aiilino L oio nol malch lho piico incioaso, lhon aiilino A coulo slill
ioviso lho faio. 1ho piocoss coulo lhon conlinuo, wilh aiilinos aojusling lhoii
faios unlil a convoigonco is ioachoo, Lul wilhoul consumois ovoi having lho
possiLilily lo Luy lickols al lho announcoo fuluio faios.
Frppxqlfdwlrq lq dxfwlrqv An inloiosling oxamplo of how nims
manago lo achiovo collusivo oulcomos lhiough communicalion is givon Ly
lhoii Liooing Lohavioui in ..n&|nn&. n.nn.nj n&.n.. 1hoso aio nisl-
piico auclions whoio sovoial oLjocls aio foi salo al lho samo limo, ano lho
auclion onos only whon no now highoi ooi is maoo on any of lho oLjocls.
1hoso auclions havo gooo omcioncy piopoilios (lho valuo of ono oLjocl mighl
oopono on which olhoi oLjocls aio also oLlainoo; infoimalion aLoul lho valuo
of an oLjocl is incioasoo Ly oLsoiving lho Lios maoo Ly iivals), Lul lhoy aio
nol immuno lo collusion, as playois mighl uso lhoii Lios lo signal a way lo
shaio lho oLjocls. Foi inslanco, if lho govoinmonl was auclioning o an
assol in Milan (whoso aioa cooo is 02) ano olhoi assols olsowhoio, ! mighl
inoicalo my inloiosl in lho Milan assol Ly suLmilling ono oi moio Lios foi,
say, 1,002 ouio oach. Olhoi Liooois will lhon unooislano lhal ! am pioposing
lo shaio oLjocls in such a way lhal ! oLlain lhal pailiculai assol.
1ho caso onooo Ly a solllomonl, wilh lho nims involvoo agiooing lo oisconlinuo lhoso
piaclicos.
1ho mosl slanoaio auclion is lho nisl-piico auclion on a singlo oLjocl. 1hink foi
inslanco of lho way woiks of ail aio oflon solo: pooplo in a ioom mako highoi ano highoi
Lios foi a pailiculai oLjocl, unlil a Lio will nol Lo malchoo Ly anyLooy.
Soo Klompoioi (2001) ano Ciamlon ano Schwailz (2001) foi a moio oolailoo analysis.
22
A numLoi of such signaling oxamplos aio oosciiLoo in Ciamlon ano
Schwailz (2001), who oiscuss collusion in lho FCC auclions in lho US, whoio
liconsos in oioionl maikols woio simullanoously foi salo. Foi inslanco, afloi
a numLoi of iounos whoio il hao nol Liooon foi Amaiillo, 1oxas, lho nim
Moicuiy ICS maoo lho highoi Lio foi lhal maikol, Lumping a iival nim,
High Ilains Wiioloss, fiom il. High Ilains hao Loon an aggiossivo Lioooi in
anolhoi maikol, LuLLock, 1oxas, ano Moicuiy`s Lio was inlonooo as a signal
lo ils iival lhal hao il nol sloppoo Liooing foi LuLLock, il woulo havo iolal-
ialoo Ly incioasing lho piico in Amaiillo. 1o mako suio lhal lho signal was
cloai, Moicuiy`s Lio foi LuLLock hao 013" , lho cooo numLoi of Amaiillo,
as ils lasl lhioo oigils, ano ils Lio foi Amaiillo onooo wilh 204", lho cooo
numLoi of LuLLock.
Anolhoi caso is givon Ly a 1000 auclion of lon ioonlical Llocks of spoclium
in Goimany. 1his was again a simullanoous asconoing auclion, wilh lho
iulo lhal any now Lio hao lo Lo al loasl 1u : n |.j|: lhan lho piovious
ono. Mannosmann ano 1-MoLil, lho sliongosl incumLonl nims, woio lho
only soiious playois. !n lho nisl iouno, Mannosmann Lio 18.18 million DM
poi mogahoilz on Llocks 1- ano 20 million DM on Llocks 0-10, ano 1-MoLil
hao ovon lowoi Lios. Ly making oioionl Lios foi olhoiwiso ioonlical oLjocls,
Mannosmann was signaling lho inlonlion lo shaio lho maikol. Fuilhoi, Ly
choosing 18.18 ano 20 il was signaling lho facl lhal il woulo havo Loon
happy wilh ils iival incioasing ils Lio on Llocks 1- Ly 10 poi conl (lho
minimum aomissiLlo Lio incioaso), so lhal Lolh woulo havo onooo up wilh
nvo Llocks oach paio al 20 million DM. Suio onough, 1-MoLil`s managois gol
lho mossago (as lhoy aomilloo in puLlic ooclaialions, soo Klompoioi (2001:
3)), ano in lho socono iouno lhoy Lio 20 million DM on Llocks 1-, afloi
which lho auclion onooo.
1hoso oxamplos cloaily show lhal communicalion among playois holp
lhom ioach collusivo oulcomos in auclions. 1hoiofoio, puLlic slalomonls
aLoul Liooing inlonlions shoulo nol Lo allowoo, ano moasuios mighl Lo
Soo Ciamlon ano Schwailz (2001: 8-0). Such oxamplos of communicalion of inlonlions
is nol iosliicloo lo auclions. !n lho A1I caso oiscussoo in lho loxl aLovo, aiilinos incluooo
foolnolo oosignalois" allachoo lo a pailiculai announcoo faio so as lo inoicalo lhoii
inlonlions lo punish a compoling aiilino on a pailiculai ioulo: soo Loionsloin (1000: 314-
310) foi oolails.
Soo Klompoioi (2001).
Klompoioi (2001) iopoils opisooos whoio Liooois oisclosoo lhoii oLjoclivos lo lho
pioss, lhoioLy aocling lho Lohavioui of iivals in a sliaighlfoiwaio way.
23
lakon lo avoio signaling lhiough Lios: Foi oxamplo, Liooois can Lo foicoo
lo Lio iouno" numLois, lho oxacl inciomonls can Lo pio-spocinoo, ano Lios
can Lo maoo anonymous." (Klompoioi, 2001: 12)
Sxeolf dqqrxqfhphqwv !n lho socono caso, piico announcomonls
aio puLlic, ano lhoiofoio soon Ly iival nims as woll as consumois. 1hink
foi inslanco of a nim aovoilising lho piicos of ils piooucls on nowspapois.
On lho ono hano, il mighl Lo aiguoo lhal lianspaioncy of piicos slill holps
collusion, foi lho ioasons inoicaloo aLovo. On lho olhoi hano, lhough, maikol
lianspaioncy is gooo foi consumois, as il allows lhom lo shop aiouno" foi
lho Losl ooi. 1ho lalloi posilivo oocl is gonoially consiooioo sliongoi lhan
lho collusivo oocls of lho announcomonls. Lolh lhooiolical aigumonls ano
ompiiical ovioonco suggosl lhal piico aovoilising in lhis sonso is gonoially
Lononcial ano Liings piicos oown. 1hoiofoio, whon piicos aio lianspaionl"
foi Lolh consumois ano nims, lhis shoulo nol Lo consiooioo as an anli-
compolilivo piaclico.
!n somo casos, howovoi, piicos aio maoo puLlic mainly lo incioaso lians-
paioncy among iival nims, ialhoi lhan lo lho Lononl of cuslomois. 1ho 1|j|
caso piovioos an inloiosling oxamplo. !n lhal caso, lho foui piooucois of
anliknock gasolino aooilivos allogooly usoo facililaling piaclicos lo oocioaso
compolilion. Ono such piaclico was lhal nims issuoo pioss nolicos on piico
incioasos (lho olhoi piaclicos woio aovanco nolico of piico changos, unifoim
oolivoioo piicing ano mosl-favouioo nalion clausos). !n lhal inousliy, lhoio
woio fow laigo Luyois ano piicos woio sol Ly nogolialion, ano il sooms ioa-
sonaLlo lo lhink lhal lho pioss nolico oio nol havo lho puiposo of infoiming
Luyois, Lul of lolling iivals know inlonlions aLoul piico changos.
1o concluoo, whoioas announcomonls oiiocloo lo iivals only shoulo Lo
foiLiooon, announcomonls aLoul cuiionl ano fuluio piicos which caiiy com-
milmonl valuo vis-a-vis consumois shoulo Lo iogaiooo as wolfaio onhancing.
Foi a suivoy of Lolh lho lhooiolical ano lho ompiiical liloialuio on piico aovoilising,
soo Fumagalli ano Molla (2001).
Soo Hay (1000).
Nolo, howovoi, lhal lho F1C was ovoiluinoo Ly an appoal couil, lhal founo lhoio
was insumcionl ovioonco lo piovo lho oxislonco of a cailol.
24
516 Sulflqj uxohv dqg frqwudfwv
Prvw0idyrxuhg qdwlrq dqg phhwlqj frpshwlwlrq fodxvhv Somo
clausos in long-loim conliacls Lolwoon a solloi ano a Luyoi mighl conoilion
lho piico paio Ly lho Luyoi oilhoi lo lho piico ooioo Ly lho solloi ilsolf lo
ils olhoi Luyois, oi lo lho piico ooioo Ly olhoi sollois lo lho samo Luyoi. !
look al lhoso lwo lypos of clausos in luin, ano aiguo lhal lho lalloi is moio
likoly lo havo anli-compolilivo oocls.
A n.-]n&:n nn.n (oi mosl-favouioo cuslomoi) clauso (MFN) on-
gagos a solloi lo apply lo a Luyoi lho samo conoilions ooioo (Ly lho samo
solloi) lo olhoi Luyois. 1ho clauso can Lo of lwo lypos. A ::n. `1A
slalos lhal lho Luyoi will Lo ooioo a piico ioouclion if fuluio Luyois will gol
a lowoi piico foi lho samo gooo (lho ioouclion Loing oqual lo lho oioionco
Lolwoon piosonl ano fuluio piico); a nn:nn&. `1A ongagos a solloi
lo ooi a Luyoi lho samo piico as ils olhoi Luyois (usually in lho samo aioa),
ano ooclivoly amounls lo an ongagomonl nol lo piico oisciiminalo.
1hoso clausos aio oflon saio lo Lo anli-compolilivo, Locauso lhoy mako
il moio coslly foi nims lo givo piico oiscounls: a nim lhal wanls lo alliacl
now cuslomois musl also ioouco ils piico ano maigins on oxisling cuslomois.
Howovoi, il is nol cloai lhal a MFN clauso woulo facililalo (lacil oi ovoil)
collusion. On lho ono hano, lho clauso makos il haiooi lo oovialo fiom
a collusivo oulcomo (lho aooilional pionl lo Lo gainoo is smalloi Locauso a
piico ioouclion woulo apply lo oxisling cuslomois); on lho olhoi hano, il also
makos il moio coslly lo caiiy oul a punishmonl, foi piocisoly lho samo ioason
(lho punishmonl cannol Lo soloclivo, ano laigol only iivals` cuslomois).
`.nj n..n clausos aio oioionl. 1hoy slalo lhal if lho Luyoi
iocoivos a Lolloi piico ooi fiom nn|: solloi, lho cuiionl solloi will malch
lhal piico. !n lhis caso, lho polonlial foi collusion is highoi, ano lwofolo.
Fiisl, lho clauso woiks as a oovico lo oxchango infoimalion: whonovoi a Luyoi
Salop (1080) was among lho nisl lo poinl oul lho possiLlo anlicompolilivo oocls of
lhoso clausos.
1hoio is a small liloialuio lhal shows lhal if a MFN clauso is aooploo, nims mighl
onjoy highoi piicos ano pionls lhan wilhoul. Soo foi inslanco Coopoi (1080), Holl ano
Schoman (1087) ano Schnilzoi (1004). Lul lhoso aio all moools whoio nims play a nnilo
hoiizon gamo, ano collusion as wo havo oonnoo il woulo nol aiiso. !n olhoi woios, !
know of no moool whoio MFN is founo lo incioaso suslainaLilily of collusion in an innnilo
hoiizon gamo.
A n-:-:|n. clauso givos lho solloi lho possiLilily lo malch lho piico oi fioo lho
cuslomoi fiom lho conliacl.
2
is ooioo a Lolloi piico, il will havo an inconlivo lo iopoil lhal infoimalion
lo lho cuiionl solloi. 1his will mako nims immooialoly awaio of a oovialion
fiom a collusivo oulcomo in lho inousliy, ano wo know lhal limoly ooloclion
of oovialions is a ciucial olomonl foi collusion. Socono, lho clauso iooucos
lho inconlivos lo oovialo in lho nisl placo: if iivals can iolain lhoii cuiionl
cuslomois ouo lo a mooling compolilion clauso, lho piico oocioaso can only
alliacl now Luyois, Lul cannol sloal oxisling Luyois fiom olhoi nims.
Lolh MFN ano mooling-compolilion clausos mighl havo omcioncy oxpla-
nalions, loo. Fiisl, if Luyois aio iisk-avoiso, lhoso clausos mighl havo somo
insuianco piopoilios: a iolioaclivo MFN fiom lho possiLilily lhal only fu-
luio Luyois will Lononl fiom fuluio shocks; a conlompoianoous MFN fiom
lho possiLilily lhal iival Luyois will gol lho samo inpul al lowoi piicos; a
mooling compolilion clauso fiom lho possiLilily lhal a piico ioouclion will
Lo ooioo Ly olhoi sollois (allhough, as poinloo oul aLovo, lho voiy oxislonco
of lho clauso mighl push olhoi sollois nol lo ooi lowoi piicos!). Socono, if
galhoiing infoimalion aLoul piicos is a coslly piocoss, lhoso clausos mighl
spooo up puichaso sinco lhoy insuio lho oaily Luyoi lhal il is nol missing
Lolloi ooals. 1hiio, lhoy inlioouco somo piico oxiLilily in long-loim con-
liacls, Ly onsuiing lhal shocks lhal aocl oulsioo oplions aio inloinalisoo in
lho conliacls.
1hoio is coilainly nooo of moio iosoaich on lho possiLlo anli-compolilivo
oocls of lho MFN ano mooling-compolilion clausos. Ovoiall, howovoi, lho
pio-collusivo impacl of mooling compolilion clausos sooms so sliong lhal anli-
liusl agoncios shoulo pioLaLly pul lhom unooi a poi so piohiLilion iulo.
Uhvdoh sulfh pdlqwhqdqfh Bosalo (oi iolail) piico mainlonanco (BIM)
is a voilical agioomonl whoioLy a manufacluioi imposos lo ils iolailoi(s) lho
piico al which lho gooo shoulo Lo solo in lho nnal maikol. As ! will show in
chaploi 0, lhoio aio a numLoi of ioasons why BIM can Lo omcionl, ano lhoio-
foio pio-compolilivo. Howovoi, BIM mighl also facililalo collusion among
manufacluiois. 1ho inluilion is cloaily convoyoo in lho following quolo:
Wilh a compolilivo iolail maikol ano slaLlo iolail cosl conoilions, man-
ufacluiois coulo assumo agiooo-upon iolail piicos Ly nxing lhoii wholosalo
piicos appiopiialoly. !n ioalily, howovoi, vaiialion ovoi limo in lho cosls of
iolailing woulo loao lo uclualing iolail piicos. !f wholosalo piicos aio nol
Soo Salop (1080: 283-284) ano ospocially Ciockoi ano Lyon (1004).
20
oasily oLsoivoo Ly oach cailol momLoi, cailol slaLilily woulo suoi Locauso
momLois woulo havo oimcully oislinguishing changos in iolail piicos lhal
woio causoo Ly cosl changos fiom choaling on lho cailol. BIM can onhanco
cailol slaLilily Ly oliminaling lho iolail piico vaiialion."
1his sloiy has Loon ioconlly foimalisoo Ly Jullion ano Boy (2001). !n
lhoii papoi, manufacluiois can only soll lhiough local iolailois, ano lhoio
oxisl local shocks on iolail cosl oi oomano. Only lho iolailoi will oLsoivo lho
local shock on lho oomano foi lho piooucl il solls, oi on ils oisliiLulion cosl.
!f lho iolailoi was fioo lo chooso lho piico of lho nnal gooo, lho piico woulo Lo
moio oxiLlo ano woulo iospono lo lho shock. BIM woulo lhoiofoio Lo loss
omcionl Locauso il woulo nol allow foi aojuslmonl lo local conoilions. How-
ovoi, BIM implios lhal piicos woulo Lo unifoimly sol Ly lho manufacluiois,
ano lhoiofoio allows lo Lolloi ioonlify oovialions fiom a collusivo aclion, as
lho quolo aLovo suggosloo. Jullion ano Boy (2001) show lhal whonovoi lho
manufacluiois will nno il oplimal lo aoopl BIM, collusion can Lo suslainoo
ano lho iosull will Lo wolfaio ooliimonlal.
Rwkhu sulflqj sudfwlfhv wkdw lqfuhdvh revhuydelolw| Whon pio-
oucois aio localoo in oioionl googiaphic aioas, ano soivo consumois lhal
aio also spioao oul on lho loiiiloiy, il mighl Lo oimcull foi nims lo com-
paio piicos ano lo oolocl piico changos, sinco piicos vaiy wilh lianspoilalion
cosls. 1ho piaclico of solling &n.]:n n|.:n :.. woulo lhon facililalo
piico oLsoivaLilily among iivals. A nim woulo sol lho samo piico inclusivo
of lianspoilalion cosl ovoiywhoio on lho loiiiloiy, ano inooponoonl of lho
cuslomois` localions. SomoLooy localoo noxl lo a nim`s planl woulo pay
oxaclly lho samo as somoLooy localoo hunoioos of kilomolios away.
A similai oocl is achiovoo Ly hn..nj .n :..nj, a syslom whoioLy
oach piooucoi sols lho nnal piico as lho mill piico al lho common Lasing
poinl (which mighl Lo lho soal of planls of ono oi moio nims oi il mighl
Lo complololy aiLiliaiy) plus lianspoil cosl fiom lhal poinl lo lho nnal
ooslinalion. Again, lhis allows lo incioaso lianspaioncy on lho piooucois`
sioo, in lhal il allows lo Lolloi compaio piicos.
Malhowson ano Winloi (1008: 0).
Whilo oolivoioo piicing ano Lasing poinl piicing havo Loon claimoo lo facililalo collu-
sion foi a long limo, ! am nol awaio of any moool lhal shows iigoiously lhoii pio-collusivo
oocl in a supoigamo conloxl. Howovoi, soo 1hisso ano Vivos (1002: 27-8) foi somo
consiooialions on lhis issuo.
27
517 Dqdo|vlv ri frooxvlrq= frqfoxvlrqv
1ho aLovo analysis has ioonlinoo lho main faclois which aocl lho likolihooo
of collusion. Foi lho puiposo of compolilion policy, lhis shoulo Lo usoful in
lwo iospocls. Fiisl, il inoicalos which faclois an anli-liusl aulhoiily shoulo
pay allonlion lo if il wanloo lo liy ano piovonl (oxplicil oi lacil) collusion.
1hoiofoio, ! shall ioly on lhis analysis in soclion 4, whoio ! focus on lho
logal lioalmonl of collusion. Socono, in a moigoi caso which iaisos oouLls of
cooioinaloo oocls (joinl oominanco), il is impoilanl lo assoss coiioclly lho
iolo playoo Ly oach vaiiaLlo in ooloimining lho likolihooo of fuluio collusion
in lho inousliy. 1ho analysis will oflon Lo voiy complox. Apail fiom lho
casos whoio all faclois poinl lowaios lho samo oiioclion, in gonoial ono shoulo
oxpocl lhal lho analysis of lhoso faclois will loavo somo spaco foi oisciolion,
as il is oimcull lo unooislano how such faclois inloiacl ano wholhoi collusion
is likoly lo aiiso fiom lho moigoi oi nol.
518 Idfwruv wkdw idflolwdwh frooxvlrq-
!n lhis soclion ! nisl foimaliso lho Lasic moool of collusion Lasoo on lho so-
calloo inconlivo consliainls, lhon ! analyso lho faclois lhal facililalo collusion,
iolying on lho slanoaio inousliial oiganisalion loxlLook moool.
51814 Frqglwlrqv iru frooxvlrq wr dulvh-
Consiooi an inousliy whoio : nims play an innnilo hoiizon gamo. Call :
ano \ iospoclivoly lho cuiionl pionls ano lho piosonl oiscounloo valuo of
pionls lhal nim i iocoivos if il choosos a coilain collusivo aclion, givon lhal
all nims also colluoo. Call : lho cuiionl pionl of nim i if il oovialos whon
all olhoi nims lako lho collusivo aclion, ano \ lho piosonl oiscounloo valuo
of nim i`s pionls in lho punishmonl phaso, lhal is in all poiioos lhal follow
lho oovialion poiioo. Donolo wilh c (0, 1) lho oiscounl facloi, assumoo
ioonlical foi all nims in lho inousliy. Nolo lhal lho oiscounl facloi can Lo
oxpiossoo as c = 1,(1 r), whoio r is lho inloiosl ialo Lolwoon lwo poiioos
Soo also lho soclion on joinl oominanco of chaploi .
Soo 1iiolo (1088: ch. 0).
!f nims playoo a iopoaloo gamo wilh a nnilo (ano coilain) hoiizon, lho collusivo
oulcomo woulo novoi Lo allainoo al oquiliLiium. Al lho lasl slago of lho gamo, all nims
woulo play lho Nash oquiliLiium aclion, sinco il is as if lhoy playoo a ono shol gamo. Ly
Lackwaio inouclion, lho Nash oquiliLiium woulo Lo playoo in oach poiioo. Soo chaploi 8.
28
of limo, ano lhoiofoio inoicalos how much is woilh in looay`s loims 1 ouio
lhal ono iocoivos in lho following poiioo. 1hoiofoio, c = 0 coiiosponos lo lho
caso whoio r : ono ouio oainoo in lho fuluio is nol woilh anylhing in
looay`s loims (pooplo aio innniloly impalionl, ano oo nol allach any valuo
lo lho fuluio); al lho olhoi oxliomo, c 1 coiiosponos lo lho caso whoio
r = 0: ono ouio oainoo in any fuluio poiioo has lho samo valuo as ono ouio
oainoo looay (pooplo aio innniloly palionl, ano lhoy allach oqual valuo lo
lho fuluio as lo lho piosonl).
Collusion can aiiso only if oach nim will piofoi lo play lho collusivo aclion
ialhoi lhan oovialing fiom il (ano Lo punishoo). 1hoiofoio, il musl Lo
lhal lho following 1nn. n.:n.n. (!Cs) holo, ono foi oach nim in lho
agioomonl:
: c\ _ : c\ i = 1, .., :. (1)
Cloaily, lho lowoi lho oovialion pionl ono makos iolalivo lo lho collusivo
pionl, ano lho lowoi lho pionl in lho punishmonl phaso, lho moio likoly
collusion will Lo suslainoo. (1ho haishoi lho punishmonl lho sliongoi lho
ooloiionl lo choaling on lho collusivo agioomonl.) 1ho : inconlivo consliainls
can also Lo wiillon as:
: : _ c(\ \ ) i = 1, .., : (2)
which slalos lhal lho gains fiom oovialing oLlainoo looay musl Lo lowoi
lhan lho lossos fiom oovialing fiom lho collusivo slialogy, incuiioo fiom
lomoiiow onwaios. Again, lhis conoilion musl Lo salisnoo foi all nims,
olhoiwiso ono oi moio oovialions will occui ano collusion cannol Lo suslainoo.
Finally, anolhoi way lo oxpioss lho samo inconlivo consliainl is:
c _
: :
\ \
c i = 1, .., : (3)
1his is lho foim in which lho conoilion foi suslainaLilily of collusion is
mosl oflon oxpiossoo. Collusion aiisos al oquiliLiium only if lho oiscounl
facloi is laigo onough, lhal is, if il is laigoi lhan a coilain ciilical oiscounl
facloi", c. Only if nims aio palionl onough will lho collusivo agioomonl Lo
20
suslainoo. 1his is voiy inluilivo: if lho oiscounl facloi is voiy low, nims oo
nol givo impoilanco lo whal will happon in lho fuluio, ano lhoy will piofoi
lo choal so as lo ioap all lho Lononl lhoy can looay. Honco, collusion will
nol aiiso.
Nolo lhal lho conoilions ioonlinoo aLovo holo foi Lolh lacil ano oxplicil
collusion.
51815 Wkh edvlf prgho wr dqdo|vh idflolwdwlqj idfwruv-
Consiooi an inousliy whoio : ioonlical nims play a iopoaloo gamo wilh
innnilo hoiizon (oi, which is oquivalonl, wilh an uncoilain nnal oalo). 1hoy
pioouco lho samo homogonous gooo al lho samo unil cosl c. !n oach poiioo
t of lho gamo, nims sol piicos simullanoously ano non-coopoialivoly. 1hoy
all havo lho samo oiscounl facloi c. (!f ono piofois lo consiooi lho gamo
as ono whoio lho maikol oxisls in lho following poiioo wilh a pioLaLilily
c (0, 1), lako lho oiscounl facloi lo Lo oqual foi all ano laLol il d. Ly
solling c = dc, lho analysis is oquivalonl.) Assumo also lhal lhoio aio
no capacily consliainls, ano lhal oach nim wanls lo maximiso ils piosonl
oiscounloo valuo of pionl.
Finally, spocify nim i`s oomano in lho following way (which is lho usual
ono foi a Loiliano gamo wilh homogonous piooucls). !f all lho nims chaigo
lho samo piico j = j = j, lhon lhoy all shaio oqually oomano, so lhal
1 = 1(j),: ano : = :(j),:, whoio : oonolos nim i`s pionl ano :(j)
is lho aggiogalo pionl whon all nims chaigo piico j. !f nim i sols a piico
j < j , foi any ,= i, lhon 1 = 1(j ) ano : = :(j ). Finally, if lhoio
oxisls a / such lhal nim i sols a piico j j , lhon 1 = 0 ano : = 0.
Consiooi lho following :.jj: .:nj... Al lho inilial poiioo t = 0,
oach nim sols lho collusivo piico j (lhal is, lho piico lhal maximisos joinl
pionls). Al limo t, il sols lho piico j if all nims havo sol j in ovoiy
poiioo Lofoio t. Olhoiwiso, oach nim sols j = c foiovoi. !n woios, oach
nim Lohavos in a collusivo way as long as all olhois oo, Lul if ono of lhom
oovialos fiom lho collusivo aclion, lhon lho punishmonl is liiggoioo ano lhoy
all iovoil lo lho ono-shol Loiliano oquiliLiium foi lho iosl of lho gamo.
Exoiciso BB analysos lho caso of quanlily compolilion.
As ! shall oiscuss Lolow, lhis is nol lho only piico lhal can Lo suslainoo as an oqui-
liLiium of lho gamo, unooi lho samo conoilions on lho oiscounl facloi.
1his is lho haishosl punishmonl: afloi a oovialion occuis, all nims oain zoio pionl
foiovoi: no ciooiLlo punishmonl can Lo haishoi lhan lhal. 1hoiofoio, wilh homogonous
30
Collusion aiisos al oquiliLiium if no nim has an inconlivo lo oovialo fiom
lho Lohavioui inoicaloo Ly lho liiggoi slialogios. Sinco all nims aio ioonlical,
wo jusl nooo lo consiooi lho inconlivo consliainl foi a nim:
:(j )
:
(1 c c c ...) _ :(j ). (4)
1ho LHS givos lho lolal payo a nim iocoivos if il colluoos (i.o., if il
follows lho liiggoi slialogy whon all olhoi nims oo). !n oach poiioo, ano
foi all poiioos, lho nim iocoivos ils shaio 1,: of lho aggiogalo monopoly
pionl. Iionls oainoo al a limo t aio oiscounloo Ly a facloi c . 1ho BHS
givos lho pionl unooi lho oplimal oovialion. !f a nim oocioos lo choal"
whon all olhois colluoo, lho Losl payo is oLlainoo Ly slighlly unooiculling
j . Ly solling j , all consumois will Luy fiom lho oovialing nim, lhal
will lhus oain a pionl :(j ). Foi small onough, lho nim will lhoiofoio
gol pionl voiy closo lo :(j ) in lho poiioo il oovialos. !n lho following
poiioo, howovoi, lho punishmonl occuis as all nims will iovoil lo lho Nash
oquiliLiium foiovoi. 1hoiofoio, lho oovialing nim (liko all olhois) will mako
zoio pionl in all poiioos of lho gamo.
Nolo lhal
c = 1,(1 c). Honco, afior simplo algohra, iho inconiivo

consiraini ahovo hocomos:
c _ 1
1
:
. ()
Ior : = 2 wo havo iho sianoaro ioxihook (ouopoly) caso: collusion is
susiainahlo as long as c _ 1,2: for : , collusion is impossihlo, as a ois-
couni facior highor ihan ono woulo ho nocossary for iho inconiivo consiraini
io holo, whoroas c (0, 1).
Frqfhqwudwlrq Irom iho inoqualiiy ahovo ii is oasy io soo ihai iho largor
iho numhor of nrms : iho iighior iho inconiivo consiraini, ihai is iho loss
likoly ihai collusion will ho susiainoo ai oquilihrium. In a moool whoro nrms
aro symmoiric, ihis is ianiamouni io saying ihai an incroaso in conconiraiion
(1,: hoing an inoox of conconiraiion) makos collusion moro likoly.
prooucis ano prico oocisions, no oihor soi of siraiogios can improvo iho chancos of collusion
upon ihoso iriggor siraiogios.
Lui rocall ihai asymmoirios - ihai mighi incroaso conconiraiion moasuros - hinoors
conconiraiion: soo sociion 2.1.
81
Uhjxodu rughuv idflolwdwh frooxvlrq 1o soo how rogular oroors faciliiaio
collusion, ii is convonioni io show how a |n:j oroor woulo hroak collusion.
Supposo ihai wo havo iho samo gamo as ahovo hui ihai ai t = 0 markoi
oomano ano markoi proni aro rospociivoly /1(j) ano /:(j), wiih / 1. In
iho following porioos, t = 1, 2, ..., oomano ano proni aro hack io iho usual
lovols 1(j) ano :(j). 1his is oquivaloni io saying ihai ihoro is an unusually
largo oroor in ono porioo. 1ho inconiivo consiraini woulo ihon hocomo:
:(j )
:
(/ c c c ...) _ /:(j ). (0)
1his can ho rowriiion: c _ (: 1)/,[1 (: 1)/[. 1ho IC is iho moro
hinoing iho largor is /, as / incroasos iho IHS moro ihan iho LHS. In iho
limii, if / , ihoro woulo ho no valuo of iho oiscouni facior ihai can
saiisfy iho conoiiion for collusion.
Lxorciso BB shows ihai high froquoncy of markoi coniacis also holps col-
lusion.
Ghpdqg hodvwlflw| Sinco oomano olasiiciiy oniors iho IC for collusion
only ihrough iho oxprossions of pronis, :(j ), ano ihoso cancol oui, ihis
variahlo ooos noi soom io havo any ohvious impaci on iho likolihooo of col-
lusion.
Frooxvlrq dqg wkh hyroxwlrq ri ghpdqg Ono of iho nrsi papors io
analyso iho oocis of iho ovoluiion of oomano on iho likolihooo for collusion
is Ioiomhorg ano Salonor (1080). In ihoir moool, oomano can ho oiihor in
a low (d ) or in a high (d ) oomano siaio, ano oach siaio occurs wiih a
prohahiliiy 1,2. 1ho crucial assumpiion in ihoir moool is ihai shocks aro
inooponoonily ano iooniically oisirihuioo: ihoro is no corrolaiion hoiwoon
iooay`s ano iomorrow`s siaio of oomano. Ioiomhorg ano Salonor (1080)
show ihai collusion is loss likoly io holo in iho gooo siaios of oomano: nrms`
iompiaiion io ooviaio is highor ihon. Iull collusion, oonnoo as nrms soiiing
iho monopoly prico in hoih siaios of oomano, can ho achiovoo only for vory
high oiscouni faciors. Ior iniormooiaio oiscouni faciors a loss ihan fully
1o soo ii hoiior, wriio iho collusivo proni as +j c,1+j ,. Jlo IC Locomos: +j
c,1+j ,+4 . c . c . ...,,: +j c,1+j ,, wlicl simplifos lo llo isial conoilion
c 4 4,:, wloio llo oomano finclion ooos nol onloi.
82
collisivo oilcomo can Lo acliovoo: fims sol llo monopoly piico in low slalo
of oomano, ano lowoi piicos in llo ligl slalo of oomano.
Jo inooislano llo moclanism Lolino IolomLoig ano Salonoi`s papoi,
nolo llal in lloii papoi llo occiiionco of a ligl slalo of oomano is oqiiv-
alonl lo a silialion wloio lloio is an inoxpoclooly laigo oiooi looay, wlilo
lomoiiow llo maikol goos oown lo llo isial oomano lovols. Jlo oxpocloo
lovol of oomano in lloii papoi is (d d ),2, so if lloio is a ligl oomano
slock a fim facos a oomano ligloi llan llo oxpocloo: d (d d ),2.
Lvoiylling is llo samo as in llo pioviois soclion wlon llo isial lovol of
oomano is 1 ano lloio is an inoxpocloo laigo oiooi sicl llal oomano in
llo ciiionl poiioo is /1 1.
Jlo inliooiclion of a posilivo coiiolalion among llo oomano slocks
clangos complololy llo sconaiio. If llo Loom is likoly lo conlinio in llo
filiio, llon llo inconlivos lo oovialo aio iooicoo: llo pinislmonl iooicos
piofl in poiioos of ligl oomano. If insloao a ooclino in oomano is oxpocloo
lo Lo poisislonl, llon collision is loss likoly lo Lo sislainaLlo, as ono woilo
piofoi lo oovialo now llal oomano is ligl, sinco llo cosl of llo pinislmonl
is lowoi lomoiiow llal oomano is lowoi. Jlo following oxamplo slows lloso
oocls.
Al limo t = 0, oomano ano piofl aio givon Ly 1(j) ano :(j). Al limo t,
lloy aio givon iospoclivoly Ly / 1(j) ano / :(j), will / 0. Jlo inconlivo
consliainl can llon Lo iowiillon:
:(j )
:
(1 c/ c / c / ...) :(j ), (7)
oi: c (1,/)(1 1,:). Wo now lavo lo oislingiisl lwo casos.
(1) (Conliniois) oomano giowll. If / 1, il is oasy lo soo llal collision
is oasioi (llo IC is iolaxoo): llo oxpocloo iiso in filiio oomano incioasos llo
filiio cosl of a oovialion.
(2) (Conliniois) oomano ooclino. If / < 1, collision is loss likoly lo Lo
sislainoo (llo IC is ligllonoo): llo lomplalion lo oovialo is sliongoi Locaiso
llo filiio cosl of oovialing, llal is llo pinislmonl, is lowoi.
In llis sonso, lloio aio piico wais oiiing Looms". Howovoi, nolo llal llo aclial
(lowoi llan monopoly) piico sol in llo ligl slalo of oomano migll Lo ligloi llan llo
monopoly piico sol in llo lowoi slalo of oomano. Jlo loim piico wai jisl moans llal
fims aio nol aLlo lo sol llo filly collisivo piico in llo ligl oomano slalo.
88
In llo ioal woilo oomano is likoly lo iclialo in cyclos, will poiioos of
giowll followoo Ly poiioos of ooclino. Howovoi, Haiiinglon ano Halliwangoi
(1001)`s iosills on collision ovoi llo cyclo aio consislonl will llo picliio
givon Ly llis simploi moool: collision is moio likoly lo Lioak wlon oomano
is falling.
V|pphwu| khosv frooxvlrq Consioor a markoi whoro iwo nrms 1 ano 2
oporaio. Iirm 1 has a markoi sharo \ ano nrm 2 has a markoi sharo 1 \.
Assumo \ 1,2: nrm 1 is largo" ano nrm 2 is small". Iirms havo iho
samo iochnology, summarisoo hy a consiani marginal cosi c, ano iho samo
oiscouni facior c. Iirms play iho prico gamo for an innniio numhor of iimos.
Donoio iho fully collusivo prico hy j , ano consioor simplo iriggor siraiogios
wiih Nash rovorsal forovor. 1ho inconiivo consiraini for nrm i = 1, 2 is givon
hy:
(j c) Q(j )
1 c
(j c) Q(j ) _ 0, (8)
whoro = \, ano = 1 \ aro rospociivoly nrm 1 ano 2`s markoi
sharos. 1ho IC of iho iwo nrms in markoi aro ihoroforo givon hy 1C :
\,(1 c) 1 _ 0, ano 1C : (1 \),(1 c) 1 _ 0. 1ho formor can
ho simplinoo as c _ 1 \ ano iho laiior as c _ \. Cloarly, iho hinoing
consiraini for collusion in markoi is c _ \, ihai of iho small nrm. 1ho
iniuiiion is simplo: along iho collusivo paih, iho largo nrm has a largor sharo
of iho markoi, whilo hy ooviaiing oach nrm ohiains (for ono porioo) all iho
markoi for iisolf. Cloarly, iho inconiivo io ooviaio is highor for iho small nrm,
which can capiuro a highor aooiiional sharo hy oocroasing pricos. Collusion
is limiioo hy iho oxioni io which iho markoi sharos aro asymmoiric. In iho
symmoiric caso, whoro nrms havo iho samo markoi sharo, wo fall hack io iho
sianoaro conoiiion for collusion c _ 1,2. 1ho highor asymmoiry iho moro
siringoni iho IC of iho smallosi nrm.
Lui soo Iahra (2001h) for iho caso of capaciiy consirainis.
1ho assumpiion ihai markoi sharos aro oxogonously givon is simplisiic: iypically,
markoi sharos shoulo ho ooiorminoo onoogonously. Howovor, ono coulo iniorproi ihis
oxamplo as iho rooucoo form of a richor gamo whoro nrms oior in somo assois - capaciiios
as in Compio oi al. (2002) ano Vasconcolos (2001), or numhor of hranos as in K hn ano
Moiia (1008) - ano markoi sharos will mirror iho oisirihuiion of ihoso assois.
84
Pxowl0pdunhw frqwdfwv Consioor now anoihor markoi 1 wiih iooniical
foaiuros as markoi ahovo, hui whoro iho samo iwo nrms havo rovorsoo
markoi posiiions. Iirm 1 has a markoi sharo \ (rospociivoly 1\) in markoi
(rosp. 1) ano nrm 2 has a markoi sharo 1\ (rosp. \) in markoi (rosp.
1), wiih \ 1,2, so ihai nrm 1 is largo in markoi hui small in markoi 1,
ano vico vorsa for nrm 2.
Consioor iho ICs for collusion, nrsi for oach markoi in isolaiion ano ihon
for hoih markois iogoihor. Wo shall soo ihai mulii-markoi coniacis holp
faciliiaio collusion in ihis oxamplo.
1ho IC for nrm i = 1, 2 in markoi = , 1 :..J:J .: ..|n.: is:
(j c) Q(j )
1 c
(j c) Q(j ) _ 0, (0)
whoro is iho markoi sharo holo hy nrm i = 1, 2 in markoi = , 1.
Wo havo soon ihai iho ICs in markoi aro givon hy 1C : c _ 1 \, ano
1C : c _ \. In markoi 1 iho iwo ICs aro 1C : (1 \),(1 c) 1 _ 0 ano
1C : \,(1 c) 1 _ 0, ihai roouco io c _ \ ano c _ 1 \. Iirm 1 is iho
small nrm in markoi 1 so iis IC, c _ \ , is iho hinoing ono.
Wo can now concluoo ihai hy looking ai iho iwo markois .: ..|n.: (or,
oquivalonily, hy assuming ihai nrms 1 ano 2 oporaiing in iho iwo markois
aro oioroni) collusion will ariso in oach markoi if c _ \, whoro \ 1,2.
`&|.-nn:| :n.
So far, wo havo assumoo ihai oach nrm iakos iis oocision ahoui collusion
in oach markoi soparaioly. Howovor, ihis is noi corroci: oach nrm i = 1, 2 is
solling in iwo markois, ano ii will ihoroforo iako inio accouni hoih markois
whon iaking iis oocisions (rocall ihai if a nrm ooviaios ii will ooviaio in hoih
markois, sinco afior a ooviaiion collusion woulo ho hrokon in hoih markois),
so iis IC is:
(j c) Q(j )
1 c

(j c) Q(j )
1 c
2 (j c) Q(j ) _ 0, (10)
Loih inconiivo consirainis simplify io \1\ _ 2(1c), whonco c _ 1,2.
In iho caso whoro nrms 1 ano 2 woro oporaiing in ono markoi only, collusion
woulo ariso if c _ \. Mulii-markoi coniacis holp collusion, sinco iho criiical
oiscouni facior is lowor: 1,2 < \.
8
1hoso rosulis follow from iho faci ihai unoor mulii-markoi coniacis nrms
pool ihoir inconiivo consirainis ano can uso slacknoss of iho consiraini in
ono markoi io onforco moro collusion in iho oihor. Moro iniuiiivoly, in iho
oxamplo prosonioo horo mulii-markoi coniacis rosioro symmoiry in markois
which aro asymmoiric. Unoor mulii-markoi coniacis, collusion arisos if c _
1,2, which is procisoly iho samo conoiiion facoo hy symmoiric nrms in a
givon (iakon in isolaiion) markoi.
51816 D sureohp zlwk vxshujdphv= pxowlsoh htxloleuld-
Ono prohlom wiih gamos whoro nrms play ovor an innniio horizon is ihai ihoy
aomii a coniinuum of oquilihrium soluiions. Consioor for insianco procisoly
iho samo hasic moool as iho ono analysoo in iho provious sociion 2. hui
assumo ihai nrms havo iho following iriggor siraiogios. Lach nrm sois a prico
j [c, j [, whoro c is iho marginal cosi ano j iho joini proni maximisaiion
prico, ai t = 0. Ii sois j ai porioo t if all nrms havo soi j in ovory porioo
hoforo t: oihorwiso, ii sois j = c forovor. 1hoso siraiogios, ihai oior from
ihoso siuoioo in iho provious sociion only in ihai ihoso rosiricioo iho collusivo
prico io ho j = j , roprosoni an oquilihrium of iho gamo if iho following IC
holos:
:(j)
:
(1 c c c ...) _ :(j). (11)
Ii is siraighiforwaro io rowriio iho IC ano chock ii amounis io c _ 11,:.
1horoforo, iho samo valuo of iho oiscouni facior allows for a coniinuum of
oquilihrium soluiions io holo: any prico hoiwoon iho Lorirano prico ano iho
monopoly prico can ho susiainoo ai oquilihrium!
1his rosuli is noi oniiroly saiisfaciory, sinco a numhor of ouicomos aro
possihlo, ano a priori ii cannoi ho saio which onos aro moro likoly ihan oihors.
Of courso, iho oxamplo givon horo is oxiromo ano vory simplinoo for illusiraiivo pur-
posos. Soo Lornhoim ano Whinsion`s papor for moro gonoral oxamplos.
Spagnolo (1000) assumos nrms havo a siricily concavo ohjociivo funciion (for insianco,
insioao of maximising iho sum of pronis . , lloy woilo maximiso oq+4 . . ,)
ano fnos llal millimaikol conlacls facililalo collision also inooi maikol symmoliy.
Jlo iosill llal llo ciilical oiscoinl facloi is inooponoonl of llo collisivo piico is an
ailofacl of llo Loiliano moool. In gonoial, ono sloilo oxpocl llal llo lowoi llo collisivo
piico llo oasioi lo sislain collision (llal is, llo lowoi llo ciilical oiscoinl facloi). Jlis
is slowoo in oxoiciso 11.
80
Moio woik is nooooo lo inooislano if somo pailicilai oqiiliLiia aio moio
likoly lo Lo solocloo. In liin, llis calls foi moio llooiolical on llo iofnomonls
of llo oqiiliLiiim in sipoigamos, Lil also foi oxpoiimonlal ovioonco wlicl
lolps inooislano low agonls in llo ioal woilo aio cooioinaling on coilain
oqiiliLiia ialloi llan ollois. Soo also soclion 2.2.1 foi a oiscission on llo
piaclical implicalions of llis milliplicily of oqiiliLiia.
3 Advancod natorIaI**
3.1 CrodILIIIty oI punIsnnont and optInaI ponaI codos**
I lavo so fai nol oiscissoo llo ciooiLilily of pinislmonls onco a oovialion
lakos placo, Lil llis is a koy issio foi Loll lacil ano oxplicil collision. If
fims woio nol Lo willing lo caiiy oil llo pinislmonl, llal is onloiing a plaso
of low piicos, onco a oovialion is aclially oLsoivoo, llon llo llioal of llo
pinislmonl woilo nol oxisl, ano collision coilo nol Lo sislainoo. Ioimally,
llis implios llal foi collision lo Lo sislainoo olloi inconlivo consliainls
(ono foi oacl fim) sloilo lolo, llal is llal a fim piofois lo ongago in llo
pinislmonl aclion (i.o., iolalialo) ialloi llan lo oovialo fiom il (i.o., nol
iolalialo).
Jloio aio (al loasl) lwo oioionl loclnical solilions foi llo ciooiLilily
of llo pinislmonl. In liiggoi slialogios" moools, afloi a oovialion fiom
llo collisivo aclion is oLsoivoo llo pinislmonl consisls in all fims iovoiling
lo llo ono-slol Nasl oqiiliLiiim foiovoi. Cloaily, loio pailicipaling in llo
pinislmonl is ialional: givon llal all olloi fims play llo Nasl oqiiliLiiim
aclions, a fim las no inconlivo lo oovialo fiom ils own Nasl oqiiliLiiim ac-
lion. Accoioingly, I lavo so fai nol oxplicilly inliooicoo inconlivo consliainls
along llo pinislmonl pall, Locaiso lloy aio always salisfoo.
In anolloi class of moools, oio lo ALioi (1080, 1088) ano ALioi, Ioaico
ano Slacclolli (1080), fims caiiy oil oplimal ponal cooos llal involvo ..|
n:J n:: slialogios. ALioi nolos llal playing Nasl oqiiliLiiim foiovoi is
nol nocossaiily llo oplimal pinislmonl, wlonovoi \ is posilivo. If a laisloi
pinislmonl can Lo imposoo, llis will impiovo llo likolilooo of collision.
ALioi`s pioposoo pinislmonl involvos a voiy sliong pinislmonl (llo
Nolo llal playing llo Loiliano oqiiliLiiim foiovoi is llo oplimal ponal cooo wlon
fims clooso piicos ano lloy lavo lomogonois piooicls, sinco il givos fims zoio payo
along llo pinislmonl pall, \ @ 3.
87
..|) immooialoly afloi a oovialion, iosilling in fims making nogalivo piof-
ils oiiing llo pinislmonl poiioo. Jo mako pailicipalion in sicl a sliong
maikol pinislmonl ciooiLlo, llo ponal cooo also oslaLlislos llal fims will
immooialoly iovoil lo llo collisivo aclions if lloy oo lako pail in llo pinisl-
monl (llo n::), wloioas llo pinislmonl woilo conlinio inloss all fims
lako pail in il. If llo piosonl oiscoinloo valio of piofl afloi a oovialion is
zoio (\ = 0), llo sislainaLilily of collision will Lo maximal, sinco a laisloi
pinislmonl cannol Lo Liill (a fim woilo novoi Lo willing lo lako pail in
a pinislmonl wlicl loavos il will a nogalivo piosonl oiscoinloo valio of
piofls, Locaiso il coilo Lo Lolloi o piooicing zoio foiovoi). Jlo following
soclion illislialos a simplo moool will symmoliic lwo-plaso pinislmonls,
ano slows low lloy can impiovo ipon Nasl iovoisal liiggoi slialogios.
An oxanpIo oI optInaI punIsnnonts Consiooi : fims piooicing lo-
mogonois gooos ano cloosing j&n:... in oacl poiioo foi an infnilo nimLoi
of poiioos. Domano in llo inoisliy is givon Ly j = max0, 1 Q}, Q Loing
llo sim of inoivioial oilpils. All fims in llo inoisliy aio ioonlical: lloy
lavo llo samo conslanl maiginal cosls c < 1, ano llo samo oiscoinl facloi
c.
asn rovorsaI trIggor stratogIos Lol mo fisl givo llo conoilions foi
collision inooi liiggoi slialogios will Nasl iovoisal. Lxoiciso ?? slows llal
in llis inoisliy inoivioial oilpils ano piofls inooi collision aio givon Ly
= (1 c),(2:) ano : = (1 c) ,(4:): iho opiimal ouipuis ano pronis
a nrm can mako hy ooviaiing unoor collusion aro givon hy = (: 1)(1
c),(4:), ano : = (1c) (:1) ,(16: ): nnally, iho Cournoi quaniiiios ano
pronis aro givon hy: = (1 c),(: 1) ano : = (1 c) ,(: 1) .
1ho ICs for collusion aro givon hy : ,(1 c) _ : c: ,(1 c), which
afior suhsiiiuiion ano roarranging hocomos:
c _
(1 :)
1 6: :
c . (12)
Rswlpdo sxqlvkphqw vwudwhjlhv Unoor iho ahovo iriggor siraiogios
wiih Nash rovorsal forovor, nrms mako posiiivo pronis along iho punishmoni
1horo aro iwo oioroncos hoiwoon my iroaimoni horo ano Ahrou (1080), who also
analysos iho Cournoi moool. Iirsi, ho focusos only on iho conoiiions unoor which iho
88
paih: \ = c: ,(1 c) 0. Ahrou (1080) sirossos ihai hy sirongihoning
iho punishmoni, ihai is rooucing iho prosoni oiscounioo valuo of iho pronis
maoo afior iho ooviaiion, call ii \ , collusion mighi ho achiovoo unoor miloor
conoiiions on iho oiscouni facior. Ho focusos on ..| n:J n:: (or iwo-
phasos) siraiogios, ano shows conoiiions unoor which ihoro oxisi a symmoiric
opiimal punishmoni whoro oach nrm prooucos iho samo quaniiiy ano oarns
nogaiivo proni : for iho porioo immooiaioly afior iho ooviaiion, io ihon
rovori io iho collusivo quaniiiy in iho following porioo: \ ( ) = : ( )
c: ,(1 c). 1ho punishmoni is opiimal in iho sonso ihai iho quaniiiy is
choson in such a way ihai \ = 0, which is iho worsi possihlo punishmoni
ihai nrms can rosori io.
Of courso, iho punishmoni musi ho crooihlo, ihai is nrms shoulo noi havo
an inconiivo io ooviaio from iho punishmoni paih. Donoiing wiih : ( )
iho proni maoo hy ooviaiing from iho punishmoni paih (ihai is, iho ono-shoi
gamo hosi rosponso whon all oihor nrms soi quaniiiy ), ii musi ho: \ ( ) _
: ( )c\ ( ), or : ( )c: ,(1c) _ : ( )c (: ( ) c: ,(1 c)).
(Noio ihai afior a ooviaiion iho punishmoni woulo ho rosiarioo.)
1ho conoiiions for collusion aro ihon ooiorminoo joinily hy a pair of ICs
(sinco iho nrms aro symmoiric ano wo focus on symmoiric opiimal punish-
monis, iho iwo ICs aro iooniical for all iho nrms), which slighily roarrangoo
aro:
c _
: :
: : ( )
c ( ) (ICcollusion) (18)
c _
: ( ) : ( )
: : ( )
c ( ) (ICpunishmoni). (14)
Iirsi of all, noio ihai iho iwo ICs oopono on iho harshnoss of iho pun-
ishmonis. 1ho harshor iho punishmoni (iho highor iho ouipui ano iho
lowor : ( ) afior iho ooviaiion) iho moro likoly ihai iho IC for collusion is
saiisnoo: dc ( ),d < 0. Howovor, a harshor punishmoni also iighions iho
IC along iho punishmoni paih: coioris parihus, iho punishmoni is susiainahlo
opiimal punishmoni is susiainoo (hui \ is noi nocossarily iho hosi nrms can oo, as
shown holow). Socono, ho ooos noi rosirici io iho highosi collusivo payo as I oo. As
a rosuli, ho nnos opiimal symmoiric punishmonis hui for varying lovols of collusion.
Noio also ihai iho punishmonis aro hisiory-inooponooni": iho punishmoni schomo
is iho samo whon a nrm ooviaios from iho collusivo paih ano whon ii ooviaios from iho
punishmoni paih.
80
only for a highor oiscouni facior. Inoooo, iho highor iho ouipui iho lowor
: ( ): furihor, ono can chock ihai iho highor iho lowor : ( ) (wo aro
ooaling wiih siraiogic suhsiiiuios: iho highor iho aggrogaio ouipui prooucoo
hy iho (: 1) rivals, iho lowor iho quaniiiy iho :-nrm wanis io proouco ai
iis hosi rosponso): dc ( ),d 0.
Moro spocincally, in iho linoar oomano Cournoi oxamplo, wo havo:
: ( ) =
_
(1 : c) , for < <
c , for _ .
(1)
Noio nrsi ihai I focus on (1c),(:1), which is iho Cournoi-Nash
ouipui: socono, ihai iho punishmoni proni funciion changos whon _ 1,:,
hocauso iho markoi prico hocomos zoro (I assumo j is non-nogaiivo).
: ( ) =
_
(1 (: 1) c) ,4, for < <
0, for _ .
(10)
Noio ihai : = 0 if a nrm cannoi mako posiiivo pronis ovon if ii rooucos
unilaiorally iis ouipui givon all iho oihor nrms soi ouipui . In iho prosoni
soiiing, ihis iranslaios inio iho conoiiion j = 1 (: 1) _ c, or _
(1 c),(: 1). (Only in ihis caso is iho punishmoni opiimal, in iho sonso
ihai \ = 0. 1o soo ihis, noio ihai iho harshosi punishmoni is crooihlo only
if 0 = \ _ : c\ which implios : = 0.)
Accoroingly, ono can now suhsiiiuio ano wriio iho ICs as funciions of :
c ( ) =
_
, for < <
, for _ ,
(17)
ano:
c ( ) =
_
_
, for < <
, for _ <
, for _ .
(18)
Iiguro 4.1 illusiraios iho prohlom: hy making a sirongor punishmoni (ihai
is, hy incroasing ), ono rolaxos iho IC on iho collusivo paih, hui iighions
40
iho IC on iho punishmoni paih). 1ho poini of iniorsociion hoiwoon iho iwo
ICs ooiorminos iho ouipui lovol which mosi rolaxos iho conoiiions for hoih
collusivo ano punishmoni paih io ho susiainahlo (ihai is, iho lowosi possihlo
c).
INSLI1 Iiguro 4.1 Inconiivo consirainis along collusivo ano punishmoni
paihs.
Ii iurns oui ihai ihoro aro iwo possihlo poinis of iniorsociions of ihoso
iwo curvos. In Iiguro 4.1(a) iho ouipui lovol ihai makos collusion moro
likoly is lowor ihan (1 c),(: 1), ihai is, \ = 0 cannoi ho onforcoo. In
Iiguro 4.1(h), insioao, is such ihai \ = 0.
Noio ihai only in iho socono caso is such ihai \ = 0. In oihor woros,
iho hosi possihlo siraiogios (in iho sonso ihai ihoy allow nrms io onforco col-
lusion for iho largosi possihlo rango of oiscouni faciors) aro noi nocossarily
ihoso which roquiro iho sirongosi possihlo punishmoni \ = 0. 1ho harshor
iho punishmoni, iho highor iho oiscouni facior nooooo for making iho roiurn
io collusion oosirahlo onough io pariicipaio in iho punishmoni iisolf. Im-
posing \ = 0 mighi mako iho IC along iho punishmoni paih ovon iighior
ihan iho IC along iho collusivo paih. 1his is procisoly whai happons whon
a small numhor of nrms oporaios in iho inousiry, as in nguro 1a: soiiing a
punishmoni _ (1 c),(: 1) (which implios \ = 0) roquiros ioo high
a oiscouni facior for iho punishmoni io ho onforcoo. Honco, hoiior io rosori
io a miloor punishmoni unoor which \ 0.
Ono can ihon chock ihai iho lowosi possihlo criiical oiscouni facior c for
which iho highosi lovol of collusion can ho susiainoo is givon hy:
c =
_
, for : < 3 2
_
2
, for : _ 3 2
_
2.
(10)
INSLI1 Iiguro 4.2 Conoiiions for collusion: Nash rovorsal (c ) v.
iwo-phaso (c) punishmoni siraiogios.
Iiguro 4.1 is orawn for c @ 4,5 ano (a) : @ 7; (L) : @ ;. Ioimally, in Iigiio 4.1(a)
h q @ +6:4,+4c,,^5:+:.4,` h q . In Iigiio 4.1(L), h q @ +4.
s
:, +4c,,^7:
s
:` h q .
Il liins oil llal h q < +4 c,,+:4, foi : < 6 .5
s
5 * 8.;, wloioas h q +4 c,,+: 4,
foi : 6 .5
s
5. Iocall llal : is llo nimLoi of fims, a oisciolo vaiiaLlo wlicl is lioaloo
as conliniois in llo loxl jisl foi simplicily.
41
Iigiio 4.2 illislialos llo ciilical oiscoinl c oLlainoo inooi lloso caiiol
ano slick slialogios, ano compaios il will llo ciilical oiscoinl facloi c
oLlainoo inooi Nasl iovoisal slialogios.
615 Fduwhov dqg uhqhjrwldwlrq--
As wo lavo saio, a collisivo oilcomo can Lo ioacloo willoil aclial moolings
ovoi laking placo. Lil sipposo now llal wo consiooi oxplicil agioomonls
(ialloi llan lacil collision), will fims mooling lo cooioinalo on piicos ano
pinislmonl slialogios. McCilcloon (1007) slows llal llo possiLilily llal
fims mool again ano io-nogolialo llo agioomonl migll aclially Lioak oown
llo cailol, a iosill wlicl las pioLaLly limiloo piaclical applicalions Lil is
novoilloloss voiy inloiosling ano oosoivos allonlion.
Consiooi again oii simplo moool of collision will lwo lomogonois pioo-
icls fims cloosing :.. in ovoiy poiioo ano iovoiling lo llo ono-slol Nasl
oqiiliLiiim afloi a oovialion. Jlis moool calls foi Loll fims lo lavo zoio
piofl foiovoi along llo pinislmonl pall. Inoooo, if lloy cannol mool ano
ionogolialo lloii Lolavioii (oi if foi somo ioasons ionogolialion cosls woio
pioliLilivoly ligl), noilloi fim woilo lavo an inconlivo lo oovialo fiom llo
pinislmonl pall: givon llal llo iival claigos al maiginal cosl, a fim cannol
oLlain ligloi piofls Ly aoopling a oioionl piico.
Lil consiooi now llo possiLilily llal llo lwo fims coilo mool again
(ano assimo llal il is coslloss foi llom lo oo so, foi llo limo Loing) ano
ionogolialo lloii slialogios. Afloi a oovialion las lakon placo, lloy woilo
lavo an inconlivo lo agioo nol lo pinisl oacl olloi ano ioslail collioing
insloao. Inoooo, il is in lloii milial inloiosl lo liy ano avoio a silialion
wloio lloy woilo Loll mako zoio piofls foiovoi. In olloi woios, llo on-
foicomonl of sicl a pinislmonl woilo nol Lo ionogolialion-pioof. Jlis las
a sliong implicalion on llo oxislonco of collision: sinco fims anlicipalo llal
llo pinislmonl woilo Lo ionogolialoo ano lloiofoio woilo nol lako placo,
lloio is nolling llal will piovonl llom fiom cloaling in llo fisl placo. Only
if fims coilo commil nol lo mool again oi lloy foino il voiy coslly lo mool,
woilo lloy Lo aLlo lo sislain collision al oqiiliLiiim.
Jlis conclision slill lolos if ono consioois a oioionl sol of slialogios llan
simplo giim slialogios, foi inslanco ono wloio asymmoliic pinislmonls oxisl
Nolo again llal llis aigimonl ooos nol apply lo lacil collision, wloio no mooling
ovoi lakos placo.
42
ano wloio llo pinislmonl lasls foi a fnilo nimLoi of poiioos. Il makos
sonso lo consiooi asymmoliic lioalmonl of playois Locaiso ono way lo Lioak
llo inconlivo lo ionogolialo is lo givo oioionl payos lo llo fims along llo
pinislmonl pall: llis way, ono migll wanl lo ionogolialo wlilo llo olloi
ooos nol. In pailicilai, llo non-oovianl misl gol al loasl as micl as il woilo
oLlain Ly accopling lo ionogolialo. Jloiofoio, in llis gamo, in oiooi nol lo
Lo inoicoo lo foigivo llo oovianl, il sloilo gol al loasl :(j ),2.
Consiooi lloiofoio a sol of slialogios wlicl, foi 1 poiioos afloi a oovi-
alion, calls foi llo non-oovianl ano llo oovianl fim lo claigo iospoclivoly
piicos j ano j j , wloio j is closon so llal llo non-oovianl gols al loasl
:(j ),2. Afloi 1 poiioos, fims woilo iovoil lo monopoly piicing. Of
coiiso, 1 sloilo Lo closon appiopiialoly, so as lo givo a low onoigl payo
along llo pinislmonl llal a fim is nol lomploo lo oovialo. In olloi woios,
1 sloilo salisfy llo inconlivo consliainl along llo collisivo pall:
:(j )
2(1 c)
_ :(j )
c :(j )
2(1 c)
, (20)
wlicl coilo Lo iowiillon c(2 c ) _ 1.
Howovoi, foi collision lo lolo llo oovianl misl Lo inoicoo lo pinisl
ilsolf. Jlo inconlivo consliainl along llo pinislmonl pall oosciiLoo Ly llo
slialogios aLovo woilo Lo:
c :(j )
2(1 c)
_
:(j )
2

c :(j )
2(1 c)
. (21)
Only oqiiliLiia llal iso fnilo pinislmonls aio ionogolialion-pioof.
Jlo non-oovianl fim migll also Lo iowaiooo ano gol a piofl as ligl as llo monopoly
piofl along llo pinislmonl pall.
Nolo llal llis woilo nol Lo an oplimal pinislmonl slialogy, sinco il woilo loavo llo
oovianl will a sliiclly posilivo payo along llo pinislmonl pall, inliko llo giim slialogy.
Howovoi, an oplimal pinislmonl slialogy llal givos a zoio piosonl oiscoinloo valio of
piofls lo llo oovianl along llo pinislmonl pall woilo nol oliminalo llo inconlivos of llo
non-oovianl lo ionogolialo. Consiooi foi inslanco a slialogy wlicl calls foi llo oovianl
fim lo mako nogalivo piofls foi ono oi moio poiioos. Jlis ioqiiios llo oovianl lo sipply
all oomano Lolow maiginal cosl foi ono oi moio poiioos. Lil llon llo non-oovianl fim
woilo nol Lo aLlo lo mako posilivo piofls oiiing llo pinislmonl poiioo (oilloi il also
sipplios Lolow cosl oi il ooos nol soll anylling). Honco, il woilo lavo an inconlivo lo
ionogolialo ano ioslail a collisivo plaso.
48
Jlo LHS oonolos llo payo llo oovianl woilo gol if il accopls lo gol zoio
payo foi 1 poiioos. Jlo IHS oonolos llo payo il woilo gol if il oovialoo
ano claigo a piico sligllly lowoi llan j , lloioLy golling all oomano ano
a piofl sligllly lowoi llan :(j ),2 in llo oovialion (fiom llo pinislmonl
pall) poiioo, Lil llon llo pinislmonl woilo Lo ioslailoo llo noxl poiioo.
Il is immooialo, lowovoi, lo clock llal llo pioviois conoilion can Lo
iowiillon as c _ 1, llal is falso. Jloiofoio, an alloinalivo sol of collisivo
slialogios wlicl call foi asymmoliic payos oiiing llo pinislmonl cannol
Lo sislainoo al oqiiliLiiim. Honco, wo aio lofl will llo conclision llal a
collisivo oilcomo cannol Lo sislainoo al oqiiliLiiim wlon ionogolialion is
allowoo.
Frvwo| uhqhjrwldwlrq McCilcloon (1007) isos llis fiamowoik lo ai-
gio llal inloimooialo fnos migll ovon Lo coinloipiooiclivo ano piomolo col-
lision. Sipposo llal ovoiy mooling onlails a pioLaLilily / of Loing foino oil,
loaoing llo fim lo iocoivo a fno 1. Jlo oxpocloo cosl of a mooling, wlolloi
llo fisl ono oi a ionogolialion ono, is lloiofoio /1. Jlo Lonofl of llo ini-
lial mooling is givon Ly llo oioionco Lolwoon llo slioam of collisivo piofls
ano llo ono-slol oqiiliLiiim payo (oqialling zoio): :(j ), (2(1 c)). Jlis
mooling woilo lloiofoio lako placo if /1 < :(j ), (2(1 c)).
Consiooi now llo inconlivo lo lavo anolloi mooling, afloi a oovialion
lakos placo. Unooi giim slialogios llal involvo zoio piofl foiovoi, llo ox-
pocloo gain fiom ionogolialion woilo again Lo :(j ), (2(1 c)). Jloiofoio,
a ionogolialion mooling woilo lako placo again if /1 < :(j ), (2(1 c)).
Honco, collision coilo novoi Lo sislainoo, sinco ionogolialion woilo always
lako placo. Il makos sonso, lloiofoio, lo focis on slialogios llal iooico llo
Lonofl fiom ionogolialion afloi a oovialion, llal is, slialogios llal iooico
llo cosl of llo pinislmonl. A slialogy wlicl calls foi a pinislmonl lo lako
placo llo minimim possiLlo nimLoi of poiioos 1, ialloi llan foiovoi, filfls
llis lask. Sicl nimLoi 1 is llo ono llal salisfos llo inconlivo consliainl
along llo collisivo pall (20), c(2 c ) _ 1, will oqialily.
I am assiming llal llo non-oovianl fim gols +j ,,5 along llo pinislmonl pall. Il
coilo gol any piofl ip lo +j , (in wlicl caso, llo oovialion fiom llo pinislmonl pall
woilo givo a piofl +j , loo) willoil clanging llo conclision llal collision cannol Lo
sislainoo.
Nolo llal llo samo iosill lolos foi any possiLlo collisivo piico (jisl ioplaco j will
any j c in llo oiscission aLovo lo voiify il). Givon llal fims aio oiganisoo in a cailol,
lowovoi, il makos sonso lo focis on llo joinlly piofl maximising piico j .
44
Accoioingly, llo cosl of llo pinislmonl oi, wlicl is oqiivalonl, llo Lono-
fl fiom ionogolialing, amoinls lo foiogoing llo collisivo piofls :(j ),2 foi
1 poiioos:
c
:(j )
2
=
:(j )
2
_
1 c
1 c
_
. (22)
1horoforo, a ronogoiiaiion mooiing woulo iako placo afior iho punishmoni
if /1 < :(j )(1c ), (2(1 c)). Oihorwiso, ronogoiiaiion has no hiio: nrms
woulo profor io go ihrough iho punishmoni ano collusion will ariso.
Wo can ihon summariso iho analysis as follows, accoroing io iho oxpocioo
cosi of a mooiing, /1.
1. /1 _ :(j ), (2(1 c)). In ihis caso, oach mooiing is vory cosily ho-
causo ii woulo involvo a high oxpocioo nno: nrms woulo novor siari io
colluoo in iho nrsi placo: no collusion arisos ai oquilihrium.
2. :(j ), (2(1 c)) /1 _ :(j )(1c ), (2(1 c)). 1ho nnos ano iho
prohahiliiy of hoing founo oui aro small onough for iho iniiial mooiing
io iako placo, hui high onough for a suhsoquoni ronogoiiaiion mooiing
noi io iako placo. 1his loaos io iho worsi ouicomo, whoro collusion
arisos ai oquilihrium sinco iho punishmoni will noi ho ronogoiiaioo.
8. :(j )(1 c ), (2(1 c)) /1. Horo iho oxpocioo cosi of a mooi-
ing is so small ihai ronogoiiaiion will iako placo, hringing iho iniiial
agroomoni io collapso: no collusion can ho susiainoo ai oquilihrium.
Glvfxvvlrq McCuichoon`s analysis is provocaiivo, hui raihor ihan iis
policy implicaiions (if anyihing, I woulo siross ihai laws shoulo mako suro
ihai nnos aro largo onough, sinco no nnos mighi ho hoiior ihan small onos).
Iis implicaiions aro also limiioo hy iho faci ihai iho moool applios only io
cariols, woro ihoro aro oxplicii mooiing, ano noi io iacii collusion, whoro no
mooiing iakos placo.
I ihink ihai ii unoorlinos iho imporianco of hargaining ano nogoiiaiion
among poioniial colluoors. Howovor, ihis work omphasisos iho nogaiivo (from
Somo of iho assumpiions sho makos aro quosiionahlo ioo: iho iniiial mooiing - which
has io oonno all iho collusivo siraiogios - mighi woll ho moro cosily ihan iho following
onos.
4
iho poini of viow of prospociivo cariol momhors) aspocis ihai ronogoiiaiion
of a collusivo agroomoni mighi havo. Yoi, in oioroni conioxis, such furihor
mooiings mighi havo a oioroni rolo. Ior insianco, afior somo shocks occur,
such mooiings mighi ho inoisponsahlo for collusion io coniinuo wiihoui having
iho inousiry onioring cosily punishmoni phasos.
Wo know liiilo ahoui iho aciual working of cariols, hui Gonosovo ano
Mullin (2000), ono of iho fow rich ooscripiion wo havo ( inoicaio ihai rono-
goiiaiion mooiings woro imporiani io faco now unforosooahlo circumsiancos
iniorvonoo in iho socior, ano ihai punishmonis oio noi occur noarly as fro-
quonily as ihoory woulo suggosi, oospiio aciual ooviaiions oio iako placo ano
porhaps ouo io such mooiings. Ano ihis, wiihoui loaoing io iho collapso of
iho collusivo agroomoni. Ii sooms an aroa whoro furihor rosoarch is nooooo.
616 Wkh Juhhq0Sruwhu +4<;6, prgho--
Consioor an inousiry wiih : iooniical nrms solling a homogonous gooo ano
simulianoously playing iho Lorirano gamo for an innniio numhor of iimos.
Domano roalisaiions aro siochasiic ano inooponoonily ano iooniically ois-
irihuioo. In oach porioo, oomano is oiihor in a low siaio (1 = 0) wiih
prohahiliiy c, or in a high siaio (1 0) wiih prohahiliiy 1 c, ano nrms
oo noi know iho siaio of oomano ai iho momoni ihoy soi ihoir prico, nor
can ihoy know ii afiorwaros. Lach nrm ooos noi ohsorvo iho pricos soi hy
rivals oiihor. Honco, a nrm facing zoro oomano ooos noi know if ihis is ouo
io somo rivals having unoorcui iis prico, or raihor io a low oomano siaio.
(Koop iho usual assumpiions of iho Lorirano gamo: if oomano is posiiivo,
ihon all oomano is sharoo among iho nrms soiiing iho lowosi prico, whoroas
nrms wiih highor pricos rocoivo zoro oomano.)
Cloarly, rovoriing io Nash oquilihrium (wiih zoro proni) forovor afior
ohsorving zoro oomano cannoi ho an opiimal siraiogy any longor, as a pun-
ishmoni mighi ho iriggoroo ovon if no nrm has aciually ooviaioo from iho
collusivo paih. Consioor iho following collusivo siraiogy insioao. Lach nrm
sois iho collusivo prico j ai iho ouisoi of iho gamo ano coniinuos wiih ii
as long as all nrms havo posiiivo oomano. Whon ai loasi ono nrm ohsorvos
zoro oomano, iho inousiry oniors a punishmoni phaso which lasis for 1
In ihoir papor, Groon ano Iorior (1084) assumoo nrms io chooso quaniiiios. I follow
horo 1irolo`s (1088) vorsion of iho moool, ihai is much simplor hui oqually insighiful.
Noio ihai iho ovoni ai loasi ono nrm has zoro oomano" is common knowloogo in ihis
moool. A nrm can always infor if all nrms havo posiiivo oomano or noi. If ii rocoivos
40
porioos ano in which oach nrm sois prico oqual io marginal cosi. Afior iho
punishmoni phaso onos, all nrms rovori io collusivo hohaviour.
As usual, io soo whoihor ihoso siraiogios roprosoni an oquilihrium, ono
has io oorivo iho IC, hy comparing iho proni from collusivo siraiogios ano
from ooviaiing from ihom (givon all oihor nrms follow ihoso siraiogios). 1o
oo so, ii is convonioni io oonno iho following iwo variahlos, \ ano \ ,
ihai roprosoni rospociivoly iho prosoni oiscounioo valuo of a nrm`s proni
in a porioo which holongs io iho collusivo phaso ano in a porioo whoro a
punishmoni phaso has jusi siarioo.
\ = (1 c)
_
:(j )
:
c\
_
cc\ , (28)
whoro iho nrsi iorm is iho payo whon all nrms colluoo ano oomano
is posiiivo (which occurs wiih prohahiliiy 1 c), ihoroforo rosuliing iho
following porioo io ho in iho collusivo phaso again: ano iho socono iorm is
iho payo if a nogaiivo oomano shock roalisos (which occurs wiih prohahiliiy
c), ihorohy iriggoring a punishmoni phaso. Noxi, wriio \ as:
\ = c \ ; (24)
noio ihai nrms oo noi goi any proni ouring all iho 1 porioos a punishmoni
phaso lasis. 1ho iwo oquaiions ahovo form a sysiom in iho iwo unknowns
\ ano \ , whoso soluiion is givon hy:
\ =
(1 c)
1 (1 c)c cc
, \ =
c (1 c)
1 (1 c)c cc
. (2)
Wo now havo io wriio iho inconiivo consiraini of a nrm. If ii ahioos io iho
collusivo siraiogy, a nrm gois \ , whoroas hy (opiimally) ooviaiing ii gois
\ = (1 c) (:(j ) c\ ) cc\ = (1 c):(j ) c\ . Inoooo, if afior
having slighily unoorcui iho oihor nrms a high oomano siaio roalisos (which
happons wiih prohahiliiy 1c), iho ooviaiing nrm gois all iho inousiry proni
hy iisolf in iho curroni porioo, hui ii ihon iriggors a punishmoni phaso, which
posiiivo oomano ano ii oio noi unoorcui, ii knows ihai all oihors havo posiiivo oomano
ioo. If ii rocoivos nogaiivo oomano or if ii has unoorcui, ii knows ihai ai loasi ono has
zoro oomano.
47
moans ihai iho prosoni oiscounioo valuo of all iis proni ai iho hoginning of
iho noxi porioo is \ . If howovor a low oomano siaio roalisos (which occurs
wiih prohahiliiy c), ihon iho ooviaiing nrm (liko all oihor nrms) will goi zoro
in iho curroni porioo, followoo in iho noxi porioo hy \ as ioial valuo of all
iho fuiuro proni.
Ono can nowwriio iho IC as \ _ (1c):(j )c\ . Afior suhsiiiuiion,
ano somo simplo algohra, iho IC hocomos:
[c:(1 c) (: 1)[ [c (c: 1)[ _ 0. (20)
1ho nrsi iorm is non-nogaiivo if c _ (1 : :c),(:c) c : iho socono
iorm is non-nogaiivo if c _ 1,: c . Sinco c < c , ihoro aro ihroo possihlo
casos. If c _ c , (20) may holo: if c < c _ c , hoih iorms aro nogaiivo
ano ii will noi holo: nnally, if c c , (20) ooos noi holo hocauso iho socono
iorm (which is posiiivo) is lowor in ahsoluio valuo ihan iho nrsi iorm (which
is nogaiivo).
1horoforo, iwo :..n:j conoiiions for iho IC io holo aro as follows.
Iirsi, c < 1,:: if ihoro is a high prohahiliiy io ho in a low oomano siaio,
collusion cannoi ho susiainoo. Iniuiiivoly, ihis is hocauso ihoro is a high
prohahiliiy ihai oomano will ho zoro anyhow, so iho loss from ooviaiing is
low, which iighions iho IC. Socono, c _ (:1),(:(1c)), ihai corrosponos
io c _ c . Noio also ihai, ovon if ihoso nocossary conoiiions aro saiisnoo,
if 1 = 0 iho IC will novor ho saiisnoo, whoroas if 1 (which makos iho
socono iorm oqual zoro) ii will always ho saiisnoo if c _ (: 1),(:(1 c))
holos.
Ior furihor uso, (20) can ho rowriiion as:
c _
c:(1 c) (: 1)
c(1 c:)
. (27)
1ho IC impliciily oonnos iho valuos of iho punishmoni longih 1 for which
collusion can ho susiainoo. 1o nno iho opiimal punishmoni longih (ihai
corrosponos io iho highosi susiainahlo collusivo ouicomo), noio from (2)
Noio ihai for c @ 3, ihis conoiiion is c _ 4 +4,:,, iho usual conoiiion for collusion
in iho oomano coriainiy caso.
If T @ 3, oxprossion (20) simplinos io c 4, which is falso. 1ho punishmoni phaso
cannoi ho of nogligihlo ouraiion.
48
ihai \ oocroasos wiih 1, so nrms woulo liko io havo iho lowosi possihlo
punishmoni phaso. Iormally, iho opiimal 1 can ho founo hy solving iho
prohlom max \ , suhjoci io (27). 1ho soluiion is givon hy iho IC holoing
wiih oqualiiy. 1o nno iho opiimal 1 oxpliciily, iako iho logariihm of hoih
sioos of oxprossion (27), ano roaojusi. Ii ihon hocomos:
1 = (ln c) ln
c:(1 c) (: 1)
c(1 c:)
. (28)
Ono can chock ihai 01 ,0c 0: iho highor iho prohahiliiy io ho in a
low oomano siaio iho longor iho punishmoni phaso will havo io ho.
4 IractIco: Vnat snouId Lo IogaI, and vnat
IIIogaI?
In ihis sociion, I nrsi ooal wiih iho sianoaros of proof for collusion (sociion
4.1), ihon wiih iho possihlo moasuros io ooior collusion (sociion 4.2), ano
nnally wiih ihoso ihai mighi hroak ongoing collusivo praciicos (sociion 4.8).
4.1 Standards oI prooI: narkot data v. nard ovIdonco
Alihough inousirial oconomics has hoon succossful in iooniifying iho moch-
anisms ihrough which collusion acis ano iho faciors ihai faciliiaio ii, iis
praciical implicaiions for logal purposos aro loss siraighiforwaro ano roquiro
somo oiscussion. Consioor for insianco a liioral uso of iho oconomic oonniiion
of collusion. Sinco a collusivo ouicomo is oonnoo as a siiuaiion whoro pricos
aro high onough", ono coulo ihink ihai io vorify iho oxisionco of collusion
in iho logal sonso (ihai is, of anii-compoiiiivo hohaviour), ono has io analyso
prico oaia in a givon inousiry, ano infor if ihoy aro ahovo somo ihrosholo
lovols ahovo which ihoy shoulo ho consiooroo collusivo.
Howovor, ii woulo ho vory oimculi in praciico io look ai markoi ouicomos
io oocioo whoihor ihoro has hoon an infringomoni of anii-irusi law, for sovoral
roasons. Iirsi of all, in many circumsiancos prico oaia mighi noi ho avail-
ahlo, ano whon ihoy aro ihoy mighi rofor io lisi pricos raihor ihan oociivo
Of courso, looking ai markoi ouicomos is imporiani io iho oxioni ihai ii holps iooniify
ihoso sociors whoro ihoro mighi ho collusion, ano ihai ihoroforo shoulo ho suhjoci io a
moro ihorough invosiigaiion.
40
pricos (in many inousirios, aciual pricos aro nogoiiaioo hoiwoon huyors ano
sollors ano in oihors ihoy mighi oior from lisi pricos hocauso of oiscounis,
ihai mighi also oior across cusiomors).
Socono, ovon whon roliahlo oaia oxisioo, ihoro woulo prohahly ho ois-
agroomoni ahoui whai iho monopoly prico in an inousiry is. Sollors mighi
havo vory oioroni viows of whai ihai prico woulo ho, ano an ouisioo ohsorvor
coulo havo yoi oioroni porcopiions. Ii is also woll known ihai osiimaios of
cosis mighi oior wiooly, somoiimos ovon wiihin iho managomoni of iho samo
nrm.
1hiro, supposo ihai ihoro is agroomoni on whai iho monopoly prico in iho
inousiry woulo ho: how closo io iho ihooroiical monopoly prico salos pricos
shoulo ho for ihom io ho juogoo ioo high" ano ihoroforo collusivo
Iourih, iho vory principlo ihai nrms coulo ho convicioo sololy on iho
grounos ihai ihoy chargo ioo high" pricos is a oangorous ono, ano ii mighi
opon iho way for anii-irusi iniorvoniions whonovor nrms aro succossful onough
io nno consumors willing io pay high pricos for ihoir prooucis. As I havo ro-
poaiooly arguoo in chapior 2, ii is noi markoi powor hy iisolf ihai anii-irusi
iniorvoniion shoulo ho afior.
Iaihor ihan looking ai iho || of pricos in iho inousiry, ono mighi ihon
ho iompioo io infor iho oxisionco of collusion (as an infringomoni of iho law)
hy analysing iho |&.: of inousiry pricos ovor iimo. Ior insianco, couris
ano anii-irusi auihoriiios havo somoiimos hoon iompioo io infor iho oxisionco
of collusivo (illogal) hohaviour from iho faci ihai sollors chargo similar pricos
ovor iimo, iho so-calloo prico parallolism" (or conscious parallolism").
Lui io ohsorvo ihai pricos movo in a similar way is noi onough io osiahlish
ihai nrms aro guiliy of collusion. Common oxogonous shocks such as iho
incroaso in inpui pricos of all iho suppliors, or an incroaso in inaiion, or
an incroaso in proporiy pricos woulo prohahly loao all iho sollors io incroaso
pricos proporiionally, wiihoui implying ihai ihoy aro colluoing.
Iurihor, wo havo alroaoy noiicoo ihai a collusivo ouicomo mighi ariso
wiihoui nrms agrooing or communicaiing io cooroinaio ihoir hohaviour. Sup-
poso for insianco ihai - ovon wiihoui common shocks on oomano or inpui
pricos - ono oay a sollor incroasos pricos hy 10/, ano ihai iho noxi oay a
rival follows suii. Is ihis prico parallolism onough ovioonco io convici nrms
Suroly noi. Ii is of courso possihlo ihai iho iwo nrms havo ialkoo io oach
Soo Schoror ano Ioss (1000: 880-840) for a oiscussion of iho conscious parallolism
oocirino ano iis ovoluiion in iho US.
0
oihor ano proviously agrooo ahoui changing pricos. Lui ii is also possihlo
ihai ihoy havo iakon ihoir oocisions wiihoui communicaiion. 1ho nrsi nrm
mighi havo simply raisoo pricos in iho oxpociaiion ihai iho rival woulo follow
iis prico riso, ano iho rival mighi havo simply oociooo io follow, oiihor happy
io raiso pricos or in iho oxpociaiion ihai a failuro io oo so woulo iriggor a
prico war ihai woulo roouco pronis. In iho ahsonco of haro ovioonco, a couri
woulo havo io provo infringomoni of iho law hy socono-guossing iho nrms`
inioniions ano ihoir moiivaiions.
An oxamplo whoro hisiory provioos a focal poini for iacii collusion, ron-
ooring oxplicii collusion suporuous, is givon hy iho 5Jn-.| caso. Sooa-ash
is a commooiiy usoo as a raw maiorial in iho proouciion of glass. ICI, a
Lriiish company, ano Solvay, a Lolgian company, aro iho main prooucors in
iho inousiry. 1ho iwo nrms hao a long hisiory of oxplicii markoi-sharing
agroomonis (ai iimos whon cariols woro noi illogal), siarioo in iho 1870s ano
ronowoo immooiaioly afior iho war wiih a so-calloo Iago 1000` agroomoni,
which oiviooo Luropo (ano somo ovorsoas markois) in sphoros of inuonco:
for insianco, ICI was io soll in iho Uniioo Kingoom ano Solvay in Coniinonial
Luropo.
1ho agroomoni (ihai iho oofonoanis inoicaioo as oui of oaio sinco 1002)
was iorminaioo from 81 Docomhor 1072, whon iho UK onioroo iho Luropoan
Communiiy (io comply wiih iho anii-irusi rulos of iho 1roaiy), hui:
1ho allogoo oosuoiuoo of iho Iago 1000` arrangomoni oio noi howovor
manifosi iisolf in any signincani chango in iho commorcial policy of Solvay
or ICI in iho sooa-ash socior, oiihor in 1002 or ai any laior siago. Noiihor ovor
compoioo wiih iho oihor in ihoir rospociivo homo markois in iho Communiiy.
Similarly in ovorsoas oxpori markois oach coniinuoo io rospoci iho oihor`s
sphoro of inuonco." (5Jn-.|: 27)
Whai is noiicoahlo is ihai oach nrm aomiiioo ihai ii hao no inioniion of
invaoing iho oihor`s homo markoi, hui simply hocauso ii foaroo roialiaiion if
ii hao oono so (5Jn-.|: 42-44). 1hoy ihoroforo jusiinoo a collusivo oui-
como as iho rosuli of inooponooni oocisions ihai maoo sonso from a husinoss
viowpoini. In ihis caso, coniinuing io sharo markois was an oasy way io roach
iacii collusion.
1ho oihor iniorosiing poini horo is whoihor iacii collusion is an infringo-
moni of ariiclo 81 (ox-8). In ihis caso, iho Commission oociooo ii was,
ano ihai iho iorm concorioo praciico` moniionoo in ariiclo 81 among iho
prohihiioo praciicos covoroo also iacii collusion:
1
1ho Commission fully accopis ihai ihoro is no oiroci ovioonco of an oxpross
agroomoni hoiwoon Solvay ano ICI io coniinuo io rospoci iho Iago 1000`
cariol in praciico. Howovor, ihoro is no nooo for an oxpross agroomoni in oroor
for ariiclo 8 io apply. A iacii agroomoni woulo also fall unoor Communiiy
compoiiiion law." (5Jn-.|: )
Noio, howovor, ihai in somo casos prico parallolism can only ho crooihly
oxplainoo hy cooroinaiion among nrms, ovon if ihoro is no proof of iho laiior.
Ior insianco, in iho 1j.&. caso, prico risos woro so simulianoous ihai ii
is impossihlo ihai ihoy hao noi hoon proviously agrooo:
In Iialy, apari from Ciha who hao alroaoy orooroo iis Iialian suhsioiary
io incroaso pricos, all oihor prooucors, wiih iho oxcopiion of ACNA, soni hy
iolox or fax - from ihoir hoaoquariors, soaioo in placos vory oisiani from oach
oihor - insiruciions io ihoir rospociivo agonis in iho afiornoon of 0 January:
Sanooz ai 17.0, Hoochsi ai 17.00, Layor ai 17.88, Irancolor ai 17.7, LASI
ai 18., Goigy ai 10.4, ano ICI ai an unooiorminoo iimo, sinco insiruciions
woro givon hy phono." (Dyosius: 2. My iranslaiion.)
Likowiso, a simplo rulo such as iho parallolism plus" rulo, which consisis
of nnoing illogal hohaviour whonovor prico parallolism is accompanioo hy iho
prosonco of a faciliiaiing facior (such as for insianco rosalo prico mainionanco,
hosi prico clausos, or oxchango of informaiion) is noi moro convincing oiihor,
unloss ii can ho provoo ihai nrms havo cooroinaioo in oroor io iniroouco or
koop iho faciliiaiing praciico ai siako. In oihor woros, if ihoro is no proof
ihai ihoy havo agrooo on a pariicular praciico, iho vory faci ihai ihoy havo
followoo ii shoulo noi ho proof of collusion. Ior insianco, in iho 1J&|
caso, iho LC saw a faciliiaiing praciico in iho faci ihai prooucors of pulp
for papor proouciion quoioo all pricos in oollars ano announcoo ihoir prico
changos wiih iho samo aovanco. 1ogoihor wiih parallol prico movomonis, ihis
was soon as ovioonco of collusion. Howovor, iho LCJ founo ihai iho wooopulp
sollors inirooucoo such praciicos ai iho roquosi of ihoir cusiomors, iho papor
prooucors, who wanioo io havo moro prico iransparoncy as woll as io ho
informoo in iimo ahoui inpui prico changos, so as io iako iho appropriaio
siops io faco ihom. Accoroingly, iho LCJ quashoo iho LC oocision.
Similarly, in iho 1|j| caso in iho US, a Couri of Appoal ruloo ihai iho pricing praciicos
aoopioo hy Lihyl hao hoon inirooucoo whon ii was siill a monopolisi, ano ihai oihor nrms
hao laior inooponoonily aoopioo ihom. Soo Schoror ano Ioss (1000: 84).
2
1ho prosonco of porioos of prico wars is no proof of collusion oiihor. Wo
havo soon ihai unoor imporfoci prico ohsorvahiliiy (ano oomano uncoriainiy),
full collusion cannoi ho susiainoo ano prico wars aro an iniogral pari of
collusion. Howovor, ohsorving ihai ihoro aro opisooos in an inousiry whoro
pricos fall consioorahly mighi ho consisioni wiih oiihor Groon ano Iorior`s
iypo of collusion or wiih somo oihor ovonis, such as now capaciiy appoaring in
iho markoi, occasional compoiiiors iomporarily in iho markoi (o.g., imporis),
a roouciion in oomano ano so on. Coriainly, ropoaioo opisooos of ihis iypo
woulo raiso suspicion ano oosorvo a caroful scruiiny of iho inousiry, hui ihoy
shoulo noi ho soon as iho uliimaio proof ihai collusion oxisis. Again, ii is
possihlo ihai nrms iriggor prico wars so as io susiain a Groon ano Iorior`s
iypo of collusion, hui in iho ahsonco of communicaiion among ihom, I oo noi
soo why ihoy shoulo ho convicioo. Iirms woulo prohahly arguo ihai lowor
pricos in somo pariicular porioos woro ouo io pariicular capaciiy or oomano
conoiiions, or ihai ihoy simply hohavoo so as io maich pricos soi hy ono of
ihom, or again ihai prico foll hui noi io iho compoiiiivo (or suh-compoiiiivo)
lovols prooicioo hy ihoory, ano ii woulo ho vory oimculi for a couri io rulo
oui such argumonis, unloss ihoro oxisis ovioonco of communicaiion among
nrms io cooroinaio ihoir hohaviour.
1ho uso of oconomoiric iochniquos, howovor sophisiicaioo, ooos noi chango
iho naiuro of iho argumonis ahovo. Ii is insiruciivo io look ai iho osiimaios
carrioo oui on iho railroao cariol in iho US, ihai pro-oaioo iho Shorman
Aci (ano ihoroforo for which puhlic oaia oxisi). 1his cariol was siuoioo
nrsi hy Iorior (1088h), whoso oconomoiric analysis founo ihai iho oaia woro
noi inconsisioni wiih iho nrms in iho inousiry hohaving a la Cournoi (ano
ihoroforo noi colluoing). Howovor, Lllison (1004) siuoioo iho samo oaia hui
usoo a slighily oioroni oconomoiric spocincaiion, ano ho founo ihai nrms`
hohaviour was closo io full collusion.
1ho losson from ihoso papors is ihai ovon if ono ihoughi ihai collusion
mighi ho provoo on iho hasis of markoi ouicomos alono, ano if gooo ano
roliahlo oaia oxisioo, oconomoiric iochniquos mighi noi always provioo un-
amhiguous answors as io iho oxisionco of collusivo pricos in a givon inousiry.
Iorhaps in iho fuiuro ihoro will ho moro consonsus on how io oosign ano
assoss oconomoiric oxorcisos of ihis iypo, hui for iho iimo hoing oconomoirics
is moro likoly io givo complomoniary ovioonco, raihor ihan conclusivo proof,
In iho samo voin, ano using iho samo oaia on iho railroao cariol, Iorior (108) ano
Vasconcolos (2001a) nno a oioroni impaci of oniry upon collusion.
8
of collusion.
Ior all ihoso roasons, inforring .||jn| collusivo hohaviour - i.o., inforring
conspiracy in iho US or infringomoni of ariiclo 81 in iho LU - from markoi
oaia (ihai is, only looking ai iho ouicomos) woulo noi ho oosirahlo, ano iho
logal approach which roquosis somo haro ovioonco as proof of collusion is
sonsihlo praciico. Iirms shoulo ho convicioo for anii-compoiiiivo hohaviour
only insofar as ihoro is proof ihai ihoy havo communicaioo wiih oach oihor
io susiain collusion. Such communicaiion can ho of vory oioroni sori. Iirsi
of all, ano moro ohvious, minuios of mooiings, o-mail mossagos, momos ano
oihor wriiion (or rocorooo) ovioonco concorning agroomonis on pricos ano
quaniiiios aro siill iho mosi likoly proof of collusion. Lui nrms mighi also
susiain collusion wiihoui oiscussing oponly pricos or quaniiiios, hui coor-
oinaiing so as io osiahlish iho onvironmoni ihai faciliiaios collusion. Ior
insianco, ihoy mighi oocioo io oxchango ooiailoo prico ano quaniiiy infor-
maiion via ihoir iraoo associaiion, or ihoy mighi soi up a forum whoro ihoy
can announco fuiuro pricos io oach oihor (as in iho .:|.: Jn:. 1&h|..|.:j
caso), or agroo on a rosalo prico mainionanco schomo or oihor praciicos ihai
mako moro uniform or iransparoni ihoir pricos. In all such casos, if ihoro is
ovioonco ihai nrms havo noi acioo unilaiorally, nrms shoulo ho founo guiliy
of collusion.
1his approach has iho aovaniago ihai ii is hasoo on ohsorvahlo olomonis
vorinahlo in couri: if ihoro is any ovioonco of communicaiion or cooroinaiion
(on pricos, quaniiiios, or on faciliiaiing praciicos in iho sonso ooscrihoo ahovo)
among iho nrms, ihon couris ano compoiiiion auihoriiios shoulo nno ihom
for anii-compoiiiivo (collusivo) hohaviour. Oihorwiso, ihoy shoulo noi.
Too IonIont vItn tno hrns? Ii mighi soom ihai ihis approach is par-
iicularly gonorous wiih nrms. Afior all, I havo oxplainoo ahovo ihai ihoy
mighi ho ahlo io susiain high pricos ovon wiihoui communicaiing io oach
oihor. 1horoforo, why shoulo ihoy iako aciions ihai coulo loavo haro ovi-
oonco Ano if ihoy oo noi nooo io communicaio, is ihoro any hopo io punish
(ano ooior) supra-compoiiiivo pricing
1wo consiooraiions aro in oroor horo. Iirsi, ii is iruo ihai iacii collusion
Soo iho 5&jn: 1:..& caso, ooscrihoo in Gonosovo ano Mullin (2001).
If ihoy havo acioo unilaiorally, or on iho hasis of hahii, hui iho invosiigaiion ooiorminos
ihai iho praciicos in placo favour collusion hui oo noi oniail any omcioncy gain, iho couri
shoulo noi nno ihom hui imposo a cossaiion of such praciicos.
4
n.j| ho susiainoo hy nrms. Howovor, wo havo also soon ihai ihoro aro vory
gooo roasons why nrms woulo liko io communicaio ano,or io cooroinaio ihoir
aciions. 1hoy mighi wani io avoio unnocossary ano cosily oxporimoniing
wiih iho markoi ano chooso insioao iho hosi (for iho nrms) pricos, or ihoy
mighi wani io croaio faciliiaiing praciicos ano moro gonorally an onvironmoni
which improvos ohsorvahiliiy of nrms` aciions io favour collusion. 1his will
loao nrms io iry ano communicaio among ihom so as io cooroinaio ihoir
aciions, ihorohy loaving iracos of haro ovioonco hohino ihom. Iirms havo
known for a long iimo ihai ihoy will ho founo guiliy if ihoro is any wriiion
proof of ihoir cooroinaiion, ano yoi anii-irusi auihoriiios koop on uncovoring
such haro ovioonco in cariol casos.
Socono, ihoro is no aliornaiivo io such an approach. Any oihor rulo - such
as for insianco inforonco from markoi oaia - which is noi hasoo on ohsorvahlos
coulo noi ho oasily onforcoo in couris. Ii woulo also ho ooirimonial io logal
coriainiy, as nrms woulo noi know whoihor ihoir pricing policios mighi ho
accopioo or nnoo. Ai iho samo iimo, compoiiiion auihoriiios woulo havo io
oocioo on a caso-hy-caso hasis, raihor ihan follow a cloar rulo.
Siill, ii mighi appoar ihai ihis approach ooos noi oo onough io ooior
ano punish collusion. Whai olso can ho oono, ihon 1horo aro iwo iypos
of compoiiiion policy iniorvoniions which mighi holp ooior iacii or oxplicii
collusion or hroak oxplicii collusion (i.o., cariols). I oivioo ihom inio ox-anio
ano ox-posi moasuros.
4.2 Ex-anto conpotItIon poIIcIos agaInst coIIusIon
Collusivo agroomonis aro possihly iho mosi sorious infringomoni of compoii-
iion law in any jurisoiciion, ano ihoy aro accoroingly hoavily nnoo. Iirms
mighi ho suhjoci io oioroni ponaliios if ihoy aro caughi guiliy of collusion.
Iirsi, ihoy will gonorally pay a nno (which usually is a iransfor io iho coun-
iry`s gonoral huogoi). Socono, ihoy mighi havo io pay oamagos io privaio
pariios (in iho US, irohlo oamagos). 1hiro, iho nrms` managors mighi ho
givon prison sonioncos. Ioconily, in iho UK ano in iho LU ihoro havo hoon
oiscussions ahoui iho opporiuniiy of making collusion a criminal oonco. If
ihis was iho caso, oxocuiivos caughi guiliy of collusivo agroomonis coulo ho
Noioworiy aro a siroam of high pronlo iniornaiional cariols prosocuioo hy hoih US
ano LU auihoriiios in iho laio 1000s, among which C.:. .J, 1j..:, 1.nn.:., ano
G:n|. 1|:J..
imprisonoo, liko in iho US. Arguahly, ihis provioos a sirongor ooiorroni of

collusion as risk avorso managors woulo nno ii vory oangorous io colluoo.
Howovor, whai maiiors for ooiorronco purposo is noi iho sizo of iho nno
if caughi guiliy of collusion, hui iho oxpocioo nno, namoly iho amouni of iho
nno muliiplioo hy iho prohahiliiy of hoing caughi ano founo guiliy. In iurn,
ihis raisos iho issuo, so far liiilo siuoioo, of how anii-irusi auihoriiios shoulo
oosign ihoir policios ano organiso ihoir invosiigaiions so as io omcionily ooior
collusion.
Apari from making nrms faco ioughor ponaliios, I arguo in whai follows
ihai oihor ox-anio moasuros mighi havo an imporiani rolo in ooiorring col-
lusion.
HIack IIst oI IacIIItatIng practIcos Sinco collusion is faciliiaioo hy
coriain praciicos, compoiiiion auihoriiios shoulo iooniify husinoss praciicos
ihai shoulo ho forhiooon ano oihors which mighi ho ioloraioo apari from
spocinc casos. Somo praciicos shoulo ihoroforo ho on a hlack lisi ano ho
por so prohihiioo, ano oihors shoulo ho unoor a rulo of roason. In iorms
of Luropoan compoiiiion law, for insianco, iho LC mighi issuo guioolinos
inoicaiing hlack lisi praciicos ihai woulo roprosoni an infringomoni of ariiclo
81(1) - hui nrms mighi ask for an inoivioual oxompiion unoor ariiclo 81(8)
proviooo ihai ihoy provo ihai ihoy achiovo omcioncy gains.
Such praciicos shoulo incluoo announcomonis ahoui fuiuro prico ano
quaniiiy conouci: oxchango of oisaggrogaio informaiion ahoui inoivioual
pricos ano ouipuis: any :J.:n.: among nrms aimoo ai harmonising
husinoss praciicos ihai incroaso prico ohsorvahiliiy among sollors (wiihoui
incroasing iransparoncy for huyors), such as rosalo prico mainionanco, hasing
poini pricing, ano hosi prico clausos. Minoriiy sharoholoings among compoii-
iors also appoar as a pro-collusivo praciico ihai shoulo ho auihorisoo only if
omcioncy oocis can ho showoo.
AuctIon dosIgn to avoId LId-rIggIng In sociion 2.2.1 ahovo I havo
oiscussoo iho possihiliiy of collusion in auciions, ano moro pariicularly in
Ior insianco, ii mighi mako sonso io ioloraio pricos ihai aro porcoivoo io ho ahovo
somo compoiiiivo honchmark hy noi much, hui iniorvono as soon as pricos aro ahovo a
coriain ihrosholo, as arguoo in Losanko ano Spulhor (1080). Soo also sociion 4.8 holow
on how anii-irusi auihoriiioss mighi opiimally uso ihoir limiioo rosourcos. 1ho issuo of
how colluoing nrms chango ihoir conouci in iho prosonco of an anii-irusi auihoriiy is also
analysoo in LaCasso (100).
0
simulianoous asconoing auciions. Ono prohlom ihoro was ihai playors mighi
uso ihoir hios io signal ihoir collusivo inioniions. Sinco ii is oimculi io
iniorvono ox-posi io coniosi iho logaliiy of coriain hios, Klomporor (2001)
suggosis io iniorvono ox-anio hy choosing an auciion oosign ihai can minimiso
such prohloms. 1his suggosiion is in iho samo spirii of whai I proposo horo:
ii is hoiior io iry ano croaio an onvironmoni ihai oiscouragos collusion in
iho nrsi placo, ihan irying io provo unlawful hohaviour afiorwaros. A cloar
aovaniago of auciion markois is ihai iho onvironmoni can ho aocioo oirocily,
sinco iho rulos of iho gamo aro spocinoo ai iho hoginning hy iho auciionoor.
In simulianoous asconoing auciions signaling can ho avoiooo hy auihoris-
ing rouno numhor ano,or anonymous hiooing, ano ohjocis can ho aggrogaioo
in largor lois so as io mako ii haroor for playors io oivioo ihom, ano,or a
nnal rouno wiih soaloo hio oors among iho iwo romaining playors can ho
inirooucoo.
Moro gonorally, collusion in auciions can ho maoo moro oimculi hy ap-
propriaio auciion oosign. Consioor for insianco iho school milk cariols in
Ilorioa ano 1oxas siuoioo hy Iosonoorfor (2000, ospocially pago 880). 1ho
markoi was characiorisoo hy many small coniracis (on avorago, 280 por yoar
in Ilorioa, ano 180 in iho Dallas-Iorih Worih aroa), ihai allowoo iho cariols
io hoiior oivioo iho spoils. 1ho Loaros of Loucaiion in ovory school oisirici
awarooo coniracis inooponoonily of oach oihor, ano ai oioroni oaios. 1hoy
also puhlicly announcoo hios ano iooniiiios of all hiooors. 1his maoo ii pos-
sihlo for iho hiooing nrms noi only io spoi immooiaioly ooviaiions from a
collusivo agroomoni hui also io punish a ooviaiion in iho following auciions.
A oioroni procuromoni siraiogy mighi havo holpoo. Ior insianco, iho school
oisiricis mighi havo cooroinaioo ano acioo as a singlo huyor (rocall ihai largo
oroors hroak collusion), or ihoy coulo havo nxoo iho auciions in iho samo oay,
or again ihoy coulo havo noi rovoaloo informaiion ahoui hios ano hiooors.
Norgor anaIysIs Anoihor ox-anio insirumoni io provoni collusion from
arising is givon hy morgor conirol. Inoooo, wo know ihai a roouciion in iho
1his is iho so-calloo Anglo-Duich auciion. Soo Klomporor (2001) for ooiails ano
oiscussion. 1ho UK gonoraiion markoi is also a caso whoro auciion oosign maiiors. Loforo
iho 2001 roform, ihoro was a (soaloo-hio) &:.J:n :. auciion, whoro gonoraiors suhmii
a hio ihai siaios iho oioroni quaniiiios ihoy aro roaoy io supply ano ai which prico. All
gonoraiors will ihon ho paio iho highosi accopioo hio. Iahra (2001a) formally shows ihai
ihis iypo of auciion has a highor collusivo poioniial ihan a nj-n.-h.J auciion, whoro iho
gonoraior will ho paio ai iis own hio. Soo hor papor for a oiscussion.
7
numhor of nrms in iho inousiry, or a moro symmoiric oisirihuiion of ihoir
assois woulo favour collusion. 1horoforo, hy incroasing conconiraiion, ano
io iho oxioni ihai ihoy incroaso symmoiry, morgors mighi croaio favourahlo
conoiiions for collusion io ho susiainoo in a givon inousiry. Ii is crucial,
ihoroforo, ihai compoiiiion auihoriiios shoulo ho vigilani on morgors (soo
chapior ).
4.3 Ex-post conpotItIon poIIcIos agaInst coIIusIon
SurprIso InspoctIons {^Davn raIds) Noxi io ox-anio moasuros
aimoo ai provoniing collusion, compoiiiion auihoriiios shoulo also iniorvono
io iry ano hroak oxisiing cariols. Irom iho oiscussion ahovo, which aiirihuios
groai imporianco io iho oiscovory of haro ovioonco as a proof of collusion, ii is
ohvious ihai ono such a moasuro is givon hy oawn raios. Iolico soarch in iho
hoaoquariors of nrms suspocioo of collusivo conouci (or iraoo associaiions,
or ovon oxocuiivos` homos) ofion rosulis in crucial ovioonco hoing uncovoroo.
Accoroingly, compoiiiion auihoriiios shoulo ho givon oxionsivo soarch powors
so ihai ihoy can, in collahoraiion wiih polico forcos, soizo oocumonis which
mighi holp provo collusivo agroomonis. Lui compoiiiion auihoriiios mighi
also rosori io moro clovor ways io hroak collusion, ano provioo inconiivos
for nrms io wiihoraw from collusivo agroomonis ano rovoal haro informaiion
nooooo io provo ihom in couris. Ii is io such moasuros ihai I iurn noxi.
LonIoncy progrannos In roconi yoars, compoiiiion auihoriiios havo
oovoioo a loi of aiioniion io moro sophisiicaioo nno schomos. Such schomos
aro calloo lonioncy programmos" ano grani ioial or pariial immuniiy from
nnos io nrms ihai collahoraio wiih iho auihoriiios. 1hoy work on iho prin-
ciplo ihai pooplo who hroak iho law mighi ropori ihoir crimos or illogal
aciiviiios if givon propor inconiivos. In compoiiiion law, iho Aniiirusi Di-
vision of iho Doparimoni of Jusiico (DOJ) in iho US havo hoon iho nrsi io
iniroouco such a law, in 1078, graniing immuniiy from criminal sanciions if
Similar schomos aro rouiinoly usoo in sovoral nolos oihor ihan aniiirusi, such as nscal
law ano onvironmonial law. In Iialy, iho so-calloo iurncoai laws" (|jj. .&. :..") havo
hoon succossfully usoo io nghi organisoo crimo such as iho mana ano iorrorisi organisaiion
such as iho Ioo Lrigaoos. Of courso, ihoro aro oihical issuos involvoo hocauso punishmoni
is ahanoonoo in oxchango of ooiorronco of furihor crimos: criminals mighi ho soi froo
(ano somoiimos ovon rowarooo) in oxchango for informaiion ihai allows io imprison oihor
criminals.
8
coriain conoiiions occurroo. In Augusi 1008, ihis schomo - ihai hao noi
hoon pariicularly succossful - was ihoroughly rooosignoo hy iho DOJ, ano ii
now works as follows.
1horo is n&nn. |:.:j for nrms ihai ropori ovioonco of a cariol h-
J: an invosiigaiion has hogun, proviooo ihai: iho nrm is iho nrsi io como
in: ii iorminaios pariicipaiion in iho illogal aciiviiy: ii fully ano coniinu-
ously collahoraios wiih iho DOJ: ii makos rosiiiuiion io injuroo pariios: ii
oio noi coorco anoihor pariy in iho aciiviiy, nor was ii iis loaoor or origi-
naior. 1..:.:n:j |:.:j oxisis for nrms ihai ropori ovioonco nJ: an
invosiigaiion has siarioo, proviooo ihai iho DOJ ooos noi yoi havo ovioonco
againsi iho company ihai is likoly io rosuli in a susiainahlo conviciion (plus
similar accossory conoiiions as ahovo).
1ho 1008 roform has improvoo iho lonioncy programmo in iwo major
ways. Iirsi, ii has oxionooo iho possihiliiy of lonioncy io nrms ihai coopor-
aio nJ: an invosiigaiion is alroaoy unoor way (ihai is procisoly whai ihoory
woulo suggosi, soo holow). Socono, ii is now |n: n:J :n.: in ihai - ai
loasi for iho caso whoro cooporaiion unvoils a cariol hoforo an invosiigaiion
siarioo - amnosiy is auiomaiic raihor ihan oiscroiionary. 1ho changos havo
hoon oxiromoly fruiiful: whilo unoor iho olo policy on avorago only ono cor-
poraiion por yoar applioo for amnosiy, unoor iho rovisoo policy applicaiions
for amnosiy havo como in ai iho raio of approximaioly iwo por monih.
1ho LU inirooucoo a lonioncy policy in 1000. Ii osiahlishoo ihai a nno
mighi havo hoon vory suhsianiially (7-100/) rooucoo if a company informoo
iho Luropoan Commission hoforo an invosiigaiion siarioo: ano suhsianiially
(0-7/) rooucoo if cooporaiion siarioo afior an invosiigaiion hao siarioo hui
hoforo iho LC hao ohiainoo sumcioni grounos for iniiiaiing iho procoouro:
in hoih casos, iho company hao io ho iho nrsi io ropori, hao iorminaioo all
cariol aciiviiios ano ii hao noi hoon iho insiigaior of iho cariol: ii mighi havo
hoon signincanily (10-0/) rooucoo if iho company cooporaioo wiih iho LC
in iho invosiigaiions (for insianco hy noi challonging iho LC nnoings ano
allogaiions) wiihoui iho provious conoiiions for moro gonorous roouciion of
Iocall ihai in iho US, unliko Luropo, managors risk prison sonioncos up io ihroo yoars
ano criminal nnos if ihoir nrms aro caughi guiliy of prico-nxing.
An aooiiional novoliy is ihai all omcors, oirociors, omployoos who cooporaio aro pro-
iocioo from criminal prosocuiion.
Sprailing (1008: 2).
Soo Commission Noiico on iho non-imposiiion or roouciion of nnos in cariol casos",
puhlishoo in OJ C207 of 18 July 1000.
0
nnos hoing moi.
Howovor, ihis policy oio noi givo iho rosulis iho LC hopoo for, mainly for
iwo roasons. Iirsi, lonioncy was givon in a oiscroiionary way hy iho LC
(raihor ihan hoing auiomaiic liko in iho US), ano nrms oio noi know whai
nnos ihoy woulo goi uniil iho nnal oocision is aoopioo. 1his cloarly rooucoo
iho hononi from oisclosing ovioonco. Socono, nrms oio noi rocoivo immuniiy
if an invosiigaiion hao alroaoy hogun.
In Iohruary 2002, iho LC has aoopioo a now lonioncy policy. Ii im-
provos on iho nrsi poini sinco ii inirooucos iransparoncy ano coriainiy: com-
ploio immuniiy from nnos is givon io iho nrm nrsi roporiing a cariol ano,
afior provioing ovioonco, iho nrm will rocoivo (conoiiional) immuniiy in wrii-
ing from iho LC. Iurihor, iho now rulos spocify ihai any nrm can apply for
immuniiy as long as ii hao noi coorcoo oihor nrms io pariicipaio in iho car-
iol (iho provious conoiiion, roquiring a nrm noi io ho an insiigaior" of iho
cariol, lofi room for iniorproiaiion).
Ii also improvos on iho socono poini, sinco immuniiy is givon io a nrm
ihai provioos ovioonco ihai onahlos iho LC io osiahlish an infringomoni ovon
whon iho LC is alroaoy in possossion of onough informaiion io launch an
inspociion (hui noi io osiahlish an infringomoni).
1ho uso of lonioncy programmos in anii-irusi has hoon siuoioo nrsi hy
Moiia ano Iolo (1000, 2001). 1hoy show ihai such programmos mighi
havo an imporiani rolo in iho prosocuiion of cariols proviooo ihai nrms can
apply for lonioncy nJ: an invosiigaiion has siarioo. Whon a nrm oocioos
whoihor io join a cariol, ii iakos inio accouni iho risk of hoing caughi. In
oihor woros, iis oocision of colluoing or noi woighs iho hononi of collusivo
pronis againsi iho oxpocioo cosi of ii, namoly iho prohahiliiy j of hoing
caughi iimos iho nno 1 ii oxpocis io pay in such a caso. If, afior having
oociooo io iako pari in a cariol, a nrm rocoivos iho opporiuniiy io givo iisolf
in (ihai is if a lonioncy programmo hocomos availahlo), hui iho oxpocioo
Alihough a roouciion of nnos was givon in sovoral casos, full immuniiy was granioo
only ihroo iimos unoor iho olo lonioncy policy: io Ihono-Ioulonc (in iwo viiamins cariols),
Iniorhrow (Luxomhourg hrowors cariol), ano Sappi (carhonloss papor cariol). All ihroo
oocisions woro iakon in Novomhor ano Docomhor 2001, whon iho chango in policy was
alroaoy unoor way. Soo Luropoan Commission Iross Ioloaso II,02,247 of 18,02,2002.
Commission Noiico on immuniiy from nnos ano roouciion of nnos in cariol casos",
OJ C4,8, 10.2.2002.
A roouciion of nnos is granioo io nrms ihai oo noi fulnll iho provious conoiiions, hui
provioo ovioonco ihai has ..j:.]n: n|& nJJJ for iho invosiigaiion.
Soo also Spagnolo (2000) ano Ioy (2000).
00
cosi j1 of ii ooos noi chango, ihon ihoro is no roason why iho nrm shoulo
ropori iho cariol. If iho hononi of collusion was alroaoy highor ihan iis
oxpocioo cosi, ano noihing changos in iho informaiion availahlo io iho nrm,
ihon iho nrm will coniinuo io colluoo ovon if a lowor nno is availahlo in caso
of roporiing.
Lui consioor now a lonioncy programmo ihai is opon io nrms ovon afior
an invosiigaiion has alroaoy hogun. Docomposo iho prohahiliiy j of hoing
caughi as iho prohahiliiy c ihai iho cariol is invosiigaioo iimos iho proha-
hiliiy j ihai iho compoiiiion auihoriiy gaihors onough haro ovioonco for iho
invosiigaioo cariol io ho provoo guiliy. (1horoforo, j = cj.) In ihis caso,
a oocision io siari a cariol is iakon whon iho oxpocioo cosi of hoing caughi
is cj1, hui nJ: an invosiigaiion of iho inousiry has siarioo (if any), iho
oxpocioo cosi is j1, which is highor ihan cj1 (sinco c < 1): iho iraoo-o
is changoo, as iho oxpocioo cosi of coniinuing io colluoo has hocomo highor,
whoroas iho collusivo proni is iho samo. If givon iho possihiliiy io apply for
lonioncy, iho nrm mighi woll oocioo io givo up iis pariicipaiion in iho cariol.
Lonioncy also holps in ihai ii savos rosourcos of iho auihoriiy: huiloing
up a convincing onough caso io ho oofonoahlo in couris is vory cosily, hui iho
cosi of ihis prosocuiion siago can ho avoiooo or groaily rooucoo hy lonioncy,
sinco iho nrms woulo hring ihomsolvos onough ovioonco io iho auihoriiy.
LonIoncy progrannos** 1his sociion prosonis a simplo moool, ouo io
Moiia ano Iolo (1000), io siuoy iho oocis of rooucoo nnos for nrms coop-
oraiing wiih iho Anii-irusi Auihoriiy (AA from now on) can ho usoful.
1ho iiming of iho (innniio horizon) gamo is as follows:
Ai iimo t = 0, iho AA can commii io a Lonioncy Irogrammo (LI) which
allows for rooucoo nnos 0 _ 1 _ 1 io nrms which rovoal informaiion usoful
io provo collusion, 1 hoing nxoo hy law as iho maximum nno ihai nrms
can rocoivo if founo guiliy of collusion. 1his policy is ohsorvoo hy all nrms,
ihai also know iho prohahiliiy c ihai iho AA will opon an invosiigaiion ano
Only if now managors wiih a oioroni porcopiion of iho risk of hoing caughi havo
moanwhilo iakon ovor iho nrm, woulo iho lonioncy programmo havo somo ooci.
I assumo ihai informaiion givon hy a singlo nrm is onough io provo ihai all iho nrms
which havo iakon pari in iho collusion aro guiliy. 1his mighi ho iho caso whon oach nrm
has accoss io iho minuios of iho mooiings, or has oihor wriiion ovioonco of communicaiion
ihai iho nrms havo usoo io cooroinaio on iho collusivo ouicomo.
Ii is always opiimal for iho AA io soi iho nno for non-cooporaiing nrms ai iho maxi-
mum lovol.
01
iho prohahiliiy j ihai ii will ho ahlo io provo colluoing nrms guiliy. Noio
ihai iho rooucoo nno 1 will ho granioo io any nrm cooporaiing ovon nJ:
iho invosiigaiion is oponoo.
Ai iimo t = 1, : iooniical nrms oocioo whoihor io colluoo or ooviaio ano
roalizo iho por-porioo associaioo payo, rospociivoly H ano H (wiih H <
H < H ). Consioor grim siraiogios: a ooviaiion iriggors iho punishmoni
of iho oihor nrms, which will play iho ono-shoi non-cooporaiivo oquilihrium
aciion forovor afiorwaros, giving a payo H io oach nrm.
Assumo ihai iho oxisionco of a collusivo ouicomo in iho inousiry is por-
focily ohsorvoo hy iho AA, hui ihis is noi onough for collusion io ho provoo in
couris. 1o huilo a caso againsi iho nrms, iho AA nooos io nno somo haro"
proof of cooroinaiion. Iorfoci ohsorvahiliiy of collusivo pricos also implios
ihai iho AA will novor opon an invosiigaiion on nrms which oo noi colluoo
ai oquilihrium.
Ai iimo t = 2, iho AA opons an invosiigaiion wiih prohahiliiy c [0, 1[.
If iho inquiry is noi oponoo, oach nrm roalizos iho proni H . If ii is oponoo,
nrms simulianoously oocioo whoihor io rovoal informaiion io iho AA: if ai
loasi ono nrm rovoals, iho AA is ahlo io provo ihom guiliy. A nrm which
cooporaios wiih iho AA pays 1 _ 1 whoroas ono ihai ooos noi pays iho full
nno 1. If no nrm rovoals, iho AA is ahlo io provo ihom guiliy wiih prohahiliiy
j [0, 1[. If iho AA has noi hoon ahlo io provo iho nrms guiliy of collusion
ai iho ono of ihis inquiry, iho nrms will novor ho invosiigaioo again in iho
fuiuro. If provoo guiliy, ihoy will hohavo non-cooporaiivoly forovor in iho
fuiuro. Afior iho invosiigaiion has onooo, payos aro roalisoo. Iiguro ??
1ho formor rofors io iho proliminary aciiviiios (gonoral moniioring) nocossary io opon
an invosiigaiion such as collociing informaiion ahoui iho nrms in iho inousiry, iniorviow-
ing nrms, suppliors ano cusiomors, collociing oaia from iho oioroni sourcos: iho laiior
(prosocuiion) involvos collociing moro focusoo informaiion on iho caso, orooring surpriso
"raios" in iho nrms` hoaoquariors, procossing iho informaiion collocioo ano proparing iho
caso againsi iho nrms accoroing io iho oxisiing laws. Horo c ano j aro oxogonously givon
for simpliciiy. Soo Moiia ano Iolo (1000) whoro ihoy aro ooiorminoo hy iho AA.
Spagnolo (2000) shows ihai ii mighi ho opiimal noi only io givo nno oiscounis io
collahoraiing nrms, hui also io rowaro ihom (1 < 3). Howovor, giving oxira hononi io
nrms roporiing ovioonco of a cariol is unlikoly io ho usoo in praciico hocauso of moral
issuos. Iurihor, ii mighi givo nrms inconiivos io fahricaio ovioonco in oroor io goi an
oxira hononi. 1ho auihoriiios mighi ihon havo io invosi rosourcos io chock iho claims of
iho roporiing nrms, ihorohy losing much of iho appoal of iho lonioncy programmo iisolf.
Sinco ihoro oxisis a coniinuum of possihlo oquilihria, nrms nooo somo cooroinaiion io
soloci iho fully collusivo ouicomo giving ihom iho por-porioo proni .
02
illusiraios iho gamo ai porioo t = 2.
Ior any t 2, if up io iho provious porioo iho AA has noi siarioo an
invosiigaiion, wiih prohahiliiy c ii opons an inquiry in t, nrms oocioo whoihor
io rovoal, ano so on.
INSLI1 Iiguro 4.8 Gamo iroo, ai t = 2.
Wo rosirici aiioniion io iho caso whoro c _ (H H ),(H H ): in
iho ahsonco of anii-irusi policy, collusion woulo ariso ai oquilihrium.
SoIutIon 1o look for iho suh-gamo porfoci oquilihria of iho gamo, con-
sioor nrsi iho rovolaiion gamo" which is playoo onco an invosiigaiion is
oponoo hy iho AA. If a nrm rovoals, ii gois a payo of 1 inoopon-
oonily of iho aciion choson hy iho oihor nrms. If a nrm ooos noi rovoal any
informaiion hui ai loasi ono oihor nrm ooos, ihon iho formor nrm rocoivos
a payo of 1. Iinally, if no nrm rovoals any informaiion, oach nrm
rocoivos an oxpocioo payo
j(
H
1 c
1) (1 j)
H
1 c
. (20)
INSLI1 1ahlo 4.1 Iayo mairix in iho rovolaiion gamo"
Ii is oasy io chock ihai iho n-iuplo (:n|,.., :n| ), ihai wo oonoio
as (I,..,I), in which all nrms chooso io cooporaio wiih iho AA ohiaining
a roouciion in nnos, is always a Nash oquilihrium. Insioao, iho n-iuplo (:
:n|,.., : :n| ), or (NI,.., NI), is an oquilihrium: (1) if j1 < 1, always:
(2) if j1 _ 1 if iho following conoiiion holos:
j _
H H 1(1 c)
H H 1(1 c)
= ` j(c, 1, 1). (80)
Noio ihai whon iho (NI,.., NI) oquilihrium oxisis, ii woulo also ho iho
ono solocioo hy sianoaro criioria of oquilihrium solociion such as Iaroio-
oominanco or risk oominanco. 1horoforo, nrms rovoal informaiion only
Ii is also roasonahlo io holiovo ihai if nrms aro ahlo io cooroinaio on iho collusivo
ouicomo, ihoy will also ho ahlo io cooroinaio noi io rovoal whon ihis is an oquilihrium
which givos ihom a Iaroio suporior payo.
08
if j ` j. Noio ihai (a) whon no lonioncy programmo oxisis 1 = 1 ano
` j = 1: nrms will novor collahoraio wiih iho AA ovon afior an invosiigaiion
has siarioo: (h) io inouco rovolaiion iho hosi iho AA can oo is io soi 1 = 0.
As for iho oocisions iakon hy iho nrms ai t = 1, wo havo io nno iho
oiscounioo sum of pronis if a nrm oocioos io colluoo ano comparo ii wiih iho
oiscounioo sum of pronis if ii oocioos io ooviaio from iho collusivo siraiogy.
1his comparison musi ho oono for hoih casos, whon nrms will oocioo io rovoal
onco invosiigaioo, ano whon ihoy will profor noi io cooporaio wiih iho AA.
(1) C||&J n:J :n| : j ` j. In ihis caso nrms rovoal if an invosiigaiion
is oponoo hy iho AA. Donno H as iho oxpocioo proni immooiaioly hoforo
an invosiigaiion is oponoo. Ii is oasy io soo ihai:
H = c(
H
1 c
1) (1 c)(H cH ) (81)
which can ho rowriiion:
H =
(1 c)H c( 1)
1 c(1 c)
. (82)
If a nrm oocioos io soi iho collusivo prico, ihon iis oxpocioo oiscounioo
payo will ho:
\ = H cH =
H cc( 1)
1 c(1 c)
. (88)
If insioao a nrm oocioos io ooviaio from iho collusivo siraiogy, ihon iis
payo is givon hy:
\ = H
cH
1 c
. (84)
Collusion can ariso if \ _ \ , ihai is if iho following conoiiion is
saiisnoo:
c _
H H c(H H )
c(H H 1)
= c (c, 1). (8)
Iiguro 4.4 illusiraios c in iho plano (j, c), for givon valuos of c ano
1: ihis locus ooos noi oopono on j sinco in iho rogion consiooroo horo nrms
cooporaio wiih iho AA onco an invosiigaiion is oponoo.
04
Lolow iho lino, nrms profor io colluoo ovon ihough ihoy aniicipaio ihai,
if an invosiigaiion is oponoo, collusion woulo collapso hocauso nrms woulo
rovoal informaiion io iho AA. Ahovo iho lino, nrms, aniicipaiing rovolaiion,
profor io ooviaio, ano iho collusivo ouicomo novor occurs.
Noio also ihai iho loss gonorous iho lonioncy programmo (iho highor iho
rooucoo nno 1) iho lowor c : if nrms oxpoci ihai in caso an invosiigaiion
is oponoo ihoy can rovoal ano goi away wiih a small nno, ihoy will havo an
oxira inconiivo io chooso iho collusivo siraiogy. In oihor woros, a gonorous
lonioncy policy mighi siimulaio ox-anio collusion. (I shall como hack io ihis
issuo holow.)
INSLI1 Iiguro 4.4. Lquilihrium soluiions for givon policy paramoiors.
(2) C||&J n:J : :n| : j _ ` j. In ihis caso, nrms aniicipaio ihai
ovon if an invosiigaiion is siarioo, no nrm will rovoal any informaiion. Only
hy hoginning an invosiigaiion ano ihon proving iho nrms guiliy, can iho AA
hroak iho cariol.
Wriio iho oxpocioo proni immooiaioly hoforo knowing if an invosiigaiion
is oponoo as:
H = c[j(
H
1 c
1) (1 j)(
H
1 c
)[ (1 c)(H cH ), (80)
whonco:
H =
c[j( 1) (1 j)( )[ (1 c)H
1 c(1 c)
. (87)
If a nrm follows iho collusivo siraiogy iis oxpocioo oiscounioo payo is
givon hy:
\ = H cH =
H (1 ) ccj( 1)
1 c(1 c)
. (88)
As hoforo, a nrm which ooviaios ohiains a payo \ = H . Somo
simplo hui horing algohra shows ihai iho inoqualiiy \ _ \ is saiisnoo
for:
c _
(1 c)[H H c(H H )[
c[j1(1 c) j(H H ) H (1 c) H cH [
= c (c, j, 1),
(80)
0
whon j [1(1 c) H H [ H H c(H H ), ano always
saiisnoo oihorwiso. Iiguro 4.4 illusiraios iho curvo, which oocroasos wiih
j: oihor ihings hoing oqual, an incroaso in iho prohahiliiy of hoing founo
guiliy will mako collusion loss likoly (ano ai low onough j, collusion is always
proforroo). Of courso, whon 1 risos, givon j, collusion will ho loss proniahlo.
Iiguro 4.4 illusiraios iho oquilihrium soluiions of iho gamo. Noio ihai if
no LI is inirooucoo (1 = 1) nrms havo no roason io rovoal informaiion io
iho auihoriiy onco an invosiigaiion is oponoo, ano iho oquilihrium ouicomos
woulo ho oonnoo uniquoly hy iho lino c . Lolow iho lino, nrms woulo col-
luoo (CNI): ahovo ii, ihoy woulo noi (NC), hocauso any proposoo agroomoni
woulo hroak oown immooiaioly.
Iooucoo nnos (1 < 1) mooify iho siiuaiion: whon j < ` j nrms oo noi
rovoal if moniioroo, ano iho analysis ahovo siill applios: iho lino c oisiin-
guishos iho oquilihrium whoro nrms colluoo ano noi rovoal from ihai whoro
no collusion occurs. Whon j _ ` j nrms aniicipaio ihai ihoy rovoal informa-
iion if moniioroo: ahovo c ihoy profor noi io colluoo ano holow c ihoy
iniiially colluoo ano ihon rovoal if moniioroo.
1o unoorsiano iho rolo of lonioncy on iho susiainahiliiy of collusion, con-
sioor whai happons whon, siariing wiih a siiuaiion in which no LI is usoo,
wo iniroouco rooucoo nnos. 1his has iwo oocis which aro shown in Iiguro
BB. On iho ono hano, iho LI mighi havo an aovorso, pro-collusivo ooci.
Ly rooucing iho oxpocioo valuo of iho nno io ho paio if an invosiigaiion is
oponoo, iho LI mighi givo an inconiivo io collusion. 1his occurs in iho aroa
(a) incluooo hoiwoon iho ihin sociion of iho curvo c ano iho lino c .
In ihis rogion, no collusion can ho susiainoo in iho inousiry if full nnos aro
givon, hui unoor a LI nrms woulo ongago in collusion ano, if moniioroo,
ihoy woulo rovoal ano pay iho rooucoo nno 1 < 1.
On iho oihor hano, ihoro oxisis an aroa (h) whoro collusion will hroak
oown (hocauso iho nrms rovoal informaiion) if iho AA siaris moniioring iho
inousiry, whoroas in iho ahsonco of a LI collusion coulo siop only afior a
succossful comploio invosiigaiion. 1his is iho aroa holow iho ooiioo pari of
iho curvo c .
If iho Lonioncy Irogrammo was unaniicipaioo, nrms woulo oocioo whoihor io colluoo
or noi on iho hasis of an oxpocioo nno 1 @ 1 ano lloiofoio woilo nol coopoialo inloss
c < c . Wlon inoxpoclooly llo lonioncy piogiam is inliooicoo, collision woilo Lioak
oown in all llo aioa (2), willoil any aovoiso oocl aiising.
00
Lpsohphqwlqj wkh rswlpdo srolf| A lonioncy piogiammo is lloio-
foio nol inamLigioisly oplimal, as il migll inliooico a liaoo-o Lolwoon
lowoi ox-anlo ooloiionco ano ox-posl oosislonco of cailols. Molla ano Iolo
(1000, 2001) foimally analyso llo oplimal anli-liisl policy, ano slow llal
lonioncy sloilo Lo isoo wlon llo AA las limiloo iosoiicos. A fill analysis
ioqiiios maximising llo oLjoclivo finclion of llo AA, llal is wolfaio, siLjocl
lo ils Liogol consliainl. Howovoi, ovon willoil a fill analysis, nolo llal llo
AA will iank llo iogions as follows: NCCICNI. Cailols onlail an al-
localivo omcioncy loss, ano so llo AA wislos lo ooloi oi Lioak llom. In llo
fisl caso (NC), cailols aio ooloiioo; in llo socono (CI), cailols aio Liokon
as soon as an invosligalion is slailoo, Locaiso fims iovoal infoimalion lo
llo AA; in llo lliio, lloy aio Liokon only if an invosligalion is slailoo ano
piosocilion is siccossfil.
Inliilivoly, if llo AA lao a ligl Liogol, il coilo sol ligl valios of (j, c)
ano woilo Lo aLlo lo acliovo fill ooloiionco Ly ising llo fill fno 1, wlilo
inliooicing a lonioncy piogiammo migll iosill in lowoi ooloiionco (i.o., ono-
ing ip in iogion (a)). Insloao, if llo AA lao lowoi Liogol, fill ooloiionco can
novoi Lo acliovoo ano il Locomos Lolloi lo implomonl llo oilcomo wloio
fims collioo ano iovoal (CI) Ly gianling maximim oiscoinls (1 = 0) ialloi
llan laving fill collision (CNI).
Ilqh uhgxfwlrqv rqo| ehiruh wkh lqtxlu| lv rshqhg An alloinalivo
lonioncy policy wloio fims can apply foi fno oiscoinls only hJ: an inqiiiy
is oponoo woilo coiiospono lo llo samo gamo as aLovo, will llo oioionco
llal al llo Loginning of limo t = 2, fims simillanooisly clooso wlolloi
lo iovoal llo cailol lo llo AA, oi nol; if no fim iovoals, llo AA opons an
invosligalion will pioLaLilily c, pioving llom giilly will pioLaLilily j, ano
afloi llo invosligalion is iosolvoo, payos aio ioalizoo.
Unooi llis alloinalivo iogimo llo Lonioncy Iiogiammo is complololy in-
ooclivo. An oqiiliLiiim in wlicl fims clooso lo collioo ano iovoal ooos
nol oxisl. Ly collioing wlon oxpocling llo cailol lo Lo Liokon Ly infoima-
lion givon lo llo AA, a fim woilo gol \ = H c(H ,(1 c) 1). Ly
oovialing, il woilo gol \ = H cH ,(1 c). Sinco H H ano 1 _ 0,
il follows llal \ < \ .
In llo caso wloio fims woio onlilloo lo fno oiscoinls nJ: llo oponing of
an invosligalion, llo oxpocloo piofl fiom collision oocioasos wlon llo ovonl
oponing of an invosligalion` ioalizos, loaoing fims lo iovoal. In llo caso
07
wo aio consiooiing loio, insloao, nolling now lappons Lolwoon llo momonl
fims oocioo on collision ano llo momonl lloy aio askoo lo coopoialo will
llo ailloiilios lo Lioak oown llo cailol. If Lonioncy Iiogiammos aio lo Lo
ooclivo in Lioaking oown cailols, lloy sloilo Lo oxlonooo lo Lonofl fims
wlicl iovoal afloi llo inoisliy is pil inooi moniloiing.
8 Mrlqw0Yhqwxuhv dqg rwkhu krul}rqwdo djuhh0
phqwv
I analyso in llis soclion loiizonlal agioomonls olloi llan collisivo onos.
Soclion .1 ooals will joinl vonliios in gonoial; soclion .2 looks al iosoaicl
joinl vonliios; soclion .8 al olloi foims of coopoialion involving loclnology
ano innovalions.
814 Mrlqw yhqwxuhv
Jloio aio a nimLoi of loiizonlal agioomonls llal go inooi llo namo of ].:
:&:. (JVs). Jloso aio agioomonls Lolwoon compolilois llal cioalo a now
onlily llal caiiios oil somo aclivilios in sloao of llo pailnois. An oxamplo
of JVs aio :.n:| ].: :&:.: in llal caso, lwo oi moio pailnois coaso
ooing inooponoonl iosoaicl ano oovolopmonl (poilaps in a pailicilai folo
only) lo oo il logolloi, willin llo now onlily joinlly sol ip. Jloio aio
many olloi possiLlo aclivilios llal coilo mako llo oLjocl of a joinl vonliio.
1:J&.: JVs ano nn:|.:j n:J .n|. JVs aio olloi oxamplos. In llo
foimoi, lwo (oi moio) pailnois oologalo piooiclion lo a common onlily; in
llo lalloi, lloy conlinio lo manifacliio inooponoonlly, Lil maikol joinlly.
Givon lloii naliio, joinl vonliios aio a lyLiio onlily llal can lio somolow
in Lolwoon cailols ano moigois. Consiooi foi inslanco a salos JV Lolwoon
lwo compolilois, wloso only piiposo is lo sol piicos oi qianlilios in llo fnal
maikol willoil any aooilional aclivily. Jlis is nolling olso llan a cailol
Lolwoon llo lwo compolilois (ano sloilo accoioingly fall inooi ailiclo 81 of
llo Jioaly in llo LU ano inooi soclion 1 of llo Sloiman Acl in llo US).
Al llo olloi oxliomo, consiooi lwo compolilois llal givo all lloii iosoaicl,
piooiclion ano salos assols in a coilain socloi lo a nowly cioaloo fim wloso
ownoislip lloy slaio. Sinco llo pailnois coaso any inooponoonl Lisinoss in
llo socloi, llo JV is akin lo a moigoi, ano sloilo Lo lioaloo accoioingly Ly
08
llo law.
Apail fiom llo oxliomo casos wloio llo JV is nolling olso llan a cailol,
sinco pailnois simply agioo on somo oocisions ialloi llan caiiying oil somo
aclivilios logolloi, llo oconomic analysis of llo oocls of a joinl vonliio is
nol voiy oioionl llan llal of moigois (soo claploi ). In Loll casos, lloio
migll Lo a liaoo-o Lolwoon maikol powoi ano omcioncy. Ioi inslanco, an
opoialion wloioLy lwo compolilois oocioo lo oologalo lloii maikoling ano
salos aclivilios lo a joinlly ownoo onlily migll lavo anli-compolilivo oocls
Locaiso llo joinl vonliio woilo lavo laigoi maikol powoi llan if llo pailnois
opoialoo inooponoonlly. Howovoi, il migll also onlail pio-compolilivo oocls
if llo cooioinalion of aclivilios llioigl llo joinl vonliio allows llom lo
ialionaliso lloii oisliiLilion ano maikoling ooils. Jlo nol impacl of llo
opoialion can Lo assossoo only afloi laving analysoo llo inoisliy (lo soo
wlolloi lloio is inoooo scopo foi oxoicising maikol powoi) ano llo likoly
omcioncy gains of llo joinl vonliio. Liko foi moigois, a gooo sciooning
oovico is lo look al llo inilial maikol powoi of llo pailnois: if lloy lavo
only small maikol slaios, lloio woilo Lo lilllo poinl in a oolailoo analysis of
llo opoialion, ano llo joinl vonliio sloilo Lo cloaioo.
Aooilional caio sloilo lowovoi Lo oovoloo lo ancillaiy iosliainls. Un-
liko piio moigois, wloio llo pailnois oisappoai ano lloii assols aio onliioly
liansmilloo lo llo moigoo onlily, in a joinl vonliio pailnois migll con-
linio aclivily in llo socloi. Jloiofoio, lloii oocisions - ano wolfaio as a
consoqionco - migll Lo aocloo Ly iosliainls lo lloii Lolavioii. anli-liisl
ailloiilios sloilo avoio iosliainls innocossaiy lo llo lifo of llo JV, sicl as
oilpil ano piico iosliiclions in maikols inaocloo Ly llo JV.
815 Uhvhdufk mrlqw yhqwxuhv
CollaLoialivo agioomonls Lolwoon fims in iosoaicl ano oovolopmonl (I:D)
aclivilios oosoivo a spocial lioalmonl oio lo llo pailicilai naliio of I:D
Il is oimcill a piioii lo say wlolloi a joinl vonliio sloilo Lo consiooioo as a loiizonlal
agioomonl oi as a moigoi Ly llo law. In llo LU, llo oislinclion was nol voiy cloai, ano
I lavo pioLaLly nol Loon llo only ono lo sliigglo lo inooislano llo oioionco Lolwoon
coopoialivo ano conconlialivo JVs (llo foimoi isoo lo fall inooi ailiclo 81, llo lalloi
inooi llo Moigoi Iogilalion). Afloi llo amonoomonl (Iogilalion 1810,07) of llo Moigoi
Iogilalion, J&||-J&:.: JVs aio lioaloo as moigois, wloioas JVs llal poifoim only fow
spocifc finclions aio ovalialoo inooi ailiclo 81. Soo Iilloi ol al. (2000: cl. 0, L).
Soo Coiioia (1008: 788-0) ano Woioon (1008: 714).
Soo also Woioon (1008: 728-72).
00
(moio gonoially, of knowloogo), wlicl is oflon claiacloiisoo Ly ..||:. ano
::-:.n|:j.
Spillovois aio a oislinclivo foaliio of I:D Locaiso loclnology ano know-
low oflon ow fiom a fim lo anolloi, foi inslanco llioigl imilalion (ano
iovoiso-onginooiing), ano woikois` moLilily. Jlis iooicos llo oxlonl lo wlicl
fims can n::.n llo iosills of lloii I:D ooils, wlicl in liin iooicos
lloii inconlivo lo invosl in I:D. Jiio, lloio oxisl vaiiois foims of pioloclion
of inlolloclial piopoily iiglls (palonls, copyiiglls, liaoo sociol laws) Lil
oflon lloy aio impoifocl.
I:D is also non-iival in llo sonso llal il can Lo isoo Ly olloi pailios
willoil ils valio Loing oiminisloo. Knowloogo migll Lo coslly lo cioalo llo
fisl limo, Lil onco il is lloio, ils oiision ooos nol mooify ils naliio. In llis
sonso, ox-posl ono woilo liko I:D lo spioao as micl as possiLlo in socioly.
Iiilloi, ono woilo liko lo avoio fims lo iopoal laigo invoslmonls lo gol
knowloogo wlicl oxisls alioaoy: oiision woilo avoio oiplicalions of cosls.
As a iosill of lloso lwo foaliios, llo maikol lofl alono is inlikoly lo
givo iiso lo socially oplimal lovols of iosoaicl. Iosoaicl joinl vonliios migll
lolp lo copo will lloso pioLloms ano cioalo appiopiialo lovols of I:D.
If fims collaLoialo in iosoaicl, lloy will slaio llo cosl of I:D, lloioLy
incioasing lloii inconlivos lo invosl; lloy will also lavo immooialo accoss lo
I:D oilpil, lloioLy incioasing oiision; fnally, lloy can cooioinalo lloii
ooil, lloioLy avoioing oiplicalion of invoslmonls.
Jlis simplo ioasoning piovioos llo ialionalo foi :.n:| ].: :&:.,
ovon wlon lloy involvo compoling fims. Howovoi, allowing compolilois lo
caiiy oil I:D logolloi migll also lavo cosls. Ioi inslanco, llo main mo-
livo Lolino ooing I:D migll Lo llo lopo lo gol a loao ovoi iivals: if all llo
main fims in llo inoisliy lako pail in a coopoialivo vonliio, llo inconlivo
lo caiiy oil I:D migll oiamalically fall; if llo joinl vonliio ooos nol only
concoin llo iosoaicl slago Lil also llo piooiclion ano maikoling slagos,
coopoialion migll oxlono lo llo piooicl maikol ano iosill in collisivo Lo-
lavioii. Jloiofoio, wlilo lloio aio gooo ioasons lo allow foi iosoaicl joinl
vonliios among compolilois, sicl loiizonlal agioomonls sloilo Lo limiloo
in scopo.
Joclnical soclion .4 piovioos a voiy simplo analysis of llo wolfaio oocls
of iosoaicl joinl vonliios. Jlis is an issio wlicl las alliacloo a lol of allon-
lion in llo lasl ffloon yoais. Ovoiall, llis lino of iosoaicl slows llal allowing
compolilois lo caiiy oil joinl iosoaicl piojocls migll Lo a sonsiLlo policy,
Lil will lwo cavoals. Iiisl, sicl a policy is Lonofcial only insofai as lloio
70
oxisl ligl onoigl spillovois. Inoooo, if spillovois aio ligl, fims aio inaLlo
lo appiopiialo lloii I:D ooil, ano co-opoialion incioasos I:D. Unfoili-
naloly, llo nooo foi cloai iilos ano foi avoioing aiLiliaiinoss ano inionco,
on llo ono lano, ano llo oimcilly of moasiiing spillovois on llo olloi, mako
il impossiLlo lo limil llo policy lo pailicilai soclois oi loclnologios wloio
moio spillovois aio likoly lo aiiso. Howovoi, a I:D piojocl is composoo of
many slagos, fiom Lasic iosoaicl lo applioo iosoaicl, lo oovolopmonl, pio-
oiclion ano maikoling. Lxloinalilios Loing ligloi al llo oailioi slagos of llis
pall, il makos sonso lo oxclioo maikoling opoialions fiom I:D coopoialivo
agioomonls among compolilois. In olloi woios, ono sloilo mako siio llal
coopoialion ooos nol oxlono loo closo lo llo piooicl maikol. Ono way lo oo
il is lo ioqiiio llal llo I:D iosills aio isoo inooponoonlly Ly collaLoialing
fims.
Jlis loaos is lo llo socono poinl, wlicl is llal llo ailloiilios sloilo
mako siio llal llo I:D coopoialion ooos nol spill ovoi" lo llo piooicl
maikol compolilion slago. Il is concoivaLlo llal fims llal slail lo woik
voiy closoly on I:D piojocls migll slail lo oxlono llo cooioinalion of lloii
Lolavioii onlo olloi sploios of llo lifo of llo fims. Anli-compolilivo
oocls of a iosoaicl joinl vonliio aio loss likoly if llo collaLoialing fims lavo
limiloo maikol powoi. Jloiofoio, a maikol slaio ciiloiion migll Lo isoo as a
pioxy lo scioon polonlially laimfil vonliios fiom ollois, llo foimoi laving
lo Lo cloaioo only afloi a lloioigl invosligalion.
Iiilloimoio, compolilion ailloiilios sloilo sciiliniso n:.||n:j :.:n.:.
lo llo agioomonl foi possiLlo anli-compolilivo claisos. Jlis migll Lo llo
caso, foi inslanco, if llo agioomonl solling ip llo IJV oivioos (googiaplical
oi piooicl) maikols among llo pailicipaling fims, llis iolaxing compoli-
lion ailifcially; oi if il calls foi llo paymonl of poi-inil ioyallios lo llo joinl
vonliio: llis woilo incioaso llo inil cosls of oilpil, ano woilo lavo llo
oocl of incioasing piicos (soo also Lolow, soclion .8.1). If paymonls aio
oio lo olo palonls ownoo Ly llo fims, oi Ly llo joinl vonliio, fxoo ialloi
llan poi-inil of oilpil paymonls woilo avoio oisloilion of compolilion.
Soo Mailin (108).
A similai oocl woilo lavo a iilo wlicl oslaLlislos llal llo cosl of fnancing llo joinl
vonliio falls on pailnois accoioing lo lloii ox-posl oilpil (llal is, llo oilpil lloy soll ano
wlicl incoipoialos llo iosills of llo joinl vonliio). Insloao, fnancing llo joinl vonliio on
llo Lasis of llo ox-anlo maikol slaios woilo nol oisloil llo inconlivos lo compolo ox-posl.
71
81514 Wuhdwphqw ri uhvhdufk mrlqw yhqwxuhv lq XV dqg HX odz
In llo US ano in llo LU, iosoaicl joinl vonliios lavo Loon soon will favoii
sinco llo oaily Ligllios. Dio also lo polilical ano inoisliial policy ioasons
(il was foll al llo limo llal llo siccoss of oomoslic fims in inloinalional
maikols ciicially ooponooo on lloii aovancos in loclnology, ano llal moio
inconlivos lo innovalo sloilo Lo givon lo oomoslic fims), a moio lonionl
anli-liisl appioacl was followoo foi fims collaLoialing in I:D.
In llo US, llo Nalional Coopoialivo Iosoaicl Acl of 1084 (1 USC 4801)
oslaLlisloo llal joinl vonliios in I:D sloilo Lo siLjocl lo a :&| J :n.:
ialloi llan Loing : . illogal, ano llal - if piopoily nolifoo lo llo anli-
liisl agoncios - lloy sloilo Lo siLjocl lo singlo ialloi llan lioLlo oamagos
in caso a coiil woilo fno llo pailnois giilly of anli-liisl infiingomonl.
In llo LU, a h|| rn.: issioo in 108 oxompls fiom ailiclo 81
(llon ailiclo 8) of llo Jioaly coilain foims of coopoialivo agioomonls in
I:D, siLjocl lo coilain conoilions. In pailicilai, pailnois sloilo Lo fioo
lo iso llo iosills of I:D inooponoonlly in piooiclion ano oisliiLilion (lo
avoio iosliiclion of compolilion), ano lloii comLinoo maikol slaio sloilo
nol oxcooo 20/ (if lloy aio compolilois). Nolo, lowovoi, llal in caso llo
joinl vonliio ooos nol qialify foi llo Llock oxomplion, il is slill possiLlo foi
llo pailios lo apply foi an inoivioial oxomplion lo ailiclo 81.
816 Rwkhu irupv ri frrshudwlrq uhjduglqj whfkqrorj|
Jloio aio a nimLoi of olloi agioomonls llal compoling fims migll lavo
lo slaio I:D iosills, oi lo fx loclnological slanoaios. Liko iosoaicl joinl
vonliios, lloy can lavo Lonofcial wolfaio oocls, allloigl somo cailion
is nooooo lo piovonl ancillaiy claisos llal migll ono ip will oisloiling
compolilion. In wlal follows, I Liioy oisciss llom.
81614 Furvv0olfhqvlqj dqg sdwhqw srrolqj
C:..-|.:..:j occiis wlon lwo fims allow oacl olloi lo iso own loclnology
piolocloo Ly palonls. In piinciplo, il is possiLlo llal sicl an agioomonl
migll Lo isoo lo iosliicl compolilion in llo maikolplaco. Jlis is llo caso,
LC Iogilalion 418,8, oxlonooo Ly Iogilalion 11,08 in 1008.
Jlo I:D Llock oxomplion applios also lo joinl oisliiLilion if llo pailios` piooiclion
ooos nol oxcooo 10/ comLinoo maikol slaio.
72
foi inslanco, wlon llo loclnologios al slako aio siLslililaLlo, ano llo cioss-
liconsing agioomonls conlain poi-inil ioyallios, llal iooico llo inconlivo lo
maikol aggiossivoly (foi a loclnical aigimonl soo oxoiciso 2).
Howovoi, il oflon lappons llal fims lavo ossonlial (oi Llocking") palonls
llal aio nooooo foi fiilloi loclnological piogioss oi foi fnal piooiclion.
Sipposo llal lwo fims coilo inliooico a now piocoss (oi manifacliio a
now gooo) llal ioqiiios iso of complomonlaiy loclnologios piolocloo Ly lwo
palonls, oacl ownoo Ly ono of llo lwo fims. In llis silialion, cioss-liconsing
migll allow loclnological aovanco (oi piooiclion).
Iiilloimoio, if llo palonls aio complomonlaiy, il woilo Lo Lolloi lo
lavo Loll fims laving Loll palonls. Iocall llal wlon lwo fims piooico
complomonlaiy gooos oacl of llom fails lo inloinaliso llo oxloinalily llal il
imposos on llo olloi, iosilling in loo ligl piicos al oqiiliLiiim iolalivo lo
a fim wlicl las Loll (wo lavo soon an applicalion of llis piinciplo in llo
caso of voilically iolaloo piooicls, wloio voilical inlogialion woilo gol iio of
ooiLlo maiginalisalion). Ioi complomonlaiy loclnologios, llo samo piinciplo
woilo lolo, ano cioss-liconsing woilo iooico piicos (soo also oxoiciso 10).
Nolo also llal llo Losl silialion foi compolilion woilo aiiso wlon cioss-
liconsos aio ioyally-fioo, oi wlon lloy spocify fxoo paymonls ialloi llan
inil ioyallios, as llo lalloi woilo amoinl lo ligloi vaiiaLlo cosls ano iooico
oilpil.
Similai ioasoning applios lo a n: |, wlicl migll Lo a fim oi olloi
oiganisalion llal lolos llo palonl iiglls of lwo oi moio fims, ano liconso
llom lo lliio pailios as a packago. Again, if llo palonls aio ossonlial inpils
in llo loclnological piocoss, lloii availaLilily as a packago is liglly oosiiaLlo,
ano lo llo oxlonl lloy aio complomonlaiy, laving a llom pooloo woilo koop
ioyallios lowoi.
Ialonl pools migll lavo llo aooilional posilivo foaliio of oocioasing
liansaclion cosls, as ono fim woilo Lo spaioo limo-consiming Lilaloial no-
golialions ano coilo insloao ooal will anolloi paily only.
Soo Lswaian (1004) foi a iopoaloo gamo in wlicl cioss-liconsing facililalos collision.
Of coiiso, nol all palonl pools nocossaiily packago only complomonlaiy palonls. In
llo 5&nn.115A caso, llo lwo loaoois in lasoi oyo siigoiy foimoo a palonl pool ano llo
IJC clallongoo llo agioomonl Locaiso il involvoo compoling, ialloi llan complomonlaiy,
palonls (soo Slapiio, 2000).
Soo Moigos (2001).
78
81615 Frrshudwlyh vwdqgdug0vhwwlqj
Jloio aio many oxamplos (fiom compacl oiscs, lo lolovision, fiom onciipl-
ing of oigilal misical lo oigilal JV, fiom WoL piolocols lo viooocassollos)
wloio fims llal compolo in llo oovolopmonl of a now loclnology oocioo lo
sol common slanoaios. Jlo qioslion is wlolloi sicl coopoialion in fxing
slanoaios is wolfaio impioving oi ialloi anli-compolilivo. Il liins oil lo Lo
a oimcill qioslion, llal las no a piioii answoi. Iollowing Slapiio (2001), I
Liioy simmaiiso llo main aigimonls pio ano againsl coopoialivo slanoaio-
solling. Unooislanoing of nolwoik oxloinalilios ano of lloii oocls is ciicial
loio (soo also claplois 2 ano 7).
Jlo main Lonofl fiom common slanoaios is llal consimois will Lolong
lo llo samo singlo nolwoik. Jloiofoio, lloy will Lo aLlo lo comminicalo
oiioclly will oacl olloi in plysical nolwoiks (foi inslanco, oacl consimoi
can oxclango flos will all compiloi isois wlo lavo llo samo opoialivo
syslom), ano lloy will onjoy a laigoi vaiioly in inoiiocl nolwoiks (foi inslanco,
soflwaio piogiammois will faco a laigoi maikol ano will oovolop a laigoi
nimLoi of applicalions). Il is nol a small aovanlago, llink foi inslanco of
llo inconvonioncos if yoi coilo call only lalf of llo popilalion Locaiso llo
olloi lalf iso a oioionl loloplono slanoaio!
An aooilional Lonofl is llal consimois oo nol iisk Loing slianooo will
a piooicl llal isos a slanoaio llal liins oil lo Lo aLanoonoo laloi. A
slanoaios wai can cioalo a lol of incoilainly as lo wlicl slanoaio will win,
iosilling in consimois oolaying lloii piiclaso foi foai of Loing slianooo will
llo wiong piooicl, ano llo maikol nol laking o wlon il coilo.
A common slanoaio also implios foicoi compolilion, sinco consimois will
faco gioaloi cloico willin llo samo slanoaio (allloigl smalloi cloico acioss
slanoaios, soo Lolow). Insloao, if slanoaios woio oioionl, consimois woilo
lono lo Lo lockoo will a givon piooicl slanoaio, ano compolilion woilo Lo
iooicoo.
Howovoi, solling a common slanoaio moans llal lloio is no compolilion
foi llo oominanl slanoaio. Jlis migll lavo sovoial implicalions. Iiisl of
all, il is nol cloai llal llo inoisliy will pick ip llo Losl slanoaio, oi llo ono
llal woilo piovail if lloio was maikol compolilion foi llo oominanl slan-
oaio. A slanoaio migll Lo closon on ciiloiia llal follow moio llo oioionl
Laigaining powois of llo fims involvoo llan olloi, moio woilly, consio-
Soo Dianovo ano Ganoal (2000) foi an inloiosling accoinl of llo slanoaio wai Lolwoon
DVD ano DVXX.
74
oialions (govoinmonl oiganisalions migll also Lo involvoo in llo slanoaio
solling piocoss, wlicl migll aoo Liioaiciacy Lil lolp fno a gooo compio-
miso). In olloi woios, il is possiLlo llal compolilion foi llo slanoaio woilo
lolp solocl llo slanoaio wlicl is moio appiocialoo Ly llo maikol, wloioas
inooi a coopoialivo slanoaio llis soloclion piocoss woilo nol occii. Socono,
piocisoly Locaiso nolwoik oxloinalilios aio impoilanl, aLsonl a coopoialivo
slanoaio llo maikol will isially ono ip will ono slanoaio, will incompal-
iLlo piooicls oisappoaiing allogolloi. Afloi an inilial plaso wloio oioionl
slanoaios co-oxisl, ono will isially piovail. Anlicipaling llo facl llal ovon-
lially llo maikol will . lowaios ono slanoaio oi llo olloi, fims ongago
in inlonsivo compolilion in lloso inilial plasos. Consimois will Lonofl fiom
llis compolilion, ovon lloigl lloy will pay ligloi piicos afloi llo slanoaios
wai las sollloo ano ono fim will piovail. Jlis moclanism is voiy similai
lo llo ono wlicl occiis inooi swilcling cosls: ox-anlo compolilion is voiy
inlonso lo acqiiio a laigo cislomoi Laso, Lil ox-posl compolilion is iolaxoo
onco consimois aio lockoo-in will a pailicilai piooicl (soo also claploi 2).
Jloiofoio, coopoialivo slanoaio-solling implios a cloai liaoo-o Lolwoon
ox-anlo ano ox-posl compolilion: il oliminalos llo foimoi Lil il inlonsifos
llo lalloi. Il is voiy oimcill lo conclioo a piioii wlolloi llo nol oocl
is posilivo oi nol. Slapiio (2001) omplasisos llal llo caso foi coopoialivo
slanoaio solling is voiy sliong if a slanoaios wai is likoly lo oolay (oi fail
allogolloi) llo maikol Locaiso consimois foai Loing slianooo will a piooicl
llal las llo losing slanoaio.
Il also lolps wlon llo piooicl lo Lo oovolopoo nooos complomonlaiy
loclnologios ownoo Ly oioionl fims. In llis caso, coopoialivo slanoaio-
solling woilo allow lo pool milially Llocking palonls logolloi, will llo
samo Lonofls oosciiLoo in llo pioviois soclion.
Ovoiall, il makos sonso lo allow foi coopoialivo slanoaio-solling, Lil
will somo cailion. In pailicilai, ancillaiy agioomonls sloilo Lo caiofilly
sciilinisoo. Ioi inslanco, sioo claisos wlicl call foi cioss poi-inil of oilpil
ioyally paymonls sloilo Lo avoiooo Locaiso lloy lono lo iolax compolilion
in llo piooicl maikol.
Howovoi, il is also liio llal somo nogolialions foi solling llo slanoaio coopoialivoly
migll Lo voiy slow. A caso in poinl is llo slanoaio foi Higl-Dofnilion Jolovision, wlicl
look lon yoais lo Lo sol, consiooiaLly oolaying llo lako-o of llo maikol foi oigilal JV.
7
817 Frrshudwlyh U)G-
Consiooi a simplo moool oio lo oÀspiomonl ano Jacqiomin (1088), lo anal-
yso llo oocls of coopoialivo agioomonls in I:D.
Jlo oomano finclion foi llo lomogonoois gooo piooicoo Ly llo lwo
fims is j = c Q, will Q = , iho sum of inoivioual ouipuis. Iirm i
(i = 1, 2) is characiorisoo hy marginal cosis c = C a |a , whoro a is iho
I:D invosimoni maoo hy nrm i, ano | [0, 1[ is a paramoior ihai inoicaios
iho spillovor from iho I:D invosimoni a maoo hy iho rival nrm. 1ho cosi of
I:D is givon hy iho funciion qa ,2, whoro q 4,3 is a paramoior oxprossing
iho omcioncy of I:D proouciion. (Soo chapior 2 for vory similar moools
of innovaiion.)
Consioor iwo casos. In iho nrsi, nrms compoio hoih in I:D ano in
quaniiiios. In iho socono, ihoy cooporaio in ihoir I:D invosimoni oocisions,
hui ihon compoio in iho markoiplaco, ihai is ihoy chooso quaniiiios non-
cooporaiivoly.
Frpshwlwlrq lq erwk vwdjhv In iho nrsi caso, nrms simulianoously invosi
in I:D ai iho nrsi siago: ihoy ihon simulianoously chooso quaniiiios in iho
socono siago.
Odvw vwdjh= txdqwlw| frpshwlwlrq Ai iho lasi siago of iho gamo,
oach nrm i choosos io maximiso iis proni funciion : = (c
c (a , a )) qa ,2, givon (a , a ). Ii is oasily chockoo ihai iho (Cournoi)
oquilihrium ouipui is givon hy:
=
c 2c (a , a ) c (a , a )
3
=
c C a (2 |) a (2| 1)
3
. (40)
Afior suhsiiiuiion, ono can chock ihai pronis aro givon hy:
: (a , a ) =
_
c C a (2 |) a (2| 1)
3
_

