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Abstract:
This short paper prepared for the Antitrust Law Journal's Symposium on Antitrust at the Millennium examines the contribution to antitrust reasoning and law of the Supreme Court's Kodak opinion. The main focus of the article involves the first principles approach to antitrust analysis. In this approach, analysis is centered on the evaluation of the competitive effects of the conduct. Market power and market definition have a role, but their role is part of and in reference to the main analysis of the alleged anticompetitive conduct and its likely market effects. Market power and market definition are not analyzed in a vacuum or in a threshold test, divorced from the conduct and effects allegations. Instead, analysis focuses on competitive effects, in some sense, the effects on the conduct on changes in market power. The competitive benchmark for analyzing both market effects and market power is the price that would prevail in the absence of the alleged anticompetitive conduct. This benchmark price often differs from both the current price and the perfectly competitive price. By following this first principles approach, logic and consistency are maintained and analytic traps and factual errors can be avoided. These traps include the well-known Cellophane Trap, but also the Marginal Cost, Price-Up, Threshold Test and Unilateral SSNIP Traps that are defined and discussed in the article. In addition, useless quibbling about the proper relevant market also sometimes may be avoided and replaced with evidence of market efffects.

Abstract:
This short paper prepared for the Antitrust Law Journal's Symposium on Antitrust at the Millennium examines the contribution to antitrust reasoning and law of the Supreme Court's Kodak opinion. The main focus of the article involves the first principles approach to antitrust analysis. In this approach, analysis is centered on the evaluation of the competitive effects of the conduct. Market power and market definition have a role, but their role is part of and in reference to the main analysis of the alleged anticompetitive conduct and its likely market effects. Market power and market definition are not analyzed in a vacuum or in a threshold test, divorced from the conduct and effects allegations. Instead, analysis focuses on competitive effects, in some sense, the effects on the conduct on changes in market power. The competitive benchmark for analyzing both market effects and market power is the price that would prevail in the absence of the alleged anticompetitive conduct. This benchmark price often differs from both the current price and the perfectly competitive price. By following this first principles approach, logic and consistency are maintained and analytic traps and factual errors can be avoided. These traps include the well-known Cellophane Trap, but also the Marginal Cost, Price-Up, Threshold Test and Unilateral SSNIP Traps that are defined and discussed in the article. In addition, useless quibbling about the proper relevant market also sometimes may be avoided and replaced with evidence of market effects.

Abstract:
Among the proposed remedies in the Microsoft case are structural remedies that would create competition in operating systems for personal computers. One criticism that has been raised against such remedies is that they would lead to "fragmentation" of the Windows standard. According to this critique, the remedy would lead to a number of radically different and incompatible operating systems. As a result, these remedies would impose expensive porting costs on applications developers, leading to higher costs and less product variety for consumers. This paper examines the "fragmentation" hypothesis and concludes that fears of fragmentation and high porting costs resulting from Windows competition are unwarranted. The competing operating systems created by an effective structural remedy will start from the same code base and run on the same hardware platform, thereby reducing porting costs. In addition, the operating systems competitors will have the incentive to maintain backward compatibility and compatibility with each other, which will serve to reduce porting costs. Finally, porting costs can be reduced further by cooperation among the operating systems competitors. The cost of porting from one operating system to another will be far smaller than from the Windows operating system running on an Intel microprocessor to a new operating system running on a different microprocessor.


Other papers related to the Microsoft Case:

"Creating Competition in the Market for Operating Systems: A Structural Remedy for Microsoft"
by Thomas M. Lenard.

"A Fool's Paradise: The Windows World After a Forced Breakup of Microsoft"
by Stan J. Liebowitz.

"Breaking Windows: Estimating Some Costs of Breaking up Microsoft Windows"
by Stan J. Liebowitz.

Our database includes more than 20 other papers about the Microsoft case. To find them, please use an "abstract body" search,. and enter "Microsoft" as the search term.

