This presentation by John Davies (Executive Vice President, Compass Lexecon) was delivered during a workshop on “Methodologies to measure market competition” held virtually for competition authorities officials on 23 February 2021. More materials on the topic can be found at http://oe.cd/mmkts. This presentation was uploaded with the author’s consent.

1. NON CONFIDENTIAL
John Davies
23 February 2021
Presentation
Why measure competition?
Initial remarks at OECD seminar
The views expressed in this presentation are those of the speaker and should not be assumed to represent Compass
Lexecon, its clients or any of its other experts.

2. COMPASS LEXECON 1
Non Confidential
Two distinct purposes (at least):
1. Legal processes: to apply the law!
 Significant Lessening of…”,
 “Significant Impediment to Effective …”,
 “Adverse effect on…”.
...plus: assessing through ex post review
2. Policy process: to assess whether pro-competitive intervention is:
 Needed (e.g. how competitive is this industry/country compared to others),
 Likely to be beneficial and by how much
… plus: assessing through ex post review
Can we actually measure competition? Or just its effects? Can we apply any
lessons from legal processes to policy assessment?
WHY MEASURE COMPETITION

3. COMPASS LEXECON 2
Non Confidential
MEASURING COMPETITION IN LEGAL CASES
Inputs “Rivalry” Outputs
Consumer welfare
Other measures of
welfare
Productivity growth
Innovation
Concentration in
relevant markets:
• Existing
• After merger
• Barriers to entry
Exclusionary
conduct: foreclosure
of competitors
Collusive conduct

4. COMPASS LEXECON 3
Non Confidential
INFERRING A LOSS OF COMPETITION - MERGERS
Inputs “Rivalry” Outputs
Prices rise (better:
output falls)
Consumer welfare
Other measures of
welfare
Productivity growth
Innovation
Concentration in
relevant markets:
• Existing
• After merger
• Barriers to entry
Exclusionary
conduct: foreclosure
of competitors
Collusive conduct
If CA decides concentration will
meaningfully rise AND expects
an increase in prices: -> SLC

5. COMPASS LEXECON 4
Non Confidential
INFERRING A LOSS OF COMPETITION – EXCLUSIONARY
ABUSE OF DOMINANCE
Inputs “Rivalry” Outputs
Prices rise (better:
output falls)
Consumer welfare
Other measures of
welfare
Productivity growth
Innovation
Concentration in
relevant markets:
• Existing
• After merger
• Barriers to entry
Exclusionary
conduct: foreclosure
of competitors
Collusive conduct
If CA decides suspect is engaged
in effective foreclosure, AND
expects a loss of consumer
welfare: -> Abuse of Dominance

6. COMPASS LEXECON 5
Non Confidential
Hard to define: something about incentives on the firm (fear of loss, prospect of gain)
 Ideally, can be measured through measuring elasticities and critical loss
(Although even that only really works for unilateral effects)
 But elasticities:
• require lots of data to measure
• apply only at the level of the product (or pairwise)
• are not directly available to assess significant changes in market
 Often, even in intensive competition investigations we only infer them.
Can we use summary measures to infer rivalry at the industry/national level in a
reliable way, as we do in cases?
Is there any aggregate way to measure rivalry at the industry/national level we
can use to assess policy?
MEASURING RIVALRY MORE DIRECTLY (?)

7. COMPASS LEXECON 6
Non Confidential
 Measuring “inputs” (but most are not exogenous for industry and for long run).
“Concentration went up in this industry so it has become less competitive”
 Measuring the relationship of “inputs” to outcomes
“Country X liberalised its electricity industry and prices went down”
 Identifying competitive mechanisms within the relationship between “inputs” and
outcomes
“When we removed restrictions on entry, new firms entered and prices fell.”
 Measuring things that seem to reflect the process of rivalry: profitability, dynamic
measures such as churn
“Entrepreneurship measured by new start-ups is falling.”
 Measuring things that seem to reflect the process of rivalry and relating them to
outcomes
MEASURING COMPETITION FOR POLICY
DESIGN/EVALUATION/ADVOCACY

8. COMPASS LEXECON 7
Non Confidential
EVEN STATIC MEASURES CAN SHOW THE IMPORTANCE
OF RIVALRY
 Hsieh and Klenow, QJE 2009 showed that
India (especially) and China in 1990s had
‘fatter left tail’ of inefficient firms ranked by
TFP than did the US (see left).
 More generally, greater variance of TFP in
India and China than the US. Hsieh and
Klenow quantified the output gains from
adopting more efficient distribution of firms.
 Van Reenan et al (2010) extended by relating
these findings to management quality:
specifically, many very poorly-managed firms
in India
 Interesting as consistent story reaching
inside the ‘rivalry’ black box to explain how
and why it works.

9. COMPASS LEXECON 8
Non Confidential
 Some competition authorities have been seeking to measure competition and the
effectiveness of pro-competitive interventions for some time:
– United Kingdom 2004: “‘Empirical indicators for market investigations”
– Norway Copenhagen Economics report 2007: “Competition indicators and other relevant
methods”
– European Union, LEAR 2009: “Competition Policy Index”
– Netherlands 2012: Economic Detection Instrument of the Netherlands Competition Authority,
The Competition Index
 What has been the policy impact? What cases / deregulation / policy change were
influenced by these indices?
 Time for an ex post evaluation?
A FINAL QUESTION