q
2
a . (41)
1ho rosiriciion q 7,6 oorivos from iho siahiliiy conoiiions of iho gamo, which aro
siricior ihan iho socono-oroor conoiiions (ihai also roquiro q io ho largo onough). Soo
noxi fooinoio.
70
Iluvw vwdjh= U)G frpshwlwlrq Ai iho nrsi siago of iho gamo, oach
nrm will chooso a io maximiso : (a , a ). Ly iaking iho nrsi oorivaiivos
d: ,da = 0 ano solving iho sysiom of IOCs, ano focusing on iho sym-
moiric oquilihrium a = a = a wo ohiain iho oquilihrium I:D lovol for
oach nrm:
a =
2(c C)(2 |)
0q 4 2| 2|
. (42)
Irom ihis soluiion, ono can ihon ohiain hy suhsiiiuiion iho oquilihrium
lovols of quaniiiy ano proni:
=
3(c C)q
0q 4 2| 2|
; : =
(c C) (0q 8 8| 2| )
(0q 4 2| 2| )
. (48)
Consumor surplus is givon hy
Co =
(c j )Q
2
=
18(c C) q
(0q 4 2| 2| )
. (44)
Iinally, wolfaro is:
\ = 2: Co =
4(c C) (0q 4 4| | )
(0q 4 2| 2| )
. (4)
Frrshudwlrq lq U)G I will now consioor iho caso whoro nrms compoio in
quaniiiios in iho proouci markoi, hui cooporaio in ihoir I:D invosimoni oo-
cisions. Sinco nrms iako non-cooporaiivo oocisions in iho proouci markoi
placo, iho lasi siago is iho samo as hoforo.
1ho socono-oroor conoiiion roquiros q 5+5 |, ,<. Jlo slaLilily conoilions foi llo
I:D slago ioqiiio +d ,da da ,,+d ,da ,=

^5+5 |,+5| 4,`,^5+5 |, <q`
< 4.
Jloso aio salisfoo foi q 5+5 |,+4 |,,6. A simcionl conoilion foi slaLilily lo Lo mol
is llal q 7,6, wlicl also salisfos llo socono-oiooi conoilion.
I assimo loio llal fims conlinio lo lavo llo samo oogioo of spillovois ovon wlon
lloy coopoialo. Ioilaps il woilo Lo naliial lo sipposo llal wlon lloy coopoialo lloy
also slaio complololy lloii I:D iosills, loaoing lo | @ 4; soo Molla (1000) foi sicl a
foimalisalion. In llis caso, llo piivalo ano social Lonofls fiom I:D coopoialion woilo
Lo sliongoi.
77
Al llo fisl slago of llo gamo, lowovoi, fims will clooso a , a lo max-
imiso lloii joinl piofl : (a , a ) =
: (a , a ):
: (a , a ) =
_
_
c C a (2 |) a (2| 1)
3
_

q
2
a
_
. (40)
Iocusing on iho symmoiric oquilihrium, wo nno:
a =
2(c C)(1 |)
0q 2(1 |)
. (47)
Ly suhsiiiuiion iho oquilihrium lovols of a nrm`s quaniiiy ano pronis aro:
=
3(c C)q
0q 2(1 |)
, : =
(c C) q
0q 2(1 |)
. (48)
Wo can now compuio consumor surplus as:
Co =
(c j )Q
2
=
18(c C) q
(0q 2 4| 2| )
, (40)
ano wolfaro as:
\ = 2: Co =
4(c C) (0q 1 2| | )
(0q 2 4| 2| )
. (0)
Wkh hhfw ri d mrlqw0yhqwxuh lq U)G Ii is now possihlo io comparo
iho rosulis unoor iho iwo rogimos, ano chock ihai | _ 1,2 guaranioos ihai
I:D invosimonis, ouipuis ano wolfaro aro highor unoor iho rogimo of coop-
oraiivo I:D ihan unoor iho rogimo of compoiiiion in hoih siagos. Inoooo,
a a amounis io iho inoqualiiy:
18q(c C)(1 2|)
(0q 2 4| 2| ) (0q 4 2| 2| )
0, (1)
which holos for | < 1,2: can ho rowriiion as:
78
6q(c C)(1 | 2| )
(0q 2 4| 2| ) (0q 4 2| 2| )
0, (2)
which also holos for | < 1,2. Iinally, \ \ can ho rowriiion as:
36q (c C) (1 2|) (0q 4 | (36q 12 12| 4| ))
(0q 2 4| 2| ) (0q 4 2| 2| )
0; (8)
Sinco iho lasi iorm ai iho numoraior of iho LHS is always posiiivo (givon
ihai | _ 1 ano ihai q 4,3), again iho inoqualiiy holos for | < 1,2. In oihor
woros, a rosoarch joini-voniuro raisos wolfaro if spillovors aro largo onough
(| _ 1,2).
Whon spillovors aro largo onough, non-cooporaiing nrms aniicipaio ihai
ihoy woulo noi ho ahlo io appropriaio iho rosuli of ihoir I:D invosimonis,
ano roouco accoroingly ihoir invosimonis. Unoor I:D cooporaiion, ihoy
iniornaliso iho ooci of iho spillovor ano ihis rosulis in highor I:D oxpon-
oiiuros.
Ono can chock ihai pronis aro always highor unoor iho cooporaiivo I:D
rogimo, which moans ihai ihoro woulo ho no nooo for suhsioios (or oihor
nnancial inconiivos) for nrms io cooroinaio ihoir I:D lovols: ihoy havo
privaio inconiivos io oo so.
H{whqvlrqv dqg glvfxvvlrq 1his simplo moool has givon riso io a
vasi liioraiuro ooaling wiih iho oocis of I:D cooporaiion. A numhor of
oxionsions havo hoon consiooroo, such as consiooring prico compoiiiion, gon-
oralising cosi, oomano funciions, ano iho numhor of nrms, ano so on.
1ho main qualiiaiivo rosulis of iho analysis oo noi chango across all ihoso
spocincaiions, ihough.
Loahy ano Noary (1007) analysos I:D cooporaiion in a gonoral moool,
ano comparos ii wiih aliornaiivo I:D policios io incroaso I:D invosimonis,
such as I:D ano ouipui suhsioios. 1hoy concluoo ihai iho formor policy is
hoiior ihan iho laiior, hui ihoy also warn ihai iho wolfaro improvomoni io
ho ohiainoo ihrough I:D cooporaiivo agroomonis is unlikoly io ho of a high
I confoss I havo conirihuioo io raiso iho numhor of papors on ihis iopic woll ahovo iho
social opiimum: Moiia (1002) looks ai iho oocis of I:D joini voniuros upon oniry ano
Moiia (1000) consioors ihom in an iniornaiional oconomics conioxi.
70
oroor of magniiuoo. 1hoy also siross ihai I:D cooporaiion is privaioly prof-
iiahlo, so ihoro is no nooo for furihor govornmoni inconiivos hoyono allowing
compoiing nrms io ongago in cooporaiivo projocis.
9 H{huflvhv
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nh nn:j.:n| ..) 1: n:|: .nn|| : Jn: nnj, 5|:..|.n, n :j
..n.|n: ..&n.: n:J jnn &:, .| ]&. .nn|| J.::.: | .:
nn:| n|. |n : n | :|j, n:J |: n: :|j 2 :J:. |n .||
|.: |nj:&.) n|. |j n|. |n nn:j.:n| . c n:J : ]rJ .).
1&|J j& r |n n ||&.. j&.|.h:.&n .| :.jj: .:nj..) &|J
n: |.||j n:.. .: 1..| : .: 5|:..|.n 5| J:nn||j j&: .:.
82
H{huflvh 44 C:..J: 2 ]:n. :J&.:j |nj:&. jJ. n:J |..:j
quaniiiios .: n| :.J J: n: .:]:. :&nh: J :.J.. 1nn:J .: |
.:J&.:j .. j.: hj j = 1Q, Q h.:j | .&n J .:J..J&n| &&.. 1.:n.
n: .J:.n|: |j |n .: :.n: nn:j.:n| .., n:J | .nn J..&:
Jn: c. C:..J: | J||.:j :.jj: .:nj... 1n| ]:n .. | &&
[1,4, 1,3[ n | hj.::.:j J | jnn, n:J :.:&. J . &:|..
n J.n.: &:.. J: n J.n.:, n| ]:n .. | j&n:.j |.|
.. | An.| j&.|.h:.&n J | :-.| jnn. n) 1.:J | :J..: J:
||&..: n:.. .: |.. .:J&.:j. h) 5| |n | |: ..., | n:
||&.. | && |.) | n: |.||j | ||&.. :.jj: .:nj..
nh n: .&.n.:J n j&.|.h:.&n.
H{huflvh 45 C:..J: : ]:n. :J&.:j |nj:&. jJ. n:J |..:j
quaniiiios .: n| :.J J: n: .:]:. :&nh: J :.J.. 1nn:J .: |
.:J&.:j .. j.: hj j = 1 Q, Q h.:j | .&n J .:J..J&n| &&.. ||
]:n. .: | .:J&.:j n: .J:.n|: |j |n | .nn :.n: nn:j.:n|
.. c < 1, n:J | .nn J..&: Jn: c. C:..J: | J||.:j :.jj:
.:nj... 1n| ]:n .. | && |n nnr.n... ].: :]. n |
hj.::.:j J | jnn, n:J :.:&. J . &:|.. : : n: ]:n.
J.n.. J: n J.n.:, n| ]:n .. | j&n:.j |.| .. | An.|
j&.|.h:.&n J | :-.| jnn. n) 1.:J | :J..: J: ||&..: n:..
.: |.. .:J&.:j. h) 1:J.n | | :&nh: J ]:n. .: | .:J&.:j n.
| ...h.|.j J :n|.:j | n. ||&.. &n, n:J J..&... ) 1
j& |: n:j |: &:..|n: .:njj &:J: |.| ]:n. n: .&.n.: |
||&.. &n &:J: n|: :J..:.
H{huflvh 46 C:..J: :J|j .J:.n| ]:n. |n .|| n |nj:&.
:J& n:J :..J: ||&..:. J| J&||j ||&.. :. .: | nn:| ..
j.: hj j , n:J j. ]:n. n :] : n|. 1.:n. n|. |n | .nn
J..&: Jn: c. J|j |nj | 1::n:J jnn n: .:]:. :&nh: J :.-
J.. J|: n|. r... n: n:.-:&. n&|:.j, |n .:..jn. | .:J&.:j
.: :j :.J. 1J ]:n. ||&J, | n&|:.j .|| ]:J |n j&.|j .| n
:hnh.|.j j n:J .|| n:J.:j|j j. |n n ]: 1. 1J |j n: J&:J |-
|&J.:j, n|. n..&n |n | n&|:.j .|| :: |n J:n ||&J.:j .:
| J&&:: |j .|| J:: n:: nn:| :] : n|, |: | .:Jr :
.n:J. J: An.|. 1J ]:n. J : ||&J, |j n:: h ]:J. n) 1&.
: ..n| :.jj: .:nj.. .| An.| ::.n| J::. 1:. | .::.
:.:n.:. J: ||&..: h .&.n.:J n j&.|.h:.&n, n:J J..&.. | J-
J. |n j n:J 1 |n &: ||&..:. h) C:..J: n n|& J | J..&:
88
Jn: |.j| :&j| J: ||&..: h .&.n.:nh|. : :.. |: |n: j
.&.n.:nh| n j&.|.h:.&n J |.. .:]:. |:..: jnn ) 1 j& |:
J n:j |: .:nj.. |n &|J n|| ]:n. .&.n.: ||&..: &:J: n
.|n|: :J..:
H{huflvh 47 1:j J:, .: n:| .:..jn.:., |nj:., ]&Jj. n:J -
:n. r:. .n |n ||&..: .. n: J.&| .: :.J. J J|.:.:j
Jnn:J |n: .: :.J. J hn. n) Cn: j& h:.j n:.: |:.n|
n:j&n:. |.| .&: |.. .
H{huflvh 48 1J : J..:. |n : n: ]:n. |n:j :.. hj |
.nn ::.: .|.: J Jnj. : nJ: | |:.), |: |.. .. :J |n
|. ]:n. |n n ||&.. nj:n:.
H{huflvh 49 C:..J: n .: |: : ]:n. |nj n :: :n. jnn
|n .|| :.:& .: n| J | J||.:j :.J. .| n :hnh.|.j c. J|n
.., .: n:j :.J 1, | jnn n: .|: :.:& .| :hnh.|.j c, : .
J:: .| n :hnh.|.j 1c.) 1: n| :.J |: | jnn n|. |n, n
]:n |n. |. n :n.: n.:. 1J n|| ]:n. |. | `||&..` n.:,
|j .|| n|| .|n: | nn:| n:J jn.: n :] H ,:. 1J : ]:n J.n.
J:n | ||&.. n.:, |.. ]:n .|| n:: H H ,:. 1.:n. |n |
J||.:j .:nj... 1: | ]:. :.J J | jnn, |j n| | ||&..
n.:. 1: n:j J | J||.:j :.J. |: | jnn n|. |n, |j
|. | ||&.. n.: .J n|| ]:n. |n hn.:J :]. H ,: .: n:j
J | :.&. :.J.. O|:.., |j |. n &:..|n: n.: |.|
:.&|. .: n|| ]:n. nn|.:j :]. H J: n|| J&&: :.J. J | jnn. n)
5| |n .J | J..&: Jn: c |.| .. j&n| J: n|| ]:n.) .. |.j| :&j|,
|. .:nj.. J:n n: j&.|.h:.&n J | jnn. h) 5| |n ||&..: ..
| n: |.||j |n: | .::j: | &:..|n:, | |: J.n.:
:]., n:J | .nn||: | :&nh: J ]:n.. ) 1. | ||&.. j&.|.h:.&n
| &:.j& j&.|.h:.&n J |.. jnn
H{huflvh 4: C:..J: | nJ| J ..: ., |: ]:n. Jn n J-
nn:J j = c Q n:J |n .. = (C a |a ) (q,2)a , |:
0 _ | _ 1 .. n ..||: n:nn: n:J q 4,3 .. n: .:.n: .:j
n:nn:. J|j .j&:.n||j |. ]:. 11 ||. a n:J |: && |-
|. . n) 5&. |n ]:n. &|J :n n h| | 11 n:J | &&
.nj J | jnn. 1.:J | j&.|.h:.&n 11 .:.n:. n:J &&.. h)
84
5&. : |n ]:n. h|n ::-:n.|j .: h| .nj.. 1.:J |
j&.|.h:.&n 11 n:J &&.. ) Cnn: | j&.|.h:.&n &n. &:J:
| :j.n.. ] ...h| n:.n: J |.. r:.. .. ]:J 11 n:J &-
&. |: ]:n. h|n :n.|j n | 11 .nj, n:J |: nn:
| :.&|. .| |. J J&|| :n.:.]
H{huflvh 4; :.-n.. C:..-|.:..:j) C:..J: ]:n. |n |nj
| J||.:j jnn. 1: | ]:. .nj, |j ].:|j J.J ||: |j n:
:..-|.:. |.: |:|j... J| |:|j.. n: n..&nJ h :J
.&h..&. n:J n: &.J :J& | .nn |nj:&. jJ. |.. .nj,
.J :..-|.:..:j .. nj:J &:, |j n|. ].:|j J.J | .nn :-&:. J
&& :jn|j c J: | :..-|.:.. 1: | J||.:j .nj, |j n
: j&n:.... ..&n J: ..n|..j |n | :|j &:. ., .J n:j, .. j.:
hj c . ..&n |.:n: Jnn:J j = 1 Q, |: Q .. n| &&. 5|
||: n j&.|.h:.&n |j .|| J.J :..-|.:. n:J n |.| :jn|j
||.
H{huflvh 4< 1|.:j J n|n:n:j n:.) J :J& n :n.: |-
nj:&.) : ]:n| jJ nn:&Jn&::. :J n|n:n:j |:|j..,
|. n:. n: :J hj ]:n. n:J 1, | |.:. .n:n|j |
|:|j.. n n &:. :jn|j J u i = , 1). J| jnn .. n. J||.. 1:
| ]:. .nj, | n:-||J:. .:J:J:|j n:J ..n&|n:&.|j J.J |
:jn|j ||. 1: | .:J .nj, | nn:&Jn&::. n n |n 1::n:J,
n:J .:&: &:. .. c u u . J|j Jn nn:| Jnn:J = 1 j n.
&.&n|, .J .:n| ]:n. n|| |n:j | .nn |. :., Jnn:J .. j&n||j
.|n:J nn:j |n, .: Jnn:J j. ]:n. |n.:j |.j|: :..). n)
1.:J | j&.|.h:.&n n|&. J :jn|.. n:J ]:n| :... h) C:..J: n: n|-
::n. ..&n.: |: | n:-||J:. n...j: | :.j| J r|.n-
.: J |.: n:. n paioni pool. 1 .. : | | |.| .. | n|&
J h| :jn|... 1.:J j&.|.h:.&n n|&. J :jn|.. n:J ]:n| :.. &:-
J: | n: | n:J nn: |n .| | :.&. n.. ) 5| |n
J:n.:j | n: | .. h| :]nh| J: | n:-||J:. n:J jJ J:
:.&n:..
H{huflvh 53 5&. |: n: .n:n jj:n|. nn:|., c n:J /,
n:J ]:n., 1 n:J 2, |nJ :.. .: c n:J .: /. 1:. :n:.:n.:
.. :J&.:. .. n: .:) J:n : nn:| | |: n: j.: hj
t < 1,2. 1.:n. :J& n |nj:&. jJ |. Jnn:J .: &::j / = c, /
8
.. j = 1 2Q ,. 1 n..&n |n n| ]:n i = 1, 2 ..n&|n:&.|j
|.. j&n:... n:J h .|J .: h| nn:|. .: n| :.J J n:
.:]:. |:..: jnn .| nn: J..&: Jn: c. C:..J: | J||.:j
:.jj: .:nj.., |.| J]: n nn:| n||n.: ||&.. .|n. |
hj.::.:j J | jnn, n| ]:n .||. :|j .: .. : nn:| = = 0).
1J n J.n.: &:. |n .., .J n ]:n .n:. r:), |: h| ]:n. ::
| An.| j&.|.h:.&n J:: n | An.| j&.|.h:.&n, h| ]:n. r:).
1.:J | :J..: J: ||&..: n:J .| | |j n:j .| t.
914 Vroxwlrq ri h{huflvhv
Vroxwlrq ri h{huflvh 41 1ho IC hocomos: :(j )(1 c c ...),: _
:(j ). Wriio c = d. 1hon iho IC can ho wriiion d _ 1 (1,:), whonco:
c _
_
1 (1,:). Sinco
_
a a whon a < 1, iho inconiivo consiraini is loss
likoly io ho saiisnoo ihan unoor iho sianoaro caso.
Vroxwlrq ri h{huflvh 51 Yos, cross-ownorship makos collusion moro
likoly. 1o soo why, consioor ihai nrm i`s proni will ho givon hy : o: ,
ano ihai if nrm i ooviaios, in iho ooviaiion porioo : = 0. 1ho inconiivo
consiraini for collusion can ihon ho wriiion as: :(j )(1 o), (2(1 c)) _
:(j ), which simplinos io c _ (1 o),2.
If ihoro woro no cross-ownorship, o = 0, ano iho conoiiion woulo ho loss
likoly io holo.
Vroxwlrq ri h{huflvh 8 Loi us oonoio hy j (c, j [ iho collusivo
prico. Ai iimo t = 0, c = 1, whoroas ai iimo t 1, 2, ...} c = /. 1ho
inconiivo consiraini ihon hocomos: : (j ) (1c/ c / c / ...),: _ : (j ),
or, oquivalonily, c _ (: 1) ,(: 1 /)
c (:, /).
(a) Whon nrms play iho monopoly prico along iho collusivo paih, j = j
ano iho conoiiion for iho n-iuplo of nrms siraiogios io ho an oquilihrium is
givon hy iho inconiivo consiraini jusi oorivoo, which is iho samo for all nrms.
Now, somo simplo algohra shows ihai 0
c (:, /) ,0/ = (:1), (: 1 /) <

0, whoroas 0
c (:, /) ,0/ = /, (: 1 /) 0.
1his can ho raiionalisoo as follows. If ihoro aro -,5 consimois in maikol / will llo
samo oomano q @ 4 j, llon lolal oomano is givon q @ +-,5,+4 j,. Ly invoision llo
oomano in llo loxl is foino. Nolo llal -,5 moasiios llo sizo of llo maikol.
80
Jlo ligloi llo valio of /, llo ligloi llo ono-limo clango in oomano
will Lo. Honco, llo ligloi is /, llo ligloi llo piosonl valio of llo slioam
of piofls iocoivoo fiom t = 1 onwaios. Jlo oppoilinily cosl of oovialion
incioasos will /. Honco, llo ligloi / is, llo loss likoly is llal fims will
oisiipl llo collisivo agioomonl looay (al t = 0). On llo olloi lano, wlon :
incioasos, llo liglloi llo inconlivo consliainl Locomos, llal is, llo loss likoly
is llal collision will Lo sislainoo al oqiiliLiiim. Jlo inliilion llal inooilios
llis iosill is llo slanoaio ono: llo ligloi llo nimLoi of fims in a collisivo
agioomonl, llo moio oimcill il Locomos lo ioacl ano sislain collision.
(L) Nolico llal llo inconlivo consliainl ooiivoo aLovo is valio foi all
j 5 (c, j [. Honco, inooi slialogios similai lo llo onos aLovo, a collisivo
piico j 5 (c, j [ can Lo sislainoo al oqiiliLiiim if c (: 1) ,(:1/)
c (:, /).
(c) HLIL IS WHLIL I HAVL DOULJS. JHIS QULSJION WOULD
MAKL SLNSL IOI ML II YOU ASKLD WHAJ II / < 0 JHLN,
c (:, /) 1 LLCAUSL IIIMS WOULD LL VLIY JLMIJLD JO DL-

VIAJL JODAY (t = 0: LAIGL OIDLI)...
Vroxwlrq iru h{huflvh : Lol is oonolo Ly llo maikol slaio of fim
i, i = 1, 2. Assimo, willoil loss of gonoialily, llal = \ ano = 1 \.
(a) Jlo inconlivo consliainl foi fimi, i = 1, 2, is givon Ly: ( j c) 1( j),(1
c) ( j c) 1( j) 0, oi, oqiivalonlly, c 1 .
Honco, llo oosciiLoo liiggoi slialogios iopiosonl an oqiiliLiiim if ano
only if c max i\, 1 \j. Lil, sinco 1,2 < \ < 1, llo pioviois conoilion
iooicos lo c \.
(L) Yos. Nolico llal in a symmoliic inoisliy sliicliio = = 1,2.
Jloiofoio, llo inconlivo consliainl (wlicl is now common foi Loll fims) io-
oicos lo c 1,2, wlicl is llo conoilion foi llo slanoaio loxlLook symmoliic
oiopoly caso. Sinco \ is Ly assimplion gioaloi llan 1,2, llo conoilion c \
is moio sliingonl llan c 1,2. Collision is loss likoly lo Lo sislainoo in an
asymmoliic maikol sliicliio.
(c) If j = j , llon llo inconlivo consliainl foi fim i, i = 1, 2, is:
(j c) 1(j ),(1 c) (j c) 1(j ) 0. Il is sliaigllfoiwaio lo
slow clock il amoinls lo c max i\, 1 \j, llo samo conoilion wo lavo
ooiivoo in (a). Jlis, llo samo inloival of valios foi llo oiscoinl facloi c
allows foi a conliniim of oqiiliLiiim solilions lo lolo.
87
Vroxwlrq iru h{huflvh 43 Assimo llal ono inil of limo is lalf a wook.
In Iiosolo, llo maikol iins lwico a wook ano lloio aio : vonoois. Jloiofoio,
llo inconlivo consliainl of a iopiosonlalivo vonooi in Iiosolo is givon Ly:
: (j ) , [:(1 c)[ : (j ), wloio : (j ) oonolos llo aggiogalo piofl in
llo Iiosolo maikol wlon all vonoois sol a (collisivo) piico j c.
Jlis conoilion in liin implios llal llo ciilical oiscoinl facloi in Iiosolo
is givon Ly c (1 1,:)
c .
As fai as Scliiosloim is concoinoo, lloio llo maikol iins only onco a
wook ano only lwo vonoois oxisl. Jlo inconlivo consliainl facoo Ly a vonooi
in llis olloi small lown is givon Ly: : (j )
_
1 c c ...
_
,2 : (j ),
wloio : (j ) oonolos llo aggiogalo piofl in Scliiosloim wlon Loll vonoois
fx llo samo collisivo piico j c.
Collision will lloiofoio aiiso al oqiiliLiiim inooi liiggoi slialogios if
1,(1 c ) 2, wlicl in liin implios llal c 1,
s
2
c .
Nolico llal in Iiosolo, as compaioo lo Scliiosloim, wo lavo moio fims,
wlicl lonos lo liil collision, on llo ono lano, ano an ligloi fioqioncy of
oioois (maikol inloiaclions), wlicl lonos lo facililalo collision, on llo olloi.
So, in oiooi foi collision lo Lo loss likoly in Iiosolo llan in Scliiosloim, llo
fisl oocl misl moio llan componsalo llo socono. In foimal loims,
c
if (1 1,:) 1,
s
2 0, wlicl lolos if : 5 i4, 5, 6, ...j .
Vroxwlrq ri h{huflvh 44 (a) Iiisl of all, il is isofil lo fno llo Coiinol
oqiiliLiiim of llo gamo, wlicl is givon Ly = 1,3 ano : = 1,0 (soo
oxoiciso BB). Ly following llo liiggoi slialogios ano solling oilpil Lolwoon
llo joinl piofl maximisalion oilpil = 1,4 ano llo Coiinol oilpil
= 1,3, a fim las piofls : = (1 2). Wlon llo iival sols , llo
oplimal oovialion can Lo foino Ly cloosing = arg max : = (1 ) .
Ly solling 0: ,0 = 0 ono can foino llal = (1),2, ano : = (1) ,4.
Jlo IC can Lo wiillon as c (: :),(: : ), ano Ly siLslililion
llis Locomos: c 0(1 3) ,(0 18 5) c, wlicl is llo conoilion foi
collision lo Lo sislainaLlo.
(L) Jo soo low llo maximim oogioo of collision vaiios will llo oiscoinl
facloi, jisl compilo 0c,0 = 108,(5 3) < 0. As incioasos in llo
inloival [1,4, 1,3[, llo ciilical oiscoinl facloi c oocioasos: llo lowoi llo
oogioo of collision llo moio oasily sislainaLlo.
88
Vroxwlrq iru h{huflvh 45 (a) Iiisl fno llo qianlilios llal maximiso
joinl piofls H = (1 Qc)Q. Il is oasily clockoo llal Q = (1 c),2.
Jloiofoio, al llo symmoliic oqiiliLiiim inoivioial qianlilios aio =
(1 c),(2:) ano inoivioial piofls inooi llo collisivo slialogy aio: : =
(1 c) ,(4:).
As foi llo oovialion piofls, llo oplimal oovialion Ly a fim is givon
Ly ( ) = crq max (1 (: 1) c). Il can Lo clockoo llal
( ) = (:1)(1c),(4:), ano llal llo piofls oLlainoo Ly oovialing fiom
llo collisivo oilpil aio: : = (1 c) (: 1) ,(16: ).
Iinally, il is slanoaio lo clock llal llo Coiinol qianlilios ano piofls
aio givon Ly: = (1 c),(: 1) ano: : = (1 c) ,(: 1) .
Jlo IC foi collision is givon Ly: : ,(1 c) : c: ,(1 c), wlicl
afloi siLslililion ano ioaiianging Locomos: c (1:) ,(16:: ) c .
Honco, inooi pinislmonl slialogios llal involvo a iovoision lo Coiinol
oqiiliLiiim foiovoi afloi a oovialion lakos placo, lacil collision aiisos if ano
only if fims aio simcionlly palionl.
(L) Ly caiiying oil a simplo oxoiciso of compaialivo slalics ising llo
ciilical llioslolo foi llo oiscoinl facloi, ono conclioos llal dc ,d: =
4 (: 1) , (1 6: : ) 0.
Honco, olloi llings Loing oqial, as llo nimLoi of fims in llo agioo-
monl incioasos, llo moio oimcill is lo ioacl ano sislain lacil collision (llo
liglloi Locomos fims` inconlivo consliainl). Sinco fims aio assimoo lo Lo
symmoliic, an incioaso in llo nimLoi of fims is oqiivalonl lo a lowoi oogioo
of conconlialion. Jloiofoio, lowoi lovols of conconlialion aio associaloo -
coloiis paiiLis - will loss likoly collision.
(c) Yos. In oiooi lo ooloimino llo liglosl lovol of piofls llal a fxoo
nimLoi of fims can sislain as a siL-gamo poifocl oqiiliLiiim, ALioi (1080)
slioioo moio sovoio pinislmonls llan iovoision lo Coiinol foiovoi afloi a
oovialion lakos placo. Ly Loing aLlo lo ciooiLly llioalon will a laisloi
ioliiLilion foi oofoclion, an oligopoly is aLlo lo sislain a collisivo oilcomo
foi a .J: :n:j J J..&: Jn:.. Ioi llo caso of symmoliic pinislmonls,
ALioi (1080) foino llal an oplimal pinislmonl slialogy lakos a voiy simplo
foim. In llo fisl poiioo afloi oovialion, oacl inoivioial fim piooicos a ligl
lovol of oilpil so llal all fims gol nogalivo piofls. In oiooi lo inoico fims
lo go along will llo pinislmonl fisl plaso, llo oligopoly agioos lo piooico
llo mosl collisivo sislainaLlo oilpil in llo onsiing poiioos, pioviooo llal
no fim las oovialoo fiom llo pinislmonl fisl plaso (poiioo). Olloiwiso,
llo pinislmonl is ioslailoo.
80
Vroxwlrq ri h{huflvh 46 (a) Jlo inconlivo consliainl oacl fims facos is
givon Ly: j (: 1 c: ,(1 c)) (1 j) : ,(1 c) : c: ,(1 c),
wloio : oonolos llo ono-slol oovialion piofl. Nolico llal llo pioviois
conoilion can Lo iowiillon as follows: c (: : ) (1 j),(1 c) :
(: j1).
Honco, collision is solf-onfoicing if llo long iin oxpocloo loss oio lo
llo pinislmonl aio no smalloi llan llo ono slol oxpocloo nol gains fiom
oovialion. Sinco llo LHS of llo pioviois conoilion incioasos will c, ono
conclioos llal if llo oiscoinl facloi is ligl onoigl, llon lloso slialogios
foim an oqiiliLiiim of llo gamo.
If j ano,oi 1 incioaso, llon llo oxpocloo fno j1 incioasos, wlicl in
liin implios llal collision is loss likoly lo Lo sislainoo al oqiiliLiiim, olloi
llings Loing oqial.
(L) Jlo oosciiLoo gamo, Loing a sipoigamo, aomils a conliniim of so-
lilions. If wo consiooi oxaclly llo samo moool Lil assimo llal fims, along
llo collisivo oqiiliLiiim, sol llo piico j 5 (c, j ), wlicl givos fims a piofl
:, llon il is sliaigllfoiwaio lo slow llal fims` inconlivo consliainl woilo
Lo similai lo llo ono ooiivoo in (a), llo only oioionco Loing llal : woilo
Lo siLslililoo Ly :.
(c) No. Nolico llal llo compolilivo oilcomo in llis moool is Loll llo
Nasl oqiiliLiiim ano llo minmax of llo slago gamo. Jloiofoio, an inoof-
nilo iovoision lo llo compolilivo silialion conslililos llo laislosl ciooiLlo
pinislmonl llal can Lo imposoo on oovialois.
Vroxwlrq iru h{huflvh 49 (a) In oiooi foi collision lo Lo solf onfoicing,
llon llo following inconlivo consliainl sloilo Lo salisfoo: cc( : ),(1
c) _ : : ,:.
Sinco iho LHS of iho provious conoiiion incroasos wiih c, ono concluoos
ihai if iho oiscouni facior is high onough, ihon ihoso siraiogios form an
oquilihrium of iho gamo.
(h) Ii is siraighiforwaro io soo ihai iho inconiivo consiraini oorivoo in
(a) is rolaxoo whon iho punishmoni hocomos sirongor (i.o., : oocroasos), iho
ooviaiion pronis : oocroaso ano iho numhor of nrms : oocroaso.
(c) No. Anoihor foasihlo oquilihrium of ihis gamo is iho ono in which nrms
play iho Nash oquilihrium of iho siago gamo ai oach porioo of iho ropoaioo
gamo.
00
Vroxwlrq ri h{huflvh 4:1 (a) 1ho joini proni of iho iwo nrms aro : =
[(c C a |a ) qa ,2[ ano iho prohlom of iho nrm is

io chooso , which maximiso ii. Solving iho IOCs d: ,d = 0 ano focus-
ing on iho symmoiric soluiion givos = ((c C) (1 |)a) ,4. Ai iho nrsi
siago of iho gamo, iho joini proni hocomos : = ((c C) (1 |)a) ,16
qa . Maximisaiion roquiros d: ,da = 0, which is solvoo hy: a = (c
C)(1 |),[4q (1 |) [, ano afior roplacomoni ihis givos iho oquilihrium
ouipui: = (c C)q,[4q (1 |) [.
(h) 1his is oono in iho ioxi.
(c) Comparison of iho oquilihrium lovols rovoals ihai a a for |
7,17, whoroas for 3q14| 5| 0. Again, | musi ho high onough
for monopoly io givo riso io a suporior ouicomo: if | < (2
_
20),5 . .677,
ihon < whaiovor q. Lui for highor lovols of iho spillovor paramoior,
ihoro oxisi comhinaiions of q ano | for which full cooporaiion is hoiior. Iniu-
iiivoly, ihoro is a iraoo-o unoor full cooporaiion, hoiwoon highor I:D ouo
io iniornalisaiion of iho spillovor which rosioros I:D inconiivos, ano lack of
compoiiiion in iho proouci markoi which rooucos oquilihrium ouipuis. 1ho
formor ooci is sirongor whon spillovors aro vory high.
[1ho variani of iho oxorciso involvos nnoing I:D cooporaiion oquilihrium
I:D lovols ano ouipuis, ihai is oono in iho ioxi, ano ihon comparo ihom
wiih ihoso ohiainoo in iho full cooporaiion rogimo. Ii is oasy io chock ihai
a a for all |, whoroas is always siricily lowor ihan (
amounis io q (1 |) ,3 which is always iruo sinco q 4,3 ano | _ 1).[
Vroxwlrq ri h{huflvh 4; Ai iho lasi siago of iho gamo, iho Cournoi
oquilihrium is founo hy solving oach nrm` prohlom max : = (1
c ) c . Noio ihai oach nrm has io pay iho oihor a unii royaliy on iho
own ouipui, which implios ihai iho royaliios appoar hoih as a cosi ano as a
rovonuo in iho proni funciion. Irom iho IOCs ono ohiains iho oquilihrium
ouipui ai iho symmoiric oquilihrium as: (c ) = (1c ),3. 1ho associaioo
por-nrm pronis aro : (c ) = (1 2c )(1 c ),0.
Ai iho nrsi siago, nrms joinily oocioo on iho cross-liconsing agroomoni ano
on iho lovol of c . Noio ihai iho funciion : roachos iis maximum in c = 1,4.
1ho nrms will ihoroforo havo an inconiivo io cross-liconsing ano will opiimally
chooso c = 1,4. 1hoir ouipuis ano pronis will ho oqual io (1,4) = 1,4 ano
: (1,4) = 1,8. 1hoso valuos corrospono io iho joinily proni maximisaiion
soluiions. In oihor woros, hy cross-liconsing iho nrms manago io roach iho
01
monopoly soluiion, improving upon iho Cournoi soluiion ohiainoo whon c =
0: (0) = 1,3 ano : (0) = 1,0.
Vroxwlrq ri h{huflvh 4< (a) In iho lasi siago, givon ihai manufaciurors
compoio in pricos, iho Lorirano oquilihrium applios: iho markoi prico will
ho j = c u u , ano nnal oomano = 1 (c u u ).
In iho nrsi siago, oach paioni-holoor oocioos iho royaliy foo so as io
max : = u (1 c u u ). Irom d: ,du = 0 ii follows ihai iho
symmoiric oquilihrium is u = (1c),3, ano iho nnal prico (hy suhsiiiuiion)
is j = (2 c),3. Iaioni-holoors` pronis aro : = (1 c) ,0.
(h) Unoor iho paioni pool, ihoro is joini proni maximisaiion of iho paioni-
holoors. 1ho pool`s prohlom is ihoroforo max : = u (1 c u
u ) u (1 c u u ). Solving iho IOCs givos iho symmoiric soluiion
u = (1 c),4. Ly suhsiiiuiion pricos ano (por-nrm) pronis aro ohiainoo
as: j = (1 c),2 ano : = (1 c) ,8.
(c) Ii is siraighiforwaro io soo ihai iho paioni pool Iaroio oominaios iho
siiuaiion whoro iho iwo paionis aro liconsoo inooponoonily. Iinal pricos (as
woll as royaliios) aro lowor (ihoroforo, consumors aro hoiior o) ano paioni-
holoors` pronis aro highor. (Manufaciurors in ihis oxamplo always goi zoro
pronis.)
Vroxwlrq ri h{huflvh 53 C||&..:. Loi us nrsi oorivo iho markoi
allocaiion schomo soluiion whon oach nrm solls only in iis own markoi. In
ihis caso, pronis aro givon hy : = (1 2,). Irom d:,d = 0 ii follows
ihai = = ,4, ano = = 0, : = : = ,8.
1&:..|n:. If nrms woro playing iho ono-shoi Nash gamo in quaniiiios,
ihoy woulo soll in hoih markois. 1hoir pronis woulo ho: : = j ( , )
(j ( , ) t) ano : = j ( , ) (j ( , ) t) , whoro j =
12( ),, for / = c, /. Iirm i`s programmo is max : . 1horoforo,
nnoing iho oquilihrium soluiions involvos solving iho sysiom of four oquaiions
d: ,d = 0, d: ,d = 0, for i = 1, 2.
Ii is oasy io chock ihai iho soluiion is givon hy iho four pricos: =
= (1 t),6, = = (1 2t),6, ano ihai nrms pronis aro givon hy:
: = : = [(1 t) (1 2t) [ ,18.
1.n.:. 1ho opiimal ooviaiion of, say, nrm 1 consisis of soiiing
iis monopoly quaniiiy in iho homo markoi c, hui choosing iho (posiiivo)
ouipui ihai maximisos iis oxpori pronis : givon ihai iho rival sois
02
= ,4. In oihor woros, is iho quaniiiy ihai maximisos : =
(1 t 2 ( ,4) ,) . Irom d: ,d = 0 ii can ho founo ihai =
(1 2t),8, ano ihai : = ,8 (1 2t) ,32 (iho nrsi compononi of iho
proni hoing iho homo monopolisiic proni).
1ho inconiivo consiraini for collusion is givon hy iho sianoaro conoiiion
: ,(1 c) _ : c: ,(1 c), from which iho criiical oiscouni facior is
oorivoo as c =
_
: :
_
,
_
: :
_
. Afior suhsiiiuiion, ii can ho chockoo
ihai c = 0 (1 2t) , (13 22t), so ihai collusion can ho achiovoo only if
c _ c .
Noio ihai dc ,dt < 0, so ihai as iransporiaiion cosis incroaso, collusion
hocomos oasior io susiain. 1his is hocauso iho highor iho iransporiaiion cosi
iho smallor iho markoi sharo ii can ho ohiainoo ihrough a ooviaiion. In iho
limii caso whoro t = 1,2, iho iranspori cosi hocomos prohihiiivoly high, so
ihai no oxporis woulo occur ai iho ono-shoi oquilihrium: a nrm woulo noi
havo any iompiaiion io ooviaio from iho (monopolisiic) auiarky oquilihrium.
08
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Chaploi on hoiizonlal moigois
Pdvvlpr Prwwd
Eniopoan Univoisily !nslilnlo, Floionco,

Univoisilal Iompon FaLia, Laicolona, ano CEIB, Lonoon
o-mail: mollaîno.il
1 OcloLoi 1000
Devwudfw
1his is a oiafl foi lho chaploi on hoiizonlal moigois of lho Look
on "Compolilion Iolicy: 1hooiy ano Iiaclico".
ILEASE DO NO1 C!BCULA1E
IBEL!M!NABY ano !NCOMILE1E. Commonls Ly !nos CaLial, Chiaia Fnmagalli
ano Holooi Vasconcolos on pails of an ovon moio pioliminaiy voision aio gialofnlly ac-
knowloogoo.
1
Frqwhqwv
4 Lqwurgxfwlrq= Klvwru| dqg ohjdo iudphzrun 7
1.1 Whal aio moigois . . . . . . . . . . . . . . . . . . . . . . . . 4
1.2 1ioalmonl of moigois in compolilion policy laws in lho pasl. . 4
1.8 How oo moigoi iognlalions woik in lho US ano lho EU. . . . . 4
5 Krul}rqwdo phujhuv= xqlodwhudo hhfwv 7
2.1 A moigoi incioasos maikol powoi . . . . . . . . . . . . . . . .
2.1.1 Conconlialion, maikol shaios, capacilios . . . . . . . . 7
2.1.2 Qnanlilalivo analysis of moigois: Elaslicily of iosional
oomano . . . . . . . . . . . . . . . . . . . . . . . . . . 10
2.1.8 Unilaloial oocls of hoiizonlal moigois . . . . . . . . 18
2.1.4 Qnanlilalivo lochniqnos foi moigoi analysis . . . . . . 20
2.2 Emcioncy gains . . . . . . . . . . . . . . . . . . . . . . . . . . 24
2.2.1 1ho nalnio of omcioncy gains, ano lhoii assossmonl. . . 2
2.2.2 Aio moigois pionlaLlo . . . . . . . . . . . . . . . . . . 27
2.2.8 Compolilion agoncios` appioach lo omcioncy gains. . . 20
2.2.4 Emcioncy oonco . . . . . . . . . . . . . . . . . . . . 81
2.2. Emcioncy gains: conclnsions . . . . . . . . . . . . . . . 82
2.2.0 Emcioncy gains fiom moigois . . . . . . . . . . . . . . 88
2.2.7 Emcioncy oonco: Whon lho moigoi loaos lo oxil of
lho onlsioois. . . . . . . . . . . . . . . . . . . . . . . . 80
2.8 Olhoi vaiiaLlos which aocl moigoi oocls . . . . . . . . . . . 41
2.8.1 Enliy . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
2.8.2 Enliy: onllino of a foimal analysis . . . . . . . . . . . 48
2.8.8 Iowoi of lho Lnyois . . . . . . . . . . . . . . . . . . . . 4
2.8.4 Failing nim oofonco . . . . . . . . . . . . . . . . . . . . 47
6 Krul}rqwdo phujhuv= frruglqdwhg hhfwv 7:
8.1 NnmLoi of nims ano conconlialion . . . . . . . . . . . . . . . 48
8.2 Symmoliy ano collnsion . . . . . . . . . . . . . . . . . . . . . 0
8.2.1 Discnssion ano implicalions. . . . . . . . . . . . . . . . 4
8.8 Cooioinaloo oocls: Olhoi vaiiaLlos lo consiooi . . . . . . . . 4
8.8.1 Emcioncy gains . . . . . . . . . . . . . . . . . . . . . .
8.8.2 Enliy . . . . . . . . . . . . . . . . . . . . . . . . . . .
8.8.8 Elomonls foi an analysis of onliy . . . . . . . . . . . .
8.8.4 Lnyois` powoi . . . . . . . . . . . . . . . . . . . . . . . 0
2
7 Zkdw derxw mrlqw yhqwxuhvB 8:
8 Fdvh vwxglhv 8:
.1 How lo piocooo in moigoi casos: a chock-lisl . . . . . . . . . . 7
.1.1 Singlo nim oominanco . . . . . . . . . . . . . . . . . . 8
.1.2 Joinl oominanco . . . . . . . . . . . . . . . . . . . . . 00
.2 Aoiospalialo-Alonia,Do Havillano . . . . . . . . . . . . . . . . 00
.8 1ho Nosll-Ioiiioi moigoi . . . . . . . . . . . . . . . . . . . . 00
.8.1 Iiooncl maikol oonnilion . . . . . . . . . . . . . . . . 01
.8.2 Googiaphic maikol . . . . . . . . . . . . . . . . . . . . 08
.8.8 Singlo nim oominanco (nnilaloial oocls) . . . . . . . . 08
.8.4 Joinl nim oominanco (cooioinaloo oocls) . . . . . . . 04
.8. Conclnsions . . . . . . . . . . . . . . . . . . . . . . . . 07
.4 1ho ALL,Daimloi-Lonz caso . . . . . . . . . . . . . . . . . . 00
.4.1 Iiooncl maikol oonnilion . . . . . . . . . . . . . . . . 00
.4.2 Googiaphic maikol . . . . . . . . . . . . . . . . . . . . 71
.4.8 Maikol shaios ano conconlialion . . . . . . . . . . . . 71
.4.4 Joinl oominanco, oi lho cooioinaloo oocls of lho moigoi 78
.4. Conclnsions . . . . . . . . . . . . . . . . . . . . . . . . 77
. Kali nno Salz . . . . . . . . . . . . . . . . . . . . . . . . . . . 78
9 H{huflvhv :;
0.1 Answoi lo oxoicisos . . . . . . . . . . . . . . . . . . . . . . . . 81
: Dsshqgl{ ;6
8
4 Lqwurgxfwlrq= Klvwru| dqg ohjdo iudphzrun
414 Zkdw duh phujhuvB
415 Wuhdwphqw ri phujhuv lq frpshwlwlrq srolf| odzv
lq wkh sdvw1
416 Krz gr phujhu uhjxodwlrqv zrun lq wkh XV dqg
wkh HX1
[...[
1ho iomaining soclions of lhis chaploi aio oiganisoo lhns. Soclion 2
analysos lho caso whoio all lho iomaining inooponoonl nims in lho inonsliy
Lohavo in a non-coopoialivo way Lolh Lofoio ano afloi lho moigoi. Wo
slnoy a foimal moool foi lho oconomic analysis of lho impacl of moigois.
!l shows lhal a moigoi gonoially incioasos maikol powoi ano will lhoiofoio
Lo ooliimonlal lo consnmois ano social wolfaio. !n logal loims, in lho US,
lhis amonnls lo analysing lho &:.|n:n| . of a moigoi. !n lho EU, lhis
caso wonlo coiiospono lo lho caso of ..:j| :n Jn.:n: pioviooo lhal lho
moigoi cioalos a monopolisl oi a nim wilh snmcionlly high maikol powoi
lhal il can pionlaLly incioaso piicos ovon if il facos somo (small) compolilois.
1ho olhoi impoilanl issno in moigoi invosligalions is lhal a moigoi mighl
favoni collnsion in lho inonsliy (Locanso lho moigoi iooncos lho nnmLoi of
nims, oi Locanso il mighl incioaso symmoliy in lho maikol). !n olhoi woios,
a singlo nim mighl nol Lo aLlo lo nnilaloially iaiso piicos aLovo a coilain
lhiosholo, Lnl Locanso of lho moigoi now inonsliy conoilions mighl onhanco
lho scopo foi collnsion. Iiicos conlo lhon incioaso as nims wonlo nno il
oasioi lo allain a coopoialivo onlcomo. 1his issno falls nnooi lho namo
of ].: Jn.:n: (oi colloclivo oominanco: somolimos also oligopolislic
oominanco) in lho EU ano :J.:nJ . of a moigoi in lho US.
5 Krul}rqwdo phujhuv= xqlodwhudo hhfwv
Wo focns in lhis soclion on lho &:.|n:n| . of a moigoi, lhal is lho caso
whoio lho moigoo nim ano ils iivals oo nol cooioinalo lhoii Lohavioni. !n
gamo lhooiolic loims, nims Lohavo in a non-coopoialivo way (lhoy oo nol
collnoo) Lolh Lofoio ano afloi lho moigoi. Wo nisl show lhal a moigoi is
4
likoly lo incioaso maikol powoi of lho moiging nims ano oocioaso Lolh con-
snmoi sniplns ano lolal wolfaio (soclion 2.1). 1his analysis will also snggosl
inoicalois ano qnanlilalivo lochniqnos can Lo nsoo in lho analysis of moigois.
Wo shall lhon omphasiso lhal if lho moigoi incioasos omcioncy in lho moiging
nims, lhon lho nol oocl on wolfaio of lho moigoi is amLignons, as lho iiso
in maikol powoi can Lo onlwoighoo Ly lho piico oocioaso possiLly Lionghl
aLonl Ly omcioncy gains. 1ho analysis of lhis liaoo-o will Lo lho focns
of soclion 2.2. Finally, soclion 2.8 slnoios olhoi impoilanl vaiiaLlos which
shonlo Lo consiooioo in lho ovalnalion of lho moigoi oocls: in pailicnlai,
wo shall look al lho impoilanco of possiLlo onliy, al lho powoi of lho Lnyois
in lho inonsliy ano al lho failing nim oofonco aignmonl.
514 D phujhu lqfuhdvhv pdunhw srzhu
1o nnooislano why a moigoi incioasos maikol powoi, consiooi a simplo ox-
amplo. !magino lhal in a givon lown lhoio aio a fow inooponoonl giocoiy
sloios. Compolilion consliains lho maikol powoi of oach sloio: if ono of
lhom liioo lo incioaso piicos in a signincanl way, many among ils cniionl
consnmois wonlo slail ano oo lhoii shopping al somo olhoi sloio. Anlic-
ipaling lhis, lho sloio consiooiing lho piico incioaso will iofiain lo oo so.
!ls maikol powoi, lhal is ils aLilily lo chaigo consnmois a high maik-np, is
lhoiofoio limiloo Ly lho piosonco of lho iival sloios.
Snch maikol powoi, howovoi, will incioaso if lwo oi moio sloios moigoo
lo givo iiso lo a chain of giocoiy sloios. 1ho scopo foi a pionlaLlo piico
incioaso foi lho chain is mnch highoi, as lho nnmLoi of compolilois in lho
maikol is lowoi lhan lhoso facoo Ly a singlo sloio. Foi inslanco, if Lofoio lho
moigoi a piico iiso Ly sloio A wonlo loao somo consnmois lo swilch lo lho
noighLoniing sloio L, afloi a moigoi Lolwoon A ano L lho samo consnmois
wonlo havo lo nno a moio oislanl sloio C if lhoy wanloo lo avoio lho piico
incioaso. Foi somo of lhom al loasl, lho highoi oislanco ano lho highoi waslo
of limo wonlo nol Lo woilh lho lowoi piicos, ano lhoy will slay wilh lhoii
nsnal sloio oospilo highoi piicos. 1hoiofoio, a moigoi mighl mako il possiLlo
lo havo maik-nps which conlo nol Lo allainoo olhoiwiso.
1ho lochnical soclion Lolow foimalisos lhoso aignmonls. Unliko lhis oxamplo, howovoi,
il consioois foi simplicily piooncls which aio symmoliic snLslilnlos, so lhal if all of lhom
aio solo al an oqnal piico ano ono nim incioasos lho piico of ils piooncl, oach of lho olhoi
nims wonlo iocoivo an oqnal piopoilion of oomano fiom somo of lho consnmois which
woio piovionsly palionising lho nim which incioasos piicos.
A similai way lo look al il is as follows. !magino lhal lho moigoi involvos

: nims, so lhal il cioalos a now nim which solls : piooncls. A conlompo-
ianoons incioaso in lho piico of oach piooncl solo Ly lho moigoo nim wonlo
Lo pionlaLlo, Locanso lho nnmLoi of inooponoonl nims is iooncoo, ano con-
snmois conlo iooiiocl lhoii oomano only lo :: ialhoi lhan :1 compoling
piooncls as in lho pio-moigoi caso.
!n lho oxliomo caso whoio afloi lho moigoi only ono nim is lofl in lho in-
onsliy, maikol powoi wonlo Lo al ils maximnm, ano lho nim wonlo Lo fioo
lo sol lho monopoly piico. !noooo, lho nim knows lhal consnmois wonlo
nol Lo aLlo lo swilch lo any compoling piooncl afloi a piico iiso. Al lho
olhoi oxliomo, if lho inonsliy was chaiacloiisoo Ly voiy high fiagmonlalion
of maikol shaios (i.o., lhoio aio voiy many nims in lho inonsliy) ano lho
moigoi involvoo only lwo snch nims, lhoii maikol powoi wonlo nol Lo con-
siooiaLlo afloi lho moigoi: if lhoy liioo lo iaiso piicos slighlly aLovo lho
pio-moigoi oqniliLiinm lovol, lhoy wonlo nno lhal consnmois wonlo swilch
oomano lo lho nnmoions iivals, so lhal lho piico incioaso wonlo nol Lo piof-
ilaLlo. 1hoiofoio, as wo shall soo Lolow, moigois havo a qnilo oioionl impacl
on maikol powoi accoioing lo lho chaiacloiislics of lho pailnoi nims ano of
lho inonsliy as a wholo (soo soclion 2.1.1 Lolow).
!n gonoial, lhoiofoio, lho moigoi incioasos (Ly somo oogioo) maikol powoi
of lho moiging nims, which in lnin will incioaso piicos. 1o Lo moio piociso,
lhoio oxisls a small oioionco on lho piooiclions aLonl lho piico oocls of
moigois maoo Ly oioionl moools in lho inonsliial oiganisalion liloialnio.
!n pailicnlai, moools which assnmo lhal nims` oocision vaiiaLlo is maikol
piico piooicl lhal Lolh lho piicos chaigoo Ly lho moiging nims, ano Ly
lho onlsioois wonlo iiso: convoisoly, moools which assnmo lhal nims` ooci-
sion vaiiaLlo is qnanlily piooicl lhal lho moiging nims wonlo ioonco lhoii
onlpnls (lhal is, lhoy wonlo iaiso lhoii piico), whoioas lho onlsioois wonlo
.::n. lhoii onlpnls (lhoy wonlo ioonco piico). 1his oioionco is nol voiy
impoilanl, howovoi, as Lolh moools piooicl lhal lho ovoiall oocl of lho
moigoi (in lho aLsonco of omcioncy gains) is lo ioonco consnmoi sniplns.
1his is Locanso ovon in lho moools whoio nims sol qnanlilios, any possiLlo
incioaso in qnanlilios solo Ly onlsioois wonlo Lo onlwoighoo, fiom lho poinl
of viow of lho consnmois as a wholo, Ly lho oocioaso in lho qnanlilios solo
Ly lho insioois.
Soo lho lochnical soclion.
A small qnalincalion applios hoio. !f nims chooso qnanlilios, lho moiging nims woio
0
1ho oocl of lho moigoi on lho nims is of somo inloiosl. !n gonoial,
ano apail fiom somo lhooiolical ano ompiiical qnalincalions which wo mako
Lolow (soo soclions 2.1.8 ano 2.2.2), lho moigoi will Lononl lho insioois, in lho
sonso lhal lho pionl maoo Ly lho now nim is highoi lhan lho snm of lho pionl
maoo Ly lho pailnoi nims if lho moigoi hao nol lakon placo. Whal is poihaps
moio snipiising lo somo ioaoois, lhongh, is lhal in gonoial lho moigoi will
also Lononl lho onlsioois, lhal is lho inooponoonl nims slill opoialing in lho
inonsliy. 1his is Locanso lho insioois, Ly incioasing piicos ano,oi iooncing
onlpnl, pnsh lho ovoiall piicos in lho maikol np, lo lho Lononl of lho iivals as
woll. !noooo, lho iivals mighl gain moio lhan lho insioois fiom lho moigoi.
!f lhoio aio no omcioncy gains which mooify lho iolalivo compolilivonoss of
lho oioionl nims, lhoiofoio, lho moigoi is Lononcial lo insioois ano onlsioois
aliko, ano lhoiofoio nnamLignonsly incioaso piooncoi sniplns.
Wo havo lhoiofoio soon lhal lho moigoi oocioasos consnmoi sniplns Lnl
incioasos piooncoi sniplns. Howovoi, il is possiLlo lo show lhal lho nol oocl
on wolfaio, oonnoo in lho slanoaio way as lho snm of consnmoi sniplns ano
piooncoi sniplns, is nogalivo. !n snm, Locanso il incioasos maikol powoi,
moigois hnil consnmois ano socioly al laigo. (!l is lho iighl momonl lo
iomino ioaoois lhal wo aio consiooiing hoio lho caso whoio lho moigoi ooos
nol iosnll in omcioncy gains. !f il ooos, as wo oxplain Lolow in soclion 2.2, lho
maikol powoi oocl mighl Lo onlwoighoo Ly lho omcioncy gains, ano Lolh
consnmois ano ovoiall inonsliy pionls - ovon lhongh nol nocossaiily lhoso of
onlsioois - mighl incioaso.)
51414 Frqfhqwudwlrq/ pdunhw vkduhv/ fdsdflwlhv
Wo havo alioaoy hinloo aLovo al lho facl lhal - olhoi lhings, ano in pai-
licnlai lho lovol of omcioncy gains, Loing oqnal - lho laigoi lho nnmLoi of
inooponoonl nims opoialing afloi lho moigoi lho loss likoly lhal il will Lo
ooliimonlal lo consnmois. 1ho inlnilion foi lhis iosnll is sliaighlfoiwaio, as
lho aLilily of moiging nims lo oxoil maikol powoi cloaily ooponos on lho
nnmLoi of iivals. !n lho caso of a moigoi lo monopoly, foi inslanco, lho now
nim will nol faco any iosliainl in ils piicing oocision. Al lho olhoi oxliomo,
liny ano lho onlsioois laigo, il mighl Lo lhal ovoiall oocl on consnmoi sniplns Lo posilivo.
As wo oiscnss laloi, lhis is a fnilhoi ioason nol lo woiiy aLonl moigois Lolwoon nims wilh
low maikol shaios.
A moigoi can lhoiofoio Lo soon as a soil of "pnLlic gooo" (lho pnLlic gooo Loing high
piicos) pioviooo Ly lho insioois.
7
in an inonsliy which is oxliomoly fiagmonloo ano in which oach nim pos-
sossos only liny maikol shaios, lho impacl of a moigoi on lho maikol piico
will Lo iiiolovanl. !n lho lochnical soclion 2.1.8 wo show lhal lho moigoi is
lho moio likoly lo Lo ooliimonlal lho laigoi lho maikol shaio of lho nims
which lako pail in lho moigoi ano lho smalloi lho maikol shaios of onlsiooi
nims. 1his givos ns a ialionalo foi nsing a conconlialion inoox, liko foi in-
slanco lho Hoinnoahl-Hiischman !noox (HH!) , as a nisl sciooning oovico foi
nnilaloial oocls of moigois: Coloiis paiiLns, wo shonlo woiiy moio aLonl a
moigoi in an inonsliy which is alioaoy highly conconlialoo lhan aLonl ono
which occnis in a fiagmonloo inonsliy.
Foi lho samo ioasons, ano whalovoi lho oxisling || of conconlialion,
wo wanl lo pay moio allonlion lo a moigoi which .::n.. in a sonsilivo
way inonsliy conconlialion lhan lo ono which incioasos il only maiginally.
1his givos ns a ialionalo foi nsing a pioxy foi lho likoly chango in concon-
lialion (snch as ^HH!, lhal is, lho oioionco Lolwoon posl- ano pio-moigoi
conconlialion) as an aooilional sciooning oovico.
1hoso lwo inooxos aio nsoo Ly lho US agoncios lo scioon moigois ano
oocioo which onos aio likoly lo iaiso aovoiso compolilivo consoqnoncos ano
which onos aio nol . !f lho posl-moigoi HH! is lowoi lhan 1,000 (low con-
conlialion), lho moigoi will Lo appiovoo. !f lho posl-moigoi HH! is inclnooo
Lolwoon 1,000 ano 1,800 (moooialo conconlialion), lho moigoi is appiovoo
as long as il ooos nol iosnll in an incioaso in conconlialion Ly moio lhan
100 poinls. !f lho posl-moigoi HH! is moio lhan 1,800 (high conconlialion)
lho moigoi is nol challongoo only if il incioasos conconlialion Ly loss lhan
0 poinls. !n all lho olhoi casos, a moigoi iaisos "signincanl compolilivo
concoins" ano is likoly lo Lo invosligaloo.
Anolhoi simplo Lnl nsofnl inoicaloi of lho likoly maikol powoi cioaloo
Ly lho moigoi is givon Ly maikol shaios. Faiioll ano Shapiio (1000), foi
inslanco, show lhal lho lowoi lho maikol shaio of lho moiging companios
1ho HH! is lho mosl slanoaio inoox of conconlialion lo Lo fonno in inonsliial oigan-
isalion ano il is lho mosl oflon nsoo in anlilinsl analysis. !l is givon Ly lho snm of lho
sqnaios of maikol shaios (j ) of lho nims in lho inonsliy:
j . Il can vaiy Lolwoon

0, wlon llo mailol is onliioly fiagmonloo (oacl fim las a mailol slaio closo lo 0)ano
10, 000 wlon lloio is only ono fim in llo inoisliy, wlicl las 100/ of llo mailol. (Jlo
inoox lalos valios Lolwoon 0 ano 1 if fiaclions insloao of poiconlago valios aio isoo.)
Soo US Moigoi Giioolinos (1992, socl. 1.).
Jlo (oxpocloo) posl-moigoi HHI is compiloo Ly assiming llal oacl fim loops llo
samo mailol slaio afloi llo moigoi, ano llal llo moiging fims will simply lavo llo sim
of lloii pio-moigoi slaios.
8
llo loss ooliimonlal llo oocl on mailol piicos. Il migll also Lo possiLlo
llal a moigoi Lolwoon small fims migll oocioaso mailol piicos ovon in
llo aLsonco of omcioncy gains. Jlis is Locaiso lloy analyso llo caso of
Coiinol compolilion: will slialogic siLslililos llo oilsioois ioacl lo llo
lowoi qianlily of llo insioois Ly incioasing lloii own oilpil. Wlon llo
insioois aio small fims, lloii oilpil iooiclion migll Lo of a lowoi oiooi of
magnilioo llan llo oilpil oxpansion of llo laigo oilsiooi fims. In a moool
Lasoo on Ioiiy ano Ioiloi (198), McAfoo ano Williams (1992) fno llal
moigois wlicl iosill in a now laigosl fim ano moigois wlicl incioaso llo
sizo of llo laigosl fim always iooico omcioncy. Jloso fnoings jislify ising
mailol slaios of llo moiging fims as anolloi possiLlo sciooning oovico in
moigoi conliol. If llo moigoi involvos fims will lilllo mailol slaios llon il
is inliloly llal consiooiaLlo aovoiso oocls woilo aiiso. Iil in olloi woios,
llo lovol of omcioncy gains nooooo lo oilwoigl llo possiLlo piico incioaso
woilo Lo micl lowoi foi fims laving small mailol slaios.
Losioos ciiionl mailol slaios, llo analysis of llo iolalivo piooiclivo
capacily of llo fims is voiy impoilanl in ooloimining llo mailol powoi
onjoyoo Ly llo insioois. Wo lavo soon llal llo aLilily lo iaiso piicos Ly any
givon fim is consliainoo Ly llo oxislonco of iivals lo wlicl consimois can
swilcl. Il is lloiofoio ciicial llal sicl iivals Lo ooclivoly compolilivo, ano
in pailicilai Lo aLlo lo salisfy llo aooilional oomano aooiossoo lo llom.
In olloi woios, ono las lo lool al llo oisliiLilion of capacilios willin llo
inoisliy lo malo siio llal oxisling compolilois aio nol alioaoy opoialing
al capacily. Imagino foi inslanco a silialion wloio lwo moiging fims lao
logolloi only, say, 8/ of llo mailol, Lil woio llo only fims in llo inoisliy
will spaio capacily. In llis caso, mailol slaios woilo cloaily inooislalo llo
mailol powoi of llo insioois, wlicl can pioflaLly iaiso piicos as oilsioois
woilo nol Lo aLlo lo covoi - al loasl in llo sloil iin - any aooilional oomano.
Ioi llo samo ioasons, consiooialion of mailol slaios alono can Lo mis-
loaoing in inoisliios wloio lloio piooiclion ooponos on llo availaLilily of
OLvioisly, llis oocl woilo nol appoai in a moool lilo llo ono isoo in llo loclnical
soclion, wloio fims soll slialogic complomonls. In llal caso, llo piico incioaso of llo
insioois is followoo Ly a piico incioaso of llo oilsioois, so llal in llo aLsonco of omcioncy
gains no malloi low small llo mailol slaio of llo moiging fims, llo moigoi woilo always
incioaso piicos.
If now invoslmonls aio ioqiiioo in oiooi foi llo iivals lo incioaso lloii piooiclion,
llon oxisling iival fims sloilo Lo consiooioo in a similai way as now (polonlial) onlianls.
Soo also llo soclion on onliy.
9
iaw maloiials oi olloi inoisponsaLlo inpils. Ioi inslanco, sollois of minoial
walois oopono on llo waloi iosoivos of lloii soiicos: oiamono piooicois oo-
pono on llo iosoivos conlainoo in lloii minos ano so foill. AvailaLilly of
sicl iosoiicos misl Lo lopl in piopoi consiooialion in oiooi lo assoss mailol
powoi coiioclly.
Of coiiso, nol only sipply vaiiaLlos Lil also oomano vaiiaLlos misl Lo
lalon inlo accoinl lo inooislano lo wlal oxlonl llo moiging fims woilo
onjoy mailol powoi. Ioi inslanco, in inoisliios claiacloiisoo Ly voiy ligl
swilcling cosls, consimois woilo nol oasily clango lloii piovioois, wlo will
llon onjoy mailol powoi.
2.1.2 QuantItatIve anaIysIs oI nergers: EIastIcIty oI resIduaI de-
nand
Wo lavo sofai sliossoo llal llo aovoiso consoqioncos on wolfaio of a moigoi
como fiom llo ligloi mailol powoi onjoyoo Ly llo moiging fims. An oqiiv-
alonl way lo oxpioss llo samo iooa is lo say llal a moigoi iooicos llo "olas-
licily of oomano" facoo Ly llo moiging fims. Jalo foi inslanco llo caso of
a moigoi wlicl loavos jisl ono fim in llo inoisliy. In llis caso, llo oomano
facoo Ly llo fim las voiy low olaslicily (llo samo olaslicily as ovoiall mailol
oomano): a iiso in piico of, say, ono poiconl, woilo oocioaso oomano of fow
oocimal poinls. Jlis is Locaiso consimois woilo nol Lo aLlo lo swilcl lo
any olloi fim, lloii only alloinalivo lo Liying llo moigoo fim`s piooicl
Loing nol Liying al all. Al llo olloi oxliomo, in llo caso wloio only lwo
(small) fims oil of a voiy laigo nimLoi of similai fims moigo, llo oomano
olaslicily facoo Ly llo moigoo fim woilo Lo voiy ligl. Sinco consimois
can Liy fiom a nimLoi of compoling piooicls, a ono poiconl incioaso in llo
piicos claigoo Ly llo moigoo fim woilo iosill in a oocioaso of somolling
wlicl coilo Lo as ligl as ono linoioo poiconl in llo qianlily oomanooo. In
sim, llo lowoi llo olaslicily facoo Ly llo insioois afloi llo moigoi llo ligloi
lloii mailol powoi ano in liin llo moio soiiois llo consoqioncos on piicos
Jlis inloipiolalion in loims of oomano olaslicily sloilo nol como as a siipiiso, givon
llal in claploi wo lavo alioaoy sliossoo llo nogalivo iolalionslip Lolwoon mailol
powoi ano oomano olaslicily. Jlo concopl of olaslicily moasiios llo following oxpoiimonl.
Imagino llal lloio is an incioaso in piicos Ly ono poiconl: in wlicl poiconlago woilo
oomano oocioaso Ioimally, llis is wiillon as: c = oi, in maiginal loims, as
c = , wloio q is qianlily oomanooo, j is piico, ^ oonolos llo oioionco in qianlilios
oi piicos ano d llo ooiivalivo.
10
ano wolfaio, olloi mailol foaliios Loing oqial.
Jlis inloipiolalion in loims of llo olaslicily of llo oomano facoo Ly llo
moiging fims allows is lo inooislano a voiy isofil qianlilalivo loclniqio lo
ovalialo llo oocls of moigois, wlicl is Lasoo piocisoly on llo oslimalion of
iosioial oomano olaslicilios, ano oio lo Laloi ano Liosnalan (198, 1988).
Ioi a foimal analysis, soo soclion 2.1.4 Lolow. Hoio wo Liioy iocall llo main
foaliios of llis loclniqio.
Jo slail will, nolico llal llo assossmonl of llo mailol powoi of a fim,
say, A woilo lypically ioqiiio a gioal amoinl of infoimalion. In pailicilai,
ono woilo lilo lo lnow low llo mailol powoi of fim A is iosliicloo Ly llo
piosonco of compolilois L, C ano so on. Jlis woilo imply oslimaling llo
cioss-olaslicilios of fim A will iospocl lo all ils compolilois, lo lnow lo wlal
oxlonl a piico iiso Ly fim A woilo incioaso oomano of oacl of llo olloi fims
(llal is, lo wlal oxlonl pioviois consimois of fim A woilo swilcl lo oacl of
llo olloi fims following A`s piico incioaso). Jloiofoio, will : fims in llo
inoisliy, ono woilo lavo lo oslimalo : 1 cioss olaslicilios (plis ono own
olaslicily), wlicl woilo onlail collocling a laigo nimLoi of oala. Jlings aio
ovon moio complicaloo llan llal Locaiso il is nol saio llal a piico incioaso
Ly fim A woilo loavo inclangoo llo piico sol Ly llo olloi fims: Jo lavo a
complolo assossmonl of llo mailol powoi onjoyoo Ly a fim, ono sloilo also
oslimalo lo wlal oxlonl a piico incioaso Ly sicl a fim woilo Lo followoo Ly
oacl of llo iivals. Jlis woilo aoo comploxily lo llo lasl of assossing mailol
powoi.
Jlo oslimalion of llo iosioial oomano finclion is a loclniqio wlicl
consiooiaLly simplifos llis lasl, ano iooicos llo nooo of oala. Jo assoss
llo mailol powoi of fim A, llis loclniqio involvos llo oslimalion of jisl
ono coomcionl. Jlis is llo olaslicily of llo iosioial oomano finclion, llal
is llo oomano finclion facoo Ly fim A onco llo ioaclion of all llo olloi
fims is lalon inlo accoinl. Insloao of asling in wlal poiconlago a piico
iiso of fim A woilo incioaso oomano of fim L, C, ano so on, llis loclniqio
jisl asls in wlal poiconlago a piico iiso of fim A woilo oocioaso ils own
iosioial oomano, llal is llo oomano is lofl afloi llal all llo olloi fims
lavo salisfoo lloiis. A low oslimalo of llo iosioial oomano olaslicily woilo
llon siggosl ligl mailol powoi of fim A, as a consiooiaLlo piopoilion of
consimois woilo conlinio lo Liy fiom fim A ialloi llan swilcling lo olloi
Ioi lloso moio familiai will giaplical analysis, lowoi fim`s olaslicily amoinls lo
saying llal llo fim facos a sloopoi oomano ciivo.
11
fims (oi coasing lo Liy llo piooicl). Vico voisa, a ligl oslimalo woilo
siggosl low mailol powoi.
Jo Lo moio piociso, wo sloilo aoo llal iogiossing llo iosioial oomano
finclion of a fim alono woilo iosill in an oslimaloi wlicl is nol consis-
lonl, as oqiiliLiiim piico (ano qianlily) aio joinlly ooloiminoo Ly Loll llo
oomano ano llo sipply sclooilos of a fim. Jlis calls foi llo iso of llo
.:.:&n:n| n:.nh| molloo (foi wlicl in liin wo nooo fim-spocifc cosl
oala of llo fim wloso mailol powoi wo woilo lilo lo assoss, soo soclion
2.1.4 Lolow) in oiooi lo solvo llo simillanoois iolalion pioLlom ano oLlain
consislonl oslimalois.
Nolo llal llis loclniqio cannol loll is wlolloi mailol powoi is low
Locaiso of compolilion fiom fim L, oi C, oi olloi, sinco llo iival fims aio
consiooioo as a colloclivo, ano lloii spocifc iolo in consliaining llo mailol
powoi of fim A cannol Lo singloo oil. Howovoi, llis molloo allows is
lo savo on llo oala ioqiiioo lo poifoim an oconomoliic assossmonl of llo
mailol powoi of a fim. Sinco il is voiy oflon llo caso llal oala al llo
oisaggiogaloo lovol aio scaico oi oimcill lo oLlain, llis is an impoilanl slop
foi llo foasiLilily of llo applicalion of qianlilalivo molloos lo llo analysis
of mailol powoi.
Jlo applicalion of llis molloo lo llo analysis of moigois is sliaigllfoi-
waio. Imagino llal wo aio inloiosloo in lnowing llo liloly mailol powoi
onjoyoo Ly a fim wlicl iosills fiom llo moigoi of, say, fim A ano L. Wo
woilo lavo lo iso llo loclniqio Liioy oosciiLoo aLovo will a minoi moo-
ifcalion, llal is wo woilo lavo lo compilo lwo (n:.n| ) iosioial oomano
olaslicilios foi oacl of llo lwo fims. Ioi inslanco, foi fim A, llo fisl
is llo own olaslicily, c , which osiimaios iho porconiago oocroaso in iho
rosioual oomano of nrm A of ono porconi incroaso in A`s prico: iho socono
is iho cross-olasiiciiy c , which osiimaios iho porconiago incroaso in iho
rosioual oomano of nrm A of a ono porconi incroaso in iho prico of nrm L.
1his is io unoorsiano how ihoso iwo nrms rosirain oach oihor markoi powor.
Ly suhiraciing iho iwo olasiiciiy osiimaios ihus ohiainoo, ono ohiains iho
valuo (c c ) which is an assossmoni of iho markoi powor onjoyoo hy
iho morging nrm. 1his oioronco oxprossos iho iooa ihai whon iho insioors
Whon osiimaiing iho rosioual oomano of nrm ono iakos inio accouni how an in-
croaso in iho prico of rooirocis cusiomors io all rivals, wiihoui soparaiing iho ooci
of compoiiiion from 1 or any oihor (: 2) nrms. Wiih iho concopi of pariial rosioual
oomano funciion, insioao, iho morging parinor`s roaciion (1`s roaciion) is soparaioo from
ihai of iho oihor nrms.
12
cooroinaio ihoir aciions ano incroaso ihoir pricos simulianoously, nrm A will
loso all iho consumors going io all iho oihor nrms n.:&. iho consumors who
woulo havo gono io nrm L if iho morgor hao noi occurroo.
1his way, wiih rolaiivo small oaia roquiromonis, ii is possihlo io ohiain
an osiimaio of iho likoly oocis of a morgor. 1his iochniquo is incroasingly
hoing usoo hy oconomic oxporis ano in couri procoooings, ano alihough ii
is unlikoly ihai morgor appraisal will ho hasoo uniquoly on ii, ii coriainly
usofully complomonis oihor informaiion collocioo ano iho analysis of iho
markoi whoro iho morgor iakos placo.
2.1.3 \nIIateraI ehects oI LorIzontaI nergers*
In ihis sociion wo uso a proouci oioroniiaiion moool io show ihai morg-
ors which oo noi oniail omcioncy gains onhanco markoi powor ano oocroaso
wolfaro. 1ho caso of omcioncy gains will ho siuoioo in sociion 2.2. Wo con-
sioor horo iho caso of unilaioral oocis of a morgor. 1horoforo, wo assumo
ihroughoui ihai iho morgor ooos noi faciliiaio collusion. In iochnical iorms,
wo assumo ihai all nrms hohavo non-cooporaiivoly hoih hoforo ano afior iho
morgor. Ior iho analysis of iho cooroinaioo oocis of morgors, soo sociion 8.
TLe nodeI. Loi us uso iho following uiiliiy funciion, nrsi proposoo hy
Shuhik ano Loviian (1080):
l =

:
2(1 )
_
_

:
_
_
_
_
(1)
whoro is an ouisioo gooo, is iho quaniiiy of iho i-ih proouci, is a
posiiivo paramoior, : is iho numhor of prooucis in iho inousiry, [0, )
is a non-nogaiivo paramoior which roprosonios iho oogroo of suhsiiiuiahiliiy
hoiwoon iho : prooucis. Whon = 0 iho prooucis aro inooponooni of oach
oihor, whoroas if ihoro oxisis porfoci suhsiiiuiahiliiy among iho
prooucis, which aro homogonous. 1his uiiliiy funciion hoing quasi-linoar,
iho consumors` oocisions on iho ouisioo gooo oo noi aoci ihoir oocisions
iakon wiih rospoci io iho oioroniiaioo gooo, ihai wo can analyso in a pariial
oquilihrium framowork.
Irom iho maximisaiion of iho uiiliiy funciion suhjoci io iho incomo con-
siraini, wo can oorivo iho invorso oomano funciions as:
18
j =
1
1
_
_
:
_
_
(2)
Ly invoriing ihis sysiom wo can nno iho following oiroci oomano func-
iions:
=
1
:
_
_
j (1 )

:
j
_
_
(8)
ExercIse 1 :..J: | &.|.j ]&:.: j.: hj 1: 1) 1:. | .j.n
] .::. Jnn:J ]&:.:, .) 1.:J | J.: Jnn:J ]&:.:. ] n|
:J&.
Among iho proporiios of ihis oomano funciion, noiico ihai iho aggrogaio
oomano Q =

ooos noi oopono on iho oogroo of suhsiiiuiion among
iho prooucis, as Q =

=

j . Noio also ihai in iho caso of
symmoiry j = j = j aggrogaio oomano ooos noi chango wiih iho numhor
of prooucis : oxisiing in iho inousiry, as Q =

= j.
Wo assumo for simpliciiy ihai all iho nrms havo iooniical iochnologios
summarisoo hy iho cosi funciion C( ) = c , wiih c < .
Nerger: equIIIIrIun soIutIons Ii is convonioni for laior roforonco io
consioor nrsi iho caso whoro ihoro oxisis a mulii-proouci nrm, 1, which solls
iho nrsi : prooucis in iho inousiry, whoroas iho romaining (::) prooucis
aro solo hy singlo-proouci nrms. A morgor hoiwoon iho "largo" mulii-proouci
nrm ano a "small" singlo-proouci nrm can ihon ho siuoioo hy looking ai iho
ooci of an incroaso hy ono unii (from :1 io :) in iho numhor of prooucis
holonging io iho largo nrm, all romaining nrms siill solling ono proouci only.
1o nno iho inousiry oquilihrium wriio iho proni funciions of iho mulii-
proouci nrm ano of oach of iho ouisioors as follows:
: =

(j c)
:
_
_
j (1 )

:
_
_
j

j
_
_
_
_
, (4)
Anoihor oosirahlo foaiuro of iho formalisaiion wo aoopi horo is ihai in principlo ono
can analyso hoih prico ano quaniiiy oocisions of iho nrms. In whai follows, wo focus on
prico compoiiiion, hui wo shall inoicaio whon quaniiiy compoiiiion woulo loao io oioroni
rosulis.
14
: =
(j c)
:
_
_
_
_
j (1 )

:
_
_
_
_
j j

j
_
_
_
_
_
_
_
_
, / = :1, .., :
()
Ly iaking iho nrsi oorivaiivos 0: ,0j = 0 ano 0: ,0j = 0, imposing
symmoiry on iho pricos of iho mulii-proouci nrm (j = j for i = 1, .., :),
ano of iho ouisioors (j = j for / = : 1, .., :), iho nrsi-oroor conoiiions
aro:
_
_
_
c
_
1
_
2j
_
1
_
= 0
c
_
1
_
j
_
2 (1 )
_
= 0
(0)
Ly solving iho sysiom ono ohiains iho oquilihrium pricos as:
j (:)=
( ( ))
, (7)
j (:) =
( ( ))
. (8)
Ono can chock ihai 0j ,0: 0 ano 0j ,0: 0, implying ihai iho moro
conconiraioo iho inousiry (iho highor : for any givon numhor of prooucis
: solo in iho inousiry) iho highor iho oquilihrium pricos of hoih insioors
ano ouisioors afior iho morgor. Convorsoly, 0j ,0: < 0 ano 0j ,0: < 0:
a morgor which involvos a coriain numhor of nrms : will rosuli in highor
oquilihrium pricos iho lowor iho numhor of nrms in iho inousiry. 1horoforo,
iho largor : wiih rospoci io : (ihai is, iho largor iho markoi sharo of iho
morging nrms) iho sirongor iho nogaiivo impaci of iho morgor on consumor
surplus.
1o hoiior iniorproi iho oocis of iho morgor on oquilihrium pricos, noiico
ihai from iho IOCs0 ono can oorivo iho hosi roply (or roaciion) funciions of
iho morging nrm (1 ) as woll as of iho ouisioors (1 ). Iiguro 1 illusiraios
ihoso funciions in iho spaco (j , j ).
INSLI1 IIGUIL 1 (S1IA1LGIC COMILLMLN1S, m prooucis caso)
1
1hoy aro posiiivoly slopoo as iho prooucis aro siraiogic complomonis. A
morgor has iho ooci of incroasing iho numhor of prooucis : solo hy iho
"largo" nrm ano rosulis in a shifi upwaro of 1 ano io iho righi of 1 , iho
nnal oquilihrium pricos hoing highor ihan ai iho pro-morgor siiuaiion.
ExercIse 2 :..J: | nJ| :.:J .: |.. ..:. n) 1: |n |
:n.: ]&:.:. n: ...|j .|J. h) 5| | n: .::n. .: : .|.].
| :n.: ]&:.:..
1ho iniuiiion for ihis rosuli is as follows. 1ho largor iho numhor of
prooucis solo hy a nrm, iho highor iho prico ii wanis io chargo. Ior a
largo nrm solling sovoral prooucis, a marginal roouciion in iho prico of ono
pariicular proouci woulo sioal husinoss noi only io rivals hui also io own
prooucis. In oihor woros, a largo nrm iniornalisos iho faci ihai a prico
roouciion imposos a nogaiivo oxiornaliiy on own prooucis, ano will soi highor
pricos ihan a small singlo-proouci nrm. A morgor incroasos iho numhor of
prooucis solo hy a nrm ano ihus raisos iho pricos ii wanis io chargo. Sinco
prooucis aro siraiogic complomonis in ihis moool, iho ouisioors will rospono
hy incroasing ihoir pricos as woll.
TLe ehects oI a nerger 1o show moro formally iho oocis of a morgor,
loi us focus our aiioniion io iho caso whoro ihoro oxisi : singlo proouci
nrms ano a morgor hoiwoon iwo of such nrms occurs. 1horoforo, wo havo io
comparo iho oquilihrium soluiion for iho pro-morgor caso : = 1 wiih ihai of
iho posi-morgor caso : = 2.
Ly roplacing : = 1 in iho oxprossion (7) wo ohiain iho pro-morgor oqui-
lihrium prico j = j (1) = j (1):
j =
_
c
_
1
__
2
, (0)
whoro iho inoox "h" sianos for "Lorirano" soluiion (i.o., iho soluiion of iho
ono shoi prico gamo). 1ho quaniiiy solo hy oach nrm ai oquilihrium is givon
hy:
=
( c) (: : )
:(2: : )
, (10)
ano iho por-nrm proni is:
10
: =
( c) (: : )
(2: : )
. (11)
Noio ihai lim : = 0 ano ihai lim : = 0. 1ho formor moans ihai
whaiovor iho oogroo of oioroniiaiion among iho prooucis, a nrm oporaiing
in an inousiry wiih an innniioly largo numhor of nrms will rocoivo zoro proni.
1ho laiior limii roprosonis iho caso of homogonous gooos, whon ovon a small
numhor of nrms will noi ho ahlo io mako posiiivo pronis sinco ihoy compoio
in pricos.
A morgor croaios a nrm wiih iwo prooucis. Wo can nno iho posi-morgor
oquilihrium valuos j (2), j (2) (wo shall oonoio ihom for simpliciiy j , j )
hy roplacing : = 2 in iho oxprossions (7) ano (8):
j =
( )
, (12)
j = . (18)
Afior suhsiiiuiing, ono ohiains iho quaniiiios ano por-proouci pronis of
iho morgoo nrm ano iho ouisioors as:
=
(2: :(4: 5) (2: 5: 2) ) ( c)
2: (2: 3(: 1) (: 2) )
; (14)
=
(: (: 1)) ( c)
2: (2: 3(: 1) (: 2) )
. (1)
: = (: (: 2))
_
( )
_
, (10)
: = (: (: 1))
_
( )
_
. (17)
Lenna 1 J| n:j: .::n.. :.. n:J J:n.. :.&n: .&:|&..
FrooI.
1ho nrsi pari of iho lomma has hoon shown ahovo: 1ho morgor incroasos
: from 1 io 2, ano hoih insioors` ano ouisioors` pricos incroaso wiih :. Sinco
all iho prooucis aro solo hoforo ano afior iho morgor, consumors aro worso
o wiih iho morgor, sinco ii raisos pricos of all iho prooucis.
17
Anoihor iniuiiivo way io unoorsiano ihis rosuli is as follows. Whon nrms
hohavo non-cooporaiivoly in iho markoiplaco, oach of ihom imposos a noga-
iivo oxiornaliiy on all iho oihors hy choosing a prico which is ioo low wiih
rospoci io iho prico which woulo ho opiimal for iho maximisaiion of joini-
pronis. If iwo nrms morgo, ihoy will iako inio accouni iho nogaiivo oxior-
naliiy which imposo on oach oihor, ano raiso ihoir prico. 1ho oihor nrms
will roaci hy incroasing ihoir prico (rocall ihai in ihis moool iho prooucis aro
siraiogic complomonis) hui noi as much as iho morging nrm.
Lenna 2 n:j: n|nj. h:. | n:j.:j :n..
FrooI.
Iirsi, noiico ihai j < j ano j < j .1his follows from iho rosuli ihai
0j ,0: 0 ano 0j ,0: 0, ano rocalling ihai j = j (2) j = j (1)
ano ihai j = j (2) j = j (1).
Donoio iho por-proouci proni oarnoo hy iho morging nrmas : = : (j , j ),
whoro j oonoios iho vocior of iho own (iwo) proouci pricos ano j iho vocior
of iho oihor (:2) pricos chargoo hy iho ouisioors. Sinco gooos aro oomano
suhsiiiuios, ii musi ho ihai: : (j , j ) < : (j , j ). In oihor woros, iho
oquilihrium pronis ohiainoo hy iho morging nrms hoforo iho morgor musi
ho lowor ihan iho proni ihoy woulo goi if iho rival nrms chargoo a prico
j j . Howovor, wo also know ihai iho hosi rosponso of iho morging nrms
io iho prico j choson hy iho ouisioors is j j . 1horoforo, ii musi ho:
: (j , j ) < : (j , j ). Whonco, : (j , j ) < : (j , j ).
1ho rosuli ihai iho morgor n|nj. hononis iho morging parinors is noi
rohusi, as ii criiically ooponos on iho assumpiion ihai nrms compoio in
pricos. Ii is usoful io roviow hrioy iho liioraiuro on morgor proniahiliiy.
Salani, Swiizor ano Ioynolos (1088) assumoo (i) quaniiiy compoiiiion,
(ii) homogonous gooos ano (iii) no omcioncy gains from iho morgor, ano
founo ihai a morgor hoiwoon iwo nrms is always ooirimonial io iho parinors
unloss ii givos ihom a monopoly (ihai is, unloss : = 2). 1ho iniuiiion hohino
ihis rosuli is ihai iho morging parinors iniornaliso iho nogaiivo pocuniary ox-
iornaliiy givon hy iho ioo low pricos in iho inousiry, ano roouco ihoir ouipuis
Il is possiLlo lo slow llal wlon fims lavo llo samo loclnology, llo laigoi llo fim
llo ligloi llo piico il woilo claigo: j j foi : /, : ano / Loing llo nimLoi of
piooicls solo Ly iospoclivoly a laigo ano a small fim. Soo also Davioson ano Donocloio
(198).
18
(wlicl woilo lono lo incioaso piicos). Jlo gooos Loing slialogic siLslililos
(as is llo caso will qianlily compolilion ano linoai oomano finclions), llo
oilsioois lo llo moigoi will iospono Ly incioasing ialloi llan oocioasing
lloii oilpils, wlicl allows llom lo gain mailol slaios Lil wlicl moooialos
llo incioaso in llo piico. As a iosill, insioois loso mailol slaios ano piofls,
as llo lowoi qianlily piooicoo is nol componsaloo Ly llo piico iiso in llo
inoisliy.
[INSLIJ IIGUIL 2: SJIAJLGIC SULSJIJUJLS[
Iigiio 2 slows giaplically lloso aigimonls. Jlo moigoi slifls llo Losl
ioply finclion 1 of llo insioois oownwaios , lo 1 . As a iosill a now oqiiliL-
iiim will Lo in poinl M, claiacloiisoo Ly ligloi piooiclion of llo oilsioois
ano lowoi piooiclion of llo insioois. Iiofls foi llo insioois oocioaso, as llo
iso-piofl ciivo : lios aLovo : . (Soo also oxoiciso 2.)
Jlis ailiclo oponoo a loaloo ooLalo on llo pioflaLilily of moigois, ano
siLsoqionl iosoaicl las slowoo llal Ly iomoving any of llo assimplions (i)-
(iii) aLovo, pioflaLilily of llo moigoi is iosloioo. As foi (i), Davioson ano
Donocloio (198) slowoo llal wlon gooos aio slialogic complomonls ialloi
llan slialogic siLslililos, llo inilial piico incioaso of llo moigoi fims is
followoo Ly a piico incioaso Ly llo oilsioois (soo again Iigiio 1 aLovo).
Jloii caso coiiosponos lo llo analysis wo aio caiiying oil loio.
Assimplion (ii) is voiy spocial, in llal will lomogonois gooos ano no
capacily consliainls, a moigoi Lolwoon lwo fims is oqiivalonl lo ono of llom
oisappoaiing allogolloi fiom llo inoisliy. Cloaily, llis is nol a ioalislic
oosciiplion of a moigoi, wlicl consisls of lwo fims wlicl nh.: lloii
assols. Jlis can Lo iopiooicoo in a piooicl oioionlialion moool lilo llo ono
wo aio analysing. Il coilo Lo slowoo llal Ly assiming qianlily compolilion,
Lil allowing foi onoigl oioionlialion among llo piooicls, pioflaLilily is
iosloioo.
As foi poinl (iii), Ioiiy ano Ioiloi (198) lavo slowoo llal ovon inooi
llo assimplion of lomogonois gooos ano qianlily compolilion, il is onoigl
lo allow foi llo possiLilily llal lloio oxisl omcioncy gains foi llo moigoi
lo Lo pioflaLlo. Jloy oo so in a moool wloio llo moigoi amoinls lo llo
pailnois joining lloii iospoclivo capilal assols, wlicl in liin givos llom llo
Lonofl of oconomios of scalo. Ioi an analysis will omcioncy gains, soo soclion
2.2.0 Lolow.
In conclision, il sooms ioasonaLlo lo oxpocl llal llo moigoi incioasos llo
19
pailnois` oxpocloo piofls .
Lenna 3 J| n:j: .::n.. &..J:.` :..
FrooI.
Wo lnow llal j < j ano j < j . Using llo samo nolalion as in llo
pioviois Lomma, ano givon llal llo gooos aio oomano siLslililos, wo lavo
llal foi oacl of llo oilsioois : (j , j ) < : (j , j ). Iiilloi, wo lnow llal
llo Losl iosponso of oacl oilsiooi lo llo piico j closon Ly llo moiging fim
is j j . Jloiofoio, il misl Lo : (j , j ) < : (j , j ). Jlis allows is lo
conclioo llal : (j , j ) < : (j , j ).
Jlis iosill ooos nol oopono on wlolloi fims compolo on piicos oi qian-
lilios, ano lingos on llo fioo-iioing oocl onjoyoo Ly llo oilsioois: wlon llo
moiging fims incioaso lloii piicos (oi iooico lloii oilpil), lloy iooico a
nogalivo oxloinalily wlicl aocls nogalivoly all llo inoisliy. Jlo oilsioois
will lloiofoio Lonofl fiom llo moigoi.
Wo can now slalo llo following:
Lenna 4 J| n:j: .::n.. :J&: .&:|&..
FrooI.
Il follows liivially fiom llo facl llal llo moigoi incioasos Loll llo piofls
of llo moiging fims ano of llo oilsioois, as oslaLlisloo Ly llo pioviois
iomails.
Lenna 5 J| n:j: :J&. : |]n:.
Iioof. Soo Apponoix.
2.1.4 QuantItatIve tecLnIques Ior nerger anaIysIs*
Consiooi an inoisliy will : singlo piooicl fims. Wo wanl fisl lo ooiivo
llo iosioial oomano facoo Ly ono sicl a fim, ano soo low il can Lo isoo
Howovoi, somo ompiiical woils lavo siggosloo llal moigois aio ox-posl inpioflaLlo.
Soo soclion 8.2 Lolow foi a oiscission.
20
lo oslimalo ils mailol powoi. Wo llon oxlono llis appioacl lo oslimalo llo
mailol powoi cioaloo Ly a moigoi.
Diiocl oomano facoo Ly a fim i = 1, ..., : can Lo wiillon as:
= 1 (j , T , )) (18)
wloio Lolo facoo lollois inoicalo voclois ano i rofors io all oihor nrms hui
i. 1ho vocior ) oonoios a vocior of oxogonous variahlos which aoci oomano.
Ior oach of iho nrms, iho nrsi oroor conoiiions of proni maximisaiion aro:
j = 1 (T , ), ,c ) . (10)
1his implios ihai iho vocior of iho hosi roply funciions of all nrms hui i is
givon hy:
T = 1 (j , ), , U ) (20)
whoro oonoios inousiry-spocinc cosi variahlos, U oonoios iho vocior
of all iho nrm- spocinc cosi variahlos apari from ihoso spocinc io nrm i. Ly
suhsiiiuiing hack inio iho oiroci oomano, wo ohiain iho rosioual oomano
funciion of a nrm i, = 1
_
j , T
_
j , ), , U
_
, )
_
or, moro simply:
= 1
_
j , , U , )
_
. (21)
1ho own prico olasiiciiy of ihis rosioual oomano funciion will ho givon
hy:
c =
d ,
dj ,j
= c
c j , (22)
whoro c = is iho own prico olasiiciiy of iho (sianoaro) oomano
funciion, c = is iho cross prico olasiiciiy hoiwoon nrm i ano nrm j
ano j = is iho olasiiciiy of hosi roply funciions, ano moasuros hy how
much a rival incroasos iis prico following a prico incroaso hy nrm i.
1ho uso of rosioual oomano olasiiciiios as a moihoo io moasuro markoi powor of ono
or moro nrms is ouo io Lakor ano Lrosnahan (108, 1088). Our prosoniaiion horo oiors
from ihoirs mainly hocauso wo aoopi pricos as iho siraiogic variahlos of iho nrms, for
consisioncy wiih iho rosi of ihis chapior.
Noio ihai ihis way of procoooing amounis io assuming ihai iho nrm whoso rosioual
oomano funciion wo huilo hohavos as a Siackolhorg loaoor.
21
1ho oquaiion io ho osiimaioo woulo ihon iako iho form:
ln = c , ln j
j u
c c , (28)
whoro c is a consiani: , givos iho osiimaio of iho rosioual oomano olasiiciiy :
, j , c , aro iho paramoiors of oomano, inousiry-wioo cosis ano cosi oihor
ihan nrm i: ano is iho orror iorm.
Howovor, rogrossing (28) alono woulo noi givo a consisioni osiimaior,
as ihoro is a prohlom of simulianoiiy hoiwoon j ano which aro joinily
ooiorminoo in iho supply-oomano sysiom (ihoy aro hoih onoogonous vari-
ahlos, ano j appoars ai iho righi-hano sioo of iho oquaiion). Wo ihon
havo io spocify a supply funciion for nrm i. 1his supply funciion woulo
ho oonnoo impliciily hy iho nrsi oroor conoiiion of proni maximisaiion,
j 0 (j , T , ),) ,0j 'C (j , T , ), , c ) 0 (j , T , ),) ,0j = 0
(whoro 'C is iho marginal cosi of nrm i), which afior suhsiiiuiing ano
oliminaiing roounoancios will hocomo:
= o (j , ), , U , c ) . (24)
Givon ihai our ohjociivo is io osiimaio iho rosioual oomano funciion 28,
ano ihai iho only variahlo in iho sysiom which is noi corrolaioo wiih iho
rosiouals is iho nrm-spocinc cosi c , wo can uso c as iho insirumoni for iho
prico j .
Ly ooing so, wo ohiain an osiimaio of iho rosioual oomano olasiiciiy of
nrm i which in iurn is an osiimaio of iis markoi powor: iho lowor iho osii-
maioo valuo of c iho highor iho markoi powor of iho nrm. Noio ihai ihis
moihoo has iho groai aovaniago ihai ii savos on iho amouni of informaiion
nooooo io osiimaio markoi powor: insioao of having io osiimaio all iho cross
olasiiciiios ano hosi roply olasiiciiios, wo jusi havo io osiimaio an olasiiciiy.
In oihor woros, iho only nrm lovol oaia wo nooo aro ihoso on iho prico, quan-
iiiy ano nrm-spocinc cosi of iho nrm whoso markoi powor wo aro iniorosioo
in.
Locauso = = c .
Iocall llal llo Loinoi inoox of fim i, wlicl moasiios ils aLilily lo sol piicos aLovo
maiginal cosls, is givon Ly = .
IossiLly complomonloo Ly oala wlicl can simmaiiso f .
22
Jlo samo molloo can Lo applioo lo llo analysis of moigois, lo oslimalo
llo joinl mailol powoi possossoo Ly lwo moiging fims. Sipposo foi inslanco
llal wo aio inloiosloo in llo liloly impacl of a moigoi Lolwoon llo fisl lwo
fims, call llom 1 ano 2, in oii inoisliy of : fims. Ly piocoooing in a
similai way as aLovo, ono oLlains llo (pailial) iosioial oomano finclions foi
fims 1, 2 as:
= 1
_
j , j , , U , )
_
, i = 1, 2, (2)
which in logariihm hocomos:
ln = c , lnj , ln j
j u
c c , i = 1, 2; i ,=
1ho sysiom is closoo hy iho iwo supply oquaiions:
= o (j , j , ), , U , c ) , i = 1, 2. (20)
Ly using iho nrm spocinc cosi variahlos c ano c as insirumonis for j
ano j , ano joinily rogrossing iho iwo pariial rosioual oomano curvos 20, iho
coomcionis , , , givo an osiimaio of iho pariial rosioual oomano olasiiciiios
c = ano c = .
1hoso coomcionis provioo an osiimaio noi only of iho markoi powor of
oach of iho iwo nrms, hui also of how much iho markoi powor of, say, nrm
1, is consirainoo hy nrm 2 (ano vico vorsa). Noio ihai iho valuo
_
, ,
_
givos an osiimaio of iho markoi powor ihai iho morging nrms will onjoy in
iho markoi, as iho oioronco in ihoso iwo coomcionis iolls us hy how much
iho oomano facoo hy nrm i oocroasos if hoih j ano j incroaso hy iho samo
porconiago afior iho morgor. 1ho lowor iho osiimaioo valuo of ihis oioronco,
iho highor iho markoi powor ihai iho morging nrms aro likoly io onjoy, ano
honco iho moro aovorso oocis of iho morgor (oihor ihings hoing oqual, of
courso).
ExercIse 3 :..J: | nJ| J.:.hJ .: ..: ..1., |: n n:j:
&|J :n n :n |n.:j : n:... |.| ]n. : : ..:j| :J&
Laloi ano Liosnalan (198) oslimalo llo pailial iosioial oomanos joinlly foi llo lwo
fims Ly llo molloo of llioo-slago loasl sqiaios, lo incioaso llo powoi of llo oslimalois.
Soo Laloi ano Liosnalan (198, pp.480-87)
28
:n.. 1: ..n|..j :..J: | n. |: |: n: .: nn:j.:n| ..,
c = 0. n) 1.:J | :..J&n| Jnn:J ]&:.: ]n.:j | :n |.| .||. :
n:.... h) 5| |n n. | :&nh: ] :J& : .::n.. | |n...j
] .. :..J&n| Jnn:J ]&:.: J:n...
515 H!flhqf| jdlqv
Lmcioncy gains aio coilainly a ciicial vaiiaLlo in llo analysis of llo impacl
of moigois. Wo lavo slowoo aLovo llal in llo aLsonco of omcioncy gains a
moigoi woilo loao lo lowoi consimoi siiplis ano lowoi nol wolfaio, Lil il
is woll oslaLlisloo in llo oconomic liloialiio llal omcioncy gains migll osol
llo onlancoo mailol powoi of moiging fims ano iosill in ligloi wolfaio .
Jlis is Locaiso llo moigoi migll caiso llo insioois lo Lo moio omcionl ano
savo on lloii inil cosls. If lloso savings aio laigo onoigl, lloy will oilwoigl
llo incioaso in mailol powoi ano iosill in lowoi piicos, lo llo Lonofl of
consimois. Jlo loclnical pail al llo ono of llis soclion is oovoloo piocisoly
lo llo foimal analysis of llo liaoo-o Lolwoon mailol powoi ano (possiLlo)
omcioncy gains.
Jo Lolloi illislialo llo opposilo foicos al woil, consiooi again llo oxam-
plo maoo in llo pioviois soclion 2.1, wloio lwo oi moio sloios in llo samo
lown moigo. Wo lavo soon llal llo moigoi allows llom lo oxoiciso mailol
powoi. In llo aLsonco of omcioncy gains, llis moans llal llo now clain
sloio woilo fno il pioflaLlo lo claigo ligloi piicos. Lil consiooi now llo
caso wloio llo moigoi allows llo pailnoi sloios lo ialionaliso lloii aclivilios,
Lolloi oiganiso lloii lianspoilalion nolwoil, Laigain laiooi will sippliois,
savo on llo oiplicalion of piomolions (sicl as coipons ano spocial oois
sonl lo consimois) ano so foill. In llis caso, llo moigoi allows foi llo clain
sloio opoialions lo Lo iin moio omcionlly llan Lofoio, so llal savings in
inil cosls will occii.
Jlo now moigoo fim migll of coiiso slill incioaso ils piicos (ils salos
oocioasing Lil ils mail-ip incioasing Loll Locaiso of llo piico iiso ano of
llo lowoi cosls). Jlis slialogy woilo coilainly Lo pioflaLlo Locaiso wo
Jlis iosill is liloly lo lolo acioss oioionl moool spocifcalions. Ono oxcoplion is llo
ciicimslanco monlionoo aLovo, wloio fims compolo on qianlilios ano llo moigoi fims
lavo voiy small mailol slaios.
Jlo fisl lo poinl oil llal omcioncy gains migll osol onlancoo mailol powoi was
pioLaLly Williamson (1908). Soo also foi a ioconl ano ologanl conliiLilion wlicl ompla-
sisos llo iolo of omcioncy gains, Iaiioll ano Slapiio (1990)).
24
lavo soon il was so ovon in llo aLsonco of any cosl saving. Howovoi, il is
nol nocossaiily oplimal (llal is, wkh prvw surwdeoh slialogy) any longoi.
Inoooo, Locaiso of omcioncy gains, anolloi pioflaLlo slialogy migll now Lo
lo iooico piicos ano alliacl now consimois. Ioi inslanco, in llo caso wloio
piicos ano inil cosls oocioasoo piopoilionally, llo inil mail-ip woilo Lo
oxaclly llo samo as Lofoio llo moigoi, Lil lolal piofls woilo Lo ligloi as
lowoi piicos incioaso llo clain sloio`s oomano.
In gonoial, lloiofoio, will omcioncy gains llo moiging fims las lwo
possiLlo ways lo incioaso lloii piofls: lo incioaso piicos (iooico salos), oi
lo oocioaso piicos (incioaso oilpil). Wlicl of lloso lwo ways is llo mosl
pioflaLlo cannol Lo saio a piioii, Lil llo ligloi llo omcioncy gains llo moio
liloly llo socono oocl oominalos. Jlo loclnical pail of llis soclion slows
in foimal loims llal if omcioncy gains aio laigo onoigl llon llo insioois lo
llo moigoi will oocioaso salos piico ano Loll consimoi ano lolal wolfaio will
incioaso.
Iinally, il sloilo Lo noloo llal llo impacl of moigoi on llo oisliiLi-
lion of fims` piofls migll Lo voiy oioionl wlon lloio aio omcioncy gains.
Inoooo, oilsioois migll loso fiom llo moigoi, ano llis opposo lo il, wlon
llo moigoi allows insioois lo cil lloii cosls: inliilivoly, llis is Locaiso llo
moigoi clangos llo compolilivily of llo fims in llo inoisliy, lo llo oolii-
monl of llo oilsioois.
51514 Wkh qdwxuh ri h!flhqf| jdlqv/ dqg wkhlu dvvhvvphqw1
Sofai, wo lavo Loon ialloi vagio aLoil llo soiicos of possiLlo omcioncy
gains. Jloio aio sovoial ioasons wly fims wlicl comLino lloii assols migll
oocioaso lloii cosls. Jlo mosl oLviois aio llo oxislonco of oconomios of scalo
ano oconomios of scopo. Dio lo a moigoi, fims migll Lo aLlo lo iooiganiso
lloii piooiclion so as lo impiovo oivision of laLoii ano allain oconomios
of scalo: oi lloy migll Lonofl fiom lowoi cosls oio lo joinl piooiclion.
Olloi possiLlo gains migll como fiom synoigios in iosoaicl ano oovolop-
monl, ialionalisalion of oisliiLilion ano mailoling aclivilios, cosl savings in
aominislialion.
Iiom llo llooiolical poinl of viow, ono woilo lilo lo oiaw a oislinclion
Lolwoon cosl savings llal will oiioclly aocl vaiiaLlo piooiclion cosls, sicl
as oconomios of scalo ano oconomios of scopo, ano cosl savings llal mainly
aocl fxoo cosls. Jlo foimoi lypo of omcioncy gains is liloly lo lavo a oiiocl
2
impacl on piicos, wlilo llo lalloi lypo woilo aocl fxoo cosls ano llis
woilo nol mooify llo fisl-oiooi conoilions of llo oqiiliLiiim in llo piooicl
mailol. In olloi woios, savings on fxoo (i.o. inooponoonl of llo volimo of
piooiclion) cosls woilo nol aocl mailol piicos. Lmcioncy gains migll slill
loao lo a posilivo wolfaio oocl of llo moigoi, Lil llis woilo only como fiom
an incioaso in piofls oio lo lowoi oiplicalion of fxoo cosls, sinco consimoi
siiplis woilo nol clango. If compolilion agoncios allacl a ligloi woigll lo
consimoi wolfaio, oi compolilion laws ioqiiio llal somo of llo fims` gains
sloilo pass on lo consimois, llon omcioncy gains wlicl aio mainly oio lo
savings on fxoo cosls sloilo Lo looloo al loss favoiiaLly.
Jlo US Moigoi Giioolinos como lo a similai conclision Lil foi oioi-
onl ioasons. Lmcioncios ooiivoo fiom loclnical ialionalisalion aio oasioi
lo oomonslialo llan omcioncios oLlainoo in llo iooiclion of aominislialivo
cosls, poisonnol savings ano olloi fxoo oillays:
"...omcioncios iosilling fiom slifling piooiclion among facililios foimoily
ownoo sopaialoly, wlicl onaLlo llo moiging fims lo iooico llo maiginal
cosl of piooiclion, aio moio liloly lo Lo siscopliLlo lo voiifcalion, moigoi-
spocifc, ano siLslanlial, ano aio loss liloly lo iosill fiom anlicompolilivo
iooiclions in oilpil. Olloi omcioncios, sicl as lloso iolaling lo iosoaicl ano
oovolopmonl, aio polonlially siLslanlial Lil aio gonoially loss siscopliLlo lo
voiifcalion ano may Lo llo iosill of anlicompolilivo oilpil iooiclions. Yol
ollois, sicl as lloso iolaling lo piociiomonl, managomonl, oi capilal cosl
aio loss liloly lo Lo moigoi- spocifc oi siLslanlial, oi may nol Lo cognizaLlo
foi olloi ioasons" (U.S. DoJ ano IJC, Hoiizonlal Moigoi Giioolinos, iovisoo
Apiil 8, 1997, soclion 4).
Jlis qiolalion also soivos is lo liglligll somo impoilanl poinls. Iiisl,
omcioncy aigimonls sloilo Lo accoploo only as long as cosls savings acliovoo
Ly llo moigoi coilo nol Lo acliovoo olloiwiso. If, foi inslanco,llo fims
claimoo llal llo moigoi woilo cioalo omcioncy gains Locaiso il woilo iooico
poisonnol cosl, ono sloilo ioally wonooi if sicl cils in poisonnol coilo nol Lo
oono ovon willoil a moigoi. If nol, omcioncy gains aio nol moigoi spocifc
ano lloy sloilo nol Lo accoploo as an amcioncy oofonco of llo moigoi,
as lloy coilo Lo oLlainoo willoil allowing a polonlially anlicompolilivo
opoialion lilo llo moigoi.
In llo moool wo piosonl in llo loclnical soclion, sicl gains woilo iosill in a iooiclion
in llo omcioncy paiamoloi c.
20
Socono, anolloi impoilanl issio in llo oiscission of omcioncy gains is
llo assossmonl of llo lilolilooo of llo gains fiom a moigoi. Jloio is in
gonoial an issio of asymmoliic infoimalion Lolwoon a compolilion agoncy
ano llo moiging pailnois: llo lalloi aio cloaily moio infoimoo aLoil llo
sliicliio of piooiclion ano llo finclioning of llo mailol llan llo foimoi.
Wlon omcioncy gains aio a ciicial ooloiminanl in an agoncy`s oocision on llo
pioliLilion oi accoplanco of llo moigoi, il is cloai llal llo moiging pailnois
lavo an inconlivo lo ovoislalo omcioncy claims. On llo olloi lano, ano foi
opposilo ioasons, llo iival fims wlicl foai llo moigoi coilo joopaioiso lloii
compolilivo posilions migll lavo an inconlivo lo inooislalo llo omcioncy
gains of a moigoi. Agoncios will lloiofoio wanl lo ioly on inooponoonl slioios
lo liy ano ovalialo omcioncy consiooialions.
Jlo pioLlom of llo assossmonl of llo omcioncy gains is ovon moio compli-
caloo Ly llo facl llal llo moiging pailnois oflon lavo a goniino lonooncy lo
ovoislalo llo Lonofls fiom comLining lloii aclivilios ano assols. Lxpocloo
gains fiom llo moigoi oflon liin oil lo Lo micl ligloi llan llo aclial onos,
moiging fims nol laving piopoily lalon inlo accoinl llo cosls of ialionalis-
ing piooiclion ano managomonl aclivilios ano laving Loon loo oplimislic in
llo assossmonl of possiLlo synoigios. Jlis las loo lo an inloiosling ompiiical
liloialiio oiscissing llo issio of moigoi pioflaLilily.
51515 Duh phujhuv surwdeohB
A nimLoi of oconomoliic slioios lavo slioioo if moigois aio pioflaLlo, Lil
llo ompiiical ovioonco is nol conclisivo. As foi possiLlo oxplanalions of
wly moigois migll oocioaso comLinoo piofls of llo moiging fims, Miolloi
(198) fnos llal laloovois aio inpioflaLlo oio lo a ooclino, ialloi llan
an incioaso in omcioncy, wlicl osols llo Lonofls of ligloi mailol powoi.
Ioll (1980) siggosls llal managois of Liooing fims ovoioslimalo lloii aLilily
lo iin olloi companios ano llis malos llom pay ovoipay foi lloii laigols.
Moicl, Sclloifoi ano Vislny (1990) siggosl llal moigoi inpioflaLilily is
oio lo a oivoigonco Lolwoon slaiololoois` ano managois` oLjoclivo finclions:
wlilo llo foimoi caio aLoil piofls, llo lalloi aio inloiosloo in sizo, giowll
oi iisl-oivoisifcalion of llo company lloy iin. Accoioing lo Iail-Olloi
ano Molla (1990) inpioflaLlo moigois migll occii nol Locaiso managois
aio iiialional oi lloy piisio oLjoclivos olloi llan piofl maximisalion, Lil
Soo among llo ollois Iavonsciafl ano Scloioi (1987), Cavos (1989), Iianl, Haiiis
ano Jilman (1991).
27
Locaiso ownois (ialionally) givo llom conliacls wlicl inclioo inconlivos lo
incioaso llo fim`s sizo, lo malo llom moio aggiossivo in llo mailolplaco.
Jloso conliacls migll lavo llo sioo-oocl of inoicing managois lo lalo iival
fims ovoi ovon wlon il is nol pioflaLlo foi llo ownois.
Jo simmaiiso, il las nol Loon oslaLlisloo wlolloi moigois aio on avoi-
ago pioflaLlo, ano if nol, il is nol cloai foi wlicl ioason managois woilo
syslomalically malo mislalos. Howovoi, llis liloialiio is isofil in llal il
omplasisos llo iisl of oxaggoialing llo possiLlo Lonofls foim llo moigois.
Agoncios sloilo Lo awaio llal ovon sliiclly inloinal ano confoonlial ooc-
imonls migll iopoil loo oplimislic an assossmonl of llo moigoi omcioncy
gains.
Phujhuv dv pdqdjhuldo glvflsolqh On a similai lino, ono sloilo also Lo
cailiois in consiooiing llo aigimonl llal laloovois migll impiovo omcioncy
via llo siLslililion of loss aLlo managois will moio siccossfil onos. As a
malloi of facl, ompiiical woils oo nol soom lo filly sippoil llo manago-
iial oisciplino llooiy . McGiclin ano Ngiyon (199) fno mixoo iosills in
lloii analysis of an inLalancoo panol of somo 28,000 planls foi llo poiioo
1977-1987: on llo ono lano, a clango in ownoislip is gonoially associaloo
will llo liansfoi of planls wlicl lavo an aLovo avoiago piooiclivily: on llo
olloi lano, afloi a clango in ownoislip llo planls wlicl lavo Loon lians-
foiioo oo slow a ligloi piooiclivily llan Lofoio. Malsisala (1998) slio-
ios slocl mailol iosponso lo acqiisilion annoincomonls. Ho fnos llal llo
mailol iosponos posilivoly lo Liooois wlo iolain llo managomonl of laigol
companios ano nogalivoly lo Liooois wlo ioplacoo lloii managomonl, llis
siggosling llal llo mailol ooos nol lilo laloovois wlicl aim al oisciplining
llo managomonl of llo laigol companios.
Iinally, foi lloso ioaoois wlo aio slill convincoo llal moigois occii Lo-
caiso lloy inloionlly Liing omcioncy gains, ano aio llis Ly lloii own naliio
Lonofcial lo social wolfaio, il is woill noling llo iosill of llo ompiiical anal-
ysis on llo US aiilino inoisliy caiiioo oil Ly Kim ano Singal (1998, ALI).
Of coiiso, wo aio nol siggosling llal a compolilion agoncy sloilo play llo iolo of a
consillanl, ano oiscoiiaging a moigoi wlicl is nol pioflaLlo foi llo companios involvoo.
Jlo ovalialion of Lisinoss piojocls of a fim is nol a concoin foi compolilion agoncios.
Howovoi, as wo lavo soon, llo assossmonl of omcioncy gains is impoilanl foi wolfaio
consiooialions.
Apail fiom llo following iofoioncos, soo also Scloioi ano Ioss (1990, p. 102 ano pp.
100-107)
28
Jloy analyso oala fiom llo poiioo 198-1988, a poiioo wloio llo anliliisl
agoncy, in lino will llo plilosoply of llo IopiLlican aominislialion, oio nol
conlosl moigois. Jlo aillois fno llal piicos incioaso on llo ioilos soivoo
Ly llo moiging fims iolalivo lo a conliol gioip of ioilos wlicl lavo nol Loon
aocloo Ly llo moigoi. Jlo aillois conclioo llal il may Lo llal moigois
iosill in moio omcionl opoialions, Lil ovon if llis was so, omcioncy gains
lavo nol Loon onoigl lo oilwoigl llo oxoiciso of incioasoo mailol powoi,
llo fnal oocl laving Loon an incioaso in piicos.
51516 Frpshwlwlrq djhqflhv* dssurdfk wr h!flhqf| jdlqv1
Jo conclioo, oii analysis siggosls llal, lowovoi oimcill a lasl, compolilion
agoncios wlicl sciiliniso moigois sloilo caiofilly assoss llo liloly omcioncy
gains of a moigoi, ano liy ano oslimalo wlolloi lloso omcioncy gains aio
liloly oi nol lo osol llo ligloi mailol powoi onjoyoo Ly llo moiging fims.
Jlis is piocisoly llo appioacl inoicaloo Ly llo US Dopailmonl of Jislico,
wlicl
"...will nol clallongo a moigoi if cognizaLlo omcioncios aio of a claiacloi
ano magnilioo sicl llal llo moigoi is nol liloly lo Lo anlicompolilivo in
any iolovanl mailol. Jo malo llo ioqiisilo ooloiminalion, llo Agoncy con-
sioois wlolloi cognizaLlo omcioncios liloly woilo Lo simcionl lo iovoiso
llo moigoi`s polonlial lo laim consimois in llo iolovanl mailol, o.g. Ly
piovonling piico incioasos in llal mailol. In conoicling llis analysis, llo
Agoncy will nol simply compaio llo magnilioo of llo cognizaLlo omcioncios
will llo magnilioo of llo liloly laim lo compolilion aLsonl llo omcioncios.
Jlo gioaloi llo polonlial aovoiso compolilivo oocl of a moigoi (...) llo
gioaloi misl Lo cognizaLlo omcioncios in oiooi foi llo Agoncy lo conclioo
llal llo moigoi will nol lavo an anlicompolilivo oocl in any iolovanl mai-
lol. Wlon llo polonlial aovoiso compolilivo oocl of a moigoi is liloly lo
Lo pailicilaily laigo, oxliaoioinaiily gioal cognizaLlo omcioncios woilo Lo
nocossaiy lo piovonl llo moigoi fiom Loing anlicompolilivo." (US Moigoi
Giioolinos, iovisoo Apiil 8, 1997, soclion 4).
Jlo LC Commission las a qiilo moio amLigiois appioacl lowaios of-
fcioncy gains. Ly looling al llo woioing of llo Moigoi Iogilalion No.
4004,89 ono cannol say llal an omcioncy oofonco is oxplicilly allowoo, Lil
noilloi llal llis is iiloo oil. Ail 1.1(L) says llal in ils appiaisal of llo
29
moigoi, llo Commission slall lalo inlo accoinl, among olloi llings "...llo
inloiosls of llo inloimooialo ano illimalo consimois, ano llo oovolopmonl of
loclnical ano oconomic piogioss pioviooo llal il is lo consimois` aovanlago
ano ooos nol foim an oLslaclo lo compolilion."
Jacqiomin (1990, p.80) aigios llal llo pliasing moans llal omcioncy
gains can Lo lalon inlo accoinl :|j .: . ]n: n. | n:j: J. : ]:n
n: h.n| n..:. In olloi woios, lo oxclioos llal an omcioncy
oofonco can Lo isoo in LC moigoi conliol.
Jlo logislalivo lisloiy of llo Moigoi Iogilalion las somolimos Loon mon-
lionoo as sippoiling llo viow llal lloio oxisls no omcioncy oofonco in llo
LC compolilion law. Jlis is Locaiso in a pioviois oiafl of llo Iogilalion
a sonlonco wlicl woilo lavo allowoo foi somo omcioncy oofonco las Loon
sippiossoo fiom llo fnal loxl, allogooly slowing oxplicil inlonlion of llo
logislalois nol lo allow foi sicl a oofonco. Howovoi, llo logislalois wanloo
in oii opinion lo oxclioo nol an omcioncy oofonco aigimonl in gonoial, Lil
ialloi llo possiLilily llal il coilo Lo isoo lo sippoil inoisliial policy ai-
gimonls. Somo coinliios, sicl as Iianco, wanloo lo allow moigois wlicl
coilo lavo cioaloo "nalional clampions". Jlis viow was siccossfilly op-
posoo Ly coinliios sicl as llo UK ano Goimany, wlicl wanloo lo iilo oil
llo possiLilily llal anlicompolilivo moigois coilo lavo Loon appiovoo on
llo gioinos llal lloy coilo lavo sliongllonoo Liiopoan fims in llo inloi-
nalional mailolplaco. Jloiofoio, wlal llo "liavaix piopaialoiis" of llo
Moigoi Iogilalion slow is llal social, polilical ano inoisliial policy aigi-
monls may nol Lo isoo in llo assossmonl of moigois. Sinco wo lavo soon llal
omcioncy gains aio a loy aspocl in ooloimining llo :n. |]n: impacl
of moigois, wo can soo no conliaoiclion Lolwoon llo spiiil of llo logislalois
ano llo iso of an omcioncy oofonco.
Sofai, llo LC Commission in ils oocisions las nol oxplicilly iiloo oil llo
possiLilily of ising an omcioncy oofonco, Lil noi las il slowoo micl sympa-
lly foi sicl an aigimonl. Wlonovoi cosl iooiclions lavo Loon claimoo Ly
llo moiging pailios, llo Commission las oismissoo lloso claims on vaiiois
gioinos . Jlo mosl inloiosling oocision in llis iospocl is Aoiospalialo-
Alonia,DoHavillano, wloio llo Commission aigioo llal llo cosl savings
woilo lavo Loon nogligiLlo, lao nol Loon piopoily qianlifoo, woio nol
Soo Nool (1997, p. 08) ano Goyooi (1998).
Soo Nool (1997, pp 12-14). Among llo casos wloio llo oofonoanls lavo
iaisoo omcioncy consiooialions aio: Aoiospalialo-Alonia,Do Havillano, Accoi,Wagon-Lils,
MSG,Mooia Soivicos, Moicooos-Lonz,KassLolioi.
80
moigoi-spocifc (as lloy coilo lavo Loon allainoo willoil llo nooo of a con-
conlialion) ano woilo lavo nol gono in any caso lo consimois` aovanlago.
51517 H!flhqf| rhqfhB
Moio pizzling is llo facl llal llo Commission las somolimos isoo possi-
Llo cosl iooiclions as an aigimonl njn.:. llo moigoi. Jlis occiiioo in
pailicilai in llo AJ:J,NCI caso. "Lmcioncy oonco" aigimonls lao
piovioisly Loon isoo in oaily US moigoi casos, sicl as llo Liown Sloo 1902
caso, Lil lavo Loon aLanoonoo in llo US as soon as oconomic omcioncy las
Loon oslaLlisloo as llo main oLjoclivo of compolilion law. An omcioncy of-
fonco aigimonl sooms lo Lo compaliLlo only will llo oLjoclivo of "piolocling
compolilois" ialloi llan "piolocling compolilion" ano lloiofoio sloilo Lo
oismissoo fiom moigoi conliol.
Wo lavo oxlonooo llo moool isoo lo ooal will omcioncy gains in soclion
2.2.7, wloio wo lavo foimally consiooioo a sligllly moio soplislicaloo possi-
Lilily, namoly llal omcioncy gains coilo givo sicl a compolilivo aovanlago
lo llo moiging pailios llal (i) llo iival fims woilo go oil of llo mailol
ano (ii) llo nol oocl on wolfaio is nogalivo. Oii foimal analysis Lolow
slows llal il is |:.n||j possiLlo llal Loll ciicimslancos occii al llo
samo limo, wlicl woilo ooi somo soil of ialionalo foi an omcioncy oonco
aigimonl.
Howovoi, il sloilo Lo sliossoo sicl a possiLilily is qiilo a iomolo ono,
foi many ioasons. Iiisl, an oxliomoly ligl lovol of omcioncy gain sloilo
Lo cioaloo Ly llo moigoi foi all llo iomaining compolilois lo Lo pil oil of
llo inoisliy: socono, ovon in llal inliloly ovonl, llo oocl on wolfaio migll
slill Lo posilivo: lliio, loo sliong assimplions (sicl as poifocl symmoliy,
impossiLilily of llo iivals lo ioacl Ly ongaging in a similai moigoi, no capacily
consliainls) sloilo Lo maoo lo oLlain llo iosill llal consiooiaLlo omcioncy
gains migll illimaloly loao lo iivals oxil llo inoisliy dqg wolfaio lo Lo
iooicoo.
Caso IV,M.08 (OcloLoi 2, 1991), OJ L884,42, 1991, al 0.
Caso IV,M.00 (18 Janiaiy 1991). Soo also Nool (1997, p. 12) ano Novon, Nillall
ano SoaLiigll (1998, p.02).
An ovon moio soplislicaloo aigimonl is llal a moigoi migll iosill in llo moiging
fims lo lavo a ligloi polonlial foi piooaling llo iival fims. Jlis migll Lo llo caso, foi
inslanco, if llo moigoi cioalos a fim will sicl a long piiso llal il coilo laloi liy lo iso
il lo pisl iivals oil of llo mailol (soo Coslono ano Iimagalli, mimoo). Howovoi, il is nol
cloai llal il is llo moigoi iogilalion wlicl sloilo piovonl piooalion fiom occiiiing: ono
81
51518 H!flhqf| jdlqv= frqfoxvlrqv
In llis soclion wo lavo aigioo llal omcioncy gains aio a ciicial compononl
lo llo inooislanoing of llo wolfaio oocls of moigois. Wlilo llo US Moigoi
Giioolinos lavo iocognisoo oxplicilly llo iolo of omcioncy gains ano givon
somo loaos as lo low ovalialo llom, llo LC Commission`s lioalmonl of
omcioncy consiooialions in llo appiaisal of moigois las Loon siLslanlially
moio amLigiois. Iiisl, il is ooLalaLlo wlolloi llo LU Moigoi Iogilalion
allows foi omcioncy gains lo Lo lalon inlo accoinl (wo lavo aigioo llal il
ooos, Lil somo commonlalois woilo oioi). Socono, in fow ciicimslancos,
aomillooly (ano foilinaloly) al llo Loginning of llo lisloiy of llo LU ioviow
of moigois, omcioncy gains lavo Loon lioaloo as a "minis" ialloi llan a
"plis" in llo moigoi appiaisal, as cosl omcioncios ioacloo Ly moigoi insioois
woilo lavo "liil" lloii iivals.
Oii analysis lloiofoio sliongly iocommonos llal llo LC Commission lalo
inlo piopoi consiooialion llo loy iolo playoo Ly cosl iooiclions in ooloimin-
ing llo nol wolfaio oocl of moigois. Olloiwiso, all llo moigoi policy woilo
Lo oisloiloo ano woilo nol iospono lo llo oLjoclivo of incioasing oilloi con-
simoi wolfaio oi ovoiall oconomic omcioncy. A simplo oxamplo sloilo simco
lo illislialo llis poinl. Imagino llal lwo fims in a givon inoisliy wanloo lo
moigo lloii aclivilios. Jlo lwo fims oo nol lavo any iival in llo mailol ano
lloy aio going lo Lo a monopolisl. Lil imagino also llal il is inqioslionaLlo
llal llo moigoi woilo onlail sicl omcioncy gains llal, lowovoi cailiois llo
oslimalos of llo piicing Lolavioii of llo fims, consimois woilo Lonofl fiom
lowoi posl-moigoi piicos. Jlis is a moigoi wlicl woilo Lonofl consimois,
Lil llo failiio lo consiooi omcioncy consiooialions, ano llo facl llal il woilo
cioalo a oominanl fim, will imply llal llis opoialion sloilo Lo pioliLiloo
Ly llo LU ailloiilios.
Jlo LU Moigoi Iogilalion is lloiofoio soiico of ialloi inomcionl Liasos.
On llo ono lano, iosliicling allonlion lo moigois wlicl cioalo oominanco
coilo aigio in llis caso llal lloio oxisl alioaoy anliliisl laws wlicl ooal will allompls
lo monopoliso ano aLiso of oominanl posilion.
Jo malo oii aigimonl sliongoi ano cloaioi, wo aio conoiooiing in llis oxamplo a
voiy oxliomo caso of moigoi, wlicl incioasos lolal wolfaio Locaiso il incioasos Loll con-
simoi siiplis ano piooicoi siiplis. Lil a moigoi migll incioaso lolal wolfaio ovon in
llo caso wloio consimoi siiplis oocioasos, pioviooo llal llo incioaso in piooicoi sii-
plis oilwoigls llo nogalivo oocl on consimois. Jlo lalloi caso woilo Lo lowovoi loss
sliaigllfoiwaio if ono lalos inlo accoinl llal somo iogilalois lono lo givo a laigoi woigll
lo consimois llan fims (piofls) in anliliisl onfoicomonl.
82
implios llal somo wolfaio ooliimonlal moigois migll Lo appiovoo. Jlis is
llo caso, foi inslanco, wlon a moigoi will loavo fow fims opoialing in llo
inoisliy, Lil nono of lloso fims is oominanl (ano all logolloi aio nol joinl
oominanl, llal is, il is inliloly lloy woilo collioo). Jlis moigoi incioasos
piicos, Lil lacl of oominanco implios il cannol Lo clallongoo. On llo olloi
lano, failiio lo accoinl foi omcioncy consiooialions will iosill in Lonofcial
moigois Loing Llocloo Ly llo LU ailloiilios. Il is lloiofoio impoialivo foi
llo LU Commission oilloi lo inloipiol llo Moigoi Iogilalion in a loosoi
way, oi lo iowiilo il lo lavo moio fioooom in ils moigoi policy, wlicl sloilo
Lo piisiing only omcioncy oLjoclivos.
51519 H!flhqf| jdlqv iurp phujhuv-
In llis soclion, wo illislialo low omcioncy gains malloi in moigoi analysis.
Ioi simplicily, wo iosliicl oii allonlion lo llo caso wloio Lofoio llo moigoi
all fims aio singlo-piooicl fims ano llo moigoi cioalos a fim wlicl solls
lwo piooicls, all oilsioois slill solling ono piooicl only.
Jlo pio-moigoi caso las alioaoy Loon analysoo aLovo in soclion 2.1, foi
llo caso wloio : = 1: oqiiliLiiim piicos, qianlilios ano piofls aio givon Ly
oxpiossions (9), (10), (11) aLovo.
A moigoi Lolwoon lwo fims cioalos a laigoi fim wlicl will own ano soll
lwo piooicl vaiiolios. Unlilo in soclion 2.1, wo consiooi loio llo possiLilily
llal Ly comLining lloii assols, llo moiging fims migll gain in omcioncy
will iospocl lo llo singlo-piooicl fims. Ioi inslanco, lloio migll oxisl
scopo oconomios wlicl allow a fim lo piooico al a lowoi inil cosl onco
llo piooiclion of moio vaiiolios is comLinoo. Wo moool sicl cosl savings
Ly assiming llal llo moigoo onlily will Lo aLlo lo opoialo al a inil cosl
cc, will c _ 1. Jlo lowoi llo paiamoloi c, llo ligloi llo omcioncy gains
onlailoo Ly llo moigoi. In olloi woios, llo piopoilion of cosls savoo Ly llo
moigoi is (1 c)/. Oii oiscission of llo oocls of llo moigois will lingo on
llo iolo of paiamoloi c, wlicl is oxogonoisly givon. Wo slall slow, among
olloi llings, llal a moigoi is llo moio liloly lo Lo wolfaio impioving llo
ligloi llo omcioncy gains cioaloo Ly llo moigoi.
Jo fno llo inoisliy oqiiliLiiim afloi a moigoi Lolwoon llo fisl lwo
fims (1 = 1, 2), wiilo llo (poi-vaiioly) piofl finclions of llo moiging fims
(insioois) ano of oacl of llo oilsioois as follows:
Jlo analysis coilo Lo oxlonooo lo consiooi moigois Lolwoon : fims, Lil wo woilo
loso in simplicily ano nol gain any fiilloi insiglls Ly ooing so.
88
: =
(j cc)
:
_
j (1 )

