An Empirical Analysis of Bundling and Tying: Over-the-Counter Pain Relief and Cold Medicines

We apply and extend the cost-based approach to bundling and tying under competition developed in Evans and Salinger (2004a) to over-the-counter pain relievers and cold medicines. We document that consumers pay much less for tablets with multiple ingredients than they would to buy tablets with each ingredient separately. We then decompose the sources of these savings into marginal cost savings and a component that reflects fixed costs of product offerings. The analysis both documents substantial economies of bundling and illustrates the sort of cost analysis that is necessary for understanding tying.

Curing Sinus Headaches and Tying Law: An Empirical Analysis of Bundling Decongestants and Pain Relievers

We apply and extend the cost-based approach to bundling and tying under competition developed in Evans and Salinger (2004) to over-the-counter pain relievers and cold medicines. We document that consumers pay much less for tablets with multiple ingredients than they would if they bought tablets with each ingredient separately. We then decompose the sources of these savings into marginal cost savings and a component that reflects fixed costs of product offerings. The analysis both documents substantial economies of bundling and illustrates the sort of cost analysis that is necessary for understanding tying.

Universal fluctuations in growth dynamics of economic systems

The growth of business firms is an example of a system of complex interacting units that resembles complex interacting systems in nature such as earthquakes. Remarkably, work in econophysics has provided evidence that the statistical properties of the growth of business firms follow the same sorts of power laws that characterize physical systems near their critical points. Given how economies change over time, whether these statistical properties are persistent, robust, and universal like those of physical systems remains an open question. Here, we show that the scaling properties of firm growth previously demonstrated for publicly-traded U.S. manufacturing firms from 1974 to 1993 apply to the same sorts of firms from 1993 to 2015, to firms in other broad sectors (such as materials), and to firms in new sectors (such as Internet services). We measure virtually the same scaling exponent for manufacturing for the 1993 to 2015 period as for the 1974 to 1993 period and virtually the same scaling exponent for other sectors as for manufacturing. Furthermore, we show that fluctuations of the growth rate for new industries self-organize into a power law over relatively short time scales.Comment: 15 pages, 7 figure

"Self-Preferencing" - the global antitrust institute report on the digital economy

Published versio

The complicated simple economics of vertical mergers

A common justification that economists have historically given for why competition authorities should generally tolerate vertical mergers is the successive monopoly model, in which a vertical merger results in a price reduction by eliminating double marginalization (EDM). That model does not include any rivals to one of the merging firms, so it assumes away both the possibility that a vertical merger can result in raising rivals’ costs (RRC) and or vertical upward pricing pressure. I extend the successive/complementary model to allow for differentiated duopoly in the sale of the final good. This structure is one of the two simplest possible settings to allow for EDM, RRC, and vertical upward pricing pressure (the other being duopoly upstream and monopoly downstream). Since this market structure leaves the competing downstream firm with no independent source of supply, it would seem to be the one most likely to give rise to anticompetitive pricing incentives. The model reveals, however, an additional competitive effect. Eliminating double marginalization not only removes a pricing distortion for the merging firm, but it can also increase competitive pressure on the rival and its input supplier (even if the merging firm is the input supplier). I consider a variety of functional forms for demand and allow for the stages to be either successive or complementary. RRC and an increase in one of the two consumer prices occurs in some cases, but the price the merged firm charges its downstream competitor does not increase (and, indeed, drops) in a surprisingly broad set of cases. The results suggest that any prediction of a price increase due to a vertical merger based on static pricing incentives will be sensitive to assumptions about the functional form of demand and the timing of decisions that may be hard to verify.First author draf

Price gouging and the COVID-19 crisis – this time is (a little) different

Published versio

The new vertical merger guidelines: muddying the waters

The new Department of Justice and Federal Trade Commission Vertical Merger Guidelines focus attention on how vertical mergers are likely to affect static pricing incentives. In contrast, the section on vertical mergers in the Department of Justice’s 1984 Merger Guidelines, which the new Guidelines replace, place more emphasis on potential competition as a rationale for blocking vertical mergers. Even allowing for the possibility of raising rivals’ costs (which the successive monopoly model ignores), economic theory predicts that vertical mergers can provide incentives to lower all prices. Because of RRC, price increases are another possible consequence of a vertical merger, but which of the possible outcomes occurs depends on details that are likely to be difficult to measure. Potential competition between firms remains a more compelling rationale for blocking vertical mergers.First author draf

Self-Preferencing

When markets at successive or complementary stages are imperfectly competitive, firms that operate at multiple stages typically have a strong incentive to purchase from, sell to, or otherwise coordinate with its own operations at adjacent stations compared with those of individual firms. But, to the extent that such self-preferencing eliminates double marginalization that would occur under vertical separation or otherwise facilitates coordination that is difficult to accomplish between firms, competition rules that discourage self-preferencing, such as restrictions on vertical mergers or integration, can harm consumers. In 2020, the United States Department of Justice and Federal Trade Commission issue revised vertical merger guidelines that promised enforcement that more nearly resembles how they review horizontal mergers – that is, by predicting effects on static pricing incentives. But the economics of how vertical mergers on pricing incentives is more complicated than the economics of how horizontal mergers affect pricing incentives. If U.S. enforcement is based on a consumer welfare standard, the U.S. agencies will struggle to find a robust methodology for distinguishing anticompetitive from procompetitive vertical mergers. Self-preferencing has also played a key role in allegations of anticompetitive behavior in technologically advancing industries. A review of past allegations of anticompetitive product innovation against IBM, Microsoft, and Google reveals the challenges in designing rules that limit self-preferencing without acting as a drag on innovation