Microsoft Case Create and answer a case study similar to Microsoft Case (Chapters 7-11, 13) Cases Available under Assignments tab and Wikispaces Case Study folder on Blackboard- that focuses on vertical foreclosure and network effects and the benefits and costs of a company using pricing strategies to increase market power David Schroeder
The Google Case
Google has become the dominant market leader in the search engine and search advertising market. Google performs more than 65% of all online searches and controls about 79% of the search advertising sales. {Hatch 2011} Google does not disclose how its algorithms determine its ranking of search results as this is its competitive advantage. Competitors claim that Google uses anti-competitive behavior to maintain its dominance. Google claims that it just offers a better technology and that its behavior and actions has benefited consumers.
Competitors site examples such as Yelp and TripAdviser to support their position that Google uses unfair business practices. {Hatch 2011} Yelp and TripAdvisor both claim that Google violated their copyrights when Google published significant portions of their product without their consent. However, both companies were told by Google that the only way that Google would prevent that problem was by completely removing them from all Google results. Given Google's dominance in the search market, both Yelp and TripAdvisor saw this as anti-competitive behavior, especially when Google then purchased Zagat's, a competitor to Yelp, and ITA, a competitor to TripAdvisor.
The question remains as to whether such behavior violates either the Sherman Act or the Hart-Scott-Rodino Act {http://www.ftc.gov/bc/antitrust/antitrust_laws.shtm} for anti-trust behavior. It is not illegal for companies to be a monopoly. What is illegal is for companies to use their monopoly is such a way to be anticompetitive and to harm consumers. Complaints have been made that the Google case is similar in many respects to the Microsoft case in that Google has used its dominance in the search engine market to prevent entry of competitors by the network effects that Google enjoys and the vertical integration potentially foreclosing on downstream competitors. Google has also been accused of using pricing strategies as anti-competitive behavior to increase competitors costs specifically when that competitor has a service (e.g. maps, restaurant reviews, etc.) that competes with a Google service.
Google's Network Effects
Network effects occur when a more efficient and beneficial solution is available, but requires that at least a majority of current users of the current network switch simultaneously to order to be economically viable. {Baye 2011, pp. 493-499} This means that the first mover has a significant advantage in creating a barrier to entry for competitors. In Google's case, competitors such as Microsoft's Bing search engine claim that since Google has such a large network of both search users, that Google's real customers, advertising customers, can only afford to pay for searches on Google and cannot afford to not advertise on Google.
Google's Vertical Foreclosure Effects
"Vertical foreclosure is the exclusion that results when a downstream buyer is denied access to an upstream supplier (Upstream Foreclosure) or when an upstream supplier is denied access to a downstream buyer (Downstream Foreclosure)". {Stefanadis 1997}. In the Microsoft case, Microsoft prevented computer suppliers from buying internet software from Netscape. Google has been claimed to have engaged in both Upstream and Downstream Foreclosure. On the Upstream side Google has entered into exclusive contracts with internet service providers such as AOL to offer Google as their only search provider and to utilize the logo "Search powered by Google" to exclude other search engines from gaining access to these ISPs. Google has also been accused of manipulating its search algorithm to favor Google's products over its competitors. {Manne 2011}
However, Manne et.al. argue that this behavior does not meet the requirements of antitrust behavior. First, they argue that these exclusive agreements are for limited time periods and therefore do not foreclose on competitors ability to seek to gain ISP's business. Second, they argue that the Supreme Court decision in the Trinko case ruled that antitrust laws do not impose a duty to deal with competitors.
Google has also been accused of trying to vertically foreclose on the mobile phone search market. The basis for this is the attempt by Google to require mobile phone manufacturers that use Google's Android operating system to use Google as the default search engine. Further, Google has recently announced an agreement to purchase Motorola Mobility for $12.5 billion. Motorola Mobility is a major manufacturer of cell phones, tablet computers, and cable TV boxes.
