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Competition issues in aftermarkets – Lorenzo Coppi – June 2017 OECD discussion

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This presentation by Lorenzo COPPI, Executive Vice President of COMPASS LEXECON was made during the discussion “Competition issues in aftermarkets” held at the 127th meeting of the OECD Competition Committee on 21 June 2017. More papers and presentations on the topic can be found out at oe.cd/1ZY.

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Competition issues in aftermarkets – Lorenzo Coppi – June 2017 OECD discussion

  1. 1. Lorenzo Coppi 21 June 2017 Aftermarkets Tools for the Competition Analysis OECD Roundtable on Competition Issues in Aftermarkets 21 Juin 2017 Lorenzo Coppi lcoppi@compasslexecon.com
  2. 2. COMPASS LEXECON 1 Main competitive concern: the primary product supplier may attempt to monopolise the aftermarket for its product (through tying, switching costs, or obfuscation of prices)  The “lock-in effect” and the ability to monopolise – Lock in: the inability of customers to substitute to competing secondary products – Switching costs are a necessary condition for the lock-in effect to arise  The incentive to exploit locked-in customers – trade off and the “waterbed” effect – Profits from exploiting the installed base vs. – Potential loss of profits of the primary product (and related secondary products), because of customer reaction and competition for the primary product – Waterbed effect: when an increase in secondary product profits leads to a loss of primary product profits (can be incomplete, complete, or overcomplete)  Disagreement on the balance of the trade-off in the antitrust debate – Harm from secondary market lock-in is unlikely, in fact it is likely to be efficient (Chicago School) vs. – Harm from secondary market lock-in is a real possibility (Post-Chicago School) AFTERMARKET CONCERNS
  3. 3. COMPASS LEXECON 2 But note that the inclusion of complements in the relevant market can be controversial A POSSIBLE MARKET DEFINITION ALGORITHM Alternative is to move directly to dominance / market power analysis
  4. 4. COMPASS LEXECON 3 ASKING THE RIGHT QUESTION  The wrong question: “Are all the profits made in the secondary product rebated (competed away) in the primary product?”  The right question: “Are profits lower in the counterfactual?”  Counterfactual in abuse of dominance investigations: – “What is the alleged abuse?” (e.g. creation of incompatibility, tying) – “Would overall profits for the primary and secondary products be lower in the absence of the abuse?”  Counterfactual in analysis of regulatory interventions: – “What are the market characteristics that give rise to waterbed effects?” (e.g., incompatibility, switching costs, lack of price transparency) – “Would overall profits in the primary and secondary markets be lower in the absence of these market characteristics?”
  5. 5. COMPASS LEXECON 4 FOCUSING ON THE KEY FACTORS Some guidance in answering the previous question can be obtained by assessing the following factors • Degree of primary market competition (generally ambiguous) • Consumer myopia (may result in incomplete waterbeds, but often ambiguous) • Heterogeneity in consumer myopia (results in incomplete waterbeds) • Price obfuscation (results in incomplete waterbeds) • Barriers to entry (may result in incomplete waterbeds) • Network effects (may result in overcomplete waterbeds)
  6. 6. COMPASS LEXECON 5 CONCLUSIONS  The economic literature finds that waterbeds can be complete, incomplete, or overcomplete  And this can happen regardless of whether consumers are myopic, or there is effective competition in the primary market  Need a careful case-by-case analysis, which asks the right question and focuses on the right factors  Without forgetting that even incomplete waterbeds may have efficiency justifications

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