This paper surveys the contributions that economists have made to understanding standards-setting processes and their consequences for industry structure and economic welfare. Standardization processes of four kinds are examined, namely: (1) market competition involving products embodying unsponsored standards, (2) market competition among sponsored (proprietary) standards, (3) agreements within voluntary standards-writing organizations, a18d (4) direct governmental promulgation. The major trajectories along which research has been moving are described and related to both the positive and the normative issues concerning compatibility standards that remain to be studied.

The Economics Of Compatibility Standards: An Introduction To Recent Research 1

Tied sales have a long history of scrutiny under the antitrust laws of the United States The primary basis for the condemnation of this practice has been the court's belief in what has come to be known as the "leverage theory" of tying: that is, that tying provides a mechanism whereby a firm with monopoly power in one market can use the leverage provided by this power to foreclose sales in, and thereby monopolize, a second market In recent years, however, the leverage theory has come under heavy attack In this paper, I reconsider the leverage hypothesis I argue that, in an important sense, the models used by the critics of the leverage theory which all assume that the tied good market has a competitive, constant returns-to-scale structure- are incapable of addressing the central concern of the leverage theory, that tying can be profitably used to change the market structure of the tied good market I then demonstrate that when the tied good market has an oligopolistic structure, tying can indeed serve as a mechanism for leveraging market power through the foreclosure of tied market rivals sales The mechanism through which this foreclosure occurs, its profitability for the monopolist, and its welfare implications are discussed in detail

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Tying, Foreclosure, and Exclusion

Since Ronald H. Coase's (1937) seminal paper, a rich set of theories has been developed that deal with firm boundaries in vertical or input–output structures. In the last twenty-five years, empirical evidence that can shed light on those theories also has been accumulating. We review the findings of empirical studies that have addressed two main interrelated questions: First, what types of transactions are best brought within the firm and, second, what are the consequences of vertical integration decisions for economic outcomes such as prices, quantities, investment, and profits. Throughout, we highlight areas of potential cross-fertilization and promising areas for future work.

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Vertical integration and firm boundaries : the evidence

Vertical integration is a fundamental corporate strategy of interest to the fields of strategic management and organizational economics. This paper synthesizes theoretical arguments and empirical findings from this literature to identify the underlying advantages and disadvantages of choosing vertical financial ownership relative to vertical contracts. It then suggests that in the absence of agency and transaction costs, vertical financial ownership and vertical contracting are equivalent governance structures for achieving corporate objectives. However, given a world of positive agency and transaction costs, the key theoretic question then becomes predicting when market mechanisms are sufficient, when intermediate forms of vertical contracting become necessary, and when vertical financial ownership becomes the preferred governance structure. The concluding section of the paper provides a framework for making this analysis based on a synthesis of agency and transaction costs perspectives.

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The choice of organizational form: Vertical financial ownership versus other methods of vertical integration

advantage rivals by raising their costs. In this paper, we show that strategies designed to raise rivals' costs have a number of advantages over predatory pricing: They are credible, do not necessarily require the victim to exit, and do not necessarily require the existence of classical market power. The paper sets up a general model, proves a number of general results, and then applies the model to specific strategies involving "overbuying" inputs and vertical integration.

Cost-raising strategies

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Anticompetitive Exclusion: Raising Rivals' Costs To Achieve Power over Price

