Successive Monopoly Research Articles

Supply-Chain Antitrust and Being Too Big in the Context of AT&T’s 1984 Breakup

In 1984, due to a US Department of Justice antitrust lawsuit, AT&T, the U.S. telecommunications monopoly, split into eight entities, including long-distance and local service providers known as Regional Bell Operating Companies (RBOCs). Vertical integration of suppliers typically benefits consumers by avoiding the issues associated with successive monopolies, where prices may be excessively high. The separation of long-distance and local services by the Department of Justice may seem counterintuitive, potentially driven by concerns over AT&T's size rather than economic rationale. This paper suggests that integrated monopolies have more willingness to build demand rigidity due to an absence of the free-riding problem, leading to higher prices. The implications extend to regulated firms and social media, highlighting the complexity of antitrust actions and their economic consequences on market dynamics and consumer welfare.

Non-cooperative corporate social responsibility, bargaining, and double marginalization in bilateral monopoly

ABSTRACT This study incorporates CSR concerns in a general demand model focusing on the double marginalization problem in single-product successive monopolies. It assumes that the manufacturer or retailer non-cooperatively engages in CSR activities and bargains over the linear input price. The findings demonstrate that the ratio of retail and wholesale pass-through depends not only on the demand curvature and its derivative but also on the firm’s CSR weights and relative bargaining power. In a bilateral monopoly, including CSR considerations by either the manufacturer or the retailer may alleviate the double marginalization problem when bargaining over the linear wholesale price.

Technology Licensing under Successive Monopoly

Technology Licensing under Successive Monopoly

Resale Price Maintenance in a Successive Monopoly Model*

We explain why a manufacturer may impose a minimum resale price in a successive monopoly setting. Our argument relies on the retailer having noncontractible choice variables such as the price of a substitute good and/or the retailer's service effort. Our explanation for minimum resale prices is empirically distinguishable from alternative justifications that rely, for instance, on retailer competition and service free riding among retailers. Whether a min RPM benefits or harms consumers depends on its effects: if it softens competition with the substitute product, it tends to harm consumers, and if it secures service provision, it tends to benefit consumers.

Successive Monopoly, Bilateral Monopoly and Vertical Mergers

Successive Monopoly, Bilateral Monopoly and Vertical Mergers

Is partial privatization of universities a solution for higher education?

AbstractThis paper accounts simply for the link between higher education and the productive economy through educated workers. We study a model of vertical successive monopolies where students/workers acquire qualification from a University then “sell” skilled labor to a monopoly which itself sells its final product to consumers, linking through quality the education sector to the labor and output markets. We determine the optimal share the State should keep in the University to compensate for the market imperfections, while taking into account the inefficiencies of public management. The resulting partially privatized University fixes the tuition fees so as to maximize a weighted sum of profits and social welfare. We derive the optimal public share under the hypothesis that the State may subsidize the tuition fees/University losses, then under the constraint that the University should make a nonnegative profit. We prove that in both cases, the State should keep a substantial share (higher under the first hypothesis) in the University, unless public management is too inefficient in which case the University's management should be completely private.

Tariff Escalation and Vertical Market Structure

AbstractMany empirical studies have shown that most countries in the world reveal a specific form of tariff structure, referred to as tariff escalation, which is defined as tariff rates for final products being higher than those for intermediate goods, and the latter are higher than those for raw materials. However, trade theorists have paid scant attention to the causes of tariff escalation. To fill this gap, we set up a vertically related market model with n stages of successive monopolies. We find that a tariff on an imported good can be used to extract not only the profit of the foreign monopolist supplying this good, but also the rents acquired by all the foreign upstream monopolists through its effects on the prices of the upstream intermediate goods. Thus, as the number of production stages in the foreign country increases, the amount of rent captured by the foreign upstream producers rises and a higher tariff rate is therefore needed to extract the rent. This provides a theoretical explanation to the cause of tariff escalation.

Profitable Double Marginalization

When successive monopolies transact through noncooperative linear pricing, the resulting double markup decreases their joint profits relative to vertical integration. However, if there are downstream rivals (which are not double marginalized), the same noncooperative interaction often inadvertently raises their joint profits. Profit effects depend on how the well-understood harm from misaligned interests compares to the value of the resulting strategic effect. When profitable, vertical noncooperation incidentally approximates strategic delegation a la Bonanno & Vickers (1988), but avoids its credibility problem, suggesting an inability to bargain may be indirectly beneficial. The conjectural consistency concept helps to explain the disparate profit effects, and to synthesize the literature on strategic delegation and vertical control. The optimal way to distort a downstream firm's behavior is always to make it behave as if it has a conjecture, no matter the distortion mechanism. If upstream competitors do this in parallel, they induce a consistent conjectures equilibrium (CCE) -- or else a close analogue -- evincing a strong link between ordinary Nash games and the CCE.

