RBB publications

Brief 57: Mamma Mia! Mis-using Abba Lerner’s index to measure market power 26.11.18

In August 2018, the Federal Government released the Final Report of the Productivity Commission’s (PC) inquiry into competition in Australia’s financial system.

One of the main findings of that inquiry was that price competition in the banking system was limited and reinforced by opaque pricing and obfuscation. The basis for this finding was that all banks – large and small in Australia – exhibited pricing power and were able to use that power to keep prices above marginal costs.

That important finding was alleged to be supported by analysis undertaken by the PC using the Lerner index, which it claimed showed that all banks in Australia had market power, but that the major banks were the “dominant force in the market” and, as a result, were able to charge higher premiums above their marginal costs compared with other institutions.

This Brief explains why the use of the Lerner index to determine whether a firm has market power is flawed and casts doubt on the PC’s findings that all banks in Australia possess market power and moreover, that the major banks, in particular, have been able to set prices above competitive levels to the detriment of consumers.

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Brief 56: Pfizer/Flynn vs the CMA: Misdiagnosis of excessive pricing 23.07.18

On 07 June 2018, the UK Competition Appeals Tribunal (‘CAT’) set aside the Competition and Markets Authority (‘CMA’) Decision regarding the alleged excessive pricing of phenytoin sodium (an anti-epileptic drug) by two pharmaceutical companies – Pfizer and Flynn.

While the CAT supported the CMA’s findings in relation to market definition and dominance, it was critical of the CMA’s assessment of the alleged abusive conduct. Specifically, the CAT found that the CMA “did not correctly apply the legal test for finding that prices were unfair; it did not appropriately consider what was the right economic value for the product at issue; and it did not take sufficient account of the situation of other, comparable, products, in particular of the phenytoin sodium tablet”.

In short, the CAT found that the CMA had failed to conduct a thorough economic assessment of the circumstances in which prices can be held to be excessive and identified a range of factors that need to be considered in order to robustly establish a finding of excessive pricing. The CAT Judgment therefore serves as a welcome reminder of the inherent difficulties that arise in determining whether or not a given price level can be meaningfully determined to be excessive and, perhaps more importantly, that competition authorities should not ignore crucial economic evidence in that assessment.

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Brief 55: Automatic Harm to Competition? Pricing algorithms and coordination 12.02.18

In a recent speech, EU Commissioner Vestager expressed the following concerns regarding the use of pricing algorithms.

“ I think we need to make it very clear that companies can’t escape responsibility for collusion by hiding behind a computer program.”

Other competition agencies have echoed similar concerns for the risks that pricing algorithms pose for collusion. The topic has also featured in a recent OECD roundtable and in a number of academic papers. This Brief assesses the impact of different categories of pricing algorithms, identifies their links with coordination concerns, and evaluates some possible competition law enforcement responses. Pricing algorithms do raise some interesting issues, but the worst case scenarios for collusion have been overplayed, and some of the calls for increased intervention reveal a worrying gap in the understanding of the economics of oligopolistic markets.

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Brief 54: An innovative leap into the theoretical abyss: Dow/DuPont and the Commission’s novel theory of harm 05.07.17

In March 2017, the European Commission approved the proposed merger between chemical companies Dow and DuPont, subject to undertakings. The Commission applied an innovation theory of harm that is based on a much broader and more speculative concern than in other recent mergers (e.g. Pfizer/Hospira); namely, that the parties would find it profitable to reduce overall R&D investments post-merger causing a reduction in the number of innovative pesticide products in the future. This Brief explains why this theory of harm marks a departure from previous “innovation” cases. It also responds to the recently published paper by Chief Economist Tommaso Valletti and his colleagues, which claims, on the basis of a theoretical model, that horizontal mergers can be expected to reduce innovation incentives as a result of a standard unilateral effect.

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