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On how to find the perfect couple (2012 Nobel Prize in Economics)

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As announced yesterday by the Swedish academy, the recipients of the 2012 Nobel Prize in Economics are Angela Merkel and the German Government Al Roth and Lloyd Shapley.

Their research has mainly focused on the stable allocation of resources in markets where prices are inexistent. They focused on two-sided markets where monetary exchanges would be inappropriate (i.e. patients-kidney donors or the two individuals in a marriage) and figured out the way to strike non improvable (stable) matches.

As we wait for Nico to come up with a Chuck Norris joke on this, we can point you to Al Roth’s blog . In yesterday’s entry he said that his daily post could be delayed, and on Sunday Roth had written a post on the correlation between national chocolate consumption and per-capita Nobel prizes (Belgium is the exception that confirms the rule) 😉    (there is, however, a correlation which seems even stronger than the chocolate one: if you’re a US citizen, a Harvard Professor, and your research is on game theory then it’s pretty clear that you’ll get a Nobel sooner or later!).

We could also recommend you to read Shapley’s seminal paper on Long term competition (a game theoretic approach) (if you do, please tell us what it says, because we can’t really read equations!).

Now, since you probably won’t read neither Roth’s blog nor Shapley’s 1992 paper, and since the only think in this post that caught your attention was that they figured out the best way to find the perfect match in marriage, that’s where we will focus on:

In a 1962 paper Shapley and Gale assumed a market in which men propose to women (a debatable assumption as it is a bit male-chauvinist and also leaves out people who wish to stay single, gay and bisexual people and a bunch of other “real life stuff”), in which each individual has views about what their ideal couple should be like, but in which those views do not lead to perfect matching [otherwise a bunch of us would be matched to Monica Bellucci or Bar Refaeli, and that can’t work; or could it?? (note to my girlfriend: this is only a joke mandated by our editorial line; don’t worry)]. Shapley and Gale stood up for the proposition that an stable result could only be attained if women applied a “deferred acceptance” strategy. This would work as follows:

First, men would propose to their favorite woman. This means that Monica and Bar (which is how Nico and I call them in private) would have multiple choices but that other women would have less or zero choice, which (even if certainly acceptable by some of us) is unfortunately not stable. Instead of accepting their favorite “candidate”, they argue that women should “pocket” the strongest offer without accepting it and reject all others. Rejected men would then make a second proposal, which would allow women to stick to their previous pick or to replace it by one of the new candidates. Shapley and Gale proved that, if repeated enough times [1st round Monica Bellucci, 2nd round Bar Refaeli… 1456th million round Snowwhite’s evil stepmother –with two notable exceptions-] the algorithm will lead to stable non-improvable matches.

Sure this doesn’t seem to “match” the real world and, although intellectually interesting, its practical application seemed doubtful (and discouraging!).  But Roth figured out that Shapley’s algorithm could have enormous practical applications on students-schools, patient-donors, and doctors-hospitals. A great example where the intelectual beauty of economics results in very practical solutions to real problems that truly affect peoples lives. In sum, a very deserved prize.

Written by Alfonso Lamadrid

16 October 2012 at 12:29 pm

Fine and Punishment

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In the article that  kept me working during my otherwise summer holidays last year Luis Ortiz Blanco and myself wrote for the Fordham Conference held last September [the final version is published here; a draft version is available for free here] we quoted one of our “Friday Slotters”, Ian Forrester, (actually, he was the one who proposed “The Friday Slot” as a name for the section) saying that competition fines imposed by the Commission “exceed fines imposed by the public authority in any democracy of which I am aware for any offence“.

Some evolution is apparently taking place in this regard. Look, for instance, at the  $3 billion fine that GlaxoSmithkline has agreed to pay for promoting its best-selling antidepressants for unapproved uses and failing to report safety data. Take a look also at this very interesting graph, which points out at the largest corporate fines and settlements in the past seven years, and also presents the fine as a percentage of the yearly income of the sanctioned companies.

During a Paris-Brussels train trip last night I read an interesting piece on The Economist that deals precisely with the recent increment in corporate fines using international cartel fines (which reportedly “rose by a factor of one thousand between the 1990s and 2000s”) as the main example. 

