Faculty Bibliography
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The objective function of managers in the presence of overlapping shareholding may differ from the traditional own-firm profit maximization, as they may internalize the externalities their strategies impose on other firms. The dominant formulation of the objective function in such cases has, however, been criticised for yielding counter-intuitive profit weights when the ownership of non-overlapping shareholders is highly dispersed. In this paper, we examine this issue. First, we make use of a probabilistic voting model (in which shareholders vote to elect the manager) to microfound an alternative formulation of the objective function of managers, which solves the above-mentioned criticism. Second, we apply the two formulations to the set of S&P 500 firms. We show that ownership dispersion of non-overlapping shareholders is, in fact, a relevant empirical issue, which may induce an over-quantification of the profit weights computed from the dominant formulation, particularly under a proportional control assumption.
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The book presents a modern approach to understanding U.S. antitrust law, illuminating the economic analysis that dominates modern antitrust analysis in a straightforward way that minimizes technical jargon and makes the underlying economic ...
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Although empirical studies show that common shareholding affects corporate conduct and that common horizontal shareholding lessens competition, critics have argued that the law should not take any action until we have clearer proof on the causal mechanisms. I show that we actually have ample proof on causal mechanisms, but that antitrust enforcement should focus on anticompetitive market structures, rather than on causal mechanisms. I debunk claims that every type of causal mechanism that might produce anticompetitive effects is either empirically untested or implausible. I also show that critics are wrong in claiming that common shareholders lack incentives to influence corporations to increase portfolio value by lessening competition. Finally, I show that preventing anticompetitive horizontal shareholding need not restrict diversification or discourage desirable institutional investor influence on corporate conduct.
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Recent work has argued that a corporate discretion to advance the interests of stakeholders is illusory and undesirable. This article argues that, to the contrary, such discretion is both inevitable and desirable.
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New economic proofs and empirical evidence provide powerful confirmation that, even when horizontal shareholders individually have minority stakes, horizontal shareholding in concentrated markets often has anticompetitive effects. The new economic proofs show that, without any need for coordination or communication, horizontal shareholding will cause corporate managers to lessen competition to the extent they care about their vote share or re-election odds and will cause executive compensation to be less sensitive to firm performance. The new empirical evidence includes two new cross-industry studies which confirm that, just as the proofs predict, increased horizontal shareholding reduces the sensitivity of executive compensation to firm performance and increases the gap between corporate profits and investment. The new empirical evidence also includes two new industry studies that extend to the pharmaceutical industry the two prior industry studies finding that horizontal shareholding had anticompetitive effects in airline and banking markets. I also provide new analysis demonstrating that critiques of the airline and banking industry studies either conflict with the evidence or, when taken into account, increase the estimated adverse price effects from horizontal shareholding. I further provide new theoretical and factual explanations to show why, contrary to the claims of others, non-horizontal shareholder interests, vertical shareholdings, and index fund incentives do not prevent anticompetitive effects from horizontal shareholding. Finally, I provide new legal theories for tackling the problem of horizontal shareholding. I show that when horizontal shareholding has anticompetitive effects, it is illegal not only under Clayton Act §7, but also under Sherman Act §1. In fact, the historic trusts that were the core target of antitrust law were horizontal shareholders. I further show that anticompetitive horizontal shareholding also constitutes an illegal agreement or concerted practice under EU Treaty Article 101, as well as an abuse of collective dominance under Article 102. I conclude by showing that horizontal shareholding not only lessens the market concentration that traditional merger law can tolerate, but also means that what otherwise seem like non-horizontal mergers should often be treated as horizontal. Those implications for traditional merger analysis become even stronger if we fail to tackle horizontal shareholding directly.
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The dominant formulation for modeling the objective function of managers of competing firm with horizontal shareholding has been critiqued for producing the result that, if non-horizontal shareholders are highly dispersed, managers would mimic the interests of horizontal shareholders even if they own a share of the firm that does not induce full control. We show that this issue can be avoided (while maintaining the remaining features of the dominant approach) with an alternative formulation that is derived from a probabilistic voting model that assumes shareholders with higher financial stakes will take greater interest in the managerial actions, which yields the result that managers maximize a control-weighted sum of the shareholders’ relative returns.
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Einer Elhauge & Damien Geradin, Global Antitrust Law and Economics (Foundation Press 3rd ed. 2018).
