Lectures on Antitrust Economics, Chapter 1: Introduction

Antitrust laws play a prominent role in the business environment of many nations. Indeed, if one is a regular reader of the New York Times or Wall Street Journal, the chances are good of seeing in any given week at least one, and often several, articles devoted to some aspect of antitrust policy, whether about a recently announced merger of two large oil companies, a case alleging that an important software company has violated the antitrust laws by suppressing competition, or the revelation that a group of international firms producing an important feed additive have conspired to fix prices. The same can increasingly be said of newspapers in many capitals around the world. These lectures are intended to serve as an introduction to the economics behind antitrust policies. The lectures do not strive to be comprehensive in their coverage. Rather, I focus selectively on some of the most recent developments in antitrust economics, and on some areas in which I believe there are important open issues requiring further research. As a result, I do not discuss several significant areas of antitrust economics, including - for example - predatory pricing and restrictions on intrabrand competition such as resale price maintenance. In the frst part of the lectures I discuss two topics - price-fixing and horizontal mergers - that involve horizontal collaboration among firms; that is, collaboration among firms at the same stage of the production/distribution chain. In the second part I turn my attention to three potentially exclusionary practices - exclusive dealing, tying, and vertical integration - that involve contracts between entities located at different levels of the production/distribution chain; so-called vertical practices

Exclusive Dealing

In this paper, we provide a conceptual framework for understanding the phenomenon of exclusive dealing, and we explore the motivations for and effects of its use. For a broad class of models, we characterize the outcome of a contracting game in which manufacturers may employ exclusive dealing provisions in their contracts. We then apply this characterization to a sequence of specialized settings. We demonstrate that exclusionary contractual provisions may be irrelevant, anticompetitive, or efficiency-enhancing, depending upon the setting. More specifically, we exhibit the potential for anticompetitive effects in non-coincident markets (that is, markets other than the ones in which exclusive dealing is practiced), and we explore the potential for the enhancement of efficiency in a setting where common representation gives rise to incentive conflicts. In each instance, we describe the manner in which equilibrium outcomes would be altered by a ban on exclusive dealing. We demonstrate that a ban may have surprisingly subtle and unintended effects.

Entry, Contestability, and Deregulated Airline Markets: An Event Study Analysis of People Express

A number of recent papers have studied the relationship between price and market structure in the deregulated airline industry through a cross-sectional analysis of city-pair markets. Yet, while interesting, several potential difficulties underlie the inferences drawn in these analyses. In this paper, we consider an alternative approach that uses stock price reactions to entry announcements to shed light on the nature of competitive behavior in this industry. The analysis sheds light on three issues. First, it offers a clean test of contestable market theory. Second, it provides evidence on the level of profits or sunk costs present in these markets. Third, it sheds light on the degree of competitive "localization" existing in the industry. The particular entry events that we focus on are those involving People Express Airline in 1984 and 1985. To provide a more complete picture of the effects of these entry events, we also examine the price and quantity changes that occurred following entry.

A simple status quo that ensures participation (with application to efficient bargaining)

We consider Bayesian incentive-compatible mechanisms with independent types and either private values or interdependent values that satisfy a form of "congruence." We show that in these settings, interim participation constraints are satisfied when the status quo is the randomized allocation that has the same distribution as the equilibrium allocation in the mechanism. Moreover, when utilities are convex in the allocation, we can instead satisfy participation constraints with the deterministic status quo equal to the expected equilibrium allocation in the mechanism. For quasilinear settings, these observations imply the possibility of efficient bargaining when the status quo specifies the expected efficient decision provided that the total surplus is convex in the decision.Efficient property rights, asymmetric information bargaining, transaction costs

Internal versus external growth in industries with scale economies: A computational model of optimal merger policy

We study optimal merger policy in a dynamic model in which the presence of scale economies implies that firms can reduce costs through either internal investment in build- ing capital or through mergers. The model, which we solve computationally, allows firms to invest or propose mergers according to the relative profitability of these strategies. An antitrust authority is able to block mergers at some cost. We examine the optimal policy when the antitrust authority can commit to a policy rule and when it cannot commit, and consider both consumer value and aggregate value as possible objectives of the antitrust authority. We find that optimal policy can differ substantially from what would be best considering only welfare in the period the merger is proposed. We also find that the abil- ity to commit can lead to a significant welfare improvement. In general, antitrust policy can greatly affect firms` optimal investment behavior, and firms` investment behavior can in turn greatly affect the antitrust authority`s optimal policy

Dynamic Merger Review

We analyze the optimal dynamic policy of an antitrust authority towards horizontal mergers when merger proposals are endogenous and occur over time. Approving a currently proposed merger will affect the profitability and welfare effects of potential future mergers, the characteristics of which may not yet be known to the antitrust authority. We show that, in many cases, this apparently difficult problem has a simple resolution: an antitrust authority can maximize discounted consumer surplus by using a completely myopic merger review policy that approves a merger today if and only if it does not lower consumer surplus given the current market structure.

Lectures on Antitrust Economics, Chapter 3: Horizontal Mergers

In this chapter our attention turns to horizontal merger policy. The Sherman Act's prohibition on "contracts, combinations, and conspiracies in restraint of trade," whose application to price fixing we discussed in Chapter 2, also applies to horizontal mergers, but with an important difference: horizontal mergers are evaluated by the courts under a Rule of Reason analysis based on the presumption that they often have important efficiency benefits. In addition, the Clayton Act's Section 7 includes a more specific prohibition on mergers where the effect may be "substantially to lesson competition, or to tend to create a monopoly." Despite the potential for efficiencies arising from horizontal mergers, from the 1950's through the 1970's the U.S. courts were extremely hostile toward them, often condemning horizontal mergers in markets that were and would remain very unconcentrated. Since 1980, however, with a more conservative judiciary and an increasing influence of economic reasoning, horizontal merger policy has become much more permissive. During this same period, there has also been substantial progress in economists' ability to analyze proposed horizontal mergers. In what follows we will review this progress, while also noting some of the significant open questions that remain