Dennis W. Carlton

REVISION: The Economics of the LCD Cartel: Organization, Incentives, and Practical Challenges
Date Posted:Tue, 06 Sep 2022 10:46:52 -0500
A world-wide cartel met regularly and secretly for several years in an attempt to fix prices for liquid crystal displays (LCDs) which are used in nearly all present-day televisions, computer screens, and handheld devices. The parties recognized the illegality of their actions and took steps to guard the secrecy of their meetings. The Department of Justice (DOJ) uncovered the cartel when one firm entered the DOJ leniency program. There were subsequent guilty pleas, jail time for a few executives, and large government fines. Civil litigation followed alleging an even broader conspiracy than that alleged by the U.S. government. Billions of dollars of private settlements ensued.

However, a substantial question remains as to how effective the firms were at actually raising prices. The industry was characterized by rapid technological change, huge recurring investments, shifts in market share, and many differentiated products. The cartel had no effective way of monitoring ...

REVISION: LCDs and 'Crystal' Meetings—Diamond or Rock?
Date Posted:Tue, 06 Sep 2022 07:35:32 -0500
A world-wide cartel met regularly and secretly for several years in an attempt to fix prices for liquid crystal displays (LCDs) which are used in nearly all present-day televisions, computer screens, and handheld devices. The parties recognized the illegality of their actions and took steps to guard the secrecy of their meetings. The Department of Justice (DOJ) uncovered the cartel when one firm entered the DOJ leniency program. There were subsequent guilty pleas, jail time for a few executives, and large government fines. Civil litigation followed alleging an even broader conspiracy than that alleged by the U.S. government. Billions of dollars of private settlements ensued.

However, a substantial question remains as to how effective the firms were at actually raising prices. The industry was characterized by rapid technological change, huge recurring investments, shifts in market share, and many differentiated products. The cartel had no effective way of monitoring ...

New: Understanding Basic Principles and Facts about Antitrust to Create a Basis for Some (Any?) Consensus
Date Posted:Fri, 12 Aug 2022 17:08:48 -0500
The debates around antitrust reform have sometimes involved participants taking extreme positions. In some sense, this is good because it helps attract attention and there has been lots of attention from politicians, policy makers, academics, and the public. But it is not good if the debate winds up creating myths that are unhelpful in forging a path forward. I am convinced that there is a sufficient body of evidence to establish that, although there are many improvements that can be made in antitrust doctrine and enforcement, the claims by a growing number of academics, politicians, and government officials (often referred to as “Neo-Brandeisians”) that antitrust needs to be radically redirected and that the core principles that have guided it for the past half century should be jettisoned are wrongheaded and would lead to undesirable policy outcomes. My goal in this short essay is to explain a few key points that I hope many will see as obvious. I first start out with some basic ...

REVISION: A Retrospective Analysis of the AT&T/Time Warner Merger
Date Posted:Tue, 16 Nov 2021 18:10:42 -0600
The importance of merger retrospectives as a way to assess competition policy is well-recognized. Yet there have been few retrospectives – none that we are aware of for any recent merger – that examine the accuracy of the predictions made by economic models used in the antitrust investigation of the merger, despite the substantial lessons that can be learned from such studies. Moreover, there have been no such retrospectives of litigated cases that the government lost, likely because of the paucity of such cases.

In this article, we seek to fill these gaps by performing a retrospective of an important recent litigated merger in which the government lost and by focusing our attention on the accuracy of the predictions made by the economic model used by the government’s expert in the case. We focus on the 2018 AT&T/Time Warner merger, which was challenged by the U.S. Department of Justice (DOJ), litigated, and permitted to proceed by the court. To the extent data ...

REVISION: A Retrospective Analysis of the AT&T/Time Warner Merger
Date Posted:Thu, 30 Sep 2021 18:12:34 -0500
The importance of merger retrospectives as a way to assess competition policy is well-recognized. Yet there have been few retrospectives – none that we are aware of for any recent merger – that examine the accuracy of the predictions made by economic models used in the antitrust investigation of the merger, despite the substantial lessons that can be learned from such studies. Moreover, there have been no such retrospectives of litigated cases that the government lost, likely because of the paucity of such cases.