The purchase of ITA, a flight search service and ticket provider, by Google was challenged by the FTC. In this case, the DOJ claimed the the mere ability of Google to leverage ITA's proprietary software was sufficient to be a risk to vertical foreclosure and entered into a simultaneous settlement to address the DOJ's concerns. This action raises questions on when vertical integration will be challenged as the mere opportunity for anti-competitive behavior was sufficient to have the DOJ challenge the merger. {Rosch 2011}
Enforcement of Antitrust
The FTC and DOJ both have jurisdiction over enforcement of the antitrust laws. The FTC has issued guidelines on horizontal mergers, but not on vertical mergers. {http://ftc.gov/os/2010/08/100819hmg.pdf} There have been very few actions taken by either agency against vertical integration and foreclosure issues as there are many pro-competitive and pro-consumer reasons for entering into vertical integrated structures. Arguments have been made that in dynamically competitive industries where prices and technologies are not static, that vertical integration cannot have truly monopolistic behavior. {Evans 2001}
One of the questions that remain is whether Google should be split into a search engine provider and a services provider. In this way Google could be regulated for its search engine and then the services it provides (e.g. gmail, buzz, etc.) could then compete an equal footing with their competitors. Some argue though that this could be detrimental to consumers preventing Google from innovating and providing additional benefits to society.
Multiple Choice Questions:
1) Vertical Foreclosure occurs when:
a) a company buys a supplier and continues to supply its competitors from that supplier
b) a company buys a supplier and refuses to supply its competitors that previously purchased from that supplier
c) a company buys a competitor and gains more than 40% market share
d) a company fails to make payments on its loans and the bank forecloses on the loan
2) Consider the following statements on network effects:
I - Network effects always benefit the second-mover in a market
II - Penetration pricing can help the first-mover prevent competitors from entering the market
III - Network effects can create a strong barrier to entry
Which of the following are true:
a) II only
b) III only
c) II and III
d) I and III
e) none of these are true
3) Monopolies are
a) always illegal
b) are regulated by the FTC and DOJ under the Sherman Act
c) always detrimental to consumers since a monopoly will always seek to take advantage of their market power
d) games played with paper money, houses, and hotels and sold by Hasbro
4) Penetration Pricing is
a) illegal per the Hart-Scott-Rodino Act
b) can enable a second-mover in a market with network efforts to gain entry into the market
c) always beneath marginal cost
d) one method of maximizing profit for a Cournot oligopoly
5) True or False: In order to violate the Sherman Act, one must (1) possess monopoly power in the relevant market and (2) willfully acquire or maintain that power as distinguished from the growth or development as a consequence of a superior product, business acumen, or historic accident.
Baye, Michael, Managerial Economics and Business Strategy, 7th Edition, McGraw-Hill-Irwin, 2010
Stefanadis, C., "Downstream Vertical Foreclosure and Upstream Innovation", J. of Industrial Economics, Vol XLV, No. 4, Dec 1997.
Manne, G. and Wright, J., "Google and the Limits of Antitrust: The case against the case against Google", Harvard Journal of Law & Public Policy, Vol 34, No.1
Roshe, J.T., and Tucker, D.S., "Emerging Theories of Competitive Harm in Merger Enforcement", www.antitrustsource.com, October 2011
Evans, D, and Schmalensee, R., "Some Economic Aspects of Antitrust Analysis in Dynamically Competitive Industries", NBER Working Paper No. w8268
END OF WIKI
Summary of other Wiki's
Barnett on Five Forces
This wiki looked at the five forces model developed by Porter. The wiki examined the forces of competitive rivalry, new entrants, threat of substitutes, bargaining power over buyers, and bargaining power over suppliers.
Christofaro on Gov't Policies
This wiki examined the effects of prohibition on society. It included the effects of the great depression on ending prohibition. It also looked at how the gov't uses a 'sin tax' to not only discourage the use of the prohibited substance, but to also offset the economic effects of those substances. Current prohibitions include debatable topics such as the use of marijuana.
DeVoss on Regression Analysis
This wiki looked at the statistics involved in performing regression analysis. It hinted toward the use of statistics in economics, but really was just a primer on regression analysis.
Kitzman on Monopolies
This wiki did not mention the game by Hasbro. It looked at the definition of monopoly and the sources of monopoly power. It briefly described the Sherman Act and the Furukawa Electric case and ATT acquisition of T-mobile as allowing too much monopoly power.