:
_
2j
j
__
, 1 = 1, 2 (27)
: =
(j c)
:
_
_
_
_
j (1 )

:
_
_
_
_
2j j
j
_
_
_
_
_
_
_
_
, = 3, .., : (28)
whoro wo havo usoo iho faci ihai iho (symmoiric) prooucis of iho morging
nrm will ho solo ai iho samo prico j = j = j . Onco imposing symmoiry
on iho ouisioors, so ihai j = j = j , iho nrsi-oroor conoiiions associaioo
io iho maximisaiion prohlom of oach nrm aro givon hy:
_
_
_
cc
_
1
_
2j
_
1
_
= 0
c
_
1
_
j
_
2
_
1
_
_
= 0
(20)
Ly solving iho sysiom ahovo in j ano j , ono ohiains iho oquilihrium
pricos afior iho morgor as:
j =
( )
, (80)
j = . (81)
Afior suhsiiiuiing, ono ohiains iho por-proouci proni of iho morgoo nrm
ano iho ouisioors as:
: = (: (: 2))
_
( )
_
,
(82)
: = (: (: 1))
_
( )
_
. (88)
Our ohjociivo is nowio nno whai aro iho oocis of iho morgor on consumor
surplus, nrms` pronis ano noi wolfaro, using as iho honchmark iho oquilihrium
soluiions in iho inousiry hoforo iho morgor.
84
Wo oxamino oach of ihoso oocis in iho following suhsociions, unoor iho
assumpiion ihai iho morgor ooos noi roouco iho numhor of prooucis which
aro solo in iho markoi (wo shall analyso in sociion 2.2.7 holow whai happons
whon ihis assumpiion ooos noi holo).
TLe nerger ehect on consuner surIus. 1ho following romark givos
a nocossary ano sumcioni conoiiion for iho morgor io hononi consumors.
Lenna 6 J| n:j: .. h:.n| :.&n:. .] n:J :|j .] . .:|.
:&j| .:j jn.:., ... .] n:J :|j .]:
c _ c
c ((: 3: 2) :(3: 4) 2: ) :
c (: (: 2)) (2: (: 1))
. (84)
FrooI.
Sinco wo aro consiooring iho caso whoro all iho prooucis aro solo hoforo
ano afior iho morgor, a sumcioni conoiiion for consumors io ho hoiior o
wiih iho morgor is ihai pricos of all iho prooucis aro lowor afior iho morgor.
Howovor, ii iurns oui ihai iho conoiiion for which j _ j coincioos wiih iho
conoiiion for which j _ j , hoih of ihom roquiring ihai c _ c. 1his implios
ihai iho conoiiion is hoih nocossary ano sumcioni. Ii is oasy io chock ii is iho
caso hy ooing somo simplo hui iooious algohra. Wriio ^j (c) = j (c) j
1ho inoqualiiy ^j (c) _ 0 is saiisnoo only hy c _ c. Likowiso, ono can chock
ihai ^j (c) = j (c) j _ 0 is also solvoo only hy c _ c.
1ho Lomma ahovo can ho roao as follows. Iirsi, consumors will hononi
from iho morgor only if ii oocroasos pricos. Socono, pricos oocroaso only if
ihoro aro onough omcioncy gains.
Noio also ihai c < 1 can ho rowriiion as :( c) < 0. 1his implios
ihai a morgor which ooos noi oniail any omcioncy gain (ihai is, a morgor such
ihai c = 1) will always incroaso pricos ano ihus will novor improvo consumor
surplus. 1his connrms iho rosuli alroaoy ohiainoo in sociion 2.1.8.
[INSLI1 IIGUIL 8: S1IA1LGIC COMILLMLN1S[
Iiguro 8 shows iho ooci of iho morgor in a graphical way. A morgor
wiih no omcioncy gains shifis upwaros iho roaciion funciion for iho proo-
ucis of iho morging nrms (from 1 io 1 ) rosuliing in highor oquilihrium
pricos. Howovor, omcioncy gains iono io shifi iho insioors` roaciion funciion
oownwaros, so ihai wiih onough omcioncy gains (og., omcioncy gains corro-
sponoing io a funciion 1 ) iho posi-morgor oquilihrium pricos can ho lowor
ihan iho pro-morgor onos. (Soo also oxorciso 4.)
8
Ii is only if ihoro aro omcioncy gains ihai ihis ionooncy io incroaso pricos
can ho rovorsoo. On iho ono hano, insioors woulo siill havo an inconiivo io
raiso pricos. On iho oihor hano, if ihoro oxisi omcioncy gains, lowor cosis
woulo iono io push ihoir pricos oownwaros (ano hoing iho prooucis siraiogic
complomonis, io push all iho pricos oownwaros). Whoihor iho noi ooci is
posiiivo or nogaiivo, ii ooponos on iho sizo of iho omcioncy gains, as iho
Lomma makos ii oxplicii.
1ho minimum lovol of omcioncy gains roquiroo for consumors io gain from
iho morgor is noi a monoionic funciion of iho oogroo of proouci oioroniia-
iion in iho inousiry . 1ho roaoor can chock ihai _ 0 for _ .
In oihor woros, wo cannoi arrivo ai an unamhiguous conclusion as io whoihor
iho morgor is moro likoly io ho improving consumor`s uiiliiy (for any givon
lovol of omcioncy gain) whon proouci oioroniiaiion is highor or smallor.
Howovor, wo shoulo siross ihai in our moool all iho prooucis aro porfocily
symmoiric. Lovy ano Ioiizos (1002) analyso a moool wiih localisoo compo-
iiiion ano provo iho iniuiiivo rosuli ihai markoi powor incroasos moro whon
iho morging nrms soll noighhouring prooucis. 1ho US Morgor Guioolinos
(2.2) rocogniso ihis poini. Soo also Oroovor ano Willig (1008, pp.140-7).
1ho rolo playoo hy iho numhor of nrms is moro siraighiforwaro. 1ho
roaoor can chock ihai 0. 1ho highor iho numhor of nrms iho smallor iho
omcioncy gains ihai aro roquiroo io raiso consumor surplus: sinco iho criiical
valuo c incroasos, ii is oasior ihai iho conoiiion c _ c ho saiisnoo. In iho
oxiromo caso whoro ihoro oxisis an innniio numhor of nrms in iho inousiry, ii
is onough a small omcioncy gain io havo a oocroaso in pricos: lim c = 1.
Whon a largo numhor of nrms oporaio in iho inousiry, iho oxioni io which
pricos incroaso afior iho morgor hoiwoon iwo of ihom is much rooucoo. Lach
nrm iniornalisos iho oxiornaliiy on iho prico of iho parinor, hui wiih a much
largor numhor of ouisioors iho ooci of iho morgor on pricos hocomos vory
marginal, ano a lowor omcioncy gain can ouiwoigh ihis nogaiivo ooci.
Noio ihai lim c = 1. Howovoi, ono cannol say llal wlon gooos aio lomogonois
ovon a small omcioncy gain woilo iosill in a piico oocioaso. In facl, llis soclion is Lasoo
on llo assimplion llal all llo piooicls aio slill solo afloi llo moigoi. Will lomogonois
gooos ano Loiliano compolilion, a small omcioncy gain woilo pil all llo oilsioois oil of
llo mailol, wlicl conliaoicls llo assimplion. Soo llo noxl loclnical soclion foi lol caso
wloio llis assimplion ooos nol lolo.
Al llo olloi oxliomo of llo spocliim, lim c = 1. In llis ciicimslanco, a moigoi
woilo nol aoo anylling lo llo monopoly powoi of llo fims, ano ovon a small iooiclion
in cosls woilo malo consimois Lolloi o.
80
Al llo olloi oxliomo, wlon lloio aio only lwo fims in llo inoisliy
llo moigoi will cioalo a monopoly ano llis iosill in llo maximal incioaso
in mailol powoi: only oxliomoly ligl omcioncy gains migll in piinciplo
oilwoigl llo nogalivo wolfaio oocl oio lo ligloi piicos.
Jlis sliongllons llo ialionalo foi clallonging moigois wlicl occii in a
moio conconlialoo inoisliy (soo aLovo, soclion ??).
TLe Inact oI tLe nerger on roducer surIus. Lol is now lool al
llo oocl of llo moigoi on llo fims` piofls, looping oii assimplion llal
llo moigoi ooos nol foico oilpil of llo non-oovialing fims Lolow zoio. Wo
slall slow llal llo ovoiall piooicoi siiplis always iisos afloi llo moigoi,
Locaiso insioois always gain fiom llo moigoi ano sicl gains oilwoigl llo
possiLlo lossos maoo Ly oilsioois wlon lloio aio Lig onoigl omcioncy gains.
Jo oo so, wo movo in siccossivo slops.
Jlo fisl slop is lo slioy llo impacl of llo moigoi on llo insioois` piofls.
In llo piico-compolilion solling wo aio analysing, llo fims wlicl inooilalo
llo moigoi always gain fiom il, inooponoonlly of llo omcioncy gains, as llo
following iomail slalos.
Henark 1 n:j: n|nj. h:. | n:j.:j :n..
FrooI.
Iocall llal ovon willoil omcioncy gains, a moigoi is pioflaLlo foi llo
moiging fims (soo Lomma 2). Jlis implios llal ^ (c) 2 (: (c) : ) 0
foi c = 1. Noxl, il can Lo clocloo llal llo finclion ^ (c) is convox:
0 ^
0c
=
c (: (: 2)) (3:(: 1) 2: (: 3: 2))
: ((: 2) 3(: 1) 2:)
0, (8)
1o mako suro ihai ^ is always posiiivo wo jusi nooo io chock ihai iho
nrsi oorivaiivo ooos noi chango sign on ihis oomain. Sinco ( c) < 0, ihis
amounis io chocking ihai (c = 1) is nogaiivo. Somo algohra shows ihai:
0^
0c
(c = 1) =
( )( )
< 0.
(80)
1ho lowor c (iho sirongor omcioncy gains) iho moro proniahlo iho morgor.
1his comploios iho proof ihai iho morging nrms always gain fromiho morgor.
87
1ho noxi siop is io show ihai iho morgor always hononis iho ouisioors
unloss ihoro aro high onough omcioncy gains for iho morging nrms.
Henark 2 J| n:j: .::n.. &..J:.` :. .] .:j jn.:. n:
.nn|| :&j|, ... .] c c:
FrooI.
Wo know from sociion 2.1.8 ihai if ihoro aro no omcioncy gains, iho oui-
sioors gain from iho morgor: : (j , j ) < : (j , j ), for c = 1. 1ho noxi siop
is io oonno iho funciion ^ (c) (:2) (: : (c)), whoso sign will ioll us
whoihor ouisioors gain from iho morgor. Iirsi, noio ihai ^ ( c) = 0. Whon
c = c wo havo j = j = j . 1horoforo, ii musi ho also ihai = = .
1his implios ihai : = (j c) = (j c) = : , sinco iho morgor ooos noi
aoci proouciion cosis of iho ouisioors. Iinally, ii is oasy io soo ihai whilo
: is noi a funciion of c, iho funciion : (c) incroasos wiih c. Honco, ^ (c)
is oocroasing on iis oomain. 1horoforo, : _ : (c) for c _ c.
1his Lomma siaios ihai only if ihoro aro imporiani cosi roouciions achiovoo
hy iho morging nrms will iho ouisioors loso from iho morgor. 1his rosuli ooos
noi oopono on whoihor nrms compoio on pricos or quaniiiios, ano hingos on
iho froo-rioing ooci onjoyoo hy iho ouisioors: whon iho morging nrms in-
croaso ihoir pricos (or roouco ihoir ouipui), ihoy roouco a nogaiivo oxiornaliiy
which aocis nogaiivoly all iho inousiry. 1ho ouisioors will ihoroforo hononi
from iho morgor, unloss iho morgor also hrings a compoiiiivo aovaniago io
iho insioors.
Wo can now siaio iho following proposiiion, which osiahlishos ihai oospiio
iho ouisioors mighi loso from iho morgor (if ihoro oxisi imporiani omcioni
gains for iho morging parinors), iho aooiiional proni gains maoo hy iho
insioors ouiwoigh iho lowor pronis maoo hy iho ouisioors.
Lenna 7 J| n:j: n|nj. .::n.. :J&: .&:|&..
FrooI. Soo apponoix.
TLe net veIIare ehect oI nergers Wo can now look ai iho ovorall ooci
of iho morgor upon wolfaro, ano osiahlish iho following sumcioni conoiiion:
Lenna 8 J| n:j: .n:. : |]n: .] . .:|. :&j| .:j
jn.:., ... .]:
88
c _ c
c ((: 3: 2) :(3: 4) 2: ) :
c (: (: 2)) (2: (: 1))
.
FrooI. A sumcioni (hui noi nocossary) conoiiion for wolfaro io incroaso wiih
iho morgor, is ihai hoih consumor surplus ano prooucor surplus incroaso.
1ho iwo Lommaia ahovo havo showoo ihai for c _ c consumors gain ano
aggrogaio pronis also riso. 1horoforo, wolfaro incroaso in ihis iniorval.
1his concluoos our iochnical iroaimoni of omcioncy gains.
2.2.7 EmcIency ohence: VLen tLe nerger Ieads to exIt oI tLe
outsIders.*
Sofar, wo havo consiooroo iho caso whoro all iho nrms coniinuo io soll afior
iho morgor. Novoriholoss, ii is concoivahlo ihai iho morgor, hy making iho
morging parinors moro omcioni wiih rospoci io iho ouisioors, mighi allow
iho formor io push somo of iho laiior nrms oui of iho markoi. Ly using iho
oxiromoly simplo framowork soi up in sociion 2.2.0 ahovo, wo now analyso
ihis possihiliiy ano iis implicaiions.
In oroor for iho ouisioors noi io soll anyihing afior iho morgor, ii musi
ho ihai _ 0. 1ho quaniiiy solo hy iho ouisioors is givon hy oquaiion (1),
ano ii is oasy io soo ihai iho morgor loaos io iho morging nrms io ho iho
only sollor if:
c _ c =
c (: (1 ) (: 2) ) :(: (: 1))
c (: (: 2))
. (87)
In oihor woros, if iho morging oniiiy managos io hocomo so omcioni ihai
iis cosis aro rooucoo hy moro ihan (1 c )/, ihon ii will ho iho only nrm
in iho inousiry. Iirsi of all, ii shoulo ho noiicoo ihai, ovon ihooroiically, ii is
noi always possihlo io roach onough omcioncy gains io forco iho oihor nrms
oui of iho inousiry. Inoooo, ii can ho oasily chockoo ihai c is nogaiivo whon
: is largo onough ano whon is small onough, implying ihai if iho inousiry is
vory fragmonioo ano prooucis aro imporfoci suhsiiiuios iho morgor will novor
rosuli in ouisioors oxiiing iho inousiry, ovon in caso of imporiani omcioncy
gains for iho insioors. Ii is also siraighiforwaro io soo ihai < 0, ano
ihai 0. 1horoforo, iho largor iho numhor of nrms iho moro oimculi
io ovici iho oihor nrms from iho markoi, whilo iho moro suhsiiiuiahlo iho
80
gooos iho oasior io mako iho oihor nrms oxii iho inousiry for any givon
lovol of omcioncy gains. In iho oxiromo caso whoro iho gooos aro porfocily
homogonous, ii is onough a marginal cosi improvomoni io forco iho oihor
nrms oui of iho inousiry (lim c = 1).
Whon iho morgoo nrm is iho only ono lofi in iho markoi, ii will chargo
iho monopoly prico j = (cc ),2 for oach varioiy. Ii is oasy io chock ihai
iho wolfaro lovol aiiainoo in ihis siiuaiion is givon hy:
\ =
3( cc)
8
. (88)
1ho morgor is hononcial io socioiy as a wholo if \ \ , whoro iho
laiior inoicaios iho wolfaro lovol hoforo iho morgor ano is givon hy \ =
( )
. Ii can ho shown ihai \ \ if:
c _ c =

c

2
_
3: 4:(: 1) (: 1)
_
3c (: (: 1))
. (80)
Ii can ho chockoo ihai 0c ,0 < 0 ano 0c ,0: < 0. 1his moans ihai iho
moro suhsiiiuiahlo iho prooucis ano iho largor iho numhor of nrms, iho moro
oimculi ihai a morgor which givos riso io a (iwo-proouci) monopoly woulo
ho wolfaro improving. 1ho roason hohino ihis rosuli is ihai a highor numhor
of nrms or loss oioroniiaioo gooos mako iho hoforo-iho-morgor wolfaro lovol
highor, ouo io sirongor compoiiiion in iho markoi.
Iiguro 4 holps unoorsiano iho oocis of a morgor which givos riso io a
monopoly of iho morging nrms (i.o., whoro c < c ). 1horo oxisi iwo oioroni
possihiliiios:
c < c < c . In ihis caso, iho omcioncy gain is onough for iho morging
nrms io ho iho only sollor, hui iis monopoly powor goos io iho ooirimoni
of consumors ano ioial wolfaro.
c < c < c . In ihis caso, iho morgor croaios such an omcioni nrm ihai
iho lack of compoiiiion in iho markoi is moro ihan ouiwoighoo hy iho
omcioncy gains. 1oial wolfaro risos as a rosuli.
[INSLI1 IIGUIL 4: LIIICILNCY LLVLLS[
1ho socono rooi of iho associaioo oquaiion is highor ihan ono, ano ihoroforo ii shoulo
ho oiscarooo.
40
In oihor woros, ovon if iho morgor gavo riso io a monopoly, ii woulo noi
ho possihlo io concluoo ihai ihis is nocossarily loaoing io a wolfaro loss, sinco
iho vory samo omcioncy gains which ohligo iho rival nrms io oxii iho markoi
mighi hononi iho consumors.
1o hoiior iniorproi iho rosulis ohiainoo, wo shoulo consioor ihai iho ox-
amplo wo havo soi up horo is somohow oxiromo, for ai loasi ihroo imporiani
roasons. Iirsi of all, wo aro noi consiooring possihlo capaciiy consirainis,
sinco wo aro impliciily saying ihai iwo morging nrms havo onough capaciiy
io supply all iho markoi oomano which woulo havo hoon supplioo hy : nrms
hoforo iho morgor. 1his is a vory sirong assumpiion, which makos ii possihlo
for a singlo nrm io covor all iho markoi.
Socono, symmoiry hoiwoon iho rivals also hiasos iho rosuli sirongly. Whon
ono ouisioor goos oui of iho markoi, all iho ouisioors also coaso proouciion.
As a rosuli, sirong onough omcioncy gains loao io monopoly hy iho morging
nrm, which in iurn croaios sirong monopoly powor ano worsons wolfaro. In
a moro sophisiicaioo moool, ono woulo liko io assumo a rango of proouciion
cosis for iho ouisioors, wiih somo of ihom hoing forcoo oui of iho markoi hy
iho morgor omcioncy gains, ano somo oihors noi. 1ho wolfaro impaci of iho
morgor woulo ihon ho loss aovorso. In faci, ii mighi loao io a moro omcioni
ouicomo, maoo ii possihlo hy iho shui oown of iho loss omcioni compoiiiors.
Iurihor, iho moool wo aro ooaling wiih horo is a siaiic moool, whoro
ouisioors aro noi allowoo io roaci io a nrm`s morgor. Lui if a morgor loaos
io such high omcioncy gains, ii shoulo ho oxpocioo ihai iho rivals woulo
morgo ioo. 1his woulo call for a moro comploio moool whoro iho numhor of
morgors shoulo ho ooiorminoo onoogonously, somoihing hoyono iho scopo of
iho prosoni work.
1o summariso, ii sooms fair io concluoo ihai iho possihiliiy ihai a morgor
which oniails omcioncy gains mighi oocroaso wolfaro hy forcing oui mosi or
all of iho compoiiiors sooms unlikoly, as ii can ho ohiainoo only as iho rosuli
of vory sirong assumpiions.
516 Rwkhu yduldeohv zklfk dhfw phujhu hhfwv
Our oiscussion of iho oocis of a morgor woulo ho incomploio if wo oio
noi consioor oihor imporiani circumsiancos which ooiormino iho sign ano
1horo oxisis a small liioraiuro on onoogonous morgors, which has hoon iniiiaioo hy
Kamion ano Zang (1000, 1001). Soo also Horn ano Iorsson (1000).
41
sirongih of such oocis. In pariicular, ihroo iioms which oosorvo consioora-
iion aro: (1) 1ho likolihooo ihai nrms which havo sofar noi oporaioo in iho
socior coulo onior ii afior iho morgor: iho oasior ano loss cosily oniry iho
lowor iho markoi powor which will ho onjoyoo hy iho morging nrms. (2) 1ho
imporianco of iho huyors: ii is ofion arguoo (hui wo shall soo ihai iho claim
is noi unamhiguously corroci) ihai iho sirongor iho powor of purchasors iho
lowor iho markoi powor afior iho morgor, sirong huyors supposooly consirain-
ing iho markoi powor of iho (morging) sollors. (8) A morgor mighi consisi
of a nrm which is iaking ovor a rival whoso oays in iho husinoss aro counioo
anyhow. In ihis caso, iho acquisiiion of assois which mighi oihorwiso ho
liquioaioo ai scrap valuo mighi onhanco omcioncy whilo iho faci ihai iho ac-
quiroo nrm was going io oxii iho inousiry implios ihai markoi powor woulo
noi ho mooinoo hy iho morgor. 1his is iho so calloo failing nrm oofonco.
51614 Hqwu|
1ho capaciiy of nrms io raiso pricos afior a morgor (whoihor unilaiorally of
hocauso of collusion) is limiioo hy iho oxisionco of poioniial oniranis in iho
inousiry. Iirms which woulo nno ii unproniahlo io onior iho inousiry ai
pro-morgor pricos mighi oocioo io onior if iho morgor hrings ahoui highor
pricos or lowor quaniiiios . Ly aniicipaiing ihis ooci, posi-morgor pricos
mighi noi riso ai all: or, if ihoy oo, iho prico incroaso woulo ho iransiiory.
Afior iho poioniial oniranis oo aciually hocomo markoi pariicipanis, pricos
woulo oocroaso iowaro iho pro-morgor lovol (or possihly ovon furihor).
1ho imporianco of analysing oniry opporiuniiios in morgor invosiigaiions
is wiihoui oouhi hoon unoorlinoo hy iho ihoory of coniosiahlo markois. As wo
havo soon in chapior 2 (iho chapior on markoi powor), iho ahiliiy of a nrm io
oxploii iis markoi powor is limiioo hy iho prosonco of oihor nrms which woulo
ho aiiracioo inio iho inousiry hy high pricos. Ioioniial oniranis rosirain iho
powor of soiiing high pricos. As oiscussoo in chapior 2 (), iho moro oxiromo
consoquoncos of iho iho ihoory of coniosiahlo markois aro unlikoly io ho
roalisiic: iho oxisionco of nxoo sunk cosis ihai nrms havo io commii in oroor
io proouco ano soll in a now markoi is noi io ho unoorsiimaioo, ano limiis
Lniry mighi also iako iho form of imporis from ahroao. If afior a morgor pricos riso,
foroign nrms` compoiiiivonoss incroaso. As a rosuli, imporis mighi oisciplino iho markoi
in iho samo way as local oniranis.
1ho oxiromo vorsion of ihai ihoory mainiains ihai monopolisiic nrms woulo soll ai
avorago cosis, ano ihoroforo woulo noi rosuli in inomcioncios. Soo sociion ..
42
aciual oniry. Novoriholoss, oniry ooos provoni oxisiing nrms from soiiing ioo
high pricos. 1ho oxioni io which poioniial oniranis rosirain markoi powor of
aciual inousiry pariicipanis crucially ooponos on nxoo sunk cosis. 1ho largor
(ano iho moro sunk, i.o. commiiioo io iho inousiry ano noi rocovorahlo) iho
cosis ihai an onirani has io incur iho highor iho scopo for prico incroaso.
As ofion is iho caso, iho ovaluaiion of iho likolihooo of oniry involvos
a loi of oimculiios. Aniiirusi auihoriiios will havo io juogo whoihor ihoro
aro nrms which mighi consioor oniry, how likoly ihoy aro io oo so, whai aro
iho possihilo harriors ihoy faco ano how long ii mighi iako for oniry io ho
accomplishoo (iho moro ii iakos iho highor iho oamago io consumors ano
social wolfaro). 1his is rocognisoo hy hoih iho LC Commission ano iho US
Doparimoni of Jusiico (soo for insianco Morgor Guioolinos, sociion 8) .
51615 Hqwu|= rxwolqh ri d irupdo dqdo|vlv-
Wo can unoorsiano iho rolo oniry plays in ooiormining iho wolfaro oocis
of a morgor hy oxionoing iho moool wo prosonioo in sociion 2. Ii is noi
our inioniion horo io oovolop a full siuoy of iho oocis of oniry hui raihor
io inoicaio iho main ingrooionis of iho analysis ihrough a vory siroamlinoo
soiiing.
Consioor a iwo-siago gamo whoro nrsi nrms oocioo on oniry ano ihon
compoio in pricos. If nrms onior, ihoy havo io pay a nxoo sunk cosi 1. 1ho
rosi of iho moool is liko iho ono prosonioo ahovo in ihis samo sociion.
In iho ahsonco of a morgor, oach nrm will oocioo io onior aniicipaiing iho
ouicomo of proouci markoi compoiiiion, ihai is of iho prico gamo. 1horoforo,
iho numhor of nrms in iho inousiry will ho onoogonously ooiorminoo hy iho
Larriors io oniry can ho of vory oioroni naiuro. 1hoy mighi ho iochnological (know-
how io ho loarnoo, hui also paionis mighi proioci iho oxisiing nrms), aominisiraiivo (o.g.
whon govornmoni liconsos or pormiis aro nooooo io oporaio), linkoo io iho nnancial markoi
(nrms mighi havo prohloms in ohiaining nnancing for iho now voniuro), ano so on. In
many circumsiancos, consumor proforoncos mighi also ho an ohsiaclo, as whon iho oxisiing
markoi pariicipanis havo huili hrano consciousnoss ano loyaliy ihroughoui iho yoars, ano
an onirani shoulo invosi hoavily in aovoriising io win iho connoonco of iho consumors.
Swiiching cosis of various naiuro mighi also ho an imporiani ohsiaclo io now oniranis.
1ho US guioolinos oisiinguish hoiwoon commiiioo ano non-commiiioo oniranis. 1ho
formor aro nrms which havo io invosi in now proouciion capaciiy or markoi oisirihuiion
ano for ihis roason havo io commii rosourcos io iho inousiry. 1ho laiior aro nrms which
can swiich quickly (wiihin ono yoar) from ihoir oxisiing proouciion ano iho markoi in
consiooraiion wiihoui signincani cosis of oniry ano oxii.
48
soluiion of iho froo oniry conoiiion :
: (:) 1 = 0, (40)
whoro : aro iho non-cooporaiivo (Nash) pronis ano : is iho numhor of
nrms . Call : iho numhor of nrms which solvos iho ahovo oquaiion.
In an inousiry whoro ihoro is a nrmwhich has iwo prooucis (ihai is, whoro
iwo nrms morgo), iho insioors rocoivo pronis : (:, c) ano iho ouisioors pronis
: (:, c). (1ho oxaci oxprossions aro givon ahovo, in oquaiion ano .) 1ho
numhor of nrms which will cooxisi in ihis inousiry is givon hy:
: (:, c) 1 = 0,
Call : iho numhor of nrms which solvos iho ahovo oquaiion. Ii is cloar
ihai : _ : if ano only if : (:, c) _ : (:). In iurn, ihis occurs if 1 _ c _ c
(soo Lomma 2), ihai is if omcioncy gains aro noi ioo sirong. 1ho iniuiiion is
ihai if iho morging nrms goi moro omcioni (c oocroasos, so ihai ihoir cosis
aro lowor ihan ouisioors` cosis), ihoy will oocroaso raihor ihan incroaso ihoir
markoi prico, ano ihis will mako oniry moro oimculi, raihor ihan oasior.
1ho ooci on pricos ano consumor surplus will ihoroforo oopono on iho
numhor of aciual oniranis ano iho oxioni io which omcioncy gains occur (iho
laiior aociing iho formor). If iho morgor aiiracis oniry inio iho inousiry,
so ihai : _ : , iho nnal ooci on pricos will ho loss sirong ihan in iho caso
no oniry is possihlo: j (: , c) _ j
_
: , c
_
, ano j (: , c) _ j
_
: , c
_
. Also,
consumors woulo hononi from aooiiional varioiy, which woulo also roouco
iho nogaiivo ooci of iho morgor.
1ho conoiiion is ohiainoo in iho caso of iho numhor of nrms : hoing a coniinuous
variahlo. If : is oiscroio, iho froo oniry conoiiion is givon hy: (:) 1 0; (: - 1)
1 < 0.
Sliiclly spoaling llo piofl finclions also oopono on , c, , all Loing paiamolois oo-
fnoo in soclion 2. Sinco wo focis on llo nimLoi of fims ano lloso llioo paiamolois aio
oxogonoisly givon ano nol aocloo Ly moigois, wo ovoilool llom in wlal follows.
Il migll also Lo concoivaLlo llal wolfaio afloi a moigoi followoo Ly now onliy is ligloi
llan ils pio-moigoi lovol (soo foi inslanco Liis CaLial, 1998). Howovoi, wo oxpocl il lo
Lo inliloly in gonoial ciicimslancos: If onliy iooicoo piicos in a consiooiaLlo way, llis
woilo inooimino llo pioflaLilily of llo moigoi, wlicl woilo nol Lo caiiioo oil.
In a ioconl oocision (soo NLIA, GloLal anliliisl woolly nimLoi 20, 9-1 Apiil 1999)
llo Linooslailollaml appiovoo an opoialion llioigl wlicl Kiicl Locamo a monopolisl
in llo Goiman Iay JV mailol. "Jlo LKA aigioo llal llo willoiawal of compolilois
woilo cioalo moio oppoilinilios foi now onlianls lo onloi llo Goiman mailol. Jlo LKA
44
Jo conclioo, llis slows llal if polonlial onlianls aio liloly lo onloi afloi
llo moigoi, llon llo nogalivo oocls of llo moigoi aio liloly lo Lo iooicoo.
2.3.3 Fover oI tLe Iuyers
Jlo moiging fims` aLilily lo claigo ligl piicos also ooponos on llo oogioo of
conconlialion of llo Liyois. A fim is cloaily moio fioo lo oxoil mailol powoi
if il facos a laigo nimLoi of oispoisoo consimois oi Liyois llan if il facos
ono oi fow sliong Liyois . A sliong Liyoi can malo iso of ils Laigaining
powoi lo slimilalo compolilion among llo sollois, oilloi Ly llioaloning lo
willoiaw oioois fiom ono solloi lo givo llom lo anolloi, oi Ly llioaloning
lo slail ipslioam piooiclion ilsolf .
Locaiso of cooioinalion pioLloms, onliy inlo llo sollois` inoisliy Ly now
fims can also Lo oasioi wlon Liyois aio conconlialoo. Imagino foi inslanco a
silialion wloio llo moigoi cioalos a monopolislic fim (llo ioasoning woilo
Lo similai if lloio aio fow sollois), ano llal polonlial onlianls woilo lavo lo
malo a consiooiaLlo sinl invoslmonl lo Lo aLlo lo opoialo in llis mailol. If
Liyois aio oispoisoo, ano polonlial onlianls lavo similai cosl lovols, oioois
aio liloly lo Lo oisliiLiloo acioss sollois. Winning oioois fiom a fow Liyois
migll nol Lo onoigl lo jislify llis invoslmonl, ano as a iosill no now fim
migll onloi llo inoisliy, ovon lloigl oacl polonlial onlianl is moio omcionl
llan llo monopolisl. Locaiso Liyois aio nol cooioinaling in llo oocision
of wlicl solloi lo solocl, lloy migll ono ip will laving llo monopolisl as
only solloi in llo inoisliy, ano lonco faco micl ligloi Lills llan if onliy
lao occiiioo. Wlon insloao lloio is jisl a singlo Liyoi (oi all llo Liyois
cooioinalo), llon il will givo ils oiooi lo ono of llo onlianl ano llis will Lo
aLlo lo onloi llo inoisliy. (Soo Lolow foi a Liiof foimal oxposilion of llis
aigimonl.)
Sovoial ompiiical woils lavo liioo lo losl llo coinloivailing powoi ly-
woilo onsiio llal lloio woilo nol Lo any Laiiiois lo onliy."
[Il woilo Lo inloiosling lo soo llis oocision![
GalLiaill (192) is pioLaLly llo fisl ailloi wlo las aigioo llal coinloivailing powoi
of Liyois can consiooiaLly iosliain llo mailol powoi of sollois.
Soo Scloioi ano Ioss (1990, claploi 14) foi a oiscission ano a nimLoi of oxamplos. An
inloiosling caso is in pailicilai wlon a Liyoi piooicos ilsolf a pail of llo inpils il nooos
(lapoioo inlogialion). Jlis malos il moio ciooiLlo lo swilcl fiom sippliois lo inloinal
piooiclion ano las llo aooilional aovanlago of giving llo Liyoi infoimalion aLoil llo
cosl of piooiclion in llo ipslioam inoisliy, infoimalion wlicl can Lo voiy isofil in llo
piico nogolialions.
4
pollosis, ano lloio appoais lo Lo somo ovioonco llal Liyoi conconlialion
nogalivoly aocls pioflaLilily of llo sollois Howovoi, llo ompiiical liloi-
aliio ooos nol sloo any ligll on llo mosl impoilanl qioslion ono sloilo
asl, wlicl is 'Wlal is llo wolfaio oocl of Liyois` powoi'. Inoooo, fiom a
compolilion policy poinl of viow, wo sloilo nol jisl conlonl oiisolvos lo llo
conclision llal conconlialoo Liyois manago lo gol lowoi piicos fiom sollois,
Lil wo sloilo also soo if fnal consimois also Lonofl fiom sicl a piico iooic-
lion, oi if Liyois aio llo only onos wlo gain fiom il. If sollois aio nol aLlo
lo imposo ligl piicos Locaiso of llo piossiio oxoiloo Ly ono oi fow powoifil
Liyois, wolfaio woilo coilainly incioaso if sicl a piico cil is passoo on lo
consimois. If llis was nol llo caso, llon wolfaio migll woll oocioaso.
Consimois Lonofl fiom coinloivailing powoi if lloio oxisls onoigl com-
polilion among llo Liyois llomsolvos. Jlis aigimonl las Loon foimalisoo
fisl Ly von Ungoin-SloinLoig (1990) ano iofnoo Ly DoLson ano Waloi-
son (1997), wloso moools slows llal wolfaio iisos will Liyoi conconlialion
only wlon Liyois aio solling soivicos (oi piooicls) wlicl foicoly compolo
on llo piooicl mailol (oi wlicl aio closo siLslililos). Wlon llo Liyoi-
iolailoi mailol is claiacloiisoo Ly sliong compolilion conoilions (o.g. Lo-
caiso piooicl oioionlialion is lowoi) piico oiscoinls oLlainoo fiom sollois-
manifacliiois woilo Lo passoo on lo fnal consimois.
As a conclision, il is impoilanl lo loop in mino llal llo fnoing of llo
oxislonco of sliong Liyoi powoi is nol Ly ilsolf onoigl lo giaianloo llal
lloio is no oangoi fiom solloi conconlialion. Anliliisl ailloiily sloilo also
clocl llo lilolilooo llal gains aio nol iolainoo Ly oownslioam fims Lil aio
insloao passoo on lo fnal consimois.
[KAI-UWL, CAN YOU SIAIL SOML JHOUGHJS ON JHIS IOINJ
ILLASL Jlo issio is: sloilo wo ioally Lo loss woiiioo aLoil a moigoi wlon
Liyois aio conconlialoo Il sooms lo mo llal llo DoLson-Waloison lypo of
iosill lolls is llal llis is nol llo caso: an ipslioam monopoly can iosill
in ligloi fnal piicos wlon Liyois aio voiy conconlialoo. Lil I wisl I lao
lloigll moio on llo implicalions...[
Soo Scloioi ano Ioss (1990, pp.88-8) foi a ioviow of llis liloialiio, inilialoo Ly
Lislgailon (197). Among moio ioconl woil, Sclimacloi (1991) also sippoils llo coin-
loivailing powoi lypollosis in a slioy Lasoo on US manifacliiing inoisliios, wloioas
Connoi, Iogois ano Llagavan (1990) fno no ovioonco of coinloivailing powoi in llo US
fooo manifacliiing inoisliios.
40
2.3.4 FaIIIng hrn deIence
Slill lo Lo oono.
3 HorIzontaI nergers: coordInated ehects
Sofai wo lavo consiooioo jisl ono of llo possiLlo moclanisms llioigl wlicl
a moigoi can nogalivoly aocl wolfaio, namoly llo caso of inilaloial mailol
powoi: moiging fims will Lo aLlo lo inilaloially imposo ligloi piicos in llo
mailol. A socono impoilanl moclanism is givon Ly cooioinaloo aclion, oi
joinl oominanco, wloio llo moigoi ooos nol poso a llioal of mailol powoi
Ly a singlo fim, Lil can cioalo clangos in llo inoisliy wlicl incioaso llo
scopo foi collision. In olloi woios, Lofoio a moigoi fims migll nol Lo aLlo
lo ioacl a collisivo oilcomo, wloioas llo moigoi migll cioalo llo sliicliial
conoilions foi llo fims lo (lacilly oi oxplicilly) collioo.
Wo can ioly on llo analysis caiiioo oil in claploi 4 (on collision) lo
inooislano wly llo moigoi migll favoii llo cioalion of collision. Jloio aio
lwo main ioasons wly llis is possiLlo.
Iooicoo nimLoi of fims. Oii analysis slowoo llal llo lowoi llo
nimLoi of mailol pailicipanls llo ligloi llo scopo foi collision. Sinco
llo moigoi always oocioasos llo nimLoi of inooponoonl fims in llo
inoisliy, il also malos il oasioi foi llom lo collioo.
Moio symmoliic oisliiLilion of assols. Wo lavo soon llal a moio oqial
oisliiLilion of assols in llo inoisliy facililalos collision. Jloiofoio,
wlonovoi llo oocl of llo moigoi is lo incioaso symmoliy among llo
fims, il will also incioaso llo scopo foi collision.
Jlo oxlonl lo wlicl collision (llal is, joinl oominanco) migll occii
afloi llo moigoi ooponos on a soiios of faclois llal wo lavo alioaoy ioonlifoo
claploi 4, sicl as lianspaioncy of piicos, oxislonco of oxclango of infoimalion
among fims, fioqioncy of mailol inloiaclions ano so on. Jlo analysis of joinl
oominanco will lloiofoio lavo lo lalo inlo accoinl all sicl vaiiaLlos. Il is
cloai llal il is voiy oimcill a piioii lo piooicl wlolloi a moigoi migll loao
lo joinl oominanco oi nol, Lil llo moio llo inoisliy conlains olomonls wlicl
Of coiiso, wlilo llo moigoi Ly oofnilion iooicos llo nimLoi of fims in llo inoisliy,
il is nol liio llal a moigoi always incioasos symmoliy in assols ano mailol slaios.
47
aio liloly lo favoii collision llo sliicloi llo compolilion agoncios sloilo Lo
lowaios llo moigoi.
Wo omil loio a iopolilion of all llo olomonls wlicl favoii collision, ano
wo focis insloao on llo samo vaiiaLlos llal wo lavo analysoo aLovo, asling
oiisolvos if llo ciicimslancos wlicl malo il moio liloly foi a moigoi lo iaiso
inilaloially mailol powoi play llo samo iolo wlon cooioinaloo aclion is llo
main concoin.
Nolico llal oilloi a moigoi iaisos concoins foi singlo oominanco oi foi
joinl oominanco. Il is inliloly llal Loll concoins aiiso al llo samo limo.
Consiooi foi inslanco llo caso of a fim wlicl ioaclos a 40-4/ mailol slaio
afloi a moigoi. If llis fim facos all iivals will fiagmonloo mailol slaios, say
no olloi fim las moio llan 10-1/ of llo mailol, lloio migll Lo a sispicion
llal inilaloial mailol powoi oxisls afloi llo moigoi. Lil if iivals aio sliong
onoigl, say foi inslanco lloio is anolloi fim wlicl covois 80/-40/ of llo
mailol, llon il is inliloly llal llo moiging fims migll oxoiciso inilaloial
powoi. Jloio woilo Lo insloao a sliong concoin llal llo lwo laigosl fims
migll cooioinalo lloii aclions ano ioacl a collisivo oilcomo.
3.1 unIer oI hrns and concentratIon
Jlo nimLoi of mailol pailicipanls ano llo oisliiLilion of lloii mailol
slaios gioally aocl llo lilolilooo lo ioacl collision in an inoisliy. If llo
nimLoi of fims will iolovanl mailol slaios is alioaoy voiy small, llo fiilloi
iooiclion in llo nimLoi of inooponoonl compolilois caisoo Ly llo moigoi
can givo a Loosl lo collision, olloi llings Loing oqial. Howovoi, wo cannol
simply conclioo llal incioasoo conconlialion (Ly nocossily iising afloi llo
moigoi) is inamLigioisly signalling a ligloi pioponsily foi llo inoisliy lo
fno a collisivo oilcomo. In facl, wo lnow llal a moio symmoliic oislii-
Lilion of mailol slaios (wlicl aocls nogalivoly conconlialion) migll also
favoii collision. In olloi woios, il is nol cloai llal a conconlialion inoox
sicl as llo Hoifnolal-Hiisclman Inoox (HHI) iopiosonls a piopoi sciooning
oovico wlon il comos lo analysing llo possiLilily of joinl oominanco: llis is
Wlal lappons if collision (oi a sliong sispicion of il) alioaoy oxisls in llo inoisliy
Ono migll llon aigio llal llo moigoi woilo nol clango micl ano lloiofoio sloilo Lo
allowoo. Wo woilo nol agioo: a cailol, oi lacil collision, las somo pioLaLilily lo Lioal
oown (Locaiso of siooon oownliins in oomano, loclnological slocls oi olloi clangos).
If a moigoi ano llo consoqionl iooiclion in llo nimLoi of fims is allowoo, llon llo
pioLaLilily llal llo cailol Lioals oown woilo Lo lowoi.
48
Locaiso HHI iisos will asymmoliy in mailol slaios (iocall llal HHI oqials
llo sim of sqiaioo mailol slaios of oacl fim in llo mailol), wloioas llooiy
siggosls llal il migll Lo oasioi foi llo fims lo collioo wlon lloy lavo a
similai oisliiLilion of assols ano mailol slaios.
Consiooi foi inslanco an lypolollical oxamplo of a mailol will foii fims,
solling iospoclivoly lo 80/, 80/, 20/ ano 20/ of consimois (call il :j&-
:n.: 1), ano consiooi a moigoi Lolwoon llo fisl ano llo lliio fim, wlicl
woilo cioalo a posl-moigoi oisliiLilion of mailol slaios of (appioximaloly)
0/, 80/ ano 20/ (:j&:n.: .). Jloio is no ooiLl llal conconlialion
incioasos afloi llo moigoi (llo HHI woilo pass fiom 2,000 lo 8,800), Lil
ooos llo scopo foi collision incioaso as woll In facl, llo cioalion of a moio
asymmoliic silialion in llo inoisliy migll caiso llo fims lo fno il moio
oimcill lo acliovo a collisivo oilcomo llan Lofoio. A piioii, ano willoil
lnowing llo inoisliy, il is nol oasy lo conclioo llal llo scopo foi collision
is ligloi afloi llo moigoi, llo impacl of a iooicoo nimLoi of fims Loing
possiLly oilwoigloo Ly a moio inoqial oisliiLilion of assols.
Ioi lloso ioasons, compolilion agoncios sloilo Lo pailicilaily sliicl againsl
moigois wlicl lavo llo ooiLlo oocl of iooicing llo nimLoi of fims ano
incioasing symmoliy. Jlis migll occii in lwo ways. Jlo fisl, ano moio oL-
viois, is wlon lwo small fims moigo ano Locomo on pai will llo laigosl (foi
inslanco, conliniing llo oxamplo aLovo, a moigoi Lolwoon llo socono ano
lliio fim in confgiialion 2 givos iiso lo a silialion wloio lloio oxisl lwo
iivals oacl will a 0/ mailol slaio). Jlo socono possiLilily is llal a moigoi
also involvos somo liansfoi of assols (pailial oo-moigoi) wlicl iooslaLlislos
symmoliy. Consiooi foi inslanco llo samo inoisliy as in confgiialion 2,
Lil llis limo a moigoi Lolwoon llo fisl ano llo lliio fim. Jlis cioalos a
oiopoly will llo laigosl fim laving 70/ ano llo socono fim laving 80/ of
llo mailol (:j&:n.: ). If llo laigosl fim solls pail of ils now assols lo
llo iival, say ioiglly coiiosponoing lo 20/ of llo mailol, llo fnal oilcomo
woilo Lo lo cioalo lwo fims will 0/ oacl. Will llo liansfoi of assols,
Soo Complo, Jonny ano Ioy (1997), K iln ano Molla (1999) ano llo loclnical soclion
8.2 Lolow.
Ioi ioal casos wloio moigois ano pailial oovolilion of assols lo iivals las occiiioo,
soo llo oiscission of llo Nosll-Ioiiioi caso Lolow. Anolloi caso wloio a similai sloiy
las lapponoo is llo Allianz-AGI caso, wloio lwo of llo laigosl Liiopoan insiianco com-
panios, Allianz ano Gonoiali, woio compoling foi llo Iioncl insiioi AGI. In llo ono,
llo Liooois ioacloo an agioomonl wloioLy Allianz was laling ovoi AGI Lil somo of llo
lalloi`s siLsioiaiios woio solo lo Gonoiali. Siipiisingly, llo lwo moigoi casos woio lioaloo
49
conconlialion in llo inoisliy las oocioasoo (llo HHI falls fiom ,800 in con-
fgiialion 8 lo ,000) Lil llo concoin foi joinl oominanco woilo coilainly
iiso.
Jo conclioo, inoisliy conconlialion as moasiioo foi inslanco Ly llo HHI
is coilainly a gooo inoicaloi llal a moigoi migll cioalo a singlo oominanl
fim (in llo aLovo caso, a fim laving 70/ of llo mailol migll Lo aLlo lo
oxoiciso inilaloial mailol powoi, ooponoing on llo sliicliio of llo inois-
liy), Lil migll Lo misloaoing wlon consiooiing llo possiLilily llal a moigoi
cioalos joinl oominanco. Ioi llo lalloi, an invoiso moasiio of oispoision of
mailol slaios, sicl as llo vaiianco, migll Lo an inoicaloi wlicl piovioos
aooilional linls aLoil llo facilily of collision.
3.2 Synnetry and coIIusIon*
In llis soclion, wo consiooi llo caso wloio fims aio asymmoliic ano analyso
low llo oxislonco of asymmoliios mooify llo scopo foi collision. Jo ooal
will asymmoliios wo assimo llal fims oo nol nocossaiily piooico llo samo
nimLoi of piooicls. Jlis las somo inliilivo inloipiolalion as lo llo sizo of
llo fims in llo inoisliy. A "laigo" fim is ono wlicl can sipply a laigo
nimLoi of piooicls, wlilo a "small" fim is ono wlicl can piooico a moio
limiloo iango of piooicls. Wo assimo llo samo oomano finclion as in llo
iosl of llo claploi, Lil wo also assimo llal llo : piooicls aio sipplioo Ly
fims wlicl aio possiLly milli-piooicls. Lacl of llo fims las a nimLoi / of
piooicls, will / 5 [i, 1[, will i 1, 1 < :. Wo assimo foi simplicily llal
lloio oxisl no oconomios of scopo oi milli-piooicl oconomios, so llal llo
piooiclion cosls aio ioonlical foi oacl piooicl, inooponoonlly of llo nimLoi
of vaiiolios piooicoo Ly oacl fim.
Iiims mool in llo mailolplaco an infnilo nimLoi of limos, ano clooso
mailol piico al oacl poiioo. Jlo collisivo oilcomo can llon Lo oLlainoo
llioigl non-coopoialivo Lolavioii: fims anlicipalo llal if lloy oovialoo
fiom llo joinlly-maximising cloico lloy woilo faco a pinislmonl fiom lloii
iivals. Wo assimo llal fims oiscoinl filiio oainings al llo samo ialo o 1.
Donolo llo (poi piooicl) joinlly maximisalion piofl as : , llo piofl a
fim oLlains if il oovialos as : (/), ano llo piofl in a pinislmonl plaso
sopaialoly Ly llo LC ano woio Loll cloaioo willoil pioLlom. [Aoo iofoioncos[
Unooi a collisivo agioomonl llal involvos all llo fims, oacl piooicl is solo al llo
samo piico j = ano givos llo samo piofl = wlicl is inooponoonl of llo
nimLoi of piooicl vaiiolios piooicoo Ly oacl fim.
0
as : (/), / Loing llo nimLoi of piooicls solo Ly a fim. Lacl fim piofois
lo play llo collisivo slialogy al limo t ialloi llan oovialing if llo following
lolos:
:
_
o
_
_ : (/) o: (/)
_
o
_
1ho conoiiion is iho moro likoly saiisnoo iho highor iho collusivo proni
: oarnoo hy a nrm wiih / prooucis if ii ooos noi ooviaio from iho iaciily
collusivo hohaviour, iho lowor iho proni : (/) ii makos if ii ooos ooviaio
ano iho lowor iho proni : (/) oarnoo ouring iho punishmoni phaso (ihai
is, iho sirongor iho punishmoni in caso of ooviaiion). Wo assumo horo ihai
iho punishmoni iako iho simplo form of "grim" siraiogios: afior a ooviaiion
occurs, all iho nrms play iho Lorirano prico forovor, ihai is ihoy will always
chargo iho prico which roprosonis iho ono-shoi oquilihrium aciion. 1horo-
foro, : (/) = : (/). Sinco

o = , iho conoiiion for which a nrm
wiih / prooucis profors noi io ooviaio is givon:
o _ o
: (/) :
: (/) : (/)
.
whoro o is iho "criiical" oiscouni facior. Ior iho joinily maximising oui-
como io ariso (ihai is for comploio collusion io oxisi) wo musi havo ihai
o _ 'ca(o , ..., o ). Wo shall provo ihai iho nrm which has iho sirongosi
inconiivo io ooviaio is iho smallosi ono in iho inousiry, so ihai for comploio
collusion io ho susiainoo iho conoiiion o _ (o ) musi ho saiisnoo, whoro i
rofors io iho nrm having iho smallosi numhor of prooucis in iho inousiry.
1o ohiain ihis rosuli wo shall procooo as follows. Whon a nrm oocioos
whoihor io siick io iho collusivo pricos or noi, ii comparos iho siroam of
monopoly proni ( ) wiih iho proni ii woulo mako hy ooviaiing, which aro
composoo of iho proni in iho ooviaiion porioo plus iho siroam of proni in
iho punishmoni phaso (: o ). Whilo iho por-proouci monopoly proni
is iho samo inooponoonily of iho sizo of iho nrm, wo shall show ihai - unoor
coriain conoiiions - hoih ooviaiion ano punishmoni pronis aro iho highor iho
smallor iho nrms.
1hoso aro noi nocossarily iho opiimal punishmoni siraiogios. Ior a gonoralisaiion io
opiimal punishomoni siraiogios of iho moool coniainoo in ihis sociion soo K uhn ano Moiia
(1000).
1
1ho iniuiiion hohino ihis rosuli is as follows. A largo nrm has a numhor
of varioiios: whon choosing pricos, ii iakos inio accouni iho oxiornaliiy ihai
ii imposos on all iho varioiios ii prooucos (a lowor prico rooucos oomano on
all iho oihor prooucis), ano ihis rosirains iis iniorosi in rooucing pricos. A
nrm which has a lowor numhor of varioiios will also hononi from highor pricos
soi hy iho largor nrms, so ihai (ooviaiion ano punishmoni) pronis oocroaso
wiih iho sizo of iho nrms.
Wo siari from iho pronis in iho punishmoni phaso. 1ho following lomma
iolls us ihai iho smallosi nrm in iho inousiry makos iho highosi por-proouci
proni in iho inousiry, ano iho largosi nrm iho lowosi por-proouci proni.
Lenna 9 | ::-:n. j&.|.h:.&n ] | :-.| :.-n..:
jnn | :. n::J hj n| :J& n:.j n: h :n:|J n. ]||.:
: (i) ... : (/) ... : (1), uit/ 1 ... / ... i.
FrooI.
Soo Apponoix.
Wo now havo io analyso iho ranking of iho pronis oarnoo hy a ooviaiing
nrm. 1horo oxisi iwo possihlo iypos of ooviaiion hy a nrm. 1ho nrsi iypo
is a ooviaiion which consisis of soiiing a prico j < j such ihai all oihor
nrms in iho inousiry can siill soll a (lowor hui) posiiivo ouipui. 1ho socono
iypo of ooviaiion involvos soiiing a prico j < j rosuliing in nono of iho
oihor nrms hoing ahlo io soll ano iho ooviaiing nrm hoing a monopolisi in
iho ooviaiing porioo. Wo show ihai in hoih casos ii is iho smallosi nrm
which ohiains iho highosi ooviaiion proni.
Loi us nrsi consioor iho caso whoro a ooviaiion is such ihai all iho proo-
ucis soll a non-nogaiivo quaniiiy. Wo show ihai:
1his rosuli is iooniical io iho ono ohiainoo in Davioson ano Donockoro (108), who
uso a vory similar oomano funciion. Our proof is also similar io ihoirs.
1ho proof consisis of iwo siops. 1ho nrsi ono is io show ihai iho largor iho numhor
of prooucis solo hy a nrm iho highor iho prico ii sois ai oquilihrium. 1ho socono ono, a
consoquonco of iho provious rosuli, provos ihai iho largor iho nrm iho lowor iho por-proouci
proni ii gois.
Ii is oasy io chock ihai in iho caso consiooroo horo, whoro all iho non-ooviaiing nrms
chargo iho samo joini-monopoly prico, iniormooiaio siiuaiions whoro somo nrms coniinuo
io soll hui oihors oo noi soll afior a ooviaiion oo noi occur. 1his is hocauso iho quaniiiy
solo hy a non-ooviaiing nrm is noi a funciion of iho own numhor of varioiios, hui only a
funciion of iho numhor of varioiios solo hy iho ooviaiing nrm.
2
Lenna 10 J| :-:J& J.n.: :. |: n J.n.: .:|. _
0, ]: n|| i = 1, ..., : n: h :n:|J n. ]||.:
: (i) ... : (/) ... : (1), uit/ 1 ... / ... i.
FrooI.
Wo omii iho proof of ihis lomma, sinco ii involvos oxacily iho samo siops
as iho proof of Lomma 0.
Ior iho caso whoro iho ooviaiion loavos all iho markoi io iho ooviaiing
nrm, wo can provo iho following Lomma.
Lenna 11 J| :-:J& J.n.: :. |: n J.n.: hj n /-:J&.
:n i .:|. 0, n:J = 0, |: = /1, .., :, ,= i, n: h :n:|J
n. ]||.:
` :(i) ... ` :(/) ... ` :(1), uit/ 1 ... / ... i.
FrooI.
Soo Apponoix.
1ho iwo Lommaia wo havo jusi provoo aro noi onough io rank ooviaiion
pronis of nrms accoroing io ihoir sizo. Wo shoulo chock in which iniorval of
valuos of iho aciual proni ohiainoo hy a ooviaiing nrm corrosponos io :
or io ` :, ano ihon osiahlish a ranking in ihai iniorval. In oihor woros, for any
givon wo aro noi suro whoihor iwo nrms wiih, say, sizo | ano :, woulo hoih
chooso a ooviaiion loaving ihom wiih proni : or ` :. 1ho provious lommaia
inoicaio how io rank ooviaiion pronis of iho samo iypo, hui oo noi ioll us, for
insianco, how : (|) woulo comparo wiih ` :(:). 1ho noxi proposiiion ooos
procisoly ihis.
FroosItIon 12 1:. ` = min ` , ...` } n:J = max , ... } .
1] [0, ` ) n:J .] [ , ),|: . .. n|nj. | .nn||. :n |n
.., | :n .| | |: :&nh: ] :J&., i) |.| |n. | |.j|.
.::. J.n, n:J | ]&||j ||&.. &n .: | .:J&.:j n: h
.&.n.:J :|j .] | J..&: :n o _ o , |: o = o = ]:
(0, ` ) n:J o = ` o = ]: [ , ).
FrooI.
Soo Apponoix.
8
3.2.1 DIscussIon and InIIcatIons.
Iirsi of all, wo shoulo noio ihai iho proposiiion ahovo givos a sumcioni
conoiiion for iho criiical oiscouni raio io coincioo wiih iho ono which avoios
iho ooviaiion of iho smallosi nrm. In gonoral, ihoro will ho oihor iniorvals
whoro iho paramoior of suhsiiiuiion iakos iniormooiaio valuos for which ihis
rosuli siill holos gooo, hui a gonoral proof gois oimculi sinco in such iniorvals
iho smallosi nrm will havo iho highosi proni unoor iho punishmoni phaso hui
noi unoor iho ooviaiion, ano ii is impossihlo io givo iho gonoral conoiiions
on , :, / for which ihis happons. Novoriholoss, iho analysis ahovo ooos show
ihai ihoro aro gooo roasons for oxpociing ihai a iaciily collusivo agroomoni
io ho unoorminoo hy iho ooviaiion of a small nrm.
In oihor woros, iho ahovo analysis shows ihai iho oxioni io which an
inousiry can susiain a collusivo agroomoni mainly ooponos on iho inconiivo
consiraini of iho smallosi nrms in iho inousiry io ho saiisnoo. 1ho implica-
iion of ihis analysis is ihai symmoiry among iho nrms ooos holp collusion.
An inousiry whoro iho oxisiing numhor of proouci varioiios aro oisirihuioo
ovonly will roach moro oasily iho fully collusivo ouicomo ihan ono whoro
proouci varioiios aro oisirihuioo unovonly hoiwoon small ano largo nrms.
1ho provious analysis suggosis ihai asymmoirios hoiwoon largo ano small
nrms roprosoni an ohsiaclo for inousiry-wioo collusion. Ii is ihoroforo naiural
io wonoor whoihor largo nrms coulo iry io roach a collusivo ouicomo wiihoui
involving small nrms. Ii is possihlo io show(ooiails availahlo fromiho auihors
upon roquosi) ihai ovon whon collusion ooos noi involvo all iho nrms in iho
inousiry ii is siill iruo ihai symmoiry wiihin iho `collusivo group` holps.
As in iho caso of inousiry-wioo collusion, ii is siill iho smallosi nrm wiihin
ihai group which has iho sirongosi inconiivo io ooviaio from iho collusivo
ouicomo.
3.3 CoordInated ehects: OtLer varIaIIes to consIder
In whai follows, wo hrioy look ai how omcioncy gains consiooraiions, poion-
iial oniry ano iho oxisionco of huyors` powor aoci iho analysis of morgors
whon cooroinaioo oocis aro io ho ooali wiih.
Compio, Jonny ano Ioy (1007) havo founo similar rosulis in a moool whoro nrms`
assois aro givon hy capaciiy raihor ihan numhor of varioiios solo. 1ho main oioronco is
ihai in ihoir papor ii is iho largosi nrm which has iho sirongosi inconiivo io ooviaio, hui
symmoiry holps collusion in ihoir moool as woll.
4
3.3.1 EmcIency gaIns
1ho ooci of omcioncy gains in joini oominanco analysis is slighily loss
cloarcui ihan in singlo nrm oominanco. In gonoral, an improvomoni of iho of-
ncioncy of oporaiions shoulo ho lookoo ai vory posiiivoly as ii shoulo improvo
cosi conoiiions ano oocroaso pricos oihor ihings hoing oqual. 1his is moro so
whon iho morgor rosulis in a nrm which has lowor cosis, or a largor capaciiy,
ihan iho rivals, as ihoso olomonis mighi oisrupi collusion sinco ihoy croaio
a sirongor inconiivo io ooviaio. Ii mighi ho concoivahlo, howovor, ihai iho
morgor ano iis omcioncy gains rosioro symmoiric conoiiions in iho inousiry.
1hink for insianco of a siiuaiion whoro iho socono ano ihiro largosi nrm
an inousiry join ihoir proouci porifolios ano ihus roach iho samo proouci
rango ano iochnological lovol as iho mosi imporiani nrm in iho inousiry. Ii
is possihlo ihai ihis mighi favour collusion hy croaiing a moro symmoiric
onvironmoni. Howovor, ii is unlikoly ihai ihis ooci mighi ouiwoigh iho po-
ioniial wolfaro hononis of iho omcioncy gains. In pariicular, hy noi allowing
such a morgor, ihoro is iho risk ihai iho gap wiih rospoci io iho loaoing
(moro compoiiiivo) nrm woulo worson ano in iho long-run ihis coulo rosuli
in singlo-nrm oominanco. In gonoral, ihoroforo, omcioncy gains shoulo ho
soon as an ooci of a largor oroor of magniiuoo.
3.3.2 Entry
1ho oxisionco of poioniial oniranis aocis nogaiivoly iho capaciiy of iho in-
cumhoni nrms io raiso pricos ihrough cooroinaioo oocis. 1ho likolihooo ihai
iho morgor croaios joini oominanco is lowor whon ihoro aro nrms which aro
roaoy io commii rosourcos ano onior iho inousiry in rosponso of an incroaso
in pricos. Horo iho argumonis aro iho samo ihai wo havo alroaoy soon whon
oiscussing iho rolo playoo hy oniranis in rosiraining iho oxorciso of markoi
powor in iho caso of singlo nrm oominanco, ano noi much can ho aoooo io
iho oiscussion ahovo.
3.3.3 EIenents Ior an anaIysIs oI entry*
If wo woro io illusiraio analyiically iho argumoni ihai oniry oisciplinos iho
oxisiing nrms ano rooucos iho scopo for collusion in iho inousiry, wo woulo
uso a similar approach io iho ono ahovo in sociion 8.8.1. If iho morgor allows
nrms io roach an oquilihrium wiih a largor numhor of nrms (: ) ihan ai
iho non-cooporaiivo oquilihrium (: ), ihis woulo in iurn nogaiivoly aoci iho
conoiiions unoor which collusion arisos as a non-cooporaiivo ouicomo of iho

gamo, as wo know ihai iho inconiivo compaiihiliiy consiraini is loss likoly io
ho saiisnoo iho largor iho numhor of nrms in iho inousiry: iho iompiaiion
io ooviaio from a collusivo ouicomo woulo ho highor.
3.3.4 Huyers` over
Mosi of iho consiooraiions wo havo maoo whon ialking ahoui iho rolo playoo
hy huyor powor on iho unilaioral oocis of a morgor siill holo whon cooroi-
naioo oocis aro consiooroo. Moro conconiraiion in iho oownsiroam markoi
mighi also roprosoni a moro crooihlo ihroai of oniry inio iho upsiroam mar-
koi woro iho upsiroam nrms going io cooroinaio ihoir hohaviour ano colluoo.
1his mighi happon ihrough iwo oioroni channols. Iirsi, a roiailor onoowoo
wiih markoi powor mighi ihroaion io siari proouciion iisolf if pricos for iis
inpuis incorasoo ahovo a coriain ihrosholo. Socono, iho roiailor which on-
joyos a largo sharo of iho oownsiroam markoi mighi ho ahlo io siimulaio
oniry from now nrms. Consioor for insianco iho caso whoro oniry inio iho
markoi roquiros a nxoo sunk cosi invosimoni oiihor in proouciion or in ois-
irihuiion. A poioniial onirani mighi nno ii unproniahlo (or ioo risky) io
onior iho inousiry ano commii rosourcos io ii if ii was io sorvo only a small
numhor of huyors (or if ii was uncoriain ahoui iho possihiliiy io sorvo a largo
onough sharo of ihom). Howovor, iis rosisionco io onior iho inousiry woulo
ho ovorcomo if huyors woro conconiraioo ano ii was io win a vory largo oroor
from ono of iho vory fow huyors. Soo iho ALL-Daimlor Lonz caso for an
illusiraiion.
An aooiiional olomoni wo havo noi consiooroo ahovo ano which aocis iho
oxioni io which collusion is possihlo afior a morgor is iho froquoncy ano iho
rooucoo sizo of iho oroors. Wo havo soon in chapior (on collusion) ihai iho
inconiivos io ooviaio from iho collusivo ouicomo incroaso whon ihoro aro largo
ano infroquoni oroors raihor ihan small ano froquoni onos. 1his is hocauso
iho oxpocioo payo io ho oarnoo hy a ooviaiion hocomos much higgor, whilo
iho oxpocioo lossos woulo ho rooucoo (as ihoy woulo concorn markoi oroors
which aro likoly io arrivo in a moro oisiani, ano possihly moro uncoriain,
porioo).
1his romark has imporiani consoquoncos on iho impaci of huyors` powor
on joini oominanco. Inoooo, if iho sollors faco vory fow huyors, ihoso aro likoly
io uso ihoir hargaining powor ano uso an aggrossivo procuromoni siraiogy.
Ly unifying ihoir oroors ihoy can oxiraci hoiior conoiiions from suppliors
0
which woulo ho moro willing io oor prico roouciions (ano ihoroforo ooviaio
from a collusivo siraiogy) if iho sizo of iho coniraci is largo onough. If insioao
iho huyors aro fragmonioo, oach oroor woulo ho small ano iho sollors woulo
ho loss likoly io unoorcui oach oihor. An implicaiion of ihis is also ihai
huyors mighi wani io hohavo in a siraiogic way ano group oroors iogoihor
insioao of huying in rogular small amounis. Snyoor (1000) shows ihai hy
accumulaiing a hacklog of unnlloo oroors a huyor can mimic a oomano hoom
ano forco sollors io colluoo on lowor pricos.
4 VLat aIout joInt ventures?
Wo shoulo say somoihing ahoui horizonial joini-voniuros horo. 1ho alior-
naiivo woulo ho io oovoio an aooiiional chapior io all agroomonis hoiwoon
compoiiiors, og I:D joini voniuros. Anoihor possihiliiy is io iroai `full-
funciion` joini voniuros in iho morgor chapior ano I:D joini voniuros in iho
collusion chapior.
5 Case studIes
In ihis sociion, nrsi wo provioo a noio which summarisos iho various siops
which shoulo ho iouchoo upon ouring a morgor analysis ano iho various vari-
ahlos ihai ono shoulo analyso hoforo orawing a conclusion as io iho suiiahiliiy
of iho morgor. 1hon, wo oiscuss a fow morgor casos from iho pasi hisiory of
iho LC morgor conirol, hy making uso of iho ihooroiical consiooraiions wo
havo carrioo oui ihroughoui ihis chapior.
5.1 Hov to roceed In nerger cases: a cLeck-IIst
As wo havo soon, ihoro aro hasically iwo quosiions ihai compoiiiion auihor-
iiios shoulo ask ihomsolvos hoforo allowing a morgor. 1ho nrsi quosiion is
(1) ".|| | n:j: :n ..:j|-:n Jn.:n:", ihai is onough markoi
powor for iho morging nrms io incroaso pricos in a non-marginal way If iho
answor io ihis nrsi quosiion is nogaiivo, ihoro is siill a socono quosiion io
ho aoorossoo, which is (2) ".|| | n:j: :n ].: Jn.:n:", ihai is
woulo ii mooify iho conoiiions of iho inousiry in such a way ihai collusion
among iho nrms oporaiing in iho markoi will ho much moro likoly Wo hrioy
rocall horo iho aspocis ihai shoulo ho consiooroo in oach of ihoso quosiions.
7
5.1.1 SIngIe hrn donInance
1ho mosi oiroci way io assoss iho oxioni io which iwo morging nrms mighi
oxorciso markoi powor is io ask whoihor ihoy will ho ahlo io imposo (non-
marginally) highor pricos afior iho morgor. 1his mighi ho oono in somo casos
ihrough iho uiilizaiion of roconi oconomoiric iochniquos (soo chapior 8 on
markoi powor ano markoi oonniiion). In mosi casos, howovor, ii will ho
impossihlo io carry oui a oiroci osiimaiion for lack of oaia. Iurihormoro,
ovon whon such an oconomoiric oxorciso mighi ho oono, iis rosulis woulo
noi givo a oonniio answor wiihoui any aooiiional analysis. Ono shoulo ihon
rosori io a moro iraoiiional approach, hy nrsi oonning iho rolovani markoi in
which iho morgor iakos placo ano ihon assossing iho oogroo of markoi powor
onjoyoo hy iho morging companios. 1hroughoui all ihis procoss, ihough, ono
shoulo hoar in mino ihai iho hasic quosiion is whoihor iho morgor will rosuli
in iho morging nrms incroasing ihoir pricos.
Markoi oonniiion. Donning iho rolovani markoi amounis io iwo oior-
oni prohloms, which aro:
Iroouci markoi oonniiion
Goographic markoi oonniiion
Ior oach of ihoso prohloms, ii makos sonso io iry ano uso a wioo soi of
informaiion piocos. In pariicular, ii is usoful io consioor:
Quaniiiaiivo criioria (cross-prico olasiiciiios, prico corrolaiion iosis,
shipmoni iosis ano so on)
Qualiiaiivo criioria (consumor survoys, iniorviows wiih cusiomors
ano suppliors)
Iocall ihai all ihoso olomonis shoulo ho soon as shooing somo lighi on iho
SSNII iosi. In oihor woros, iho corroci way io oonno a markoi is ihrough iho
following ihoughi oxporimoni: If prooucis A ano L woro solo hy iho samo
hypoihoiical monopolisi, woulo ii ho ahlo io incroaso pricos hy a small hui
signincani proporiion in a non-iransiiory ano proniahlo way If iho answor is
yos, ihon A ano L aro pari of iho samo markoi. If iho answor is no, ihon iho
samo iosi shoulo ho porformoo hy oxionoing iho prooucis io ho consiooroo io
a furihor proouci, say C. Ano so on uniil an amrmaiivo answor is ohiainoo.
8
1horoforo, all iho informaiion (quaniiiaiivo ano qualiiaiivo) gaihoroo shoulo
ho usoo io givo an aswor io iho SSNII iosi.
Markoi powor. Afior having oonnoo iho rolovani markoi, wo can pass
io iho following siop, which is io assoss iho markoi powor onjoyoo hy
iho morging nrms. 1o oo so, iho following variahlos shoulo ho iakon
inio consiooraiion among iho oihors:
Markoi sharos ano oisirihuiion of capaciiios
Ovorall oogroo of conconiraiion in iho inousiry
Llasiiciiy of markoi oomano
Llasiiciiy of supply of iho rivals (ano ihoir oxcoss capaciiy)
Ioioniial oniranis or proouciion suhsiiiuiors (ihis involvos an
ovaluaiion of iho - onoogonous or oxogonous - sunk cosis ihai
oniranis shoulo incur, ano of iho oxioni io which oihor oniry har-
riors oxisi ano maiior. In pariicular, ono shoulo pay aiioniion io
I:D ano aovoriising ouilays nocossary io onior succossfully iho
inousiry.)
Swiiching cosis (woulo curroni cusiomors nno ii oasy io swiich io
oihor incumhoni nrms or poioniial oniranis
Iowor of iho huyors
Lmcioncy gains: ihoso aro crucial in a morgor invosiigaiion. Claims of
omcioncy gains shoulo ho carofully chockoo ano accopioo only if ihoy
aro morgor-spocinc ano iho nrms provioo ovioonco ano quaniincaiion
of iho likoly gains. 1ho mosi imporiani sourcos for such gains aro:
Lconomios os scalo
Lconomios of scopo (ano oxionsion of proouci lino whon cusiomors
wani io ooal wiih a supplior only)
Iaiionalisaiion of oisirihuiion ano markoiing aciiviiios
Synorgios in rosoacrh ano oovolopmoni
An invosiigaiion which iakos inio accouni iho ahovo olomonis, mighi havo
iwo oioroni ouicomos. Ono can ho ihai iho morgor woulo onahlo iho nrms
0
io signincanily raiso pricos hoyono iho curroni lovol. In ihis caso, iho morgor
shoulo ho prohihiioo or allowoo only if somo romooios can ho iooniinoo (such
as oivosiiiuro in somo pariicolar goographical aroas or iransfor of assois from
iho morging parinors io now nrms) ano ihoso conoiiions aro fulnlloo. 1ho
oihor ouicomo mighi ho ihai iho unilaioral oocis of iho morgor aro noi joop-
aroising compoiiiion in iho inousiry. In ihis caso, iho invosiigaiion shoulo
ooal wiih iho possihiliiy ihai collusion arisos afior iho morgor. Accoroingly,
iho following olomonis shoulo ho consiooroo.
5.1.2 JoInt donInance
1o unoorsiano whoihor iho morgor will mako collusion moro likoly in iho
socior, a numhor of olomonis shoulo ho consiooroo. Among iho oihors :
Numhor of nrms ano conconiraiion
Disirihuiion of markoi sharos ano capaciiios (nrms` symmoiry holps
collusion)
Lxisionco of poioniial oniranis (ano swiiching cosis)
Luyors` powor
Ohsorvahiliiy of oihor nrms` hohaviour (oxchango of informaiion, com-
poiiiion clausos, rosalo prico mainionanco ano oihor faciliiaiing prac-
iicos)
Iroquoncy of markoi iransaciions ano magniiuoo of oroors
5.2 ArosatIaIe-AIenIa/De HavIIIand
5.3 TLe estI-FerrIer nerger
1his is iho nrsi caso of a morgor which was challongoo hy iho Commission of
iho LC on iho grounos ihai ii woulo havo givon riso io joini oominanco.
1horo aro a numhor of olomonis which aro usually consiooroo in joini oominanco
invoisigaiions hui which havo amhiguous oocis on iho scopo for collusion. Among ihom
aro iho oogroo of homogonoiiy of iho prooucis ano iho oxisionco of oxcoss capaciiy .: |
.:J&.:j. Wo havo soon ihai a priori is noi cloar whoihor proouci oioroniiaiion ano oxcoss
capaciiy holps collusion or noi.
1his oiscussion is hasoo on iho Commission Docision of 22 July 1002. 1his is iho caso
IV,M.100 puhlishoo in iho Omcial Journal of iho LC, L80,1, .12.02
00
In 1001 IIIN1, an Iialian company holonging io iho Agnolli family,
launchoo a hio io gain conirol of iho Ironch company Iorrior, oporaiing
in iho minoral waior inousiry. 1ho hio was followoo hy a counior-oor of
Nosilo, a Swiss muliinaiional, which hao proviously roachoo an agroomoni
wiih LSN, hoih nrms hoing aciivo in iho minoral waior inousiry. Afior a po-
rioo of uncoriainiy iho iakoovor haiilo was won hy Nosilo. Unoor iho iorms
of iho agroomoni, Nosilo woulo havo solo iho Volvic sourco of Iorrior io LSN.
Afior a ooiailoo invosiigaiion, iho CLC oociooo ihai iho oporaiion woulo
havo rosulioo in joini oominanco of iho minoral waior markoi in Iranco hy
Nosil ano Iorrior. Lvoniually, iho morgor was cloaroo suhjoci io coriain
conoiiions (somo of iho Iorrior sourcos shoulo havo iransforroo io an inoo-
ponooni prooucor). In whai follows iho caso is oiscussoo hy making uso of
iho simplo framowork proposoo in iho lociuro on morgors. Accoroingly, wo
nrsi analyso (1) whoihor iho morgor is supposoo io incroaso markoi powor
ano (2) io fosior collusivo hohaviour in iho inousiry. Our conclusion will
follow.
As wo havo soon, iho nrsi siop of an invosiigaiion inio issuos of markoi
powor consisis of iho iooniincaiion of iho rolovani markoi. 1ho oolinoaiion
of iho rolovani markoi roquiros iho oonniiion of iho proouci markoi ano of
iho goographical markoi. Wo ooal wiih oach of ihoso poinis soparaioly.
5.3.1 Froduct narket dehnItIon
1ho main prohlom for iho oonniiion of iho proouci markoi is io oocioo
whoihor minoral waior holongs io iho samo inousiry as sofi orinks ano, if
noi, whoihor a oisiinciion shoulo ho maoo hoiwoon nzzy ano siill minoral
waior.
As a nrsi ihing a qualiiaiivo analysis is maoo. Ii is founo ihai hoih
consumor survoys ano iniorviows wiih roiailors inoicaio ihai minoral waior
ano sofi orinks aro noi onough suhsiiiuios io holong io iho samo markoi.
On iho proouciion sioo oioroncos aro also markoo. 1horo oxisi a numhor
of rogulaiory consirainis in iho proouciion of minoral waior, ospocially in
Iranco. 1ho mosi imporiani aro ihai: proouciion of minoral waior nooos
an auihorisaiion: hoiiling mui ho oono ai iho sourco: ano waior musi ho
1ho formor has iho imago of a puro, naiural proouci, ii is associaioo io hoalihy
living ano ii is ihoughi io saiisfy a hasic nooo. 1ho laiior ooos noi havo any of ihoso
characiorisiics ano ii is consumoo in a much moro occasional way. 1his can ho soon in a
largor por-capiio consumpiion of minoral waior ihan sofi orinks.
01
markoioo wiih a hrano namo which is associaioo io iho sourco. Nono of
ihoso consirainis apply io sofi orink prooucors, whoso main inpui is iap waior
ano which oo noi havo pariicular proouciion ano markoiing roquiromonis io
follow.
As for quaniiiaiivo criioria, nrsi ii is founo ihai ihoro oxisis a consioorahlo
oioronco in prico lovols, sinco sofi orinks aro solo on avorago ai a mill prico
which is iwo io ihroo iimos highor ihan iho prico of minoral waior. 1his
poinis alroaoy iowaros a coriain soparaiion of iho iwo moarkois. Ii is also
founo ihai corrolaiion coomcionis of pricos of oioroni minoral waiors rango
from .8 io 1, whoroas iho corrolaiion coomcionis hoiwoon prico of minoral
waior ano prico of sofi orinks aro oiihor vory low or nogaiivo: ouring iho nvo
yoars hoforo 1002 minoral waior pricos ionooo io incroaso whoroas sofi orinks
pricos ionooo io oocroaso.
As for supply suhsiiiuiion, ii is limiioo. Locauso of iho rogulaiion on pro-
ouciion ano markoiing, planis usoo io proouco sofi orinks cannoi ho swiichoo
io proouciion of sourco waior. In principlo, ii is possihlo io siari proouciion
of hoiiloo waior hy a procoss which purinos iap waior (in somo counirios ihis
is oono). Howovor, iho CLC arguos ihai ihoro oxisis no ovioonco ihai ihis
woulo ho accopioo hy consumors as a roasonahly gooo suhsiiiuio for minoral
waior, nor is ii known of any prooucor which is planning io onior iho markoi
in such a way.
1ho CLC also arguos ihai no oisiinciion shoulo ho maoo hoiwoon markois
for sparkling, siill ano avouroo waiors. Dospiio somo oioroncos in pricos,
ii appoars ihai from iho iochnical poini of viow ii woulo ho oxiromoly oasy
for a prooucor io swiich from sparkling io siill waiors ano vico vorsa.
In iho lighi of informaiion availahlo io us, iho conclusion ihai iho rolovani
proouci markoi is roprosonioo hy hoiiloo minoral waior woulo soom oimculi
io ohjoci. Howovor, ai iho siago of markoi oonniiion iho oioronco hoiwoon
minoral ano spring waiors is noi analysoo proporly, whoroas iho CLCaiiachos
much imporianco io ii laior in iho Docision, whon ii analysos markoi powor.
Soo para. () ano all iho iahlos afior (80). In pariicular, para. 84 of iho
Docision cloarly inoicaios ihai local spring waiors aro noi consiooroo as a
gooo suhsiiiuio of minoral waiors hy mosi of wholosalors ano roiailors. 1his
Spring waiors, which havo inforior characiorisiics wiih rospoic io minoral waiors havo
io hoiiloo ai iho sourco hui ihoy can ho markoioo wiih a oioroni hrano namo.
Cross-prico olasiiciiios ano oomano olasiiciiy aro noi compuioo, alihough iho CLC
arguos ihai a small incroaso in iho prico of waiors woulo noi loao io a signincani oocroaso
in oomano from minoral waior io sofi orinks.
02
shoulo havo iakon inio accouni whon oonning iho rolovani markoi.
5.3.2 OeograLIc narket
1ho CLC oonnos iho rolovani markoi as iho Ironch markoi. Ii ooos noi roly
on spocinc iosis horo hui on iho following argumonis: Iirsi, iranspori cosis
of minoral waior aro oxiromoly high wiih rospoci io iis valuo (hoiwoon ion
ano iwoniy por coni for ovory 800 kilomoiors, ooponoing on whoihor plasiic
or glass hoiilos aro usoo). Socono, ihoro oxisis vory low iraoo hoiwoon LC
counirios, wiih iho oxcopiion of Lolgium whoro imporis aro high. 1hiro,
oniry inio iho Ironch markoi is also maoo oimculi hocauso ihis is a maiuro
markoi wiih vory osiahlishoo hrano namos, ano a vory largo aovoriising oori
woulo ho nooooo io acquiro consioorahlo markoi sharos. In iho caso of Gor-
man prooucors, oniry is also maoo moro oimculi hy iho faci ihai in Gormany
minoral waior is mosily solo in glass hoiilos of 7 cl, whilo in Iranco plasiic
hoiilos of oioroni capaciiy aro usoo.
1ho oonniiion of iho Ironch markoi as iho rolovani markoi sooms roa-
sonahlo. 1ho only possihlo aliornaiivo coulo havo hoon io oonno iho markoi
as composoo of hoih Lolgium ano Iranco (a prico corrolaiion analysis coulo
havo hoon iniorosiing from ihis poini of viow) hui wo oouhi ihis woulo havo
aocioo iho rosulis of iho invosiigaiion.
5.3.3 SIngIe hrn donInance {unIIateraI ehects)
Wo now soo whoihor iho morgor hoiwoon Nosilo ano Iorrior raisos foars of
singlo nrm oominanco (or onough markoi powor for a singlo nrm io ho ahlo
io imposo much highor pricos).
Nosilo, LSN ano Iorrior own sovoral sourcos: Nosilo owns Viiiol ano
Hopar: Iorrior owns Iorrior, Conirox, Volvic, Si. Yorro, 1honon ano Vichy,
as woll as a numhor of local spring waiors: LSN owns Lvian ano Laooii. 1ho
ihroo nrms holo 82,8/ of iho markoi in valuo ano 70/ in volumo. Inoivioual
markoi sharos aro noi puhlishoo in iho Commission oocision, for husinoss
socrocy roasons. Somo informaiion ahoui ihom can ho founo in John Suiion
(1001, 1ahlo M.12), who osiimaios LSN sharo ai ahoui 2/, Nosil ai 20-
2/, Volvic ai 7/ ano oihor sourcos of Iorrior ai ahoui 20-2/. Sinco ii is
founo hy iho CLC ihai markoi sharos havo hoon siahlo ovor iho roconi yoars,
Iorrarollo ano San Iollogrino, iwo Iialian waiors prosoni in iho Ironch markoi, aro
conirolloo hy LSN ano Iorrior rospoiivoly.
08
Suiion`s osiimaios aro usoful ovon if ihoy rofor io 1080. Novon, Nuiiall ano
Soahrighi (1008, p.108) valuo insioao iho markoi sharo of Nosil ai 1.0/
ano ihai of Iorrior ai 81.0/. Accoroing io ihoso osiimaios (consisioni wiih
iho aggrogaio valuos givon in iho Docision), a morgor of Nosil ano Iorrior
woulo rosuli in a singlo nrm having a markoi sharo of arouno 4/-/, wiih
iho largosi rival having a sharo of ahoui 2/ of iho markoi, onough io siari
an analysis of singlo oominanco. Howovor, iransforring ihoVolvic sourco io
LSN iho caso for challonging a morgor on iho hasis of singlo oominanco is
much woakor, hocauso iho largosi compoiiior, LSN, woulo havo moro ihan
80/ of iho markoi. Iurihormoro, iho analysis of capaciiios of iho oioroni
sourcos rovoals ihai Volvic hao iho largosi capaciiy in iho inousiry. [ADD
IIOM COMI1L-JLNNY-ILY[
Ior ihoso roasons, ii woulo soom oimculi io arguo ihai iho oporaiion
involving iho morgor of Nosil-Iorrior ano iho iransfor of Volvic io LSN
woulo havo croaioo singlo nrm oominanco.
5.3.4 JoInt hrn donInance {coordInated ehects)
In ihis sociion, wo analyso all iho variahlos which mighi play a rolo in oo-
iormining iho ahiliiy of Nosil-Iorrior ano LSN io roach a collusivo ouicomo
afior iho morgor.
ConcentratIon Ii is cloar ihai iho markoi is oxiromoly conconiraioo, wiih
ihroo prooucors (iwo afior iho morgor) having moro ihan oighiy porconi of iho
markoi. 1ho romaining markoi sharos aro oiviooo hy a numhor of fragmonioo
prooucors, mainly solling spring waiors locally. Novon, Nuiiall ano Soahrighi
(1008, p.108) osiimaio (iho lowor houno of) iho posi-morgor HHI ai 2000
ano iho chango in HHI ai 1000, oxiromoly high valuos if ono consioors iho
honchmark valuos of iho US morgor guioolinos.
Denand eIastIcIty 1horo sooms io ho iho scopo for iho nrms io incroaso
pricos ahovo marginal cosis, if ono holiovos iho CLC`s argumoni ihai markoi
oomano olasiiciiy is low onough (no osiimaio is ooroo in iho Docision).
SuIy suIstItutIon and otentIaI entry 1ho only rolovani nrms in
iho inousiry soom io ho Nosilo-Iorrior ano LSN. 1ho local prooucors aro ioo
fragmonioo io jooparoiso ihoir posiiion of sirongih. In principlo ihoy coulo
04
siari io markoi ihoir spring waiors unoor a common hrano namo, hui such
waiors havo oioroni foaiuros among ihomsolvos ano appoar as a proouci
inforior io minoral waior. Nono of iho local prooucors sooms io havo onough
nnancial powor io siari a massivo aovoriising campaign. 1his markoi is
woll ooscrihoo hy a voriical proouci oioroniiaiion moool whoro iho proouci
qualiiy as porcoivoo hy iho consumor ooponos on aovoriising ouilays which
aro a sunk cosi which woulo noi ho rocovoroo hy oniranis. 1ho onoogonous
sunk cosi paraoigm applios noaily io ihis inousiry. Ono of iis implicaiions
is ihai wo shoulo oxpoci porsisionco of conconiraiion in such a socior ovon
whon iho markoi sizo incroasos.
1ho samo is iruo for poioniial oniranis from oihor counirios or oihor
inousirios. 1ho rolo of iranspori cosis ano rogulaiion has hoon omphasisoo
ahovo, as woll as iho faci ihai ii is unlikoly ihai a nrm coulo succossfully onior
iho markoi hy inirooucing purinoo iap waior. Iurihor, iho praciico of giving
prico oiscounis linkoo io iho volumos purchasoo ano io iho wholo rango of
waiors houghi io a singlo company, as woll as iho oxisionco of cooporaiivo
agroomonis hoiwoon suppliors ano huyors mako oniry moro oimculi for
nowcomors.
ature oI transactIons Wo aro ooaling wiih an inousiry characiorisoo
hy shori informaiion lags ano froquoni iransaciions, which favour collusion.
Huyers` over As for iho powor of iho huyors, ii iurns oui ihai ihoro aro
ion largosi huyors of hoiiloo minoral waior accouni for arouno 70/ of iho
ioial salos of iho ihroo waior suppliors Nosilo, Iorrior ano LSN, wiih iho nrsi
four largo oisirihuiion groups (Iniormarcho, Loclorc, Carrofour, Iromooos)
roprosoniing 0/ of purchasos. Novoriholoss, nono of iho huyors alono goos
hoyono 11/. Iurihor, iho loaoing minoral waiors aro hranos iowaro which
mosi consumors aro loyal cusiomors. Largo cusiomors woulo risk losing somo
of ihoir clioniolo (ano iho loss woulo concorn all iho rango of gooos solo, noi
jusi waior) if ihoy roplacoo such hranos wiih òwn lahols`, ihai is local spring
waiors which aro solo unoor iho oisirihuiors` hrano namo.
1ho majoriiy of roiailors ano wholosalors iniorviowoo hy iho Commission
Iromoiion ano aovorising oxponoiiuros for iho major hranos havo hoon high for yoars,
ano amouni io roughly 10/ of iho hrano iurnovor. Soo para 00.
Soo Suiion (1001).
1ho naiuro of such agroomonis is noi spocinoo in iho Docision. Soo para. 0.
0
inoicaio ihai iho morgor woulo furihor oiminish ihoir hargaining powor wiih
rospoci io hoih Nosilo ano LSN. 1hoir rango of minoral waiors woulo ho
hroaoor ano ihis woulo givo ihom furihor powor sinco oiscounis aro usually
givon on iho hasis of iho volumos purchasoo on iho wholo rango of waiors
ooroo (soo para. 88 ano 84). 1his is an oxamplo of `pocuniary` oconomios
of scopo from iho morgor: ihoy oo noi roprosoni a gain for iho oconomy as a
wholo, hui jusi a shifi in hargaining powor from purchasors io suppliors. In
conclusion, ii ooos noi appoar likoly ihai iho markoi powor of iho prooucors
mighi ho limiioo conoioorahly hy iho hargaining powor of iho huyors.
Narket transarency Ohsorvahiliiy of oihor nrms` hohaviour is a crucial
olomoni which oasos iho ahiliiy of iho nrms io roach iho collusivo ouicomo,
ihrough ooiociion of ooviaiions which in iurn mako possihlo punishmoni
siraiogios. Markoi iransparoncy is oxiromoly high in ihis inousiry. Accoroing
io iho para. 02 of iho Docision:
"1ho ihroo naiional suppliors puhlish ihoir lisi pricos wiih iho hasic quaniiiy rohaios.
Sinco ihoy all supply iho samo cusiomors, ihoro is also a consioorahlo fooohack from
ihoso cusiomors. In aooiiion, iho ihroo suppliors provioo iho Chamhro synoicalo oos
oaux minoralos wiih ihoir monihly salos volumos ano oach ono rocoivos iho monihly salos
quaniiiios hrokon oown hy hrano of iho oihor suppliors. In a narrow oligopoly such a
praciico furihor incroasos iho markoi iransparoncy ano pormiis oach supplior io follow iho
ovoluiion of iho markoi posiiions of iho oihors."
Wo aro ihoroforo noi pariicularly surprisoo io loarn ihai iho inousiry has
known a sirong parallolism in prico. Accoroing io para 0 of iho Docision:
1ho ox-works pricos (hoforo rohaios ano VA1) of iho nvo major siill minoral waiors of
iho ihroo naiional suppliors havo consianily incroasoo in a parallol way sinco ai loasi 1087
(...). Whoovor nrsi incroasoo iis pricos was always followoo hy iho oihor iwo suppliors.
1horo was no prico oocroaso ouring iho wholo porioo consiooroo. 1ho prico loaoor sooms
always io havo hoon Iorrior which has iraoiiionally mainiainoo iho highosi prico lovol for
mosi of iis prooucis."
Synnetry 1horo sooms io oxisi a coriain oogroo of symmoiry in iho gooos
prooucoo (ihoy aro fow ano woll iooniinahlo), ano iho iochnologios appoar io
ho simplo, sinco iho proouciion procoss hasically consisis of hoiiling. Nosilo
acknowloogos ihai iho main hranos of iho ihroo prooucors havo a similar
Ii sooms ihai ovon Nosilo acknowloogos ihai ii woulo ho oimculi for a huyor io oo
wiihoui iho wholo rango of gooos supplioo hy iho loaoing waior prooucors. Soo para 80.
00
cosi siruciuro (para 08). Lconomios of scalo aro noi imporiani hocauso of
iho rogulaiion which conirains prooucors io hoiilo ai iho sourco. Iurihor,
iransporiaiion cosis aro incurroo oirocily hy iho cusiomors. [Aoo IIOM
compio-jonny-roy[
EmcIency gaIns Wo knowihai if nrms manago io colluoo ii is unlikoly ihai
omcioncy gains woulo pass ovor io consumors. Howovor, ii is possihlo ihai
iho morging nrm woulo onjoy such omcioncy gains io givo ii a much sirongor
compoiiiivo posiiion ihan iho rivals, ihus possihly making ooviaiions from
collsuivo hohaviour moro likoly. 1his ooos noi appoar io ho iho caso horo.
1ho analysis of iho proouciion procoss ano of iho inousiry suggosis ihai
iho morgor ooos noi allow for suhsianiial oconomios of scalo ano of scopo.
Inoooo, rogulaiory consirainis oo noi allownrms io conconiraio proouciion of
oioroni minoral waiors. Honco, no scalo oconomios shoulo ho oxpocioo from
iho morgor. Iurihor, sinco oach hrano shoulo ho hoiiloo ai iho sourco ano
markoioo unoor iis own namo, ii is haro io nno any possihlo roal oconomios
of scopo. Ly having a hroaoor spocirum of hranos, Nosilo ano LSN mighi
roap pocuniary scalo oconomios ai iho siago of aovoriising ano oisirihuiion,
sinco ihoy mighi ho ahlo io onjoy largor oiscounis from joinily aovoriising
moro hranos ano imposing hoiior iorms in nogoiaiions wiih roiailors. Lui
ihoso aro noi oconomios which wo woulo classify as omcioncy gains, ano ihoy
mighi insioao allow iho nrms io chargo highor pricos.
Oihor possihlo oconomios, such as on rosoarch ano oovolopmoni aro irrol-
ovani horo givon iho characiorisiics of iho inousiry. Ii is noi cloar ai all ihai
iho morgor woulo givo riso io aominisiraiivo oconomios or moro omcioni man-
agomoni of iho nrms. Lui ihoso aro haroly morgor-spocinc oconomios ano wo
knowo ihai ihoy aro oxiromoly oimculi io moasuro. Ior whai wo know, ihoro
mighi as woll ho a clash of corporaio iooniiiios afior iho iakoovor, rosuliing
in aominisiraiivo lossos.
5.3.5 ConcIusIons
1ho Commission mainiainoo ihai wiih iho acquisiiion hy Nosil of Iorrior`s
assois ano porifolio of hranos ano iho iransfor of Volvic io LSN, a collociivo
oominani posiiion woulo ho joinily holo hy iho iwo nrms , ouo io ihoir
1ho Commission also arguoo ihai if Nosilo woulo havo iakon ovor Iorrior ano kopi
iho Volvic hrano for iisolf ihon Nosilo woulo havo croaioo a singlo nrm oominani posiiion.
07
symmoiric siiuaiion in iho inousiry ano givon iho markoi onvironmoni which
was favourahlo io collusivo ouicomos. Howovor, iho CLC oociooo io accopi
a romooy proposoo hy Nosilo. 1ho morgor wiih Iorrior, plus iho iransfor
of Volvic io LSN woro allowoo unoor iho conoiiion ihai Nosilo woulo havo
solo io an unspocinoo inooponooni nrm (oihor ihan LSN) iho hranos Vichy,
1honon, Iiorval, Saini-Yorro plus somo minor local pring waiors. Accoroing
io iho CLC, ihoso waiors woulo roprosoni a capaciiy of arouno 20/ of Nosilo,
Iorrior ano LSN iogoihor, ovon ihough iho markoi sharos of such hranos aro
noi vory high.
1ho Docision of iho Commission was innovaiivo, sinco ii was iho nrsi
iimo ihai iho CLC aoopioo iho concopi of `collociivo oominanco` io hlock a
morgor. (1ho LCJ laior connrmoo ihai prohihiiing a morgor if ii is osiah-
lishoo ihai collociivo oominanco woulo rosuli from ii is compaiihlo wiih iho
Morgor Iogulaiion. Soo iho Kali-Salz caso.)
Irom iho oconomic poini of viow, our opinion is ihai iho Commission
shoulo havo hlockoo iho morgor & &:, wiih ano wiihoui romooios. Wo
havo soon ihai iho inousiry is oxiromoly conconiraioo, ihai iho markoi is
highly iransparoni ano ihai iho nrms havo pui in placo a sysiom of oxchango
of informaiion which faciliiaios collusion. Lvon ihough prico parallolism por
so is noi a proof of collusion, iho oxisionco of parallol prico risos in iho
prosonco of such a mochanism of iransmission of informaiion suggosis ihai
iho nrms havo hoon ahlo io cooroinaio ihoir hohaviour io susiain iho collusivo
ouicomo.
Iurihor, iho faci ihai Nosilo ano LSN roacioo immooiaioly ano of com-
mon agroomoni whon an ouisioor liko IIIN1 irioo io onior iho inousiry
ihrough iho iakoovor of Iorrior is a cloar inoicaior of iho cooroinaiion ho-
iwoon ihom. Our iniorproiaiion of iho ovonis is ihai iho incumhoni nrms
hao managoo ihrough iimo io cooroinaio ihomsolvos in such a way io roach
a collusivo ouicomo. Whon a poioniial onirani jooparoisoo iho siahiliiy of
ihis ouicomo, ihoy roacioo iogoihor io pui an ono io ihis ihroai.
Allowing iho iransfor of Volvic io LSN woulo only worson maiiors, as ii
incroasos iho oogroo of symmoiry hoiwoon Nosil ano LSN, which wo havo
iooniinoo as ono of iho olomonis which faciliiaio collusiovo ouicomos.
Ior all ihoso roason, wo holiovo ihai iho morgor shoulo havo hoon oonioo.
Novon, Nuiiall ano Soahrighi (1008, p.108) osiimaio iho posi-morgor HHI afior iho
romooy ai 2810, ano iho chango in HHI ai 040, which aro siill vory high valuos of concon-
iraiion.
08
Wo also foar ihai iho romooios aoopioo hy iho Commission woulo noi ho
onough io promoio compoiiiion in iho inousiry. A priori, wo havo oouhis
ihai iho nrm huying iho hranos oivosioo from Iorrior woulo ho a sirong
compoiiior in iho mooium-long run. 1ho purchaso of such hranos shoulo ho
agrooo upon hy iho CLChui is nogoiiaioo hy Nosilo. Ii is unlikoly ihai Nosilo
woulo nno a compoiiior having iho nnancial sirongih ano iho willingnoss io
hroak iho cosy hahiis in iho markoi. 1ho DGIV of iho CLC is curronily
carrying oui an invosiigaiion of iho minoral waior inousiry afior iho morgor
ano iho romooios. Ii will ho iniorosiing io soo iho rosuli of such an assossmoni.
5.4 TLe AHH/DaInIer-Henz case
1his caso concorns iho proposoo joini-voniuro hoiwoon Asoa Lrown Lovori
(ALL), a Swooish-Swiss company, ano Daimlor-Lonz, a Gorman company, io
form ALL Daimlor-Lonz 1ransporiaiion. 1ho joini-voniuro woulo incorpo-
raio all iho aciiviiios of iho paroni companios in iho sphoro of rail iochnology.
Sinco iho paroni nrms woulo noi coniinuo io oporaio inooponoonily in iho
socior, iho joini-voniuro falls upon iho LC morgor rogulaiion, iho iurnovor
conoiiions for Communiiy oimonsion also hoing moi.
5.4.1 Froduct narket dehnItIon
Donning iho rolovani markoi in ihis caso is noi oasy. Iail iochnology can
ho oiviooo inio moro ooiailoo markoi sogmonis. 1ho nrsi ano mosi ohvious
oivision is hoiwoon rolling siock (mainly rail vohiclos) ano siaiionary oquip-
moni ano oach of ihom can in iurn ho oiviooo in a lowor sogmoniaiion. 1ho
prohlom is ihai among such markoi sogmonis ihoro oxisi a numhor of rola-
iionships of complomoniariiy ano suhsiiiuiahiliiy which mako iho analysis
moro oimculi. Ior insianco, ano moro ohviously, rolling siock ano siaiionary
oquipmoni can ho solo inooponoonily whon ihoy nooo io ho roplacoo, hui
ihoy aro hasically complomoniary ano nooo io ho maichoo. Llocirical ano
oiosol locomoiivos aro suhsiiiuios, hui locomoiivos ano passongor coachos aro
complomonis, alihough iakon iogoihor ihoy aro suhsiiiuiahlo wiih rospoci io
comploio irain sois for mainlino iransporiaiion. Iurihor, whon consiooring
rail vohiclos, ono shoulo prohahly oraw a oisiinciion (noi oxpliciily maoo in
1ho oiscussion is hasoo on iho Docision iakon hy iho Commission of iho LC on iho
18.10.1000, caso IV,M.80.
00
iho Docision) hoiwoon iho mochanical ano iho olocirical olomonis of vohiclos
(iho laiior accouni for -00/ of iho valuo aoooo).
1ransaciions in ihis inousiry oo noi occur froquonily. Ii is hasically
impossihlo io rosori io quaniiiaiivo iosis such as prico collinoariiy or cross-
prico olasiiciiios.
1ho CLC has oonnoo iho rolovani markois ai iho moro oisaggrogaioo
lovol. 1horoforo, nfioon soparaio markois havo hoon founo (soo righi-hano
sioo column in iahlo 1). 1his oonniiion has hoon oociooo in iho lighi of sur-
voys wiih compoiiiors of iho pariios involvoo in iho joini-voniuro ano wiih
cusiomors.
olocirical locomoiivos
oiosol locomoiivos
mainlino irains irain sois for mainlino iransporiaiion
passongor coachos
rolling froighi wagons
siock rogional irains olocirical muliiplo uniis
oiosol muliiplo uniis
local irains irams (lighi rail ano irolloys)
ano sysioms moiro vohiclos
auiomaiic guiooo iransporiaiion
caionary sysioms
waysioo sysioms iraciion powor supply
siaiionary irain conirol ano proiociion sysioms
oquipmoni miscollanoous mainionanco ano rofurhishmoni
informaiion sysioms ano iickoiing
TaIIe 1 - Froduct narket dehnItIon In tLe raII tecLnoIogy In-
dustry
Howovor, iho mosi rolovani oisiinciion shoulo havo prohahly hoon ai a
loss oisaggrogaioo lovol. Inoooo, ii appoars from iho Docision ihai cusiomors
iono io huy comploio sysioms raihor ihan huying oioroni olomonis. 1ho
comploio sysiom mighi ho supplioo hy a nrm alono if ihis has iho nocossary
iochnology for provioing, say, hoih locomoiivos ano coachos as woll as hoih
mochanical ano olocirical compononis. Llso, a company which acis as iho
loaoing coniracior will look for parinors io which ii will suhconiraci iho
olomonis ii is noi ahlo io provioo hy iisolf.
70
5.4.2 OeograLIc narket
1ho rolovani goographic markoi is oonnoo as iho Gorman markoi. 1his is
hocauso ihoro oxisi a numhor of pariicular naiional proouci spocincaiions
(o.g. oioroncos in mains voliago ano froquoncios, in irack wioihs ano safoiy
sysioms) ano hocauso puhlic procuromoni policios havo always favouroo local
suppliors ihorohy soparaiing oociivoly iho markois in naiional onos. Inoooo,
ii appoars ihai imporis inio Gormany havo occurroo vory raroly.
Dospiio incroasoo lihoralisaiion in iho iransporiaiion markois ano a possi-
hlo chango in procuromoni policios away from iho iraoiiional naiional hiasos,
ihis siiuaiion of markoi sogmoniaiion is noi likoly io chango rapioly ovor
iho noxi yoars. Aciually, ii appoars ihai iho familiariiy of suppliors wiih
cusiomors` spocinc roquiromonis plays an imporiani rolo. 1ho oxisionco of
ihoso `swiiching cosis` moans ihai cusiomors will iono io givo proforonco io
provious suppliors. Ii is only whon a comploioly now sysiom musi ho pui in
placo ihai poioniial oniranis will ho on an oqual hasis wiih incumhonis.
1ho nocossiiy of aoapiing io oioroni naiional iochnical sianoaros works
as a nxoo oxogonous cosi of oniry: such an invosimoni woulo ho worih in
caso of a vory imporiani coniraci hui noi of a small ono. 1his will play an
imporiani rolo in iho Commission`s oocision.
5.4.3 Narket sLares and concentratIon
1ahlo 2 shows markoi sharos ano conconiraiion inooxos in oighi so-
locioo proouci markois, namoly ihoso which raiso suhsianiial concorns. In
iho romaining proouci markois iho joini-voniuro ooos noi havo onough mar-
koi sharos io ihink ii coulo oisiori compoiiiion or croaio a oominani posiiion.
Markoi sharos havo hoon supplioo hy iho pariios ano accopioo hy iho Commission.
1hoy havo hoon compuioo hy looking ai iho oroors won in iho ihroo yoars provious io iho
caso consiooroo horo.
1ho conconiraiion inooxos havo hoon compuioo hy using informaiion proviooo in iho
Docision. Sinco informaiion ahoui markoi sharos is incomploio - markoi sharos oo noi aoo
up io iho ioial of iho inousiry - iho nguros givo iho lowor houno of conconiraiion. 1ho
roal HHI woulo ho highor.
71
Iroouci Markoi Markoi sharos (/) HHI ^ HHI
ALL DL Siomons DWA LHL Llpro
olocirical locom. 87 17 40 np np np 082 128
mainlino irain sois 20 40 18 np np 8401 200
rog. olocir. m,uniis 18 20 2 17 14 np 8040 080
rog. oiosol m,uniis 0 40 28 np 10 np 8201 0
irams 1 20 41 np 8 np 8081 870
moiro vohiclos 42 22 10 np 11 np 478 1848
caionary sysioms 80 81 88 np np 0 4840 1800
iraciion powor supply 0 20 8 np np 18 2418 812
TaIIe 2 - Narket sLares and ost-nerger HerhndLaI-HIrscLnan
Index oI concentratIon In seIected roduct narkets
As iho iahlo shows, ii is unlikoly ihai iho joini-voniuro hoiwoon ALL ano
Daimlor-Lonz coulo croaio a singlo oominani posiiion, sinco Siomons onjoys
a sirong markoi posiiion in all iho proouci markois consiooroo. Novoriho-
loss, iho nguros roporioo oo show ihai iho markois iakon inio accouni aro
oxiromoly conconiraioo. If iho morgor hao hoon proposoo in iho US, iho
Morgor Guioolinos woulo havo cloarly inoicaioo a prosumpiion againsi iho
morgor, sinco all iho conconiraiion inooxos aro ahovo iho uppor ihrosholo of
1800 poinis.
Unforiunaioly, wo oo noi havo oaia ahoui iho oihor proouci markois ano
wo aro ihoroforo unahlo io givo markoi sharos ano conconiraiion inooxos ai
iho moro aggrogaio lovol (for insianco, of mainlino irains, rogional irains ano
local irains ano sysioms) which mighi ho a moro appropriaio oonniiion of
iho rolovani markoi. Nono iho loss, ii is likoly from iho oaia availahlo horo
ihai ovon ai ihai lovol of aggrogaiion iho morgor woulo raiso sorious oangors
of markoi oisioriions.
Ovorall, ihoro is coriainly noi an issuo of singlo nrm oominanco in ihis
morgor caso, Siomons cloarly hoing a nrm in a vory sirong compoiiiivo siiua-
iion in iho Gorman markoi. Howovor, a quick glanco ai iho comhinoo markoi
sharos of ALL ano Daimlor-Lonz rovoals ihai iho morgor woulo osiahlish a
siiuaiion of markoi symmoiry hoiwoon iho morging nrms on ono hano ano
Siomons on iho oihor. Givon also iho vory high inousirial conconiraiion lov-
ols, iho possihiliiy ihai iho morgor mighi loao io joini oominanco shoulo
ihoroforo ho iakon vory soriously.
72
5.4.4 JoInt donInance, or tLe coordInated ehects oI tLe nerger
Loi us consioor iho oioroni siruciural variahlos which mighi aoci iho pos-
sihiliiy ihai iho morgor onhancos iho scopo for collusion.
EIastIcIty oI suIy oI rIvaIs and otentIaI entrants 1ho sirongih
of iho nrms involvoo in iho morgor ano of Siomons is prohahly unoorsiaioo
hy iho iahlo ahovo. 1his is hocauso iho joini-voniuro ano Siomons havo
iho iochnology nooooo io supply hoih iho mochanical onginooring ano iho
olocirical compononis of a rail sysiom, whoroas mosi of iho rivals aro noi
`full-lino suppliors`. Sinco cusiomors iono io oomano iho comploio proouci
sois, iho capaciiy of ALL,Daimlor-Lonz ano Siomons io oxori markoi powor
is somohow onhancoo hy iho faci ihai mosi of iho compoiiiors woulo noi
ho ahlo io saiify oroors alono (oiihor hocauso ihoy lack of olocirical iochnol-
ogy, or hocauso ihoy oo noi supply iho wholo rango of prooucis nocossary io
provioo iho full-lino proouci). Iurihor, somo of iho oxisiing rivals aro rola-
iivoly small nrms which woulo noi ho ahlo io copo wiih vory largo oroors.
Inoooo, mosi of iho oroors won hy iho rivals havo hoon ohiainoo ihanks io
cooporaiion wiih oiihor ALL or Daimlor-Lonz (ano iis suhioiary ALG) or
Siomons. In pariicular, ono of iho raro oroors won hy a foroign nrm, was won
hy iho Canaoian nrm Lomharoior which hao io roly on Kiopo, a suhsioiary
of Daimlor-Lonz,ALG, for iho nocossary olocirical compononis.
A crucial poini is io unoorsiano if iho ahiliiy of iho nrms io raiso pricos
woulo ho limiioo hy poioniial oniranis. Irom ihis poini of viow, ii shoulo ho
iakon inio accouni ihai ihoro oxisis only ono nrm which has iho samo char-
aciorisiics as ALL,Daimlor-Lonz ano Siomons, ano ihis is iho Ironch nrm
GLC-Alsihom. 1ho CLC iniorosiingly romarks ihai ii mighi noi ho a prof-
iiahlo siraiogy for GLC-Alsihom io aci aggrossivoly in iho Gorman markoi,
sinco ihis woulo prohahly inviio a roialiaiory rosponso hy ALL,Daimlor-
Lonz ano Siomons in iho Ironch markoi. Wo shall also noio holow ihai
GLC-Alsihom is involvoo in a sorios of cooporaiivo arrangomonis wiih iho
Gorman companios, which ronoor loss likoly an aggrossivo oniry in iho Gor-
man markoi. 1ho Ironch company has roconily acquiroo LHL hui ii is noi
cloar whoihor ihis shoulo loao io a moro aciivo involvomoni in iho Gorman
markoi.
1ho scopo for collusion whon mulii-markoi oligopolisis oxisi has hoon unoorlinoo in
Chapior 4 on collusion. Soo among oihors Lornhoim ano Whinsion (1000).
78
1horo aro also oihor foroign nrms which aro oporaiing in iho rail iochnol-
ogy sociors, hui so far ihoir iniorosi in iho Gorman markoi has hoon raihor
limiioo, or ihoir hios havo hoon unsuccossful. Ii shoulo also ho rocalloo ihai
iho oioroni iochnical spocincaiions oo roprosoni an ohsiaclo for foroign nrms.
Iinally, ii shoulo ho noioo ihai DWA - an inooponooni nrm - has hoon
irying io croaio iis own olocirical onginooring capaciiy ihrough iis suhsioiary
IAGA, hui ii is uncloar whoihor ihoso ooris aro going io ho succossful in
iho fuiuro.
Fover oI tLe Iuyers 1ho Commission`s oocision oors a ooiailoo analysis
of iho oioroni proouci markois iooniinoo. Howovor, iho oioroni markois
soom io sharo mosi of iho hasic foaiuros from iho poini of viow of iho iochno-
logical, oomano ano supply conoiiions. 1ho ono poini which is omphasisoo
hy iho CLC as oisiinguishing iho oioroni proouci markois is iho hargaining
powor of iho huyors. 1his is iho roason why - as wo soo holow - iho CLC
woulo ovoniually ooclaro iho morgor compaiihlo wiih iho common markoi
in iho naiional ano rogional irains markois hui noi in iho local irains ano
sysioms markois.
1ho only clioni for mainlino irains is givon hy iho naiional railways com-
pany Douischo Lahn AG. Ai iho oihor oxiromo, ihoro aro a numhor of cus-
iomors for local irains ano sysioms: iho Commission has iooniinoo 8 Gor-
man municipal iranspori companios which havo purchasoo irams, husos ano
moiro sysioms. Somohow iniormooiaio hoiwoon iho iwo casos is iho siiuaiion
for rogional irains.
1ho Commission aiiachos a groai imporianco io iho faci ihai Douischo
Lahn is a monopsonisi for iho mainlino iransporiaiion markoi, ano as such
ahlo in principlo io inuonco iho siruciuro of supply. If Douischo Lahn
oociooo io group oroors in such a way io inviio ionoors for vory largo singlo
oroors, ii woulo ho ahlo io aiiraci iho iniorosi of foroign groups such as
GLC-Alsihom, for insianco. Iacing vory largo oroors, foroign nrms woulo
ho willing io incur iho nxoo cosis of changing ihoir proouci spocincaiions io
mooi iho Gorman iochnical sianoaros.
1ho Commission mainiains ihai Douischo Lahn will ho ohligoo io ox-
ori iis hargaining powor ano ihoroforo siimulaio compoiiiivo hohaviour hy a
numhor of faciors, among which iho faci ihai ii has hoon iransformoo in a
privaio law company, ihai ihoro aro prossuros for ii io hohavo accoroingly io
commorcial rulos, ihai ii facos compoiiiion from oihor moan of iransporia-
74
iion, ano ihai LU puhlic procuromoni oirociivos shoulo noi allow naiional
hiasos in assigning oroors.
Surprisingly, Douischo Lahn also ooclaroo noi io ho concornoo hy iho
croaiion of iho joini-voniuro ano mainiainoo ihai ihoro woulo siill ho onough
compoiiiion in iho markoi.
Ii is noi cloar whoihor Douischo Lahn woulo fully oxori iho hargaining
powor ii has, ospocially consiooroo ihai ii mighi siill ho suhjoci io prossuros
io huy from a naiional sourco, sinco irain sois for mainlino iransporiaiion
aro soon as a maiior of prosiigo ano as a koy roforonco proouci (para 78).
1ho siiuaiion is raoically oioroni for municipal companios, noi so much
hocauso of ihoir hargaining powor is splii (onco an oroor is ionooroo, iho mu-
nicipal company is a monopsonisi as woll) hui hocauso iho sizo of iho oroors
is of a much smallor sizo ano ihoroforo loss aiiraciivo io foroign companios,
for which iho nxoo cosis of aoapiing io iho Gorman spocincaiions woulo ho
loss worih incurring. Inoooo, ii appoars ihai such local companios aro much
moro worrioo ahoui iho joini-voniuro ihan Douischo Lahn AG is.
As for rogional irains, iho prosonco of hoih Douischo Lahn ano smallor
rogional companios implios ihai iho hargaining powor of iho huyors is loss
sirong ihan for mainlino irains hui highor ihan in iho caso of local sysioms.
Howovor, iho Commission aiiachos groai imporianco io iho faci ihai in iho
fuiuro Douischo Lahn shoulo play a higgor rolo in rogional irains (para. 120).
1his is iho main argumoni io jusiify iho nnoing ihai in ihis proouci markoi
iho morgor ooos noi raiso concorn for iho croaiion of a oominani posiiion.
1ho CLC arguos ihai ihoro shoulo ho onough compoiiiion ouisioo iho
ouopoly sinco LHL ano DWA aro hoih in a sirong posiiion. Howovor, ii
appoars ihai ihoir markoi sharos havo hoon acquiroo ihanks io cooporaiion
wiih oiihor ALL or ALG.
OtLer Iactors ahectIng tLe scoe Ior coIIusIon Wo now havo io ask
oursolvos ahoui iho faciors which mighi faciliiaio (ovori or iacii) collusion
in iho proouci markois oonnoo ahovo.
Ii is cloar ihai afior iho morgor ihoro will oxisi in many of iho markois
involvoo in ihis oocision iwo nrms, namoly ALL,Daimlor-Lonz ano Siomons,
which aro hy far sirongor ihan iho oihors. Also, iho iwo nrms aro in a
conoiiion of symmoiry ano havo similar iochnological capahiliiios ano can
oor similar proouci rangos, apari from minor oioroncos (para 88).
As for iho characiorisiics of iho inousiry, a numhor of faciors havo io ho
7
consiooroo io assoss iho oxioni io which iho nrms can ongago in collusivo
hohaviour or aiiain a iacii collusion ouicomo. 1o siari wiih, ii musi ho
saio ihai iho markois consiooroo oo noi provioo iho hosi onvironmoni for a
collusivo ouicomo. Inoooo, oroors oo noi como froquonily in ihis inousiry,
ano whon ihoy como ihoy usually aro of vory largo sizo. 1his incroasos iho
inconiivos for iho compoiiiors io ooviaio: iho iompiaiion io goi a raro ano
imporiani oroor is sirong.
Howovor, iho iwo ouopolisis aro likoly io ho iho main compoiiiors in
all iho procuromoni coniracis involving rail iochnologios ai oioroni lovols
(naiional, rogional ano local). Also, ihoro sooms io ho a coriain iransparoncy
in iho puhlic hios which shoulo allow iho compoiiior io conirol ano moniior
iho movos of iho rivals.
Novoriholoss, iho rail iochnology inousiry is characiorisoo hy a prosonco
of a vory complox noiwork of cooporaiivo agroomonis which involvos all iho
main nrms, which makos ii oimculi io porcoivo ihis socior as ono whoro nrms
compoio norcoly. 1ho Commission mainiains ihai: "On iho markoi in main-
lino irain sois, oroors for iho proouciion of high-spooo irains ai loasi havo
in iho pasi hoon placoo wiih oomosiic consoriia in which ii was oimculi io
oiscorn any iniornal compoiiiivo rolaiionship. 1hus Siomons, ALG ano ALL
collahoraioo on Douischo Lahn`s ICL 1. Siomons ano ALG aro curronily
collahoraiing on iho ICL 2" (para 111).
Also, iho main prossuro iowaros compoiiiivo hohaviour in iho inousiry
shoulo como from ouisioors, iho main ono hoing GLC-Alsihom. Irom ihis
poini of viow, ii is pariicularly worrying ihai iho Ironch nrm has alroaoy
collahoraiivo agroomonis wiih ALL,Daimlor-Lonz ano Siomons. In pariic-
ular, Siomons ano GLC-Alsihom plan io cooporaio io markoi joinily ihoir
high-spooo irain iochnology ouisioo Luropo (para. 112). Iiai Iorroviaria,
iho Iialian nrm which has oovolopoo an innovaiivo iili iochnology is alroaoy
cooporaiing wiih Siomons (ano DWA).
In iho proouci markoi concorning rogional irains iho cooporaiivo arrango-
monis hoiwoon iho nrms aro noi ahsoni oiihor, sinco succossful ionoors havo
hoon maoo hy Siomons wiih ALG, LHL wiih ALL, DWA wiih ALG, ALG
wiih Siomons ano DWA, Siomons wiih LHL ano ALG.
In iho local irains, iho woh of cooporaiivo arrangomonis is also vory woll
Ii is a piiy ihai wo oo noi know moro ahoui iho way in which iho hios aro conoucioo.
Apparonily, ihoy aro oxiromoly opon sinco wo aro iolo ihai suppliors ohiain furihor infor-
maiion ovon in iho courso of nogoiiaiions following iho suhmission of ionoors.
70
osiahlishoo, ano oach nrm has hoon involvoo in cooporaiivo arrangomonis
wiih hasically any oihor major nrm (soo para. 12 for a lisi).
EmcIency gaIns Ii is oimculi io assoss iho possihlo omcioncy gains aris-
ing from iho morgor, givon ihai ihis issuo is noi covoroo in iho oiscussion
prosonioo in iho Docision. Irohahly, iho mosi imporiani sourco of gains
lios in oconomios of scopo, ospocially ai iho lovol of mainlino irains iochnol-
ogy. Accoroing io iho Commission (para.72) Daimlor-Lonz,ALG ooos noi
possoss iho koy iochnologios io ho a full supplior of irain sois for mainlino
iransporiaiion. Inoooo, ii woulo havo ohiainoo markoi sharos in ihis proouci
markoi only ihrough cooporaiivo agroomonis wiih Siomons, iho loaoor in iho
socior. Howovor, ALL hao alroaoy iho nocossary iochnology io ho afull-lino
supplior ovon hoforo iho morgor (liko Siomons). Ii is also possihlo ihai oivi-
sion of lahour can ho fosioroo hoiwoon ALL ano Daimlor-Lonz, rosuliing in
oconomios of scalo. Ovorall, howovor, ii ooos noi soom ihai iho naiuro of iho
scalo oconomios mighi possihly oisrupi iho scopo for a collusivo ouicomo.
5.4.5 ConcIusIons
1ho Commission ooclaroo iho conconiraiion hoiwoon ALL ano Daimlor-Lonz
incompaiihlo wiih iho common markoi in iho proouci markoi of irams (in-
cluoing lighi rail vohiclos ano olocirical oquipmoni for irolloy husos) ano
moiro vohiclos, whoro a joini oominani posiiion along wiih Siomons woulo
havo hoon croaioo. As a consoquonco of iho Docision, iho pariios commiiioo
io oivosi from iho ALG,Daimlor-Lonz`s suhsioiary Kiopo, which possossos
iho olocirical onginooring iochnology which is a koy olomoni for supplying a
comploio proouci in iho local rail iochnology. Ly mainiaining ihis nrm in-
ooponooni, oihor nrms which possoss iho mochanical onginooring iochnology
will nno an availahlo parinor for compoiing succossfully in iho local irains
markois.
In our opinion, ihoro aro no major siruciural oioroncos hoiwoon iho
mainlino, rogional ano local proouci markois in iho rail iochnology. 1ho
oocision iakon hy iho CLC io nno only iho local irains proouci markois
as incompaiihlo wiih iho common markoi is cloarly orivon hy iho oioroni
woighi givon io iho huyors` hargaining powor. Whilo in iho mainlino ano
rogional markois Douischo Lahn is iooniinoo as a huyor wiih a vory sirong
hargaining powor, ihis is noi iho caso for iho municipal companios oporaiing
in iho local markois.
77
Howovor, ii is far from cloar ihai in iho rogional markois Douischo Lahn
woulo havo iho samo powor as in iho mainlino irains. Moro imporianily,
ihough, ii is noi cloar ihai iho hargaining powor of iho huyor woulo ho ahlo
io limii markoi powor in iho inousiry, for ai loasi iwo roasons. 1ho nrsi ono
is ihai Douischo Lahn mighi noi oxori such powor, for insianco hocauso ii
woulo ho suhjoci io poliiical prossuros io profor naiional nrms wiih rospoci
io foroign suppliors. Soconoly, hocauso ovon if Douischo Lahn was willing io
inviio hiooing from ouisioors ii is noi cloar ihai a moro compoiiiivo ouicomo
woulo ariso. 1ho main nrms in iho rail inousiry havo hoon involvoo in a
numhor of cooporaiivo arrangomonis hoih wiihin ano ouisioo Gormany, ano
iho ovorall piciuro is noi ono of a vory compoiiiivo inousiry. Iurihor, iho faci
ihai naiional markois havo hoon so far sogmonioo along iho naiional horoors,
wiih naiional nrms onjoying a oominani posiiion locally, sooms io ho haroly
an onvironmoni whoro ono woulo oxpoci norco compoiiiivo incursions in oach
oihor`s homo iurfs.
[Kai-Uwo, I know ihai iho Lunooskariollami was vory nogaiivo on iho
DGIV oocision, ano ihoy musi havo wriiion somoihing in iho LKA Annual
Iopori. Coulo you havo a look ai ii[
5.5 KaII und SaIz
6 ExercIses
ExercIse 4 . :..J: | nJ| n. J.:.hJ .: ..: ..
1. (a) Iino iho roaciion funciions of a nrm i ano a nrm / (rospociivoly,
1 ano 1 ) ano oraw ihom in iho plano (j , j ). Show ihai ihoy
aro posiiivoly slopoo ano chock ihai siahiliiy conoiiions aro moi.
(h) Now assumo ihai iwo nrms i ano morgo ano as a consoquonco of
iho morgor ihoir unii proouciion cosis aro cc, (wiih c _ 1) whilo
all iho oihor nrms havo unii cosis c. Dorivo iho roaciion funciion
for proouci i ano for proouci / unoor ihis assumpiion. Draw iho
roaciion funciions for proouci i ano proouci / ano comparo ihom
wiih iho provious 1 ano 1 . Do you oxpoci iho posi-morgor
pricos io ho highor ai iho oquilihrium
(c) Show iho isoproni funciions of an insioor ano an ouisioor nrm,
hoforo ano afior iho morgor, ano uso iho nguro io siuoy iho morgor
impaci on nrms` proniahiliiy.
78
ExercIse 5 &n:.j n..:.) 1. | .::. Jnn:J ]&:.:. j.:
.: j&n.: .) .&Jj | nJ| |: :n. n : j&n:.... 1
|:.. n|| | |: n..&n.:. nnJ .: | ..:.
1. (a) Iino iho quaniiiy , prico j , ano pronis : maoo hy iho nrms ai
iho symmoiric Nash oquilihrium in quaniiiios (Cournoi-Nash).
(h) Now consioor iho caso of a morgor hoiwoon iwo nrms (which rosuli
in iho morging nrm having unii cosis cc, wiih c _ 1, insioao of c),
ano oorivo analyiically quaniiiy, prico ano pronis for hoih insioors
ano ouisioors.
(c) (Salani, Swiizor ano Ioynolos, 1088) Assumo now c = 1 ano
. Unoor which conoiiions is a morgor proniahlo
ExercIse 6 1.j&: ] n:j:. .| .:nj. .&h..&.) :..J: | :-
.&. r:...
1. (a) Unoor iho assumpiion ihai all nrms aro singlo proouci oorivo iho
roaciion funciions of a nrmi ano a nrm/ (rospociivoly, 1 ano 1 )
ano oraw ihom in iho plano (j , j ). Show ihai ihoy aro nogaiivoly
slopoo ano chock ihai siahiliiy conoiiions aro moi.
(h) Now assumo ihai iwo nrms i ano j morgo ano as a consoquonco of
iho morgor ihoir unii proouciion cosis aro cc, wiih c _ 1, whilo
all iho oihor nrms havo unii cosis c. Dorivo iho roaciion funciion
for proouci i ano for proouci / unoor ihis assumpiion. Draw iho
roaciion funciions for proouci i ano proouci / ano comparo ihom
wiih iho provious 1 ano 1 . Do you oxpoci iho posi-morgor
pricos io ho highor ai iho oquilihrium
(c) Show iho isoproni funciions of an insioor ano an ouisioor nrm,
hoforo ano afior iho morgor, ano uso iho nguro io siuoy iho morgor
impaci on nrms` proniahiliiy.
ExercIse 7 5n|n:, 5..: n:J 1j:|J. ]&:J |n n:j:. n: :n:|j :]-
.nh|. n) 1:.j J.:.h | nJ| |j :|j &: n:J r|n.: | .:&..:
]: |.: :.&|. h) 1..&.. |j |.. :.&| .. : :h&. n:.. J.:: nJ|
..n.:..
70
ExercIse 8 1n::|| n:J 5|n.: :.: n nJ| |.| :.. :J j::n|
:J..:. &:J: |.| n:j:. .::n. |]n:. n: j& J.:.h |.:
n|J :j h:.j, n:J nn: &: | n|.nh.|.j ] .&| n n|J
]: :n| n:.:&. n..
ExercIse 9 1&j: : :J.:n.:, J:n: ]:n 1&nnjn||. n:J `n
1000) ). :..J: | ]||.:j n&|.-.nj jnn, |.| Jn|. .| n .||:
.:J&.:j |: |: .. n: .:&nh: :n, 1, |.| |n. n|:nJj .&:| ..
nn:|-.. .., n:J n :.n| ::n:, 1, |.| |n. ..|| nn| |..
rJ .&:| . .:.n:, 1. 1 n..&n |n | :.n| ::n: &|J h
n: .:, n. . &|J |n n &:. n:.nh| . c |.| .. .:.|j |:
|n: | . ] | .:&nh:, c . u, A h&j:. n|| n :&:n: n&-
.: ]: | .&|j ] n: .J:.n| :J& : .:.. 1, | .:&nh:
n:J | :.n| ::n: nn| |.: h.J.. J| h.J. n: ..n&|n:&. ]: n||
| h&j:.. 1n| h&j: h.:. | h.J . |n. :.J n:J .:J:J:|j
]:n n| |: J.J. ||: n | .:&nh:`. : | ::n:`.
:. . | .:&nh: ]&||. n|| | :J:. . |n. :.J, | ::n:
h.:. n|| | h.J. . |n. :.J, n:J J.J. ||: n&n||j ::
| .:J&.:j : :. 1: | ]:n: n., . nn|. .nnJ.n|j | :..n:j
.:.n: n:JJ ]&||. | :J:.. 1: | |n: n., . .nj. & n:J nj. n
:n|j t _ 0 n|| | h&j:. |.| |nJ :J | ::n .. ,
| h&j:. |. :J:. |n : h: ]&|||J hj :n 1 : | ::n
| .:&nh:. 5| |n |: r... n: j&.|.h:.&n |: | :.n|
::n: J. : :: | .:J&.:j n:J .:J.n &:J: |.| :J..: |..
&:..
ExercIse 10 1: n &::j |: n: |: h.j || |n.:. |. :nn. n:
`:J:, 1|n: n:J 5|.: :..|j. || j|:, |j : 1uu ] |
nn:|. 1::j .: |.. .: .. r:n|j J.&|, j.: |n | &::j
.n.. .::j :.:..:. : h&.|J.:j |.:.., ..n||j .: n:n. ] :n&:n|
.::. n:J : | n.|.:, |.| .. :..|j |: n. ||. n:. J|
|: :n. ].:|j : n| : .| : |.:J ] | .|n:.) | :n J.hh|,
|.| .. n :n| nn:j |.| :J.:n. || :.:n.:.. `:J: |n.
nnJ n &h|. : ]: | &:|n. ] | n|.j ] 5|.:`. .|n:.. J|
1his papor is iisolf inspiroo hy iwo oihor papors: Iasmuson, Iamsoyor ano Wiloy
(1001) ano Sogal ano Whinsion (1000) which oiscuss a similar cooroinaiion mochanism
hui in iho conioxi of oxclusivo ooaling.
80
n:.:&. nj:j ] | &::j |n. J:.J | n&|:..n.: ]: | n|:,
: | j:&:J. |n .&| n n:j: &|J :n n Jn.:n: ...:. J|
:n |n. |J n: nn| .| | &: ] J&.., n:J n:j&. |n | n:j:
&|J n|| ]: :..J:nh| .n| n:J . :n.., n. || n. ]: |
:n.:n|..n.: ] | .n|. ] || .:... 1. |n.n .. .&:J hj n ::
]:n n |nJ.:j :n.. :]..: | |n.n. |n | :n &|J .n &
u ] .. .. |n:|. | n:j: n:J |n | :.&n:. &|J |n:|j
h: ]:n |. .:j jn.:.. `& n: | ]&Jj.
ExercIse 11 1.:.h | n. :|n: ]n&:. ] | .:&&: ] | 1::|
n.::n| n: .:J&.:j. 1. |.. J.:..: .nj ||: | n:j: ]
A.| n:J 1::.: &|J |n :nJ ..:j|-:n nn:| Jn.:n: : |-
|. nn:| Jn.:n:.
ExercIse 12 1: | n. A.|-1::.:, |n n...: |&h.:n :.J j&
Jn: nn. . n| n:j&n: J |n. n:.n. J j& |n ]&..: :n..n &:n.
jn:n:.n. J .:.n J |n. &n|. . |&h.:n: h:.nJ nnh.: |. :-
.&n.J:. jn j&, n |n. .. : |n :.n, |n J]:.n J |n .:.n
. &: n:j&n: .n:n: j& |nj j& :: : &:n n |n |:n J :-
n..: :|.h.: &:n ]&..:. 1. .. .n. J n&:J : .n ]:n., j r|.n
: j&.
ExercIse 13 1:J.n |.| |n:. n.j| || ||&..: .: | 1::|
n.::n| n: .:J&.:j. 1r|n.: ||: . ]: ||&..: &|J |n .:-
:n.J .| | n|: ] 1::.: .&| n. . n. :.j.:n||j :.J hj
A.|. :j& ||: : : .: j&: .:.: | :J..:. .n.J hj |
nn....: n|| | n:j: n: n: h.n| ||&..: .: | .:J&.:j.
6.1 Ansver to exercIses
A1.
1) Ii is siraighiforwaro ano follows from iho nrsi oroor conoiiions.
2) 1ho sysiom of invorso oomano funciions can ho wriiion in mairicial
form as j = , whoro j, aro rospociivoly iho prico ano quaniiiy
(:, 1) vocior, is a (:, 1) vocior having iho scalar in oach oniry, is a
scalar, ano is a (:, :) mairix having olomoni : on iho oiagonal ano
81
olomoni ovorywhoro o iho oiagonal. Ii is immooiaio io chock ihai iho
oiroci oomano funciions can ho rowriiion in mairicial form:
= (1 ) (j ) .
Our prohlom is ihoroforo io nno , ihai is iho invorso of mairix .
Donno d = . Ii is oasy io chock ihai = :(1 dG), whoro 1 is
iho iooniiiy mairix having 1 on iho oiagonal ano 0 o iho oiagonal, ano
whoro G is iho mairix wiih 1 in all iis onirios. 1horoforo, ii musi ho =
(1 dG) .
Ii iurns oui ihai (1 dG) = 1
_ _
G. Wo can chock ihis hy
rocalling ihai iho proouci of a mairix hy iis invorso musi ho 1. 1his roquiros
a fow siops, as follows.
(1 dG)
_
1
_ _
G
_
= 1 dG
_ _
G
_ _
G .
Ono can immooiaioly chock ihai G = :G. 1ho provious oxprossion can
ihoroforo ho rowriiion:
1 dG
_ _
G
_ _
G = 1
_
d
_
G =
1
_

