Economic Analysis of Pay-for-delay Settlements and Their Legal Ruling

In this paper, we ask whether courts should continue to rule settlements in the context of pharmaceutical claims per se legal, when these settlements comprise payments from originator to generic companies, potentially delaying generic entry compared to the underlying litigation. Within a theoretical framework we compare consumer welfare under the rule of per se legality with that under alternative standards. We find that the rule of per se legality induces maximal collusion among settling companies. In comparison, the rule of per se illegality entirely prevents collusion and the rule of reason induces limited collusion when antitrust enforcement is subject to error. Contrary to intuition, limited collusion can be welfare enhancing as it increases companies' expected settlement profits and thus fosters generic entry. Generic companies obtain additional incentives to challenge probabilistic patents, which potentially leads to overall increased competition. We further show that generic entry is fostered more effectively by inducing limited collusion than by rewarding first generic entrants with an exclusivity right

Economic Analysis of Pay-for-delay Settlements and Their Legal Ruling

In this paper, we ask whether courts should continue to rule settlements in the context of pharmaceutical claims per se legal, when these settlements comprise payments from originator to generic companies, potentially delaying generic entry compared to the underlying litigation. Within a theoretical framework we compare consumer welfare under the rule of per se legality with that under alternative standards. We find that the rule of per se legality induces maximal collusion among settling companies. In comparison, the rule of per se illegality entirely prevents collusion and the rule of reason induces limited collusion when antitrust enforcement is subject to error. Contrary to intuition, limited collusion can be welfare enhancing as it increases companies' expected settlement profits and thus fosters generic entry. Generic companies obtain additional incentives to challenge probabilistic patents, which potentially leads to overall increased competition. We further show that generic entry is fostered more effectively by inducing limited collusion than by rewarding first generic entrants with an exclusivity right.antitrust and intellectual property law; patent settlements; collusion; per se rule; rule of reason; Hatch-Waxman Act

Russian market power on the EU gas market: can Gazprom do the same as in Urkaine?

In the course of 2006, Gazprom sharply increased gas prices for Ukraine, Belarus, Georgia and Moldova. This paper assesses (i) to what extent Europe is vulnerable to similar use of market power by Russia, and (ii) to what extent the construction of strategic gas storage could help Europe to reduce its vulnerability. The European market for imported gas is described by differentiated Cournot competition between Russia and other – potentially more reliable – suppliers, in particular LNG imports. The results show that Russian market power is limited, because demand is not completely inelastic even in the short run. Moreover, if Russia’s unreliability increases (or if European short-run demand elasticity decreases) Russia gives away more and more of its expected profits to the other suppliers. For Europe, buying gas from more reliable suppliers at a price premium turns out to be more attractive than building storage capacity.

Insufficient Incentives for Investment in Electricity Generation

In theory, competitive electricity markets can provide incentives for efficient investment in generating capacity. We show that if consumers and investors are risk averse, investment is efficient only if investors in generating capacity can sign long-term contracts with consumers. Otherwise the uncovered price risk increases financing costs, reduces equilibrium investment levels, distorts technology choice towards less capital-intensive generation and reduces consumer utility. We observe insufficient levels of long-term contracts in existing markets, possibly because retail companies are not credible counter-parties if their final customer can switch easily. With consumer franchise, retailers can sign long-term contracts, but this solution comes at the expense of the idea of retail competition. Alternative capacity mechanisms to stimulate investment are discussed

Retail Competition and Electricity Contracts

Long-term contracts for electricity can counter market power and reduce prices in short-term markets. If electricity retailers face competition, however, companies signing long-term contracts are exposed to the risk that a fall in short-term prices would allow rivals to buy on the spot market and undercut them. Could this lead to less contracting and higher prices? This paper combines a model of electricity retailing and a Cournot model of competition in the wholesale markets to estimate the size of this effect, and finds that it could raise wholesale prices by two or three percent

