The secret of the pyramids

Many firms are controlled by other firms, whose shares are themselves mainly held by other entities or individuals. Who uses such pyramidal structures? What for? Those were some of the questions addressed in a recent TILEC seminar. Douglas de Jong (University of Iowa) and co-authors managed to track the ownership structure of all firms listed on the French main market from 1997 to 2003. 56% of those companies are controlled by upstream firms, which is a larger proportion than thought. Preliminary work does not seem to support the hypothesis that pyramids are used so as to force minority shareholders to participate in the internal funding of business groups, while there is limited evidence that they are used to introduce a wedge between control rights and cash flow rights. Christoph van der Elst (Tilburg University) performs a comparison of the shareholding of operating companies listed in five European countries in 1999 and 2007.
Over the period, about a third of them were delisted. Contrary to a commonly held opinion, there is no general decrease in the control rights of the largest blockholders: that depends on the country and the concentration measure chosen.

Towards efficient contract rules in Europe?

What would be the economic impact of a harmonized contract law for the entire Europe? While many researchers around the continent are drafting common rules to be submitted to the European Commission as part of the 'common principles of European contract law' or CoPECL project, the Economic Impact Group (EIG) is working on providing insights about their economic consequences. The EIG, led by TILEC members Filomena Chirico, Pierre Larouche and Eric Van Damme and composed of highly qualified economists and lawyers, was convened for its second roundtable on 17 December 2007. The event was hosted by the University Pompeu Fabra in Barcelona. Draft papers on the economic analysis of certain rules of European contract law were presented and discussed by the participants. The rules discussed on this occasion concerned performance and breach of contract, measure of damages, consumer contracts, long-term contracts and insurance contracts. The boundary between contractual and extra-contractual obligations was also touched upon. The EIG will meet again in June 2008 and continue exploring the economic implications of the proposed rules.

Dealing with exclusive dealing

How should competition authorities treat exclusive dealing contracts? On 18 January 2008, TILEC organized a seminar on this topic. Paul Lugard, Head of Antitrust at Philips, gave a critical summary of the current legal framework, which has been shaped in recent years by several cases involving rebates rather than exclusivity clauses in their purest form. In his view, while the Community courts' case law has shown signs of a less rigid approach, the European Commission in its 2005 Discussion Paper about the application of article 82 missed an opportunity for suggesting a fully-structured consumer welfare test. Instead, the proposed approach resorts even more to proxies for anti-competitive foreclosure, potentially giving rise to numerous errors. David Spector (Paris School of Economics) presented his recent work extending the main theory of harm under exclusivity contracts (the so-called "naked exclusion" story) to the (typical) case where the potential victim is present at the contracting stage. It is shown possible for a firm to use exclusivity contracts in order to deprive a rival of the minimum viable size, exclude it from the market, and enjoy increased market power but such eviction is less likely than inefficient entry deterrence.

Two TILEC researchers honored with prestigious grants

Two active TILEC researchers were recently awarded prestigious competitive grants. Jan Boone won a Dutch Science Foundation (NWO) Vici grant of € 1,250,000 for his research project on the health care system. Vici grants are given to senior researchers who have shown that they have the ability successfully to develop their own innovative lines of research and to build a research group. Jan's research aims at identifying the costs and benefits of intensifying competition in health care markets. Although more intense competition forces providers and insurers to yield higher quality at a lower price, the question is whether one can have too much competition. Bert Willems was granted a two-year Marie Curie fellowship by the European Commission for his research project about investments in electricity markets. Such grants are meant to improve the career perspectives of young researchers by broadening their scientific and generic skills. Bert will study how generator firms make their investment decisions in a competitive electricity market and whether governments should regulate the security of supply. TILEC is very proud of those achievements and extends its warmest congratulations to the winners!

Will Dutch windmills bring stormy weather to electricity markets?

A new seminar series on energy economics was launched on 14 February 2008 in The Hague. TILEC created this discussion platform for Dutch energy economists together with the Dutch national competition authority (Nma), the Dutch Ministry for Economic Affairs, and the Netherlands Bureau for Economic Policy Analysis (CPB) in order to bridge the gap between policy-makers and academics. The first meeting focused on the large-scale introduction of wind energy in a future low carbon-intensive economy and featured  Karsten Neuhoff (Cambridge University) and Xander van Tilburg (Energy Research Center of the Netherlands). Karsten Neuhoff explained that, due to the stochastic nature of wind output, future electricity prices will be more volatile. As a result, the future energy system will rely less on large-scale base-load power plants and more on flexible peak-load power plants. If incumbent generators have market power, the price volatility will increase even further, with insufficient investments in wind energy as a result. This will force the competition authorities to think again about the alternative strategies to address market power in the electricity sector. The speakers' presentations can be found on TILEC's website. To receive an invitation for future seminars in the series, please send your contact information to the TILEC secretariat.

