Should the European prohibition on market manipulation be narrowed down?

On 30 November 2007, TILEC member Matthijs Nelemans publicly defended his doctoral dissertation entitled 'The prohibition of market manipulation', which was supervised by Prof. M.S. Groenhuijsen and Prof. F.G.H. Kristen. The European prohibition of market manipulation, included in the European Market Abuse Directive, covers both disseminating false or misleading information and trading shares to initiate a price change or to cause an artificial price. Matthijs argues that this prohibition poorly characterizes market manipulation. His dissertation provides an economic background to the relevant issues and offers narrower definitions. One of his conclusions is that the prohibition of information-based manipulation should include a materiality standard in order to exclude minor forms of false or misleading information.
Furthermore, the prohibition of trade-based manipulation would benefit from being interpreted in line with his 'unsupported price pressure' standard. Whereas supported price pressure, defined as price pressure that is based on sufficient information, contributes to price efficiency, unsupported price pressure may create social costs.

A European network of competition law and economics institutes

Many of the problems raised by competition policy and market regulation gain from being addressed not only from an interdisciplinary perspective but also from an international one. Earlier this year, TILEC was active in setting up a European network of research institutions with a similar focus. The first event organized under the banner of the network took place in Bonn, Germany earlier this month. This workshop on the law and economics of competition policy was generously hosted by the Max-Planck Institute for research on collective goods. Researchers from the Amsterdam Center for Law and Economics (ACLE), the Centre for Infocommunication Law at the Hungarian Academy of Sciences, the Centre for Market and Public Organization (CMPO) at the University of Bristol, the Centre for Competition Policy (CCP) at the University of
East Anglia and TILEC joined their Germany-based colleagues to discuss various aspects of competition policy, from procedural requirements in cartel cases to the influence of competition law enforcers' experience on decisions. A similar event, specifically designed to showcase the work of the network's young researchers, will be held in Norwich, UK next June, at the initiative of CCP.

Do the European rules governing insider trading make sense?

Does authorized trading by insiders (say, by the directors of a listed company) contribute to pricing efficiency or should we ban it altogether? Is there some legal certainty with regards to the kind of information that is reqarded as inside information? Those questions were addressed in a recent TILEC/AFM seminar held in Tilburg. Eric de Bodt (University of Lille 2 and CORE) presented some empirical evidence gathered with co-authors Nihat Aktas and Hervé van Oppens. Using data on more than 2,000 US-listed companies, covering almost five years of trade, they show that, even though financial markets do not strongly respond (in terms of abnormal returns) to insider trading activities, the significant change in the price sensitivity to relative order imbalances associated with abnormal insider trades suggests that price discovery is hastened on insider trading days. François Kristen (University of Amsterdam) analyzed some key elements of the definition of inside information, as set by the recent European Union directive on market abuses. To fall under the prohibition, a piece of information must be of a precise nature, which he argues excludes market rumours, and have the capacity significantly to affect the price of an asset if publicly known, a feature that is even more problematic to assess.

Should access to the electricity grid be traded on a market?

Should European policy-makers wishing to improve the allocation of resources in the electricity sector content themselves with providing market-based incentives? A recent TILEC discussion paper by Gerd Küpper (KU Leuven) and Bert Willems (TILEC) studies the welfare implications of using market mechanisms to allocate transmission capacity in recently liberalized electricity markets. It addresses the issue as to whether access to this essential facility should be traded on a market, or whether the incumbent should instead retain exclusive usage rights. They show that granting exclusive use to the incumbent might be optimal if the capacity of the grid is small and the incumbent can reduce production costs by taking advantage of interregional production-cost differences. This result runs counter to the intuition that arbitrage leads markets to function better. The reason is that when competition is imperfect, arbitrage may reduce productive efficiency. Thus, market mechanisms for the allocation of electricity transmission capacity should be introduced only if sufficient investment in the network is guaranteed or if the market power of the incumbent is curtailed in at least one of the regional markets in which it operates.

