While everyone else is waiting in line to check out Kristen’s MySpace page, we at the Antitrust Review keep offering wholesome nerd fare such as Paul Krugman’s 1978 Theory of Interstellar Trade. (HT: /.) The paper

extends interplanetary trade theory to an interstellar setting. It is chiefly concerned with the following question: how should interest charges on goods in transit be computed when the goods travel at close to the speed of light? This is a problem because the time taken in transit will appear less to an observer traveling with the goods than to a stationary observer. A solution is derived from economic theory, and two useless but true theorems are derived. … It should be noted that while the subject of this paper is silly, the analysis actually does make sense. This paper, then, is a serious analysis of a ridiculous subject, which is of course the opposite of what is usual in economics.

The First Fundamental Theorem of Interstellar Trade is:

When trade takes place between two planets in a common inertial frame, the interest costs on goods in transit should be calculated using time measured by clocks in the common frame, and not by clocks in the frames of trading spacecraft.

Indeed. For further elaboration I suggest that the reader turn to Alastair Reynolds Revelation Space universe and to Ken MacLeod’s Engines of Light trilogy. Frank Herbert, on the other hand, cheated his way out of the problem with FTL travel, which Krugman rightly dismisses.

That brings us to the Second Fundamental Theorem of Interstellar Trade:

If sentient beings may hold assets on two planets in the same inertial frame, competition will equalize the interest rates on the two planets.

The upshot is that interstellar trade can be viewed as long-term investments, similar to 17th Century merchant capitalism. Interestingly, Krugman remarks that:

Recent progress in the technology of space travel … raise[s] the distinct possibility that we may eventually discover or construct a world to which orthodox economic theory applies.

But what if the rate of innovation within the inertial frame makes any estimate of the value of goods in transit a wild guess? In that case, interstellar trade might not be trade in new goods but rather in antiques, a possibility that Cory Doctorow considers in his short story Craphound.

Technorati Tags: economics, SF, interstellar trade

Merger analysis works best in markets with unchanging, undifferentiated products, and costs that are affected more by scale than by changes in production methods. This is mainly because merger analysis is forward looking and the more tomorrow will look like today, the more reliable our prognosis. However (fortunately!) few markets that I have dealt with fall into this category. Katz’ and Shelanski’s excellent paper on mergers and innovation deals with the twofold effects that “innovation” has on merger analysis:

1. Innovation disrupts market definition and competitive effects prognosis; and
2. Innovation may be threatened directly by the merger.

The first effect they refer to as “innovation impact,” the second as “innovation incentives.”

Innovation impact

As long as the technology that forms the backdrop of today’s products and thus market boundaries doesn’t change much, there is a robust positive correlation between the number of rivals, the intensity of competition, and consumer welfare gains. More rivals, more intense competition, lower prices. That’s the tried and true structure-conduct-performance or concentration-competition-welfare paradigm. But what if technology changes or is about to change? Disruptive innovation:

• Severs the continuity between pre- and post-merger market definition;
• Makes pre-merger market shares both less reliable and less significant, which, in practice, suggests that new customer sales or license revenues are often more telling than share of installed base;
• Makes it much harder to identify competitors and entrants;
• Renders the SSNIP test pretty much useless, because where innovation rules, “price” (of what?) is often not a useful reflection of value.

Innovation incentives

Here, the concern is that the merger itself might change the nature, pace, and direction of innovation itself. Consider the acquisition of a small electric car maker by a traditional gasoline car manufacturer. The small company has every incentive to disrupt the market and steal share. The large company has to balance incremental profits from electric cars against potential losses from selling fewer gasoline-powered cars and, more importantly, undermining the market itself. Cannibalization can therefore be a significant disincentive to radical innovation. Redeploying the small company assets to make better car batteries and starters might thus be the more “civilized” approach to innovation. (Here are slides from my antitrust/ip course, discussing the replacement effect.)

Katz and Shelanski discuss the two traditional approaches to “innovation incentives,” that courts and agencies have taken in the past.

