by Kevin Coates | Nov 8, 2009 | Economics
What follows are some initial thoughts on how behavioural economics might affect antitrust and regulation. They are not particularly advanced, but some points of the points raised I have not seen elsewhere (even when I remember to search for “behavioral economics” and not just “behavioural economics”). Wikipedia has a good general introduction to behavioural economics, and the European Commission has also published a short overview for the press. (Disclosure: the European Commission is my employer, even though I am on secondment to NYU at the moment. I was not involved in the preparation of that document. All opinions are my own, etc…) There is understandable reluctance by economists to transpose conclusions about the behaviour of individuals to the behaviour of firms: arguably much of the analysis carried out by firms before they decide on a strategy is precisely to widen the bounds of their rationality, avoiding the conceptual limits of individuals. This sidesteps the question, though, of what the implications of behavioural economics should be when an antitrust analysis depends on consumer behaviour. The Microsoft bundling cases in the US and the EU depended in part on how consumers would react to the bundling into Windows of Internet Explorer and Media Player. Given that behavioural economics suggests that consumers are influenced by “defaults” to a greater extent than traditional (rational market) economics would predict, then the negative effects of the bundling on consumer welfare would be greater than that which traditional economics would suggest. Other biases also might be relevant: availability bias – where individuals are disproportionately influenced by highly visible or memorable factors – might suggest that incumbency...
by Kevin Coates | Oct 29, 2009 | Economics
The Origin of Wealth, Eric D Beinhocker, 2006, p116-119 “Imagine you walk into your grocery store and see some tomatoes… You have well-defined preferences for tomatoes compared with everything else you could possibly buy in the world, including bread, milk, and a vacation in Spain. Furthermore, you have well-defined preferences for everything you could possibly buy at any point in the future, and since the future is uncertain, you have assigned probabilities to those potential purchases. For example, I believe that there is a 23 percent chance that in two years, the shelf in my kitchen will come loose and I will need to pay $1.20 to buy some bolts to fix it. The discounted present value of that $1.20 is about $1.00, multiplied by a 23 percent probability, equals an expected value of twenty-three cents for possible future repairs, which I must trade off with my potential purchase of tomatoes today, along with all of my other potential purchases in my life- time. In the Traditional Economics model, all these well-defined preferences are also ordered very logically. So if I prefer tomatoes to carrots, and prefer carrots to green beans, I will always take the tomatoes over the green beans. Likewise, if I prefer tomatoes to carrots, I won’t suddenly go for the carrots simply because I saw some green beans. Traditional Economics also assumes that you know exactly what your budget is for spending on tomatoes. To calculate this budget, you must have fully formed expectations of your future earnings over your entire lifetime and have optimized your current budget on the basis of that knowledge. In...
by Kevin Coates | Oct 27, 2009 | Antitrust, Apple, Microsoft
Scoble has a great piece on why he thinks Apple’s iPhone isn’t going to be pushed aside anytime soon: 85,000 reasons why Apple’s iPhone isn’t going to be disrupted. The availability of large numbers of applications valued by users is one of the arguments that was used to support the finding that Microsoft had market power in the US and EU antitrust cases. In the US, the District Court’s findings of fact discusses the applications barrier to entry starting at para. 37: Consumer interest in a PC operating system derives primarily from the ability of that system to run applications. The consumer wants an operating system that runs not only types of applications that he knows he will want to use, but also those types in which he might develop an interest later. Also, the consumer knows that if he chooses an operating system with enough demand to support multiple applications in each product category, he will be less likely to find himself straitened later by having to use an application whose features disappoint him. Finally, the average user knows that, generally speaking, applications improve through successive versions. He thus wants an operating system for which successive generations of his favorite applications will be released — promptly at that. The fact that a vastly larger number of applications are written for Windows than for other PC operating systems attracts consumers to Windows, because it reassures them that their interests will be met as long as they use Microsoft’s product. For the EU, see the confirmation in the CFI’s Microsoft judgment of September 2007 (at para. 1088) upholding the Commission 2004 Microsoft...