_
G = 1 0G = 1.
Wo can ihon concluoo ihai iho invorso of mairix A is givon hy:
=
1
:
_
1
_

: :
_
G
_
.
Wiih fow siops of algohra ono can ihon simplify iho oxprossion = (1
) (j )ano chock ihai ii corrosponos io iho sysiom of oiroci oomano
funciions in iho ioxi.
A8.
(a) Irom iho IOCs (0) of iho ouisioors ii is possihlo io oorivo iho hosi
roply funciion j of oach of iho ouisioor wiih rospoci io iho prico j soi hy
iho insioors. Givon ihai c = 0, ihis simplinos io:
j =
:j :
2: (: :1)
.
1ho rosioual oomano funciion for a varioiy prooucoo hy iho mulii
proouci nrm can ho ohiainoo hy iaking iho oomano (8) ano imposing iwo
conoiiions: (1) ai oquilihrium iho pricos of all symmoiric varioiios will ho
iooniical: (2) io soo iho markoi powor onjoyoo for any varioiy solo hy iho mulii
82
proouci nrmwo shall consioor a proporiional incroaso in all iho proouci pricos
soi hy iho nrm ai iho samo iimo (if j incroasos, ii incroasos simulianoously
for all proouci varioiios). Wo ihon ohiain:
=
1
:
_
j (1 )
:j
:

(: :) j
:
_
.
Ly suhsiiiuiing iho valuo of j ono nnos iho oxplicii oxprossion of iho
rosioual oomano funciion of iho insioors.
(h) 1o compuio iho olasiiciiy of iho rosioual oomano funciion c =
, nno nrsi iho oorivaiivo:
d
dj
=
_
1
_
:
:
1
_
:(: :)
:(2: (: :1))
_
j
:
.
Wo can now calculaio iho olasiiciiy as:
c =
( (: :)(: 1) (3: :1) 2: ) j
(: :)(: 1)j 2: ( j ) :((2: 1) (3: :1)j )
,
ano somo calculaiions show ihai:
dc
d:
=
(2: :(4: 3) (2: ) 3: 1) :j
( (: :)(: 1)j 2: ( j ) :((2: 1) (3: :1)j ))
< 0.
1ho largor iho numhor of prooucis solo hy iho morging nrms iho lowor
iho olasiiciiy of iho rosioual oomano funciion facoo hy oach of iis proouci,
i.o. iho largor iis markoi powor. Ii is also possihlo io show ihai 0: as
wo woulo oxpoci, for givon numhor of prooucis m solo hy iho insioors, iho
largor iho numhor of nrms oporaiing in iho inousiry iho highor iho olasiiciiy
facoo hy iho insioors (iho lowor iho markoi powor onjoyoo hy iho morging
nrms).
: Dsshqgl{
Surri ri Ohppd 81 Wolfaro is oonnoo as iho sum of consumor surplus
ano prooucor surplus. In iho caso of iho morgor, wolfaro is givon hy:
88
\ = l( , ) 2j (: 2)j 2(j c) (: 2)(j c) =
= (2 (: 2) )
:
2 (1 )
_
2 (: 2)

:
(2 (: 2) )
_
2c (: 2)c .
Ly roplacing oquilihrium quaniiiios in iho ahovo oxprossion wo ohiain:
\ =
( )
.
(41)
Wolfaro hoforo iho morgor is insioao givon hy:
\ = :
:
2
:c . (42)
Ly roplacing quaniiiios wo ohiain:
\ =
( (: 1) 4:(: 1) 3: ) ( c)
2 (2: (: 1))
. (48)
1ho oioronco in wolfaro ^\ = \ \ is givon hy:
^\ =
( )
< 0.
Ii is siraighiforwaro io soo ihai iho oioronco is nogaiivo, givon ihai iho
numoraior is always posiiivo for : _ 2. 1his provos ihai (whon ihoro aro no
omcioncy gains) iho morgor always rooucos wolfaro.
Surri ri Ohppd :1 Surri1 Wo know ihai ioial inousiry pronis incroaso
whon c [ c, 1[, as in ihis iniorval hoih insioors ano ouisioors gain from iho
morgor. 1horoforo, wo only nooo io show ihai aggrogaio pronis riso in iho
iniorval c [0, c[.
Donoio iho prooucor surplus afior iho morgor as 1o = 2: (:2): , ano
prooucor surplus hoforo iho morgor as 1o = :: . Ior prooucor surplus io
incroaso wiih iho morgor, wo musi ihoroforo havo 1o 1o , or oquivalonily:
^ (c) 2 (: (c) : ) ^ (c) (: 2) (: : (c)). 1o provo ihai ihis
is iho caso in iho iniorval c _ c, wo movo in ihroo siops.
84
(1) ^ ( c) ^ ( c).
(2) ( c) < ( c) < 0.
(8) 0 .
1akon iogoihor, ihoso ihroo conoiiions onsuro ihai ^ (c) ^ (c) for
c _ c, as showoo in Iiguro 8.
[INSLI1 IIGUIL : IIOOI OI IIOIOSI1ION 8[
Loi us siari wiih (1). 1o show ihai ^ ( c) ^ ( c), rocall ihai ^ (c)
0 on all iis oomain, ano ihai whon c = c wo havo : = : . Honco, ^ ( c) =
2 (: ( c) : ) 0 = ^ ( c) = (: 2) (: : ( c)).
As for poini (2), wo havo io compuio iho oorivaiivos ano iako ihoir valuo
in c = c. Afior somo algohra, ono nnos ihai:
0^
0c
( c) =
( )
< 0,
0^
0c
( c) = < 0,
1ho inoqualiiy ( c) < ( c) can ho ro-wriiion as:
( )
< 0,
which provos poini (2).
Wo aro now lofi wiih poini (8), which jusi consisis of compuiing iho soc-
ono oorivaiivos ano showing ihai ^ (c) is convox whoroas ^ (c) is concavo.
Ii can ho chockoo ihai:
0 ^
0c
=
2c (: 2) (: (: 2)) (: (: 1))
: ((: 2) 3(: 1) 2:)
< 0.
1his comploios iho proof.
Surri ri Ohppd <1 1o provo ihis lomma, ii is usoful io mako uso of iho
following:
Uhpdun 6 | ::-:n. j&.|.h:.&n ] | :-.| :.-n..:
jnn | :.. n |.| n| :J& n:.j .. .|J n: h :n:|J n. ]||.:
8
j (i) < ... < j (/) < ... < j (1), uit/ 1 ... / ... i.
1his romark iolls us ihai iho smallosi nrm in iho inousiry chargos iho
lowosi por-proouci pricos in iho inousiry, ano iho largosi nrm iho highosi
por-proouci pricos.
Wo can provo ihis rosuli hy coniraoiciion. Supposo ihai j (:) j <
j j (/) whon : /. 1ho proni funciion of iho nrm having iho nrsi :
prooucis is givon hy:
:(:) = :
_
_
_
j c
:
_
_
_
j
_
1
:
:
_
j
_
_
_
_
,
whoro wo havo maoo uso of iho faci ihai all iho : prooucis solo hy iho
nrm havo iho samo prico j . 1ho nrsi-oroor conoiiion of iho maximisaiion
prohlom of ihis mulii-proouci nrm is givon hy:
0:(:)
0j
= j
_
1
:
:
_
j (j c)
_
1
:
:
_
= 0,
which can ho ro-wriiion as: = (j c)
_
1
_
, whoro is iho
quaniiiy solo hy iho nrm for oach of iis : prooucis. Ly analogy, iho maximi-
saiion of iis proni roquiros iho following conoiiion for a nrm wiih / prooucis:
= (j c)
_
1
_
.
Sinco wo havo assumoo ihai j < j ano ihai : /, ii musi follow
ihai < . Lui from iho oomano funciion, ii musi holo ihai =
j (1 )

j ano ihai = j (1 )

j .
Ly suhiraciing iho laiior fromiho formor wo ohiain: = (j j ) (1 ).
Sinco j < j hy assumpiion, ii musi ho ihai , hui ihis coniraoicis
whai wo havo founo ahovo. 1his comploios iho proof on iho ranking of pricos.
Loi us now iurn io our socono siop in iho proof of iho lomma, whoro
wo havo io show ihai : < : if / < :. Loi us wriio iho por-proouci
proni : ihai iho largo nrm wiih : prooucis ohiains ai oquilihrium as
: = : (j , .., j , j , .., j , j , .., j ), whoro iho nrsi : pricos j aro
ihoso chargoo hy iho : prooucis of iho largo nrm, ano iho pricos j (from
: 1 io :/) aro ihoso chargoo for iho / prooucis of iho smallor nrm.
80
Consioor now whai happons if iho / prooucis from : 1 io : /
chargoo iho highor prico j insioao of j . Sinco wo aro consiooring proo-
ucis which aro oomano suhsiiiuios, ii musi ho ihai : woulo incroaso.
1horoforo, ii musi ho: : = : (j , .., j , j , .., j , j , .., j ) < : =
: (j , .., j , j , .., j , j , .., j ).
Sinco nrms aro symmoiric oxcopi for iho numhor of prooucis prooucoo,
iho por-proouci proni oarnoo hy iho largo nrm whon hoih iho small ano iho
largo nrm chargo pricos j on all ihoir proouci varioiios musi coincioo wiih
iho por-porioo proni oarnoo hy iho small nrm whon hoih nrms chargo pricos
j : : =: (j , .., j , j , .., j , j , .., j ) = : =: (j , .., j , j , .., j , j , .., j ).
1ho provious oxprossion : givos iho por-proouci proni oarnoo hy oach
of iho / prooucis of iho small nrm whon ii solls all iis prooucis ai iho samo
prico j chargoo hy iho largo nrm. Lui ai iho non-cooporaiivo oquilihrium
iho hosi rosponso of iho small nrm whon iho largo nrm solls iis prooucis ai
j roquiros charging iho prico j < j . 1horoforo, ii musi ho ihai: : =
: (j , .., j , j , .., j , j , .., j ) <: =: (j , .., j , j , .., j , j , .., j ).
1his shows ihai ai iho non-cooporaiivo oquilihrium : < : if / < :.
Surri ri Ohppd 441 Surri1
Ior iho prooucis solo hy iho non-ooviaiing nrms io ho posiiivo whon a
nrm wiih / prooucis ooviaios hy unoorcuiiing iis pricos io ` j, wo musi havo:
=
_
1
:
_
_
j (1 )
(: /) j
:

/` j
:
_
_ 0
whoro j = ( c),2. Afior somo algohra, ii can ho chockoo ihai a
ooviaiing nrm ohiains all iho markoi if:
` j(/) =
(/ :) (/ :)c
2/
Noio ihai a largo nrm wiih many proouci varioiios will nno ii oasior io
unoorcui a rival, sinco iho IHS of iho oxprossion ahovo incroasos wiih /. In
oihor woros, a largo nrm ooos noi nooo io cui iis pricos as much as a small
As inoicaioo in iho provious fooinoio, noio ihai whoihor anoihor nrm is ahlo io soll
or noi afior a nrm ooviaios hy soiiing a prico j ooponos on iho numhor of varioiios / of
iho ooviaiing nrm.
87
nrm shoulo oo in oroor io ho ahlo io oxcluoo iho rivals from iho markoi
ouring a ooviaiion porioo. (Howovor, wo shall soo ihai iho largo nrm has
also loss inconiivo io unoorcui.) A nocossary conoiiion for such a ooviaiion
io ho proniahlo is ` j(/) 0. 1horoforo, ii musi ho ihai (/).
Supposo now ihai such a ooviaiion is proniahlo for a nrm wiih / prooucis
ano ono wiih r < / prooucis. A nrm wiih / prooucis ohiains from iho
ooviaiion a por-proouci proni ` :(/) = ` :(` j(/), ..., ` j(/)), corrosponoing io iho
siiuaiion whoro ii solls / prooucis all solling ai iho samo prico ` j(/). Ly
oliminaiing somo prooucis ano kooping unchangoo iho prico, iho por-proouci
proni will incroaso: ` :(/) < ` : (/) = ` : (` j(/), ..., ` j(/)), whoro iho prico vocior
is now composoo of r < / iooniical olomonis ` j(/).
Iinally, ii musi ho ihai ` : (/) = ` : (` j(/), ..., ` j(/)) < ` :(` j(r), ..., ` j(r))
` :(r), whoro iho laiior inoqualiiy comos simply from iho faci ihai iho opiimal
ooviaiion prico for a nrm wiih r prooucis is ` j(r) ano noi ` j(/). Honco, wo
havo showoo ihai ` :(/) < ` :(r) for / r.
FrooI oI FroosItIon 12. 1ho nrsi siop is io compuio oxpliciily : (/).
1his can ho oono as follows. Ly roplacing in iho nrsi oroor conoiiion ahovo
ano solving wiih rospoci io iho prico, ono ohiains iho opiimal ooviaiion prico
whon all iho nrms havo a posiiivo ouipui. 1his is givon hy:
j (/) =
(2: : /) c(3: 3/ 2:)
4(: : /)
Ly suhsiiiuiion ono can nno iho opiimal ooviaiion proni:
: (/) =
(2: : /) ( c)
16: (: : /)
Ii is oasy io chock ihai < 0, which connrms ihai iho highor iho
numhor of proouci varioiios of a nrm, iho lowor iho ooviaiion pronis ii can
mako. Howovor, wo also havo io chock if iho ooviaiion prico j (/) is consis-
ioni wiih all iho nrms solling a posiiivo ouipui. 1his is saiisnoo as long as
j (/) ` j. Ly suhsiiiuiing ano solving wiih rospoci io , ihis conoiiion can
ho oxprossoo as:
< (/) =
:
/
_
1
_
: /
: /
_
88
1horoforo, iho funciion : (/) has valuos in (0, (/)),ano ii is in-
croasing in iis oomain.
1ho noxi siop is io siuoy iho funciion ` :(/). If iho ooviaiing nrm chargos
iho highosi possihlo prico ` j which guaranioos ii will ho iho only nrm solling
in iho markoi, iis proni is:
` :(/) =
( / : )( c)
4 /
which is an incroasing ano concavo funciion in iis oomain ( (/), ).
Sinco (/) < (/), wo havo ihai in iho iniorval ( (/), (/)) hoih iypos
of ooviaiion givo posiiivo pronis io iho ooviaiing nrm. Wo shoulo ihon iry
io soo which iypo of ooviaiion is opiimal in ihis iniorval. 1ho following can
ho shown.
Henark 4 J|: r... n n|& ` (/) ( (/), (/)), |.| .. hn.:J n.
| .|&.: ] | j&n|.j : (/) = ` :(/), .&| |n ]: < ` (/) | .nn|
J.n.: : .. : (/).
FrooI.
Unforiunaioly, io nno iho oxplicii form of ` (/) iurns oui io ho a oimculi
iask. 1o provo ihis romark wo procooo in iwo siops. Iirsi wo provo ihai if
` (/) oxisis ii musi ho ` (/) (/). Wo know ihai in iho poini = (/)
wo havo ` j(/) = 0. 1horoforo, ` :(/) = 0, whoroas : (/ [ = (/))
0. 1horoforo, hy coniinuiiy ihoro musi oxisi an iniorval ( (/), ) for which
: (/) ` :(/).
Noxi siop is io provo ihai ` (/) < (/). Whon = (/), wo havo:
` :(/ [ = (/)): (/ [ = (/)) =
( c) (: /)
_
: :
_
: / /
_
4:/
_
:
_
: /
_ _
:
_
: / /
_ 0.
Sinco hoih funciions aro coniinuous ano incroasing in ( (/), (/)) from
: (/) ` :(/) in = (/) ano : (/) < ` :(/) in = (/), ii follows ihai
ihoro oxisis only a poini = ` (/), whoro : (/) = ` :(/). 1his comploios iho
proof of iho romark.
Wo can now osiahlish iho proposiiion. If (0, ` [ ihon all iho nrms
havo ooviaiing pronis : (/).In ihis iniorval, iho inconiivo consiraini of oach
nrm will ho givon hy : _ (1 o) : (/)o: (/). Lui wo havo soon ihai :
80
, o aro iooniical for all nrms, ano ihai hoih iho ooviaiion proni : (/) ano
iho punishmoni proni : (/) aro iho highor iho lowor iho numhor of prooucis
of a nrm. 1horoforo, iho consiraini is iho mosi hinoing for iho smallosi nrm
in iho inousiry, iho ono wiih i prooucis.Iull collusion is susiainahlo only if
o _ o = .
If [ , ),ihon all iho nrms havo ooviaiing pronis ` :(/). 1ho incon-
iivo consiraini is givon hy : _ (1 o) ` :(/) o: (/). In ihis caso as woll,
hoih iho ooviaiion proni ` :(/) ano iho proni in iho punishmoni phaso : (/)
aro iho highosi for iho smallosi nrm, ano collusion can ho susiainoo only if
o _ ` o = .
HeIerences
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Coniaci ano Collusivo Lohavior", Iano Journal of Lconomics, Vo. 21,
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[[ Cavos, Iicharo L., 1080, Morgors, 1akoovors ano Lconomic Lmcioncy.
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[0[ Cosiono, Giacinia ano Iumagalli, Chiara, 1000, Iniornal
Capiial Markois ano Iroouci Markoi Compoiiiion", mimoo, GIL-
MAQ, Univorsiio
oo 1oulouso.
00
[7[ Compio, Olivior, Iroooric Jonny ano Iairick Ioy, 1000,
Capaciiy Consirainis, Morgors ano Collusion", mimoo, Univorsiio oo
1oulouso.
[8[ Connor, John M., Iogors, Iicharo 1. ano Lhagavan, Vijay, 1000,
Conconiraiion Chango ano Couniorvailing Iowor in iho U.S. Iooo
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[0[ Donockoro, Iaymono ano Carl Davioson, 108, Inconiivos io
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478-480.
[10[ Dohson, Iaul W. ano Waiorson, Michaol, 1007, Couniorvailing
Iowor ano Consumor Iricos", Lconomic Journal, 107 (441), 418-80.
[11[ Iarroll, Josoph ano Carl Shapiro, 1000, Horizonial Morgors:
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[18[ Irank, Julian, Harris, Iohori S., ano 1iiman, Shorioan, 1001,
1ho Iosimorgor Sharo-Irico Iorformanco of Acquiring Iirms", Jour-
nal of
Iinancial Lconomics: 20(1), 81-00.
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Concopi of Couniorvailing Iowor", Ioprini ooiiion. Classics in Lco-
nomics
Sorios. Now Lrunswick, N.J. ano Lonoon: 1ransaciion, 1008.
01
[1[ Goyoor, D.G. 1008, LC Compoiiiion Law", Socono Loiiion, Oxforo,
Claronoon Iross.
[10[ Horn, Honrik ano Iorsson, Lars, 1007, Lnoogonous Morgors in Con-
coniraioo
Markois", Discussion Iapor 144, Coniro for Lconomic Iolicy Io-
soarch,
Lonoon.
[17[ Jacquomin, Aloxis, 1000, Morgors ano Luropoan Iolicy", in
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02
[28[ Lusigarion, Siovon H., 107, 1ho Impaci of Luyor
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[24[ Maisusaka, John G., 1008, 1akoovor moiivos ouring
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[2[ McAfoo, Irosion, Williams, Michaol A., 1002, Horizonial Morgors ano
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soarch
oaiahaso", Iano Journal of Lconomics, 20 (2), 27-70.
[27[ Morck, Ianoall Anoroi Schloifor ano Iohori Vishny, 1000, Do
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[80[ Nool, Iiorro-Lmanuolo,1007, Lmcioncy consiooraiions
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08
[82[ Iorry, M.K. ano I. Iorior, 108, Oligopoly ano iho inconiivo
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1001, Nakoo Lxclusion", Amorican Lconomic Ioviow: 81(), 1187-4.
[84[ Iavonscrafi, Davio J. ano Schoror, Iroooric M., 1087,
Morgors, soll-os, ano oconomic omcioncy", Washingion, D.C.:
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[8[ Ioll, Iicharo, 1080, 1ho huhris hypoihosis of corporaio
iakoovors", Journal of Lusinoss, 0 (2), pari 1, 107-210.
[80[ Salani, Siophon, Sholoon Swiizor ano Iohori Ioynolos, 1088,
Lossos from horizonial morgors: iho oocis of an oxogonous chango in
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of
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[87[ Schumachor, Uio,1001, "Luyor Siruciuro ano Sollor Iorformanco in
U.S. Manufaciuring Inousirios", Ioviow of Lconomics ano Siaiisiics,
78(2), 277-284.
[88[ Sogal, Ilya I. ano Whinsion, Michaol D., 1000, "Nakoo Lxclusion ano
Luyor Cooroinaiion", Harvaro Insiiiuio of Lconomic Iosoarch, Discus-
sion Iapor 1780, Harvaro Univorsiiy.
[80[ Schoror, I.M, ano Ioss, Davio, 1000, Inousirial Markoi Siruciuro ano
Lconomic Iorformanco, Losion, Houghion Mimin, 1hiro Lo.
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04
[42[ Suiion, John, 1001, Sunk cosis ano markoi siruciuro: Irico
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07-10.
[44[ US Doparimoni of Jusiico ano Ioooral 1raoo Commission, 1002,
Horizonial Morgor Guioolinos".
[4[ Williamson, Olivor L., 1008, "Lconomios as an Aniiirusi Dofonso: 1ho
Wolfaro 1raoo-os", Amorican Lconomic Ioviow, 0,04-00.
0
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Chaplci 0: Vcilical icsliainls ano vcilical
mcigcis
(IILLIMINAIY VLISION: Commcnls wclcomc!)
n..: 1|.j: J|:j n:J 1:n.
Camhiiogc Univcisily Iicss, 2008
Massimo Molla
Dcpailmcnl of Lconomics
Luiopcan Univcisily Inslilulc, Iloicncc
ano Univcisilal Iompcu Iahia, Laicclona
7 Januaiy 2008
1
Frqwhqwv
4 Yhuwlfdo uhvwudlqwv dqg yhuwlfdo phujhuv 4
1.1 Whal aic vcilical icsliainls . . . . . . . . . . . . . . . . . . . . 1
1.2 Ilan of lhc chaplci . . . . . . . . . . . . . . . . . . . . . . . . . . 4
5 Lqwud0eudqg frpshwlwlrq 8
2.1 Douhlc maiginalisalion . . . . . . . . . . . . . . . . . . . . . . . . 0
2.1.1 Douhlc maiginalisalion . . . . . . . . . . . . . . . . . . . 8
2.1.2 Douhlc maiginalisalion wilh iclailcis` iisl avcision . . 11
2.2 Hoiizonlal cxlcinalily: Iicc iioing in lhc piovision of sciviccs . . 12
2.2.1 A moocl of unocipiovision of sciviccs . . . . . . . . . . . 14
2.2.2 Vcilical inlcgialion mighl icoucc wclfaic: An cxamplc . 19
2.8 A moic gcncial licalmcnl . . . . . . . . . . . . . . . . . . . . . 21
2.8.1 Hoiizonlal ano vcilical cxlcinalilics: A moocl . . . . . . 28
2.8.2 Vcilical inlcgialion ano vaiicly . . . . . . . . . . . . . . 29
2.4 Olhci cmcicncy icasons foi vcilical icsliainls ano vcilical mcigcis 81
2. Vcilical icsliainls, vcilical mcigcis, ano lhc commilmcnl piohlcm 8
2..1 Vcilical icsliainls ano lhc commilmcnl piohlcm . . . . . 40
2.0 Conclusions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
6 Lqwhu0eudqg frpshwlwlrq 77
8.1 Slialcgic cfccls of vcilical icsliainls . . . . . . . . . . . . . . . . 4
8.1.1 Slialcgic usc of vcilical icsliainls . . . . . . . . . . . . . 47
8.2 Vcilical icsliainls as collusivc ocviccs . . . . . . . . . . . . . . . 4
8.2.1 IIM mighl facililalc collusion . . . . . . . . . . . . . . . 4
8.2.2 Common agcncy . . . . . . . . . . . . . . . . . . . . . . . 4
7 Dqwl0frpshwlwlyh hhfwv= ohyhudjh dqg iruhforvxuh 8;
4.1 Anlicompclilivc cfccls: Lxclusivc ocaling . . . . . . . . . . . . . 8
4.1.1 Lxclusivc ocaling ano cnliy oclciicncc . . . . . . . . . . 02
4.2 Lxclusionaiy cfccls of vcilical mcigcis . . . . . . . . . . . . . . . 00
4.2.1 Lxclusionaiy cfccls of vcilical mcigcis . . . . . . . . . . 08
8 Frqfoxvlrqv dqg srolf| lpsolfdwlrqv :4
9 H{huflvhv :6
0.1 Solulions of cxciciscs . . . . . . . . . . . . . . . . . . . . . . . . . 77
2
4 Yhuwlfdo uhvwudlqwv dqg yhuwlfdo phujhuv
414 Zkdw duh yhuwlfdo uhvwudlqwvB
In mosl mailcls, pioouccis oo nol scll oiicclly lhcii gooos, hul icach fnal
cuslomcis lhiough inlcimcoiaiics, wholcsalcis, ano iclailcis. Iuilhci, in many
cascs pioouclion of lhc fnal gooo unocilalcs scvcial slagcs, fiom iaw malciial,
lo inlcimcoialc gooo, lo fnal piooucl. Vciy oflcn, fims al oifcicnl slagcs of
lhc vcilical pioccss oo nol simply icly on spol mailcl liansaclions, hul cngagc
in conliacls of vaiious lypcs lhal aic signco in oioci lo icoucc liansaclion cosls,
guaianlcc slahilily of supplics, ano hcllci cooioinalc aclions. Jhcsc agiccmcnls
ano conliaclual piovisions hclwccn vcilically iclalco fims aic callco :.n|
:-:n.:-. Jhis chaplci analyscs lhc wclfaic cfccls of vcilical icsliainls as wcll
as of vcilical mcigcis, lhal is mcigcis hclwccn vcilically iclalco fims.
Jo gain somc inilial insighl on lhc lopic, consioci lhc classical cxamplc of
lhc vcilical iclalionship hclwccn a manufacluici ano a iclailci which oisliihulcs
ils piooucls. In gcncial, holh lhc manufacluici ano lhc iclailci will havc
lo occioc on oifcicnl aclions, ano whal is an oplimal aclion foi onc, is nol
ncccssaiily oplimal foi lhc olhci. As a icsull, a paily can liy lo usc conliacls
ano clauscs so as lo icsliain lhc choicc of lhc olhci ano inoucc an oulcomc
which is moic favouiahlc lo ilsclf. (Oi, pul il olhciwisc, cach paily`s aclions
cicalcs an cxlcinalily on lhc olhci. Vcilical conliacls mighl hc usco lo liy ano
conliol foi lhcsc cxlcinalilics.)
Ioi inslancc, lhc manufacluici woulo lilc lhc iclailci lo malc a lol of cfoil
in mailcling ils piooucls (such as aovcilisc ils piooucls, pul lhcm in cviocncc
on shclvcs, cmploy spccialisco pcisonncl who assisl polcnlial cuslomcis, ofci
posl-salc assislancc ano so on), hul lhc lallci mighl havc a lowci inccnlivc lo
oo so, as cfoil ano sciviccs aic coslly lo piovioc. Jhc manufacluici mighl
lhcn occioc lo usc conliaclual piovisions (lhal is, vcilical icsliainls) in oioci
lo inoucc highci mailcling cfoil fiom ils iclailci. Jo conlinuc lhc cxamplc, il
mighl assign an cxclusivc aica of compclcncc lo lhc iclailci so lhal il woulo
fully appiopiialc lhc hcncfls of lhc sciviccs piovioco (if olhci iclailcis caiiy lhc
samc hiano wilhin lhc samc icgion, lhcic is a ficc-iioing piohlcm lhal fuilhci
icouccs lhc amounl of sciviccs piovioco); oi il mighl usc a non-lincai conliacl
such lhal lhc iclailci woulo havc a oiscounl if il huys a laigc numhci of unils, in
oioci lo cncouiagc ils salcs cfoil; oi il mighl simply imposc lhc iclailci lo scll
a minimum numhci of unils of lhc gooo, which again woulo incicasc ils cfoil;
oi il mighl convincc lhc iclailci nol lo caiiy compcling hianos, lo slimulalc ils
salcs cfoils of lhc own hianos; oi il mighl simply lalc ovci lhc iclailci so as
lo malc cooioinalion of aclions casici. Jhc ohjcclivc of lhis chaplci will hc lo
iocnlify whcn lhcsc vcilical icsliainls (ano vcilical mcigcis) shoulo hc cxpcclco
lo show posilivc oi ncgalivc cfccls on wclfaic.
As lhc simplc cxamplc ahovc inoicalcs, lhcic aic scvcial lypcs of vcilical
icsliainls. Somc of lhc mosl common cxamplcs aic lhc following.
A: |.:n: :..:j. (Also callco J:n:|.- J (hcnccfoilh, II) oi l-n:
n:. conliacls.) Jhc simplcsl possihlc iclalionship hclwccn lwo agcnls
is lhal onc huys fiom lhc olhci on lhc hasis of a lincai piicing" iulc, lhal
is, lhc lolal paymcnl is piopoilional lo lhc numhci of unils involvco in lhc
liansaclion. Whclhci onc huys onc unil oi onc hunoico unils, lhc unil
piicc woulo hc lhc samc. A simplc vcilical icsliainl is lhcn non-lincai
piicing", a conliacl which spccifcs a fxco amounl inocpcnocnl of lhc
numhci of unils houghl (lhc fianchisc fcc") plus a vaiiahlc componcnl.
Ioi inslancc, lo scll a givcn clolhcs piooucci`s hiano, a shop mighl havc
lo pay 1, 000 cuio pci ycai plus 10 cuio foi cach J-shiil il huys. Jhc
cfccl of such a conliacl is lhal lhc unil cosl cfcclivcly paio hy lhc shop
occicascs wilh lhc numhci of unils houghl fiom lhc samc piooucci. Jhc
cfccl is lo cncouiagc lhc iclailci lo huy moic unils.
&n:.j J.-&:-. Quanlily oiscounls oi :j:--. :|n- havc lhc
samc cfccl as non lincai piicing conliacls, as lhc laigci lhc quanlily
houghl lhc chcapci lhc liansaclion on avciagc.
1-n| :. nn.::n: ;111). Jhc manufacluici mighl havc oifcicnl
pciccplions fiom lhc iclailci as lo which piicc fnal cuslomcis shoulo hc
chaigco foi lhc piooucl. As a conscqucncc, lhc foimci mighl wanl lo
afccl lhc piicc occisions of lhc lallci. In ils mosl cxlicmc foim, IIM
simply consisls of lhc piicc al which lhc iclailci shoulo scll lhc piooucl.
Lul il mighl also hc a iccommcnoco piicc, oi il mighl cslahlish cilhci
a minimum icsalc piicc (piicc fooi) oi a maximum icsalc piicc (piicc
cciling).
&n:.j ]..:j. Jhc manufacluici mighl wanl lo spccify lhc numhci of
unils lhal lhc iclailci shoulo huy. Again, lhis mighl also lalc oifcicnl
foims, such as quanlily foicing (lhc iclailci cannol huy lcss lhan a ccilain
amounl) oi quanlily ialioning (il cannol huy moic lhan a ccilain amounl).
2
1.|&-..j |n&--. Manifacliioi ano iolailoi migll also sign oxclisivily
agioomonls. Foi inslanco, an .|&-. .j (EJ) claiso woilo imply
llal lloio is only ono iolailoi wlo can soll a coilain Liano willin a coilain
googiaplical aioa (oi lo a coilain lypo of cislomois). 1.|&-. nn|.nj is
wlon a iolailoi agioos lo caiiy only llo Liano of a coilain manifacliioi.
5|. n.-.|&.n claisos consisl of claisos wlicl allow only a coilain
lypo of iolailois - isially spocifoo in oLjoclivo loims - lo caiiy a man-
ifacliioi`s Liano. Foi inslanco, a lixiiy gooo piooicoi migll wanl lo
piovioo ils piooicl only lo ligl sliool iolailois ano nol lo sipoimailols
oi oiscoinl sloios, foaiing llal llo lalloi migll inooimino llo qialily oi
lixiiy imago associaloo will ils piooicl.
Il is impoilanl lo nolico llal in any givon mailol - oio lo llo naliio of
llo liansaclions, oi oio lo inslililional consliainls - somo of lloso voilical
iosliainls migll Lo ofoclivo wloioas ollois migll nol Lo. Foi inslanco, BIM
malos sonso only insofai as llo ofoclivo piico paio Ly fnal cislomois can Lo
oLsoivoo Ly llo manifacliioi. Foi mass piooicls (say, llo J-sliils of oii
oxamplo aLovo) llis migll Lo llo caso; Lil in olloi ciicimslancos lloio migll
Lo a Laigaining piocoss Lolwoon llo iolailoi ano llo fnal Liyoi wloso oilcomo
migll Lo oimcill lo oLsoivo. If oiscoinls on piicos cannol Lo oLsoivoo Ly llo
manifacliioi, BIM losos ils powoi as a iosliainl, ano a manifacliioi migll
wanl lo ioly on olloi iosliainls lo acliovo a coilain oLjoclivo. Foi inslanco,
qianlily fxing migll Lo a siLslililo lo BIM.
|.nj (Liying wloio llo piico is cloap lo iosoll wloio llo piico is ligl)
migll also Lo a foico wlicl oiminislos llo ofoclivonoss of somo iosliainls. If
consimois lavo lowoi soaicl ano lianspoil cosls (will iospocl lo llo valio of
a gooo), il is inliloly llal oxclisivo loiiiloiial claisos woilo Lo ofoclivo. If
iolailois coilo aiLiliago, also non-linoai piicing oi qianlily oiscoinls migll
loso ofoclivonoss, as ono iolailoi coilo Liy a laigo nimLoi of inils ano llon
iosoll somo of llom lo iolailois wlo plan lo soll low qianlilios. Jloso iosliainls
aio lloiofoio moio ofoclivo wlon llo manifacliioi can also oLsoivo iolailois`
salos.
Mosl of llo claisos aLovo aio lo somo oxlonl siLslililaLlo will ollois. Jlis
implios llal il woilo Lo laigoly isoloss, foi inslanco, lo oillaw a coilain lypo
of claisos wlilo allowing ollois llal acliovo llo samo oLjoclivos.
Yhuwlfdo lqwhjudwlrq +ru yhuwlfdo phujhuv, In somo ciicimslancos,
manifacliiois migll fno il oimcill lo iso claisos llal inoico llo Lolavioii
lloy wanl fiom llo iolailois. In sicl a caso, lloy coilo also iosoil lo voilical
inlogialion, i.o., lloy coilo simply moigo will (oi lalo ovoi) llo iolailois. Jloy
woilo llon Lolong lo llo samo fim, so llal lloii oLjoclivos sloilo Lo moio
oasily ioconciloo. Il is impoilanl lo loop in mino llal voilical moigois aio
oflon an alloinalivo lo voilical iosliainls. Il woilo Lo inconsislonl lo aoopl a

voiy fim slanco againsl voilical iosliainls if moigois aio nol siLjocl lo a sliicl
conliol.
415 Sodq ri wkh fkdswhu
Soclion 2 analysos llo ofocl of voilical iosliainls wlon lloy afocl .nn-|nnn
compolilion, llal is llo iolalionslip Lolwoon fims wlicl piooico ano oisliiLilo
llo samo Liano, aLsliacling fiom llo ofocl on compoling Liano piooicois oi
oisliiLilois. In llis caso, voilical iosliainls ano voilical moigois allow fims
al oifoionl slagos of llo voilical piocoss lo conliol foi oxloinalilios ano llis is
lypically as Lonofcial foi llo fims as foi consimois. In somo ciicimslancos,
voilical iosliainls migll impiovo cooioinalion in llo voilical clain Lil aovoisoly
afocl consimoi siiplis ano lolal wolfaio. Howovoi, I slall aigio llal as long
as inlia-Liano compolilion is concoinoo, llo piosimplion is llal sicl iosliainls
aio wolfaio impioving.
Soclion lools al llo ofocls of voilical iosliainls ipon .n-|nnn com-
polilion. Ly afocling llo aclions lalon Ly a piooicoi ano ils iolailoi(s) (i.o.,
llo voilical clain of a givon Liano), voilical iosliainls also gonoially afocl llo
mailol inloiaclions Lolwoon llis voilical clain ano olloi voilical clains (i.o.,
piooicois ano oisliiLilois of olloi Lianos). Wlon llo voilical iosliainls aio
aooploo lo solvo llo cooioinalion pioLloms willin llo samo clain, consiooia-
lion of inloi-Liano compolilion ooos nol pioLaLly afocl lloii ovalialion. Foi
inslanco, if a piooicoi isos voilical iosliainls lo solvo llo ooiLlo maiginalisa-
lion pioLlom oi fioo iioing in llo piovision of soivicos, lloso sloilo incioaso
mailol compolilion, sinco lloy will lono lo malo llo Liano moio compolilivo
vis-a-vis iivals (llioigl lowoi piicos ano ligloi salos ofoil). Howovoi, il is pos-
siLlo llal voilical iosliainls migll Lo aooploo nol so micl lo incioaso omcioncy
of llo voilical clain Lil lo iooico compolilion will olloi voilical clains.
Soclion 4 piisios fiilloi llo lopic ano slows llal Loll voilical iosliainls
ano voilical moigois migll lavo anli-compolilivo ofocls, Ly foioclosing com-
polilion. Foi inslanco, an incimLonl fim migll iso oxclisivo conliacls lo
pio-ompl omcionl onliy inlo an inoisliy; ano a moigoi migll allow a voilically
inlogialoo fim lo foiocloso an inpil lo ils oownslioam iivals, lloioLy iooicing
lloii compolilivonoss ano possiLly foicing llom lo oxil llo inoisliy.
Soclion aigios llal ono sloilo Lalanco omcioncy ano anli-compolilivo
ofocls of voilical iosliainls ano voilical moigois wlon assossing llom. Jlo
samo lypo of voilical iosliainl migll Lo isoo will a oifoionl piiposo, llal is
il migll Lo isoo lo impiovo cooioinalion willin llo clain (wlicl isially las
a wolfaio impioving ofocl) oi will llo aim of afocling compolilion will llo
olloi clains (wloso ofocl migll Lo lo lowoi wolfaio). Jlis las lwo implicalions.
4
Fiisl, ono cannol say llal a givon lypo of iosliainl is always gooo oi always
Lao: il ooponos on wlal is llo molivo Lolino il. Foi inslanco, BIM migll
impiovo inlia-Liano omcioncy, Lil il migll also afocl inloiLiano compolilion
ano favoii collision Ly incioasing oLsoivaLilily of fims` Lolavioii. Jlis moans
llal ono cannol simply oillaw coilain iosliainls ano poimil ollois. In logal
loims, llis moans llal oconomic analysis siggosls a &| J n-n ialloi llan
a - &| of pioliLilion of coilain iosliainls. Socono, in llo ioal woilo Loll
molivos migll cooxisl lo somo oogioo, oi in any caso il migll nol Lo cloai al
fisl sigll wlicl ono is oominanl. Oflon, only an olaLoialo analysis migll sloo
ligll on wlolloi omcioncy consiooialions oi anlicompolilivo onos piovail.
Jlis woilo nol Lo a salisfacloiy conclision lloigl. Saying llal lloio is
no cloai iilo on voilical iosliainls, ano llal lloy sloilo all Lo analysoo on a
caso-lo-caso Lasis woilo amoinl lo oisasloi. Givon llo poivasivonoss of voilical
agioomonls Lolwoon fims, compolilion agoncios woilo collapso Locaiso lloy
sloilo oovolo mosl of lloii iosoiicos lo lool inlo sicl casos, as las lapponoo
lo llo EC al llo Loginning of ils lisloiy ano - lo a minoi oogioo - inlil llo
now iilos on voilical agioomonls. Foilinaloly, lloio is a moio lolpfil policy
conclision wlicl can Lo ooiivoo fiom llo analysis of voilical iosliainls. Sinco
llo only voilical iosliainls llal iaiso wolfaio concoins aio lloso aooploo Ly
fims wlicl onjoy onoigl mailol powoi, llo main policy conclision is llal only
llo voilical claisos aooploo Ly fims onjoying laigo mailol powoi aio woill
invosligaling, ano on llom a iilo of ioason appioacl sloilo Lo isoo.
5 Lqwud0eudqg frpshwlwlrq
In llis soclion I ioviow llo main wolfaio ofocls of voilical iosliainls wlon lloy
afocl compolilion Lolwoon iolailois llal soll llo samo piooicl oi Liano. Jlo
silialion wo consiooi loio is ono wloio a manifacliioi (a monopolisl foi sim-
plicily) solls llioigl ono oi moio iolailois. Soclion 2.1 slows llal if Loll a
manifacliioi ano ils iolailoi lavo mailol powoi, Loll claigo a posilivo mail-
ip, iosilling in loo ligl mailol piicos foi llo voilical clain (llo so-calloo n&||
nnj.nn|.-n.n pioLlom). If voilical iosliainls woio isoo, oi voilical inlogialion
occiiioo, piicos woilo oocioaso ano Loll piooicoi siiplis ano wolfaio woilo
incioaso. Soclion 2.2 illislialos insloao llo fioo iioing pioLlom in llo piovision
of soivicos Ly llo iolailois. If sovoial iolailois oisliiLiloo llo samo Liano, lloy
migll Lo inaLlo lo appiopiialo llo ofoil maoo lo mailol llo Liano (lo llo
aovanlago of compoling iolailois) ano, anlicipaling llis, lloy woilo malo loss
ofoil llan woilo Lo oplimal foi llo manifacliioi. Ly ising appiopiialo io-
sliainls, inconlivos foi iolailois lo piovioo ofoil ano soivicos migll Lo iosloioo.
Again, if consimois valio sicl soivicos, voilical iosliainls aio liloly lo incioaso
Loll piooicoi ano consimoi siiplis. Soclion 2. will slioy llo caso wloio sov-
oial oxloinalilios co-oxisl. Soclion 2.4 will lool al olloi omcioncy molivos foi
voilical iosliainls (in oiooi nol lo fiagmonl llo analysis, I slall also consiooi
iosliainls isoo wlon lloio is inloi-Liano compolilion). Soclion 2. slows llal
wlon conliacls aio inoLsoivaLlo, voilical iosliainls oi a voilical moigoi migll
Lo isoo Ly a manifacliioi lo commil ilsolf lo soll al ligl piicos. Elso, il woilo

Lo lomploo lo ionogolialo ils ofoi lo llo iolailois, onoing ip will lowoi piicos
llan il woilo lilo lo claigo.
514 Grxeoh pdujlqdolvdwlrq
Jlo Losl lnown oxamplo of oxloinalilios afocling voilically sopaialoo fims is
givon Ly llo n&|| nnj.nn|.-n.n pioLlom, fisl ioonlifoo Ly Spongloi (190).
Sipposo llal a manifacliioi iolios on a iolailoi foi solling lo fnal cislomois,
ano llal llo foimoi solls lo llo lalloi accoioing lo a conslanl inil piico (linoai
piicing). Sipposo also, foi simplicily, llal llo iolailoi ooos nol lavo any cosls
olloi llan llo wlolosalo piico. Figiio 0.1 illislialos llo sliicliio of llo
mailol.
INSEBJ Figiio 0.1. DoiLlo maiginalisalion
Loll fims wanl lo maximiso lloii piofl ano in oiooi lo oo so lloy Loll
clooso llo monopolislic mail-ip (maigin) ovoi lloii own cosl: llo ipslioam
fim cloosos llo wlolosalo piico n givon ils cosl c, ano llo oownslioam fim as
a iosill will clooso j givon ils own cosl, namoly llo wlolosalo piico n (wlicl is
ligloi llan c Locaiso llo ipslioam fim las a maigin). Jlo iosill, lowovoi, of
Loll fims aooing lloii maigin is llal lloy ono ip will consimois paying loo
ligl a piico (Liying loo fow inils) will iospocl lo wlal woilo Lo oplimal fiom
lloii joinl poinl of viow, llal is fiom llo poinl of viow of llo voilical clain (llo
sim of llo piofls maoo Ly llo ipslioam ano oownslioam fim).
If llo lwo fims aio insloao inooi llo samo managomonl, llo fnal piico j
woilo Lo closon so as lo aoo only a mail-ip ovoi llo cosl c. Voilical inlo-
gialion - llal is llo moigoi among llo lwo fims - is omcionl sinco il allows
llom lo cooioinalo on llo oplimal oilcomo, oi lo inloinaliso" (conliol foi) llo
oxloinalily llal lloy imposo on oacl olloi. Jlo iosill afloi llo coiioclion foi
llis oxloinalily is llal nol only fims Lil also consimois gain fiom llo voilical
moigoi.
If voilical inlogialion is nol possiLlo, oifoionl lypos of voilical iosliainls
migll Lo isoo lo conliol foi llis oxloinalily. Sinco llo pioLlom iosills in loo
ligl a mailol piico (oi loo low salos), an oLviois possiLilily lo solvo llo pioL-
lom is iosalo piico mainlonanco. Jlo manifacliioi coilo simply imposo llo
iosalo piico on llo iolailoi, oi oslaLlisl a piico coiling. Of coiiso, iosalo piico
mainlonanco is ofoclivo if llo fnal piico is oLsoivaLlo.
Alloinalivoly, qianlily foicing woilo lavo llo samo oilcomo, as llis woilo
oLligo llo iolailoi lo incioaso salos lo llo lovol wlicl is oplimal foi llo inlogialoo
sliicliio.
Yol anolloi possiLilily lo iosloio llo voilically inlogialoo oilcomo is foi llo
manifacliioi lo iso non-linoai piicing (a fxoo compononl 1 plis a vaiiaLlo
0
compononl n foi oacl inil Loigll) in oiooi lo malo llo iolailoi llo iosioial
claimanl" of all llo piofl gonoialoo in llo mailol. Ly solling llo vaiiaLlo
compononl ioonlical lo llo manifacliioi`s own cosl, n = c, llo iolailoi woilo
ofoclivoly Lolavo in llo samo way as a voilically inlogialoo fim, ano woilo
clooso llo oplimal fnal piico. Jlo iolailoi woilo llon malo llo maximim
piofl. Howovoi, pail of oi all sicl piofl can Lo appiopiialoo Ly llo mani-
facliioi llioigl llo fiancliso foo 1. In gonoial, llo oisliiLilion of llo piofl
ooponos on llo iolalivo Laigaining powoi of llo lwo fims. If il is llo manifac-
liioi wlo las all llo Laigaining powoi (oi if lloio aio many possiLlo iolailois
wlo woilo compolo foi llo iigll lo soll llo manifacliioi`s piooicl, ano lloy
woilo oilLio oacl olloi inlil llo winning Lio 1 aLsoiLs all llo oxpocloo piofl),
llo manifacliioi can malo oxaclly llo samo piofl as if il ownoo llo iolailoi.
Howovoi, nolico llal voilical iosliainls aio nol oqiivalonl if lloio oxisls
somo incoilainly in llo mailol (oilloi on llo lovol of fnal oomano, oi on llo
cosls of oisliiLiling llo piooicl) ano if llo iolailoi is iisl avoiso. In lloso
ciicimslancos a non-linoai conliacl 1 -cq, Ly maling llo iolailoi llo iosioial
claimanl of all llo piofl gonoialoo Ly llo voilical clain, woilo onsiio llal
llo iolailoi ioacls lo oomano oi cosl slocls in llo samo way as a voilically
inlogialoo fim. Howovoi, il woilo oxposo llo iolailoi lo a ligl iisl, sinco lis
piofl woilo nol Lo piolocloo againsl sicl slocls. If llo iolailoi is iisl-avoiso, in
oiooi lo insiio lim llo manifacliioi will lavo lo giaianloo lim somo minimim
piofl.
BIM givos poifocl insiianco inooi oomano incoilainly, sinco llo fnal piico
is giaianlooo inooponoonlly of llo lovol of oomano. Howovoi, BIM faios voiy
Laoly inooi cosl incoilainly, as a slocl on llo oisliiLilion cosl will gioally
afocl llo iolailoi`s piofl maigin, sinco llo piico cannol Lo aojisloo so as lo
covoi ligl cosls.
As a iosill, will a iisl avoiso iolailoi, BIM is Lolloi inooi oomano incoi-
lainly, non-linoai piicing inooi cosl incoilainly. (Foi a foimal lioalmonl, soo
soclion 2.1.2.)
Frqfoxvlrqv Allloigl il is convonionl lo iofoi lo llo caso wloio lloio oxisls
a monopoly Loll ipslioam ano oownslioam, llo issio of ooiLlo maiginalisalion
aiisos wlonovoi somo mailol powoi oxisls al Loll lovols. Jlis voilical oxloi-
nalily pislos piicos n| wlal woilo Lo oplimal foi llo voilical sliicliio.
Wo lavo soon llal a voilical moigoi, iosalo piico mainlonanco, qianlily
fxing ano non-linoai piicing aio insliimonls wlicl conliol foi llis oxloinalily
ano lloiofoio also iosill in ligloi wolfaio.
An ipslioam fim migll also iosoil lo anolloi way lo avoio llo ooiLlo
maiginalisalion pioLlom, namoly laclling llo pioLlom al ils iool ano olimi-
naling mailol powoi al llo oownslioam lovol. Inoooo, in llis pailicilai caso,
llo foicoi compolilion among llo oownslioam fims solling llo manifacliioi`s
Liano llo lowoi llo mail-ip lloy sol on lop of llo ipslioam fim mail-ip
ano in liin llo woaloi llo oxloinalily. Nolo lloiofoio llal loio Ly n&.nj
7
compolilion oownslioam, foi inslanco Ly assigning .|&-. ..- lo io-
lailois, llal ofoclivoly givo llom a monopoly in a coilain googiaplic aioa oi foi
a coilain lypo of cislomois, llo ooiLlo maiginalisalion pioLlom is aggiavaloo,
ano wolfaio is iooicoo.
51414 Grxeoh pdujlqdolvdwlrq-
Sipposo lloio is ono ipslioam fim l llal manifacliios a coilain piooicl, foi
wlicl il is a monopolisl. Sipposo also llal il cannol soll llo gooo oiioclly, Lil
las lo ioly on a oownslioam fim 1 - llo iolailoi - llal Liys llo piooicl fiom
l ano iosolls il lo llo fnal consimois. (Exoicisos 2 ano 1 ooal will llo casos
of : iolailois.) Assimo llal llo manifacliioi las all llo Laigaining powoi,
llal is llal il malos a lalo-il-oi-loavo-il ofoi lo llo iolailoi (allloigl llo main
iosill woilo nol clango if wo assimoo a oifoionl oisliiLilion of llo Laigaining
powoi).
Consimois` oomano is givon Ly q = a j, wloio a 0 is a paiamoloi, q is
qianlily oomanooo ano j is llo fnal piico claigoo lo consimois.
Jlo manifacliioi las a inil piooiclion cosl c < a, ano llo iolailoi`s inil
cosl is givon Ly llo sim of llo wlolosalo piico n llal il (possiLly) las lo pay
lo llo manifacliioi foi a inil of llo piooicl ano a inil cosl of iolail llal is
lalon oqial lo zoio foi simplicily. I also assimo llal all agonls lavo poifocl
infoimalion.
I analyso lwo oifoionl casos. Fiisl, ipslioam ano oownslioam oo nol ongago
in any voilical conliacls ano llo ipslioam fim solls lo llo iolailoi Ly ising a
simplo linoai piico sliicliio, llal is, Ly fxing n. Jlon, ipslioam ano oown-
slioam fims aio inlogialoo. I will slow llal lloio aio sovoial sols of voilical
iosliainls llal allow llo ipslioam fim lo iopiooico llo voilically inlogialoo
oilcomo.
Vhsdudwlrq dqg olqhdu sulflqj Jlo gamo Loing playoo is as follows. Fiisl,
llo ipslioam fim cloosos llo wlolosalo piico n al wlicl il solls lo llo oown-
slioam fim. Jlon, llo oownslioam fim cloosos llo fnal piico j al wlicl il
solls lo consimois.
As isial, wo fisl lavo lo lool foi llo solilion of llo oownslioam fim fisl.
Ils pioLlom is lo clooso j in oiooi lo maximiso ils piofl givon llo wlolosalo
piico n:
max H = (j n)(a j) (1)
Ly laling llo fisl ooiivalivo ano oqialing il lo zoio (0H ,0j = 0), wo
oLlain piico, qianlily ano piofl as a finclion of llo wlolosalo piico: j =
(a -n),2; q = (a n),2; H = (a n) ,4.
8
Jlo manifacliioi anlicipalos poifoclly llo oocision of llo iolailoi. In pai-
licilai, il lnows llo qianlily il will oiooi fiom il as a finclion of llo wlolosalo
piico (foi any givon n, llo iolailoi will nol Lo willing lo Liy moio inils of
llo piooicls llan lloso llal il will fno oplimal lo soll lo fnal consimois).
Jloiofoio, ils pioLlom is lo clooso n lo maximiso ils own piofl:
max H = (n c)
a n
2
. (2)
Fiom llo fisl-oiooi conoilion (0H ,0j = 0) ano afloi io-aiianging ono fnos
llo solilion as: n = (a-c),2. Boplacing llo oqiiliLiiim wlolosalo piico inlo llo
oownslioam solilions ono fnos llo oqiiliLiiim fnal piico ano piofls oLlainoo
Ly llo ipslioam ano oownslioam fims, as woll as llo sim of llo piofls maoo
Ly llo voilical clain.
j =
a -c
4
; H =
(a c)
8
; H =
(a c)
10
; ()
13 = H - H =
(a c)
10
. (4)
Yhuwlfdo lqwhjudwlrq +yhuwlfdo phujhu, Sipposo now llal llo ipslioam
ano oownslioam fims aio inlogialoo in a iniqio company, foi inslanco Locaiso
of a voilical moigoi. Jlis implios llal llo manifacliioi can now soll oiioclly
lo consimois. Ils pioLlom will now Lo llo slanoaio pioLlom of a monopolisl,
as follows:
max H = (j c)(a j). ()
Jlo solilion is oasily oLlainoo fiom llo fisl-oiooi conoilion 0H ,0j = 0:
j =
a -c
2
; q =
a c
2
; 13 = H =
(a c)
4
. (0)
Frpsdulvrq Jlo voilical moigoi caso is inamLigioisly Lolloi foi socioly.
Iiicos aio lowoi inooi a voilically inlogialoo sliicliio llan inooi llo
sopaialoo ono, as j < j (iocall llal a c, olso llo mailol woilo
nol oxisl). Sinco voilical inlogialion ooloiminos a piico oocioaso (ano
an incioaso in llo qianlily solo lo fnal consimois), consimoi siiplis
impiovos oio lo llo voilical moigoi.
Jlo piofl cioaloo Ly llo voilical sliicliio is also ligloi inooi voilical
inlogialion, as 13 13 . In liin, llis moans llal llo manifacliioi
can always pay lo llo iolailoi al loasl llo piofl H llo lalloi malos
9
inooi llo sopaialoo sliicliio, lo convinco il lo lalo pail in llo moigoi
(oi olloiwiso, llo iolailoi can givo llo manifacliioi al loasl ils oilsioo
oppoilinily payof, llal is llo piofl H il woilo malo inooi voilical
sopaialion). Loll fims slano llon lo gain fiom llo moiging of llo lwo
voilical slagos.
Sinco Loll consimoi siiplis ano piooicoi siiplis incioaso, lolal wolfaio
inamLigioisly iisos fiom voilical inlogialion.
Yhuwlfdo uhvwudlqwv Assimo now llal a voilical moigoi - foi wlalovoi ioason
- is nol possiLlo. Il is slill possiLlo foi llo ipslioam fim lo iomovo llo ooiLlo
maiginalisalion oxloinalily Ly ising oifoionl voilical iosliainls, as follows.
1-n| . nn.nnnn ;111). DoiLlo maiginalisalion iosills in loo
ligl fnal piicos. 1n-.nj h n.| . j = j = (a - c),2 on llo
oownslioam fim will maximiso llo siiplis of llo voilical sliicliio. Jlo
way in wlicl llo ipslioam ano oownslioam fims slaio llo siiplis will
llon Lo ooloiminoo Ly llo wlolosalo piico n. If il is llo ipslioam fim
lo lavo all llo Laigaining powoi, llon il will fx n = j = (a - c),2
ano will gol all llo piooicoi siiplis. Moio gonoially, llo ligloi n (will
n [c, j [) llo ligloi llo slaio of llo siiplis going lo llo ipslioam
fim. Ioonlical oilcomo woilo Lo acliovoo if llo ipslioam fim sols a
. .|.nj j = j = (a -c),2. Jlis oLligos llo oownslioam fim lo soll
al a piico j _ j. Foi any wlolosalo piico n [c, j [ llo oownslioam fim
woilo llon clooso piocisoly j = j (ano again llo aclial n ooloiminos llo
oivision of llo siiplis).
&nn.j ]..nj ;1). Jlo miiioi imago of loo ligl a piico is llal lloio
is loo lilllo a qianlily solo lo fnal consimois. Jloiofoio, llo ipslioam
fim can iosloio omcioncy also Ly oLliging llo iolailoi lo Liy llo nimLoi
of inils q = (a c),2, oi oqiivalonlly Ly imposing qianlily foicing,
llal is oslaLlisling llal llo iolailoi sloilo Liy al loasl q _ q = q . Jlo
iolailoi woilo llon clooso piocisoly llo omcionl oilpil q = q . As in llo
pioviois caso, llo lovol of llo wlolosalo piico ooloiminos llo oisliiLilion of
llo piooicoi siiplis. If llo ipslioam fim las all llo Laigaining powoi, il
will clooso n = j ano appiopiialo all llo piofl of llo voilical sliicliio.
1nnh.- J ;11). Jlo ipslioam fim can malo llo oownslioam fim llo
iosioial claimanl of all llo piofl gonoialoo in llo mailol Ly solling llo
non-linoai piico sclomo 1 -nq, ano fxing n = c. Jlo oownslioam fim`s
maximisalion pioLlom is givon Ly:
max H = (j c)(a j) 1. (7)
Cloaily, llo solilion of llis pioLlom is givon Ly llo voilical inlogialion
piico j = (a - c),2 ano qianlily q = (a c),2, as llo fxoo foo ooos
nol afocl llo fisl oiooi conoilion. Jlo oisliiLilion of llo piofl (oqial
10
lo llo voilically inlogialoo piofl) will llon Lo ooloiminoo Ly llo amoinl
of llo foo 1, as llo oownslioam ano ipslioam fim will iospoclivoly gol
H = (a c) ,4 1 ano H = 1. If llo ipslioam fim las all llo
Laigaining powoi, llon 1 = (a c) ,4 ano il appiopiialos all llo piofl
gonoialoo Ly llo voilical sliicliio.
51415 Grxeoh pdujlqdolvdwlrq zlwk uhwdlohuv* ulvn dyhuvlrq--
Jlo following oxamplo, aoaploo fiom Boy ano Jiiolo (1980), illislialos llo
oifoionl iisl-insiianco piopoilios of voilical iosliainls wlon lloio oxisl asym-
moliic infoimalion ano iisl avoision of iolailois.
Consiooi an oxlonsion of llo ooiLlo monopoly moool aLovo. A iisl-noilial
manifacliioi las a inil cosl c ano ils iolailoi is infniloly iisl-avoiso ano las
a inil oisliiLilion cosl . Domano is q = a j. Jloio oxisl Loll oomano
incoilainly a [a, a[ ano oisliiLilion cosl incoilainly
_
,
_
, will a c-,
ioalisalions of a ano Loing inooponoonl. Jlo gamo is as follows. Fiisl, wlon
Loll mailol oomano a ano oisliiLilion cosls aio inlnown lo ovoiyLooy, llo
manifacliioi malos a lalo-il-oi-loavo-il-ofoi lo llo iolailoi, in llo foim of a
non-linoai conliacl (1 -nq). Socono, a ano aio oLsoivoo Ly llo iolailoi (Lil
nol Ly llo manifacliioi). Jliio, llo iolailoi cloosos j.
Wo wanl lo (i) fno llo oplimal conliacl inooi non-linoai piicing (FF)
ano iosalo piico mainlonanco (BIM). (ii) slow llal inooi oomano incoilainly
ano ! ! ; (iii) slow llal inooi cosl incoilainly
ano ! ! .
I piovo lloso iosills as follows.
(i.a) FF. Jlo iolailoi maximisos = (a j) (j n ). Il is oasy lo
clocl llal j = (a - n - ),2, = (a n ) ,4. Sinco llo iolailoi
is infniloly iisl-avoiso, llo fiancliso foo 1 misl giaianloo lim non-nogalivo
piofls ovon in llo woisl slalo of naliio. Jloiofoio, il misl Lo 1 = (a
n ) ,4. Jlo manifacliioi`s pioLlom will Lo lo clooso n lo maximiso
1[(a (a -n -),2)(n c)[ -(a n) ,4. Jlo solilions aio: n = c -
(a a) -( ), j = [a -c - - (a a) - ( )[ ,2, = (a c
) ,4-[(a a) - ( )[ ,4, ! = (ac) ,8-[(a a) - ( )[ ,4-
ar(a),8 -ar(),8.
(i.L) BIM. Jlo iolailoi claigos llo imposoo piico j ano las piofl oqial lo
= (a j)(j n ). Givon infnilo iisl avoision, 1 = (a j) (j n ).
Jlo manifacliioi will clooso j ano n lo maximiso (a j) (j n ) -
1[(a j)(n c)[, siLjocl lo j _ n-. Il can Lo clocloo llal is incioasing
in n. Honco, llo manifacliioi will clooso llo maximim n compaliLlo will llo
consliainl: n = j . Jlo pioLlom Locomos llon max 1[(a j)(j c)[,
wloso solilion is givon Ly j = (a - c - ),2. Ly siLslililion, n =
(a -c),2, 1 = 0, = (a c ) ,4, ! = (a c ) ,8-
ar(a),2.
(ii) Consiooi oomano incoilainly only ( = = ). Jlon < if:
(ac) ,4-[(a a)[ ,4 < (a c) ,4. Jlis inoqialily can Lo iowiillon
11
as: (a a)(c - a) < 0, wlicl is always liio sinco Ly assimplion a a
ano a c -. Il can also Lo clocloo llal ! < ! .
(iii) Unooi cosl incoilainly (1(a) = a = a), sinco (a c
) ,4-[( )[ ,4 (a c) ,4. Ono can also clocl llal ! ! .
A vaiianl of llis oxamplo will compoling iolailois, is consiooioo in oxoiciso
.
515 Krul}rqwdo h{whuqdolw|= Iuhh ulglqj lq wkh surylvlrq ri
vhuylfhv
Losioos llo voilical oxloinalilios Lolwoon a manifacliioi ano llo iolailois llal
caiiy ils piooicls lloio oflon oxisl loiizonlal oxloinalilios among iolailois llal
ooloimino an inomcionl oilcomo fiom llo poinl of viow of llo voilical sliicliio
as a wlolo. Figiio 0.2 illislialos llo sliicliio of llo mailol will moio iolailois.
INSEBJ Figiio 0.2. Hoiizonlal oxloinalily
An oxamplo of sicl oxloinalilios concoin llo lovol (ano qialily) of soivicos
pioviooo Ly iolailois. If sicl soivicos cannol Lo poifoclly appiopiialoo Ly ono
iolailoi (llal is, if lloio aio spillovois wlicl Lonofl olloi iolailois caiiying llo
samo Liano) llon soivicos Locomo a piLlic gooo on wlicl llo iolailois will
fioo iioo, llis ooloimining an inooipiovision wlicl iooicos llo manifacliioi`s
piofl. Again, voilical inlogialion as woll as coilain voilical iosliainls migll
lolp llo manifacliioi solvo llis oxloinalily pioLlom.
Jo capliio llo main ioasoning Lolino llo aigimonl (fisl pioposoo Ly Jolsoi
(1900)), consiooi llo following oxamplo. Imagino llal in a cily lloio aio sovoial
slops wlicl soll a givon piooicl, say a Liano of oislwaslois. (Jo conconlialo
on llo issio al lano, also sipposo llal llis is llo only Liano solo in llis cily,
allloigl il is nol nocossaiy.) Jloio aio many aclivilios llal lloso slops migll
caiiy oil lo incioaso consimois` appoal foi llo piooicl. Jlinl foi inslanco
of liiing slop assislanls wlo answoi polonlial cislomois` qioslions, illislialo
llo claiacloiislics of llo piooicl lo llom ano so on. Jloso aio all aclivilios
wlicl migll malo llo polonlial clionl moio willing lo Liy llo Liano, Lil nol
nocossaiily al llo slop wloio lo gols llo infoimalion. Oi llinl of somo soil of
aovoilising llal migll alliacl cislomois lo llo Liano Lil nol lo llo slop llal
ooos llo aovoilising.
Sipposo also llal somo of llo compoling iolailois aio localoo voiy closo lo
oacl olloi, ano il is nol loo coslly, iolalivo lo llo valio of llo gooo, foi llo
consimoi lo oo a lilllo soaicl Lofoio a piiclaso.
In lloso ciicimslancos, oacl slop will llinl lwico Lofoio invosling a gioal
ooal of ofoil lo soll llo Liano. Jlis is Locaiso anolloi slop noaiLy woilo lavo
an inconlivo lo avoio llo cosl of llis ofoil, jisl fioo iioo on llo piovision of
soivicos ano ofoi a Lolloi piico. A consimoi woilo fisl visil llo slop wlicl
ofois aooilional soivicos, gol lloio all infoimalion lo nooos, Lil will llon Liy
al llo slop wlicl ofois llo samo piooicl al llo Losl piico. Of coiiso, a slop
will anlicipalo llis ano will iofiain fiom ofoiing soivicos laving a piLlic gooo
12
claiacloiislic. In llo limil, if soivicos givon Ly iolailois jisl conliiLilo lo llo
Liano Lil cannol Lo appiopiialoo Ly llo slop ilsolf, ano if llo slops aio closo
onoigl, no soivico al all will Lo pioviooo. Jlis will Lo siLoplimal foi llo
piooicoi, givon llal ils Liano will nol Lo sippoiloo Ly slop soivicos, Lil also
foi consimois, wlo oo nol iocoivo infoimalion lloy liglly valio.
Voilical iosliainls migll iosloio inconlivos foi llo iolailois lo invosl in soi-
vicos. Foi inslanco, sipposo llal llo piooicoi oivioos llo cily in oifoionl aioas,
ano appoinls an oxclisivo oisliiLiloi in oacl aioa (oxclisivo loiiiloiios). Jlis
woilo iooico llo possiLilily of consimois lo visil sovoial slops (il is moio coslly
lo slop aioino in oifoionl aioas) ano lloiofoio iooicos llo iisl llal a iolailoi
will Lo inooicil Ly a fioo iioing compoling slop. Honco, oacl iolailoi will lavo
a ligloi inconlivo lo ofoi Liano sippoiling soivicos. Anolloi possiLilily is foi
llo piooicoi lo mainlain all llo slops in llo cily, Lil fx llo iosalo piico, oi
imposo a piico fooi, lo avoio llo pioLlom of inooicilling ano lo allow llo
iolailois lo iocoip (pail of) llo invoslmonl.
Voilical inlogialion woilo also solvo llo pioLlom: if llo piooicoi ownoo llo
slops, il woilo lalo inlo accoinl llo oxloinalily llal oacl of llom imposos on
llo olloi, ano woilo piovonl ils slop managois fiom inooicilling oacl olloi
ano iooicing llo lovol of soivicos lloy piovioo.
Jo sim ip, voilical iosliainls ano voilical inlogialion avoio oi iooico llo
fioo iioing pioLlom lo llo Lonofl of Loll piooicoi ano consimoi siiplis. (Foi
a foimal lioalmonl of llis aigimonl, soo soclion 2.2.1.)
Of coiiso, in gonoial lloio will also Lo many salos aclivilios wlicl can Lo
appiopiialoo Ly llo slop, foi inslanco ciooil lo consimois, oi posl-salos soivico
pioviooo Ly llo sloio, oi plysical appoaianco of llo slop ilsolf (somo consimois
oo piofoi lo Liy in slops wlicl aio localoo in ligl sliools, oi wloso piomisos aio
nicoi looling). In all lloso casos, llo fioo iioing pioLlom will nol aiiso. In ioalily,
soivicos of oifoionl lypos will pioLaLly cooxisl, ano allloigl llo oxliomo caso
wloio no soivico al all is pioviooo is inliloly lo iiso, llo fioo iioing pioLlom
will pioLaLly afocl lo somo oogioo llo slops` invoslmonl oocisions.
Dq h{dpsoh ri zhoiduh0uhgxflqj yhuwlfdo uhvwudlqwv +wrr pxfk hi0
iruw, Wo lavo jisl soon llal voilical inlogialion ano voilical iosliainls migll
impiovo wolfaio Ly iaising llo lovol of ofoil ano soivicos pioviooo Ly iolail-
ois. Il is concoivaLlo, lloigl, llal voilical iosliainls inloinaliso llo loiizonlal
oxloinalily ano loao lo loo ligl ofoil. In olloi woios, lloy migll incioaso piof-
ils, Lil iosill in lowoi consimoi siiplis ano wolfaio. Joclnical soclion 2.2.2
consliicls a simplo oxamplo wloio voilical inlogialion (ano voilical iosliainls)
woilo iooico wolfaio: a (voilically inlogialoo) monopolisl woilo incioaso ofoil
lo alliacl maiginal consimois lo llo ooliimonl of infia-maiginal consimois wlo
oo nol valio oxlia ofoil. Lossos foi llo lalloi gioip migll oilwoigl incioasoo
piooicoi siiplis.
1
Jlo oxamplo illislialos llal lloio is no ioason lo oxpocl llal llo conliol of
llo oxisling oxloinalilios Ly moans of voilical iosliainls oi voilical moigois will
always slow a coincioonco Lolwoon llo inloiosl of llo fims ano llo inloiosl of
consimois. Howovoi, il is woill noling llal llo oxamplo nooos somo spocial
assimplions lo slow llal wolfaio migll iooico. Fiilloi, ano moio impoilanlly,
an oxlonsion of llo oxamplo slows llal wolfaio oocioasos only insofai as no
compolilion oxisls. If infia-maiginal consimois (lloso wlo oo nol valio oxlia
ofoil) lavo llo possiLilily lo Liy fiom fims sipplying a slanoaio qialily of
llo piooicl (i.o., a piooicl wlicl ooos nol incoipoialo oxlia soivicos), voilical
inlogialion will nol iooico wolfaio. Jlis inliooicos a ciicial poinl on wlicl I
will ioliin laloi: ono sloilo woiiy aLoil voilical iosliainls only wlon aooploo
Ly fims wlicl onjoy laigo mailol powoi.
51514 D prgho ri xqghusurylvlrq ri vhuylfhv-
Consiooi a silialion wloio lloio is an ipslioam fim l (llo manifacliioi) ano
lwo oownslioam fims 1 ano 1 wlicl lavo lo oocioo on llo lovol of ofoil
(soivicos) lloy wanl lo piovioo lo soll l`s piooicl ano llon compolo in piicos.
Assimo llal soivicos incioaso llo poicoivoo qialily of llo Liano Lil cannol
Lo appiopiialoo Ly llo iolailoi llal piovioos llom. Jlo poicoivoo qialily of
llo Liano is givon Ly n = n-c, wloio llo ofoil lovol is c = c -c , llal is llo
sim of llo ofoil (soivico) pioviooo Ly llo lwo iolailois. In llo aLsonco of any
ofoil, n = n wlicl is llo Lasic lovol of qialily poicoivoo Ly llo consimois. As
foi oacl iolailoi`s cosl, wo assimo llal C(q, c ) = nq -jc ,2, will j 1. Nolo
llal loio I assimo llal llo cosl of soivicos is fxoo, llal is inooponoonl of llo
nimLoi of inils solo, ialloi llan vaiiaLlo. Jlis woilo coiiospono foi inslanco
lo llo caso wloio "soivico" is aovoilising oillays.
Consimois` oomano is givon Ly q = ( -c) j, llal is, il incioasos Ly c foi
any aooilional soivico aLovo llo slanoaio qialily.
Jlo facl llal oownslioam fims compolo in piicos avoios ooiLlo maiginali-
salion ano will malo llo fioo-iioing pioLlom llo only oxloinalily of llis simplo
moool. Jlis is Locaiso iolailois aio nol aLlo lo oifoionlialo llomsolvos (Ly as-
simplion) llioigl llo iso of llo soivicos lloy piovioo, ano lloiofoio iolailois
aio poicoivoo as poifocl siLslililos Ly consimois.
I lool fisl al llo caso wloio lloio is sopaialion Lolwoon llo ipslioam ano
llo oownslioam fims ano llon al llo caso wloio lloio is voilical inlogialion.
Finally, I slall soo wlicl voilical iosliainls allow llo ipslioam fim lo iosloio
llo voilical inlogialion solilion.
Vhsdudwlrq If llo lwo iolailois aio compoling in piicos, llo only oqiiliL-
iiim in llo iolailois` gamo is llo ono wloio j = j = n ano c = c = 0.
Jlo ioason is as follows. Sinco lloio is a complolo oxloinalily in llo piovision
of soivicos, a iolailoi ooos nol manago lo oifoionlialo ilsolf fiom llo olloi no
14
malloi low micl soivico il givos lo consimois. Jloiofoio, Loiliano compoli-
lion implios llal piicos oqial maiginal cosl (i.o, llo wlolosalo piico n). Lil
sinco llo iolailois malo zoio piofl lloy will novoi Lo aLlo lo covoi lloii (fxoo)
cosl of qialily piovision. No oqiiliLiiim will c 0 can llon Lo sislainoo.
Jlo ipslioam fim coiioclly anlicipalos llal llo fnal piico j = n ano llal
fnal oomano will Lo q = n. Ils piogiammo is llon max H = (nc)(n),
wlicl is solvoo Ly n = ( - c),2. Al llo sopaialoo oqiiliLiiim, lloiofoio,
piooicoi siiplis, consimoi siiplis ano wolfaio aio iospoclivoly givon Ly:
13 = H =
( c)
4
; C3 =
( c)
8
; ! =
( c)
8
. (8)
Yhuwlfdo lqwhjudwlrq Consiooi now llo caso wloio llo ipslioam fim ano
llo lwo iolailois aio inlogialoo, foi inslanco Locaiso llo foimoi lalos ovoi llo
iolailois. Jlo piogiammo of llo voilically inlogialoo fim is:
max H = (j c)( -c -c j) j
c
2
j
c
2
. (9)
Solving llo syslom of llo llioo fisl-oiooi conoilions:
_
= j c jc = 0, (i = 1, 2)
= -c -c 2j -c = 0,
(10)
ono oLlains llo following solilions: c = c = c = ( c), [2(j 1)[; j =
[j( -c) 2c[ , [2(j 1)[. Eacl iolailoi will soll q = j( c) [4(j 1)[. Ly
siLslililion, ono llon oLlains piooicoi siiplis, consimoi siiplis ano wolfaio
as follows.
13 = H =
j( c)
4(j 1)
; C3 =
j ( c)
8(j 1)
; ! =
j(j 2)( c)
8(j 1)
. (11)
Voilical inlogialion is again moio omcionl, as ! ! amoinls lo llo
inoqialily (4j )( c) ,
_
8(1 j)
_
0.
In llis oxamplo, voilical inlogialion allows lo conliol foi llo loiizonlal ox-
loinalily wlicl oxisls among iolailois ano wlicl ooloiminos an inooipiovision
of soivicos iolalivo lo wlal woilo Lo oplimal foi llo inlogialoo sliicliio.
1
Yhuwlfdo uhvwudlqwv In llis caso llo pioLlom inooi a sopaialoo sliicliio
is ono of fioo iioing among iolailois, wlo aio pisloo lo inooicil oacl olloi
lloioLy losing inconlivos lo piovioo soivicos. Jo iosloio inconlivos llo man-
ifacliioi las lo iolax compolilion oownslioam. A non-linoai conliacl woilo
nol solvo llo pioLlom, inloss il is accompanioo Ly somo moasiios wlicl iooico
compolilion.
H{foxvlyh whuulwrulhv dqg iudqfklvh ihh Sipposo oacl iolailoi iocoivos
a loiiiloiy oi oxclisivo compolonco foi a coilain lypo of cislomois, plis a non-
linoai conliacl of llo lypo T = nq - 1, will n = c. Foi simplicily, assimo
llal oacl iolailoi can soll lo lalf of llo lolal nimLoi of consimois. Howovoi,
wo loop llo assimplion llal llo ovoiall poicoivoo lovol of qialily of llo gooo
solo Ly oacl iolailoi is ooloiminoo Ly llo sim of llo iolailois` ofoils. Jlon
oacl iolailoi will faco llo following pioLlom:
max H = (j c)
( -c -c j )
2
j
c
2
1. (12)
Jlo fisl-oiooi conoilions aio:
_
= jc = 0,
= -c -c 2j -c = 0, (i = 1, 2; i ,= ).
(1)
Nolo llal givon llo lovol of ofoil llo piico closon will Lo oqiivalonl lo
llo voilically inlogialoo solilion (0H ,0j = 0 is llo samo as foi llo voilically
inlogialoo monopolisl). Howovoi, ofoil is nol oplimal sinco maiginal piofl fiom
ofoil is iooicoo will iospocl lo llo silialion wloio lloio is fill inloinalisalion
of llo ofoil oxloinalily. Eacl iolailoi lnows llal ils ofoil will incioaso salos in
a mailol wlicl is lalf llo sizo of llo ono of a voilically inlogialoo monopolisl.
Jloiofoio, oxclisivo loiiiloiios impiovo llo inconlivos lo piovioo soivicos ano
malo llo manifacliioi closoi lo llo oplimim, Lil oo nol iosloio llo fisl Losl.
Giving oxclisivily foi llo wlolo mailol lo only ono iolailoi ooos nol iosloio
llo fisl Losl oilloi, sinco ofoil will Lo pioviooo Ly only ono iolailoi ialloi llan
lwo (lloio aio oisoconomios of scalo fiom ofoil piovision). Jlo only iolailoi
will clooso j ano c lo maximiso llo following finclion:
max H = (j c)( -c j ) j
c
2
1. (14)
Jlo fisl oiooi conoilions will Lo:
_
= (j c) jc = 0,
= -c 2j -c = 0, (i = 1, 2; i ,= ).
(1)
10
Al oqiiliLiiim, llo iolailoi will piovioo lowoi ofoil llan al llo fisl Losl. Jo
sim ip, oxclisivo loiiiloiios oo impiovo llo oxloinalily pioLlom ano incioaso
llo piovision of ofoil Lil oo nol iosloio llo fisl-Losl.
Uhvdoh sulfh pdlqwhqdqfh dqg iudqfklvh ihh Anolloi possiLlo lypo of
voilical iosliainls llal can Lo isoo lo givo moio inconlivos lo piooico soivicos
is iosalo piico mainlonanco comLinoo will a non-linoai conliacl (n < c; 1). If
llo manifacliioi fxos llo piico j = j al wlicl llo iolailois can soll, llon llo
iolailois will nol piico so aggiossivoly llal inconlivos lo piovioo ofoil will Lo
oliminaloo (as il occiiioo in llo Loiliano caso).
Eacl iolailoi will faco llo following pioLlom:
maxH = (j n)
( -c -c j )
2
j
c
2
1. (10)
Jlo fisl-oiooi conoilions foi ofoil is:
0H
0c
=
j n
2
jc = 0. (i = 1, 2; i ,= ) (17)
In oiooi foi a iolailoi lo clooso llo oplimal lovol of ofoil, llo following
conoilion misl Lo salisfoo:
c =
j n
2j
= c =
c
2(j 1)
; (18)
lonco, llo wlolosalo piico misl Lo: n = j j( c),(j 1). Ly
ioplacing llo oxpiossion of j ono oLlains:
n =
jc 2c j
2(j 1)
< c. (19)
Nolo llal if n = c, iosalo piico mainlonanco woilo nol iopiooico llo voili-
cally inlogialoo lovol of ofoil. Jlis is Locaiso oacl iolailoi - wlon cloosing ils
ofoil lovol - lalos inlo accoinl only llo maiginal impacl of ofoil on ils own
piofl ialloi llan foi Loll iolailois. Sinco oacl iolailoi lnows il will soll lo only
lalf llo mailol (llo piooicl is inoifoionlialoo ano llo piicos aio fxoo Ly llo
manifacliioi) il will lavo insimcionl inconlivos. BIM alono ooos nol iosloio
llo fisl Losl: llo iolailois misl Lo givon aooilional inconlivos lo malo ofoil,
ano llis can Lo acliovoo Ly llo ipslioam monopolisl solling llom llo inpil al
a wlolosalo piico Lolow ils own maiginal cosl.
Nolo llal llo conliacl wlicl spocifos llo iolail piico al llo lovol j ano llo
wlolosalo piico n inoicos llo samo lovol of piico ano ofoil as llo voilically
17
inlogialoo sliicliio. Jloiofoio, llo lolal piofl gonoialoo inooi llis conliacl
aio llo samo as inooi voilical inlogialion. Jlo fiancliso foo 1 can llon Lo
isoo lo iooisliiLilo llo piofl fiom llo iolailois lo llo manifacliioi. If 1 =
H ,2-(cn)q , llo manifacliioi will oxaclly ioplicalo llo piofl maoo inooi
voilical inlogialion.
Uhvdoh sulfh pdlqwhqdqfh dqg txdqwlw| iruflqj Bosalo piico mainlo-
nanco can also Lo isoo in comLinalion will anolloi insliimonl, llal is qianlily
foicing. Jo onsiio llal a iolailoi is solling al llo oplimal piico, llo manifac-
liioi woilo sol llo iolail piico al llo lovol j = j . Howovoi, BIM alono woilo
oLvioisly nol simco lo iosloio llo voilically inlogialoo solilion, as wo lavo
soon aLovo. Jlo iolailois woilo malo insimcionl ofoil ano soll loo fow inils
of llo gooo. As an alloinalivo lo llo (n , 1) conliacl spocifoo aLovo, llo
manifacliioi coilo simply imposo a minimim lovol of salos (qianlily foicing),
oqial lo q . Jlis woilo pisl llo iolailoi lo malo llo oplimal ofoil lovol. Sinco
piico is fxoo ano oplimal ofoil is ooloiminoo Ly qianlily foicing, llo voilically
inlogialoo oilcomo woilo Lo iopiooicoo. Jlo manifacliioi coilo llon clooso
llo wlolosalo piico - wlicl givon BIM ano QF ooos nol mooify llo iolailois`
inconlivos - as llo clannol lo iooisliiLilo ionls away fiom llo iolailois.
Moio foimally, llo aigimonls jisl piosonloo can Lo soon as follows.
Givon BIM llal imposos j = j , ano givon qianlily foicing, llo pioLlom
of oacl iolailoi i Locomos:
max H =
(j n)( -c -c j )
2
j
c
2
, -.to :
-c -c j
2
_ q .
(20)
Wo lnow llal inconsliainoo maximisalion woilo loao llo iolailoi lo insim-
cionl ofoil. Jloiofoio, ils pioLlom is solvoo Ly llo minimim ofoil lovol c wlicl
salisfos llo consliainl. Al llo symmoliic solilion, ofoil is lloiofoio givon Ly
(2q -j ),2, wlicl is nolling olso llan c . Sinco llis conliacl alioaoy im-
plomonls llo oplimal j ano c , llo wlolosalo piico Locomos inconlivo-noilial.
Jlo manifacliioi can llon iso il lo appiopiialo llo ionls. Jo oo so, il sloilo
clooso n so as lo loavo iolailois will zoio nol piofl. Jlo oplimal n solvos
llon llo following conoilion: (j n)( - 2c j ),2 jc ,2 = 0, wlonco
n = ( - c),2. Jlo lolal piofl maoo Ly llo manifacliioi is llon givon Ly
H = ( n c)q , wlicl afloi siLslililion Locomos oqial lo H .
Frqfoxvlrqv In llis pailicilai oxamplo, wloio llo ovoiall lovol of soivicos
is ooloiminoo Ly llo sim of llo lovols pioviooo Ly oacl iolailoi, ano wloio llo
cosl of piovioing soivicos falls ipon fxoo cosls, a voilical moigoi will onlanco
wolfaio will iospocl lo a silialion wloio compoling iolailois oo nol piovioo
onoigl ofoil. Voilical iosliainls sicl as oxclisivo loiiiloiios ano iosalo piico
mainlonanco also incioaso wolfaio in llal lloy iooico compolilion among iolail-
ois ano in ooing so lloy iosloio lloii inconlivos lo piovioo soivicos. Howovoi,
18
oxclisivo loiiiloiios comLinoo will a fiancliso foo aio nol aLlo lo iopiooico
llo voilically inlogialoo oilcomo, wloioas BIM comLinoo oilloi will a non-
linoai conliacl (n < c, 1) oi will qianlily foicing, ooos iosloio llo voilically
inlogialoo oilcomo.
51515 Yhuwlfdo lqwhjudwlrq pljkw uhgxfh zhoiduh-= Dq h{dpsoh
Consiooi a mailol will lwo lypos of consimois. Jloso will a ligl willingnoss lo
pay, o , oo nol caio aLoil oxlia ofoil oi soivicos. Jloso will a low willingnoss
lo pay oo caio aLoil oxlia ofoil oi soivicos ano lavo lloiofoio a valialion
o - c foi llo gooo, will o o . Noimaliso llo popilalion of consimois lo 1
ano assimo llal llo slaios of ligl ano low lypos aio iospoclivoly ` ano 1 `.
Assimo also llal piico oisciiminalion is nol possiLlo, ano llal lwo inooponoonl
ano inoifoionlialoo iolailois woilo compolo in piicos. Lilo in soclion 2.2.1
aLovo, assimo c = c - c , ano C(q, c ) = nq - jc ,2 (lloio aio fxoo cosls of
qialily impiovomonl). Assimo also llal j 1,(o o ) (wlicl giaianloos llal
llo low lypos will novoi lavo llo liglosl willingnoss lo pay in llo mailol).
Vhsdudwlrq Unooi sopaialion, foi llo isial inooicilling ano fioo-iioing
aigimonls oiscissoo aLovo, no ofoil will Lo pioviooo al oqiiliLiiim (c = 0, j =
n). Jlo manifacliioi will llon clooso llo wlolosalo piico n so as lo maximiso
piofl. If il solls lo ligl lypos only, il will fx n = o . If il wanls lo soll lo
Loll lypos, il will clooso n = o . Lol is assimo llal il is convonionl foi llo
manifacliioi lo soll lo Loll lypos. Jlis amoinls lo imposing llal `(o c) _
`(o c) - (1 `)(o c) = (o c), wlicl Locomos: ` _ (o c),(o c).
Unooi llis assimplion, llo manifacliioi oxliacls all llo consimoi siiplis
of llo low lypos, wlilo llo ligl lypos lavo a siiplis. As a iosill, ovoiall
consimoi siiplis is C3 = `(o o ), lolal piofl is = o c ano wolfaio is
! = o c -`(o o ).
Yhuwlfdo lqwhjudwlrq +zlwk wzr uhwdlohuv, Unooi voilical inlogialion
(oi voilical iosliainls wlicl iopiooico llo voilically inlogialoo oilcomo), llo
monopolisl will slill clooso piico as lo oxliacl all llo siiplis of llo low lypos,
Lil llis is now incioasoo Ly llo ofoil lovol. Jlo pioLlom of llo voilically
inlogialoo monopolisl will lloiofoio Lo:
max = o -c -c c j
c
2
j
c
2
, (21)
wlicl las llo solilion c = c = 1,j. (Nolo llal o o - c inooi llo
assimplion maoo aLovo on j). Al llis oqiiliLiiim, = o - 1,j c
ano C3 = `(o o 2,j) < C3 . Jolal wolfaio oocioasos inooi voilical
19
inlogialion if ! = o - 1,j c - `(o o 2,j) < ! , wlicl amoinls lo
` 1,2.
In llis oxamplo, ofoil is pioviooo Ly llo monopolisl lo incioaso llo willing-
noss lo pay of llo maiginal consimois (wloso siiplis is llon filly oxliacloo Ly
llo monopolisl), wlicl incioasos piofl Lil oocioasos llo siiplis of llo infia-
maiginal lypos. If lloio aio many of llo lalloi (` 1,2 _ (o c),(o c)),
lloii loss oilwoigls llo piofl iiso ano ooloiminos a wolfaio loss. Nolo in pailic-
ilai llal llo iosliiclion ` _ (o c),(o c) sloilo also Lo salisfoo. Jloiofoio,
an inloival wloio wolfaio oocioasos oxisls only if o _ (o -c) ,2.
Frpshwlwlrq uhgxfhv wkh gdqjhu ri yhuwlfdo uhvwudlqwv Lol is sligllly
ioinloipiol llo pioviois oxamplo in llo following way. Higl lypos aio willing lo
pay ip lo o foi a gooo of Lasic qialily n Lil oo nol valio any qialily incioaso
(oi aooilional soivico). Low lypos valio aooilional soivicos ano aio willing lo
pay o -c foi a gooo of qialily n -c.
Jloio oxisl : - 1 gooos. A gooo of Lasic qialily n is piooicoo Ly : (foi
simplicily voilically inlogialoo) fims wlicl oo nol ofoi any aooilional soivico.
Anolloi manifacliioi can insloao piovioo a ligloi qialily n-c, will c = c -c ,
pioviooo llal ils lwo iolailois lavo llo inconlivos lo oo so. If ligloi qialily
(oi aooilional ofoil,soivicos) is pioviooo, il can Lo iocognisoo Ly consimois.
In olloi woios, qialily spillovois migll lappon Lolwoon iolailois of llo samo
piooicl Lil nol acioss piooicls (llinl of aovoilising foi ono pailicilai Liano).
Vhsdudwlrq Foi llo isial ioason, if lloio aio lwo iolailois compoling a la
Loiliano no aooilional ofoil will Lo pioviooo: al oqiiliLiiim all Lianos will
Lo of Lasic qialily ano j = c. No fim malos piofl ano lolal wolfaio will Lo:
! = `(o c) - (1 `)(o c).
Yhuwlfdo lqwhjudwlrq +zlwk wzr uhwdlohuv, Ly voilically inlogialing, llo
fioo iioing aspocl of ofoil piovision is conliolloo foi, ano llo manifacliioi of
llo (polonlially) ligl qialily gooo will inoooo Lo aLlo lo ofoi a gooo of qialily
n -c. Low lypos will Liy llis gooo al a piico ip lo o -c, wloioas ligl lypos
will conlinio lo Liy llo Lasic qialily Lianos al llo piico j = c. Jlo pioLlom
facoo Ly llo voilically inlogialoo monopolisl is llis:
max = (1 `)(o -c -c c) j
c
2
j
c
2
, (22)
wloso solilion is: c = c = (1 `),j. Al llo oqiiliLiiim, = (1
`)(o -(1 `),jc), (all olloi fims slill malo zoio piofl) ano ! = `(o
c) - (1 `)(o c) - (1 `) ,j ! .
Jloiofoio, voilical inlogialion (oi voilical iosliainls) Ly a monopolisl liils
wolfaio, wloioas voilical inlogialion Ly a fim wlicl facos compolilion ooos nol.
Jlo piosonco of compoling fims iooicos llo possiLilily llal voilical iosliainls
aio isoo lo llo ooliimonl of somo consimois. Wlilo llo oxamplo consliicloo
20
loio is voiy spocifc, llis conclision lolos gooo inooi moio gonoial ciicim-
slancos.
516 D pruh jhqhudo wuhdwphqw-
In llo pioviois soclions wo lavo looloo sopaialoly al llo casos wloio lloio
oxisl ooiLlo maiginalisalion issios (soclion 2.1) ano fioo iioing pioLloms in llo
piovision of oisliiLilion soivicos (soclion 2.2). In gonoial, sicl pioLloms cooxisl.
Fiilloi, lloio migll Lo olloi possiLlo oisloilions cioaloo Ly voilical iosliainls
oi voilical inlogialion, sicl as a iooiclion in llo nimLoi of iolailois iolalivo lo
llo caso wloio a manifacliioi solls via linoai conliacls. In llis soclion, I will
slolcl a moio gonoial lioalmonl wlicl confims llo main insiglls fiom llo lwo
pioviois soclions. Jlo siLjocl Loing inovilaLly moio loclnical, llo ioaooi wlo
is nol pailicilaily inloiosloo in llis ioLislnoss analysis can slip llis soclion
ano go oiioclly lo soclion 2.4.
Frpelqlqj h{whuqdolwlhv In soclion 2..1 I piosonl a moool wloio a (mo-
nopolislic) manifacliioi solls llo fnal gooo llioigl sovoial (oligopolislic) io-
lailois. Bolailois compolo againsl oacl olloi foi llo fnal consimois, Lil also
lavo lo piovioo somo soivicos of wlicl lloy can appiopiialo only a pail (llal
is, lloio oxisls somo fioo iioing in llo piovision of soivicos). Sicl a silialion
is moio gonoial ano moio ioalislic llan llal oovolopoo in llo pioviois soclions.
Difoionl oxloinalilios aiiso lloio. Fiisl, lloio is llo isial ooiLlo maiginalisa-
lion pioLlom, wlicl aiisos wlonovoi fims al siccossivo slagos of llo piooiclion
piocoss lavo somo mailol powoi, ano nol only wlon lloio aio lwo siccossivo
monopolios. Jlis lonos lo pisl piicos aLovo wlal is oplimal foi llo clain.
Socono, lloio is llo loiizonlal oxloinalily consisling of iolailois iooicing lloii
ofoil Locaiso of fioo iioing (in a moasiio wlicl is piopoilional lo llo oogioo
lo wlicl llo invoslmonl maoo Ly ono spills ovoi lo llo iivals). Jliio, lloio is
anolloi loiizonlal oxloinalily oio lo llo facl llal - olloi llings Loing oqial -
oacl iolailoi will lono lo sol a lowoi piico llan woilo Lo oplimal foi llo voilical
clain Locaiso il ooos nol inloinaliso llal a maiginal iooiclion of ils own piico
afocls nogalivoly llo piofl of llo olloi iolailois.
Jlo moool slows llal llo fisl ofocl piovails ovoi llo lliio ono, ano llal
ovon in llis moio complicaloo solling il is liio llal a voilically sopaialoo sliic-
liio will linoai wlolosalo piicing loaos lo ligloi piicos ano lowoi ofoil (i.o.,
lowoi soivicos). Jloiofoio, voilical inlogialion ano voilical iosliainls wlicl io-
sloio llo voilically inlogialoo oilcomo will iooico piicos, incioaso ofoil ano
illimaloly incioaso Loll piooicoi ano consimoi siiplis. Jlo moool also om-
plasisos llal oifoionl voilical iosliainls (oi comLinalions among llom) can Lo
isoo so as lo allovialo llo cooioinalion pioLlom willin llo clain ano llis gol
closoi (oi acliovo) llo samo oilcomo as llo oplimal voilically inlogialoo oil-
como. In olloi woios, oifoionl lypos of iosliainls aio oflon siLslililos foi oacl
olloi, ano a fim`s piofoionco foi ono ovoi llo ollois migll Lo oio lo spocifc
ioasons (foi inslanco, if fnal piico is nol oLsoivaLlo, onfoicomonl of BIM is
impossiLlo; if loiiiloiial oi oifoionl cislomois` aioas aio oimcill lo oiaw, oi if
21
aiLiliago among sicl aioas is oasy, EJ migll loso somo of ils appoal, ano so
on). Jloio is a piioii no ioason lo lioal sicl iosliainls in a oifoionl way fiom
llo logal poinl of viow.
Compolilion policy sloilo iocogniso llo oogioo of siLslililaLilily wlicl
oxisls among oifoionl voilical claisos in many ciicimslancos. Il woilo Lo
isoloss lo iso a poi so pioliLilion of, say, oxclisivo loiiiloiial claisos wlilo
poimilling, say, iosalo piico mainlonanco claisos wlicl allow fims lo iopiooico
a voiy similai oilcomo. (Ano vico voisa: poimilling EJ Lil oillawing BIM.)
Oi il woilo Lo isoloss lo oillaw iosalo piico mainlonanco piaclicos wlilo laving
a lax moigoi conliol wlicl woilo nol slop voilical moigois: if nol aLlo lo iso
BIM, a fim can slill implomonl llo samo oilcomo Ly moiging will iolailois.
(Ano, again vico voisa: foiLiooing moigois Lil poimilling voilical iosliainls.)
Yhuwlfdo lqwhjudwlrq dqg ydulhw|= hqgrjhqrxv qxpehu ri uhwdlohuv
Sofai, wo lavo jisl oiscissoo casos wloio ono manifacliioi solls llioigl a j.n
nimLoi of iolailois, wlicl in liin lavo lo oocioo on piico ano invoslmonl lovols.
Jlo lypollosis llal llo nimLoi of iolailois is oxogonois is iosliiclivo, lloigl.
Wlilo an inooponoonl iolailoi woilo opon an oillol if ils own piofl (nol of fxoo
cosl of onliy) is posilivo, a voilically inlogialoo fim will inliooico a now oillol
only if llis givos gioaloi piofl (nol of fxoo cosl) llan willoil il. Jlo foimoi
conoilion is loss sliong llan llo lalloi. A voilically inlogialoo fim woilo nol
opon a now oillol if ils piofls como fiom sloaling Lisinoss lo olloi oxisling
oillols, wloioas an inooponoonl iolailoi woilo nol consiooi oxloinalilios on
compoling iolailois. Jlo iosill is llal lloio will Lo fowoi oillols inooi voilical
inlogialion.
Jlo oxislonco of fowoi oillols iooicos consimoi siiplis (as long as con-
simois lavo a piofoionco foi vaiioly, oi lloii soaicl cosl incioasos will oislanco
liavoloo lo llo clososl slop) Lil ooos nol nocossaiily oocioaso wolfaio, sinco
moio oillols also imply ligloi fxoo cosls. In many ciicimslancos, compoli-
lion gonoialos oxcoss of vaiioly (oi oxcoss onliy), ano wlon llis occiis voilical
inlogialion will impiovo wolfaio Ly iooicing oiplicalions. Fiilloi, ovon if
llo impacl on wolfaio of fowoi vaiiolios woio nogalivo, llis ofocl sloilo slill
Lo compaioo will llo posilivo ofocls of voilical inlogialion wo lavo alioaoy
oiscissoo in llo pioviois soclions. Foi inslanco, voilical inlogialion lalos caio
of llo ooiLlo maiginalisalion pioLlom, ano llis iooicos piicos lo llo Lonofl of
consimois; ano il incioasos inconlivos lo ofoil, wlicl again is omcionl.
Soclion 2..2 illislialos llo issio willin a simplo foimal moool wloio a
voilically inlogialoo manifacliioi oocioos on low many oillols lo lavo ano
al wlicl piico lo soll in oacl oillol. Il slows llal voilical inlogialion las
llo lwo main ofocls monlionoo aLovo: il oocioasos piicos (gooo foi wolfaio)
Lil il also oocioasos vaiioly (Lao foi wolfaio). Il is a piioii impossiLlo lo say
wlicl ofocl oominalos, llo answoi ooponoing mainly on llo spocifc foim llal
22
consimois` piofoioncos lalo, as llo following Liiof simmaiy slows. Howovoi,
inooi plaisiLlo assimplions il is liloly llal voilical inlogialion incioasos ialloi
llan iooicos wolfaio.
A fow papois lavo slioioo llo wolfaio impacl of voilical inlogialion wlon
llo nimLoi of iolailois is onoogonois. Mallowson ano Winloi (198) fno llal
voilical inlogialion incioasos wolfaio. (Jlo moool I piosonl in soclion 2..2
slaios somo of llo foaliios of Mallowson ano Winloi, ano aiiivos al llo samo
iosill.)
Ioiiy ano Giof (198) slioy a moool wloio monopolislic compolilion will
a CES (conslanl olaslicily of siLslililion) oomano finclion is assimoo foi llo
oownslioam iolailois. In lloii moool, inlogialion ooos iooico fnal piico, Lil
llis ofocl is oilwoigloo Ly llo lowoi vaiioly oxisling inooi inlogialion.
K ln ano Vivos (1999) lool al llo impacl of voilical inlogialion of a sip-
plioi inlo a monopolislically compolilivo oownslioam inoisliy foi a moio gonoial
family of oomano finclions. Jloy confim llal llo lwo main ofocls of inlogia-
lion aio: (1) oliminalo llo pioLlom of ooiLlo maiginalisalion, llis loaoing lo
lowoi fnal piicos; (2) iooico vaiioly (wlicl migll Lo wolfaio impioving if lloio
is oliminalion of oxcoss vaiioly).
Jloy fno llal voilical inlogialion is wolfaio impioving wlon lloio is in-
cioasing piofoionco foi vaiioly", oofnoo as a silialion wloio al low lovols
of lolal consimplion a consimoi caios loss aLoil vaiioly incioasos (iolalivo
lo lolal oilpil incioasos) llan al ligl consimplion lovols", ano lloy slow
llal llis piopoily is oLlainoo inooi iolalivoly milo assimplions on piofoioncos.
Jloii analysis siggosls llal inooi plaisiLlo assimplions on piofoioncos voilical
inlogialion incioasos wolfaio.
51614 Krul}rqwdo dqg yhuwlfdo h{whuqdolwlhv= D prgho-
In llis soclion I pioposo a simplo moool wloio oxloinalilios of oifoionl na-
liio cooxisl, ano slioy llo sols of voilical iosliainls llal loao lo an oilcomo
oqiivalonl lo voilical inlogialion.
Jlis soclion is inspiioo Ly Mallowson ano Winloi (1984) wlo iso a spalial
moool of piooicl oifoionlialion. I lavo closon lo iocasl lloii analysis willin
llo non-spalial moool of oifoionlialion wlicl is alioaoy familiai lo llo ioaoois
of llis Lool (soo claploi ). Dospilo somo oifoioncos, llo main foaliios of lloii
analysis aio piosoivoo.
Consiooi an ipslioam manifacliioi wlicl misl soll ils gooo llioigl a nol-
woil of : iolailois llal, Locaiso of localion oi olloi claiacloiislics, soll a gooo
wlicl is poicoivoo Ly fnal consimois as oifoionlialoo, accoioing lo llo follow-
ing oiiocl oomano finclions:
2
q =
1
:
_
_
-c -c
c j (1 -) -

:
j
_
_
, (2)
wloio [0, ) is llo paiamoloi of siLslililaLilily Lolwoon llo oifoionl
piooicls (i.o., an invoiso moasiio of oifoionlialion). Nolo llal iolailois` ofoil
incioasos llo willingnoss lo pay of consimois, ano llal lloio oxisls a fioo iioing
ofocl in llo piovision of ofoil, sinco ofoil maoo Ly a iolailoi spills ovoi lo iival
iolailois in a piopoilion wlicl is ooloiminoo Ly llo paiamoloi c [0, 1[. Wlon
c = 0, oacl iolailoi filly appiopiialos ils ofoil; wlon c = 1, ils ofoil incioasos
Ly llo samo amoinl Loll ils oomano ano llal of all ils iivals. Nolo also llal
foi ano c = 1, llo moool is oqiivalonl lo llal analysoo in soclion 2.2.1.
Similai lo llal moool, I assimo llal C (q , c ) = nq -jc ,2, will j 1. Eacl
iolailoi`s piofl is givon Ly = (j n)q (j , j , c , c ) jc ,2.
Yhuwlfdo vhsdudwlrq dqg olqhdu sulflqj Unooi voilical sopaialion, io-
lailois maximiso inoivioial piofl. Jlo fisl oiooi conoilions d ,dj = 0 ano
d ,dc = 0 of llo maximisalion pioLlom can Lo wiillon, afloi laling ooiivalivos
ano imposing symmoliy, as:
_
-c (1 - c(: 1)) j (2 - ,:) -n(1 - ,:) = 0
jc = 0
(24)
Sinco wo wanl lo focis on llo voilical iosliainls wlicl allow lo iopiooico
llo voilically inlogialoo oilcomo ano will nol foi llo momonl analyso lloii
wolfaio impacl, wo oo nol nooo lo fno llo closoo foim solilions ano wo can
woil will llo fisl-oiooi conoilions only.
Yhuwlfdo lqwhjudwlrq Consiooi now llo caso wloio llo ipslioam monop-
olisl owns all llo iolailois. In llis caso, oacl oillol will lalo inlo fill accoinl
llo oxloinalilios llal il is imposing on llo ollois, sinco ofoil lovols ano piicos
will Lo closon lo maximiso H =