The Economist‘s piece draws on economic research to justify the conclusion that “to deter bad behavior fines need to rise”.

You may recall that our guest Benoît Durand dealt with this same issue some posts ago and came to a contrary conclusion: that deterrence would be better served by envisaging individual sanctions (fines, disqualification and/or prison penalties) for the executives directly involved in cartel meetings. We haven´t really thought this through, but we’re not big fans of prison penalties, nor would we favor the imposition of disproportionate individual fines. A well designed disqualification sanction, however, would appear to us as a reasonable measure. Any views?

Written by Alfonso Lamadrid

23 July 2012 at 3:08 pm

Reading Competition Law Books

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In our “Friday Slot” interviews we ask what competition law book deserves an Antitrust Oscar. A frequent reply from our interviewees is that they do not read competition law books but rather consult specific sections of such books when they are looking for something in particular.

We don’t necessarily agree with this view. Even though there are certainly some books that we only use for reference, we believe that some of the best books on antitrust are texts that you will not come accross if you’re just looking for references or for the answer to a very particular problem.

In our very own experience, reading certain competition law books written by people who clearly outsmart us has provided us good general overview of issues that we may not had/have yet seen in our professional life, and, most importantly, it has obliged us to reflect and think about what makes sense and what doesn’t in a discipline to which we devote an insane proportion of our life. Personally, we have learnt most of the theory we know from books and not from attending courses, seminars or conferences, no matter how good they were.

The obvious -and reasonable- response is “if, as you say, you already devote an insane amount of time to this, why on earth would you spend non-working time reading about the same subject?”. That’s partly true, but, the way we see it, it is one thing to spend your time working on a particular issue, and a very different one to take the time and distance (not to let the trees hide the woods) to reflect on the reasonableness of the overall discipline in which we are immersed.

We’re not saying that we do -nor, of course, that anyone else should- read competition law books instead of non-competition law books. No matter how good a competition law book is, non-competition law books teach you or open your mind to much more important stuff. We are just saying that -when we’ve had the time- we have found it useful to include some competition law books in our reading list.

A (certainly non-exhaustive) selection of some of the competition law books that make a most interesting read could feature Hovenkamp’s “The Antitrust Enterprise“; Areeda and Kaplow’s “Antitrust Analysis: Problems, Text, Cases“; Bork’s “The Antitrust Paradox“; Posner’s “Antitrust Law“; Amato’s “Antitrust and the Bounds of Power“; Luis Ortiz’s “Market Power in EU Antitrust Law“, Giorgio Monti’s “EC Competition Law” or Odudu’s “The Boundaries of EC Competition Law; The Scope of Article 81“. There are many other great books but we can’t name them all (suggestions in the form of comments will be welcome!).

The ones I’m currently in the (slow) process of reading (alternating from one to the other) are “Creation without Restraint: Promoting Liberty and Rivalry in Innovation” by C. Bohannan and H. Hovenkamp;  Kevin Coates’ “Competition Law and Regulation of Technology Markets” and Einer Elhauge’s (Ed), “Research Handbook on the Economics of Antitrust Law“. I´ll also be happy to read Nicolas’ most recent book ; sorry, wrong link; this is the right one!  😉 I intend to post a review of these books here once I´m done with them.

Regardless of all the above, my personal favourite antitrust book ever is one that I have only used for specific consultations and that I will most likely never read: the Treatise written by Areeda and Hovenkamp: “Antitrust Law: An Analysis of Antitrust Principles and their Application“. The reason why I know I won’t read it is that it looks like this:

Three additional comments:

– Herbert Hovenkamp -whose work is referenced above a few times- is clearly one of the 4 or 5 people from whom I’ve learnt more antitrust law, and the only one of these (aside from his co-author late Philip Areeda) whom I have never had the chance to meet in person (which again proves the importance of competition law books). We are very proud to anticipate that our next Friday Slot interview is with him!

– There is much to be said about the pricing of many of these books. But we’ll deal with that in a separate post.

– I recently recommended here a non-competition book -in Spanish, though- and a few (four) of you have sent emails saying that you loved it, which is nice to hear. Here is another suggestion, in English this time: A Heartbreaking Work of Staggering Genious.

