Current research

When an OFT investigation identifies a serious problem in a market, it is under a duty to suggest a way in which the problem can be addressed - a remedy. The OFT continually endeavours to improve the performance of its remedies. This includes sharpening remedies in cases where consumers tend to act rationally as well as formulating more effective remedies in cases where behavioural biases are common.

Back to top

Price Relationship Agreements

The OFT awarded in February 2011 a contract to Lear (Laboratorio di economia, antitrust, regolamentazione) to undertake a review of the literature relating to Price Relationship Agreements (PRAs).

PRAs are arrangements linking one supplier's price to those charged to other customers or by competitors. Examples of PRAs include 'most favoured nation' clauses (MFNs), price guarantees, and meeting competition clauses. This piece of research aims to provide a comprehensive literature review, bringing together different economic theories of harm and efficiency motivations for PRAs (and critiques of these theories) and drawing out their possible policy implications. 

More specifically the objectives of this project are to:

• Review the theoretical and empirical economic literature, as well as the key case law and practice, regarding the possible economic theories of harm and pro-efficiency theories. This will include any critiques of these theories, as well as empirical and experimental evidence.
  
• Using the literature, draw policy implications for the competition treatment of PRAs, stating the key assumptions and limitations of the policy implications.
  
• Where there is less economic literature regarding the impact of certain types of PRAs such as most favored trading platform clauses, draw out insights from existing literature regarding other PRAs in order to provide initial thoughts.
  
• Identify gaps in the literature and key areas for further academic research.

We are aiming to publish a final report in May 2012.

For further information please contact Matthew Bennett on matthew.bennett@oft.gsi.gov.uk

Back to top

Conjectural Variations

The OFT has awarded a contract to RBB Economics to undertake a general review of the empirical and theoretical literature on the Policy Implications of Conjectural Variations.

Conjectural Variations (CVs) is the term historically used to capture the adjustment process that firms make in reaching the equilibrium state. They also describe strategic behaviour in terms of 'the expectations that firms have about how their rivals will react to their chosen action'.

The authors have been asked to pull out issues that are relevant to the work of the OFT and to consider the broad policy implications of CVs emerging from the literature reviewed. We have identified the following specific areas of interest:

• Coordinated effects: what insights do CVs provide on oligopolistic markets and how can they be used to better detect less obvious forms of collusion? 
• Unilateral effects: what role can the literature on CVs play in improving our understanding of the unilateral effects of mergers and what role can they play in addressing some of the recent criticisms on the models used to assess unilateral effects of mergers such as the Upwards Pricing Pressure (UPP)? 
• Empirical estimation: how can CVs be used consistently in the empirical estimation of the level of market competitiveness?

The project is scheduled for completion in the first half of 2011 and the final report will be published on our website. For further information please contact Matthew Bennett (matthew.bennett@oft.gsi.gov.uk).

Back to top

Consumer behavioural biases in competition

The OFT has published a report on consumer behavioural biases in competition (pdf 951kb) written by London Economics in association with Steffen Huck (University College London). The report carries out a review of how consumer behavioural biases impact firms' decisions and hence the competitive equilibria. Consumer behavioural biases imply that consumers may not behave in the rational way many economic models presume.

The aims of this project are:

• To review the empirical and theoretical behavioural economic literature that looks at how consumer behavioural biases impact on competitive equilibria. 
• To determine the key implications for consumer and competition policy in particular to understand how and when competitive equilibrium may change for the worse. 
• To identify key areas for further academic research.

This research provides a practical reference which will enable the OFT to keep informed of recent developments in behavioural economics that may impact on consumer and competition policy. It also contributes to our understanding of when, why and how we should intervene.

From our understanding of the literature, there are some broad policy implications (and this is by no means exhaustive) include:

• Whether firms profit from consumer behavioural biases.
• Whether different groups of consumers benefit from consumer biases.
• Whether all consumers benefit or lose from consumer behavioural biases.
• Whether exploitation by all firms may or may not require coordination.
• Under what conditions may exploitation be a unilateral equilibrium for each firm?

The research report to considers these broad policy implications as well as other relevant findings uncovered by the literature review.

For further information please contact Mary Davies (mary.davies@oft.gsi.gov.uk).

Back to: Economic research