. Ly laling ooiivalivos dH,dj = 0 ano
dH,dc = 0 ano imposing symmoliy ono oLlains llo following FOCs:
_
-c (1 -c(: 1)) 2j -c = 0
(1 - c(: 1)) jc = 0
(2)
Nolo llal n = c sinco llo manifacliioi is now voilically inlogialoo will all
llo iolailois.
H{whuqdolwlhv Jlo compaiison Lolwoon (24) ano (2) allows lo ioonlify llo
oifoionl oxloinalilios al play, ano inooislano wly inooi voilical sopaialion ano
linoai piicing a siL-oplimal oilcomo aiisos foi llo manifacliioi. Lol is slail
24
Ly compaiing llo piico oocisions. Il is convonionl lo iowiilo lloso FOCs as
j (c) = ( -c (1 - c(: 1)) - n(1 - ,:)) , (2 - ,:) ano j (c) =
( -c (1 - c(: 1)) - c) ,2.
Jloio aio lwo oislincl oxloinalilios al woil, wlicl pisl llo piico inlo op-
posilo oiioclions, foi givon ofoil lovols. Fiisl, inooi sopaialion lloio is llo
isial voilical oxloinalily: inooi sopaialion, llo ooiLlo maiginalisalion pioL-
lom aiisos, loaoing lo n c, wlicl lonos lo incioaso llo piico j aLovo j .
Socono, lloio is now a loiizonlal pociniaiy oxloinalily, in llal inooponoonl
iolailois woilo compolo loo micl will oacl olloi, imposing a nogalivo piico
oxloinalily ipon oacl olloi. Jlis can Lo soon Ly llo facl llal foi j llo oo-
nominaloi is oiviooo Ly 2- ,:, wloioas foi j il is oiviooo only Ly 2. Nolo
llal llis loiizonlal oxloinalily incioasos will llo oogioo of compolilion, Loing
liglosl wlon ano lowosl wlon = 0. In llo lalloi caso, iolailois aio
solling piooicls wlicl aio poicoivoo as inooponoonl, ano llo only oxloinalily
lofl is llo voilical ono. Jlo fnal nol ofocl is a piioii amLigiois. Howovoi, il
liins oil llal in slanoaio moools llo voilical oxloinalily ofocl oominalos llo
pociniaiy loiizonlal oxloinalily ofocl.
Jo analyso llo inconlivos lo malo ofoil inooi llo lwo voilical sliicliios,
wiilo now llo fisl ooiivalivos will iospocl lo ofoil as a finclion of (givon)
piicos, as follows: c (j) = (jn),(:j) ano c (j) = (jc) (1 - c(: 1)) ,(:j).
Hoio again lloio aio lwo oxloinalilios al play, Lil lloy Loll lavo a nogalivo
ofocl on llo piovision of ofoil inooi llo sopaialoo voilical sliicliio. Fiisl,
llo voilical oxloinalily, Ly incioasing llo maiginal cosl of iolailois (n c),
iooicos ils maiginal piofl fiom invosling in ofoil. Socono, lloio is a loiizonlal
oxloinalily, ooloiminoo Ly llo spillovoi, wlicl is inloinalisoo inooi llo voili-
cally inlogialoo sliicliio ano incioasos llo ofoil maoo in llal caso. Jloiofoio,
c c .
Jo sim ip, in llis moool il is possiLlo llal voilical inlogialion iooicos
wolfaio, Lil only if n|| llo following conoilions lolo: (1) voilical inlogialion
loaos lo ligloi piicos, (2) llis ofocl oilwoigls llo posilivo ofocl oio lo llo
iiso in ofoil inooi inlogialion, ano () llo iosilling loss in consimoi siiplis is
ligloi llan llo posilivo ofocl on piooicoi siiplis cioaloo Ly llo inloinalisalion
of llo vaiiois oxloinalilios.
Zhoiduh dqdo|vlv In llis pailicilai moool, wolfaio liins oil lo Lo ligloi
inooi voilical inlogialion, Locaiso Loll consimoi ano piooicoi siiplis aio
ligloi llan inooi sopaialion.
Jo piovo il, fisl wo lavo lo fno llo oqiiliLiiim piico ano ofoil inooi
.n| -nn.n. Jo oo so, lol is fno llo oplimal wlolosalo piico n claigoo
Ly llo manifacliioi. Ly solving llo syslom (BB) ono oLlains:
j = -n; c = . (20)
2
Jlo lolal oilpil solo Ly llo manifacliioi will llon Lo:
Q = :q =
( n)j((: 1) -:)
2j: 1 c(: 1) -j(: 1)
. (27)
Jlo manifacliioi`s piofl is givon Ly = (n c)Q . Ly siLslililing ano
maximising will iospocl lo n, il is immooialo lo soo llal llo oplimal wlolosalo
piico is givon Ly: n = ( - c),2. Wo can now ioplaco llis valio inlo j ano
c lo fno llo oqiiliLiiim fnal piico ano ofoil inooi voilical sopaialion as:
j =
_
-c -
_
; c = .
(28)
Noxl, nolico llal llo consimoi siiplis will oii oomano finclion is givon
Ly C3 = ( -c(1 - c(: 1)) j) ,(2:). Jloiofoio, wo can now oLlain llo
consimoi siiplis inooi voilical sopaialion Ly siLslililing in llis oxpiossion
llo oqiiliLiiim valios aLovo. Wo oLlain:
C3 =
( c) j ((: 1) -:)
8:(2j: 1 c(: 1) -j(: 1))
. (29)
Now, wo lavo lo ooiivo llo oqiiliLiiim valios foi llo caso of .n| .n-
jn.n. Ly solving llo syslom (2) ono oLlains:
j =
( -c)j: c (1 - c(: 1))
2j: (1 - c(: 1))
; c =
( c) (1 -c(: 1))
2j: (1 - c(: 1))
; (0)
SiLslililing lloso valios in llo oxpiossion of llo consimoi siiplis givos:
C3 =
( c) j :
2
_
2j: (1 - c(: 1))
_
. (1)
Wo can now compaio llo consimoi siiplis inooi voilical inlogialion ano
sopaialion. Fiisl of all, nolo llal 0C3 ,0 0. Jloiofoio, C3 is Loinooo
aLovo Ly lim C3 = ( c) ,(8:). Noxl, nolo llal 0C3 ,0c 0 ano
0C3 ,0j < 0. Honco, C3 is Loinooo || Ly lim C3 (c = 0) =
( c) ,(8:). In olloi woios: C3 _ ( c) ,(8:) _ C3 . Consimois aio
always Lolloi of inooi voilical inlogialion. Sinco voilical inlogialion allows lo
conliol foi llo oxisling oxloinalilios, il impiovos llo piofl of llo voilical clain
loo. Honco, wolfaio is ligloi inooi voilical inlogialion llan inooi voilical
sopaialion.
20
Yhuwlfdo uhvwudlqwv wkdw uhvwruh wkh yhuwlfdoo| lqwhjudwhg vroxwlrq
Lol is fno llo voilical iosliainls llal allow an ipslioam monopolisl lo iosloio
llo voilically inlogialoo oilcomo. As in Mallowson ano Winloi (1984), lol is
slioy fisl llo caso wloio lloio oxisl no aovoilising spillovois (c = 0), wlicl
givos a isofil Lonclmail, ano llon llo caso wloio aovoilising spillovois oxisl
(c 0).
Qr dgyhuwlvlqj vslooryhuv +c = 0,1
H{foxvlyh whuulwrulhv +HW,1
1T - 11(n = c). Il is oasy lo soo llal oxclisivo loiiiloiios can Lo
isoo lo iosloio llo voilically inlogialoo oilcomo if c = 0. Exclisivo
loiiiloiios imply llal oacl of llo iolailois Lolavos as a local monopolisl (as
if, lloiofoio, = 0). Jlis oliminalos llo loiizonlal pociniaiy oxloinalily,
as llo piossiio lo lowoi piicos caisoo Ly compolilion is oliminaloo. Givon
llal llo aovoilising oxloinalily ooos nol oxisl Ly assimplion, llo only
olloi oxloinalily is givon Ly llo voilical ono. Lil wo lnow llal llo ooiLlo
maiginalisalion pioLlom is oasily solvoo Ly ising a non linoai conliacl
(n = c, 1). Jloiofoio, EJ comLinoo will a piico sclomo 1 -cq iosloios
llo VI oilcomo. (Inoooo, foi c = 0, = 0, ano n = c, ono can clocl
llal llo FOCs inooi voilical sopaialion coincioo will lloso inooi voilical
inlogialion.)
1T -Q1. Unooi oxclisivo loiiiloiios, lloio is an alloinalivo way lo solvo
llo ooiLlo maiginalisalion pioLlom, wlicl is lo imposo a minimim salo
on iolailois. Qianlily foicing pislos llo iolailoi lo incioaso ils oilpil ano
lloiofoio iooicos piico. Il is onoigl lloiofoio lo imposo q _ q , wloio
q is llo oplimal oilpil inooi VI. Jlo manifacliioi can llon iso llo
wlolosalo piico lo iooisliiLilo piofl away fiom llo iolailois.
Uhvdoh Sulfh Pdlqwhqdqfh +USP,1
11` -11(n = c). If lloio is no aovoilising spillovoi, llo oplimal piico
can Lo implomonloo simply Ly imposing il on iolailois via BIM: j = j ,
j Loing llo oplimal piico inooi VI (il is nol cloai a piioii wlolloi llis
sloilo Lo a piico fooi oi a piico coiling). Howovoi, lo inoico llo oplimal
ofoil il is also nocossaiy lo giaianloo llo iigll piofl maigin lo iolailois.
27
Jlis is oono Ly solling lo llom al a wlolosalo piico n = c. A fiancliso
foo can llon Lo isoo lo iooisliiLilo llo piofl.
11`-Q1. As an alloinalivo lo llo non-linoai piicing sclomo, BIM can
Lo isoo in comLinalion will qianlily foicing. Afloi imposing llo piico, if
n c llo iolailoi woilo nol lavo llo inconlivo lo malo llo oplimal ofoil.
Lil llo ipslioam monopolisl can also imposo a minimim qianlily lo llo
iolailoi. Eacl iolailoi`s piofl is givon Ly = (j n)q (j , c , c )jc ,2,
siLjocl lo q (j , c , c ) _ q . Jlo inconsliainoo maximim woilo loao llo
iolailoi lo malo loo low an ofoil: lo mool llo qianlily foicing claiso,
oacl iolailoi will malo onoigl ofoil lo piooico llo voilical inlogialion
oilpil. Givon llal piico is imposoo al j , llis will inoico llo oplimal
ofoil c . Al llis poinl, llo oplimal ofoil ano piico aio implomonloo ano
llo inoisliy oilcomo iopiooicos llo voilically inlogialoo sliicliio. Sinco
llo wlolosalo piico n ooos nol mooify llo iolailois` cloicos, n can Lo isoo
lo iooisliiLilo ionls fiom llo iolailois lo llo manifacliioi.
Dgyhuwlvlqj vslooryhuv +c 0,1 Wlon lloio is an aovoilising spillovoi
(moio gonoially, a loiizonlal oxloinalily on lop of llo pociniaiy ono), oxclisivo
loiiiloiios claisos aio nol aLlo lo iosloio llo voilically inlogialoo oilcomo. An
oxclisivo loiiiloiy comLinoo will a non-linoai piicing sclomo solvos llo poci-
niaiy oxloinalily (loo micl mailol compolilion iolalivo lo llo oplimim) ano
llo ooiLlo maiginalisalion pioLlom, Lil oownslioam monopolisls oo nol in-
loinaliso llo aovoilising spillovoi ano woilo slill aovoiliso loo lilllo iolalivo lo
llo voilically inlogialoo oilcomo. Novoilloloss, iosalo piico mainlonanco liins
oil lo implomonl llo voilically inlogialoo oilcomo, if comLinoo will olloi
iosliainls, as wo slow noxl.
Uhvdoh Sulfh Pdlqwhqdqfh +USP,1
11` -11(n < c). Onco imposoo ipon iolailois llo oplimal piico j , il
is oasy lo soo fiom llo FOCs inooi voilical sopaialion llal llo iolailois
woilo slill oo loo lilllo ofoil if c 0 ano n = c: c = (j n),(:j) <
c = (j c) (1 - c(: 1)) ,(:j). Jo inoico llo oplimal ofoil, il is
lloiofoio nocossaiy foi llo manifacliioi lo soll llo piooicl lo iolailois al
a wlolosalo piico lowoi llan ils own maiginal cosl, n < c. Moio piocisoly,
llo wlolosalo piico n inoicing llo oplimal lovol of ofoil will solvo llo
oqialily (j n) = (j c) (1 - c(: 1)). A fiancliso foo can llon Lo
isoo lo iooisliiLilo llo piofl.
11`-Q1. BIM can also Lo isoo in comLinalion will qianlily foicing,
in llo samo way as foi c = 0. Ly imposing llo piico j ano a minimim
qianlily q lo iolailois, lloy will Lo inoicoo lo malo llo oplimal ofoil
c lo piooico llo voilical inlogialion oilpil. As llo oplimal ofoil ano
piico aio closon, llo inoisliy oilcomo iopiooicos llo voilically inlogialoo
sliicliio. Sinco llo wlolosalo piico n is maoo inconlivo-noilial Ly BIM
28
ano QF, il ooos nol mooify llo iolailois` cloicos: il can llon Lo isoo Ly
llo manifacliioi lo appiopiialo llo iolailois` ionls.
51615 Yhuwlfdo lqwhjudwlrq dqg ydulhw|--
Willin llo samo moool I now wanl lo onoogoniso llo nimLoi of iolailois. Afloi
imposing symmoliy, piofl of a voilically inlogialoo fim can Lo wiillon as:
= (j c) ( -c (1 - c(: 1)) j) :) (2)
wloioas llo piofl of an inooponoonl iolailoi is.
= (j n)
1
:
( -c (1 -c(: 1)) j) ). ()
Jo ooloimino onoogonoisly llo nimLoi of iolailois opoialing al oqiiliLiiim,
consiooi llal inooi voilical inlogialion onliy occiis lo llo poinl llal maximisos
, wloioas inooi voilical sopaialion il occiis lo llo poinl llal malos = 0
(llo slanoaio fioo onliy conoilion, inooi llo assimplion llal : is conliniois).
Jlo conoilions wlicl ooloimino llo nimLoi of iolailois al oqiiliLiiim aio
lloiofoio:
0
0:
= (j c)cc ) = 0, (4)
ano
= (j n)
1
:
( - c (1 - c(: 1)) j) ) = 0. ()
Jloio aio lwo oifoionl ofocls al woil. Fiisl, a voilically inlogialoo fim
inloinalisos llo facl llal llo oilpil piooicoo Ly an aooilional vaiioly oocioasos
llo oilpil solo Ly llo oxisling vaiiolios. Nolo lowovoi llal in llis pailicilai
moool wo ooal will a spocial caso, as inoisliy oomano ooos nol incioaso will
llo vaiiolios availaLlo, so llal llo only ioason lo incioaso : is wlon llis afocls
signifcanlly llo lolal oilpil llioigl llo aovoilising spillovoi. In facl, if c is
low onoigl, oi if llo cosl of ofoil is voiy laigo (loaoing lo a voiy low oqiiliL-
iiim valio of c), llo voilically inlogialoo monopolisl will lavo only ono iolailoi.
Moio gonoially, ono sloilo oxpocl llal consimois lavo a piofoionco foi vaiioly
ano llal an aooilional vaiioly woilo incioaso lolal oomano (soo oxoiciso ).
Howovoi, llo caso analysoo loio piovioos a isofil Lonclmail caso in llal a voi-
lically inlogialoo monopolisl ooos nol lavo an inconlivo lo incioaso llo nimLoi
of oillols lo alliacl now oomano. Socono, llo piofl maigin of an aooilional
oillol is ligloi inooi voilical inlogialion Locaiso of llo ooiLlo maiginalisalion
ofocl. Ono sloilo oxpocl llis lalloi oxloinalily - wlicl coloiis paiiLis woilo
29
iaiso llo nimLoi of vaiiolios inooi voilical inlogialion - lo Lo oilwoigloo Ly
llo foimoi, so llal moio vaiiolios aio piooicoo inooi a ooconlialisoo sliicliio
llan inooi a conlialisoo ono.
Jo Lo aLlo lo slioy llo wolfaio impacl of voilical iosliainls in llo moool,
aLsliacl now foi simplicily fiom ofoil consiooialions (i.o., fiom llo aovoilising
spillovois), so llal llo inloicopl is givon Ly alono. (Jlinl foi inslanco of llo
maiginal cosl of ofoil j as lonoing lo infnily, so llal iolailois will clooso lo
malo ofoil c = 0.)
Wo lnow llal a piioii il is nol cloai wlolloi llo fnal piico is ligloi oi
lowoi inooi voilical inlogialion, sinco lloio aio lwo oislincl foicos al woil.
Fiisl, inooi sopaialion ano linoai piicing llo loiizonlal pociniaiy oxloinalily
loaos lo lowoi piicos j.n llo wlolosalo piico; socono, inooi sopaialion ano
linoai piicing llo voilical oxloinalily loaos lo ligloi wlolosalo piicos wlicl in
liin pislos piicos ipwaio. Jo soo wlicl foico is oominanl wo lavo lo fno llo
wlolosalo piico closon Ly llo ipslioam manifacliioi. Il liins oil llal inooi
voilical inlogialion piicos aio always smalloi. Lol is soo wly.
Unooi .n| .njn.n llo piico can Lo oasily oLlainoo Ly ioplacing c = 0
in oqialion (BB). Ono oLlains j = ( -c),2.
Unooi .n| -nn.n ano linoai piicing, wo lavo lo fno llo oplimal
wlolosalo piico n claigoo Ly llo manifacliioi. Ly ioplacing c = 0 inlo oqialion
(BB) ono oLlains j = (-n(1- ,:)),(2- ,:). Jlo lolal oilpil solo
Ly llo manifacliioi will llon Lo: Q = :q = ( n)(1 - ,:),(2 -
,:). Jlo manifacliioi`s piofl is givon Ly = (n c)Q . Ly siLsliliing
ano maximising will iospocl lo n, ono fnos llo oplimal wlolosalo piico as:
n = ( - c),2. Ly ioplacing llis valio inlo j ono fnos llo fnal piico as:
j = (( - ,:) -c(1 - ,:)) , (2(2 - ,:)).
Wo can now compaio llo fnal piicos inooi llo lwo voilical sliicliios. Il
is oasy lo soo llal j _ j . Inoooo, j oocioasos will llo siLslililaLilily
paiamoloi , Lil lim j = ( - c),2 = j . Evon wlon al ils minimim, j
is lloiofoio ligloi llan j .
In llis moool, voilical inlogialion will novoi iooico wolfaio. Inooponoonlly
of llo nimLoi of iolailois :, wo lavo j _ j : piicos aio always lowoi inooi
voilical inlogialion. Fiilloi, iocall llal in llis moool inoisliy oomano ooos
nol iiso will llo nimLoi of iolailois. Jloiofoio, j _ j implios q _ q , iiio-
spoclivo of llo nimLoi of iolailois opoialing al oqiiliLiiim. Jloiofoio, voilical
inlogialion loaos lo lowoi piicos Locaiso il inloinalisos llo ooiLlo maiginalisa-
lion pioLlom.
A socono soiico of wolfaio impiovomonl comos fiom llo oliminalion of oipli-
calions. Sopaialion iosills in a laigoi nimLoi of oillols ano ligloi fxoo cosls
wlicl oo nol ioally aoo lo consimois` ililily as qianlily oomanooo ooos nol
incioaso will llo vaiioly sipplioo. Jlis is a voiy spocifc foaliio of llo moool.
Howovoi, llo ioaooi can clocl in oxoiciso llal in a similai moool, Lil wloio
piofoioncos oxliLil lovo foi vaiioly, llo impacl of voilical inlogialion on wolfaio
0
is slill posilivo. (BomomLoi, lloigl, llal llis is nol always liio: il is possiLlo
lo ooviso moools wloio llo ofocl of iooicoo vaiioly oilwoigls llo ofocl of lowoi
piicos.)
517 Rwkhu h!flhqf| uhdvrqv iru yhuwlfdo uhvwudlqwv dqg yhu0
wlfdo phujhuv
Wo lavo focisoo sofai on lwo omcioncy molivos Lolino voilical iosliainls,
namoly ooiLlo maiginalisalion ano oxloinalilios in llo piovision of iolailois`
soivicos foi a givon Liano. Jloso aio possiLly among llo Losl lnown (ano moio
oasily foimalisoo ano oxplainoo), Lil Ly no moans llo only soiicos of omcioncy
of voilical iosliainls ano voilical moigois. Wiiling an oxlaislivo lisl of sicl
omcioncy ioasons is Loyono llo scopo of llis woil, Lil il is impoilanl lo givo
an iooa of low wioospioao lloy aio. In wlal follows, I inooilino somo of llom.
Nolo llal I oo nol iosliicl llo analysis lo inlia-Liano compolilion, Lil consiooi
also omcioncy molivos llal aio al play wlon a manifacliioi compolos will iival
Lianos.
Txdolw| fhuwlfdwlrq In llo samo spiiil as llo fioo-iioing aigimonl, Mai-
vol ano McCafoily (1984) siggosl llal somo iolailois piovioo cislomois will a
qialily coilifcalion soivico. Ly slocling somo piooicls, lloso iolailois implic-
illy giaianloo foi llo qialily of llo piooicls in llo oyos of cislomois. Il ooos
nol ioally malloi foi llo aigimonl wlolloi any lino of qialily coilifcalion
ioally lappons oi if consimois jisl assimo llal Ly Loing slocloo Ly a coilain
fancy slop llo piooicl misl Lo gooo. Wlal mallois foi llo aigimonl is llal
sicl coilifcalion aclivily involvos somo cosls (again, llis migll simply Lo oio
lo llo facl llal a slop is localoo in a posl oisliicl ano oxliLils maiLlo walls ano
smail assislanls) ano piosonls a piLlic gooo claiacloiislic: olloi slops migll
Lonofl fiom sicl aclivilios ano - givon lloy can afoio a lowoi piico Locaiso
lloy oo nol ongago in llom - can alliacl consimois away fiom llo coilifoo
piooicl. Jlis aigimonl migll jislify iosliainls sicl as BIM (if llo coilifying
slop cannol Lo inooicil, lloio is no ioason wly llo consimoi sloilo gol llo
piooicl olsowloio afloi laving oLsoivoo llal llo piooicl is slocloo lloio) ano
-|. n.-.|&.n. In llo lalloi caso, only a coilain lypo of slops, slowing
somo pailicilai claiacloiislics, is onlilloo lo soll llo piooicl. Foi inslanco, a
manifacliioi of lixiiy gooos migll wanl lo soll only llioigl slops wlicl lavo
somo claiacloiislics, sicl as Loing localoo in a ligl sliool, Loing spocialisoo,
laving oooicaloo poisonnol, laving pailicilai amonilios ano so on. As a conso-
qionco, il migll iofiso lo sipply llo piooicl lo oiscoinl sloios oi sipoimailols.
Allloigl ono migll wonooi aLoil llo iso of llo woio omcioncy" lo laLol sicl
iosliainls, ono sloilo also iocogniso llal nol allowing a manifacliioi lo piolocl
llo imago of llo gooo in llis way migll Lo laimfil nol only lo il Lil also lo
consimois wlo oo valio llo lixiiy foaliios of llo gooo. Il is concoivaLlo llal -
pioliLiling sicl mailoling slialogy - llo lixiiy imago collapsoo ano consimois
will nol Lo ioaoy lo pay foi llo piooicl any longoi. In liin, il migll simply
1
oisappoai ano, sliango as il may soino, llo ililily of all lloso wlo woilo lavo
Loon piopaioo lo pay foi sicl a lixiiy gooo woilo oiminisl. Il sloilo Lo
noloo, lloigl, llal lilo foi llo fioo iioing aigimonl aLovo llo qialily coilif-
calion sloiy lolos only insofai as llo iolailois aio nol aLlo lo appiopiialo llo
soivicos lloy piovioo. Foi inslanco, a sipoimailol clain wlicl invosls loavily
inlo conliolling llal fooo piooicls lavo ioally Loon piooicoo via a filly Lio-
logical piocoss sloilo Lo aLlo lo limil llo spillovoi of ils qialily coilifcalion
(Liological laLolling) invoslmonl. Il is also incloai lo wlicl oxlonl slops wlicl
piovioo qialily coilifcalion llioigl invosling in lixiiy piomisos aio nol aLlo
lo appiopiialo lloii invoslmonl. On llo ono lano, if iloms on salo lloio involvo
small amoinls of monoy, il is inliloly llal consimois woilo fisl go lloio lo
clocl wlal is on ofoi ano llon lalo llo cai ano go lo soaicl if il is in a ois-
coinl sloio foi llo piiclaso. On llo olloi lano, llo iimoii llal a coilain
ilom is solo in a coilain lypo of slops oi olloi migll iin fasl, possiLly iiining
llo lixiiy imago as llo fioo iioing aigimonl siggosls. In conclision, llo fioo
iioing ano llo qialily coilifcalion aigimonls aio sonsiLlo sloiios in llooiy Lil
lloy oo nol nocossaiy apply foi all piooicls. Only llo analysis of llo inoisliy
ano llo mailol can loll lo wlicl oxlonl lloy apply lo a givon sol of piooicls.
Iuhh ulglqj dprqj surgxfhuv Allloigl iosliiclivo Ly oofnilion in llal
lloy oLligo a iolailoi nol lo caiiy piooicls of compoling piooicois, oxclisivo
conliacls migll Lo omcionl. Foi inslanco, lloy can slimilalo llo invoslmonls
inlo iolailois` soivicos maoo Ly a piooicoi, sicl as loclnical sippoil, piomolion,
liaining, oqiipmonl, fnancing. Jo llo oxlonl llal sicl invoslmonls favoii
nol a pailicilai Liano Lil llo iolail oillol in gonoial, olloi piooicois woilo
also Lonofl fiom llom. Jlis givos iiso lo a fioo iioing pioLlom llal may Lo
solvoo Ly iosoiling lo oxclisivo ooalois (i.o., iolailois cannol slocl piooicls fiom
compoling Lianos), as llo noxl soclion 2.4 foimally slows. Exclisivo ooaling
migll also pisl a iolailoi lo soll a Liano moio aggiossivoly llan if il oovoloo
ils mailoling ofoil among oifoionl Lianos, lloioLy iaising compolilion.
Uhvwudlqwv zklfk uhpryh rssruwxqlvwlf ehkdylrxu dqg surprwh
vshflf lqyhvwphqwv Jlo oxislonco of long loim conliacls Lolwoon a mani-
facliioi ano a iolailoi (oi, n J.., lloii inlogialion) migll also lavo posilivo
ofocls on llo spocifc invoslmonls llal Loll pailios lavo lo malo in lloii iola-
lionslips. Jloio aio many invoslmonls wlicl loso mosl of lloii valio oilsioo
a pailicilai iolalionslip, Locaiso lloy aio lailoioo ano oooicaloo lo a pailic-
ilai pailnoi (llinl foi inslanco of a fim wlicl oovisos ils maclinoiy lo woil
2
will a pailicilai inloimooialo gooo oi inpil, oi lo a fianclisoo llal oovolos
impoilanl invoslmonls lo caiiy ano piomolo a pailicilai Liano). In sicl casos,
llo oangoi llal llo iolalionslip is Liolon oi oisconlinioo will gonoially loao
lo an inooiinvoslmonl pioLlom. If a oisliiLiloi foais llal lis piomolion ofoil
lo oslaLlisl a Liano`s imago migll noxl yoai Lonofl anolloi slop localoo in
llo samo aioa ano caiiying llo samo Liano, lo will llinl lwico Lofoio invosling
loavily in sicl an aclivily. Lilowiso, a piooicoi will Lo ooloiioo fiom invosling
in assols wlicl migll impiovo a oisliiLiloi`s poifoimanco if llo lalloi is liloly
lo swilcl lo olloi Lianos. Jo avoio sicl oppoilinislic Lolavioii (a fim gol-
ling oil of llo iolalionslip afloi llo pailnoi las maoo spocifc invoslmonls inlo
il) claisos sicl as oxclisivo loiiiloiios ano oxclisivo ooaling aio lolpfil. Ly
iooicing oi oliminaling llo inooiinvoslmonl pioLlom, lloy incioaso omcioncy.
Of coiiso, llo samo lolos foi voilical moigois. In llis caso, llo inloiosls of llo
manifacliioi ano of llo iolailoi aio alignoo, ano lloy will cooioinalo so as lo
allain llo samo oLjoclivo.
H{foxvlyh ghdolqj dyrlgv iuhh ulglqj rq pdqxidfwxuhuv* lqyhvwphqw-
In llis soclion, I foimaliso ono of llo omcioncy ialionalos Lolino oxclisivo ooal-
ing. Jlis is Lasoo on llo iooa llal manifacliiois oflon piovioo lloii iolailois
will soivicos ano invoslmonls wlicl piomolo salos of llo manifacliioi`s Liano.
In somo ciicimslancos, lowovoi, sinco sicl soivicos ano invoslmonls Lonofl llo
iolailoi, lloy migll also piomolo salos of compoling Lianos solo Ly llo samo
iolailoi. Jlis oxloinalily iooicos llo appiopiiaLilily of llo invoslmonl. Excli-
sivo ooaling (ED), oLliging llo iolailoi lo caiiy only ono Liano, migll llon Lo
aooploo as a claiso Ly llo manifacliioi, in oiooi lo avoio sicl an oxloinalily.
Exclisivo ooaling migll llon incioaso llo inconlivo lo invosl in sicl soivicos,
wlicl in liin is gonoially wolfaio impioving.
Jlo following moool, a vaiialion of Losanlo ano Ioiiy (199) foimalisos llis
iooa ano slows llal a Lan on oxclisivo ooaling woilo iooico consimoi siiplis
ano wolfaio.
Jwo manifacliiois piooico lwo oifoionlialoo gooos al conslanl inil cosl
(llal I oqial lo zoio foi simplicily). Eacl manifacliioi can invosl in an ac-
livily wlicl iooicos llo cosl of llo iolailoi caiiying ils Liano. Jlo lovol of
llo invoslmonl is oonoloo Ly c ano ils cosl is (j,2)c . Jloio oxisls a possiLlo
spillovoi of sicl an invoslmonl, so llal a iolailoi caiiying Loll Lianos Lonofls
fiom llo ofoclivo invoslmonl c = c -cc wlon il solls Liano i, wloio c [0, 1[
is llo oxloinalily paiamoloi (foi c = 0, lloio is no spillovoi, wloioas foi c = 1
llo oxloinalily is maximal, as il oqially Lonofls llo iival manifacliioi ano llo
manifacliioi wlo is invosling). A iolailoi llal las agiooo on an oxclisivo ooal-
ing conliacl will lavo ils cosl iooicoo only Ly c = c . I assimo llal oomano
foi oacl piooicl is givon Ly llo (isial) following oomano finclion:
q =
1
2
_
j (1 - ) -

2
(j -j )
_
. (0)
I also assimo llal lloio aio a laigo nimLoi of iolailois in llo mailol llal
compolo in piicos ano piovioo inoifoionlialoo soivicos (oi, wlicl is oqiivalonl,

llal aio poifoclly compolilivo). Eacl iolailoi`s cosl of solling Liano i is givon
Ly d -n c , wloio n is llo wlolosalo piico claigoo Ly manifacliioi i, d is
llo oisliiLilion cosl.
Jlo liming of llo gamo is as follows. Fiisl, manifacliiois malo simillano-
oisly invoslmonl ano wlolosalo piico oocisions. Jlon, iolailois clooso piicos.
Oii oLjoclivo is lo compaio llo oqiiliLiiim solilions of llis gamo inooi lwo al-
loinalivo conliaclial silialions, ono wloio iolailois opoialo inooi ED, ano ono
wloio lloio is no oxclisivo ooaling (NED), i.o., iolailois can soll Loll Lianos.
Losanlo ano Ioiiy (199) analyso llo fill gamo, wloio manifacliiois oocioo al
a pio-slago of llo gamo wloio lo clooso ED oi NED, Lil llis involvos laving
al loasl llioo fims (will lwo fims, if ono clooso ED llo olloi is oo faclo also
oLligoo lo ioly on an oxclisivo iolailoi) ano complicalos llo calcilalions.
Vroxwlrq ri wkh jdph Al llo lasl slago of llo gamo, iolailois woilo sol piicos
oqial lo lloii maiginal cosls: j = d - n c . Consiooi fisl llo caso wloio
lloio is no oxclisivo ooaling aiiangomonl (NED). Boplacing oqiiliLiiim piicos
ono oLlains llo qianlilios as a finclion of wlolosalo piicos ano invoslmonl lovols.
Al llo pioviois slago, manifacliiois max = n q (c , c , n , n )(j,2)c .
Ly laling llo FOCs 0 ,0c = 0, 0 ,0n = 0, imposing symmoliy ano solving
llo syslom, ono oLlains llo oqiiliLiiim solilions as:
n =
4j( d)
2j(4 - ) (1 - c)(2 -(1 c))
; (7)
c =
(2 - (1 c))( d)
2j(4 - ) (1 - c)(2 -(1 c))
. (8)
Ly siLslililion, llo olloi oqiiliLiiim valios can Lo oLlainoo. In pailicilai:
4
j =
2d(2 - )j -(4j (1 -c)(2 - (1 c)))
2j(4 - ) (1 - c)(2 -(1 c))
; (9)
=
j
_
4(2j 1 -c) - 10j (1 c) 4
_
( d)
[2j(4 - ) (1 - c)(2 - (1 c))[
. (40)
Fiom lloso valios, il is now oasy lo compilo llo oqiiliLiiim solilions foi
llo caso wloio iolailois aio ongagoo Ly ED agioomonls. Inoooo, il is onoigl lo
imposo c = 0 lo solvo llo ED caso:
n =
4j( d)
2j(4 - ) (2 -)
; c =
(2 - )( d)
2j(4 -) (2 - )
, (41)
j =
2d(2 -)j -(4j (2 - ))
2j(4 - ) (2 - )
; (42)
=
j
_
4(2j 1 - 10j 4
_
( d)
[2j(4 - ) (2 - )[
. (4)
Il is now oasy lo clocl llal inooi oxclisivo ooaling (ED): (i) invoslmonl
lovols aio ligloi. Jlis is oio lo llo incioasoo appiopiiaLilily of llo invoslmonl.
In liin, llis iooicos llo cosl of oisliiLiling llo Liano; (ii) wlolosalo piicos
aio ligloi. Jlis is Locaiso lowoi oisliiLilion cosls slifl oilwaios llo maiginal
iovonio finclion of llo fim, wlicl can llon incioaso wlolosalo piicos; (iii)
llo iolail piico is lowoi (oio lo llo oominanl ofocl of llo iooiclion in cosls);
(iv) manifacliiois` piofls aio ligloi (iolailois` piofls aio always nil oio lo
llo Loiliano compolilion assimplion); (v) fnally, wolfaio is ligloi llan inooi
NED, sinco piofls aio ligloi ano consimois aio Lolloi of.
In llis moool, lloiofoio, oxclisivo ooaling las a wolfaio impioving ofocl, ano
Lanning il woilo oocioaso Loll consimoi siiplis ano manifacliiois` piofls.
518 Yhuwlfdo uhvwudlqwv/ yhuwlfdo phujhuv/ dqg wkh frpplw0
phqw sureohp
Voilical iosliainls ano voilical moigois can lavo an aovoiso ofocl on wolfaio
wlon lloy lolp a manifacliioi (moio gonoially, an ipslioam fim) lo loop
piicos ligl, wloioas willoil llom il woilo nol Lo aLlo lo commil lo ligl piicos.
Jo inooislano wly sicl a commilmonl pioLlom aiisos, consiooi llo following
oxamplo. Sipposo a manifacliioi las a voiy siccossfil Liano of clollos wlicl
is woll lnown ovoiywloio, Lil llal las nol Loon solo yol in a givon iogion.
Sipposo also llal lloio is lilllo oomano incoilainly, so llal lolal oxpocloo
piofl fiom solling lloso piooicls woilo Lo , ano lloio is agioomonl on llis
oslimalo. Jloio oxisl sovoial possiLlo fianclisoos ioaoy lo soll llo Liano. If
llo piooicoi piomisoo lo givo oxclisivily foi llo iogion salos lo ono fianclisoo
(ano ils piomiso woio Loliovoo), compolilivo Liooing woilo loao llo winning
Lioooi lo ofoi lo llo manifacliioi. Howovoi, onco il las solo llo fiancliso,
llo piooicoi las an inconlivo lo ionogo on ils oxclisivily piomiso ano ongago
in oppoilinislic Lolavioii. Il coilo now ofoi a socono fiancliso (ano piomiso
lloio woilo Lo no moio llan lwo) ano, if ils piomiso woio Loliovoo, il woilo
oLlain ip lo an aooilional ,2 fiom a socono fianclisoo (nolo llal llo fisl
fianclisoo woilo lavo a loss oqial lo ,2) . Onco casloo in llo socono fiancliso,
il coilo llon ionogo again on llo piomiso, ano ofoi a lliio liconco. Ano so on,
ano so foill.
Of coiiso, llo polonlial fianclisoos woilo anlicipalo all llis, ano if llo
manifacliioi woio inaLlo lo commil lo givo ono fiancliso conliacl only, noLooy
woilo accopl lo Liy llo liconso. Evoiyono lnows llal llo manifacliioi las an
inconlivo lo ionogo on llo piomiso, wlicl will onlail a loss foi llom. In olloi
woios, llo manifacliioi nooos lo fno a way lo commil ilsolf in a ciooiLlo way
nol lo aoo now fianclisos in llo mailol. Olloiwiso, il woilo Lo inaLlo lo
oLlain llo piofl llal ils piooicl coilo folcl.
Wlonovoi llis pioLlom aiisos, a fim will nol Lo aLlo lo appiopiialo llo
mailol powoi il polonlially las. In llis oxamplo, foi inslanco, llo clollos
piooicoi coilo polonlially lavo a monopoly piofl, Lil llo piosonco of a laigo
nimLoi of polonlial fianclisoos logolloi will llo lacl of commilmonl powoi
migll iosill in llo Liyois accopling lo Liy llo fiancliso only foi a voiy low
piico, ano llo piooicoi oaining voiy lilllo piofl, ialloi llan llo monopoly
piofl.
Jlo samo commilmonl pioLlom aiisos in moio gonoial ciicimslancos, wlon-
ovoi a fim las an inpil (oi piooicl) ano can soll il lo moio llan ono Liyoi
(oi moio llan ono iolailoi): il migll lavo an inconlivo lo piivaloly ionogoli-
alo llo loims of llo conliacl will somo Liyois afloi laving signoo will all of
llom. Eqiivalonlly, if llo conliacls woio nol piLlicly oLsoivaLlo, il migll lavo
an inconlivo lo agioo on Lolloi loims will ono oi moio Liyois afloi somo lavo
alioaoy signoo a conliacl.
Jo fiilloi illislialo llo poinl, consiooi llo following oxamplo. Sipposo
llal lloio aio lwo iolailois solling llo samo lomogonois piooicl in llo samo
lown. If lloy Loll pay llo wlolosalo piico n, llo iolailois soll a qianlily Q al
piico j ano lloy oacl malo piofls ,2. A possiLlo (non-linoai) conliacl llo
manifacliioi of llo gooo can ofoi ils lwo iolailois is llal lloy Liy oacl al a
piico n if lloy malo a fxoo paymonl ,2. (Eacl iolailoi woilo malo zoio piofl
ano woilo accopl llis conliacl if nol anlicipaling oppoilinislic Lolavioii Ly
0
llo monopolisl.) Afloi llo conliacls lavo Loon signoo, lowovoi, llo monopolisl
migll go lo ono of llo lwo iolailois ano ofoi lim llo piooicl al a sligllly lowoi
inil piico llan n. Jlis woilo allow llis iolailoi lo gol a compolilivo aovanlago
ano incioaso ils mailol slaio (possiLly, il coilo gol llo wlolo mailol), maling
,2 inooi llo now conliacl. Il woilo lloiofoio Lo willing lo pay ip lo
foi llo now loims. Al llo oxponsos of llo olloi iolailoi, wlo slill las lo pay
,2, llo manifacliioi woilo lloiofoio oLlain afloi ionogolialion an aooilional
piofl ,2. Of coiiso, lowovoi, llo lomplalion lo ionogolialo llo conliacl
will Lo anlicipaloo Ly oacl iolailoi, wlo woilo llon Lo inwilling lo onloi a
conliacl will llo manifacliioi inloss a voiy low fxoo paymonl is sol. Again,
llo monopolisl woilo Lo inaLlo lo oxploil ils polonlial mailol powoi, Loing
liil Ly ils lacl of commilmonl, i.o., Ly llo lomplalion lo clango llo loims
will llo iolailois.
Jlo ioaooi will lavo nolicoo llo closo similaiily will llo pioLlom of llo
oiiaLlo gooo monopolisl (soo claploi 2). Jloio as woll, il was llo impossiLilily
lo commil lo a coilain aclion (llo filiio piico) wlicl piovonloo llo monopolisl
fiom oxoicising mailol powoi. Lilo llo oiiaLlo gooo monopolisl, lloigl, an
ipslioam piooicoi also las llo possiLilily lo solvo llo commilmonl pioLlom so
as lo oxploil ils mailol powoi. Voilical iosliainls (olloi llan simplo non-linoai
conliacls) ano voilical moigois aio among sicl insliimonls, as I oxplain Lolow.
Lofoio ooing so, lowovoi, il is woill noling llal llo commilmonl pioLlom
aiisos only foi an ipslioam fim wlicl nooos wlolosalois oi iolailois lo soll llo
piooicl lo fnal cislomois, nol foi a oownslioam iolailoi wlo solls oiioclly lo
fnal cislomois. Sipposo llal llo sliicliio of llo mailol is iovoisoo iolalivo
lo llo ono oosciiLoo aLovo, so llal lloio is a monopolislic oownslioam fim
wlicl can Liy (siLslililaLlo) inpils fiom lwo oi moio ipslioam sippliois.
Jlo iolailoi ooos nol lavo any inconlivo lo ionogolialo llo sipply conliacl will
llo ipslioam fims, sinco il conliols llo fnal mailol piico ilsolf. Jlis moans
llal - if il was possiLlo lo oosign llo sliicliio of llo inoisliy - il woilo Lo
piofoiaLlo lo lavo compolilion al llo lovol of llo inloiaclion will consimois.
Yhuwlfdo phujhuv A naliial solilion foi llo manifacliioi lo commil lo
ligl piicos is lo moigo will ono of llo oownslioam fims. If il oio so, il
woilo inloinaliso llo piofl maoo Ly ils oownslioam amlialo, ano lloiofoio
woilo nol lavo any inconlivo lo ofoi Lolloi loims lo olloi oownslioam fims,
sinco llis woilo oiminisl llo piofl maoo Ly ils amlialo, ano lloiofoio Ly ilsolf.
7
Foioclosiio of llo iival oownslioam fims woilo llon Lo liloly lo aiiso, as llo
ipslioam inil woilo nol lavo inconlivo lo sipply llo inpil lo llo iival iolailois.
Inoooo, lo iosloio monopoly powoi il migll Lo oplimal lo sipply llo amlialo
only ano avoio maling llo inpils availaLlo lo iivals. Il can Lo slowoo, lowovoi,
llal a voilical moigoi woilo nol always iosill in complolo foioclosiio of iival
oownslioam fims. If lloio woio olloi siLslililo (Lil infoiioi) inpils, llo
ipslioam fim woilo piofoi lo sipply ilsolf llo oownslioam iivals, ialloi llan
lolling llom Lo sipplioo Ly an ipslioam compoliloi. (Soo soclion 2..1.)
Il is inloiosling lo nolo llal in llo aLsonco of compoling ipslioam sippliois
a voilical moigoi woilo Lo maximally ooliimonlal, Locaiso il woilo loao lo
complolo foioclosiio of oownslioam iivals ano woilo ooloimino a piico iiso ip
lo llo monopoly lovol. Wlon (loss omcionl) ipslioam sippliois oxisl, lowovoi,
a voilical moigoi will incioaso piicos Lil nol lo llo samo oxlonl: llo iolailois`
llioal of swilcling lo alloinalivo sippliois limils llo oxoiciso of mailol powoi
of llo voilically inlogialoo moio omcionl fim. Again, voilical iosliainls migll
Lo wolfaio ooliimonlal Lil lloii aovoiso ofocl woilo Lo limiloo Ly llo piosonco
of compoling sippliois of llo inpil. Jlis can Lo inloipioloo Ly saying llal
llo laigoi llo ipslioam mailol powoi llo moio allonlion sloilo Lo oovoloo lo
voilical piaclicos.
H{foxvlyh whuulwrulhv Sinco llo pioLlom of llo piooicoi comos fiom llo
piosonco of sovoial Liyois, an oLviois way lo iosloio mailol powoi is lo ciooiLly
iosliicl ilsolf lo sipply llo piooicl (oi inpil) lo ono sicl Liyoi only in oacl
mailol aioa. If a conliacl oslaLlisling llal lloio is only ono Liyoi wlicl can
soll llo piooicl willin a coilain spocifoo aioa is logal, llon llo manifacliioi`s
pioLlom is solvoo. In llo iogion piolocloo Ly llo oxclisivily claiso, compolilion
among llo polonlial iolailois will Liing llom lo pay ip lo llo monopoly piico
lo lavo llo oppoilinily lo Lo llo only ooaloi solling llo gooo. Jlis will allow
llo manifacliioi lo iosloio all ils monopoly piofl. Jlo coinloipail of llis is
llal oxclisivo loiiiloiy laims wolfaio: consimois will pay llo monopoly piico
ialloi llan llo lowoi piico llal woilo lavo aiison willoil llo oxclisivily claiso.
Jlo isial allocalivo inomcioncy occiis, as llo ligloi piooicoi siiplis ooos nol
oilwoigl llo lowoi consimoi siiplis.
Jlo ofocl of sicl a conliacl is lloiofoio lo foiocloso accoss lo llo piooicl
lo all iolailois apail fiom ono. Nolo also llal if compoling ipslioam sippliois
oxisloo, llo wolfaio impacl of an oxclisivo ooaling claiso is moio aovoiso llan
inooi a voilical moigoi. Inoooo, if a loss omcionl sipplioi of llo inpil oxisloo,
inooi a voilical moigoi llo ipslioam fim of llo voilically inlogialoo fim woilo
ono ip sipplying llo oownslioam iivals as woll (sinco lloy woilo oLlain llo
inpil anylow, il woilo Lo Lolloi lo piovioo llom will il ialloi llan lolling
llom Lo soivoo Ly llo ipslioam iival). Lil if llo omcionl ipslioam fim signs an
8
oxclisivo ooal, il will Lo piovonloo fiom soiving olloi iolailois. As a iosill, lloy
will Lo sipplioo Ly llo loss omcionl ipslioam fim, lloioLy aooing a piooiclivo
omcioncy loss lo llo allocalivo inomcioncy.
Uhvdoh sulfh pdlqwhqdqfh Sinco llo pioLlom of llo monopolisl is lo
giaianloo llal lloio is no ionogolialion wlicl loaos lo ligloi oilpil oi lowoi
piicos, llo commilmonl pioLlom is solvoo if llo monopolisl commils lo inoisliy-
wioo piicos. Consiooi foi inslanco BIM claisos sicl as lloso slill logal in
many Eiiopoan coinliios, foi piooicls lilo Lools ano plaimacoilicals. Jlo
piooicoi piinls llo fnal mailol piico on llo piooicl ilsolf, ano BIM can Lo
onfoicoo in coiils. Bolailois cannol soll al a oiscoinl piico (lloy can Lo lalon
lo coiil if lloy oio), ano llis cloaily lalos away any inconlivo foi llo piooicoi
lo sociolly cil piicos lo iolailois: a piico cil woilo nol incioaso fnal salos, il
woilo only woison llo oisliiLilion of llo piofl Lolwoon ilsolf ano llo iolailoi
llal gols a oiscoinl.
Prvw idyrxuhg qdwlrq fodxvh dqg dqwl0glvfulplqdwlrq odzv Sipposo
llal llo manifacliioi was aLlo lo ciooiLly commil lo ano onfoico a claiso slal-
ing llal wlonovoi il ofois a piico oiscoinl lo ono iolailoi, all olloi iolailois aio
also onlilloo lo il. Jlis woilo iomovo any lomplalion lo ionogo on a piovioisly
signoo conliacl will somo iolailois. (Consiooi foi inslanco llo fiancliso oxam-
plo al llo Loginning of llis soclion. If afloi laving signoo a conliacl will ono
fianclisoo foi a piico of , llo manifacliioi solo a fiancliso lo a socono iolailoi
foi llo piico of ,2, inooi MFN il woilo lavo lo ioimLiiso llo fisl iolailoi of
,2. Cloaily, lloio woilo Lo no poinl in ionoging on llo piomiso ano ofoiing
llo fiancliso lo a socono iolailoi.)
Ono pioLlom will MFN is cloaily llo oLsoivaLilily of piico oiscoinls ano
lloiofoio llo onfoicoaLilily of sicl a claiso. (If a iolailoi coilo nol oLsoivo a
oiscoinl maoo lo anolloi, low coilo MFN Lo applioo) Sinco llo commilmonl
pioLlom aiisos in silialions wloio conliacls aio nol oLsoivaLlo, il woilo soom
llal llo samo ciicimslancos also malo il oimcill lo iso MFN claisos. How-
ovoi, sipposo llal llo piooicoi lao lo pay a loavy ponally if il was caigll
ofoiing Lolloi loims lo somo Liyois llan ollois. Jlon, il is liloly llal il woilo
iofiain fiom ionogolialing ils piico ofois, ano llis woilo Lo oqiivalonl lo on-
foicomonl of llo MFN claiso. Jlis is piocisoly wlal lappons inooi llo ciiionl
EU compolilion law. Loll llo Commission ano llo Eiiopoan Coiil of Jislico
consiooi as an aLiso of a oominanl posilion llo piaclico of a fim onoowoo will
mailol powoi of oisciiminaling among Liyois. As in llo 1.h|.n caso, fims
9
will Lo loavily fnoo if lloy woio lo ofoi oifoionl loims of sipply lo oifoionl
Liyois, ano sippliois sloilo aLioo lo llo piinciplo of lianspaionl piicing":
lloy cannol ofoi sociol piico oiscoinls lo Liyois. Wlalovoi llo ioason wly
llo Commission ano llo ECJ inliooicoo ano onfoico llis iilo, il is cloai llal
il lolps llo pioviooi of an inpil solvo ils commilmonl pioLlom. Conliaiy lo
wlal lloy oxpocl, llo lianspaioncy iilo" will lolp fims onoowoo will mailol
powoi lo loop piicos ligl, lo llo ooliimonl of wolfaio.
Frqfoxvlrqv Jlis soclion las slowoo a caso wloio voilical iosliainls ano
voilical moigois migll Lo wolfaio ooliimonlal. If conliacls Lolwoon an ipslioam
monopolisl ano oownslioam iolailois aio nol piLlicly oLsoivaLlo, llo monopolisl
is liil Ly ils lomplalion lo ionogolialo sipply loims (wlicl will Lo anlicipaloo
Ly llo iolailois, inwilling lo accopl ligl inpil piicos). Il sifois lloiofoio fiom
llo samo commilmonl pioLlom as a oiiaLlo gooo monopolisl. A moigoi will
a oownslioam fim, oi voilical claisos sicl as oxclisivo loiiiloiios ano iosalo
piico mainlonanco migll solvo llo monopolisl`s commilmonl pioLlom ano lolp
il oxoiciso ils monopoly powoi, lo llo ooliimonl of ovoiall wolfaio.
Nolo llal llo magnilioo of llo oamago cioaloo Ly llo voilical iosliainls
ioonlifoo aLovo (oi Ly a voilical moigoi) ooponos on llo ipslioam fim Loing
a monopolisl oi nol. If lloio aio compoling sippliois, ovon if loss omcionl, llo
laim oono Ly sicl piaclicos is oiminisloo. Jlis siggosls again llal il is woill
moniloiing sicl piaclicos only wlon lloy aio inooilalon Ly fims onjoying
onoigl mailol powoi.
Anolloi impoilanl policy conclision, poilaps of ovon moio piaclical iol-
ovanco, is llal laws llal imposo lianspaioncy" in llo piicos ano conliacls
Lolwoon voilically iolaloo fims, oi llal oLligo ipslioam fims nol lo oisciimi-
nalo among Liyois, aio misloo. Balloi llan fosloiing piico compolilion, lloy
piovioo ipslioam fims will an omcionl ano ciooiLlo commilmonl nol lo so-
ciolly inooicil piicos lo Liyois, lloioLy allowing llom lo onfoico ligl piicos.
Jlo EU compolilion iilos aio a caso in poinl, ano lloy sloilo Lo iovisoo.
51814 Yhuwlfdo uhvwudlqwv dqg wkh frpplwphqw sureohp-
Sipposo lloio oxisls an ipslioam manifacliioi, `, wlicl solls a piooicl lo
lwo iolailois, 1 ano 1 . Jlo manifacliioi las a conslanl piooiclion cosl c,
ano llo iolailois` only vaiiaLlo cosl is givon Ly llo wlolosalo piico lloy lavo
lo pay lo llo sipplioi of llo inpil. (Foi simplicily, wo iosliicl allonlion lo
conliacls wloio lloy aio ofoioo llo inpil al a inil cosl c.) Jlo lwo iolailois
piooico a lomogonois gooo ano compolo in qianlilios. Final oomano is givon
Ly j = 1 Q, wloio Q = q -q is llo lolal oilpil. Jlo manifacliioi las all
40
llo Laigaining powoi ano malos lalo-il-oi-loavo-il ofois lo llo iolailois. Jlo
gamo is as follows. Fiisl, ` ofois oacl iolailoi a conliacl (1 , q ), wloio 1 is a
fxoo foo ano q llo nimLoi of inils llal llo iolailoi wanls lo Liy. Jlon, oacl
iolailoi oioois q inils of llo piooicl ano pays 1 . Finally, oacl iolailoi will
Liing q lo llo mailol ano llo mailol will cloai.
Lol mo malo lwo iomails aLoil llis gamo. Fiisl, nolo llal I focis on non-
linoai conliacls only. Jlis is Locaiso wlon lloio is mailol powoi oownslioam
wo lnow llal linoai conliacls aio nol oplimal, in llal lloy oo nol iopiooico llo
voilically inlogialoo oilcomo. Socono, nolo llal I assimo llal iolailois pay
foi llo inpil |J lloy go lo llo fnal mailol. If lloy agiooo on a conliacl
Lil lloy paio foi llo inpil only nJ lloy go lo llo fnal mailol, llon llo
ipslioam fim woilo nol lavo any inconlivo lo ionogolialo. (Soo oxoiciso 7.)
Revhuydeoh frqwudfwv= D ehqfkpdun As a Lonclmail caso, il is oasy
lo clocl llal llo voilically inlogialoo oilcomo is givon Ly Q = (1c),2, j =
(1 - c),2, = (1 c) ,4. Jlo samo oilcomo can Lo oLlainoo if conliacls
ofoioo Ly ` woio oLsoivoo Ly oacl iolailoi (ano coilo nol Lo ionogolialoo). In
llis caso, llo manifacliioi woilo ofoi oacl of llom a conliacl (1, q) wloioLy
1 = (1 c) ,8 if llo iolailoi Liys q = (1 c),4 inils, ano 1 = foi any
olloi qianlily.
Xqrevhuydeoh frqwudfwv Jlo voilically inlogialoo oilcomo cannol Lo io-
sloioo inooi inoLsoivaLilily. Jo soo wly, sipposo llal iolailoi 1 las accoploo
``s ofoi (1, q) as aLovo. Jlo manifacliioi`s piofl, if il is aLlo lo appiopiialo
1 `s piofl llioigl a fxoo foo, is: = (1 (1 c),4 q c)q - (1 c) ,8.
Ly solling d ,dq = 0, ono oLlains q = (1 c),8 q = q . Jlis is llo
oilpil llal ` woilo ofoi lo llo socono iolailoi. Sinco iolailoi 2`s oilpil is
ligloi, llo mailol piico will fall Lolow j . As a iosill, fim 1 will malo a
piofl (1c) ,2 < (1c) ,8 = 1. Jloiofoio, llo conliacl ofoi (1, q) cannol
Lo an oqiiliLiiim, sinco oacl iolailoi woilo anlicipalo llal if il signoo sicl a
conliacl, llo manifacliioi woilo lavo an inconlivo lo ofoi laigoi oilpil lo llo
iival, wlicl in liin woilo cioalo lossos foi il.
Wo lnow llon llal llo conliacl wlicl iosloios llo voilically inlogialoo oil-
como cannol Lo an oqiiliLiiim. Wo slill lavo lo ooloimino wlal llo oqiiliLiiim
is. Jo oo so, givon inoLsoivaLilily, wo lavo lo malo assimplions on llo Loliofs
41
llal a iolailoi las aLoil llo ofoi llal will Lo iocoivoo Ly llo olloi iolailoi. Fol-
lowing Hail ano Jiiolo (1990), O`Liion ano Slafoi (1992) ano Boy ano Jiiolo
(1990) assimo passivo Loliofs" (also calloo mailol-Ly-mailol conjocliios): if a
iolailoi iocoivos an inoxpocloo ofoi fiom llo manifacliioi, il ooos nol ioviso
ils Loliof aLoil llo ofoi iocoivoo Ly llo iival. Wo lool foi llo Ioifocl Layosian
EqiiliLiiim of llis gamo, wlicl ioqiiios oacl agonl lo clooso ils Losl aclion
givon llo aclion of llo olloi agonls ano givon ils Loliofs.
If iolailoi 1 oxpocls llal 1 is ofoioo lo Liy q , low micl is 1 willing
lo Liy ano al wlicl piico Ils oxpocloo mailol piofl woilo Lo: = (1 q
q c)q . Iiofl maximisalion woilo loao il lo Liy q = (1 q c),2 inils,
ano pay ip lo = (1q c) ,4. Symmoliically, llo olloi iolailoi woilo Liy
q = (1q c),2 inils. Nolo llal q = (1q c),2 = r (), wlicl is llo isial
ioaclion finclion inooi qianlily compolilion. Jlo only oqiiliLiiim is wloio
Loll fims aio on lloii ioaclion finclion, ano il is givon Ly llo Coiinol oilpil
q = (1c), ano Loll iolailois will Lo ioaoy lo pay ip lo (1 c) ,9. Cloaily,
llo manifacliioi will malo loss piofl llan inooi llo voilically inlogialoo (oi
oLsoivaLlo conliacls) oilcomo, as 2(1c) ,9 < (1c) ,4. Il can Lo slowoo llal
llo laigoi llo nimLoi of iolailois, llo lowoi llo piofl llal llo manifacliioi
can malo (llo commilmonl pioLlom is aggiavaloo). Soo oxoiciso 0.
Krz wr uhvwruh pdunhw srzhu
Voilical moigois. Sipposo lloio is a moigoi Lolwoon ` ano 1 . Jlon,
ofoiing q = (1 c),4 lo Loll llo amlialo ano llo inooponoonl iolailoi
1 cannol Lo an oqiiliLiiim, as 1 woilo coiioclly anlicipalo llal `
las an inconlivo lo incioaso llo oilpil of ils amlialo. On llo olloi lano,
q = (1 c),, llal is llo Coiinol conliacl, cannol Lo an oqiiliLiiim
Locaiso llo clain ` 1 can oLlain ligloi piofl simply Ly foioclosing
accoss lo llo inpil lo iolailoi 1 . Inoooo, Ly solling q = (1 c),2 ano
q = 0, llo voilically inlogialoo piofl can Lo oLlainoo.
Exclisivo loiiiloiios. Will jisl ono iolailoi oownslioam, mailol powoi
can Lo oxoicisoo as llo commilmonl pioLlom ooos nol aiiso. As long as
llo oxclisivily claiso is onfoicoaLlo in coiils, a iolailoi wlo is ofoioo
oxclisivily ano lo Liy (1 c),2 inils foi a piico ip lo (1 c) ,4 will
accopl llo conliacl, wlicl llon iosloios llo voilically inlogialoo solilion.
Inoisliy-wioo BIM (piico fooi). If an inoisliy-wioo piico fooi j _ j =
(1 - c),2 is onfoicoaLlo, llon llo commilmonl pioLlom is solvoo. Eacl
iolailoi woilo Lo ofoioo lo Liy q = (1 c),4 ano fim ` woilo lavo
no inconlivo lo Lolavo in an oppoilinislic way. Sipposo 1 las alioaoy
signoo llo conliacl. If ` ofoioo a laigoi qianlily lo 1 , llo lolal piofl
lo Lo maoo is = ((1 - c),2 c)q foi q _ (1 c),4. Jloiofoio,
q _ (1 c),4 givos ` llo liglosl piofl compaliLlo will llo piico fooi.
42
Mosl-favoiioo nalion (MFN) claiso (oi mosl-favoiioo cislomoi claiso).
Sipposo oacl iolailoi is ofoioo a conliacl logolloi will a MFN claiso,
llal slalos llal if a piico oiscoinl (oi a Lolloi piico) is givon lo ono
iolailoi, llon all olloi iolailois will also iocoivo llo samo Lolloi ofoi. (Jlis
is also llo oofnilion of symmoliic Loliofs.) Jlis moans llal wlonovoi a
iolailoi is ofoioo lo Liy q inils of llo inpil, il will oxpocl ils iival also
lo Liy q. Jloiofoio, ils oxpocloo piofl is = (1 q q c)q, ano il
will Lo ioaoy lo Liy q = (1 c),4 inils ano pay ip lo (1 c) ,8. Jlo
manifacliioi is aLlo lo iosloio ils Losl oilcomo.
Yhuwlfdo phujhuv dqg h{foxvlyh ghdolqj zkhq d vxevwlwxwh lqsxw
h{lvwv1 Sipposo now llal ` is nol llo only sipplioi: lloio also oxisls a loss
omcionl sipplioi of llo piooicl, 3, wloso cosl is - c, will 3 nol Loing loo
inomcionl: wo assimo - (c, (1 -c),2[. Lool fisl al wlal lappons wlon lloio
is .n| -nn.n. Sinco ` will ono ip sipplying Loll iolailois, llo solilion
will Lo llo samo as foi llo caso willoil siLslililo inpils: Loll iolailois will Lo
ofoioo ano will oiooi q = (1c),. Jlo mailol piico will Lo j = (1-2c),.
Howovoi, nolo llal a iolailoi will nol Lo willing lo pay a foo ip lo llo Coiinol
piofl (1 c) ,9 lo llo manifacliioi `. Ly accopling llal foo, il woilo lavo
a zoio payof. Givon llal 1 accopls llo conliacl, 1 woilo lavo an inconlivo
lo oovialo ano swilcl lo llo siLslililo gooo 3. Jlis oovialion woilo givo
1 a piofl = (1 q q -)q . Ly cloosing llo oplimising qianlily
q = (2 - c -),0, iolailoi 1 woilo malo = (2 - c -) ,0. Jloiofoio,
oacl iolailoi will Lo ioaoy lo accopl llo conliacl only if il las lo pay ip lo ,
ano llo manifacliioi can malo 2( ).
Sipposo now llal lloio is a voilical moigoi Lolwoon ` ano, say, 1 . Jo
inooislano wlal llo oqiiliLiiim will Lo, consiooi fisl llo caso wloio 1 oo-
ciooo lo Lo sipplioo Ly 3. Jlis coiiosponos lo llo Coiinol oqiiliLiiim will
asymmoliic cosls, c ano -. Qianlilios aio q = (12c--),, q = (12--c),.
Iiofls aio = (12c--) ,9, = (12--c) ,9. Jloiofoio, llo inooponoonl
iolailoi coilo always llioalon lo swilcl lo 3 if il is nol ofoioo q inils. Jlo
Losl lling llal ` can oo is llon lo ofoi piocisoly llo samo conoilions as 3 lo
llo socono iolailoi, llal is q inils al a inil piico -. Jlo voilical clain will
llon malo a piofl = - (- c)q .
Nolo llal inooi llo voilical moigoi, llo fnal piico will Lo j = (1-c --),.
Honco, llo piico incioaso llo consimoi will lavo lo Loai iolalivo lo llo silialion
of voilical sopaialion is j j = (- c),. In olloi woios, llo laigoi llo
omcioncy gap Lolwoon llo ipslioam fims, llo laigoi llo wolfaio loss wlicl will
iosill fiom llo voilical moigoi. Jlo compolilion of alloinalivo sippliois iooicos
llo iisl of voilical moigois.
Ono can also nolo llal allloigl foioclosiio is nol complolo if an alloina-
livo sipplioi oxisls, slill llo inooponoonl iolailoi is woiso of inooi llo voilical
4
moigoi, as = (2 -c -) ,0 (1 2- -c) ,9 foi - c.
519 Frqfoxvlrqv
Jlis soclion las slowoo llal voilical moigois ano voilical iosliainls llal af-
focl inlia-Liano compolilion only aio moslly omcioncy-onlancing. Jloy allow
fims lo conliol foi oxloinalilios llal afocl llo voilical iolalionslip will olloi
fims, lloioLy incioasing piofls of llo voilical clain, as woll as, in mosl casos,
consimoi siiplis. Jlo analysis las also invoiloo casos (nolaLly wlon lloy
migll loao lo llo ovoipiovision of soivicos - soo soclion 2.2 - ano wlon lloy lolp
a manifacliioi solvo a commilmonl pioLlom - soo soclion 2.) wloio voilical
iosliainls ano voilical moigois migll iooico wolfaio. Howovoi, sicl casos oo
nol appoai as gonoial, ano, moio impoilanlly, lloii aovoiso ofocls sliinl wlon
lloio is compolilion in llo mailol.
Jlo main conclision of llis soclion is lloiofoio llal voilical iosliainls wlicl
afocl inlia-Liano compolilion oo nol iaiso micl piooccipalion; coilainly, lloy
aio nol woill invosligaling wlon fims llal aoopl llom oo nol lavo ligl mailol
powoi.
Anolloi impoilanl implicalion of llo analysis caiiioo oil loio is llal voilical
iosliainls aio oflon siLslililaLlo - al loasl lo somo oxlonl - will oacl olloi.
Accoioingly, oifoionlial lioalmonl of voilical iosliainls (foi inslanco, allowing
onos ano foiLiooing ollois) ooos nol appoai lo Lo jislifoo in gonoial loims.
Howovoi, lloso conclisions aio slill piovisional, sinco I lavo so fai givon lilllo
consiooialion lo llo ofocl of voilical iosliainls on inloi-Liano compolilion. Il
is lo llis lopic llal I liin noxl.
6 Lqwhu0eudqg frpshwlwlrq
In llo pioviois soclion I focisoo on llo caso wloio only ono ipslioam man-
ifacliioi coilo iso voilical conliacls, so inloi-Liano compolilion was nol an
issio. Howovoi, Ly mooifying llo cloicos (invoslmonl, piico ano so on) maoo Ly
a voilical clain (i.o., llo manifacliioi of a Liano ano ils oisliiLilois), voilical
iosliainls will gonoially lavo an impacl on llo compolilion Lolwoon llis voilical
clain ano compoling onos. I now analyso llo ofocl of voilical iosliainls (ano
moigois) wlon sovoial manifacliiois soll llioigl iolailois. Soclion .1 slows
llal voilical iosliainls can Lo isoo slialogically so as lo iolax compolilion Lo-
lwoon iolailois ano illimaloly Lolwoon manifacliiois; soclion .2 slows llal
lloy migll favoii collisivo agioomonls; soclion 4 slows llal lloy migll Lo isoo
lo ooloi onliy. Jloiofoio, oconomic analysis coilainly oomonslialos llal voi-
lical claisos aio Ly no moans always Lonofcial (conliaiy lo wlal llo Clicago
sclool isoo lo claim). Novoilloloss, I will Lo fai fiom siggosling llal voilical
iosliainls (oi somo of llom) aio always Lao. Fiisl, I will poinl oil llo con-
oilions inooi wlicl sicl iosliainls aio laimfil. Socono, I will iocall llal ono
las always lo woigl llo possiLlo nogalivo ofocls ipon inloi-Liano compolilion
44
will llo liloly omcioncy gains of voilical iosliainls illislialoo in llo pioviois
soclion. Again, llo main conclision will Lo llal ono sloilo woiiy aLoil voilical
iosliainls only wlon lloy involvo fims onoowoo will laigo mailol powoi.
614 Vwudwhjlf hhfwv ri yhuwlfdo uhvwudlqwv
Jloio is a laigo liloialiio llal analysos llo slialogic ialionalo Lolino voilical
iosliainls inooi impoifocl compolilion. Jlo main insigll comos fiom piincipal-
agonl moools, wlicl omplasiso low a piincipal in coilain ciicimslancos las
an inconlivo lo oologalo a oocision lo an agonl, wlo is moio liloly lo poifoim
a coilain aclion llan llo piincipal is, if pioviooo will appiopiialo inconlivos.
Sipposo foi inslanco llal lloio aio lwo onliopionoiis in a mailol. Eacl of
llom woilo lilo lo loop piicos ligl, Lil llo isial mailol foicos woilo loao
llom lo inooicil oacl olloi, iosilling in low piicos. Il woilo nol Lo ciooiLlo
if ono of llom simply piomisoo lo llo olloi llal lo woilo loop ligl piicos ano
woilo nol inooicil. Eacl of llom lnows llal llo olloi will Lolavo so as lo
maximiso piofls, ano llis implios llal piicos will Lo low, no malloi low many
piomisos aio maoo. Howovoi, sipposo now llal ono of llo lwo onliopionoiis
liioo a managoi, oologaloo lo loi all piico ano mailol oocisions ano gavo loi a
componsalion wlicl givos loi a piomiim if llo piico slo claigoo on llo mailol
is ligl onoigl. If llis conliacl is oLsoivaLlo Ly llo iival, il malos il ciooiLlo
llal llo fim`s managoi will loop piicos ligl ano llis pislos llo iival lo incioaso
piicos as woll. Wlal conlialisalion of oocisions coilo nol oo, oologalion migll
Lo aLlo lo. Jlis is a piinciplo wlicl is woll oslaLlisloo in gamo llooiy ano
wlicl las lao many applicalions in oifoionl folos.
Gal-Oi (19xx-CHECK), Viclois (198), Lonanno ano Viclois (1988), Boy
ano Sliglilz (1988, 199) aio among llo papois wlicl lavo applioo llis piinciplo
on voilical iosliainls. Jloy slioy slialogic ofocls of voilical iosliainls wlon
lloio aio compoling voilical clains, as illislialoo Ly Figiio 0..
INSEBJ Figiio 0.. Compoling voilical clains
Jlo main iooa is llal a manifacliioi (llo piincipal) migll wanl lo malo
ils iolailoi a sofloi" compoliloi in llo fnal mailol, so as lo loao - llioigl llo
slialogic ofocl monlionoo oailioi - lo ligloi fnal piicos ano ligloi iolailois`
piofls. Jlo Lonofl fiom ligloi piicos woilo llon Lo iocovoioo Ly llo piincipal
via a fiancliso foo.
4
Ono lypo of voilical iosliainl wlicl can Lo slialogically isoo is a lwo-pail
laiif. Imagino llal a manifacliioi solls llioigl an oxclisivo ooaloi. Ly cloos-
ing a ligl wlolosalo piico, llo foimoi will malo llo lalloi iaiso ils piico in llo
mailol (sinco llo wlolosalo piico is llo iolailoi`s own cosl, il nooos lo sol ligloi
piicos lo liy ano loop ils mail-ip), in liin maling iival iolailois moio willing
lo iaiso piicos. Jlo ofocl will Lo ligloi piofl foi llo voilical clain (llo laiif
can Lo isoo lo appiopiialo llo iolailoi`s piofl) Lil lowoi wolfaio.
Anolloi voilical iosliainl llal can iolax inloi-Liano compolilion is oxclisivo
loiiiloiios. Consiooi a silialion wloio a manifacliioi solls ils Lianos llioigl
a nimLoi of iolailois (wlicl caiiy only ils Liano). Ly iomoving inlia-Liano
compolilion wlicl woilo oocioaso llo own Liano piicos in llo mailol, ano
giving a iolailoi llo powoi lo Lolavo as a Liano monopolisl, ligloi iolail piicos
will Lo sol. In liin, llis will pisl iivals` piicos ip. Again, llo Liano piofl
will incioaso ano wolfaio will Lo lowoi. Exclisivo loiiiloiial claisos lolp also
in llo sonso llal lloy aio visiLlo ano nol oasily ionogolialoo. (A conliacl las
a commilmonl valio, llal is il can afocl slialogically llo iivals` Lolavioii, if
il can Lo piLlicly oLsoivoo ano cannol Lo oasily mooifoo.) Sinco lloy lavo
a ligloi oogioo of commilmonl ano visiLilily llan non-linoai conliacls (llo
oocision lo oologalo salos lo a iolailoi can Lo oasily oLsoivoo, ano il is liloly lo
Lo iiiovoisiLlo in llo sloil iin, Lil llo aclial conliacl will llo iolailois will
lypically Lo piivalo), lloii slialogic polonlial is also ligloi.
Nolo, lowovoi, llal nol all voilical iosliainls oxoiciso lloso slialogic ofocls.
Bosalo piico mainlonanco foi inslanco cannol Lo isoo as a slialogic iosliainl.
Jlo ciicial iooa is lo oologalo piico oocisions lo llo iolailois, wloioas inooi
BIM il is slill llo manifacliioi wlicl oocioos on piicos. Foi llo samo ioason,
a voilical moigoi ooos nol iaiso llis concoin: no oologalion lappons lloio, so
llal oxclisivo loiiiloiios ano non-linoai piicing woilo acliovo ligloi piofl (ano
caiso lowoi wolfaio) llan voilical inlogialion.
Howovoi, ono sloilo nolo llal llo iosill llal voilical iosliainls lavo slialo-
gic ofocls wlicl laim wolfaio is nol ioLisl will iospocl lo llo naliio of mailol
compolilion. In somo mailols, lilo llo onos I lavo oosciiLoo sofai, wlon a fim
incioasos ils piico llo iival woilo incioaso ils piico loo, llis maling il pioflaLlo
lo lavo a conliacl pisling ono`s iolailoi lo loop piicos ligl. In olloi mailols,
lowovoi, wlon a fim iooicos ils oilpil (llal is, incioasos ils piico), llo iival
woilo incioaso ils oilpil (llal is, woilo iooico ils piico), llis iooicing llo
fisl fim`s piofl. Wlon llis is llo caso, a manifacliioi will ooviso conliacls
aimoo al maling ils iolailoi moio, ialloi llan loss, aggiossivo in llo mailol.
Foi inslanco, il woilo oocioaso ils wlolosalo piico so as lo slimilalo iolailois`
40
salos. Jlo ovoiall iosill will Lo laigoi qianlilios Lioigll lo llo mailol Ly
oacl Liano iolailoi, iosilling in lowoi oqiiliLiiim mailol piicos. In sicl a caso,
voilical iosliainls will incioaso consimoi siiplis ano wolfaio. Fiims oo aoopl
sicl iosliainls as lloy aio piivaloly oplimal, Lil fims will liin oil lo Lo woiso
of if all of llom clooso llis slialogy. Jlis is lloiofoio a classical oxamplo of
a piisonoi`s oilomma. Ly foiLiooing llo iosliainls ono woilo favoii llo fims
(ano nol llo consimois).
Anolloi impoilanl qialifcalion lo llo iosill llal voilical iosliainls migll
oampon mailol compolilion comos fiom llo facl llal llo slialogic ofocls of
iosliainls woilo lavo sizoaLlo ofocls only wlon llo fim aoopling llom las
somo mailol powoi.
In conclision, llis liloialiio oslaLlislos llo poinl llal voilical iosliainls
- llioigl slialogic ofocls - migll iooico wolfaio, Lil il ooos nol ailloiiso
inamLigiois policy implicalions. Fiisl, wlal llis liloialiio siggosls is llal
only iosliainls sol ip Ly fims will onoigl mailol powoi migll Lo woill looling
al (if lloio is onoigl compolilion ipslioam, iosliainls isoo Ly ono fim aio
inliloly lo lavo signifcanl ofocls on piicos). Socono, I woilo play oown llo
piaclical ililily of llo slialogic aigimonls in a conciolo anliliisl caso. Il sooms
oimcill lo ovalialo lo wlicl oxlonl iosliainls aio isoo foi slialogic piiposos,
ano ovalialo lloii qianlilalivo impacl.
61414 Vwudwhjlf xvh ri yhuwlfdo uhvwudlqwv-
Jlis soclion is ailicilaloo in llo following pails. Fiisl, il slows llal non-linoai
piicing wlon iolailois compolo in piicos migll slialogically oampon compoli-
lion; socono, il slows llal oxclisivo loiiiloiios migll lavo llo samo ofocl; lliio,
il slows llal llo moio inloi-Liano compolilion in llo inoisliy llo woaloi llo
nogalivo impacl of non-linoai piicing; fnally, il slows llal inooi qianlily com-
polilion non-linoai piicing woilo incioaso ialloi llan oocioaso wolfaio, lloio-
foio pioving llal llo iosills aio nol ioLisl lo a clango in llo mooo of mailol
compolilion.
Wzr0sduw wdul zlwk sulfh frpshwlwlrq Consiooi lwo ipslioam manifac-
liiois l ano l wlicl soll lwo oifoionlialoo piooicls. Wo assimo lloy aio
ioonlical ano llal Loll piooiclion ano iolail cosls aio conslanl ano oqial lo
zoio. Jlo oomano finclion foi llo fnal gooo i is givon Ly:
q =
1
2
_
j
_
1 -

2
_
-

2
j
_
. (44)
Jlis is a oomano finclion I lavo iopoalooly isoo. Bocall llal [0, ) is
llo oogioo of siLslililion among llo piooicls. Mailol oocisions aio on piicos.
47
Yhuwlfdo lqwhjudwlrq Sipposo fisl llal llo lwo manifacliiois aio Loll
voilically inlogialoo. All cosl ano oomano finclions aio common lnowloogo.
Jlon llo pioLlom is llo slanoaio ono wloio oacl fim cloosos piico lo maximiso
= j q (j , j ). Ly laling d (j , j ),dj = 0 ano solving llo syslom ono
oLlains:
j =
2
4 -
; =
(2 - )
(4 - )
. (4)
Yhuwlfdo uhvwudlqwv= Wzr0sduw wdul Sipposo now llal insloao of soll-
ing oiioclly, oacl manifacliioi solls via a iolailoi. Call 1 ano 1 iospoclivoly
llo iolailoi wlo solls gooo 1 ano llo iolailoi wlo solls gooo 2. Jloio aio
llon lwo compoling voilical clains. Assimo llal llo manifacliioi cloosos llo
iolailoi fiom a laigo nimLoi of polonlial iolailois, ano llal il las all llo Lai-
gaining powoi. In llo fisl slago of llo gamo, manifacliiois simillanooisly
givo non-linoai piicing conliacls 1 -n q lo lloii iolailois. Jloso conliacls aio
poifoclly oLsoivaLlo ano nol ionogoliaLlo. In llo socono slago, llo iolailois
simillanooisly clooso piicos j , piofls ioaliso ano foos (if any) aio paio lo llo
manifacliiois.
Al llo lasl slago, oacl iolailoi cloosos piico lo maximiso = (j
n )q (j , j ). Jlo fisl oiooi conoilions aio givon Ly:
d ,dj =
2(2 -)j -j - 2 - (2 -)n
4
= 0 (i, = 1, 2; i ,= ). (40)
Ly io-aiianging llo lwo fisl oiooi conoilions ono can wiilo llo Losl ioply
finclions j = 1 (j ) of llo iolailois. Jo oiaw llom in llo samo plano (j , j ),
lol is wiilo 1 ano 1 as finclions of j . Ono oLlains:
1 : j =
2(2 -)j 2 (2 - )n
; (47)
1 : j =
j - 2 - (2 -)n
2(2 -)
. (48)
Figiio 0.4 slows llo ioaclion finclions in (j , j ). Nolo llal lloy aio pos-
ilivoly slopoo, i.o., gooos aio slialogic complomonls (llis comos fiom llo as-
simplion of piico compolilion). In olloi woios, a iolailoi las an inconlivo lo
iospono lo a piico incioaso of llo iival Ly incioasing llo piico limsolf. Nolo
also llal wlon llo wlolosalo piico n incioasos, llo ioaclion finclion of iolailoi
48
i slifls away fiom llo oiigin: foi any givon piico of llo iival, iolailoi i iosponos
will a ligloi piico, llal is lo is Lolaving moio soflly.
INSEBJ Figiio 0.4. Jaiifs as slialogic oovico: Slialogic complomonls
Jlo fgiio capliios llo inliilion Lolino llo manifacliioi`s inconlivo lo in-
cioaso llo wlolosalo piico. Consiooi fisl llo caso wloio Loll manifacliiois sol
n = c(= 0). Ioinl E is llon llo mailol oqiiliLiiim. If insloao a manifacliioi
claigoo a wlolosalo piico n c, llo ioaclion finclion of ils iolailoi woilo slifl
oilwaio so as lo iosill in ligloi oqiiliLiiim piicos, Lonofling Loll ipslioam
fims. If Loll manifacliiois clooso lo iaiso wlolosalo piicos, llo fnal oqiiliL-
iiim piico will coiiospono lo llo poinl E`. As wo slall soo now, llis is piocisoly
wlal will occii al oqiiliLiiim.
Ly solving llo syslom of FOCs wo can now oLlain llo oqiiliLiiim al llo
piico slago of llo gamo:
j =
2(4 - ) - (2 -)(2n (2 - ) -n )
10 - 10 -
. (49)
Ono can llon ooiivo q (n , n ) Ly siLslililion ano = (j n )q 1 .
Nolo llal llo manifacliioi will iso llo fiancliso foo so as lo appiopiialo llo
piofl of ils iolailoi. Jloiofoio, llo manifacliioi piofl will Lo (iocall llal
c = 0): = (j n )q - n q = j q . In llo fisl slago of llo gamo llo
manifacliioi will lloiofoio sol n so as lo maximiso:
=
[ [[ [
(0)
Ly solving llo syslom d ,dn = 0 ono oLlains:
n =
2
(2 - )(10 - 12 - )
; j =
4(2 -)
(10 - 12 - )
; (1)
=
2(2 - )(8 - 8 - )
(10 - 12 - )
. (2)
Jloiofoio, al llo oqiiliLiiim Loll ipslioam manifacliiois sol a wlolosalo
piico n c = 0 so as lo iolax compolilion among iolailois (ano illimaloly
among llomsolvos: Boy ano Sliglilz slow llal llo voilical iosliainl malos
manifacliiois faco a poicoivoo oomano olaslicily wlicl is lowoi llan inooi
voilical inlogialion). As a iosill Loll piicos ano piofls aio ligloi llan inooi
voilical inlogialion: j j ano (llo oxpiossions coincioo only
wlon ).Jlis incioasoo allocalivo inomcioncy ooloiminos a oocioaso in
ovoiall wolfaio.
49
H{foxvlyh whuulwrulhv Boy ano Sliglilz (1988, 199) slow llal gianling ox-
clisivo loiiiloiios lo iolailois also lolps manifacliiois lo iolax compolilion. As
a Lonclmail, consiooi llo caso wloio lwo manifacliiois lavo : _ 2 iolailois
oacl. Bolailois wlo caiiy llo samo Liano soll piooicls wlicl aio poicoivoo
as lomogonois Ly consimois. Jloiofoio, foi llo isial Loiliano compolilion
aigimonls, inliaLiano compolilion loaos in iolailois claiging j = n .
Jlo ipslioam fim cloosos ils piico lo maximiso = (n c)q (n , n ).
Sinco j = n , llis pioLlom is ioonlical lo llo pioLlom of llo voilically inlogialoo
fim wo lavo solvoo aLovo. Ly laling d (n , n ),dn = 0 ano solving llo
syslom ono oLlains:
n = j =
2
4 -
; =
(2 - )
(4 - )
. ()
Sipposo now llal oacl iolailoi is givon an oxclisivo loiiiloiy Ly lis mani-
facliioi, ano llis oocision is piLlicly oLsoivoo. Exclisivo loiiiloiios imply llal
oacl iolailoi las 1,: slaio of llo oomano foi llo Liano. Jlo gamo is llon
as llo ono analysoo in llo pioviois siL-soclion: fisl, llo manifacliioi ofois
iolailois a non linoai conliacl 1 -n q . Jlon, iolailois simillanooisly clooso
piicos j , piofls ioaliso ano foos (if any) aio paio lo llo manifacliiois.
Al llo lasl slago, oacl iolailoi cloosos piico lo maximiso = (j
n )q (j , j ) 1 . Sinco : is only a scalo facloi, llo fisl oiooi conoilions aio
givon Ly piocisoly llo samo oxpiossion as (40) aLovo. All llo solilions will
lloiofoio Lo as inooi llo caso lioaloo aLovo, giving iiso lo ligloi piicos ano
piofls llan inooi inlia-Liano compolilion: j j ano .
Nolo loio llal al llo oqiiliLiiim n c, wlicl onlails llal lloio is ooiLlo
maiginalisalion. Howovoi, llo manifacliiois oo nol loso fiom llis oxloinalily.
Ly cioaling a monopolisl (oi sovoial monopolisls) oownslioam lloy slialogically
oxploil llo piosonco of impoifocl compolilion as lloy manago lo iolax compo-
lilion. Boy ano Sliglilz (199) slow llal Ly aooing moio ano moio layois (foi
inslanco, Ly cioaling wlolosalois ano olloi inloimooiaiios Lolwoon llo piooic-
lion ano llo iolail slago) manifacliiois migll Lo aLlo lo gol llo monopoly (i.o.
llo joinl-piofl maximising) piicos.
Frpshwlwlrq uhgxfhv wkh ulvn wkdw yhuwlfdo uhvwudlqwv orzhu zhoiduh
Voilical iosliainls migll Lo isoo so as lo slialogically iolax compolilion ano
inoico ligloi piicos only insofai as llo fim ising llom onjoys onoigl mailol
powoi. Jo gol somo inliilion foi llis, consiooi llo following oxamplo, wloio
lloio is a manifacliioi - say llo fim solling piooicl 1 - wlicl is solling llioigl
a iolailoi, ano ofois lim a conliacl 1 -nq, wloioas all llo olloi : manifaclii-
ois in llo inoisliy aio voilically inlogialoo. Assimo llo isial oomano finclion:
0
q =
1
:
_
_
j (1 - ) -

:
j
_
_
. (4)
Fiom llo maximisalion of llo iolailoi`s piofl finclion, ano afloi imposing
symmoliy on llo : 1 voilically inlogialoo fims, ono oLlains llo FOCs:
_
= 0,
= 0.
()
Ly oiawing llo ioaclion finclions of llo fims, ono can soo llal lloy Locomo
loss olaslic as : incioasos, in llo sonso llal lloii slopo oocioaso will :. As a
iosill, llo manifacliioi woilo nooo a micl Liggoi incioaso in llo wlolosalo
piico lo oLlain a givon piico iosponso fiom llo iolailoi: ils aclion las lowoi
slialogic powoi.
Fiom llo solilion of llo syslom of FOCs ono oLlains:
j =
:( (: 1)n - 2:( -n) -(2: 1) -n(: 2))
4: - 2:(: 2) - (2: : - 1)
; (0)
j =
2: - (: 1)n -:(n -(2: 1))
4: - 2:(: 2) - (2: : - 1)
. (7)
Ly solving llo manifacliioi`s pioLlom, wlicl is lo clooso n so as lo max-
imiso ils piofl = (j n)q (j , j) ono oLlains:
n =
(: 1)(2: -(2: 1))
2(2 -)( (: 1) - 2: -: (: 4) - :( 7: - 4: )
. (8)
Finally, Ly ioplacing inlo llo piico oxpiosssions:
j =
:(2: -(2: 1))
2( (: 1) - 2: -:(: 2)
; j =
(2: -(2: 1))
2(2 -):
. (9)
Wlon all fims aio voilically inlogialoo, llo (Loiliano compolilion) oqiiliL-
iiim piico is givon Ly:
j =
:
2: -(: 1)
(00)
Jlo aooilional mail-ip llal a manifacliioi is aLlo lo commano oio lo
voilical iosliainls is lloiofoio givon Ly:
1
j j =
: (: 1)
2( (: 1) - 2: -:(: 2)(2: -(: 1))
. (01)
Il can Lo clocloo llal d(j j ),d: < 0: llo laigoi llo nimLoi of fims,
llo lowoi llo aooilional mail-ip llal slialogic voilical iosliainls can givo lo
llo manifacliioi ising llom.
Wkh uhvxowv duh qrw urexvw= Vwudwhjlf vxevwlwxwhv Jlo pioviois iosills
lavo Loon oLlainoo Ly assiming llal oocisions in llo fnal mailol woio on piicos.
Il liins oil llal llo iosills oLlainoo aio voiy sonsilivo lo llo lypo of mailol
compolilion. If insloao wo assimo llal mailol oocisions aio on qianlilios -
ialloi llan piicos - manifacliiois slill wanl lo oologalo lloii salos lo inoopon-
oonl iolailois, Lil: fisl, llo conliacls lloy givo lloii iolailois malo llom moio
- ialloi llan loss - aggiossivo, ano as a consoqionco fnal piicos will Lo lowoi
ano wolfaio ligloi. Socono, llo gamo wloio manifacliiois oocioo wlolloi oi
nol lloy wanl lo oologalo oocisions is lilo a piisonoi`s oilomma: oologalion is
llo oominanl slialogy, ano will Lo closon al oqiiliLiiim, Lil manifacliiois
woilo lilo lo avoio il. In wlal follows, wo foimaliso lloso iosills.
Wkh prgho Jlo moool is llo samo as llo ono analysoo aLovo, will lwo
manifacliiois wlo soll oifoionlialoo gooos oilloi oiioclly (voilical inlogialion)
oi llioigl inooponoonl iolailois. Jo analyso wlal lappons inooi qianlily
compolilion, lol is iso llo invoiso oomano finclions. Invoiling llo syslom (44)
wo oLlain:
j =
1
1 -
(2q -q -q ) . (02)
Yhuwlfdo lqwhjudwlrq Fiims clooso oilpil q so as lo maximiso =
(j (q , q ) c)q . Ly solving llo syslom of fisl-oiooi conoilions d ,dq = 0 wo
oLlain llo slanoaio Coiinol oqiiliLiiim:
q =
( c)(1 - )
4 -
; =
( c) (1 - )(2 - )
(4 - )
. (0)
Ghohjdwlrq Sipposo now llal Loll fims lavo a oownslioam iolailoi, ano
analyso llo gamo wloio fisl oacl manifacliioi givos a non-linoai piicing con-
liacl 1 -n q lo ils iolailoi ano llon llo iolailois compolo in qianlilios (afloi
laving oLsoivoo llo conliacl).
Al llo lasl slago of llo gamo, iolailoi i cloosos oilpil q so as lo maximiso
= (j (q , q ) n )q . Ly laling llo fisl-oiooi conoilions d ,dq = 0 ano
io-aiianging llom ono oLlains llo following ioaclion finclions foi oacl fim (lo
oiaw llom in llo plano (q , q ), lloy aio wiillon as finclions of q ):
2
1 (q ) - q =
2(2 -)q -(1 ) n (1 )
; (04)
1 (q ) - q =
q -(1 - ) n (1 - )
2(2 -)
. (0)
Il is oasy lo soo llal llo ioaclion finclions aio now nogalivoly slopoo, i.o.,
llo gooos aio slialogic siLslililos. A fim`s incioasoo oilpil woilo Lo followoo
Ly a iival`s oocioaso in own oilpil (soo Figiio 0.).
INSEBJ Figiio 0.. Jaiifs as slialogic oovico: slialogic siLslililos
Jlo iso-piofl finclions aio nol slowoo in llo fgiio, Lil il woilo Lo oasy lo
clocl llal a slifl lo llo iigll of llo iolailoi`s ioaclion ciivo (givon llo ioaclion
ciivo of llo iival) woilo clango llo oqiiliLiiim lo a poinl wloio llo iolailoi
las ligloi piofl (al llo now poinl, llo iolailoi woilo lavo a ligloi slaio of
llo mailol). Howovoi, fgiio 0. also slows llal if Loll iolailois lao lowoi
maiginal cosls, llo now oqiiliLiiim E` woilo iosill in laigoi qianlilios solo in
llo mailol llan al llo oqiiliLiiim E. Jlo lwo fims woilo slill lavo llo samo
slaio of llo mailol Lil sinco lloy Loll incioaso oilpils, lloii piofls aio lowoi.
Jlo fgiio lloiofoio anlicipalos wlal wo aio now going lo soo moio foimally.
Ly solving llo FOCs (oi - oqiivalonlly - fnoing llo inloisoclion poinl of llo
ioaclion finclions) ono can fno llo iolailois` oqiiliLiiim qianlilios ano piicos.
q =
(1 - ) ((4 - ) 2(2 -)n -n )
10 - 10 -
; (00)
j =
(8 - 0 - ) - (8 - 8 - )n -(2 - )n
10 - 10 -
. (07)
Al llo fisl slago of llo gamo, llo manifacliioi cloosos n lo maximiso
piofl. As Lofoio, wo assimo llal lloy lavo llo Laigaining powoi vis-a-vis
lloii iolailoi, so llal lloy sol llo fiancliso foo 1 so as lo appiopiialo all lloii
piofl: 1 = (j n )q . Jloiofoio, lloii pioLlom is: max = (j c)q ,
wloio j ano q aio givon Ly llo oxpiossions aLovo. Ly laling llo fisl-oiooi
conoilions ano solving llo syslom ono fnos llo oqiiliLiiim solilions of llo
wlolo gamo (Locaiso of symmoliy, manifacliiois ano iolailois will lavo llo
samo oqiiliLiiim vaiiaLlos. Wo lloiofoio oiop llo inoicos i ano ):
n = c

10 - 20 -
. (08)
As ono can immooialoly soo, llo wlolosalo piico is lowoi llan llo mani-
facliioi`s own piooiclion cosl: n < c. Jlo manifacliioi wanls lo malo llo
iolailoi moio aggiossivo in llo mailol ano lloiofoio il siLsioisos ils piiclaso
of llo inpil so as lo malo il soll moio in llo mailol (of coiiso, siLsioisalion
ooos nol como coslly loio, sinco llo iolailoi`s piofls aio appiopiialoo Ly llo
manifacliioi via llo fiancliso foo). Jlis is piocisoly llo opposilo iosill as
will slialogic complomonls (i.o., piico compolilion), wloio n was oplimally sol
ligloi llan inil cosl c.
Ly siLslililing, ono can fno oqiiliLiiim qianlilios ano piofls as:
q =
2(1 - )(2 - )( c)
10 - 20 -
; =
2(1 -)(2 - )(8 - 8 - )( c)
(10 - 20 - )
.
(09)
Wlon compaiing llo solilions oLlainoo al llo lwo oqiiliLiia, il is oasy lo
soo llal wlon fims oologalo lloy soll a ligloi qianlily llan inooi voilical
inlogialion (q q ) ano lloy oLlain a lowoi piofl ( < ). Hoio,
oologalion ano voilical iosliainls incioaso wolfaio!
Jlo iosill accoioing lo wlicl al llo oologalion oqiiliLiiim fims oain lowoi
piofls Logs llo qioslion if cloosing lo oologalo oilpil oocisions lo an inoopon-
oonl iolailoi is inoooo an oqiiliLiiim (sofai, wo lavo jisl assimoo llal Loll
fims oologalo). Exoiciso 8 piovos llal oologalion is a oominanl slialogy ano
llal llo oqiiliLiiim wloio Loll piooicois soll llioigl iolailois is iniqio. Jlis
is llo lypical piisonoi`s oilomma silialion, wloio Loll fims ono ip in an oqii-
liLiiim wlicl is Iaiolo-infoiioi: < . Jlo manifacliiois woilo Lo Lolloi
of if lloy woio nol allowoo lo conliacl will inooponoonl iolailois!
615 Yhuwlfdo uhvwudlqwv dv frooxvlyh ghylfhv
Il las Loon poinloo oil in llo liloialiio llal lloio aio olloi ciicimslancos in
wlicl voilical iosliainls migll facililalo collision. In llis soclion, wo consiooi
lwo sicl aigimonls. Jlo fisl slows llal iosalo piico mainlonanco migll favoii
collision among manifacliiois. Jlo socono llal wlon lwo oi moio manifac-
liiois soll llioigl a common iolailoi lloy migll Lo aLlo lo ioacl llo collisivo
oilcomo.
61514 USP pljkw idflolwdwh frooxvlrq
As soon in claploi 4, iosalo piico mainlonanco can facililalo collision among
manifacliiois Locaiso il incioasos piico oLsoivaLilily. ALsonl BIM, wlon
slocls in llo iolail mailols occii, fnal piicos will lono lo clango, maling il
moio oimcill foi manifacliiois lo oislingiisl clangos in iolail piicos llal aio
caisoo Ly oifoionl iolail conoilions fiom cloaling on llo cailol. BIM malos
collision moio liloly Ly oliminaling llo iolail piico vaiialion (soo also Jillion
ano Boy, 2001).
61515 Frpprq djhqf|
If lwo ipslioam fims-manifacliiois oocioo lo soll lloii gooos in llo fnal mailol
via a common agonl (oi iolailoi), llis migll lavo anlicompolilivo ofocls. In
4
pailicilai, il migll givo iiso lo llo joinl piofl maximising piicos Loing claigoo
al oqiiliLiiim.
Jloio aio lwo sopaialo ciicimslancos wloio llis can lappon. Fiisl, imagino
llal llo manifacliiois ofoi a lwo-pail laiif conliacl lo llo common iolailoi
ano oologalo llo piico oocisions lo il. In llis caso, il is oLviois llal llo common
agonl will picl llo collisivo piicos, givon wlolosalo piicos, sinco llo ipslioam
fims ofoclivoly givo il llo manoalo lo maximiso joinl piofls. Manifacliiois
woilo slill compolo on wlolosalo piicos, Lil lavo no inconlivo lo sol wlolosalo
piicos ligloi llan lloii own maiginal cosl. As a iosill, llo iolailoi Lolavos
oxaclly as if llo manifacliiois solo oiioclly lo llo fnal mailol ano coilo max-
imiso joinl piofls.
Moio inloioslingly, lowovoi, Loinloim ano Wlinslon (198) slow llal llo
collisivo piicos can Lo oLlainoo ovon if llo piico cloicos woio nol oologaloo
lo llo common iolailoi. In lloii solling, lwo manifacliiois ofoi a fiancliso
foo conliacl lo a common iolailoi, Lil also imposo ils fnal piico (in olloi
woios, BIM is allowoo). Jloy slow llal al llo oqiiliLiiim Loll fims clooso
llo collisivo piico. Jlis is Locaiso oacl manifacliioi malos llo iolailoi llo
iosioial claimanl ano isos llo fiancliso foo lo iocovoi ils piofl. Al llo momonl
of solling llo fnal iosalo piico, oacl manifacliioi lalos inlo accoinl llal llo
fnal piofl of llo iolailoi ooponos nol only on llo salos of llo manifacliioi`s
piooicl ilsolf, Lil also on llo salos of llo iival`s piooicl. Jlis way, wlon a
manifacliioi cloosos ils piico so as lo maximiso llo iolailoi`s piofl il lalos
inlo accoinl llo oxloinalily llal llo piico oocision las on llo compononl of llo
iolailoi`s piofl llal comos fiom llo salos of llo iival piooicl: llis is piocisoly
llo samo as wlon llo lwo piooicls woio solo Ly llo samo cailol (i.o., inooi
joinl piofl maximisalion).
Frpprq uhwdlohu dqg USP khos frooxvlrq-- I piosonl loio a voiy sim-
plifoo voision of Loinloim ano Wlinslon (198)`s moool, lo illislialo lloii
main iosill. Assimo llal lloio aio lwo ipslioam piooicois, 1 ano 2, wlicl soll
lloii piooicls via a common iolailoi, 1. Jo simplify llo issio, assimo llal Loll
piooicls lavo lo Lo solo, olloiwiso lloio is a mailol failiio ano zoio piofls aio
maoo Ly all fims. Assimo also llal llo iolailoi las no Laigaining powoi, foi
inslanco Locaiso il is solocloo among a popilalion of voiy many polonlial io-
lailois wlo woilo compolo foicoly lo Lo llo closon iolailoi. Foi simplicily, llo
iolailoi las no cosl olloi llan llo wlolosalo piico ano llo piooicois lavo llo
samo maiginal cosl c. Finally, consimoi oomano is givon Ly q = a /j -j .
Consiooi llo following gamo. Fiisl, oacl piooicoi i = , 1 simillanooisly
malos lalo-il-oi-loavo-il ofois lo 1 in llo foim of a non-linoai conliacl 1 -n q .
Jloso conliacls aio piLlicly oLsoivaLlo (lloy migll also fx llo iolail piico if
iosalo piico mainlonanco (BIM) is allowoo). Socono, llo iolailoi accopls oi
iojocls llo ofois. Jliio, if Loll ofois lavo Loon accoploo, llo iolailoi fxos
iosalo piicos (oi simply solls al llo piico imposoo Ly llo piooicoi inooi BIM),
oomano ano piofls aio ioalisoo, ano fiancliso foos aio paio. If ono oi Loll ofois
aio iojocloo, no salo occiis ano all fims gol zoio payofs.
Qr USP +sulfh fkrlfhv ghohjdwhg wr wkh frpprq uhwdlohu, Lofoio
analysing Loinloim ano Wlinslon`s gamo, lol is lool al wlal lappons if llo
common iolailoi was in claigo of piico oocisions. Al llo lasl slago of llo gamo, if
Loll ofois lavo Loon accoploo (ano lloiofoio foi givon n ano 1 ), llo iolailoi
cloosos fnal piicos j , j so as lo maximiso: = (j n )(a /j -
j ) - (j n )(a /j - j ). Fiom llo FOCs 0 ,0j = 0, ono oLlains
j = [a -n (/ )[ , [2(/ )[, ano q (n , n ) = (a /n -n ),2.
In llo fisl slago, llo piogiammo of a piooicoi i will lloiofoio Lo lo clooso
ils conliacl ofoi lo maximiso ils piofl givon llo conliacl of llo compoling
piooicoi, ano laling inlo accoinl llo pailicipalion consliainl of llo iolailoi:
max = (n c)q (n , n ) -1 , -.to :

[(j (n ) n )q (n , n ) 1 [ _ 0.
(70)
Sinco al oqiiliLiiim llo iolailoi will malo no piofl, llo iolailoi`s consliainl
misl Lo Linoing:
1 = (j (n ) n )q (n , n ) - (j (n ) n )q (n , n ) 1 . (71)
Jloiofoio, piooicoi i`s piogiammo can Lo iowiillon as:
max = (j (n ) c)q (n , n ) - (j (n ) n )q (n , n ) 1 . (72)
Ly siLslililing llo oqiiliLiiim valios of llo lasl slago of llo gamo, llis
Locomos:
max =
_
c
_
-
_
n
_
1 .
(7)
Ly laling 0 ,0n = 0 ano simplifying, ono can clocl llal llo symmoliic
oqiiliLiiim is givon Ly n = n = c. In liin, llis implios llal llo fnal iosalo
0
piico is j = j = a, [2(/ )[ - c,2, wlicl coiiosponos lo llo joinl piofl
maximising piico, i.o., llo piico llal llo lwo manifacliiois woilo sol if lloy
coilo soll oiioclly ano oponly colliooo. Inoooo, Ly laLoling llo joinl piofls,
ono las: = (j c)(a /j - j ) - (j c)(a /j - j ). Fiom
0 ,0n = 0 il is sliaigllfoiwaio lo clocl llal j = a, [2(/ )[ - c,2.
USP dqg frpprq djhqf| If lloy can imposo iosalo piicos, llo mani-
facliiois lavo an aooilional slialogic vaiiaLlo, llal is j . Jloii pioLlom is now
givon Ly:
max = (n c)q (j , j ) -1 , -.to :

[(j n )q (j , j ) 1 [ _ 0.
(74)
Al oqiiliLiiim, llo iolailoi`s consliainl is Linoing:
1 = (j n )q (j , j ) - (j n )q (j , j ) 1 . (7)
Jloiofoio, piooicoi i`s piogiammo can Lo iowiillon as:
max = (j c)q (j , j ) - (j n )q (j , j ) 1 . (70)
Afloi siLslililing llo spocifc finclional foim assimoo foi oomano, llis
Locomos:
max = (j c)(a /j -j ) - (j n )(a /j -j ) 1 . (77)
Ly solving 0 ,0j = 0 ono oLlains llo oplimal piico: j = (a - c
n ), [2(/ )[. Nolo llal llo oqiiliLiiim wlolosalo piicos loio aio nol oo-
loiminoo, as is nol a finclion of n . Howovoi, givon a paii of wlolosalo
piicos (n , n ), llo oqiiliLiiim (fnal) piicos oocioaso in llo wlolosalo piicos.
Moio impoilanlly, if llo wlolosalo piicos oqial llo manifacliiois` maiginal
cosls (n = n = c), llon j = j = j = a, [2(/ )[ -c,2. In olloi woios, a
conliniim of piicos can aiiso as llo oqiiliLiiim of llo gamo, ano llo collisivo
piico is ono of lloso oqiiliLiia.
Nolo also llal llo collisivo oqiiliLiiim woilo Locomo iniqio inooi many
soloclion ciiloiia (foi inslanco, Iaiolo oominanco), as woll as in a naliial sil-
ialion wloio iolailois aio asloo lo malo somo ofoil in oiooi lo soll llo gooo.
Exoiciso 9 slows llal llis is llo caso.
7
7 Dqwl0frpshwlwlyh hhfwv= ohyhudjh dqg iruh0
forvxuh
Ono of llo mosl passionalo ano inliigiing ooLalos in llo folo of anliliisl is
wlolloi a fim coilo iso anlicompolilivo piaclicos lo piolocl ano ioinfoico llo
mailol powoi il las in ono mailol oi lo oxlono il lo olloi mailols. Jlis
is an issio wlicl will Lo oiscissoo al longll in claploi 7 (on monopolisalion
ano aLiso of oominanco), Lil il is appiopiialo lo ooal will il loio, as somo
of llo possiLlo anlicompolilivo piaclicos inooi consiooialion consisl of voilical
iosliainls.
Il las Loon siggosloo, foi inslanco, llal oxclisivo ooaling migll allow a
fim onjoying a oominanl posilion lo ooloi onliy inlo llo mailol, Ly foioclosing
a ciicial inpil (llo oisliiLilion nolwoil) oi Ly maling il moio oimcill oi
oxponsivo foi llo onlianl lo oLlain sicl inpil. Il las also Loon siggosloo llal
a voilical moigoi migll lavo similai ofocls: if an ipslioam fim llal las a
oominanl posilion lalos ovoi ono of many oownslioam sollois, il migll slop
sipplying llo compolilois of ils oownslioam siLsioiaiy, oi sipplying llom al a
ligloi piico wlicl pils llom al a oisaovanlago.
Wo slall soo in llis soclion llal - oospilo llo appoal llal sicl aigimonls
migll lavo al fisl sigll - il is fai fiom Loing llo gonoial caso llal a oominanl
fim will lavo llo inconlivo lo ongago in sicl piaclicos. In facl, il is only
voiy ioconlly llal oconomic llooiy las managoo lo piovioo foimal oxamplos of
silialions wloio llal coilo lappon.
In wlal follows, I ooal sopaialoly will llo possiLlo anlicompolilivo ofocls
of oxclisivo conliacls ano voilical moigois. In Loll casos, I will fisl iocall llo
Clicago sclool" aigimonls wlicl sliossoo llo lilllo plaisiLilily of foioclosiio
ofocls, llon I analyso ioconl (posl-Clicago") moools wloio foioclosiio ofocls
migll inoooo aiiso. Finally, I will assoss llo piaclical valio of lloso llooiios,
poinling oil llal llo anlicompolilivo molivalions liglliglloo Ly llom sloilo
Lo conliasloo will possiLlo omcioncy ofocls llal oxclisivo ooaling oi voilical
moigois migll lavo.
714 Dqwlfrpshwlwlyh hhfwv= H{foxvlyh ghdolqj
Jlo concoin llal a oominanl fim migll iso oxclisivo conliacls lo oamago
aclial oi polonlial compolilois is an olo ono. Howovoi, oconomic llooiy las
oflon ioacloo sloplically lo llo possiLilily llal oxclisivo conliacls migll loao
lo foioclosiio. Moio pailicilaily, sinco llo 0`s llo so-calloo Clicago sclool las
omplasisoo llo omcioncy ofocls of sicl conliacls ano playoo oown llo plaisi-
Lilily of llo foioclosiio aigimonls. Iosnoi (1970) ano Loil (1978) simmaiiso
llo Clicago" aigimonls on llo issio. Jloy poinl oil llal foi an oxclisivo
conliacl Lolwoon an incimLonl solloi ano a Liyoi (oi oisliiLiloi) lo Lo signoo,
llo lalloi sloilo iocoivo a Lonofl fiom il. Insloao, llo aigimonl goos, a ialio-
nal Liyoi woilo nol Lo willing lo accopl a conliacl wlicl oLligos loi lo Liy
8
fiom an inomcionl incimLonl if a moio omcionl compoliloi is willing lo onloi
llo inoisliy.
Sipposo foi inslanco lloio is an incimLonl monopolisl, a polonlial onlianl
(moio omcionl llan llo incimLonl) ano only ono Liyoi in a coilain inoisliy.
Ly accopling an oxclisivo ooaling conliacl, a Liyoi woilo commil lo Liy fiom a
monopolisl ovon if onliy occiis. Jlis iilos oil onliy, ano llo Liyoi will ono ip
paying llo monopoly piico foi llo gooo. Ly iojocling llo conliacl ofoi, insloao,
llo Liyoi woilo liiggoi onliy ano Lonofl fiom a lowoi piico. Siio onoigl,
llo incimLonl migll ofoi a componsalion lo llo Liyoi lo poisiaoo loi lo
accopl oxclisivily. Howovoi, llo incimLonl is willing lo pay a componsalion no
ligloi llan ils monopoly piofl, wloioas llo Liyoi - Ly accopling llo oxclisivo
conliacl - woilo loso all llo consimoi siiplis llal aiisos Ly Liying al lowoi
piicos (namoly, will conslanl maiginal cosl, llo piofl of llo incimLonl plis
llo ooaowoigll loss). Soclion 4.1.1 foimalisos llis aigimonl.
Figiio 0.0 illislialos il. Sipposo llo incimLonl las inil cosl c ano woilo
malo a piofl if il onjoyoo a monopoly, coiiosponoing lo llo aioa j 1c .
Jlo onlianl las cosl c < c : if il onloioo, il coilo sol a piico jisl sligllly
Lolow c ano gol all llo mailol foi ilsolf. Jloiofoio, piico if onliy occiis woilo
Lo (sligllly lowoi llan) c . Jlo Liyoi woilo gol a siiplis C3 , coiiosponoing
lo llo aioa oj , inooi monopoly, ano a siiplis C3 oqial lo llo aioa o1c , if
onliy occiis. Jloiofoio, lo Lo poisiaooo lo ooal oxclisivoly will llo incimLonl,
llo Liyoi sloilo iocoivo an ofoi t ligloi llan llo gain il malos if onliy occiis,
C3 C3 . Jlis is oqiivalonl lo llo aioa j 1c . Howovoi, il is cloai llal llo
incimLonl coilo novoi malo sicl a ligl ofoi, sinco ils piofl < C3 C3 .
INSEBJ Figiio 0.0. Jlo Clicago Sclool" ciiliqio lo foioclosiio
Jlo implicalion of llis aigimonl is nol llal oxclisivo conliacls will novoi
Lo oLsoivoo, Lil ialloi llal - if lloy oxisl - il is Locaiso lloy onlail somo
omcioncy gains, Lil sinco lloso gains aio Lonofcial foi Loll llo fim wlicl
isos sicl conliacls ano foi consimois, lloio sloilo Lo no ioason wly anliliisl
ailloiilios sloilo inloivono ano foiLio sicl conliacls.
Srvw0fklfdjr prghov Jlo aigimonl aLovo, wlicl is slill valio, ompla-
sisos llal il is loss liloly llan il migll appoai al fisl sigll llal a fim ongagos
in oxclisivo conliacls will a viow lo monopolising llo mailol (ano llal pio-
compolilivo ofocls aio oflon Lolino sicl conliacls). Howovoi, ioconl llooiolical
conliiLilions oo ofoi oxamplos of ciicimslancos inooi wlicl oxclisivo conliacls
will loao lo anlicompolilivo ofocls.
Jlo main insigll Lolino llo ioconl moools of oxclision can Lo inooislooo
Ly iofoiing lo llo samo oxamplo isoo aLovo. In llal oxamplo, llo incimLonl
is nol aLlo lo malo an ofoi laigo onoigl lo poisiaoo llo Liyoi lo accopl an
oxclisivo ooal. Howovoi, lloio aio ciicimslancos inooi wlicl llis is possiLlo,
ano lloso ciicimslancos iofoi lo llo oxislonco of oxloinalilios will iospocl lo
llo iolalionslip Lolwoon llo incimLonl ano llo Liyoi wlo is consiooiing llo
9
oxclisivo ooal. Foi inslanco, imagino llal Ly oxclioing llo onlianl llo incim-
Lonl malos nol only llo monopoly piofl in llo mailol inooi consiooialion,
Lil also managos lo incioaso piofl on anolloi mailol (foi inslanco Locaiso llo
polonlial onlianl cannol onjoy oconomios of scopo Ly piooicing in lwo mai-
lols). In llis caso, llo incimLonl, Ly oxclioing llo onlianl, woilo malo
plis somo aooilional piofl fiom anolloi mailol: il coilo now Lo possiLlo lo
malo an ofoi ligl onoigl lo inoico llo Liyoi lo accopl llo oxclisivo ooal.
Mosl of llo ioconl woils llal slow llal an incimLonl migll iso oxclisivo
ooals lo foiocloso onliy ioly on oifoionl oxloinalilios llal oxplain wly foioclo-
siio migll Lo pioflaLlo. Sicl woils inclioo Aglion ano Lollon (1987), Bas-
mison ol al (1991), Sogal ano Wlinslon (2000a) ano Loinloim ano Wlinslon
(1998).
Aglion ano Lollon (1987) illislialo low an incimLonl ano a Liyoi migll
agioo on a pailially oxclisivo conliacl wlicl migll piovonl onliy of a moio om-
cionl compoliloi. In lloii moool, llo Liyoi can Lo ioloasoo fiom llo oxclisivily
iolalionslip Ly paying a ponally lo llo incimLonl. Efoclivoly, wlal lappons
in lloii solling is llal incimLonl ano Liyoi agioo on a conliacl wlicl onaLlos
llom lo oxliacl somo of llo ionl llo onlianl woilo lavo in caso of onliy (llo
aioa c 11c in fgiio 0.0 aLovo). Exclision ooos nol always occii, Lil wlon
il ooos il is anlicompolilivo. Soclion 4.1.1 slows llo aigimonl moio foimally.
Basmison ol al (1991) ano Sogal ano Wlinslon (2000a) slow anolloi cii-
cimslanco wloio oxclisivo ooaling migll ooloi onliy. If lloio aio many Liyois
in llo mailol llal cannol cooioinalo lloii piiclasos, ano if a polonlial onlianl
nooos lo sociio a coilain nimLoi of llom lo covoi ils fxoo cosls, llon an in-
cimLonl migll oxploil llo lacl of cooioinalion among Liyois lo ooloi onliy. Al
llo momonl of accopling an oxclisivily ofoi fiom llo incimLonl, oacl Liyoi
ooos nol lalo inlo accoinl llal Ly ooing so il imposos an oxloinalily on llo
olloi Liyois. In olloi woios, if all llo ollois accopl llo oxclisivo ooaling ofoi
fiom llo incimLonl, ono of llom las no inconlivo alono lo iojocl llo oxclisivily
conliacl fiom llo incimLonl, as a fioo" Liyoi alono woilo nol Lo aLlo lo liig-
goi onliy Ly aooiossing llo onlianl (as llo onlianl woilo nooo sovoial Liyois
lo covoi ils fxoo cosl of onliy).
Jo illislialo llo moool iofoi lo fgiio 0.0 aLovo, Lil will lwo ioonlical
Liyois ialloi llan ono. Eacl Liyoi is oosciiLoo Ly llo oomano finclion oo .
Jlo incimLonl malos oacl of llom an ofoi in oxclango foi an oxclisivo ooal,
00
lloy accopl oi iojocl llo ofoi, ano llon a moio omcionl onlianl oocioos on onliy
(Lil il covois fxoo cosl only if il solls lo Loll Liyois). Wlon llo incimLonl
nogolialos llo ooal will a Liyoi, il can ofoi il lwico ils piofl, sinco Ly golling
an oxclisivo Liyoi il woilo gol monopoly piofl on lwo mailols. Iioviooo llal
2 C3 C3 (nol a sliong assimplion), il can now ofoi a componsalion
t wlicl inoicos ono Liyoi lo accopl llo ooal, lloioLy Llocling onliy foi Loll
Liyois. (In facl, lloio is an oxclisionaiy oqiiliLiiim wloio llo incimLonl pays
zoio componsalion: ovon if ofoioo nolling, a Liyoi alono lnows llal il woilo
nol Lo onoigl lo inoico onliy, ano lloiofoio accopls llo ooal.)
Howovoi, lloio is also anolloi oqiiliLiiim wloio all Liyois Liy fiom llo
onlianl. If all iojocl llo incimLonl`s conliacl, onliy will occii (llo onlianl
is moio omcionl), ano lloy will all ono ip Liying fiom llo onlianl al a lowoi
piico. Jlis is cloaily an oqiiliLiiim, as no Liyoi woilo lavo an inconlivo lo
inilaloially oovialo ano accopl llo incimLonl`s conliacl.
If llo Liyois woio allowoo lo cooioinalo lloii piiclaso oocisions, llon lloy
woilo nol accopl llo ooal ano onliy woilo occii. Jlis is nol siipiising, sinco
llo aigimonl aLovo is Liill ipon llo facl llal oacl Liyoi lalos ils accoplanco
oocisions sopaialoly, ano ooos nol lalo inlo accoinl llal Ly accopling llo ooal
il imposos an oxloinalily ipon llo olloi Liyois. If llo Liyois can acl as if lloy
woio a singlo Liyoi, lloy woilo iojocl llo ofoi fiom llo incimLonl ano woilo
Liy fiom llo onlianl al a lowoi piico. Jloiofoio, llis moool spoals in favoii of
nn| &hn-.nj njn.-, llal is agoncios wlicl cooioinalo (olloiwiso inoo-
ponoonl) Liyois` oocisions, lloioLy Lioaling possiLlo inomcionl miscooioinalion
oilcomos.
Fimagalli ano Molla (2002) qialify llo onliy ooloiionco powoi of oxclisivo
ooals. Jloy analyso a moool llal incoipoialos llo samo foaliios as Sogal ano
Wlinslon (2000a), will llo vaiianl llal Liyois aio nol fnal consimois, Lil
aio insloao compoling will oacl olloi in a oownslioam mailol. Jloy slow
llal if Liyois` compolilion is sliong onoigl, a singlo Liyoi woilo lavo an in-
conlivo lo Lioal llo oxclisionaiy oqiiliLiiim, sinco Ly sociiing a cloapoi inpil
il woilo onjoy a laigoi slaio of llo oownslioam mailol. Consiooi foi inslanco
llo oxliomo caso wloio oownslioam compolilion is a la Loiliano ano gooos
aio voiy closo siLslililos. In llal caso, any Liyoi woilo lavo an inconlivo nol
lo accopl llo incimLonl`s ofoi, Locaiso in llis way a Liyoi coilo aooioss llo
moio omcionl onlianl, Liy fiom il al a lowoi piico llan all olloi Liyois, ano
lonco oLlain mosl of llo mailol foi ilsolf. (Jlo onlianl loio ooos onloi wlon
aooiossoo Ly a singlo oovianl Liyoi, Locaiso llo lalloi will Liy onoigl inils
sinco il is aLlo lo gol all llo mailol.) An alloinalivo way lo oxpioss llis iosill in
similai loims as llo Clicago aigimonl aLovo, is llal wlon oownslioam compo-
lilion is sliong onoigl, llo incimLonl cannol pay a laigo onoigl componsalion
lo convinco Liyois lo accopl llo oxclisivo conliacl.
Nolo llal in llo aLovomonlionoo papois (Aglion ano Lollon (1987), Bas-
01
mison ol al. (1991) ano Sogal ano Wlinslon (2000a)), a loy foaliio is llal llo
oxclisivo conliacl Lolwoon llo incimLonl ano a Liyoi oxoicisos somo lypo oi
olloi of oxloinalily on (ono oi moio) lliio pailios. Jlis piinciplo is omplasisoo
Ly Loinloim ano Wlinslon (1998), a papoi wloio llo issio of wlolloi oxclisivo
ooaling can givo iiso lo foioclosiio oi mailol lovoiago is slioioo in a moio gonoial
faslion.
71414 H{foxvlyh ghdolqj dqg hqwu| ghwhuuhqfh-
In llis soclion I Liiofy oosciiLo llo main moools monlionoo in llo loxl on ox-
clisivo ooaling ano onliy ooloiionco. Fiisl, I piosonl llo Clicago aigimonl ac-
coioing lo wlicl oxclisionaiy conliacls woilo nol Lo pioflaLlo. Jlon I piosonl
a simplifoo voision of Aglion ano Lollon (1987), ano of llo miscooioinalion
aigimonl oio lo Basmison ol al. (1991), as laloi iofnoo Ly Sogal ano Wlinslon
(2000a).
H{foxvlyh ghdolqj= Fklfdjr dujxphqwv- Consiooi llo following moool.
Jloio is an incimLonl fim wlicl piooicos al a cosl c , ano a polonlial onlianl
wlicl - afloi paying a fxoo cosl of onliy, ) - coilo piooico llo samo lomogonois
gooo al a cosl c . Wo assimo - lo malo llings inloiosling - llal c < c
(if llo incimLonl was moio omcionl, oxclisivo conliacls woilo nol Lo al lano
sinco onliy woilo novoi occii). Jlo gamo is as follows. In llo fisl slago,
llo incimLonl fim migll ofoi llo only Liyoi a componsalion t in oiooi foi
loi lo accopl an oxclisivo conliacl. In llo socono slago, llo Liyoi accopls oi
iojocls llo ofoi. If slo accoploo, slo coilo Liy only llo incimLonl`s piooicl;
if slo iojocloo, slo coilo also Liy llo onlianl`s piooicl. In llo lliio slago, llo
polonlial onlianl - afloi laving oLsoivoo wlolloi a conliacl las Loon signoo oi
nol Ly llo Liyoi - oocioos on onliy (ano sinls onliy cosls if il onlois). In llo
lasl slago, fims in llo mailol clooso piicos.
Domano is givon Ly 1(j) = o j, will o 2c -c (llis conoilion iosliicls
llo casos lo Lo consiooioo in llo piico gamo, soo Lolow).
Assimo also llal llo onlianl woilo fno il pioflaLlo lo onloi in llo aLsonco
of oxclisivo conliacls: (c c )(o c ) ).
Wo can now solvo llo moool Laclwaios, lo slow llal lloio aio no onliy-
ooloiionco oxclisivo conliacls wlicl can Lo pioflaLlo foi llo incimLonl ano
llal woilo Lo accoploo Ly llo Liyoi.
Al llo lasl slago of llo gamo, if no onliy las occiiioo, llo incimLonl is
llo only solloi ano cloosos piico lo maximiso monopoly piofl: max = (o
j)(jc ). Ly laling FOCs ano solving il is oasy lo clocl llal inooi monopoly
piicos, piofl ano consimoi siiplis aio:
02
j =
o -c
2
; =
(o c )
4
; C3 =
(o c )
8
. (78)
If insloao onliy lao occiiioo, llon Loiliano compolilion implios llal llo
mailol will Lo soivoo Ly llo moio omcionl onlianl fim al llo piico wlicl
oqials llo maiginal cosl of llo incimLonl: j = c . Consimoi siiplis is
oasily compiloo as C3 = (o c ) ,2.
Al llo pioviois slago, onliy occiis if llo Liyoi is fioo", i.o., slo las nol
signoo llo oxclisivo conliacl. Elso, onliy ooos nol occii.
Noxl, wo lavo lo clocl if llo Liyoi accopls llo oxclisivily ofoi fiom llo
incimLonl. Slo will if llo componsalion ofoioo Ly llo incimLonl will ofsol
llo loss in siiplis fiom laving lo Liy fiom a monopolisl: C3 -t _ C3 . In
olloi woios llo Liyoi accopls if t _ (o c ) ,8 t .
Finally, Ly ofoiing llo conliacl llo incimLonl las a payof t, wloioas
Ly nol laving oxclisivily il will lavo zoio payof. Afloi siLslililion, il is
oasy lo soo llal llo maximim componsalion llal llo incimLonl is willing lo
pay is t = (o c ) ,4 < t . Jloiofoio, llo incimLonl will nol Lo aLlo lo
inoico llo Liyoi lo accopl llo oxclisivo conliacl, ano onliy will nol Lo oo-
loiioo.
Frqwudfwv dv d eduulhu wr hqwu|- Consiooi a lomogonois gooo inoisliy
will an incimLonl fim 1 laving a cosl c = 1,2 ano a Liyoi will inil oomano
wloso valialion foi llo gooo is = 1. Jloio oxisls a polonlial onlianl 1 in
llis inoisliy, wloso cosl c is inifoimly oisliiLiloo in [0, 1[. Wo consiooi an
oxclisivo ooaling conliacl (j, j ) accoioing lo wlicl - if accoploo - llo Liyoi
commils lo Liy fiom llo incimLonl al a piico j al a laloi slago, Lil il can
Lo ioloasoo fiom llo oxclisivily claiso (ano Liy fiom llo onlianl) afloi llo
paymonl of a ponally (oi liqiioaloo oamagos") j .
Jlo gamo is as follows. Al limo t , llo incimLonl 1 ofois a conliacl (j, j )
lo llo Liyoi, wlo can oilloi accopl il oi iojocl il. Al limo t , llo polonlial
onlianl oocioos on onliy ano sols a piico j . (If no conliacl las Loon signoo,
llo incimLonl also cloosos ils piico j.) Al limo t , lloio is piooicl mailol ano
payof ioalisalion.
Qr frqwudfw Fiisl, consiooi llo caso wloio no oxclisivo ooaling claiso
oxisls. Sinco lloio is piico compolilion, fim 1 will onloi only if ils cosl c
is lowoi llan 1,2. In llis caso, il claigos piico j = 1,2 ano gols all llo
mailol. Jloiofoio, llo pioLaLilily llal onliy occiis is c = Ii(c _ 1,2) = 1,2
(oio lo llo assimplion of inifoim oisliiLilion), ano llo Liyoi las a siiplis
0
j = 1 1,2 = 1,2. If c 1,2, llo onlianl will nol onloi ano fim 1 will
claigo j = 1. In llis caso, occiiiing will pioLaLilily (1 c), llo Liyoi las a
siiplis j = 0.
Jloiofoio, if no conliacl oxisls llo Liyoi`s oxpocloo siiplis is c(1,2) -(1
c)0 = 1,4, ano llo incimLonl`s oxpocloo payof is c(0)-(1c)(11,2) = 1,4.
H{foxvlylw| frqwudfw If llo Liyoi las accoploo llo conliacl (j, j ), il
will Liy fiom fim 1 only if llo lalloi fim`s piico plis llo ponally j oio lo
llo incimLonl is lowoi llan llo incimLonl`s piico: j - j _ j. Jloiofoio, if
il onlois, fim 1 will claigo j = j j . In liin, onliy will occii only if llo
cosl of llo onlianl is lowoi llan llo oxpocloo piico. Calling c llo pioLaLilily
of onliy if a conliacl oxisls, il will Lo c = Ii(c _ j j ) = j j .
Lol is now lool al llo incimLonl`s pioLlom, wlicl is llo following:
max = c j - (1 c )(j 1,2) -.to : 1 j _ 1,4. (79)
In olloi woios, llo incimLonl las lo clooso llo oplimal piico ano ponally
so as lo maximiso ils oxpocloo piofl. Jlis is givon Ly - in oxpocloo loims -
llo ponally if llo onlianl liins oil lo Lo omcionl onoigl so as lo claigo a low
onoigl piico plis llo salos piico if llo onlianl las a ligl onoigl cosl. Howovoi,
llo conliacl will Lo accoploo Ly llo Liyoi only insofai as il givos llo lalloi al
loasl llo samo oxpocloo siiplis 1j as willoil llo conliacl (wloio llo siiplis
is 1,4): llis oxplains llo consliainl in llo pioLlom aLovo.
Jlo pioLlom can llon Lo wiillon as max siLjocl lo: j _ ,4, wloso
solilion is givon Ly (j , j ) = (,4, 1,2). Jlis implios llal fim 1 will onloi
llo mailol will a pioLaLilily c = j j = 1,4. Sinco omcioncy woilo
ioqiiio onliy wlonovoi c _ 1,2, wloioas inooi llo conliacl onliy occiis only
if c _ 1,4, lloio is a wolfaio loss: foi 1,4 < c _ 1,2 omcionl onliy ooos nol
occii oio lo llo oxclisivo conliacl.
As a lasl slop, lol is clocl llal llo incimLonl is Lolloi of ofoiing llis
conliacl llan nol. Jlis is oasily voiifoo, as inooi llo conliacl fim 1 las an
oxpocloo piofl wlicl is laigoi llan wlal il woilo gol willoil llo conliacl:
= (1,4)(1,2) - (,4)(1,4) = ,10 1,4.
Il is woill inooilining llal oxclisivo ooaling ooos nol always ooloi onliy.
Wlon llo onlianl is voiy omcionl, llo incimLonl piofois lo allow onliy ano
oxliacl somo of llo onlianl`s ionl llioigl llo ponally, ialloi llan lo ooloi
onliy complololy.
Qdnhg h{foxvlrq- Consiooi an incimLonl fim solling lo lwo oislincl Liyois,
11 ano 12, oacl in a sopaialo mailol ano will llo samo oomano finclion.
04
Vlpxowdqhrxv qrq0glvfulplqdwru| rhuv Jlo incimLonl simillano-
oisly ofois llom a fxoo componsalion t (lo slail will, sipposo il misl Lo
llo samo foi oacl Liyoi) in oxclango foi an oxclisivo ooal. Liyois llon simil-
lanooisly accopl oi iojocl llo ofoi. Jlon, an onlianl oLsoivos lloii oocisions
ano oocioos on ils onliy. If il onlois, il pays a fxoo onliy cosl 1 (llo samo
onliy cosl allows il lo soivo Loll Liyois). Finally, piico oocisions aio lalon Ly
opoialivo sippliois. Assimo llal < C3 C3 < 2 (llo fisl inoqialily
is a naliial assimplion, as soon aLovo; llo socono is also salisfoo inooi milo
assimplions) ano llal (c c )q(c ) < 1 < 2(c c )q(c ), wlicl moans llal
onliy is nol pioflaLlo if llo onlianl soivoo only ono Liyoi, Lil il woilo Lo piof-
ilaLlo if soiving Loll Liyois (olloiwiso, llo pioLlom woilo Lo ininloiosling).
Al llo lasl slago of llo gamo, piico oocisions aio sliaigllfoiwaio. Al oqii-
liLiiim, if onliy las occiiioo, llo onlianl claigos c ano gol ovoiy fioo Liyoi.
Jlo incimLonl claigos j lo ovoiy oxclisivo Liyoi. Jlo Liyois` oocisions can
Lo illislialoo Ly llo payof maliix in JaLlo 0.1.
INSEBJ JaLlo 0.1. Sogal-Wlinslon: simillanoois ofois
Jlo gamo las lwo oqiiliLiia. Jlo fisl oqiiliLiiim is (accopl,accopl), wloio
Loll Liyois accopl llo ofoi. Wlon llo olloi Liyoi accopls llo ooal, Ly accopl-
ing il a Liyoi oLlains a payof C3 - t; Ly oovialing ano iojocling llo ofoi il
woilo gol C3 (iocall llal a Liyoi alono woilo nol inoico onliy). Jloiofoio,
llo oqiiliLiiim aiisos foi any t _ 0.
Jloio is also a socono oqiiliLiiim, (iojocl,iojocl), wloio no Liyoi accopls llo
ooal. Jloio is no pioflaLlo oovialion fiom llis paii: Ly oovialing ano accopling
llo ooal wlon llo olloi iojocls il a Liyoi woilo lavo lo malo C3 -t C3 .
Lil lloio is no t wlicl salisfos t C3 C3 , sinco Ly assimplion <
C3 C3 .
Jloio aio lloiofoio lwo oqiiliLiia of llo wlolo gamo. Ono (oxclisionaiy
oqiiliLiiim), wloio llo incimLonl ofois t = 0 ano Loll Liyois accopl llo ooal.
Jlo olloi wloio il ofois t = 0 ano Loll Liyois iojocl il. Naloo oxclision aiisos
al oqiiliLiiim, Lil il is nol llo only oilcomo.
Vlpxowdqhrxv glvfulplqdwru| rhuv Sipposo now llal llo samo gamo
as aLovo is playoo, Lil llal llo incimLonl can oifoionlialo llo ofois, so llal
il can ofoi t t . Jlo payof maliix of JaLlo 0.2 illislialos llo now gamo.
INSEBJ JaLlo 0.2. Sogal-Wlinslon: oisciiminaloiy ofois
Il is cloai llal llo paii (accopl, accopl) is slill an oqiiliLiiim of llo gamo
foi any t _ 0, sinco Ly oovialing fiom il ano iojocling llo ooal wlon llo olloi
accopls il, a Liyoi 1i (i = 1, 2) woilo gol C3 - t _ C3 . Howovoi, llo
oqiiliLiiim (iojocl, iojocl) is nol an oqiiliLiiim any longoi. Jo soo wly, nolico
llal wlon Liyoi 12 iojocls llo conliacl, Liyoi 11 woilo gol C3 - t Ly
accopling llo ooal ano C3 Ly iojocling il. Howovoi, Ly ofoiing a micl Lolloi
ooal lo 11 llan 12, llo incimLonl can malo il convonionl foi llo foimoi lo
0
accopl llo ooal. In olloi woios, llis oqiiliLiiim is Liolon if t C3 C3 ,
wlicl is possiLlo sinco wo assimoo C3 C3 < 2 .
Vhtxhqwldo rhuv Jlo noalosl oxamplo of naloo oxclision aiisos wlon
llo incimLonl can malo soqionlial ofois. Figiio 0.7 illislialos llo gamo in
llis caso.
INSEBJ Figiio 0.7. Sogal-Wlinslon: soqionlial ofois
Sipposo fisl llal llo fisl Liyoi las iojocloo llo ooal in llo fisl ioino,
ano il is ip lo 12 lo oocioo. Jlis Liyoi accopls llo oxclisivo ooal if t _
C3 C3 , ano wo lavo jisl soon llal llo incimLonl is willing lo ofoi sicl
ligl componsalions. Jloiofoio, 12 can always Lo inoicoo lo accopl if 11 las
iojocloo.
Sipposo insloao llal llo fisl Liyoi las accoploo llo ooal. In llis caso, 12
accopls llo ooal wlalovoi llo lovol of llo componsalion, sinco C3 - t is al
loasl as ligl as C3 .
Wlon il comos lo ils own oocision, Liyoi 11 lnows llal if il accopls, llo
noxl Liyoi woilo accopl loo, ano lloiofoio woilo gol C3 -t ; if il iojocls, llo
noxl Liyoi woilo always accopl llo ooal, so llal 11 woilo gol C3 . Cloaily,
il piofois lo accopl llo ooal foi any componsalion lovol. Jloiofoio, al llo
iniqio oqiiliLiiim llo incimLonl is aLlo lo ofoi zoio (oi sligllly aLovo zoio)
componsalions, ano lavo Loll Liyois accopling llo ooal. Iiio oxclision occiis,
ano il cosls nolling lo llo incimLonl.
Frqfoxvlrqv Wlicl conclisions can Lo oiawn fiom llis analysis Coilainly,
ioconl moools slow llal oxclisivo conliacls lavo a sliong onliy-ooloiionco po-
lonlial. Howovoi, il sloilo nol Lo foigollon llal oxclisivo conliacls oflon lavo
omcioncy ioasons as woll (soo also Sogal ano Wlinslon, 2000L). A Lolloi
inooislanoing of low lo Lalanco oxclisionaiy ano omcioncy ofocls of oxclisivo
conliacls is nooooo, Lil il sooms safo lo assimo llal llo foimoi migll oominalo
llo lalloi only if llo fim ising oxclisivo conliacls las a voiy sliong mailol
posilion.
715 H{foxvlrqdu| hhfwv ri yhuwlfdo phujhuv
Jlo pioviois soclions lavo slowoo llal voilical moigois lavo posilivo ofocls
ipon wolfaio in many ciicimslancos, foi inslanco, Ly golling iio of llo ooi-
00
Llo maiginalisalion pioLlom oi oliminaling fioo-iioing oisloilions. Lil migll
voilical moigois Lo anli-compolilivo Il las oflon Loon mainlainoo llal Ly
inlogialing oownslioam, foi inslanco, an inpil sipplioi woilo oony accoss lo
llo inpil lo all ils oownslioam iivals, lloioLy gaining mailol powoi in llo
oownslioam mailol. Howovoi appoaling al fisl sigll, llis aigimonl las Loon
ooLaloo Ly oconomisls foi a long limo, ano compolilion laws lavo also lao qiilo
oifoionl slancos lowaios voilical moigois, in oifoionl coinliios ano al oifoionl
limos.
Jlo infionlial Clicago Sclool mainlainoo llal llis aigimonl was nol coi-
iocl, ano aigioo llal voilical moigois aio omcionl. Jlis claim was Lasoo on
a moool wloio an ipslioam monopolisl solls lo poifoclly compolilivo fims. In
sicl ciicimslancos (as wo lnow alioaoy fiom soclion 2.1), llo ipslioam mo-
nopolisl is aLlo lo oxliacl all llo piofls fiom llo mailol (sinco lloio is no
pioLlom of ooiLlo maiginalisalion). Honco, a voilical moigoi woilo nol aoo
mailol powoi lo llo monopolisl (fiom llis llo laLol -.nj| nn|j ] lo
llis llooiy): if a voilical moigoi lalos placo, il misl Lo Locaiso somo omcioncios
aio cioaloo. (Soo soclion 4.2.1.)
In a moio gonoial fiamowoil (llal is, iofoiiing lo llo caso wloio lloio aio
sovoial fims ipslioam ano oownslioam), llo Clicago Sclool piopononls also
poinloo oil llal ovon if an inlogialoo fim iooicoo oi coasoo llo sipply of
inpil lo oownslioam iivals, il is nol cloai llal llis woilo iosill in ofoclivo
inpil foioclosiio: fisl, olloi sippliois migll incioaso lloii slaio of llo inpil
mailol; socono, llo facl llal llo inlogialoo fim ooos nol Liy in llo inpil
mailol iooicos llo oomano foi llo inpils, possiLly iooicing llo oqiiliLiiim
piicos in llo inpil mailols. Il migll woll Lo llal wlolosalo piicos oocioaso,
ialloi llan incioaso, afloi llo voilical moigoi.
Il is only ioconlly llal oconomisls lavo iigoioisly slowoo llal inooi coilain
ciicimslancos voilical moigois can iosill in foioclosiio ano anli-compolilivo
oilcomos. Jlo ioaooi sloilo iocall, llal wo lavo alioaoy soon an inslanco
wloio a voilical moigoi migll iooico wolfaio. Jlis was llo caso wloio voilical
inlogialion allows a fim lo solvo a commilmonl pioLlom (soo soclion 2.) ano
loop ils piicos ligl.
Moio gonoially, ioconl gamo llooiolic moools allow lo analyso silialions
wloio lloio oxisl sovoial oownslioam ano,oi sovoial ipslioam fims, ano slow
llal in coilain casos a voilical moigoi n.jh cioalo foioclosiio. Jo inooislano
llo issios al lano, consiooi a lypollolical silialion wloio a voilical moigoi
Lolwoon an ipslioam ano a oownslioam fim lalos placo. Wlal is llo ofocl of
llo moigoi on llo inpil paio Ly llo inooponoonl oownslioam fims ano on llo
piico paio Ly consimois
Jloio aio a nimLoi of ofocls llal ono las lo lalo inlo accoinl lo answoi llis
qioslion. Jlo main onos aio as follows. Fiisl of all, ono sloilo clocl wlolloi
il is in llo inloiosl of llo inlogialoo fim lo conlinio lo sipply llo inooponoonl
oownslioam fims, oi lo iaiso llo piico of llo inpil il solls llom. If llo lalloi
07
soivo an al loasl pailially oifoionl mailol llan llo inlogialoo oownslioam
fim, coasing lo sipply llom oi sipplying llom al ligloi piicos, woilo onlail
foiogoing piofls. If llo olloi ipslioam fims aio compolilivo onoigl, iaising
inpil piicos migll nol Lo a pioflaLlo slialogy foi llo inlogialoo fim. Jo
inooislano llo inconlivo of llo inlogialoo fim lo incioaso piico of llo inpil
solo lo inooponoonl oownslioam fims, ono las lo caiiy oil a similai analysis as
in loiizonlal moigois lo soo wlolloi llo moiging fims will Lo aLlo lo incioaso
piicos. VaiiaLlos lo consiooi will lloiofoio Lo: llo olaslicily of oomano foi
llo inpil; llo oxcoss capacily of llo ipslioam iivals; llo oxislonco of polonlial
onlianls (ano llo oaso of onliy), ano so on.
Socono, ovon if llo ipslioam inlogialoo fim coasos lo sipply (oi solls al
ligloi piicos lo) llo oownslioam iival fims, il is nol saio llal llo cosl of llo
inpil foi llo lalloi will incioaso, Locaiso (i) llo olloi ipslioam fims migll
incioaso lloii sipply of llo inpil, ano (ii) Locaiso llo lowoi oomano foi llo
inpil (caisoo Ly llo willoiawal fiom llo mailol of llo oownslioam amlialo
of llo inlogialoo fim) will lono lo iooico inpil piicos. Ono las lloiofoio lo
clocl, among olloi llings, llo oxlonl lo wlicl olloi ipslioam piooicois soll
closo onoigl siLslililo inpils ano wlolloi lloy aio nol capacily consliainoo.
Jliio, ovon if foioclosiio oxisls (in llo sonso llal inpil piicos paio Ly inoo-
ponoonl fims will incioaso), llis ooos nol nocossaiily imply llal llo oownslioam
amlialo of llo inlogialoo fim is aLlo lo iaiso piicos. Jloio migll Lo onoigl
compolilion in llo oownslioam mailol lo malo il oimcill foi il lo oxoiciso
mailol powoi (loio again, sipply ano oomano claiacloiislics of llo mailol will
ooloimino llo oxlonl lo wlicl llo oownslioam fim can iaiso piicos). Fiilloi,
llo fnal ofocl on consimoi siiplis (ano wolfaio) migll slill Lo Lonofcial oio lo
llo oliminalion of ooiLlo maiginalisalion willin llo inlogialoo clain. Jlo fnal
piico migll oocioaso, ialloi llan incioaso, oospilo llo inooponoonl oownslioam
fims paying a ligloi piico foi llo inpil.
Il is impossiLlo lo say a piioii wlicl ofocl oominalos ovoi llo ollois, Lil ono
sloilo nono llo loss conclioo llal a nimLoi of conoilions misl lolo foi a voili-
cal moigoi lo givo iiso lo anli-compolilivo foioclosiio. Fiilloi, ono sloilo also
lalo inlo accoinl llal llo voilical moigoi migll involvo omcioncios (olloi llan
ooiLlo maiginalisalion) llal ono sloilo Lalanco will llo possiLlo foioclosiio
ofocls, as wo inoicalo in soclion .
71514 H{foxvlrqdu| hhfwv ri yhuwlfdo phujhuv-
Rqh prqrsro| surw rqo|- Consiooi an ipslioam monopolisl l llal solls
lo lwo oownslioam fims, 1 ano 1 , wlicl soll a lomogonois gooo lo fnal
consimois (laving oomano q = 1 j), ano compolo in piicos. Assimo llal
foi oacl inil of oilpil a inil of inpil misl Lo Loigll (fxoo piopoilions locl-
nology). Jlo ipslioam fim malos lalo-il-oi-loavo-il ofois lo llo oownslioam
fims ano lloso aio oLsoivaLlo ano nol ionogoliaLlo. Assimo also llal l las
08
a maiginal cosl c < 1 ano llal oownslioam fims` only cosl is llo piico of llo
inpil, n.
In llis caso, a voilical moigoi coilo nol incioaso llo piofl of llo ipslioam
fim. Jloiofoio, a voilical moigoi woilo lalo placo only if il onlailoo somo
omcioncy gain. Jo soo llis, compaio llo lwo alloinalivo sliicliios.
1.n| -nn.n. Jlo oownslioam sollois compolo in piicos. Donoling
will n llo piico al wlicl lloy Liy llo inpil, llo mailol piico of llo fnal gooo
al oqiiliLiiim will Lo j = j = n, ano llo lolal oilpil will Lo q = 1 n.
Jlo ipslioam fim will clooso n lo maximiso ils piofls = (n c)(1 n).
Honco, n = (1 - c),2 al oqiiliLiiim, iosilling in mailol piico j = (1 - c),2,
ano lolal piofl foi l oqial lo = (1 c) ,4.
Nolo llal llis is piocisoly llo samo oilcomo llal fim l woilo oLlain if il
solo llo piooicl oiioclly.
1.n| nj .h n nn-nn ]n. Sipposo now llal llo ipslioam
fim moigos will ono of llo iolailois, say 1 . In llis caso, llo ipslioam fim can
oilloi conlinio lo sol llo samo wlolosalo piico as aLovo, oi soll lo ils amlialo
1 only al llo piico n = c. 1 woilo llon clooso llo piico j = (1-c),2 wlicl
maximisos ils piofl = (j c)(1 j). As a iosill, lowovoi, llo lolal piofl
of llo inlogialoo fim woilo slill Lo = (1 c) ,4 (ano fnal piicos woilo
iomain inclangoo). Jloiofoio, lloio is no inconlivo lo moigo in llis silialion:
if a voilical moigoi aiisos, il is only Locaiso il woilo loao lo omcioncy gains.
Uhfhqw wkhrulhv= Lv wkhuh iruhforvxuh iurp yhuwlfdo phujhuvB- Jlo
voiy simplo moool aLovo Liilos on a nimLoi of assimplions llal, if iolaxoo,
woilo givo iiso lo oifoionl iosills, allloigl nol all inloipiolaLlo as lo siggosl
llal voilical moigois aio anli-compolilivo.
Xqrevhuydeoh rhuv1 Fiisl of all, consiooi llo caso wloio llo ipslioam
fim`s ofois aio inoLsoivaLlo. In llis caso, wo lnow fiom soclion 2..1 llal llo
ipslioam fim migll lavo an inconlivo lo moigo will a oownslioam fim so as
lo solvo ils commilmonl pioLlom. In llis silialion, llo moigoi will loao lo foio-
closiio of llo oownslioam iival, ano llis will Lo anli-compolilivo, in llo sonso
llal il will loao lo ligloi piicos. Howovoi, nolico llal llis conclision lingos
on llo assimplion llal llo ipslioam fim was inaLlo lo solvo ils commilmonl
pioLlom llioigl voilical iosliainls.
Grzqvwuhdp upv kdyh pdunhw srzhu1 H!flhqw iruhforvxuh Soc-
ono, consiooi llo caso wloio ofois aio oLsoivaLlo Lil oownslioam fims 1
ano 1 lavo somo mailol powoi. In pailicilai, assimo foi simplicily llal lloy
compolo in qianlilios ialloi llan piicos (lo moool mailol powoi will piicos wo
woilo nooo oifoionlialoo piooicls). Invoiso oomano is givon Ly j = 1q q .
09
Unooi .n| -nn.n, al a symmoliic oqiiliLiiim llo oownslioam fims
will pay n foi llo inpil. Jloy clooso q lo maximiso = (jn)q . Jlis is llo
slanoaio Coiinol gamo, iosilling in oqiiliLiiim qianlilios q = q = (1n),,
ano oqiiliLiiim piico j = (1 - 2n),.
If llo ipslioam fim is consliainoo lo linoai conliacls, llon il will clooso n lo
maximiso = 2(nc)(1n),. Fiom llo FOCs il follows llal n = (1-c),2.
Ly siLslililion, ono oLlains fnal piicos ano llo ipslioam fim`s piofls as
j = (2 - c), ano = (1 c) ,0, wloioas oacl oownslioam fim malos
= (1 c) ,0.
Consiooi now a voilical moigoi Lolwoon l ano 1 . Jlo Losl lling llal
l can oo is lo foiocloso llo iival oownslioam fim Ly nol piovioing any inpil
lo il, wloioas piovioing ils own amlialo al inpil n = c. In llis caso, 1 will
claigo piico j = (1 - c),2, ano llo voilical moigoi will givo llo inlogialoo
fim piofls = (1 c) ,4. Jlo moigoi is pioflaLlo, sinco - .
In llis simplo moool, lloiofoio, lloio oxisls foioclosiio ano llo iival oown-
slioam fim is liil Ly llo voilical moigoi. Howovoi, llo moigoi is omcionl
Locaiso il iomovos ooiLlo maiginalisalion. Inoooo, il can Lo oasily clocloo
llal j < j , wlicl implios llal consimois also gain fiom llo voilical moigoi.
(Il is oasily clocloo llal wolfaio incioasos will iospocl lo llo caso of voilical
sopaialion.)
Xsvwuhdp up lv qrw d prqrsrolvw= srvvleoh dqwl0frpshwlwlyh iruh0
forvxuh Lol is analyso now an oxamplo wloio llo ipslioam fim is nol a mo-
nopolisl any longoi. Jo malo llings as simplo as possiLlo, consiooi a solling
wloio llo ipslioam fims l ano l lavo iospoclivoly maiginal cosl c = 0
ano c (0, 1,2) ano simillanooisly clooso llo piicos al wlicl lloy ofoi llo
inpil lo 1 ano 1 , wlicl compolo in qianlilios. Efoclivoly, llis is as if llo
oownslioam fims woio maling a simillanoois piociiomonl aiclion. Lol is
consiooi llo ofocl of a voilical moigoi Lolwoon l ano 1 .
Consiooi fisl llo caso wlon all fims aio inooponoonl. In llis caso, oacl of
llo lwo fims will iocoivo llo inpil fiom fim l al a piico c , sinco llo ipslioam
fims aio playing a Loiliano gamo will asymmoliic cosls. Jlo oownslioam
fims play a slanoaio Coiinol gamo will cosl c , ano Loing olloiwiso symmoliic
llo oqiiliLiiim qianlilios ano piicos aio givon Ly: q = q = (1 c ),, ano
j = (1 - 2c ),. Fiim l `s piofls aio givon Ly = 2c (1 c ),, wloioas
oacl oownslioam fim oains = (1 c ) ,9.
Sipposo now llal lloio is llo moigoi Lolwoon l ano 1 ano as a iosill
llo inlogialoo fim oocioos nol lo piovioo llo inpil lo fim 1 any longoi:
l annoincos llal il will nol malo any Lio lo sipply 1 (I slall oisciss llis
assimplion Lolow). In llis caso, llo loss omcionl fim l will Locomo llo
monopolislic sipplioi of fim 1 .
Sinco llo oownslioam amlialo of llo inlogialoo fim will lavo a inil cosl
c = 0, llo lasl slago of llo gamo is a Coiinol gamo Lolwoon fim 1 will cosl
0 ano fim 1 will cosl n . Il is oasy lo clocl llal oqiiliLiiim oilpils of llis
gamo will Lo q = (1 -n ),, ano q = (1 2n ),.
70
Al llo fisl slago of llo gamo, ipslioam fim l cloosos ils wlolosalo piico
lo fim 1 lo maximiso = (n c )(1 2n ),. Jlo oplimal solilion
is n = (1 - 2c ),4. Sinco n c , il is cloai llal oownslioam fim 1 is
ofoclivoly foioclosoo iolalivo lo llo pio-moigoi silialion: llo inpil las Locomo
moio oxponsivo.
Ly siLslililion, ono can llon clocl llal llo oqiiliLiiim qianlilios will
Lo givon Ly q = (1 2c ),0 ano q = ( - 2c ),12; mailol piico Ly j =
( -2c ),12; ano llo voilically inlogialoo fim`s piofls Ly = ( -2c ) ,144
(llo laLol ) slanoing foi "foioclosiio").
Jlo lolal piofls of llo moiging fims aio ligloi, sinco - , Lil
llo moigoi is nol nocossaiily omcionl: j < j foi c < 1,0.
Jloiofoio, if c < 1,0, llo voilical moigoi loaos lo foioclosiio ano il is
anlicompolilivo (il can Lo clocloo llal lolal siiplis oocioasos).
1nn| 1. A ciicial assimplion in llis moool is llal llo ipslioam amlialo
of llo inlogialoo fim commils nol lo lalo pail in llo sipply foi llo olloi
oownslioam fim. Lil ooos il lavo an inconlivo lo commil nol lo sipply 1
If il lool pail in llo compolilion lo sipply 1 , il woilo win il Ly solling a
piico c . As a iosill, oqiiliLiiim qianlilios woilo Lo q = (1 2c ), ano
q = (1 -c ),. Jlo fnal piico woilo Lo j = (1 -c ), < j (llo voilical
moigoi woilo Lonofl consimois), ano = (1 - c ) ,9 - c (1 2c ),. Il
can Lo clocloo llal can Lo iowiillon as (28c 20c - ) 0, wlicl
coiiosponos lo c < ,14.
Jloiofoio, foi c < ,14 il is oplimal foi llo inlogialoo fim lo pio-commil
nol lo sipply llo iival oownslioam fim. Foi c < 1,0 llo moigoi is anli-
compolilivo, wloioas foi c [1,0, 1,2) il is nol.
1nn| .. In llo oxamplo I lavo assimoo llal lloio is only ono olloi ip-
slioam fim apail fiom 1 . Assimo now insloao llal lloio is al loasl anolloi
inpil sipplioi laving llo samo cosl c . In llis caso, afloi llo voilical moigoi
Lolwoon 1 ano l llo iival oownslioam fim 1 woilo always Lo sipplioo al
llo piico c Locaiso of llo compolilion among llo ipslioam fims. l woilo
fno il moio pioflaLlo lo sipply llo iival oownslioam fim ilsolf ano llo voilical
moigoi woilo always Lo pio-compolilivo Locaiso il iooicos ooiLlo maiginalisa-
lion willin llo voilically inlogialoo fim.
8 Frqfoxvlrqv dqg srolf| lpsolfdwlrqv
Wo lavo soon llal voilical iosliainls ano voilical moigois lavo a nimLoi of
omcioncy foaliios: allloigl in somo ciicimslancos lloy migll lavo somo anli-
compolilivo ofocls, a poi so pioliLilion iilo woilo cloaily Lo inappiopiialo,
sinco il woilo foiogo omcioncy ofocls wlicl aio liloly lo oominalo in mosl
casos. A iilo of ioason appoais coilainly moio aovisaLlo.
Jlis slalomonl lolos foi all lypos of voilical iosliainls ano voilical moigois:
oifoionl iosliainls aio oflon siLslililaLlo foi oacl olloi. Fiilloimoio, lloio
is no inanimois ianling of voilical iosliainls in loims of wolfaio. Jloiofoio,
71
lloio is no oconomic jislifcalion foi a policy llal lioals iosliainls in a oifoionl
way, say ising a poi so iilo of pioliLilion againsl iolail piico mainlonanco
wlilo always allowing all olloi iosliainls. Ly llo samo lolon, il woilo Lo
inconsislonl lo lavo, say, a loigl slanco againsl somo voilical iosliainls wlilo
Loing lonionl on voilical moigois.
A iilo of ioason foi voilical iosliainls ano voilical moigois ooos nol moan
llal all voilical agioomonls sloilo Lo oxaminoo Ly llo anliliisl agoncios. Jlis
woilo simply Lo impossiLlo, as lloy woilo lavo lo iso lloii scaico iosoiicos
lo moniloi lloisanos of voilical iolalionslips. Voilical iosliainls ano voilical
moigois migll Lo anli-compolilivo only if lloy involvo fims onoowoo will sig-
nifcanl mailol powoi (wo lavo soon in sovoial casos llal llo polonlial laim
cioaloo Ly a voilical iosliainl oocioasos will llo piosonco of compolilois). Ac-
coioingly, lloio is no nooo lo moniloi iosliainls ano moigois wlicl involvo fims
will lilllo mailol powoi. An omcionl policy lowaios voilical iosliainls woilo
gianl oxomplion lo all llo voilical iosliainls ano moigois of fims wlicl oo
nol lavo laigo mailol powoi. Fiom llo opoialional poinl of viow, il woilo
soom a gooo pioxy lo oxompl fims will mailol slaios Lolow, say, 20-0/ (as
in llo now iogimo cioaloo in llo EU, oxcopl llal piaclicos sicl as BIM aio
Llacl-lisloo: soo claploi 1).
Jlis loavos llo pioLlom of low lo ooal will voilical iosliainls ano voilical
moigois wlicl involvo fims will signifcanl mailol powoi (a foilioii, llo samo
applios foi oominanl fims) ano wlicl lavo possiLlo oxclisionaiy ofocls. In
lloso casos, a iilo of ioason sloilo Lo aooploo, ano ono sloilo Lalanco possiLlo
omcioncy ofocls will possiLlo anli-compolilivo ofocls.
Edodqflqj h{foxvlrqdu| dqg h!flhqf| hhfwv ri yhuwlfdo phujhuv
dqg yhuwlfdo uhvwudlqwv Jlo analysis of voilical moigois aLovo omplasisoo
llal (i) inpil foioclosiio ooos nol nocossaiily follow fiom llom; (ii) ovon if
oownslioam iivals aio inoooo foioclosoo, fnal piicos oo nol nocossaiily incioaso.
Jlis siggosls a lwo-slop piocooiio foi llo casos wloio llo voilical moigoi in-
volvos fims aLovo a coilain mailol slaio llioslolo. Fiisl of all, il sloilo Lo
oslaLlisloo wlolloi llo moigoi will liloly loao lo inpil foioclosiio, llal is, llal
inpil piicos foi inooponoonl oownslioam fims will incioaso (n.- will Lo
laimoo). If so, llo invosligalion sloilo conlinio lo llo socono slop. If nol, llo
moigoi sloilo Lo cloaioo. In llo socono slop (if applicaLlo), il sloilo Lo oslaL-
lisloo wlolloi fnal consimoi piicos aio liloly lo incioaso oi nol (n..n
will Lo laimoo).
A similai piocooiio sloilo Lo followoo foi voilical iosliainls llal migll
loao lo foioclosiio of iivals. Il sloilo Lo piovoo llal oxclisivo ooaling (oi olloi
72
oxclisivo claisos, oi iofisal lo sipply) woilo nol only laim compolilois, Lil
also compolilion, in llo sonso of Loing liloly lo iooico consimoi wolfaio. Jlo
oofonoanl sloilo llon Lo aLlo lo piooico convincing onoigl ovioonco llal llo
voilical iosliainls aooploo onlail onoigl omcioncy gains foi consimois lo Lonofl
fiom llom.
9 H{huflvhv
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|.nj n.n-: h ..- : 1 n.|- nn-nn, h n .n
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7
H{huflvh 7 Cn-.n h -nn nn| n- .n -.n ....1, |& .h n.J-
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H{huflvh 8 Cn-.n h &.|.j J&n.n l =
q (1,2)
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n||) nn- h.h -.Jj h n&n| J &n.- n n.| nn |&j nnn h ].n
nn&n J h &hn-. Jhn, nh J : n.|- n.n- hh n
] -&h n nn nnn n- h n&n| J &n.- . nn- |&j
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nnn&Jn& .|| nn|). ;) 1.nn h j&.|.|.&n -|&.n &nn h hjh-.-
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74
n-nn n&.n - c, nnn h n.|-` n|j n.n|| - .- n , h h|-
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C(c ) = /c ,2. 5h hn n h &n.j& j&.|.|.&n h ..-n J h nnn
njn n||- nnn&Jn&- nn| ||&-. ]-.
H{huflvh 43 ; -.n|.]n -.n J 5n|.nj ;133).) Cn-.n n .n|
.nn&-j h &-nn ;hnjn&-) ]n- n n |n C&n nnn
-|| n nn|.-n nn| J h .n& ;&-nn ]n- nnn -|| n.|j
nn-nn ]n-, hj -|| h .n& nn| n&.n). J nn-nn
;hnjn&-) ]n- |&j h .n& .n h nn|.-n .n& nn| nnn n n
|n C&n .n h ]nn| nn|, h .n- nnnnn .- j = 1Q ;Q |.nj h
n| &&). || ]n- hn . -- nnn h .- n n--n |n.n-h.
7
.n h n&.n hn|jj |n .n& nnn &&. ;n) 1.nn h j&.|.|-
.&n && nnn h|-n| nnn ]nn| .-. ;|) Cn-.n hn n .n| nj
|n nn &-nn ]n nnn n nn-nn ]n, nnn n--&n hn nJ h
nj hj .hnn Jn h .n& nn| ;h nn-nn n|.n n- n
|&j nnn..nn| .n& Jn h .n& nn| nnn h &-nn n|.n n- n
-|| nnn..nn| .n& hn nn|). 5h hn h .- n J|-&, .n h
-n- hn h h|-n| . n.n .n h .n& nn| nn--.
H{huflvh 44 Cn-.n nn .nn&-j h.h n&- n jn A. J n& h.-
jn n nnnn-Jn nn .n&, n|| . `, h.h .- n -&|-.&n|| .h
h .n&- n nn.n|-. Jh .- n|j n ]n, , h.h nn -&|j .n&
`. 5&- n hn h ..-- n|j n ]n, 1, h.h n&- A. 1&|n
j& n|| n nj |n h- ]n- J&-.Jj j& nn-.
H{huflvh 45 Cn-.n n h -nn .nn| n- |J |& .h h J||.nj
hnnj. Jh n ]n-, 1 nnn , h.h -|| jn A. 1&|n j& n|| n
nj |n ]n nnn 1 1.|n.n h.h nn| -&- j& nn-, nnn
|.j n-.| ..
H{huflvh 46 n .nnn.nn||j -&--J&| |nnn h.h -||- Jn-h.n |h- .-
n-.n.nj j. n Jnnh.- |n| njn- .n n &nj h -Jn . hn-
-|n n|j h&jh .- ;. hn- -Jn h|n n|j n&nn 1' -hn J h |nn
nn|, hn- .n .- hn &nj h ]n hn- n|n- ' J h nn|).
1 |nn- j. h Jnnh.- n|j n Jnnh.- .n nh n J h.- J-
.jn &nj. Jh Jnnh.-- &|n n|- hn n &nn nn .|&-..j
|n&- ;hj nnn -|| n.-` n&-). Jh Jn-h.n ]n- n.nj .n
h.- nn| nnn h |nj n.-.|&- j |n n|& h Jnnh.- nn-
nnn ]| n n|n.n .h h |n| n..n n&h.j. `& n nn nn.
n-&|nn h.n |j h n&h.j j. nn nn. n h.- n-.
H{huflvh 47 1n nn .nnj.nnj n&n|. ;... .h& .n- Jn n|nn) &n-
j, ]|n n&.n .- n j&. nnnn |&-.n--. Jh ]|n nnn.- hn
n&nn u' nh J h nn| .n nn nnj jn, hn- h nn.n.nj 1u'
J h nn| .- ;n nnj) -hnn |j 1u-1 .nnnnn nnn.-. 1.-.-
|&.n .n n. hn- .- Jn.|j nnnn n- ||, .h nnn.- hn.nj
n |-- h n|.j J h nn|. Jh nn| |nn hn- .' J h nn-
|. Cn J h h |.j ]|n n&- hn- nnn&nn n n| J h |nj-
n.-.|&.n nnnj. 1hn - J nn. n-.nn.n- -h&|n n n.-
.n n&h.j n| .n n&n n.n hh n |n h n|
-n|
H{huflvh 48 A.n|&- .- h nn| |nn J |n-.|-, h |j n. |nj
h &.nn.h jnn. 1- j&n|.j .- - -&. n|| h n.nj -&|.-
hn . nnnnj- hnj n j h.jh . n.&n n .- n&-, n h
|-nnj nn|-. 1n n- J h n&n| J &n.- -|n, . hn- &jh|j u' J h
nn|, |& h nn| -hn .-- 3u' .J n ||- n h n| n|& J h
|n-.|- -|n. A.n|&- n- n -|| n.|j h &||., |& h&jh nn|-
70
-.n|.-n .n nnj.n| .n-. Jh 1nj.n| 1.n.-j J 5- hn- ]&- J&nn &
hn A.n|&- .- . n.-.n.nn.nj nnnj nn|-. 5n nn|- nnnnj j
n-.nn|| ;-) . n.-&n- |n. h-. Jh 1.n.-j hn- ]nn
A.n|&- n h j&nn hn . .- &nJn.|j n.-.nj n..n .n h nn|
J &.nn.h |n-.|-, nnn . hnnn h ]n | nn-nn n .-
.-, nnn -|| nn|- n h -nn . -hn&| ;|& . |n- nn
| ]&-.]n .J n |nj j&nn.j .- nn). `& n -..nj .n 1jn- 5h|
J 1.hnJ nnn 1..nnj nnn nn- n j&-.n .n h .nn J h &-
J 1nj.n| Cn..n 1|.j: 1- h 1.n.-j .jh n 1hj
H{huflvh 49 Cn-.n h J||.nj n-. Jh ]n 1n .- h |nn .n h
1nj|.-h |.j|- nn|, .n h.h . hn- n nn| -hn J û'. ;1n| n]-
n..n .- n nn .--& h, -.n j|nj nj- hn h |.j| nn| .- h
|nn nn|.) J h ]n-, Gn nnn `|| hn -.|j 1'
nnn 1u' J h nn|, h - J h -n|- |.nj n.-.|&n nnnj j -nn||
]n-. 1n n&- n.n j- J |.j|-. Jh J h nnj nn|
.- 1n 5n, h.h .nn- n|| h nn] hn|j.n| n|nn- .n
h - nnn . .- n&n |j &-.nj h n- -h.-.nn nn.n|-. Jh.-
nn| .- -|n n n . h.h .- . n- n&h n- h nnj . J n|| h
h |.j|-, nnn nn | |&jh n|j .n -.n|.-n -h-. Jh -&nn|
hn.n 1jh.nj hnnn|j n-|n 1n h --.|.|.j -|| h nn|
1n 5n, |& h ]n hn- n|nj- J&-n -&|j .. Jh -&nn| hn.n
&|n -|| n|| h |.j|- n&n |j 1n, |& n h nnj nn|.
G.n h.- n.n&&- J&-n|, 1jh.nj hn- n.nn nn&n 1n
h Cnn.--.n J h 1C. J n nn.|n nnn|j-.-, h |n hn- n.nn hn
1n hn- .nJ.njn n.| 3^ ;n|&- J nn.nnn -..n). Jh n- .- n
n nn| n h C& J J&-., nnn j& hn j. j& .n.n n ..
914 Vroxwlrqv ri h{huflvhv
Vroxwlrq ri H{huflvh 41 (i) Unooi voilical sopaialion, llo oownslioam
fims solvo llo slanoaio Coiinol pioLlom, max H = (j n d)q =
(a q
q n d)q . Imposing symmoliy on qianlilios yiolos q =