The Optimal Scope of the Royalty Base in Patent Licensing

Legal scholars debate the merits of using the total value of the product, as opposed to the value of the component to which the technology contributes, as the base for a royalty in licensing contracts. In this paper we make use of the fact that these two royalty bases are equivalent to using ad valorem and per-unit royalties, respectively. We abstract from implementation and practicability considerations to analyze the welfare implications of the two rules. Ad valorem royalties tend to lead to lower prices, particularly in the context of successive monopolies. They benefit upstream innovators and do not necessarily hurt downstream producers. This benefit increases when there are multiple innovators contributing complementary technologies, as is typical of standard-setting organizations. Ad valorem royalties are even more desirable when enticing upstream investment is optimal. Our findings explain why most licensing contracts include royalties based on the value of the product.

ONE PIECE AT A TIME: SUCCESSIVE MONOPOLY AND TYING IN ANTITRUST

As highlighted by the linkLine case, litigation alleging anticompetitive price squeezes due to a defendant's successive monopoly remains the recurring feature in antitrust that it has been since Alcoa. Some decisions, notably then-Judge Breyer's Town of Concord opinion, treat the matter as one of economics. Others, such as linkLine and similar appellate court decisions, resolve the matter on narrower legal grounds. This article revisits the Concord opinion's economics, correcting small errors in Judge Breyer's graphical analysis but reaffirming his principal economic point that successive monopoly ordinarily is procompetitive and may well benefit consumers. Decisions upholding price squeezes in a successive monopoly on purely legal grounds are therefore economically correct. The article then argues that the economics of successive monopoly offer an economically sound extrication from the morass in which tying law currently wallows. The economic differences between successive monopoly and tying are inconsequential. So the law governing the two practices (section 2 of the Sherman Act for successive monopoly, section 1 of the Sherman Act and section 3 of the Clayton Act for tying) should be reduced to a single set of standards. Parallels to the economics and law of exclusive dealing are also noted as part of the case for legal unification.

Rent Seeking in Successive Monopoly: The Case of Casino Gambling in New Orleans

This study explores how rent seeking in the U.S. casino gambling industry relates to unique issues concerning industry structure. To do so, we apply mathematical and graphical approaches from industrial economics to the history of land-based casino gambling in New Orleans, Louisiana, a history that includes public franchising, successive monopoly, vertical separation and integration, and rent seeking costs. Our conceptual approach highlights how local governments can gain advantages over higher forms of government (e.g., state government) in rent seeking contests.

Formula Pricing and Profit Sharing in Inter‐Firm Contracts

Ronald Coase viewed transaction cost minimization as a central goal of contracting and organizational decisions. We discuss how a solution to the traditional successive monopoly problem that has not been discussed in the literature can economize on such costs. Specifically, we show that when we allow for profit sharing between upstream and downstream firms, a simple formula pricing contract can be used to generate the vertically integrated level of profits. This simple contract, empirically, would take the form of the standard linear wholesale price contracts that are ubiquitous in vertical contexts, even those where we might expect successive monopoly to be an issue. We discuss the advantages of the proposed contract from a transaction cost perspective. We also discuss some of its limitations, in particular the likelihood of misrepresentation of costs, and ways in which such misrepresentation might be addressed in the contract. Copyright © 2014 John Wiley & Sons, Ltd.

Upstream Foreclosure Decisions under Successive Monopoly Structure

This article models the upstream foreclosure decisions using the successive monopoly structure, whereby production requires two types of inputs, exclusive materials, and commonly available labor. An opportunity for upstream foreclosure arises when a downstream firm strategically merges with the material supplier, thereby foreclosing its rival's access to the exclusive input. The model shows that upstream foreclosure is not always optimal. A downstream firm opts for upstream foreclosure only when its relative positions in the labor‐management and material‐procurement negotiations are sufficiently strong. Copyright © 2014 John Wiley & Sons, Ltd.

The Optimal Scope of the Royalty Base in Patent Licensing

There is considerable controversy about the relative merits of the apportionment rule (which results in per-unit royalties) and the entire market value rule (which results in ad-valorem royalties) as ways to determine the scope of the royalty base in licensing negotiations and disputes. This paper analyzes the welfare implication of the two rules abstracting from implementation and practicability considerations. We show that ad-valorem royalties tend to lead to lower prices, particularly in the context of successive monopolies. They benefit upstream producers but not necessarily hurt downstream producers. When we endogenize the investment decisions, we show that ad-valorem royalties improve social welfare when enticing upstream investment is optimal or when multiple innovators contribute complementary technologies. Our findings contribute to explain why most licensing contracts include royalties based on the value of sales.

Double marginalization and cost pass-through: Weyl–Fabinger and Cowan meet Spengler and Bresnahan–Reiss

Consider the classical double marginalization problem of single-product successive monopolies. We show that the ratio of the cost pass-through at the final sale relative to that at the wholesale level is characterized by the curvature of inverse demand in the final market. We also apply Cowan’s (2012) method, which utilizes the idea of pass-through in an analysis of third-degree price discrimination, to compare consumer surplus under vertical integration and separation.

Why do Payment Card Networks Charge Proportional Fees?

I extend Shy and Wang's (2011) model and study the problem of successive monopoly when complementarity is imperfect. In my model, consumers value the good no matter they pay in cash or by card. However, they are willing to pay a higher price if they can enjoy additional card service. Since merchants can sell at a lower price without providing card service, their outside option imposes a participation constraint on the card network's maximization. I show that double marginalization does not arise as long as the constraint is binding, and the constraint is binding if and only if the degree of complementarity is smaller than a critical value. If double marginalization does not arise, the effects of proportional fees found in the S-W model become ambiguous.

