Jeffrey K. MacKie-Mason

Manipulating Interface Standards as an Anti-Competitive Strategy (Download full paper)

Jeffrey K. MacKie-Mason and Janet S. Netz

Published on: January, 2006

Abstract: The creation of interface standards enables competition at the level of components, rather than competition in complete systems. Consumers often benefit from component competition. However, the standard-setting process might be manipulated to achieve anticompetitive ends. We consider the conditions under which a standards consortium could impose anticompetitive burdens on the market, and several strategies such a consortium might employ to achieve anti-competitive objectives. We present a new strategy -- one-way standards -- and discuss the conditions under which it can be anticompetitive.

What to do About Unilateral Refusals to License? (Download full paper)

Jeffrey K. MacKie-Mason

Published on: January, 2002

Abstract: There are well-known circumstances under which unilateral refusals to license will cause harm to competition, that is, will lower consumer welfare. However, when the strategy is profitable, refusals to license also increase the returns to intellectual property, and thus limitations on them will reduce the incentives for firms to invest in innovation. The optimal balance between innovation incentives and protection against static monopoly harm is not knowable to any reasonable degree of precision. Economists may be able to identify some special cases in which the desired rule is unambiguously knowable, but these cases will be few. Given a policy or legal rule, economists can help interpret and apply the rule. Analysis of recent legal statements on the treatment of refusals to license shows that some of the current confusion and frustration in this area can be attributed to failure to formulate the rules in terms of the economic purposes of the underlying statutes. Some attempts to delineate a boundary between cases in which intellectual property protection is absolute and those in which antitrust restrictions may be imposed are based on logical or semantic distinctions that are not related to the economic issues. These attempts will fail to resolve the confusion.

Exercising Market Power in Proprietary Aftermarkets (Download full paper)

Borenstein, Severin, Jeffrey K. MacKie-Mason and Janet S. Netz

Published on: January, 2000

Abstract: In many recent antitrust cases, manufacturers of complex high-technology equipment have been accused of exercising market power in the sale of proprietary service or parts necessary to maintain the machines they produce. The manufacturer generally concedes that it has market power in selling the aftermarket service or parts, but argues that it would not exercise such power because high aftermarket prices would cause consumers to select a different brand in the competitive market for the original equipment. We study the incentive to exercise market power in aftermarkets when the original equipment market is perfectly competitive, a differentiated duopoly, or monopolized. In all cases, we show that the price in the aftermarket will exceed marginal cost. Furthermore, our analysis indicates that aftermarket prices may actually be higher when the equipment market is more competitive. Nonetheless, we suggest that in a richer model P in which equipment sellers might want to price discriminate, create barriers to entry, or influence the pace at which users upgrade to newer models P firms in less competitive equipment markets are likely to have a greater incentive to maintain a monopoly position in the sale of their aftermarket products.

Inducements to Advocacy: The Economist as Independent Expert (Download full paper)

MacKie-Mason, Jeffrey K. and Richard A. Pfau

Published on: January, 1999

Abstract: The appropriate role of the economic expert in antitrust litigation is to seek the truth, whereas the role for the attorneys is to seek the best possible outcome possible for the client. Yet the attorneys hire the economic experts, and the experts often work closely in many aspects of researching and developing the client's case. Can an expert economist provide an independent, professionally respectable opinion in this setting fraught with advocacy? We discuss the inducements to advocacy faced by economists who testify in antitrust proceedings, and ways in which a practicing economic expert might counter these inducements. We discuss two cases in which we have been involved to illustrate some of the important issues.

An AOL/Time Warner Merger Will Harm Competition in Internet Online Services (Download full paper)

MacKie-Mason, Jeffrey K.

Abstract: America Online (AOL) is the largest, and in some aspects dominant, firm in the aggregation and distribution of content and services over the Internet. AOL is also the largest provider of Internet access in the U.S. Overall, it is the most successful firm in the business of online services, or the joint provision of Internet access and content and service distribution. This is a business that AOL essentially invented, and no other firm has been able to compete effectively with AOL. Time-Warner (including its Road Runner subsidiary) is one of the most important present and future competitors in this business because it is the number two aggregator and distributor via high-speed (broadband) Internet connections, the next generation of Internet access. This merger thus combines AOL and one of its most significant competitors in online services, creating significant horizontal anti-competitive effects. The merger between AOL and Time Warner will horizontally and vertically increase AOL's power in the market for Internet online services. The anti-competitive effects of this merger will harm consumers.

