Rethinking Antitrust in the Presence of Transaction Costs: Coasian Implications

Abstract

This article analyzes the implication of transaction costs for antitrust analysis and explains why the usual antitrust analysis can be misleading as a guide to consumer or society welfare because it assumes that pricing is linear and uniform. The article shows how the relevant transaction costs can be altered by conduct subject to antitrust review, such as loyalty discounts or merger, and thereby influence the pricing mechanism used. When conduct alters the pricing mechanism, a correct antitrust analysis must account for the consequences of that pricing on improved efficiency. The paper summarizes the results of merger simulations using nonlinear pricing to further illustrate the potential errors from ignoring the use of nonlinear pricing. Finally, the paper discusses how coalition formation, viewed through the lens of cooperative game theory, can identify those situations that might give rise to the creation of market power. The paper then applies the analysis to several topics of current antitrust interest including exclusive dealing, the conduct of credit card companies, and the setting of fair reasonable and non-discriminatory (FRAND) royalty rates for standard essential patents.

Keywords: Transaction costs, nonlinear pricing, antitrust merger simulation

JEL Classification: L00