Faculty & Research

Dennis W. Carlton

David McDaniel Keller Professor of Economics

Phone :
1-773-702-6694
Address :
5807 South Woodlawn Avenue
Chicago, IL 60637

Dennis W. Carlton focuses his research on microeconomics, industrial organization, and antitrust. He has published more than 100 articles and two books, including one of the leading textbooks in industrial organization. He is also the coeditor of the Journal of Law and Economics and is on the editorial boards of Competition Policy International and the Journal of Competition Law and Economics. From 2006 to 2008, he served as the Deputy Assistant Attorney General for Economic Analysis at the U.S. Department of Justice.

He is the recipient of a number of awards, including a John Harvard Award in 1970, a National Science Foundation Fellowship from 1972 to 1975, and the 1977 P.W.S. Andrews Memorial Prize Essay for the best essay in the field of industrial organization by a scholar under the age of 30, and the 2008 Robert F Lanzillotti prize for the best essay in antitrust economics. He was designated the 2014 Distinguished Fellow of the Industrial Organization Society. In 2014, he was also designated by the publication, Global Competition Review, as Economist of the Year. His research has been funded by the National Science Foundation and the Lincoln Foundation.

He has served as an advisor on antitrust matters to the Department of Justice, the Federal Trade Commission, and to private clients. He has served as a commissioner on the Antitrust Modernization Commission, a congressional committee investigating the antitrust laws.

Carlton earned a master's degree in operations research and a PhD in economics from Massachusetts Institute of Technology in 1974 and 1975 and a bachelor's degree summa cum laude in 1972 from Harvard College, where he majored in applied mathematics and economics and was a member of Phi Beta Kappa. He joined the Chicago Booth faculty in 1984.

 

2014 - 2015 Course Schedule

Number Name Quarter
33923 Advanced Industrial Organization III 2015 (Spring)

Other Interests

Family, basketball, and billiards.

 

Research Activities

Theoretical and empirical examination of price rigidity; size distribution of firms during business cycles; incentives for planning and their effect on firm size; various issues in futures markets and antitrust economics.

With J. Perloff, Modern Industrial Organization, 4th ed. (2004).

"Why Barriers to Entry are Barriers to Understanding," American Economic Review (2004).

With E. Landes and A. Frankel, "The Control of Externalities in Sports Leagues," Journal of Political Economy (2004).

With M. Waldman, "The Strategic Use of Trying to Preserve and Create Market Power in Evolving Industries," The Rand Journal (2002).

With J. Chevalier, "Free Riding and Sales Strategies for the Internet," The Journal of Industrial Economics (2001).

New: Identifying Benchmarks for Applying Non-Discrimination in Frand
Date Posted: Jul  05, 2014
Standard setting organizations have for many years asked members to commit to license patents essential to use of standards on Fair, Reasonable and Non-discriminatory, or FRAND, terms. Previous work has shown how standard setting that incorporates patents can lead to complicated situations in which the patent owner, sometimes in collaboration with rival firms, can exploit the market power that is created by being designated a standard essential patent, but that the non-discriminatory provision of FRAND can be interpreted so as to mitigate the inefficiencies that can result when patent owners try to exploit their market power conferred by the standard setting process. This paper discusses the availability of appropriate benchmarks for implementing the non-discriminatory provision and shows how even when license terms for patents are not set in advance, FRAND terms can protect members of an SSO and that this protection can be implemented by using various benchmarks.

