Demsetz Research Articles

A CONTROVERSIA SOBRE O EXCESSO DE CAPACIDADE NO MODELO DE CONCORRÊNCIA MONOPOLÍSTICA

Em 1959, Harold Demsetz iniciou uma controvérsia ao demonstrar a possibilidade da inexistência de excesso de capacidade na posição de equilíbrio a longo prazo da firma no modelo de concorrência monopolística, onde exista um grande número de firmas em cada grupo de produto. Somente a partir de 1970 é que surgiram algumas contestações importantes ao resultado de Denisetz, embora na forma de novas demonstrações do teorema do excesscrde capacidade, sem nenhum ataque direto à demonstração de 1959. O propósito do presente trabalho é mostrar que o aparecimento de resultados contlitivos decorreu de diferentes juízos de valor sobre qual deveria ser o nível ideal de produção para fins de medição do excesso de capacidade. A fim de fazer essa demonstração, o autor sumaria os principais trabalhos envolvidos na controvérsia. Apresenta, também, uma versão algébrica do modelo geométrico utilizado por Demsetz para explicar a natureza do equilíbrio sob concorrência monopolística.

Frischmann's View of "Toward a Theory of Property Rights"

In this brief article, Professor Harold Demsetz defends his seminal paper "Toward a Theory of Property Rights" against the most recent critique to his theory made by Brett Frischmann in “Evaluating the Demsetzian Trend in Copyright Law” (Review of Law and Economics, 2007).

Supreme Court Amicus Brief of Professors and Scholars in Law and Economics in Support of Certiorari, Pacific Bell Telephone Co. v. linkLine Communications, Inc., No. 07-512 (filed Nov. 16, 2007)

The linkLine price squeeze case from the Ninth Circuit is the most important antitrust case that the Supreme Court could take during the Fall 2007 Term. Amici are professors and scholars in law and economics who have taught, or have conducted research on, antitrust law and the economics of industrial organization. They include William J. Baumol, Robert H. Bork, Robert W. Crandall, George Daly, Harold Demsetz, Jeffrey A. Eisenach, Kenneth G. Elzinga, Gerald Faulhaber, Franklin M. Fisher, Charles J. Goetz, Robert Hahn, Jerry A. Hausman, Thomas M. Jorde, Robert E. Litan, Paul W. MacAvoy, J. Gregory Sidak, Pablo T. Spiller, and Daniel F. Spulber. We agree with the petitioners that the Ninth Circuit has generated an inescapable conflict among circuits, and that the Ninth Circuit's opinion below is incompatible with this Court's reasoning in Verizon Communications Inc. v. Law Offices of Curtis V. Trinko, LLP, 540 U.S. 398 (2004), Weyerhaeuser Co. v. Ross-Simmons Hardwood Lumber Co., 127 S. Ct. 1069 (2007), and Brooke Group Ltd. v. Brown & Williamson Tobacco Corp., 509 U.S. 209 (1993). We agree with Judge Gould's dissent in linkLine that Trinko takes the issues of wholesale pricing out of the case, such that the plaintiffs' only possible remaining theory of harm would be predatory pricing at the retail level - which the plaintiffs did not allege. linkLine Commc'ns Inc. v. Pac. Bell Tel. Co. d/b/a/ ATT it also permits imposition of liability based on apparently subjective evaluation of disputed and hard-to-prove facts, which will lead to a substantial risk of false positives.

Toward a Clarification of the Block-Demsetz Debate on Psychic Income and Externalities

For over a quarter of a century, one small corner of the voluminous literature on the Coase theorem has been the scene of an animated and, at times, heated debate between Walter Block and Harold Demsetz. Over the entire course of the debate, Block (1977, 1995, 2000) has argued that when individuals have only psychic income with which to maintain their property rights, the Coase theorem fails. And Block (1977, 1995) holds the position that his psychic income case represents a conceptually distinct qualification to the Coasian position. Demsetz (1979, 1997) maintains that Block’s case against the Coase theorem, at least in its weak form, involves nothing more than a demonstration of the potential importance of income effects and as such does not constitute a conceptually distinct qualification.