McNutt on Oligopolies
This wiki provided examples of oligopolies in industries such as the satellite Tv, auto, oil, and cola industries. It defined the various types of oligopolies markets and examined how these require a contestable market.
10/06/2011 The background
In the mid 1990's, Microsoft had created an effective monopoly on the operating system for most computers. More than 80% of Intel-based PC's used Microsoft's OS and 90% of OEM computers were shipped with MS Windows. MS had created a very effective barrier to entry for the OS market. The main barrier was that most of the software that was written to run on PC's was written to run on MS Windows operating system. This made it disadvantageous for a competitor to enter the market as the user of the PC would not be satisfied with the meager amount of software available to run on a non-Windows OS.
At this time, the internet was emerging as a new technology. The market leader at that time in the internet browser software was Netscape. Even though MS's Internet Explorer was given away for free, Netscape maintained its market leadership position even though it charged for its software. Concurrently, programs were being written to be run through the internet on a new software platform named Java from Sun. As mentioned above, one of the primary barriers to entry into the OS market was the limitation that a new OS would have a very limited number of software programs written to run on it and buyers would not be interested in a different OS. MS recognized the combination of Netscape and Java as a threat to its monopoly on the PC operating system market.
MS strategy #1
Recognizing this threat to its monopoly in the Windows operating system which formed the basis for its competitive advantage, Microsoft knew that it needed to take address this threat. If MS failed to respond, the 'alternate' software platform of Java on the internet may allow other companies to introduce competitive operating software through which the market leader in the internet browser, Netscape, could neutralize Microsoft's competitive advantage. Microsoft's first action to neutralize the Netscape threat was to 'collude' with Netscape to split the internet browser market between MS Internet Explorer and Netscape. Microsoft attempted to get Netscape to agree to let Internet Explorer be used with MS Windows 95 OS and successors while Netscape would only be able to operate on OS other than Windows 95 and the successors to those OS's.
Not only was this attempt to stop competition illegal, it would have been foolish of Netscape to agree to such terms. Netscape already had ~70% market share in the internet browser market. If Netscape agreed to MS's proposal, they would have dropped to 20% market share in 1-2 years as Windows 95 and 98 held a 80% market share.
MS strategy #2
Vertical foreclosure. (Note: this is an anti-competitive strategy that the author of this Wiki has not studied yet. Therefore, feel free to provide insight or examples other than MS. I'll be back next week to discuss this strategy.)
11/2/11 http://www.jstor.org/pss/2950611
Key points
1) vertical foreclosure occurs when a downstream buyer is denied access to an upstream supplier or vice versa.
2) in the MS case, MS was accused of vertical foreclosure by forcing the downstream buyers (PC manufacturers) to purchase only from MS (Internet Explorer) rather than from other upstream suppliers (Netscape)
3) the paper referenced above discusses that consumer welfare is reduced by Downstream ForeClosure (Upstream supplier is denied access to Downstream Buyer or Netscape was denied access to PC Manufacturers).
The paper looks takes a different look at vertical foreclosure which is the efficiency of specific investments that firms make once they engage in a vertical merger. The paper assumes that rather than denying access, either upstream or downstream, that vertical mergers are inefficient to consumer welfare. Their model predicts that firms that vertically integrate have an incentive to make more investments in their internal supplier and less in their external suppliers relative to an efficient level of investment. Because of this 'skewing' of investments, other companies will respond by skewing their investments resulting in a reduction of inputs purchased by downstream firms. The article relates this to the pharmaceutical industry where in the early 1990's, there were mergers between pharmacy benefit management companies (PBM's) and pharmaceutical suppliers. Merck-Medco was an example of a PBM. The PBM did not compete for consumers in the short run as their consumers were contracted to buy only from them because of their insurance plans. Rather than looking at Merck-Medco's ability to recommend Merck's drugs over other pharamaceutical company drugs, they looked at the incentive for Merck-Medco to invest in research that would show that Merck's drugs at the exclusion of other drugs. This research would then raise the demand for Merck's products increasing Merck's revenue. Merck-Medco would then favor Merck's drugs in an efficient model. However, the investment itself may have been inefficient as it may have reduced the variety of drugs available to patients.