New: An Economic Interpretation of FRAND
Date Posted: Apr  26, 2013
Standard setting organizations have for many years required members to commit to license patents essential to use of standards on Fair, Reasonable and Non-discriminatory terms. Unfortunately, SSOs have not defined what FRAND means, leaving its interpretation to courts and regulators. This paper explains the economic concerns underlying FRAND – hold-up and strategic behavior leading to inefficient behavior in a standard setting context – and how a proper economic interpretation of FRAND can

New: Net Neutrality and Consumer Welfare
Date Posted: Oct  24, 2010
The Federal Communications Commission’s proposed net neutrality rules would, among other things, prohibit broadband access providers from prioritizing traffic, charging differential prices based on the priority status, imposing congestion-related charges, and adopting business models that offer exclusive content or that establish exclusive relationships with particular content providers. The proposed regulations are motivated in part by the concern that the broadband access providers will adopt

New: Revising the Horizontal Merger Guidelines
Date Posted: Oct  24, 2010
The U.S. Department of Justice and the Federal Trade Commission are currently in the process of revising their Horizontal Merger Guidelines. I explain that if a revision is to occur, then there are certain parts of the Guidelines that are most in need of revision, including the sections on unilateral and coordinated effects, committed and uncommitted entry, numerical concentration thresholds for safe harbors, and fixed costs. I also explain what should not become part of any new Guidelines, such

New: Antitrust Treatment of Nonprofits: Should Hospitals Receive Special Care?
Date Posted: Apr  22, 2010
Nonprofit hospitals receive favorable tax treatment in exchange for providing socially beneficial activities. Extending this rationale suggests that nonprofit hospital mergers should be evaluated differently than mergers of for-profit hospitals because suppression of competition may also allow nonprofits to cross-subsidize care for the poor. Using detailed California data, we find no evidence that nonprofit hospitals are more likely than for-profit hospitals to provide more charity care or offer

New: Barriers to Entry
Date Posted: Jan  01, 2010
This chapter analyzes the concept of barriers to entry. It explains that the concept is a static one and explores the inadequacy of the concept in a world with sunk costs, adjustment costs, and uncertainty. The static concept addresses the question of whether profits are excessive. The more interesting and relevant questions are how fast entry or exit will erode profits or losses, and how do the bounds that entry and exit place on price vary with uncertainty and sunk cost. Intuition based on the

New: Tying
Date Posted: Jan  01, 2010
This chapter first reviews economic theories for why firms tie their products and then discusses our views concerning what this review implies concerning optimal antitrust policy for tying cases. The review considers efficiency rationales for tying, price discrimination rationales, and various exclusionary rationales that have recently been put forth. The chapter specifically discusses the Chicago School view that tying should raise no antitrust concern and explains when that logic breaks down.

Product Variety and Demand Uncertainty
Date Posted: Aug  29, 2009
We show that demand uncertainty leads to vertical product differentiation even when consumers are homogeneous. When a firm anticipates that its inventory or capacity may not be fully utilized, product variety can reduce its expected costs of excess capacity. When the firm offers a continuum of product varieties, the highest quality product has the highest profit margins but the lowest percentage margin, while the lowest quality product has the highest percentage margin but the lowest absolute ma

New: A Solution to Airport Delays
Date Posted: Aug  15, 2009
Airport delays are increasingly significantly. These delays are largely attributable to increased congestion on runways and at gates as airlines increasingly use smaller but more frequently-departing passenger jets. This paper proposes reducing congestion by auctioning off takeoff and landing 'slots' at airports. These auctions would have several benefits: they would redistribute airport facilities toward higher-valued uses, incentivize airlines to make more efficient use of airport capacity, an

New: Why We Need to Measure the Effect of Merger Policy and How to Do it
Date Posted: Feb  19, 2009
In this article, I explain the inadequacy of our current state of knowledge regarding the effectiveness of antitrust policy towards mergers. I then discuss the types of data that one must collect in order to be able to perform an analysis of the effectiveness of antitrust policy. There are two types of data one requires in order to perform such an analysis. One is data on the relevant market pre and post merger. The second is data on the specific predictions of the government agencies about the

New: Should Price Squeeze Be a Recognized Form of Anticompetitive Conduct?
Date Posted: Feb  13, 2009
Should a price squeeze constitute anticompetitive conduct requiring investigation under the antitrust laws? A price squeeze occurs when a vertically integrated firm supplies an input to its downstream competitors at a price that generates a profit margin so low that the competitors exit the downstream market. I ask whether it is sensible to try to use antitrust laws to prevent such conduct or whether such an attempt would create more harm than benefit. The current case, linkLine Communications