Registration open for the TILEC conference on "Market Governance and Innovation"

On 14 April 2008, TILEC will celebrate its fifth anniversary with a conference held in Tilburg on the theme of 'Market Governance and Innovation'. The attractive programme is now finalized. Andrew McLaughlin (Google Inc.) will open the day with a talk about managing an innovative firm in the web of national and international regulations. Then, a morning session on 'Competition and Innovation' will focus on the interplay between innovation, intellectual property law and competition policy. Suzanne Scotchmer (Berkeley) and Gustavo Ghidini (Milan and LUISS, Rome) will be the key speakers. An afternoon session on 'Financing Innovation' will study the reciprocal relationship between innovation and financial markets. Mike Wright (Nottingham) and Bill Megginson (Oklahoma) will be the key speakers. The day will be closed with a distinguished
panel of academics, regulators and business community representatives discussing the possible need for 'Regulating Innovation?'. Catherine Waddams (East Anglia), Chris Fonteijn (OPTA, the Dutch telecommunications regulator); Hendrik Jan de Ru (Free University Amsterdam), Cecilio Madeiro (European Commission), Mindert Mulder (NZa, the Dutch regulator for the health care sector) have already confirmed their participation. Attendance is free but registration is requested: please click here.

How do innovations find their way to final consumers?

On 15 February 2008, TILEC held a seminar on innovators' access to the market. Lars Persson (Research Institute of Industrial Economics, Stockholm) reported about a model in which an innovator has to decide whether (s)he wants to sell (or license) its business idea to the incumbent firms, or venture into production and enter the final good market. The intuition according to which the entrepreneur will enter when his or her idea is really good is proved wrong: sales are more likely when the innovation is more drastic. Policies that aim at stimulating the entry of small entrepreneurs may be counterproductive, as they may then give innovators the incentive to develop products of lower value. Damien Geradin (TILEC) addressed the various legal and economic issues surrounding two forms of patent bundling. The first relates to the creation of patent portfolios, which are a helpful way to solve transaction costs and other inefficiencies when patents essential to a standard are held by many different firms. The second, which has been ignored so far in academic circles, relates to the situation where patent holders license bundles. Although those practices may generate efficiencies, they can also be problematic under current competition laws.

The financial impact of merger control

Does merger control make any difference? In the recent years, researchers have been struggling with identifying the effects of competition policy on economic outcomes. In a recent discussion paper, Elena Carletti (CFS, Wharton and TILEC), Philipp Hartmann (ECB and CEPR) and Steven Ongena (TILEC and CEPR) provide some surprising evidence. Working with a unique dataset of legislative changes in industrial countries, they identify events that strengthen the control of mergers and acquisitions, analyze their impact on banks and non-financial firms, and explain the different reactions observed by the various regulatory characteristics of the banking sector. Covering nineteen countries for the period from 1987 to 2004, they find that more competition-oriented merger control increases the stock prices of banks and decreases the stock prices of non-financial firms. A major determinant of the positive bank returns is the degree of opaqueness that characterizes the institutional setup for supervisory bank merger reviews: the less transparent are the supervisory reviews, the higher the valuation gains of banks in anticipation of changes in the control of concentrations. These results show the importance of sector characteristics and of the interplay between different regulations in explaining the effects of a particular legislative change.

Innovative research on competition and intellectual property

Last Fall, TILEC issued a call for research proposals on 'the interplay between innovation, intellectual property and competition policy.' The goal of this competition was to bring together scholars in the fields of law and of economics to generate new, scientific, policy-relevant findings on this issue. The selection committee comprised Vicenzo Denicolo (Bologna), Damien Geradin (Tilburg), and Greg Sidak (Georgetown). It received 31 quality applications from all but one continent and ranked them in accordance with the criteria set forth in the call for proposals. Last month, it announced that the projects submitted by (in no specific order) Michael Ward (Texas at Arlington), Scott Baker (North Carolina at Chapel Hill) and Claudio
Mezzetti (Warwick), and Bruce Kobayashi and Joshua D. Wright (both of George Mason) would be each awarded a EUR 15,000 grant. On 15 December 2008, TILEC will organize a workshop in Tilburg, where the preliminary results of those projects will be presented and discussed. This competition was part of a research programme on competition law, intellectual property law and innovation sponsored by Qualcomm Inc. at TILEC. Innovation will be at the core of the conference organized by TILEC on 14 April 2008 to celebrate its fifth anniversary.

Is competition in the banking sector welcome?

Few will disagree with the statement that banks are important for economic growth and welfare, but what about banking competition? Is it good or bad? Furthermore, what do we know about the intensity of banking competition? Does deregulation, or the creation of a single European market, increase or decrease that intensity? These questions were discussed at a workshop that TILEC organized together with the Netherlands Bureau for Economic Policy Analysis (CPB) and the Dutch Ministry of Economic Affairs on 31 January 2008. The speakers were Michel van Leuvensteijn (CPB), Nicola Cetorelli (Federal Reserve, New York) and Arnoud Boot (ACLE, University of Amsterdam). The main lessons that emerged from the workshop are that banking competition is good but that, in contrast to the US, the intensity of banking competition in the Euro
area seems to be decreasing. Taken together, this does not bode well for Europe. Additional details can be found here.