The economics of information exchange Matthew Bennett Director of Economics, OFT GCLC, Brussels, February 2011 The opinions within are mine alone and not necessarily those of the OFT. 1
The good exchanges 2
Information plays a key role for customers in delivering a well functioning market Well informed, confident, and effective consumers can play a key role in activating vigorous competition between firms Access Assess Act Need information regarding prices. Information may not be always available. May worry if firms hinder access. Need to be able to assess the Bad at information future across offerings. Limits to processing ability Intermediaries may assist in this. Need to be able to act on information in front of them Much of consumer policy is about ensuring consumers have access to the right information Vigorous competition should provide firms with incentives to deliver what consumers want as efficiently and innovatively as possible 3
In some cases dissemination of information has been mandated Personal Current Accounts - Not enough information regarding prices of bank charges - Difficult to predict and assess differences or compare across offers. - Increased transparency by providing prices to web comparison intermediaries. Printers and Cartridges - OFT recommended development of a standard test under which the price and performance of inkjet cartridges could be measured. Payment Protection Insurance - CC stated that all PPI providers should be required to provide information on pricing of PPI policies to FSA and third parties for comparison tables. 4
Sharing information to achieve more efficient market outcomes (i) Information to allow benchmarking: - Comparing performance across businesses in order to improve individual performance. Information for better allocations (Jensen 2007): - More efficient allocation to customers may lead to cheaper prices and greater profits. - Similar intuition to price discrimination literature. Allocate to highest willingness to pay. Information to reduce demand uncertainty (Kuhn & Vives 95): - Information about rivals expectations allows better predictions of demand. - Better demand predictions minimise poor supply decisions. - Can reduce (or increase) prices depending on assumptions. Information to increase investment (Dixit 89): - Reductions in uncertainty increase investment. 5
Sharing information to achieve more efficient market outcomes (ii) Information for adverse selection: - Reduces problems of adverse selection and moral hazard. - Provides rationale for exchanging claim rates within the insurance industry (Asnef-Equifax). - Risk of no market without information (lemons). Information required for provision of services: - Some sectors information sharing may be necessary to provide service - For example shipping hence separate block exemptions for them. Information in order to sustain other agreements: - R&D Agreements - Standardisation 6
The bad exchanges 7
The bad risks to coordination Focal point for coordination (Stigler 1961). - Choosing focal point is difficult - what price should one agree to in order to coordinate? - Exchanges of information facilitate a common understanding. - Future pricing particularly dangerous as allows competitors to discuss where they would like to be, without actually having to commit to the price. Can facilitate monitoring of any agreements (internal stability). - Generally coordination requires ability to monitor/punish. - Information allows firms to see when someone is cheating and who it is. - More disaggregated prices allow better monitoring. External stability of cartel - Shows entry. - Where to target punishments? 8
The bad isn t all this just cheap talk? Cheap talk in focal points Low cost firm would like a low price focal point whilst high cost would like high. Cheap talk in monitoring Firm wants to maximise the time before other firms find out it has cheated on an understanding If talk influences focal point, there is an incentive to say whatever needed to move price to own optimum. If information allows monitoring there is incentive to say whatever needed to indicates firm has not deviated A rational firm discounts any information not compatible with other firm s incentives Information becomes cheap (Baliga and Morris 2002) 9
The bad but is it always cheap? Theoretical Literature Some information can be verified, and may narrow down possibilities (Crawford and Sobel 19982) Experimental Literature Parties do communicate and face to face communication works best (Potters 1999) Empirical Literature Most cartels have involved significant communications used to create trust (Levenstein and Suslow 2006) Empirical and experimental evidence appear to show that not all talk is cheap and some is valued conspirators. 10
But is uncertainty a pre-requisite for effective competition? Law: - Uncertainty is bad for competition in oligopolistic market. (Tractors, Fatty Acid) Economics: - No necessity for uncertainty and may harm consumers (e.g. Milgrom Roberts 1982) - Uncertainty absent coordination may increase or reduce welfare (Kuhn and Vives 1995). Why the difference? - Economists are happy to abstract the mode of communication from information communicated. - Lawyers do not divorce a reduction in uncertainty with its origination. Market example: - Independent verification - Posted prices - Chatting at pub! 11
The law and economics 12
Most likely to provide net harm? Disaggregated, confidential information on future intentions between competitors exchanged in private. - High potential for information used to coordinate and harm consumers. - Although may be some commercial benefits from disclosing future pricing information, benefits may be realised through the disclosure of less harmful information for example aggregated forecasts. Implies that disaggregated, future intentions on confidential strategic variables most likely to be within an object box. - Ties in with law i.e. most like smoke filled rooms 13
Least likely to provide net harm? Past, aggregated, public information between competitors. - Low potential for information used to coordinate and harm consumers not helpful for focal points, not helpful for monitoring. - Potential for benefits for example benchmarking. Publically available for customers - helpful for consumer decisions. Implies that past, aggregated, public information should not be in object box (may even be outside 101(1)). - No past cases based on this type of information. 14
The difficult area Individualised, Private, Future, Pricing/Quantity Individualised, Private Current, Pricing/Quantity Individualised, Public Future Pricing/Quantity Individualised Public.. Current, Pricing/Quantity Aggregated, Public, Historic, Cost Most likely to have anticompetitive impact Difficult to classify Least likely to have anticompetitive impact Grey areas - Potential for information used to coordinate and harm consumers. - Potential for benefits to consumers i.e. price comparison websites 15
OFT recent experience 16
OFT Motor insurance case Exchanges of future pricing information: - Information exchanged to create a product such that motor insurance firms could see how much each other was pricing. - Highly detailed information at individual firm level. - Information provided before prices went live in policies sold by brokers. Concern that information could facilitate coordination. But possible pro-efficiency effects: - Facilitate entry by identifying profitable opportunities. - Provides risk information for entrants without substantial databases. 17
Commitments under consultation Remove the possibility of anti-competitive effects by aggregating such that coordination is not feasible. But make possible retention of information to facilitate entry and identify profitable entry opportunities. - NB: not a balancing exercise. Anonymise and aggregate so individual price cuts are not observable, but average prices still retain information. - Considered how much aggregation needed before a 20% cut is statistically indistinguishable from normal price fluctuations. - OFT analysis of insurance data suggested minimum number in motor insurance industry is five. 18
Further reading: Matthew Bennett and Philip Collins: The law and economics of information sharing: The good the bad and the Ugly. August 2010, European Competition Journal. Motor insurers agree to limit data exchange after OFT investigation OFT Press release and consultation document: http://www.oft.gov.uk/news-andupdates/press/2011/04-11 19