In this article, we seek to fill these gaps by performing a retrospective of an important recent litigated merger in which the government lost and by focusing our attention on the accuracy of the predictions made by the economic model used by the government’s expert in the case. We focus on the 2018 AT&T / Time Warner merger, which was challenged by the U.S. Department of Justice (DOJ), litigated, and permitted to proceed by the court. To the extent data ...

REVISION: The Revolution in Antitrust: An Assessment
Date Posted:Thu, 10 Sep 2020 06:31:24 -0500
In this essay we evaluate the impact of the revolution that has occurred in antitrust and in particular the growing role played by economic analysis. Section II describes exactly what we think that revolution was. There were actually two revolutions. The first was the use by economists and other academics of existing economic insights together with the development of new economic insights to improve the understanding of the consequences of certain forms of market structure and firm behaviors, as well as the application of advanced empirical techniques to large data sets. The second was a revolution in legal jurisprudence, as both the federal competition agencies and the courts increasingly accepted and relied on the insights and evidence emanating from this economic research. Section III explains the impact of the revolution on economists, consulting firms, and research in the field of industrial organization. One question it addresses is why, if economics is being so widely employed ...

REVISION: The Revolution in Antitrust: An Assessment
Date Posted:Tue, 08 Sep 2020 06:26:02 -0500
In this essay we evaluate the impact of the revolution that has occurred in antitrust and in particular the growing role played by economic analysis. Section II describes exactly what we think that revolution was. There were actually two revolutions. The first was the use by economists and other academics of existing economic insights together with the development of new economic insights to improve the understanding of the consequences of certain forms of market structure and firm behaviors, as well as the application of advanced empirical techniques to large data sets. The second was a revolution in legal jurisprudence, as both the federal competition agencies and the courts increasingly accepted and relied on the insights and evidence emanating from this economic research. Section III explains the impact of the revolution on economists, consulting firms, and research in the field of industrial organization. One question it addresses is why, if economics is being so widely employed ...

New: Some Observations on Claims That Rising Market Power Is Responsible for US Economy Ills and That Lax Antitrust Is the Villain
Date Posted:Wed, 22 Jul 2020 16:31:08 -0500
This paper evaluates the recent literature claiming that the US economy has generally become less competitive causing the US economy to perform poorly and that lax antitrust policy is one important reason for the decline in economic performance. Although there certainly are empirical facts requiring further study, I conclude that the evidence does not support calls for dramatic changes in antitrust policy.

New: An Evaluation of the Impact of the 2010 Horizontal Merger Guidelines
Date Posted:Fri, 27 Mar 2020 05:15:45 -0500
In comparison to the prior Guidelines, the 2010 Guidelines:

(i) de-emphasized market definition;

(ii) introduced the concept of upward price pressure (UPP) explicitly into the Guidelines;

(iii) maintained focus on potential harm from “coordinated effects” despite what appeared to be its diminishing role in merger analyses (but failed to connect the economics of unilateral behavior to the economics of coordinated behavior);

(iv) discussed entry and the implications of profit margins; and

(v) discussed auctions and bargaining.

In this article we address several questions. How have these more novel changes worked out in practice? How does what happened compare to what we thought would happen at the time the 2010 Guidelines were introduced? And what lessons can be learned from experience to date?

New: Transaction Costs and Competition Policy
Date Posted:Mon, 28 Oct 2019 09:25:31 -0500
This paper evaluates current antitrust policy in light of our current understanding of how transaction costs influence the ability of firms and consumers to deal with market power. The paper shows how the failure to consider transaction costs can lead to erroneous policy decisions. Many models employed today make simplifying assumptions about transaction costs that can lead to biased results in analyzing vertical and horizontal issues. The increased ability to monitor the effect of promotional behavior should cause us to reexamine whether free riding justifications, previously accepted as justifications for various vertical restrictions, still hold. Nash bargaining and Nash-in-Nash models raise concerns about the simplified assumptions assumed in which supposedly high transaction costs restrict the choice and form of the assumed competitive alternatives. The increasing importance of two-sided markets together with an understanding of transaction costs is needed to understand ...

