Economic analysis

 

Author Definition

 

Definition

Economic analysis in a competition context refers principally to the use of industrial economics – a field of economics devoted to industrial organisation and market structures –, increasingly alongside other fields such as behavioural economics (which combines economics with insights from psychology), to assist in the development of a framework and/ or a set of hypotheses or theories to test. The analysis may be employed in the consideration of anti-competitive conduct, abuses of market power, merger assessments, state-aid compatibility or follow-on damages.

Economics also provides a wide set of tools and techniques for use by competition practitioners, ranging from hypothetical monopolist tests to merger simulation models to difference-in-differences assessments (as may be used, for instance, in a cartel damages claim). Taken together, the economic framework, theories of harm and the practical toolkit can serve to guide and inform the construction of an economic evidence base. The oft-used term ‘competition economics’ is generally employed as shorthand for the use of economic analysis within a competition setting.

 

Commentary

That economics is neither art nor science, that it remains inexact and that the discipline teems with theoretical dichotomies, is well documented. And yet, despite decades of examination and deliberation by academics, policy makers and practitioners alike, economics remains a cornerstone of competition policy and of its laws around the world. The inability to extricate competition policy and enforcement from the supposed vagaries of economics is, however, with good reason.

First, knowledge of industrial economics is crucial to understanding the ways in which markets are structured and how participants within those constructs operate and behave. Developing an understanding of how any given market structure might be formed, strengthened, destabilised or ultimately supplanted by another, can generally only be done through a lens of economics and its building blocks: alternative competition models, game theory, and the core economic principles of demand, supply, efficiency and consumer welfare.

Economics can in theory provide a coherent explanation of the incentives that drive firms to behave and engage with their customers, their suppliers and their competitors in the variety of ways that they do. This may include, for example, the choice of products and services that firms offer, the prices and the quality of those, the level of innovation that might be observed and how participants within a market might interact with and respond to one another, for example in relation to price changes or following market entry by new players.

Absent such a grounding in economics, competition policy makers, for example, would struggle to advance credible bases upon which to reason for reform. A well-structured narrative around the likely market impact of a change in policy would likely require economic theory to describe how each of the individual market participants and stakeholders might be likely to respond to the change and how consumers might collectively benefit (or not).

Parenthetically, much is made of conflicting schools of thought amongst economists. Take, for example, the ‘hipster’ antitrust movement, brought into recent prominence in the US, arguing that competition policy has thus far failed to contain the activities of technology giants. Notably, however, the schools do not appear to differ in respect of underlying economic explanators, such as the structure of these markets. Rather, the conflict appears to arise in relation to the objectives of antitrust policy, with the hipster argument for wider standards of consumer welfare including, for example, non-price measures in respect of personal data that users exchange for the free use of platforms.

Second, in the case of competition enforcement, economics provides a theoretical framework against which to examine a case. Coherent theories can be constructed around the evolution of a market, allowing for the development of a strawman against which to examine the facts in any given case. As noted by the OECD, for example in the case of mergers, “(t)he economic framework for merger analysis provides the scaffolding on which to hang both quantitative and qualitative evidence and analysis of data, documents and witnesses, in order to build an integrated picture of how competition and efficiency are likely to be affected by a merger”. Economic frameworks can assist practitioners in developing theories of harm: a set of plausible and internally consistent hypotheses for testing and validation, be it with empirical, documentary or witness evidence. Some of the objectives behind establishing such theories of harm might include (i) to determine which of a wide range of hypotheses might fit most closely with the facts of the case as observed, (ii) to ascertain which sub-set of underlying assumptions might in theory have held true given the evidence presented and (iii) to the extent feasible, to assess what range of effects might be envisaged under competing hypotheses and/ or alternative scenarios.

Third, economics, together with its sister discipline, econometrics (the use of statistical techniques to analysis economic and financial issues), provides a veritable treasure chest of tools and techniques, a variety of which can be used to analyse and assess data collected as part of a competition case. For example, depending on the specifics of the case at hand, the tests might include:

- the hypothetical monopolist (or Small but Significant Non-transitory Increase in Price (SSNIP)) test to circumscribe markets,
- the Herfindahl–Hirschman index to measure the level of concentration in a market,
- econometric estimation to assess the elasticity of demand,
- merger simulation models to assess structural equilibria or the likely impacts of a merger,
- balancing tests to inform state-aid compatibility considerations, or
- price-cost margin analyses to assess unduly excessive or predatory pricing behaviour.

The 2021 Nobel prize - as won by Angrist, Card and Imbens - related to a key set of tools now widely in use in competition cases: natural experiments that could, depending on the specifics of the case, provide a view on causality rather than simply providing insights on correlation. Difference-in-differences assessments are now widely being used in the competition arena in the case of follow-on cartel damages claims for example, to examine, where possible, the potential extent of overcharges that may have been experienced by customers of cartelists (by comparing, for instance, price differences across time periods, product sets or geographies).

As competition analysis becomes increasingly sophisticated using a wider range (and choice set) of tools and with larger volumes of data being analysed, the importance of rigorous testing and careful examination by practitioners increases manifestly. For example, where specific tools may not necessarily be prescribed or where there may be multiple techniques to choose from, some practitioners may seek to assess ranges of plausible outcomes. In this context, the UK’s Competition and Markets Authority (CMA) has set out its view of a series of principles for the submission of economic evidence including, for example, the need for clarity and transparency in relation to assumptions and results, the completeness of submissions with discussion around the choice of techniques and the need for the CMA to be able to replicate results using raw, underlying data.

