Heiko A. Gerlach

Multi‐Market Collusion with Demand Linkages and Antitrust Enforcement

This paper analyzes dynamic cartel formation and antitrust enforcement when firms operate in demand-related markets. We show that cartel prosecution can have a knock-on effect: desisting a cartel in one market reduces profits and cartel stability and leads to the break-up of the cartel in the adjacent market. Cartel prosecution can also have a waterbed effect: desisting a cartel increases cartel stability in the adjacent market and induces cartel formation in previously competitive markets. We also consider policy implications of our analysis regarding an antitrust authoritys investment decision in cartel enforcement.

INTERNATIONAL ANTITRUST ENFORCEMENT AND MULTIMARKET CONTACT

This article analyzes cartel formation and international antitrust enforcement when multinational firms operate in several jurisdictions with local antitrust authorities. We are concerned with how the sustainability of collusion in one local market is affected by the existence of collusion in other markets when they are linked by a negative demand relationship. The interdependence of cartel stability across markets leads to potential externalities in antitrust enforcement across jurisdictions. Local antitrust enforcement equilibrium enforcement may exhibit a nonmonotonicity in the degree of market integration. We compare it with globally optimal antitrust enforcement policy and discuss the role of international antitrust coordination.

Announcement, Entry, and Preemption When Consumers Have Switching Costs

I study the incentives of innovating firms to announce their entry in markets in which consumers incur a cost of switching from one product to another. Announcing entry can prevent the lock-in of potential demand before the launch of the new product. At the same time, however, the incumbent firm learns about the impending entry and has the opportunity to cut prices and preempt the market. In equilibrium, entrants do not always announce, and I show that this behavior maximizes ex ante total welfare. By contrast, consumers might be better off with a ban on announcements. When the entrants claims are not verifiable, vaporware announcements arise in equilibrium, and I demonstrate that they can be beneficial for consumers.

Selection Biases in Complementary R&D Projects

This paper analyzes selection biases in the project choice of complementary technologies that are used in combination to produce a final product. In the presence of complementary technologies, patents allow innovating firms to hold up rivals who succeed in developing other system components. This hold-up potential induces firms to preemptively claim stakes on component property rights and excessively cluster their R&D efforts on a relatively easier technology. This selection bias is persistent and robust to several model extensions. Implications for the optimal design of intellectual property rights are discussed. We also analyze selection biases that arise when firms differ in research capabilities.

Patent Pools, Litigation and Innovation

This paper analyzes patent pools and their effects on innovation incentives. It is shown that the pro-competitive effects of patent pools for complementary patents naturally extend for dynamic innovation incentives. However, this simple conclusion may not hold if we entertain the possibility that patents are probabilistic and can be invalidated in court. In such a case, the licensing fees reflect the strength of patents. Patent pools of complementary patents can be used to discourage litigation by depriving potential licensees of the ability to selectively challenge patents and making them committed to a proposition of all-or-nothing in patent litigation. We show that if patents are sufficiently weak, patent pools with complementary patents reduce social welfare as they charge higher licensing fees and chill subsequent innovation incentives.

A Model of Patent Trolls

This paper develops a model of patent trolls to understand various litigation strategies employed by nonpracticing entities (NPE). We show that when a NPE faces multiple potential infringers who use related technologies, it can gain a credible threat to litigate even when it has no such credibility vis-a-vis any single potential infringer in isolation. This is due to an information externality generated by an early litigation outcome for subsequent litigation. Successful litigation creates an option value against future potential infringers through Bayesian updating. This renders a credible litigation threat against the initial defendant and allows the NPE to extract more rents. We discuss policy implications including the adoption of the British system of “loser-pays” fee shifting and the use of injunctive relief.

Self-Reporting, Investigation, and Evidentiary Standards

Self-reporting schemes have become a substantial part of law enforcement. This paper analyzes the optimal use of such schemes when the authority cannot commit to an ex post investigation effort. I show that this leads to a negative relationship between self-reporting incentives and investigation effort. Three main conclusions arise. First, violators self-report with a probability of 1 if and only if full amnesty is offered. Second, self-reporting schemes are not efficient when the level of harm of the act is high. Finally, authorities can increase the incentives to self-report when they convict without hard evidence. However, a hard-evidence standard provides more deterrence and is weakly welfare superior.

Exclusionary Contracts, Entry, and Communication

I examine the incentives of firms to communicate entry into an industry where the incumbent writes exclusionary, long-term contracts with consumers. The entrants information provision affects the optimal contract proposal by the incumbent and leads to communication incentives that are highly non-linear in the size of the innovation. Entry with small and medium-to-large innovations is announced whereas small-to-medium and large innovations are not communicated. It is demonstrated that this equilibrium communication behavior maximizes ex ante total welfare by reducing the anti-competitive impact of excessively exclusive contracts. By contrast, consumers always prefer more communication and the incumbents equilibrium contract maximizes ex ante consumer surplus.