2024-03-29T13:00:29Zhttps://escholarship.org/oaioai:escholarship.org:ark:/13030/qt9mv167r82012-01-23T20:29:03Zqt9mv167r8Integration and Independent Innovation on a NetworkFarrell, Joseph2012-01-23Physical telecom networks are costly and few, traditionally to the point of monopoly. Innovation thrives with many independent minds. So one might hope independent innovators, not only its proprietor M, can offer innovative services on a network, as has been true on the Internet. This issue is central in telecom policy; it also arises elsewhere, including complaints about Microsoft. I try to expound the following key points. Often an unregulated M has ex ante incentives to organize service innovation efficiently. But this incentive breaks down ex post as M can extract an independent J’s quasi-rents (Farrell and Michael Katz 2000). Even ex ante, the "one monopoly rent theorem" (Ward Bowman 1957) fails when M’s bottleneck access business is more regulated than its competitive services (e.g., Jean-Jacques Laffont and Jean Tirole 2000). This tempts M to sabotage J’s innovations. "Quarantining" M from the service sector solves these problems, but excludes the firm with (often) the best opportunities and the strongest incentives to innovate. "Parity pricing" or ECPR (Robert Willig 1979) purports to get the best of both worlds (BoBW). But it seems so hard to implement in innovation markets that one might construe ECPR analysis as reductio ad absurdum for BoBW.telecom networksinnovationcompetitionaccess pricingapplication/pdfpubliceScholarship, University of Californiahttps://escholarship.org/uc/item/9mv167r8articleoai:escholarship.org:ark:/13030/qt6kv798tf2012-01-23T20:28:43Zqt6kv798tfDeal or No Deal? Licensing Negotiations in Standard-Setting OrganizationsGilbert, Richard J.2011-12-01Technical standards benefit consumers and producers by facilitating productadoption, promoting compatible solutions, and helping to create anecosystem of products and services in which competition can thrive. However,standards also may create opportunities for the exercise of market power. Owners of patents with claims that are essential to a standard may “hold up” firms or consumers that are “locked-in” to a standard by charging high royalties for the use of products that comply with the standard. This licensor (or seller) market power3 arises “ex post,” i.e., after firms and consumers have made investments that are specific to the standard.application/pdfpubliceScholarship, University of Californiahttps://escholarship.org/uc/item/6kv798tfarticleoai:escholarship.org:ark:/13030/qt75g4k1nt2011-07-04T03:48:03Zqt75g4k1ntHigher Prices from Entry: Pricing of Brand-Name DrugsPerloff, Jeffrey M.Suslow, Valerie Y.Seguin, Paul J.1995-08-01When a new firm enters a market and starts selling a spatially-differentiated product, the prices of existing products may rise due to a better match between consumers and products. Entry may have three unusual effects. First, the new price is above the monopoly price if the two firms collude and may be above the monopoly price even if the firms play Bertrand. Second, the Bertrand and collusive price may be identical. Third, prices, combined profits, and consumer surplus may all rise with entry. Consistent with our theory, the real prices of some anti-ulcer drugs rose as new products entered the market.Bertrandmonopoly priceproduct marketingapplication/pdfpubliceScholarship, University of Californiahttps://escholarship.org/uc/item/75g4k1ntarticleoai:escholarship.org:ark:/13030/qt0643v2vp2011-07-04T03:47:58Zqt0643v2vpModularity, Vertical Integration, and Open Access Policies: Towards a Convergence of Antitrust and Regulation in the Age of the InternetFarrell, JosephWeiser, Philip2002-11-15This article aims to help regulators and commentators incorporate both Chicago School and post-Chicago School arguments in assessing whether regulation should mandate open access to information platforms. The authors outline three alternative models that the FCC could adopt to guide its regulation of information platforms in the future and facilitate a true convergence between antitrust and regulatory policy.Science and Technology PolicyTechnology and Innovationvertical integrationleverageICEone monopoly profitantitrusttelecommunicationsapplication/pdfpubliceScholarship, University of Californiahttps://escholarship.org/uc/item/0643v2vparticleoai:escholarship.org:ark:/13030/qt5gx9n3tf2011-07-04T02:31:12Zqt5gx9n3tfFreedom to Trade and the Competitive ProcessEdlin, AaronJennings, RichardFarrell, Joseph2011-02-01Although antitrust courts sometimes stress the competitive process, they have not deeply explored what that process is. Inspired by the theory of the core, we explore the idea that the competitive process is the process of sellers and buyers forming improving coalitions. Much of antitrust can be seen as prohibiting firms’ attempts to restrain improving trade between their rivals and customers. In this way, antitrust protects firms’ and customers’ freedom to trade to their mutual betterment.Other BusinessAntitrustIndustrial OrganizationCompetition PolicyLaw and EconomicsTrade RegulationTrade RestraintsMonopoly JEL Class: D24K2L245M2.application/pdfpubliceScholarship, University of Californiahttps://escholarship.org/uc/item/5gx9n3tfarticleoai:escholarship.org:ark:/13030/qt1qx4q0z62011-07-03T21:22:45Zqt1qx4q0z6Revising the Horizontal Merger Guidelines: Lessons from the U.S. and the E.U.Gilbert, Richard JRubinfeld, Daniel L.2010-02-01Recently, the U.S. Department of Justice and Federal Trade Commission have embarked on an effort to revise and update the U.S. Horizontal Merger Guidelines. There is substantial overlap between the U.S. and E.U. Guidelines, which makes a proposal for U.S. revisions immediately applicable to the E.U. and elsewhere. The U.S. Merger Guidelines can be revised in light of the learning of economists and lawyers in the past two decades to emphasize the importance of competitive effects analysis in merger evaluation and the forces that drive innovation. The Guidelines should also note that once a competitive effects analysis has been completed, it is possible to “back out” a relevant market (or markets) that is consistent with that competitive effects analysis.mergersantitrustmarket competitionapplication/pdfpubliceScholarship, University of Californiahttps://escholarship.org/uc/item/1qx4q0z6articleoai:escholarship.org:ark:/13030/qt86h8863t2011-07-03T21:22:40Zqt86h8863tThe Rising Tide of Patent DamagesGilbert, Richard J2010-02-01Very large awards and settlements for patent infringement have increased dramatically since the 1980s. A large fraction of these awards have occurred in the computer hardware and software industries. Complex technologies such as computer hardware and software require rights to a very large number of patents. One explanation for the large awards for patent infringement is the bargaining power of a patentee that has a credible injunction threat for a product that requires rights to multiple patents. This can lead to infringement damage awards and settlements that overestimate the patent’s contribution to product value.Other BusinessOther EconomicsTechnology and Innovationpatentsinfringementdamagesinnovationapplication/pdfpubliceScholarship, University of Californiahttps://escholarship.org/uc/item/86h8863tarticleoai:escholarship.org:ark:/13030/qt3h7363s32011-07-03T21:22:35Zqt3h7363s3A World Without Intellectual Property? Boldrin and Levine, Against Intellectual MonopolyGilbert, Richard2010-02-01In their recent book, Against Intellectual Monopoly, Michele Boldrin and David Levine conclude that patents and copyrights are not necessary to provide protection for either innovation or creative expression and should be eliminated. The authors note the many flaws of the U.S. system of intellectual property protection and argue that other means are available to appropriate the benefits of invention and creative expression. However, the authors overlook important functions of intellectual property. Their efforts would be put to better use by more carefully analyzing policy proposals that may improve our system of intellectual property rights and have some potential to be implemented.Other EconomicsOther Legal StudiesTechnology and Innovationintellectual propertypatentcopyrightapplication/pdfpubliceScholarship, University of Californiahttps://escholarship.org/uc/item/3h7363s3articleoai:escholarship.org:ark:/13030/qt3470h6352011-07-03T20:36:09Zqt3470h635Risk-Taking and Gender in HierarchiesScotchmer, Suzanne2008-09-01In a labor market hierarchy, promotions are affected by the noisiness of information about the candidates. I study the hypothesis that males are more risk taking than females, and its implications for rates of promotion and abilities of survivors. I define promotion hierarchies with and without memory, where memory means that promotion depends on the entire history of success. In both types of hierarchies, the surviving risk takers have lower average ability whenever they have a higher survival rate. Further, even if more risk takers than non risk takers are promoted in the beginning of the hierarchy, that will be reversed over time. The risk takers will eventually have a lower survival rate, but higher ability. As a consequence of these differences, the various requirements of employment law cannot simultaneously be satisfied. Further, if promotion standards are chosen to maximize profit, the standards will reflect gender in ways that are difficult to distinguish from discriminatory intent.Labor market hierarchypromotiondiscriminationaffirmative actionhierarchyrisk takinggender bias.application/pdfpubliceScholarship, University of Californiahttps://escholarship.org/uc/item/3470h635articleoai:escholarship.org:ark:/13030/qt2p5543p02011-07-03T20:36:04Zqt2p5543p0Scarcity of Ideas and R&D Options: Use it, Lose it, or Bank itScotchmer, Suzanne2009-04-15We investigate optimal rewards in an R&D model where substitute ideas for innovation arrive to random recipients at random times. By foregoing investment in a current idea, society as a whole preserves an option to invest in a better idea for the same market niche, but with delay. Because successive ideas may occur to different people, there is a conflict between private and social optimality. We investigate the optimal policy when the social planner learns over time about the arrival rate of ideas, and when private recipients of ideas can bank their ideas for future use. We argue that private incentives to create socially valuable options can be achieved by giving higher rewards where "ideas are scarce."Technology and InnovationScarce ideasimaginationinnovationreal optionssearch modelsrewards to R unknown hazard rateapplication/pdfpubliceScholarship, University of Californiahttps://escholarship.org/uc/item/2p5543p0articleoai:escholarship.org:ark:/13030/qt4d9052w72011-07-03T20:35:59Zqt4d9052w7Openness, Open Source, and the Veil of IgnoranceScotchmer, Suzanne2010-01-01The open source movement evolved in the one industrial context where openness is not required by intellectual property law.1 Nevertheless, openness itself cannot be the driving force behind the open source movement. This is because openness can be achieved in many ways other than the GPL, for example, with proprietary licenses, or licenses that are even more permissive than the GPL, such as the BSD license.Early commentators explained this new development model by focussing on the motives of the programmer, such as to demonstrate skills. See the survey by Stephen M. Maurer and Suzanne Scotchmer (2006). But firms also participate in open-source collaborations, sometimes contributing significant resources (Joachim Henkel, 2006, Dirk Riehle, 2009). Doing so can be profitable even if the contributors are rivals in the market. The quality improvements or cost reductions provided by a rival’s open-source contributions may outweigh the deleterious effect of empowering the rival to be a better competitor.Technology and Innovationopen sourcesoftware developmentgeneral public licenseapplication/pdfpubliceScholarship, University of Californiahttps://escholarship.org/uc/item/4d9052w7articleoai:escholarship.org:ark:/13030/qt1761z7w22011-07-03T20:15:20Zqt1761z7w2Ties that Bind: Policies to Promote (Good) Patent PoolsGilbert, Richard J2009-11-01Hundreds of patents cover products in many high technology fields such as semiconductors, information technology, and biotechnology. Firms that make, sell, or use products in these fields often have to negotiate patent rights with many intellectual property owners. The time and effort required to assemble these rights can interfere with the adoption and diffusion of new technologies and the cumulative payments to rights holders for use of their intellectual property can weigh heavily on technology costs.patentstechnologypatent rightsintellectual propertypatent thicketapplication/pdfpubliceScholarship, University of Californiahttps://escholarship.org/uc/item/1761z7w2articleoai:escholarship.org:ark:/13030/qt5dt9h0p32011-07-03T18:49:55Zqt5dt9h0p3Dollars for Genes: Revenue Generation by the California Institute for Regenerative MedicineGilbert, Richard J2006-06-01application/pdfpubliceScholarship, University of Californiahttps://escholarship.org/uc/item/5dt9h0p3articleoai:escholarship.org:ark:/13030/qt1tw2d4262011-07-03T18:49:49Zqt1tw2d426The Economics of Welfare Standards in AntitrustFarrell, JosephKatz, Michael L2006-07-20There has been considerable debate concerning whether consumer surplus or total surplus should be the welfare standard for antitrust. This debate misses two critical issues. First, antitrust is not straightforwardly welfarist—it does not maximize but protects, and it does not forbid all actions that seem likely to lower some welfare measure. Rather, antitrust enforcement has both process and consequence components: “anticompetitive” actions that harm consumers are illegal but other actions that harm consumers are not. Second, the enforcement process involves multiple steps and multiple decision makers. Mergers, for instance, are proposed by the merging parties, reviewed and perhaps challenged by antitrust agencies, and reviewed by courts. Hence, a