Law And Economics Of Vertical Integration And Control

Law and Economics of Vertical Integration and Control focuses on the processes, methodologies, and approaches involved in the law and economics of vertical integration and control. The publication first elaborates on transaction costs, fixed proportions and contractual alternatives, and variable proportions and contractual alternatives. Discussions focus on sales revenue royalties, ownership integration, output royalties, important product-specific services, successive monopoly, advantages and limitations of internal transfers, and transaction cost determinants. The text then examines vertical integration under uncertainty and vertical integration without contractual alternatives. The book ponders on legal treatment of ownership integration and per se illegal contractual controls. Topics include tying arrangements, public policy assessment, resale price maintenance, vertical integration and the Sherman Act, market foreclosure doctrine, and the 1982 Merger Guidelines. The text also takes a look at contractual controls that are not illegal per se, alternative legal rules, and antitrust policy. The publication is a dependable reference for researchers interested in the law and economics of vertical integration and control.

These contributions discuss a number of important developments over the past decade in a newly established and important field of economics that have led to notable changes in views on governmental competition policies. They focus on the nature and role of competition and other determinants of market structures, such as numbers of firms and barriers to entry; other factors which determine the effective degree of competition in the market; the influence of major firms (especially when these pursue objectives other than profit maximization); and decentralization and coordination under control relationships other than markets and hierarchies.ContributorsJoseph E. Stiglitz, G. C. Archibald, B. C. Eaton, R. G. Lipsey, David Enaoua, Paul Geroski, Alexis Jacquemin, Richard J. Gilbert, Reinhard Selten, Oliver E. Williamson, Jerry R. Green, G. Frank Mathewson, R. A. Winter, C. d'Aspremont, J. Jaskold Gabszewicz, Steven Salop, Branko Horvat, Z. Roman, W. J. Baumol, J. C. Panzar, R. D. Willig, Richard Schmalensee, Richard Nelson, Michael Scence, and Partha Dasgupta

Vertical integration occurs when a firm does something for itself that it could otherwise procure on the market. For example, a manufacturer that opens its own stores is said to be vertically integrated into distribution. One irony of history is that both classical political economy and neoclassicism saw vertical integration and vertical contractual arrangements as much less threatening to competition than cartels or other horizontal arrangements. Nevertheless, vertical integration has produced by far the greater amount of legislation at both federal and state levels and has motivated many more political action groups. Two things explain this phenomenon. First, while economists prior to the 1930s rarely saw a threat, neither did they understand why firms integrate or enter into long term contracts, except for fairly obvious savings in production costs. Second, vertical integration led to many bankruptcies of small family businesses unable or unwilling to take on the costs and associated risks of integrating vertically themselves. When that happened, politics inevitably triumphed over economics.Both the common law and classical economists tended to view vertical integration favorably. The principal limitation on vertical integration by contract was common law rules limiting restraints on alienation. The managerial revolution in the United States in the nineteenth century occasioned the rise of significant vertical integration. At the same time, however marginalist, or neoclassical, economics first began to see significant competitive problems. The emergent legal policy toward vertical control by contract was developed first in intellectual property law's quot;first salequot; doctrine, and later on in antitrust policy. In his 1937 article on the quot;Nature of the Firm,quot; Ronald H. Coase formulated a purely marginalist theory of vertical integration, but it was ignored by both economists and legal policy makers for nearly half a century. Economists continued to wrestle with theories that were far more myopic, and as a result much less satisfactory. The result was that vertical integration became much more vulnerable to special interest legislation than did competition policy generally. By the mid-twentieth century a set of aggressive antitrust policies had emerged that dealt harshly with both vertical integration by contract and ownership vertical integration.

The most important book on antitrust ever written. It shows how antitrust suits adversely affect the consumer by encouraging a costly form of protection for inefficient and uncompetitive small businesses.

Co-written by an expert lawyer and economist, this book provides a thorough guide to the economic theory behind the regulation of mergers. The economic theory is then used to analyse the current state of European competition law, and test the success of the European Commission's search for a 'more economic approach' to merger regulation.