The above article looks at vertical mergers and discusses some of the difficulties in evaluating whether a vertical merger causes harm to the consumers. There are many instances where horizontal mergers have been challenged by the FTC or DOJ and there are specific guidelines on the parameters for such mergers. However, evaluating vertical mergers are more difficult. All firms have some amount of vertical integration. This integration can be done organically or be acquisition. There are some advantages to consumers as a vertically integrated firm may be able to offer lower prices. There are potential disadvantages to consumers as vertical mergers can reduce competition thereby harming the consumer. This difficulty lies at the heart of the relatively few situations that the FTC has decided to intervene in vertical mergers. This is discussed in the above article.
11/17/11
Network effects are a method of obtaining a competitive advantage and can lead to a monopoly. Baye et.al. discuss the network effects in the classic eBay example where eBay took advantage of the first mover advantage. eBay was the first mover into the online auction market. As such, they attracted more sellers. The sellers attracted more buyers. With the increase in buyers, sellers saw increased benefit in utilizing ebay and this cycle continued. Yahoo Auctions tried to penetrate this market by adopting a penetration pricing model to gain entry. In their penetration pricing model, Yahoo Auctions charge no fees to list or purchase items on their site. The anticipated that this would allow them to gain customers until the network effect was working for them and they could begin to charge fees for their auctions. However, even with Yahoo Auctions penetration pricing, they weren't able to overcome the network effect of eBay. Current and future customers of eBay placed a higher value on the increased buyers/sellers in the eBay network than on the fee charged by eBay.
Create and answer a case study similar to Microsoft Case (Chapters 7-11, 13) Cases Available under Assignments tab and Wikispaces Case Study folder on Blackboard- that focuses on vertical foreclosure and network effects and the benefits and costs of a company using pricing strategies to increase market power
David Schroeder
The Google Case
Google has become the dominant market leader in the search engine and search advertising market. Google performs more than 65% of all online searches and controls about 79% of the search advertising sales. {Hatch 2011} Google does not disclose how its algorithms determine its ranking of search results as this is its competitive advantage. Competitors claim that Google uses anti-competitive behavior to maintain its dominance. Google claims that it just offers a better technology and that its behavior and actions has benefited consumers.
Competitors site examples such as Yelp and TripAdviser to support their position that Google uses unfair business practices. {Hatch 2011} Yelp and TripAdvisor both claim that Google violated their copyrights when Google published significant portions of their product without their consent. However, both companies were told by Google that the only way that Google would prevent that problem was by completely removing them from all Google results. Given Google's dominance in the search market, both Yelp and TripAdvisor saw this as anti-competitive behavior, especially when Google then purchased Zagat's, a competitor to Yelp, and ITA, a competitor to TripAdvisor.
The question remains as to whether such behavior violates either the Sherman Act or the Hart-Scott-Rodino Act {http://www.ftc.gov/bc/antitrust/antitrust_laws.shtm} for anti-trust behavior. It is not illegal for companies to be a monopoly. What is illegal is for companies to use their monopoly is such a way to be anticompetitive and to harm consumers. Complaints have been made that the Google case is similar in many respects to the Microsoft case in that Google has used its dominance in the search engine market to prevent entry of competitors by the network effects that Google enjoys and the vertical integration potentially foreclosing on downstream competitors. Google has also been accused of using pricing strategies as anti-competitive behavior to increase competitors costs specifically when that competitor has a service (e.g. maps, restaurant reviews, etc.) that competes with a Google service.
Google's Network Effects
Network effects occur when a more efficient and beneficial solution is available, but requires that at least a majority of current users of the current network switch simultaneously to order to be economically viable. {Baye 2011, pp. 493-499} This means that the first mover has a significant advantage in creating a barrier to entry for competitors. In Google's case, competitors such as Microsoft's Bing search engine claim that since Google has such a large network of both search users, that Google's real customers, advertising customers, can only afford to pay for searches on Google and cannot afford to not advertise on Google.