full discussion of what standard is or should be applied must specify by whom and how it fits in the overall process. We conclude that, while some popular arguments for a consumer surplus standard are weak, other arguments have some merit.antitrustmerger policyconsumer surpluswelfare analysisantitrust standardsapplication/pdfpubliceScholarship, University of Californiahttps://escholarship.org/uc/item/1tw2d426articleoai:escholarship.org:ark:/13030/qt4010c6w92011-07-03T18:49:45Zqt4010c6w9Contracting for Information under Imperfect CommitmentKrishna, VijayMorgan, John2004-11-01Organizational theory suggests that authority should lie in the hands of those with information, yet the power to transfer authority is rarely absolute in practice. We investigate the validity and application of this advice in a model of optimal contracting between an uninformed principal and informed agent where the principal's commitment power is imperfect. We show that while full alignment of interests combined with delegation of authority is feasible, it is never optimal. The optimal contract is "bang-bang"---in one region of the state space, full alignment takes place, in the other, no alignment takes place. We then compare these contracts to those in which the principal has full commitment power as well as to several "informal" institutional arrangements.Imperfect commitmentoptimal contractingdelegationapplication/pdfpubliceScholarship, University of Californiahttps://escholarship.org/uc/item/4010c6w9articleoai:escholarship.org:ark:/13030/qt9760k3hz2011-07-03T18:49:39Zqt9760k3hzBrand and Price Advertising in Online MarketsBaye, MichaelMorgan, John2004-10-01We model a homogeneous product environment where identical e-retailers endogenously engage in both brand advertising (to create loyal customers) and price advertising (to attract "shoppers"). Our analysis allows for "cross-channel" effects; indeed, we show that price advertising is a substitute for brand advertising. In contrast to models where loyalty is exogenous, these cross-channel effects lead to a continuum of symmetric equilibria; however, the set of equilibria converges to a unique equilibrium as the number of potential e-retailers grows arbitrarily large. Price dispersion is a key feature of all of these equilibria, including the limit equilibrium. While each firm finds it optimal to advertise its brand in an attempt to "grow" its base of loyal customers, in equilibrium, branding (1) reduces firm profits, (2) increases prices paid by loyals and shoppers, and (3) adversely affects gatekeepers operating price comparison sites. Branding also tightens the range of prices and reduces the value of the price information provided by a comparison site. Using data from a price comparison site, we test several predictions of the model.Price dispersionapplication/pdfpubliceScholarship, University of Californiahttps://escholarship.org/uc/item/9760k3hzarticleoai:escholarship.org:ark:/13030/qt4h02v1jp2011-07-03T17:19:29Zqt4h02v1jpDo Investors Forecast Fat Firms? Evidence from the Gold Mining IndustryBorenstein, SeverinFarrell, Joseph2006-01-31JEL CODES: D21, G3, L2, L72KEYWORDS: profit function, free cash flow, gold mining, x-efficiency, rent seeking, fatABSTRACT: Conventional economic theory assumes that firms always minimize costs given the output they produce. News articles and interviews with executives, however, indicate that firms from time to time engage in cost-cutting exercises. One popular belief is that firms cut costs when they are in economic distress, and grow fat when they are relatively wealthy. We explore this hypothesis by studying how the stock market valuations of gold mining companies vary with gold prices. The value of a cost-minimizing, profit-maximizing firm is convex in the price of a competitively supplied input or output, but we find that the stock values of many gold mining companies are concave in the price of gold. We show that this is consistent with fat accumulation when a firm grows wealthy. We then address a number of potential alternative explanations and discuss where fat in these companies might reside.profit functionfree cash flowgold miningx-efficiencyrent seekingfatapplication/pdfpubliceScholarship, University of Californiahttps://escholarship.org/uc/item/4h02v1jparticleoai:escholarship.org:ark:/13030/qt5ps3f7p92011-07-03T17:19:25Zqt5ps3f7p9Modularity, Vertical Integration, and Open Access Policies: Towards a Convergence of Antitrust and Regulation in the Internet AgeFarrell, JosephWeiser, Philip J.2003-09-24This article aims to help regulators and commentators incorporate both Chicago School and post-Chicago School arguments in assessing whether regulation should mandate open access to information platforms. The authors outline three alternative models that the FCC could adopt to guide its regulation of information platforms in the future and facilitate a true convergence between antitrust and regulatory policy.vertical integrationleverageICEone monopoly profitantitrusttelecommunicationsapplication/pdfpubliceScholarship, University of Californiahttps://escholarship.org/uc/item/5ps3f7p9articleoai:escholarship.org:ark:/13030/qt8767t00s2011-07-03T16:47:59Zqt8767t00sCompetition Policy for Intellectual Property: Balancing Competition and RewardGilbert, RichardWeinschel, Alan J.2007-09-01This chapter reviews the history of antitrust enforcement for intellectual property and identifies reasons why appropriate antitrust enforcement for intellectual property may differ from antitrust enforcement for ordinary property. The complex interplay between the scope of patent protection and incentives for innovation in different industries make it difficult to craft antitrust rules that take these differences into account. Instead, antitrust policy generally should recognize that innovators need to be compensated for their innovative efforts, and that this sometimes requires practices that may exclude potential competitors. At the same time, one must be careful not to lean too heavily on practices that focus on rewards to innovation, because these practices incur costs in the short run by limiting the use of innovations and possibly in the long run by raising the costs for future innovators who use protected innovations as inputs into their own innovative efforts.anti trust enforcementintellectual propertypatent protectioninnovationcompetition policyapplication/pdfpubliceScholarship, University of Californiahttps://escholarship.org/uc/item/8767t00sarticleoai:escholarship.org:ark:/13030/qt1qm754rc2011-07-03T16:47:54Zqt1qm754rcPatent Reform: Aligning Reward and ContributionShapiro, Carl2007-03-26Economists and policy makers have long recognized that innovators must be able to appropriate a reasonable portion of the social benefits of their innovations if innovation is to be suitably rewarded and encouraged. However, this paper identifies a number of specific fact patterns under which the current U.S. patent system allows patent holders to capture private rewards that exceed their social contributions. Such excessive patentee rewards are socially costly, since they raise the deadweight loss associated with the patent system and discourage innovation by others. Economic efficiency is promoted if rewards to patent holders are aligned with and do not exceed their social contributions. This paper analyzes two major reforms to the patent system designed to spur innovation by better aligning the rewards and contributions of patent holders: establishing an independent invention defense in patent infringement cases, and strengthening the procedures by which patents are re-examined after they are issued. Three additional reforms relating to patent litigation are also studied: limiting the use of injunctions, clarifying the way in which “reasonable royalties” are calculated, and narrowing the definition of “willful infringement.”innovationappropriationpatent licensingpatent reformapplication/pdfpubliceScholarship, University of Californiahttps://escholarship.org/uc/item/1qm754rcarticleoai:escholarship.org:ark:/13030/qt59x0t6tv2011-07-03T16:47:50Zqt59x0t6tvShould Good Patents Come in Small Packages? A Welfare Analysis of Intellectual Property BundlingGilbert, Richard JKatz, Michael L2007-01-27Intellectual property owners often hold the rights to several patents, each of which is essential to make or use a product. We compare the welfare properties of package licenses, under which a licensee pays the same fee regardless of the number of technologies licensed, with component licenses, under which each technology is licensed separately and there is no quantity discount. A central finding is that a long-term package license can induce incentives to invent around patents and invest in complementary assets that are closer to their socially optimal levels than are those induced by a long-term component license. We also identify settings in which a short-term license is a partial substitute for a package license and a prohibition on package licensing induces parties to adopt contracts that result in less efficient complementary investment because of hold-up.Intellectual propertyLicensingAsymmetric informationResearch and developmentapplication/pdfpubliceScholarship, University of Californiahttps://escholarship.org/uc/item/59x0t6tvarticleoai:escholarship.org:ark:/13030/qt8638s2572011-07-03T16:47:36Zqt8638s257Patent Hold-Up and Royalty StackingLemley, Mark AShapiro, Carl2007-01-10We study several interconnected problems that arise under the current U.S. patent system when a patent covers one component or feature of a complex product. This situation is common in the information technology sector of the economy. Our analysis applies to cases involving reasonable royalties, but not lost profits. First, we show using bargaining theory that the threat to obtain a permanent injunction greatly enhances the patent holder’s negotiating power, leading to royalty rates that exceed a natural benchmark range based on the value of the patented technology and the strength of the patent. Such royalty overcharges are especially great for weak patents covering a minor feature of a product with a sizeable price/cost margin, including products sold by firms that themselves have made substantial R&D investments. These royalty overcharges do not disappear even if the allegedly infringing firm is fully aware of the patent when it initially designs its product. However, the hold-up problems caused by the threat of injunctions are reduced if courts regularly grant stays to permanent injunctions to give defendants time to redesign their products to avoid infringement when this is possible. Second, we show how hold-up problems are magnified in the presence of royalty stacking, i.e., when multiple patents read on a single product. Third, using third-generation cellular telephones and Wi-Fi as leading examples, we illustrate that royalty stacking can become a very serious problem, especially in the standard-setting context where hundreds or even thousands of patents can read on a single product standard. Fourth, we discuss the use of “reasonable royalties” to award damages in patent infringement cases. We report empirical results regarding the measurement of “reasonable royalties” by the courts and identify various practical problems that tend to lead courts to over-estimate “reasonable royalties” in the presence of royalty stacking. Finally, we make suggestions for patent reform based on our theoretical and empirical findings.patentsintellectual propertystandard settingopportunismhold-upinjunctionsroyalty stackingreasonable royaltiesapplication/pdfpubliceScholarship, University of Californiahttps://escholarship.org/uc/item/8638s257articleoai:escholarship.org:ark:/13030/qt3v04b2rx2011-07-03T16:47:30Zqt3v04b2rxProduct Improvement and Technological Tying in a Winner-Take-All MarketGilbert, Richard JRiordan, Michael H2005-11-01In a winner-take-all duopoly market for systems in which firms invest to improve their products, a vertically integrated monopoly supplier of an essential system component may have an incentive to advantage itself by technological tying; that is, by designing the component to work better in its own system. If the vertically integrated firm is prevented from technologically tying, then there is an equilibrium in which the more efficient firm invests and serves the entire market. However, another equilibrium may exist in which the less efficient firm invests and captures the market. Technological tying enables a vertically integrated firm to foreclose its rival. The welfare implications of technological tying are ambiguous and depend on the asymmetric qualities of the system suppliers and on equilibrium selection.systems competitionforeclosureinnovationapplication/pdfpubliceScholarship, University of Californiahttps://escholarship.org/uc/item/3v04b2rxarticleoai:escholarship.org:ark:/13030/qt9vf0k91t2011-07-03T16:47:26Zqt9vf0k91tCustomer or Complementor? Intercarrier Compensation with Two-Sided BenefitsHermalin, Benjamin EKatz, Michael L2006-07-31Both senders and receivers of telecommunications messages derive benefits, creating the possibility of externalities. We explore whether intercarrier compensation (i.e., access charges) can induce carriers to internalize these external effects. In important settings, access charges are irrelevant. Where they are relevant, access charges can induce an efficient ratio of off-net send and receive prices--taking their sum as given--but cannot induce the correct sum. The latter requires a mechanism for cross-carrier internalization, such as repeat play or pricing policies contingent on one another. Lastly, non-zero access charges can be efficient even in highly symmetrical situations.Access chargeintercarrier compensationinterconnectiontwo-sided marketsapplication/pdfpubliceScholarship, University of Californiahttps://escholarship.org/uc/item/9vf0k91tarticleoai:escholarship.org:ark:/13030/qt81r3b7xs2011-07-03T16:47:21Zqt81r3b7xsThe Economics of Product-Line Restrictions With an Application to the Network Neutrality DebateHermalin, Benjamin EKatz, Michael L2006-07-28We examine the welfare effects of product-line restrictions, such as those called for by some