New: Lessons from AT&T/Time Warner
Date Posted:Fri, 12 Jul 2019 06:16:49 -0500
AT&T and Time Warner is the U.S. Department of Justice’s first vertical merger challenge in decades. The merging parties hired us initially to provide economic analyses of the antitrust issues raised by the merger and ultimately to assist with and testify in the litigation. There are three keys lessons that we draw from the outcome of the litigation for future antitrust practice. First, history matters, particularly the outcomes of similar integrations or integrations, both in predicting price effects and in testing merger simulation models proposed by economic experts. Second, one should be careful of simulation models of vertical transactions as they can be complicated and fragile. Third, the fact that the courts credited cost-saving efficiencies as credible, cognizable and relevant to the analysis of net harm is likely to be important for the analysis of future mergers, as the role of efficiencies in merger litigation remains an open question.

REVISION: The Anticompetitive Effects of Vertical Most-Favored-Nation Restraints and the Error of Amex
Date Posted:Wed, 27 Mar 2019 10:45:14 -0500
This paper illustrates the underlying economic logic behind the anticompetitive effects of what Ralph Winter and I have labeled vertical most favored nation restraints in Carlton and Winter (2018). Those are restraints in which one supplier tells a retailer that the retailer cannot set the retail price of its product higher than that of a rival, even if its wholesale price is higher than that of its rival. I explain the possible anti-competitive effect of such restraints. I then apply the reasoning to credit cards and finally, using the economic framework developed, explain the economic errors in the Court’s recent Amex decision.

REVISION: The Anticompetitive Effects of Vertical Most-Favored-Nation Restraints and the Error of Amex
Date Posted:Thu, 14 Feb 2019 09:36:48 -0600
This paper illustrates the underlying economic logic behind the anticompetitive effects of what Ralph Winter and I have labeled vertical most favored nation restraints in Carlton and Winter (2018). Those are restraints in which one supplier tells a retailer that the retailer cannot set the retail price of its product higher than that of a rival, even if its wholesale price is higher than that of its rival. I explain the possible anti-competitive effect of such restraints. I then apply the reasoning to credit cards and finally, using the economic framework developed, explain the economic errors in the Court’s recent Amex decision.

New: Transaction Costs and Competition Policy
Date Posted:Tue, 29 Jan 2019 07:07:12 -0600
This paper studies how current competition policy should be altered in order to take into account our understanding of how transaction costs influence the ability of firms and consumers to deal with market power. Ever since Coase (1937) first established the importance of transaction costs to understand the theory of the firm, the study of transaction costs has been central to understanding several aspects of firm organization. Coase’s article (1960) on social costs underscored the importance of transaction costs in understanding why certain externalities exist. There has been a large literature exploring externalities and their relation to transaction costs in the field of public finance. There has been no corresponding literature in the field of competition policy despite the fact that a distortion of competition is an externality. The externality that competition authorities typically study is the one caused by the gap between price and marginal cost that arises from the ...

REVISION: Vertical MFN's and the Credit Card No-Surcharge Rule
Date Posted:Sat, 19 May 2018 10:42:12 -0500
A vertical MFN prohibits a multi-product retailer charging more for a supplier's product than for the products of rival suppliers. In the market for credit card services, this restraint takes the form of a no-surcharge rule: that a retailer not surcharge for transactions with a particular credit card. This paper sets out a general theory of the vertical MFN restraint and then applies the theory to credit cards. In a symmetric, differentiated duopoly, the vertical MFN raises price from the Bertrand equilibrium value to a level greater than the fully collusive value. In a monopoly-competitive fringe model, the restraint can allow the dominant firm to leverage its power to extract surplus from the entire set of consumers. The theory applies directly to the credit card market. Contrary to accepted wisdom and an important legal case, the two-sided nature of the credit card market does not mandate new economic foundations.

REVISION: Vertical MFN's and the Credit Card No-Surcharge Rule
Date Posted:Thu, 08 Jun 2017 01:05:25 -0500
A vertical MFN prohibits a multi-product retailer charging more for a supplier's product than for the products of rival suppliers. In the market for credit card services, this restraint takes the form of a no-surcharge rule: that a retailer not surcharge for transactions with a particular credit card. This paper sets out a general theory of the vertical MFN restraint and then applies the theory to credit cards. In a symmetric, differentiated duopoly, the vertical MFN raises price from the Bertrand equilibrium value to a level greater than the fully collusive value. In a monopoly-competitive fringe model, the restraint can allow the dominant firm to leverage its power to extract surplus from the entire set of consumers. The theory applies directly to the credit card market. Contrary to accepted wisdom and an important legal case, the two-sided nature of the credit card market does not mandate new economic foundations.

