Copyright (c) 2010 All rights reserved. http://works.bepress.com/herbert_hovenkamp Recent documents in Herbert Hovenkamp en-us Fri, 12 Feb 2010 23:56:09 PST 3600 http://works.bepress.com/herbert_hovenkamp/11 http://works.bepress.com/herbert_hovenkamp/11 Thu, 11 Feb 2010 05:13:33 PST ABSTRACT Ronald Coase merged two traditions in economics, marginalism and institutionalism. Neoclassical economics in the 1930s was characterized by an abstract conception of marginalism and frictionless resource movement. Marginal analysis did not seek to uncover the source of individual human preference, but accepted preference as given. It treated the business firm in the same way, focusing on how firms make market choices, but saying little about their internal workings. "Institutionalism" historically refers to a group of economists who wrote mainly in the 1920s and 1930s. Their place in economic theory is outside the mainstream, but they have found new energy with the rise of behavioral economics and socio-economics. The institutionalists emphasized the importance of human created institutions that allocate resources and power, institutional rules of social control, and the effect of institutions on the economy. The institutionalists severely qualified marginalist analysis, and they rejected the emergent neoclassical creed that the study of naked individual preference is the exclusive methodology of economic science. Most institutionalists defended the study of the biological and behaviorist sources of preference. Finally, unlike mainstream neoclassicists, most institutionalists believed that market exchange is only one of many institutions that move resources through the economy. Coase's work merged neoclassicism with institutionalism by incorporating marginalist analysis into the study of institutions. As the neoclassicists, he was not concerned about the source of preferences but only with the mechanisms by which they are asserted. More explicitly, by recognizing individual preference orderings and market exchange as the only efficient movers of resources, he reduced the problem of resource movement to one of "transaction costs." The result was a new brand of institutionalism that was far more palatable to neoclassicists but largely unacceptable to traditional institutionalists. This revised institutionalism became an important source of theory for modern law and economics. First, it recognized marginalism and the conception of the rational actor as central to economic analysis of legal institutions. Second, it preserved the Pigouvian, fundamentally institutionalist concern that economics consider the costs of moving resources from one spot to another. Third, its market-oriented marginalism led Coase to assume that the only relevant costs of resource movement are the internal value maximizing decisions of individual economic agents, captured by Coase's 1937 essay on The Nature of the Firm; and the costs of bargaining , reflected in his 1959 and 1960 articles on social cost. Herbert Hovenkamp Economics Law and Economics Legal History http://works.bepress.com/herbert_hovenkamp/10 http://works.bepress.com/herbert_hovenkamp/10 Mon, 01 Feb 2010 07:55:23 PST A tying arrangement is a seller's requirement that a customer may purchase its "tying" product only by taking its "tied" product. In a variable proportion tie the purchaser can vary her purchases of the tied product. For example, a customer might purchase a single printer, but either a contract or technological design requires her to purchase varying numbers of printer cartridges from the same manufacturer. Such arrangements are widely considered to be price discrimination devices, but their economic effects have been controversial. Price discrimination comes in various "degrees." In third degree price discrimination the seller isolates two or more different sets of customers who have differential willingness-to-pay and charges them different prices. This practice entails that some output is assigned from higher value to lower value purchasers. As a result, any third degree price discrimination scheme that fails to increase output reduces economic welfare. By contrast, second degree price discrimination occurs when a firm creates a price schedule and customers determine where on the schedule they purchase. In a tie every buyer purchases up to the point that her marginal valuation of the tied product equals its price, which is the same for everyone. We conclude that variable proportion ties nearly always increase both total welfare (producer surplus plus consumer surplus) and consumer welfare (consumer surplus alone), particularly if output increases. We consider and reject the argument that tying produces greater welfare losses when viewed from an ex ante rather than an ex post perspective. The argument rests on a flawed premise about the sources of the increased returns to innovations whose distribution requires tying. Further, it ignores the important role of fixed costs in producing innovation incentives. We also show that tying in concentrated markets produces significant benefits from the elimination of double marginalization, which occurs when firms in complementary markets have market power and the two are unable to coordinate their output. Then we extend our analysis to bundled discounts, focusing on the possibility of increased harm that can occur if the monopolist increases the standalone price of one good when inaugurating the bundled discount. Finally, and briefly, we consider the role of efficiencies in justifying ties. We conclude that the vast majority of ties produce welfare gains and most of them benefit consumers as well. As a result, harsh antitrust treatment of unilaterally imposed ties is never warranted. Herbert Hovenkamp Antitrust Intellectual Property Law Law and Economics http://works.bepress.com/herbert_hovenkamp/9 http://works.bepress.com/herbert_hovenkamp/9 Tue, 