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This Article shows that new economic proofs and empirical evidence provide powerful confirmation that, even when horizontal shareholders individually have minority stakes, horizontal shareholding in concentrated markets often has anticompetitive effects. The new economic proofs show that, without any need for coordination or communication, horizontal shareholding will cause corporate managers to lessen competition to the extent they care about their vote share or re-election odds and will cause executive compensation to be based less on firm performance and more on industry performance. The new empirical evidence consists of cross-industry studies which confirm that, just as the proofs predict, increased horizontal shareholding increases the distortion of executive compensation and the gap between corporate profits and investment. I also provide new analysis demonstrating that critiques of earlier empirical studies showing adverse price effects for airlines and banking are generally invalid and that addressing the valid subset of those critiques actually increases the estimated price effects. I further demonstrate that the various excuses for delaying enforcement action are meritless. Finally, I provide new legal theories for tackling the problem of horizontal shareholding. I show that when horizontal shareholding has anticompetitive effects, it is illegal not only under Clayton Act §7, but also under Sherman Act §1. In fact, the historic trusts that were the core target of antitrust law were horizontal shareholders. I further show that anticompetitive horizontal shareholding also constitutes an illegal agreement or concerted practice under EU Treaty Article 101, as well as an abuse of collective dominance under Article 102.
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Critics of current tying doctrine argue that metering ties can increase consumer welfare and total welfare without increasing output and that they generally increase both welfare measures. Contrary to those claims, we prove that metering ties always lower both consumer welfare and total welfare unless they increase capital good output. We further show that under market conditions we argue are realistic (which include a lognormal distribution of usage rates that are independently distributed from per-usage valuations), metering ties always harm consumer welfare, even when output increases. Whether metering ties raise or lower total welfare depends on the dispersion of desired usage, the cost structure, and the dissipation of profits caused by metering. For realistic cost values, metering ties will reduce total welfare if the dispersion in desired usage of the metered good is below 0.62. (For comparison, 0.74 is the dispersion of income in the United States.) If 5% of metering profits are dissipated, metering will reduce total welfare for all cost levels unless the dispersion in desired usage exceeds 150% of the dispersion of income in the United States.
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The Supreme Court recently held that in reverse-payment settlements of drug patent disputes, anticompetitive effects can be inferred if the reverse payment exceeds the patent holder’s anticipated litigation costs, absent some offsetting justification. Application of this standard is problematic because defendants usually: (1) obscure the amount of the reverse payment; and (2) claim their settlement was justified by risk aversion. Further, even if a net reverse payment can be proven, it is little help in estimating the period of delay or damages. This Essay offers another type of evidence that demonstrates and quantifies anticompetitive effects. An otherwise unexplained bump in the patent holder’s stock price shows that the settlement created new future profits by extending the period without generic competition beyond what the stock market expected. The stock market test has several advantages: it rebuts the risk aversion claim (which cannot explain the stock price rise); it more effectively (though still conservatively) captures damages than the magnitude of the reverse payment; and, finally, it relies on the behavior of objective traders rather than deal makers with well-understood incentives to obscure the presence of a payment. We conduct a stock market event study on one of the early instances of a reverse-payment settlement to illustrate how the method works.
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This amicus brief explains why Ted Cruz fails to satisfy the "natural born citizen" requirement that the U.S. Constitution makes necessary to be eligible to be President. It also explains why the issue is not a political question.
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Contractual duress, unconstitutional conditions, and blackmail have long been puzzling. The puzzle is why these doctrines sometimes condemn threatening lawful action to induce agreements but sometimes do not. This Article provides a general solution to this puzzle. Such threats are (and should be) deemed unlawfully coercive only when they are contrived, meaning that the threatened action would not have occurred if no threat could have been made. I show that such contrived threats can be credible because making the threat strongly influences whether the threatened action occurs. When such threats are uncontrived warnings, meaning that the threatened action would have occurred even if no threat could have been made, they are not coercive and can only benefit the agreeing parties. However, sometimes (as with blackmail) agreements produced by uncontrived warnings are also unlawful on the ground that they harm third parties. The contrived-threat test explains why the Medicaid-defunding threat in the Affordable Care Act was unconstitutional. It also explains why the recent King v Burwell conclusion—that the Affordable Care Act does not withhold tax credits from states that do not create insurance exchanges—would have been constitutionally required even if it had not been required by the statutory text.