Google's Vertical Foreclosure Effects
"Vertical foreclosure is the exclusion that results when a downstream buyer is denied access to an upstream supplier (Upstream Foreclosure) or when an upstream supplier is denied access to a downstream buyer (Downstream Foreclosure)". {Stefanadis 1997}. In the Microsoft case, Microsoft prevented computer suppliers from buying internet software from Netscape. Google has been claimed to have engaged in both Upstream and Downstream Foreclosure. On the Upstream side Google has entered into exclusive contracts with internet service providers such as AOL to offer Google as their only search provider and to utilize the logo "Search powered by Google" to exclude other search engines from gaining access to these ISPs. Google has also been accused of manipulating its search algorithm to favor Google's products over its competitors. {Manne 2011}
However, Manne et.al. argue that this behavior does not meet the requirements of antitrust behavior. First, they argue that these exclusive agreements are for limited time periods and therefore do not foreclose on competitors ability to seek to gain ISP's business. Second, they argue that the Supreme Court decision in the Trinko case ruled that antitrust laws do not impose a duty to deal with competitors.
Google has also been accused of trying to vertically foreclose on the mobile phone search market. The basis for this is the attempt by Google to require mobile phone manufacturers that use Google's Android operating system to use Google as the default search engine. Further, Google has recently announced an agreement to purchase Motorola Mobility for $12.5 billion. Motorola Mobility is a major manufacturer of cell phones, tablet computers, and cable TV boxes.
The purchase of ITA, a flight search service and ticket provider, by Google was challenged by the FTC. In this case, the DOJ claimed the the mere ability of Google to leverage ITA's proprietary software was sufficient to be a risk to vertical foreclosure and entered into a simultaneous settlement to address the DOJ's concerns. This action raises questions on when vertical integration will be challenged as the mere opportunity for anti-competitive behavior was sufficient to have the DOJ challenge the merger. {Rosch 2011}
Enforcement of Antitrust
The FTC and DOJ both have jurisdiction over enforcement of the antitrust laws. The FTC has issued guidelines on horizontal mergers, but not on vertical mergers. {http://ftc.gov/os/2010/08/100819hmg.pdf} There have been very few actions taken by either agency against vertical integration and foreclosure issues as there are many pro-competitive and pro-consumer reasons for entering into vertical integrated structures. Arguments have been made that in dynamically competitive industries where prices and technologies are not static, that vertical integration cannot have truly monopolistic behavior. {Evans 2001}
One of the questions that remain is whether Google should be split into a search engine provider and a services provider. In this way Google could be regulated for its search engine and then the services it provides (e.g. gmail, buzz, etc.) could then compete an equal footing with their competitors. Some argue though that this could be detrimental to consumers preventing Google from innovating and providing additional benefits to society.
Multiple Choice Questions:
1) Vertical Foreclosure occurs when:
a) a company buys a supplier and continues to supply its competitors from that supplier
b) a company buys a supplier and refuses to supply its competitors that previously purchased from that supplier
c) a company buys a competitor and gains more than 40% market share
d) a company fails to make payments on its loans and the bank forecloses on the loan
2) Consider the following statements on network effects:
I - Network effects always benefit the second-mover in a market
II - Penetration pricing can help the first-mover prevent competitors from entering the market
III - Network effects can create a strong barrier to entry
Which of the following are true:
a) II only
b) III only
c) II and III
d) I and III
e) none of these are true
3) Monopolies are
a) always illegal
b) are regulated by the FTC and DOJ under the Sherman Act
c) always detrimental to consumers since a monopoly will always seek to take advantage of their market power
d) games played with paper money, houses, and hotels and sold by Hasbro
4) Penetration Pricing is
a) illegal per the Hart-Scott-Rodino Act
b) can enable a second-mover in a market with network efforts to gain entry into the market
c) always beneath marginal cost
d) one method of maximizing profit for a Cournot oligopoly
5) True or False: In order to violate the Sherman Act, one must (1) possess monopoly power in the relevant market and (2) willfully acquire or maintain that power as distinguished from the growth or development as a consequence of a superior product, business acumen, or historic accident.
Answers
1) b
2) b
3) b
4) b
5) True
References
Hatch, David, "Googles Dominance", CQ Researcher, Vol 21, No. 40, Nov 11, 2011
http://www.ftc.gov/bc/antitrust/antitrust_laws.shtm
Baye, Michael, Managerial Economics and Business Strategy, 7th Edition, McGraw-Hill-Irwin, 2010
Stefanadis, C., "Downstream Vertical Foreclosure and Upstream Innovation", J. of Industrial Economics, Vol XLV, No. 4, Dec 1997.