REVISION: Are Legacy Airline Mergers Pro- or Anti-Competitive? Evidence from Recent U.S. Airline Mergers
Date Posted:Wed, 07 Jun 2017 13:07:59 -0500
Due to a series of recent mergers, the number of legacy airlines in the United States has decreased from six to three. We conduct a comprehensive investigation of the effect on fares and output of these legacy airline mergers to determine whether the mergers have had an overall pro-competitive or anti-competitive effect on consumers. Our difference-in-differences regression analysis shows that these mergers have been pro-competitive, with no significant adverse effect on nominal fares and with significant increases in passenger traffic as well as capacity. Taken together, the results indicate that the recent legacy mergers were pro-competitive.

REVISION: Are Legacy Airline Mergers Pro- or Anti-Competitive? Evidence from Recent U.S. Airline Mergers
Date Posted:Thu, 27 Oct 2016 08:10:25 -0500
Recent mergers have reduced the number of legacy airlines in the United States from six to three. We examine the effect of these legacy airline mergers on fares and output to determine whether the mergers have had an overall pro-competitive or anti-competitive effect. We focus on routes most likely to have been adversely affected by a reduction in competition. Our difference-in-differences regression analysis shows that those routes experienced no significant adverse effect on fares and significant increases in passenger traffic as well as capacity. These results indicate that the recent legacy mergers were pro-competitive.

REVISION: Are Legacy Airline Mergers Pro- or Anti-Competitive? Evidence from Recent U.S. Airline Mergers
Date Posted:Fri, 21 Oct 2016 03:15:18 -0500
Due to a series of recent mergers, the number of legacy airlines in the United States has decreased from six to three. We conduct a comprehensive investigation of the effect on fares and output of these legacy airline mergers to determine whether the mergers have had an overall pro-competitive or anti-competitive effect on consumers. Our difference-in-differences regression analysis shows that, considered together or individually, these mergers have been pro-competitive, with no significant adverse effect on nominal fares and with significant increases in passenger traffic as well as capacity. Taken together and in sharp contrast to recent contrary claims, the results indicate that the recent legacy mergers were pro-competitive.

REVISION: Are Legacy Airline Mergers Pro- or Anti-Competitive? Evidence from Recent U.S. Airline Mergers
Date Posted:Tue, 18 Oct 2016 05:12:57 -0500
Due to a series of recent mergers, the number of legacy airlines in the United States has decreased from six to three. We conduct a comprehensive investigation of the effect on fares and output of these legacy airline mergers to determine whether the mergers have had an overall pro-competitive or anti-competitive effect on consumers. Our difference-in-differences regression analysis shows that, considered together or individually, these mergers have been pro-competitive, with no significant adverse effect on nominal fares and with significant increases in passenger traffic as well as capacity. Taken together and in sharp contrast to recent contrary claims, the results indicate that the recent legacy mergers were pro-competitive.

New: A Critical Evaluation of the FTC's Theory of Product Hopping as a Way to Promote Competition
Date Posted:Wed, 13 Jul 2016 14:18:42 -0500
This paper evaluates the effect on competition of adopting the FTC’s product hopping theory as an antitrust doctrine. The paper criticizes the theory and explains why it would be a mistake to adopt it as a guide to antitrust liability.

New: Rethinking Antitrust in the Presence of Transaction Costs: Coasian Implications
Date Posted:Sat, 07 Feb 2015 09:45:32 -0600
This article analyzes the implication of transaction costs for antitrust analysis and explains why the usual antitrust analysis can be misleading as a guide to consumer or society welfare because it assumes that pricing is linear and uniform. The article shows how the relevant transaction costs can be altered by conduct subject to antitrust review, such as loyalty discounts or merger, and thereby influence the pricing mechanism used. When conduct alters the pricing mechanism, a correct antitrust analysis must account for the consequences of that pricing on improved efficiency . The paper summarizes the results of merger simulations using nonlinear pricing to further illustrate the potential errors from ignoring the use of nonlinear pricing. Finally, the paper discusses how coalition formation, viewed through the lens of cooperative game theory, can identify those situations that might give rise to the creation of market power. The paper then applies the analysis to several topics ...