15 Sep 2009 09:45:54 PDT ABSTRACTA tying arrangement is a seller's requirement that a customer may purchase its "tying" product only by taking its "tied" product. In a variable proportion tie the purchaser can vary her purchases of the tied product. For example, a customer might purchase a single printer, but either a contract or technological design requires her to purchase varying numbers of printer cartridges from the same manufacturer. Such arrangements are widely considered to be price discrimination devices, but their economic effects have been controversial.Price discrimination comes in various "degrees." In third degree price discrimination the seller isolates two or more different sets of customers who have differential willingness-to-pay and charges them different prices. This practice creates a discontinuity in marginal valuation which entails that some output is assigned from higher value to lower value purchasers. As a result, any third degree price discrimination scheme that fails to increase output will reduce economic welfare. By contrast, second degree price discrimination occurs when a firm creates a price schedule and customers determine where on the schedule they purchase. Common examples are quantity discounts or differential pricing for different classes of transportation. In these cases, which include variable proportion ties, there is no discontinuity in marginal valuation. For example, in a tie every buyer purchases up to the point that her marginal valuation of the tied product equals its price, and that price is the same for everyone. Such arrangements can improve welfare and benefit consumers even if output falls, and are likely to benefit consumers when output increases. We conclude that variable proportion ties very likely increase both total welfare (producer surplus plus consumer surplus) and consumer welfare (consumer surplus alone).The case for variable proportion ties becomes even stronger when one considers fixed costs and scale economies, which reward higher output with lower costs. Variable proportion ties can also deconcentrate downstream markets, benefitting consumers. Finally, tying often reflects economies of joint provision or improved quality of product or distribution. The policy implication is that antitrust law should forget about price discrimination as an independent anticompetitive concern. The one measurable exception occurs when the tie benefits no one other than the seller. Even the noneconomic rationale for condemnation that price discrimination is an unappealing practice disappears once we consider that the true impact of variable proportion ties is to reduce rather than increase the extent of price disparities to buyers. Herbert Hovenkamp Antitrust Economics Law and Economics http://works.bepress.com/herbert_hovenkamp/8 http://works.bepress.com/herbert_hovenkamp/8 Thu, 20 Aug 2009 10:12:49 PDT IP AND ANTITRUST: ERRANDS INTO THE WILDERNESSABSTRACT Antitrust and intellectual property law both seek to promote economic welfare by facilitating competition and investment in innovation. At various times both antitrust and IP law have wandered off this course and have become more driven by special interests. Today, antitrust and IP are on very different roads to reform. Antitrust began an Errand into the Wilderness in the late 1970s with a series of Supreme Court decisions that linked the plaintiff's harm and right to obtain a remedy to the competition-furthering goals of antitrust policy. Today, patent law has begun its own reform journey, but it is in a much earlier stage. The outlook for copyright law is much bleaker. We argue that the main component in these reform journeys is the development of a concept of harm that is related to the underlying goal of legal policy. In its 1977 Brunswick decision the Supreme Court largely ignored the language of an expansive antitrust damages provision that gives private plaintiffs treble damages for every injury caused by an antitrust violation. Rather, the Court said, the type of harm must be sufficiently related to the goals of the antitrust laws, which is to make markets more competitive. We propose a concept of "IP injury" that limits IP remedies to situations in which the IP holder has suffered actual harm sufficiently linked to the purpose of IP law, which is to incentivize innovation. An infringement that benefits the infringer and does no cognizable harm to the IP right holder or anyone else is a pure Pareto improvement - something that can be said of few involuntary transactions. The trick for legal policy is to determine when the IP holder has not suffered any cognizable harm. This analysis requires a re-examination of IP externalities, or spillovers, where IP should follow the antitrust lead in permitting the market to correct for them, intervening only where the inability to recover for an external benefit has a material impact on ex ante incentives to innovate. It also requires a re-examination of patent holdup and remedies. We propose rules that reward the relevant actors for either giving or obtaining timely notice. As in the case of antitrust, reformation of IP's theory of harm will most likely come from the judiciary and not from Congress. Herbert Hovenkamp Antitrust Courts Intellectual Property Law http://works.bepress.com/herbert_hovenkamp/7 http://works.bepress.com/herbert_hovenkamp/7 Wed, 11 Mar 2009 10:05:16 PDT ABSTRACTVertical integration occurs when a firm does something for itself that it could otherwise procure on the market. For example, a manufacturer that opens its own stores is said to be vertically integrated into distribution. Both classical political economy and marginalist economics saw vertical integration and vertical contractual arrangements as much less threatening to competition than cartels or other horizontal arrangements. Nevertheless, vertical integration produced by far the greater amount of