Rethinking Antitrust in the Presence of Transaction Costs: Coasian Implications

Review of Industrial Organization, Feb 2015

This article analyzes how transaction costs influence the ability to charge nonlinear prices and how market structure and industry behavior affect those transaction costs. The failure to recognize that nonlinear pricing produces a different equilibrium than linear pricing together with a recognition that the pricing mechanism can be altered by conduct under antitrust review explains why the usual antitrust analysis can be misleading. The paper illustrates its points using merger simulations with nonlinear pricing. Finally, the paper analyzes how to identify situations where market power might arise and applies the analysis to exclusive dealing, credit cards and FRAND royalties.

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Rethinking Antitrust in the Presence of Transaction Costs: Coasian Implications

Rethinking Antitrust in the Presence of Transaction Costs: Coasian Implications Dennis W. Carlton 0 1 2 Bryan Keating 0 1 2 0 B. Keating (&) Compass Lexecon , 1101 K St., NW, Washington, DC 20005 , USA 1 D. W. Carlton Booth School of Business, University of Chicago , 5807 Woodlawn Ave, Chicago, IL 60637 , USA 2 This essay is based on Carlton's Keynote Address at the 12th Annual International Industrial Organization Conference , Chicago, IL, April 12, 2014 This article analyzes how transaction costs influence the ability to charge nonlinear prices and how market structure and industry behavior affect those transaction costs. The failure to recognize that nonlinear pricing produces a different equilibrium than linear pricing together with a recognition that the pricing mechanism can be altered by conduct under antitrust review explains why the usual antitrust analysis can be misleading. The paper illustrates its points using merger simulations with nonlinear pricing. Finally, the paper analyzes how to identify situations where market power might arise and applies the analysis to exclusive dealing, credit cards and FRAND royalties. 1 Introduction Coase (1960) altered fundamentally how most economists think about externalities and government intervention. Coase made the point that in a world with welldefined property rights and no transaction costs, parties would always wind up at an efficient point, thereby eliminating externalities and the need for government intervention. But Coases main point was that we do not live in such a world and that by the assignment of property rights, a government can influence transaction costs and thereby the ability of the economy to reach an efficient point. Therefore, a government should assign property rights in order to enable the economy to reach an efficient solution.1 We explore in this article the implications of Coases insights for antitrust and show how Coases insights mean that we should refocus much or at least some of our economic analysis of the antitrust issues that are related to mergers and market power. This article together with a companion paper (Carlton and Keating forthcoming) makes several points that are related to transaction costs and antitrust. In the absence of transaction costs, output would be at the efficient level, and there would be no deadweight loss, and hence no need for antitrust if one uses a total surplus criterion (Demsetz 1968). Since there are transaction costs, it is important for an antitrust analysis to examine whether they are sufficiently low to enable nonlinear pricing; and, if not, whether the conduct that is under scrutiny lowers transaction costs so as to allow the use of nonlinear pricing. Failure to account for the use of nonlinear pricing can lead to a mistaken antitrust analysisespecially when efficiencies are involved. Finally, the cost of creating a coalition of economic agents is related to transaction costs. Cooperative game theory tells us that one can view all of antitrust in a unified way as the creation of one coalition that exploits the non-coalition members. By studying when coalition formation is low and high, one can identify situations where the creation of market power is possible. This paper is organized as follows. Section 2 examines the foundational model of antitrust in which a firm (or group of firms) maintains a uniform price that is above marginal cost, restricts output (below the level that would be dictated by the criterion of price equals marginal cost), and harms consumer and total welfare. For example, the famous Williamson diagram (Williamson 1968) is still the way mergers are often thought ofwith the deadweight loss from the mergers consequence of raising the price offset in part or in total by the efficiency gain from the lowered costs that are also the consequence of the merger. But Coases insight forces us to focus on transaction costs in our analysis. What prevents any firm with market power from eliminating the deadweight loss that is typically associated with that market power? How does competition affect that transaction cost, and how will that transaction cost be altered by a change in market structure or by certain conduct such as the imposition of vertical restrictions? Section 2 explores these questions and shows that only by answering them can we 1 Or, more precisely, the efficient solution is one that takes account of transaction costs and depends on the efficient assignment of property rights. Stigler, only half-jokingly, described Coases article and in particular his first resultthe one involving no transaction costsas 60 pages of Pareto-optimality said very slowly. Stiglers point is that since a bigger pie is always preferred to a smaller one, Coases point is obvious if one defines no transaction costs to mean that one obtains efficiency. [Stigler would be the first to admit that Coases point was not, at least initially, obvious to anyone; see Stigler (2003).] hope (...truncated)


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Dennis W. Carlton, Bryan Keating. Rethinking Antitrust in the Presence of Transaction Costs: Coasian Implications, Review of Industrial Organization, 2015, pp. 307-321, Volume 46, Issue 4, DOI: 10.1007/s11151-015-9453-4