Archive for the ‘Subversive Thoughts’ Category
Subversive Thoughts (3) – Regulating Rating Agencies with the Competition Rules
The rating agencies “oligopoly” has been trashed by virtually all EU policy makers in the past days.
The big question on the policy agenda is now: how to regulate them?
Here’s a first taste of my answer, which I will further articulate in a forthcoming paper with my assistant N. Neyrinck. This paper will make extensive use of my prior research on oligopolistic dominance.
Let’s start with two propositions.
Proposition 1: The market for rating services exhibits a bunch of features which makes them prone to antitrust scrutiny. Market structure is oligopolistic, with essentially three big players (Moody’s, S&P and Fitch). Conduct is close to coordination (tacit or explicit), with quasi simultaneous and identical downgrading cycles. Performance is welfare decreasing, with borrowers paying a steep price in terms of interest rates (not to talk of the price to pay for taxpayers, called to rescue downgraded countries)
Proposition 2: The toolbox of antitrust agencies comprises a variety of flexible remedies which could be instrumental to regulate the rating agencies oligopoly (e.g., structural and behavioral remedies). Moreover, competition policy is an exclusive EU competence. Hence, those Member States that are reluctant to regulate the rating agencies cannot undermine Commission action under the competition rules. Finally, the EU competition rules can be enforced in a timely fashion (think of Article 9 proceedings) and also apply to non-EU firms.
Obviously, the main outstanding issue is to build a case around those two basic propositions. This implies devising a credible theory of harm, in other words a scenario of anticompetitive conduct that would allegedly explain the rating agencies’ behavior.
On this, and out of pure speculation, an hypothesis with both a collusion and a foreclosure component can be floated. Together with a number of banks, the rating agencies may be trying to harm other rival banks that have purchased Greek and Portuguese paper. Of course, the main problem here would be to (i) explain why rating agencies have an interest in siding with certain banks and not others; (ii) establish a link, convergence of interests, concertation between the rating agencies and those banks.
But even in the absence of a strategic link with banks, one may still consider that the rating agencies conduct is amenable to antitrust scrutiny. After all, with their self-fulfilling prophecies, the rating agencies risk injuring the structure of banking markets by pushing certain players to bankruptcy. In turn, this will increase market concentration, weaken competition and harm consumer welfare. Note that scenarios of this kind are often found in secondary line injury price discrimination cases (where the seller places some third parties at a “competitive disadvantage” (a sort of negative externality?) in a related market). Hence, it would not be crazy for antitrust regulators to run a theory of this kind. Moreover, the explanation for the rating agencies’ conduct can perfectly be framed in the words used by (i) behavioral economists to describe irrational conduct – why hammer Greece and Portugal, and meanwhile maintain the US’ AAA?- in markets where players are excessively risk averse; or (ii) conventional economists to describe information imperfections and reputation dynamics (to stay credible, agencies need to be tough on rating).
Happy to have your comments on this.
PS: I had initially decided to use a picture of Cassandra to illustrate this post. I changed my mind given (i) the fact that Cassandra was often right, but never believed; and (ii) my musical tastes.
The Spanish CNC at the avant-garde of competition enforcement?
Some posts ago we referred here to the Spanish Competition Authority’s decision sanctioning the main Spanish electricity companies with fines totaling some 61 million euros as a good illustration of how quantity and quality may not necessarily go hand in hand with regard to competition law enforcement in Spain.
(Btw, the comments to our previous post express interesting views on the CNC´s attitude and offers possible explanations to its causes. In the days after that post was published several other pieces on the CNC´s performance also appeared elsewhere).
As anticipated then, I believe that the “innovative” theories put forward by the CNC on its decision (which include “sham litigation” and a version of what Nicolas has labeled as “Karate competition law“) merit a comment on this blog, so here go some brief remarks on the decision:
(Before getting started, a disclaimer is in order: my firm is representing one of the entities sanctioned by the CNC. Accordingly, and although I am expressing my very personal views, you are at liberty to take them with a pinch of salt). Those interested in a summary overview of the facts and of the CNC’s official position, check out the CNC´s Press Release here.
Even though the decision declares that companies are responsible for two infringements I will merely focus on the one that can be of greater interest to our readers:
According to the CNC, this infringement consisted of a strategy (note: not a conduct, but a strategy revealed by circumstantial evidence) aimed at hindering customers from changing of electricity supplier at a moment in which deregulation was taking place. One –the main- component of this strategy was an agreement adopted by electricity companies within the framework of their association to appeal a Ministerial Order on the grounds that it contravened data protection rules by not envisaging the right of companies to refuse to provide certain personal data. The other alleged elements consisted of a temporal “cutt-off” of operations relating to applications to move to the free market (which both the Ministry and the Energy Regulator consider justified) as well as of a refusal to meet the requests of one supplier (that had previously been sanctioned by the CNC on a different decision).
(Click here if you’re interested in a comment on the issues that perplex me the most) Read the rest of this entry »
Subversive Thoughts (2) – Excessive Pricing
Today, I would like to advance again four heretical propositions, this time in relation to excessive pricing cases under Article 102 TFEU. In essence, they challenge the mainstream view that there are insuperable conceptual and practical hurdles to the control of dominant firms’ pricing policies. No doubt this will again trigger opposition from the mainstream.
