In 1984 the UK embarked on a new approach to economic regulation, which influenced the design of regulation in many countries. While it has largely stood the test of time, the UK model of economic regulation is perceived by some to be costly, complex, and divorced from some of its original aims. This paper describes the UK model, identifies common trends in its evolution, and critically evaluates possible adaptations to address the problems identified. Given the significant influence of the UK model internationally, the analysis offers insights for other jurisdictions on issues such as regulatory independence, institutional design, and how to deal with multiple policy agendas, accountability, appeals, and governance structures. It also highlights how the institutional context affects the outcomes of key industrial organization ideas – such as privatization, incentive regulation, and structural separation.
If firms in an industry with low barriers to entry form a cartel, the supracompetitive profits that are generated by collusion may attract new entrants, and thereby reduce the cartel’s profitability. This paper quantifies the effect of barriers to entry on cartel profitability by studying the Chilean nitrate cartels of the early 20^th century. This setting is particularly well suited for this analysis because nitrate cartels were public and legally enforceable, and the economic importance of the industry led to the compilation of unusually detailed firm-level and aggregate statistics. Combining a newly collected data set, historical accounts that describe the internal functioning of these cartels, and cost structure information from contemporary technical reports, we estimate that realized cartel profits for the incumbent firms were approximately 33
We study the strategic interaction between a downstream firm’s make-or-buy decision and an upstream firm’s investment decision. Our findings show that a downstream firm may have an incentive to make an essential input internally rather than to buy the input from a more cost-efficient supplier. By doing so, the downstream firm can deter the supplier from undertaking cost-reducing investments, which thereby increases the input price for its rivals who depend on the same supplier. This strategic element to the make-or-buy decision can result in underinvestment and an inefficient production pattern within the industry. Moreover, this adverse effect is more pronounced when the investment can generate greater efficiency gains.
Collusion may change price dynamics prior to and, especially, following a formal period of coordination. This paper presents a dynamic model of capacity choice under partial irreversibility to study the implications of a capacity cartel on price dynamics and damage estimates. We study both transitory pre- and post-cartel adjustment effects as well as a long-run effect and find that collusion damage continues after the cartel ends, and may persist indefinitely when demand remains constant. These effects imply biased estimates of cartel overcharge by both dummy-variable and forecasting methods, both of which rely on data during and after the collusion.
We examine pricing behavior following the blocked merger between JetBlue and Spirit Airlines. We particularly focus on whether firms engaged in coordinated pricing. Using a two-way fixed effects model with instrumental variables, we compare fare patterns before and after both the merger announcement and the regulatory block. Despite the merger’s termination, we document patterns that are consistent with coordinated pricing, greater price alignment, and lower dispersion on overlapping routes — which possibly reflect information that was gained during the pre-merger due diligence. To deepen our understanding of firm conduct, we also tested whether JetBlue’s post-block decisions reflect strategic responses to cost information that was revealed during merger negotiations. The findings support the possibility that information-driven behavior, along with tacit coordination, shaped post-block market outcomes. In line with Adam Smith’s caution in The Wealth of Nations, even unrealized mergers may create channels for coordination and challenge the assumption that market competition naturally reasserts itself once consolidation is blocked.
Using novel occupational data from the U.S. between 1860 and 1940, we evaluate three of Adam Smith’s core propositions about the relationship between the division of labor, market size, innovation, and productivity. We first document significant growth in occupational diversity during this period. We use new measures of occupational specialization constructed from workers’ self-reported job titles in the decennial Census. Consistent with Smith’s hypotheses, we find strong empirical evidence that occupational specialization increases with the extent of the market, is facilitated by technological innovation, and is ultimately associated with higher labor productivity. Our findings also extend Smith’s narrative by highlighting the role of organizational changes and innovation spillovers during the Second Industrial Revolution. These results speak to the enduring relevance of Smith’s insights in the context of an industrializing economy that is characterized by large firms, complex organizational structures, and rapid technological change.
The threat of economic regulation wields pricing discipline that may obviate the need for explicit regulatory mechanisms that are costly to implement and administer. In a Bertrand duopoly under the threat of regulation, neither duopolist considers the financial effect of increasing its price on the increased probability that regulation will be triggered for its rival. This externality is internalized in the collusive equilibrium. When the financial effect of triggering regulation is sufficiently large, the collusive outcome yields lower prices (and higher welfare) than does the non-cooperative Bertrand-Nash outcome. Collusive behavior is efficient under these conditions because it facilitates a type of self-regulation that yields lower prices and thereby renders less likely the necessity for costly regulatory regimes.
This article highlights some of Adam Smith’s observations with regard to competition and collusion in the labor market. These observations include: (1) competitive labor markets; (2) frictions in the labor market that interfere with competition; (3) collusion among employers; (4) collusion among employees; and (5) bilateral monopoly. Smith’s observations are related to a variety of current public policy issues that involve antitrust law and labor law.
We consider a Bertrand duopoly in which firms have the opportunity to invest a fixed sum in process innovation. The decision to invest may take place under two alternative scenarios. In the complete information scenario firms know each other’s costs at the time of investment. In the incomplete information scenario each firm is privately informed of its own cost. We show that the probability that both firms invest in equilibrium may be greater under incomplete information than under complete information. This, moreover, is always the case provided that market demand is sufficiently large.