Successive monopolies and product variety

If there is a shift of market power from manufacturers to retailers or from retailers to manufacturers, how are consumers affected? When the value chain has successive firms, each with market power, the shifting balance of power up or down the chain (away from the consumer or towards the consumer, respectively) can lead to a further fractionation of the consumer market, meaning greater product variety. If retailers have a minimum efficient scale greater than manufacturers, a shift in bargaining power from manufacturers to retailers will increase consumer welfare while market fractionation can enhance firms' abilities to price discriminate, capturing some of this consumer surplus.

Towards State Legitimacy in Afghanistan

After almost io years of substantial international efforts at nation-building in Afghanistan, the prospects of achieving a functioning, democratically governed state are facing ever greater dangers. Grave doubts have arisen from the mismanaged and fraudulent presidential elections of 2009, the persistence of warlords in positions of official authority, and signs that Afghans' fundamental rights may be subject to compromise for the sake of political expethency. Equally disconcerting is the yet- to-be quelled insurgency that, with the ethnic dimensions it possesses, stands to fracture the embryonic sense of national unity glimpsed over the last decade. Combined shortcomings in nationwide infrastructure reconstruction, the spotty provision of basic social services, and the ubiquitous menace of corruption exacerbate Afghans' weakening confidence in their government and its foreign backers.Given these setbacks, countries contributing blood and treasure to Afghanistan's reconstruction are gradually lowering their expectations for a democratic Afghanistan; nonetheless, their stated goals remain largely unchanged. Citing the 2001 Bonn agreement, these contributors have yet to reverse their acknowledgement ofthe right ofthe people of Afghanistan to freely determine their own political future in accordance with the principles of Islam, democracy, pluralism and social justice.1 Recent statements made by the US and UK governments appear to indicate that their commitment remains to assist the Afghan government in the fulfilment and protection of this right and its accompanying principles.2This promise is welcomed and desired by the Afghan people. A large majority of Afghans have made clear their desire for a universally elected, representative, and accountable government faithful to the rule of law. They have made this apparent with continued engagement in political processes such as elections, through several public opinion polls, and in civil society's growing advocacy for the rule of law and social services. Never before in Afghanistan's history have so many of its people come to recognize their rights and obligations as citizens, as well as those ofthe state.While this aspiration remains fundamentally shared, the depth and breadth of its realization is encumbered. Indeed, the widespread fraud that so deeply marred the 2009 elections revealed numerous weaknesses in the independent electoral commission and its monitoring processes. If these and other detriments of responsible and accountable governance are left unresolved, their persistence will effectively undermine a core basis of the government's legitimacy, and thus jeopardize the potential for a stable and prosperous Afghanistan.A mounting number of Afghanistan watchers cite the state's legitimacy - as perceived by its people - as fundamental to the maintenance of military gains against an increasingly bold and coordinated insurgency. They are correct. This article considers political legitimacy in Afghanistan, the ways in which increasingly localized democratic governance stands to enhance the government's legitimacy, and civil society's vital contribution to this process.POLITICAL LEGITIMACY IN AFGHANISTAN- PAST AND PRESENTThe sources of political legitimacy in Afghanistan have undergone significant shifts from the years leading up to 1978 Sawr revolution to the present. Contrary to the pessimistic romanticism or convenience often employed by those content to leave Afghan society in a 19th-century time capsule, Afghans' cumbersome yet progressive recognition of legal legitimacy corresponds with its people's ever-greater appreciation of the rule of law.Max Weber's classic definition of the legitimate state applies here, i.e., its successful monopoly of the legitimate use of force within a given territory.3 The basis of such legitimate rule can be traditional, charismatic, or legal.4 The strength of legal legitimacy rests in the belief in the validity of the legal statute and functional competence based on rationally created rules. …

Successive Monopolies and Product Variety

If there is a shift of market power from manufacturers to retailers or from retailers to manufacturers, how are consumers affected? When the value chain has successive firms that each have market power, the shifting balance of power up or down the chain (away from the consumer or towards the consumer, respectively) can lead to a further fractionation of the consumer market, meaning greater product variety. If retailers have a minimum efficient scale greater than manufacturers, a shift in bargaining power from manufacturers to retailers will increase consumer welfare while market fractionation can enhance firms’ abilities to price discriminate, capturing some of this consumer surplus.

Multinationals' Mode of Entry in the Presence of Upstream Spillovers

Multinationals' mode of foreign expansion may depend on their expectations of spillovers. I consider a monopolist with a vertical production structure where outsourcing of intermediates to a host country firm is one of three possible entry modes. Spillovers generate threat of entry of a new input producer. With incomplete outsourcing contracts that result in the two firms bargaining over how to share the potential surplus, upstream spillovers do not necessarily benefit the downstream multinational. If the multinational instead allows the supplier to set the price of intermediates (successive monopoly), it clearly benefits from upstream spillovers.