Salop and David Scheffman (1983) show that firms profitably can gain market power by conduct that raises their competitors' costs. Raising rivals' costs is a more credible route to market power than is predatory pricing because it is not necessary to cause the rivals to exit, no "deep pocket" is required, and the additional profits are gained immediately. That paper argues that vertical restraints and contracts with input suppliers can be fertile ground for raising competitors' costs. By contracting with one or more suppliers to exclude rivals, either by dealing with them on discriminatory terms or refusing to deal with them altogether, a firm sometimes can increase its rivals' costs. As a result, it can sometimes gain the power to raise price in the market in which it sells output. This type of contract often can be characterized as the purchase of an exclusionary right from the input suppliers. That is, in addition to the purchase of inputs, the "predator" also purchases the right to exclude (some of) its rivals from access to the suppliers' inputs. Exclusionary rights contracts can exist in a variety of forms. At one extreme are agreements that involve only exclusionary rights; no inputs are exchanged at all. For example, it was reported in Alcoa that at one time Alcoa purchased exclusionary covenants from power companies from which it did not purchase electricity. The contracts involved only the utilities' promises not to sell electricity to other aluminum companies. Such " naked" exclusionary rights contracts are unusual, of course. Most exclusionary rights are bundled with the sale of inputs. For example, Stroh Beer has alleged that the two major brewers purchase not only advertising time on network sports programs, but also the right to exclude remaining brewers from advertising on those same programs, even though the networks have other advertising time available. It might be argued that such exclusionary conduct would always fail for two reasons: the excluded rivals would have available effective counterstrategies to prevent their own exclusion; and input suppliers would have no incentives to reduce their sales by excluding some customers. These criticisms imply that raising rivals' costs by contracting with suppliers would not be credible. It surely is not true that exclusionary strategies to restrict rivals' input purchases will always succeed in raising their costs. For example, where rivals easily can substitute to other equally cost-effective inputs, or where entry into the production of inputs is so easy that the excluded rivals can efficiently produce the input themselves, then cost-raising strategies will fail. Moreover, where competition in the output market would be sufficient to maintain low prices despite the exit or increased costs of the excluded competitors, then no profit-maximizing firm would spend any resources trying to exclude those rivals. These conditions are discussed in detail in our earlier paper (1985). tDiscussants: Ronald H. Coase, University of Chicago; Gregory K. Down, Yale University; David Sappington, Bell Communications Research and University of Pennsylvania.

Competition and Cooperation in the Market for Exclusionary Rights

The regulatory scheme created - the Radio Act of 1912, Herbert Hoover and the early growth of radio, the rise and fall of Hoover's policy, the Radio Act of 1927, the Federal Radio commission, the commission and the courts market failure - framework for defining "public interest", potential sources of market failure, the limits of competition, broadcasters' special access to a unique resource diversity - minimum diversity levels, diversifying program mix, outlet and source diversity conformity - sex, drugs, violence, advertising, conclusion the public interest - the malleable public interest, the creation of the public trustee image broadcasting and the Supreme Court - overview, the early cases, the NBC case, the Red Lion case, the League of Women Voters case, the Pacifica case broadcasting versus print - scarcity, intrusion, power, public property, equality without a difference the fairness doctrine - costs, benefits, effects and alternatives, doctrinal incoherence regulatory failure - markets, competition, technology reinventing broadcast regulation - television's critics, the problems for the critics, the appropriate scope of the regulation.

Regulating Broadcast Programming

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.

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Monopoly Power and Market Power in Antitrust Law

Immediately following the Supreme Court's opinion in Red Lion Broadcasting Co. v. FCC,' which sustained the constitutionality of the Federal Communications Commission's (FCC) Fairness Doctrine,2 a flurry of articles appeared describing how to apply the doctrine vigorously to new and different situations.3 Subsequently, especially after the Court's decision in CBS v. Democratic National Committee4 curtailed access possibilities, and Miami Herald Publishing Co. v. Tornillo 5 refused to sustain right to reply laws for candidates attacked by the print media, most discussions of the Fairness Doctrine have addressed its constitu-

https://scholarship.law.duke.edu/cgi/viewcontent.cgi?article=2903&context=dlj

Thomas G. Krattenmaker

Papers

Anticompetitive Exclusion: Raising Rivals' Costs To Achieve Power over Price

Competition and Cooperation in the Market for Exclusionary Rights

Regulating Broadcast Programming

Monopoly Power and Market Power in Antitrust Law

The Fairness Doctrine Today: A Constitutional Curiosity and an Impossible Dream