Manne, G. and Wright, J., "Google and the Limits of Antitrust: The case against the case against Google", Harvard Journal of Law & Public Policy, Vol 34, No.1
Roshe, J.T., and Tucker, D.S., "Emerging Theories of Competitive Harm in Merger Enforcement", www.antitrustsource.com, October 2011
Evans, D, and Schmalensee, R., "Some Economic Aspects of Antitrust Analysis in Dynamically Competitive Industries",
NBER Working Paper No. w8268
END OF WIKI
Summary of other Wiki's
Barnett on Five Forces
This wiki looked at the five forces model developed by Porter. The wiki examined the forces of competitive rivalry, new entrants, threat of substitutes, bargaining power over buyers, and bargaining power over suppliers.
Christofaro on Gov't Policies
This wiki examined the effects of prohibition on society. It included the effects of the great depression on ending prohibition. It also looked at how the gov't uses a 'sin tax' to not only discourage the use of the prohibited substance, but to also offset the economic effects of those substances. Current prohibitions include debatable topics such as the use of marijuana.
DeVoss on Regression Analysis
This wiki looked at the statistics involved in performing regression analysis. It hinted toward the use of statistics in economics, but really was just a primer on regression analysis.
Kitzman on Monopolies
This wiki did not mention the game by Hasbro. It looked at the definition of monopoly and the sources of monopoly power. It briefly described the Sherman Act and the Furukawa Electric case and ATT acquisition of T-mobile as allowing too much monopoly power.
McNutt on Oligopolies
This wiki provided examples of oligopolies in industries such as the satellite Tv, auto, oil, and cola industries. It defined the various types of oligopolies markets and examined how these require a contestable market.
10/06/2011
The background
In the mid 1990's, Microsoft had created an effective monopoly on the operating system for most computers. More than 80% of Intel-based PC's used Microsoft's OS and 90% of OEM computers were shipped with MS Windows. MS had created a very effective barrier to entry for the OS market. The main barrier was that most of the software that was written to run on PC's was written to run on MS Windows operating system. This made it disadvantageous for a competitor to enter the market as the user of the PC would not be satisfied with the meager amount of software available to run on a non-Windows OS.
At this time, the internet was emerging as a new technology. The market leader at that time in the internet browser software was Netscape. Even though MS's Internet Explorer was given away for free, Netscape maintained its market leadership position even though it charged for its software. Concurrently, programs were being written to be run through the internet on a new software platform named Java from Sun. As mentioned above, one of the primary barriers to entry into the OS market was the limitation that a new OS would have a very limited number of software programs written to run on it and buyers would not be interested in a different OS. MS recognized the combination of Netscape and Java as a threat to its monopoly on the PC operating system market.
MS strategy #1
Recognizing this threat to its monopoly in the Windows operating system which formed the basis for its competitive advantage, Microsoft knew that it needed to take address this threat. If MS failed to respond, the 'alternate' software platform of Java on the internet may allow other companies to introduce competitive operating software through which the market leader in the internet browser, Netscape, could neutralize Microsoft's competitive advantage. Microsoft's first action to neutralize the Netscape threat was to 'collude' with Netscape to split the internet browser market between MS Internet Explorer and Netscape. Microsoft attempted to get Netscape to agree to let Internet Explorer be used with MS Windows 95 OS and successors while Netscape would only be able to operate on OS other than Windows 95 and the successors to those OS's.
Not only was this attempt to stop competition illegal, it would have been foolish of Netscape to agree to such terms. Netscape already had ~70% market share in the internet browser market. If Netscape agreed to MS's proposal, they would have dropped to 20% market share in 1-2 years as Windows 95 and 98 held a 80% market share.
MS strategy #2
Vertical foreclosure. (Note: this is an anti-competitive strategy that the author of this Wiki has not studied yet. Therefore, feel free to provide insight or examples other than MS. I'll be back next week to discuss this strategy.)
11/2/11
http://www.jstor.org/pss/2950611
Key points
1) vertical foreclosure occurs when a downstream buyer is denied access to an upstream supplier or vice versa.
