A Pac-Man Defense Against Predatory Pricing?

After the story of how Southwest Airlines broke an attempt at predatory pricing with booze, I learned of the Dow vs. Die Deutsche Bromkonvention episode. See here for an interesting narrative of events. To summarize, at the turn of the twentieth century, the German chemical industry was dominant and the various producers there had a comfortable cartel selling bromine at 49 cents a pound. Herbert Dow had developed a way to produce bromine and sold it in the US for 36 cents. The Germans might have been OK if he stayed in the US, but the cartel swung into action when he began exporting in 1904. 

It poured bromine into America at 15 cents a pound, well below its fixed price of 49 cents, and also below Dow’s 36 cent price.  

Dow simply pulled out of the US market and sold abroad. Moreover, he had his agents secretly buy up hundreds of thousands of pounds at that 15 cents, repackage it, and resell it in Europe at 27 cents. Instead of being driven out of business, he profited from the cartel's actions! At first the Germans were confused by the insatiable demand in the US and the lost orders from Europe. Was one of their cartel members offering secret discounts? Accusations were made. Even after they discovered Dow's ploy, they were not sure how to respond. In the end, the bromine monopoly was broken.

Perhaps Dow got lucky, but perhaps predatory pricing may not be so easy.

Can you Go to Jail if your AI Engages in Collusion?

The stereotype of price fixing is fat, cigar-chomping executives meeting secretly in smoke-filled rooms to agree to raise prices. But the Justice Department's recent consent decree with RealPage anticipates that AI collusion may look different. RealPage sold revenue-management software that used confidential pricing information from competing landlords to recommend rents. Although the software generated the recommendations, the DOJ alleged that the system facilitated unlawful coordination among competitors. I had my doubts. Nevertheless, the settlement requires RealPage to stop using certain competitively sensitive data and to change features of its pricing software.

AI can still recommend prices. Firms have used sophisticated pricing software for decades. A broader implication is that firms cannot avoid antitrust liability by outsourcing pricing decisions to an algorithm. If competing firms provide confidential information to a common AI system that helps coordinate pricing decisions, regulators may view the arrangement much like traditional collusion.

This distinction will become increasingly important as companies deploy AI agents to make autonomous business decisions. An AI pricing system that independently analyzes a firm's own costs, demand, and inventory is generally very different from one that relies on competitors' confidential information or otherwise facilitates coordination among rivals. The RealPage consent decree is consistent with antitrust law focusing on economic outcomes rather than how those outcomes were produced.

Waning Credit Card Market Power?

 

Historically, Visa and Mastercard earned substantial interchange fees because merchants had few practical alternatives. But FedNow, RTP, “pay-by-bank” systems, and blockchain-based settlement reduce switching costs and create new competitive options for merchants and fintech firms. Recent reporting from American Banker noted that RTP and FedNow transaction volumes are growing rapidly while firms simultaneously experiment with stablecoin-based international transfers that bypass traditional correspondent banking systems. Meanwhile, regulators are increasingly scrutinizing the market power of incumbent payment firms, including a new UK competition probe involving Visa, Mastercard, and PayPal. Network effects can create durable market power, but interoperability, regulatory pressure, and technological innovation can gradually transform even seemingly entrenched monopolies into far more competitive markets.

For decades, Visa and Mastercard benefited from one of the strongest forms of market power: network effects. Consumers tend to apply for cards that are accepted by more retailers and retailers accept cards that are held by more consumers. The resulting feedback loop favored first-mover credit cards and made subsequent entry difficult. But now new payment “rails” are beginning to erode that dominance. Real-time payment systems like FedNow and RTP now allow money to move directly between bank accounts in seconds, bypassing traditional credit card networks entirely. At the same time, stablecoins and open-banking systems are creating alternative methods for transferring funds with lower fees and faster settlement. Reuters recently reported that Visa’s annualized stablecoin settlement volume has already reached roughly $7 billion, while Mastercard is spending up to $1.8 billion to acquire stablecoin infrastructure firm BVNK. These investments reveal that incumbents increasingly view new payment rails as potential substitutes for traditional card networks.

It Has Become Cheaper to Lose Weight

Finding out that GLP-1 drugs can help reduce weight has been life changing for many and could stem the social costs of being overweight. Recently, prices have fallen dramatically. I asked ChatGPT to for some summary data for Wegovy & Zepbound which I plot below. 

Competition matters. Initially, Wegovy was the effective monopolist selling at a list price of $1,349. In November 2023. Zepbound was approved and entered at just over $1,000 but dropped its price to ~$500 in Spring 2024. Wegovy may have sold at discount by Fall 2024, but it's direct-to-consumer price did not fall to ~$500 until Jan 2025.