Vertical agreements represent a variety of supply and distribution contracts involving different market players, such as suppliers of diverse inputs, manufacturers, distributors and retailers. They gain particular significance in a global economy where technological advances are dynamic and are changing all the time. Such agreements are signed among businesspeople on a daily basis, and antitrust experts around the world are often asked to advise on whether they have any negative impact on competition or whether they infringe antitrust law. Taking into consideration the complex economic impacts of these vertical alliances, and the different market conditions that firms face in a wide variety of situations, the author proposes an in-depth examination of the following topics: resale price-fixing; geo-blocking clauses; exclusive and selective distribution systems; the concept of ‘economic efficiency’ in the context of vertical restraints; self-assessment of potential anticompetitive effects and antitrust risks; ex post control of vertical restraints; digital economies and its policy impact; alternative enforcement models under various institutional frameworks; the role and influence of political pressure groups. The book offers very constructive theoretical and political insights at the frontier between the disciplines of Economics and Law. By comparing two world’s leading antitrust jurisdictions, this book explores the lessons to be learned from the legal rules in the European Union and in Brazil, considering their promises and drawbacks, and formulates policy recommendations.

This 2005 book describes in much detail both how and why franchising works. It also analyses the economic tensions that contribute to conflict in the franchisor-franchisee relationship. The treatment includes a great deal of empirical evidence on franchising, its importance in various segments of the economy, the terms of franchise contracts and what we know about how all these have evolved over time, especially in the US market. A good many myths are dispelled in the process. The economic analysis of the franchisor-franchisee relationship begins with the observation that for franchisors, franchising is a contractual alternative to vertical integration. Subsequently, the tensions that arise between a franchisor and its franchisees, who in fact are owners of independent businesses, are examined in turn. In particular the authors discuss issues related to product quality control, tying arrangements, pricing, location and territories, advertising, and termination and renewals.

Volume 2 uses the economic and legal concepts/theories of Volume 1 to (1) analyze the U.S. and E.U. antitrust legality of mergers, joint ventures, and the pricing-technique and contractual/sales-policy distributor-control surrogates for vertical integration and (2) assess related positions of scholars and U.S. and E.U. antitrust officials. Its analysis of horizontal mergers (1) delineates non-market-oriented protocols for determining whether they manifest specific anticompetitive intent, would lessen competition, or are rendered lawful by the efficiencies they would generate, (2) criticizes the U.S. courts’ traditional market-share/market-concentration protocol, the HHI-oriented protocols of the 1992 U.S. DOJ/FTC Guidelines and the European Commission (EC) Guidelines, and the various non-market-oriented protocols the DOJ/FTC have increasingly been using, (3) argues that, although the 2010 U.S. Guidelines and DOJ/FTC officials discuss market definition as if it matters, those Guidelines actually reject market-oriented approaches, and (4) reviews the relevant U.S. and E.U. case-law. Its analysis of conglomerate mergers (1) shows that they can perform the same legitimate and competition-increasing functions as horizontal mergers and can yield illegitimate profits and lessen competition by increasing contrived oligopolistic pricing and retaliation barriers to investment, (2) analyzes the determinants of all these effects, and (3) assesses limit-price theory, the toe-hold-merger doctrine, and U.S. and E.U. case-law. Its analysis of vertical conduct (1) examines the legitimate functions of each type of such conduct, (2) delineates the conditions under which each manifests specific anticompetitive intent and/or lessens competition, and (3) assesses related U.S. and E.U. case-law and DOJ/FTC and EC positions. Its analysis of joint ventures (1) explains that they violate U.S. law only when they manifest specific anticompetitive intent while they violate E.U. law either for this reason or because they lessen competition, (2) discusses the meaning of an “ancillary restraint” and demonstrates that whether a joint-venture agreement would be illegal if it imposed no restraints and whether any restraints imposed are ancillary can be determined only through case-by-case analysis, (3) explains why scholars and officials overestimate the economic efficiency of R&D joint ventures, and (4) discusses related U.S. and E.U. case-law and DOJ/FTC and EC positions. The study’s Conclusion (1) reviews how its analyses justify its innovative conceptual systems and (2) compares U.S. and E.U. antitrust law as written and as applied.