New: Product Variety and Demand Uncertainty: Why Markups Vary with Quality
Date Posted: Dec  15, 2008
We demonstrate that demand uncertainty can explain equilibrium product variety in the presence of sunk costs. Product variety is an efficient response to uncertainty because it reduces the expected costs associated with excess capacity. We find that within the firm's product line, the highest quality product has the highest profit margin but the lowest percentage margin, while the lowest quality product has the highest percentage margin but the lowest absolute margin. Both of these relationships

New: Assessing the Anticompetitive Effects of Multiproduct Pricing
Date Posted: Aug  28, 2008
In response to the standardless approach used in LePage's v. 3M, the Antitrust Modernization Commission (AMC) and others advocate using a discount allocation approach to assess whether bundled loyalty discounts violate Section 2 of the Sherman Act. This approach treats loyalty discounts like predatory pricing. The analogy to predatory pricing is flawed. We propose an alternative approach that focuses on the presence of significant scale economies. We use our approach to analyze LePage's, as well

The Strategic Use of Tying to Preserve and Create Market Power in Evolving Industries
Date Posted: Apr  02, 2008
This article investigates how the tying of complementary products can be used to preserve and create monopoly positions. We first show how a monopolist of a product in the current period can use tying to preserve its monopoly in the future. We then show how a monopolist in one market can employ tying to extend its monopoly into a newly emerging market. Our analysis explains how a dominant firm can use tying to remain dominant in an industry undergoing rapid technological change. The analysis

New: Appropriate Antitrust Policy Towards Single-Firm Conduct
Date Posted: Mar  23, 2008
In this article we distinguish between two types of single-firm conduct. The first, which we call "extraction," is conduct engaged in by the firm to capture surplus from what the firm has itself created independent of the conduct's effect on rivals. The second, which we call "extension," is single firm conduct that increases the firm's profit by weakening or eliminating the competitive constraints provided by products of rivals. We propose as a fundamental antitrust policy towards single-firm

New: Safe Harbors for Quantity Discounts and Bundling
Date Posted: Feb  04, 2008
The courts and analysts continue to struggle to articulate safe harbors for a wide variety of common business pricing practices in which either a single product is sold at a discount if purchased in bulk or in which multiple products are bundled together at prices different from the ones that would emerge if the products were purchased separately. The phenomenon of tying in which the sale of one product is conditioned on the purchase of another is closely related to bundling. Its analysis reli

New: Mergers in Regulated Industries: Electricity
Date Posted: Dec  19, 2007
Mergers in any industry can raise complicated questions about the elimination of competition and the achievement of efficiencies. Mergers in regulated industries such as electricity raise even more complicated issues as the analyst needs to grapple with the constraining effects of regulation, multiple levels of regulation, the ability to evade regulation, and the desire for efficiency. This paper discusses the electricity industry in general and one particular electricity merger that the U.S. De

New: The Need to Measure the Effect of Merger Policy and How to Do It
Date Posted: Dec  19, 2007
In this article, I explain the inadequacy of our current state of knowledge regarding the effectiveness of antitrust policy towards mergers. I then discuss the types of data that one must collect in order to be able to perform an analysis of the effectiveness of antitrust policy. There are two types of data one requires in order to perform such an analysis. One is data on the relevant market pre and post merger. The second is data on the specific predictions of the government agencies about the

New: Why Tie a Product Consumers Do Not Use?
Date Posted: Oct  23, 2007
This paper provides a new explanation for tying that is not based on any of the standard explanations - efficiency, price discrimination, and exclusion. Our analysis shows how a monopolist sometimes has an incentive to tie a complementary good to its monopolized good in order to transfer profits from a rival producer of the complementary product to the monopolist. This occurs even when consumers - who have the option to use the monopolist's complementary good - do not use it. The tie is profitab

New: Proposal for a Market-Based Solution to Airport Delays
Date Posted: Oct  15, 2007
With the clamor rising over airport delays and with both the Congress and the Administration considering remedies, this paper advocates the use of market mechanisms, specifically slot auctions, to promote efficient usage of airport capacity, reduce airport delays, and, more generally, promote competition.