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Horizontal shareholdings exist when a common set of investors own significant shares in corporations that are horizontal competitors in a product market. Economic models show that substantial horizontal shareholdings are likely to anticompetitively raise prices when the owned businesses compete in a concentrated market. Recent empirical work not only confirms this prediction, but also reveals that such horizontal shareholdings are omnipresent in our economy. I show that such horizontal shareholdings can help explain fundamental economic puzzles, including why corporate executives are rewarded for industry performance rather than individual corporate performance alone, why corporations have not used recent high profits to expand output and employment, and why economic inequality has risen in recent decades. I also show that stock acquisitions that create anticompetitive horizontal shareholdings are illegal under current antitrust law, and I recommend antitrust enforcement actions to undo them and their adverse economic effects.
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We show that loyalty discounts create an externality among buyers because each buyer who signs a loyalty discount contract softens competition and raises prices for all buyers. This externality can enable an incumbent to use loyalty discounts to effectively divide the market with its rival and raise prices. If loyalty discounts also include a buyer commitment to buy from the incumbent, then loyalty discounts can also deter entry under conditions in which ordinary exclusive dealing cannot. With or without buyer commitment, loyalty discounts will increase profits while reducing consumer welfare and total welfare as long as enough buyers exist and the entrant does not have too large a cost advantage. These propositions are true even if the entrant is more efficient and the loyalty discounts are above cost and cover less than half the market. We also prove that these propositions hold without assuming economies of scale, downstream competition, buyer switching costs, financial constraints, limits on rival expandability, or any intra-product bundle of contestable and incontestable demand.
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Health care fragmentation today raises costs and worsens health outcomes. The theory of the firm indicates that cost and quality problems could be addressed by permitting greater vertical integration among complementary health care providers. The puzzle is why such integration does not occur. The answer is that a host of regulatory and payment laws create artificial obstacles to such integration. Various provisions in Obamacare could and should be used to lift these obstacles and allow health care integration that could potentially save tens of thousands of lives and hundreds of billions of dollars.
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This Article argues that the same legal standards should apply to RAND commitments whether they are made to standard-setting organizations or not. The arguments for concluding that RAND commitments should limit injunctive patent relief or trigger antitrust liability turn on whether the commitment reasonably induces lock-in that generates hold-up effects or market power when that commitment is breached. But RAND commitments can induce such lock-in effects when they are made outside of standard-setting organizations and do not always induce them when they are made to standard-setting organizations. Thus, any special legal rules for RAND commitments should turn on whether the commitments induced such lock-in, rather than on the institutional context. The arguments against using special legal rules for RAND commitments turn on the extent to which lock-in might fail to generate holdup problems, denying patent injunctions might generate reverse-holdup problems, and contract or promissory estoppel remedies might obviate the need for antirust liability. But those arguments likewise apply equally inside and outside of standard-setting organizations. Thus, however one resolves the arguments for and against applying special legal rules to RAND commitments, the resulting legal standards should be the same whether or not the commitment is made to a standard-setting organization.
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The United States is becoming more like Europe, and not in a good way. For a long time, the central difference between antitrust enforcement in the United States and Europe has been that the United States features not only public enforcement, but a vigorous system of private antitrust enforcement, while in Europe, public agencies have had an effective monopoly on antitrust enforcement. But that difference is on the verge of collapsing. We are achieving a form of convergence; but contrary to expectations, this convergence is not coming from recent European efforts to facilitate private enforcement, which have not yet overcome some serious obstacles on discovery and class actions. Instead, it is coming from the recent US Supreme Court decision in American Express v. Italian Colors Restaurant, which threatens to gut private antitrust enforcement in the United States by replacing it with ineffective forms of arbitration.