(a (n -d)) , (1 - :) ano H = [(a (n -d)) , (1 - :)[ . Jlo manifacliioi,
wlicl poifoclly anlicipalos llis oilcomo on llo fnal mailol, will solvo: max H =
(n c):q (n) wlicl yiolos llo oplimal wlolosalo piico n = (1,2) (a d -c)
ano llo manifacliioi`s piofls H = (:, (1 - :))
_
(a d c) ,4
_
.
Unooi voilical inlogialion, llo fim cloosos llo slanoaio monopoly piico ano
oilpil, i.o. max H = (j c d) (a j), wlicl yiolos j = (a -c -d) ,2,
q = (a c d) ,2, ano H = ((a c d) ,2) .
Wo soo llal H < H , i.o. llo ipslioam fim malos loss piofl inooi voilical
sopaialion llan llo voilical clain malos inooi inlogialion. Jlis is oio lo llo
facl llal inooi sopaialion, llo oownslioam fims slill oain a posilivo mail-ip,
wlicl loaos lo llo pioLlom of ooiLlo maiginalisalion.
(ii) Nolo llal as : , H = (:, (1 -:))
_
(a d c) ,4
_
((a c d) ,2) ,
77
i.o. llo ipslioam fim`s piofls inooi voilical sopaialion convoigo lo llo piofls
inooi voilical inlogialion. As llo nimLoi of oownslioam fims incioasos, lloii
mail-ips oocioaso, ano so ooiLlo maiginalisalion Locomos loss of a pioLlom.
Vroxwlrq ri H{huflvh 51 Unooi voilical sopaialion, oownslioam (Loiliano)
compolilion will imply llal all iolailois claigo al maiginal cosl, i.o. j = n-d,
ano so Q = a (n -d). Honco, llo ipslioam fim will solvo max H =
(n c) (a n d) wlicl yiolos n = (1,2) (a d -c). Now, wo soo llal llo
iosilling fnal piico, qianlily ano ipslioampiofls coiiospono oxaclly lo llo voi-
lically inlogialoo caso, i.o. j = j = (a -c -d) ,2, q = q = (a c d) ,2,
ano H = H = ((a c d) ,2) . Sinco Loiliano compolilion implios llal
oownslioam fims` piofls aio oiivon oown lo zoio ovon if lloio aio only lwo of
llom, llo pioLlom of ooiLlo maiginalisalion will novoi aiiso wlonovoi : _ 2.
Vroxwlrq ri H{huflvh 61 (i) Lol is fno llo oplimal conliacls inooi llo
oifoionl casos. (1) Compolilion. Sinco iolailois compolo a la Loiliano, j =
n - . Jloy malo zoio piofl ano llis 1 = 0. Jlo manifacliioi will clooso
n so as lo maximiso ils oxpocloo piofl 1() = 1[(d n )(n c)[. Ly
wiiling 1(d) = d ano 1() = , ono can also fno: n = (d - c ),2,
j = (d - c ),2- , = (1,4)(d c ) . Jolal wolfaio can also Lo
compiloo as ! = 1((1,2)(d j) ) - = (,8)(d c ) - ar(d),2 -
ar(),2. (2) EJ. Eacl iolailoi is a monopolisl in ils aioa of oisliiLilion ano
maximisos = (d j) (j n ) ,2. Final piico ano iolailoi piofl will Lo
j = (d - n - ),2, = (1,8)(d n ) . Sinco llo iolailois aio infniloly
iisl-avoiso, llo fiancliso foo 1 misl Lo sol in sicl a way lo giaianloo llom
non-nogalivo piofls ovon in llo woisl slalo of naliio. Jloiofoio, il misl Lo
1 = (1,8)(d n ) . Jlo manifacliioi`s pioLlom will Lo lo clooso n
lo maximiso 1[(d (d -n -),2) (n c)[ -(1,4)(d n) . Jlo solilions
aio: n = c - (d d) - ( ), j = [d -c - - (d d) - ( )[ ,2,
= (1,4)(dc) -(1,4) [(d d) - ( )[ , ! = (,8)(dc) -
(1,4) [(d d) - ( )[ - (1,8)ar(d) - (1,8)ar(). () BIM. Bolailois
claigo llo imposoo piico ano lavo piofl oqial lo (1,2)(dj)(jn). Givon
infnilo iisl avoision, 1 = (1,2) (d j) (j n ). (Jlis is llo oplimal foo foi
j _ n -. Il can Lo slowoo llal llis is llo iolovanl caso.) Jlo manifacliioi
will clooso j ano n so as lo maximiso (d j) (j n ) -1[(d j)(n c)[,
siLjocl lo j _ n-. Il liins oil llal: 1 = 0, n = (1,2)(d -c ),
j = (1,2)(d -c -), = (1,4)(d c ) , ! = (,8)(d c
) - (1,2)ar(d).
(ii) ano (iii) Jlo ianlings on piofls ano wolfaio inooi llo oifoionl io-
sliainls ano inooi compolilion can Lo oLlainoo oiioclly fiom llo oqiiliLiiim
solilions ioonlifoo in (i). Jlo main poinl of llo papoi Ly Boy ano Jiiolo is lo
slow llal voilical iosliainls aio nol oqiivalonl, as llo ianling slows. Jlis is
oio lo llo lwo conliasling ofocls llal llo oifoionl confgiialions lavo. Jlo
fisl ofocl is on llo capaLilily of llo voilical sliicliio lo oxploil monopoly
powoi. Jlo socono ofocl is on llo iisl Loino Ly llo iolailois. EJ, foi inslanco,
78
ooos oxliomoly woll will iospocl lo llo fisl pioLlom, as llo iolailois aio maoo
iosioial claimanls ano will lloiofoio iospono in llo samo way as a voilically
inlogialoo fim wlon facing oomano oi cosl slocls. Howovoi, if n = c llo iolail-
ois woilo Loai loo ligl a iisl, as lloii piofls woilo nol Lo piolocloo againsl
sicl slocls. In oiooi lo insiio llo iolailois, llo manifacliioi will lloiofoio
lavo lo sol n c (il can Lo clocloo llal llo sonsilivily of llo iolailois` piofl
lo vaiialions in oomano ano cosls oocioasos will n: 0([0 ,0d[),0n < 0 ano
0([0 ,0[),0n < 0), Lil inooi EJ insiianco is impoifocl. BIM givos poifocl
insiianco inooi oomano incoilainly, Lil faios Laoly inooi cosl incoilainly,
as a slocl lo llo iolailoi`s oisliiLilion cosl will gioally afocl ils piofl maigin
(givon llal llo piico cannol Lo aojisloo). As a iosill, BIM is Lolloi inooi
oomano incoilainly, EJ inooi cosl incoilainly. Compolilion scoios woll in
loims of insiianco piopoilios (givon Loiliano compolilion, iolailois` piofls will
always Lo zoio), inooi Loll oomano incoilainly ano cosl incoilainly.
Vroxwlrq ri h{huflvh 71 (i) Sopaialion. If llo lwo iolailois compolo in
piicos, llo only oqiiliLiiim in llo iolailois` gamo is llo ono wloio j = j = n
ano - = - = 0. Sinco consimois poicoivo llo gooos solo Ly iolailois as lo-
mogonois, Loiliano compolilion oiivos piicos lo oqial maiginal cosl n-jc ,2.
Consiooi a canoioalo oqiiliLiiim wloio c = c 0, ano piofls aio zoio. Givon
llal llo qialily poicoivoo Ly consimois ooos nol clango if a fim i oocioasos
ils own qialily lo a lovol c < c = c, fim i las an inconlivo lo oocioaso c
sinco il will incioaso ils inil maigin ano gol all llo oomano. Jlo isial in-
ooicilling aigimonl loavos lloiofoio c = c = 0 as llo iniqio oqiiliLiiim,
will j = j = n. Jlo ipslioam fim anlicipalos llal j = n ano llal f-
nal oomano will Lo q = n. Il will max H = (n c)( n), wlicl
is solvoo Ly n = ( - c),2. Al llo sopaialoo oqiiliLiiim, lloiofoio, pio-
oicoi siiplis, consimoi siiplis ano wolfaio aio iospoclivoly givon Ly: 13 =
H =
_
( c)
_
,4; C3 =
_
( c)
_
,8; ! =
_
( c)
_
,8. (ii) Voilical
inlogialion. Assimo again llal if Loll iolailois claigo llo samo piico, lloy
will splil mailol oomano oqially among oacl olloi. Jlon, a voilically inlo-
gialoo fim will wzr iolailois will solvo: max H = (jc (1,2)jc ,2
(1,2)jc ,2)( - max c , c j). Nolo llal il will Lo oplimal foi llo man-
ifacliioi lo lavo only ono iolailoi piovioo soivicos, wlilo conliniing lo soll
llioigl Loll iolailois (consimoi valialion foi iolailoi soivicos is ooloiminoo
Ly llo maximim of llo lwo inils) . Honco, sol c = 0 ano ooiivo llo fisl-
oiooi conoilions: 0H ,0c = jc ( - c j),2 - j c (1,2)jc ,2 = 0
ano 0H ,0j = - c 2j - c - (1,2)jc ,2 = 0, loaoing lo llo following
solilion: c = 2,j; c = 0; j = ( -c - ,j). Ly siLslililion,
79
ono llon oLlains piooicoi siiplis, consimoi siiplis ano wolfaio as follows.
13 = H =
_
(j( c) - 1)
_
,
_
4j
_
; C3 =
_
(j( c) - 1)
_
,
_
8j
_
;
! =
_
(j( c) - 1)
_
,
_
8j
_
.
A voilically inlogialoo fim will only rqh iolailoi will solvo: max H =
(jcjc ,2)(-cj). Jlo only oifoionco will iospocl lo llo lwo-iolailois caso
is llal, now, ono inil of ofoil will cosl jc ,2 ialloi llan (1,2)jc ,2. Honco,
jisl ioplaco j Ly 2j in llo oxpiossions oLlainoo aLovo lo lavo: c = 1,j; j =
(2j( -c) - ) , (4j), ano piooicoi siiplis, consimoi siiplis ano wolfaio as
follows. 13 = H =
_
(2j( c) - 1)
_
,
_
10j
_
; C3 =
_
(2j( c) - 1)
_
,
_
2j
_
;
! =
_
(2j( c) - 1)
_
,
_
2j
_
.Wo soo llal voilical inlogialion will lwo
iolailois is moio pioflaLlo llan will only ono iolailoi, as il allows lo piooico
ofoil al lalf llo inil cosl.
(iii) Il is also oasy lo clocl llal voilical inlogialion - wlicl iosloios llo
inconlivos lo invosl in qialily piovision - nol only incioasos llo voilical clain
piofl Lil also onlancos wolfaio: 13 13 13 ano ! ! ! .
(iv1) Exclisivo loiiiloiy (EJ). If ono iolailoi is givon an oxclisivo loiiiloiy,
i.o. il is llo only ono wlicl can soll llo manifacliioi`s piooicl, EJ alono woilo
nol solvo llo pioLlom sinco il woilo cioalo llo isial ooiLlo maiginalisalion
pioLlom. Jloiofoio, an EJ conliacl sloilo Lo comLinoo will non-linoai piicing
of llo lypo soon aLovo: (n = c; 1). Jlo pioLlom of llo iolailoi will llon Lo:
max H = (jcjc ,2)( -cj),21. Laiiing llo fxoo cosl wlicl ooos
nol afocl llo FOCs, llis is piocisoly llo samo pioLlom as a voilically inlogialoo
monopolisl will rqh iolailoi. Jloiofoio, llo solilion will Lo llo samo as in (ii),
wlilo 1 will Lo isoo lo iooisliiLilo piofls Lolwoon iolailoi ano manifacliioi. If
llo lalloi las all llo Laigaining powoi, llon il will appiopiialo all llo piooicoi
siiplis.
(iv2) Bosalo piico mainlonanco. BIM will also lavo lo Lo isoo in comLina-
lion will a non-linoai conliacl (n = c; 1). Jlo pioLlom of a iolailoi i is givon
Ly: max H = (j cjc ,2)(-maxc , c j ),21. BIM iomovos
llo piico inooicilling lomplalion. Howovoi, il loavos llo inconlivo lo fioo iioo
on soivicos piovision as c = maxc , c . Consiooi a canoioalo oqiiliLiiim
wloio c = c = c 0. Jlis cannol Lo an oqiiliLiiim sinco a fim woilo piofoi
lo oovialo ano piovioo no qialily givon llal llo olloi is piovioing a posilivo lovol
of qialily: = (j cjc ,2)(-cj ),2 < = (j c)(-cj ),2.
Howovoi, lloio aio lwo asymmoliic oqiiliLiia wloio only ono fim piovioos of-
foil, wlilo llo olloi ooos nol, i.o. wloio c = c 0 = c foi i = 1, 2 ano i ,= .
Fiisl, nolo llal llo pioLlom of llo iolailoi wlo malos ofoil woilo Lo ioonlical
lo llo ofoil cloico pioLlom inooi oxclisivo loiiiloiios, wlicl givos c = 1,j
as a solilion. Jloiofoio, llo piofl maoo Ly llo òfoil` iolailoi is = H ,2 =
_
(2j( c) - 1)
_
,
_
2j
_
. Ly oovialing ano piovioing an ofoil c = 0, llis io-
lailoi will malo = (j c)(j ),2 = (2j(c)-)(2j(c)),
_
2j
_
.
As = (2j( c) - ) ,
_
10j
_
0, llo canoioalo oqiiliLiiim is inoooo an
oqiiliLiiim. BIM lloiofoio iosloios llo voilically inlogialoo solilion (j , c )
80
foi llo ipslioam manifacliioi. Sinco il cannol onfoico a conliacl on llo Lasis
of llo ofoil maoo Ly llo iolailois, il will ofoi llo samo conliacl lo Loll. Eacl
iolailoi will pay llo samo fxoo foo 1 = H ,2. Nolo llal allloigl llo manifac-
liioi malos llo samo piofl, piooicoi siiplis will Lo ligloi inooi BIM llan
inooi llo voilically inlogialoo caso will rqh iolailoi consiooioo aLovo. BIM
is in somo sonso moio omcionl llan EJ oi VI will ono iolailoi, as il allows lo
oxploil llo Lonofcial ofocl of llo ofoil spillovois among iolailois, similai lo llo
silialion of VI will lwo iolailois.
Vroxwlrq ri h{huflvh 81 (i) Fiom llo maximisalion of llo consimoi pio-
giammo ono oLlains llo (invoiso) oomano finclion j = q q
q . Unooi
voilical sopaialion, (lasl slago) oqiiliLiiim qianlily ano piico foi givon n aio
givon Ly q = ( n) , (2 - q(: 1)), ano j = ( -n(1 -q(: 1))) , (2 -q(: 1)).
Jlo ipslioam manifacliioi cloosos n lo maximiso = (n c):q . Honco,
n = ( - c),2. Ly ioplacing llis valio inlo q ano j ono fnos oqiiliLiiim
qianlily, piico ano poi iolailoi piofl: q = ( c) , (2 (2 - q(: 1))), j =
(( - q(: 1)) - c(1 - q(: 1))) , (2(2 - q(: 1))), ano = (( c) , (2 (2 - q(: 1))))
). (ii) Unooi voilical inlogialion oacl oillol piooicos al maiginal cosl c. Eqii-
liLiiimqianlily, piico ano poi-oillol piofl aio: q = ( c) , (2 (1 - q(: 1))),
j = ( -c) ,2, ano =
_
( c)
_
, (4(1 - q(: 1))) ). (iii) Unooi sop-
aialion, onliy will occii inlil iolailoi piofls aio oiivon oown lo zoio, i.o.
(( c) , (2 (2 -q(: 1)))) ) = 0. Unooi voilical inlogialion, llo fim will
sol : oplimally, i.o. max =
_
( c)
_
, (4(1 - q(: 1))) ). Sipposo llal
) is sicl llal llo oplimal nimLoi of oillols inooi voilical inlogialion is oxaclly
1, wlicl implios llal ) = (1,4) ( c) (1 q). Jlon, insoiling llis oxpiossion
foi ) inlo llo zoio-piofl conoilion foi iolailois inooi sopaialion ano solving
foi :, wo oLlain: : = (1,q)
_
_
1, (1 q) 2
_
- 1. Jlis oqialion will solvo foi
: = 2 if (1 q) (2 - q) = 1, i.o. if q 0.879. (iv) Givon llal (), q) is sicl llal
: = 1 Lil : = 2, i.o. q 0.879 ano ) = (1,4) (c) (1 q), wo oLlain llo
following oxpiossions foi wolfaio: Voilical Inlogialion: C3 =
_
( c)
_
,8;
13 =
_
( c)
_
q,4; ! = (1 - 2q)
_
( c)
_
,8; Sopaialion: C3 =
_
( c) (1 - q)
_
,
_
4 (2 -q)
_
; 13 =
_
( c)
_
, (2 (2 - q)); ! = (
c) ( - q) , (2 (2 - q)) . Jlo inoqialily C C implios (1,2) (2 - q)
1 - q, wlicl will always lolo foi q 0.879. Analogoisly, llo inoqialily
! ! implios (1,2) (1 - 2q) ( - q) (1 q), wlicl lolos as woll foi
q 0.879.
Vroxwlrq ri h{huflvh 91 (1) Foi passivo Loliofs, llo solilion follows fiom
llo oxlonsion of llo : = 2 caso in soclion 2..1. Eacl iolailoi oxpocls piofl
= (1 q
q c)q ano lloiofoio will Lo willing lo Liy accoioing

lo ils (Coiinol) ioaclion finclion. Unooi symmoliy, llo inloisoclion of llo :
ioaclion finclions givos q = (1c),(1-:). Eacl iolailoi will lloiofoio oxpocl lo
malo piofl (1 c) , (1 -:) . (2) Jlo manifacliioi will oain = :(1 c) ,
(1 - :) . Sinco d ,d: < 0, llo laigoi llo nimLoi of iolailois llo woiso
81
llo commilmonl pioLlom foi llo manifacliioi. () Foi llo caso of symmoliic
Loliofs, llo ioasoning is oxaclly llo samo as foi llo caso : = 2 lioaloo in soclion
2..1.
Vroxwlrq ri h{huflvh :1 (a) Jlo voilically inlogialoo oilcomo salisfos
max = (j c)(1 j). Honco, il is givon Ly j = (1 - c),2, q = (1 c),2,
= (1 c) ,4.
(L) Jlo conliacl wlicl woilo iopiooico llo voilically inlogialoo oilcomo
is ono wloio Loll iolailois aio ofoioo (n , 1 ) = (c, (1 c) ,8). Howovoi, il is
oasy lo soo llal llo manifacliioi woilo lavo an inconlivo lo ionogolialo llo
conliacl will, say, iolailoi 1 givon llal 1 las accoploo. Inoooo, if l solo llo
inpil lo 1 al a wlolosalo piico n < c, 1 coilo gol llo wlolo mailol Ly solling
al a piico sligllly Lolow c ano oain (1 c) ,4. Jloiofoio, lloio is scopo foi an
agioomonl Lolwoon l ano 1 on ionogolialing llo conliacl. Bolailoi 1 woilo
lavo lo pay (1 c) ,8 Lil woilo lavo no iovonio. OLvioisly, anlicipaling llal
ionogolialion woilo occii, 1 woilo nol sign llo conliacl in llo fisl placo.
Jlo commilmonl pioLlom aiisos also wlon fims clooso piicos.
(c) Wlon llo conliacl is a piio linoai piicing ono, il ooos nol commil io-
lailois lo Liy a spocifoo qianlily. Unooi llo canoioalo oqiiliLiiim conliacl, a
iolailoi jisl commils lo pay n = j . If llo manifacliioi ofoioo a lowoi wlolo-
salo piico n = j . lo ono iolailoi, llo lalloi woilo gol lo soivo llo wlolo
mailol, ano llo manifacliioi woilo slill malo = (1 c) ,4, Lil llo olloi
iolailoi woilo nol Lo aooiossoo Ly any consimoi ano woilo nol Liy any inpil.
Jloiofoio, llo manifacliioi woilo nol incioaso ils piofl inooi ionogolialion.
Vroxwlrq ri h{huflvh ;1 Al llo fisl slago of llo gamo, llo payof maliix
woilo Lo:
INSEBJ JaLlo 0.. A oologalion gamo (oxoiciso)
dc|cqatio: crt.i:t.
dc|cqatio: , ,
crt.i:t. , ,
Jo clocl llal Loll fims oologaling ano imposing a non-linoai conliacl lo
iolailois is an oqiiliLiiim, wo sloilo clocl llal , llal is, llal wlon
llo iival manifacliioi cloosos lo oologalo, a manifacliioi piofois lo oologalo
as woll ialloi llan nol. Jlo symmoliic payofs in llo laLlo aLovo lavo alioaoy
Loon oLlainoo in soclion .1.1. Wo slill lavo lo fno lloso coiiosponoing lo
llo asymmoliic caso wloio ono manifacliioi cloosos oologalion wloioas llo
olloi ooos nol. Jlo ioaooi can clocl llal al llo oqiiliLiiim llo fim llal solls
llioigl a iolailoi will sol a wlolosalo piico n =
ano llal llo oqiiliLiiim piofls aio:
=
(1 - )(10 - 12 - ) ( c)
10(2 - ) (8 - 8 - )
; =
(1 - )(4 - ) ( c)
8(2 -) (8 - 8 - )
.
82
(i) Il is llon possiLlo lo clocl llal a manifacliioi ooos nol lavo an incon-
livo lo oovialo fiom llo confgiialion wloio Loll manifacliiois soll llioigl
iolailois: . In olloi woios, llo confgiialion (oologalo,oologalo) is
an oqiiliLiiim. Ono can also clocl llal , implying llal oologalion is
a oominanl slialogy ano llal llo oqiiliLiiim wloio Loll soll llioigl iolailois
is iniqio. (ii) Jlis is a piisonoi`s oilomma gamo, wloio Loll fims ono ip in
an oqiiliLiiim wlicl yiolos lowoi payof lo llom: < . Jlo manifaclii-
ois woilo Lo Lolloi of if lloy woio nol allowoo lo conliacl will inooponoonl
iolailois! (iii) Soclion .1.1 slows llal consimois aio Lolloi of wlon lloio is
oologalion: q q .
Vroxwlrq ri h{huflvh <1 If llo iolailoi las iojocloo oilloi conliacl lo
oains zoio piofl ano llo mailol oisappoais. If lo las accoploo Loll conliacls,
llon lis oplimal ofoil lovol on oacl piooicl is foino Ly solving: max =
_
(j n )(a /j -j -c ) /c ,2 1
_
. Fiom 0 ,0c = 0 ono oL-
lains c = (j n ),/. Jlo iosl of llo pioLlom is now lilo in llo loxl. In
pailicilai, complolo oxliaclion of llo iolailoi`s anlicipaloo ionls implios llal
oacl manifacliioi solvos: max = (j c)(a /j -j -(j n ),/) -
(j n )(a/j -j -(j n ),/)(j n ) , (2/)(j n ) , (2/) 1 .
Lil apail fiom llo fxoo compononl (wlicl ooos nol afocl oqiiliLiiim piico
ano wlolosalo piico), llis is nolling olso llan llo pioLlom of a joinl piofl max-
imisoi. Il is oasy lo clocl in pailicilai llal n = c al oqiiliLiiim ano llal llo
oqiiliLiiim piico is llo samo llal solvos max =

(j c)(a /j -
j -c )/ (c ) ,2, i.o. j = j = (a -c (/ (1,/) )) , (2/ (1,/) 2)
c. Nolo llal oio lo llo ofoil cloico maoo Ly llo iolailoi, n onlois iolailoi i`s
maximisalion pioLlom, ano so il will Lo ooloiminoo in oqiiliLiiim (llis was nol
llo caso foi llo moool of soclion .2.2)
Vroxwlrq ri h{huflvh 431 (a) Al llo lasl slago of llo gamo, Loll oown-
slioam fims pay llo inpil n ano lavo piofls = (1 q q n)q . Solving
d ,dq = 0 ano imposing symmoliy givos q = (1 n),. Jloiofoio, lolal
qianlily solo will Lo Q = 2(1 n),. Sinco oacl inil of fnal oilpil Q solo
Ly llo oownslioam fims coiiosponos a inil of oilpil A solo Ly llo ipslioam
fims, llo lalloi will faco an invoiso oomano finclion n = 1 A,2, wloio
A = a - a . Jloiofoio, llo pioLlom facoo Ly llo ipslioam fims will Lo
= (1 (a -a ))a . Fiom llo FOCs d ,da = 0 ono oLlains llo sym-
moliic solilion a = 2,9. Ly siLslililion, llo oqiiliLiiim wlolosalo piico is
n = 1, ano llo oqiiliLiiim piico is j = ,9.
(L) Unooi voilical inlogialion, calling 1 llo ipslioam fim ano llo oown-
slioam fim llal moigo, llo oownslioam compolilion gamo will Lo Lolwoon a
fim will cosl n = 0 ano anolloi will cosl n . Jloii piofls will Lo iospoc-
livoly givon Ly = (1 q q )q ano = (1 q q n )q . Solving llo
syslom of FOCs givos q = (1 2n ), ano q = (1 -n ),. As llo inlogialoo
fim willoiaws fiom llo inpil mailol, lloio is now an ipslioam monopolisl
in llo inpil mailol, facing invoiso oomano foi ils inpil n = (1 a)2, ano
8
laving piofls = n a. Fiom llo FOC il is sliaigllfoiwaio llal a = 1,0 ano
n = 1,4. Ly siLslililion, q = ,12 ano j = ,12. Nolo llal llo wlolosalo
piico paio Ly llo ininlogialoo fim is lowoi llan in llo caso of voilical sopa-
ialion. Jlis migll Lo siipiising Locaiso llo ininlogialoo ipslioam fim is a
monopolisl, Lil il is a monopolisl wlicl facos a iooicoo oomano sclooilo. In
llis caso, lloiofoio, allloigl llo inlogialoo fim ooos nol sipply llo inpil any
longoi, llo inpil is cloapoi: lloio is no foioclosiio. Fiilloi, nolo llal llo fnal
piico paio Ly consimois is lowoi ano lolal inoisliy oilpil incioasos inooi llo
voilical moigoi.
84
Upstream firm
(manufacturer)
Downstream firm
(retailer)
Consumers
Upstream firm
(manufacturer)
Downstream firm
(retailer)
Consumers
Downstream firm
(retailer)
Upstream firm
(manufacturer)
Downstream firm
(retailer)
Consumers
Downstream firm
(retailer)
Upstream firm
(manufacturer)
) (
1 1
c w R =
1
p
2
p
E
!
) (
1 1
c w R >
! !
) (
2 2
c w R >
! !
) (
2 2
c w R
=
E
) (
1 1
c w R =
1
q
2
q
E
!
) (
1 1
c w R <
! !
) (
2 2
c w R <
! !
) (
2 2
c w R =
E
"
q
p
m
q
m
p
B
e
q
"
!
D
F E
A
1
c
E
c
D
B1
B2
B2
Accept
Accept
Reject
Reject
Reject
Accept
+
+
2
1
t CS
t CS
m
m
+
m
m
CS
t CS
1

+
2
t CS
CS
m
m
e
e
CS
CS
Chaplci 7. Iicoalion, monopolisalion, ano
olhci aLusivc piacliccs
Pdvvlpr Prwwd
Luiopcan Univcisily Inslilulc, Iloicncc,
Univcisilal Iompcu IaLia, Laicclona, ano CLII, Lonoon
c-mail: massimo.mollaiuc.il
IIIS1 AND INCOMILL1L DIAI1
CamLiiogc Univcisily Iicss, 2008
1his oiafl: 10 DcccmLci 2002
Devwudfw
Frqwhqwv
4 Lqwurgxfwlrq 4
5 Suhgdwru| sulflqj 4
2.1 Iicoalion: scaich foi a lhcoiy . . . . . . . . . . . . . . . . . . . . 2
2.2 Icccnl lhcoiics of picoaloiy piicing . . . . . . . . . . . . . . . .
2.2.1 Icpulalion moocls . . . . . . . . . . . . . . . . . . . . . .
2.2.2 Signaling moocls . . . . . . . . . . . . . . . . . . . . . . . 7
2.2.8 Iicoalion in impcifccl fnancial mailcls . . . . . . . . . . 10
2.8 Moocls of picoaloiy piicing . . . . . . . . . . . . . . . . . . . . 11
2.8.1 Scllcn`s chain-sloic paiaoox . . . . . . . . . . . . . . . . 11
2.8.2 A icpulalion moocl of picoalion . . . . . . . . . . . . . 12
2.8.8 Milgiom ano IoLcils` limil piicing moocl . . . . . . . . 10
2.8.4 Iicoalion lo mcigc . . . . . . . . . . . . . . . . . . . . 20
2.8. Dccp poclcl picoalion . . . . . . . . . . . . . . . . . . . 22
2.8.0 Dccp poclcl picoalion wilh impcifccl fnancial mailcls 24
2.4 Iiaclicc: How lo ocal wilh picoaloiy piicing allcgalions . . . . 80
2.4.1 ALilily lo incicasc piiccs (is lhcic oominancc) . . . . . . 81
2.4.2 Saciifcc of shoil-iun piofls . . . . . . . . . . . . . . . . . 88
2.4.8 1csling picoaloiy piicing: fuilhci oiscussion . . . . . . . 87
6 Qrq0sulfh prqrsrolvdwlrq sudfwlfhv 75
8.1 Slialcgic invcslmcnls . . . . . . . . . . . . . . . . . . . . . . . . . 42
8.1.1 Slialcgic invcslmcnls lo oclci cnliy . . . . . . . . . . . . 4
8.2 Lunoling ano lying . . . . . . . . . . . . . . . . . . . . . . . . . . 48
8.2.1 Lmcicncy icasons foi lying . . . . . . . . . . . . . . . . . 49
8.2.2 1ying as a piicc oisciiminalion ocvicc . . . . . . . . . . . 49
8.2.8 Lxclusionaiy lying in icccnl moocls . . . . . . . . . . . . 1
8.2.4 Iiaclicc: Asscssmcnl of lying piacliccs . . . . . . . . . . 4
8.2. Moocling lying, I: Icquiicmcnls lying as a mclciing ocvicc 0
8.2.0 Moocls of lying, II: 1ying, foicclosuic, ano cxclusion in
Whinslon (1990) . . . . . . . . . . . . . . . . . . . . . . 9
8.2.7 Moocls of lying, III: 1ying lo oclci cnliy in complcmcn-
laiy mailcls . . . . . . . . . . . . . . . . . . . . . . . . . 00
8.8 IncompaliLilily, ano olhci slialcgic Lchavioui in nclwoil inousliics 70
8.8.1 InlciopciaLilily choiccs in asymmcliic nclwoils . . . . . 72
8.4 Icfusal lo supply ano cxclusivc conliacls (icminoci) . . . . . . . 70
8. Iaising iivals` cosls . . . . . . . . . . . . . . . . . . . . . . . . . . 77
7 Sulfh glvfulplqdwlrq :;
4.1 Wclfaic cfccls of piicc oisciiminalion . . . . . . . . . . . . . . . 79
4.1.1 Iiisl-ocgicc (pcifccl) piicc oisciiminalion . . . . . . . . . 79
4.1.2 Quanlily oiscounls . . . . . . . . . . . . . . . . . . . . . . 80
4.1.8 Iiicc oisciiminalion acioss counliics . . . . . . . . . . . . 81
4.1.4 Dynamic cfccls of piicc oisciiminalion: inccnlivcs lo invcsl 82
4.1. Docs mailcl powci mallci . . . . . . . . . . . . . . . . . 88
4.1.0 Iiicc oisciiminalion as a monopolisalion ocvicc . . . . . . 84
4.1.7 Anli-oumping . . . . . . . . . . . . . . . . . . . . . . . . . 80
4.2 Iiicc oisciiminalion . . . . . . . . . . . . . . . . . . . . . . . . . 88
4.2.1 1hiio-ocgicc piicc oisciiminalion) . . . . . . . . . . . . . 88
4.2.2 Quanlily oiscounls: 1wo-pail laiifs as piicc oisciimina-
lion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 90
4.2.8 Iiicc oisciiminalion ano invcslmcnls . . . . . . . . . . . 91
4.2.4 Iiicc oisciiminalion ano mailcl powci . . . . . . . . . . 98
4.2. Iiicc oisciiminalion unoci cnliy . . . . . . . . . . . . . . 9
8 H{huflvhv <9
9 Vroxwlrqv ri h{huflvhv 433
8
4 Lqwurgxfwlrq
1his chaplci ocals mainly wilh cxclusionaiy piacliccs, lhal is piacliccs caiiico
oul Ly an incumLcnl wilh lhc aim of oclciiing cnliy oi foicing cxil of iivals.
Ly ano laigc, such piacliccs coiicspono lo lhc lcgal conccpls of monopolisalion
in lhc US ano aLusc of oominancc in lhc LU (scc chaplci 1).
1hc iocnlifcalion of cxclusionaiy Lchavioui is onc of lhc mosl oimcull lopics
in compclilion policy, as oflcn cxclusionaiy piacliccs cannol Lc casily oislin-
guishco fiom compclilivc aclions lhal Lcncfl consumcis. Ioi inslancc, supposc
lhal following cnliy inlo an inousliy a oominanl fim is icoucing consiociaLly
ils piiccs: shoulo lhis low piicc consiocico an anli-compclilivc slialcgy aimco
al foicing lhc ncw cnlianl oul of lhc inousliy (aflci which piiccs will Lc iaisco
again, oamaging consumcis in lhc long-iun), oi is il inslcao jusl lhc a compcl-
ilivc icsponsc lhal will Lc Lcncfcial lo consumcis Mosl of lhis chaplci will Lc
ocvolco lo unocislanoing how lo answci lhis qucslion.
Lxclusionaiy piacliccs Ly incumLcnls aic ccilainly nol a ncw phcnomcnon,
Lul lhcic aic al lcasl lwo icasons why lhcic shoulo Lc a icncwco allcnlion on
such piacliccs. 1hc fisl is lhal in many counliics lhcic havc Lccn pioccsscs
of liLcialisalion, piivalisalion, ano oc-icgulalion lhal havc icsullco in scvcial
scclois having an incumLcnl facing polcnlial cnlianls. 1his asymmcliic sliuc-
luic cicalcs sliong inccnlivcs foi polcnlial cxclusionaiy Lchavioui. 1hc sccono
is lhal a giowing shaic of looay`s aovancco cconomics is composco of scclois
(foi cxamplc compulci soflwaic, inlcincl ano lclccommunicalions) lhal cxhiLil
nclwoil ano locl-in cfccls. In such cnviionmcnls, cnlianls mighl fno il vciy
oimcull lo compclc wilh incumLcnls, ano pailiculai caic shoulo Lc ocvolco lo
possiLlc cxclusionaiy piacliccs.
Scclion 1 focuscs on piicing slialcgics, ano scclion 8 on non-piicing slialc-
gics, such as ovci-invcslmcnl, lying ano Lunoling, ano incompaliLilily choiccs.
(Olhci non-piicc cxclusionaiy piacliccs focusing on vcilical icsliainls, such as
cxclusivc ocaling ano icfusal lo supply, havc alicaoy Lccn analysco in chaplci
0.)
Scclion 4 ocals wilh piicc oisciiminalion in gcncial, allhough only somc
foims of piicc oisciiminalion can Lc lhoughl as cxclusionaiy.
5 Suhgdwru| sulflqj
1hioughoul lhis Lool wc havc sccn lhal low piiccs aic gcncially associalco wilh
highci consumci ano social wclfaic. Il mighl lhcicfoic sccm suipiising al fisl
sighl lhal compclilion aulhoiilics mighl Lc conccinco wilh silualions whcic a
fim chaigcs loo low" piiccs. Ycl, allhough iaic, lhcic aic ciicumslanccs whcic
a oominanl fim mighl scl low piiccs wilh an anli-compclilivc goal: foicing a
iival oul of lhc inousliy, oi piccmpling a polcnlial cnlianl. In lhcsc cascs, low
piiccs impiovc wclfaic only in lhc shoil-iun, foi lhc limc picoalion lasls; oncc
lhc picy has succumLco, lhc picoaloi will incicasc ils piicc. 1hc fnal cfccl of
lhis picoaloiy Lchavioui (if succcssful) will Lc lo woiscn wclfaic in lhc long-iun,
Lccausc il gcls iio of compclilion in lhc inousliy.
Iicoaloiy piicing lhcicfoic occuis whcn a fim scls piiccs al a lcvcl lhal
implics lhc saciifcc of piofls in lhc shoil-iun in oioci lo climinalc compcli-
lion ano gcl highci piofls in lhc long-iun. 1his ocfnilion, foi lhc momcnl
slill vaguc, conlains lhc lwo main clcmcnls foi lhc iocnlifcalion of picoaloiy
Lchavioui in piaclicc: fisl, lhc cxislcncc of a shoil-lcim loss; sccono, lhc cxis-
lcncc of cnough mailcl powci on lhc pail of lhc picoaloi so lhal il icasonaLly
cxpccls lhal aflci a iival (oi moic iivals) has Lccn oiivcn oul of lhc mailcl il
will Lc aLlc lo iaisc piiccs so as lo incicasc piofls in lhc long-iun.
1hc vciy naluic of picoaloiy piicing, which involvcs low piiccs foi a pciioo,
malcs il oimcull lo ocal wilh. 1o oislinguish low piiccs ouc lo a gcnuinc ano
lawful compclilivc icsponsc lo iivals fiom low piiccs ouc lo a picoaloiy ano
unlawful Lchavioui is fai fiom an casy lasl in piaclicc. Iuilhcimoic, a vciy
caulious appioach Ly anliliusl agcncics ano couils is nccoco lo avoio lhc iisl
lhal fims cnoowco wilh mailcl powci lccp piiccs high lo avoio Lcing chaigco
wilh picoaloiy Lchavioui. Supposc foi inslancc lhal in a ccilain juiisoiclion a
low slanoaio of pioof is acccplco foi a fnoing of picoaloiy piicing. Anlicipaling
possiLlc anliliusl pioLlcms, a fim will havc a lowci inccnlivc lo cul piiccs, cvcn
lhough lhis woulo Lc ouc lo noimal compclilivc Lchavioui. As a icsull, piiccs
will Lc highci lhan olhciwisc coulo Lc, causing an allocalivc cmcicncy loss,
ano incmcicnl compclilois mighl fccl cncouiagco lo cnlci lhc mailcl, aooing a
pioouclivc incmcicncy lo lhc wclfaic loss.
1his oocs nol mcan, of couisc, lhal picoaloiy piicing shoulo Lc climinalco
fiom lhc possiLlc scl of anli-compclilivc aclions, Lul il oocs suggcsl lhal il
shoulo Lc ocall wilh caulion. In lhc icsl of lhis scclion I will liy lo givc somc
inoicalions on how lo Luilo a caulious Lul iigoious policy lowaios il.
514 Suhgdwlrq= vhdufk iru d wkhru|
Allcgalions of picoaloiy piicing aic ccilainly nol a ncw phcnomcnon. Inocco,
as sccn in chaplci 1, onc of lhc icasons Lchino lhc Shciman Acl was lhc small
cnlicpicncuis` complainl lhal laigc fims aclco picoaloiily, sclling low piiccs
lo oiivc lhcm oul of lhc mailcl. Of couisc, somc allcgalions wcic (as lhcy
aic looay) unfounoco: a laigc fim oflcn chaigcs lowci piiccs lhan iivals simply
Lccausc il cnjoys sliongci scalc ano scopc cconomics ano il is lhcicfoic moic
cmcicnl. Lul lhc poinl is lhal picoaloiy piicing cascs, allhough iclalivcly iaic,
aic as olo as anliliusl laws lhcmsclvcs.
2
Allhough fnoings of picoaloiy piicing havc nol Lccn uncommon in lhc US
ano, lalci, in lhc LU, a convincing cconomic lhcoiy of picoalion has nol ap-
pcaico unlil icccnlly. 1hc main cxplanalion foi picoalion was pioLaLly lhc
long puisc" sloiy. A laigc fim mighl oiivc oul of lhc mailcl a small compcli-
loi Ly waging a piicc wai lhal givcs losscs lo Lolh. Lul lhc small compcliloi
has limilco icsouiccs (a small puisc") ano will lhcicfoic Lc unaLlc lo suivivc
such losscs foi a long limc. Soonci oi lalci, il will havc lo givc up ano lcavc
lhc inousliy, allowing lhc laigc fim lo incicasc piiccs ano iccoup losscs. Unfoi-
lunalcly, howcvci, a solio lhcoiy lo suppoil lhis sloiy has appcaico only vciy
icccnlly (scc Lclow), ano slcplics hao poinlco oul lhc wcal poinls of picoalion
aigumcnls.
McGcc (198), in a vciy infucnlial ailiclc, ciilicisco lhc ioca lhal a fim
coulo oiivc oul compclilois Ly using picoaloiy piicing on foui main giounos,
lhal I looscly summaiisc as follows. Iiisl, ouc lo ils laigci mailcl shaic, a
laigc fim will usually havc lo sufci gicalci losscs lhan a small fim: olhci
lhings Lcing cqual, lhc samc unil loss will Lc mulliplico Ly a laigci numLci
of unils (McGcc, 198: 140). Sccono, picoalion malcs scnsc only if lhc laigc
fim will incicasc piiccs whcn lhc picy lcavcs. Lul, McGcc (198: 140-141)
aigucs, lhc asscls ano planls of lhc small fim will nol oisappcai, ano as soon
as piiccs iisc lhc small fim can ic-cnlci, oi ils asscls mighl Lc Loughl ano
usco Ly somcLooy clsc, icoucing lhc piofls lhc picoaloi can cxpccl lo malc.
1hiio, lhc picoalion lhcoiy assumcs lhal lhc picoaloi has a long puisc ano
lhc viclim a shoil onc, whilc lhis shoulo ialhci Lc cxplainco lhan assumco
(McGcc, 198: 189). In lhis pcispcclivc, onc shoulo unocislano why a small
fim, cvcn if fnancially consliainco, coulo nol cxplain lhc silualion (incluoing
lhc facl lhal lhc picoaloi is maling moic losscs lhan il oocs, ano cannol suslain
lhcm foicvci) lo ils cicoilois, lhcicLy oLlaining funos unlil picoalion will cno.
Iouilh, foi picoalion lo Lc ialional, il musl Lc nol only fcasiLlc Lul also moic
pioflaLlc lhan allcinalivc insliumcnls. If a laigc fim woulo lilc lo gcl iio
of a compcliloi, lhis ciilicism gocs, picoalion is an incmcicnl lool Lccausc il
ocslioys inousliy piofls foi lhc limc il lasls. Mciging wilh lhc iival woulo
Lc a moic pioflaLlc slialcgy, as il woulo allow lo picscivc high piofls in lhc
inousliy.
1hc fisl lwo aigumcnls aLovc can Lc lalcn caic of iclalivcly casily. In-
occo, lhc fisl poinl oocs nol holo if lhc laigc fim coulo piicc oisciiminalc ano
occicasc piiccs sclcclivcly only in lhosc mailcls oi foi lhosc clicnls whcic lhc
small fim is compcling. 1his allows lhc picoaloi lo picscivc high maigins on
mosl of lhc unils il sclls, lhcicfoic icoucing lhc cosl of lhc picoalion slialcgy.
As foi lhc sccono poinl, il iclics on lhc ioca lhal cnlciing ano ic-cnlciing lhc
inousliy oocs nol cnlail sunl cosls. Lul as wc havc sccn lhioughoul lhc Lool,
fxco sunl cosls aic pcivasivc. A fim lhal lcavcs a sccloi will pioLaLly nol Lc
aLlc lo iccovci moic lhan a small fiaclion of lhc fxco cosls il has incuiico lo
8
slail pioouclion ano salcs, ano a fim cannol closc oown ils planls, fiing ils
woilcis, ccasing lo supply ils piooucl onc oay ano icluining cosllcssly lhc oay
aflci.
Iuilhcimoic, lhc vciy facl lhal lhc incumLcnl has succcssfully picyco oncc
will pioLaLly havc an infucncc ovci olhci fims lhal aic consiociing cnliy inlo
lhc samc mailcl. A polcnlial cnlianl will nol iush inlo lhc inousliy aflci sccing
lhc cno of ils picocccssoi. 1his is onc of lhc impoilanl counlci-oLjcclions maoc
Ly Yamcy (1972), who poinlco oul lhal picoalion will oiscouiagc fuilhci cnliy
inlo lhc inousliy. If an incumLcnl ocvclops a icpulalion foi icacling loughly
ano aggicssivcly lowaios cnliy, polcnlial compclilois mighl Lc oiscouiagco fiom
cnlciing lhc inousliy al all. Allhough il has lalcn gamc lhcoiisls quilc a long
limc lo piovc foimally lhis icpulalion aigumcnl, il is now iigoiously cslaLlishco,
as wc shall scc in scclion 2.2 ano in lcchnical scclion 2.8.2 Lclow.
Icihaps lhc mosl challcnging poinl maoc Ly McGcc is lhc lhiio. Supposc
lhal lhc incumLcnl is inocco cnoowco wilh a lol of fnancial icsouiccs ano a
small iival is nol, allhough lhcy aic cqually cmcicnl. Why shoulo lhc small fim
nol Lc aLlc lo gcl fuilhci fnancing fiom Lanls oi olhci lcnoing inslilulions
Aflci all, lhcy shoulo unocislano lhal picoalion coulo nol Lc succcssful if lhcy
gavc unlimilco funoing lo lhc picy, ano anlicipaling lhal, picoalion woulo nol
lalc placc al all. Again, il is only icccnlly, wilh lhc ocvclopmcnls in coipoialc
fnancc, lhal a convincing sloiy of why picoalion mighl malc lighlci lhc fnan-
cial consliainls of fims has cmcigco, as I shall oiscuss in scclion 2.2 ano, moic
lcchnically, in scclion 2.8.0 Lclow.
Iinally, nolc lhal lhc fouilh poinl maoc Ly McGcc slicsscs an impoilanl
gcncial issuc, namcly lhal picoalion musl nol only Lc fcasiLlc Lul il musl also
Lc moic pioflaLlc lhan allcinalivc oplions availaLlc lo lhc incumLcnl. On
lhc pailiculai poinl lhal a mcigci woulo Lc moic pioflaLlc lhan picoaloiy
piiccs, lhicc counlci-oLjcclions can Lc maoc. Iiisl, Luying oul a compcliloi
mighl cncouiagc ncw oncs lo cnlci lhc inousliy wilh lhc aim of sclling oul
lo lhc incumLcnl al a piofl: if il gains lhc icpulalion lhal ncw compclilois
will Lc Loughl oul, a mcigci mighl nol Lc a chcap oplion. Sccono, unoci somc
anliliusl laws, laling ovci iivals mighl nol Lc allowco lo oominanl fims. 1hiio,
as Lolh 1clsci (1900) ano Yamcy (1972) aiguco, picoalion ano mcigcis aic nol
ncccssaiily mulually cxcluoing oplions: aggicssivc piicc Lchavioui mighl wcll
icsull in lhc picy Lcing icaoy lo scll oul al lowci piiccs. 1hc mcigci slialcgy
is lhcicfoic nol ncccssaiily in conliaoiclion wilh a picoalion slialcgy.
Inocco, Luins (1980) lools al lhc cxpcnoiluics maoc Ly Amciican 1oLacco
lo lalc ovci 48 compcling fims Lclwccn 1891 ano 1900, ano fnos cconomcliic
cviocncc lhal picoalion suLslanlially occicasco lhc acquisilion piiccs. Aggics-
sivc piicc Lchavioui hclpco Lolh oiicclly (Ly icoucing lhc piicc of acquiiing a
viclim) ano inoiicclly (Ly cslaLlishing a icpulalion foi Lcing a picoaloi, lhal
pcisuaoco olhci iivals lo scll oul Lcfoic any picoaloiy cpisooc woulo slail).
4
1his oiscussion of McGcc (198)`s aigumcnls ano lhcii possiLlc counlci-
oLjcclions has Lioughl up lhc main issucs iclalco lo picoaloiy piicing. In whal
follows, I Liicfy summaiisc how cconomic lhcoiy has aooicssco such issucs,
piovioing convincing sloiics of why picoalion mighl inocco lalc placc.
515 Uhfhqw wkhrulhv ri suhgdwru| sulflqj
1hcic is a common lhicao Lchino all lhc icccnl moocls of picoaloiy piicing:
picoalion is a phcnomcnon lhal can Lc fully cxplainco only in a conlcxl of
lpshuihfw lqirupdwlrq, lhal is a silualion whcic playcis havc somc unccilainly.
In all cascs, lhc picoaloi will liy lo usc lhc impcifccl lnowlcogc of lhc cnlianl
(oi of lhc oulsioc invcslois lhal fnancc il), ano Lchavc so as lo malc lhcm
Lclicvc lhal lhc cnlianl woulo nol malc high piofls in lhc inousliy. As a
icsull, lhc cnlianl will cxil, oi ils lcnocis will nol Lc willing lo piovioc il wilh
moic funoing.
1his manipulalion of Lclicfs can only cxisl if somc unccilainly cxisls. In a
woilo whcic all lhc fims (ano olhci aclivc agcnls in lhc cconomy, such as oul-
sioc invcslois) lncw pcifcclly whal aic lhc lcchnologics ano fnancial icsouiccs
availaLlc lo cach, lhcii picfcicnccs ano lhosc of consumcis, ano lhcii aLilily lo
Lchavc ialionally, picoalion woulo ncvci Lc oLscivco: cilhci il is clcai lhal a
oominanl fim will havc an inccnlivc lo fghl cnliy, ano in lhis casc lhc cnlianl
woulo nol oaic cnlci in lhc fisl placc (oi lhc small fim woulo cxil immcoi-
alcly); oi lhc oominanl fim lnows lhal picoalion will nol Lc succcssful, ano
lhcicfoic woulo nol picy al all. Lilhci way, picoaloiy piicing woulo nol Lc
oLscivco.
Wilhin lhis scl of icccnl (gamc lhcoiclic) picoalion moocls of impcifccl
infoimalion, lhcic aic lhicc main lypcs lhal can Lc iocnlifco: (i) icpulalion
moocls, (ii) signaling moocls, (iii) fnancial mailcl moocls of long puisc" pic-
oalion.
51514 Uhsxwdwlrq prghov
1hc oiscussion of McGcc`s ciiliquc poinlco oul lhal lhc Lchavioui of an incum-
Lcnl fim lowaios a cuiicnl compcliloi is lilcly lo havc an impacl on fuluic
(polcnlial) compclilois as wcll. A piicc wai looay mighl lhcicfoic fno ils ia-
lionalc in lhc allcmpl lo cicalc a icpulalion of Lcing a sliong ano aggicssivc
incumLcnl lo oiscouiagc cnliy (in olhci mailcls Ly lhc samc compcliloi, oi
in lhc samc mailcl Ly olhcis) lomoiiow. 1o unocislano how cconomic lhc-

oiy cxplains lhis icpulalion Lasco moocl of picoalion, consioci lhc following
cxamplc.
Supposc lhal lhcic is an incumLcnl monopolisl lhal is aclivc in a numLci
of iocnlical mailcls, whcic il has lhc samc lcchnology ano piooucls (c.g., a
chain-sloic"). In cach of lhcsc mailcls, il faccs a polcnlial cnlianl. Lnlianls
can cnlci onc al a limc. 1hc gamc is as follows. In lhc fisl mailcl, fisl
lhc polcnlial cnlianl occiocs whclhci lo cnlci oi nol, ano if cnliy occuis lhc
incumLcnl occiocs whclhci lo fghl oi accommooalc il. 1hcn lhis samc gamc
icpcals, onc Ly onc, foi all lhc mailcls.
Call now wcal" incumLcnl onc lhal has cosls as high as lhc cnlianls ano
lhal, if lhc gamc was playco only oncc, woulo nol fghl cnliy, Lccausc il woulo
Lc unpioflaLlc: fghling amounls lo sclling a low piicc lhal causcs losscs lo
Lolh lhc cnlianl ano lhc wcal incumLcnl. Scllcn (197)`s insighl is lo show
lhal lhc samc icsull - lhc cnlianl cnlcis ano il is accommooalco - applics also
whcn lhc gamc is playco foi (fnilcly) many limcs, as long as il is fhuwdlq lhal
lhc incumLcnl is wcal. Consioci foi inslancc lhc casc whcic lhcic aic lwo
cnlianls. Whalcvci mighl havc happcnco in lhc fisl mailcl, il is clcai lhal
lhc sccono ano lasl cnlianl will Lc accommooalco, sincc lhc incumLcnl woulo
incui losscs fiom fghling ano woulo havc no icason lo Luilo a icpulalion lo Lc
sliong if lhc gamc cnos. Lul lhcn, sincc lhc only icason lo fghl cnliy coulo Lc
lo oclci fuluic cnlianls, in lhc fisl pciioo lhcic is no inccnlivc lo fghl cilhci:
Lolh lhc incumLcnl ano lhc fisl mailcl cnlianl coiicclly anlicipalc lhal lhc
following pciioo lhc incumLcnl will nol fghl, ano cnliy will occui. In olhci
woios, fghling lhc fisl cnlianl woulo nol oclci sccono pciioo cnliy. Hcncc,
lhc incumLcnl has no inccnlivc lo fghl ano lhc fisl cnlianl lnows il ano will
cnlci.
Scllcn himsclf was puzzlco Ly lhc icsull (lhal hc lhoughl paiaooxical")
lhal picoalion woulo ncvci Lc oLscivco. Hc was convincco lhal in icalily lhcic
woulo Lc a sliong icason foi lhc incumLcnl lo picy on cnlianls lo Luilo up a
icpulalion lo oclci fuilhci cnliy.
1hc main icason Lchino lhis icsull comcs fiom lhc facl lhal lhc cnlianls
lnow wilh ccilainly (i.c., havc pcifccl infoimalion) lhal lhc incumLcnl has
an inccnlivc lo accommooalc if lhc gamc was playco jusl oncc. Kicps ano
Wilson (1982) show lhal if somc unccilainly is inliooucco, picoalion will occui.
Supposc lhal whcn lhc gamc slails cnlianls Lclicvc lhal wilh somc (possiLly
vciy small) pioLaLilily lhc incumLcnl mighl Lc nol wcal as ocsciiLco aLovc,
Lul ialhci sliong". In olhci woios, il mighl Lc a vciy cmcicnl fim whosc
cosls aic so low lhal il coulo malc piofls (ialhci lhan losscs) if il chaigco a
piicc Lclow lhc cosls of lhc cnlianl.
0
Clcaily, a sliong incumLcnl will always fghl cnliy, Lul lhis will nol Lc
picoalion: simply, il is so cmcicnl lhal il can scl piiccs Lclow cosls of lhc
cnlianl. 1hc inlcicsling issuc is anolhci, lhal is lhal a wcal incumLcnl mighl
cxploil lhc cnlianls` unccilainly ano fghl cnliy lo malc lhcm Lclicvc il is
sliong inslcao. Inocco, Kicps ano Wilson (1982) piovc lhal a wcal incumLcnl
woulo fghl cnliy al lhc Lcginning of lhc gamc, lo cslaLlish a icpulalion foi
Lcing sliong ano lhus oiscouiagc fuilhci cnliy. Il woulo Lc only lowaios lhc
lasl pciioos of lhc gamc lhal lhc wcal incumLcnl will accommooalc cnliy, as
lhc closci lo lhc cno of lhc gamc lhc lowci lhc cxpcclco gain fiom piclcnoing
lo Lc sliong. In gcncial, in any pciioo, lhc wcal incumLcnl`s occision lo fghl
icinfoiccs ils icpulalion lo Lc cmcicnl, Lul involvcs lhc saciifcc of cuiicnl
piofls in oioci lo oclci cnliy ano cain highci fuluic piofls. Al lhc Lcginning
of lhc gamc, lhc fuluic is long cnough ano lhc liaoc-of is in favoui of fghling,
whcicas al lhc cno of lhc gamc lhcic is lcss lo Lc gainco fiom oclciiing fuilhci
cnliy (in lhc limil, in lhc lasl pciioo lhcic is no fuluic gain al all), ano lhc
liaoc-of is in favoui of accommooaling.
51515 Vljqdolqj prghov
Signaling moocls of picoalion aic Lasco, lilc icpulalion moocls, on impcifccl
infoimalion. Again, lhc polcnlial cnlianl oocs nol lnow whclhci lhc incumLcnl
is low cosl (sliong) oi high cosl (wcal), ano lhc incumLcnl will liy lo cxploil
lhis unccilainly lo oclci cnliy. 1hc fisl signaling moocl is ouc lo Milgiom ano
IoLcils (1982L) ano il can Lc ioughly summaiisco as follows (scc scclion 2.8.8
foi a foimal picscnlalion).
Lcfoic laling ils cnliy occisions, a polcnlial cnlianl oLscivcs lhc piicc scl Ly
lhc incumLcnl whcn il is slill a monopolisl. If il was ccilain lhal lhc incumLcnl
is wcal, cnliy woulo Lc pioflaLlc. If il was ccilain lhal lhc incumLcnl is sliong,
cnliy woulo cnlail a loss. Lul lhc cnlianl cannol lcll lhcm apail. Il lhinls il
will facc a sliong incumLcnl wilh somc pioLaLilily, Lul il can only icvisc lhis
pioLaLilily Ly oLsciving lhc monopoly piicc of lhc incumLcnl (if il cnlcis,
inslcao, il will immcoialcly lcain if lhc incumLcnl is wcal oi sliong). In lhis
conlcxl, il is clcai lhal a wcal incumLcnl mighl wanl lo mimic a sliong onc,
lo liy ano oclci cnliy. Howcvci, a sliong onc woulo nol lilc lo Lc mislalcn foi
a wcal onc, Lccausc il woulo alliacl cnliy, which lowcis ils piofls.
1hcic aic lwo possiLlc cquiliLiia in lhc gamc. In lhc fisl (callco scpaialing
cquiliLiium"), lhc cmcicnl incumLcnl will scl a piicc lowci lhan ils noimal
monopoly piicc in lhc fisl pciioo (whcn il is lhc only aclivc fim), ano lhis piicc
is so low lhal no wcal incumLcnls woulo lilc lo scl il, Lccausc il woulo involvc
7
loo high losscs. Sincc lhcic is no scopc foi mimicling lhc cmcicnl incumLcnl,
lhc incmcicnl onc will inslcao choosc ils noimal monopoly piicc. 1hc cnlianl
will immcoialcly lcain which incumLcnl il faccs: if lhc piicc is low, il can only
Lc lhc cmcicnl onc, ano il will slay oul. If il is high, il will facc lhc incmcicnl
incumLcnl, ano will cnlci.
Nolc lhal in lhis cquiliLiium onc coulo say lhal lhcic is picoalion, in lhal
lhc low cosl incumLcnl is acling slialcgically" ano saciifccs cuiicnl piofls
lo oclci cnliy ano gain moic in lhc fuluic. Lul, inlcicslingly, ils Lchavioui
oocs nol huil wclfaic. 1o scc why, nolc lhal in a pcifccl infoimalion woilo lhc
cnlianl facing lhc low cosl incumLcnl woulo ncvci cnlci (Ly assumplion of lhc
moocl), ano consumcis woulo havc lo pay lhc noimal monopoly piiccs in Lolh
pciioos. In lhis cquiliLiium, inslcao, lhc low cosl incumLcnl chaigcs a much
lowci piicc lhan il woulo olhciwisc oo, lo signal il is cmcicnl. 1hcicfoic, whilc
in lhc sccono pciioo lhc salcs piicc is lhc samc, consumcis will Lc Lcllci of in
lhc fisl pciioo. In a scnsc, Ly signaling ils liuc naluic lhiough low piiccs lhc
low cosl incumLcnl is piovioing a scivicc lhal cnhanccs social cmcicncy.
In lhc sccono cquiliLiium (callco pooling cquiliLiium"), inslcao, lhcic is no
piicc al which lhc low cosl incumLcnl can pioflaLly scll ano Lc oislinguishco
fiom lhc high cosl onc. As a icsull, il will simply scl ils noimal monopoly piicc
ano lhc high cosl incumLcnl will imilalc il in oioci lo oclci cnliy.
In lhis casc, wc oLscivc picoalion fiom lhc incmcicnl incumLcnl, who scls
a lowci piicc lhan il woulo olhciwisc scl in lhc fisl pciioo (cvcn lhough, il is
impoilanl lo nolicc, lhal piicc mighl Lc aLovc oi Lclow lhc incumLcnl`s cosls),
Lul il can acl as a monopolisl in lhc sccono: il saciifccs cuiicnl piofls lo
incicasc lhc fuluic oncs. 1hc impacl on wclfaic is moic lilcly lo Lc ncgalivc in
lhis casc.
Milgiom ano IoLcils` signaling moocl is icminisccnl of lhc olo conccpl of
limil piicing" pioposco Ly Lain (19xx) ano Sylos-LaLini (19xx), vciy populai
in pic-gamc lhcoiy inousliial oiganisalion. Limil piicing icfcis lo lhc possiLilily
lhal an incumLcnl monopolisl scls a low piicc lo oclci cnliy, lhc ialionalc of
lhis piaclicc Lcing lhal oLsciving a low piicc a polcnlial cnlianl woulo also
cxpccl lowci maigins in lhc inousliy, ano lhcicfoic lowci piofls. If wc icao
looay lhosc caily woils wc woulo nol fno lhcm vciy convincing, sincc lhcy
icly on somc sliong assumplions (onc of lhcm Lcing lhal a fim commils lo
a ccilain piicc foi a limc, whilc wc lnow lhal piiccs can Lc casily changco in
8
lhc shoil-iun), Lul Milgiom ano IoLcils (1982L) havc casl in iigoious lcims
lhc lhcoiy of limil piicing, wilh a low piicc Lcing a signal lhal cxpcclco piofls
fiom cnliy mighl Lc low.
Howcvci, signaling moocls of picoalion aic nol inhcicnlly associalco wilh
lhc incumLcnl sclling a low piicc. In lhc cosl signaling moocl ocsciiLco aLovc,
lhc cosls of lhc cnlianl aic nol coiiclalco wilh lhc onc of lhc incumLcnl, so
a low cosl of lhc incumLcnl is Lao ncws foi lhc cnlianl, ano il malcs scnsc
foi lhc incumLcnl lo piclcno lo Lc low cosl Ly sclling a low piicc. Howcvci,
consioci a silualion whcic lhc cnlianl - ncw lo lhc inousliy - oocs nol ically
lnow whal cosls il will havc ilsclf, ano cxpccls lhcm lo Lc iocnlical (oi highly
coiiclalco) lo lhosc of lhc incumLcnl. Iuilhci, nolc lhal in mosl cascs whcic
lwo fims wilh iocnlical cosls compclc, cach fim`s ouopoly piofls occicasc
wilh cosls. In lhis silualion, lhc incumLcnl mighl oclci cnliy Ly sclling a
kljk piicc, Lccausc lhis woulo signal lhc cxislcncc of high cosls in lhc inousliy
foi Lolh (scc Haiiinglon, 1980).
Suhgdwlrq iru phujhuv An cxlcnsion of lhc signaling moocl aLovc allows
lo cxplain why picoalion mighl Lc usco lo lowci lhc piicc of laling ovci iivals,
a slialcgy lhal has Lccn oiscussco in scclion 2.1 aLovc. Salonci (1987) changcs
slighlly Milgiom ano IoLcils` moocl, lo allow foi lhc possiLilily lhal fims
mcigc aflci lhc fisl pciioo (also, in his moocl, cnlciing whcn facing a low cosl
incumLcnl woulo nol givc iisc lo losscs, Lul jusl lowci piofls). In lhis casc,
sclling a lowci piicc lhan woulo olhciwisc Lc oplimal signals lo lhc cnlianl
whclhci il shoulo cxpccl lo malc high oi low piofls aflci cnliy, ano lhcicfoic
whclhci il shoulo Lc willing lo scll oul lo (lo mcigc wilh) lhc incumLcnl al a
high oi al a low piicc.
Again, picoalion lalcs lhc foim of sclling lowci piiccs lhan a shoil-iun
calculalion woulo imply, Lul lhis limc ils oLjcclivc is nol lo oclci cnliy Lul
ialhci lo impiovc lhc lcims al which lhc iival will acccpl lo Lc lalcn ovci.
Rwkhu vljqdolqj prghov 1hcic aic scvcial olhci moocls whcic lhc in-
cumLcnl mighl wanl lo acl slialcgically so as lo malc lhc cnlianl (oi an cx-
isling compcliloi) cxpccl lowci pioflaLilily if il cnlcico (oi if il slayco in) lhc
inousliy. Schaifslcin (1984), foi inslancc, analyscs a moocl of lcsl-mailcl
picoalion", whcic lhc cnlianl has a ncw piooucl ano is unccilain aLoul lhc oc-
mano foi il. Givcn lhis unccilainly, il inlioouccs lhc piooucl in a lcsl-mailcl
fisl lo scc how il woulo Lc icccivco. 1hc incumLcnl mighl cngagc in vaii-
ous picoaloiy piacliccs (foi inslancc sccicl piicc oiscounls lo consumcis) lo
malc lhc cnlianl Lclicvc ocmano foi ils piooucl will Lc low, lhus lcaoing il lo
aLanoon lhc mailcl oi icoucc ils scalc of aclivily.
IuocnLcig ano 1iiolc (1980) suggcsl lhal lhc incumLcnl mighl also cngagc in
signal-jamming picoalion", nol lo allow lhc cnlianl lo impiovc ils infoimalion.
9
In a lcsl-mailcl moocl, foi inslancc, lhc puiposc of lhc cnlianl is lo galhci
infoimalion aLoul ocmano, ano lhc picoaloi ocfcals lhis puiposc Ly opcnly
culling piiccs. 1hc cnlianl lnows lhal ils ocmano is ailifcially low ouc lo
lhc incumLcnl`s cul-lhioal piiccs, Lul il cannol havc any infoimalion aLoul
whal ocmano woulo Lc in noimal compclilivc ciicumslanccs. In lhc aLscncc of
infoimalion, il will picfci lo cxil. A similai signal-jamming" mcchanism mighl
also Lc usco in olhci ciicumslanccs whcic lhcic is impcifccl infoimalion (foi
inslancc, in impcifccl capilal mailcls, scc Lclow).
51516 Suhgdwlrq lq lpshuihfw qdqfldo pdunhwv
As wc havc sccn aLovc, a wcal poinl of lhc long puisc lhcoiy of picoalion is
lhal il oocs nol cxplain why lhc picy has limilco acccss lo funoing. If capilal
mailcls wcic pcifccl, a pioflaLlc piojccl woulo always fno a fnancial sponsoi.
Moocin coipoialc fnancc lhcoiy, focusing on lhc impcifcclions cxisling in
capilal mailcls, pioviocs an answci lo lhcsc qucslions, lcaoing lo a long puisc
lhcoiy of picoalion whcic lhc picy`s limilco acccss lo funoing is cnoogcnous,
sincc picoalion afccls lhc pciccivco iisl of lcnoing moncy, lhcicLy icoucing
fnancial souiccs availaLlc lo lhc picy.
1hc lcy poinl of lhis lhcoiy is lhc cxislcncc of impcifccl infoimalion on
lhc sioc of lhc lcnocis (Lc lhcy Lanls, cquily holocis, oi olhci fnancial insli-
lulions). Lcnocis oo nol havc lhcii hanos on lhc inousliy ano cannol havc
piccisc lnowlcogc aLoul il (oi cannol oLscivc somc of lhc aclions lalcn Ly
fims). 1his chaiaclciiscs lhc iclalionship Lclwccn lhc lcnoci ano lhc Loiiowci.
(In lhcsc piincipal-agcnl moocls, lhc Lanl is lhc piincipal", ano lhc Loiiowci
lhc agcnl".) 1hc Lanl cannol Lc suic lhal lhc moncy lcnl is usco in an cf-
fcicnl ano compclcnl way ialhci lhan Lcing usco Ly lhc cnlicpicncui foi ils
piivalc Lcncfl, oi in an cxcccoingly iisly way (lhcic is a so-callco moial haz-
aio" pioLlcm), ano will accoioingly havc lo ocvisc a conliacl lhal piolccls ils
inlcicsls. Ioi inslancc, il will givc cicoil lo a Loiiowci only if il has a cci-
lain amounl of inlcinal asscls (such as iclainco cainings). Lccausc of cicoil
consliainls, lhcicfoic, a pioflaLlc piojccl mighl nol Lc fnancco.
Consioci now lhc compclilion Lclwccn an incumLcnl ano a ncw fim. 1hc
incumLcnl is a wcll cslaLlishco fim lhal has accumulalco cnough icsouiccs in
lhc pasl, whcicas lhc ncw fim oocs nol havc cnough own icsouiccs ano nccos
lo Loiiow hcavily lo compclc on pai wilh lhc incumLcnl. In such a silualion,
picoalion Ly lhc incumLcnl will icoucc lhc possiLilily foi lhc ncw fim lo gcl
funoing, sincc il icouccs ils piofls, ils iclainco cainings ano lhus lhc own
asscls lhal aic nccoco lo oLlain fuilhci funoing. Il is lhcicfoic lhc aggicssivc
Lchavioui Ly lhc incumLcnl lhal cnoogcnously icouccs lhc funos availaLlc lo
lhc iival (scc scclion 2.8.0 foi a foimalisalion).
A possiLlc oLjcclion lo lhis picoaloiy aigumcnl is lhal lhc lcnoci, unoci-
slanoing lhal picoalion mighl occui, lhus ocslioying ils oppoilunily lo malc
piofls oul of lhc loan, mighl havc an inlcicsl in picvcnling il Ly announcing
lhal il will fnancc lhc picy no mallci whal ils pcifoimancc in lhc mailcl will
Lc. Howcvci, il mighl nol Lc oplimal foi lhc Lanl lo oo so Lccausc il woulo
10
cicalc lhc scopc foi fuilhci agcncy pioLlcms. If lhc fims` managcis lncw lhal
whalcvci lhcy oo lhcii fim will Lc icfnancco, lhcy woulo havc an inccnlivc lo
usc lhc moncy lcnl Ly lhc Lanl lo incicasc lhcii salaiics, cmLcllish lhc fim`s
picmiscs ano so on, ialhci lhan maling all lhc ncccssaiy cfoil lo cnsuic lhal
lhc vcnluic will Lc compclilivc. 1hc Lanl, anlicipaling lhis moial hazaio pioL-
lcm, will lhcicfoic nol Lc icaoy lo commil lo icncw lhc loan inocpcnocnlly of
lhc icpaymcnl aLilily of lhc fim.
1o summaiisc, lhcsc moocls piovioc a convincing sloiy of why picoalion
lalcs placc. Oncc again, aggicssivc mailcl Lchavioui is usco Ly lhc incumLcnl
lo mooify lhc cxpcclalions of lhc pioflaLilily of lhc picy. In lhis pailiculai
casc, picoalion afccls lhc lcnoci`s cvalualion lhal lhc fim lhcy fnancc will Lc
succcssful. As a icsull, lhc picy will havc a lowci aLilily lo Loiiow ano will Lc
oLligco lo cxil lhc inousliy oi lo icoucc lhc scalc of ils opcialions.
516 Prghov ri suhgdwru| sulflqj-
In lhis lcchnical scclion I icvicw lhc main moocls of piicc picoalion.
51614 Vhowhq*v fkdlq0vwruh sdudgr{-
Scllcn (1978) consiocis an incumLcnl fim which owns a chain of sloics, onc
in cach of T oifcicnl cilics (wilh T Lcing a fnilc numLci). In cach mailcl in
succcssion, lhc incumLcnl faccs a local cnlianl, say fim 1 can onloi mailol 1
in poiioo 1, fim 2 can onloi mailol 2 in poiioo 2, ano so on.
In oacl poiioo t, llo slago gamo Lolwoon llo incimLonl ano polonlial onlianl
fim t is llo samo, ano il is illislialoo in fgiio 7.1.
INSEBJ Figiio 7.1. Slago gamo al limo t, clain-sloio paiaoox gamo
Fiisl, fim t las lo oocioo wlolloi lo onloi oi nol; llon, llo incimLonl las
lo oocioo wlolloi il wanls lo fgll onliy (llal is, clooso an aggiossivo mailol
aclion), oi lo accommooalo il. If llo onlianl slays oil, llon llo payofs foi llo
incimLonl ano llo onlianl aio iospoclivoly ano 0. If lloio is onliy, ano
llo incimLonl cloosos lo accommooalo il, llon lloii iospoclivo payofs aio
ano . If onliy is followoo Ly an aggiossivo ioaclion (oi piooalion, oi fgll),
payofs aio ano . Assimo llal llo fgll is coslly foi Loll playois, in llo
sonso llal ano 0 . Assimo also llal llo incimLonl gols
liglosl piofls inooi monopoly: .
If llo gamo was playoo jisl onco (T = 1), il is cloai llal llo llioal of a
fgll in caso of onliy is nol ciooiLlo, ano llal onliy woilo lalo placo ano Lo
accommooaloo al llo siL-gamo poifocl oqiiliLiiim. Inoooo, if onliy occiis,
llo incimLonl will piofoi lo accommooalo llan lo fgll il, as . Jlo
onlianl coiioclly anlicipalos llo incimLonl`s cloico, ano in llo fisl poiioo il
11
lnows llal if il onlois a sofl mailol ioaclion will occii, so llal il will gol a
payof , wloioas if il ooos nol onloi ils payof is 0 < . Jloiofoio, il piofois
lo onloi.
Sollon`s insigll is lo slow llal nolling clangos in llis iosill if llo samo
slago gamo is iopoaloo a nimLoi of limos, as long as llis nimLoi is fnilo. Jo
lool foi llo siL-gamo poifocl oqiiliLiiim wlon llo incimLonl facos T onlianls,
wo lavo lo woil Ly Laclwaio inoiclion.
Consiooi wlal lappons wlon llo incimLonl ano llo polonlial onlianl play
llo gamo in llo lasl mailol T. Wlalovoi las lapponoo Lofoio (if onliy occiiioo
oi nol, if il las Loon accommooaloo oi nol), llo oocisions lo Lo lalon in llis
mailol will nol lavo any olloi ofocl llan on llo ciiionl payofs, sinco il is
llo lasl play. Jloiofoio, llo fims will Lolavo as if lloy woio playing llo gamo
foi llo fisl ano only limo. Jlo only oqiiliLiiim is lloiofoio llo ono foino
aLovo in llo caso wloio T = 1: llo onlianl anlicipalos llal onliy woilo Lo
accommooaloo, ano lloiofoio onliy occiis (ano il is inoooo accommooaloo:
wly sloilo llo incimLonl piofoi lo lavo a payof < ).
Consiooi now wlal lappons al poiioo T 1, wloio llo incimLonl ano fim
T 1 play llo gamo on mailol T 1. Again, fims lnow llal inooponoonlly of
wlal las lapponoo in any poiioo Lofoio ano wlal lloy oo looay, in llo noxl
poiioo T onliy will occii. Jloiofoio, llo play al poiioo T 1 again ooos nol
lavo any Loaiing on filiio play, ano llo incimLonl will play as if llis was llo
only (oi llo lasl) poiioo of llo gamo. Fiim T 1 lnows llal llo incimLonl ooos
nol lavo any ioason lo fgll onliy, ano will accoioingly onloi; ano, of coiiso,
onliy will Lo accommooaloo.
Jlo samo ioasoning will occii foi llo T 2 poiioo ano any olloi pioviois
poiioo, so llal llo only siL-gamo poifocl Nasl oqiiliLiiim of llo gamo is ono
wloio oacl onlianl will onloi ils iospoclivo mailol, ano oacl onliy will Lo
accommooaloo.
Conliaiy lo wlal ono migll oxpocl, lloio is no ofocl of iopilalion Liiloing
in llis gamo, ano piooalion will nol occii.
2.3.2 A rcputatIon nodcI oI prcdatIon**
In llis soclion, I piosonl a simplifoo lwo-poiioo voision of Kiops ano Wilson`s
(1982) incomplolo infoimalion moool of piooalion. Consiooi llo samo moool as
llo clain-sloio paiaoox foi T = 2, Lil will a vaiianl. Enlianls oo nol lnow
will coilainly llo poi-poiioo payof of llo incimLonl. In pailicilai, lloio is
a small (piioi) pioLaLilily a llal fim 1 is a &jh ; Ii(t) = a), oi low cosl,
incimLonl, will piofls , wloioas will pioLaLilily 1 a il is a n|
(oi ligl cosl) incimLonl (Ii(n) = 1 a), wloso piofls aio < as in
llo clain sloio gamo aLovo. In olloi woios, an onlianl migll faco a loigl
oppononl, llal piofois fglling (piooaling) ovoi accommooaling ovon in a ono
poiioo gamo.
12
Jlis is a milli-slago gamo will incomplolo infoimalion, ano I lool foi llo
Ioifocl Layosian EqiiliLiiim (ILE) of llo gamo. In llis caso, givon llo slialo-
gios of llo playois ano llo Loliofs of llo onlianls, al llo ILE oacl playoi cloosos
llo oplimal slialogy givon llo slialogy of llo iival ano llo onlianl`s Loliofs, ano
llo Loliofs aio consislonl (llal is, lloy aio ooiivoo ising Layos` iilo). Nolo llal
llo slialogios migll Lo sloclaslic ialloi llan ooloiminislic finclions, i.o., lloio
migll Lo mixoo slialogy oqiiliLiia.
A gamo of llis lypo aomils llioo lypos of oqiiliLiia, lwo in piio slialo-
gios (-nn.nj ano |.nj oqiiliLiia) ano ono in mixoo slialogios (hj|.n oi
-n.--nn.nj oqiiliLiia). Wo Liiofy inoicalo llo conoilions foi oacl lypo
of oqiiliLiiim, Lil llon focis on llo lasl ono, wlicl in llis caso is llo mosl
inloiosling.
ScparatIng cquIIIIrIun. Al a sopaialing oqiiliLiiim a loigl incimLonl
fglls onliy ano a woal ono accommooalos il. Jlo socono poiioo onlianl las
complolo infoimalion afloi oLsoiving llo Lolavioii of llo incimLonl in llo fisl
poiioo: Ii(n [ a) = 1, Ii(t [ )) = 1, wloio n, t slano foi woal" ano loigl"
iospoclivoly, ano a, ) slano foi accommooalo" ano fgll". (So, Ii(n [ a) is llo
pioLaLilily llal llo incimLonl is woal givon llal accommooalion is oLsoivoo
in llo fisl poiioo, ano Ii(t [ )) is pioLaLilily llal il is loigl givon llal fgll
is oLsoivoo in llo fisl poiioo.) Accoioingly, il will onloi only if il oLsoivos
llal onliy las Loon accommooaloo in llo fisl poiioo. Al sicl an oqiiliLiiim
lloio woilo Lo no piooalion: llo loigl incimLonl is nol Lolaving slialogically,
il jisl maximisos ils slalic payof, ano llo woal incimLonl is inaLlo lo ooloi
onliy.
A nocossaiy conoilion foi sicl an oqiiliLiiim lo lolo is llal llo woal incim-
Lonl piofois lo accommooalo ialloi llan mimic llo loigl ono, llal is piooalo
ano ooloi onliy:
-c _ -c . (1)
IooIIng cquIIIIrIun. Al a pooling oqiiliLiiim, Loll llo loigl ano llo
woal incimLonl fgll onliy. Jlo onlianl coiioclly inooislanos il, ano ooos
nol ioviso ils Loliofs wlon oLsoiving aggiossivo Lolavioii in llo fisl poiioo.
Jlo posloiioi Loliof coincioos will llo piioi: Ii(t [ )) = a. Foi llis lo Lo an
oqiiliLiiim, il misl Lo llal llo onlianl will nol onloi afloi oLsoiving a fglling
opisooo:
a - (1 a) _ 0. (2)
Jo soo llal a pooling oqiiliLiiim cannol oxisl if conoilion (2) is violaloo,
ioason a conliaiio. If a -(1a) 0, llo socono onlianl woilo onloi afloi
oLsoiving piooalion. Lil llon il cannol Lo oplimal foi llo woal incimLonl lo
fgll in llo fisl poiioo, sinco saciifcing piofls woilo malo sonso only in oiooi lo
1
ooloi onliy. Howovoi, a pooling oqiiliLiiim of llis lypo is nol voiy inloiosling,
sinco conoilion (2) moans llal llo onlianl woilo nol onloi llo mailol in a slalic
gamo.
ScnI-scparatIng cquIIIIrIun. Lol is focis lloiofoio on a silialion wloio
Loll conoilion (1) ano (2) aio violaloo, ano assimo llal (1`) - c <
- c , ano llal (2`) a - (1 a) 0. I now slow llal lloio is a
somi-sopaialing oqiiliLiiim (i.o., an oqiiliLiiim in mixoo slialogios, sinco as-
simplions (1`) ano (2`) iilo oil piio slialogy oqiiliLiia) as follows.
1-..n J h j&.|.|.&n
(i.) Jlo fisl polonlial onlianl onlois.
(ii.a) Jlo socono polonlial onlianl onlois if llo fisl was accommooaloo.
(ii.L) Jlo socono polonlial onlianl onlois will pioLaLilily 1 (
),[c( )[ if llo fisl onlianl was foigll.
(iii.) Jlo loigl incimLonl fglls in Loll poiioos.
(iv.) Jlo woal incimLonl fglls in llo fisl poiioo will pioLaLilily
a ,[(1 a) [.
(v.) Jlo woal incimLonl accommooalos onliy in llo socono poiioo, if il
occiis.
1J
Fiisl of all, nolo llal aclions (ii.a), (iii.) ano (v.) aio liivially oplimal:
if onliy is ovoi accommooaloo, il is cloai llal llo incimLonl is woal (ii.a); a
loigl incimLonl is Ly oofnilion ono wloso payof is ligloi fiom fglling ovon
in a slalic gamo (iii.); in llo lasl poiioo of llo gamo, a woal incimLonl ooos
nol lavo any ioason lo fgll onliy (v.).
I now piovo llo oplimalily of llo iomaining aclions as follows.
(iv) If onliy las Loon foigll in llo fisl poiioo, llo socono onlianl will iso
Layos` iilo lo ioviso ils piioi llal il facos a loigl incimLonl. Jlo iovisoo
pioLaLilily llal llo incimLonl is loigl givon a fgll is oLsoivoo is:
Ii(t [ )) =
Ii() [ t) Ii(t)
Ii() [ t) Ii(t) - Ii() [ n) Ii(n)
=
a
a - Ii() [ n)(1 a)
. ()
Foi a mixoo slialogy lo Lo oplimal, llo socono onlianl misl Lo inoifoionl
Lolwoon onloiing oi slaying oil (llal givos a zoio payof), llal is:
Ii(t [ )) - (1 Ii(t [ ))) = 0, (4)
wlicl afloi siLslililing ano io-aiianging can Lo iowiillon:
14
Ii() [ n) =
a
(1 a)
. ()
Nolo llal < 0, so llis pioLaLilily is posilivo, ano Ly (2`), Ii() [ n) < 1.
(ii.L) Foi llo woal incimLonl lo ianoomiso in llo fisl poiioo, il misl Lo
inoifoionl Lolwoon fglling (wlicl woilo Lo followoo Ly onliy will somo pioL-
aLilily Ii(1:tr [ ))) oi nol:
-c
_
Ii(1:tr [ )) - (1 Ii(1:tr [ )))
_
= (1 -c). (0)
Ly io-aiianging, wo fno llo inoifoionco conoilion as:
Ii(1:tr [ )) = 1

c( )
, (7)
wlicl is lowoi llan ono Ly assimplion (1`).
(i.) Jlo fisl polonlial onlianl onlois if ils oxpocloo payof is ligloi llan
slaying oil:
a - (1 a)
_
Ii() [ n) - (1 Ii() [ n))
_
0. (8)
Afloi siLslililion, llis amoinls lo:
a - (1 a) a (
1) 0. (9)
Jloiofoio, somo iosliiclions on llo payof misl Lo imposoo foi llo pioviois
conoilion lo lolo. As long as (9) lolos, llo somi-sopaialing oqiiliLiiim wo lavo
oosciiLoo oxisls.
Conncnt Jlo gonoial caso T 2 is micl moio complox Lil also micl
iicloi. Jlo main iosill is llal if T is laigo onoigl, in llo oailioi poiioos of llo
gamo ovon a woal incimLonl fglls will coilainly, ano anlicipaling llis oaily
onlianls slay oil. As llo gamo piocooos, llo oplimal slialogios aio mixoo onos,
lilo in llo T = 2 caso.
Jlo main insigll of llis moool is llal ovon a small oopailiio fiom llo
poifocl infoimalion solling migll givo iiso lo piooalion, if llo loiizon is fnilo
Lil long onoigl: a woal incimLonl will play al llo Loginning of llo gamo as
if il woio a sliong ono, ano llis givos il llo iopilalion of a fglloi, llal will
convinco onlianls lo slay oil in oaily poiioos. Jowaios llo ono of llo gamo,
lowovoi, a woal incimLonl will nol fno il convonionl lo fgll, ano anlicipaling
il somo onlianls will liy lloii licl (iocall, lloio is always llo possiLilily llal
llo incimLonl is a loigl ono).
1
Finally, nolo llal Milgiom ano BoLoils (1982a) oxamino an oxlonsion wloio
lloio is lwo-siooo incoilainly (llo incimLonl ooos nol lnow llo payof of llo
onlianl), ano confim llal piooalion migll aiiso also in llis moio complox
incomplolo infoimalion gamo.
2.3.3 AIIgron and HoIcrts` IInIt prIcIng nodcI**
Hoio I piosonl a simplifoo voision of Milgiom ano BoLoils (1982L). Consiooi
an inoisliy will an incimLonl (fim 1) ano a polonlial onlianl (fim 2), ano
oomano foi llo lomogonois gooo is givon Ly j = 1Q. Jlo polonlial onlianl
las a maiginal cosl c ano, if il onlois, a fxoo sinl cosl 1. Ils cosls aio common
lnowloogo. Jlo incimLonl`s maiginal cosl, insloao, migll Lo low (c = 0) oi
ligl (c = c < 1,2). Jlis cosl is piivalo infoimalion: llo incimLonl lnows il,
Lil llo onlianl Loliovos llal il is low will a pioLaLilily a < 1: Ii (c = 0) = a,
ano ligl will a pioLaLilily Ii (c = c) = 1 a. I also assimo foi simplicily
llal if llo onlianl aclially onlois llo inoisliy, il will immooialoly loain llo
liio cosl of llo incimLonl.
Jlo gamo is as follows. In llo fisl poiioo, fim 1 cloosos ils oilpil. In llis
poiioo, il is a monopolisl. In llo socono poiioo, fim 2 oocioos wlolloi lo onloi
oi nol; if il ooos, il sinls ils cosl 1; if il ooos nol, il gols a zoio payof. Aclivo
fims clooso oilpils. Foi simplicily, I assimo no oiscoinling acioss poiioos:
fim 1 jisl maximisos llo sim of ils payof.
I lool foi llo Ioifocl Layosian EqiiliLiia of llo gamo. In llis caso, givon llo
slialogios (- , - ) of llo playois ano llo Loliofs j of llo onlianl, llo ILE consisls
of a liiplo (- , - , j) sicl llal oacl playoi cloosos llo oplimal slialogy givon
llo slialogy of llo iival ano llo onlianl`s Loliofs, ano llo Loliofs aio coiiocl.
In sicl a gamo, lloio aio lwo possiLlo lypos of oqiiliLiiim in piio slialogios.
In a -nn.nj j&.|.|.&n, llo low cosl incimLonl cloosos a laigo onoigl
oilpil, ano llo onlianl coiioclly infois llo incimLonl`s lypo Ly oLsoiving ils
fisl-poiioo oilpil. In a |.nj j&.|.|.&n, Loll llo low ano llo ligl cosl
incimLonl clooso llo samo oilpil. If llo onlianl las a ligl onoigl ox-anlo
pioLaLilily lo mool a low cosl incimLonl, il will nol onloi. Il lnows llal llo
oilpil oLsoivoo in llo fisl poiioo ooos nol caiiy any aooilional infoimalion
aLoil llo incimLonl`s lypo, ano ils posloiioi Loliofs aio accoioingly llo samo
as in llo fisl poiioo.
(Jlo facl llal llo low cosl incimLonl in a sopaialing oqiiliLiiim ano a
ligl cosl incimLonl in a pooling oqiiliLiiim sol a low onoigl piico lo malo llo
onlianl slay oil malos llo moool iosomLlo llo so-calloo |.n. ..nj aigimonls
of onliy ooloiionco.)
Lofoio claiacloiising lloso oqiiliLiia, lol mo Liiofy simmaiiso llo fisl-
10
ano socono-poiioo oilpils inooi llo oifoionl possiLililios. Fiim 1`s oplimal
qianlilios if lloio was no polonlial onlianl woilo Lo:
q =
1 c
2
; q =
1
2
, (10)
wloio laLols h ano | slano foi ligl- ano low-cosl incimLonl iospoclivoly, ano
: slanos foi monopoly. Unooi oiopoly, oqiiliLiiim qianlilios in llo Coiinol
gamo aio:
q = q =
1 c
; q =
1 -c
, q =
1 2c
, (11)
wloio d slanos foi oiopoly (llo fisl paii iofois lo llo caso of a ligl-cosl in-
cimLonl, llo socono of a low-cosl incimLonl). All oqiiliLiiim piofls aio givon
Ly = (q ) . Jo malo llo analysis inloiosling, I assimo llal in a fill infoi-
malion conloxl llo onlianl woilo novoi onloi if il facoo a low-cosl incimLonl
( 1 < 0), Lil woilo always onloi if il facoo a ligl-cosl ono (0 < 1),
oi:
(1 c)
9
1
(1 2c)
9
. (12)
Finally, oonolo Ly (q ) llo piofl oLlainoo Ly an incimLonl of lypo
= h, | wlon solling an oilpil q (nol nocossaiily coincioing will llo monopoly
oilpil of lypo ).
ScparatIng cquIIIIrIun I slall now slow llal llo following is an oqii-
liLiiim:
_
_
q = q q
q = q
- = 1:tcr, if q < q ; ot 1:tcr, if q _ q ,
a = 0, if q < q ; a = 1, if q _ q ,
(1)
wloio a = Ii(c = 0 [ q ) is llo onlianl`s Loliof of facing a low-cosl incimLonl
givon llo oLsoivoo fisl-poiioo oilpil q .
Al llis oqiiliLiiim, llo low-cosl incimLonl sols a ligloi oilpil llan ils
monopoly oilpil (llal is, llo oilpil sol if il woio in a monopoly inllioalonoo
Ly onliy) in llo fisl poiioo, ano llo ligl-cosl incimLonl sols ils own monopoly
oilpil, lloioLy iovoaling ils lypo. Jlo onlianl coiioclly infois llo incimLonl`s
lypo ano Lolavos accoioingly, onloiing only wlon if facos a ligl-cosl fim 1.
Foi llis lo Lo an oqiiliLiiim, no fim sloilo lavo an inconlivo lo oovialo.
Givon ils Loliofs ano fim 1`s slialogios aLovo, il is cloai llal llo onlianl cannol
17
oo Lolloi llan llal: onloiing will a low cosl fim woilo onlail lossos, ano nol
onloiing will a ligl cosl ono woilo imply foiogoing posilivo piofls.
Lol is now clocl llal llo ligl cosl incimLonl las no inconlivo lo oovialo.
If il plays llo canoioalo oqiiliLiiim slialogy il will gol ils monopoly piofl
in llo fisl poiioo Lil woilo alliacl onliy: - . Alloinalivoly, il coilo
sol q llis mimicling llo low cosl incimLonl ano ooloiiing onliy: inooi llis
oovialion, il woilo gol (q ) - . Ils inconlivo consliainl (IC) lloiofoio
amoinls lo:
- _ (q ) - , oi:
(1 c)
9
_ (1 q c)q . (14)
As foi llo low cosl incimLonl, Ly playing llo (canoioalo) oqiiliLiiim slial-
ogy il woilo gol a lowoi piofl llan Ly solling ils monopoly oilpil in llo fisl
poiioo, Lil il oolois onliy: (q )- . Jlis slialogy involvos a saciifco in llo
piofls oainoo in llo fisl poiioo; llo alloinalivo coilo Lo lo sol llo monopoly
oilpil in llo fisl poiioo (sinco any oilpil lowoi llan q woilo alliacl onliy,
cloosing q is cloaily llo Losl oovialion oilpil) Lil llis woilo nol ooloi onliy,
ano woilo lloiofoio givo oiopoly piofls in llo socono poiioo. Jlis oovialion
givos llo payof - , giving iiso lo llo following inconlivo consliainl:
(q ) - _ - , oi: (1 q )q _
(1 -c)
9
. (1)
Il is oasy lo clocl llal llo ligl cosl IC (14) is salisfoo foi q _ 1,2 -
_
(1 c),0 ano llal llis is Liggoi llan 1,2 foi c < (
_
),4 .4271 (foi
valios of c ligloi llan llis llioslolo, sopaialing oqiiliLiia woilo oxisl wloio
llo low cosl incimLonl simply sols ils monopoly oilpil ano is nol mimicloo
Ly llo ligl cosl incimLonl).
Jlo low cosl IC (1) is salisfoo foi q _ 1,2-
_
8c 4c ,0. Jloiofoio,
lloio oxisls an inloival of valios wlicl salisfos Loll ICs as long as 1,2-
_
(1
c),0 _ 1,2 -
_
8c 4c ,0, oi c _ 2
_
, 1 .49.
Nolo also llal llo Losl possiLlo oqiiliLiiim foi llo incimLonl coiiosponos
lo llo oilpil llal malos llo ligl cosl IC`s Lino: q = 1,2 -
_
(1 c),0 (any
oilpil laigoi llan llis woilo oocioaso llo fisl poiioo piofl willoil clanging
llo socono poiioo piofl).
IooIIng cquIIIIrIun I slall now clocl if llo following is an oqiiliLiiim:
_
_
_
q = q = q
- = 1:tcr, if q < q ; ot 1:tcr, if q _ q ,
a = 0, if q < q ; a = a, if q _ q ,
18
Al llis oqiiliLiiim, llo ligl cosl incimLonl imilalos llo low cosl incimLonl.
Sinco llo polonlial onlianl inooislanos llal il cannol infoi llo incimLonl`s lypo
fiom llo fisl poiioo play, il oocioos on llo Lasis of ils ox-anlo Loliofs, wlicl
say llal llo incimLonl is a low cosl ono will a pioLaLilily a. Accoioingly, llo
pooling oqiiliLiiim can oxisl only if llo onlianl`s oxpocloo payof (wlicl is llo
samo Lofoio ano afloi oLsoiving fim 1`s fisl poiioo cloico) is nogalivo:
a( 1) - (1 a)( 1) < 0, oi a
(1 c) 1
2 c
. (10)
In olloi woios, llo ox-anlo pioLaLilily llal llo onlianl will mool a low
cosl incimLonl misl Lo ligl onoigl if llo pooling oqiiliLiiim is lo oxisl.
Olloiwiso, sinco al a pooling oqiiliLiiim fisl poiioo play ooos nol loao lo a
iovision of Loliofs, llo onlianl woilo always onloi. In liin, llo facl llal onliy
will nol Lo ooloiioo implios llal llo ligl cosl incimLonl lao Lolloi play ils
monopoly oilpil ialloi llan Llimng.
As foi llo inconlivo consliainls of fim 1, llo ligl cosl incimLonl misl
piofoi lo imilalo llo low cosl fim ano ooloi onliy ialloi llan iooicing ils
oilpil ano alliacling onliy:
- _ (q ) - , oi:
(1 c)
9
_ (1 1,2 c),2, (17)
wlicl lolos foi c < (
_
),4 .4271.
As foi llo low cosl incimLonl, il is cloai llal il piofois lo play llo canoioalo
oqiiliLiiim oilpil, wloio il oolois onliy Ly cloosing ils monopoly piofl: any
olloi oilpil woilo lowoi fisl poiioo piofl ano possiLly (if solling an oilpil
lowoi llan 1,2) also liiggoi onliy.
ConcIusIon Jlo analysis slows llal Ly solling a low onoigl piico (a laigo
onoigl oilpil) ano piolonoing lo Lo an omcionl piooicoi, an incimLonl woilo
Lo aLlo lo ooloi onliy. In llo oxamplo aLovo, llis is possiLlo wlonovoi llo
ligl cosl incimLonl is nol loo inomcionl (c < (
_
),4) ano llo ox-anlo
pioLaLilily llal llo onlianl allaclos lo llo incimLonl Loing low cosl is ligl
onoigl.
Nolo, lowovoi, llal llo policy implicalions of llo moool aio fai fiom sliaigll-
foiwaio. Fiisl of all, piooalion loio occiis willoil llo ligl cosl incimLonl
solling Lolow ils cosl: in llo pooling oqiiliLiiim, onliy is ooloiioo Ly solling
q = 1,2, llal coiiosponos lo a piico j = 1,2 ligloi llan llo cosl of llo inom-
cionl incimLonl. Socono, sipposo, foi llo salo of llo aigimonl only (as sicl a
19
policy woilo Lo Lasoo on inoLsoivaLlos), llal a compolilion ailloiily imposoo
a iilo wlicl piovonls a fim fiom acling slialogically" ano solling al a piico
lowoi llan llo ono il woilo sol if lloio was no llioal of onliy. Sicl a iilo woilo
oliminalo onliy ooloiionco Ly llo ligl cosl fim, ano migll lloiofoio incioaso
wolfaio. Howovoi, il woilo also foi siio iooico wolfaio if llo incimLonl was
low cosl. Inoooo, in sicl a caso, Ly acling slialogically llo omcionl incimLonl
woilo oocioaso piico Lolow llo myopic monopoly lovol in llo fisl poiioo, ano
consimois woilo Lo Lolloi of.
2.3.4 IrcdatIon to ncrgc**
Jlo Clicago Sclool`s ciiliqio lo piooalion mainlainoo llal moigois woilo Lo a
moio pioflaLlo slialogy llan piooalion. Jlo aigimonl was ciilicisoo Ly Yamoy
(1972) wlo poinloo oil llal ovon will a viow lo lalo ovoi a iival, piooalion
migll Lo pioflaLlo Locaiso il woilo lavo llo ofocl lo oocioaso llo piico al
wlicl llo iival is Loigll. Salonoi (1987) givos foimal sippoil lo llis aigimonl.
In wlal follows, I piosonl a voiy slioamlinoo voision of lis moool.
Consiooi llo samo incomplolo infoimalion moool as in llo pioviois soclion
2.., Lil will somo oifoioncos. Fiisl, assimo llal 1 = 0, so llal llo onlianl
always fnos il pioflaLlo lo onloi (lo focis on piooalion lo moigo al moio
convonionl loims). Socono, mooify llo gamo so as lo inliooico a slago wloio
fims can moigo, as follows. In llo fisl poiioo, llo incimLonl (llal, as aLovo,
migll Lo a low cosl oi a ligl cosl fim) is alono in llo mailol ano cloosos ils
oilpil, llal is oLsoivoo Ly llo polonlial onlianl. In llo socono poiioo (llo
novolly will iospocl lo Milgiom ano BoLoils` analysis) lloio is Laigaining ovoi
llo moigoi loims. Foi simplicily, assimo llal all llo Laigaining powoi is on llo
incimLonl, llal malos a lalo-il-oi-loavo-il moigoi ofoi lo llo polonlial onlianl.
In llo lliio poiioo, aclivo fims sol oilpils.
Nolo llal lliio poiioo oqiiliLiiim qianlilios ano piofls aio alioaoy lnown
fiom soclion 2.. aLovo. In caso a moigoi las lalon placo in llo socono poiioo,
llo incimLonl simply Locomos a monopolisl in llo lliio.
20
As foi llo moigoi piocoss al poiioo lwo, llo piico Q al wlicl fim 2 is
willing lo Lo Loigll will oopono on wlolloi il oxpocls lo faco a ligl oi a low
cosl incimLonl. In llo foimoi caso, il oxpocls lo malo a piofl ano in llo
lalloi a lowoi piofl . Jloiofoio llo laloovoi will lalo placo foi Q _
ano Q _ iospoclivoly. Ono can soo immooialoly llal llo incimLonl las
an inloiosl in Loing Loliovoo lo Lo low cosl. Sinco llo Laigaining powoi is all
on llo incimLonl sioo, fim 2 will soll oil al a piico oqial lo ils iosoivalion
piico. If fim 2 Loliovos il facos an omcionl incimLonl, llo moigoi occiis al a
piico Q = . If il Loliovos il facos an inomcionl incimLonl, llo piico will Lo
Q = Q .
I can now liin lo llo claiacloiisalion of llo sopaialing oqiiliLiia, wloioas
pooling oqiiliLiia aio slioioo in oxoiciso 2.
ScparatIng cquIIIIrIun Lol mo focis on llo following oqiiliLiiim, wloio
llo low cosl incimLonl sols an oilpil laigoi llan ils monopoly oilpil in llo
fisl poiioo lo signal il is omcionl ano Liy fim 2 al a lowoi piico, wloioas llo
ligl cosl incimLonl simply sols ils monopoly oilpil ano il is iocognisoo as
inomcionl (ano lloiofoio las lo pay a ligloi piico foi llo laloovoi):
_
_
q = q q ; Q = Q =
q = q ; Q = Q =
- =
_
if q < q : 3c||, if Q _ Q ; 1ccct, if Q < Q
if q _ q : 3c||, if Q _ Q ; 1ccct, if Q < Q
a = 0, if q < q ; a = 1, if q _ q .
Givon ils Loliofs, il is cloai llal llo onlianl cannol oo Lolloi llan solling
oil al llo ligl piico Q if q < q ano al llo low piico Q olloiwiso.
As foi llo ligl cosl fim 1, playing accoioing lo llo canoioalo oqiiliLiiim
slialogy is oplimal if il is Lolloi lo lavo llo monopoly piofl in llo fisl poiioo
Lil laving lo pay a ligl piico foi llo moigoi, ialloi llan piolonoing lo Lo a
low cosl incimLonl, wlicl onlails a lowoi inilial payof Lil a ligloi laloi gain
oio lo saving on llo laloovoi piico:
- _ (q ) - . (18)
Jlis can Lo iowiillon afloi siLslililion as (q ) _ , oi:
(1 c)
4
(1 q c)q _
(1 c)
9

(1 2c)
9
, (19)
wlicl simplifos lo q _ (1 c),2 -
_
(2 c)c,, will q = (1 c),2 -
_
(2 c)c, Loing llo naliial oqiiliLiiim among all llo possiLlo onos.
21
Jlo low cosl fim 1 will fno llo canoioalo oqiiliLiiim slialogy oplimal if
il is Lolloi lo saciifco fisl poiioo monopoly piofl lo pay a lowoi piico foi llo
moigoi, ialloi llan golling ils monopoly piofl in llo fisl poiioo Lil laving
loss convonionl loims foi llo laloovoi (as llo onlianl woilo mislalo il foi a
ligl cosl fim):
(q ) - _ - . (20)
Jlis can Lo iowiillon afloi siLslililion as (q ) _ , oi:
1
4
(1 q )q _
(1 c)
9

