Michael D. Whinston

Multimarket contact and collusive behavior

Traditional analyses of industrial behavior typically link the exercise of market power in an industry to internal features such as demand conditions, concentration, and barriers-to-entry. Nevertheless, some economists have remained concerned that external factors, such as contact across markets, may also play a significant role in determining the level of competitiveness in any particular industry. In this article, we examine the effect of multimarket contact on the degree of cooperation that firms can sustain in settings of repeated competition. We isolate conditions under which multimarket contact facilitates collusion and show that these collusive gains are achieved through modes of behavior that have been identified in previous empirical studies of multimarket firms.

Free Entry and Social Inefficiency

Previous articles have noted the possibility of socially inefficient levels of entry in markets in which firms must incur fixed set-up costs upon entry. This article identifies the fundamental and intuitive forces that lie behind these entry biases. If an entrant causes incumbent firms to reduce output, entry is more desirable to the entrant than it is to society. There is therefore a tendency toward excessive entry in homogeneous product markets. The roles of product diversity and the integer constraint on the number of firms are also examined.

Coalition-Proof Nash Equilibria I. Concepts

Abstract In an important class of “noncooperative” environments, it is natural to assume that players can freely discuss their strategies, but cannot make binding commitments. In such cases, any meaningful agreement between the players must be self-enforcing. Although the Nash best-response property is a necessary condition for self-enforceability, it is not sufficient—it is in general possible for coalitions arrange plausible, mutually beneficial deviations from Nash agreements. We provide a stronger definition of self-enforceability, and label the class of efficient self-enforcing agreements “coalition-proof.”

Patent Expiration, Entry, and Competition in the U.S. Pharmaceutical Industry

THE ETHICAL PHARMACEUTICAL industry is an important one, not so much for its economic size as for the benefits that it delivers to users of its products. The industry has been transformed structurally since the 1940s from a producer of selected chemicals to a research-oriented sector that makes a major contribution to the technology of health care. I Its very success in generating a stream of new drugs with important therapeutic benefits has involved the industry in intense public policy debates over the financing of the cost of its research, the veracity of claims for its products, the prices charged for them (not to mention who pays those charges), and the socially optimal degree of patent protection.

Incomplete Contracts, Vertical Integration, and Supply Assurance

This paper extends the analysis of transactions cost models of vertical integration to multilateral settings. Its main focus is on supply assurance concerns which arise when several downstream firms are competing for inputs in limited supply. Integration reduces supply assurance concerns for an integrating firm but it may increase them for others. Therefore, to explain the scope of any firm, one must consider the overall network of production and distribution relations. Three fundamental questions are addressed: (1) What are the effects of different integration structures?; (2) What are the determinants of the socially efficient integration structures?; (3) In what way do equilibrium integration structures differ from socially efficient structures?

On the Efficiency of Privately Stipulated Damages for Breach of Contract: Entry Barriers, Reliance, and Renegotiation

Two roles for stipulated damage provisions have been debated in the literature: protecting relationship-specific investments and inefficiently excluding competitors. Aghion and Bolton (1987) formally demonstrate the latter effect in a model without investment or renegotiation. Although introducing renegotiation alone destroys their result, introducing both renegotiation and investment restores it. In particular, if an entrant has market power and the sellers cost of production is observable but not verifiable, then privately stipulated damages are set at a socially excessive level to facilitate the extraction of the entrants surplus. In contrast, if the entrant prices competitively (as typically is assumed in the law and economics literature on breach), then private stipulation is efficient. Whereas a simple legal restriction on the contract corrects for any inefficiency, standard court-imposed remedies do not.

Antitrust in Innovative Industries

We study the effects of antitrust policy in industries with continual innovation. A more protective antitrust policy may have conflicting effects on innovation incentives, raising the profits of new entrants, but lowering those of continuing incumbents. We show that the direction of the net effect can be determined by analyzing shifts in innovation benefit and supply holding the innovation rate fixed. We apply this framework to analyze several specific antitrust policies. We show that in some cases, holding the innovation rate fixed, as suggested by our comparative statics results, the tension does not arise and a more protective policy necessarily raises the rate of innovation.

Dynamic Merger Review

We analyze the optimal dynamic policy of an antitrust authority toward horizontal mergers when merger proposals are endogenous and occur over time. Approving a currently proposed merger may affect the profitability and welfare effects of potential future mergers, whose characteristics may not yet be known. We identify conditions under which discounted expected consumer surplus is maximized by using a completely myopic merger review policy that approves a merger if and only if it does not lower consumer surplus given the current market structure. We also discuss a number of extensions as well as factors that undermine the optimality of myopic merger review policies.

Coalition-Proof Nash Equilibria II. Applications

Abstract In Bernheim, Peleg, and Whinston (“Coalition-Proof Equilibria. I. Concepts,” J. Econ. Theory 42 (1987), 1–12), we proposed the notion of Coalition-Proof Nash equilibrium and Perfectly Coalition-Proof Nash equilibrium as solution concepts for strategic environments in which players can freely discuss their strategies, but cannot make binding commitments. This paper undertakes applications to several economic problems, including the behavior of Cournot oligopolists, oligopolistic entry deterrence, cooperation in finite horizon games, and social choice rule implementation.

Antitrust Policy toward Horizontal Mergers

Recently there has been a notable increase in interest in antitrust law in much of the world. This chapter discusses antitrust policy toward horizontal mergers, the area of antitrust that has seen some of the most dramatic improvements in both economic tools and the application of economics in enforcement practice. The chapter discusses theoretical considerations, merger laws and enforcement practices, econometric methods for analyzing prospective horizontal mergers, and evidence concerning the ex post effects of actual horizontal mergers.