Thursday, November 19, 2015

Antitrust, Transaction Costs, and Merger Simulation with Nonlinear Pricing

Dennis W. Carlton (U Chicago) and Bryan Keating (Compass Lexecon) analyze Antitrust, Transaction Costs, and Merger Simulation with Nonlinear Pricing.

ABSTRACT: This article explores the relationship between transaction costs and antitrust. It makes three points. First, the usual antitrust analysis can be seriously misleading as a guide to consumer or society welfare because it assumes that pricing is linear and uniform. But the type of pricing endogenously depends on transaction costs, including information costs. Second, two key issues in any antitrust analysis are whether transaction costs change as a result of the action under scrutiny and, regardless of whether they change, how the existence of nonlinear pricing alters the usual antitrust analysis. We develop a merger simulation model with nonlinear pricing to illustrate how misleading the standard analysis can be. Third, since transaction costs influence the ability of various coalitions of consumers, distributors, and manufacturers to form, cooperative game theory can provide a unifying perspective into what situations might give rise to the creation and exploitation of market power.

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