legislation at both federal and state levels and motivated many more political action groups. Two things explain this phenomenon. First, while economists prior to the 1930s rarely saw a threat, neither did they understand why firms integrate or enter into long term contracts, except for fairly obvious savings in production costs. Second, vertical integration led to many bankruptcies of small family businesses unable or unwilling to take on the costs and associated risks of integrating vertically themselves. When that happened, politics inevitably triumphed over economics.Both the common law and classical economists tended to view vertical integration favorably. The principal limitation on vertical integration by contract was common law rules limiting restraints on alienation. The managerial revolution in the United States in the nineteenth century occasioned the rise of significant vertical integration. At the same time, however marginalist, or neoclassical, economics first began to see significant competitive problems. The emergent legal policy toward vertical control by contract was developed first in intellectual property law's "first sale" doctrine, and later on in antitrust policy. In his 1937 article on the "Nature of the Firm," Ronald H. Coase formulated a purely marginalist, nonmonopolistic theory of vertical integration, but it was ignored by both economists and legal policy makers for nearly half a century. Economists continued to wrestle with theories that were far more myopic, and as a result much less satisfactory. The result was that vertical integration became much more vulnerable to special interest legislation than did competition policy generally. By the mid-twentieth century a set of aggressive antitrust policies had emerged that dealt harshly with both vertical integration by contract and ownership vertical integration. Herbert Hovenkamp Corporations Economics Law and Economics Legal History http://works.bepress.com/herbert_hovenkamp/6 http://works.bepress.com/herbert_hovenkamp/6 Wed, 18 Feb 2009 10:57:44 PST In "The Problem of Social Cost" Ronald Coase was highly critical of the work of Cambridge University Economics Professor Arthur Cecil Pigou, presenting him as a radical government interventionist. In later work Coase's critique of Pigou became even more strident. In fact, however, Pigou's Economics of Welfare created the basic model and many of the tools that Coase's later work employed. Much of what we today characterize as the "Coase Theorem" was either stated or anticipated in Pigou's work. Further, Coase's extreme faith in private bargaining led him to fail to see problems that Pigou saw quite clearly and that remain with us to this day. Herbert Hovenkamp Jurisprudence Law and Economics http://works.bepress.com/herbert_hovenkamp/5 http://works.bepress.com/herbert_hovenkamp/5 Tue, 17 Feb 2009 11:37:40 PST COMPLEX BUNDLED DISCOUNTS AND ANTITRUST POLICYABSTRACT A bundled discount occurs when a seller conditions a discount or rebate on the buyer's purchaser or two or more different products. Firms that produce fewer than all the good in the bundle find it difficult to compete because they must amortize the discount across a smaller range of goods. For example, if the dominant firm offers a 10% discount for purchase of both good A and good B, but the rival makes only good B, it will have to offer a discount that is large enough to match the dominant firm's B discount as well as the foregone discount on A. The Antitrust Modernization Commission and several courts have adopted an "attribution" test for assessing the antitrust legality of bundled discounts. The test attributes the full discount to the product(s) for which rivals are claiming exclusion, and asks whether the resulting price is below cost. This test contains some features of the cost-based rule for single product predatory pricing, but it also differs in important respects. Both tests query whether an equally efficient rival can match the dominant firm's price. Most models of bundled discounting consider two goods that are purchased in a one-to-one ratio. None of the judicial decisions involve such simplicity. In most the bundle consists of more than two goods, and different rivals may produce differing subsets of the dominant firm's bundle. Further, in nearly all of the cases the proportion of goods in the bundle can be varied at the will of the customer. We show that in such situations antitrust analysis of the bundle is significantly more complex and anticompetitive exclusion must typically be assessed on a rival-by-rival and customer-by-customer basis. This has important implications for the certification of class actions in bundled discount cases. We also provide some apparatus for assessing bundled discounts in these situations. Herbert Hovenkamp Antitrust Economics Law and Economics http://works.bepress.com/herbert_hovenkamp/4 http://works.bepress.com/herbert_hovenkamp/4 Mon, 02 Feb 2009 08:03:00 PST NEOCLASSICISM AND THE SEPARATION OF OWNERSHIP AND CONTROL Herbert Hovenkamp ABSTRACT The separation of ownership and control is a phrase that will forever be associated with Adolf A. Berle and Gardiner C. Means The Modern Corporation and Private Property (1932), as well as with Institutionalist economics, Legal Realism, and the New Deal. Neoclassical economists have generally been sharply critical, both of the historical facts that Berle and Means purported to describe and of the conclusions that they drew. In fact, however, the separation of ownership and control had already been an essential element of the neoclassical theory of corporate governance and corporate finance. This paper explores the history of the concept of separation of ownership and control within neoclassical economics, starting with Yale economist Irving Fisher's separation theorem developed early in the twentieth century, which held that a corporation's profit function