Abstract:
There is currently great intellectual ferment over the proper antitrust liability standard governing allegedly exclusionary conduct under Section 2. This article (which is forthcoming in the Antitrust Law Journal) focuses on the two main competing liability standards: the profit-sacrifice standard (and the no economic sense variant of the test) and the consumer welfare effect standard. The central thesis of this article is that the use of the profit-sacrifice test as the sole liability standard for exclusionary conduct, or as a required prong of a multi-pronged liability standard is fundamentally flawed. The profit-sacrifice test may be useful, for example, as one type of evidence of anticompetitive purpose. In unilateral refusal to deal cases, it can be useful in determining the non-exclusionary benchmark. However, the test is not generally a reliable indicator of the impact of allegedly exclusionary conduct on consumer welfare - the primary focus of the antitrust laws. The profit-sacrifice test also is prone to several significant pitfalls and often would be complex and subjective to implement in practice. As a result, relying on the profit-sacrifice test as the legal standard would lead to significant legal errors. Instead, a better standard to govern exclusionary conduct is the consumer welfare effect test which is focused directly on the anticompetitive effect of exclusionary conduct on price and consumer welfare. This standard can be described in various ways: for example, as conduct that is "unreasonably exclusionary" or "unnecessarily restrictive", or simply as conduct that causes "consumer harm on balance". This can be implemented without causing excessive false positives that might lead to over-deterrence or a welfare-reducing diminution in innovation incentives. Many of the criticisms of the consumer welfare standard are based on a misunderstanding of the workings of the standard relative to the profit-sacrifice test. In fact, the consumer welfare standard exhibits fewer potential over-deterrence and under-deterrence errors in implementation.

competition, antitrust, exclusion, monopolization, consumer harm

Abstract:
There is now a growing interest in antitrust in the anticompetitive conduct of buyers. This article (to be published in the Antitrust Law Journal) analyzes potentially anticompetitive "overbuying" conduct by power buyers. Overbuying involves increasing the purchases of a particular input with the purpose and effect of gaining either monopsony power in the input market or market power in the output market. Predatory overbuying is overbuying inputs as a predatory strategy to cause buyer-side competitors in the input market to exit from the market or permanently shrink their capacity, in order to gain monopsony power in the input market. Raising Rivals' Costs ("RRC") Overbuying is overbuying inputs in order to raise rivals' input costs and thereby gain market power in the output market. After briefly reviewing classical monopsony conduct, the article analyzes these two strategies in detail. It examines the impact of the conduct on the overbuying firm, its competitors, input suppliers and the consumers in the output market. It sets out the conditions under which these strategies are both profitable for the firm and harmful to consumers. This analysis suggests a four-part rule of reason legal standard. It then discusses short-cut tests and compares this conduct to classical predatory pricing, including the relevance of the price-cost test and the profit-sacrifice test. It also compares the relative competitive risks of the two overbuying strategies. It concludes that predatory overbuying raises less serious competitive concerns than RRC overbuying, and that plaintiffs alleging such predatory overbuying should be subject to a more demanding legal standard, including a requirement that plaintiffs show price less than cost.

Abstract:
The Competitor Collaboration Guidelines recently issued in draft form by the Federal Trade Commission do not include detailed analysis of exclusionary access agreements. This short article begins to fill this gap by formulating sample guidelines on exclusionary access agreements. These sample guidelines are preliminary and are intended to stimulate further debate and analytic development. They will be revised and refined on the basis of comments and suggestions received.

Abstract:
The Competitor Collaboration Guidelines recently issued in draft form by the Federal Trade Commission do not include detailed analysis of exclusionary access agreements. This short article begins to fill this gap by formulating sample guidelines on exclusionary access agreements. These sample guidelines are preliminary and are intended to stimulate further debate and analytic development. They will be revised and refined on the basis of comments and suggestions received.