TILEC 5th Anniversary Conference: 14 April 2008

On 14 April 2008, TILEC will celebrate its 5th anniversary with a conference devoted to the Law and Economics of Innovation. Innovation is a theme that is central to TILEC's two main research lines: 'Institutions, Competition and Regulation' and 'Law and Finance'. In the opening lecture, Andrew McLaughlin (Head of Global Public Policy and Government Affairs, Google Inc.) will set out how an innovative firm manages its way through the web of national and international regulations. A first session on 'Competition and Innovation' (with speaker Suzanne Scotchmer, UC Berkeley and a leading legal academic still to be confirmed) will then focus on the interplay between innovation, intellectual property law and competition policy. In the afternoon, a session on 'Financing Innovation' (with speakers Mike Wright, Nottingham, and Bill Megginson, U of Oklahoma) will discuss the workings of the market for seed capital and the need for financial markets themselves to innovate. The day will be closed with a distinguished panel of academics, regulators and market players on 'Regulating Innovation?': How should market regulators and competition authorities react to market innovations? Can they stimulate innovation, or do they necessarily stand in the way? More details will be provided in the next newsletter; meanwhile, mark the date in your calendar!

Excessive prices or excessive price controls?

Do European competition authorities sanction firms that allegedly exploit their consumers by setting excessive prices? Should they do so, in any case? In a recent discussion paper, TILEC professor Damien Geradin discusses this peculiar area of competition law. First of all, excessive pricing is an antitrust offence only in a limited number of jurisdictions. Second, Article 82(a) EC and equivalent national provisions allowing competition authorities and courts to control excessive prices charged by dominant firms have been enforced only infrequently compared to the bulk of the case-law on abuses of dominance. Clearly, competition authorities have focused their attention on exclusionary pricing measures seeking to foreclose competitors rather than on exploitative practices. This is in line with a growing consensus that competition authorities are ill-suited to carry out price controls, a task which is better left to sector-specific regulators. Damien Geradin argues that controlling prices should indeed be limited to exceptional circumstances. Moreover, where such circumstances justify them, given the inherent risks of costly mistakes and unintended adverse effects, price controls should be based on a sound economic analysis of market characteristics and carried out with the utmost caution.

Urgent need for patent reform?

Is patent reform a fad? Do firms really misuse the patent system? Those were some of the questions addressed by a panel of distinguished researchers during a conference on "patent policy and innovation" organized by TILEC and the University of Bologna, Italy, this November. The speakers (Alfonso Gambardella (Bocconi), Richard Gilbert (Berkeley), John Golden (Texas Law), Dietmar Harhoff (Munich), Gerard Llobet (CEMFI, Madrid), Klaus Schmidt (Munich), Richard Schmalensee (MIT), and Damien Geradin (TILEC)) discussed the evidence showing that the increase in the numbers of patent applications and granted patents is associated to a decrease in their "quality" and caused by firms strategically using the system to generate royalty revenues. Reforming the system to discourage such gaming may be desirable and involve a change in the fee structure or the expansion of the possibilities for opposing strategic patent applications. The problem seems particularly acute in those cases where multiple patented technologies are needed for the production of a new good or technological standard. The risk then is that the royalties for those complementary inputs be set too high. Whether this royalty stacking risk is high and requires public intervention was a matter for debate.

A single European market for gambling services?

Can EU Member States justify the restrictions to competition on the market for gambling services? Since 2006 the European Commission has opened infringement procedures against twelve member states (including France, Germany and The Netherlands), arguing that state-run monopolies violate basic internal market principles. It is established case law of the European Court of Justice that public interest concerns (such as the prevention of crime and gambling addiction) can justify restrictions, but it is also clear that restrictions have to be suitable to achieve national policy aims, as well as proportionate and consistent. A recent Tilburg conference addressed the question whether member states can prove that their policies satisfy these criteria. It made clear that, in Europe, there is little hard evidence on the relation between gambling activity, crime and problem gambling, and that some member states regulate more addictive forms of gambling less strictly than less dangerous ones. The dispute between the Commission and the member states is therefore likely to continue. On this issue of on-going concern, see the recent discussion paper by Eric van Damme. In addition, a book on its legal aspects was published in 2006; another one, focusing on the economic aspects, is forthcoming.

