The curse of antitrust facing bilateral monopoly: Is regulation hopeless?

Abstract

This paper is about the challenges that antitrust authorities face when dealing with bilateral monopolies. The curse of antitrust refers to traps threatening the efficient applicability of antitrust policies in these situations. Standard theories diverge about the attainability of equilibrium under bilateral monopolies but share skepticism about its efficiency if it ever exists. We suggest a different approach, based on transaction cost theory. First, since bilateral monopolies often develop in the upper segment of value chains, misalignment between parties may generate negative externalities. Second, if parties reach an agreement, the impact of the governance mechanism implemented must be assessed beyond the usual parameters of prices and quantities. Indeed, the risk of negative externalities in the absence of appropriate governance increases dramatically when "critical transactions" are at stake. With vertical integration prohibited, second-best alternatives in which antitrust authorities leave room for innovative hybrid governance may allow internalizing externalities while avoiding high switching costs.

Antitrust in BRICS: Agenda and achievements in comparative perspective

“…Russian antitrust enforcement practice demonstrates a wide diversity of methods to manage problems with competition restrictions in situations of bilateral monopoly, in spite of the pessimism of economists on the prospects for the application of antitrust laws in the context of high bilateral switching costs due to high risks of enforcement errors (first of all, type I errors). However, to avoid regulatory intervention in an economy that still has a structure inherited from the Soviet times with territorial-production complexes and non-alternative technological chains controlled by independent owners after the privatization of the 1990s -the antimonopoly agency implemented, for example, an instrument of compulsory mediation (Shastitko et al, 2018).…”