proponents of network neutrality regulation. We find that restricting a monopoly supplier to a single product has the following effects: (a) consumers who would otherwise have consumed a low-quality variant are excluded from the market; (b) consumers "in the middle" of the market consume a higher and more efficient quality; and (c) consumers at the top of the market consume a lower and less efficient quality. Total surplus may rise or fall. We also examine a duopoly model and find that imposition of a single-product restriction always reduces welfare. Absent the restriction, the two firms engage in head-to-head competition across full product lines. In some circumstances, the restriction induces the two firms to offer identical products. The resulting loss of variety reduces welfare. In other circumstances, the restriction induces the firms to offer non-overlapping, or vertically differentiated, products. Here, the resulting loss of competition harms both consumers and economic efficiency. Lastly, we find that, to the extent that the regulation is intended to eliminate low-quality products, it may fail. Even though any one firm can offer only a single product, various firms can collectively offer a menu of products.product lineproduct varietyregulationnetwork neutralityapplication/pdfpubliceScholarship, University of Californiahttps://escholarship.org/uc/item/81r3b7xsarticleoai:escholarship.org:ark:/13030/qt9n26k7v12011-07-03T16:47:16Zqt9n26k7v1Coordination and Lock-In: Competition with Switching Costs and Network EffectsFarrell, JosephKlemperer, Paul2006-05-01Switching costs and network effects bind customers to vendors if products are incompatible, locking customers or even markets in to early choices. Lock-in hinders customers from changing suppliers in response to (predictable or unpredictable) changes in efficiency, and gives vendors lucrative ex post market power—over the same buyer in the case of switching costs (or brand loyalty), or over others with network effects.Firms compete ex ante for this ex post power, using penetration pricing, introductory offers, and price wars. Such “competition for the market" or “life-cycle competition" can adequately replace ordinary compatible competition, and can even be fiercer than compatible competition by weakening differentiation. More often, however, incompatible competition not only involves direct efficiency losses but also softens competition and magnifies incumbency advantages. With network effects, established firms have little incentive to offer better deals when buyers’ and complementors’ expectations hinge on non-efficiency factors (especially history such as past market shares), and although competition between incompatible networks is initially unstable and sensitive to competitive offers and random events, it later “tips" to monopoly, after which entry is hard, often even too hard given incompatibility. And while switching costs can encourage small-scale entry, they discourage sellers from raiding one another’s existing customers, and so also discourage more aggressive entry.Because of these competitive effects, even inefficient incompatible competition is often more profitable than compatible competition, especially for dominant firms with installed-base or expectational advantages. Thus firms probably seek incompatibility too often. We therefore favor thoughtfully pro-compatibility public policy.switching costsnetwork effectslock-innetwork externalitiesco-ordinationindirect network effectsmarket structurefirm strategy and market performanceoligopoly and other imperfect marketsmonopolistic competitioncontestable marketsinformation and product qualitystandardization and compatibilitymonopolytransactional relationshipscontracts and reputationnetworksmarket structure and pricingoligopoly and other forms of market imperfectionmarket structure and pricingapplication/pdfpubliceScholarship, University of Californiahttps://escholarship.org/uc/item/9n26k7v1articleoai:escholarship.org:ark:/13030/qt7dj5k2qq2011-07-03T16:47:11Zqt7dj5k2qqU.S. Domestic Airline Pricing, 1995-2004Borenstein, Severin2005-01-05Between 1995 and 2004, I find that airline prices fell more than 20% adjusted for inflation. I also show that premia at hub airports declined and that there is now substantially less disparity between the cheaper and more expensive airports than there was a decade ago. Still, I find that prices remain quite high at a few dominated airports.Airline CompetitionAirline HubsPrice Indicesapplication/pdfpubliceScholarship, University of Californiahttps://escholarship.org/uc/item/7dj5k2qqarticleoai:escholarship.org:ark:/13030/qt6f6593512011-07-03T16:47:06Zqt6f659351Profit Neutrality in Licensing: The Boundary Between Antitrust Law and Patent LawMaurer, Stephen M.Scotchmer, Suzanne2004-02-08From the antitrust case law that governs restrictions on patent licenses, we derive three unifying principles: just reward, profit neutrality and minimalism. The just-reward principle holds that the patentholder's profits should be earned, if at all, from the social value created by his invention. Profit neutrality holds that patent rewards should not depend on the rightholder's ability to work the patent himself. Minimalism holds that licensing contracts should not use more restrictive terms than required for neutrality. We discuss how these principles determine which patent license restrictions should and should not be acceptable from an antitrust perspective. We also compare these principles and the per se rules that follow from them to the potential benefits and drawbacks likely to be encountered under a rule of reason approach.antitrustpatentsprice fixinglicensingapplication/pdfpubliceScholarship, University of Californiahttps://escholarship.org/uc/item/6f659351articleoai:escholarship.org:ark:/13030/qt9pv2d9fn2011-07-03T16:47:01Zqt9pv2d9fnAsymmetric Price Adjustment and Consumer Search: An Examination of the Retail Gasoline MarketLewis, Matt2004-09-01It has been documented that retail gasoline prices respond more quickly to increases in wholesale price than to decreases. However, there is very little theoretical or empirical evidence identifying the market characteristics responsible for this behavior. This paper presents a new theoretical model of asymmetric adjustment that empirically matches observed retail gasoline price behavior better than previously suggested explanations. I develop a “reference price” consumer search model that assumes consumers’ expectations of prices are based on prices observed during previous purchases. The model predicts that consumers search less when prices are falling. This reduced search results in higher profit margins and a slower price response to cost changes than when margins are low and prices are increasing. Following the predictions of the theory, I use a panel of gas station prices to estimate the response pattern of prices to a change in costs. Unlike previous empirical studies I focus on how profit margins (in addition to the direction of the cost change) affect the speed of price response. Estimates are consistent with the predictions of the reference price search model, and appear to contradict previously suggested explanations of asymmetric adjustment.AsymmetricConsumer SearchGasolinePriceAsymmetric AdjustmentCointegrationError CorrectionDynamicResponseapplication/pdfpubliceScholarship, University of Californiahttps://escholarship.org/uc/item/9pv2d9fnarticleoai:escholarship.org:ark:/13030/qt9xf1488p2011-07-03T16:46:57Zqt9xf1488pProbabilistic PatentsLemley, Mark A.Shapiro, Carl2004-07-14Economists often assume that a patent gives its owner a well-defined legal right to exclude others from practicing the invention described in the patent. In practice, however, the rights afforded to patent holders are highly uncertain. Under patent law, a patent is no guarantee of exclusion but more precisely a legal right to try to exclude. Since only 0.1% of all patents are litigated to trial, and since nearly half of fully litigated patents are declared invalid, this distinction is critical to understanding the economic impact of patents. The growing recognition among economists and legal scholars that patents are probabilistic property rights has significant implications for our understanding of patents in four important areas: (1) reform of the system by which patents are granted; (2) the legal treatment of patents in litigation; (3) the incentives of patent holders and alleged infringers to settle their disputes through licensing or cross-licensing agreements rather than litigate them to completion; and (4) the antitrust limits on agreements between rivals that settle actual or threatened patent litigation.PatentsPatent litigationantitrustapplication/pdfpubliceScholarship, University of Californiahttps://escholarship.org/uc/item/9xf1488particleoai:escholarship.org:ark:/13030/qt3s03932b2011-07-03T16:46:52Zqt3s03932bIntellectual Property, Competition, and Information TechnologyFarrell, JosephShapiro, Carl2004-03-01This paper was prepared as a companion to the Mattioli Lectures delivered by Hal R. Varian, “Economics of Information Technology,” available at: http://www.sims.berkeley.edu/~hal/Papers/mattioli/mattioli.pdf. Professor Varian’s overview analyzes a variety of competitive strategies used by high-tech companies. These strategies—such as personalized pricing, lock-in, and the adoption of uniform compatibility standards to fuel bandwagon effects—often rely on intellectual property, typically copyrights or patents. Since Professor Varian does not explore this issue at length, we complement his work by focusing on it.Intellectual propertycopyrightsinformation technologycompetition policyapplication/pdfpubliceScholarship, University of Californiahttps://escholarship.org/uc/item/3s03932barticleoai:escholarship.org:ark:/13030/qt7j60d3r22011-07-03T16:46:47Zqt7j60d3r2Converging Doctrines? US and EU Antitrust Policy for the Licensing of Intellectual PropertyGilbert, Richard2004-02-01This paper was prepared for the Antitrust Section Spring Meeting, Washington D.C., 2004. The author discusses and compares European Community Technology Transfer Block Exemption Regulation (TTBER) and U.S. Guidelines. Together the guidelines present a framework to evaluate technology licensing arrangements that respects the objectives of EU competition policy and still provides a berth for procompetitive licensing.Technology Transfer Block Exemption RegulationTTBERU.S. guidelinesblock exemptionstechnology licensingcompetition policyapplication/pdfpubliceScholarship, University of Californiahttps://escholarship.org/uc/item/7j60d3r2articleoai:escholarship.org:ark:/13030/qt92m0w4px2011-07-03T16:46:42Zqt92m0w4pxRemedies for Price Overcharges: The Deadweight Loss of Coupons and DiscountsPolinsky, A. MitchellRubinfeld, Daniel L.2003-11-30This article evaluates two different remedies for consumers who have been injured by a price overcharge on the sale of a good. Under a coupon remedy, injured consumers are awarded coupons that can be used for a limited period of time to purchase the good at a price below that which prevails after the overcharge has been eliminated, that is, below the competitive price. Under a discount remedy, any consumer, without proof of injury, may purchase the good for a limited period of time at a price that is set below the competitive price. Both remedies generally cause consumers to buy an excessive amount of the good during the remedy period. Under the coupon remedy only a subset of consumers are affected in this way (those holding a relatively high number of coupons), while under the discount remedy all consumers are affected. We show nonetheless that the resulting deadweight loss could be lower under the discount remedy. We also consider how the deadweight loss changes when the length of the remedy period is increased.price fixingantitrust remediescouponsdiscountsdeadweight lossapplication/pdfpubliceScholarship, University of Californiahttps://escholarship.org/uc/item/92m0w4pxarticleoai:escholarship.org:ark:/13030/qt9p72k8fn2011-07-03T16:46:37Zqt9p72k8fnNegotiation and Merger Remedies: Some ProblemsFarrell, Joseph2003-08-22merger remediesmergersnegotiationcompetitionapplication/pdfpubliceScholarship, University of Californiahttps://escholarship.org/uc/item/9p72k8fnarticleoai:escholarship.org:ark:/13030/qt4f4972zk2011-07-03T16:46:32Zqt4f4972zkMerger Simulation with Brand-Level Margin Data: Extending PCAIDS with NestsEpstein, Roy J.Rubinfeld, Daniel L.2003-08-23We present a method to calibrate empirically the demand parameters in a merger simulation model by using brand-level profit margin data. While the approach can be generalized, we develop these ideas within a particular framework — the PCAIDS (proportionality-calibrated AIDS) model. We show that the brand-level margins effectively define product “nests” (products that are especially close substitutes) and substantially increase the flexibility of PCAIDS for modeling critical own- and cross-price elasticities. The model is particularly valuable for transactions at the wholesale level (where scanner data do not exist) and for geographic markets that span national borders (where comparable data may not be available), since other methods to derive elasticities, particularly those based on econometric estimation, may not be possible or may not be reliable.merger simulationunilateral effectsapplication/pdfpubliceScholarship, University of Californiahttps://escholarship.org/uc/item/4f4972zkarticleoai:escholarship.org:ark:/13030/qt66w6p7qz2011-07-03T16:46:27Zqt66w6p7qzBusiness Method Patents, Innovation, and PolicyHall, Bronwyn H.2003-05-04The trickle of business method patents issued by the United States Patent Office became a flood after the State Street Bank decision in 1998. Many scholars, both legal and economic, have critiqued both the quality of these patents and the decision itself. This paper discusses the likely impact of these patents on innovation. It first reviews the facts about business method and internet patents briefly and then explores what economists know about the relationship between the patent system and innovation. It concludes by finding some consensus in the literature about the