by Kevin Coates | Oct 27, 2009 | Competition, Regulation
(The third part of a general lecture on competition law, state aid and regulation, separated into three posts: Part 1, Part 2, Part 3.) Competition Enforcement in the Financial Crisis What should we make of State aid control? Is it a consistent part of a competition law system? Although it is often difficult to enforce, I think the answer is yes. There is already some recognition of its value in the – far too weak – WTO rules on subsidies, but until State aid laws are seen as important parts of domestic competition laws, I do not think that we are going to see significant multilateral enforcement mechanisms (which is a shame). If you want a consistent system of competition law, however, State aid control should be included to control national and sub-national State aid, and not just aid which has cross-border effects. At first sight, the US Commerce Clause would appear to provide a constitutional basis for that here,(“The central rationale for the rule against discrimination is to prohibit state or municipal laws whose object is local economic protectionism, laws that would excite those jealousies and retaliatory measures the Constitution was designed to prevent”; Toomer v. Witsell, 334 U. S. 385, 403–404 (1948)} but I know very little about US constitutional law so more informed minds may differ.) The present financial crisis has shown the value of the EU’s State aid rules. When he spoke here in September, Professor Jenny gave a number of examples of involvement of the EU competition rules in the financial crisis. The European Commission, as a competition authority, has been deeply involved in...
by Kevin Coates | Oct 27, 2009 | Competition, Regulation
(The second part of a general lecture on competition law, state aid and regulation, separated into three posts: Part 1, Part 2, Part 3.) The Competition Rules and State Action For a US antitrust lawyer, discussion of the competition rules does not extend to State (or state) action. For the drafters of the EC Treaty, however, it would have been obvious that State action would need to be covered. Looking at the different Member States, it would have been very clear that it is not just laws prohibiting trade, or actions of companies that could distort competition on the market. State owned companies were common – in some Member States they still are (even before the nationalisations caused by the financial crisis); state granted monopolies were also common. So completing the single market meant completing the competition rules with control on state action, control being exercised through Articles 86 – which imposes limits on the state’s ability to grant special or exclusive rights – and Article 87 – which imposes limits on the state’s ability to grant aid to individual companies or sectors. From the description of the system of the Treaty above, you can see that these rules aimed at the States have a dual origin – they are part of completing the single market (for example, state monopolies could effectively prevent free movement of goods and services), and they are part of the competition rules (for example, state aid could undermine productive efficiency, and incentives to invest and innovate). No other jurisdiction had, or has, comparable rules – the anti-subsidy provisions of the WTO are a shadow...
by Kevin Coates | Oct 27, 2009 | Competition, Regulation
As part of Professor Eleanor Fox’s comparative EU/US competition law LLM class at NYU, she asked if I would give a lecture on state aid and regulation issues and how they relate to the competition rules. Here is the text of the lecture, separated into three posts: this is Part 1; Part 2; Part 3) Competition law, State aid, and Regulation One of the difficulties about studying the law is that there is never a good place to start. No individual law or rule exists in isolation; if you learn about one rule, you will understand a little; if you learn about more rules you will understand a little more about that first rule. Professor Dworkin’s idealised judge, Hercules, has a perfect knowledge of all rules, and only with that knowledge can the judge form a complete understanding of any individual rule. Fortunately, real life standards are a little lower, but it is useful to think about how any one rule fits into the overall system of laws; this is particularly useful when comparing US and EU competition law, as the EU system of “competition law” is rather different to that in the US. Rather than focused exclusively on company behaviour, the EU system looks at state action as well. The objective is, however, the same. Creating a Single Market When the drafters of the Treaties sat down in the 1950s, they had a specific object in mind – to create a single economic area out of the then six separate national economies (now 27 national economies). One of the major reasons to integrate the economies of the Member...