Blog on industrial organization and antitrust

(UK) The Office of Fair Trading and the Competition Commission will merge soon. OFT was doing antitrust investigations and therefore had an overlapping mandate with the Competition Commission, but was also responsible for consumer protection, a function that will probably disappear in the merged entity. One argument for the merger is to speed up antitrust reviews and decrease cost: an efficiency argument that certainly sounds familiar for merger cases. Some feel that the decrease in costs is unlikely (see the FT article OFT merger.pdf), but having one rather two hurdles should indeed speed up antitrust reviews. One potential risk to consumers is the loss of a direct advocate (OFT) with a relatively broad mandate, risk that is dismissed by officials but should perhaps be considered seriously if the new entity will outsource the consumer functions of the OFT (the literature on organizations and contracts has indeed highlighted the efficiency role of competing agencies; see for instance "Advocates" by Mathias Dewatripont and Jean Tirole, Journal of Political Economy 1999).

The launch of the iPad creates ripple effects in other industries. iPad will offer e-books and enters in concurrence with Amazon and its Kindle for distributing e-books. The initial negotiation of Apple with book publishers like Macmillan seems to have been done under the shadow of the "agency model" where the publisher retains most of the rights to set the price and gives 30% to the distributor. After an initial announcement by Apple that e-books will be offered at a price of 14.99$, significantly more than the going price of 9.99$ offered by Amazon on the Kindle, Apple later announced that the price will be adjusted to be similar to that on the Kindle. Interestingly, Macmillan -- and probably other publishers -- renegotiated their deal with Amazon, insisting on shifting to the agency model also. See Amazon Reluctantly Agrees to Higher eBook Pricing, Amazon closes the e-book on Macmillan (FT article). and . Amazon bows to Macmillan over e-booksAt the end of the day, more competition for distributing books seems to have given more power to the publishers, and will eventually lead -- at least in the short run -- to higher prices for e-books.

This shows that the welfare analysis of bilateral oligopolies is complex and that entry on one side may lead to higher prices through what can be called a "bargaining effect."

The introduction of the Apple iPad is seen by firms already offering eReaders as a positive: rather than being afraid that Apple will eat their market share, the competitors hope that the iPad will create a demand push for such devices. Hence, even if Apple gets a lion share of the increasing market -- like they did with the iPod and the iPhone -- the increased demand will benefit all. See a recent Financial Times article on this.

A monopsony is a firm that has market power on its suppliers. The distortions in the supplier market are similar to those observed in product markets under monopoly but are less often in the media or in antitrust cases. A recent Korean newspaper suggests that Apple is able to manipulate the supply of flash memory because of his large demand for its iPods and iPhones. See Apple accused of manipulating Flash memory prices.