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Courts and commentators are sharply divided about how to assess “reverse payment” patent settlements under antitrust law. The essential problem is that a PTO-issued patent provides only a probabilistic indication that courts would hold that the patent is actually valid and infringed, and parties have incentives to structure reverse payment settlements to exclude entry for longer than this patent probability would merit. Some favor comparing the settlement exclusion period to the expected litigation exclusion period, but this requires difficult case-by-case assessments of the probabilities of patent victory. Others instead favor a formal “scope of the patent” test that allows such settlements for nonsham patents if the settlement does not delay entry beyond the patent term, preclude noninfringing products, or delay nonsettling entrants. However, the formal scope of the patent test excludes entry for longer than merited by the patent strength, and it provides no solution when there is either a significant dispute about infringement or a bottleneck issue delaying other entrants. This Article provides a way out of this dilemma. It proves that when the reverse payment amount exceeds the patent holder’s anticipated litigation costs, then under standard conditions the settlement will, according to the patent holder’s own probability estimate, exclude entry for longer than both the expected litigation exclusion period and the optimal patent exclusion period, and thus will both harm consumer welfare and undermine optimal innovation incentives. Further, whenever a reverse payment is necessary for settlement, it will also have those same anticompetitive effects according to the entrant’s probability estimate. This proof thus provides an easily administrable way to determine when a reverse payment settlement is necessarily anticompetitive, without requiring any probabilistic inquiry into the patent merits. We also show that, contrary to conventional wisdom, patent settlements without any reverse payment usually (but not always) exceed both the expected litigation exclusion period and the optimal patent exclusion period, and we suggest a procedural solution to resolve such cases.
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We show that loyalty discounts create an externality among buyers even without economies of scale or downstream competition, and whether or not buyers make any commitment. Each buyer who signs a loyalty discount contract softens competition and raises prices for all buyers. We prove that, provided the entrant’s cost advantage is not too large, with enough buyers, this externality implies that in any equilibrium some buyers sign loyalty discount contracts, reducing total welfare. Moreover, if loyalty discounts require buyers to commit to buy only from the incumbent, there exists an equilibrium in which all buyers sign, foreclosing the rival entirely. As a result, the incumbent can use loyalty discounts to increase its profit and decrease both buyer and total welfare.
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Einer R. Elhauge, Introduction and Overview to Current Issues in Antitrust Economics, in Research Handbook on the Economics of Antitrust Law 1 (Einer Elhauge ed., Edward Elgar Publ'g 2012).
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Yet the field is surprisingly dynamic and changing. The specially commissioned chapters in this landmark volume offer a rigorous analysis of the field's most current and contentious issues.
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This short book analyzes the Obamacare case — focusing on many points the Supreme Court was never told about — including the fact that the constitutional framers themselves had approved mandates to buy health insurance!
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One might mistakenly think that the long tradition of economic analysis in antitrust law would mean there is little new to say. Yet the field is surprisingly dynamic and changing. The specially commissioned chapters in this landmark volume offer a rigorous analysis of the field's most current and contentious issues.
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We show that loyalty discounts create an externality among buyers even without economies of scale or downstream competition, and whether or not buyers make any commitment. Each buyer who signs a loyalty discount contract softens competition and raises prices for all buyers. We prove that, provided the entrant’s cost advantage is not too large, with enough buyers, this externality implies that in any equilibrium some buyers sign loyalty discount contracts, reducing total welfare. Moreover, if loyalty discounts require buyers to commit to buy only from the incumbent, there exists an equilibrium in which all buyers sign, foreclosing the rival entirely. As a result, the incumbent can use loyalty discounts to increase its profit and decrease both buyer and total welfare.
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This is the second edition of the acclaimed text on global antitrust law.
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All the recent Supreme Court antitrust cases are fully incorporated into the structure of the book, as are all the relevant agency guidelines.
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Although the Google Books Settlement has been criticized as anticompetitive, I conclude that this critique is mistaken. For out-of-copyright books, the settlement procompetitively expands output by clarifying which books are in the public domain and making them digitally available for free. For claimed in-copyright books, the settlement procompetitively expands output by clarifying who holds their rights, making them digitally searchable, allowing individual digital display and sales at competitive prices each rightsholder can set, and creating a new subscription product that provides digital access to a near-universal library at free or competitive rates. For unclaimed in-copyright books, the settlement procompetitively expands output by helping to identify rightsholders and making their books saleable at competitive rates when they cannot be found. The settlement does not raise rival barriers to offering any of these books, but to the contrary lowers them. The output expansion is particularly dramatic for commercially unavailable books, which by definition would otherwise have no new output.
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This book takes a fresh approach by focusing instead on what judges should do once the legal materials fail to resolve the interpretive question.