Loyalty discounts

This paper considers the use of loyalty inducing discounts in vertical supply chains. An upstream manufacturer and a competitive fringe sell differentiated products to a retailer who has private information about the level of stochastic demand. We provide a comparison of market outcomes when the manufacturer uses two-part tariffs (2PT), all-unit quantity discounts (AU), and market share discounts (MS). We show that retailer's risk attitude affects manufacturer's preferences over these three pricing schemes. When the retailer is risk-neutral, it bears all the risk and all three schemes lead to the same outcome. When the retailer is risk-averse, 2PT performs the worst from manufacturer s perspective but it leads to the highest total surplus. For a wide range of parameter values (but not for all) the manufacturer prefers MS to AU. By limiting the retailer's product substitution possibilities MS makes the demand for manufacturer s product more inelastic. This reduces the amount (share of total profits) the manufacturer needs to leave to the retailer for the latter to participate in the scheme.This study is funded from the Valencian Economic Research Institute (IVIE) and the European Commission

The Economic Theory of Retail Pricing: A Survey

The types of contracts that arise in a typical vertical manufacturer–retailer relationship are more sophisticated than usually assumed in standard macroeconomic models. In addition to setting per-unit prices, manufacturers and retailers revert to non-linear pricing and non-price instruments. These instruments or contracts are referred to as vertical restraints and can take the form of franchise fees, resale-price maintenance, exclusive dealing, exclusive territories, and slotting allowances. The use and the effects of one type of instrument versus another depend crucially on specific market assumptions upstream and downstream and on the division of bargaining power between manufacturers and retailers. The author surveys the industrial organization literature on retail pricing and shows that vertical restraint instruments have important effects on producer and consumer prices, market structure, efficiency, and welfare. Some potentially important macroeconomic implications of vertical restraints are suggested.Market structure and pricing