Written by Alfonso Lamadrid

2 May 2012 at 5:55 pm

The Economist Corner (III): “Intent” in Article 102 cases

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For this third edition of The Economist Corner we have invited Hans Zenger. Hans used to be a member of the Chief Economist Team at DG Comp and is currently Senior Consultant at CRA. He’s is not only one of the most brilliant economists in town, but he’s also a great gruy.

 As noted here some months ago, and even though there remains much to be done, Hans will also be one of the co-authors (the others will be Miguel de la Mano, Renato Nazzini and myself) of the Article 102 chapter of the next edition of Faull & Nikpay’s The EU Law of Competition. 

We leave you with his ruminations on the role of intent in Article 102 cases. This topic, and many others, are dealt with in his article “Loyalty Rebates and the Competitive Process”, which is forthcoming in the Journal of Competition Law & Economics.)

***

In criminal law, proof of intent plays an important role in establishing the scope of liability. If A intends to benefit at the expense of B, then A is probably up to no good. In antitrust, this principle has all too easily been extended to unilateral conduct law. The problem is that the intent of benefitting at the expense of others is essentially what generates the beneficial outcome of a market economy:

• The prospect of “exploiting” consumers is what provides firms with an incentive to produce valuable products that improve over existing varieties.

 • And the prospect of “excluding” rivals from making sales is what provides firms with an incentive to cut price to expand output.

In other words, the self-serving intent to “exploit” and “foreclose” is a cornerstone of the competitive process.

Adam Smith succinctly explained this in 1776: “It is not from the benevolence of the butcher, the brewer, or the baker, that we can expect our dinner, but from their regard of their own interest … By directing that industry in such a manner as its produce may be of greatest value, he intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention.”

If one too readily transposes the zero-sum logic of criminal law to unilateral conduct investigations, then Smith’s conclusion constitutes a paradox: If A intends to benefit at the expense of B, how could that possibly be good for B? But as Schumpeter has explained, “There is no more of a paradox in this than there is in saying that motorcars are traveling faster than they otherwise would because they are provided with brakes.”

The evidentiary value of intent evidence in Article 102 cases therefore has its limits. Perhaps not surprisingly, regulators on occasion have shown a tendency to read too much into such documents. As Judge Easterbrook has noted, “firms ‘intend’ to do all the business they can, to crush their rivals if they can … Rivalry is harsh, and consumers gain the most when firms slash costs to the bone and pare price down to cost, all in pursuit of more business. Few firms price unaware of what they are doing; price reductions are carried out in pursuit of sales, at others’ expense. Entrepreneurs who work hardest to cut their prices will do the most damage to their rivals, and they will see good in it. You cannot be a sensible business executive without understanding the link among prices, your firm’s success and other firm’s distress. If courts use the vigorous, nasty pursuit of sales as evidence of forbidden ‘intent,’ they run the risk of penalizing the motive forces of competition.”

Written by Alfonso Lamadrid

11 April 2012 at 11:31 am

The vertical expression of a horizontal desire

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A few days ago someone sent us a very interesting piece published by Okeoghene Odudu (who is also the author of a great book on Art. 101) in European Competition Journal (August 2011) under the title: “Indirect Information Exchange and the Constituen Elements of Hub and Spoke Collusion“.

Although we have enjoyed the substance of this article, the reason why it was sent to us in the first place was not its content but rather a particular footnote at the very end of it. It reads as follows:

“187.  In his blog posting of 21 February 2011, Nicolas Petit expressed the view that there was nothing worthy of analysis in the hub-and-spoke phenomenon and concluded by writing, “The bottom-line: I will fight any proposal to organise an event on hub-and-spoke agreements. See https://chillingcompetition.com/2011/02/21/much-ado-about-nothing/.”

[*Note by Alfonso: The original post features a smiley face like this :) right after this quoted statement. The face is nevertheless missing in the quote that appeared in the article. It’s a pity, because it would have been funny to see the smiley appear in European Competition Journal!].

However, by 24 May 2011 he seems to have had a conversion, announcing that, through the Brussels School of Competition Law, he had co-organised a seminar on information exchange, to deal in part with “Sharing Information through Intermediaries (supply-purchase relationships, distribution agreements, meet and release clauses, hub-and-spokes, etc)”. See https://chillingcompetition.com/2011/05/24/information-exchange-in-eu-competition-law-conference-22-june/

We were surprised at this footnote (since we don’t always take what we write seriously, it’s curious to find out that people do), which nonetheless expresses a very legitimate opinion.