Evaluation of the effects of Dutch deregulation policies

Should policy-makers stop pushing for the introduction of market-based incentives in those sectors formerly dominated by public firms and pause for reflection? In the Netherlands, successive governments have introduced regulatory reforms in various markets with the aim of increasing competition intensity and thereby social welfare. These microeconomic policies have recently come under attack. Among others, the Socialist Party (SP) and the labor unions have called for a "time out". In May, the Dutch parliament asked for a formal evaluation of past policies and the minister of economic affairs agreed to it. Presently, the extent to which those policies have succeeded in enhancing efficiency, accessibility, quality and affordability of services, and their overall impact on welfare and employment are under investigation. An external committee was set up to supervise this research and guarantee its objectivity. TILEC Director Eric van Damme was appointed as one of its members. See Kamerstukken Tweede Kamer 24036, nr. 337.

Are merger remedies effective and proportional?

More and more merger proposals are cleared under the condition that the merging parties sell some of their assets to a competitor. What do competition authorities exactly get from this? How does it affect the incentives for firms to propose mergers in the first place? This issue was the topic of a recent TILEC seminar. Helder Vasconcelos (University of Porto) presented a model of merger control with conditional clearance. Although structural remedies create new merger opportunities to firms, when insisting on them to clear a merger the antitrust authority tends to over-fix the competition problem (i.e., to go beyond the return to the level of competition that existed prior to the transaction), which may discourage firms to propose more efficient mergers. Alessandro Tajana (Johnson & Johnson and TILEC) analyzed the evolving practice of the European Commission in this respect. According to him, the available evidence suggests that it has a clear preference for the sale of whole business units over other possible remedies. Along the way, the proportionality requirement present in the relevant Council regulation has been lost. Thus, a risk exists that the Commission be tempted to use mergers as an opportunity to redistribute capital among firms in the industry.

Regulation and investment in infrastructures in network industries

How can regulation be designed to foster investment in major infrastructure projects now outstanding in network industries, such as the upgrade to Next Generation Networks in telecoms? Economists, engineers and policymakers are busy with this issue. In a recent discussion paper, Pierre Larouche provides a
critical legal contribution to the debate. When the focus of regulation moves away from increasing efficiency on a constant-asset basis ("fat trimming") to ensuring that assets are correctly replaced and upgraded over time, weaknesses in institutional design come to the fore. As regards substance, if structural solutions -that is, separation- are not retained, behavioural regulation must be reviewed (including regulatory holidays). Here the ex ante/ex post distinction obscures the debate. The appropriate standard should be that investors are not subjected to more risk than with comparable investments elsewhere. An ex ante statement of the conditions under which ex post intervention will take place might well be the best option. Secondly, as regards institutions, the need for EC-level coordination can be overstated: some measure of divergence is also useful to gather empirical information. In any event, regulation is likely to be fairly granular, even within a single Member State.

The end of the Microsoft antitrust cases?

On 22 October, Microsoft announced that it would take the steps required to comply fully with the March 2004 decision of the European Commission, that it would not appeal the September 2007 decision of the Court of First Instance, and that it would "continue to work closely with the Commission and the industry to ensure a flourishing and competitive environment for information technology in Europe and around the world." In the US case, most of the historic Microsoft Antitrust Consent Decree will expire on 12 November. It is therefore an appropriate time to assess the two cases against Microsoft in the light of rapidly evolving markets, refinements in economic theories of technological innovation, and the increasing challenges of operating a global business under multiple antitrust regimes. The Searle Center at Northwestern University School of Law organizes a conference on 15 and 16 November in which several distinguished academics and practitioners will present their views on the topic. TILEC will be represented by Pierre Larouche, who will participate in a panel on "Microsoft, The European Court of First Instance and Beyond". For more details on the conference, please visit the website of Northwestern School of Law.

TILEC seminar on health care

On 26 October, TILEC devoted its monthly seminar to the issue of health care. Catherine Schaumans (KU Leuven) presented her work on the structural estimation of an entry model for physicians in Belgium. Its objective is to analyze the nature of the interaction between general practitioners and specialists. On the one hand, GPs and specialists could compete for the same set of patients; on the other hand, through the referral process, they may be used a complementary inputs in the production of health care, thus mutually benefiting from one another's presence. Which effect dominates is of importance in order to assess the market impact of mandatory referral schemes (gate-keeping), in place or under study in many countries. Wolf Sauter (Dutch Health Care Authority, NZa, and TILEC) discussed the scope for applying the EU framework for services of general economic interest (SGEI) to the market for curative health care (see TILEC DP 2007-029). Although many issues are not settled in the existing case law, the SGEI regime might provide a useful regime for those hospital services that cannot at present be subjected to full market-based provision- while solidarity-based state provision is not an option, or is no longer desirable.