A Proposed Theory of Harm for Excessive Pricing Cases, the Foreclosure of Ir-Relevant Markets – To start, I believe that there is a reasonably sound – and overlooked – conceptual basis to challenge monopolists’ excessive pricing policies on the basis of the antitrust rules. Take a monopolist charging excessive prices in market A (the relevant market). With this, the monopolist dries up demand on neighboring markets (B, C, D …). But this is not all. He also dries up a range of unrelated markets (W, X, Y, Z) which include virtually all the markets where customers make purchases of goods/services. To take one example of this, a customer faced with an increase in the price of oil will purchase lesser quantities of milk, cereals, fruits, etc. (assuming finite resources). The monopolist’s pricing policy on market A thus forecloses – possibly unwillingly – the sales opportunities of other producers on a range of ir-relevant markets. In turn, this may force out a number of firms of those markets, increase concentration, decrease entry opportunities and eventually harm market competition. This effect will be particularly acute on markets relating to products/services that do not fulfill basic needs, where customers will simply forego consumption.
But this is not all. With this conduct, the monopolist may even distort, and drive demand up in market A. This is because consumers foregoing consumption of B, C, D, W, X, Y, Z will divert their freed resources towards market A, thereby consuming more of the monopolist’s product (for instance, because they fear a further increase in the price of A). This may give rise to extra-superprofits on the part of the monopolist.
From an economic standpoint, there is nothing truly shocking to my proposition. After all, we know since Walras that markets work altogether in equilibrium. Moreover, it suggests that dominant firms’ excessive prices inflict a collateral damage on other firms which, in the word of economists, is akin to a negative externality. Hence, there is good ground to regulate such pricing practices. Finally, the emphasis of this proposed theory of harm is on foreclosure (and not on exploitation, thereby limiting the risks that agencies will seek to achieve distributional goals).
In practice, the upshot of this first proposition is that competition authorities, who often view markets as silos, should not shy away from thinking outside of the box relevant market. There is nothing wrong to consider the effects that price increases may have on other unrelated markets. After all, competition authorities do this all the time. Think for instance of the complexities involved in the balancing, under Article 101 TFEU, of the anticompetitive effects of an agreement in market 1 with its pro-competitive effects in market 2. Likewise, many theories of harm under Article 102 TFEU involve practices that take place in one market, and that have anticompetitive effects in another market (e.g., predatory pricing, tying, etc.).
A Proposed Practical Benchmark to Screen Excessive Pricing Cases – The most powerful argument against excessive pricing cases is practical in nature. No one, let alone antitrust regulators, can arguably say at what level a price (and a profit margin) becomes excessive. Moreover, price-costs benchmarks would be unpractical, because there would be insuperable cost-measurement problems in a number of areas (e.g. multi-products firms, etc.). Read the rest of this entry »
Subversive thoughts (1) – Fines, Leniency and the Search for an Optimal Detection Policy
A somewhat heretical idea sprung to mind yesterday. The mainstream will not like it (fortunately disputes with the mainstream are not any longer settled by recourse to bonfires).
(Note to our readers: the mainstream comprises adepts of Chicago School thinking and Public Choice theory. It combats, with caricatural arguments, all attempts to intensify competition enforcement. As if we were subject to Pavlovian conditioning, all too often we lawyers side with the mainstream, thereby failing to remember that competition enforcement is a genuinely good thing).
But let´s get back to this idea: to improve cartelists incentives to report infringements to agencies, why not allocate the entire amount of the fines (or a significant proportion thereof) to the whistle blower?
As long as the ring leader(s) is (are) excluded from a such reward, I see no obvious perverse effects to the proposal.
Surely, it sounds quite immoral to reward financially what is plain and simple betrayal. But on the other hand, it is fair and efficient that society rewards those firms that exhibit the strongest desire to comply with the law.
Also, one cannot rule out that clever firms involved in multiple cartels will coordinate leniency applications so that each participant benefits at least once from the reward (some sort of market sharing on leniency applications). Yet, this hypothesis rests on restrictive factual assumptions. More importantly, given that the fine will likely change from one cartel to the other, cartelists will not withdraw equal benefits from leniency applications. In turn, this will undermine their incentives to join/observe the coordination.
Finally, some could be warry for the EU budget to which competition fines contribute. Again, the objection is not decisive. This is because competition fines do not increase the EU budget but finance it. Technically, they are deducted from MS contributions, who pay less when competition fines are high. The sole and whole issue there is thus distributional: shall we transfer the product of fines from MS to whistle blowers? I am not sure of the answer, but I am incline to believe that competition fines are just a drop in the sea of MS contributions.
Those thoughts came yesterday whilst I was preparing a lecture on public and private enforcement for the LL.M students of the University of Gent (see ppt. below). I am very grateful to Prof. Govaere for her kind invitation.
5 May 2011 – Public and Private Enforcement of Competition Law
Chillin'Competition 