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Written by Alfonso Lamadrid

28 March 2012 at 5:02 pm

A turn of the screw (José Luis Buendía on SGEIs)

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[Note by Nicolas and Alfonso: Since we learnt the news that the Commission was preparing a reform of the State aid rules applying to services of general economic interest we have been trying to have our friend (also Alfonso’s boss) José Luis Buendía to give us his views on the reform. Apart from a  being a top-notch State aid lawyer and the author of the seminal (and perhaps only) book on Article 106 (a new edition is in the pipeline), he was heavily involved in the drafting of the original “Altmark package” at the time when he was working for the European Commission. In fact, a few months ago a member of the European Commission said at a conference that whereas some people call this package the “Monti package”, many Commission officials refer to it as the “Buendía package”. We are very thankful for him for having taken the time to write this insightful piece that we believe will be a “must” for anyone dealing with this subject. It’s a privilege for us. Enjoy!]

The editors of this blog have kindly invited me to comment the recently adopted ‘Almunia package’, in which the EC has revisited the State aid rules applicable as regards the financing of Services of General Economic Interest (SGEI).[1]

I have chosen the expression “a turn of the screw” to introduce this short comment for two reasons. The first and most obvious reason is that the new rules would – at least at first sight – increase the pressure and make life more difficult for the big operators of SGEI. The second relates to a Henry James novel, The Turn of the Screw” (1898), subsequently adapted to cinema by Jack Clayton under the titleThe innocents” (1961). The reference to the story seems pertinent to me because it has had very differing interpretations, often mutually exclusive.  The ambiguity of the story makes difficult to conclude whether the governess has actually seen the ghosts or whether she simply dreamed. “The Turn of the Screw” definitively looks like a ghost story but… is it really a ghost story? In any case it is a great story I can recommend.

As I will try to explain, when comparing it with the previous post-Altmark (or Monti-Kroes) Package, the Almunia package definitively looks as a turn of the screw as regards the rules applicable to the financing of SGEI.

In my opinion, and given the current political context, the most remarkable feature is the mere adoption of the package by the Commission.  One has to remember that some Member States wanted that the rules on SGEI were adopted, not by the Commission but by the Council and the Parliament, under the new legal basis introduced in Article 14 TFEU by the Lisbon Treaty. Despite this political pressure the Commission chose not to make a proposal under this new basis (probably for the same reason that turkeys do not vote for Thanksgiving). Instead, it revisited the package under its own powers under Articles 106 and 107 TFEU. This decision seems wise and legally well founded, in particular given the limits of Article 14, but is still quite courageous in this time of centrifugal tendencies at the EU level.

Obviously this small comment cannot cover all the interesting issues raised by the package. It is however fair to say that the content of the reviewed package does not look as particularly conciliatory with those who wanted more flexibility for SGEI. It is true that there are some changes going in that direction. This is the case for the small operators in charge of SGEI that are exempted from notification (in particular, there is a new exemption of some social services and a new draft de minimis specially conceived for SGEIs), but the story seems quite different for the bigger operators that remain subject to individual notification.  Under the Almunia package – and contrary to the previous Monti-Kroes package – the rules applicable to the big operators are going to be different and stricter from the rules applied to the smaller.

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Written by Alfonso Lamadrid

14 March 2012 at 2:21 pm

Yet another well-timed complaint against Google

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It has been reported by Reuters that Microsoft and other companies are behind a new complaint against Google before the European Commission. Microsoft has denied having lodged any formal complaint. Regardless of whether Microsoft is involved or not, the news raises some thoughts:

Timing:

Once again, this complaint seems to have been strategically timed. Rumor had it that the European Commission would be adopting a preliminary position on the ongoing investigation by mid-March. No matter the merits of the complaint, whoever is behind it deserves credit for outstanding timing; they know how to play the game.