It will be interesting to see if similar adjustments occur over the next few years as at least three new entrants are expected..

 

Streaming Merger Market Definition

 

One aspect of the antitrust review of the Warner Brothers Discovery (WBD) merger with Netflix (or Paramount) will be what constitutes the relevant market. Eric Fruits provides a nice explanation of the issues over on "Truth on the Market." It essentially boils down to whether a narrow "streaming services" definition is used versus a broader "screen time" definition that includes recreational Internet scrolling and maybe video gaming. The market would be quite concentrated under the former definition and quite a bit less so under the latter. This is an empirical question over the extent to which consumers substitute their time between various screen content. 

I happen to have some experience with time use data from the ATUS from some of my past research. These data are amazing with a quarter million "diary days" covering every day since 2003. Other nice things about these data are that they are publicly available and have consistent definitions over almost a quarter century. Among other activities, these data include time spent watching TV, playing games (mostly video games), and "recreational computer" usage. A major problem with ATUS for screen time measurement is that, because it was setup before smartphones were a thing, there is no good way of measuring time spent looking at your smartphone while you are doing something else. The amount of computer time in ATUS is a fraction of time on smartphones reported elsewhere. So I spent the morning seeing how time spent on these three activities related to each other. My quick and dirty analysis indicates that each minute playing games decreases TV time by 4 seconds [P<0.01] while each minute "recreating" with a computer decreases TV time by 8 seconds [P<0.01].* If you confine the sample to just the past 10 years, you get slightly more time diversion. This is evidence suggesting that consumers do substitute between television and other screen time.

Surely the parties, whoever they end up being, will have more granular proprietary data yielding better analyses. 

 

*This analysis includes fixed effects for age category by sex and year by sex and uses ATUS's weights. Interpreting these correlations as causal is problematic. Most of the variation is likely to come from ever better video games and ever more Internet activities (e.g., YouTube, Facebook, TikTok, etc) which would suggest a causal interpretation. But this analysis is merely conditional correlations.

Europe at a crossroad

The Constitution of Innovation

The continent faces two options. By the middle of this century, it could follow the path of Argentina: its enormous prosperity a distant memory; its welfare states bankrupt and its pensions unpayable; its politics stuck between extremes that mortgage the future to save themselves in the present; and its brightest gone for opportunities elsewhere. In fact, it would have an even worse hand than Argentina, as it has enemies keen to carve it up by force and a population that would be older than Argentina’s is today.

Or it could return to the dynamics of the trente glorieuses. Rather than aspire to be a museum-cum-retirement home, happy to leave the technological frontier to other countries, Europe could be the engine of a new industrial revolution. Europe was at the cutting edge of innovation in the lifetime of most Europeans alive today. It could again be a continent of builders, traders and inventors who seek opportunity in the world’s second largest market.

HT: Mike

Imperfect Entry Barriers

Occupational licensing is often used to exclude potential competition. However, it is only as effective as it is enforceable. 

Fixed - Mobile Substitution ... for Internet Service

A generation ago, a middling economist started a series of projects that found that mobile phone service would substitute for landline telephone service (here, here, and here). In talks, I would caution that this trend of "cutting the cord" would not bode well for traditional telephony. Incredible as it seems now, at the time, many critics thought I was nuts. I think I may be vindicated by the fact that globally there now are about ten times as many mobile subscribers as fixed line subscribers. Connecting almost all of humanity through mobile phones, and usually smartphones, is one of the under appreciated triumphs of modern technology.

But how about for Internet service? More than 99.9% of bandwidth is used for data and not voice telephony. Indeed, calling them mobile "phones" seems nearly archaic. Most US residential Internet access has been through home WiFi modems connected to high-speed fixed lines to homes. Most homes are passed by only two wires, usually from the CATV and phone companies. With only two competitors, US prices for Internet service have remained significantly higher than in most comparable countries. However, the increased speed of 5G technology makes Internet access from your mobile carrier a viable alternative. The WSJ reports that these carriers' fixed-wireless services have been gaining ground against traditional Internet providers. Competition from 5G entry has increasingly enabled Internet consumers to cut the cord. And wire based services are responding with significant price cuts. 

 

Innovative Strategic Levers

Is narc'ing on your competition the prisoners' dilemma equilibrium?

What do Ferrari and Hermes have in common?

 WSJ:

With a list price of $3.7 million, Ferrari’s new “hypercar” was revealed to the public in October with a twist: It wasn’t available for sale....

Money isn’t enough to buy a top-of-the-range Ferrari. You need to be in a long-term relationship with the company.