Abstract:
This paper explores cooperation incentives in the absence of public reputation information, using an infinite-horizon Prisoners' Dilemma model of sequential relationships. We examine a strategy which we call Quit-for-Tat (QFT). In this model, individuals initially are paired randomly. In the equilibrium with identical profit-maximizing individuals, each initially cooperates with some probability. If both cooperate, they form a long-term cooperative relationship until one dies. If one defects, then the victim quits the relationship and both are paired with others. Defection is not public information, but known only to the victim. There are three possible steady-state equilibria, one in which each person defects every period and, under certain conditions, two partial cooperation QFT equilibria. In these QFT equilibria, a fraction of individuals cooperate initially with new partners (or each individual follows a mixed strategy in the initial interaction with a new partner) and then follow a QFT strategy thereafter. Given this basic structure, if there arises a critical mass of ethical or religious families (a moral minority) who never defect in the initial interaction, but follow QFT afterwards, these "righteous" people (and their righteous offspring) induce a cooperation bandwagon and dramatically increase the equilibrium amount of cooperation in society, despite the lack of public reputation information. Moreover, if the discount rate tends to zero, then the required critical mass of the righteous also tends to zero.

Prisoners' Dilemma, random matching, imperfect information, altruism, law and economics, behavioral economics

Abstract:
This note describes the implementation of the hypothetical monopolist ssnip test for market definition in the context of merger cases where firms produce multiple differentiated products. The test developed here represents an extension and generalization of the Katz-Shapiro and O'Brien-Wickelgren market definition test for the case of multi-product firms. We present and explain this test with an illustrative example. In the Appendix, we provide a more general and technical description of the test.

market definition, SSNIP test, multi-product firms

Abstract:
This paper formulates a rigorous rule of reason legal standard under Section 2 of the Sherman Act for refusals to deal and price squeezes undertaken by an unregulated, vertically integrated monopolist against actual or potential competitors. This rule of reason standard is administrable by the courts and the monopolist. It takes into account the direct effects on consumers, as well as the longer run effects on the innovation and investment incentives of both the monopolist and its would-be competitors. In this way, the legal standard protects consumers and the competitive process on which a successful market economy is based.

antitrust, refusals to deal, sherman act

Abstract:
This article seeks an answer to a question that should be well settled: for purposes of antitrust analysis, what is 'market power' and/or 'monopoly power'? The question should be well settled because antitrust law requires proof of actual or likely market power or monopoly power to establish most types of antitrust violations.

Examination of key antitrust law opinions, however, shows that courts define 'market power' and 'monopoly power' in ways that are both vague and inconsistent. We conclude that the present level of confusion is unnecessary and results from two different but related errors:

(1) the belief or suspicion that market power and monopoly power are two different concepts, when they are in fact, for antitrust purposes, qualitatively identical. We argue that attempting to distinguish between market power and monopoly power creates a false dichotomy; and

(2) the failure to recognize that anticompetitive economic power can manifest itself in two distinct ways, and these differences have significant legal and policy implications. The true distinction is between anticompetitive economic power that is exercised by restricting one's own output, and such power exercised by restricting the output of one's rivals. Identifying this fundamental distinction and discarding the false one can help to clarify a number of troublesome antitrust issues.

The body of this article describes these conclusions, and the bases for them, in some detail. The appendix presents a shorter, more technical description of the principal argument. Readers already familiar with the main body of antitrust law and conversant with antitrust economics may wish to begin by reading the appendix.

antitrust,market power,monopoly power,competition law,

Abstract:
The standard Ricardian model of competition has a fixed number of firms, each with limited capacity and differential exogenous costs or qualities. In this paper, we introduce a real entry process by formulating a multistage Ricardian equilibrium model with free entry and stochastic product qualities and costs. The set of active firms and their qualities and costs are determined by an equilibrium dynamic entry process in which an unlimited number of potential entrants face identical investment costs and prospects. In the first stage, each firm sequentially chooses whether or not to undertake a risky investment that determines its quality and cost. The process continues until no more firms wish to invest. In the second stage, the firms compete to sell their limited capacity to a fixed number of identical buyers. The resulting Ricardian stochastic free entry equilibrium has a number of interesting properties. Firms invest as long as the "marginally active" (i.e., worst sold) seller's quality (or cost) does not meet a critical threshold that does not depend on the realizations of the other active sellers or the number of units demanded. There are two possible equilibrium market structures. One structure involves excess sellers in which prices are determined by the cost and quality of the "marginally inactive" (i.e., best unsold) seller. The other structure involves the number of investing potential entrants just equal to the number of units demanded, and sellers charging prices equal to the buyers' value. Regardless of the market structure, the entry process and equilibrium are socially optimal. Surprisingly, demand increases either have no effect on prices or, more generally, lead to lower prices. Restricting sales by active sellers similarly cannot lead to higher prices because such supply restrictions induce entry investment that continues until a new entrant replaces the unit that was withheld from the market. In fact, it generally leads to lower prices. However, "warehousing" the marginally inactive (best unsold) unit is a profitable method of raising prices because it does not induce entry. In the limiting case of a large number of small sellers, the model nicely illustrates the distinction between short and long run competitive equilibrium, and the expected price converges to a long run supply price.