problems associated with this particular expansion of patentable subject matter, highlighting remaining areas of disagreement, and suggesting where there are major gaps in our understanding of the impact of these patents.intellectual propertyState Streetsoftwareinternetbusiness methodspatentsinnovationapplication/pdfpubliceScholarship, University of Californiahttps://escholarship.org/uc/item/66w6p7qzarticleoai:escholarship.org:ark:/13030/qt4wq4g70r2011-07-03T16:46:22Zqt4wq4g70rProspects for Improving U.S. Patent Quality via Post-grant OppositionHall, Bronwyn H.Graham, Stuart J. H.Harhoff, DietmarMowery, David C.2003-05-02The recent surge in U.S. patenting and expansion of patentable subject matter has increased patent office backlogs and raised concerns that in some cases patents of insufficient quality or with inadequate search of prior art are being issued. At the same time patent litigation and its costs are rising. This paper explores the potential of a post-grant review process modeled on the European opposition system to improve patent quality, reveal overlooked prior art, and reduce subsequent litigation. We argue that the welfare gains to such a system may be substantial.patent systemlitigationintellectual propertyoppositionreexaminationapplication/pdfpubliceScholarship, University of Californiahttps://escholarship.org/uc/item/4wq4g70rarticleoai:escholarship.org:ark:/13030/qt7088q1vs2011-07-03T16:46:17Zqt7088q1vsIntegration and Independent Innovation on a NetworkFarrell, Joseph2003-04-01Physical telecom networks are costly and few, traditionally to the point of monopoly. Innovation thrives with many independent minds. So one might hope independent innovators, not only its proprietor M, can offer innovative services on a network, as has been true on the Internet. This issue is central in telecom policy; it also arises elsewhere, including complaints about Microsoft. I try to expound the following key points. Often an unregulated M has ex ante incentives to organize service innovation efficiently. But this incentive breaks down ex post as M can extract an independent J’s quasi-rents (Farrell and Michael Katz 2000). Even ex ante, the "one monopoly rent theorem" (Ward Bowman 1957) fails when M’s bottleneck access business is more regulated than its competitive services (e.g., Jean-Jacques Laffont and Jean Tirole 2000). This tempts M to sabotage J’s innovations. "Quarantining" M from the service sector solves these problems, but excludes the firm with (often) the best opportunities and the strongest incentives to innovate. "Parity pricing" or ECPR (Robert Willig 1979) purports to get the best of both worlds (BoBW). But it seems so hard to implement in innovation markets that one might construe ECPR analysis as reductio ad absurdum for BoBW.telecom networksinnovationcompetitionaccess pricingapplication/pdfpubliceScholarship, University of Californiahttps://escholarship.org/uc/item/7088q1vsarticleoai:escholarship.org:ark:/13030/qt3xs1h2v12011-07-03T16:46:12Zqt3xs1h2v1Optimal Penalties in ContractsEdlin, Aaron S.Schwartz, Alan2002-12-15Contract law’s liquidated damage rules prevent enforcement of contractual damage measures that require the promisor, if it breaches, to transfer to the promisee a sum that exceeds the net gain the promisee expected to make from performance; but these rules permit the promisor to transfer less than the promisee’s expectation. We define a contractual damage multiplier as any number between zero and infinity by which the promisee’s expected gain -- its expectation interest -- is multiplied. Multipliers of one or less thus comply with the liquidated damage rules while multipliers that exceed one do not; the high multipliers are unenforceable penalties. This paper shows that multipliers of any size can be efficient or inefficient, depending on the parties’ purposes in creating them. For example, a multiplier that exceeds one will decrease welfare if used by a seller with market power to deter entry; but will increase welfare if used by parties to induce efficient relation specific investment. As a consequence, a court should inquire, not into the size of the multiplier, but into the purpose the multiplier serves for the parties. The practical implication of this view is that it no longer should be a sufficient defense to an action to enforce a contractual damage measure that the parties’ multiplier exceeded one.breach of contractpenaltiesliquidated damagesspecific investmentapplication/pdfpubliceScholarship, University of Californiahttps://escholarship.org/uc/item/3xs1h2v1articleoai:escholarship.org:ark:/13030/qt8md3920f2011-07-03T16:46:08Zqt8md3920fMarket Structure, Organizational Structure, and R&D DiversityFarrell, JosephGilbert, RichardKatz, Michael2002-09-09We examine the effects of market structure and the internal organization of firms on equilibrium R&D projects. We compare a monopolist’s choice of R&D portfolio to that of a welfare maximizer. We next show that Sah and Stiglitz’s finding that the market portfolio of R&D is independent of the number of firms under Bertrand competition extends to neither Cournot oligopoly nor a cartel. We also show that the ability of firms to pre-empt R&D by rivals along particular research paths can lead to socially excessive R&D diversification. Lastly, using Sah and Stiglitz’s definition of hierarchy, we establish conditions under which larger hierarchies invest in smaller portfolios.Internal organizationmarket powerresearch and developmentapplication/pdfpubliceScholarship, University of Californiahttps://escholarship.org/uc/item/8md3920farticleoai:escholarship.org:ark:/13030/qt32h8b40m2011-07-03T16:46:03Zqt32h8b40mThe American Airlines Case: A Chance to Clarify Predation PolicyEdlin, Aaron S.Farrell, Joseph2002-10-02Predation occurs when a firm offers consumers favorable deals, usually in the short run, that get rid of competition and thereby harm consumers in the long run. Modern economic theory has shown how commitment or collective-action problems among consumers can lead to such paradoxical effects.But the paradox does signal danger. Too hawkish a policy might ban favorable deals that are not predatory. “It would be ironic indeed if the standards for predatory pricing liability were so low that antitrust suits themselves became a tool for keeping prices high.” Predation policy must therefore diagnose the unusual cases where favorable deals harm competition. To this end, courts and commentators have largely defined predation as “sacrifice” followed, at least plausibly, by “recoupment” at consumers’ expense. The American Airlines case raises difficult questions about this approach.competitionrecoupmentsacrificeapplication/pdfpubliceScholarship, University of Californiahttps://escholarship.org/uc/item/32h8b40marticleoai:escholarship.org:ark:/13030/qt8zq3z0tj2011-07-03T16:45:48Zqt8zq3z0tjMediating Market Power in Electricity NetworksGilbert, RichardNeuhoff, KarstenNewbery, David2002-08-07We ask under what conditions transmission contracts increase or mitigate market power. We show that the allocation process of transmission rights is crucial. In an efficiently arbitraged uniform price auction generators will only obtain contracts that mitigate their market power. However, if generators inherit transmission contracts or buy them in a ‘pay-as-bid’ auction, then these contracts can enhance market power. In the two-node network case banning generators from holding transmission contracts that do not correspond to delivery of their own energy mitigates market power. Meshed networks differ in important ways as constrained links no longer isolate prices in competitive markets from market manipulation. The paper suggests ways of minimizing market power considerations when designing transmission contracts.electricitymarket powertransmission rightsnodal pricingapplication/pdfpubliceScholarship, University of Californiahttps://escholarship.org/uc/item/8zq3z0tjarticleoai:escholarship.org:ark:/13030/qt7931q79x2011-07-03T16:45:44Zqt7931q79xPost-Issue Patent “Quality Control:” A Comparative Study of US Patent Re-examinations and European Patent OppositionsGraham, Stuart J.H.Hall, Bronwyn H.Harhoff, DietmarMowery, David C.2002-08-01We report the results of the first comparative study of the determinants and effects of patent oppositions in Europe and of re-examinations on corresponding patents issued in the United States. The analysis is based on a dataset consisting of matched EPO and US patents. Our analysis focuses on two broad technology categories - biotechnology and pharmaceuticals, and semiconductors and computer software. Within these fields, we collect data on all EPO patents for which oppositions were filed at the EPO. We also construct a random sample of EPO patents with no opposition in these technologies. We match these EPO patents with the “equivalent” US patents covering the same invention in the United States. Using the matched sample of USPTO and EPO patents, we compare the determinants of opposition and of reexamination. Our results indicate that valuable patents are more likely to be challenged in both jurisdictions. But the rate of opposition at the EPO is more than thirty times higher than the rate of reexamination at the USPTO. Moreover, opposition leads to a revocation of the patent in about 41 percent of the cases, and to a restriction of the patent right in another 30 percent of the cases. Re-examination results in a cancellation of the patent right in only 12.2 percent of all cases. We also find that reexamination is frequently initiated by the patentholders themselves.patent systemlitigationintellectual propertyoppositionre-examinationapplication/pdfpubliceScholarship, University of Californiahttps://escholarship.org/uc/item/7931q79xarticleoai:escholarship.org:ark:/13030/qt6318920c2011-07-03T16:45:38Zqt6318920cPer-Mile Premiums for Auto InsuranceEdlin, Aaron S.2002-06-03Most insurance premiums are only weakly linked to mileage, and have largely lump-sum characteristics. The probable result is too many accidents and too much driving from the standpoint of economic efficiency. This paper develops a model of the relationship between driving and accidents that formalizes Vickrey’s [1968] central insights about the accident externalities of driving. We use it to estimate the driving, accident, and congestion reductions that could be expected from switching to other insurance pricing systems. Under a competitive system of per-mile premiums, in which insurance companies quote risk-classified per-mile rates, we estimate that the reduction in insured accident costs net of lost driving benefits would be $9.8 -$12.7 billion in the U.S., or $58-$75 per insured vehicle. When congestion reductions are considered, the net benefits rise to $15-$18 billion, exclusive of monitoring costs. The total benefits of per-mile premiums with a Pigouvian tax to account for accident externalities would be $19-$25 billion, or $111-$146 per insured vehicle, exclusive of monitoring costs. Accident externalities may go a long way toward explaining why most insurance companies have not switched to per-mile premiums despite these large potential social benefits.competitionpricingauto insuranceinsurance premiumseconomicsapplication/pdfpubliceScholarship, University of Californiahttps://escholarship.org/uc/item/6318920carticleoai:escholarship.org:ark:/13030/qt9756j0km2011-07-03T16:45:33Zqt9756j0kmThe FTC's Challenge to Intel's Cross-Licensing PracticesShapiro, Carl2002-06-02After an investigation lasting several months, in June 1998 the Federal Trade Commission brought an antitrust lawsuit against Intel Corporation based on Intel's conduct towards Intergraph, and similar conduct towards Digital Equipment Corporation and Compaq, all in the context of disputes where Intel was accused of patent infringement. The FTC charged that Intel's practices were an abuse of Intel's monopoly position in microprocessors. Is Intel's conduct anti-competitive and thus illegal under the antitrust laws? That is the central question explored in this paper.An introductory section provides some background for the case by discussing the tension between intellectual property rights and antitrust law, a tension that is evident in the FTC's dispute with Intel, and by describing the role of patents in the semiconductor industry. Section 3 provides a succinct summary of the facts surrounding Intel's conduct in each of the three patent disputes identified by the FTC. Section 4 explains the FTC's theory of how Intel's conduct was anti-competitive. Section 5 presents Intel's response. Section 6 describes the settlement reached between the FTC and Intel. The final section discusses legal and economic developments since the case was settled and remarks on the lasting implications of the Intel case.antitrustIntelintellectual propertypatent infringementpatent thicketFTCapplication/pdfpubliceScholarship, University of Californiahttps://escholarship.org/uc/item/9756j0kmarticleoai:escholarship.org:ark:/13030/qt2sq9s8c82011-07-03T16:45:28Zqt2sq9s8c8Merger Simulation: A Simplified Approach with New ApplicationsRubinfeld, Daniel L.Epstein, Roy J.2001-11-01Merger simulation is growing in importance as a tool to evaluate the unilateral competitive effects of mergers. This paper offers a relatively non-technical description of the principles of merger simulation. In addition, it introduces PCAIDS, a new and highly flexible "calibrated-demand" merger simulation methodology that is based on a simplified version of AIDS. PCAIDS can be implemented using market shares and two price elasticities; scanner or transaction-level data are not required. The paper offers some applications of merger simulation with PCAIDS that include comparisons with other simulation models. It also shows how PCAIDS can be applied to the analysis of efficiencies, divestiture, and product repositioning/entry. Finally, the paper offers an analysis of the Merger Guidelines safeharbors. A detailed mathematical appendix is included.antitrustmerger simulationunilateral effectsempirical methodsJEL: L40application/pdfpubliceScholarship, University of Californiahttps://escholarship.org/uc/item/2sq9s8c8articleoai:escholarship.org:ark:/13030/qt0p18h2d82011-07-03T16:45:24Zqt0p18h2d8Sales