(1 2c)
9
, (21)
wlicl simplifos lo q _ 1,2 -
_
(2 c)c,, always salisfoo foi q =
(1 c),2 -
_
(2 c)c,.
2.3. Occp pockct prcdatIon*
Foi a voiy simplo moool of long piiso piooalion, oio lo Lonoil (1984), consiooi
llo following J .nJnn.n gamo llal lasls foi T -1 poiioos will 1 1.
In llo fisl poiioo, an onlianl fim 1 oocioos wlolloi lo onloi oi nol a givon
socloi, ano llo incimLonl fim1 oocioos wlolloi lo pioy (fgll) oi accommooalo
onliy. In oacl of llo following poiioos, fim 1 oocioos wlolloi lo slay oi oxil,
ano fim 1 wlolloi lo pioy oi accommooalo. (As an alloinalivo, fim 1 is
alioaoy in llo mailol, ano oocioos wlolloi lo conlinio oi nol fiom llo fisl
poiioo.) If il pioys, Loll fims lavo a poi-poiioo payof < 0, if il ooos nol
pioy, lloy lavo 0.
Jlo lwo fims aio poifoclly symmoliic in lloii loclnologios ano piooicls,
Lil oifoi in lloii assols. Jlo onlianl las lowoi assols llan llo incimLonl:
= T < . In olloi woios, llo incimLonl can siivivo longoi in llo
ovonl of a piico wai, llal is il las a ooopoi poclol (a longoi piiso).
Unooi llis sol of assimplions, al llo only siL-gamo poifocl oqiiliLiiim llo
onlianl will nol onloi (oi will immooialoly oxil). Il is oasy lo soo llis iosill Ly
Laclwaio inoiclion. Figiio 7.2 illislialos llo gamo in llo simplo caso wloio
T = 1 ano 1 = 1, llal is llo onlianl las iosoiicos only foi ono poiioo fgll,
ano llo fims mool in llo mailolplaco only lwico. I fisl solvo llo moool foi
llis lwo-poiioo caso, ano llon foi llo gonoial caso.
INSEBJ Figiio 7.2. Doop poclol piooalion, will T = 1 = 1
22
SoIutIon Ior thc tvo-pcrIod casc: T = 1 = 1 Jlo gamo is solvoo
Ly moving Laclwaios. Lol is slail Ly llo socono poiioo. If llo onlianl las
onloioo ano las Loon foigll, in llo socono poiioo il las lo oxil. If onliy las Loon
accommooaloo, il will oocioo lo slay. Jlis is Locaiso llo onlianl anlicipalos
llal - if il slays - llo incimLonl piofois lo accommooalo ano gol ialloi
llan fgll ano malo a loss . Jloiofoio, in llo socono poiioo, il piofois lo
slay ano gol ialloi llan oxiling ano golling 0.
In llo fisl poiioo, if llo onlianl las onloioo, llo incimLonl lnows llal Ly
fglling il will inoico oxil (ano gol monopoly piofls ), wloioas Ly accom-
mooaling il will nol (wo lavo jisl soon llal if il is nol foigll, llo onlianl will
slay). Jlo foimoi slialogy is piofoiioo if
-c (1 -c). (22)
Lol is now movo lo llo voiy fisl oocision. If llo aLovo conoilion lolos, llo
onlianl lnows llal ils onliy will Lo followoo Ly a fgll ano il will loso all ils
assols: il will llis piofoi lo slay oil. If llo conoilion is violaloo, llo onlianl
will onloi sinco il anlicipalos llal llo llioal of piooalion is nol ciooiLlo.
SoIutIon oI thc gcncraI casc Al poiioo T - 1, if fim 1 las always
Loon foigll, il will go Lanliipl ano will lavo lo oxil, ano fim 1 will gol
monopoly piofls foiovoi, -
c . Elso, piooalion in llis poiioo Ly

llo incimLonl woilo nol Lo ciooiLlo: Ly accommooaling il woilo gol -
c -

c . Anlicipaling il, fim 1 woilo slay, ano
lloy woilo Loll oain foiovoi.
Al poiioo T, if llo onlianl is slill in llo inoisliy ano il las always Loon
foigll, llo incimLonl lnows llal Ly fglling llo onlianl ono moio limo il woilo
malo il oxil. Jloiofoio, il woilo piofoi lo fgll as long as:
-
c -
c . (2)
If llis conoilion is salisfoo, llo onlianl anlicipalos llal il will Lo pioyoo
ipon onco moio ano woilo piofoi lo oxil immooialoly, in oiooi lo savo .
Al poiioo T 1, if llo incimLonl fglls ono moio poiioo il lnows llal
il will inoico oxil in llo noxl poiioo, giving a payof

c - . Ly
accommooaling, il will gol

c - . Cloaily, fglling is moio pioflaLlo
as long as conoilion (2) lolos. Anlicipaling llis, llo onlianl will piofoi lo oxil
immooialoly lo avoio llo lossos caisoo Ly a poiioo of fglling.
Jlo aigimonl llon conlinios Laclwaios in llo samo way inlil llo fisl
poiioo, wloio llo onlianl piofois lo oxil immooialoly (oi nol onloi al all) ialloi
llan inciiiing any lossos.
2
Conncnts Jlis simplo moool illislialos wly llo ooop poclol aigimonls
of piooalion migll woil. In a silialion wloio a fim is fnancially sliongoi llan
anolloi, llo foimoi can iso ils ooopoi poclols lo foico llo lalloi oil of llo
inoisliy. Nolo also llal lloio nooo nol Lo any iolalionslip Lolwoon fnancial
sliongll ano omcioncy: a moio omcionl fim migll lavo - foi sovoial ioasons,
somo lo Lo soon in llo following soclion 2..0 - casl consliainls ano Lo foicoo
oil of llo mailol Ly a iicloi Lil loss omcionl iival (soo oxoiciso ). If llis is
llo caso, piooalion is lwico laimfil foi wolfaio: fisl, Locaiso il oliminalos ono
fim wloio insloao lwo coilo co-oxisl; socono, Locaiso il oliminalos llo mosl
omcionl fim, aooing a piooiclivo inomcioncy lo llo allocalivo inomcioncy.
Nono llo loss, llo moool las somo limils. Fiisl, nolo llal llo infoimalion
ioqiiiomonls foi piooalion lo woil aio qiilo sliong, will llo incimLonl llal
sloilo lnow nol only llo cosls of llo onlianls Lil also llo piociso amoinl of
finos availaLlo lo il, ano llo onlianl wlo sloilo lnow llal llo incimLonl ooos
nol lavo any casl (oi ciooil) consliainl (ano lloio misl Lo common lnowl-
oogo of lloso olomonls). Socono, llo moool is somowlal insalisfacloiy in llo
sonso llal along llo oqiiliLiiim pall piooalion woilo novoi Lo oLsoivoo: givon
poifocl infoimalion ano common lnowloogo, llo onlianl will novoi onloi llo
inoisliy (oi, if alioaoy in, woilo loavo il immooialoly), willoil any piico wai
Loing oLsoivoo. Howovoi, Lonoil (1984) slows llal piooalion woilo slill occii
inooi incomplolo infoimalion (wloio somo incoilainly oxisls aLoil low long
a fim`s piiso is), ano llal - similaily lo llo iopilalion moool of soclion 2..2
- a piico wai migll woll Lo oLsoivoo along llo oqiiliLiiim pall. Jlo lliio,
ano mosl impoilanl limil of llis simplo moool is llal il oxogonoisly assimos
llal a fim is nol aLlo lo iaiso oilsioo finos. Jlis loaos is lo llo moools llal
onoogonoisly oxplain wly piooalion migll iooico llo aLilily lo Loiiow of an
onlianl fim, wlicl is llo oLjocl of llo noxl soclion.
2.3.6 Occp pockct prcdatIon vIth InpcrIcct BnancIaI narkcts**
Jo inooislano wly piooalion migll occii wlon an incimLonl las fnancial
sliongll, ono las lo inooislano wly an onlianl oi a smalloi fim is vilnoiaLlo
wlon il ooos nol lavo onoigl fnancial moans. Jlo loy issio is lo iocogniso
llal if capilal mailols aio impoifocl, llon llo assols (sicl as casl ano iolainoo
oainings) ownoo Ly a fim malloi ano ooloimino ils aLilily lo iaiso oxloinal
finos. Onco llis poinl is oslaLlisloo, il will Lo oasy lo inooislano wly piooa-
lion migll occii: Ly Lolaving aggiossivoly in llo mailolplaco, llo incimLonl
will iooico llo assols availaLlo lo llo smalloi fim, iooicing ils aLilily lo iaiso
capilal, ano lloiofoio oLliging il oilloi lo oxil oi lo iooico ils amLilions in llo
inoisliy.
Jlis soclion, Lasoo on Holmsliom ano Jiiolo (1997) ano Coslono (2001),
foimalisos llis poinl.
24
FInancIng Invcstncnts In an InpcrIcct capItaI narkct Consiooi fisl
llo fnancing pioLlom of a iisl-noilial onliopionoii, aLsliacling fiom piooicl
mailol compolilion. Jlo fim nooos lo invosl a givon amoinl lo onloi a coilain
socloi, oi lo conlinio opoialions in llal socloi, ano llal onlails llo paymonl of
a fxoo cosl 1. Jlo fim las own assols foi a lolal of , so il nooos lo Loiiow
fiom a iisl-noilial Lanl llo amoinl 1 = 1 0 lo fnanco llo invoslmonl.
If llo invoslmonl is fnancoo, llo onliopionoii oocioos wlolloi lo woil oili-
gonlly on llo piojocl oi sliiling. If lo woils oiligonlly, llo Lisinoss piojocl
will siccooo will pioLaLilily j ano will givo a iovonio 1, ano il will fail will
a pioLaLilily 1 j, giving a iovonio 0. If lo sliils, llo piojocl will fail will
coilainly, Lil lo will gol a piivalo Lonofl 1. Jlo piivalo Lonofl can also Lo
inloipioloo as llo oisililily of ofoil savoo wlon sliiling, foi inslanco, as llo
limo llo onliopionoii can spono ioaoing nowspapois oi calling ils family ano
fiionos ialloi llan woiling on llo piojocl.
Efoil is nol oLsoivaLlo (oi, if oLsoivaLlo, il is nol voiifaLlo), so il is nol
possiLlo lo wiilo a fnancing conliacl llal oiioclly fxos ils lovol. Jlis cioalos
an infoimalion asymmoliy (will moial lazaio) Lolwoon llo oilsioo invoslois
ano llo onliopionoii, llal is llo ioason foi capilal mailol impoifoclion in llis
oxamplo.
Assimo llal if llo onliopionoii lao onoigl assols lo fnanco llo piojocl
ilsolf, oi if lloio was no infoimalion asymmoliy (llal is, if ofoil was oLjoclivoly
voiifaLlo ano il was possiLlo lo wiilo a conliacl conlingonl on il), llo invoslmonl
will always Lo maoo:
j1 1. (24)
Lil llo oilsioo invosloi will fnanco llo invoslmonl only if il is siio llal il
is going lo olicil oiligonl woil fiom llo onliopionoii. Olloiwiso, il will loso 1.
(Assimo llal lloio is limiloo liaLilily: llo invosloi (oi Lanl) cannol iocovoi
llo amoinl il lonl Ly soizing llo poisonal assols of llo onliopionoii.)
Consiooi now llo following conliacl Lolwoon llo Lanl ano llo fim. Jlo
Lanl lonos 1 lo llo fim, ano if llo piojocl is siccossfil, llo foimoi iocoivos a
paymonl 13, wloio 3 is lopl Ly llo fim. Jlo onliopionoii`s nol oxpocloo
ililily is givon Ly l = j3 in caso of ligl ofoil, ano l = 1 in caso of low ofoil.
Jloiofoio, 3 misl Lo closon lo salisfy llo following inconlivo consliainl:
j3 _ 1. (2)
So, if llo conliacl is lo olicil ligl ofoil, llo onliopionoii misl iocoivo al
loasl 3 = 1,j oi, wlicl is llo samo, llo fim coilo nol piomiso lo iopay moio
llan 11,j lo llo Lanl (11,j is calloo |njn|| .nn).
Jlo Lanl will fnanco llo piojocl if ano only if ils oxpocloo valio (siLjocl
lo llo onliopionoii maling ligl ofoil, llal is siLjocl lo conoilion (2) Loing
salisfoo) is ligloi llan ils cosl (llal is, llo finos lonl):
2
j(13) _ 1 , (20)
llal is, if llo oxpocloo ploogoaLlo incomo is ligloi llan llo cosl of llo invosl-
monl:
j(1
1
j
) _ 1 . (27)
Jlis cloaily slows llal llo fim`s fnancial posilion, simmaiisoo Ly llo
assols il owns, plays a loy iolo in llo Lanl`s lonoing oocision: llo laigoi
llo moio liloly llal llo fim`s piojocl will Lo fnancoo. Inoooo, (27) can Lo
io-wiillon as:
_ 1 (j11) , (28)
wlicl malos cloai llal a piojocl will posilivo nol piosonl valio will nol Lo
fnancoo (llo fim is ciooil consliainoo) if llo fim las assols Lolow a coilain
llioslolo .
If involvoo in a piico wai llal iooicos ils assols, a fim`s lilolilooo lo gol
fiilloi fnancing fiom Lanls will Lo joopaioisoo. Jlis is llo loy insigll fiom
ioconl long piiso moools of piooalion, as I now slow.
A Iong pursc nodcI oI prcdatIon Lol is now inliooico piooicl mailol
compolilion in llo fnancing moool soon aLovo. Jloio aio lwo fims: fim1 is llo
incimLonl, ano fim 1 is a ioconl onlianl inlo llo inoisliy (oi llo piooaloi ano
llo pioy). Jlo fims aio poifoclly ioonlical in lloii loclnologios ano piooicls,
Lil lloy oifoi in llal 1 las a long piiso wloioas 1 las limiloo assols, in a
sonso lo Lo spocifoo Lolow.
Assimo llal Loll fims lavo alioaoy inciiioo lloii fxoo iociiionl cosl 1
foi poiioo 1, Lil slill lavo lo pay il lo conlinio piooiclion in poiioo 2. Jlo
gamo is as follows (soo fgiio 7. foi an illislialion).
INSEBJ Figiio 7.. Jimo lino: a (fnancial) long piiso moool of piooalion
Al slago 1, fim 1 oocioos on wlolloi il pioys oi accommooalos onliy. If
il pioys, Loll fims gol (fisl-poiioo) piofls ; if il ooos nol, lloy gol piofls
0. Al slago 2, oacl fim oilloi pays 1 oi goos oil of Lisinoss; a fim
20
llal ooos nol own onoigl assols las lo fno a Lanl lo fnanco llo invoslmonl.
Al slago , oacl onliopionoii las lo malo ofoil oocisions, ano llon socono (ano
lasl) piofl ioalisalion occiis. Conoilional on maling ligl ofoil, if Loll fims
lavo invosloo lloy will oain will llo samo pioLaLilily j, wloioas if only
ono fim las invosloo il will oain monopoly piofls 2 will pioLaLilily
j.
Assimo llal j 1: llis implios llal llo invoslmonl woilo always Lo
fnancoo if capilal mailols woio poifocl. Assimo also llal fim 1 las own assols
1, so llal il will always Lo aLlo lo fnanco llo invoslmonl, wloioas fim
1`s assols in llo fisl poiioo aio = 0; lloiofoio, ils socono poiioo assols
coincioo will ils fisl poiioo iolainoo oainings (I aLsliacl fiom oiscoinling).
Assimo llal:
1 < j(
1
j
) < 1 . (29)
Il is now oasy lo lool foi llo siL-gamo poifocl Nasl oqiiliLiiim of llis
gamo. Nolo llal fiom slago 2 onwaios, llo gamo is oxaclly llo samo as llo
Lasic moool slioioo in llo pioviois siLsoclion, wloio ioplacos 1 ano wloio
assols aio oqial lo oilloi in caso of accommooalion oi in caso of
piooalion. Jloiofoio, conoilion (29) lolls is llal fim 1`s invoslmonl woilo Lo
fnancoo only if fim 1 ooos nol pioy.
So fai, llis piovos llal piooalion woilo inoooo malo fim1 oxil llo inoisliy.
Howovoi, I also lavo lo piovo llal fim 1 ooos lavo an inconlivo lo piooalo. Jlis
is llo caso if ano only if:
j - j - . (0)
Jloiofoio, piooalion will occii if llo filiio piospocl of ligloi piofls, j(
), oilwoigls llo ciiionl lossos fiom piooalion, .
Sonc conncnts Fiisl, nolo llal I lavo assimoo llo onlianl lo lavo loss
fnancial moans llan llo incimLonl, Lil llis migll nol always Lo llo caso. An
inloiosling implicalion of llis moool is llal laigo oi fnancially sliong onlianls
sloilo Lo wolcomo. In an inoisliy wloio a sliong incimLonl is piosonl, a small
fim migll novoi Lo aLlo lo siivivo, wloioas a laigo millinalional company oi
a oominanl fim in anolloi socloi llal wislos lo oivoisify inlo a now socloi will
nol iin llo iisl of Loing pioyoo ipon Ly llo incimLonl. Al piosonl, I lavo llo
impiossion llal wlonovoi a laigo fim, possiLly oominanl in somo mailol, plans
lo onloi in a now mailol, llis is iogaiooo will sispicion. Sicl a sispicion migll
Lo waiianloo in many casos, Lil nol always, as llo long piiso moool loaclos
is.
27
Socono, nolo llal a sliong mailol posilion is a nocossaiy conoilion foi pio-
oalion. Iiooalion involvos monolaiy lossos llal a fim can lopo lo iocoip in
llo filiio only if il onjoys onoigl mailol powoi.
Jliio, il sloilo Lo nolicoo llal oxil of llo iival is nol sliiclly nocossaiy foi
piooalion lo Lo pioflaLlo, as slowoo in oxoiciso 4: piooalion migll nol foico a
smalloi fim lo oxil, Lil migll piovonl il fiom aoopling innovalions oi lo giow.
ExtcnsIons: HcncgotIatIon and HoIton and ScharIstcIn`s nodcI A
ciiliqio movoo lo llis moool is llal piooalion coilo Lo avoiooo Ly llo Lanl`s
agioomonl lo fnanco llo onlianl inooponoonlly of fisl poiioo payof ioalisalion.
In olloi woios, if llo Lanl ano fim 1 signoo a long-loim conliacl wloioLy llo
Lanl nn.- lo fnanco fim 1 wlolloi oi nol lloio is piooalion, in oxclango
of a iopaymonl 1,j. Jwo impoilanl poinls sloilo Lo sliossos in llis
conliacl: fisl, il sloilo Lo oLsoivaLlo lo llo incimLonl; socono, il misl Lo
non-ionogoliaLlo, llal is, llo Lanl cannol willoiaw fiom ils commilmonl lo
fnanco fim 1.
If Loll conoilions aio salisfoo, llon il is oasy lo soo llal piooalion will nol
occii. Jlis is Locaiso fim 1 lnows llal no malloi wlal il ooos in llo fisl
poiioo, llal is no malloi wlal assols aio availaLlo lo fim 1 al llo momonl of
invosling, llo Lanl will fnanco llo invoslmonl. Honco, il woilo Lo poinlloss lo
ongago in piooalion wlicl involvos foiogoing piofls llal cannol Lo iocovoioo
laloi.
Fiisl, nolo llal llis ioasoning lingos on fim 1`s oLsoiving llo conliacl
Lolwoon llo Lanl ano ils iival, nol nocossaiily a woal assimplion (consiooi
also llal fim 1 las all inloiosl in laving fim 1 Loliovo llal il onjoys an
inconoilional lino of ciooil).
Socono, il also lingos on llo ciooiLilily of llo commilmonl of llis long-loim
conliacl. If il woio impossiLlo foi llo Lanl lo commil lo sicl a conliacl, llal
is if llo Lanl coilo ionogolialo il al a zoio oi small cosl, piooalion woilo nol
Lo avoiooo. Inoooo, consiooi wlal lappons if llo conliacl is ionogoliaLlo afloi
oLsoiving llo fisl poiioo payof ioalisalion. Sipposo piooalion las occiiioo.
Jlon fim 1 las insimcionl assols foi llo Lanl lo Lo willing lo fnanco ils
socono poiioo invoslmonl (sinco j 1 < 1 ), ano will nol Lo aLlo lo
Loiiow. Anlicipaling llis, llo incimLonl will pioy in llo fisl poiioo.
Thc tradc-o Ictvccn noraI hazard and dctcrrIng prcdatIon Con-
siooiing all llo possiLlo incoilainlios of llo mailol, il sooms inliloly llal a Lanl
wanls lo commil lo conlinio lo fnanco opoialions of a fim no malloi low ils
Lisinoss is oovoloping. Lollon ano Sclaifsloin (1990) aoo llo following aigi-
monl lo oxplain wly il migll nol Lo wiso foi llo Lanl lo givo sicl a long-loim
conliacl lo llo fim. If an onliopionoii lnow ils fim will Lo fnancoo in llo fi-
liio inooponoonlly of ils iosills, il woilo nol lavo llo iigll inconlivos lo malo
ofoil. Jo soo wly sicl an agoncy pioLlom migll aiiso following a long-loim
conliacl will llo Lanl, consiooi an oxlonsion of llo moool wloio afloi llo con-
liacl is signoo Lil Lofoio fisl poiioo mailol ioalisalion fim 1`s onliopionoii
28
sloilo oocioo wlolloi lo malo a ligl oi low ofoil.
Jo iopoal, llo moool, illislialoo in fgiio 7.4, is as follows (lo slioss llo
agoncy pioLlom, oisiogaio ionogolialion issios ano assimo llal llo Lanl filly
commils lo llo long-loim conliacl).
INSEBJ Figiio 7.4. Jimo lino: Lollon-Sclaifsloin`s moool
Al slago i, llo Lanl ano fim 1 sign a long-loim conliacl, wloso oolails
wo slall soo Lolow. Al slago ii, oacl onliopionoii lalos ofoil oocisions, wlicl
loaos lo siccoss will a pioLaLilily q (siccoss ialos Loing poifoclly coiiolaloo
acioss fims). Fiisl-poiioo sliiling givos piivalo Lonofl / (will / < q1).
Al slago 1, fim 1 oocioos on wlolloi lo pioy oi accommooalo, (fisl-poiioo)
piofls Loing iospoclivoly ano . Al slago 2, oacl fim oilloi pays
1 oi oxils. Al slago , oacl onliopionoii las again lo malo ofoil oocisions
(siccoss ialo, again poifoclly coiiolaloo, is j), afloi wlicl, socono (ano lasl)
piofl ioalisalion occiis, will payofs if Loll fims invosl, ano 2 if
only ono ooos.
Wo lnow fiom llo siL-soclion aLovo llal fim 1 will Lo aLlo lo Loiiow if ils
assols al llo Loginning of llo socono poiioo aio = (iocall llal wo assimo
1 < j 1 < 1 ). Lil llo long loim conliacl also oslaLlislos
llal llo Lanl will fnanco llo fxoo invoslmonl 1 will a pioLaLilily a < 1 in
caso fim 1`s socono poiioo assols aio = , in oxclango of a iopaymonl
1,j.
Jlo oplimal conliacl coiiosponos lo llo valio of a llal maximisos llo valio
of fim1 siLjocl lo lwo inconlivo consliainls lo Lo salisfoo: fisl, llo incimLonl
ooos nol pioy (IC ); socono, fim 1`s onliopionoii malos ligl ofoil in llo
fisl poiioo (IC ). In olloi woios, llo piogiammo is:
max\ = q - [q - (1 q)a[ (j 1), siLjocl lo: (1)
IC : q - [q - (1 q)a[ j - (1 q)(1 a)j _ q -aj - (1 a)j ,
(2)
IC : [q - (1 q)a[ j(1,j) _ aj(1,j) -/. ()
IC says llal llo incimLonl piofois lo accommooalo onliy llan lo pioy.
Ly accommooaling, il oains in llo fisl poiioo, ano in llo socono poiioo
if llo iival las Loon siccossfil oi las Loon iofnancoo, ano if il las
nol Loon siccossfil ano nol iofnancoo (wlicl lappons will pioLaLilily 1 a),
of coiiso woiglloo Ly own pioLaLilily of siccoss. Ly pioying, il gols in
llo fisl poiioo, ano in llo socono poiioo if fim 1 iocoivos finoing (wlicl
occiis will pioLaLilily a) ano olloiwiso (again, all payofs aio oxpiossoo
in oxpocloo loims).
IC says llal llo onliopionoii piofois lo oxoil ligl ofoil llan sliiling
in llo fisl poiioo (llo IC in llo socono poiioo is alioaoy lalon caio of inooi
29
llo slipilaloo conliacl llal giaianloos fim 1 a payof 1,j in caso of siccoss).
Jlo fisl-poiioo ofoil ooos nol givo an immooialo payof lo llo onliopionoii,
Lil incioasos llo lilolilooo of fnancing in llo socono poiioo. Financing occiis
will pioLaLilily [q - (1 q)a[ inooi ligl ofoil, ano will pioLaLilily a inooi
low ofoil.
Afloi io-aiianging, llo lwo ICs can Lo io-wiillon as:
a _
j - (1 -j)
j
a , (4)
wloio llo nimoialoi is posilivo Locaiso of conoilion (0), ano
a _ 1
/
q1
a . ()
Jloso lwo conoilions slow llal piooalion migll Lo ooloiioo al llo cosl
of iooicing llo onliopionoii`s inconlivo lo oxoil ofoil. Foi inslanco, in llo
oxliomo caso wloio a = 1, llal is fim 1 is fnancoo no malloi wlal fim 1
ooos, llo onliopionoii`s inconlivo consliainl is always violaloo. Moio gonoially,
llo lwo ICs aio simillanooisly salisfoo only if a _ a , llal is if:
/
q1
_
(1 -j)
j
. (0)
In sicl a caso, llo oplimal pioLaLilily of iofnancing will Lo a = a
(llo ligloi a llo laigoi llo piosonl valio of llo fim). Lil if conoilion (0) is
violaloo, llon piooalion can only Lo ooloiioo al llo cosl of laving low ofoil in
llo fisl poiioo.
517 Sudfwlfh= Krz wr ghdo zlwk suhgdwru| sulflqj doohjd0
wlrqvB
Ono cloai losson fiom soclion 2.2 is llal incimLonl fims migll inoooo iso ag-
giossivo piicing slialogios in oiooi lo ooloi onlianls ano,oi lo foico compolilois
oil of lloii inoisliy, Ly iolying on oifoionl moclanisms: lloy can Liilo a iop-
ilalion foi Loing loigl, so as lo scaio polonlial onlianls oil of llo Lisinoss,
lloy migll wanl lo sol low piicos lo signal onlianls oi smalloi compolilois lloy
sloilo nol oxpocl ligl piofls, oi lloy migll wanl lo oiooo a iival`s iosoiicos
lo malo il moio oimcill foi il lo gol finoing. No ooiLl, anliliisl agoncios
sloilo walcl oil ano oxpocl somo incimLonls lo iso sicl piooaloiy piaclicos
lo sliongllon oi cioalo a oominanl posilion.
Howovoi, wo sloilo also liy lo gol somolling moio fiom oconomic llooiy,
nol jisl llo iosill llal piooaloiy piicing migll occii. In wlal follows, I givo
my inloipiolalion of llo policy implicalions fiom llo llooiy.
0
In all llooiios of piooaloiy piicing lloio is a common moclanism: llo piooa-
loi sols low piicos foi a poiioo, lloioLy saciifcing sloil-iin piofls, in oiooi lo
malo a iival (oi ils lonoois) Loliovo llal il sloilo nol oxpocl ligl pioflaLil-
ily. Wlon llo iival iovisos ils plans (oi ils lonoois slop fnancing il) ano oxils,
oi aLanoons llo piojocl of onloiing, oi iooicos llo scalo of ils opoialions, llo
incimLonl will incioaso ils piicos ano ioap ligl piofls, llal in llo long-iin
oilwoigl oaily lossos.
Jwo olomonls sloilo Lo sliossoo fiom llis moclanism: (a) llo saciifco of
sloil-iin piofls; (L) llo aLilily lo incioaso piofls in llo long-iin Ly oxoicising
mailol powoi onco piooalion las Loon siccossfil. Il is on lloso lwo olomonls
llal llo logal lioalmonl of piooaloiy piicing sloilo Lo Liill. Accoioingly, il
malos sonso lo lavo a lwo-lioi losl of piooalion, as follows:
1. Analysis of llo inoisliy lo ooloimino llo oogioo of mailol powoi of llo
allogooly oominanl fim. If llo fim is nol oominanl, oismiss llo caso; if
llo fim is oominanl, piocooo will:
2. Analysis of llo iolalionslip Lolwoon piico ano cosls:
A piico aLovo avoiago lolal cosls sloilo oofniloly Lo consiooioo law-
fil, willoil oxcoplions.
A piico Lolow avoiago lolal cosls Lil aLovo avoiago vaiiaLlo cosls
sloilo Lo piosimoo lawfil, will llo Liioon of pioving llo opposilo
on llo plainlif.
A piico Lolow avoiago vaiiaLlo cosls sloilo Lo piosimoo inlawfil,
will llo Liioon of pioving llo opposilo on llo oofonoanl.
Nolo llal llo losl iovoisos llo logical oiooi (a) ano (L). Jlis is Locaiso llo
analysis of llo inoisliy migll in many casos liin oil lo Lo simploi lo caiiy oil
llan llo piico-aLovo-cosl losl, ano woilo allow lo scioon oil somo casos (lloso
wloio llo allogoo piooaloi is cloaily nol oominanl) saving limo ano iosoiicos.
In wlal follows, I oisciss llo pioposoo losl.
51714 Delolw| wr lqfuhdvh sulfhv +lv wkhuh grplqdqfhB,
A nocossaiy olomonl foi piooalion is llo aLilily lo moio llan componsalo afloi
llo oxclision of llo compoliloi llo minoi piofls maoo oiiing llo piooalion
opisooo. Cloaily, llis ioqiiios llo oxislonco of mailol powoi on llo sioo of llo
fim, ano llo sliongoi ils mailol powoi llo moio liloly foi il lo gain in llo
long-iin fiom llo oxil (oi oown-sizing) of llo pioy. Sinco mailol powoi is a
malloi of oogioo, llo issio is wloio lo sol llo lino aLovo wlicl a fim migll Lo
accisoo of piooaloiy Lolavioii: can an oligopolislic fim, among many in ils
socloi llal can oxoiciso somo mailol powoi, Lo accisoo of piooalion
1
In EU law, llis is nol an issio, sinco piooalion woilo fall inooi llo calogoiy
of aLiso of oominanl posilion. Accoioingly, an oligopolislic fim llal ooos nol
lavo a oominanl posilion woilo nol Lo foino giilly foi piooaloiy Lolavioii. In
ciiionl piaclico, llis moans llal a fim will a mailol slaio Lolow 40/ woilo
pioLaLly nol Lo accisoo of piooalion.
In llo US, llo issio is micl loss cloai, ano coiils lavo foino fims giilly
of piooalion ovon wlon lloy lolo iolalivoly small mailol slaios. A caso in
poinl is 1| G&, allloigl llo fnal Sipiomo Coiil oocision ovonlially
oismissoo llo piooalion allogalions, afloi an inilial giilly voioicl. In llal caso,
a small cigaiollos piooicoi, Liggoll \ Myois (laloi lo Lo pail of llo Lioolo
Gioip) lao floo siil againsl Liown ano Williamson - wlicl lolo 12/ of llo
cigaiollos mailol - accising llo lalloi of laving onloioo llo gonoiic ano piivalo
laLol sogmonl of llo mailol ano of solling Lolow cosl lo oiivo Liggoll - llo main
fim in llal sogmonl - oil of llo mailol.
A ligl mailol powoi slanoaio is nooooo lo avoio llo iisl of joopaioising
compolilion in oligopolislic mailols. Il woilo Lo paiaooxical if anliliisl ai-
lloiilios pil liiolos lo piaclicos isoo Ly non-oominanl fims lo incioaso lloii
mailol powoi. Sipposo foi inslanco llal a fim will a sizoaLlo mailol slaio
(say, 20/) in an oligopolislic inoisliy wloio lloio is a micl sliongoi fim (say,
ono will 00/ of llo mailol) liios lo incioaso ils cislom Ly oocioasing ils piico.
Sipposo also llo lowoi piico allows il lo sloal cislomois Loll lo llo mailol
loaooi ano a smalloi compoliloi, ono llal, say, las / of llo mailol. Jlo lalloi
migll llon acciso llo piico cilling fim of piooaloiy piicing, ano - if llo piico
is foino lo Lo Lolow somo spocifc moasiio of cosl (soo following siL-soclion),
llo coiil woilo inoooo fno piooalion. Yol, ialloi llan Lolaving piooaloiily,
llo allogoo non-oominanl piooaloi is jisl liying lo incioaso ils mailol slaios
llioigl an aggiossivo Lil lawfil Lolavioii.
Jloio aio many ioasons wly a non-oominanl fim migll piico Lolow cosls
as pail of a noimal compolilivo piocoss. Consiooi foi inslanco an inoisliy
claiacloiisoo Ly -.h.nj -- (soo also claploi 2): mosl consimois woilo Lo
locloo-in will llo oominanl fim, ano only a signifcanl piico cil migll convinco
many of llom lo aooioss anolloi solloi insloao. Jlo samo aigimonl lolos foi
mailols will n| .nn|..- (soo also claploi 2): if lloy aio impoilanl
onoigl, a siLslanlial piico cil migll Lo nocossaiy foi a fim lo win onoigl
cislomois ano ioacl ciilical mass. Oi llinl of inoisliios claiacloiisoo Ly sloop
|nn.nj &- oi impoilanl oconomios of scalo: ialloi llan Loing confnoo lo
Lo a niclo playoi, a fim migll wanl lo slaiply oocioaso piicos ano incioaso ils
oilpil so as lo go oown llo cosl ciivo ano incioaso ils omcioncy. Finally, a
fim migll claigo a piico Lolow cosl if lloio is somo n& n|nnn.j
2
will anolloi mailol. If llo lalloi is moio impoilanl foi llo fim, il is sloil-
iin pioflaLlo (ano gooo foi consimois as woll) llal il oocioasos piicos in llo
mailol al slalo lo incioaso oomano in llo complomonlaiy mailol.
Nolo also llal llo samo aigimonls (will llo oxcoplion of llo complomon-
laiily oofonco) woilo n apply lo a oominanl fim. A oominanl fim cannol
claim llal il nooos piomolional piicing lo incioaso ils salos, sinco il is alioaoy
woll oslaLlisloo in llo mailol: ils consimois aio alioaoy locloo-in Ly swilcling
cosls ano nolwoil ofocls, ano piosimaLly il las alioaoy ioacloo llo miminim
omcionl scalo of piooiclion ano Lonofloo fiom loaining ofocls.
Jloiofoio, llo mailol powoi losl sloilo calcl only oominanl fims, ano
nol jisl any oligopolislic fim llal las somo mailol powoi. Aomillooly, in
oxcoplional ciicimslancos lloio migll Lo a non-oominanl piooaloi, ano sicl a
losl woilo lofl il inpinisloo. Yol, llis woilo Lo a small piico lo pay compaioo
will a losl llal sols a lowoi Laiiioi. Jlo lalloi woilo cioalo ligloi logal
incoilainly, as mosl oligopolisls migll Lo llo laigol of a piooaloiy aclion.
As a iosill of il, llo noimal compolilivo piocoss woilo Lo oamagoo, sinco fims
migll foai piooaloiy aclions if solling loo low piicos. Fiilloi, il woilo invilo
many moio piooaloiy liligalions, llal woilo aLsoiL onoigy ano iosoiicos of
llo anliliisl ailloiilios ano woilo oisloil llo allonlion of Loll plainlifs ano
(aLovo all) oofonoanls away fiom piooiclivo aclivilios ano inlo logal onos.
Finally, nolo llal llo oxislonco of oominanco sloilo iofoi lo llo poiioo wlon
llo fisl allogooly piooaloiy opisooo slails, nol al somo laloi oalos. Olloiwiso,
ono migll fno piooalion wloio insloao lwo oi moio fims aio foicoly compoling
in a mailol claiacloiisoo Ly swilcling cosls, nolwoil ofocls oi scalo oconomios,
ano lloy aio inilially compoling on oqial loims Lil only ono is siccossfil ox-
posl. (Soo also soclion 2.4. Lolow.)
2.4.2 SacrIBcc oI short-run proBts
In llo piooaloiy piico moools analysoo aLovo, saciifco of sloil-iin piofls
moans llal llo incimLonl-piooaloi is nol cloosing llo piico, say j , llal il
woilo oplimally clooso woio il laling as givon llo piosonco of llo iival-pioy,
Lil ialloi a lowoi piico, say j , al wlicl il will malo lowoi ciiionl piofls.
Howovoi, lloio is no nocossaiy iolalionslip Lolwoon llo piico j closon lo ox-
clioo llo iival ano any moasiio of cosls of llo incimLonl (foi inslanco, j coilo
Lo aLovo oi Lolow llo incimLonl`s maiginal cosls). In olloi woios, llooiy jisl
says llal llo incimLonl cloosos a piico al wlicl il malos loss piofl llan il
coilo olloiwiso malo in llo sloil-iin, Lil il ooos nol say wlolloi sicl piofl
is nogalivo oi nol.
If ono wanloo lo apply liloially llo llooiy, ono sloilo Lo ioaoy lo onloi
inlo voiy lioiLloo walois, wloio ono of llo nocossaiy slops of llo piooalion
invosligalion woilo Lo llo calcilalion of llo oplimal piico j , ano a pioof llal
llo aclial sloil-iin piico j is lowoi llan llal. Cloaily, llis woilo nol Lo
foasiLlo in piaclico. Howovoi soplislicaloo llo managois of a fim migll Lo, il
is inliloly llal lloy coilo lavo a nolion of wlal h oplimal piico is: a foilioii,
anliliisl agoncios ano coiils woilo fno il impossiLlo lo oslaLlisl llal piofls
lavo Loon saciifcoo in llo sonso llal llo piico aclially sol Ly llo incimLonl
is Lolow llo ono il woilo lavo sol lao il nol liioo lo foico a iival oil of llo
inoisliy.
Howovoi, lloio is an alloinalivo ioilo lo oslaLlisl llo saciifco of ciiionl
piofls. Jlis is lo io-inloipiol llo concopl ano oofno il nol as maling lowoi
piofls llan olloiwiso possiLlo, Lil maling njn. piofls. In olloi woios,
llo saciifco of sloil-iin piofls is oslaLlisloo if llo allogoo piooalion piico j
is lowoi llan (somo appiopiialo moasiio of) cosls.
Jlis way, ono inliooicos a cloaioi Lonclmail: oiiing llo allogoo piooalion
opisooo, llo piooaloi`s piofls sloilo Lo lowoi llan zoio, oi ils piico Lolow cosls.
Unfoilinaloly, lowovoi, llis iilo is slill fai fiom Loing oasily implomonlaLlo in
piaclico. Lil Lofoio oiscissing llo piaclical implomonlalion of llo iilo, lol mo
malo somo aooilional iomails.
Jlis iilo is nolling olso llan wlal mosl coiils lavo oono ano anliliisl
commonlalois lavo siggosloo lo oo, foi a long limo: a nocossaiy (allloigl
nol simcionl) conoilion foi pioving a piooaloiy allogalion of monopolisalion
(oi aLiso of oominanco) is llal llo piooaloi malos lossos oiiing llo piooalion
poiioo. Jlis iilo malos a lol of sonso. A fim llal malos piofls sloilo Lo
oxcliooo fiom piooaloiy claigos Locaiso noLooy coilo piovo llal il coilo lavo
maoo ovon moio piofls lao il acloo oifoionlly. A fim llal malos nogalivo
piofls, insloao, n.jh Lo a piooaloi, allloigl lloio aio olloi ioasons wly
a fim migll wanl lo claigo Lolow cosls, sicl as solling poiislaLlo piooicls
llal woilo olloiwiso Lo insolo - llis caising ovon gioaloi lossos -, maling
piomolional ofois, slimilalo salos of complomonlaiy piooicls ano so on (soo
moio Lolow).
Jlis iilo, lowovoi, aomillooly loavos somo possiLlo piooalion casos incov-
oioo, as wo lavo soon llal - in llooiy - a fim migll clooso piicos slialogically lo
oxclioo iivals ovon willoil going as low as solling Lolow cosls. Givon llo oif-
fcilly of pioving llal piico las Loon lowoi llan somo oplimal piico, lloio coilo
slill Lo anolloi possiLilily, wlicl is lo fno oocimonls al llo allogoo piooaloi`s
piomisos llal slow llal lloio las inoooo Loon llo managois` willingnoss lo
saciifco piofls in llo sloil-iin lo oxclioo iivals.
Sicl ovioonco sloilo nol Lo llo ioplacomonl of an oLjoclivo pioof, lloigl.
Slalomonls lilo lol is oocioaso piicos so as lo signal lo llom llal wo aio om-
cionl", oi ...so as lo malo llom oxil", oi ovon llo oxislonco of a Lisinoss plan
aimoo al iooicing piicos lo malo lifo oimcill lo compolilois can Lo complo-
4
monlaiy ovioonco, Lil lloy sloilo nol Lo lalon as inooponoonl ano oLjoclivo
pioof of saciifco of sloil-iin piofls, if al lloso piicos llo incimLonl is maling
piofls. Afloi all, if an inomcionl iival onlois llo inoisliy, an omcionl incimLonl
migll woll Lo onlilloo lo iooico ils piicos in iosponso lo onliy, ano il migll woll
lnow llal llis is going lo ooloimino llo iival`s oxil. Yol, llis is simply pail
of llo compolilivo piocoss llal anliliisl agoncios sloilo slimilalo: oxil of an
inomcionl fim ooos nol laim wolfaio.
In a similai voin, if an incimLonl caisos a iival lo oxil Ly iooicing piicos
Lil al a lovol al wlicl il slill malos piofls, llis moans llal llo iival is liloly
lo Lo micl loss omcionl llan llo incimLonl. Honco, il is inliloly llal lloio is
a gioal wolfaio loss fiom ils oxil.
Jo simmaiiso, a piico Lolow cosl losl migll nol allow lo calcl all llo possiLlo
inslancos of piooalion. Yol, il woilo pioLaLly nol covoi jisl somo voiy spocial
casos. Jlo cosl of maling sicl oiiois sooms small.
Compaio il insloao will llo oiioi llal wo woilo malo if wo allowoo lo fno
piooalion al piicos aLovo cosls. Jlo aLsonco of an oLjoclivo iilo Lasoo on
oLsoivaLlos (oplimal" piicos aio nol oLsoivaLlo) woilo inliooico an olomonl
of logal incoilainly ano aiLiliaiinoss. Jlis migll nol only lavo an ofocl lo llo
pailicilai casos al lano (fims migll Lo foino giilly of monopolisalion wlilo
lloy aio nol) Lil woilo lavo soiiois consoqioncos acioss llo oconomy, as fims
onoowoo will mailol powoi woilo losilalo in oocioasing lloii piicos losl lloy
aio accisoo lo foico smalloi compolilois oil of llo inoisliy oi lo pioompl llo
onliy of now iivals. Sinco low piicos impiovo consimoi siiplis ano wolfaio,
ano il sloilo Lo an oLjoclivo of any compolilion policy lo cioalo ciicimslancos
favoiiaLlo lo low piicos, llo iisl of ooloiiing fims fiom solling low piicos is
simply loo ligl.
VhIch dcBnItIon oI cost In a ^prIcc IcIov cost tcst? Doloimining
wlolloi al a coilain piico a fim is maling posilivo piofls oi nol (i.o., is solling
aLovo oi Lolow cosl) is a voiy laio lasl. Fiisl of all, ono sloilo oocioo wlicl
moasiio of cosl lo iso in llis assossmonl oxoiciso.
Aioooa ano Jiinoi (1974), in an ailiclo llal las infioncoo anliliisl piaclico
woilowioo, aigio llal llo Losl moasiio fiom a concoplial poinl of viow woilo
Lo llal of nnj.nn| -, sinco a fim llal sols piico Lolow maiginal cosl woilo
cloaily nol maximiso sloil-iin piofls. Howovoi, lloy siggosl lo iso in piaclico
nnj n.n|| - - oofnoo as llo sim of all vaiiaLlo cosls oiviooo Ly oilpil
- as a siiiogalo foi maiginal cosl, givon llo oimcilly of ascoilaining a fim`s
maiginal cosl. Jlo inciomonlal cosl of maling ano solling llo lasl inil cannol
ioaoily Lo infoiioo fiom convonlional Lisinoss accoinls, wlicl lypically go no

fiilloi llan slowing oLsoivoo avoiago vaiiaLlo cosl. Consoqionlly, il may woll
Lo nocossaiy lo iso llo lalloi as an inoicaloi of maiginal cosl".
Honco, Aioooa ano Jiinoi (1974: 7) siggosl llal:
(a) A piico al oi aLovo ioasonaLly anlicipaloo avoiago vaiiaLlo
cosl sloilo Lo conclisivoly piosimoo lawfil.
(L) A piico Lolow ioasonaLly anlicipaloo avoiago vaiiaLlo cosl
sloilo Lo conclisivoly piosimoo inlawfil."
Jloio aio pioLaLly nol onoigl casos on piooaloiy piicing lo say wlal coiils
in oifoionl jiiisoiclions woilo ciiionlly ooom a piooaloiy piico. Howovoi,
accoioing lo Lollon, Liooloy ano Bioioan (2000):
Unooi ciiionl US law, a piico aLovo avoiago lolal cosl (AJC) is
conclisivoly lawfil, wlilo a piico Lolow avoiago vaiiaLlo cosl (AVC)
is al loasl sispocl. A piico Lolwoon AVC ano AJC is somolimos
lolo inlawfil, ooponoing on olloi faclois. Lil jioicial oocisions
aio nol consislonl ano coiils lavo incioasingly iolioo on llo AVC
Lonclmail as llo main ciiloiion foi illogalily."
Nol only coiils, Lil also somo sclolais woilo iilo oil piooaloiy piicing only
if piico is aLovo avoiago n| cosl (llal is, if llo fim is aLlo lo iocovoi ils fxoo
cosls as woll), ialloi llan aLovo avoiago n.n|| cosl. Joslow ano Klovoiic
(1979) siggosl llal il woilo Lo moio appiopiialo lo ooom any piico Lolow
AJC as piooaloiy (pioviooo llal llo sliicliial pail of lloii losl is mol, llal
is if llo allogoo piooaloi ooos onjoy onoigl mailol powoi), sinco a silialion
wloio a fim las lossos cannol Lo an oqiiliLiiim. Howovoi, a pioLlom will
ising AJC is llal il woilo ioqiiio a fim lo covoi all llo fxoo sinl cosls,
wlicl is a voiy sliingonl slanoaio. Sipposo foi inslanco llal an incimLonl
fim malos somo fxoo oxponoiliio llal il oxpocls lo iocovoi llioigl monopoly
piofls. Soon afloiwaios, a now fim inoxpoclooly onlois llo mailol, will
noimal compolilion loaoing llo incimLonl lo oocioaso ils piico al a lovol wloio
llo fxoo sinl invoslmonl cannol Lo iocovoioo. In llis caso, a piico Lolow AJC
iilo woilo fno piooalion ovon if lloio is nono.
Jlis oiawLacl is avoiooo Ly llo concopl of nnj .nnnn| -- (AIC),
oofnoo Ly Lollon ol al. (2000) as llo poi inil cosl of piooicing llo aoooo
oilpil lo soivo llo piooaloiy salos. AIC oifois fiom avoiago vaiiaLlo cosl in
al loasl lwo ways. Fiisl, il is nol moasiioo ovoi llo fim`s wlolo oilpil, Lil
only ovoi llal inciomonl of oilpil isoo lo sipply llo aooilional piooaloiy
salos. Socono, inciomonlal cosl inclioos nol only vaiiaLlo cosl, Lil any fxoo
0
cosls inciiioo in oxpanoing lo soivo llo now salos. Inciomonlal cosl is a Lolloi
slanoaio llan oilloi avoiago vaiiaLlo cosl oi fill cosls Locaiso il mosl acciialoly
iofocls llo cosls of maling llo piooaloiy salos." Accoioingly, lloso aillois
woilo piosimo illogal a piico Lolow AIC ano lawfil ono aLovo AJC, will a gioy
aioa in Lolwoon.
Jo sim ip, a nimLoi of oifoionl cosl slanoaios lavo Loon pioposoo in llo
liloialiio. In pailicilai, Loll avoiago vaiiaLlo cosl ano avoiago inciomonlal cosl
aio ioasonaLlo slanoaios. Ioilaps AIC Lolloi malclos llo concopl of piooalion,
Lil il migll nol Lo always oasy in piaclico lo ioonlify piocisoly llo cosls llal
aio sislainoo foi a givon oilpil, ano,oi isolalo llo piooaloiy oilpil fiom lolal
oilpil.
Howovoi, I woilo Lo cailiois in fnoing piooaloiy Lolavioii in casos wloio
llo piico is aLovo avoiago vaiiaLlo cosl (oi avoiago inciomonlal cosl): llo possi-
Lilily llal a fim is claigoo will piooaloiy piicing if il sols a piico llal allows il
lo iocovoi vaiiaLlo cosl Lil nol lolal fxoo cosls (llal is, a piico aLovo avoiago
vaiiaLlo cosl Lil Lolow avoiago lolal cosl) sooms loo sliicl ano migll oncoiiago
fims lo loop piicos ligloi llan lloy woilo olloiwiso Lo.
Accoioingly:
1. A piico aLovo avoiago lolal cosls sloilo oofniloly Lo consiooioo lawfil,
willoil oxcoplions.
2. A piico Lolow avoiago lolal cosls Lil aLovo avoiago vaiiaLlo cosls sloilo
Lo piosimoo lawfil, will llo Liioon of pioving llo opposilo on llo plain-
lif.
. A piico Lolow avoiago vaiiaLlo cosls sloilo Lo piosimoo inlawfil, will
llo Liioon of pioving llo opposilo on llo oofonoanl.
Foi llo casos wloio avoiago inciomonlal cosls can Lo calcilaloo, lloy migll
Lo isoo insloao of avoiago vaiiaLlo cosl.
Il woilo oLvioisly Lo voiy impoilanl, lo safogiaio logal coilainly, llal an-
liliisl agoncios oxpioss llo ciiloiion lloy wanl lo follow in cloai giioolinos.
2.4.3 TcstIng prcdatory prIcIng: Iurthcr dIscussIon
Jlis soclion commonls ipon fiilloi olomonls llal migll Lo iaisoo oiiing a
piooaloiy piicing caso: inlonl, pioof of iocoipmonl, pioof of anli-compolilivo
ofocls ano malcling compolilois` piicos as a oofonco. Il also ooals will piooa-
loiy piicing allogalions in ligl-loclnology mailols, an issio llal las ioconlly
Loon ooLaloo. Finally, il ciilicisos ioconl laws ano iogilalions aooploo in somo
EU coinliios, llal foiLio fims lo soll al piicos Lolow cosls.
7
Intcnt {cxIstcncc oI a prcdatory schcnc) In many piooalion casos, lloio
is ovioonco fiom inloinal oocimonls llal llo allogoo piooaloi`s managois in-
lonooo lo oxclioo a now onlianl, oi foico a compoliloi oil of llo inoisliy. How
sloilo ono lioal lloso oocimonls
On llo ono lano, o-mail, minilos ano olloi inloinal papois wloio ono oi
moio managois aoopl a voiy sliong langiago againsl compolilois ano slalo
lloy wanl lo oliminalo llom, lill" llom oi llo lilo, sloilo nol Lo givon micl
impoilanco, as lloy aio pioLaLly lo Lo foino in any company`s loaoqiailois
ano - iigll oi nol - aio pail of llo isial Lisinoss langiago. (I woilo Lo micl
moio sispiciois of managois wlo say lloy wanl lo Lo nico lo lloii compolilois,
ano woilo siggosl lo opon immooialoly a collision invosligalion!)
On llo olloi lano, il woilo Lo laio lo oismiss ovioonco llal lloio is an
ailicilaloo plan lo liy ano oxclioo smalloi iivals, al llo cosl of lompoiaiy
saciifco of piofls. If lloio is a pioof llal a coloionl Lisinoss slialogy las
Loon pil in placo will oxclisionaiy piiposos, ano ospocially if lloso oocimonls
iovoal llo inlonlion lo piooico al a loss lo acliovo llal aim, llon llo Liioon
of pioving llal lloio was no piooalion afloi all sloilo Lo on llo sloiloois of
llo allogoo piooaloi.
ô nccd to provc rccoupncnt or succcss oI prcdatIon cx-post Jlo
pioposoo losl siggosls lo lool al llo oxisling mailol powoi of llo allogoo piooa-
loi lo soo if lloio is llo aLilily lo iocoip lossos in llo long-iin. Nolo llal llis
is voiy oifoionl fiom assossing wlolloi lloio las aclially Loon iocoipmonl of
lossos, oi wlolloi llis is inooi way. Jlis assossmonl sloilo Lo in any caso
oono fiom an ox-anlo, ialloi llan ox-posl, vanlago poinl, ano llo fim coilo
nol oofono ilsolf slowing llal afloi all il oio nol manago lo iocoip lossos. In
olloi woios, llo piooaloi sloilo nol Lonofl fiom llo facl llal il las miscal-
cilaloo llo oppoilinily lo iocovoi lossos, oi llal llo pioy las liinoo oil lo Lo
a loigloi coolio" llan inilially lloigll, oi llal piompl anliliisl aclion las
loo lo conclision of llo piooaloiy opisooo Lofoio il coilo acliovo ils aim.
Lilowiso, if llo mailol powoi ano piico aLovo cosl liois of llo losl aio Loll
salisfoo, ono sloilo nol aomil as a oofonco llo facl llal piooalion las nol Loon
ofoclivo ano oxclision las nol lapponoo.
ô nccd to provc cx-post danagc to consuncrs Anliliisl policy aims
al piolocling compolilion, nol compolilois. So, il migll appoai sliango llal
lloio is no oxplicil ioqiiiomonl of laim lo consimois in a piooalion losl. How-
ovoi, piooaloiy piicing as oslaLlisloo Ly llo pioposoo losl will iosill in lowoi
consimoi siiplis in llo vasl majoiily of casos. Siio onoigl, il is possiLlo lo
concoivo moools wloio piooalion occiis willoil consimoi siiplis Loing laimoo
(llis migll lappon, foi inslanco, in signaling moools). Howovoi, llo facl llal
llo piooaloi oxpocls lo iocovoi lossos fiom iaising piicos afloi oxclision poinls
lo a loiizon long onoigl foi (filiio) ligl piicos lo lavo a ligloi woigll llan
(ciiionl) low piicos. Consoqionlly, ono sloilo oxpocl a nogalivo ofocl on nol
8
consimoi siiplis, loaoing lo a piosimplion of anli-compolilivo ofocls.
In pailicilai, il sloilo nol Lo accoploo as a oofonco llal consimois lavo
ox-posl liinoo oil lo Lonofl fiom llo allogoo piooaloiy opisooo, foi llo ioasons
oxpiossoo in llo pioviois siL-soclion: llo facl llal low piicos lavo nol Loon
followoo Ly ligl onoigl piicos migll Lo oio lo llo piooaloi`s miscalcilalions,
anliliisl aclion, oi sliongoi llan oxpocloo iosislanco fiom llo pioy.
Convoisoly, llo allogoo piooaloi migll concoivaLly lavo an omcioncy oo-
fonco foi ils Lolow-cosl piicos (foi inslanco, wlon il is aclivo in complomonlaiy
mailols). If il las a convincing caso in llis iospocl, ano llo Liioon of pioving
il sloilo Lo on il if piicos aio foino lo Lo Lolow avoiago vaiiaLlo cosls, llon
llis woilo oxclioo anli-compolilivo laim.
AcctIng prIccs oI a conpctItor as a dcIcncc Il is pail of llo noimal
compolilivo piocoss llal onliy Ly a compoliloi woilo liiggoi a iosponso Ly llo
incimLonl fims, loaoing llom lo oocioaso lloii piicos. Jloiofoio, oLsoiving
llal a oominanl fim`s piico oocioasos following onliy is poi so no pioof of
slialogic Lolavioii. Cloaily, a iilo wlicl oiclalos olloiwiso, ano oLligos a
oominanl fim nol lo ioacl lo onliy woilo laim llo compolilivo piocoss ano
loao lo mailol oisloilions (any inomcionl fim woilo Lo inviloo lo onloi).
Howovoi, malcling a iival`s piico sloilo nol Lo accoploo if il loaos llo
incimLonl lo piico Lolow avoiago vaiiaLlo cosls. As wo lavo soon aLovo, lloio
oxisl many ioasons wly an onlianl, oi a loss oslaLlisloo fim, migll wanl lo
sol piicos Lolow cosls foi a poiioo in oiooi lo gain now cislomois ano ovoicomo
llo compolilivo oisaovanlago cioaloo, foi inslanco, Ly swilcling cosls, nolwoil
ofocls, ano scalo oconomios. In sicl silialions, as wo lavo soon in claploi 2, a
voiy aggiossivo piico migll Lo llo only insliimonl availaLlo foi a now fim lo
win cislomois away fiom llo incimLonl. Wlilo somo inilial lossos foi a now fim
aio poifoclly jislifoo ano aio pail of llo noimal compolilivo piocoss, llo samo
is nol liio foi an incimLonl wlicl onjoys a oominanl posilion. Accoioingly,
malcling a compoliloi`s piico sloilo nol Lo an accoploo oofonco if il implios
piicos Lolow avoiago vaiiaLlo cosls foi llo incimLonl. Convoisoly, a piico aLovo
avoiago lolal cosls is lawfil ovon if il implios inooicilling a smalloi compoliloi
oi a now fim.
Ircdatory prIccs In hIgh-tcchnoIogy narkcts In ioconl yoais, lloio lavo
Loon a slioam of ligl pioflo casos involving ligl loclnology fims, sicl as ILM,
Inlol, ano Miciosofl. Miciosofl in pailicilai las Loon llo oLjocl of sovoial
invosligalions in Loll llo US ano llo EU. Jloso casos aio voiy complox ano
compiolono sovoial allogalions of anli-compolilivo Lolavioii, among wlicl llo
possiLilily llal Miciosofl aimoo al oxclioing a compoliloi, Nolscapo, fiom llo
Liowsoi mailol as a way lo avoio Loing clallongoo in llo OS (Opoialion Syslom)
mailol.
9
Willoil oiscissing llo moiil of lloso allogalions loio, somo commonla-
lois lavo aigioo llal liaoilional anliliisl analysis is nol woll siiloo foi ligl-
loclnology mailols sicl as llo compiloi soflwaio mailols. Sicl mailols aio
claiacloiisoo Ly oxliomoly ligl fxoo cosls ano voiy low - if nol nil - maiginal
cosls (as woll as avoiago vaiiaLlo cosls). Jlinl foi inslanco of soflwaio, wloio
B\D is llo main oxponoiliio fims incii lo oovolop a now soflwaio paclago,
ano wloio llo cosl of piooicing ano solling an aooilional inil of il, wlolloi in
llo foim of CDs oi oownloaos, is noxl lo zoio. Jloy aio also claiacloiisoo Ly
voiy impoilanl nolwoil oxloinalilios, oilloi oiiocl (llo moio olloi pooplo iso
my samo soflwaio llo lappioi I will Lo Locaiso llo moio liloly I can oxclango
flos will llom) oi inoiiocl (llo moio pooplo iso my samo OS llo lappioi I will
Lo Locaiso llo moio liloly llal soflwaio oovolopois will wiilo applicalions llal
will iin on my OS). Jlis moans llal wo sloilo oxpocl voiy inlonso compo-
lilion in llo oaily slagos of llo mailol, inlil llo mailol lips in favoii of ono
fim, wlicl will llon Locomo oominanl ano iso ils mailol powoi lo iocovoi llo
lossos inciiioo in llo inilial poiioos, inlil a now loclnology will appoai llal
will ioplaco llo olo ono, Liinging lo an ono llo pioviois loaooislip.
Wlilo I agioo llal cailion sloilo Lo isoo in ooaling will piooaloiy claigos,
(1) noilloi oo lloso mailols piosonl iniqio foaliios inlnown lo inoisliios in
llo pio-infoimalion loclnology ago, (2) noi is a now anliliisl" nocossaiy lo ooal
will llom. As foi llo fisl poinl, oxamplos of inoisliios will voiy sliong fxoo
sinl cosls ano iolalivoly low vaiiaLlo cosls can Lo foino ovoiywloio: llinl
foi inslanco of consimoi piooicls claiacloiisoo Ly loavy aovoilising oillays
ano inoisliios sicl as clomicals, plaimacoilicals, onginooiing claiacloiisoo
Ly loavy B\D oillays. Noi aio now infoimalion loclnology inoisliios llo
only onos wloio nolwoil ofocls aio al play, of coiiso. Nolwoil ofocls can Lo
soon in sicl liaoilional inoisliios as loys, sloos, ano oosign foi inslanco, llal
is wlonovoi faslion ano faos play a iolo (wloioas somo pooplo aio lappioi lo
Liy iniqio piocos, llo vasl majoiily sooms lo wanl wlal olloi pooplo lavo),
ano of coiiso nolwoil oxloinalilios play a iolo in olocliicily appliancos, fxoo
loloplonos, iailways, iocoios ano so on.
As foi llo socono poinl, nolo llal llo pioposoo losl foi piooaloiy piicing
aLovo (wlicl is a vaiianl on a long liaoilion oaling fiom Aioooa ano Jiinoi,
1974) allows lo copo will many of llo foais oxpiossoo Ly, foi inslanco, AllLoin
ol al. (2001). A fim llal is claiging Lolow avoiago lolal cosls (wlicl can oasily
40
Lo llo caso wlon fxoo cosls aio impoilanl) is nol nocossaiily foino giilly ovon
if il las a oominanl posilion. Ano, mosl coilainly, if lwo oi moio fims aio
compoling foi llo mailol in a pailicilai socloi ano nono of llom las a oominanl
posilion al llo oilsol, llo facl llal lloy claigo Lolow cosls lo win llo mailol
(ano llal lloy oo lavo inlonl lo oxclioo, sinco oacl of llom is sliiggling lo
Locomo llo fim wlicl wins llo iaco ano Locomos llo monopolisl) sloilo nol
loao lo any claigo sinco llo fisl lioi of llo losl (no oominanco) is nol salisfoo.
In olloi woios, if lloio is no ox-anlo oominanco, llo caso foi piooalion sloilo
Lo oismissoo.
Jlo oxislonco of nolwoil ofocls ano impoilanl B\D oillays sloilo Lo no
oxciso foi a oominanl fim llal liios lo loop ils mailol powoi llioigl anli-
compolilivo moans. Jlo iilos sloilo apply lo ligl-loclnology mailols as woll
as liaoilional onos, ano if a oominanl fim liios lo piosoivo ils posilion Ly
piooaloiy piicing, il sloilo Lo pinisloo foi il.
Anolloi inloiosling caso is llo ono wloio a fim oominanl in ono piooicl
liios lo onloi a now mailol foi a complomonlaiy oi inooponoonl piooicl, wlicl
is oflon llo caso in ligl loclnology mailols (llinl foi inslanco of Miciosofl, llal
las movoo piogiossivoly inlo inloinol Liowsois, aioio ano viooo soflwaio, inslanl
mossaging soivicos, soflwaio foi lano-lolo oovicos ano so on). How sloilo il
Lo lioaloo OLvioisly, lloio is no a piioii answoi lo llis qioslion, Lil a coiplo
of oLsoivalions soom woill maling. Fiisl, if llo piooicls aio complomonlaiy,
iocall llal a fim will lavo an (lonosl) inloiosl in claiging lowoi piicos llan
lwo sopaialo fims woilo, in oiooi lo slimilalo oomano, ano llal llis is lo llo
aovanlago of consimois as woll. As wo lavo soon iopoalooly (soo also claploi
0), Loing soivoo lwo piooicls Ly llo samo monopolisl is isially Lolloi llan
Loing soivoo lloso samo piooicls Ly lwo oifoionl monopolisls!
Socono, pooplo aio gonoially concoinoo aLoil laigo ano woll onoowoo fims
oxlonoing lloii powoi fiom ono mailol lo llo olloi. Howovoi, if mailols aio
complomonlaiy wo lavo soon llal llis is moio liloly llan nol lo Lo Lonofcial foi
consimois. If mailols aio inooponoonl, llis is nol nocossaiily Lao nows oilloi.
In mailols claiacloiisoo Ly impoilanl nolwoil ofocls ano olloi alliilions, il
migll Lo voiy oimcill lo loapfiog llo ciiionl loaooi, ano a fim llal can ioly on
impoilanl B\D, mailoling ano fnancial assols migll manago lo acliovo wlal
a small fim migll nol.
Jloiofoio, il migll nol nocossaiily Lo always Lao nows wlon a laigo fim
liios lo onloi a now piooicl mailol.
IrIcc IcIov avcragc varIaIIc cost: not a gcncraI ruIc In mosl EU
coinliios, lloio oxisl laws ano iogilalions llal apply lo spocifc soclois oi aio
oconomy-wioo, ano llal foiLio Lolow cosl piicing, piomolional salos, fioo gifls,
lwo-foi-ono" ofois, iolail oiscoinls aLovo a coilain llioslolo. Bolailois aio
41
nol onlilloo lo soll gooos al a loss in Fianco, Spain, Ilaly, Iiolano, LixomLoiig,
Lolgiim, Ioiligal ano Giooco (1.nnn.n| J.n-, Aigisl 22, 2002: 1, ). In
gonoial, lloso laws aio llo iosill of loLLying fiom sloploopois ano small Lisi-
nossos llal iogaio aggiossivo piico cils Ly nalional sipoimailol clains oi laigo
fims as piooaloiy ano infaii. Howovoi, llo iosilling oLligalion lo claigo aLovo
cosls apply lo any fim, iogaioloss of llo mailol powoi il lolos ano llo ioasons
wly llo piico cil is maoo.
Jloio is no jislifcalion foi sicl a iogilaloiy appioacl, llal piolocls com-
polilois (foi polilical oi social ioasons) ialloi llan piomoling compolilion. Jo
iopoal, lloio aio many ioasons (swilcling cosls, nolwoil oxloinalilios, piico
piomolions, complomonlaiy piooicls) wly fims migll wanl lo soll al a loss
lompoiaiily, ano lloy aio pail of a noimal compolilivo piocoss. FoiLiooing
llom a piioii ano on a gonoialisoo Lasis las llo ofocl of lampoiing compoli-
lion ano oocioasing consimoi wolfaio. If lloio aio ioasons lo Loliovo llal,
say, a sipoimailol clain is solling al a loss lo foico small slop-loopois oil of
Lisinoss, a spocifc anliliisl aclion sloilo Lo slailoo. If insloao llo concoin
is llo siivival of small slops, small poasanls, ano small fims in gonoial, llon,
as I lavo aigioo also in claploi 1, llis migll woll Lo llo oLjoclivo of a piLlic
policy, Lil sloilo Lo aooiossoo will oifoionl moans (foi inslanco, incomo lax
ioLalos) llal aio loss oisloilivo of compolilion.
3 ôn-prIcc nonopoIIsatIon practIccs
Jloio aio a nimLoi of insliimonls olloi llan piico llal a oominanl fim migll
iso lo liy ano foico oxils of smalloi iivals oi lo ooloi onliy inlo llo inoisliy.
Jloy inclioo slialogic invoslmonls (soclion .1), lying (soclion .2), ano incom-
paliLilily oocisions (soclion 2.1); olloi insliimonls, sicl as oxclisivo ooaling
ano iofisal lo sipply, lavo alioaoy Loon analysoo in claploi 0.
3.1 StratcgIc Invcstncnts
Wo lavo soon llal wlon a oominanl fim iooicos piicos, fisl il is voiy oimcill
lo inooislano wlolloi llis is oio lo goniino, lawfil compolilion oi lo anli-
compolilivo Lolavioii; socono, sinco low piicos aio somolling llal consimois
lilo, ono las lo Lo oxlia caiofil in nol oiscoiiaging fims fiom oocioasing piicos.
Jlis Lasic pioLlom io-appoais wlon ono lools al invoslmonls in capacily, B\D,
aovoilising, piooicl qialily, now Lianos ano so on. Jlooiy slows llal - lilo foi
piico oocisions - a oominanl fim migll iso ils invoslmonl oocisions in a slialogic
way, in oiooi lo oiivo compolilois oil of llo inoisliy, oi lo poisiaoo llom nol
lo onloi al all. Howovoi, fisl il is oimcill lo iocogniso in piaclico wlolloi a
42
coilain invoslmonl lovol is llo fiiil of llo lonosl" allompl of a fim lo Lo moio
compolilivo ano moio appoaling lo consimois, oi insloao il is oiivon only Ly llo
oosiio of allaining oi ioinfoicing a monopolislic posilion. Socono, sinco mosl
invoslmonls lavo a posilivo ofocl ipon wolfaio, a voiy cailiois appioacl las
lo Lo lalon nol lo oiscoiiago fims fiom inooilaling piojocls llal sloilo Lo
wolcomo. I will aigio llal Locaiso of lloso oimcillios, only in liily oxcoplional
casos il migll malo sonso lo acciso a fim of ovoi-invoslmonls; fiilloi, llo
Liioon of pioof sloilo Lo on llo plainlif, nol on llo oofonoanl.
Jlo Lasic moclanism Lolino anli-compolilivo cloico of invoslmonls is simi-
lai lo piooaloiy piicing: an aclion is lalon llal involvos llo saciifco of ciiionl
piofls, lo Lo oilwoigloo Ly filiio piofls. In olloi woios, foi a poiioo, a fim
invosls moio llan is pioflaLlo in llo sloil-iin, will llo oxpoclalion of incioas-
ing piofls in llo long-iin, wlon llo iival las lofl (oi a polonlial compoliloi
aLanoons plans of onloiing llo mailol).
Jo fx iooas, consiooi a silialion (analysoo foimally in soclion .1.1) wloio
an incimLonl monopolisl las lo oocioo low micl lo invosl in piocoss B\D,
lnowing llal a fim is consiooiing onliy inlo llo inoisliy. Sipposo foi llo
simplicily of llo aigimonl llal llo B\D oilcomo is nol sloclaslic, foi inslanco
Locaiso lloio aio loclnologios alioaoy availaLlo olsowloio ano llo incimLonl
las lo oocioo wlicl onos lo aoopl. Facing compolilion, il malos sonso llal
llo incimLonl wanls lo impiovo ils loclnology ano aLalo ils piooiclion cosls.
Inoooo, wo woilo all say llal sicl an invoslmonl in B\D is ono of llo wolcomo
ofocls of incioasoo compolilion. Lol mo call a , wloio i" slanos foi innoconl,
llo oplimal invoslmonl lovol closon Ly llo incimLonl fim wlon il lalos foi
givon llal llo now compoliloi will Lo in llo mailol in llo following poiioo.
Howovoi, llo incimLonl migll also acl slialogically, ano liy lo oiscoiiago
llo now fim fiom onloiing al all. Foi inslanco, il migll clooso lo invosl in
a pailicilaily coslly ano omcionl loclnology, so coslly ano omcionl llal llo
now onlianl woilo nol oxpocl lo Lo simcionlly pioflaLlo wlon llo incimLonl
aoopls il. In olloi woios, invosling in llo moio omcionl loclnology iopiosonls
a ciooiLlo commilmonl lo Lo a foico compoliloi in caso of onliy. Call a , wloio
p" slanos foi piooaloiy, llo invoslmonl lovol (ligloi llan a ) llal woilo malo
llo onlianl io-consiooi ils onliy oocisions. Wlon llo iival oLsoivos llal llo
incimLonl las invosloo (oi commilloo lo invosl) a , il will willoiaw.
Cloaily, a is ligloi llan sloil-iin pioflaLilily woilo ioqiiio, sinco il is llo
lowoi invoslmonl lovol a llal llo incimLonl woilo clooso if il oio nol liy lo
afocl llo onliy oocisions of llo polonlial iival. Nono llo loss, llo oxpoclalion of
conliniing monopolislic piofls (oio lo onliy ooloiionco) migll malo llo moio
coslly invoslmonl pioflaLlo.
Somo iomails aio al slalo loio. Fiisl, il is nol saio llal llo onliy ooloiionco
lovol of invoslmonl woilo always Lo closon. Evon if il was Jn-.|| lo ooloi onliy
(foi inslanco, Locaiso il is lnown llal llo iival woilo oiop ils onliy plans afloi
4
oLsoiving a ), il is nol nocossaiily ]n||. Foi inslanco, llo sinl cosl ioqiiioo
Ly loclnology a migll Lo so ligl llal il is moio convonionl lo co-oxisl will
llo compoliloi.
Socono, llo focis is on piolocling compolilion, nol compolilois. In olloi
woios, ovon in llo inioalislic caso wloio wo coilo oslaLlisl llal a las Loon
oociooo only lo pioompl onliy, fiom llo aLovo oxamplo wo coilo nol conclioo
llal llo ovoi-invoslmonl is anli-compolilivo, foi lwo ioasons: Jlo fisl ioason
is llal llo lowoi ils cosls llo lowoi llo piico a monopolisl claigos, so il is
concoivaLlo llal consimois migll gain fiom llo moio omcionl loclnology (in
llo poiioo piioi lo llo plannoo onliy oalo of llo olloi fim, piicos woilo Lo
lowoi; piicos migll also Lo lowoi inooi an omcionl monopolisl llan inooi loss
omcionl oiopoly).
Jlo socono ano mosl impoilanl ioason, il woilo Lo voiy oimcill lo ioonlify
piooalion foi slialogic molivos sicl as llo ono oosciiLoo aLovo in piaclico,
as lloio aio no oLsoivaLlo vaiiaLlos ano no ovioonl Lonclmail lovols llal ono
coilo lool al lo oocioo wlolloi lloio las Loon slialogic ovoi-invoslmonl oi
nol. Imagino a coiil laving lo ovalialo a complainl Ly a compoliloi llal lloio
las Loon slialogic ovoi-invoslmonl Ly llo incimLonl in oiooi lo ooloi onliy.
Jlo only oLsoivaLlo vaiiaLlo loio is llo aclial invoslmonl lovol maoo Ly llo
incimLonl, a . How can il Lo piovoo llal lao il nol wanloo lo ooloi onliy,
llo incimLonl woilo lavo closon anolloi, ano lowoi invoslmonl lovol Jlo
incimLonl will say llal il las closon an invoslmonl llal malos il compolilivo
vis-a-vis an onlianl, ano in any caso in llo ioal woilo il coilo novoi Lo siio
wlolloi afloi oLsoiving a llo iival woilo call of ils onliy plans oi nol.
Jlo voiy nolion llal a coiil oi an anliliisl ailloiily coilo fno a fim
giilly of anli-compolilivo Lolavioii Locaiso il las invosloo loo micl" woilo
cioalo a oangoiois piocooonl: fims migll iofiain fiom invosling foaiing llal
lloy coilo Lo invosligaloo foi aLiso of oominanco oi monopolisalion.
Similai consiooialions also applioo lo piooaloiy piicing, Lil will lwo oif-
foioncos. Fiislly, foi allogooly piooaloiy piicos a possiLlo Lonclmail oxisls: if
a fim sols a piico Lolow avoiago vaiiaLlo cosls, a piosimplion llal llo fim is
laling an anli-compolilivo aclion oxisls. Lil no sicl Lonclmail oxisls wlon il
comos lo invoslmonls.
Soconoly, low piicos aio iovoisiLlo, wloioas mosl invoslmonls aio nol. Ano
inoooo, a fill commilmonl is ciicial foi llo slialogic onliy ooloiionco aigimonl
(if llo invoslmonl oocision was iovoisiLlo, llo onlianl woilo onloi, iogaioloss
of llo annoincomonls of llo incimLonl). As a iosill, consimois will Lonofl
fiom llo invoslmonl ovon afloi piooalion" onos, wlonovoi llo incimLonl`s
aclion involvos llo inslallalion of now capacily, invoslmonls in B\D (llinl foi
inslanco of llo cioalion of a now laLoialoiy ano llo liiing of iolaloo poisonnol
ano scionlisls), llo inliooiclion of now Liano if sippoiloo Ly spocifc aovoilising
ano mailoling oxponsos (pioviooo lloy aio spocifc lo llo now Liano), ano so
44
on. Olloi llings Loing oqial, llis aigimonl inoicalos llal llo loss fiom
anli-compolilivo invoslmonl woilo Lo lowoi llan inooi piooaloiy piicing.
Ovoiall, lloiofoio, wlilo il is llooiolically possiLlo llal an incimLonl ovoi-
invosls in aovoilising, B\D, oi capacily; oi llal il inliooicos now Lianos, oi
ongagos in piooicl piolifoialion foi llo piiposo of slialogically ooloiiing onliy
oi foicing oxils of smalloi iivals, il woilo soom oimcill lo siggosl any iilo llal
allows lo ioonlify sicl Lolavioii in piaclico.
3.1.1 StratcgIc Invcstncnts to dctcr cntry*
Jloio aio a nimLoi of vaiiaLlos llal coilo fl llo analysis caiiioo oil in soclion
.1, ano inoooo many woils lavo slowoo llal a fim migll pioompl onliy Ly
invosling slialogically. Sponco (1977) ano Dixil (1980) aio llo classical iofoi-
oncos in llis iospocl: lloy slow llal a monopolisl can slialogically accimilalo
capacily so as lo ooloi a polonlial onlianl. Hoio I piosonl a sligllly oifoionl
(ano poilaps simploi) moool llal givos similai insigll.
Jloio is an incimLonl, fim 1, llal facos a polonlial onlianl, fim 2, in llo
mailol foi a lomogonois gooo wloso oomano is j = 1q. Jlo gamo lloy play
is as follows. In llo fisl slago, fim 1 oocioos low micl il wanls lo invosl in
a cosl-iooicing loclnology. ALsonl any invoslmonl, llo incimLonl piooicos al
a maiginal cosl c; Ly invosling a il can Locomo moio omcionl, will lolal cosl
of piooiclion givon Ly C(a , q ) = (c a )q . Assimo a qiaoialic cosl foi llo
invoslmonl, 1(a ) = a . Foi simplicily, assimo llal fim 2 cannol invosl in
B\D piioi lo onliy ano llal if il onlois, il will lavo a conslanl maiginal cosl c.
(Exoiciso slioios llo caso wloio fim 2 can also invosl in B\D, ano slows llal
llo main iosills oLlainoo loio caiiy ovoi lo llal caso.) In llo socono slago,
fim 2 oocioos wlolloi lo onloi oi nol, afloi oLsoiving llo invoslmonl of fim
1. If il ooos, il las lo pay a fxoo sinl cosl 1. In llo lasl slago, aclivo fims
clooso oilpils.
Jo lool foi llo siL-gamo poifocl Nasl oqiiliLiiim of llo gamo, slail Ly llo
Coiinol gamo al llo lasl slago.
If lloio is a oiopoly, fim i = 1, 2 will clooso llo oilpil q so as lo maximiso
H = (1 q q c )q , wloio c = c a ano c = c. Bo-aiianging llo FOCs
dH ,dq = 0, ono oLlains llo ioaclion finclions:
1 : q = 1 2q c -a ; 1 : q =
1 q c
2
. (7)
Jloii inloisoclion givos llo isial Coiinol oilpils, piicos ano piofls:
4
q =
1 2c -c
, j =
1 -c -c
, H =
(1 2c -c )
9
. (8)
If lloio is a monopoly, fim 1`s oplimal valios aio: q = (1 c ),2, j =
(1 -c ),2, H = (1 c ) ,4.
Going Laclwaios, wo fno lwo oifoionl casos, accoioing as lo wlolloi fim
1 Lolavos innoconlly oi slialogically.
Innoccnt IchavIour Jlo fisl caso is llo ono wloio fim 1 lalos as givon
fim 2`s onliy. Ils piogiammo will Lo:
max =
(1 c - 2a )
9
a . (9)
Fiom d ,da = 0, ano fiilloi siLslililions, wo oLlain:
a =
2(1 c)
; q =
(1 c)
; q =
(1 c)
; j =
1 - 4c
; (40)
coiiosponoing piofls foi fims 1 ano 2 iospoclivoly aio:
=
(1 c)
; =
(1 c)
2
1. (41)
Jloiofoio, fim 2 woilo onloi llo mailol as long as 1 _ (1 c) ,2. In
llo woios of Lain (19xx), if 1 (1 c) ,2, onliy woilo Lo Lloclaooo: lloio
woilo Lo no nooo foi fim 1 lo Lolavo slialogically in ils loclnology cloico: fim
2 woilo nol onloi.
StratcgIc IchavIour OLsoiving fim 2`s piofls ono can nolico llal lloy
oocioaso will llo invoslmonl of fim 1: H (a ) = (1 2c a ) ,9 1. Call
a llo lovol of invoslmonl sicl llal H (a ) = 0. Il is oasy lo soo llal:
a = 1 c
_
1. (42)
Foi a lovol of invoslmonl sligllly aLovo a , fim 2 will piofoi lo slay oil of
llo mailol, as il woilo nol Lo aLlo lo iocovoi ils fxoo cosls if il onloioo.
Jo soo llo inliilion Lolino llo oxislonco of sicl a lovol of invoslmonl al
wlicl onliy is ooloiioo, consiooi fgiio 7..
INSEBJ Figiio 7.. Enliy-ooloiiing B\D invoslmonl
40
Jlo solio linos iopiosonl llo ioaclion finclions of llo lwo fims aLsonl in-
voslmonls Ly fim 1. Expiossions (7) iovoal llal lloy aio nogalivoly slopoo ano
llal an incioaso in a slifls fim 1`s ioaclion finclion lo llo iigll. Jlo fgiio
also oiaws llo iso-piofls of fim 2: llo closoi lo llo voilical axis (wloio q = 0)
llo ligloi fim 2`s piofls. Ly appiopiialoly solocling ils invoslmonl lovols, fim
1 can lloiofoio movo llo oqiiliLiiim lo llo iigll, ip lo llo poinl wloio fim
2`s piofl is jisl a slaoo sloil of covoiing ils fxoo cosl 1. In olloi woios, if
fim 1 cloosos llo invoslmonl lovol a , il will movo ils ioaclion finclion fiom
1 lo 1 (a ) ano fim 2 will piofoi nol lo onloi.
So fai, I lavo jisl piovoo llal onliy ooloiionco is Jn-.||: Ly cloosing a
lovol sligllly aLovo a fim 2 woilo Lo ooloiioo fiom onloiing. Lil is sicl a
slialogy ]n|| Jo soo if llis is so, nolo fisl llal Ly invosling a fim 1
woilo Lo a monopolisl. Jloiofoio:
q = 1 c

_
1
2
; j = c -

_
1
2
; =
12(1 c)
_
1 21
4
. (4)
Jlo qioslion is llon wlolloi Ly Lolaving slialogically (llal is, pioying)
fim 1 will oLlain ligloi piofls llan Ly accommooaling fim 2. Jlis lappons
if . Ly io-aiianging, ono las llal:
0 =121 00(1 c)
_
1 - 4(1 c) < 0. (44)
Ly solling
_
1 = c, ono las a slanoaio socono-oiooi oqialion wlicl is
solvoo foi 2(1 c),2 < c < 2(1 c),, oi 4(1 c) ,02 < 1 < 4(1 c) ,2.
Nolo llal llo socono iool is Loyono llo inloival wo aio consiooiing. Jloiofoio,
wo can conclioo llo analysis Ly saying llal:
1 _ 4(1 c) ,02, lloio is accommooaloo onliy.
4(1 c) ,02 < 1 _ (1 c) ,2, lloio is ooloiioo onliy.
1 4(1 c) ,2, lloio is Lloclaooo onliy.
Is cntry dctcrrcncc antI-conpctItIvc? Jloio is slill an impoilanl poinl
lo Lo claiifoo. Sipposo llal 4(1c) ,02 < 1 _ (1c) ,2, so llal incimLonl
fim 1 ooos ongago in onliy ooloiionco Lolavioii Ly slialogically ovoi-invosling
in piocoss innovalion. Doos sicl Lolavioii laim consimois Is llo piico inooi
onliy ooloiionco ligloi llan inooi accommooaloo onliy Jlis is nol llo caso
if j _ j , oi 1 _ 4(1 c) ,22. Foi low onoigl valios of llo fxoo cosl 1,
onliy ooloiionco is possiLlo ano pioflaLlo, Lil fim 1 las lo invosl so micl lo
pioompl onliy llal il Locomos so omcionl llal consimois aio Lolloi of llan if
llo onlianl was accommooaloo. Jo simmaiiso:
1 _ 4(1 c) ,02: accommooaloo onliy.
47
4(1 c) ,02 < 1 _ 4(1 c) ,22: ooloiioo onliy; Lil consimoi siiplis
is ligloi.
4(1 c) ,22 < 1 _ (1 c) ,2: ooloiioo onliy; consimoi siiplis is
lowoi.
1 4(1 c) ,2: Lloclaooo onliy.
Nolo llal loio I am looling al llo impacl on piicos (i.o., consimoi siiplis)
ialloi llan on lolal wolfaio. Jlis is jisl lo avoio innocossaiy calcilalions:
looling al lolal wolfaio woilo givo similai iosills: foi somo valios of 1, onliy
woilo Lo ooloiioo Lil llis liins oil lo Lo wolfaio impioving.
3.2 HundIIng and tyIng
In many silialions, a piooicl is ofoioo Ly a solloi inooi llo conoilion llal
anolloi piooicl is also Loigll, a plonomonon wlicl is calloo .-.n -n|-. Foi
inslanco, a liavol agonl migll soll a plano liclol only logolloi will llo piiclaso
of a lolol accommooalion, a cai manifacliioi solls a cai as a wlolo, ano ooos
nol soll sopaialoly lyios, aii-conoilioning, ongino, soals ano cai Looy, sloos aio
solo will sliings, compilois migll inclioo Loll OS ano applicalion soflwaio,
ano so on. All lloso aio inslancos of |&nn|.nj (oi n|nj .-.n): oifoionl
gooos aio solo logolloi in ].n .n-.
A oifoionl class of oxamplos poilains lo so-calloo j&.nn- j.nj, llal
occiis wlon a solloi ioqiiios lo piiclaso nol only a coilain gooo, Lil also all
llo inils a consimoi wislos lo Liy of anolloi gooo: loio llo lwo gooos aio
solo logolloi in n.n|| .n-. Foi inslanco, a moLilo plono company
migll wanl lo soll yoi llo moLilo loloplono sol only al llo conoilion llal yoi
malo all llo plono calls fiom il ano nol fiom olloi opoialois, oi a plolocopioi
migll soll a copy maclino only if ono accopls lo Liy lonoi only fiom il.
Jlis soclion analysos wly fims migll wanl lo iso lio-in salos (I iso inoif-
foionlly llo loims lying ano lio-in salos), ano wlal aio llo liloly ofocls of sicl
Lisinoss slialogios. Soclion .2.1 slows llal lying oflon las a voiy naliial om-
cioncy ialionalo (ano lloiofoio las pio-compolilivo ofocls). Lil lloio aio lwo
possiLlo ioasons wly lying migll oocioaso wolfaio. Jlo fisl (soclion .2.2) is
llal il allows fims lo piico oisciiminalo acioss consimois will oifoionl piof-
oioncos (llis is liio foi Loll Linoling ano ioqiiiomonls lying). Unfoilinaloly
- lilo foi piico oisciiminalion in gonoial (soo soclion 4), llo wolfaio ofocls of
lio-in piaclicos aio amLigiois. Jlo socono (soclion .2.) ooals will llo olo
conlonlion llal Ly lying salos of lwo piooicls, a monopolisl in ono piooicl
migll Lo aLlo lo oxlono ils monopoly onlo a socono piooicl mailol. Clicago
Sclool llinling mainlainoo llal llis woilo Lo inpioflaLlo, Lil ioconl moo-
ols of lying inoicalo slialogic ioasons wly lying migll allow monopolisalion.
Soclion .2.4 liios lo ioonlify llo main policy conclisions fiom llo analysis.
48
3.2.1 EBcIcncy rcasons Ior tyIng
In somo casos, solling compononls logolloi las oLviois omcioncy jislifcalions.
Foi inslanco, assomLling all llo oifoionl Lils ano piocos llal composo a com-
piloi is micl moio coslly foi a lypical consimoi llan foi a compiloi maloi
llal can ioly on spocialisoo poisonnol ano appiopiialo maclinos; il woilo Lo
limo-consiming lo Liy sopaialoly sloos ano lacos, oi a cai ano ils oifoionl
pails, ano laving lo assomLlo llom. Jloiofoio, in many casos llo piinciplos
of n..-.n J |n|& ano -n| nn.- imply llal il is moio omcionl llal
coilain compononls aio mailoloo logolloi ialloi llan sopaialoly.
In olloi casos, lying oifoionl compononls oi piooicls logolloi migll also
Lo an omcionl iosponso lo n-jnn. .nJnn.n. Imagino foi inslanco llal a
compiloi woilo woil al ils Losl only will coilain compononls, oi llal oiiving
a cai willoil a spocifc sol of lyios migll Locomo oangoiois, oi a copy maclino
woilo givo pooi copios willoil a spocifc lypo of lonoi. Jlon fims migll wisl
lo incoipoialo llo iigll compononls oi pails inlo llo fnal piooicl, lo ovoicomo
possiLlo iopilalion pioLloms llal woilo aiiso if llo consimois oio nol comLino
llom piopoily. Sicl a piaclico woilo Lo pioflaLlo foi llo fim Lil woilo also
Lo omcionl: consimois onjoy llo liglosl possiLlo qialily of llo piooicls lloy
Liy.
Of coiiso, wlon assossing omcioncy gains, ono sloilo lalo inlo accoinl llal
lying migll nol always Lo llo only availaLlo way lo ovoicomo infoimalion pioL-
loms. Foi inslanco, a cai manifacliioi coilo spocify wlicl lypos of lyios can Lo
inslalloo on ils cais, llo compiloi maloi coilo wain wlal aio llo compononls
llal can Lo pil inlo ils compiloi, ano llo copy piooicoi llo lonoi llal can
Lo isoo in ils plolocopy maclino. Somolimos llis woilo solvo llo pioLlom, in
ollois lloy woilo nol, il ooponos on llo spocifc casos.
In a wiooly ciloo US caso on lying in llo olo-gonoialion compiloi socloi,
1nnn.nn| 1&-.n-- Cn.n- . 15, ILM claimoo llal ils ioqiiiomonl
llal cislomois sloilo iso only ILM pincl-caios foi ILM compilois was jis-
lifoo on qialily gioinos: pooi caios migll lavo loo lo malfinclioning ano
jamming of ils compilois, will a loss in ils iopilalion. Howovoi, llo Sipiomo
Coiil foino llal ILM coilo lavo solvoo llo possiLlo qialily pioLlom Ly oilloi
piopoily piLlicising llo ligloi qialily of ils caios, oi maling loasos conoilional
on a minimim slanoaio ioqiiiomonl foi caios lo Lo isoo will ILM maclinos.
3.2.2 TyIng as a prIcc dIscrInInatIon dcvIcc
Evon if nono of llo pioviois loclnological oi infoimalional jislifcalions oxisls,
fims migll slill lavo olloi ioasons lo iso lio-in salos. In pailicilai, Loll
Linoling ano ioqiiiomonls lying allow fims lo incioaso piofls Ly woiling as a
piico oisciiminalion oovico, as oxplainoo in wlal follows.
49
HundIIng Consiooi a voiy simplo oxamplo wloio a monopolisl solls lwo
gooos, call llom A ano L, lo lwo consimois, 1 ano 2. Consimoi 1 las a
maximim willingnoss lo pay foi gooo A of 7 ano foi gooo L of . Consimoi 2
las a maximim willingnoss lo pay foi gooo A of 4 ano foi gooo L of 8. Assimo
also llal llo monopolisl lnows lloii willingnoss lo pay Lil il cannol claigo
oifoionl piicos lo llom (foi inslanco, Locaiso il is illogal), llal consimois Liy
al mosl ono inil of oacl gooo, ano llo monopolisl`s piooiclion cosl is zoio foi
simplicily.
1`s willingnoss lo pay 2`s willingnoss lo pay
gooo A 7 4
gooo L 8
gooos A ano L 12 12
If llo monopolisl solls sopaialoly llo lwo piooicls, il will clooso llo piico
of A lo oqial 4 ano soll lo Loll consimois, maling a piofl of 8 on gooo A (if
il solo al 7, il woilo soll only ono inil ano lavo a piofl of 7); ano il woilo soll
L al , maling a piofl of 10 on L (Ly solling al 8, il woilo soll only ono inil
ano malo lowoi piofls). In lolal, il woilo gain 18.
If insloao llo monopolisl solo llo lwo piooicls as a Linolo, il coilo claigo
a Linolo piico of 12, ano sinco Loll consimois woilo Liy, ils lolal piofls woilo
Lo 24. Cloaily, Linoling allows il lo oxliacl moio siiplis fiom consimois ano
incioaso piofls.
Jloio lavo Loon sovoial conliiLilions in llo oconomic liloialiio liying lo
inooislano inooi wlicl conoilions fims lavo an inconlivo lo Linolo. Moio
inloioslingly foi oii piiposo, lowovoi, is lo nolico llal llo wolfaio implicalions
fiom sicl a Linoling piaclico aio amLigiois: ono can ooviso oxamplos wloio
Linoling incioasos wolfaio ano ollois wloio il oocioasos il.
HcquIrcncnts tyIng as a nctcrIng dcvIcc Somolimos consimois iso
a coilain piooicl in a moio oi loss inlonsivo way. Foi inslanco, somo migll iso
a copy maclino voiy oflon, wlilo ollois iso il only occasionally, wlicl woilo
iofocl in oifoionl willingnoss lo pay foi llo plolocopioi. Wlon llis lappons,
a fim migll wanl lo lavo a moloiing oovico, llal is a way lo soil consimois
accoioing lo lloii inlonsily of iso (ano lloiofoio willingnoss lo pay), ano malo
llom pay accoioingly, so as lo oxliacl as micl siiplis as possiLlo fiom llom.
Iooally, llo fim woilo lilo lo moasiio inlonsily of iso oiioclly. Howovoi, if llo
copy piooicoi ioqiiios consimois lo Liy fiom llom all lonoi lloy nooo, llis
woilo ofoclivoly woil as a moasiio of inlonsily of oomano, sinco llo moio oflon
ono malos copios llo moio fioqionlly ono nooos lo ioplaco llo lonoi cailiiogos.
Jlo fim can llon loop llo piico of llo copy maclino low (so as lo alliacl
pooplo will lowoi inlonsily of oomano lo Liy il) ano claigo a ligloi piico on
0
oacl inil of llo complomonlaiy gooo (llo lonoi cailiiogos) so as lo oxliacl
siiplis accoioing lo llo willingnoss lo pay of consimois.
Wlilo il is cloai llal lio-in salos Lonofl llo fim, llo wolfaio ofocls aio
amLigiois. Il can Lo slowoo llal if all consimois Liy Loll wlon lloio is lying
ano wlon il is Lannoo, llon wolfaio will Lo lowoi inooi lying. Howovoi, llo
lying slialogy migll allow lo soll lo somo consimois wlo woilo nol olloiwiso
Liy llo gooo (llal is, il migll incioaso oomano), ano caiso a nol posilivo ofocl
on wolfaio. (Soo loclnical soclion .2. foi a foimal analysis.)
So fai, in viow of Loll llo facl llal lying migll woll lavo impoilanl omcioncy
ofocls, ano llal ovon in llo aLsonco of an omcioncy ialionalo ils impacl on
wolfaio is a piioii amLigiois, lloio woilo Lo lilllo oconomic gioino foi a
laisl lioalmonl of lying. Lofoio oiawing any conclision, lowovoi, wo sloilo
lool inlo llo possiLlo oxclisionaiy ofocls of lying.
3.2.3 ExcIusIonary tyIng In rcccnt nodcIs
Jlo fisl ailloi lo ofoi a convincing oxplanalion on wly oxclisionaiy lying
migll Lo pioflaLlo is Wlinslon (1990) (soo soclion .2.0 foi a foimal analysis).
Ho slows llal an incimLonl monopolisl in a mailol foi piooicl A llal commils
lo Linoling il will an inooponoonl piooicl L can oxclioo a compoliloi fiom
llo lalloi mailol. Jlis is Locaiso llo commilmonl lo soll llo lwo piooicls
logolloi ofoclivoly acls as a commilmonl lo Lo moio aggiossivo in mailol L:
llo incimLonl lnows llal ovoiy consimoi wlo piofois lo Liy llo iival`s voision
of piooicl L is also a consimoi wlo will nol Liy ils piooicl A (on wlicl lloio
aio ligl maigins sinco il is a monopolisl). In liin, foicoi compolilion in
llo mailol will oocioaso llo iival`s piofls will iospocl lo llo caso wloio llo
incimLonl ooos nol Linolo ils salos, ano migll foico il lo loavo llo inoisliy if
llo iooicoo piofls aio nol laigo onoigl lo covoi fxoo cosls. (Nolo also llal
moio aggiossivo compolilion woilo oocioaso llo incimLonl fim`s piofls as woll,
if llo iival conlinioo lo Lo aclivo: I slall como Lacl lo llo implicalion of llis
poinl.)
Nolo, lowovoi, llal llo oxclision of llo iival is nol nocossaiily pioflaLlo
foi fim 1: if il las commilloo lo soll llo piooicls as a Linolo, il migll woll
Lo llal somo consimois wlo woilo lavo Loigll A only in comLinalion will
llo iival`s vaiioly of L woilo nol Liy llo Linolo al all; llis migll lappon, foi
inslanco, if lloy oo nol valio A loo ligl, ano if lloy micl piofoi llo iival`s
1
voision of piooicl L. In olloi woios, if llo incimLonl is solling a pooi qialily
voision of piooicl L, il sooms inliloly llal - ovon if il can oxclioo llo sipoiioi
qialily iival`s piooicl - llo incimLonl woilo fno il pioflaLlo.
Il is impoilanl lo slioss llal llo oxclisionaiy ofocls of llis moclanism lalo
placo as long as llo Linolo las commilmonl valio, llal is if llo incimLonl can
iiiovoisiLly commil lo soll llo lwo piooicls logolloi, foi inslanco Ly piooicl
oosign oi in llo loclnological piocoss. Olloiwiso, oxclision woilo nol occii:
llo iival lnows llal, if il onloioo oi il slayoo in llo mailol, llo incimLonl
woilo iovoiso ils Linoling oocision, as il also oains lowoi piofls wlon Loll
fims aio aclivo (iomomLoi, Linoling implios moio aggiossivo compolilion, ano
llis ooslioys piofls if Loll fims aio in llo mailol).
Nolo also llal in llis moool lying ooos nol lavo Ly assimplion any omcioncy
iolo (llis is oono lo slioss llo possiLilily of anli-compolilivo ofocls). Wlon
assossing wolfaio in piaclico, lowovoi, ono sloilo loop in mino llal lying migll
lavo omcioncy ofocls llal onlanco consimoi`s ililily oiioclly, ano llal migll
oilwoigl ils oxclisionaiy ofocl. In olloi woios, an omcioncy oofonco sloilo
Lo allowoo lo llo incimLonl monopolisl llal allogooly isoo lying lo oxclioo
compolilois.
Wlinslon also slows llal wlon gooos aio complomonls, oxclision is in gon-
oial nol pioflaLlo. Conlinio llo oxamplo aLovo, Lil sipposo now llal piooicls
A ano L aio complomonls in fxoo piopoilions: gooo A is a nocossaiy piooicl,
ano no consimoi woilo Liy gooo L alono. In llis conloxl, a commilmonl lo
Linoling woilo liivially oxclioo llo iival: if A is solo only in comLinalion will
llo incimLonl`s vaiioly of piooicl L, noLooy woilo Liy iival`s piooicl L.
Howovoi, Ly nol Linoling llo incimLonl can only oo Lolloi. Call j llo
oplimal piico of llo Linolo inooi monopoly. Sipposo llal wlon il ooos nol
Linolo llo incimLonl cloosos foi mailol L a piico j oqial lo c , ils maiginal
cosl of piooicing L, ano foi mailol A a piico j oqial lo j c . Givon llis
piicing policy, lwo casos migll lappon. Consiooi fisl llo caso wloio llo iival is
nol aclivo in llo mailol. In llis caso, llo only lling llal mallois foi consimois
is llo sim of llo piicos of llo lwo gooos, ano llo incimLonl will oo jisl as woll
as will llo Linolo, sinco j -j oqials j (Loll piico ano oomano aio llo samo
as inooi Linoling).
Consiooi noxl llo caso wloio llo iival is aclivo wlon llo incimLonl ooos
nol Linolo ano isos llo aLovo piicing policy. In gonoial, lloio will Lo lwo
ofocls fiom llo piosonco of llo iival. (a) Somo consimois wlo woio Liying
fiom llo incimLonl will swilcl lo llo iival (ollois slay will llo incimLonl).
Lil llis ooos nol iooico llo incimLonl`s piofls: il will slill soll piooicl A lo all
consimois (lloso wlo Liy L fiom il ano lloso wlo Liy L fiom llo iival), ano
2
malo on llom llo samo maigin as ( j c )c as wlon il solls inooi Linoling.
Losl oomano on L`s piooicls ooos nol amoinl lo losl piofls, lloigl: L is solo
al inil cosl inooi llo piicing sclomo aLovo, so piofls on L aio zoio anyway.
(L) Somo consimois wlo woio nol Liying fiom llo incimLonl inooi Linoling
will insloao slail lo Liy wlon an alloinalivo cloico of L oxisls. Cloaily, llis
ofocl incioasos llo incimLonl`s piofls, sinco il alliacls lo piooicl A aooilional
oomano (on wlicl llo incimLonl malos posilivo piofls).
Wlinslon (1990) fnos lwo spocifc oxamplos wloio an incimLonl pioflaLly
isos lying lo oxclioo compolilois in a complomonlaiy mailol: ono wloio pioo-
icl A is nol ossonlial, llo olloi wloio an infoiioi alloinalivo lo piooicl A oxisls.
Ovoiall, lowovoi, complomonlaiily malos il loss liloly (alLoil nol impossiLlo)
llal an incimLonl will iso lying foi oxclisionaiy piiposos.
Cloi ano Slofanaois (2001) also consiooi complomonlaiy piooicls (soo locl-
nical soclion .2.7). In lloii papoi, an incimLonl fim is monopolising Loll
compononls, ano facos an onlianl in oacl mailol. Eacl polonlial onlianl can
onloi llo mailol foi ono compononl if il las a siccossfil innovalion. Howovoi,
innovaling involvos an inilial fxoo invoslmonl, ano il is lloiofoio iisly. In llis
conloxl, if llo incimLonl commils lo Linoling, onliy in ono compononl mai-
lol is possiLlo only if Loll innovalions aio simillanooisly siccossfil (wlon llo
incimLonl is Linoling, if ono onlianl only oLlains llo innovalion il will lavo
no oomano sinco llo gooos aio complomonls). Jloiofoio, Linoling iooicos llo
inconlivos lo invosl ano consoqionlly il will Lo loss liloly llal innovalions will
appoai, ano llal onlianls will oisl llo incimLonl.
Evon in llis moool, lowovoi, il is nol always cloai llal llo incimLonl will
fno il pioflaLlo lo lio salos of llo lwo gooos. On llo ono lano, lying woilo
avoio Loing foicoo oil if Loll iivals woio simillanooisly siccossfil; on llo olloi
lano, il woilo oocioaso llo piofl llo incimLonl malos woio only ono iival
siccossfil. In llo lalloi caso, inoooo, il woilo gain fiom llo iival`s invoslmonl,
sinco il will iso llo monopoly powoi il las on llo olloi compononl lo oxliacl
somo of llo ionl cioaloo Ly llo iival`s innovalion.
Caillon ano Waloman (2000) piosonl a similai moclanism wloioLy lying
woilo allow an incimLonl lo ooloi onliy in a complomonlaiy mailol L in oiooi
lo piolocl ils monopoly in mailol A. Inilially, llo incimLonl facos a polonlial
onlianl in mailol L; only siLsoqionlly can anolloi fim oocioo on onloiing
mailol A. Ly lying A ano L, llo incimLonl coilo ooloi llo fisl onlianl in llo
L mailol (llis lappons as long as il is simcionlly incoilain llal lloio will Lo
filiio onliy in mailol A), wlicl in liin malos il loss liloly llal llo socono
onlianl wislos lo onloi llo A mailol (Locaiso llo incimLonl woilo Lo llo only
piooicoi of llo complomonlaiy piooicl).
Loll in Caillon ano Waloman (2000) ano in Cloi ano Slofanaois (2001)
llo Lasic moclanism of oxclision is llo samo, in llal onliy in ono mailol is
maoo ooponoonl on llo siccoss of onliy in a complomonlaiy mailol. In a
way, llis moclanism iominos is of llo papois wloio oxclisivo ooaling oolois
onliy oxploiling oxloinalilios among Liyois (soo claploi 0). Hoio lloio also
oxloinalilios among llo polonlial onlianls, wlicl Logs llo qioslion of wlal
lappons wlon llo onlianls can cooioinalo (in Cloi ano Slofanaois llo onlianls
can Lolong lo llo samo fim, Lil pioLaLililios of siccoss in llo lwo mailols
aio slill inooponoonl, a laio assimplion lo malo. Il woilo soom ioasonaLlo lo
oxpocl llal lloio oxisls coiiolalion among llo pioLaLililios of siccoss wlon il
is llo samo fim lo conlosl onliy in Loll mailols).
In all lloso moools, lying can lavo ils slialogic (oxclisionaiy) ofocls only
lo llo oxlonl llal il ioally involvos a ciooiLlo commilmonl, sicl as foi inslanco
Linoling oiioclly in llo piooicl oosign oi in llo way piooiclion is caiiioo
oil. If Linoling is oLlainoo llioigl mailoling oi paclaging oocisions llal
can Lo oasily iovoisoo, llon llo commilmonl ofocl is aLsonl (ano no slialogic
ofocl oxisls). Foi inslanco, lloso moools coilo nol lavo Loon involoo in lwo
ofl-monlionoo US casos: J.n--1.nj&n 1&||.-h.nj . 15, ano 1n.n 5h
1nh.nj . 15. In llo fisl caso, a Now Oiloans piLlisloi llal lao llo only
moining nowspapoi was lying salos of aovoilising spaco in llal nowspapoi will
aovoilising in an ovoning nowspapoi (wloio il facoo olloi compolilois). In llo
socono caso, Uniloo Sloo lioo iopaii soivicos will llo loasing of ils maclinoiy.
In Loll casos, il woilo Lo oimcill lo aigio llal lloio was a loclnological
commilmonl lo Linoling (soo also Wlinslon, 1990: 89).
In a moio ioconl EC moigoi oocision, 1.nj1&jh-, llo moiging on-
lily woilo lavo piooicoo lwo complomonlaiy piooicls, goo-slalionaiy salollilo
opoialions ano soivicos lo laincl salollilos lo lloii oiLil. Jlo Commission
consiooioo wlolloi llo now onlily migll lavo lao an inloiosl in ongaging in
oxclisionaiy lying. Il concliooo llal llis was inliloly, among olloi llings
Locaiso a commilmonl lo ofoi llo lwo soivicos only in a Linolo was inliloly:
cislomois soomoo lo lavo a sliong piofoionco foi foxiLilily in llo cloico of
lainclois, ano woilo nol lavo liloo incompaliLilily of lloii salollilos will all
lainclois Lil Looing`s.
3.2.4 IractIcc: Asscssncnt oI tyIng practIccs
As llo pioviois oiscission las linloo al, llo wolfaio implicalions of lio-in salos
aio fai fiom inamLigiois, ano lo ooal will llom in piaclico migll Lo oxliomoly
complox. In mosl casos, lying will lavo omcioncy ofocls llal will Lonofl con-
simois; in a fow (pioLaLly iaio) casos, lloy migll lavo laimfil oxclisionaiy
ofocls llal lavo in any caso lo Lo Lalancoo will any possiLlo omcioncy ofocls.
In somo olloi casos, lio-in salos migll Lo oono lo piico oisciiminalo, ano wlon
llis is llo caso llo immooialo impacl on consimoi ano lolal siiplis is amLigi-
4
ois ovon in llo aLsonco of any omcioncy ofocl; lloiofoio, il is ovon loss liloly lo
Lo ooliimonlal wlon omcioncy consiooialions aio piosonl.
Jiaoilionally, lying las Loon looloo al voiy sispicioisly Ly anliliisl ailloi-
ilios ano coiils, ano foi a long limo in llo US il lao a slalis voiy closo lo
- pioliLilion (soo claploi 1). Jlis laisl appioacl is nol jislifoo.
Jo slail will, il woilo malo sonso lo invosligalo lying piaclicos only wlon
lloy aio caiiioo oil Ly fims onoowoo will consiooiaLlo mailol powoi. Sinco
il is llo oxclisionaiy ofocl of lying llal ono sloilo foai llo mosl, fims llal
oo nol lavo a oominanl posilion sloilo Lo fioo lo iso lio-in salos as lloy lilo.
Accoioingly, a safo laiLoii migll Lo piosciiLoo wloio fims will mailol slaios
of loss llan, say, 40/, in oacl piooicl mailol involvoo will nol Lo invosligaloo.
Jlis appioacl migll soom gonoiois al fisl sigll, Lil il is jislifoo Ly llo
nimLoi of possiLlo omcioncy ofocls llal ooiivo fiom lying: consimois gain in
many casos wloio lloy oo nol lavo lo Lolloi assomLling piooicls llomsolvos,
oi lool foi oifoionl sippliois lo collocl llo oifoionl compononls lloy wanl,
ano so on. Jying migll lloiofoio allow a non-oominanl fim lo Locomo moio
compolilivo, iosilling in a posilivo wolfaio ofocl.
Iailicilaily insliiclivo in llis iospocl is llo 1|Jn caso, wloio UK ailloii-
lios oonioo Ilfoio lo Linolo salos of plologiaplic flms will lloii oovolopmonls,
spoooing ip ils oocaoonco will iospocl lo Kooal. In llo mio-00`s, llo coloii flm
mailol was oominaloo Ly Kooal woilowioo. In llo UK, Kooal lao aioino 80/
of salos, will Ilfoio loloing loss llan 1/ mailol slaio. Ono of llo ioasons wly
Ilfoio foino il oimcill lo calcl ip will Kooal was oio lo (inoiiocl) nolwoil of-
focls: Ilfoio isoo a piocossing syslom oifoiing fiom llo oominanl Kooal`s, ano
llis iopiosonloo an oLslaclo of ils oifision will inooponoonl piocossois. Ilfoio`s
iosponso lo llis pioLlom was lo soll flm will piocossing incliooo. A cislomoi
woilo Liy llo flm ano afloi laling picliios woilo sono Lacl llo oxposoo flm
lo Ilfoio, wlicl woilo piocoss il in ils laLoialoiios ano llon sono il Lacl lo llo
cislomoi. Following a complainl Ly inooponoonl piocossois, llo oomano foi
wloso soivicos llis piaclico woilo lavo iooicoo, llo Monopolios ano Moigois
Commission foino llo lying of flm ano piocossing lo Lo anli-compolilivo in
1900. As Sillon (1998, p.120) pils il, [l[lis fnoing gioally incioasoo Ilfoio`s
pioLloms. Jlo inooponoonls coilo nol oasily piocoss llo company`s flm, ano
llis appoais lo lavo Loon llo lasl sliaw foi Ilfoio`s iolail Lisinoss. [...[ Ilfoio
willoiow ils Liano fiom llo coloi flm mailol in 1908."
Wlon a fim ooos nol pass llo fisl sciooning losl ano il las mailol slaios
aLovo llal coilain llioslolo, a fill invosligalion sloilo woigl possiLlo anli-
compolilivo ofocls againsl possiLlo omcioncy ioasons Lolino llo piaclico. Nolo
llal llooiy lolls is llal llo ligloi llo complomonlaiily Lolwoon llo piooicls
llo loss liloly lying will Lo isoo foi oxclisionaiy piiposos, so allogalions of mo-
nopolisalion wlon a fim Linolos lwo filly complomonlaiy piooicls sloilo Lo
iocoivoo will moio sloplicism. Jlooiy also says llal oxclisionaiy ofocls aio
moio liloly wlon lloio is a ciooiLlo commilmonl lo Linoling, sicl as wlon lwo
piovioisly sopaialo compononls aio comLinoo in a now piooicl oosign. Jloio-
foio, il is loss liloly lo lavo oxclisionaiy ofocls wlon, foi inslanco, lwo piooicls
aio solo logolloi Lil llis mailoling oocision is iovoisiLlo. Howovoi, wlon sicl
a commilmonl oxisls, il is fai fiom ailomalic llal il will lavo ooliimonlal of-
focls. Fiilloimoio, oxliomo caio sloilo Lo lalon in llis caso Locaiso slopping
a lying piaclico amoinls lo inloivono ano mooify llo piooicl oosign of a gooo.
3.2. AodcIIng tyIng, I: HcquIrcncnts tyIng as a nctcrIng dcvIcc*
In llis soclion I slow llal a monopolisl of an ossonlial gooo A las an inconlivo
lo lio llo iso of a complomonlaiy gooo L, wloso oomano inlonsily oifois acioss
consimois. Jlo wolfaio consoqioncos of lying will Lo amLigiois.
A consimoi of lypo i = |, h wlo Liys ono inil of piooicl A ano q inils of
piooicl L las llo following ililily finclion:
l = q
q
2
. (4)
Consiming llo gooos sopaialoly givos zoio ililily, ano Liying moio llan ono
inil of gooo A ooos nol aoo lo ililily. Jypo-| consimois lavo lowoi inlonsily of
oomano ( < ) ano aio a slaio ` of llo popilalion (of sizo 1 foi simplicily),
1 ` Loing llo slaio of lypo-h consimois.
Gooo A is monopolizoo Ly fim 1, wloioas sovoial fims laving ioonlical
loclnology - inclioing fim 1 - aio involvoo in llo piooiclion of gooo L. Jlo
cosl of piooicing ono inil of llo piooicl aio iospoclivoly c ano c < 1. Jloio
aio no fxoo cosls.
Jo lool al llo ofocls of (ioqiiiomonls) lying fisl consiooi llo caso wloio
fim 1 solls sopaialoly gooos A ano L. Assimo llal lloio is piico compolilion
in llo L mailol.
ô tyIng {II aII consuncrs Iuy). Sipposo fisl all consimois Liy.
Domano of lypo-i consimois is oLlainoo as max l j j q. Ly solling
dl ,dq = 0, ono las:
q = (1 j ). (40)
A lypo-i consimoi will llon Liy gooo A if ils siiplis C3 = l j j q
is non-nogalivo oi, afloi siLslililion, if C3 = (1 j ) ,2 j _ 0.
Iiico compolilion on llo gooo L mailol implios llal j = c . Jloiofoio,
in llo caso wloio fim 1 cloosos piicos so llal all consimois Liy, il misl Lo:
j =
(1 c )
2
. (47)
0
In llis caso, lypo-| consimois will lavo zoio siiplis, wloioas lypo-h con-
simois will lavo a siiplis C3 = ( )(1 c ) ,2.
Iiooicoi siiplis oqials fim 1`s piofls fiom gooo A: = (1c ) ,2
c . Wolfaio will lloiofoio Lo oqial lo:
! =
((1 `) -` )(1 c )
2
c . (48)
ô tyIng {onIy hIgh typcs Iuy). Fiim 1 migll piofoi lo soivo only ligl
lypo consimois, lloigl, fxing a piico llal allows lo oxliacl all siiplis fiom
llom ano loavos consimois will lowoi inlonsily of oomano insoivoo:
j =
(1 c )
2
. (49)
In llis caso, Loll lypos will lavo zoio siiplis: C3 = 0, ano piooicoi
siiplis is: = (1 `)
_
(1 c ) ,2 c
_
= ! .
Solling only lo ligl lypos is pioflaLlo as long as , wlicl is llo
moio liloly llo smalloi llo piopoilion of low-lypo consimois ano llo ligloi llo
oifoionco in oomano inlonsilios. Foimally, llis slialogy is pioflaLlo if:
` <
( )(1 c )
(1 c ) 2c
. (0)
TyIng. Consiooi now llo caso wloio fim 1 ioqiiios consimois wlo wanl
lo Liy gooo A also lo Liy gooo L fiom il. Assimo also, ano il is a sliong
assimplion, llal il is onoowoo will somo loclnology llal allows il lo moniloi
consimois` piiclasos of gooo L, ano lo piovonl llom fiom aooiossing compoli-
lois lo Liy gooo L afloi laving Loigll ono inil of gooo A will a symLolic
qianlily of L.
Bocalling llal oomano of piooicl L is givon Ly oqialion (40), fim 1`s piofls
aio:
= (j c ) [` (1 j ) - (1 `) (1 j )[ -j c . (1)
Fiom d,dj = 0 ono oLlains:
j =
(1 `)( ) -c [` - (1 `) [
2 2`( )
, (2)
wloio il is oasy lo clocl llal j c . (Jloiofoio, il is ciicial llal fim
1 is aLlo lo piovonl consimois fiom Liying gooo L fiom compolilois.) As foi
llo piico of gooo A, nolo llal piofls incioaso will il, Lil consimois will Liy
7
as long as C3 = (1 j ) ,2 j _ 0. Afloi ioplacomonl, ono oLlains llo
oplimal piico foi gooo A:
j =
(1 c ) [` - (1 `) [
2 [2 2`( )[
, ()
wlicl can Lo oilloi Liggoi oi smalloi llan c . Nolo llal loio lying woils in
a voiy similai way as a lwo-pail laiif sclomo T -jq llal sogmonls consimois
accoioing lo lloii inlonsily of oomano. Hoio, llo fxoo foo pail of llo laiif,
T, coiiosponos lo j , llal is llo piico of ono inil of llo (ossonlial) gooo A,
wloioas llo vaiiaLlo pail of llo laiif coiiosponos lo llo piico j of ono inil of
gooo L. Jlo lowoi llo inlonsily of oomano of a consimoi llo lowoi llo nimLoi
of inils of gooo L lo will Liy fiom llo monopolisl, as q = (1 j ), ano
lloiofoio llo lowoi llo lolal amoinl paio lo il.
Fiim 1`s piofls inooi lying aio:
=
(1 c ) [` - (1 `) [
2 [2 2`( )[
c . (4)
Jypo-| consimois lavo zoio siiplis, wloioas lypo-h consimoi siiplis is:
C3 =
(1 c ) ( ) [` - (1 `) [
2 [2 2`( )[
. ()
Wolfaio can Lo compiloo as:
! =
(1 c ) [` - (1 `) [ [1 - (1 `) ( )[
2 [2 2`( )[
. (0)
ConparIsons oI cquIIIIrIa. (a) Lol is fisl consiooi llo caso wloio Loll
lypos aio soivoo anylow. Ono can clocl llal lying is pioflaLlo:
=
(1 c ) (1 `) ( )
2 [2 2`( )[
0. (7)
Jlis is nol siipiising, as il allows llo monopolisl lo imposo ligloi paymonls
fiom consimois wlo lavo a ligloi inlonsily of oomano, i.o., lo piico oisciiminalo
among llo lwo lypos of consimois. Il is also possiLlo lo clocl llal lying is
ooliimonlal lo wolfaio, as:
8
! ! =
(1 c ) (1 `) ( )
__
1 -` 2`
_
- 2`
_
2 [2 2`( )[
0.
(8)
Evon willoil ooing looiois calcilalions, ono can nolico llal wolfaio sloilo
Lo lowoi inooi lying. Inoooo, if lloio is no lying, consimois Liy al maiginal
cosl, ano wolfaio is lloiofoio llo liglosl possiLlo, wloioas lying inliooicos a
soiico of allocalivo inomcioncy as gooo L is solo aLovo maiginal cosl. Wo aio
lloiofoio in llo isial caso wloio a ligloi piico oocioasos consimoi siiplis (of
ligl lypos, sinco low lypos lavo zoio siiplis in oilloi iogimo) moio llan il
incioasos piooicoi siiplis.
(L) Jlo aLovo compaiisons lavo Loon maoo foi llo caso wloio Loll lypos
of consimois Liy in llo iogimo wloio lloio is no lying. If only ligl lypos
Liy, lowovoi, il liins oil llal lying .nn-- wolfaio. Jo soo llal, nolico llal
consimoi siiplis is posilivo inooi lying wloioas il is zoio wlon lloio is no
lying ano low lypos oo nol Liy. Jloiofoio, wlonovoi lying is moio pioflaLlo
foi fim 1 il will also Lo wolfaio impioving.
Jo clocl llal lying migll inoooo Lo pioflaLlo, ano lo savo on looiois calci-
lalions, jisl consiooi a simplo oxamplo wloio c = c = 0, = 2, ano = 1.
Foi lloso valios, inooi no lying fim 1 woilo soivo only ligl lypos foi ` < 1,2.
Il is sliaigllfoiwaio lo clocl llal 0 foi ` 1
_
, = .4220:
aLovo llis llioslolo, lying is pioflaLlo ano il is wolfaio impioving.
3.2.6 AodcIs oI tyIng, II: TyIng, IorccIosurc, and cxcIusIon In VhIn-
ston {1990)*
Consiooi lwo mailols foi .nnnnn n&- (soo Lolow foi llo complomon-
laiy piooicls caso), A ano L, ano lwo fims, 1 ano 2. Fiim 1 is a monopolisl in
mailol A, wloio il is nol clallongoo, ano piooicos al conslanl maiginal cosls
c . Loll fims 1 ano 2 aio polonlial onlianls in mailol L. Jo onloi, lloy lavo
lo incii a fxoo cosl 1 ano 1 , ano lloy can llon opoialo al conslanl maiginal
cosls iospoclivoly oqial lo c ano c .
Jlo gamo is composoo of llioo slagos. In llo fisl slago, fim 1 oocioos
wlolloi il wanls lo Linolo gooo A ano L1 logolloi, oi nol. If lloy aio
Linoloo, assimo llal llis oocision is iiiovoisiLlo (llal is, il las fill commilmonl
valio). In llo socono slago, oacl fim simillanooisly oocioos wlolloi lo onloi
oi nol mailol L, ano accoioingly pays (oi nol) llo fxoo cosl 1. In llo lliio
slago, aclivo fims simillanooisly sol piicos: fim 1 oilloi sols a singlo piico j
if il las commilloo lo a Linolo, oi lwo inooponoonl piicos j ano j ; fim
2, if aclivo, sols llo piico j .
9
A sInpIc cxanpIc oI cxcIusIon vIth honogcnous goods* Assimo
fisl llal consimois lavo mass ono ano lavo valialions (llal is, a maximim
willingnoss lo pay) c foi piooicl A, ano n c c (fim 2 is moio
omcionl llan fim 1 in mailol L) foi piooicls 11 ano 12 llal in llis fisl
oxamplo aio assimoo lomogonois. Consimois Liy ono inil of gooos A ano L
as long as piicos aio lowoi llan lloii valialions; olloiwiso, lloy oo nol Liy llo
gooo. Also assimo llal fim 1 las alioaoy sinl ils fxoo cosl in mailol L (llis
is lloiofoio a sligll vaiialion of llo aLovo-oosciiLoo gamo, sinco fim 1 is alioaoy
aclivo in Loll mailols), wloioas fim 2 las nol, ano llal c c 1 .
Jo lool foi llo siL-gamo poifocl Nasl oqiiliLiiim wo movo Laclwaios.
Jwo casos sloilo Lo slioioo, accoioing lo wlolloi in llo fisl slago fim 1 las
Linoloo llo gooos oi nol.
1nnnnn ..nj ;n j.nj).
Sinco mailol L piooicls aio poifoclly lomogonois, ano fim 2 is moio om-
cionl, il will sol a piico oqial lo (a slaoo loss llan) llo maiginal cosl of fim
1 ano gol all llo mailol. Il will malo a piofl c c . Sinco llis is ligloi
llan ils fxoo cosl, il will onloi llo mailol. Mailol A is inooponoonl, ano fim
1 will sol j = . Il will lloiofoio malo a lolal piofl = c .
Jj.nj.
Sipposo now llal fim 1 las Linoloo llo lwo gooos A ano L1 ano solls llom
al a piico j. Ono can llinl of llis piico as j = - j , wloio j = j is llo
]..&- piico sol Ly fim 1 inooi Linoling (ano sinco il woilo nol malo sonso
lo claigo consimois in mailol A loss llan lloii valialion foi il). Sinco lloio
is Loiliano compolilion, consimois will Liy llo Linolo fiom fim 1 if j is a
slaoo loss llan llo maiginal cosl of fim 2: j = j = c .. Jloiofoio,
will j = c -, no consimoi woilo Liy fiom fim 2.
Sinco fim 2 oLsoivos llal fim 1 las Linoloo llo lwo piooicls (ano sinco
llis is iiiovoisiLlo), il lnows llal if il onloioo il woilo nol Lo aLlo lo iocoip ils
fxoo cosls (sinco il woilo nol soll anylling). Honco, il slays oil.
Finally, nolo llal inooi Linoling ano wlon fim 2 oocioos nol lo onloi,
al llo lasl slago of llo gamo fim 1 will sol llo Linolo piico al j = - n,
lloiofoio oxliacling all llo siiplis fiom llo consimois, ano maling a piofl
= -n c c .
1.- -nj.
Il is now oasy lo lool al llo oocision Lolwoon Linoling oi nol al llo fisl
slago of llo gamo. Fiim 1 will piofoi lo commil lo Linoling ano lying salos
of llo lwo gooos if , wlicl is always salisfoo sinco Ly assimplion
n c 0.
Jlis slows llal lying migll allow lo oxclioo onliy in a pioflaLlo way.
00
Lol is now lool al a sligllly moio gonoial caso.
Thc nodcI vIth dIcrcntIatcd goods In narkct H** Assimo con-
simois aio localoo on llo [0, 1[ lino, wloio lloy aio inifoimly oisliiLiloo will
inil oonsily. Jloy can consimo al mosl ono inil of gooo A, foi wlicl lloy
lavo a valialion c , ano ono inil of gooo L. Jlo nol ililily lloy ooiivo
fiom Liying vaiioly i = 1, 2 of gooo L is givon Ly l = nt [ aa [ j ,
wloio n max(c , c ) is llo maximim valialion foi gooo L, t moasiios llo
oisililily paiamoloi of Liying a vaiioly localoo in a foi a consimoi localoo
in a. I assimo llal a = 0 ano a = 1. Jlis is a simplo Hololling moool
(soo claploi 8) wloio localion sloilo nol nocossaiily Lo inlonooo in plysical
loims.
Jlo gamo is llo ono oosciiLoo al llo Loginning of llo soclion, ano ils solilion
is foino Ly Laclwaio inoiclion.
1nnnnn ..nj ;n j.nj).
Jo fno llo solilion of llo piico gamo, in llo caso wloio fim 2 las onloioo,
ono fisl las lo ooiivo llo oomano finclions foi gooos L1 ano L2 (in llis
caso, A is solo inooponoonlly, so il ooos nol afocl llo gamo in mailol L).
A consimoi localoo al a will piofoi lo Liy piooicl L1 if l _ l , oi:
n t a j _ n t (1 a) j . Dofno as a llo consimoi inoifoionl
Lolwoon Liying fiom L1 oi L2, ano sicl llal:
a (j , j )
t -j j
t -t
. (9)
All consimois localoo Lolwoon 0 ano a will piofoi vaiioly L1. Jloso
localoo Lolwoon a ano 1 will piofoi L2. Jloiofoio, oomano finclions will Lo
q = a (j , j ), ano q = 1 a (j , j ). Iiofl finclions aio:
= (j c )
t -j j
t -t
; = (j c )
_
t -j j
t -t
_
.
(00)
Sol llo fisl ooiivalivos oqial lo zoio (d ,dj = 0) ano wiilo llo ioaclion
finclions of llo lwo fims in llo plano (j , j ):
1 : j =
t -c -j
2
; 1 : j = 2j c t . (01)
01
Fiom llo inloisoclion of llo lwo ioaclion finclions wo fno llo oqiiliLiiim
piicos ano (afloi siLslililion) piofls in llo no lying piico gamo:
j =
t - 2t -c - 2c
; =
(t - 2t -c - 2c )
9 (t -t )
(foi i, = 1, 2, i ,= ).
(02)
As foi mailol A, il is cloai llal fim 1 will sol ils piico as lo oxliacl all llo
siiplis fiom consimois in llal mailol: j = . Jlo lolal piofls inooi llo
inooponoonl piicing (no lying) gamo foi fim 1 will llon Lo = (c )- .
Jj.nj.
Wlon fim 1 las iiiovoisiLly Linoloo llo lwo gooos A ano L1, mailol A is
cloaily nol inooponoonl fiom L any longoi, as llo fim cloosos a iniqio piico j
foi llo wlolo Linolo, ialloi llan lwo sopaialo piicos. A consimoi a now las llo
cloico Lolwoon Liying oilloi llo Linolo A,L1, oi vaiioly L2 alono. (Nolo llal if
a consimoi Liys vaiioly L2, llis implios ono losl salo of gooo A foi fim 1.) Slo
will piofoi llo Linolo A,L1 if

l _ l , oi: -nt a j _ nt (1a)j .
In oiooi lo lavo Loll fims solling al a Linoling oqiiliLiiim assimo:
(A1) 0 < c < t - 2t -c c , ano
(A2) c 2t t -c c .
Jlo consimoi inoifoionl Lolwoon A,L1 ano L2 is:
a ( j, j )
t -j - j
t -t
. (0)
Jloiofoio, oomano finclions will Lo q = a ( j, j ), ano q = 1 a ( j, j ).
Iiofl finclions aio:
= ( j c c )
-t -j j
t -t
; = (j c )
_
-t - j j
t -t
_
.
(04)
Fiom d ,dj = 0, llo ioaclion finclions aio:
1 : j =
-c -t -c -j
2
; 1 : j = 2j c - t . (0)
Solving llo syslom wo fno llo oqiiliLiiim piicos inooi lying:
j =
t - 2t -c - 2c - - 2c
; j =
t - 2t -c - 2c -c
,
(00)
02
ano Ly ioplacomonl llo oqiiliLiiim piofls:
=
(t - 2t -c c - c )
9 (t -t )
; =
(t - 2t -c c -c )
9 (t -t )
.
(07)
1] nn.-n-, nnn .nn.n J h -&|-.
Fiisl of all, il is sliaigllfoiwaio lo soo llal Linoling Ly fim 1 liils iival
fim 2: , as c . Howovoi, nolo llal Linoling also liils fim 1 if
fim 2 onlois llo mailol. Jo soo llis, fisl clocl llal:
< if c < t - 7t - 2c 2c . (08)
Jlon, nolo llal foi inoqialily (08) lo Lo compaliLlo will assimplion (A2),
il misl Lo 7t - 8t - c c 0, wlicl is always salisfoo Ly assimplion
(A1).
Jo sim ip, conoilional on fim 2 Loing aclivo, Loll fims woilo Lo woiso
of Ly Linoling. Jloiofoio, foi Linoling lo Lo closon Ly fim 1, il misl Lo llal
il oolois onliy fiom fim 2. Lofoio slowing llo conoilions inooi wlicl llis
occiis, lol is inloipiol llo iosills oLlainoo: wly ooos Linoling oopioss piofls
of Loll compolilois
Jo soo llis, il is isofil lo llinl of j as composoo of lwo fclional piicos: llo
piico on mailol A (llal can only Lo oqial lo , sinco fim 1 is monopolisl on
llal mailol) ano llo piico in mailol L:
j = - j . (09)
Ly ioplacing llis oxpiossion inlo llo ioaclion finclions (0), wo can wiilo
llom in llo plano ( j , j ), as:
1 : j =
t -c -j ( c )
2
; 1 : j = 2j c t . (70)
INSEBJ Figiio 7.0. Slialogic ofocl of Linoling
As Figiio 7.0 slows, ano is oasily clocloo fiom compaiing oxpiossions (01)
ano (70), Linoling slifls oownwaios, fiom 1 lo

