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.
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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
Need
information
regarding
prices.
Need to be
able to
assess the
Bad at
information
future
across
Limits to
offerings.
processing
ability
Intermediaries
may assist in
this.
Information
may not be
always
available.
May worry if
firms hinder
access.
Act
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
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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.
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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.
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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
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The bad exchanges…
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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?
-
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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)
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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
Empirical and
experimental
evidence
appear to show
that not all talk
is cheap and
some is valued
conspirators.
Most cartels have involved significant communications –
used to create trust (Levenstein and Suslow 2006)
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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!
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The law and economics
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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’
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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.
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The difficult area…
Individualised,
Private,
Future,
Pricing/Quantity
Individualised,
Private
Current,
Pricing/Quantity
Most likely to have
anticompetitive
impact
●
Individualised,
Public
Future
Pricing/Quantity
Difficult to classify
Individualised
Aggregated,
Public
Public,
…..
Current,
Historic,
Pricing/Quantity
Cost
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
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OFT recent experience
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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.
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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 18
motor insurance industry is five.
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
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