1. Extension of the static rivals-competition-welfare model to innovation cases, assuming that more rivals lead to more intense competition for innovation, resulting in increased consumer welfare.
2. Schumpeterian competition, with a three phase model of monopoly, creative destruction through disruptive innovation, and a subsequent race to monopoly, repeated over and over.

The authors find that there is only a weak correlation between increased concentration and less R&D, except in cases of mergers to monopoly, and a somewhat weakened connection between R&D and welfare, considering that some R&D races are wasteful. For example, spending an incremental $1 billion to beat a competitor in a paten race by one day. The incremental day is hardly worth $1 billion to society.

Efficiencies

In “innovation cases,” companies often make claims as to increased post-merger innovation. Katz and Shelanski identify the following:

1. Combination of complementary IP and R&D assets
2. Better R&D funding through risk-spreading; and
3. Higher margins, which will allow greater R&D funding.

Personally, I have never heard anyone make argument (3), for obvious reasons. As to the other claims, Katz and Shelanski find (2) unpersuasive because of cannibalization and because there is no evidence that a larger firm invests in qualitatively better R&D. In contrast (1) is plausible, provided that the parties can show that cooperative R&D is more promising than parallel, competitive R&D. In my view, (2) is not per se unpersuasive. It all depends on whether and to what extent the acquired potential for innovation competes with the buyer’s present capabilities and its valuation of its present market position going forward. A large buyer looking to displace the status quo may well be a more powerful disruptive force than a small firm, for example, because customers are more likely to adopt a radically new technology if it is backed by a blue chip corporation.

There’s more in this great paper. Download it while it’s hot!

Technorati Tags: innovation, antitrust, mergers

The December issue of The Antitrust Source is now online.  It includes, among the many excellent articles, Symposium: What’s Next for the Supreme Court? regarding reamining antitrust issues for the Court to adress and an interview with William Blumenthal, General Counsel, Federal Trade Commission.

Barak Orbach of the University of Arizona is in the process of creating a comprehensive RPM web archive. Orbach’s new paper, Antitrust Vertical Myopia: The Allure of High Prices and Consumer Experiences, provides an in depth discussion of the practice. Here’s the abstract:

Low prices are one of antitrust law’s traditional promises to society. Resale price maintenance (”RPM”), the practice whereby a manufacturer sets pricing rules for retailers, artificially inflates prices and, thus, allegedly runs afoul of antitrust laws. The practice emerged in the last quarter of the nineteenth century with the rise of advertising and has been one of the most controversial antitrust topics ever since. This Essay examines the practice of RPM and argues that courts and scholars have been trapped in the habit of using traditional arguments for and against the practice, overlooking its common uses in markets for premium-brand goods. The Essay argues that manufacturers of premium-brand goods often use RPM to protect the appeal of their products as status goods.

Technorati Tags: antitrust

Joshua Spivak posted a nice review of Bruce Abramson’s The Secret Circuit over at the The San Francisco Chronicle.

In “The Secret Circuit: The Little-Known Court Where the Rules of the Information Age Unfold,” Bruce Abramson, author of “Digital Phoenix,” a study of the information economy’s collapse and revitalization, pulls back the curtain of American legal and economic policy to provide an engaging discussion of the recent developments and debates that have led to the creation of the country’s strong patent system. Focusing on the relatively obscure U.S. Court of Appeals for the Federal Circuit in Washington, Abramson provides an excellent discussion of how and why America’s politicians decided to strengthen patent protection, what this new arrangement meant for the American economy and whether further reforms need to be undertaken. Though the end of the book gets a little lost in the minutiae of the circuit court’s non-intellectual property caseload, the overall work is sound, providing a great examination of an important engine for America’s economic growth.

Einer Elhauge speculates that Justice Breyer’s dissent in Leegin might have been motivated by considerations outside the realm of traditional vertical restraints analysis.