2) in the MS case, MS was accused of vertical foreclosure by forcing the downstream buyers (PC manufacturers) to purchase only from MS (Internet Explorer) rather than from other upstream suppliers (Netscape)
3) the paper referenced above discusses that consumer welfare is reduced by Downstream ForeClosure (Upstream supplier is denied access to Downstream Buyer or Netscape was denied access to PC Manufacturers).
Here's another interesting paper on vertical foreclosure:
http://www.sss.ias.edu/files/papers/econpaperthirteen.pdf
The paper looks takes a different look at vertical foreclosure which is the efficiency of specific investments that firms make once they engage in a vertical merger. The paper assumes that rather than denying access, either upstream or downstream, that vertical mergers are inefficient to consumer welfare. Their model predicts that firms that vertically integrate have an incentive to make more investments in their internal supplier and less in their external suppliers relative to an efficient level of investment. Because of this 'skewing' of investments, other companies will respond by skewing their investments resulting in a reduction of inputs purchased by downstream firms. The article relates this to the pharmaceutical industry where in the early 1990's, there were mergers between pharmacy benefit management companies (PBM's) and pharmaceutical suppliers. Merck-Medco was an example of a PBM. The PBM did not compete for consumers in the short run as their consumers were contracted to buy only from them because of their insurance plans. Rather than looking at Merck-Medco's ability to recommend Merck's drugs over other pharamaceutical company drugs, they looked at the incentive for Merck-Medco to invest in research that would show that Merck's drugs at the exclusion of other drugs. This research would then raise the demand for Merck's products increasing Merck's revenue. Merck-Medco would then favor Merck's drugs in an efficient model. However, the investment itself may have been inefficient as it may have reduced the variety of drugs available to patients.
11/10/11
http://www.wilmerhale.com/files/Publication/c911f2f2-b8d8-4683-83fb-f2cd3108c260/Presentation/PublicationAttachment/ba43d8dd-b019-46e2-a5c2-fdaf9f8cd8b6/Vertical%20Mergers%20in%20USA%20Paper_IBA%20Conference.pdf
The above article looks at vertical mergers and discusses some of the difficulties in evaluating whether a vertical merger causes harm to the consumers. There are many instances where horizontal mergers have been challenged by the FTC or DOJ and there are specific guidelines on the parameters for such mergers. However, evaluating vertical mergers are more difficult. All firms have some amount of vertical integration. This integration can be done organically or be acquisition. There are some advantages to consumers as a vertically integrated firm may be able to offer lower prices. There are potential disadvantages to consumers as vertical mergers can reduce competition thereby harming the consumer. This difficulty lies at the heart of the relatively few situations that the FTC has decided to intervene in vertical mergers. This is discussed in the above article.
http://www.ftc.gov/speeches/harbour/050329vertical.pdf
This speech was given by an FTC commissioner on the effect of vertical mergers on the retail/distribution portion of the market.
11/17/11
Network effects are a method of obtaining a competitive advantage and can lead to a monopoly. Baye et.al. discuss the network effects in the classic eBay example where eBay took advantage of the first mover advantage. eBay was the first mover into the online auction market. As such, they attracted more sellers. The sellers attracted more buyers. With the increase in buyers, sellers saw increased benefit in utilizing ebay and this cycle continued. Yahoo Auctions tried to penetrate this market by adopting a penetration pricing model to gain entry. In their penetration pricing model, Yahoo Auctions charge no fees to list or purchase items on their site. The anticipated that this would allow them to gain customers until the network effect was working for them and they could begin to charge fees for their auctions. However, even with Yahoo Auctions penetration pricing, they weren't able to overcome the network effect of eBay. Current and future customers of eBay placed a higher value on the increased buyers/sellers in the eBay network than on the fee charged by eBay.
11/22/11
Is google the new Microsoft?
http://www.linuxfordevices.com/c/a/News/FTC-investigating-Android-allegations/
12/1/2011
Article stating that Google is anticompetitive:
http://library.cqpress.com/cqresearcher/document.php?id=cqresrre2011111100&PHPSESSID=tpqb1tpab9j72u7nhg8rlvoj12
Article stating that Google is a strong innovative company and that they have not violated any antitrust or anticompetition regulations:
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1577556