Evaluating the Demsetzian Trend in Copyright Law

Abstract Copyright law provides an excellent case study with which to evaluate Harold Demsetz's theory of property rights. Regardless of how one feels about the relationship between property and intellectual property, it is hard to escape the fact that intellectual property rights have expanded and grown more property-like and more privatized in recent decades. In this article, I critique the undeniable Demsetzian trend in copyright law and challenge some of the fundamental premises upon which rest the normative arguments for continued privatization and propertization of intellectual resources. First, I focus on the perceived benefits of internalizing externalities, arguing that externalities do not necessarily distort incentives or, more generally, the market allocation of resources. For many externalities, there is no efficiency benefit to internalization (whether accomplished by Pigouvian taxes/subsidies or property rights). In the end, the benefits of internalization must be carefully assessed rather than assumed. The view that increasing the degree of internalization through private property rights inevitably leads to increased incentives to invest in creation or distribution is not well-established in either theory or practice. Second, I focus on the frequently-invoked solution of efficient licensing and the “logic” that property rights should be extended “into every corner in which people derive enjoyment and value...[so that] signals of consumer preference [may] trigger and direct [producers'] investments” (Goldstein, 1994). I argue that a fundamental flaw in this logic undermines the efficient licensing hypothesis. Social demand for individuals' access to and use of copyright protected works often exceeds private demand. Purchasers'/licensees' willingness to pay reflects only their private demand and does not take into account value that others might realize as a result of their use. As I explain, many uses of copyrighted works generate value for third-parties. Finally, drawing from the first two points, I argue that, from a Coasean perspective, both externalities and property rights have symmetrical and reciprocal potentials to distort the market allocation of resources. A priori and devoid of context, one cannot say that the potential distortions caused by a property right, externality, or incremental change in a property right have a net positive or negative effect on social welfare.

Property Economics versus New Institutional Economics: Alternative Foundations of How to Trigger Economic Development

'What are the core economic principles to be implemented for protected transactions in developing and transitional countries to trigger economic development? In recent decades, two approaches have been developed which claim to answer this question: (i) the theory of property rights, or new institutional economics, originating from Armen Alchian (1977) and Harold Demsetz (1967; see also Alchian and Demsetz 1973) and developed by Nobel laureate Douglass C. North (1973, with Robert P. Thomas; see also North 1981 and 1990)1 and (ii) the property-based theory of the economy, or property

What'd I Say?: Coase, Demsetz and the Unending Externality Debate

Economists study various problems referred to as - situations that, at least potentially, justify government intervention to solve them. Externalities (or costs) are viewed as perhaps the greatest market failure problems. externality issue has also occasioned much re-thinking of fundamental economic principles, particularly in the context of Ronald Coase's article on The Problem of Social Cost. Coase explained that externalities manifested a more fundamental issue in economics, the costs of transacting over rights to affect other's welfare. Following Coase's work, economists almost reflexively consider social costs problematic only when transaction costs are relatively high. Yet, Coase's analysis has resulted in much confusion, even disagreement. For example, Harold Demsetz has recently objected to aspects of the Coase approach, as a matter of both economics and of government policy. As economics, Demsetz says, Coase's focus on transactions costs is not helpful in resolving questions concerning externalities. Even if transaction costs were zero, externalities would still exist. Moreover, Demsetz objects that focus on transaction costs to explain persistent externalities furnishes spurious reasons for undesirable government intervention in markets. This paper summarizes and evaluates Demsetz objections, maintaining that Demsetz sometimes ignores points that Coase has made. At the same time, Demsetz adds new insights to the Coase Theorem.