So, it seems clear that, under standard Harvard school principles, the majority was right to overrule the per se rule against vertical minimum price-fixing. The puzzle is what provoked a vigorous dissent Justice Breyer, one of the world’s most sophisticated antitrust justices, who has generally been fully within the Harvard school. Part of the reason may be that the majority failed to express the stronger grounds for its conclusion that I have described above. But the fact that Breyer’s dissent referred no less than six times to the stare decisis considerations that were cited in an abortion case made it hard to avoid the conclusion that this case had gotten mixed up with abortion politics. One wonders sometimes whether it would not be better to have a separate Supreme Court of Abortion Law, to prevent abortion issues from mucking up the rest of Supreme Court jurisprudence and from distorting the nomination and confirmation process for justices who spend the lion’s share of their time on unrelated issues.

Here is the link to the article.

Technorati Tags: antitrust, abortion

Daniel Sokol has the list.

Technorati Tags: antitrust

The new edition of the Antitrust Source is now available.  This edition includes an article by Marie Fiala and Scott Westrich regarding “how courts are likely to evaluate retail price maintenance cases following the Supreme Court’s Leegin decision” and an article by Andrew Frackman and Brendan Dowd analyzing “the implications of the Supreme Court’s recent decision in Credit Suisse Securities (USA) LLC v. Billing for private antitrust claims challenging securities-related conduct.”

Congratulations to the winners!

The COMPASS Prize is awarded to published or forthcoming papers in a peer-reviewed journal that, in the opinion of the selection committee, make the most significant contributions to the understanding and implementation of competition policy. The 2007 co-winners, who will share $20,000, are:

• Mark Armstrong of University College London for his paper, published in the RAND Journal of Economics, entitled “Competition in Two-Sided Markets.”
• IgalHendel and Aviv Nevoof Northwestern University for their paper, published in Econometrica, entitled “Measuring the Implications of Sales and Consumer Inventory Behavior.”

The COMPASS Prize in the amount of $5,000 is awarded to the paper written by a Ph.D. candidate that makes the most significant contribution to the understanding and implementation of competition policy. The winner of this year’s Ph.D. award is:

• Nathan Miller of the University of California at Berkeley for his paper, “Can Strategic Leniency Fight Organized Crime? Empirical Evidence from Cartel Enforcement.”

William Page and Seldon Childers discuss one of the more interesting aspects of the remedies in the Mircosoft case.

An important provision in each of the final judgments in the government’s Microsoft antitrust case requires Microsoft “make available” to software developers the communications protocols that Windows client operating systems use to interoperate “natively” (that is, without adding software) with Microsoft server operating systems in corporate networks or over the Internet. The short-term goal of the provision is to allow licensees of the protocols to write applications for non-Microsoft server operating systems that can interoperate as well with Windows client computers as can applications written for Microsoft servers. The long-term goal is to preserve, in the network context, the “middleware threat” to the Windows monopoly - the possibility that middleware applications running on servers might become a platform that could erode the “applications barrier to entry” as Netscape and Java had threatened to do. The district court singled out this provision as the “most forward-looking” in the final judgments, and as the key to assuring that the other provisions do not become “prematurely obsolete.” The provision has, however, proven to be by far the most difficult to implement. We argue that it has not accomplished its purpose and that courts can draw some hard lessons from the experience.

Thanks to Danny Sokol for the pointer.

Technorati Tags: antitrust, microsoft

Steve Hannaford, the man behind the Oligopoly Watch blog (a blog with 100% original content, imagine that!), just published a book: Market Domination!: The Impact of Industry Consolidation on Competition, Innovation, and Consumer Choice.

Here’s the Amazon blurb:

An oligopoly (from the Greek, “few sellers”) is a market that is dominated by a few large and powerful players. As Steve Hannaford documents with numerous examples, virtually every industry today–from medical equipment to airlines, toy retailing to oil–is trending in this direction, in the greatest movement toward industry consolidation and concentration since the turn of the 20th century. Everyone who reads the newspapers is aware of the dizzying pace of mergers, acquisitions, buyouts, and alliances, between big companies and small companies in every industry. Such deals, along with the growing social and political clout of the biggest companies, are critical issues for the economy and for our future as consumers. Charting the course of this trend around the world, Hannaford examines the motivations behind consolidation into corporate empires, how companies exert political pressure to their advantage, and how the actions of the most dominant players, such as Coca-Cola, Wal-Mart, Viacom, Dell, ExxonMobil, Citigroup, and others, affect the choices we have at the supermarket, the drugs we are prescribed, and the movies we watch. Considering the implications of industry concentration on competition, technological innovation, business management, strategy, consumer behavior, and politics, Hannaford paints a provocative, but ultimately balanced, picture of big business and its impact on society.