and Consumer InventoryHendel, IgalNevo, Aviv2001-09-01Temporary price reductions (sales) are quite common for many goods and usually result in an increase in the quantity sold. We explore whether the data support the hypothesis that these increases are, at least partly, due to dynamic consumer behavior: at low prices consumers stockpile for future consumption. This effect, if present, has broad implications for interpretation of demand estimates. We construct a dynamic model of consumer choice and use it to derive testable predictions. We test the implications of the model using two years of store-level scanner data and data on the purchases of a panel of households over the same time. The results support the existence of household stockpiling behavior.consumer behaviorconsumer choicestockpilingapplication/pdfpubliceScholarship, University of Californiahttps://escholarship.org/uc/item/0p18h2d8articleoai:escholarship.org:ark:/13030/qt1ts674n22011-07-03T16:45:14Zqt1ts674n2Higher Prices from Entry: Pricing of Brand-Name DrugsPerloff, Jeffrey M.Suslow, Valerie Y.Seguin, Paul J.1995-08-01When a new firm enters a market and starts selling a spatially-differentiated product, the prices of existing products may rise due to a better match between consumers and products. Entry may have three unusual effects. First, the new price is above the monopoly price if the two firms collude and may be above the monopoly price even if the firms play Bertrand. Second, the Bertrand and collusive price may be identical. Third, prices, combined profits, and consumer surplus may all rise with entry. Consistent with our theory, the real prices of some anti-ulcer drugs rose as new products entered the market.Bertrandmonopoly priceproduct marketingapplication/pdfpubliceScholarship, University of Californiahttps://escholarship.org/uc/item/1ts674n2articleoai:escholarship.org:ark:/13030/qt3b7101mj2011-07-03T09:29:02Zqt3b7101mjVertical Integration in Gasoline Supply: An Empirical Test of Raising Rivals' CostsGilbert, RichardHastings, Justine2001-06-01This paper explores the relationship between the structure of the market for the refining and distribution of gasoline and the wholesale price of unbranded gasoline sold to independent gasoline retailers. Theoretically, the effect of an increase in vertical integration is ambiguous because opposing forces act to increase and decrease wholesale prices. We empirically examine the effects of vertical and horizontal market structures on wholesale prices using both a broad panel and an event analysis. The panel covers twenty-six metropolitan areas from January 1993 through June 1997. The event is a merger of Tosco and Unocal in 1997 that changed the vertical and horizontal structure of thirteen West Coast metropolitan areas. Both data sets show that an increase in the degree of vertical integration is associated with higher wholesale prices.vertical integrationoligopolymarket powergasolineapplication/pdfpubliceScholarship, University of Californiahttps://escholarship.org/uc/item/3b7101mjarticleoai:escholarship.org:ark:/13030/qt45r5r72p2011-07-03T09:28:57Zqt45r5r72pAntitrust Policy During the Clinton AdministrationLitan, Robert E.Shapiro, Carl2001-07-01antitrusteconomicsapplication/pdfpubliceScholarship, University of Californiahttps://escholarship.org/uc/item/45r5r72particleoai:escholarship.org:ark:/13030/qt8zv6b8c52011-07-03T09:28:51Zqt8zv6b8c5Is Innovation King at the Antitrust Agencies? The Intellectual Property Guidelines Five Years LaterGilbert, RichardTom, Willard K.2001-05-03The Microsoft antitrust case focused public attention on the role of antitrust enforcement in preserving the forces of innovation in high-technology markets. Traditionally, regulators focused on whether companies artificially hiked prices or reduced output. Now, they're increasingly likely to look first at whether corporate behavior aids or impedes innovation.In this paper, we examine whether innovation has displaced short-term price effects as the focus of antitrust enforcement by the Department of Justice and the Federal Trade Commission and, to the extent that it has, whether enforcement actions are any different as a result. We also ask whether enforcement actions in the area of intellectual property and innovation have been consistent with the 1995 DOJ/FTC Antitrust Guidelines for the Licensing of Intellectual Property [IP Guidelines]. Finally, we consider whether recent enforcement actions identify key areas in which additional guidance from the Agencies would be desirable. We address these questions first in merger cases and then in non-merger cases.innovationintellectual propertymergersantitrust policystandardsmonopolizationapplication/pdfpubliceScholarship, University of Californiahttps://escholarship.org/uc/item/8zv6b8c5articleoai:escholarship.org:ark:/13030/qt0bw767hm2011-07-03T09:28:45Zqt0bw767hmVertical Relationships and Competition in Retail Gasoline Markets: An Empirical Evidence from Contract Changes in Southern CaliforniaHastings, Justine2000-11-11This study examines how much, if any, of the differences in retail gasoline prices between markets is attributable to differences in the composition of vertical contract types at gasoline stations in each market. The purchase of the independent retail gasoline chain, Thrifty, by ARCO provides a unique opportunity to examine the effects of changes in different vertical contract types on local retail prices. This event caused sharp changes in the market share of i) fully vertically integrated stations, and ii) independent stations; differentially affecting local markets in the Los Angeles and San Diego Metropolitan areas. Using unique and detailed station-level data, this study examines how these sharp changes affected local retail prices. The detailed data and the research design based on the Thrifty station conversions allow for credible estimation of the effects of the market share of independent retailers and vertically integrated retailers on local market prices, controlling for any omitted factors at the station level, and the city level over time. Results for the Los Angeles and San Diego metropolitan areas indicate that a decrease in the market share of independent stations has a significant positive impact on local retail price. However, a change in the market share of refiner owned and operated branded stations does not have a significant impact on local market price. These results have important implications as policy makers consider the regulation of vertical contracts as a means to increase competition in gasoline markets. The research design and detailed data also allow for inference on the underlying nature of retail gasoline competition.gasoline pricesbranded stationsapplication/pdfpubliceScholarship, University of Californiahttps://escholarship.org/uc/item/0bw767hmarticleoai:escholarship.org:ark:/13030/qt7cm5p8582011-07-03T08:21:23Zqt7cm5p858Measuring Market Power in the Ready-to-Eat Cereal IndustryNevo, Aviv1999-03-01The ready-to-eat cereal industry is characterized by high concentration, high price-cost margins, large advertising-to-sales ratios, and numerous introductions of new products. Previous researchers have concluded that the ready-to-eat cereal industry is a classic example of an industry with nearly collusive pricing behavior and intense non-price competition. This paper empirically examines this conclusion. In particular, I estimate price-cost margins, but more importantly I am able empirically to separate these margins into three sources: (1) that which is due to product differentiation; (2) that which is due to multi-product firm pricing; and (3) that due to potential price collusion. The results suggest that given the demand for different brands of cereal, the first two effects explain most of the observed price-cost markups. I conclude that prices in the industry are consistent with non-collusive pricing behavior, despite the high price-cost margins. Leading firms are able to maintain a portfolio of differentiated products and influence the perceived product quality. It is these two factors that lead to high price-cost margins.Discrete choice modelsrandom coefficientsproduct differentiationready-to-eat cereal industrymarket powerprice competitionapplication/pdfpubliceScholarship, University of Californiahttps://escholarship.org/uc/item/7cm5p858articleoai:escholarship.org:ark:/13030/qt1wf596082011-07-03T08:21:19Zqt1wf59608The Essentiality Test for Patent PoolsGilbert, Richard2009-09-01Antitrust policy for the pooling of patents and other intellectual property rights has undergone a dramatic transformation since the first cases were decided at the beginning of the twentieth century. This transformation generally reflects developments in economics that provide a better understanding of the characteristics of patent pools that warrant antitrust scrutiny. The change, however, was slow, and the U.S. antitrust agencies did not clarify their enforcement principles with respect to patent pools until the publication by the Department of Justice and the Federal Trade Commission of Antitrust Enforcement and Intellectual Property Rights: Promoting Innovation and Competition, released in April 2007 (“IP Report”).1patentsantitrustintellectual propertyFederal Trade Commissioninnovationcompetitionapplication/pdfpubliceScholarship, University of Californiahttps://escholarship.org/uc/item/1wf59608articleoai:escholarship.org:ark:/13030/qt8z51b1q82011-07-03T08:21:14Zqt8z51b1q8Antitrust Evaluation of Horizontal Mergers: An Economic Alternative to Market DefinitionFarrell, JosephShapiro, Carl2008-11-25We propose a simple, new test for making an initial determination of whether a proposed merger between rivals is likely to reduce competition and thus lead to higher prices. Under current antitrust policy, the government can establish a presumption that a proposed horizontal merger will harm competition by defining the relevant market and showing that the merger will lead to a substantial increase in concentration in that market. However, this approach can perform poorly in markets for differentiated products, where market boundaries are unclear and the proximity of the products sold by the merging firms is a key determinant of the merger's effect on competition. Our test looks for upward pricing pressure (UPP) resulting from the merger. We develop a simple diagnostic for UPP based on the price/cost margins of the products sold by the merging firms and the magnitude of direct substitution between the two firm's products. We argue that our approach is well grounded in economics, workable in practice, and superior to existing methods in a substantial class of mergers.antitrustmerger policyunilateral effectsoligopolymarket definitionapplication/pdfpubliceScholarship, University of Californiahttps://escholarship.org/uc/item/8z51b1q8articleoai:escholarship.org:ark:/13030/qt4s01d7md2011-07-03T08:21:01Zqt4s01d7mdScarcity of Ideas and Options to Invest in R&DErkal, NisvanScotchmer, Suzanne2007-12-17We consider a model of the innovative environment where there is a distinction between ideas for R&D investments and the investments themselves. We investigate the optimal reward policy and how it depends on whether ideas are scarce or obvious. By foregoing investment in a current idea, society as a whole preserves an option to invest in a better idea for the same market niche, but with delay. Because successive ideas may occur to di¤erent people, there is a con‡ict between private and social optimality. We argue that private incentives to create socially valuable options can be achieved by giving higher rewards where "ideas are scarce." We then explore how rewards should be structured when the value of an innovation comes from its applications, and ideas for the innovation may be more or less scarce than ideas for the applications.Ideaspatentsintellectual propertyinnovationoptionsnonobviousnessJEL Classifications: O34K00L00application/pdfpubliceScholarship, University of Californiahttps://escholarship.org/uc/item/4s01d7mdarticleoai:escholarship.org:ark:/13030/qt0ff249px2011-07-03T08:20:56Zqt0ff249pxImproving Critical Loss AnalysisFarrell, JosephShapiro, Carl2007-12-17Introduction: Market definition analysis, which is often central in merger cases, usually claims to follow the 1992 Horizontal Merger Guidelines issued by the U.S. Department of Justice and the Federal Trade Commission (“Guidelines”). The Guidelines describe a relevant product market as a group of products for which a hypothetical monopolist would profitably impose a “small but significant and non-transitory increase in price” (“SSNIP”). Seeking relatively simple approaches to market definition that are consistent with the Guidelines, courts and agencies often rely on Critical Loss Analysis. For example, the FTC recently challenged the proposed merger between Whole Foods and Wild Oats, two chains of grocery stores, alleging that the relevant market was “premium natural/organic supermarkets” (“PNOS”). In that market, the merger was very highly concentrating in a number of geographic areas where Whole Foods and Wild Oats operated nearby stores. But the merging parties successfully argued that PNOS was too narrow a grouping of products and that the relevant market included all supermarkets. In that broader market, there were many other competitors and the merger was not highly concentrating. Arguing that PNOS was not a relevant market, the merging firms echoed the Guidelines by asking whether a hypothetical PNOS monopolist would find a SSNIP profitable, or whether a SSNIP would deter enough sales to make it unprofitable. Critical Loss Analysis calculates the hypothetical monopolist’s Critical Loss, meaning the magnitude of lost sales that would (just) make it unprofitable for the hypothetical monopolist to impose a SSNIP, and compares it against the so-called Actual Loss of sales that would result from the SSNIP. If the Actual Loss would be less than the Critical Loss, the SSNIP would be profitable, so PNOS would form a relevant market. Whole Foods and Wild Oats argued that the Actual Loss would instead exceed the Critical Loss: a hypothetical PNOS monopolist who imposed a SSNIP