could not be derived from shareholders' utility function; Ronald Coase's Nature of the Firm, which applied purely marginalist analysis to the determinants of the horizontal and vertical structure of the corporation; and then to the great corporate finance theorems and hypotheses of the 1950s and 1960s. These concluded that ownership and capital are nothing more than alternative, fungible sources of capital, and that a profitable stock ownership strategy involves no knowledge whatsoever about the firms in which one is investing. Herbert Hovenkamp Corporations Economics Legal History http://works.bepress.com/herbert_hovenkamp/3 http://works.bepress.com/herbert_hovenkamp/3 Tue, 06 Jan 2009 13:34:23 PST UNITED STATES COMPETITION POLICY IN CRISIS,1890-1955 Herbert Hovenkamp ABSTRACT The development of marginalist, or neoclassical, economics led to a fifty-year long crisis in competition theory. Given an industrial structure with sufficient fixed costs, competition always became "ruinous," forcing firms to cut prices to marginal cost without sufficient revenue remaining to pay off investment. Early neoclassicists such as Alfred Marshall were not able to solve this problem, and as a result many economists were hostile toward the antitrust laws in the early decades of the twentieth century. The ruinous competition debate came to an abrupt end in the early 1930's, when Joan Robinson and particularly Edward Chamberlin developed models that took product differentiation into account. The emergent theory of monopolistic competition came with its own problems, however -- namely, "excessive" product variety and advertising, chronic excess capacity, and prices above short-run marginal cost. In sharp contrast to the ruinous competition model, the monopolistic competition model called for aggressive antitrust enforcement. This change of model largely explains the Roosevelt administration's abrupt shift in antitrust policy between the First and Second New Deals. Only with John Maurice Clark's theory of workable competition in 1940 and the Mason-Bain structure-conduct-performance paradigm developed in the 1950s did neoclassical competition theory begin to reach a new equilibrium that attempted to calibrate the amount and kind of competition policy necessary to produce satisfactory results in diverse markets. The subsequent debate between Harvard structuralism and the emergent Chicago School occurred largely within this paradigm. Herbert Hovenkamp Corporations Economics http://works.bepress.com/herbert_hovenkamp/2 http://works.bepress.com/herbert_hovenkamp/2 Sun, 28 Sep 2008 09:30:49 PDT ABSTRACT The development of marginalist, or neoclassical, economics led to a fifty-year long crisis in competition policy. Given an industrial structure with sufficient fixed costs, competition always became "ruinous," forcing firms to cut prices to marginal cost without sufficient revenue remaining to pay off investment. Early neoclassicists such as Alfred Marshall were not able to solve this problem. As a result many early twentieth century economists were hostile toward the antitrust laws. The ruinous competition debate came to an abrupt end in the early 1930's, when economists Joan Robinson in Great Britain and particularly Edward Chamberlin in the United States developed models that took product differentiation into account. The emergent theory of monopolistic competition came with its own problems, however -- namely, "excessive" product variety and advertising, chronic excess capacity, and prices above short-run marginal cost. In sharp contrast to the ruinous competition model, the monopolistic competition model called for aggressive antitrust enforcement. This change of model largely explains the Roosevelt administration's abrupt shift in antitrust policy between the First and Second New Deals. Only with John Maurice Clark's theory of workable competition in 1940 and the Mason-Bain structure-conduct-performance (S-C-P) paradigm developed in the 1950s did neoclassical competition theory begin to reach a new equilibrium which attempted to calibrate the amount and kind of competition policy necessary to produce satisfactory results in diverse markets. The subsequent debate between Harvard structuralism and the emergent Chicago School occurred largely within this paradigm. Herbert Hovenkamp Antitrust Corporations Law and Economics Legal History http://works.bepress.com/herbert_hovenkamp/1 http://works.bepress.com/herbert_hovenkamp/1 Wed, 27 Aug 2008 08:57:51 PDT ABSTRACT A price squeeze occurs when a vertically integrated firm "squeezes' a rival's margins between a high wholesale price for an essential input sold to the rival, and a low output price to consumers for whom the two firms compete. Price squeezes have been a recognized but controversial antitrust violation for two-thirds of a century. We examine the law and economics of the price squeeze, beginning with Judge Hand's famous discussion in the Alcoa case in 1945. While Alcoa has been widely portrayed as creating a "fairness" or "fair profit" test for unlawful price squeezes, Judge Hand actually adopted a cost-based test, although a somewhat different one than most courts and scholars would adopt today. We conclude that strictly cost-based predatory pricing tests such as the one the Supreme Court developed in its 1993 Brooke Group decision are not appropriate to the concerns being raised in a price squeeze. We also consider several efficiency explanations, the importance of joint costs, situations in which the dominant firm uses a squeeze to appropriate the fixed cost portion of the rival's investment, as well as those where the shared input is a fixed rather than variable cost for the rival. Ultimately, we find little room for antitrust liability except in one circumstance: where a squeeze is used to restrain the rival's vertical integration into the monopolized market. Herbert Hovenkamp Antitrust