Competition Law and Using Prices to Assess Firm Conduct: Some Conceptual Omissions
In this paper we conduct a re-appraisal of the robustness of tests relating the abuse of market power to measures of price-cost margins and bench mark pricing. We argue that these methods do not control for variations in the correlation between workers' reservation wages and productivity. In the absence of controlling for these effects, these techniques tend to wrongly diagnose an abuse of market power and to penalise firms who are relatively worse affected by the pattern of this correlation across comparison groups. Therefore, high profit firms escape the regulatory net while low profit firms are penalised. It is also found that employment turnover is a useful indicator of the extent to which firms are adversely affected by this factor. At a policy level, the analysis reveals that contrary to recent practice, profit comparisons should be considered in cases of price bench marking and price-wage margins. In addition, the analysis indicates that it is prudent to place the onus of exoneration on fims accused of an abuse of market power, rather than plaintiffs. The results are also relevant to studies which use wages to predict industry performance.
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