9. Prosecution is not straightforward

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Do curso por National Research University Higher School of Economics

Industrial Organization: Strategy and Competition in Business

5 classificações

National Research University Higher School of Economics

Industrial Organization: Strategy and Competition in Business

5 classificações

Industrial Organization is the area of economics that studies the markets as institutions, the state of competition and strategic interaction among firms, the industrial policy and the business decisions firms make within the market framework. The course looks at the markets from three different perspectives: the economic theory, the applied business perspective and the institutional and legal perspective. The focus of the course is split equally between the economic theory and business perspective but there is a significant legal component incorporated in various topics. The course includes economic modeling, game theory, numerous real life examples and several case studies. We explore interesting topics of market organization such as negotiations, antitrust, networks, platforms, electronic markets, intellectual property, business strategies, predation, entry deterrence and many others. The basic objective of the course is to enable the student to understand the structure of markets and the nature of strategic competition. Knowledge in this course will be valuable for the students in acquiring managing and governance skills, enriching their understanding of the institutional framework of business, and improve their analytical ability in negotiations. Prerequisites: The course requires understanding of basic economic modeling, knowledge of intermediate microeconomics (especially production/cost theory), knowledge of basic concepts and methodologies of game theory, intermediate econometrics and basic calculus.

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Dynamic competition

We extend the analysis of competition introducing interactions with time depth. We will use several concepts from the previous lectures but here we have two important qualitative differences. When competition lasts for more than one period, players develop reputations and are given the opportunity to retaliate in case they are cheated upon. Reputation and retaliation may alter the outcome of interaction in comparison to interactions that last only for one period. We will talk about repetitive and dynamic interactions, collusion, renegotiation, price wars, antitrust and detection mechanisms.

9. Prosecution is not straightforward8:45

10. Detection6:45

Conheça os instrutores

Kosmas Marinakis
Assistant Professor
ICEF and Faculty of Economics Sciences, HSE

Establishing collusion is hard.

We saw that already.

Life is hard for those who want to collude but

also life is hard for those who want to prosecute collusion.

It's not easy to prosecute collusion.

Don't forget that if you are the authority that persecutes the people that they collude,

the firms that they collude to each other,

you actually have to make a case.

You have to find evidence.

You have to make a case and this case has to be convincing for

judge and for a jury in front of a normal court of law.

So, you have to make a case that someone has done

something illegal and if you want to convict them,

is not going to be easy.

So, first of all,

you have to convince the judge and the jury that there is

excess market power which means that you have to measure the market power.

It's not easy to measure market power.

It's even harder to prove that there is

exploitation of the consumers because of this market power.

Their index is, of course,

that they measure market power but in some cases,

those indexes can give you from one index to another,

a very different answer.

What if you have an industry in which you have

three big firms and then 1,000 smaller ones?

What if you have another industry in which you have two firms that they are not as big as

the previous ones but they have

equal market shares and then you have another two small ones.

So, how are you going to measure the concentration in these two businesses?

Maybe you will get contradicting indexes to show you different things.

Another one is how to estimate cost or

demand when the information access that you have is limited.

Firms sometimes they will invite the competitors to check out their practices,

their costs, how much demand they have.

They will never invite the antitrust authorities for the same reason.

Actually they want to keep them as far as possible

from them because it's a source of danger for the firms.

If the anti-trust authorities are looking into you,

that's not a very comfortable situation for anyone who

runs a company those guys in the IRS.

You always want to stay away from them.

So, how are you going to estimate if you are the prosecutor?

How are you going to estimate the demand and the cost of the firms?

How are you going to prove that these firms are charging expensive

not because they're colluding but because costs are expensive or demand is too high.

All right so you need to have information about that and sometimes you don't.

Sometimes, it is hard to determine the market.

Wait a second, how is that even possible?

You don't know what the market is.

Well, let's try to understand what is the market of education.

Can my course that I give to universities a real course in front of my students,

my classes belong to

the same market that these course that they give through video to you?

Is it the same market or is it different market?

Some people can say no,

education at the university is different from education from home,

some other people can say no it's actually education.

So, it's difficult to understand what the market is sometimes.

Some prosecutors might say you have excess power and you can say

no I have excess power in the market of video lectures,

but this is not a market in itself.

It's a market that includes hundreds of universities,

so therefore, my power is very small.

So, you have to be able to understand what the market is not only to

understand but also to convince judges and juries about that.

And then, what the product is,

even the simplest product.

Someone can make a case that this is not one product this is more than one,

like let's say this shirt I'm wearing.

So, is the shirt a product by itself?

What about the buttons?

Is it a separate product or is it coming with the shirt?

Buttons and shirt, is it the same?

Someone can tell you,

no you actually tying the batons and the shirt

together and therefore this is not the same product you're just tying them together.

There are cases like that.

There was a case a few years ago about car manufacturers,

car dealerships that they were selling

their cars together with their audio system in the car.

And the case was that you actually bundling

two different products you make consumers buy expensive radios from you.

Is it the car and the audio system a different product or not?

Today, the answer seems to be that the audio system should be

integrated into the car and therefore we consider that it's mostly one product.

Back then for some period,

you could buy the car without

the audio system and you could put your own audio system in it.

What level of market power is acceptable?

So, assuming that you have measured the market power,

how much is it reasonable?

You have a firm you are looking for market power,

you're looking to be someone who produces

a good product people like your product and they want your product specifically.

How much of market power is bought?

You have to be able to make a threshold in

that thing which after this threshold, it's too much.

What if the market power is not fully used?

In United States there are right now huge companies that they

have extremely high market power like for example Wal-Mart but they do not really use it.

Wal-Mart is not charging expensive prices to the consumer.

It's more cheap than almost any other retailer and it's reknown for that.

But it does have market power it just doesn't use it in the end.

What if the monopoly is a fair result

of your superior skill of innovation and your efficiency?

Yes, you have excess market power because you are good.

You make a good product. Can they prosecute you for that?

What if you go to court and you say yes your honor,

I do have high market power because I produce a product that no one can imitate.

So, if you can make a counter case like that,

you're not going to be convicted.

Anti-trust erases the cost of renegotiation.

This is a very smart point which was made by McCutcheon in

1997 and he made this point by saying that wait a second,

what do firms want to do when they collude?

They want to have high costs of

renegotiation and this is actually what the antitrust law does.

It makes renegotiation.

Once the coalition breaks,

the agreement breaks you have to renegotiate and then antitrust makes it harder.

So, anti-trust actually sometimes can help collusion because it

makes renegotiation much harder than it would be without antitrust.

It's also finally hard to determine the dynamics that influence the market persistence in

time meaning that we have seen several cases of

someone who has tremendous market power and that this market power,

just like that, goes away.

So, you can never be sure about your market power.

Sometimes, you might be the king in the market

and in the next period something happens and you are not anymore.

So, you have to be able to understand what are the dynamics behind

the market power that happen while these case will have to make its way to the court.

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