Talking 'Bout My Antitrust Generation: Competition For and In the Field of Competition Law

Twenty-seven years ago I took my law-school antitrust course, from a fledgling assistant professor who had just left the Federal Trade Commission. My performance was adequate, earning one of the better grades in the course, but not spectacular. Unspectacular enough that afterwards the professor said it disappointed him. In retrospect, I think I under-performed because I was a soon-to-be economist as well as a budding lawyer. Like many people back then, I approached antitrust with a presumption that the gears of industrial-organization economics and antitrust law meshed more or less synchronously. But such a presumption was unwarranted, to say the least. As the course developed, it increasingly dawned that antitrust law, supposedly devoted to enhancing competition, was more a part of the problem than the solution. A few who had thought about all this longer had figured it out already. But for a callow law student at the time, it was difficult to mesh the economics of with competition law. I went into the exam conflicted, and evidently it showed. The conflicts today are fewer, thanks to a new brand of antitrust thinking that has developed and a new breed of antitrust enforcers that have arrived over the past generation. Often the new thinkers and enforcers are one and the same. The assistant professor who taught me antitrust is now the Chairman of the Federal Trade Commission, having written prolifically on both the Commission and antitrust law generally. Likewise, seminal scholars - also among my contemporaries and teaching colleagues - such as Frank Easterbrook, Richard Posner and Diane Wood - now as judges apply the new law that they espoused as academics. This article describes aspects of the evolution by which new antitrust rules have emerged to stimulate the salutary (if incomplete) rapprochement between economics and law in antitrust. In effect, the new rules have emerged from various types of competition, of two general sorts. To invoke Harold Demsetz's useful distinction, the has occurred in the field and for the field of antitrust. That is, the current generation has witnessed competition, first, as to which intellectual (including economic) paradigm animates antitrust law - for the field. As Section I details, for the field has included in the federal judiciary, some of that represented by acts of seeming judicial disobedience in antitrust. Thereafter, there has been considerable in the field, along lines to be described in section II, focusing on developments (some desirable, some not) in enforcement of the antitrust laws.

Property, Intellectual Property, and Free Riding

Courts and scholars have increasingly assumed that intellectual property is a form of property, and have applied the economic insights of Harold Demsetz and other property theorists to condemn the use of intellectual property by others as riding. In this article, I argue that this represents a fundamental misapplication of the economic theory of property. The economics of property is concerned with internalizing negative externalities - harms that one person's use of land does to another's interest to it, as in the familiar tragedy of the commons. But the externalities in intellectual property are positive, not negative, and property theory offers little or no justification for internalizing positive externalities. Indeed, doing so is at odds with the logic and functioning of the market. From this core insight, I proceed to explain why free riding is desirable in intellectual property cases except in limited circumstances where curbing it is necessary to encourage creativity. I explain why economic theory demonstrates that too much protection is just as bad as not enough protection, and therefore why intellectual property law must search for balance, not free riders. Finally, I consider whether we would be better served by another metaphor than the misused notion of intellectual property as a form of tangible property.

Que reste-t-il de la contribution d'Alchian et Demsetz à la théorie de l'entreprise ?

Résumé La présente contribution étudie l’apport d’Alchian et Demsetz (1972), souvent présenté comme l’un des textes fondateurs de la microéconomie contemporaine de la firme, du point de vue de l’histoire de la pensée économique. Replacé dans son contexte historique, cet article peut être considéré comme une réponse au « défi radical ». Ce courant, qui s’est institutionnalisé à la fin des années 1960, a contraint les économistes néoclassiques à réformer leur approche en vue d’intégrer de nouveaux éléments au programme standard. Bien que l’article d’Alchian et Demsetz soit très largement cité, son contenu n’a pourtant que très peu été repris, en raison de ses limites internes et d’un cadre d’analyse trop restreint. Finalement, ce sont essentiellement les quelques lignes sur la spécificité de la relation d’emploi, lesquelles seront reprises au cours des années 1980 et 1990 dans les réflexions portant sur les sources de l’autorité, qui resteront à la postérité.