would lose enough business to make the SSNIP unprofitable. Merging parties have used Critical Loss Analysis regularly, and with considerable success, to argue in court for a broader market than the government asserts. Estimating a hypothetical monopolist’s Actual Loss is difficult, so that a substantial range of estimates could seem plausible. Incentives in litigation may push parties toward exploiting that range. Thus it is highly desirable, if possible, to anchor estimates of Actual Loss and to facilitate reality checks based on actual pre-merger conduct. When it comes to demand responsiveness, economics suggests that it is particularly helpful to examine firms’ own pre-merger pricing conduct. It has been suggested, however, that pre-merger pricing is so remote from the hypothetical monopolist question that these reality checks are unhelpful. In this paper we examine that claim. We find that leading suggestions of how pre-merger pricing may be uninformative about a hypothetical monopolist’s incentives are not compelling. As a result, we are able to offer two powerful new tests to determine, using Critical Loss Analysis, whether a candidate group of products forms a relevant market. These tests extract information from the gold standard for evidence about competitive conditions in antitrust cases: firms’ actual business decisions made in the normal course of business.critical loss analysismarket definition analysismerger guidelinesSSNIPmergermonopolyapplication/pdfpubliceScholarship, University of Californiahttps://escholarship.org/uc/item/0ff249pxarticleoai:escholarship.org:ark:/13030/qt3qg7270w2011-07-03T08:20:50Zqt3qg7270wClicks, Discontinuities, and Firm Demand OnlineBaye, Michael RGatti, J. Rupert JKattuman, PaulMorgan, John2006-11-01The market values of online platforms, such as Yahoo, stem from their ability to monetize the clicks they generate for firms advertising on their sites. We exploit a unique dataset on clicks from one of Yahoo's price comparison sites to estimate the determinants of clicks received by online retailers. We find that a firm enjoys a 60% jump in its clicks when it offers the lowest price at the site. This discontinuity is consistent with a variety of models that have been used to rationalize the price dispersion observed in online markets. We also show that one may use estimates of the determinants of a firm's clicks to obtain bounds on its underlying demand parameters, including own- and cross-price elasticities. Our results have potentially significant ramifications for online retailers, platforms, and policymakers: Failure to account for discontinuities distorts parameter estimates by 50 to 100 percent.application/pdfpubliceScholarship, University of Californiahttps://escholarship.org/uc/item/3qg7270warticleoai:escholarship.org:ark:/13030/qt9c11m09n2011-07-03T08:20:45Zqt9c11m09nClock Games: Theory and ExperimentsBrunnermeier, Markus KMorgan, John2006-10-03Timing is crucial in situations ranging from product introductions, to currency attacks, to starting a revolution. These settings share the feature that payoffs depend critically on the timing of moves of a few other key players—and these are uncertain. To capture this, we introduce the notion of clock games and experimentally test them. Each player’s clock starts on receiving a signal about a payoff-relevant state variable. Since the timing of the signals is random, clocks are de-synchronized. A player must decide how long, if at all, to delay his move after receiving the signal. We show that (i) equilibrium is always characterized by strategic delay—regardless of whether moves are observable or not; (ii) delay decreases as clocks become more synchronized and increases as information becomes more concentrated; (iii) When moves are observable, players “herd” immediately after any player makes a move. We then show, in a series of experiments, that key predictions of the model are consistent with observed behavior.Clock gamesexperimentscurrency attacksbubblespolitical revolutionapplication/pdfpubliceScholarship, University of Californiahttps://escholarship.org/uc/item/9c11m09narticleoai:escholarship.org:ark:/13030/qt9pt7p9bm2011-07-03T08:20:39Zqt9pt7p9bmAntitrustKaplow, LouisShapiro, Carl2007-01-16This is a survey of the economic principles that underlie antitrust law and how those principles relate to competition policy. We address four core subject areas: market power, collusion, mergers between competitors, and monopolization. In each area, we select the most relevant portions of current economic knowledge and use that knowledge to critically assess central features of antitrust policy. Our objective is to foster the improvement of legal regimes and also to identify topics where further analytical and empirical exploration would be useful. This is a survey of the economic principles that underlie antitrust law and how those principles relate to competition policy. We address four core subject areas: market power, collusion, mergers between competitors, and monopolization. In each area, we select the most relevant portions of current economic knowledge and use that knowledge to critically assess central features of antitrust policy. Our objective is to foster the improvement of legal regimes and also to identify topics where further analytical and empirical exploration would be useful.antitrustcompetition policymonopolymarket powermarket definitionoligopolycollusioncartelsprice fixingfacilitating practicesmergershorizontal mergersunilateral effectsmonopolizationexclusionary practicespredatory pricingexclusive dealingapplication/pdfpubliceScholarship, University of Californiahttps://escholarship.org/uc/item/9pt7p9bmarticleoai:escholarship.org:ark:/13030/qt5746p1622011-07-03T08:20:35Zqt5746p162Still Looking for Lost Profits: The Case of Horizontal CompetitionSchankerman, MarkScotchmer, Suzanne2005-12-28JEL Classifications: L41, K21Abstract: When infringement of a patent dissipates profit relative to the licensing agreement that would otherwise occur, damages under the lost-profit rule deter infringement, and otherwise not. We develop this point in a general model and give two examples. However, joint profit might not be dissipated by infringement. An important example is where there are restrictions on licensing that arise from competition policy.intellectual propertydamageslost profitslicensingapplication/pdfpubliceScholarship, University of Californiahttps://escholarship.org/uc/item/5746p162articleoai:escholarship.org:ark:/13030/qt8vg425vj2011-07-03T08:20:28Zqt8vg425vjHow Strong Are Weak Patents?Farrell, JosephShapiro, Carl2007-01-01We analyze patent licensing by a patent holder to downstream technology users. We study how the structure and level of royalties depends on the patent’s strength, i.e., the probability it would be upheld in court. We examine the social value of determining patent validity before licensing, in terms of deadweight loss (ex post) and innovation incentives (ex ante). When downstream users do not compete against each other or the patent holder, license fees approximate the license fee for an ironclad patent times the patent strength, and reviewing validity before licensing would be unproductive (in expected value). But when downstream users compete, two-part tariffs for weak patents have high running royalty rates, combined with a negative fixed fee, and examining patent validity generates social benefits, both ex post and ex ante. Even without negative fixed fees, rival downstream firms will accept relatively high running royalties, so determining patent validity prior to licensing is socially beneficial.probabilistic patentsweak patentspatent licensingpatent reformoligopolyapplication/pdfpubliceScholarship, University of Californiahttps://escholarship.org/uc/item/8vg425vjarticleoai:escholarship.org:ark:/13030/qt2dc6p04t2011-07-03T08:20:24Zqt2dc6p04tPrior User RightsShapiro, Carl2005-12-01Keywords: patents, innovation, oligopolyJEL codes: L13, O31.ABSTRACT: Many inventions, great and small, are discovered independently at roughly the same time by two or more individuals or organizations. Famous examples include the light bulb (Edison and Swan), the telephone (Bell and Gray), and the integrated circuit (Kilby and Noyce). Such independent invention is common for minor technological improvements. How should property rights to an invention be defined and awarded in such cases?Patent law has struggled with this question for many years. The basic rule in the U.S. is that the patent is awarded to the first firm to invent; later independent inventors come up empty-handed.However, this basic system can create some peculiar results.Suppose that Firm A achieves an invention and files for a patent. Slightly later, but before the invention is made public, Firm B independently discovers the same invention. Firm A receives the patent and can even prevent Firm B from practicing its own invention. In legal terms, a party accused of patent infringement cannot defend itself by showing that it discovered the same invention independently. Would such an independent invention defense be desirable?Alternatively, suppose that Firm A achieves an invention, but decides not to file for a patent, perhaps because Firm A does not believe this invention is sufficiently novel and non-obvious to be patentable. Instead, Firm A uses the invention internally in its own operations as a trade secret. Later, Firm B independently discovers the same invention and files for a patent. Under current U.S. patent law, Firm B is awarded the patent because Firm A kept its invention secret.patentsinnovationoligopolyapplication/pdfpubliceScholarship, University of Californiahttps://escholarship.org/uc/item/2dc6p04tarticleoai:escholarship.org:ark:/13030/qt0s6752rf2011-07-03T08:20:18Zqt0s6752rfThe Value of Commitment in Contests and Tournaments when Observation is CostlyMorgan, JohnVárdy, Felix2005-02-01We study the value of commitment in contests and tournaments when there are costs for the follower to observe the leader's behavior. In a contest, the follower can pay to observe the leader's effort but cannot observe the effectiveness of that effort. In a tournament, the follower can pay to observe the effectiveness of the leader's effort but not the effort itself. We show that this distinction matters significantly: When observation is costly, the value of commitment vanishes entirely in sequential and endogenous move contests, regardless of the size of the observation cost. By contrast, in tournaments, the value of commitment is preserved completely, provided that the observation costs are sufficiently small.ContestsTournamentsRent-SeekingCommitmentCostly Leader Gamesapplication/pdfpubliceScholarship, University of Californiahttps://escholarship.org/uc/item/0s6752rfarticleoai:escholarship.org:ark:/13030/qt9wv3k43c2011-07-03T08:20:14Zqt9wv3k43cDeconstructing Chicago on Exclusive DealingFarrell, Joseph2005-03-10While exclusive dealing can be efficient, the Chicago School has also argued that it cannot be anticompetitive, or that it seldom is. That argument takes two forms; both are weak. First, a price-theory argument (“the Chicago Three-Party Argument”) depends crucially on a special model of oligopoly and predicts that we will never see what we see. I show how simply replacing the embedded oligopoly model suggests new efficiency and anticompetitive motives for exclusive dealing; these motives differ markedly from those usually discussed. Second, “the Chicago Vertical Question” is a challenge to theories of anticompetitive vertical practices, including exclusive dealing. While that Question is salutary and helpful, its apparent force dissipates if we pay careful attention to externalities, as others have noted, and to the issue of alternatives versus benchmarks, as I describe below. Overall, economic logic does not support any general presumption that exclusive dealing is efficient.application/pdfpubliceScholarship, University of Californiahttps://escholarship.org/uc/item/9wv3k43carticleoai:escholarship.org:ark:/13030/qt2b85c93d2011-07-03T08:19:59Zqt2b85c93dMixed Equilibria in Games of Strategic Complements Are UnstableEchenique, FedericoEdlin, Aaron S.2002-05-01In games with strict strategic complementarities, properly mixed Nash equilibria--equilibria that are not in pure strategies--are unstable for a broad class of learning dynamics.mixed-strategy equilibriumlearningsupermodular gamesstrategic complementaritiesequilibrium selectioneconomicsapplication/pdfpubliceScholarship, University of Californiahttps://escholarship.org/uc/item/2b85c93darticleoai:escholarship.org:ark:/13030/qt3pr2040r2011-07-03T08:19:53Zqt3pr2040rThe Political Economy of Intellectual Property TreatiesScotchmer, Suzanne2001-08-02Intellectual property treaties have two main types of provisions: national treatment of foreign inventors, and harmonization of protections. I characterize the circumstances in which countries would want to treat foreign inventors the same as national inventors. I then argue that national treatment of foreign inventors leads to stronger intellectual property protection than is optimal, and that this effect is exacerbated when protections must be harmonized. However levels of public and private R&D spending will be lower than if each country took account of the uncompensated externalities that its R&D spending confers on other countries. The stronger protection engendered by attempts at harmonization are a partial remedy.intellectual propertyglobalizationTRIPStreatyapplication/pdfpubliceScholarship, University of Californiahttps://escholarship.org/uc/item/3pr2040rarticleoai:escholarship.org:ark:/13030/qt87s5j9112011-07-03T08:19:48Zqt87s5j911Antitrust Limits to Patent SettlementsShapiro, Carl2001-05-01This paper focuses on the class of legal rules that governs intellectual property rights: the antitrust limits imposed on patent settlements.The paper discusses the benefits and costs of settlements and explains why antitrust limits on settlements are needed to prevent abuse of the settlement process. A general rule for evaluating proposed settlements is developed.This paper explores a simple antitrust rule governing settlements of intellectural property disputes: a settlement cannot lead to lower expected consumer surplus than would have arisen from ongoing litigation. It argues that this rule respects intellectural property rights while encouraging efficient settlements. Under extremely general conditions, there exists a settlement that leaves consumers better off and raises the joint profits of the two firms engaged in the dispute. This general test is then applied to several types of settlements: mergers; agreements specifying the timing of entry; and patent pools.intellectual property rightsantitrustpatentsmergerssettlementspatent poolsapplication/pdfpubliceScholarship, University of Californiahttps://escholarship.org/uc/item/87s5j911articleoai:escholarship.org:ark:/13030/qt4hs5s9wk2011-07-03T08:19:43Zqt4hs5s9wkNavigating the Patent Thicket: Cross Licenses, Patent Pools, and Standard-SettingShapiro, Carl2000-05-01In several key industries, including semiconductors, biotechnology, computer software, and the Internet, our patent system is creating a patent thicket: an overlapping set of patent rights requiring that those seeking to commercialize new technology obtain licenses from multiple patentees. The patent thicket is especially thorny when combined with the risk of hold-up, namely the danger that new products will inadvertently infringe on patents issued after these products were designed. The need to navigate the patent thicket and hold-up is especially pronounced in industries such as telecommunications and computing in which formal standard-setting is a core part of bringing new technologies to market. Cross-licenses and patent pools are two natural and effective methods used by market participants to cut through the patent thicket, but each involves some transaction costs. Antitrust law and enforcement, with its historical hostility to cooperation among horizontal rivals, can easily add to these transaction costs. Yet a few relatively simple principles, such as the desirability package licensing for complementary patents but not for substitute patents, can go a long way towards insuring that antitrust will help solve the problems caused by the patent thicket and by hold-up rather than exacerbating them.patentpatent systemtelecommunicationscross-licensessemiconductorsbiotechnologycomputer softwareapplication/pdfpubliceScholarship, University of Californiahttps://escholarship.org/uc/item/4hs5s9wkarticleoai:escholarship.org:ark:/13030/qt7kj1x7g92011-07-03T08:19:38Zqt7kj1x7g9An Economist's Guide to U.S. v MicrosoftGilbert, RichardKatz, Michael2001-05-02We analyze the central economic issues raised by U.S. v Microsoft. Network effects and economies of scale in applications programs created a barrier to entry for new operating system competitors, which the combination of Netscape Navigator and the Java programming language potentially could have lowered. Microsoft took actions to eliminate this threat to its operating system monopoly, and some of Microsoft's conduct very likely harmed consumers. While we recognize the risks of the government's proposed structural remedy of splitting Microsoft in two, we are pessimistic that a limited conduct remedy would be effective in this case.Microsoftantitrust policymonopolizationpredationnetworkapplication/pdfpubliceScholarship, University of Californiahttps://escholarship.org/uc/item/7kj1x7g9articleoai:escholarship.org:ark:/13030/qt8jk0904s2011-07-03T08:19:32Zqt8jk0904sThe Dynamics of Competition in the Internet Search Engine MarketGandal, Neil2000-01-01Search engines hold the key to helping consumers access the wealth of information on the web. In this paper I examine the evolution of and competition in the internet search engine market. The goal of my analysis is to examine whether early entrants benefit in the long-run from their first-mover position in internet markets. I find that while early entrants (Yahoo, Lycos, Excite, Infoseek, and Altavista) still have an advantage, the pure "brand effect" advantage has been declining over time. Yahoo has maintained its leadership position by providing a superior product. The success of a wave of recent new entrants suggests that entry barriers are still quite low in the internet search engine market.InternetSearch EnginesEntryEmpirical Studyapplication/pdfpubliceScholarship, University of Californiahttps://escholarship.org/uc/item/8jk0904sarticleoai:escholarship.org:ark:/13030/qt4961n0hj2011-07-03T08:19:27Zqt4961n0hjThe DVD vs. DIVX Standard War: Empirical Evidence of VaporwareDranove, DavidGandal, Neil2000-11-01In this paper, we empirically measure the effect of the DIVX preannouncement in the DVD market. We do this by measuring the effect of potential (incompatible) competition on a network undergoing growth. We find that there are network effects in the DVD market and that the preannouncement of DIVX slowed down the adoption of DVD technology. This suggests that strategic preannouncements can indeed affect the outcome of a standards competition.network effectsproduct preannouncementsstandardsvaporwareapplication/pdfpubliceScholarship, University of Californiahttps://escholarship.org/uc/item/4961n0hjarticleoai:escholarship.org:ark:/13030/qt8v1500b82011-07-03T08:19:23Zqt8v1500b8Scale Economies and Synergies in Horizontal Merger AnalysisFarrell, JosephShapiro, Carl2000-10-01Three years ago, the Antitrust Division and the Federal Trade Commission revised their Horizontal Merger Guidelines to articulate in greater detail how they would treat claims of efficiencies associated with horizontal mergers: claims that are frequently made, as for instance in the recently proposed merger between Heinz and Beech-Nut in the market for baby food. While these revisions to the Guidelines have a solid economic basis, they leave open many questions, both in theory and in practice. In this essay, we evaluate some aspects of the treatment of efficiencies, based on three years of enforcement experience under the revised Guidelines, including several litigated mergers, and based on economic principles drawn from oligopoly theory regarding cost savings, competition, and consumer welfare.competitionFTChorizontal merger guidelinesmergersno-synergies efficienciessynergyapplication/pdfpubliceScholarship, University of Californiahttps://escholarship.org/uc/item/8v1500b8articleoai:escholarship.org:ark:/13030/qt22d2q3fn2011-07-03T08:19:04Zqt22d2q3fnElectricity Restructuring: Deregulation or Reregulation?Borenstein, SeverinBushnell, James2000-02-01We discuss the lessons that can be gleaned from the experience with electricity restructuring to date. The gains from restructuring are most likely to occur through improvement in the efficiency and prudency of long-term investment, but these benefits will be very difficult to measure. Though restructuring could have near term benefits in the efficiency of production and consumption, concerns with the efficiency of decentralized dispatch and the exercise of market power make it at least as likely that restructuring will not benefit society in the short run. We argue that electricity is especially vulnerable to the exercise of market power, even by firms with relatively small market shares, so there will be continued need for regulatory oversight in these markets, at least until there is much more real-time demand responsiveness. Thus, restructuring in electricity markets is not now, and is unlikely to be, synonymous with deregulation.electricity restructuringregulationderegulationapplication/pdfpubliceScholarship, University of Californiahttps://escholarship.org/uc/item/22d2q3fnarticleoai:escholarship.org:ark:/13030/qt2zp943hj2011-07-03T08:18:59Zqt2zp943hjTV Advertising, Program Quality, and Product-Market OligopolyNilssen, ToreSørgard, Lars2000-04-01We present a model of the TV-advertising market that encompasses both the product markets and the market for TV programs. We argue that the TV industry has several idiosyncratic characteristics that need to be modeled, and show that the strategic interaction in this industry differs from other industries in many respects. We find that a move from a TV monopoly to a TV duopoly may reduce both the total number of viewers and the total amount of TV advertising. A softening of price competition in each product market results in more investment in program quality, higher price per advertising slot, and more advertising. A reduction of the number of firms in each product market may have the opposite effect if the price competition in the product market is sufficiently soft initially. Finally, we find that even small asymmetries between product markets can cause large asymmetries with respect to which producers buy advertising on TV.TV advertising marketproduct marketsapplication/pdfpubliceScholarship, University of Californiahttps://escholarship.org/uc/item/2zp943hjarticleoai:escholarship.org:ark:/13030/qt5mr0s11v2011-07-03T08:18:45Zqt5mr0s11vEfficient Division of Profits from Complementary InnovationsGilbert, Richard JKatz, Michael L2009-06-01Many products—including microprocessors, telecommunications devices, computer software and on-line auction services—make use of multiple technologies, each of which is essential to make or sell the product. The owner of one technology benefits from the existence of complementary technologies. We show that, despite this externality, the structure of payoffs that support efficient R&D investment by duopolists racing to discover a single innovation generalizes to the structure that supports efficient investment for complementary innovations. The paper also examines how alternative intellectual property regimes and legal institutions affect R&D investment in complementary technologies. The results have policy implications for the organization of R&D, the assessment of damages for patent infringement, and allocations of value in patent pools.Patentsinnovationcomplementscompetition policyoligopolylicensing.application/pdfpubliceScholarship, University of Californiahttps://escholarship.org/uc/item/5mr0s11varticleoai:escholarship.org:ark:/13030/qt5zb4g3872011-07-03T08:18:04Zqt5zb4g387Antitrust Policy: A Century of Economic and Legal ThinkingKovacic, William E.Shapiro, Carl1999-10-02Passage of the Sherman Act in the United States in 1890 set the stage for a century of jurisprudence regarding monopoly, cartels, and oligopoly. Among American statutes that regulate commerce, the Sherman Act is unequaled in its generality. The Act outlawed "every contract, combination or conspiracy in restraint of trade" and "monopolization" and treated violations as crimes. By these open-ended commands, Congress gave federal judges extraordinary power to draw lines between acceptable cooperation and illegal collusion, between vigorous competition and unlawful monopolization.antitrustSherman Actapplication/pdfpubliceScholarship, University of Californiahttps://escholarship.org/uc/item/5zb4g387articleoai:escholarship.org:ark:/13030/qt00p2p3wv2011-07-03T08:17:59Zqt00p2p3wvUnderstanding Competitive Pricing and Market Power in Wholesale Electricity MarketsBorenstein, Severin1999-08-02Discussions of competition in restructured electricity markets have revealed many misunderstandings about the definition, diagnosis, and implications of market power. In this paper, I attempt to clarify the meaning of market power and show how it can be distinguished from competitive pricing in markets with significant short-run supply constraints. I also address two common myths about market power: (a) that it is present in all markets and (b) that it must be present in order for firms to remain profitable in markets with significant fixed costs. I conclude by arguing that, while a finding of market power in an industry does not necessarily indicate that government intervention is warranted, such analysis is an important part of creating sound public policy.competitionelectricity marketsapplication/pdfpubliceScholarship, University of Californiahttps://escholarship.org/uc/item/00p2p3wvarticleoai:escholarship.org:ark:/13030/qt3rx965d52011-07-03T08:17:54Zqt3rx965d5Diagnosing Market Power in California's Deregulated Wholesale Electricity MarketBorenstein, SeverinBushnell, JamesWolak, Frank1999-07-01Effective competition in wholesale electricity markets is the cornerstone of the deregulation of the electricity generation industry. We examine the degree of competition in the California wholesale electricity market during June-November 1998 by comparing the market prices with estimates of the prices that would have resulted if all firms were price takers. We find that there were significant departures from competitive pricing and that it was most pronounced during the highest demand periods. Overall, this raised the cost of power purchases by about 22% above the competitive level. We also explain why the prices observed cannot be attributed to competitive peak-load pricing.Californiaderegulationelectricity marketapplication/pdfpubliceScholarship, University of Californiahttps://escholarship.org/uc/item/3rx965d5articleoai:escholarship.org:ark:/13030/qt1441h2tj2011-07-03T08:17:48Zqt1441h2tjInnovation, Rent Extraction, and Integration in Systems MarketsFarrell, JosephKatz, Michael2000-01-01We consider innovation incentives in markets where final goods comprise two strictly complementary components, one of which is monopolized. We focus on the case in which the complementary component is competitively supplied, and in which innovation is important. We explore ways in which the monopoly may have incentives to confiscate efficiency rents in the competitive sector, thus weakening or destroying incentives for independent innovation. We discuss how these problems are affected if the monopolist integrates into the competitive sector.innovationsystems marketsapplication/pdfpubliceScholarship, University of Californiahttps://escholarship.org/uc/item/1441h2tjarticleoai:escholarship.org:ark:/13030/qt1d53t6ts2011-07-03T08:17:44Zqt1d53t6tsMergers with Differentiated Products: The Case of Ready-to-Eat CerealNevo, Aviv1997-11-01Traditional merger analysis, based on market definition and use of concentration measures to infer potential anti-competitive effects, is problematic and difficult to implement when evaluating mergers in industries with differentiated