New: Competition Policy and Regulation in Credit Card Markets: Insights from Single-Sided Market Analysis
Date Posted:Sun, 30 Nov 2014 22:39:31 -0600
This paper reexamines the economics of two common features of credit card networks: the interchange fee paid by merchant banks, or acquirers, to cardholder banks, or issuers; and the restraint commonly placed on merchants against surcharging for credit card transactions. We show that the parallels with the economics of conventional one-sided markets offer insights that have been overlooked in the credit card economics literature, which stresses the two-sided nature of the market. The characterization of the optimal interchange fee is equivalent to the Dorfman-Steiner theorem from conventional price theory. The principle that the interchange fee maximizes output when an optimum exists and the possibility of interchange fee neutrality also have precise parallels in one-sided markets with promotion. Our analysis shows that the no-surcharge rule is equivalent to a retail MFN constraint. The no-surcharge rule raises prices to merchants due to a competition-suppression effect as well as a ...

New: Identifying Benchmarks for Applying Non-Discrimination in Frand
Date Posted:Sat, 05 Jul 2014 02:19:46 -0500
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:Fri, 26 Apr 2013 05:17:28 -0500
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 ...

New: Net Neutrality and Consumer Welfare
Date Posted:Sat, 23 Oct 2010 22:45:31 -0500
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 ...

New: Revising the Horizontal Merger Guidelines
Date Posted:Sat, 23 Oct 2010 22:21:48 -0500
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, ...

New: Antitrust Treatment of Nonprofits: Should Hospitals Receive Special Care?
Date Posted:Thu, 22 Apr 2010 14:32:24 -0500
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 ...

New: Barriers to Entry
Date Posted:Fri, 01 Jan 2010 16:00:07 -0600
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 ...

New: Tying
Date Posted:Fri, 01 Jan 2010 15:55:35 -0600
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:Sat, 29 Aug 2009 17:00:44 -0500
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 ...

New: A Solution to Airport Delays
Date Posted:Sat, 15 Aug 2009 12:27:46 -0500
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, ...

New: Why We Need to Measure the Effect of Merger Policy and How to Do it
Date Posted:Wed, 18 Feb 2009 23:05:13 -0600
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 ...

New: Should Price Squeeze Be a Recognized Form of Anticompetitive Conduct?
Date Posted:Fri, 13 Feb 2009 01:42:16 -0600
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 ...

New: Product Variety and Demand Uncertainty: Why Markups Vary with Quality
Date Posted:Mon, 15 Dec 2008 01:26:57 -0600
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 ...

New: Assessing the Anticompetitive Effects of Multiproduct Pricing
Date Posted:Thu, 28 Aug 2008 00:24:12 -0500
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 ...

The Strategic Use of Tying to Preserve and Create Market Power in Evolving Industries
Date Posted:Wed, 02 Apr 2008 05:09:17 -0500
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 ...

New: Appropriate Antitrust Policy Towards Single-Firm Conduct
Date Posted:Sun, 23 Mar 2008 16:03:09 -0500
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 ...

New: Safe Harbors for Quantity Discounts and Bundling
Date Posted:Mon, 04 Feb 2008 02:37:35 -0600
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 ...

New: Mergers in Regulated Industries: Electricity
Date Posted:Wed, 19 Dec 2007 06:55:32 -0600
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 ...

New: The Need to Measure the Effect of Merger Policy and How to Do It
Date Posted:Wed, 19 Dec 2007 06:49:59 -0600
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 ...

New: Why Tie a Product Consumers Do Not Use?
Date Posted:Tue, 23 Oct 2007 05:24:06 -0500
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 ...

New: Proposal for a Market-Based Solution to Airport Delays
Date Posted:Mon, 15 Oct 2007 08:42:34 -0500
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:Wed, 08 Aug 2007 01:13:45 -0500
No abstract is available for this paper.