Essays on the role of information

My Ph.D. thesis consists of three chapters on Information Economics in which I explore the consequences of the lack of information in the decision-making process of the agents. In the first Chapter, I present a monopoly model of two periods with risk-averse consumers. The quality of the product is uncertain for all the agents in the first period and the switching costs arise endogenously because of the faced risk. When the consumers learn the quality in the second period, two e ects take place: first, the uncertainty disappears and the willingness to pay increases; and second, the true quality is revealed and the willingness to pay reacts consequently (it increases for high qualities and decreases for low qualities). When the consumers do not learn the quality in the second period, the uncertainty keeps being penalized. The model predicts that the bargain-then ripo pattern of prices can be reversed for su ciently low realizations of the quality, and that the rst-period price set in the presence of switching costs is always lower than the first-period price set in a market without switching costs. In the second Chapter, I extend the previous set-up to a duopoly market. One of the fi rms is known to o ffer a product of quality zero, whereas the quality of the product supplied by the other firm is uncertain but larger than zero in expected terms. The two e ffects described in the monopoly case when the consumers learn the quality still take place. However, in this model the consumers have two pieces of information (the prices of the two fi rms) to infer the uncertain quality in the second period if they did not gather the information through direct experience. The predictions of the model di ffer from those of the monopoly case. First, the bargain-thenripoff pattern of prices can be reversed but not for the two rms simultaneously. Second, the most relevant result is that the average price in the fi rst period can be larger in the presence of switching costs than in their absence, contrary to the conventional wisdom. This result happens because, given the expected quality, the firm that off ers the riskless product has a competitive advantage in the fi rst period when consumers are su fficiently risk averse that does not exist when consumers are risk neutral. It may happen that its rival cannot compensate completely this advantage through a price decrease because negative prices are not allowed. In the third Chapter, I construct a model to analyze the e ffect of the piracy in the music industry in a situation with initial copyrights. I assume a for-proffi t platform and an open platform, two consumers who are heterogeneous in their willingness to pay for the tracks, and two artists that may be heterogeneous in their popularity (famous or unknown). The artists obtain their proffi ts from both the sale of tracks and the attendance to concerts. These two businesses are related in a very particular way if the artist is unknown: a consumer will decide about attending or not to the concert only if she has learned about the existence of the artist in advance by listening to his tracks. Then, the introduction of piracy has two e ffects: the prices charged by the for-pro fit platform decrease, but the unknown artists always obtain the maximal degree of di usion (the famous artists had it without piracy too). I find that the total surplus does not decrease with piracy if the revenues from concerts are included in the negotiation process between the artist and the for-profi t platform, but it may decrease if the parties only share the revenues from the tracks. Also, the for-profi t platform and the famous artists are always damaged by piracy, although the consumers and the unknown artists may be better off .Mi tesis doctoral consta de tres capí tulos sobre la Economía de la Información en los que exploro las consecuencias de la falta de informaci on en el proceso de toma de decisiones de los agentes. En el primer Capítulo, presento un modelo de monopolio de dos periodos con consumidores aversos al riesgo. La calidad del producto es incierta para todos los agentes en el primer periodo y los costes de cambio surgen endogenamente por al riesgo asociado. Cuando los consumidores aprenden la calidad en el segundo periodo, dos efectos tienen lugar: primero, la incertidumbre desaparece y la disposición a pagar aumenta; y segundo, se revela la aut éntica calidad y la disposición a pagar reacciona en consecuencia (aumenta para calidades altas y disminuye para las bajas). Cuando los consumidores no aprenden la calidad en el segundo periodo, la incertidumbre se sigue penalizando. El modelo predice que el patrón de precios ganga-timo se puede revertir para realizaciones de la calidad sufi cientemente bajas, y que el precio de equilibrio del primer periodo con costes de cambio es siempre más bajo que sin costes de cambio. En el segundo Capítulo, extiendo el marco anterior a un mercado de duopolio. Se sabe que una de las empresas ofrece un producto de calidad cero, mientras que la calidad del producto ofrecido por el rival es incierta pero mayor que cero en términos esperados. Los dos efectos descritos anteriormente cuando los consumidores aprenden la calidad tambi én tienen lugar aqu í. Sin embargo, en este modelo los consumidores tienen dos piezas de información (los precios de las empresas) para inferir la calidad en el segundo periodo si no compraron previamente. Las predicciones del modelo difieren de las del caso de monopolio. Primero, el patrón de precios ganga-timo se puede revertir pero no para las dos empresas simultáneamente. Segundo, el resultado más relevante es que el precio medio en el primer periodo puede ser mayor en presencia de costes de cambio que en su ausencia, al contrario de lo predicho por los modelos tradicionales. Este resultado sucede porque, dada la calidad esperada, la empresa que ofrece el producto sin riesgo tiene una ventaja competitiva en el primer periodo cuando los consumidores son aversos al riesgo que no existe cuando los consumidores son neutrales al riesgo. Es posible que el rival no pueda compensar totalmente esta ventaja mediante una bajada de precios ya que los precios negativos no se permiten. En el tercer Cap ítulo, construyo un modelo para analizar el efecto de la piratería en la industria musical partiendo de una situación inicial con copyright. Asumo una plataforma con fi nes de lucro y una plataforma abierta, dos consumidores heterogéneos en su disposición a pagar por las pistas de música, y dos artistas que pueden ser heterogéneos en su popularidad (famosos o desconocidos). Los artistas obtienen sus beneficios tanto de la venta de pistas como de la asistencia a los conciertos. Estos dos negocios se relacionan de un modo muy particular si el artista es desconocido: un consumidor decidir a si asistir o no al concierto solo si sabe previamente de la existencia del artista gracias a haber escuchado sus pistas. As , la pirater a tiene dos efectos: los precios que puede cargar la plataforma con fines de lucro disminuyen, pero los artistas desconocidos siempre obtienen el grado máximo de difusión (los artistas famosos ya lo tenían sin pirater ía). Encuentro que el bienestar total no disminuye con la introducción de la piratería si los ingresos por conciertos se incluyen en el proceso de negociación entre el artista y la plataforma con fines de lucro, pero puede disminuir si solo se reparten los ingresos de las pistas. Del mismo modo, la plataforma con fines de lucro y los artistas famosos siempre salen perjudicados por la piratería, aunque los consumidores y los artistas desconocidos pueden mejorar