products. This paper discusses an alternative which consists of a front-end estimation of demand and back-end use of a model of post-merger conduct to simulate the competitive effects of a merger. I discuss and demonstrate the use of different methods of estimating demand. Furthermore, I show how the estimated demand parameters can be used to compute the post-merger price equilibrium (rather than just an approximation to it) and changes in welfare. The methodology is applied to two recent mergers and two hypothetical mergers in the ready-to-eat cereal industry. The results clearly demonstrate the importance of the model used in front-end estimation and the computation of equilibrium in determining the competitive effects of a merger.Merger analysisdiscrete choice modelsrandom coefficientsproduct differentiationready-to-eat cereal industryapplication/pdfpubliceScholarship, University of Californiahttps://escholarship.org/uc/item/1d53t6tsarticleoai:escholarship.org:ark:/13030/qt1rg1088v2011-07-03T08:17:39Zqt1rg1088vPatent Paradox Revisited: Determinants of Patenting in the U.S. Semiconductor Industry, 1980-94Hall, Bronwyn H.Ham Ziedonis, Rosemarie1999-05-01This paper examines the patenting behavior of firms in an industry characterized by rapid technological change and cumulative innovation. Recent evidence suggests that semiconductor firms do not rely heavily on patents, despite the strengthening of US patent rights in the early 1980s. Yet the propensity of semiconductor firms to patent has risen dramatically over the past decade. This paper explores this apparent paradox by analyzing the patenting activities of almost 100 US semiconductor firms during 1980-94. The results suggest that stronger patents may have facilitated entry by firms in niche product markets, while spawning "patent portfolio races" among capital-intensive firms.patentsintellectual propertycross-licensingsemiconductor industryapplication/pdfpubliceScholarship, University of Californiahttps://escholarship.org/uc/item/1rg1088varticleoai:escholarship.org:ark:/13030/qt18b1q4kr2011-07-03T08:17:33Zqt18b1q4krEstimating Coke and Pepsi's Price and Advertising StrategiesGolan, AmosKarp, Larry S.Perloff, Jeffrey M.1998-07-01A semi-parametric, information-based estimator is used to estimate strategies in prices and advertising for Coca-Cola and Pepsi-Cola. Separate strategies for each firm are estimated with and without restrictions from game theory. These information/entropy estimators are consistent, are efficient, and do not require distributional assumptions. These estimates are used to test theories about the strategies of firms and to see how changes in incomes or factor prices affect these strategies.strategiesnoncooperative gamesoligopolygeneralized maximum entropybeveragesapplication/pdfpubliceScholarship, University of Californiahttps://escholarship.org/uc/item/18b1q4krarticleoai:escholarship.org:ark:/13030/qt38p018262011-07-02T17:04:55Zqt38p01826Sky Wars: The Attempted Merger of EchoStar and DirecTV (2000)Gilbert, RichardRatliff, James2007-09-01application/pdfpubliceScholarship, University of Californiahttps://escholarship.org/uc/item/38p01826articleoai:escholarship.org:ark:/13030/qt3c21w91h2011-07-02T17:04:11Zqt3c21w91hHow much is a Dollar Worth? Tipping versus Equilibrium Coexistence on Competing Online Auction SitesBrown, JenniferMorgan, John2006-10-01The equilibrium model of Ellison, Fudenberg, and Möbius (2004) predicts that, if two competing auction sites are coexisting, then seller revenues and buyer-seller ratios on each site should be approximately equal. We examine these hypotheses using field experiments selling identical items on the eBay and Yahoo auction sites. We find evidence that is inconsistent with the equilibrium hypotheses, and suggest that the eBay-Yahoo market is in the process of tipping. Robust statistical tests indicate that revenues on eBay are consistently 20 to 70 percent higher than those on Yahoo. In addition, eBay auctions attract approximately two additional buyers per seller than equivalent Yahoo auctions. We also vary the Yahoo ending rule from a hard close to soft close but find no statistically or economically significant changes in revenue or numbers of bidders. Moreover, the magnitude of the revenue and buyer-seller ratio disparities remain inconsistent with the notion of equilibrium coexistence even after accounting for various differentiators between the sites.Tippingequilibrium coexistencefield experimentsauctionsapplication/pdfpubliceScholarship, University of Californiahttps://escholarship.org/uc/item/3c21w91harticleoai:escholarship.org:ark:/13030/qt9xh5p5p92011-07-02T16:51:13Zqt9xh5p5p9Competition and InnovationGilbert, Richard J2007-01-27The Department of Justice and the Federal Trade Commission have frequently raised innovation concerns as reasons to challenge mergers. This chapter surveys the economic theories of innovation incentives and considers how the theory may inform antitrust analysis for merger investigations and other conduct that involve innovation. Competition can promote innovation by reducing the value of failing to invest in research and development. However, with non-exclusive intellectual property rights, competition can reduce innovation incentives by lowering post-innovation profits. There is some empirical support for these economic theories. The chapter concludes that economics can inform antitrust analysis for mergers and other conduct that could affect innovation, although it is important that antitrust analysis carefully consider the key factors that drive innovation incentives.application/pdfpubliceScholarship, University of Californiahttps://escholarship.org/uc/item/9xh5p5p9articleoai:escholarship.org:ark:/13030/qt6px3m1rb2011-07-02T10:36:35Zqt6px3m1rbInjunctions, Hold-Up, and Patent RoyaltiesShapiro, Carl2006-08-01This paper studies royalty negotiations between a patent holder and a downstream firm selling a product which is more valuable if it includes a feature covered by the patent. Royalties are negotiated in the shadow of patent litigation, which will determine whether or not the patent is valid and infringed. If the two firms negotiate after the downstream firm has already designed its product to include the patented feature, the negotiated royalty rate exceeds the natural, normative benchmark level due to the patent holder’s ability, if the patent is found valid and infringed, to obtain a permanent injunction preventing the downstream firm from selling its product until it can introduce a non-infringing version. Royalty over-charges are greatest for weak patents covering minor features of products sold at prices well above marginal cost. The downstream firm’s ability to develop a non-infringing version of its product during the pendency of litigation can reduce but not eliminate these royalty over-charges. Royalty over-charges persist even if negotiations occur before the downstream firm designs its product. Indeed, for weak patents, the downstream firm gets no benefit from the ability to negotiate a license before designing its product. However, royalty over-charges are reduced if the courts stay injunctions to provide time for infringing firms to design non-infringing versions of their products.patentsinnovationlicensinghold-upapplication/pdfpubliceScholarship, University of Californiahttps://escholarship.org/uc/item/6px3m1rbarticleoai:escholarship.org:ark:/13030/qt923692d12011-07-02T09:48:46Zqt923692d1Estimating Firm-Level Demand at a Price Comparison Site: Accounting for Shoppers and the Number of CompetitorsBaye, MichaelGATTI, RUPERT JKattuman, PaulMorgan, John2004-12-01Clearinghouse models of online pricing---such as Varian (1980), Rosenthal (1980), Narasimhan (1988), and Baye-Morgan (2001)---view a price comparison site as an "information clearinghouse" where shoppers and loyals obtain price and product information to make online purchases. These models predict that the responsiveness of a firm's demand to a change in its price depends on the number of sellers and whether the price change results in the firm charging the lowest price in the market. Using a unique firm-level dataset from Kelkoo.com (Yahoo!'s European price comparison site), we examine these predictions by providing estimates of the demand for PDAs. Our results indicate that the number of competing sellers and both the firm's location on the screen and relative ranking in the list of prices are important determinants of an online retailer's demand. We find that an online monopolist faces an elasticity of demand of about -2, while sellers competing against 10 other sellers face an elasticity of about -6. We also find empirical evidence of a discontinuous jump in a firm's demand as its price declines from the second-lowest to the lowest price. Our estimates suggest that about 13% of the consumers at Kelkoo are "shoppers" who purchase from the seller offering the lowest price.InternetPrice DispersionAdvertisingapplication/pdfpubliceScholarship, University of Californiahttps://escholarship.org/uc/item/923692d1articleoai:escholarship.org:ark:/13030/qt9d72t1012011-07-02T09:09:40Zqt9d72t101Shrouded Attributes and Information Suppression: Evidence from Field ExperimentsHossain, TanjimMorgan, John2006-09-01The recent theoretical literature suggests that consumer myopia may lead firms to profitably suppress or shroud some attributes of the price. Empirical and experimental data also suggest that sellers gain by transferring a larger fraction of the price to the shrouded attributes. However, alternative theories, including mental accounting, could also explain these framing effects. Using field experiments, we show that the impact of this price framing on revenue vanishes when we explicitly reveal the prices of different attributes, while the framing effect persists only when we shroud some price attributes. Then, using data from a natural experiment that occurred on eBay, we find that when the price of a secondary attribute such as the shipping fee is prominently displayed, the framing effect also disappears. Moreover, average revenues for sellers seem to have increased after this institutional change.Field experimentsnatural experimentsshrouded attributesadd-on pricingmental accountingapplication/pdfpubliceScholarship, University of Californiahttps://escholarship.org/uc/item/9d72t101articleoai:escholarship.org:ark:/13030/qt76q6c9jh2011-07-02T09:09:36Zqt76q6c9jhCompetition Policy for Intellectual Property: Balancing Competition and RewardGilbert, Richard JWeinschel, Alan J2005-08-01application/pdfpubliceScholarship, University of Californiahttps://escholarship.org/uc/item/76q6c9jharticleoai:escholarship.org:ark:/13030/qt3tq002qk2011-07-02T07:36:14Zqt3tq002qkRegulation and the Leverage of Local Market Power in the California Electricity MarketBushnell, JamesWolak, Frank A.2000-05-02Regulators of electricity markets around the world continue to struggle with the problem of incentivizing generators whose output, due to their location in the grid, has no viable substitutes. Such generators possess 'local' market power. Since these generators also compete in broader regional markets, the actions taken to exploit their local market power can also effect market outcomes over larger areas. In California, a contract structure known as the reliability must-run (RMR) contract was developed to address the problem of local market power. However, the contract form that was in place during 1998 created serious incentive problems. We find that, during the months of June through September 1998, RMR contracts had the effect of raising overall supply bid prices from most producers, thereby leading to higher energy prices in the California regional market.electricity marketsregulationregional marketCalifornia powerapplication/pdfpubliceScholarship, University of Californiahttps://escholarship.org/uc/item/3tq002qkarticleoai:escholarship.org:ark:/13030/qt4x44j66x2011-07-02T07:35:57Zqt4x44j66xReinvigorating Horizontal Merger EnforcementBaker, Jonathan BShapiro, Carl2007-04-10Over the past forty years, there has been a remarkable transformation in horizontal merger enforcement in the United States. With no change in the underlying statute, the Clayton Act, there has been a dramatic decline in the weight given to market concentration by the federal courts and by the federal antitrust agencies. Increasing weight has been given to three arguments often made by merging firms in their defense: entry, expansion and efficiencies. We document this dramatic shift and provide examples where courts have approved highly concentrating mergers based on limited evidence of entry and expansion. We show using merger enforcement data and a survey we conducted of merger practitioners that the decline in antitrust enforcement is ongoing, especially at the current Justice Department. We then argue in favor of reinvigorating horizontal merger enforcement by partially restoring the structural presumption and by requiring strong evidence to overcome the government’s prima facie case. We propose several routes by which the government can establish its prima facie case, distinguishing between cases involving coordinated vs. unilateral anti-competitive effects.horizontal mergersmerger enforcementantitrustcoordinated effectsunilateral effectsapplication/pdfpubliceScholarship, University of Californiahttps://escholarship.org/uc/item/4x44j66xarticleoai:escholarship.org:ark:/13030/qt6hs0v0pc2011-07-02T07:35:52Zqt6hs0v0pcCompetition or Predation? Schumpeterian Rivalry in Network MarketsFarrell, JosephKatz, Michael2001-08-01We explore the logic of predation and rules designed to prevent it in markets subject to network effects. Although, as many have informally argued, predatory behavior is plausibly more likely to succeed in such markets, we find that it is particularly hard to intervene in network markets in ways that improve welfare. We find that imposition of the leading proposals for rules against predatory pricing may lower or raise consumer welfare, depending on conditions that may be difficult to identify in practice.predatory pricingnetwork marketsapplication/pdfpubliceScholarship, University of Californiahttps://escholarship.org/uc/item/6hs0v0pcarticle