Competition Between Firms that Bundle (Download full paper)

Fay, Scott and Jeffrey K. MacKie-Mason

Abstract: Information goods are characterized by high fixed (first-copy) costs, but very low costs for the production of additional copies. Marginal costs of electronically-delivered information goods have been further reduced by the remarkable recent decline in computing and digital communication costs. Most previous research focuses on how a monopolist would perform (and the proper regulation to impose) in such an environment. Achieving dynamic efficiency is difficult because pricing at marginal cost (which is statically efficient) eliminates the incentive to invest in the creation of new content. Recently, the strategy of bundling numerous goods together has been explored in greater detail. Bundling may achieve static efficiency since individuals will face a zero cost on the margin for each item consumed. Yet, dynamic efficiency can be maintained because the producer is able to recover investment costs through bundle sales. This paper analyzes the profitability and welfare properties of bundling in a multi-firm setting. This allows us to explore how incumbents and entrants interact when each firm is selling numerous competing products. Our fundamental conclusion is that even adding only a single firm to this industry with substantial fixed costs and negligible marginal costs will result in much lower prices for consumers, much higher social welfare, and only a moderate reduction in firms' profits regardless of the pricing schemes employed. This outcome is somewhat surprising given that in a standard static two-good Bertrand model, a duopoly would lead to a price war which eliminates the incentive to invest in new content (or to enter the industry in the first place). Although the firms are producing a priori identical items, consumers know that their valuations for the particular items will vary ex post. Thus, no price reduction by one firm can completely eliminate the demand faced by other firms. Although there remains an incentive to invest in new product creation, this incentive is lower than a monopolist would have. As a result, in a dynamic version of this model, the welfare superiority of the duopoly becomes dampened (but not eliminated). Finally, when firms are allowed to sell items both as a bundle and individually, we find that most revenue will be obtained from bundle sales. These results indicate that bundling will persist in a multi-firm setting and suggest that only firms of substantial size will be able to survive in such a market.

Antitrust Immunity for Refusals to Deal in (Intellectual) Property Is a Slippery Slope (Download full paper)

MacKie-Mason, Jeffrey K.

Abstract: The Federal Circuit's decision in CSU v. Xerox1 has generated enormous controversy. However, there seems to be emerging agreement among both critics and supporters of the decision on a correct, narrow reading of the decision. Whatever else the decision stands for, it appears to declare antitrust immunity for unilateral refusals to sell or license patented or copyrighted intellectual property (IP). What was at stake in Xerox is whether a firm with a legitimate property right in the design of certain parts has the right to condition sale of those parts with terms that enable Xerox to obtain a monopoly in a different market, for service labor. More broadly, what is at stake is a safe harbor for conduct that previously has been found illegal. For, although much emphasis is placed on whether this was a unilateral refusal to deal (as opposed to a concerted agreement, which would not be exempt from Section 1 scrutiny), it is at least as important that this was a conditional refusal. As I show below, the meaningful distinction between this conditional refusal to deal and a conventional illegal tie is nil. Further, if an antitrust exemption is given to all conditional unilateral refusals to deal, this formalistic shield will be easily available in the future to firms that would otherwise be subject to antitrust liability for tying or other concerted agreements.

Links Between Vertically Related Markets: ITS v. Kodak (Download full paper)

MacKie-Mason, Jeffrey K. and John Metzler

Abstract: In 1987 seventeen small companies filed an antitrust lawsuit against the Eastman Kodak Corporation, alleging that Kodak used its monopoly power over repair parts for its high-volume copiers and micrographics equipment in order to monopolize the service markets for those machines. Eleven years later, there have been two District Court opinions, two from the Ninth Circuit Court of Appeals, and one from the Supreme Court, and further post-trial, post-appeal disputes continue. Since the initial Supreme Court opinion in Kodak, there have been at least seven closely related Appeals Court opinions, and they stand in sharply divided conflict. Kodak is one of the most significant antitrust cases of the last decade or two. It is also one of the most controversial, and the controversy is far from resolved. We review the facts and the procedural history. We then present the main economic issues in dispute, and summarize the evidence presented at trial. We close with brief observations on some unresolved question that affect future antitrust economic analysis, and describe the post-Kodak conflict among other Circuit Courts of Appeal.