REVISION: Market Definition: Use and Abuse
Date Posted:Tue, 26 Jun 2007 08:14:55 -0500
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 ...

REVISION: Market Definition: Use and Abuse
Date Posted:Fri, 18 May 2007 07:23:44 -0500
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 ...

New: Antitrust and Regulation
Date Posted:Sat, 17 Feb 2007 13:09:29 -0600
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 ...

New: Does Antitrust Need to be Modernized?
Date Posted:Sun, 14 Jan 2007 19:22:24 -0600
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:Fri, 13 Oct 2006 07:42:11 -0500
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 ...

REVISION: Theories of Tying and Implications for Antitrust
Date Posted:Thu, 05 Oct 2006 08:01:26 -0500
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 ...

New: Competition, Monopoly and Aftermarkets
Date Posted:Mon, 12 Jun 2006 20:02:41 -0500
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 ...

Free Riding and Sales Strategies for the Internet
Date Posted:Fri, 06 Jan 2006 14:23:56 -0600
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 ...

Barriers to Entry
Date Posted:Fri, 02 Dec 2005 08:39:58 -0600
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 ...

REVISION: Theories of Tying and Implications for Antitrust
Date Posted:Thu, 13 Oct 2005 09:03:12 -0500
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 ...

Tying, Upgrades, and Switching Costs in Durable-Goods Markets
Date Posted:Wed, 06 Jul 2005 06:50:57 -0500
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 ...

How Economics Can Improve Antitrust Doctrine towards Tie-In Sales: Comment on Tirole's 'An Analysis
Date Posted:Thu, 21 Apr 2005 11:53:50 -0500
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 ...

Using Economics to Improve Antitrust Policy
Date Posted:Mon, 16 Aug 2004 12:58:43 -0500
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:Fri, 16 Jul 2004 02:23:47 -0500
No abstract is available for this paper.

The Rigidity of Prices
Date Posted:Fri, 16 Jul 2004 00:49:04 -0500
No abstract is available for this paper.

The Proper Role for Antitrust in an International Setting
Date Posted:Mon, 28 Jun 2004 15:14:16 -0500
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:Sun, 27 Jun 2004 23:51:13 -0500
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 ...

Planning and Market Structure
Date Posted:Fri, 25 Jun 2004 01:31:02 -0500
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 ...

Modeling Price Rigidity or Predicting the Quality of the Good that Clears the Market
Date Posted:Fri, 18 Jun 2004 02:36:46 -0500
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 ...

The Control of Externalities in Sports Leagues: An Analysis of Restrictions in the National Hockey L...
Date Posted:Tue, 27 Jan 2004 06:56:05 -0600
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 ...

Intellectual Property, Antitrust and Strategic Behavior
Date Posted:Fri, 21 Jun 2002 06:08:57 -0500
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 ...

The Strategic Use of Tying to Preserve and Create Market Power in Evolving Industries
Date Posted:Fri, 03 May 2002 22:23:36 -0500
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 ...

An Empirical Investigation of the Competitive Effects of Domestic Airline Alliances
Date Posted:Fri, 19 Apr 2002 06:22:12 -0500
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 ...

A General Analysis of Exclusionary Conduct and Refusal to Deal - Why Aspen and Kodak are Misguided
Date Posted:Fri, 05 Oct 2001 02:42:48 -0500
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, ...

Competition, Monopoly, and Aftermarkets
Date Posted:Sun, 24 Jun 2001 14:16:25 -0500
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 ...

The Choice of Organizational Form in Gasoline Retailing and The Costs of Laws Limiting that Choice
Date Posted:Mon, 09 Apr 2001 15:24:50 -0500
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 ...

The Economics of Religion, Jewish Survival and Jewish Attitudes Toward Competition in Torah Educatio...
Date Posted:Sat, 24 Feb 2001 07:23:36 -0600
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 ...

Antitrust and Higher Education: Was There a Conspiracy to Restrict Financial Aid?
Date Posted:Thu, 13 Jul 2000 10:22:53 -0500
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 ...

A Critical Assessment of the Role of Imperfect Competition in Macroeconomics
Date Posted:Tue, 09 May 2000 11:59:08 -0500
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 ...