Loans to small- and medium-sized firms: an empirical analysis

What determines the interest rate on loans granted to small- and medium-sized enterprises (SMEs)? Over the past decades, credit scoring technologies have tremendously developed but bankers often rely on their experience and distrust the blind use of quantitative information. Thus, the decisions to grant a loan and the financial conditions attached to it are taken on the basis of a mixture of statistical methods ("rules") and subjective judgments ("discretion"). In a recent TILEC discussion paper, Geraldo Cerqueiro, Hans Degryse and Steven Ongena, from Tilburg University, estimate a model of the determinants of interest rates to SMEs in the US and Belgium. Unexplained deviations from a very predictive linear loan-pricing model are
interpreted as evidence of the banks' discretionary use of market power in the loan rate-setting process. From the analysis, it emerges that "discretion" plays a large role if (i) loans are small and uncollateralized; (ii) firms are small, risky and difficult to monitor; (iii) firms' owners are older, and (iv) the banking market where the firm operates is large and highly concentrated. Overall, the costs banks face in searching information and borrowers' difficulty to switch lenders seem to be the main sources of market power in the credit market.

Grants for research on competition, intellectual property and innovation

Within the framework of its cooperation with US-based firm Qualcomm, TILEC sponsors a grant competition to provide funding for legal and economic research on the interplay between innovation, intellectual property and competition policy. See the call for proposals. Up to three scientists (or teams) will be provided with 15,000 euros each to generate new, policy-relevant findings. The results will be presented at a workshop on the issue, which will take place in Tilburg next Fall. The recent Microsoft judgment by the European Court of First Instance once again underlined the need for progress in this area. Indeed, legal doctrine traditionally puts
forward intellectual property rights as the just reward for the efforts of an inventor. A more sophisticated view, influenced by economics, presents them as devices designed to foster the production of useful information. At the same time, in competition law, intellectual property rights are usually viewed with suspicion, given that they can give rise to monopolies, with the risk of abusive conduct. With innovation now being on top of the policy agenda, those traditional views have to be re-assessed. The grant competition is meant to kick-start this process.

Merger analysis in markets for long-term care

How should competition authorities and regulators approach the issue of mergers among providers of care for the disabled? On September 21, Eric van Damme presented the results of a TILEC study on this topic to an audience consisting of representatives from the Dutch Competition Authority (NMa), the Dutch regulator for the health sector (NZa) and the Dutch organization of providers of care for the disabled (VGN). The latter organization had commissioned the report. The main conclusions were that, while the EC guidelines for the evaluation of horizontal mergers can be broadly followed, the actual implementation has to take the institutional characteristics of the sector into account. Indeed, in the Netherlands, some important aspects call for a cautious approach: (i) the service is almost exclusively supplied by not-for-profits (see Prüfer, 2007); (ii) health care provision and health care insurance are provided by different entities, although the two services are clearly interdependent; (iii) the 'zorgkantoor', a public monopsonist on the health care provision market, plays an intermediating role; (iv) the NZa has the option of regulating any firm that would become dominant as a result of mergers; and (v) there is a lack of data about service quality and patients' behavior. Lessons for all the participants involved were drawn and an agenda for future research was discussed.

ITS conference

The present and the future of telecommunications and internet regulation was debated in detail in Istanbul in the first week of September during the regional conference of the International Telecommunications Society (ITS), with participants from academia, firms and public institutions, both from within and outside Europe. TILEC was well-represented. Filomena Chirico addressed the topic of network neutrality from a European perspective, discussing why the idea that a network should treat equally all contents has been so furiously debated in business and policy circles in the US, while generating only limited passion in Europe (see TILEC DP 2007-030). Ilse van der Haar's presentation dissected the regulatory principle of technological neutrality, which, she argues, is currently based on four different rationales, a figure that accounts for the various interpretations, and misunderstandings, of the principle (see TILEC DP 2007-009). Finally, Maartje de Visser focused on questions of institutional design, in particular the need for addressing the issue of the accountability and legitimacy of the European Regulators Group (see TILEC DP 2007-028).