Abstract:
How should the views of individual judges on an appellate panel be combined to reach a decision in any particular case. Oddly enough, there has been coomparatively little attention paid to this very fundamental question, notwithstanding the fact that there are (at least) two very different procedures judges could use, and that the choice between them may be outcome-determinative in many circumstances. In this paper, we set out an analytic framework for examining the question of which voting rule multi-member courts should use, with reference to the well-known case of National Mutual Insurance Co. v. Tidewater Transfer Co., 337 US 532 (1948), and demonstrate a number of fundamental flaws in the methods of outcome-voting used by most multi-member panels.

Condorcet Paradox, judicial voting, multi-member courts

Abstract:
We present a model of ordered bargaining between one buyer and several sellers, with Nash bargaining at each stage. We first show that the model has the property that the buyer's payoff equals the expected utility of a weighted sum of independent Bernoulli random variables. We then exploit this property to uncover further properties and implications of the model using standard results from expected utility and probability theory. We derive some potential implications for merger analysis and we outline an application of the model to the allocation of pork barrel spending.

bargaining, ordered bargaining, Nash bargaining solution

Abstract:
This short article, which was submitted to the Antitrust Modernization Commission, explains why the consumer welfare standard is used by courts and is more appropriate for evaluating antitrust issues.

antitrust

Abstract:
This paper presents an economic framework for analyzing the competitive effects of partial ownership interests. The competitive effects of partial ownership depend critically on two separate and distinct elements: financial interest and corporate control. These two factors affect the incentives of the acquiring firm and the firm in which it acquires a partial ownership interest. The paper defines and analyzes a variety of different corporate control assumptions such as silent financial interest, total control, and Coasian joint control and applies the framework to horizontal and vertical joint ventures. Partial ownership forces the analyst to grapple with the question of the degree of control or influence that partial owners have over managers, how partial ownership translates into control or influence, and how this influence translates into competitive effects. The paper also develops methods for quantifying the effect of partial ownership interests and joint ventures on competitive incentives, using the modified HHI and a price pressure index (PPI) that we define.

Abstract:
This short paper prepared for the Antitrust Law Journal's Symposium on Antitrust at the Millennium examines the contribution to antitrust reasoning and law of the Supreme Court's Kodak opinion. The main focus of the article involves the first principles approach to antitrust analysis. In this approach, analysis is centered on the evaluation of the competitive effects of the conduct. Market power and market definition have a role, but their role is part of and in reference to the main analysis of the alleged anticompetitive conduct and its likely market effects. Market power and market definition are not analyzed in a vacuum or in a threshold test, divorced from the conduct and effects allegations. Instead, analysis focuses on competitive effects, in some sense, the effects on the conduct on changes in market power. In this approach, market power is the power profitably to raise or maintain price above the competitive benchmark price. The competitive benchmark is the price that would prevail in the absence of the alleged anticompetitive conduct. This benchmark price often differs from both the current price and the perfectly competitive price. By following this first principles approach, logic and consistency are maintained and analytic traps and factual errors can be avoided. These traps include the well-known Cellophane Trap, but also the Marginal Cost, Price-Up, Threshold Test and Unilateral SSNIP Traps that are defined and discussed in the article. In addition, useless quibbling about the proper relevant market also may be avoided.