Property rights: cooperation, conflict, and law

List of Figures and Tables vii Acknowledgments ix Introduction: The Economic Approach to Property Rights 1 PART I: INTRODUCTION 13 One: Property Rights in the History of Economic Thought: From Locke to J. S. Mill by Edwin G. West 20 Two: Property Rights in the Firm by Yoram Barzel 43 PART II: INTRODUCTION 59 Three: Open Access versus Common Property by Thrinn Eggertsson 73 Four: Gains from Private Property: The Empirical Evidence by Louis De Alessi 90 PART III: INTRODUCTION 113 Five: The Evolution of Property Rights by Terry L. Anderson and Peter J. Hill 118 Six: Contracting for Property Rights by Gary D. Libecap 142 Seven: Force, Threat, Negotiation: The Private Enforcement of Rights by David D. Haddock 168 PART IV: INTRODUCTION 195 Eight: First Possession as the Basis of Property by Dean Lueck 200 Nine: Government as Definer of Property Rights: Tragedy Exiting the Commons? by Fred S. McChesney 227 PART V: INTRODUCTION 255 Ten: Property Rights or Externalities? by Bruce Yandle 259 Eleven: Ownership and the Externality Problem by Harold Demsetz 282 PART VI: INTRODUCTION 301 Twelve: In and Out of Public Solution: The Hidden Perils of Forced and Unforced Property Transfer by Richard A. Epstein 307 Thirteen: Public Goods and Property Rights: Of Coase, Tiebout, and Just Compensation by William A. Fischel 343 References 365 Cases Cited 391 About the Editors and Authors 393 Index 395

Transitions between Property Regimes

Abstract What causes a society to reallocate property rights? The canonical explanation is the one offered by Harold Demsetz in “Toward a Theory of Property Rights”—that societies adopt new property regimes when some external shock alters the costs and benefits of an existing regime such that it becomes less efficient than the one that replaces it. As others have noted, however, the Demsetz account fails to specify any mechanism by which the transition can actually occur, and the existence of such a mechanism is not obvious, because the transition is likely to be costly. This paper examines the empirical operation of one such mechanism, used in the massive reallocation of property rights that took place throughout Europe and many of its colonies roughly between 1500 and 1900, in which functionally organized property systems were converted into spatially organized systems.

Cowboys and Contracts

This article expands Harold Demsetz’s seminal work on property rights by arguing that property rights entrepreneurs discover previously unowned or unpriced attributes of a resource and capture rents by defining and enforcing rights to those attributes. To keep the rents from these new uses from being dissipated in the tragedy of the commons, the entrepreneur must contract to exclude others from the value of his perception. We describe specific and general contracting and use the frontier of the American West to illustrate the two. A central theme is that smaller, homogeneous groups are more likely to prevent rent dissipation and that more centralized political processes are more likely to encourage it.

The Economic Evolution of Petroleum Property Rights in the United States

We examine Harold Demsetz’s prediction that property rights emerge as the benefits of doing so exceed the costs in the context of oil and gas resources in the United States. Familiar influences on the development of petroleum property rights, technology, market demand, and politics provide support for the hypothesis. Our primary contribution is to demonstrate the important role of a less familiar factor, the presence in the reservoir of both oil and gas with differentially volatile prices. This factor has affected the nature of the property rights assigned with unitization, an institutional arrangement to internalize the common‐pool externality. Information asymmetries and conflicting price expectations have resulted in unit agreements that would not have been predicted in a strict neoclassical sense. Our analysis provides new insights into the nature of voluntary unitization contracts, inherent limits to producers’ ability to internalize externalities, and the welfare implications of compulsory unitization.

Dynamic explanations of industry structure and performance

Examines the exercise of market power in vertical channels. Reviews the development of food systems over the past century. Presents neoclassical models arising from the work of Adam Smith, George Stigler, Harold Demsetz and John Spengler that are in juxtaposition to the more commonly advanced agency theoretic explanation of vertical organization and performance. Develops a structural model of price transmission in a channel that has differentiated product oligopolies at two stages. Increasing concentration at successive stages creates a problem of double marginalization. Vertical trading partners reduce it by avoiding vertical Nash (arms length) pricing via the use of trade promotions and other coordination methods such as private label. Finally, the rise in retail‐buyer concentration (six supermarket chains now control 52.6 percent of supermarket sales in the USA) portends a possible shift to the European model in which food retailers develop and promote their own brands.