Finally, it is this symbiosis of theory, framework, and tools and techniques that together provide a compelling foundation for competition enforcement. Views of ‘but-for’ worlds, theoretically untainted by anti-competitive conduct or market abuse, can be constructed and used to compare against the facts of the case at hand. Theories of harm could assist in the practical progression of a case by serving to clarify the scope of disclosure requests or by providing a roadmap and a set of priorities for collating evidence. The availability and level of granularity of data in a case could prove crucial to supporting a key tenet of a case or to advancing a sufficiently robust argument. In short, the economics evidence base that is ultimately arrived at in a competition assessment could prove to be pivotal to the outcome.

Overall, it appears economic analysis will remain a critical component of competition policy and enforcement, not least to the extent that economics itself will continue to evolve in respect of the tools and techniques used and how they may be applied to support competition assessments. To summarise, in the words of Paul Samuelson, “(e)conomics is not an exact science, it’s a combination of an art and elements of science. And that’s almost the first and last lesson to be learned about economics: that in my judgment, we are not converging toward exactitude, but we’re improving our data bases and our ways of reasoning about them.”

 

Bibliography

Competition and Markets Authority (2009) - Suggested best practice for submissions of technical economic analysis from parties to the Competition Commission. Originally published by the Competition Commission, and subsequently adopted by the CMA board (with original text retained and unamended).

Ioannis Lianos (2013) - Economic and Econometric Evidence in Competition Law: an Empirical Perspective, Supported by the United Nations Conference on Trade and Development (UNCTAD) Research Partnership Platform.

OECD (2020), Economic analysis in merger investigations, 2020 OECD Global Forum on Competition Discussion Paper.

Peter Davies (2018) – Economic Evidence and Procedural fairness: lessons, Journal of Competition Law & Economics 14(1), April 2018.

This article is being reviewed by the Editors of the Dictionary.

Author

Quotation

Tasneem Azad, Economic analysis , Global Dictionary of Competition Law, Concurrences, Art. N° 86015

Visites 1630

Publisher Concurrences

Date 1 January 1900

Number of pages 500

 

Institution Definition

Economic analysis plays a growing role in competition law. In the United States, the Chicago School raised economic arguments in the 1970s in order to criticize its enforcement, considered too hostile to big companies. While economic analysis subsequently evolved in a more nuanced direction, it brought about a major change in ideas, in case law, and in the actual handling of cases, which have become battles between economists as much as between lawyers. A similar phenomenon took place in Europe, starting in the 2000s. The interplay between legal procedures and often complex economic analyses raises concerns about the predictability of law, leading to a quest for “structured rules of reason”. © David Spector, Revue Tracés

In its Best Practices for the Submission of Economic Evidence and Data Collection in cases concerning the application of Articles 101 and 102 TFEU and in Merger cases the Office of Chief Economist defined the scope and purpose of economic analysis as follow : "Economic analysis plays a central role in competition enforcement. Economics as a discipline provides a framework to think about the way in which each particular market operates and how competitive interactions take place. This framework further allows formulating the possible consequences of the practices under review, whether a merger, an agreement between firms, or single firm conduct. It also provides tools to identify the direction and magnitude of these effects empirically, if appropriate and relevant. In a number of cases, economic analysis may involve the production, handling and assessment of voluminous sets of quantitative data, including, when appropriate, the development of econometric models. Economic analysis needs to be framed in such a way that the Commission can evaluate its relevance and significance. Furthermore, as an administrative authority the Commission is required to take a decision within an appropriate or sometimes a statutory time limit. It is therefore necessary to: (i) ensure that economic analysis meets certain minimum standards at the outset, (ii) facilitate the efficient gathering and exchange of facts and evidence, in particular any underlying quantitative data, and (iii) use in an efficient way reliable and relevant evidence obtained during the administrative procedure, whether quantitative or qualitative. In order to determine the relevance and significance of an economic analysis for a particular case, it is first necessary to assess its intrinsic quality from a technical perspective, i.e. whether it has been generated and presented to adequate standards. This involves, in particular, an evaluation of whether the hypothesis to be tested is formulated without ambiguity and clearly related to facts, whether the assumptions of the economic model are consistent with the institutional features and other relevant facts of the industry, whether economic models are well established in the relevant literature, whether the empirical methods and the data are appropriate, whether the results are properly interpreted and robust and whether counterarguments have been given adequate consideration." © European Commission

In its Best Practices on the Submission of Economic Evidence and Data Collection the Office of Chief Economist noted that :"It is worth distinguishing between two dimensions in the evaluation of economic analysis. First, the decision maker needs to assess the intrinsic quality of the economic evidence from a technical perspective, i.e. whether it has been generated and presented to adequate professional standards. As detailed in the Best Practices, this involves, in particular, an evaluation of whether the hypothesis to be tested is formulated without ambiguity and clearly related to facts, whether the assumptions of the economic model are consistent with the institutional features and other relevant facts of the industry, whether economic models are well established in the relevant literature, whether the empirical methods and the data are appropriate, whether the results are properly interpreted and robust and whether counterarguments have been given adequate consideration. Second, the decision maker needs to determine how much weight to assign to the economic analysis. This depends importantly on its relevance with respect to the main issues at stake. For example, is the evidence a direct test of the theory of harm? Or does it merely provide useful circumstantial evidence? Other considerations include the potential for error when relying on certain types of evidence and the congruence and consistency of the economic analysis with other evidentiary elements (such as customer responses and documentary evidence) (...)." © European Commission

 
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