Kenneth G. Elzinga

Switching Costs in the Wholesale Distribution of Cigarettes

Recent theories of price wars triggered by entry assign a critical role to switching costs in explaining price and output changes. Earlier, Elzinga and Mills (1998) showed that actual switching patterns following an episode of new entry in an industry are driven by the fact that buyers have different switching costs. The current paper draws on transaction-specific price and shipments data surrounding the 1984–1985 price war in generic cigarettes to explore the size and determinants of switching costs among wholesale cigarette distributors. Results show that switching costs vary across firms and are nontrivial in magnitude. Several implications of the findings are discussed.

Limits of the Elzinga–Hogarty Test in Hospital Mergers: The Evanston Case

Abstract The Elzinga–Hogarty (E–H) test for geographic market definition has been widely used by both government enforcement agencies and merging parties in hospital merger cases. However, two characteristics of hospital services markets – the Silent Majority Fallacy and the Payer Problem – may tend to undermine the utility of the E–H test in hospital merger cases. Where direct evidence of anticompetitive effects attributable to a merger is available, its use may diminish the need to rely on geographic market definition tools such as the E–H test. Such direct evidence is most readily available in post‐closing merger challenges such as the FTC’s Evanston case. It remains to be seen, however, whether the E–H test will continue to be relied on in more traditional, pre‐closing merger challenges.

Fifteen Theses on Classroom Teaching

The Southern Economic Association initiated a lecture series on teaching to be presented at its annual meeting. This paper, given on November 24, 2000, was the first such lecture. The editor invited the author to publish the lecture in Southern Economic Journal. Portions of the paper are the fruits of the authors more than 30 years of experience teaching economics. Parts of the paper are based on writings regarding pedagogy outside the discipline of economics. The paper puts forward 15 theses about teaching economics in the classroom. The theses range from propositions about why economics is a particularly difficult subject to teach to suggestions about how the classroom teaching of economics can be improved.

The U.S. Beer Industry: Concentration, Fragmentation, and a Nexus with Wine

The U.S. Beer industry has undergone two periods of major structural change in the post-World War II period. The first period, 1950–1980, was one of consolidation in which concentration increased dramatically. Since this period, combinations among leading brewers took place that would not have passed antitrust scrutiny earlier. The second period, from 1980 on, is one of fragmentation, marked by the entry of many craft brewers and increased product heterogeneity. The fragmentation has brought about consumption complementarities between wine and beer that never existed before. The wine and beer industry both face distributional inefficiencies sustained by state regulatory provisions that were a consequence of ending prohibition in the United States. Each of these topics is explored in this paper. (JEL Classification: L66, M37)

Leegin and Procompetitive Resale Price Maintenance

The recent Supreme Court opinion in Leegin reversed the longstanding precedent of Dr. Miles Medical. Resale price maintenance (RPM) is no longer condemned per se but instead is treated under the rule of reason. This ruling allows an inquiry as to the economic rationale and competitive consequences of a manufacturers RPM policy. This article reviews Leegins challenged pricing strategy and the business environment in which it arose. Leegins conduct is interpreted in light of the relevant economic literature about RPM. We conclude that Leegins price policy fits none of the accepted economic theories of how RPM could be anticompetitive, but instead exemplifies a theory that predicts procompetitive effects. The most compelling explanation for Leegins conduct is that it sought to induce efficient retail services to support its product line and to increase interbrand competition between the company and its many competitors.

Economics as Detective Fiction

Abstract Almost all good economic analysis is structured like classical detective fiction. This relationship goes well beyond the obvious fact that both detective fiction and economic analysis involve puzzles. The economists epistemology, presented in the form of scientific narratives, runs parallel to the puzzle-solving processes of the mastermind sleuth presented in the form of fictional narratives. The family resemblance between economic analysis and the classic whodunit becomes even more transparent by noticing another important characteristic they share: the concept of equilibrium. Examples chosen from recent economic literature bring the argument into sharper focus. In each instance, the solution to the puzzles that lie at the heart of their respective domains must be ingenious and surprising in order to be persuasive.

INJUNCTIVE RELIEF IN SHERMAN ACT MONOPOLIZATION CASES

While the popular image of the Sherman Act is that of a “trust-busting” statute, conduct remedies have been more common than structural relief. This paper evaluates the effect on economic welfare of conduct remedies that have resulted from ten prominent Sherman Act monopolization cases. In general, we find that in some cases the behavioral relief has had no consequence other than the cost of litigation and cost of compliance; in other cases, the remedies probably reduced consumer welfare. Cases studied are United Shoe Machinery, AT&T, Std. Oil of California, IBM, United Fruit, Kodak, Safeway, GM, Jerrold, and Blue Chip Stamp.

The Supreme Court's Predation Odyssey: From Fruit Pies to Cigarettes

Brooke Group, Ltd. v Brown & Williamson Tobacco Corp.-the Supreme Courts first predatory pricing decision under the Robinson-Patman Act since Utah Pie in 1967-makes clear the Courts heightened skepticism toward claims of predatory pricing. Under Brooke, plaintiffs must show not only that a defendant had a genuine possibility of bankrupting or disciplining its prey, but also that the defendant had a strong prospect of recouping its predatory losses. While applauding the Courts decision, the authors question the Courts refusal to accept a rule of per se legality to govern price cutting by members of noncollusive oligopolies. For reasons the Court itself spelled out, price cutting by members of noncollusive oligopolies is so unlikely a means of successful monopolization that such pricing behavior ought to be governed by a rule of per se legality.

Craft Beer in the USA: Strategic Connections to Macro- and European Brewers

While most of the beer consumed around the world is produced by macrobrewers such as AB InBev, craft brewers (or microbreweries) currently receive most attention. In part, this is because craft beer represents the growing segment of the malt beverage industry and in part because the craft segment has had so many new entrants. In this paper, we describe the evolution of the craft beer component of the US beer industry, we explain the strategic interactions between US craft and macrobrewers, and we show how the US craft beer industry is having a revitalizing influence upon the brewing industry in Europe. While craft beer has its contemporary roots in the USA, for centuries Europeans have been brewing what could be considered “craft beer” in terms of its batch size and output heterogeneity.

Antitrust Predation and The Antitrust Paradox

The widely recognized influence that the Chicago school of law and economics had on the institution of antitrust is nowhere more apparent than in predatory-pricing law. Starting with Aaron Director, this movement had many distinguished contributors. But even in this company, Robert Bork stands out for his part in persuading the judiciary to refocus antitrust law on the interests of consumers rather than on the interests of competing firms. In The Antitrust Paradox and other writings, Bork advanced the Chicago school insight that the kind of aggressive price cutting that, at the time, passed for predatory pricing is instead an essential and, for consumers, beneficial attribute of competition. The resulting change in direction that antitrust has taken in predatory-pricing cases culminated in the Court’s Matsushita (Matsushita Electric Industrial Co. v. Zenith Ratio Corp., 475 U.S. 574 [1986]) and Brooke Group (Brooke Group Ltd. v. Brown & Williamson Tobacco Corp., 509 U.S. 209 [1993]) opinions, both of which bear the marks of Bork’s influence.