New Economics Papers
on Law and Economics
Issue of 2006‒07‒15
four papers chosen by
Jeong-Joon Lee, Towson University

  1. Hidden Talents: Partnerships with Pareto-Improving Private Information By Andrew F. Daughety; Jennifer F. Reinganum
  2. Voice over IP. Competition Policy and Regulation By christoph Engel
  3. Competition as a Socially Desirable Dilemma By Christoph Engel
  4. How Effective is European Merger Control? By Tomaso Duso; Klaus Gugler; Burcin Yurtoglu

  1. By: Andrew F. Daughety (Department of Economics and Law School, Vanderbilt University); Jennifer F. Reinganum (Department of Economics and Law School, Vanderbilt University)
    Abstract: Can the presence of private information in a transaction yield a Pareto-improvement over complete information? In this paper we show that the combination of multi-agent simultaneous signaling of private information, and the nature of the strategic interaction, can result in non-cooperative equilibria which are Pareto superior to the complete-information non-cooperative equilibrium. Our application involves two agents who become partners in the production of a product (or the undertaking of a project). The partners’ efforts are complementary and, in addition to its direct contribution to product quality, observable (but non-verifiable) effort serves as a signal for the unobservable component, talent; each partner is privately informed only about her own talent. Because the partners share the payoff from the project, each is tempted to shirk in providing effort. However, the need for each partner to signal the quality of the product to potential buyers serves as a credible commitment to provide greater effort. We find that this non-cooperative, simultaneous signaling need not be wasteful, and can actually be welfare-enhancing in the strongest sense: there is a portion of the parameter space wherein incomplete information is Pareto-improving relative to the complete-information non-cooperative outcome for all possible non-degenerate prior distributions over the private information. Therefore, the combination of simultaneous-move strategic interaction and incomplete information can lead to conditions wherein the “problem” of adverse selection actually mitigates the problem of moral hazard.
    Keywords: Private information, welfare, moral hazard, adverse selection, signaling, partnership
    JEL: D82 L15 L20 K19
    Date: 2006–06
  2. By: christoph Engel (Max Planck Institute for Research on Collective Goods, Bonn)
    Abstract: Traditionally, there have been two separate telecommunications networks, one based on switches, the other based on routers. The switched network basically carried voice. The packet switched network basically carried data. Now voice is about to go packet switched too. Ultimately, both networks might merge. If that were to happen, the governance structure of either of these networks would have to change fundamentally. Currently, a large amount of packet switched traffic goes over the public Internet. The Internet is organised as a club good. There is an access fee, but no further fee for its actual use. Volume metering is technically feasible, but typically only bandwidth is controlled. In the switched network, a split price is standard. There is an access fee, plus a separate fee for each call. In a club good, by definition each side pays for part of the traffic. On the Internet, the receiver pays principle is thus applied. In most countries, the switched network is governed by the caller pays principle. Under that principle, there are termination charges. Each operator has a local monopoly over its customers. There is thus the possibility that telephony will in the future be controlled by the same principles. Actually, in that case the only remaining property right would be access to the network. In the opposite case, data traffic might be contaminated by the principles currently governing switched telephony. This would presuppose that operators succeed in introducing artificial property rights for the relationship with their customers, maybe even for the individual instance of communication. Technically, there are two main opportunities for this. In switched telephony, for technical reasons it is natural to give out telephone numbers to operators, not to clients. Through these numbers, they control their customers. Voice over IP operators try to implement the same scheme for packet switched voice traffic, although here the domain name system would be natural. Domains are accorded to end users, not to operators. A second conduit for artificially introducing property rights is technical standards. They are needed for defining addressees, for the management of real-time interaction, and for the digital coding of voice signals. By way of proprietary standards, the operator gains full control. Competition policy should not only see at the establishment of these fundamental governance structures. It should also check the potential for distorting systems competition between switched and packet switched telephony. Incumbents are having a host of potential strategies for creating new barriers to entry, and for distorting actual competition. Most critical are bundling strategies. Diagonally integrated incumbents might offer their clients to carry their traffic over IP where possible, and through their traditional network otherwise. That way they could turn their customer base in the traditional networks into a barrier to entry. Currently, this strategy can fully work for mobile telephony. In fixed telephony it is more difficult to implement as long as IP addressees are not earmarked.
    Keywords: property right, club good, network externality, monopolistic competition, systems competition, packet switched telephony, network access, E. 164 numbers vs. IP addresses, caller pays principle vs. receiver pays principle, sip, codecs
    JEL: D D43 H41 K21 K23 L13 L15 L43 L86
    Date: 2005–12
  3. By: Christoph Engel (Max Planck Institute for Research on Collective Goods, Bonn)
    Abstract: A cartel is socially not desirable. But is it a normative problem? And has merger control reason to be concerned about tacit collusion? Neither is evident once one has seen that the members of a cartel face a problem of strategic interaction. It is routinely analysed in terms of game theory. Much less frequently, however, an obvious parallel is drawn. For cartel members, the formation of the cartel and cartel discipline are a public good. Making the parallel explicit is elucidating both at the theoretical and at the experimental levels. The paper contrasts oligopoly theory with public goods theory, and oligopoly experiments with public goods experiments.
    Keywords: Oligopoly, Public Good, Experiment
    JEL: C D D H K L L
    Date: 2006–05
  4. By: Tomaso Duso (Wissenschaftszentrum Berlin für Sozialforschung (WZB), Reichpietschufer 50, D10785 Berlin, Germany. Tel: +49 30 25491 403, Fax: +49 30 25491 444,; Klaus Gugler (University of Vienna,; Burcin Yurtoglu (University of Vienna,
    Abstract: This paper applies a novel methodology to a unique dataset of large concentrations during the period 1990-2002 to assess merger control’s effectiveness. By using data gathered from several sources and employing different evaluation techniques, we analyze the economic effects of the European Commission’s (EC) merger control decisions and distinguish between blockings, clearances with commitments (either behavioral or structural), and outright clearances. We run an event study on merging and rival firms’ stocks to quantify the profitability effects of mergers and merger control decisions. We back up our results and methodology by using alternative measures for the merger’s profitability effects based on balance sheet data and obtain consistent results. Our findings suggest that outright blockings solve the competitive problems generated by the merger. Remedies are not always effective in solving the market power concerns, at least not on average. Nevertheless, both structural (divestitures) and behavioral remedies do help restore effective competition when correctly applied to anticompetitive mergers during the first investigation phase. Yet, they are on the whole ineffective or even detrimental when applied after the second investigation phase. Finally, remedies - especially behavioral ones - seem to constitute a rent transfer from merging firms to rivals when mistakenly applied to pro-competitive mergers.
    Keywords: Mergers, Merger Control, Remedies, European Commission, Event Studies, Expost Evaluation
    JEL: L4 K21 G34 C2 L2
    Date: 2006–07

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