It reminds me of a well-known scene of my favorite movie saga, when in The Godfather III (yes, my taste for movies is absolutely mainstream) Al Pacino screams “Just when I thought I was out, they pull me back in!” (doesn’t he look a bit like Sarkozy in the pic above?) (it also brings to mind the “Yet another on-time flight from Ryanair” pre-recorded phrase that follows that “sweet” melody that you get when you land..).

In our previous posts on this pending case we have always highlighted the good timing of complainants (see here). Also, last April Nicolas wrote here that the “chief, and maybe sole merit [of Microsoft`s complaint] is to throw some mud at Google in the press, at a moment when (i) Google has been reported to be close to a settlement with the Commission; and (ii) Google has suffered a major setback last week, when its settlement with US publishers and authors was annulled by a NY judge” (this opinion by Nicolas was also reported in the press).This time, the complaint not only comes a few days before the Commission is expected either to drop the case or send an Statement of Objections. It also comes a few days after Microsoft lodged another complaint against Motorola (only a week after the Commission and the DOJ gave green light to its acquisition by Google). Per Hellstrom and his unit must be swamped with so many complaints being brought in relation to IT markets.

Substance:

The new complaint apparently focuses on a new function recently introduced by Google (“Search, Plus Your World”) that integrates information (photos, news and comments) from Google’s social network (Google+) within Google’s search results. Those opposing the new function apparently claim that it constitutes anticompetitive tying on the part of Google. This would be intended to reinforce allegations that Google uses its search engine to promote its own services.

According to the Commission’s initial Press Release, the alleged conduct subject to investigation is “unfavourable treatment of [other search service providers’] services in Google’s unpaid and sponsored search results coupled with an alleged preferential placement of Google’s own services” . Following the initiation of the investigation by the Commission there have been various attempts at enlarging its scope.

In the past both Nicolas and myself have been very critical with the allegations against Google (we have no direct/indirect involvement whatsoever in the case and only comment on info that is in the public domain, so we may lack relevant information). For our previous comments on this case, see here, here, here and here; see also here for a guest post by Pablo Ibañez Colomo on this same issue. We understand that the Commission had no choice but to investigate it thoroughly, given that an eventual rejection of the complaints would with all certainty be challenged in Court. Nonetheless, we are concerned that a case against Google would imply either a significant lowering of standards of intervention or the acceptance of the theory of “Karate Competition Law“.

I’m not aware of any evidence pointing out to the fact that Google does or doesn’t discriminate, but let’s move away from the facts, let’s leave aside important issues such as the question of whether Google is dominant and the ease of switching to competing services, and let’s focus on a matter of legal principle: can we require absolute neutrality from a company, even if it is dominant?

The mere term “discrimination” carries extremely negative connotations (if you look at is as “differentiation” it sort of looks a bit more acceptable). It also implies some sense of inherent unfairness. Nonetheless, there is a significant difference between what is unfair and what is questionable under the antitrust rules. Many things in life are unfair, but I can’t complain saying that they’re illegal; or can I?

As we have both written in previous posts, discrimination does only run afoul of the antitrust rules provided that it gives rise to foreclosure (i.e. elimination of competition) (as with most antitrust debates, the best way to find a solution is often to go back to basics). Foreclosure is is the usual standard of intervention and we see no compelling reason for abandoning it in this particular case. Let’s apply this criterion to the reported new complaint: is the fact that information from Google+ will appear in the results enough to eliminate competition from, let’s say, Facebook? It seems like a very long shot.

Given the above, and in light of the limited information at our disposal, we tend not to see any grounds for intervention.

Some suggested readings:

I spent a few hours of the weekend in the train from Brussels to Luxembourg (I would have gone by car, but I never told you that my car got burn by skinheads who felt like burning a trash can right next to my parked car..). The train takes ages, but it allows for some good reading time. The subject of this trip’s readings (aside from an incredibly good novel in Spanish) was precisely search neutrality.The three pieces I read are highly recommendable:

If Search Neutrality is the Answer; What is the Question? (by G. Manne and J. Wright);

– “Non-Discrimination in Communications and IT Regulation: Understanding the Rise of a Transformative Principle” (forthcoming; can’t say who the author is because the paper is currently undergoing a blind-peer review).

Search Neutrality as an Antitrust Principle (by D. Crane).

Written by Alfonso Lamadrid

5 March 2012 at 6:08 pm