The Economic Evolution of Petroleum Property Rights in the United States

We examine Harold Demsetz's (1967) prediction that property rights would emerge and be refined once the benefits of doing so exceeded the costs. We follow the gradual development of property rights to subsurface oil and gas deposits in the United States through private and political negotiations to test this prediction. The pattern has been influenced by technological change, shifts in relative prices, information asymmetries, and political factors. All in all, the pattern of property rights development for oil and gas described follows the broad outlines sketched Demsetz. But the details of the bargaining process, the importance of information asymmetries and price volatility, and the key role of politics have resulted in property rights structures that would not have been predicted in a strict neo-classical sense. Our analysis provides insights regarding the industry practice of crafting unitization agreements that distinguish between multiple participating areas and/or time-phases of extraction. Completing these agreements often is plagued by high transactions costs, and the state has intervened to force unitization. But we argue that under certain circumstances this action may not improve welfare.

The Positive Correlation of Price and Concentration in Staples: Market Power or Indivisibility?

The FTC's successful challenge of the Staples-Office Depot merger is one of the most important antitrust cases in recent years. Vital to the FTC's success was evidence that prices for office supplies were significantly higher in markets having only one firm operating office supply superstores than in markets having two or three such firms. The FTC used this evidence to argue that the merger would raise the price of office supplies. This paper applies an idea of Harold Demsetz (1989) - indivisibility rent - to argue that one-firm markets probably have higher marginal costs. If so, the FTC's inference about the effect of the merger is doubtful.

Neoclassical explanations of vertical organization and performance of food Industries

This paper examines the exercise of market power in vertical marketing channels in a more general and novel fashion than prior research. Neoclassical models arising from the work of Adam Smith, George Stigler, Harold Demsetz, and John Spengler are presented in juxtaposition to the more commonly advanced agency theoretic explanation of vertical organization and performance. The paper develops a structural model of price transmission in a channel that has differentiated product oligopolies at two stages. Increasing concentration at successive stages creates a problem of double marginalization. Vertical trading partners reduce it by avoiding vertical Nash (arms length) pricing via the use of trade promotions and other coordination methods such as private label. Finally, the rise in retail buyer concentration, six supermarket chains now control 52.6% of supermarket sales in the U.S., portends a possible shift to the European model wherein food retailers develop and promote their own brands. [EconLit Citations: L13,Q13]. © 2001 John Wiley & Sons, Inc.

Efficiency, growth, and concentration: an empirical analysis of hospital markets

Taking an evolutionary view of markets, Harold Demsetz hypothesized that firms differ persistently in efficiency and that industry concentration results from growth of efficient firms at the expense of inefficient ones. We test the hypothesis with high quality microdata from the US hospital industry, an industry of keen policy and scientific interest. We measure efficiency by firm in the early 1980s and relate it to subsequent growth of efficient firms, to the persistence of profit differences and to changes in the concentration of markets. Initial hospital efficiency and subsequent growth (and profitability) are significantly and positively related. Also, greater initial variation in hospital efficiency within local markets is positively related to subsequent growth in market concentration. These findings support the logic of Demsetz's evolutionary efficiency hypothesis, though they cannot confirm the stronger idea that variation in firm efficiency is the dominant explanation for changes in concentration.

Efficiency, growth, and concentration: an empirical analysis of hospital markets

Taking an evolutionary view of markets, Harold Demsetz hypothesized that firms differ persistently in efficiency and that industry concentration results from growth of efficient firms at the expense of inefficient ones. We test the hypothesis with high quality microdata from the US hospital industry, an industry of keen policy and scientific interest. We measure efficiency by firm in the early 1980s and relate it to subsequent growth of efficient firms, to the persistence of profit differences and to changes in the concentration of markets. Initial hospital efficiency and subsequent growth (and profitability) are significantly and positively related. Also, greater initial variation in hospital efficiency within local markets is positively related to subsequent growth in market concentration. These findings support the logic of Demsetz's evolutionary efficiency hypothesis, though they cannot confirm the stronger idea that variation in firm efficiency is the dominant explanation for changes in concentration.