New: The Theory and the Facts of How Markets Clear: Is Industrial Organization Valuable for Understanding...
Date Posted: Aug  08, 2007
No abstract is available for this paper.

REVISION: Market Definition: Use and Abuse
Date Posted: Jun  26, 2007
Market definition is a crude though sometimes useful tool for identifying market power. The ambiguity in what analysts mean by market power (price above marginal cost, or excess profits) cannot be resolved by market share. When used to analyze a merger or U.S. Sherman Act Section 2 case, it is not just the level of market shares, but also the changes in market shares that are relevant to calculate whether any increase in market power occurs. Despite this, in Section 2 cases courts often use mark

New: Antitrust and Regulation
Date Posted: Feb  17, 2007
Since the passage of the Interstate Commerce Act (1897) and the Sherman Act (1890), regulation and antitrust have operated as competing mechanisms to control competition. Regulation produced cross-subsidies and favors to special interests, but specified prices and rules of mandatory dealing. Antitrust promoted competition without favoring special interests, but couldn`t formulate rules for particular industries. The deregulation movement reflected the relative competencies of antitrust and regul

New: Does Antitrust Need to be Modernized?
Date Posted: Jan  15, 2007
In 2002, Congress established the Antitrust Modernization Commission to address whether the antitrust laws needed to be changed in light of globalization and rapid technological change. This paper addresses that question. Although the basic framework of the antitrust laws is suitable to deal with current economic conditions, the paper identifies several areas where antitrust can be improved. The paper first examines whether the proper criterion for antitrust should be total or consumer surplus.

New: Antitrust and Regulation
Date Posted: Oct  13, 2006
More than a century ago, the federal government started controlling competition, first railroads through the Interstate Commerce Act and then the general economy under the Sherman Act. The Commerce Act assigned primary responsibility to the first great federal agency, the Interstate Commerce Commission, while the Sherman Act relied for its implementation on federal courts of general jurisdiction. Since that time, there has been an ongoing struggle to formulate the appropriate policy for controll

REVISION: Theories of Tying and Implications for Antitrust
Date Posted: Oct  05, 2006
This paper first reviews economic theories for why firms tie their products and then discusses our views concerning what this review implies concerning optimal antitrust policy for tying cases. The review considers efficiency rationales for tying, price discrimination rationales, and various exclusionary rationales that have recently been put forth. We specifically discuss the Chicago School view that tying should raise no antitrust concern and explain when that logic breaks down. In our disc

New: Competition, Monopoly and Aftermarkets
Date Posted: Jun  13, 2006
Consider a durable goods producer that potentially has market power in the aftermarkets associated with its own products. An important question is to what extent, if any, should the antitrust laws restrict the firm's behavior in these aftermarkets? In this paper we explore three models that illustrate how various behaviors that hurt competition in aftermarkets can, in fact, be efficient responses to potential inefficiencies that can arise in aftermarkets. Our results should give courts pause

Free Riding and Sales Strategies for the Internet
Date Posted: Jan  06, 2006
We examine manufacturers' decisions of whether and how to offer their products for sale over the internet. Manufacturers that rely on promotion of their products by brick and mortar retailers must consider the possibility that internet retailers can free ride off of that promotional effort. This creates an incentive for manufacturers to limit the availability of their products over the internet and to control the pricing of their products over the internet. We examine three categories of product

Barriers to Entry
Date Posted: Dec  02, 2005
This paper analyzes the concept of barriers to entry. It explains that the concept is a static one and explores the inadequacy of the concept in a world with sunk costs, adjustment costs and uncertainty. The static concept addresses the question of whether profits are excessive. The more interesting and relevant question is how fast entry or exit will erode profits or losses and how do the bounds that entry and exit place on price vary with uncertainty and sunk cost. Intuition based on the stati