We study a trade-off between protecting investors and encouraging new (and possibly innovative) products on reward-based crowdfunding platforms. Informing investors about the risks of an investment opportunity can protect them from losses, but this can come at the cost of discouraging new products. A regulator that prioritizes investor interests may find it optimal to choose disclosure requirements that are not fully informative about projects. Partial disclosure enables investors to commit to sometimes funding low-quality projects, which can encourage a greater array of new products. We provide conditions under which a profit-motivated platform establishes regulator-optimal disclosure requirements and study the substitutability between the regulation of disclosure and reputation systems.
I study product-quality innovation under monopolistic competition with variable demand elasticity preferences and general cost functions. I characterize the free-entry equilibrium and the effects of market size, marginal production cost, and fixed cost on equilibrium product quality and markups. Then I show how these results change with a small number of firms that engage in competitive interaction a-la Cournot. Overall, for the commonly assumed demand and cost structures, an increase in market size or marginal production cost works to decrease markups and increase product quality, while markups increase along with product quality due to an increase in fixed (entry) cost.
In many markets, switching costs limit competition by allowing firms to retain “locked-in” customers and charge prices above competitive levels. We study the effects of a major policy intervention that reduced such frictions: the implementation of mobile number portability (MNP) in the U.S. in 2003. Using detailed data on cell phone plans and carriers, we find that average prices fell significantly after MNP, which is consistent with Adam Smith’s insight that removing monopolistic barriers leads to lower prices. Price reductions were asymmetric: Larger firms cut prices more aggressively, and market share shifted from lower- to higher-quality providers. Our findings highlight the dual benefits of switching cost reduction policies: lower prices and improved allocation of consumers to better-quality firms. These results underscore the enduring relevance of Smith’s distinction between natural and monopoly prices and support the view that well-designed interventions can enhance both consumer welfare and market efficiency.
This paper examines the welfare effects of mergers between complement producers. We use a Hotelling model with vertical differentiation and a captive market (hinterland). Unlike standard Bertrand or vertical differentiation models, which predict unambiguous consumer benefits, our model reveals a richer set of welfare outcomes. Consumer surplus and total welfare may increase or decrease post-merger. Total welfare depends on allocative efficiency (how consumers are distributed between firms) and output efficiency (total output achieved). We show that mergers can increase consumer surplus while reducing total welfare. This depends on the interaction between intrinsic value effects, transportation cost effects, and the size of the hinterland. The type of differentiation – whether vertical or in transportation costs – is critical, as it influences the balance between the elimination of double marginalisation and raising rivals’ costs. These findings underline the need to account for market-specific factors when assessing the welfare implications of mergers between complement producers.
The Directorate General for Competition at the European Commission enforces competition law in the areas of antitrust, the Digital Markets Act, foreign subsidy regulation, merger control, and State aid control. After providing a general presentation of the role of the Chief Competition Economist’s team (CET), this article surveys some of the main developments at the Directorate General for Competition over 2024/2025. In particular, the article reviews the Teva Copaxone Decision in antitrust; the analysis of network effects in the airline industry in the context of mergers; and the design of guidelines under the Foreign Subsidies Regulation.
This game-theoretic study features an online intermediary that hosts third-party retailers on its marketplace platform and consumers who choose among the varieties of a differentiated product. The intermediary can enter the market as a seller either by offering a manufacturer—who may be a third-party retailer or an independent firm—the opportunity to become its wholesale supplier or by licensing the manufacturer’s technology to introduce a private label product. Accounting for feasibility, I find that among the four possible contractual relationships, the intermediary will opt for a private-label relationship with an independent firm. However, if forming a contractual relationship with an independent firm requires additional effort from the intermediary, it will choose a wholesale contract with a third-party retailer when the platform fee falls within an intermediate range and a private label relationship with a third-party retailer otherwise.
Unlike small-molecule drugs, biologics cannot be exactly replicated and instead face post-exclusivity competition from non-identical copies called biosimilars. Under a stylized model with a loyal segment of consumers, greater differences between incumbent and entrant can lead incumbents to “fight” rather than “acquiesce.” Consistent with this prediction, we find that, on average, biologics respond to biosimilar entry by sharply reducing net-of-rebate prices to maintain volume—unlike small molecule incumbents. In addition, we provide suggestive evidence that proxies of biosimilar entrant quality and loyal segment size are associated with smaller price responses.
Antitrust policy in the U.S. now explicitly includes labor-market outcomes as measures of interest when considering the potential anticompetitive effects of mergers or acquisitions. Concentration in the food retailing industry is of particular concern due to several recent high-profile mergers, and a troubling increase in concentration at the national and local levels. We study this problem using both causal reduced-form models and a structural model of search, match, and bargaining. Our reduced-form models show no relationship between concentration and wages, but our structural model finds that concentration is associated with substantial wage suppression.
We consider a two-tier industry with an upstream monopolist that charges linear input prices to downstream Stackelberg duopolists. We show that a second-mover advantage occurs in the downstream market under quantity competition and a first-mover advantage occurs in the downstream market under price competition if the upstream monopolist determines the input prices for the downstream leader and the downstream follower sequentially. If there are two-part tariff input prices, the reversal result under sequential pricing may occur under quantity competition but not under price competition.
The Antitrust Division has recently earned several victories in high-profile litigations that will benefit consumers for years to come. Economics played a significant role in shaping the theories of harm and in presenting evidence that persuaded the courts. We discuss here the role that economics played in demonstrating Google’s exclusionary conduct in the markets for general search engines and related advertising, as well as the anticompetitive effects that would flow from the Northeast Alliance: a joint venture that had been formed by American Airlines and JetBlue.