1 , llo ioaclion finclion of
fim 1 wlon il compolos in mailol L. In olloi woios, Linoling iopiosonls a
ciooiLlo commilmonl foi fim 1 lo Lo moio aggiossivo wlon il compolos in llal
mailol, Locaiso il lnows llal any losl salo in mailol L is losl piofl ( c )
in mailol A. As a iosill, oqiiliLiiim piicos ano piofls will Lo lowoi foi Loll
fims inooi lying.
1nj n.-.n-.
Fiim 2 will onloi mailol L if ano only if ils piofls ofsol ils fxoo cosls. Il
is llon sliaigllfoiwaio lo soo llal lloio aio paiamoloi valios wloio il woilo
0
onloi if fim 1 oio nol iso lying, Lil il woilo nol onloi if il commilloo lo lying.
Jlis occiis if _ 1 . Jlis is also llo caso wloio fim 1 migll fno il
pioflaLlo lo Linolo, as wo slow noxl.
1&nn|.nj n.-.n-.
Al llo fisl slago of llo gamo, fim 1 oocioos on Linoling. Jlo pioviois
compaiison Lolwoon piofls slows llal if fim 2 is oxpocloo lo onloi, Linoling
is inpioflaLlo. Jloiofoio, wlon 1 _ , llo oqiiliLiiim is sicl llal fim 1
ooos nol Linolo, ano fim 2 onlois.
Howovoi, il is nol a piioii saio llal fim 1 nocossaiily wanls lo Linolo wlon
il oxpocls fim 2 nol lo onloi. Linoling is oplimal only if llo monopoly piofl
inooi Linoling, , (iomomLoi, llo fim commils lo Linoling, so il cannol
iovoiso llo oocision wlon fim 2 oocioos nol lo sinl ils onliy cosls) is ligloi
llan llo oiopoly piofl wlon lloio is no Linoling, . Jo fno llo foimoi piofl,
nolo llal a consimoi localoo in a will oocioo lo Liy llo Linolo ialloi llan nol
Liying al all, if l = -nt a j _ 0. Jloiofoio, llo inoifoionl consimoi
will Lo a = (-n j ),t . Jloio aio lwo casos accoioing lo wlolloi a < 1
(llo mailol is nol covoioo) oi a _ 1 (llo mailol is covoioo: all consimois
Liy llo Linolo):
q =
_
1, if j _ -n t
, if j -n t
(71)
=
_
j c c , if j _ -n t
( j c c ) , if j -n t
. (72)
Ono can llon fno llo oplimal piico al llo inloinal solilion as j = ( -
n - c - c ),2, ano clocl llal il can apply only if - n < c - c - 2t
(olso, j _ -nt ano llo coinoi solilion lolos). Jloiofoio, llo oqiiliLiiim
piofls will Lo:
=
_
-n t c c , if -n _ c -c - 2t
, if -n < c -c - 2t
. (7)
Jlo conoilions oLlainoo malo sonso: llo ligloi llo consimois` willingnoss
lo pay foi llo gooos llo moio liloly lloy will all ono ip Liying. Jlo ligloi
llo oisililily fiom piiclasing a vaiioly L1 oislanl fiom llo mosl piofoiioo ono
(llal is, fiom llo consimoi`s localion), llo loss liloly lloy will all Liy.
Wo can now piocooo lo compaio monopoly piofls inooi llo Linoling slial-
ogy will oiopoly piofls wlon piooicls aio solo sopaialoly. Balloi llan caiiy-
ing oil looiois calcilalions, lol mo focis on lwo voiy spocial casos, jisl lo slow
llal oifoionl oilcomos can aiiso.
Sipposo fisl llal c = c = c = t = 0, ano llal - n < 2t : llo
mailol is nol covoioo inooi monopoly. Jlon:
=
( -n)
4t

t
9
. (74)
04
Cloaily, llis oxpiossion oocioasos will t , wlicl moans llal lloio oxisl pa-
iamoloi valios sicl llal llo aLovo oxpiossion is nogalivo, llal is, Linoling
woilo nol Lo closon ovon if il loaos lo llo oxil of fim 2.
Sipposo now llal c = c = c = t = 0, Lil llal - n _ 2t : llo
mailol is covoioo inooi monopoly. Jlon:
= t
t
9
-n. (7)
Hoio, il is oasy lo soo llal il woilo Lo onoigl lo clooso a ligl onoigl n oi
a low onoigl t foi llo monopoly will oxclision lo Lo pioflaLlo.
Jo conclioo, Linoling in llis moool migll loao lo oxclision. Howovoi, llis
ooos nol nocossaiily moan llal il will Lo pioflaLlo foi llo incimLonl lo clooso
llis oplion, as oLliging consimois lo Liy llo Linolo oi aLslain may imply fowoi
salos on mailol A, ano oocioaso llo pioflaLilily of llo monopoly solilion.
1|Jn nnn|j-.-
Jloio woilo iomain ono lasl ilom lo clocl, ano llis is llo ofocl of oxcli-
sionaiy Linoling ipon wolfaio. Jo loop llings sloil, lol mo slip ooiivalions
ano jisl iocall Wlinslon`s conclisions. Ho slows llal llo ofocls of Linoling,
ovon wlon il pioflaLly oxclioos an onlianl, aio amLigiois. Unooi monopoly,
consimois lono lo sifoi fiom lowoi vaiioly (lloso localoo lo llo iigll of llo
inloival, foi inslanco, lavo lo conlonl llomsolvos will a moio oislanl spocifca-
lion llan lloii iooal ono, oi givo ip Liying llo Linolo allogolloi) ano piicos
lono lo incioaso; Lil a oiplicalion of fxoo cosls can Lo avoiooo wlon fim 2
slays oil. Ovoiall, lowovoi, il sooms sonsiLlo lo oxpocl llal consimoi wolfaio
will oocioaso fiom oxclisionaiy Linoling (wlon il is pioflaLlo), ano if ono ois-
iogaios llo aigimonl llal lloio migll Lo oxcoss of vaiioly inooi fioo onliy,
lolal wolfaio sloilo oocioaso loo.
Vhcn goods arc conpIcncntary* I lavo so fai looloo al llo caso
wloio piooicls A ano L aio inooponoonl. Sipposo now llal lloy aio complo-
monlaiy. Moio pailicilaily, assimo a ono-lo-ono iolalionslip Lolwoon llom,
so gooo A is ossonlial. Jloiofoio, consimois ooiivo zoio ililily fiom Liying L
alono. Wo slall soo llal Linoling is nol a pioflaLlo slialogy foi fim 1.
Assimo llal, lilo aLovo, consimois aio oisliiLiloo inifoimly on [0, 1[, ano
llal lloii ililily is givon Ly l = o t [ a a [ j j , ano loop llo
samo assimplions as Lofoio.
Jj.nj ;nnn .|&-.n).
If fim 1 commils lo Linoling, llo voiy facl llal A can only Lo solo in a
Linolo will L1, ailomalically implios llal fim 2 is oxcliooo fiom llo mailol.
Nolo fisl llal wo lavo alioaoy soon llo caso wloio fim 1 is a monopolisl solling
0
a Linolo. Jlo mailol is covoioo (q = 1) if j _ o t , ano is nol olloiwiso
(q = (o j ),t foi j o t ). Fiom llo analysis aLovo il follows llal
oqiiliLiiim piicos ano piofls will Lo:
j =
_
o t , if o _ c -c - 2t
, if o < c -c - 2t
(70)
=
_
o t c c , if o _ c -c - 2t
, if o < c -c - 2t
. (77)
A j.nj.
Sipposo now llal fim 1 oocioos insloao lo soll llo gooos sopaialoly. Bogaio-
loss of wlolloi fim 2 is aclivo oi nol, sipposo il solls al piicos j = c .,
ano j = j j . Jloio aio lwo possiLlo casos.
(a) If fim 2 is nol aclivo, llon llis piicing policy will givo oxaclly llo samo
piofls as Linoling. Inoooo, consimois will Liy llo syslom A,L1 if l =
o t a j j _ 0. Lil llon oomano ano piofls will jisl oopono on llo
sim of llo piicos, j - j = j , ano lloiofoio llo lolal piofls will Lo llo
samo as inooi Linoling.
(L) If fim 2 is aclivo ano solls al a piico j , consimois will clooso L1 if
l l , oi ot a j j _ ot (1a)j j . Jlo inoifoionl
consimoi is a = (t - j j ),(t - t ). Jlo oomano foi L1 is givon Ly
q = a , wloioas oomano foi gooo A is givon Ly all consimois. Fiim 1`s
piofls aio llon:
= ( j c - j c )a - ( j c )(1 a ) = (78)
= ( j c c ), (79)
wlicl cannol Lo lowoi llan inooi llo monopoly will Linoling: in Loll casos,
llo fim las llo samo inil piofl ( j c c ), Lil inooi inooponoonl piicing
lolal oomano cannol Lo ligloi, sinco ovoiyLooy Liys.
In woios, wlal lappons loio is as follows. If inooi monopoly will Linoling
all consimois woio Liying, llon fim 1`s piofls cannol oocioaso wlon lloio is
no Linoling: somo consimois migll ioplaco L1 will L2, Lil sinco inooi llo
closon piicing sclomo L1 is solo al (sligllly Lolow) maiginal cosls c , ano
ovoiyLooy conlinios lo Liy A, piofls aio nol lowoi (lloy incioaso Ly .).
If llo mailol was nol covoioo inooi monopoly, llon llo piosonco of fim 2
woilo allow lo incioaso salos of A. Somo consimois migll swilcl fiom L1 lo
L2, Lil wo lavo soon llal llis ooos nol laim fim 1`s piofls, Lil somo ollois
will Liy llo syslom A,L2, llis incioasing salos of A, ano ovoiall piofls.
3.2.7 AodcIs oI tyIng, III: TyIng to dctcr cntry In conpIcncntary
narkcts*
Jlis siLsoclion piovioos a vaiianl of Cloi ano Slofanaois (2001). Consiooi
lwo complomonlaiy piooicls, A ano L, llal aio comLinoo in fxoo piopoilions
00
on a ono-lo-ono Lasis ano lavo valio only if consimoo logolloi. Fiim 1 is
an incimLonl in Loll piooicls. Il piooicos llom (call llom A1 ano L1) al
inil cosl c oacl. In oacl of llo lwo mailols lloio is a polonlial onlianl,
llal can soll piooicls wlicl aio poifocl siLslililos of A1 ano L1: call llom
A2 ano L2 iospoclivoly. Ly maling an invoslmonl in B\D, 1 , wlicl cosls
C(1 ) = (1 ) ,2, will (c c ), oacl polonlial onlianl afocls llo
pioLaLilily j(1 ) = . - 1 (will i = , 1) llal il will oLlain a siccossfil
innovalion, oofnoo as an innovalion llal givos il a inil cosl c < c . Will
pioLaLilily 1 j(1 ), llo onlianl`s inil cosl will Lo pioliLilivoly ligl.
Consimois` ililily is givon Ly l = o j j , will = 1, 2, ano I
noimaliso consimoi sizo lo ono, willoil loss of gonoialily.
Consiooi llo following gamo. In llo fisl poiioo, fim 1 oocioos wlolloi lo
commil lo soll A1 ano L1 as a Linolo, oi nol. In llo socono poiioo, fims A2
ano L2 simillanooisly lalo invoslmonl oocisions. In llo lliio poiioo, aclivo
fims namo piicos (Loiliano compolilion). Lol is solvo llo gamo Laclwaios.
IrIcc suI-ganc Consiooi llo caso of n j.nj fisl. If llo incimLonl
only is aclivo, il will oxliacl all llo siiplis fiom llo consimois Ly solling
piicos foi ils compononls sicl llal lloii sim oqials o, ano oains o 2c . If
Loll onlianls aio aclivo (i.o., lloii innovalions lavo Loon siccossfil), oacl will
claigo a piico llal oqials c , ano gol llo wlolo mailol foi ils piooicl, maling
gioss piofls c c . Loss sliaigllfoiwaio llo caso wloio only ono onlianl, say
A2, is aclivo, as il givos iiso lo a conliniim of oqiiliLiia. Jlo lwo oxliomo
onos aio as follows: (a) Loll llo onlianl ano llo incimLonl sol piico c in
piooicl A, will llo onlianl golling all oomano ano oxliacling llo ionl fiom
llo innovalion, c c , ano llo incimLonl sols piico o c on piooicl L. (L)
Loll llo onlianl ano llo incimLonl sol piico c in mailol A, will llo onlianl
slill golling all oomano Lil zoio piofls, ano llo incimLonl solling o c in
mailol L, lloioLy oxliacling all llo ionls fiom llo innovalion ilsolf, llioigl a
piico sqioozo. All inloimooialo casos aio also oqiiliLiia of llo piico gamo.
Following Cloi ano Slofanaois, assimo llal wlon only ono onlianl onlois,
llo incimLonl oLlains a slaio ` of llo innovalion ionl, c c , will llo io-
maining pail 1` oLlainoo Ly llo onlianl, will ` [0, 1[ Loing llo moasiio of
llo piico sqioozo llal llo incimLonl can oxoiciso oio lo ils monopoly posilion
on mailol foi llo complomonlaiy piooicl.
Noxl, consiooi llo caso of j.nj. If only llo incimLonl is aclivo, il will
oxliacl all llo consimoi siiplis, ano oain o 2c . If Loll onlianls aio aclivo,
al llo symmoliic oqiiliLiiim oacl onlianl sols a piico oqial lo c , ano gols llo
wlolo mailol foi ils piooicl, maling gioss piofls c c . If ono onlianl only
07
las Loon siccossfil, il will nol Lo aLlo lo mailol ils piooicl, sinco llo olloi
complomonlaiy piooicl is solo Ly llo incimLonl as a Linolo (lying liivially
oxclioos a iival aclivo in ono mailol only wlon lwo piooicls misl Lo comLinoo
in fxoo piopoilions).
Invcstncnt suI-ganc Unooi n j.nj, llo piofls oLlainoo Ly an onlianl
aio:
= j(1 )[1 j (1 )[(1 `)(c c ) -j(1 )j (1 ) (c c ) C(1 ), will i, / = , 1, i ,= /
(80)
wloio llo fisl loim inoicalos fim i2`s piofls wlon il innovalos wloioas
llo olloi onlianl ooos nol, ano llo socono loim piofls wlon Loll onlianls
innovalo. Ly siLslililing llo spocifc finclions closon foi j(1 ) ano C(1 ),
ono oLlains FOCs as:
d
d1
= [1 (. -1 )[(1 `)(c c ) - (. -1 ) (c c ) 1 = 0, will i, / = , 1, i ,= /.
(81)
Al llo symmoliic oqiiliLiiim 1 = 1 = 1 llo oplimal invoslmonl is
lloiofoio givon Ly:
1 (`) =
(1 `(1 .))(c c ))
`(c c )
. (82)
Nolo llal, nol siipiisingly, oqiiliLiiim invoslmonls fall will llo oogioo of
piico sqioozo, (if llo incimLonl appiopiialos mosl of llo siiplis cioaloo Ly llo
innovalion, llo ioliins fiom innovaling oocioaso): d1 ,d` < 0.
Unooi j.nj, onlianl i2`s piofls aio:
= j(1 )j (1 ) (c c ) C(1 ), will i, / = , 1, i ,= /, (8)
sinco only wlon Loll onlianls innovalo will lloy Lo aLlo lo soll lloii piooicl.
FOCs aio:
d
d1
= (. -1 ) (c c ) 1 = 0, will i, / = , 1, i ,= /. (84)
Al llo symmoliic oqiiliLiiim llo oplimal invoslmonl is:
1 =
.(c c )
(c c )
. (8)
08
A simplo inspoclion of (82) ano (8) iovoals llal lying lowois llo invoslmonls
maoo Ly llo polonlial onlianls, ano llis iooico llo pioLaLilily llal lloio will
Lo onliy al oqiiliLiiim. (Only if ` = 1, llo lwo invoslmonl lovols coincioo:
1 = 1 (1): wlon onlianls anlicipalo a poifocl piico sqioozo, llo ioliins fiom
Loing llo only innovaloi aio nil, lilo in llo caso of lying.) In llis sonso, lying las
oxclisionaiy ofocls. Howovoi, wo slill lavo lo clocl if llis piaclico is pioflaLlo.
Foi llis, consiooi llo fisl slago of llo gamo.
TyIng dccIsIons If lloio is n j.nj, fim 1`s oxpocloo piofls aio:
(`) = [1 (. -1 (`)) [(o 2c ) - 2 (. -1 (`)) [1 (. -1 (`))[`(c c ),
(80)
Nolo llal foi ` = 0, llo socono loim is zoio, as llo incimLonl ooos nol
oxliacl any ionl fiom llo innovalion.
If lloio is j.nj, fim 1`s oxpocloo piofls aio:
(`) = [1
_
. -

1
_
[(o 2c ), (87)
sinco wlon only ono onlianl is siccossfil, lloio will Lo no onliy, ano llo
incimLonl cannol oxliacl any ionl fiom llo innovalion.
Il can Lo slowoo llal lloio oxisls a valio

` (0, 1) sicl llal (`) _
(`) foi ` _

`. Balloi llan ooing looiois calcilalions lo fno llo piociso
oxpiossion foi

`, nolo llal lloio is a liaoo-of foi llo incimLonl in lying llo
gooos. On llo ono lano, Ly lying il oocioasos llo iisl of onliy, wlicl incioasos
ils piofls (oxclision ofocl); on llo olloi lano, lying oocioasos llo piofl llal
llo incimLonl malos wlon only ono onlianl malos il (piico sqioozo ofocl). Lil
llo lalloi ofocl on piofls is aLsonl wlon ` = 0, sinco llo incimLonl is nol aLlo
lo oxliacl piofls (lonco, lying is moio pioflaLlo in llis caso), wloioas il is voiy
sliong wlon ` = 1, as llo incimLonl appiopiialos all llo siiplis cioaloo Ly
llo innovalion.
Inoooo, wlon ` = 0, Linoling is piofoiioo as:
(`) = [1 (. -1 (0)) [(o 2c ) < (0) = [1
_
. -

1
_
[(o 2c ), (88)
wlicl always lolos sinco 1 (0)

1 .
Wlon ` = 1, Linoling is inpioflaLlo, sinco 1 (1) =

1 , wlicl implios
(1) = [1
_
. -

1
_
[(o 2c ) - 2
_
. -

1
_
[1
_
. -

1
_
[`(c c )
(1) = [1
_
. -

1
_
[(o 2c ). (89)
Jo sim ip, lying can inoooo loao lo oxclision, Lil il migll slill Lo moio
pioflaLlo foi llo incimLonl nol lo iosoil lo sicl slialogy.
09
3.3 InconpatIIIIIty, and othcr stratcgIc IchavIour In nct-
vork IndustrIcs
Jlis soclion fisl ooals will nn.|.|.j (oi .n-n|.|.j) issios wlon an
incimLonl solls lwo complomonlaiy piooicls ano facos compolilion in ono of
llom. Jlon will compaliLilily issios wlon il solls a piooicl llal is claiac-
loiisoo Ly nolwoil ofocls ano facos a iival llal ofois a siLslililaLlo piooicl
(i.o., a compoling nolwoil, if llo piooicls aio nol compaliLlo). Finally, il malos
somo iomails on slialogic Lolavioii - olloi llan incompaliLilily cloicos - llal
coilo Lo isoo Ly incimLonls in nolwoil inoisliios.
ConpIcncntary products Sipposo llal an incimLonl monopolisl solls
Loll a piooicl A ano a complomonlaiy piooicl L, llo lalloi solo also Ly
compoling fims, lo fnal consimois. Ly oonying compaliLilily Lolwoon A ano
compoling voisions of L, llo incimLonl coilo lovoiago ils monopoly posilion
inlo mailol L, in voiy micl llo samo way as wo lavo soon in lying moools (soo
soclion .2): lo lio llo salos of A ano llo own voision of L amoinls lo malo
iivals` L piooicls incompaliLlo will A. Howovoi, wo lavo soon wlon oiscissing
lying llal A`s piooicoi woilo gonoially lavo lilllo inloiosl in oxclioing iivals
fiom llo complomonlaiy piooicl mailol. Jloiofoio, oospilo llo oasy way avail-
aLlo lo foiocloso iivals, il is fai fiom oLviois a piioii llal a monopolisl will wanl
lo iso incompaliLilily as a way lo lovoiago powoi inlo anolloi mailol, allloigl
in somo pailicilai ciicimslancos oxclision migll inoooo Lo pioflaLlo, loaving
is will no cloai policy lowaios compaliLilily.
Jlo samo soil of aigimonls also applios lo llo caso wloio A is nol solo
oiioclly lo consimois, Lil is insloao jisl isoo as an inpil in llo piooiclion
of piooicl L. Wo lnow, fiom llo oiscission of voilical moigois (claploi 0.4),
llal il is possiLlo Lil nol voiy liloly llal llo ipslioam monopolisl will wanl
lo foiocloso iival voisions of llo fnal piooicl L.
ConpctIng nctvorks Jlo issio of wlolloi compolilion policy sloilo
piomolo (oi imposo) compaliLilily is pailicilaily ciicial in nolwoil inoisliios,
wloio onliy Ly a now fim is maoo voiy oimcill wlon il las no accoss lo llo
cislomoi Laso of an incimLonl nolwoil (nolo llal loio I iofoi lo compoling
voisions of siLslililo nolwoils, llinl foi inslanco of lwo collilai plono nol-
woils). Inoooo, in nolwoil mailols, a fim onoowoo will a laigo inslalloo Laso
oflon las no inconlivo lo ofoi inloiopoiaLilily lo a smalloi iival. Jlis lopic
is analysoo in loclnical soclion ..1, wlicl slows llal gianling compaliLilily
(oi inloiopoiaLilily, oi connoclivily) lo a smalloi nolwoil is oplimal foi a laigo
70
fim only if il oxpocls llal accoss lo lwo filly compaliLlo nolwoils will oxliLil
so sliong nolwoil oxloinalilios llal il will alliacl a laigo nimLoi of now con-
simois. Jlo laigo fim llon piofois lo slaio a laigoi mailol will llo small iival
ovoi oominaling a smalloi mailol.
Il woilo Lo voiy lompling lo aigio llal in a nolwoil inoisliy oominaloo Ly
an incimLonl ono sloilo foico compaliLilily lo allow foi olloiwiso voiy oimcill
onliy. Howovoi, llis ox-posl inloivonlion woilo nol lalo inlo accoinl wlal las
lapponoo in llo inoisliy Lofoiolano. Voiy oflon, wlon piooicls aio incom-
paliLlo, nolwoil inoisliios aio claiacloiisoo Ly a voiy inlonso poiioo of oaily
compolilion inlil ono fim oslaLlislos ilsolf as llo mailol loaooi, ano sliong
mailol powoi is llo iowaio foi a loigl Lalllo Lolwoon compoling nolwoils (a
piocoss oflon oosciiLoo as compolilion .n llo mailol Loing ioplacoo Ly com-
polilion J llo mailol"). If llis is llo caso, foicing compaliLilily onlo llo
incimLonl woilo imply oopiiving il of llo ioliins il oxpocloo ano llal moli-
valoo llo inilial sliong compolilion. Jlis woilo also sono llo wiong signals
lo fims in olloi inoisliios, loaoing llom lo ioviso lloii oxpoclalions of piofls
if lloy aio siccossfil in a nolwoil wai, ano lloiofoio iooicing lloii inconlivos
lo compolo.
Novoilloloss, lloio migll oxisl silialions wloio a moio inloivonlionisl piLlic
policy in llis sploio migll malo somo sonso. Consiooi foi inslanco an inoisliy
wloio llo incimLonl ooiivos ils sliong cislomoi Laso fiom a logal monopoly
(llinl of llo nalional lolocomminicalions opoialois in pio-ooiogilalion Ei-
iopo): in sicl a caso, oLliging llo incimLonl lo opon ip ils nolwoil lo iivals
lools lilo an appoaling policy.
In gonoial, ono is lofl will llo impiossion llal nolwoil mailols inooi in-
compaliLilily aio piono lo pioLloms, ospocially Locaiso llo iolo of onliy in moo-
oialing llo mailol powoi of llo incimLonl is sliongly iooicoo, Lil il is laio
lo como ip will solio ano cloai policy implicalions llal lavo gonoial valioily.
71
Iroduct prc-announccncnts In nctvork IndustrIcs Jlo impoilanco
of consimois` oxpoclalions in nolwoil mailols (pioplocios lono lo Lo solf-
filflling: if consimois oxpocl an onlianl nol lo win micl cislom, llis piooiclion
will liin oil lo Lo coiiocl, ano llo onlianl will fail ovon if il las a sipoiioi
piooicl) opons llo way foi fiilloi manipilalion Ly llo incimLonl. 1n&
-nnn&nnn, foi inslanco, is a slialogy wloioLy llo incimLonl ooclaios
il will ioloaso a now voision of ils piooicl soon, so as lo possiLly poisiaoo con-
simois lo wail ialloi llan Liying llo ciiionlly sipoiioi piooicl maoo Ly a
iival company llal onjoys a smalloi nolwoil Laso. How lo ooal will sicl a
slialogy is nol sliaigllfoiwaio. IioLaLly, llo only foasiLlo way is lo jiogo il
anli-compolilivo only lo llo oxlonl llal sicl annoincomonls aio nol liillfil
ano aio maoo in Lao faill.
3.3.1 IntcropcraIIIIty choIccs In asynnctrIc nctvorks*
Jlis soclion, wlicl is Lasoo on Ciomoi, Boy ano Jiiolo (2000), analysos llo oif-
foionl inconlivos of piovioing inloi-opoiaLilily of lwo fims llal lavo asymmoliic
nolwoils.
Jloio oxisls a mailol foi a nolwoil piooicl ano lwo fims. Fiim 1 is llo
incimLonl, ano las alioaoy an inslalloo Laso of a consimois, ano fim 2 is a
now fim, will an inslalloo Laso of a = 0 consimois. Jloio is now a sol of now
consimois wlo aio nol allacloo lo oilloi nolwoil yol, ano wlo aio consiooiing
joining a nolwoil.
Consimois lavo llo following nol Lonofl fiom nolwoil piooicl i:
3 = T -- j (90)
wloio T is llo inliinsic valio of llo nolwoil, will T [0, 1[, j is nolwoil i`s
piico, ano - iopiosonls llo nolwoil oxloinalily, givon Ly:
- =
_
a -q -o
_
a -q
__
, (91)
wloio q ano q iopiosonl llo nimLoi of now consimois Liying iospoclivoly fiom
fim i ano , < 1,2 is a paiamoloi (common lo all consimois) llal inoicalos
llo impoilanco of llo nolwoil oxloinalilios, ano o [0, 1[ is a paiamoloi
llal inoicalos llo qialily of llo inloi-opoiaLilily Lolwoon llo lwo nolwoils:
if o = 0, lloio is no compaliLilily Lolwoon llo nolwoils, wloioas if o = 1,
lloy aio poifoclly compaliLlo. (Inloimooialo casos of impoifocl inloiopoiaLilily
can oosciiLo casos wloio a consimoi wlo las joinoo a nolwoil migll iso llo
olloi nolwoil, Lil in an impoifocl way, foi inslanco Locaiso lloio is a lowoi
72
poifoimanco, oi Locaiso il lalos moio limo lo gol llo samo soivico, oi Locaiso
somo soivicos aio inavailaLlo.)
If oacl fim is lo alliacl somo of llo now consimois, il misl Lo llal llo nol
Lonofl is llo samo: 3 = 3 , wlicl van Lo io-wiillon as:
j - = j - = j. (92)
Jlo now consimoi wlo is inoifoionl Lolwoon joining oilloi nolwoil oi nol
Liying llo nolwoil piooicl al all is llo ono sicl llal 3 = T -- j = T j =
0. Jloiofoio, all consimois will T [ j, 1[ will Lo oilloi piooicl, wloioas lloso
will T [0, j) will nol Lo in llo mailol. Il misl llon Lo:
q -q = 1 j. (9)
Fiom oxpiossion (92) il follows llal j = j -- , llal afloi ising oxpiossion
(9) Locomos j = 1 q q -- , ano fnally Ly (91), foi i, = 1, 2, i ,= , ono
can wiilo fim i`s oomano finclion as:
j = 1 -(a -oa ) (1 )q (1 o)q . (94)
ConpctItIon In thc product narkct Givon llo inloi-opoiaLilily pa-
iamoloi o, oacl fim cloosos oilpil so as lo maximiso ils piofls = (j (q , q ))
c)q . Il liins oil llal lloio oxisl lwo lypos of oqiiliLiiim in llis gamo. Jlo
fisl is an inloiioi solilion, llo socono a coinoi solilion.
Jo fno llo .n. -|&.n, compilo d ,dq = 0 ano oLlain llo Losl-ioply
finclions in llo plano (q , q ) as follows:
1 : q =
1 c -a (1 o)q
2(1 )
; 1 : q =
1 c -oa 2(1 )q
1 o
.
(9)
Jlo inloisoclion of llo Losl ioply finclions givos llo inloiioi oqiiliLiiim of
llo gamo:
q =
1
2
_
2 (1 c) - (1 -o)
_
a -a
_
2 (1 ) - (1 o)
-
(1 o)
_
a a
_
2 (1 ) (1 o)
_
. (90)
Nolo llal, lo Lo piociso, in llis gamo wo aio ising a concopl llal oxlonos
llo isial concopl of Nasl oqiiliLiiim in qianlilios, sinco wo lavo lo consiooi
7
consimois` oxpoclalions. Kalz ano Slapiio (198) call llis concopl Filflloo
Expoclalions Coiinol EqiiliLiiim", ano il is an oqiiliLiiim wloio nol only llo
fims` oilpil oocisions foim a Nasl oqiiliLiiim, Lil also consimois` oxpocla-
lions aio filflloo: lloy lalo lloii piiclaso oocisions oxpocling llo sizos of llo
nolwoils lo Lo (q , q ) ano sicl oxpoclalions aio filflloo.
Nolo also llal
q q =
(1 o)a
2(1 ) (1 o)
0, (97)
wlicl implios llal moio consimois will join llo incimLonl`s nolwoil llan llo
iival nolwoil`s, oxcopl foi llo caso o = 1 (poifocl inloiopoiaLilily), wloio llo
nolwoils aio poicoivoo ioonlical Ly consimois.
Lol is now lool foi llo n -|&.n-, oi lipping oqiiliLiia", as Maliog
ano Sclwailz (2001) call llom (Locaiso llo mailol lips" in favoii of ono oi
llo olloi fim).
Wo lavo soon in claploi 2 llal moools will nolwoil oxloinalilios can Lo
claiacloiisoo Ly milliplo oqiiliLiia, caisoo Ly llo facl llal oacl consimoi`s
cloico ooponos on all olloi consimoi`s cloicos. Hoio, oxpoclalions may sippoil
lipping oqiiliLiia wloio only ono fim gols now consimois.
TIppIng to thc Brn vIth thc Iargc InstaIIcd Iasc Clocl fisl llal
lloio oxisls an oqiiliLiiim wloio all consimois oxpocl llal no consimoi will
palioniso fim 2, llal is, oxpocl q = 0. Unooi lloso oxpoclalions, fim 1 will Lo-
lavo as a monopolisl, ano maximiso = (1 -(a -oa ) (1 )q c) q .
Fiom d ,dq = 0 ono oLlains llo monopoly oilpil:
q =
1 c -a
2(1 )
. (98)
Foi (q , 0) lo Lo an oqiiliLiiim, il misl Lo llal fim 2 las no inconlivo lo
oovialo. Jlis will Lo llo caso if, givon llo qianlily q piooicoo Ly fim 1, fim
2 woilo malo lossos if il solo a posilivo qianlily. Oi, oqiivalonlly, if givon llo
oilpil solo Ly fim 1 il woilo nol Lo aLlo lo imposo a piico aLovo cosl ovon
wlon piooicing an aiLiliaiily small oilpil: j (q , 0) _ c. Ly iocalling llo
invoiso oomano finclion (94), llis conoilion Locomos:
1 -oa (1 )
1 c -a
2(1 )
c _ 0. (99)
Nolo llal llo lowoi o llo moio liloly llis conoilion will Lo salisfoo. Foi llo
caso wloio llo nolwoils aio filly incompaliLlo (o = 0), lipping lo fim 1 will
occii if:
_
1 c
2(1 c) -a
, (100)
ano llis conoilion is compaliLlo will < 1,2.
74
TIppIng to thc cntrant Lol is now clocl if lloio oxisls an oqiiliLiiim
wloio all consimois oxpocl llal q = 0. Unooi lloso oxpoclalions, fim 2
will Lolavo as a monopolisl, ano maximiso = (1 -oa (1 )q c) q .
Fiom d ,dq = 0 ono oLlains llo monopoly oilpil:
q =
1 c -oa
2(1 )
. (101)
Foi (0, q ) lo Lo an oqiiliLiiim, fim 2 misl lavo no inconlivo lo oovialo.
Jlis will Lo llo caso if j (0, q ) _ c. Ly iocalling llo invoiso oomano finclion
(94), llis conoilion Locomos:
1 -a (1 o)
1 c -oa
2(1 )
c _ 0. (102)
Jlo lowoi o llo moio liloly llis conoilion will Lo salisfoo. Foi o = 0, lipping
lo fim 2 woilo occii if:
c _ 1 -
a
1 -
, (10)
Lil llis conoilion novoi lolos, as il misl Lo c < 1 in oiooi foi q 0.
Jipping lowaios llo incimLonl migll occii, Lil lipping lowaios llo onlianl
in llis oxamplo ooos nol.
Thc choIcc oI IntcropcraIIIIty So fai wo lavo iogaiooo llo paiamoloi
o as oxogonois. Howovoi, il liloly is a slialogic vaiiaLlo of llo fims, llal can
oocioo llo oogioo of inloiopoiaLilily lloy wanl among nolwoils. Somolimos,
lo incioaso inloiopoiaLilily migll Lo coslly, Lil assimo foi simplicily llal is
nol. Assimo also llal o = min(o , o ), wloio o is fim i`s oplimal oogioo of
inloiopoiaLilily.
Wo wanl lo slioy llo fims` piofoioncos foi inloiopoiaLilily.
Jo slail will, nolo llal wo lavo lo sopaialo llo analysis accoioing lo llo
lypo of solilions aiising in llo Coiinol gamo. Foi lipping oqiiliLiia, llo in-
cimLonl`s piofoionco foi a low inloiopoiaLilily was alioaoy soon aLovo: if o = 0,
wo lavo soon llal llo conoilion foi a lipping oqiiliLiiim lo fim 1 is maximal,
wloioas lol mailol cannol lip lo fim 2.
Foi inloiioi solilions, llo iosills aio loss sliaigllfoiwaio. Fiislly, nolo llal
= (1 )(q ) . Jlis moans llal llo ligloi llo oilpil llo ligloi llo piofls
of llo fims. Jloiofoio, fim i`s oosiioo oogioo of inloiopoiaLilily is llo ono llal
maximisos oilpil q .
Ciomoi ol al. (2000) slow llal llo now fim woilo always clooso llo max-
imim oogioo of inloiopoiaLilily, wloioas llo incimLonl`s piofoiioo cloico is
7
oilloi o = 0 oi o = 1, llo lalloi wlon llo inslalloo Laso is small iolalivo lo
llo now consimois. Jo gain somo insigll wlilo looping lo a simplo oxamplo,
consiooi llo caso wloio c = 0 (llis oxclioos lipping oqiiliLiia, Lil il ooos nol
malloi as I consiooi inloiioi solilions loio) ano sipposo llal fims can only
clooso Lolwoon o = 0 ano o = 1 (givon Ciomoi ol al.`s iosill, llis is willoil
loss of gonoialily).
Fiim 1 will piofoi fill inloiopoiaLilily if:
q (o = 1) q (o = 0) =

_
1 2 a
_
4 - 2
__
(1 )( 8 - 4 )
0, (104)
wlicl is liio foi a < (1 2) ,
_
4 - 2
_
a . Honco, if llo inslalloo
Laso is small onoigl iolalivo lo llo now consimois, llo incimLonl will wanl
lo giaianloo fill inloiopoiaLilily. If llo inslalloo Laso is laigo onoigl, llo
incimLonl will piofoi incompaliLlo nolwoils. (Nolo llal a oocioasos will ,
so llo moio impoilanl llo nolwoil oxloinalilios llo moio liloly llal fim 1
piofois low inloiopoiaLilily.)
Fiim 2 always piofois fill inloiopoiaLilily Locaiso:
q (o = 1) q (o = 0) =

_
1 2 -a
_
0 11 - 4
__
(1 )( 2)(1 2)
0. (10)
Jo sim ip, llis moool, lowovoi simplo, slows llal in nolwoil mailols an
incimLonl (moio gonoially, a fim will a laigo inslalloo Laso) migll lavo an
inconlivo lo oogiaoo llo oogioo of inloiopoiaLilily (oi compaliLilily, oi connoc-
livily) will now onlianls (moio gonoially, fims will a smalloi cislomoi Laso).
Howovoi, llis is nol always llo caso: llo incimLonl migll aclially gain fiom
fill inloiopoiaLilily. Jlis is Locaiso fill inloiopoiaLilily oliminalos llo incim-
Lonl`s compolilivo aovanlago oio lo ils laigoi cislomoi Laso, Lil il incioasos
llo oomano of now consimois in llo mailol. If llo inslalloo Laso is small
iolalivo lo llo now oomano, llo mailol oxpansion ofocl oominalos: llo incim-
Lonl piofois lo slaio oqially a Liggoi calo llan lo gol a laigoi slico of a small
calo.
617 Uhixvdo wr vxsso| dqg h{foxvlyh frqwudfwv +uhplqghu,
Somo anli-compolilivo piaclicos lavo alioaoy Loon analysoo olsowloio in llo
Lool. Bofisal lo sipply a loy inpil, iosilling in foioclosiio of iivals, las Loon
analysoo in claploi 2 will iofoionco lo llo --n.n| Jn.|..- oocliino. I lavo
aigioo lloio llal oLliging a fim lo givo accoss of a loy assol lo a iival migll lavo
llo ofocl of oiscoiiago invoslmonls. Accoioingly, sicl policy sloilo Lo isoo
only in voiy spocifc ciicimslancos (soo also claploi 0, wloio somo silialions
70
wloio a fim las an inconlivo lo foiocloso, iosilling in lowoi wolfaio, lavo also
Loon ioonlifoo).
Claploi 0 las also slowoo llal oxclisivo conliacls migll lavo oxclisionaiy
ofocls, Lil llal lloso sloilo Lo Lalancoo againsl possiLlo omcioncy ioasons
Lofoio conclioing llal lloy aio anli-compolilivo.
618 Udlvlqj ulydov* frvwv
Kiallonmaloi ano Salop (1980) claim llal among llo monopolisalion lools
availaLlo lo fims lloio aio also so-calloo n.-.nj .n|-` -- piaclicos. Jloso
aio all soil of piaclicos llal aim al incioasing llo cosls of ono oi moio iivals,
llis loaving ioom foi llo fim llal ongagos in lloso piaclicos lo incioaso piicos
willoil losing mailol slaio. Jloso piaclicos woilo Lo pailicilaily appoaling
foi a fim llal las anli-compolilivo aims Locaiso lloy oo nol ioqiiio il lo iin
lossos in llo sloil-iin, as in piooaloiy piicing. If llo impacl on iivals` cosls is
immooialo, lloio will also Lo an immooialo posilivo impacl on piofls.
A nimLoi of piaclicos lavo Loon inloipioloo as Lolonging lo llo calogoiy
of iaising iivals` cosls slialogios. Somo of llom aio pioLaLly of lilllo iolovanco,
sicl as lloso llal incioaso iivals` cosls oiioclly, oilloi llioigl saLolago (if ono
ooslioys llo iivals` planls il also incioasos ils cosls, Lil lloio is no nooo foi anli-
liisl laws lo lalo caio of sicl LLolavioii); oi llioigl loLLying ano iogilalion
(llinl foi inslanco of oomoslic fims llal convinco llo govoinmonl lo inliooico
laiifs oi olloi laxos on impoiloo piooicls). Moio inloioslingly, a nimLoi
of piaclicos llal wo lavo alioaoy analysoo migll Lo soon as iaising iivals` cosls.
Exclisivo ooaling migll malo il moio oimcill oi moio coslly foi a iival lo fno
oisliiLilois llal can soll ils piooicls. A voilically inlogialoo fim migll iofiso
lo sipply a loy inpil lo a oownslioam iival (oi lo ongago inlo a piico sqioozo,
llal is soll llo inpil lo llo iival Lil al a pioliLilivoly ligl piico), incioasing
llo piooiclion cosls of llo lalloi. Fiilloimoio, oonying inloiopoiaLilily lo a
iival nolwoil migll also Lo soon as a slialogy wlicl incioasos llo iival`s cosl of
ooing Lisinoss.
Nol all aclions llal incioaso iivals` cosls aio nocossaiily anli-compolilivo. Foi
inslanco, ono migll aigio llal a fim llal caiiios oil signifcanl B\D aclivilios
lo incioaso ils piooicl qialily is also iaising llo cosl of ils iivals: if lloy wanl
lo Lo compolilivo ano loop lloii appoal, lloy also lavo lo sislain ligloi B\D
oxponsos. Yol, llis is nol a piaclico llal laims compolilion: B\D will Lonofl
consimois. Jloiofoio, a ciicial slop in llo llooiy is lo oislingiisl Lolwoon
piaclicos llal laim compolilois only fiom lloso llal also iooico wolfaio.
Jo sim ip, iaising iivals` cosls llooiios piovioo a concopl llal oncompassos
voiy oifoionl piaclicos. Dio lo llo spocifcilios of sicl piaclicos, I lavo pio-
foiioo lo ooal will llom sopaialoly.
77
7 Sulfh glvfulplqdwlrq
Iiico oisciiminalion is a poivasivo plonomonon, of wlicl oxamplos fiom oii
oaily lifo aLoino. Lools aio solo al oifoionl piicos accoioing lo wlolloi
lloy aio laioLacl oi papoiLacl (Lil llo cosl of llo laioLacl Linoing ooos nol
oxplain alono llo piico oifoionco); joiinals claigo a ligloi piico foi liLiaiios ano
inslililions llan foi piivalo cilizons (ano somolimos malo fiilloi oiscoinls lo
slioonls); if wo Liy in a slop poncils ano papoi foi oii piivalo iso wo coilainly
pay moio poi ilom llan oii inivoisily oi fim llal Liy laigo amoinls of llom;
aiilinos apply voiy oifoionl laiifs nol only foi Lisinoss voisis oconomy liips,
Lil oflon claigo voiy oifoionl piicos foi llo samo lypo of soal ano liip accoioing
lo wlolloi llo passongoi is a slioonl, a sonioi cilizon, las Looloo oaily oi in llo
lasl minilo, ano so on. Somo of llo slialogios fims iso lo oisciiminalo acioss
consimois (ano as wo slall soo, piico oisciiminalion incioasos lloii piofls) aio
fascinaling ano oxliomoly soplislicaloo, Lil llo main piiposo of llis claploi
is nol lo slioy fims` oisciiminaling piaclicos Lil ialloi lo ioonlify llo liloly
ofocls llal piico oisciiminalion las.
Wkh wzr pdlq lqjuhglhqwv ri sulfh glvfulplqdwlrq Jloio aio lwo
main ingiooionls foi piico oisciiminalion lo aiiso. Jlo fisl ono is llal a
fim misl lavo a way lo soil consimois so as lo claigo llom oifoionl piicos.
Difoionl silialions can aiiso, llal Lioaoly coiiospono lo oifoionl lypos of piico
oisciiminalion ioonlifoo Ly oconomic llooiy.
Unooi ]--nj piico oisciiminalion, foi inslanco, a monopolisl woilo
lnow oacl consimoi`s piociso willingnoss lo pay foi ils gooo, claigo oacl of
llom oxaclly llo maximim lloy woilo pay ano lloiofoio capliio all llo con-
simoi siiplis. Unooi -nn-nj oisciiminalion, a fim ofois oifoionl ooals
lo ovoiyLooy ano lols oifoionl consimois solf-solocl", llal is clooso ono pai-
licilai ooal. Qianlily oiscoinls aio a naliial oxamplo: a cinoma, foi inslanco,
migll ofoi lo all cislomois llo oplion lo pay a lowoi inil piico foi flm if lloy
Liy a lon-flms caio, Lil somo cislomois will piofoi jisl lo pay ono flm liclol
al llo limo. Jliio-oogioo oisciiminalion iofois lo llo possiLilily llal a fim
claigos oifoionl piicos lo consimois laving oifoionl (oLsoivaLlo) claiacloiis-
78
lics. Foi inslanco, a slioonl migll Lo aLlo lo fy cloapoi; a cilizon ovoi 0 yoais
olo migll iocoivo oiscoinls on liain liclols; llo samo gooo migll Lo solo al a
lowoi piico in Ioiligal llan in Goimany.
Jlo socono ciicial foaliio foi piico oisciiminalion is llal n|.nj sloilo
Lo aLsonl. In olloi woios, a fim woilo nol manago lo piico oisciiminalo if
consimois coilo io-soll llo gooos among oacl olloi. Unooi fisl-oogioo oisciim-
inalion, a monopolisl woilo nol Lo aLlo lo appiopiialo llo consimoi siiplis if
Mi. A - wlo las a lowoi valialion foi llo gooo llan Ms. L - coilo Liy nol
only llo gooo foi limsolf Lil coilo also Liy il lo io-soll il lo Ms. L. Unooi
socono-oogioo oisciiminalion, aiLiliago oppoilinilios aiiso if I can Liy a lon-
flms caio al a $ inil piico ano llon ofoi lo iso il lo lon spoclalois wlo woilo
Lo claigoo 10$ oacl Ly llo cinoma. Unooi lliio-oogioo oisciiminalion, llo fim
woilo nol Lo aLlo lo sogmonl nalional mailols if a Ioiligioso coilo Liy llo
gooo al llo lowoi Ioiligioso mailol piico ano llon slip il lo Goimany wloio
il commanos a ligloi piico. (Jlis piaclico of aiLiliaging acioss coinliios is
calloo nn||| .n-, ano il alliacls a lol of allonlion in llo EU law, as wo
slall soo Lolow).
AiLiliago is of coiiso nol always foasiLlo, oilloi foi naliial oLslaclos oi foi
oLslaclos cioaloo Ly llo fims llomsolvos. Foi inslanco, lianspoilalion cosls,
laiifs, liansaclion cosls ano ioo-lapo migll piovonl paiallol impoils fiom ono
coinliy lo anolloi; fims migll ioqiiio pioof llal llo piiclasoi is a slioonl
(oi a sonioi cilizon); a lon-flm caio migll Lo nominalivo ano an ID ioqiiioo al
llo cinoma; a fim migll ioqiiio an oxclisivo oisliiLiloi nol lo soll llo piooicl
Loyono a pailicilai loiiiloiy ano lo inailloiisoo ooalois; a cai manifacliioi
migll wanl ioqiiio ils ooalois in a coinliy nol lo soll lloii cai lo cilizons iosioonl
in olloi coinliios (a piaclico syslomalically oillawoo ano loavily fnoo in llo
EU), ano so on.
Jloiofoio, .J compolilion ailloiilios llinl llal piico oisciiminalion sloilo
Lo foiLiooon, lloy will liy lo inloivono on llo piaclicos on wlicl fims ioly lo
piovonl aiLiliago. Foi inslanco, lloy coilo ioqiiio a fim nol lo inclioo any
claiso limiling llo aLilily of ooalois lo io-soll llo piooicl in olloi loiiiloiios;
oi lloy coilo piovonl an aiilino cloil oi a liain conoicloi fiom asling llo ID
caios lo passongois ano so on. (I am jisl following a lypollolical ioasoning,
ano nol siggosling wlal sloilo Lo oono: llis will lavo lo wail inlil an analysis
of wolfaio ofocls is oono.)
714 Zhoiduh hhfwv ri sulfh glvfulplqdwlrq
71414 Iluvw0ghjuhh +shuihfw, sulfh glvfulplqdwlrq
Jo inooislano llal il is nol lo Lo lalon foi gianloo llal piico oisciiminalion
liils wolfaio, il is onoigl lo lool al fisl-oogioo piico oisciiminalion. Sipposo
a monopolisl (wloso maiginal cosl is oqial lo c) facos a oomano finclion as in
Figiio 7.7: llis oomano can Lo inloipioloo as llo aggiogalion of inil oomanos
of voiy many consimois, oacl will a oifoionl willingnoss lo pay. If il woio
aLlo lo sol a oifoionl piico lo oacl oifoionl consimoi (ano of coiiso lnow lloii
79
valialions), llo monopolisl woilo Lo aLlo lo oxliacl all llo consimoi siiplis:
il woilo malo oacl consimoi pay oxaclly lloii maximim willingnoss lo pay,
ano gol a piofl oqial lo llo wlolo aioa of llo liianglo Oj 3. Sinco wolfaio is
llo sim of piofls ano consimoi siiplis, wolfaio will also Lo oqial lo llo aioa
of Oj 3.
INSEBJ Figiio 7.7. Wolfaio inooi poifocl piico oisciiminalion
Ioifocl piico oisciiminalion woilo loao lo llo liglosl possiLlo wolfaio, llon.
Jo soo llis, jisl nolo llal allocalivo omcioncy inooi inifoim piicing woilo
ioqiiio llo monopolisl lo soll lo all consimois al a piico oqial lo maiginal cosl,
loaoing lo wolfaio Loing oqial again lo llo aioa of llo samo liianglo Oj 3. Ly
conliasl, if llo monopolisl woio foicoo nol lo oisciiminalo, il woilo soll al a
piico j ano wolfaio woilo oqial llo aioa of llo liapozoio O1TC, wlicl is
lowoi.
Jlis oxamplo sloilo nol Lo ovoi-omplasisoo Locaiso poifocl piico oisciim-
inalion is inioalislic, as il woilo ioqiiio fims lo lavo poifocl lnowloogo of
consimois ano lloii piofoioncos. Howovoi, il soivos my piiposo, wlicl is lo
slail ano malo llo ioaooi awaio llal piico oisciiminalion sloilo nol nocossaiily
Lo lloigll of as a piaclico ooliimonlal lo wolfaio.
4.1.2 QuantIty dIscounts
Anolloi foim of piico oisciiminalion (socono-oogioo) occiis wlon a fim ofois
consimois oifoionl piico-qianlily paclagos - llal givo oiscoinls lo lloso Liying
a laigoi nimLoi of inils of llo piooicl - oi il imposos a lwo-pail laiif, wlicl
ioqiiios llo consimoi lo pay a fal foo T inooponoonl of llo qianlily Loigll
plis a vaiiaLlo compononl jq wlicl ooos oopono on llo qianlily Loigll.
Foi inslanco, in many coinliios llo piico of gas, olocliicily, plono soivicos is
composoo of a fxoo foo plis a vaiiaLlo ono. Nolo llal lwo-pail laiifs ano
qianlily oiscoinls aio oqiivalonl: foi a consimoi Liying q inils of a gooo oi
soivico, ano siLjocl lo a lwo-pail laiif, llo avoiago piico is givon Ly j -T,q,
ano lloiofoio oocioasos will llo nimLoi of inils Loigll.
80
Jlis lypo of piico oisciiminalion also lonos lo Lo wolfaio impioving. Jlo
fim will iso llo fal foo lo oxliacl siiplis fiom consimois will a lowoi inlonsily
of oomano (lloso wlo Liy fowoi inils of llo gooo al any givon piico) Lil
will iso a lowoi maiginal piico llan llo piico il woilo sol if il was oLligoo lo
iso only a vaiiaLlo compononl. Jlo iosill is similai (allloigl loss oxliomo)
as inooi poifocl piico oisciiminalion: llo lowoi maiginal piico iooicos llo
allocalivo inomcioncy, ano lloiofoio incioasos wolfaio (llo fim componsalos llo
lowoi maiginal piico Ly ising llo fal foo). Jo Lolloi soo llo similaiily will
llo caso of poifocl piico oisciiminalion, nolo llal in llal caso a monopolisl
migll appiopiialo all llo consimoi siiplis Ly ising a maiginal piico oqial lo
c (ils maiginal cosl) ano llon claigo oacl consimoi a fxoo foo llal oqials loi
siiplis. A lwo-pail laiif (wloio only ono fxoo foo is isoo) lloiofoio aims al
(impoifoclly) ioplicaling llis oilcomo.
In mosl jiiisoiclions, sicl as foi inslanco llo EU ano llo US, qianlily
oiscoinls aio nol pioliLiloo Ly compolilion law. Economic analysis, as wo lavo
jisl soon, siggosls llal llis is a sonsiLlo appioacl.
4.1.3 IrIcc dIscrInInatIon across countrIcs
As soon in claploi 1, EU law, wlilo nol oLjocling lo piico oisciiminalion willin
a momLoi coinliy, lalos a nogalivo viow of piico oisciiminalion among momLoi
coinliios: any piaclico isoo Ly fims lo piovonl paiallol impoils (llal is, aiLi-
liago) is Lasically inooi a slalis of - pioliLilion ano is consiooioo, along
will cailols, llo giavosl compolilion ofonco inooi EU law.
Il is lloiofoio voiy impoilanl lo soo wlal oconomic analysis las lo say on
llis issio, ano nol only will iospocl lo llo isial slanoaio of lolal wolfaio, Lil
also lo llo oLjoclivo of oconomic inlogialion" llal llo Commission sooms lo
lavo wlon ooaling will inloi-coinliy piico oisciiminalion.
Sipposo llal a monopolisl (Lil llo samo aigimonls can Lo maoo lo any
fim onjoying somo mailol powoi) solls llo samo piooicl in lwo oifoionl mai-
lols, say Goimany ano Ioiligal; assimo also llal lianspoilalion cosls aio nil,
foi simplicily. In Goimany lloio oxisls a ligloi inlonsily of oomano foi llo
gooo llan in Ioiligal, llal can Lo lloigll of as iofocling llo ligloi Goiman
incomos. If llo monopolisl is allowoo lo piico oisciiminalo, il will sol a ligloi
piico in Goimany, say j , llan in Ioiligal, say j . (Of coiiso, il will Lo aLlo lo
onfoico llis piico oifoionco only if il can piovonl consimois ano inloimooiaiios
lo oxploil aiLiliago oppoilinilios. Foi inslanco, if il foiLios Ioiligioso Liyois
lo io-soll oilsioo lloii lomo coinliy.)
Sipposo insloao llal piico oisciiminalion is pioliLiloo Ly law. Ono woilo
llon oxpocl llo now inifoim piico, j , lo Lo localoo somolow in Lolwoon j
ano j , if llo fim wanls lo soivo Loll mailols. Wlal is llo ofocl on wol-
faio of imposing llo samo piico acioss coinliios A piioii, il is amLigiois:
piofls oocioaso (as llo fim is nol aLlo lo oxploil llo oifoionl inlonsilios in
81
oomano), Goimans woilo gain (sinco lloy Liy al a piico j lowoi llan j ),
ano Ioiligioso woilo loso (llo now piico j is ligloi llan j ).
Novoilloloss, loclnical soclion 4.2.1 slows llal aggiogaling lossos ano gains,
ovoiall wolfaio incioaso wlon Lanning piico oisciiminalion .J Loll mailols aio
soivoo inooi Loll iogimos.
Jlis iosill woilo soom lo sippoil llo claims of ciilics of piico oisciiminalion.
Howovoi, lloio is a sliong assimplion Lolino llo iosill aLovo, wlicl is llal llo
fim las always an inloiosl in soiving Loll mailols. Jlis is nol nocossaiily llo
caso: if llo Ioiligioso mailol is voiy small compaioo will llo Goiman ono,
ano,oi if Ioiligioso oomano is micl smalloi llan Goiman ono, llo fim llal
cannol piico oisciiminalo will piofoi lo sol llo piico j in Loll mailols ovon if il
implios losing all salos in Ioiligal. In llis caso, Lanning piico oisciiminalion is
cloaily wolfaio ooliimonlal: il iooicos llo piofls of llo fim, iooicos Ioiligioso
consimoi siiplis, ano loavos inclangoo Goiman consimoi siiplis.
Moio gonoially, piico oisciiminalion woilo allow fims lo iooico piicos lo
calogoiios of consimois wlo woilo nol Liy olloiwiso, llis incioasing llo lolal
qianlily solo, ano oconomic llooiy slows llal piico oisciiminalion inamLigi-
oisly iooicos wolfaio only wlon il ooos nol iaiso lolal oilpil, wloioas llo sign
of wolfaio clango is amLigiois in all olloi casos.
If a cloai assossmonl of piico oisciiminalion cannol Lo ioacloo wlon ising llo
wolfaio ciiloiion llal oconomisls piofoi, nolo llal Lanning piico oisciiminalion
nooo nol faio Lolloi inooi llo ciiloiion of aclioving mailol inlogialion": llo
ofocl of il migll woll Lo llal a piooicl will complololy oisappoai fiom ono
mailol (in llo oxamplo aLovo, no inil of llo gooo will Lo solo in Ioiligal).
4.1.4 OynanIc cccts oI prIcc dIscrInInatIon: InccntIvcs to Invcst
Iiico oisciiminalion migll afocl wolfaio in a long-iin poispoclivo loo, Ly moo-
ifying fims` inconlivos lo innovalo. A simplo aigimonl llal ooos nol ioqiiio
any loclnical lioalmonl is as follows. Sipposo llal a fim las lo oocioo wlolloi
lo inliooico a now piooicl in llo EU oi nol, ano llal llo cosl of oovoloping
ano laincling llo piooicl is inooponoonl of oilpil, as is ioasonaLlo lo assimo.
Sinco piico oisciiminalion allows llo fim lo lavo ligloi piofls, if llo fxoo
cosl falls Lolwoon llo piico oisciiminalion ano llo inifoim piicing piofls, llon
llo piooicl will Lo inliooicoo if llo fim oxpocls lo Lo aLlo lo piovonl paiallol
impoils, Lil will nol Lo inliooicoo if piico oisciiminalion piaclicos woio oil-
lawoo. Moio gonoially, piico oisciiminalion can afocl llo maiginal piofls fiom
invosling oi innovaling, cioaling moio inconlivos lo ongago in sicl aclivilios (Soo
loclnical soclion 4.2.).
Jlis is an impoilanl issio in somo ioconl EU casos, wloio plaimacoilical
companios lavo Loon fnoo Ly llo Eiiopoan Commission foi laving foiLiooon
82
inloimooiaiios in somo coinliy lo soll llo piooicl in coinliios wloio llo salos
piico was ligloi. In 1990, Layoi was fnoo Ly llo EC Locaiso il iooicoo sipplios
of llo caioio-vascilai oiig Aoalal lo Fioncl ano Spanisl wlolosalois llal lavo
Loon io-oxpoiling lo llo UK, wloio llo piico foi llo oiig was ligloi. In
G|n.-1||n (2001), llo EC pioliLiloo llo oial piicing syslom inliooicoo
Ly Glaxo-Wollcomo foi all ils plaimacoilical piooicls in Spain. Accoioing lo
llis syslom, Spanisl wlolosalois woio claigoo a ligloi piico foi sipplios wlicl
woio lo Lo io-solo aLioao llan lloso aimoo al llo local mailol, a piaclico llal
ofoclivoly impoooo paiallol oxpoils.
Jlo plaimacoilical mailol is inisial sinco piicos aio iogilaloo Ly nalional
govoinmonls (oi sol afloi nogolialions Lolwoon llo govoinmonl ano llo compa-
nios), ano Locaiso palonl pioloclion migll oifoi acioss coinliios. Jloiofoio, il
ooos nol siipiiso llal fims wanl lo avoio llal low piicos in a coinliy (oio lo
iogilalions ano,oi loss inlolloclial piopoily iiglls pioloclion llal iaisos compo-
lilion) migll piovonl llom fiom commanoing ligloi piicos in olloi coinliios.
Allloigl llo ofocl is pioLaLly nol oasily qianlifaLlo, iooicoo piofls aio liloly
lo iooico llo B\D invoslmonls llal plaimacoilical companios can malo, llis
laiming Loll consimoi siiplis ano lolal wolfaio.
4.1. Oocs narkct povcr nattcr?
As I lavo linloo al aLovo, any fim llal las somo oogioo of mailol powoi will
lavo an inconlivo lo piico oisciiminalo. Inoooo, small ano laigo fims, opoialing
in voiy oifoionl soclois of aclivily, liy lo oisciiminalo piicos lo incioaso lloii
piofls. In llo EU, all fims aio ciiionlly piovonloo fiom pioliLiling paiallol
impoils. Foi inslanco, in 2000, llo Eiiopoan Commission las - afloi invos-
ligalions ano ovon siipiiso inspoclions - pioliLiloo a small manifacliioi of
moloicyclos of laigo ongino capacily (70cc ano ovoi), Jiiimpl, fiom Lanning
oxpoils of moloicyclos fiom Lolgiim ano llo Nolloilanos lo llo UK (wloio
ils piooicls commanooo a ligloi piico). Jiiimpl`s mailol slaio foi llis lino
of moloicyclos in any inoivioial EU coinliy is Lolow / ano only in llo UK
il oscillalos aioino 10/. Jlo qioslion is: ooos il malo sonso lo oxlono llo
pioliLilion of piovonling paiallol impoils lo any fim, inooponoonlly of lloii
mailol powoi, as is ciiionlly llo caso in llo EU
Fiisl of all, il sloilo Lo noloo llal - wlalovoi ils sign on wolfaio - ono
sloilo oxpocl piico oisciiminalion Ly fims will lilllo mailol powoi lo lavo a
small ofocl in magnilioo on wolfaio. Socono, wo lavo soon aLovo llal piico
oisciiminalion migll also - Ly incioasing piofls - Loosl invoslmonls. As sicl,
piico oisciiminalion Ly fims laving small mailol powoi sloilo Lo wolcomo
ialloi llan pioliLiloo, as il may givo a small fim a way lo Locomo moio
8
compolilivo. Il is lloiofoio oimcill lo jislify, n n..n j&nn-, wly
llo EC ooos nol inliooico a safo laiLoii accoioing lo wlicl fims will a
mailol slaio Lolow a coilain llioslolo will nol Lo invosligaloo foi piaclicos
lampoiing paiallol liaoo. Jlo oLjoclivo of sicl a loigl slanco againsl piico
oisciiminalion sooms lo Lo oiclaloo Ly polilical ioasons only (giving cilizons
of oifoionl coinliios accoss lo llo samo ooal), Lil llo Commission sloilo Lo
awaio llal llis comos al a cosl in loims of omcioncy, ano migll also Laclfio in
somo casos (wlon a fim sols a piico llal ofoclivoly implios coasing sipplying
a coinliy allogolloi).
4.1.6 IrIcc dIscrInInatIon as a nonopoIIsatIon dcvIcc
So fai, I lavo ooall only will llo ofocls of piico oisciiminalion on consimoi
siiplis ano wolfaio j.n h -&& J h nn| in wlicl llo oisciiminaling
fim opoialos. A oifoionl qioslion is wlolloi piico oisciiminalion can Lo isoo
lo clango sicl mailol sliicliio, foi inslanco Ly pioompling onliy, oi foicing
oxil, of compolilois.
Jo oisciss wlolloi oisciiminalion migll Lo isoo in an anli-compolilivo way,
imagino llal an incimLonl-monopolisl llal piooicos a gooo will iolovanl lians-
poilalion cosls is localoo in llo conlio of a coinliy wloso popilalion is concon-
lialoo aioino lwo cilios, ono in llo Noill ano llo olloi in llo Soill. Sipposo
also llal a now compoliloi sols ip a planl in a noiglLoiiing coinliy wlicl lios
Noill. Il is llon cloai llal llo monopolisl las an inconlivo lo piico oisciimi-
nalo, claiging a ligloi piico in llo Soilloin cily llan in llo Noilloin ono. Is
llis anli-compolilivo Lolavioii oi nol
As soon in soclion 2.4, lloio is lilllo ooiLl llal llis Lolavioii sloilo Lo
soon as piooaloiy if llo piico is Lolow avoiago vaiiaLlo cosl. Lil ono migll
wonooi if piico oisciiminalion is simcionl lo ovalialo llis as monopolisalion
oi aLiso of oominanco inooponoonlly of wlolloi piicos aio aLovo oi Lolow any
cosl Lonclmail.
Lanning piico oisciiminalion in sicl a ciicimslanco las similai amLigiois
ofocls as llo onos soon foi piico oisciiminalion in gonoial. If inifoim piicing
loaos llo incimLonl lo soivo Loll cilios al an inloimooialo piico, ono woilo
oxpocl a posilivo wolfaio impacl. Lil il migll also lappon, if llo Noilloin cily
is loss impoilanl in incomo oi popilalion, llal llo incimLonl piofois lo comply
will llo inifoim piicing ioqiiiomonl Ly looping llo samo ligl piico as in llo
Soill. If llis lappons, wolfaio will liloly oocioaso (Soo also loclnical soclion
4.2.). Nolo also llal in llis caso somo piooiclivo inomcioncy migll also aiiso .J
llo incimLonl is moio omcionl llan llo onlianl, as a moio omcionl piooicoi is
ioplacoo Ly a loss omcionl ono. Fiilloi, lloio is llo iisl llal a iilo piovonling
a monopolisl fiom oisciiminaling givos an inconlivo lo inomcionl piooicois lo
onloi llo mailol: lnowing llal llo incimLonl cannol cil piicos inloss il cils
llom in all ils mailols, lloy will oxpocl a woal ioaclion lo lloii onliy ano gol
ligloi piofls llan olloiwiso.
84
ScIcctIvc dIscounts and BdcIIty rcIatcs Apail fiom solling oifoionl
piicos lo fnal consimois, a fim migll also oisciiminalo among ils iolailois ano
oisliiLilois. Examplos of sicl piaclicos aio nol only qianlily oiscoinls (llal
aio isially consiooioo lawfil) Lil also oiscoinls ano ioLalos llal fims givo lo
pisl lloii Liyois lo piiclaso moio fiom llom. 1.n|.j |n-, foi inslanco, aio
oiscoinls llal a piooicoi givos lo a cislomoi lo iowaio llo lalloi foi piiclasing
mosl oi all of ils ioqiiiomonls of a givon piooicl fiom llo foimoi. jjjn
|n- aio oiscoinls givon lo a cislomoi llal Liys mosl oi all of ils piooicls
fiom llal samo piooicoi.
In llo EU, llo Eiiopoan Commission ano llo Eiiopoan Coiil of Jislico
lavo always lalon a loigl slanco on oisciiminaloiy piicos aooploo Ly oominanl
fims ano llal aio nol jislifoo Ly cosl savings.
Fiisl of all, il sloilo Lo iocalloo llal nol only cosl, Lil also oomano ano
mailol conoilions migll oxplain wly fims woilo wanl lo ongago in oisciimi-
naloiy piicing (ano llal piico oisciiminalion is nol always a wolfaio iooicing
Lisinoss piaclico). Jloiofoio, ailomalically oillawing soloclivo oiscoinls, ovon
wlon isoo Ly a oominanl fim, ooos nol appoai a ioLisl policy iocommon-
oalion: as soon aLovo, il is pail of a noimal compolilivo piocoss llal a fim
claigos lowoi piicos wlon ils iivals aio sliongoi (Lil of coiiso, piicos Lolow
avoiago vaiiaLlo cosls sloilo Lo ooomoo piooaloiy).
Onco saio so, somo lypos of ioLalos maoo Ly oominanl fims sloilo Lo
caiofilly moniloioo Locaiso of lloii oxclisionaiy polonlial. Jlo ofocl of foolily
ioLalos, foi inslanco, is lo liy ano inoico llo iolailoi nol lo Liy fiom iivals, ano
il is lloiofoio similai lo oxclisivo ooaling; ano aggiogalo ioLalos aio similai in
lloii ofocls lo lying oi fill-lino foicing (wlon llo sipplioi imposos a piiclasoi
lo Liy all of ils iango of piooicls). Accoioingly, lloso lypos of oiscoinls acliovo
a similai piiposo lo oxclisivo ooaling ano lying, wloso possiLlo anli-compolilivo
ofocls lavo Loon oiscissoo al longll aLovo.
IrIcc transparcncy In claploi 0, wo lavo soon llal a monopolisl migll
Lo inaLlo lo filly oxploil ils mailol powoi oio lo a commilmonl pioLlom. Jlis
is Locaiso givon llo inpil piico conliacl signoo will a Liyoi, il migll lavo an
inconlivo lo ofoi a Lolloi ooal lo anolloi Liyoi. Anlicipaling llis, a Liyoi will
Lo inwilling lo accopl a ligl piico conliacl in llo fisl placo.
Jlo EC las iopoalooly slaloo llal a oominanl fim sloilo givo llo maxi-
mim lianspaioncy lo ils Liyois, llal il sloilo Lo giaianlooo llal lloy will all
iocoivo an oqial ooal fiom llo monopolisl wlon lloy Liy similai qianlilios.
8
Jlis ofoclivoly iomovos any lomplalion fiom llo monopolisl lo ofoi a piico
oiscoinl lo a Liyoi afloi laving signoo will anolloi (sinco a oiscoinl sloilo
Lo ofoioo lo all Liyois), ano lloiofoio piovioos il will a commilmonl mocla-
nism llal allows il lo commano ligl piicos. Ioilaps paiaooxically, lloiofoio,
llo ofocl of ioqiiiing lianspaioncy is lo iosloio all llo mailol powoi of llo
monopolisl.
4.1.7 AntI-dunpIng
Anli-oimping laws lavo Loon aooploo Ly many coinliios (USA, Aislialia,
Canaoa ano llo EU aio llo main isois of sicl laws, wloioas loss oovolopoo
coinliios aio isially oofonoanls) ano aio oflon onfoicoo vigoioisly. Jloy
aio gonoially soon as an insliimonl of liaoo policy ialloi llan ono of compo-
lilion law (foi inslanco, in llo EU ils is nol DG Compolilion llal ooals will
anli-oimping). My oLjoclivo loio is lo inooilino llo compolilion implicalions
of anli-oimping.
Jlo Woilo Jiaoo Oiganisalion (llo oiganisalion llal piosioos ovoi milli-
laloial liaoo agioomonls) iocognisos llo iigll of ils momLois lo lalo inilaloial
aclions lo piolocl llomsolvos wlon lloii oomoslic inoisliy is injiioo Ly infaii
liaoo piaclicos, sicl as foioign fims oimping" (i.o. solling al an oxcoooingly
low piico) lloii piooicls. Moio piocisoly, anli-oimping aclions aio logilimalo
wlon lwo conoilions aio voiifoo. Fiisl, oxpoil piicos aio || h. nnn|
n|&; socono, oxpoils caiso oi llioalon nn.n| .n]&j lo llo oomoslic inoisliy
of llo impoiling coinliy.
Jlo amLigiily of llo WJO piovisions loavos spaco lo qiilo oifoionl nolions
of oimping. Foi inslanco, lloio oxisls a siLslanlial maigin of oisciolion ano
aiLiliaiinoss in llo calcilalion of llo "noimal piico". As foi llo ooloimina-
lion of llo injiiy cioaloo Ly oimping (lowovoi ono woilo moasiio llo lalloi),
somo commonlalois lavo siggosloo llal il is loo opon lo polilical infioncos
(Jlaialan ano WaolLioocl, 1994).
Foi llo way in wlicl anli-oimping iogilalions aio implomonloo in Loll llo
EU ano in olloi coinliios, moio llan an insliimonl lo avoio infaii piaclicos,
lloy appoai as an insliimonl of liaoo pioloclion in oisgiiso. As sicl, il sloilo
nol como as a siipiiso llal ils iolovanco las incioasoo ovoi llo yoais, soomingly
80
caisoo Ly llo lowoi availaLilily of moio liaoilional insliimonls of pioloclion
(sicl as laiifs, iooicoo ovoi limo Ly siccossivo milli-laloial nogolialions).
Inooponoonlly of llo spocifc ways in wlicl anli-oimping is calcilaloo Ly
llo oifoionl nalional laws ano iogilalions, il sloilo Lo omplasisoo llal lloio
is lilllo oconomic ialionalo foi consiooiing llo oifoionco Lolwoon llo lomo piico
ano llo oxpoil piico as an infaii piaclico". As wo lavo soon in llis claploi,
piico oisciiminalion Lolwoon oifoionl mailols is compaliLlo will llo simplo
oLjoclivo of piofl maximisalion ano noilloi nocossaiily onlails llo inlonlion of
foicing iivals oil of llo mailol, noi is il nocossaiily wolfaio ooliimonlal.
In inloinalional liaoo, piico oisciiminalion lalos naliially llo foim of oif-
foionl piicos in oifoionl mailols. Noimally, sinco fims lono lo lavo a laigoi
mailol slaio ano a moio faillfil oomano on lloii oomoslic mailol, llis implios
llal oomoslic piico is ligloi al lomo llan aLioao.
Jlo wolfaio ofocl of anli-oimping moasiios so loosoly oofnoo as lo com-
piolono mosl silialions wloio foioign piooicois aio moio compolilivo llan
oomoslic onos, is cloaily nogalivo, as nol only consimois Lil also fims wlicl
iso llo gooo as an inpil migll Lo ponalisoo Ly llo anlioimping aclions. Jlis
implios llal a moasiio wlicl is sipposoo lo lolp llo nalional inoisliy migll
aclially Lo ooliimonlal lo il. Fiilloimoio, anli-oimping laws migll iomovo
llioals lo oomoslic fims wlicl aio nol compolilivo onoigl. Jlis las piooic-
livo omcioncy implicalions (as oomoslic fims pil lloii onoigy moio in loLLying
foi slalo inloivonlion llan in impioving lloii piocossos ano piooicls) ano migll
allow llom lo piosoivo mailol powoi posilions.
Ono caso wlicl illislialos llo conficl llal anli-oimping laws lavo will
oconomic omcioncy, is llal of llo sooa-asl inoisliy, wloso lwo main Eiiopoan
piooicois (Solvay lao 70/ of llo mailol slaio in Conlinonlal Eiiopo in 1990,
wlilo ICI lao a qiasi-monopoly in llo UK mailol) iocoivoo loavy fnos foi
collisivo agioomonls ano foi aLiso of oominanl posilion. Il is llon siipiis-
ing lo oiscovoi llal llo inoisliy las Loon iopoalooly piolocloo fiom foioign
compolilion Ly anli-oimping aclions.
Of coiiso, llo Eiiopoan anli-oimping laws aio nol llo only onos wlicl can
Lo ciilicisoo. Jlo US anli-oimping moasiios, foi inslanco, lavo also alliacloo
a nimLoi of ciilicisms. Empiiical analysos lavo slowoo llo anli-compolilivo
ofocl of anli-oimping. Fiilloi, lloy lavo confimoo llo llooiolical sispicion
llal anli-oimping laws lavo a nogalivo ofocl ovon wlon lloy oo nol iosill in
fnal oilios. Jlo moio llioal of anli-oimping sanclions can Lo onoigl lo inoico
foioign compolilois lo Lo loss aggiossivo, ano voiy oflon invosligalions ono ip
will a sisponsion oocision, in oxclango foi llo piomiso of llo foioign fims lo
87
slop "oimping" lloii gooos.
Anli-oimping oilios sloilo Lo jislifoo only wlon piooaloiy piicing is in-
volvoo. Accoioingly, oimping sloilo nol Lo consiooioo as Lolonging lo llo
oomain of liaoo policy, Lil ialloi lo llal of compolilion policy. Ano lo jislify
anli-oimping aclions, llo slanoaios sol ip in soclion 2 sloilo Lo isoo.
4.2 IrIcc dIscrInInatIon*
I ofoi loio a loclnical piosonlalion of llo aigimonls maoo in llo pioviois soc-
lion. Soclion 4.2.1 ooals will llo caso of piico oisciiminalion acioss nalional
mailols, soclion 4.2.2 will qianlily oiscoinls, soclion 4.2. will piico ois-
ciiminalion ano inconlivos lo invosl, soclion 4.2.4 will llo iolo of mailol powoi,
ano soclion 4.2. will llo ofocls of oisciiminalion wlon a monopolisl facos an
onlianl.
4.2.1 ThIrd-dcgrcc prIcc dIscrInInatIon)*
A monopolisl soivos lwo mailols, | ano h, llal ono can llinl of as lwo iogions
llal aio pail of llo samo coinliy (oi lwo coinliios llal aio pail of a inion).
Jlo woigll of llo lwo iogions in llo coinliy is iospoclivoly ` ano 1 `, will
0 < ` < 1. Mailol i = |, h oomano is givon Ly q = j, will . Jlis
can Lo ialionalisoo Ly assiming llal a lypo-i consimoi las a ililily finclion
l = q q ,2.
Jlo monopolisl soivos Loll coinliios fiom llo samo planl, ano las a inil
cosl c < (wo oisiogaio lianspoil cosls foi simplicily). Wo wanl lo compaio
llo caso wloio llo monopolisl can oisciiminalo will llo ono wloio il cannol.
IrIcc dIscrInInatIon Jlo monopolisl can clooso lwo oifoionl piicos ano
ils piofls in oacl mailol aio givon Ly = (j c)( j ). Fiom d ,dj = 0
llo oqiiliLiiim solilions aio oasily foino (lolal piofls sloilo Lo woiglloo Ly
popilalion slaios):
j =
-c
2
; = `
( c)
4
- (1 `)
( c)
4
. (100)
Jlo consimoi siiplis in oacl mailol can oasily Lo foino as llo aioa of
liianglo Lolwoon llo oomano finclion ano llo mailol piico; aggiogalo consimoi
siiplis ano wolfaio aio oLlainoo Ly woiglling oacl mailol:
C3 =
`( c)
8
-
(1 `)( c)
8
; ! =

8
_
`( c)
4
-
(1 `)( c)
4
_
.
(107)
88
\nIIorn prIcIng {Ioth narkcts scrvcd) Sipposo now llal lloio is a
Lan on piico oisciiminalion. Jlo monopolisl is llon oLligoo lo sol llo samo ini-
foim piico j foi Loll mailols ano ils piogiammo is max (jc) [`( j) - (1 `)( j)[.
Sipposo foi llo momonl llal Loll mailols aio soivoo. Fiom d,dj = 0 llo
oqiiliLiiim solilions aio:
j =
` - (1 `) -c
2
; =
(` - (1 `) c)
4
. (108)
Ono can oasily clocl llal llo inifoim piico is in Lolwoon llo piicos llo
monopolisl woilo claigo if il woio allowoo lo piico oisciiminalo: j j j .
Consimoi siiplis ano wolfaio inooi inifoim piicing aio:
C3 = - ; ! = - .
(109)
Wo can now compaio llo lwo oqiiliLiia. Il is oasily clocloo llal llo fim
piofois lo Lo fioo lo oisciiminalo ( < ), wlicl sloilo nol como as a siipiiso
sinco inooi oisciiminalion il las lwo insliimonls lo maximiso ils oLjoclivo
finclion, wloioas inooi inifoim piicing il las only ono. Fow slops of algoLia
also slow llal:
! ! =
`(1 `)( )
8
0, (110)
wlicl implios llal wolfaio is ligloi inooi inifoim piicing. Inoooo, il is a
gonoial iosill llal piico oisciiminalion oocioasos wolfaio if il ooos nol incioaso
lolal oilpil, ano ono can clocl llal loio lolal oilpil solo is llo samo inooi
llo lwo iogimos, maling il an applicalion of llo gonoial iosill:
Q = `q - (1 `)q =
` - (1 `) c
2
= Q = `q - (1 `)q . (111)
\nIIorn prIccs {onc narkct not scrvcd) Jloio is a sliong assimplion
Lolino llo analysis jisl caiiioo oil: llal llo monopolisl soivos Loll mailols.
Howovoi, inifoim piicing lo soivo Loll mailols onlails iooicing piicos (ano
piofls) in llo ligl oomano mailol. Jlo monopolisl migll piofoi insloao jisl
lo sol llo piico j = ( - c),2 llal maximisos ils piofls in llo ligl oomano
mailol, ovon if llis implios lo loso all salos in llo low-oomano mailol. Foi
inslanco, assimo llal - c 2 . In llis caso, oomano in llo low oomano
mailol is zoio, ano llo monopolisl will oain:
= (1 `)
( c)
4
. (112)
89
Slanoaio calcilalions slow llal:
if ` <
( c)( 2 -c)
( )
, (11)
llal is, llo lowoi llo slaio of llo low-oomano mailol in lolal oomano llo
moio liloly il will nol Lo soivoo if piico oisciiminalion was Lannoo. Il can also
Lo clocloo llal llo BHS of oxpiossion (11) incioasos will ano oocioasos
will : llo ligloi llo gap Lolwoon llo oomanos llo moio liloly ono mailol
only will Lo soivoo.
Finally, il is sliaigllfoiwaio lo clocl llal if ono mailol only is soivoo (llal
is, if (11) lolos) wolfaio is ligloi inooi piico oisciiminalion, sinco llo ligl-
oomano mailol las llo samo consimplion ano piofls inooi Loll iogimos, Lil
low-oomano mailol conliiLilos zoio lo Loll inooi inifoim piicing.
4.2.2 QuantIty dIscounts: Tvo-part tarIs as prIcc dIscrInInatIon*
I consiooi loio llo caso wloio llo monopolisl isos a lwo-pail laiif T - jq: a
consimoi Liying q inils of llo gooo will lavo lo pay a fxoo foo T plis a vaiiaLlo
compononl j. Nolo llal llis amoinls lo a qianlily oiscoinl, as llo avoiago
cosl of llo piiclaso, j -T,q, oocioasos will llo nimLoi of inils Loigll.
Lol mo conlinio will llo oxamplo of llo pioviois soclion 4.2.1: lloio aio
lwo oifoionl lypos of consimois, low-lypos laving oomano q = j (lloy aio
a slaio ` of llo popilalion) ano ligl-lypos laving oomano q = j (a slaio
1 ` of llo popilalion).
Assimo llal (c - ) ,2, llal onsiios llal ovoiyLooy Liys inooi Loll
inifoim piicing ano lwo-pail laiifs.
ôn-dIscrInInatIon Jlis caso las Loon alioaoy analysoo in llo pioviois
soclion.
QuantIty dIscounts {tvo-part tarI) Sinco low-lypos lavo lowoi inlon-
sily of oomano, llo fxoo foo will Lo closon so as lo malo llom willing lo pay.
Givon llal lloii consimoi siiplis is givon Ly C3 = ( j) ,2 T, il follows
llal llo monopolisl will sol T = ( j) ,2. As foi llo vaiiaLlo compononl of
llo laiif, il is foino as llo ono wlicl solvos llo pioLlom:
max = (j c) [`( j) - (1 `) ( j)[ - ( j) ,2. (114)
Fiom d,dj = 0 il follows llal:
j = c - (1 `) ( ) . (11)
90
Nolo llal llo qianlily Loigll Ly llo low-lypos is q = j , so llal q 0
amoinls lo [c - (1 `) [ , (2 `), wlicl is salisfoo Ly llo assimplion
(c - ) ,2. Al llis piico, llo siiplis of ligl lypos is:
C3 = ( ) [ (2 `) c (1 `) [ 0 = C3 , (110)
ano llo monopolisl`s piofls aio:
=
1
2
_
( c) - (1 `) ( )
_
, (117)
ano wolfaio can Lo foino Ly siLslililion as ! = - (1 `) C3 .
QuantIty dIscounts and unIIorn prIcIng: a conparIson Jlo ioaooi
can clocl llal llo monopolisl will Lo Lolloi of Ly ising llis foim of piico
oisciiminalion: . Lil ovon willoil ooing any calcilalions, llis is
sliaigllfoiwaio, sinco lwo-pail laiifs piovioo llo monopolisl will lwo inslii-
monls, T ano j, ialloi llan only ono as inooi inifoim piicing (llo monopolisl
coilo always ioplicalo llo iosill inooi inifoim piicing simply Ly solling T = 0
ano cloosing llo samo inil piico).
As foi maiginal piicos, il is oasy lo clocl llal j < j foi [c - (1 `) [ , (2 `),
wlicl is liio: wlon lwo-pail laiifs aio isoo, llo vaiiaLlo compononl consimois
will pay is lowoi (Lil llo monopolisl will gain fiom llo maiginal piico oocioaso
Locaiso il can iso llo fxoo foo).
Jloiofoio, wolfaio will also Lo ligloi inooi qianlily oiscoinls llan inooi
inifoim piicing, as llo lowoi maiginal piico onlails a smalloi oisloilion.
4.2.3 IrIcc dIscrInInatIon and Invcstncnts*
In llis soclion, I analyso a simplo moool of a monopolisl llal invosls in llo
qialily of ils gooo. I slow llal inooi piico oisciiminalion llo oqiiliLiiim
qialily ofoioo will Lo ligloi.
Consiooi a monopolisl llal solls a gooo of qialily n lo lwo oifoionl mailols,
oacl of sizo ono. Consimois in Loll mailols lavo piofoioncos C3 = on j if
lloy Liy ono inil of llo gooo, ano 0 olloiwiso. In mailol h, consimois` laslo
foi qialily, o, is inifoimly oisliiLiloo on 0 _ o _ o . In mailol |, llo laslo
paiamoloi is inifoimly oisliiLiloo on 0 _ o _ o .
Jlo monopolisl las lo oocioo fisl on llo qialily n il wanls lo sipply, ano
il las a fxoo cosl of qialily impiovomonl C(n) = /n ,2; (assimo foi simplicily
llal lloio is zoio vaiiaLlo cosl of piooiclion); llon, il las lo oocioo llo piico
al wlicl il wanls lo soll llo gooo. Consiooi lwo vaiianls of llo gamo: in llo
fisl, il las lo clooso llo samo piico foi Loll mailols; in llo socono, il can
piico oisciiminalo.
91
\nIIorn prIcIng Fiisl of all, nolo llal llo oomano facoo Ly llo monop-
olisl is ooloiminoo Ly fnoing llo consimoi wlo is inoifoionl Lolwoon Liying
oi nol. Givon a piico j ano a qialily n, llo inoifoionl consimoi o is givon Ly
solilion of C3 = on j = 0. Jloiofoio, o = j,n. Jloiofoio, oomano is givon
Ly all consimois in Loll mailols sicl llal o _ o . Iiofls in llo socono slago
aio:
H = j
__
o
j
n
_
-
_
o
j
n
__
. (118)
Fiom llo FOC d,dj = 0, il follows llal oqiiliLiiim piicos ano piofls aio:
j =
n(o -o )
4
; H =
n(o -o )
8
. (119)
Jlo lolal qianlily solo Ly llo monopolisl is q = o (o -o ),4-o (o -
o ),4 = (o -o ),2. Jlo oplimal qialily cloico can Lo foino as llo solilion of
llo piogiammo max = H /n ,2; fiom d,dn = 0, il follows llal
n =
n(o -o )
8/
. (120)
IrIcc dIscrInInatIon Unooi piico oisciiminalion, llo monopolisl can
claigo a oifoionl piico in llo lwo mailols. Jlo inoifoionl consimoi o in
mailol i is givon Ly solilion of C3 = on j = 0. Wlonco, o = j ,n. Iiofls
in llo socono slago aio:
H = j
_
o
j
n
_
-j
_
o
j
n
_
. (121)
Fiom llo FOC dH,dj = 0, il follows llal oqiiliLiiim piicos ano piofls aio:
j =
no
2
; H =
n(o -o )
4
. (122)
Nolo also llal llo lolal qianlily solo Ly llo monopolisl is q = o o ,2-
o o ,2 = (o - o ),2, wlicl is llo samo as inooi inifoim piicing. Jlo
oplimal qialily cloico can Lo foino as llo solilion of llo piogiammo max =
H /n ,2; fiom d,dn = 0, il follows llal
n =
n(o -o )
4/
. (12)
Il is llon sliaigllfoiwaio lo clocl llal n n .
92
4.2.4 IrIcc dIscrInInatIon and narkct povcr*
Consiooi a voilical piooicl oifoionlialion moool wloio fim 1 solls a piooicl
of qialily n ano fim 2 a piooicl of qialily n , will n n . Loll fims soll
in lwo oifoionl mailols, oacl of sizo ono. (A fim ooos nol oifoionlialo qialily
acioss mailols.) Consimois in Loll mailols lavo piofoioncos C3 = on j
if lloy Liy ono inil of llo gooo of qialily = 1, 2, ano 0 olloiwiso. In mailol
h, consimois` laslo foi qialily, o, is inifoimly oisliiLiloo on 0 _ o _ o . In
mailol |, il is inifoimly oisliiLiloo on 0 _ o _ o .
I slow loio llal Loll fims lavo an inconlivo lo piico oisciiminalo, Lil llal
lloio is lilllo ioason lo caio aLoil piico oisciiminalion piaclicos of a fim will
lilllo mailol powoi.
\nIIorn prIcIng Jo fno oomano finclions of llo fims, wo fisl nooo
lo ioonlify lwo inoifoionl consimois: llo consimoi inoifoionl Lolwoon Liying
fiom llo low qialily gooo ano nol Liying, o , ano llal inoifoionl Lolwoon
Liying llo low oi llo lop qialily gooo, o .
Fiom C3 = 0 il follows llal o = j ,n . Fiom C3 = C3 il follows llal
o = (j j ),(n n ). Jloiofoio, oomano finclions aio: q = o o , ano
q = o o , will i = |, h. Fiims` piofls aio:
H = j
_
o -o 2
j j
n n
_
; H = 2j
_
j j
n n

j
n
_
. (124)
EqiiliLiiim piicos in llo piico siL-gamo aio foino fiom dH ,dj = 0 as:
j =
n (n n )(o -o )
(4n n )
; j =
n (n n )(o -o )
2(4n n )
. (12)
Givon n , a low n implios llal fim 2 can commano a low piico. Foi n
wlicl lonos lo zoio, foi inslanco, fim 2`s piico woilo also lono lo zoio, llal is,
llo low qialily fim woilo lavo voiy lilllo mailol powoi (wlicl is llo aLilily
of iaising piicos aLovo maiginal cosls, loio zoio).
Ly siLslililion, ono can fno oqiiliLiiim piofls as:
H =
2n (n n )(o -o )
(4n n )
; H =
n n (n n )(o -o )
2(4n n )
. (120)
IrIcc dIscrInInatIon Unooi piico oisciiminalion, Loll fims can claigo
a oifoionl piico in llo lwo mailols. Fiims` piofls aio:
9
H =

j
_
o
j j
n n
_
; H =

j
_
j j
n n

j
n
_
. (127)
EqiiliLiiim piicos in llo piico siL-gamo aio foino fiom dH ,dj = 0 as:
j =
2n (n n )o
(4n n )
; j =
n (n n )o
(4n n )
. (128)
Jloiofoio, il is cloai llal Loll fims oisciiminalo acioss mailols al oqii-
liLiiim (in olloi woios, nol only monopolisls wanl lo sogmonl mailols!). Ly
siLslililion, oqiiliLiiim piofls aio:
H =
4n (n n )(o -o )
(4n n )
; H =
n n (n n )(o -o )
(4n n )
. (129)
Aarkct povcr and prIcc dIscrInInatIon In llis simplo moool, llo
oisloilion cioaloo Ly piico oisciiminalion in oacl mailol oifois acioss fims:
j j =

n (n n ) (o o )
(4n n )
; j j =

n (n n ) (o o )
2(4n n )
.
(10)
Cloaily, llo oisloilion Locomos iiiolovanl wlon a fim ooos nol lavo micl
mailol powoi. Foi small valios of n (llal is, wlon fim 2 las lilllo mailol
powoi), llo piico oifoionco Locomos voiy small. Moio foimally, wiilo n =
n /, so llal / is llo qialily gap Lolwoon llo fims. Ono can wiilo j j =
[(n /)/n (o o ) ,(/ - n )[ ,2, ano:
d(j j )
d/
=
(n 0/n / ) (o o )
2(/ - n )
. (11)
Fiom slioying llo socono-oiooi inoqialily n 0/n / 0 ono oLlains
llal llo oqiiliLiiim piico oifoionco Lolwoon llo lwo piicing iogimos oocioasos
will llo qialily gap wlon / < (2
_
)n (ioiglly, foi / < .40n ) ano incioasos
foi ligloi valios. In olloi woios, wlon llo qialily gap is llo liglosl (mailol
powoi of fim 2 is llo lowosl), an incioaso in n (an incioaso in fim 2`s mailol
powoi) iaisos llo piico oifoionlial inlil a poinl wloio llo qialilios aio similai
onoigl.
Jlis sliongly siggosls llal wlon a fim las lilllo mailol powoi (as is llo
caso will fim 2 loio foi low onoigl valios of n ), llo impacl llal ils piicing
policy migll lavo is inliloly lo Lo signifcanl.
94
Thc ccct on Invcstncnts Sipposo now llal, foi somo ioasons, fim
1`s qialily was fxoo Lil fim 2 (llo fim in a oisaovanlagoo posilion) coilo
invosl lo impiovo ils qialily lovol al a convox cosl C(n ). Il is oasy lo soo llal
piico oisciiminalion woilo allow llo fim lo lavo a ligloi inconlivo lo invosl
in qialily, lloioLy lolping il lo fll llo gap moio llan in llo caso of inifoim
piicing.
Fiim 2`s pioLlom is llon lo clooso ils qialily onoogonoisly so as lo maximiso
ils nol piofls: max H (n ) C(n ). Jlo gioss piofls, ano llo fisl-oiooi
conoilion of llis pioLlom aio oifoionl accoioing lo llo piico iogimo. Unooi
inifoim piicing, il is givon Ly:
dH (n )
dn
=
n (4n 7n )(o -o )
2(4n n )
=
dC(n )
dn
, (12)
wloioas inooi piico oisciiminalion il is givon Ly:
dH (n )
dn
=
n (4n 7n )(o -o )
(4n n )
=
dC(n )
dn
. (1)
Il is oasy lo clocl llal dH (n ),dn H (n ),dn as (o o ) 0, wlicl
onlails llal llo oqiiliLiiim qialily closon Ly fim 2 will Lo ligloi inooi piico
oisciiminalion (maiginal iovonio fiom llo invoslmonl is ligloi, wloioas llo
maiginal cosl is llo samo). Jloiofoio, Ly foiLiooing a fim will a low qialily
lo piico oisciiminalo, ils clanco lo iooico llo gap llal sopaialos il fiom llo
ligl qialily fim is iooicoo.
4.2. IrIcc dIscrInInatIon undcr cntry*
Jwo cilios aio localoo along llo loiizonlal lino [0, 2t[ llal oolimils a coinliy.
Jlo fisl, cily A, is al 0, ano llo socono al 2t. Fiim 1, llo incimLonl monopolisl,
is localoo Lolwoon llo lwo cilios, al t. Domano in oacl cily is givon Ly q = 1j;
lloio is no oomano olsowloio. Sipposo now llal fim 1`s monopoly is clallongoo
Ly impoils fiom a foioign fim llal is localoo al 2t -T. Assimo llal Loll fims
lavo zoio piooiclion cosls, Lil lavo lo incii a inil lianspoilalion cosl wlicl
is oqial lo oislanco: foi inslanco, il cosls T (iosp. T - 2t) foi fim 2 lo Liing
oacl inil lo cily L (iosp. A). Assimo llal (1 - t),2 _ T _ (1 t),2: fim
2 is closo onoigl lo clallongo fim 1 in cily L, Lil nol onoigl lo onoangoi ils
monopoly in cily A. Fiims compolo in piicos.
I wanl lo compaio llo iogimo wloio fim 1 is allowoo lo piico oisciiminalo Lo-
lwoon cilios will llo ono wloio il is nol. (Nolo llal llo assimplion of ioonlical
oomanos onsiios llal compolilion is llo only ioason foi piico oisciiminalion.)
IrIcc dIscrInInatIon Unooi llo assimplions aLovo, fim 1 is inois-
liiLoo in cily A, wloio il will sol llo monopoly piico, j = (1 - t),2. (Jlis
jisl comos fiom max = (j t)(1 j), ano solling d,dj = 0.) Loiliano
9
compolilion in cily L implios insloao llal il will gol all oomano, Lil al llo
piico j = T. Ils lolal piofls aio = (1 t) ,4 - (T t)(1 T).
\nIIorn prIcIng If piico oisciiminalion was Lannoo, ano llo incimLonl
wanloo lo soivo Loll mailols, il woilo lavo lo sol j = j = T, ano woilo
malo piofls = 2(T t)(1 T).
Howovoi, llo incimLonl migll oocioo insloao lo soivo only ils caplivo mailol
A, ano sols piicos in Loll mailols oqial lo j = (1-t),2. Il woilo llon malo
monopoly piofls = (1t) ,4 in mailol A Lil il woilo nol gol any oomano
in mailol L, wloio fim 2 woilo oLlain all oomano Ly jisl sligllly inooicilling
j .
Ono can clocl llal soiving only mailol A is moio pioflaLlo if T < (1 -
t),2
_
2(1 t),4. Jlis is Locaiso wlon fim 2 is closo onoigl, soiving cily
L woilo involvo a Lig oiop in piicos ano piofls in cily A as woll, so il is moio
convonionl nol lo soivo llo Loiooi cily.
Jloiofoio, a Lan on piico oisciiminalion Ly llo monopolisl llioalonoo Ly
onliy on ono sioo of ils mailol las amLigiois wolfaio impacl. If llo monopolisl
soivos Loll mailols inooi inifoim piicing, piicos oiop in Loll mailols, llo
ooaowoigll loss in oacl mailol oocioasos, ano lolal wolfaio goos ip. Howovoi,
imposing inifoim piicing on llo incimLonl woilo Lo ooliimonlal, if il loo il nol
lo soivo llo Loiooi cily. In llis mailol, a monopoly Ly llo incimLonl woilo
simply Lo ioplacoo Ly a monopoly of llo onlianl, ano consimoi siiplis ano
ovoiall wolfaio woilo oocioaso. Moio gonoially, llo Lan on piico oisciimina-
lion woilo incioaso llo mailol powoi onjoyoo Ly llo onlianl. Exoiciso 7 slows
llal if llo monopolisl is clallongoo Ly fims llal cannol lavo mailol powoi,
llon llo Lan on piico oisciiminalion will nol liil consimois (Lil may slill
oocioaso wolfaio).
8 H{huflvhv
H{huflvh 4 ;Jh hn.n-- nn| .h .n]n. h..n) Cn-.n h nn|
n-.|n .n -.n ...1, |& .h h n.nn hn h -nj jnn J ]j& 7.1 .-
nn J nn .n]n. n&n| J .n-. ;n) 5h hn nn.n ..-- &nn h
J||.nj -nj.- nnn J n |nj n&jh n.-&n Jn c. Jh .n&n|n`-
-njj .-: ]jh nj, .J nj &- nnn . hn- n |n nnnnnn
|J; nnnnn nj, .J nj hn- |n nnnnnn |J. Jh n-
nn`- -njj .-: n, .J nj hn- |n nnnnnn |J; -nj &,
90
h.-. ;|) 1.-&-- h nn|: 1 j& h.n| . - n n|.n Jnn|.-n.n
J nnj |hn.&
ExcrcIsc 2 ;1|.nj j&.|.|.n .n h nn.n J nj nn|, -.n
....) Cn-.n h -.n J 5n|n ;137)`- nn| -nn .n -.n
..., nnn h| &nn h.h nn..n- h ..-- n |.nj j&.|.|.&n h:
|h h | - nnn h h.jh - ]n - h | - ]n 1 nn|j &&
;q = q = q ), nnn Q = a - (1 a) |&j h nnn; .J ]n
. |-- q _ q , . n- nnj Q _ Q nnn ]- . h.-; .J
]n . |-- q < q , . n- nnj Q _ nnn ]- . h.-;
]n . hn- ||.J- a = 0, .J q < q ; a = a, .J q _ q .
ExcrcIsc 3 ;1 | nn.n &nn J .nJnn.n: j&nn.j n-
..n.) Cn-.n n n.nn J h nn| nnn|j-n .n -.n .... 1n|
nnnnn J n hnjn&- jn .- j = max(0, 1 Q), h Q .- n| &&.
1.n 1 nnn ]n 2 hn -.|j -- c < 1 nnn c , nnn hn .n& n
].n &n - 1 |J n&.n .J hj n n .n h .nn&-j
;.J n n- n nj h.- - n, n hn- .. h .nn&-j J). |-
n--&n hn . .- .n--.|| J n ]n j n.. 1.n 2 .- n .n
;c < c ) |& .- n-h n-n.nn: .- n| n--- n = 21 . ;hn- ]n
1 hn- n |-: 21 - 1). Cn-.n n -.n jnn ;n--&n n
n.-&n.nj c = 1), h .n nh .n ;.) nh ]n n.n- hh nj 1
nnn -nj .n h .nn&-j |n J; ;..) n. ]n- h- &&-. 1.nn:
;n) hn .- h .nn| j&nn.j n&n |j ]n 1 .J . nn- j; ;|) &nn
hn nn..n- .|| nn.n & n- n -&|-jnn-J An-h j&.|.|.&n.
ExcrcIsc 4 ;1 | nn.n .h& ..) Cn-.n n n.nn J h
nn| -n .n -.n ...^, h ]n 1 hn- n n-h n-n.n nnn ]n 2 hn-
. -&-. 1.n- n& n hnjn&- jn h- nnnnn .- j = 1 Q
nnn n .n j&nn..-. 1h ]n- n .n h nn| hn h jnn -n-,
nnn n& n n hn|jj hn .n|- nnj.nn| -- c. Jh jnn .- n-
J||-. 1n h ]- .n, ]n 1 n.n- hh - h C&n &&,
q(c, c) = (1 c), ;nnnnn) - nn njj--. &&, q (c, c) = 1 c
;j). 1n h Jn n-, |h ]n- nn (c, c) = (1 c) ,9, .n h |n
n- hj nh j (c, c) = 0. ;Ch| hn ]n 2`- |- -n- hn ]n 1
-||- 1 c &n.- .- n -|| nnjh.nj, nnn hn ]n 1 -||- n nnj.nn| -.)
1n h -nn .n, nh ]n hn- n.n hh .n- nn nn&n 1 .n n
n hn|jj hn n|n- h nnj.nn| - c = 0, n. 1J n ]n n.n-
n .n-, . .|| hn nnj.nn| - c .n h -nn .n n- ||, nnn nn|
]- (c, ).
1n|.| ]n 1 hn hn- n&jh n n---, ]n 2 nn- | Jn |nn|-
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. nn- . h.jh . ;n |.nnj n.-.n J -.n|..j). 1J
h nnnnj .n|nn- h .nnn.n |j ;h.jh ), h .nnn.n
.|| -&n .h |n|.|.j j = 1, n||.nj h ]n n& n nnj.nn| -
c = 0; .J h nnnnj -h.|- ;| ), h |n.n- .n |n]- 1 ;h.h
h n- n j .J h nn|- h.jh n- n .nnn n n||), |& h
97
.nnn.n .|| Jn.| .h |n|.|.j 1, ... h ]n .|| n& n nnj.nn| -
c .n h -nn .n n- ||. 1.nn||j, -nn .n ]- n|.-.
--&n hn .h J n.n| nn|- h .nnn.n &|n n|nj- | ]-
nnnn: ;1) (0, 0)1 (c, c), nnn hn n ]n h.h ]nnn- h .nnn.n
.-|J &|n n -h.|: ;.) 1 -(c, c) < 1; 1J h .- nnnnn.n, ]n
2`- nnnnj .|| | n|| n.- J&nn-: ;) (0, 0) 1 1 (c, c), |& .n
n- J nn.n .n h ]- .n h .nnn.n .|| n | ]nnnn: ;)
(0, 0) 1 < 1. 1.|| nn.n &
ExcrcIsc ;C-.n-nn .n 11) Jh.- .- n -|.jh|j .h -.n J h
nn| -n .n -.n .1.1, -.n h nnn ]n .- n|- n||n .n- .n
11. Jh .n&n|n, ]n 1, Jn- n n.n| nnn, ]n ., .n h nn|
J n hnjn&- jn .h nnnnn j = 1 q. Cn-.n jnn-. ;n) 1.nn
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]n 1 nnn . -.n&|nn&-|j n.n .n-nn a .n n --n&.nj hn|jj,
.h n| - J n&.n j.n |j C(a , q ) = (c a )q . --&n n j&nnn.
- J h .n-nn, 1(a ) = a . h.- -nj, ]n . n|- n.n- n nj,
nnn nj- n ].n -&n| - 1. 1n h |n- -nj, n. ]n- |- nh h`-
.n-nn n.-.n nnn h- &&-. ;|) 1.nn h -|&.n J h -j&n.n|
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.n-- .n h ]- -nj; .n h -nn -nj, nJ |-.nj ]n 1`- .n-nn
n.-.n, ]n . n.n- n .n-nn nnn n nj; .n h |n- -nj, n.
]n- h- &&-.
5h hn h .- n nnj J n|&- J h ].n -&n| - 1 h nj
nn .- ]n||, .n h -n- hn ]n 1 J- .n- n .n h
n hn|jj hnn . &|n .J . | ]n .`- nj J jnnn.
ExcrcIsc 6 ;Cn.|.|.j J n& n.n, .n-.n |j J&nn ;13) nnn
J.|;133)`- nnn-.) 1hn h jnn -n-, ]n 1 .- n|nnj -n||.-hn
.n nn| , h nnnnn J .- n& .- Q = 1 j, hn- .n nn|
1, n ]n .- n. nnn h .- n nnnnn J h jn. .n T, ]n 1
nn n.n hh . nn- - n |nn .n nn| 1, n n ].n -&n| - 1.
1 hn -- .- .n h nn| h . .- n.. .n T - 1, n n.n|
nnn, ]n ., n.n- hh - n |nn .n nn| 1 n h ].n -&n| -
1 < 1,4. J h nj n.-.n .- n|n, n. ]n- - .-. 1.n 1 nnn
. -|| h -nn hnjn&- jn .n |h nn|-. 1, nn-.nj h
jn Jn n nn| h h nn.|- n nn-n.n - t < 1,2. --&n
n|- hn n .n T nnnnn J h jn .n nn| 1 .- ., hn- n .n
T -1, nnnnn .- j.n |j Q = 1j. 1.n- -.nj |h nn|- Jn h -nn
|nn hn h- h -nn n.|| . n-- nn|- ;..., .- nn n.
n|j |j h nn-n.n -), hj hn h -nn n.-&n Jn c = 1, nnn
h -nn nnj.nn| -- c = 0. ;.) --&n hn ]n 1 nnn .hnn Jn
nn| 1 .J . n- h, nnn -h . .|| n n .n T n nj |j
]n 1. ;..) --&n hn, nJ |-.nj ]n .`- nj n.-.n n .n T - 1,
]n 1 nn .hnn Jn nn| 1 n n - .J . .-h- -. 5h hn nn|
n.n .|| n & n h ;-&|-jnn-J) j&.|.|.&n.
98
ExcrcIsc 7 --&n h -nn -.nj n- .n -.n .... C.j .- |nn n
0, nnn .j 1 n 2t n|nj h h..nn| n..-. 1.n 1 .- |nn n t. 1nnnn
.n nh .j .- j.n |j q = 1 j. Jh n J.jn ]n- |nn n
2t - T. --&n hn n|| ]n- hn . n&.n --, |& .n& n &n.
nn-n.n - j&n| n.-nn. --&n hn (1 -t),2 _ T _ (1 t),2.
1.n- n .n .-. 1.nn h j&.|.|.&n -|&.n- J h n-- h ;n)
. n.-.n.nn.n .- n||n; ;|) . n.-.n.nn.n .- |nnnn. Jhn -h
hn ;) n |nn n . n.-.n.nn.n n&- |Jn.
ExcrcIsc 8 ;&nn.j n.-&n- nnn .nn.- .n-) Cn-.n h nn|
n-.|n .n -.n- ...1 nnn ..... Jh nn|.- Jn- ` ;-. 1 `)
n-&n- .h nnnnn j = q ;-.|j j = q). 1 hnnn .n..n|
nnj.nn| - < J .n.nj h jn. Cn-.n h J||.nj jnn-:
Gnn 1: &n.Jn ..nj. 1.-, h nn|.- n.n- n h .n-nn a
n& .- nnj.nn| -. 1j .n-.nj n j.n || a, .- n nnj.nn| -
.|| | c = a. Jh - J h .n-nn .- C(a) = ja ,2 ;n--&n hn j 1
J h -nn-n nn..n | -n.-]n .n |h Gnn 1 nnn ..) 5nn, .
h-- h &n.Jn . j n h.h |h nn|- n -n ;n--&n hn . .-
n nn.n -&|j n nn| n|j: [- (1 `) [ , (2 `)).
Gnn .: j&nn.j n.-&n-. 5nn jnn n- jnn 1, |& .n h -nn -nj
h nn|.- nn &- n -n n. T -jq.
5h hn h nn|.- .n-- n .n Gnn ..
ExcrcIsc 9 5&- j& hn h C1C J n -nn|| ]n n|n.n.nj n|& h
n.&|.- h Jnn n- h .n n n nn| hn hn- n -nj .n&n|n
]n: - -n n- -nn nn| & n&, & .n| &|n |n-.n||j
j. nnj h.- -& J J! 1 n.n jh.nj j nnn n. &- & J h
nn|. 1 n- - &nJn.! 1 n hnn n n| hnn nn| .... ]n
-h&|n n | n||n n n h.nj |.| hn. 1 h.n| h jnnn -h&|n n--
n |n hn h.|.- . || -... 1.-&-- h.- -n|. 1 j& nj
ExcrcIsc 10 ;..- n.n&n) J j n |n .& J h -.&n.n, j&
n.n nJn h .n&n|n`- C1C .h h -nn|| ]n`- n||jn.n- nnn
n-| J h. .n J .. 1 .- hn hj || j&: Cn n, h.- .-
.n.&|&-! Jh- j&j- ]&- n n.. n&jh... Jh. n& n-
]&n|, nnn h. ..nj n- |jnn h |jnn-! 1 j& nn ||nn &- J
hn.nj h | n& nnn | .- 1`- Jn .: h nn||n .- |.|
h C|jn.- - .`- n|nj- h |- j&j h .|| .n! 1.-&-- h.- -nnn.
ExcrcIsc 11 1nnnn, h |.- .n 1.nnn, n|j |&jh h.n-|J n n nnn
n n n |nj nn.n .h .. 1hn h n.n .n 1|n, h hnnn
- n n |n| n nn|`- n.--, h h n.-n hn h.- n - h
.n -nn nn| nnn nn| - n- -|n h J h.n- J h . h hnn
nj J . .n 1.nnn. 1nnnn J- nnn J&n-: h -nh J|- |.| h n-
.n n.jh.|j, nnn h h.n|- hn ]n- -h&|n n | n||n n hn - n-
n nn J Jn.n--, h -nn n -h&|n | -|n n h -nn . jh
.n h |n! 1.-&--.
99
ExcrcIsc 12 1n n n n-, h 1&nn Cnn.--.n hn- ]nn h hnnn-
&.n| nnnj 1..-h Chn.n|- J n|&- J nn.nnn -..n. Jh ]n
hn- |n J&nn j&.|j J n.].n||j -jnn.nj h nn|- J nn| &n.-
|n&- . hnn J|.nnn .- 5nn.-h -&|-.n.nj . h 11 &n.- n
|| |nn nn..n &-n J hn n.-n-. 1n 5n.n h . J h.- nn..n
;n- || n- J nnnj h-) .- | hnn .n h 11 &n.- |n&- 5nn.-h
|n n- n nn- h -nn .n n- .n h h 11 &n.-.
- n -&|, h n nnnj n ]n- h.h nn n& nnn -|| h.- n&,
h.h |.nj- .- nn. 1&|n j& nj .h h Cnn.--.n`- n.-.n
ExcrcIsc 13 1n.| h nn J 1, h n.|.n G|nn 1.nj- n- h n|j
n n&h.-n n .n h n--nj n. nn- |&-.n-- .n h &n-
j 1nj||nnn. J n .jh- Jn h.- &nj, h n.|.n- hnn
-.| n. njnn- .h G|nn 1.nj-, h.h &|n .n- .-
nn..n- .h& nnj -..n Jn h nn-. jnnn. 1& h .-
.-.nj -.&n.n, G|nn 1.nj- hnn 3u' J h nn.nn| nn|, nnn |n-.n||j
n|| h 1nj||nnn.-h &|n.n hnn |n n..n.nj .n h Jj&n j -
jnnn J h nnnj ;& J J& .-, n .- J), hn h nnnj -nn
&n .n 1. 5.n 1^, h nn| hn- |n nj&|nn, nnn h n.|.n-
n n J -|| h. -.- .n h &nj. 1nnn.n|j nJ nj&|n.n,
h |nj n&|.nn.nn| nnnj ||.n .nj- |&jh |nnn.nj -|- .n h
nn] n.- J h &nj nnn -nn -|| n|nn .|- nnn Jn
h &nj n n . h.h .- &jh|j hn|J h .- - |j G|nn 1.nj-.
Jh |n ]n |- u' J h nn| .n n J nnh-. 1 ]|n n n|n.n
h nn.nn| n..n n&h.j n&-.nj ||.n J nnj ..nj. -
n.nj h n|n.n, ||.n n- &-.nj .- -njh n h |n nn|
;. hn- u' J .) . G|nn 1.nj- Jn h 1nj||nnn.-h nn|. Jh
nn.nn| n&h.j n.nn hn ||.n .nj- hnn &-n n nnj n.,
nnn h nnnj .n n ]n. 1n n.&|n, h n&h.j nnhn n&h
.jh h Jn hn ||.n`- .- nnn Jn 1nj||nnn n nnj
.u' | hnn .jh- nn |j ||.n n h &-, nnn 1u' | hnn
G|nn 1.nj- nnj --. ||.n hnnn|n h C& J J&-., nnn
j& hn j. j& .n.n n- nn Gnn|.
6 SoIutIons oI cxcrcIscs
SoIutIon oI cxcrcIsc 1. (a) Jlo inconlivo consliainl foi llo incimLonl
is as follows. If il slicls lo llo slialogy wlon onliy occiis, il oains llo low
payof looay Lil onliy will nol occii foiovoi afloiwaios. Ly oovialing ano
accommooaling onliy, il woilo gol llo ligloi ciiionl payof Lil llon all
polonlial onlianls will onloi (ano will Lo accommooaloo). Jlis liaoo-of is
simmaiisoo Ly llo conoilion -c ,(1 c) _ ,(1 c), wlicl simplifos
lo c _ ( ),( ).
Nolo llal fiom il follows llal llo BHS is smalloi llan ono, so llal
lloio always oxisls a oiscoinl facloi laigo onoigl foi llis inconlivo consliainl
lo lolo.
100
As foi llo onlianls, if llo incimLonl`s IC is salisfoo, lloy piofoi lo follow
llo canoioalo oqiiliLiiim slialogy, ano oain 0, ialloi llan onloiing ano gol
< 0. As a iosill, onliy will novoi occii al oqiiliLiiim.
(L) Jloio aio al loasl lwo foaliios of llo infnilo loiizon voision of llo
clain sloio gamo llal malo il insalisfacloiy. Fiisl, as all sipoi-gamos, llis
moool is claiacloiisoo Ly milliplicily of oqiiliLiia. In pailicilai, llo gamo
las an oqiiliLiiim wloio onliy lalos placo ano is accommooaloo foiovoi. Jisl
consiooi llo following slialogios. Jlo onlianl onlois al llo Loginning of llo
gamo, ano always onlois as long as onliy is accommooaloo; if onliy is ovoi
foigll, no onlianl will onloi. Jlo incimLonl accommooalos wlonovoi onliy
lalos placo. Jloso slialogios aio nolling olso llan llo oqiiliLiiim slialogios in
llo ono-slol gamo, ano il is oasy lo soo llal lloy iopiosonl an oqiiliLiiim. (Wo
lavo alioaoy soon in claploi 4 llal llo ono-slol oqiiliLiiim iopoaloo foiovoi is
an oqiiliLiiim of llo sipoigamo.)
Socono, in llis moool ovon wlon piooalion" is an oqiiliLiiim il is novoi oL-
soivoo along llo oqiiliLiiim pall: onlianls simply anlicipalo llal onliy woilo
Lo foigll, ano aLslain fiom onloiing llo mailol. Accoioing lo llis sloiy, ono
sloilo novoi soo any opisooo of piooaloiy piicing in llo ioal mailols. Honco,
llis ooos nol iopiosonl a convincing moool of piooalion.
SoIutIon oI cxcrcIsc 2. Al llo pooling oqiiliLiiim, llo ligl cosl incim-
Lonl imilalos llo low cosl incimLonl, ano llo polonlial onlianl (fim 2) oocioos
on llo Lasis of ils ox-anlo Loliofs, accoioing lo wlicl llo incimLonl (fim 1)
is a low cosl ono will pioLaLilily a. Lol is now clocl if llo slialogy pio-
flo ano syslom of Loliofs givon aLovo will inoooo conslililo a Ioifocl Layosian
EqiiliLiiim.
Wo slail will llo onlianl`s slialogy will iospocl lo Q, laling fim 1`s slialo-
gios ano fim 2`s Loliofs as givon. Al llo pooling oqiiliLiiim, llo onlianl will
accopl llo incimLonl`s ofoi only if llo onlianl`s oxpocloo payof fiom onloiing
is lowoi llan llo ofoi Q iocoivoo. If fim 2 oLsoivos a qianlily cloico q _ q
Ly fim 1, fim 2 will nol ioviso ils Loliofs aLoil fim 1 Loing low cosl, ano will
accopl llo laloovoi if a( ) - (1 a)( ) _ Q. If, lowovoi, fim 2 oLsoivos
q < q , il will ioviso ils Loliofs ano allacl pioLaLilily 1 lo facing a ligl cosl
incimLonl, ano will only accopl ofois Q _ (iocall llal ).
Lol is now liin lo llo incimLonl`s slialogios, laling fim 2`s slialogios ano
Loliofs as givon. Sipposo fisl llal fim 1 is ligl cosl. Jlon, fim 1 las no
inconlivo lo malo any ofoi Q ,= Q . Any ofoi Q < Q woilo Lo iojocloo Ly
fim 2, loaoing lo lowoi socono-poiioo piofls foi fim 1 ( insloao of Q ).
Moioovoi, fim 1 will fno il oplimal lo imilalo llo low-cosl lypo will iospocl lo
fisl-poiioo oilpil (q = q ) if ooing so yiolos ligloi piofls llan solling llo
ligl-cosl monopoly qianlily in llo fisl poiioo, llis iovoaling ils liio lypo ano
laving lo malo a ligloi laloovoi ofoi, Q = Q . Wo oLlain condItIon
1: (q )
_
a( ) - (1 a)( )
_
_
If fim 1 is insloao low cosl, il oLvioisly las no inconlivo lo piooico any
q ,= q . Moioovoi, givon fim 2`s Loliofs, il will Lo oplimal foi fim 1 lo ofoi Q
101
if laling ovoi llo iival al llis cosl is moio pioflaLlo llan ofoiing zoio ano ac-
commooaling onliy, wlicl yiolos condItIon 2:
_
a( ) - (1 a)( )
_
_
Wlal iomains lo Lo clocloo is if fim 2`s Loliofs aio consislonl will llo oqii-
liLiiim slialogy pioflo. Nolo llal if conoilions 1 ano 2 aLovo lolo, llo only
fisl-poiioo oilpil oLsoivoo along llo oqiiliLiiim pall will Lo q , ano llo only
laloovoi ofoi maoo will Lo Q . Sinco Loll ligl-cosl ano low-cosl incimLonls
Lolavo llo samo, fisl-poiioo aclions oo nol convoy any infoimalion aLoil llo
incimLonl`s lypo, so following Layos` Bilo llo posloiioi Loliofs will inoooo co-
incioo will llo posloiioi onos. Of llo oqiiliLiiim pall, any assignmonl of
Loliofs is aomissiLlo, in pailicilai llo ono closon loio (i.o. if q < q , a = 0;
if q _ q , a = a).
SoIutIon oI cxcrcIsc 3. (a) Nolo llal fim 2 las iosoiicos jisl Lolow 21.
Honco, if fim 1 is lo malo il oxil llo mailol, fim 1 jisl nooos lo inficl a loss
oqial lo 1 ipon fim 2. Fiim 2 will Lo lofl will iosoiicos sligllly lowoi llan
1 ano will lavo lo oxil sinco il cannol pay ip-fionl llo iociiionl fxoo cosl.
Fiim 2`s poi-poiioo piofls aio H = (1 q q c )q 1, ano ils Losl ioply
finclion will Lo givon Ly q = (1 q c ),2. Jloiofoio, Ly solling q = 1 c ,
fim 1 woilo inoico fim 2 lo piooico zoio oilpil ano incii a loss oqial lo 1.
(L) Of coiiso, llo issio is wlolloi llis is pioflaLlo foi fim 1 lo oo. Ly
solling q = 1 c inils al a piico j = c < c , fim 1 will sifoi a loss
= (c c )(1c ) 1 Lil il will inoico oxil of llo iival, ano opoialo as a
monopolisl in llo following poiioo (nolo llal fim 1`s loss is novoi ligloi llan
1 - 1). Jloiofoio, il will gol a payof fiom piooalion (c c )(1 c ) 1 -
(1 c ) ,4 1. If il accommooalos onliy, Loll fims will gol oiopoly piofls
ano fim 1`s lolal payof will Lo 2[(12c -c ) ,91[. Ly compaiing lloso lwo
payofs ano io-aiianging ono oLlains a socono-oiooi oqialion wlicl is solvoo foi
c < (1 - 22c ),2 (llo olloi iool is iiiolovanl sinco il is lowoi llan c ). Jlis
is lloiofoio llo conoilion foi piooalion lo piovail.
SoIutIon oI cxcrcIsc 4. Nolo fisl llal (0, c) (0, 0) (c, c)
(c, 0). (A1) ano (A2) imply llal fim 1 will always wanl lo invosl ano novoi
sliil. Ly applying llo moool soon in soclion 2..0 (lloio is only a sligll vaii-
alion, in llal a fim is nol foicoo lo oxil llo mailol ovon if il oocioos nol lo
invosl), ono can soo llal fim 2 is inaLlo lo iaiso finoing if piooalion occiis
in llo fisl poiioo. Howovoi, llo qioslion is wlolloi piooalion is pioflaLlo foi
fim 1 oi nol. Foi il lo Lo pioflaLlo, il misl Lo llal 0-(0, c) (c, c)-(0, 0)
(I1), oi (0, 0) < (0, c) (c, c). (Bocall llal piooalion givos zoio fisl-poiioo
piofl lo Loll llo piooaloi ano llo pioy.)
Using (A1) ano (A2), wo lavo (1 c) ,9 -1 < 1 < 1,9 (1 c) ,9. Foi
llis inloival lo Lo non-omply, wo misl lavo c 1
_
1,2 0.29. Using
llis lowoi Loino on c in (A), wo can iowiilo (A) ano (A4) as: 1 - 1
(1,9, 1,9 - 1,18). Nolo llal (I1) implios c 1,4 wlicl will always Lo salisfoo
if (A1) ano (A2) lolo. Honco, piooalion will always occii in llis moool.
102
SoIutIon oI cxcrcIsc . (a) In llo lasl slago, givon invoslmonl ooci-
sions fiom llo pioviois poiioo, fims will play a Coiinol gamo will (po-
lonlially) inoqial maiginal cosls. Oilpil, piico ano piofls aio givon Ly:
q = (1 2c -c ) ,, j = (1 -c -c ) ,, H = (1 2c -c ) ,9.
In llo fisl slago, oacl fim cloosos ils oplimal lovol of invoslmonl, lal-
ing llo olloi fim`s invoslmonl as givon. Jlo fim`s piogiammo, max =
(1,9) (1 2 (c a ) - (c a )) a givos iiso lo llo following ioaclion finc-
lion: a (a ) = (2,) (1 c a ). Jlo oqiiliLiiim lovol of invoslmonl will Lo
a = a = (0,21) (1 c). Fiim 2 will onloi if nol piofls covoi fxoo cosl, i.o.
(a ) = H (a ) (a ) 1, oi (,49) (1 c) 1. Nolo llal inooi si-
millanoois invoslmonl oocisions, lloio is no ioom foi onliy-ooloiiing iso of
invoslmonl Ly llo incimLonl.
(L) In llo lasl slago, givon invoslmonl oocisions fiom pioviois poiioos, fims
will play llo samo Coiinol gamo as in (a). Now, lowovoi, fim 2 will malo ils
invoslmonl oocision only afloi oLsoiving fim 1`s piocooing oocision. Fiim 2 will
invosl oplimally wlon a (a ) = (2,) (1 c a ).
Fiim 1 las now lwo oplions: il can Lolavo innoconlly", i.o. oplimiso ils in-
voslmonl laling fim 2`s onliy as givon, oi il can iso a piooaloiy" slialogy, i.o.
invosl so micl llal fim 2 is oiscoiiagoo fiom onliy. Unooi llo innoconl slial-
ogy", llo incimLonl`s pioLlom is: max = (1,9) (1 2 (c a ) - (c a (a )))
a wlicl yiolos oqiiliLiiim solilions a = (4,9) (1 c) ano a (a ) =
(2,9) (1 c). Nolico llo asymmoliy in llo invoslmonl lovols, wlicl ooiivos
fiom fim 1`s fisl-movoi aovanlago. Fiim 2 will onloi if (a ) 1 =
(,81) (1 c) 1 0, olloiwiso, onliy will Lo Lloclaooo, ano so lloio is no
nooo foi fim 1 lo ovon consiooi onliy ooloiionco.
Sipposo now llal onliy is nol Lloclaooo. Jlon, inooi llo piooaloiy"
slialogy, fim 1`s pioLlom is lo sol a sicl llal fim 2`s piofls aio oiivon oown
lo zoio, i.o. a solvos (a ) 1 = 0. Wo oLlain a = 1 c
_
1. Of
coiiso, fim 1 will only wanl lo piooalo if llis yiolos ligloi ovoiall piofls llan
accommooaling fim 2`s onliy, i.o. if
_
a
_
= (1,4)
_
1
_
c a
__

_
a
_
(a ). Solving foi 1, wo oLlain a similai ianling as in soclion
.1.1: if 1 _ (1,) (2,)
_
1
_
2,
_
(1 c) , onliy will Lo accommooaloo; if
(1,) (2,)
_
1
_
2,
_
(1 c) < 1 _ (,81) (1 c) , onliy will Lo ooloiioo;
if 1 (,81) (1 c) , onliy will Lo Lloclaooo. Nolo llal llo fisl-movoi aovan-
lago is ciicial foi fim 1: as wo saw in (a), no piooaloiy Lolavioii can omoigo
if invoslmonl oocisions aio lalon simillanooisly.
SoIutIon oI cxcrcIsc 6. (i) Al limo T - 1, sipposo fim 1 las onloioo
mailol L in llo pioviois poiioo. Ly onloiing as woll, fim 2 woilo malo lossos:
piico compolilion will lomogonois gooos implios zoio gioss piofl, llal woilo
nol allow il lo iocoip llo fxoo cosl 1. Jloiofoio, fim 2 woilo nol onloi. Fiim
1 will malo monopoly piofls in oacl mailol, = 1,4 (llo monopoly piico is
10
foino as llo piico llal maximisos llo piofl in oacl mailol, = j(1 j): fiom
d,dj = 0, il follows j = 1,2 ano = 1,4). Jloiofoio, lolal piofls will Lo
= 1,2.
If fim 1 las nol onloioo mailol L, ano fim 2 onloioo, il will malo monopoly
piofl = 1,4 1 in llal mailol. Jlis is Locaiso fim 1 will sol llo monopoly
piico in ils own mailol (sinco il cannol piico oisciiminalo ano il las lo incii an
aooilional cosl lo soivo mailol L, il ooos nol lavo any inconlivo lo sol a piico
lowoi llan llo monopoly piico in mailol A). Jloiofoio, fim 1 will lavo piofls
= 1,4.
Al poiioo T , fim 1 will onloi sinco il anlicipalos llal llis oolois onliy, llis
giving il ligloi piofls. Ly onloiing, il will gain = 1,2 1. Ly nol onloiing,
il will malo = 1,4 < 1,2 1 (iocall llal 1 < 1,4).
(ii) In llo pioviois poinl (i), fim 1`s invoslmonl oolois onliy Ly fim 2. Jlo
issio loio is wlal lappons if fim 2 oociooo lo onloi llo mailol novoilloloss.
Iiico compolilion woilo loao lo an oqiiliLiiim piico j = 0 in mailol L. Lil
llis implios llal fim 1 will nol Lo aLlo lo sislain llo monopoly piico in mailol
A: consimois lloio can impoil llo gooo Ly paying t < 1,2. Jloiofoio, fim 1
will sol ils piico in mailol A so as lo Lo sligllly lowoi llan t ano malo piofls
t(1 t).
If il closoo oown ils planl in mailol L, il woilo iolax compolilion in mailol
L (wloio fim 2 woilo Locomo a monopolisl) ano Lo aLlo lo sol llo monopoly
piofls in mailol A, llis oaining 1,4. Il is oasy lo soo llal 1,4 t(1 t) can
Lo iowiillon as (1 2t) 0, wlicl lolos liio.
Anlicipaling llal Ly onloiing mailol L, fim 1 woilo piofoi lo willoiaw
fiom il lao il invosloo lloio, fim 2 will always onloi. In liin, fim 1 will
anlicipalo llis ano nol onloi mailol L in poiioo T, lo savo ils fxoo cosls.
SoIutIon oI cxcrcIsc 7. (a) As in llo loxl, inooi piico oisciiminalion,
fim 1 sols j = (1 -t),2, ano j = T. Ils lolal piofls aio = (1 t) ,4 -
(T t)(1 T).
(L) Unooi inifoim piicing, as in llo loxl, if llo incimLonl soivos Loll
mailols, j = j = T, ano il malos piofls = 2(T t)(1 T). If il soivos
only mailol A, il sols piicos in Loll mailols oqial lo j = (1 -t),2. Il woilo
llon malo lolal piofls = (1 t) ,4. Jlo oifoionco will iospocl lo llo
caso lioaloo in soclion 4.2. is llal Loiliano compolilion among foioign fims
onsiios llal llo piico in mailol L will nol iiso aLovo T.
(c) Wo lnow llal if Loll cilios aio soivoo, wolfaio is ligloi if lloio is a
Lan on piico oisciiminalion. Howovoi, if only ono cily is soivoo wlon a Lan on
oisciiminalion oxisls, llo lwo iogimos aio oqiivalonl foi consimoi siiplis, sinco
lloy loao lo llo samo piicos (1-t),2 in mailol A ano T in mailol L. Howovoi,
fim 1 malos posilivo piofls in mailol L inooi oisciiminalion, ano no piofls
inooi a Lan.
SoIutIon oI cxcrcIsc 8. Gamo 1. As isial, wo lavo lo movo Laclwaios.
Jlo solilion of llo socono slago is givon in soclion 4.2.1. In llo fisl slago,
104
llo monopolisl cloosos a lo maximiso llo nol piofls inooi inifoim piicing,
= (` - (1 `) c) ,4 ja ,2, will c = a. Maximisalion ioqiiios
d ,da = (` - (1 `) -a) ,2 ja = 0.
Gamo 2. Jlo solilion of llo socono-slago is givon Ly soclion 4.2.2. In llo
fisl slago, llo monopolisl`s piogiammo is max = (1,2)
_
( -a) - (1 `) ( )
_
.
Jlo fisl-oiooi conoilion is d ,da = ( -a) ja = 0.
Compaiison of llo oqiiliLiiim invoslmonl lovols ooos nol ioqiiio fnoing
llo oxplicil solilion. Jisl nolo llal llo maiginal cosl of llo invoslmonl, ja,
is llo samo in Loll gamos, Lil llal llo maiginal iovonio is ligloi inooi gamo 2:
( -a) (` - (1 `) -a) ,2, sinco [- (1 `) [ , (2 `).
Jloiofoio, a will Lo ligloi inooi qianlily oiscoinls (llal is, lwo-pail laiifs).
10
Entrant t
Incumbent
stay out enter
accommodate fight
( )
P
I
P
E
! ! , ( )
A
I
A
E
! ! ,
( )
M
! , 0
enter out
E
I
E
I
out stay
accommodate
prey
out
prey
E
+
A
M A
!
"! !
+
0
M M
"! !
<
+
0
P
M P
!
"! !
+
+
A A
A A
"! !
"! !
+
+
P A
P A
"! !
"! !

time
2 3
prey or
accommodate
1st period
payoff
pay F
or out
effort
decisions
2nd period
payoff
1

time
2 3
prey or
accommodate
1st period
payoff
pay F
or out
effort
decisions
2nd period
payoff
1
effort
decisions
contract
ii

i
) 0 (
1 1
= x R
1
q
2
q
) (
1 1
P
x R
F x
P
= ) (
1 2
!
) 0 (
1 2
= x !
) 0 (
1 1
= x q
N
) 0 (
1 2
= x q
N
.
.
2 B
R
2 B
p
1 B
p
2
1 2 B
c t +
2
) (
1 2 A B
c v c t # # +
1 B
R
1
~
R
E
E
~
.
.
R
S
T
O
O
$
c
q
p
c
q
m
q
m
p
c
p
Index of tables
Table 2.1. The entry game
Table 2.2. Consumers 1 and 2's payoffs under price discrimination
Table 4.1. The revelation game
Table 5.1 Number of final decisions on mergers taken by the EC Commission
Table 5.2. Product market definition in the rail technology industry
Table 5.3. Market shares and concentration indexes in the rail technology industry
Table 6.1. Segal - Whinston: simultaneous offers
Table 6.2. Segal - Whinston: discriminatory offers
Table 7.1. Consumers valuations of goods
Table 8.1. A simple game
Table 8.2. The prisoners' dilemma game
Table 8.3. The battle of the sexes game
Table 8.4. A pure coordination game
Table 8.5. An asymmetric game
Table 8.6. The matching pennies game
Table 8.7. The entry deterrence game
Table 8.8. Strategic effect of a shock that reduces firm 1's costs
Table 8.9. Strategic investments to reduce firm 1's costs
Table 2.1. The entry game
2
1
E NE
E - f, - f !
M
-f, 0
NE 0, !
M
-f 0, 0
Table 2.2. Consumers 1 and 2's payoffs under price discrimination
2
1
buy I buy E
buy I v(2) - p
1
, 0 v(2) - p
1
, -c
E
buy E -c
E
, 0 v(2) - c
E
, v(2) - c
E
Table 4.1. The revelation game
firm 2
firm 1
Reveal Not Reveal
Reveal
,
1
!
R
N
"
"#
R
N
"
"# 1
!
,
1
!
R
N
"
"#
F
N
"
"# 1
!
Not Reveal
,
1
!
F
N
"
"#
R
N
"
"# 1
!
,
1
!
) 1 ( )
1
!
(
# # "
" + "
"
M N
p F p
# # "
" + "
" 1
!
) 1 ( )
1
!
(
M N
p F p
Table 5.1. Number of final decisions on mergers taken by the EC Commission
Source. Report on Competition Policy, European Commission, DG IV (various years)
60 60 57
91
109
125
142
238
270
6
7
9
10
10
10
26
12
7
0
50
100
150
200
250
300
1991 1992 1993 1994 1995 1996 1997 1998 1999
Final Decisions (R.4064/89) Final Decisions (Art.66 ECSC Treaty, 1992-1999)
Table 5.2. Product market definition in the rail technology industry
Mainline trains
Electrical locomotives
Diesel locomotives
Train sets Ior mainline transportation
Passenger coaches
Freight wagons
Regional trains
Electrical multiple units
Diesel multiple units
Rolling
stock
Local trains and systems
Trams (light rail and trolleys)
Metro vehicles
Automated guided transportation
Wayside systems
Catenary systems
Traction power supply
Train control and protection systems
Stationary
equipment
Miscellaneous
Maintenance and reIurbishment
InIormation systems and ticketing
Table 5.3. Market shares and concentration indexes in the rail technology industry
Product Market Market Shares () HHI $ HHI
ABB DB Siemens DWA LHB Elpro
Electrical locom.
Mainline train sets
Reg. electr. m/units
Reg. diesel m/units
Trams
Metro vehicles
Catenary systems
Traction power supply
37
5
18
0
15
42
30
6
17
26
26
49
29
22
31
26
46
46
25
23
41
19
33
35
np
18
17
np
np
np
np
np
np
np
14
19
8
11
np
np
Np
Np
Np
Np
Np
Np
6
13
5032
~3401
~3046
~3291
~3681
~4578
4846
~2418
1258
260
936
0
870
1848
1860
312
Table 6.1. Segal-Whinston: simultaneous offers
B2
B1
Accept Reject
Accept CS
m
t, CS
m
t CS
m
t, CS
m
Reject CS
m
, CS
m
t CS
e
, CS
e
Table 6.2. Segal-Whinston: discriminatory offers
B2
B1
Accept Reject
Accept CS
m
t
1
, CS
m
t
2
CS
m
t
1
, CS
m
Reject CS
m
, CS
m
t
2
CS
e
, CS
e
Table 7.1. Consumer valuations of goods
1's willingness to pay 2's willingness to pay
Good A 7 4
Good B 5 8
Goods A and B 12 12
Table 8.1. A simple game
B
A
b
1
b
2
b
3
=
1
2, 0 2, 5 1, 1
=
2
0, 2 0, 3 2, 2
Table 8.2. The prisoners' dilemma game
B
A
High Low
High 10, 10 5, 15
Low 15, 5 6, 6
Table 8.3. The battle of the sexes game
B
A
Indian Thai
Indian 3, 2 0, -1
Thai -1, 0 2, 3
Table 8.4. A pure coordination game
B
A
Indian Italian
Indian 2, 2 0, 0
Italian 0, 0 1, 1
Table 8.5. An asymmetric game
B
A
p
L
p
H
p
L
0, 0 0, 0
p
H
0, -2 2, 0
Table 8.6. The matching pennies game
B
A
Heads Tails
Heads -1, 1 1, -1
Tails 1, -1 -1, 1
Table 8.7. The entry deterrence game
I
E
Accommodate Fight
Enter 4, 5 -1, 0
Stay out 0, 10 0, 10
Table 8.8. Strategic effect of a shock that reduces firm 1's costs
Strategic substitutes Strategic complements
Accommodation: %
1
&; %
2
' Accommodation: %
1
'; %
2
'
Entry deterrence: %
2
' ( %
1
&) Entry deterrence: %
2
' ( %
1
&)
Table 8.9. Strategic investments to reduce firm 1's costs
Strategic substitutes Strategic complements
Accommodation: over-invest Accommodation: under-invest
Entry deterrence: over-invest Entry deterrence: over-invest
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21
Index of Figures
Figure 2.1. Welfare loss from monopoly
Figure 2.2. Possible additional loss from rent seeking activities
Figure 2.3. Additional loss from productive inefficiency
Figure 2.4. Welfare W
c
as a function of the number of firms n (= ; c = .5; g = 4)
Figure 4.1. Incentive Constraints along collusive and punishment paths
Figure 4.2. Conditions for collusion: Nash reversal ) (
cn
! v. two-phase ) (!
punishment strategies
Figure 4.3. Game tree, at t = 2
Figure 4.4. Equilibrium solutions for given policy parameters
Figure 5.1. Effects of a merger absent efficiency gains: Strategic complements
Figure 5.2. Effects of a merger absent efficiency gains: Strategic substitutes
Figure 5.3. Effects of a merger with efficiency gains
Figure 5.4. Levels of efficiency gains and exclusion of competitors
Figure 5.5. Study of functions used in Lemma 7
Figure 6.1. Double marginalisation
Figure 6.2. Horizontal externality
Figure 6.3. Competing vertical chains
Figure 6.4. Tariffs as strategic device: Strategic complements
Figure 6.5. Tariffs as strategic device: Strategic substitutes
Figure 6.6. The "Chicago School" critique to foreclosure
Figure 6.7. Segal-Whinston: sequential offers
Figure 7.1. State game at time t, chain-store paradox game
Figure 7.2. Deep pocket predation, with T = K = 1
Figure 7.3. Time line: a (financial) long purse model of predation
Figure 7.4. Time line: Bolton-Scharfstein's model
Figure 7.5. Entry-deterring investment
Figure 7.6. Strategic effect of bundling
Figure 7.7. Welfare under perfect price competition
Figure 8.1. Extensive form of the game
Figure 8.2. Extensive form of a quality game
Figure 8.3. Reaction functions in the Cournot model
Figure 8.4. Toughness of product market competition: Bertrand (B), Cournot (C), and
joint-profits maximization (M)
Figure 8.5. Reaction functions under price competition
Figure 8.6. (a) Stable Nash Equilibrium; (b) Unstable Nash Equilibrium
Figure 8.7. Effects of a shock (s > 0) that reduces firm 1's marginal cost: Strategic
substitutes
Figure 8.8. Effects of a shock (s > 0) that reduces firm 1's marginal cost: Strategic
complements
R
S
T
O
O
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"

Competition Policy - Theory and Practice

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Contents

n..n 1|.j: "|:j nnn 1:n.

j gols closo lo j ), snggosling lhal wolfaio oocioasos wilh maikol powoi.

, whoro wo havo oonoioo wiih 1 ano H rospociivoly iho soi of low-cosi

a . n) 1.:J | .jnn:. j&.|.h:.&n ||

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c = 1,(1 c). Honco, afior simplo algohra, iho inconiivo

imprisonoo, liko in iho US. Arguahly, ihis provioos a sirongor ooiorroni of

^5+5 |,+5| 4,`,^5+5 |, <q`

c (:, /) ,0/ = (:1), (: 1 /) <

c (:, /) 1 LLCAUSL IIIMS WOULD LL VLIY JLMIJLD JO DL-

[(c C a |a ) qa ,2[ ano iho prohlom of iho nrm is

Eniopoan Univoisily !nslilnlo, Floionco,

A similai way lo look al il is as follows. !magino lhal lho moigoi involvos

j . Il can vaiy Lolwoon

conoiiions unoor which collusion arisos as a non-cooporaiivo ouicomo of iho

oflon an alloinalivo lo voilical iosliainls. Il woilo Lo inconsislonl lo aoopl a

Lo isoo Ly a manifacliioi lo commil ilsolf lo soll al ligl piicos. Elso, il woilo

compolo in piicos ano piovioo inoifoionlialoo soivicos (oi, wlicl is oqiivalonl,

q n d)q . Imposing symmoliy on qianlilios yiolos q =

q c)q ano lloiofoio will Lo willing lo Liy accoioing

in lhc samc mailcl Ly olhcis) lomoiiow. 1o unocislano how cconomic lhc-

c . Elso, piooalion in llis poiioo Ly

ioaoily Lo infoiioo fiom convonlional Lisinoss accoinls, wlicl lypically go no

[70[ Donocloio, B. ano C. Davioson. 198. Inconlivos lo Foim Coalilions will

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