By leveraging the rabid fandom of its customers through a business model based on uber-scarcity, the storied Italian company is enjoying a new golden age. Following an almost tenfold increase in the stock since its initial public offering almost a decade ago, Ferrari is now worth $90 billion, making it the most valuable car company in Europe—despite delivering just 13,752 vehicles last year.

 John Yun on Hermes:

Aggrieved ... plaintiffs in California have filed a class-action suit against Hermès alleging that [customers are] “coerced” to spend $1,300 on a shawl or $820 on a belt before being “allowed” to hand over an additional $12,000 or more for a Birkin bag...

In antitrust language, the specific allegation is that Hermès is engaged in an illegal tying scheme—where the French company is leveraging its market power in handbags (i.e., the “tying product”) into ancillary goods, such as scarves, belts, jewelry, and shoes (i.e., the “tied products”).

How long before someone sues Ferrari for "tying" sales of new cars to past purchases?

Gig Work as Entrprenerial Training

There can be many hurdles to becoming an entrepreneur, particularly for those without a background in business startups. New findings from Denes, Lagaras, and Tsoutsoura indicate that Gig work can help budding entrepreneurs overcome these hurdles. Using data from U.S. Tax Returns, they can track individual's sources of income.

We find that gig workers are more likely to become entrepreneurs, particularly those who are lower income, younger, and benefit from flexibility. We track all newly created firms and show that gig workers start firms in similar industries as their gig experience, which are less likely to survive and demonstrate higher performance. Overall, our findings suggest on-the-job learning promotes entrepreneurial entry and shifts the types of firms started by entrepreneurs.

Of course the obvious benefit from Gig work is that we consumers have more choices to acquire goods and services. This is a static benefit. But a dynamic benefit is that Gig work becomes a stepping stone for workers to realize their potential. They will create new goods and services or they provide competitive pressure on existing suppliers. Policies that limit Gig work could undermine an economy's growth potential.
 

 

Market Reactions to Killing the Kroger - Albertsons Deal

On 10 Dec. 2024, Kroger’s proposed $25 billion merger with Albertsons was blocked in rulings that the largest merger in US supermarket history would limit competition and harm consumers. A day later, Albertsons called off the merger. How does the change in the stock market value of competitors to Albertsons and Kroger around the collapse of this deal inform us about the foregone competitive effects of the deal? 

A merger that allows firms to enjoy greater efficiencies would lower costs, potentially resulting in lower prices to customers. A merger that increases the market power of firms would result in the ability to increase price-cost margins. Large mergers usually include a little of both efficiencies and market power. A merger where the net effect is to reduces prices is usually good for consumers and one that raises prices is usually bad for consumers. Unfortunately, it is difficult to predict the net effect on prices of lower marginal costs and higher margins on those marginal costs. Fortunately, we can use hindsight of a merger event to get an idea of what stock market participants thought the effect would be. But you can't look at the merging parties, it is assumed they will benefit. You must look at the effect on third party competitors.

Competing firms love it when competitors increase prices (if this is the only change). When a competitor raises prices, some of the competitor's customers will become more inclined to purchase from you. This should boost your profits which would be reflected in an increase in your share price. But if competitors reduce price (and this is the only change), you can expect the opposite. Competing supermarkets would love a Kroger/Albertsons merger that increased prices and hate one that decreased prices. 

When the merger that would result in lower prices is called off, competitors rejoice and enjoy higher stock market returns. Likewise, calling off a merger that would increase prices causes them to lament and suffer lower stock market returns. So were they rejoicing or lamenting on the 10 December and 11 December? Below are the closing share prices of three of the biggest supermarket chains in the US. (There is no price information for chains that are not publicly traded like Publix, H-E-B, and Meijer.)

	Price at Close on			Return
	9-Dec	10-Dec	11-Dec	1-day	2-day
Costco	987.86	993.4	994.69	0.6%	0.7%
Target	135.29	135.05	135.98	-0.2%	0.5%
Walmart	93.62	94.34	94.75	0.8%	1.2%
S&P 500	6,052.85	6,034.91	6,084.19	-0.3%	0.5%

For all three firms, the returns over both the one-day and two-day windows when this merger became dead beat or met the S&P500 return. So, no lamenting and some rejoicing in moderation. It might be better to describe these values as shareholders of competitors being relieved that the merger was called off. Still, the market capitalization of Costco, Target, and Walmart tops $1 trillion. Even a 0.1% excess return is worth $1 billion to shareholders. This amount will focus the mind of most Wall Street analysts.

The inference is that the merger was more likely to have lowered prices than raised them. Antitrust is hard.