34th annual conference of the EARIE

How can TILEC members best validate and disseminate the results of their research? Publications in international, peer-reviewed, scientific journals and participations to major international conferences clearly contribute to the realization of TILEC's goal of "excellence in research". Earlier this month, TILEC was well-represented at the 34th annual conference of the European Association for Research in Industrial Economics (EARIE), which took place in Valencia, Spain. EARIE was created in 1974 with the aim of providing a professional society for academics and practitioners with an interest in the field of industrial economics.TILEC members Cédric Argenton, Lapo Filistrucchi, Jens Prüfer and Bert Willems, along with extramural fellow Evgenia Motchenkova presented their recent pieces on topics as varied as exclusivity contracts, habit-driven consumer behavior, mergers among non-profit organizations, electricity plant divestitures and anti-cartelization leniency programs. The keynote speakers, Greg Shaffer, Suzanne Scotchmer, and Lars-Hendrik Röller, respectively addressed the issues of loyalty rebates and selective price cuts, incentives for innovation beyond intellectual property rights, and the political economy of competition policy, all subjects falling within the scope of TILEC research programme, whose relevance thereby got a marked confirmation.

A first analysis of the Microsoft judgment

The ruling of the European Court of First Instance on September 17 has been hailed as a quasicomplete victory for the European Commission in its battle with Microsoft. According to Pierre Larouche, who contributed an opinion article to Het Financieele Dagblad on September 20, it remains to be seen whether it will still resonate in the years to come. Indeed, while the quality of this judgment is to be commended, the Court sometimes seemed submerged in the technicalities of the case. The Court remained very close to the facts, perhaps in an attempt to reduce its exposure to criticism from the European Court of Justice upon appeal, which is limited to points of law. For instance, as regards the disclosure of interoperability information (first issue), observers were expecting the Court to set out clear conditions under which competition law can trump intellectual property rights. The Court preferred instead to recast the reasoning of the Commission decision to conclude that in any event, the Commission was correct even under the narrow set of conditions that recent court cases suggested. As regards the tying of Media Player to Windows (second issue), the Court literally constructed the legal reasoning for the test used in the Commission's decision, thereby filling the gap. The test itself is hardly controversial, however. For the remainder, the Court stuck to the specific facts of the case and confirmed the findings of the Commission. This judgment is therefore unlikely to bring legal disputes to rest, and it is certain to elicit criticism for its conservatism. Future Commission decisions in high-tech sectors will probably continue to be challenged before the Court.

Pierre Larouche appointed special adviser to Commissioner Reding

The European Commission has appointed TILEC director Pierre Larouche as special adviser to Viviane Reding, member of the Commission responsible for Information Society and Media. Pierre will provide advice to the Commissioner and her staff on certain aspects of the Commission's upcoming proposals for reform of the European regulatory framework for electronic communications.

Two upcoming TILEC-AFM seminars on insider trading

Does legal insider trading (e.g. by a director when authorized by the board) contribute to market efficiency? Can supervision help eliminate abnormal stock returns ahead of news announcements, thereby increasing market "cleanliness"? The TILEC-AFM research network on financial market regulation will soon organize two seminars on these important issues. The first seminar, entitled "Market cleanliness and legal insider trading in Dutch financial markets", will be held at the Autoriteit Financiele Markten (AFM, the Dutch financial market supervisor) in Amsterdam on October 2. Two speakers, Bas ter Weel (AFM) and Jérémie Lefebvre (TILEC), will present their recent research, discussing the impact of the market abuse European directive on market cleanliness and the impact of legal insider trading on Dutch stock markets. The second seminar will be held at TILEC on December 14. Eric de Bodt (Université de Lille, CORE & IAG Louvain School of Management) will discuss the impact of legal insider trading on US stock markets, while François Kristen (University of Amsterdam) will highlight the corresponding legal issues. More information about those two events as well as other activities of the TILEC-AFM research network can be found here.