Rules of the Game

Overview of the course

In this course we explain how economic methods are used to decide cases in competition policy and in regulatory policy. The course consists of a sequence of lectures, active participation in class, a set of 2 (mandatory) homework assignments and a final exam. Below, we describe the detailed contents of each of the lectures.

For more details on the assignments, see the “Assignments” section on Blackboard. For active participation, students should prepare the exercises that are discussed in class.

Preliminary schedule, may be updated by announcements on BB:

day	date	time	room	topic	exercises	assignment due	datacamp
Tue	Jan 30	8:45-10:30	CZ 005	Introduction
Tue	Feb 06	8:45-10:30	CZ 005	Python	install python at home		Python Basics (Hello Python! - Variables&Types)
Tue	Feb 20	8:45-10:30	CZ 005	Article 101	question 2 after lecture notes		Basics (Variables&Types - Can Python handle everything?)
Tue	Feb 27	8:45-10:30	CZ 005	Vertical restraints	question 2 after lecture notes		Python Lists (Lists what are they? - Subset and calculate)
Tue	Mar 06	8:45-10:30	CZ 005	Article 102 (1)	question 1 after lecture notes		Python Lists (Subset and calculate - Inner workings of lists)
Tue	Mar 13	8:45-10:30	CZ 005	Article 102 (2)	question 3 after lecture notes		Functions and Packages
Tue	Mar 20	8:45-10:30	CZ 005	no class			Numpy (Numpy - 2D Numpy Arrays)
Tue	Mar 27	8:45-10:30	CZ 005	Q and A assignment 1		Assignment 1	Numpy (2D Numpy Arrays - Blend it all together)
Tue	Apr 03	8:45-10:30	CZ 005	Mergers	question 1 at the end of lecture notes
Tue	Apr 10	8:45-10:30	CZ 005	no class
Tue	Apr 17	8:45-10:30	CZ 005	Innovation	question 1 at the end of lecture notes
Tue	May 01	8:45-10:30	CZ 005	Regulation	question 1 at the end of lecture notes
Tue	May 08	8:45-10:30	CZ 005	Q and A assignment 2		Assignment 2
Tue	May 15	8:45-10:30	CZ 005	Health care	question 1 at the end of lecture notes

Assignments are due on Thursdays in the weeks indicated in the table above at 12:00 (noon).

Here we provide detailed contents of the lectures and the associated literature.

• Introduction: We provide an overview of the field and of what students can expect to learn during the course. We discuss the aims of competition policy and the instruments that competition agencies have at their disposal. We review some basic economic concepts relevant for competition policy: Consumer Surplus, Producer Surplus and Total Welfare; Allocative, Productive and Dynamic Efficiency. We also define the concept of Market Power and discuss the relationships between Market Power, the structure of the market and the different types of efficiency. Literature: Motta, Chapters 1,2.

• Agreements between Firms (Article 101): Agreements between firms that restrict competition are forbidden, unless they are efficiency enhancing and are benefiting consumers. In this lecture, we provide a general overview of the different types of agreements. We distinguish between horizontal and vertical agreements and address the following questions: when do agreements restrict competition?, when can they be classified as cartels?, when are they allowed, on the basis of Article 101.3? We also introduce collusion and why it is bad for consumers and for total welfare. We determine factors that facilitate collusion and ways for the government to discourage it. Literature: Motta, Chapter 4.

• Vertical Agreements: Vertical agreements are agreements between firms that are active at different levels of the value chain, that is, between producers and distributors. Such agreements are treated more leniently than horizontal agreements. In this lecture, we describe different types of vertical agreements and explain why they are treated more leniently. We explain the double marginalization problem and also discuss whether or not Resale Price Maintenance (RPM) should be allowed. Vertical agreements can also be anti-competitive, especially when either the producer or the distributor has market power and forces exclusive contracts. We discuss concerns of foreclosure and the conditions under which these are justified. Literature: Motta, Chapter 6.

• Article 102: Abuse of a dominant position (two lectures). Article 102 forbids a firm with a dominant position to abuse that position. But what does it mean for a firm to have a dominant position, and when is behavior abusive? In this lecture we introduce these issues. We also distinguish between dominant positions that are permanent (in which case regulation is called for) and dominant positions that may be eroded by market forces themselves (in which case competition policy may suffice as an instrument). We discuss under which conditions the competition laws force a firm to supply inputs to its rivals. Further, we analyze predatory pricing and exclusive dealing. Finally, we discuss tying and bundling. We also discuss the various antitrust cases that Microsoft has been involved in. Literature: Motta, Chapter 7.