I ordered a copy.

Technorati Tags: antitrust

No one seriously questions that ideological bias influences judicial decisions. But, as with most things, the interesting question is not whether but how much? Using a modified version of the Segal-Cover ideology scores that have proven highly predictive in civil rights cases, Nancy Staudt, Lee Epstein, and Peter Wiedenbeck analyzed every U.S. Supreme Court case decided between 1940 and 2005 that involves an interpretation of the Internal Revenue Code. Here are the Segal-Cover scores of the Supreme Court justices since 1940.

When the Court is extremely liberal, the probability that the government prevails is 83%; whereas when the Court is at its most conservative, the probability that the government will prevail falls to 47%. A moderate court (i.e. a Court with the median coded as 0) will produce a government win roughly 63% of the time, which is the mean percentage of government wins in our database of all income tax cases. These statistics offer an explanation for why the government won more often in the 1950s and is currently losing corporate tax cases at a high rate: in the 1950s the Court had a Segal-Cover score of +.499, while the current Court has had a score of –.349 since the 2000 term. Although we do not have cases from the 2005 term in our data set, because the Court currently has a score of –.5, our models predict that a corporation has a 54% probability of winning the case—quite a bit higher than the mean rate, which is just 37% over the course of the sixty-four Supreme Court terms we examined.

(HT ELS blog.) Download it while it’s hot.

Technorati Tags: antitrust

The new edition of the Antitrust Source is now online.  In addition to the Roundtable Conference with Enforcement Officials Tom Barnett (Antitrust Division), Bob Hubbard (NAAG), Neelie Kroes (European Commission), and Deborah Majoras (FTC) (from the ABA Spring Meeting), this edition includes a must-read (in this website’s humble opinion) article by Antitrust Review’s own Manfred Gabriel Twombly: A Journey from the Conceivable to the Plausible.

Check it out.

Daniel Sokol has the list with links. Here’s the short version.

1. Expert Declaration of J. Gregory Sidak Concerning the Competitive Consequences of the Proposed Merger of Sirius Satellite Radio, Inc. and XM Satellite Radio, Inc., J. Gregory Sidak
2. Behavioral Economists at the Gate: Antitrust in the 21st Century, Maurice E. Stucke
3. Mandating Access to Telecom and the Internet: The Hidden Side of Trinko, Daniel F. Spulber, Christopher S. Yoo
4. Competition Law and Copyright Misuse, John T. Cross, Peter K. Yu
5. Authorized Generics: A Prescription for Hatch-Waxman Reform, Tom Chen,
6. Two Puzzles Resolved: Of the Schumpeter - Arrow Stalemate and Pharmaceutical Innovation Markets, Michael A. Carrier
7. Mergers when Firms Compete by Choosing both Price and Promotion, Luke Froeb, Steven Tenn, Steven Tschantz
8. The Empirics of Antitrust in Two-Sided Markets, Marc Rysman
9. Hanging Up on Carterfone: The Economic Case Against Access Regulation in Mobile Wireless, Marius Schwartz, Federico Mini
10. Property, Liability and Market Power: The Antitrust Side of Copyright, Antonio Nicita, G.B. Ramello

Note the two articles on antitrust and copyright, which is quickly becoming a new frontier on both sides of the Atlantic.

Technorati Tags: antitrust, IP

Bill Henderson is applying social network analysis to graph the degree of interconnectedness between cities (NY, DC, SF, etc.) and major law firms. The results are unsurprising (big law firms like big cities, etc.) but the chart looks cool.

Technorati Tags: law firms