Abstract:
There is ongoing controversy over the proper antitrust decision process that regulatory commissions and the courts should use to evaluate various restraints. This controversy entails the question of whether to analyze conduct under a per se rule, the classical rule of reason, the quick look, the inherently suspect standard, or some other truncated rule of reason standard. This article applies decision theory to this issue of standards formulation. Decision theory sets out a process for making factual determinations and decisions when information is costly and therefore imperfect. The paper is a methodology for determining when to make decisions on the basis of current information, and when to gather and consider further information before making a decision. It then applies that methodology to the formulation of antitrust standards.

Abstract:
This paper examines a number of issues in the economics and law of leverage and monopolization through the lens of the Microsoft case. The paper explains how Microsoft's practices can be divided into two categories -- exclusivity and incompatibility. This exclusionary conduct has the effect of preserving its operating system monopoly from the threat of competition, a characterization which does not violate the single monopoly profit theory. After carrying out an economic analysis of this exclusionary conduct, the paper then uses a decision theoretic approach to evaluate alternative legal rules for governing such alleged monopolizing conduct.

Abstract:
This paper is a conference discussion of the Katz and Shapiro article "Antitrust Analysis of Software Markets," as part of a recent Progress and Freedom Foundation Conference titled, "Competition, Convergence and the Microsoft Monopoly." The paper analyzes some aspects of exclusionary vertical conduct and applies that analysis to the Microsoft-Netscape "browser wars" and the Microsoft-Sun "Java wars." The main issue stressed is the applicability of the single monopoly profit theory to monopoly leveraging allegations. in the examples, monopoly leveraging into a second market may be a rational anticompetitive strategy to preserve or enhance the firm's monopoly power in the first product.

Abstract:
Monopoly leverage involves using a monopoly in one market to achieve market power or monopoly in a second adjacent market. The concept of monopoly leverage has a long history in antitrust. Bowman, Bork , and other Chicago-school commentators successfully criticized the simple theory of monopoly leverage as failing to recognize that there may be only a single monopoly profit available to the monopolist, even if it integrates. More recent economic theories have addressed the single monopoly critique and have demonstrated a variety of circumstances in which monopoly leverage is a rational strategy that harms consumers. This contribution to the New Palgrave Dictionary of Economics and the Law sets out this analysis and a methodology for evaluating anticompetitive allegations involving monopoly leverage and vertical mergers.

Abstract:
This paper provides a conceptual framework for analyzing the impact of imperfect information on decision making. It goes without saying that rules that economize on information must not excessively sacrifice the accuracy of the outcome. On the other hand, gathering information is never costless. Accordingly, optimal rules will depend on the value of gathering additional information -- i.e. the social costs of reducing the incidence and magnitude of error.Statistical decision theory provides a formal methodology for developing optimal rules for gathering information. Building upon a well established economics literature, we treat the gathering of information as a stopping problem. The optimal stopping rule has the property that additional information is gathered only if the marginal value of the information exceeds the marginal cost of the information.In this paper, we formulate a multi-stage decision model of efficient procedure that incorporates these various elements.We determine for the optimal summary disposition standards that minimize the sum of information and error costs. We also determine the efficient sequence in which legal and factual issues are evaluated. We take into account the potential for replacing information gathering with presumption at an earlier stage. We also take into account the potential for grants of summary disposition for the plaintiff as well as for the defendant. Finally, we analyze the interaction between the full information standard and the use of summary disposition.We demonstrate five basic results. First, we derive optimal standards for summary disposition. We show how those standards depend on the cost of information, the weights of the issues in determining the overall merits of the case, and the initial degree of uncertainty regarding the issues, that is, the strength of the fact finder's initial presumptions. Second, we derive results on the optimal sequencing of issues. These results elucidate the type of issues that are most appropriate for summary disposition and what type more appropriately would be tried on the merits on the basis of a fuller record. Third, we establish that it generally is optimal for summary disposition to be two-sided. That is, plaintiffs as well as defendants should be able to be granted summary disposition on a particular issue. Fourth, we establish that there are two stages at which it is optimal to consider summary disposition. One stage occurs early in the process before detailed case specific facts on any issues are generated. The other stage occurs after facts have been gathered on some but not all of the relevant issues. Fifth, we establish that it generally is optimal for legal standards based on full information to be relative standards, in which issues are balanced, rather than separate absolute standards for each issue.