• Horizontal Mergers: in this lecture it is explained why mergers need to be notified to antitrust authorities. We will discuss why and when a merger can raise concerns of unilateral and/or coordinated effects. Literature: Motta, Chapter 5.

• Innovation: most of the lectures focus on the effects of competition on static efficiency. In this lecture, we analyze the effects on dynamic efficiency: innovation. Does more intense competition lead to more or to less innovation? Patents create a (temporary) monopoly position; is this desirable? How do we trade off the effects of this market power on static and dynamic efficiency?

• Regulating a monopolist: if there is only one firm in the market, competition may not restrain this firm’s behaviour. The government can then decide to regulate the firm. We introduce mechanism design to analyze the optimal way to regulate a monopolist.

• Competition in health care markets: countries like the US and the Netherlands have private firms competing in health care markets. This introduces a number of competition policy issues that we will analyze in this lecture. For instance, should a vertical merger between an insurer and a hospital be allowed?

Web-lectures

The competition policy lectures can be viewed on line. Each lecture page contains the links to the screencasts.

Also we use datacamp weblectures for python. The schedule above suggests a way to go through these lectures so that you finish them in time for your first assignment. Note that there is one deadline before which you need to finish the datacamp lectures. See class participation below.

In the “live” lecture, you can ask questions that you have about the web-lecture. Hence, it is important that you watch the web-lecture beforehand. Also the web-lecture will be useful to understand the exercises which allow you to practice for the exam. These exercises are discussed in the live lecture.

Finally, the live lecture will be used to teach python which you need for the assignments.

Home work assignments

There will be 2 assignments. Students are allowed to form teams to do the assignments; however, the maximum number of students per group is 2. Students will not need to communicate the teams. They will simply need to write two names and exam numbers on each assignment. The TA will assume that names appearing on the same assignment will form a group from that point onwards. Importantly, students should stick to the same partner for both assignments. In case of serious disagreements with the partner, students can ask the lecturer and the TA (by email) to be allowed to do the assignments alone from that point onwards. However, in no case they will be allowed to form a new team with another student.

Assignments are due on Thursdays in the weeks mentioned in the schedule above. The deadline for submission is 12:00 on Thursdays on the weeks indicated in the table above. One submission per team is sufficient but it should bear the names of all team members. If we receive several files from the members of a team, we will randomly pick one and disregard all others. The consequence of a submission after the deadline (no matter by how little the deadline was missed) is that the authors will receive a grade of one (1) for the respective assignment. All members of the team are responsible for making sure that the assignment is handed in on time. A submission after the deadline will affect all team members equally irrespective of who bears the fault among the team members.

Assignments will be posted on BB.

Class participation

In class we focus on questions from previous exams. Students are supposed to prepare the class by watching the lectures and studying the material beforehand, including making the questions to be discussed. We will call out student names to answer questions. What we are looking for is that you prepared for class; not necessarily that you give the right answer. If we believe that you prepared for class, we give you 1 point; if you didn’t prepare (or are absent from class) when called to answer a question, you get 0.

You can also earn 1 point with finishing the datacamp course (“Intro to python for datascience”) before Monday March 26, 2018.

Your grade for partipation \(P\) is determined as follows. Suppose, we called your name \(n\) times during the semester and summing over the grades (0’s and 1’s) you received (including the one for the datacamp assignment) \(x\) points, then

\[P = 25*x/(n+1)\]

Hence \(P\) lies between 0 and 25.

It is your responsibility to make sure that we call out your name during the semester (we will publish the list that we use on Blackboard; so you can check). If \(n=0\) for you, then \(P=0\) as well.

Final grade

Your final grade is the unweighted average of your participation in class, the two assignments and the final exam. Let \(P\) denote the grade for your participation in class (including datacamp), \(A_i\) denote your grade on assignment \(i\) and \(E\) your grade on the exam. Then the final grade \(F\) is determined by

\[\label{eq:1} F = (P+A_1+A_2+E)/4\]

Hence class participation and assignments are mandatory and very important!

The grades for participation and the assignments can only be used in this academic year 2017-2018. Next year a student does the whole course again including the assignments and class participation.

For the exam, it is important that you understand things; not learn them by heart. Therefore, at the (written) exam, you are allowed to bring a handwritten A4 page with notes. You can write on this page what you want: equations, law texts, poetry.

The exam is planned at Tuesday 29-05-2018 and the resit at Monday 02-07-2018.