Tying, Upgrades, and Switching Costs in Durable-Goods Markets
Date Posted: Jul  06, 2005
This paper investigates the role of product upgrades and consumer switching costs in the tying of complementary products. Previous analyses of tying have found that a monopolist of one product cannot increase its profits and reduce social welfare by tying and monopolizing a complementary product if the initial monopolized product is essential, where essential means that all uses of the complementary good require the initial monopolized product. We show that this is not true in durable-goods sett

How Economics Can Improve Antitrust Doctrine towards Tie-In Sales: Comment on Tirole's 'An Analysis
Date Posted: Apr  21, 2005
Given the focus on tie-in sales in several recent antitrust cases, economists have turned their attention to the motivations and consequences of tying, significantly improving our understanding. Tirole has written an excellent primer focused on what we know about tying and what he believes is desirable antitrust policy concerning the practice. Although we agree with most of Tirole's arguments, there are two topics for which our perspective is somewhat different. First, we would add one situation

Using Economics to Improve Antitrust Policy
Date Posted: Aug  16, 2004
This paper discusses the benefits and limitations of several recent trends in the use of economics to analyze antitrust questions. It explains the connection between HHI analysis and merger simulation, and also critically discusses structural estimation and critical loss analysis.

The Theory of Allocation and Its Implications for Marketing and Industrial Structure
Date Posted: Jul  16, 2004
No abstract is available for this paper.

The Rigidity of Prices
Date Posted: Jul  16, 2004
No abstract is available for this paper.

The Proper Role for Antitrust in an International Setting
Date Posted: Jun  28, 2004
This paper summarizes what lessons other countries should draw from U.S. antitrust policy. I pay special attention to small economies. I also discuss how antitrust fits in as one of many government policies that affect competition and what policies likely work best together given the level of a country's development.

The Relevance for Antitrust Policy of Theoretical and Empirical Advances in Industrial Organization
Date Posted: Jun  28, 2004
This paper discusses some of the recent theoretical and empirical advances in industrial organization over the last decade or two and explains their relevance, if any, to the analysis of antitrust problems. After discussing the very broad area of game theory, I move on to discuss some specific areas where theory has improved our understanding of certain industry practices, such as strategic behavior, raising rivals' costs and tie-ins. I also discuss some provocative work by Sutton that links hi

Planning and Market Structure
Date Posted: Jun  25, 2004
This paper examines a model in which demand is uncertain and production must occur before demand is known for sure. By investing resources in information gathering activity, demand can be forecast. The paper investigates the relationship between the incentive to plan and market structure and conduct. Competition leads to too little planning, while monopoly leads to too high a price relative to the social optimum. A dominant firm with a competitive fringe turns out to be better than either pur

Modeling Price Rigidity or Predicting the Quality of the Good that Clears the Market
Date Posted: Jun  18, 2004
To say that the price of some good is inflexible over time has little meaning if the "good" is changing over time. In this paper we concentrate on delivery lags as being the only dimension other than price that varies. We show how one can predict the relative importance of price and delivery lag fluctuations as equilibrating mechanisms. The complications of the theory as well as the surprising results underscore the complexity of predicting price behavior when the characteristics of the good

The Control of Externalities in Sports Leagues: An Analysis of Restrictions in the National Hockey L...
Date Posted: Jan  27, 2004
This paper provides one of the few successful demonstrations of the efficiency of certain types of restrictions in the context of a joint venture. The joint venture we examine is the National Hockey League (NHL) in the 1980s, which was then composed of 21 separately owned teams. (It now has 30 teams.) The restriction we analyze is the NHL rule on franchise relocation. Before one can fully understand the effect of the restriction, one must understand the theory of how sports leagues operate and w

Intellectual Property, Antitrust and Strategic Behavior
Date Posted: Jun  21, 2002
Economic growth depends in large part on technological change. Laws governing intellectual property rights protect inventors from competition in order to create incentives for them to innovate. Antitrust laws constrain how a monopolist can act in order to maintain its monopoly in an attempt to foster competition. There is a fundamental tension between these two different types of laws. Attempts to adapt static antitrust analysis to a setting of dynamic R&D competition through the use of 'innovat

The Strategic Use of Tying to Preserve and Create Market Power in Evolving Industries
Date Posted: May  04, 2002
This paper investigates how the tying of complementary products can be used to preserve and extend monopoly positions. We first show how a firm that is a monopolist of a product in the current period can use tying to preserve its monopoly position in future periods. We then show using related arguments how a monopolist in one market can employ tying to extend its monopoly position into a newly emerging market. The analysis focuses on the importance of entry costs and network externalities. T

An Empirical Investigation of the Competitive Effects of Domestic Airline Alliances
Date Posted: Apr  19, 2002
In this paper, we investigate empirically the effect of two recent domestic airline alliances. We find that both alliances benefited consumers - average fares fell and total traffic increased after the creation of the alliances on those city pairs affected by the alliances. We also find that these effects are found both on city pairs where the alliance created one or two new online carriers, and on city pairs where the alliance increased the service offered by one or both alliance partners. Fi

A General Analysis of Exclusionary Conduct and Refusal to Deal - Why Aspen and Kodak are Misguided
Date Posted: Oct  05, 2001
This paper analyzes the question: When should a single firm have a duty to deal with another? The paper uses a series of economic models to answer the question, assuming the goal is to prevent harm to competition, and applies the economic analysis to the leading cases to show when antitrust enforcement is appropriate and when it is not. The analysis shows that, to prevent harm to competition, the role for antitrust should be quite limited and that two leading cases, Aspen and Kodak, represent

Competition, Monopoly, and Aftermarkets
Date Posted: Jun  24, 2001
Consider a durable goods producer that potentially has market power in the aftermarkets associated with its products. An important question is to what extent, if any, should the antitrust laws restrict the firm's behavior in these aftermarkets? In this paper we explore a number of models characterized by either competition or monopoly in the new-unit market, and show that a variety of behaviors that hurt competition in aftermarkets can, in fact, be efficient responses to potential inefficienci

The Choice of Organizational Form in Gasoline Retailing and The Costs of Laws Limiting that Choice
Date Posted: Apr  09, 2001
This paper uses a new data source to analyze the choice of organizational form of retail gasoline stations. In recent years, gasoline stations have tended to be less likely to be owned and operated by a lessee dealer and more likely to be owned and operated by the refiner. Critics have alleged that company-operated stations are used to drive lessee dealer stations out of business in order to restrict competition. We examine the determinants of organizational form and find them to be based on

The Economics of Religion, Jewish Survival and Jewish Attitudes Toward Competition in Torah Educatio...
Date Posted: Feb  24, 2001
This paper examines the attitude of Jewish law to competition in light of the economist's understanding of the benefits of competition and of the beneficiaries from intervention in the competitive process. The punchline of this paper is simple. Although Judaism has used a whole host of restrictions on competition and has had its share of legislation to promote private interests, there has been one area that has generally been a consistent exception to impediments to competition - the teaching of

Antitrust and Higher Education: Was There a Conspiracy to Restrict Financial Aid?
Date Posted: Jul  13, 2000
In 1991, the Antitrust Division sued MIT and the eight schools in the Ivy League under Section 1 of the Sherman Act for engaging in a conspiracy to fix the prices that students pay. The Antitrust Division claimed that the schools conspired on financial aid policies in an effort to reduce aid and raise their revenues. The schools justified their cooperative behavior by explaining that it enabled them to concentrate aid on only those in need and thereby helped the schools to achieve their goals

A Critical Assessment of the Role of Imperfect Competition in Macroeconomics
Date Posted: May  09, 2000
New Keynesian models and some models of growth rely on market power for their results. This sole focus on market power as the source for certain macroeconomic phenomena is misguided both theoretically and empirically. New Keynesian multipliers are closely related to standard measures of deadweight loss used in the public finance literature. The theoretical analysis shows that a standard competitive model with taxes exactly reproduces the multipliers in the new Keynesian models, and the empiri