Joseph Farrell

• Professor (Full) at University of California, Berkeley

This paper introduces the Special Issue of the Review of Industrial Organization that studies the impact of the 2010 Horizontal Merger Guidelines after 10 years On August 19, 2010, the U.S. Department of Justice (DOJ) and the Federal Trade Commission (FTC) issued newly updated Horizontal Merger Guidelines (2010 Guidelines) [See https://www.ftc.gov/...

When the 1968 Merger Guidelines were drafted, both the economics and antitrust literatures addressed how competition could be softened when oligopolists anticipated the natural and predictable responses of their rivals to their competitive moves, such as price cuts or output expansion. But when economists developed new models of oligopoly behavior,...

The revealed-preference proof of non-negative pass-through by a profit-maximizing firm is discussed and modestly extended. A revealed-preference proof of a “bounds” version of the envelope theorem is discussed. The relationship between the envelope theorem, pass-through, and total incidence of a cost increase (with and without perfect competition)...

A firm may have an incentive to encourage competition and/or efficiency in an “aftermarket” that is vertically linked to a “foremarket” in which it participates. I describe a strong form of this potential incentive, and then explore how it is weakened in plausible circumstances. Some applications to net neutrality are described.

It is a pleasure to introduce this mini-symposium on FTC economics as part of the FTC’s centenary. While I was Director of the Bureau of Economics (BE), in 2009–2012, internal discussions of the centenary were already under way, and one enthusiastic attorney emailed a wide internal distribution list remarking on that and some other U.S. public poli...

Economists at the Federal Trade Commission pursue the agency’s competition and consumer protection missions. In this year’s essay, in antitrust, we discuss two recent mergers that involved Rx drugs: First, we describe key elements of the inquiry into the Express Scripts/Medco transaction in the pharmacy benefit management industry. Next, we analyze...

Consensus standardization often involves bargaining without side payments or substantive compromise, creating a war of attrition that selects through delay. We investigate the trade-off between screening and delay when this process selects for socially valuable but privately observed quality. Immediate random choice may outperform the war of attrit...

Economists at the Federal Trade Commission pursue the agency’s competition and consumer protection missions. In this year’s essay, in antitrust, we discuss various aspects of our hospital merger analyses as well as the effects of authorized generic drugs on consumers and competition. In consumer protection, we describe two ongoing studies on the us...

Although antitrust courts sometimes stress the competitive process, they have not deeply explored what that process is. Inspired by the theory of the core, we explore the idea that the competitive process is the process of sellers and buyers forming improving coalitions. Much of antitrust can be seen as prohibiting firms ’ attempts to restrain impr...

Economists at the Federal Trade Commission (FTC) pursue the agency’s competition and consumer protection missions. In this year’s essay, in antitrust, we discuss the new Merger Guidelines, three exclusion cases, and R&D issues in the Thoratec/HeartWare merger and the Google/AdMob merger. In consumer protection, we discuss the FTC’s new rule on debt...

We describe how the hypothetical monopolist test used to define relevant markets in horizontal merger cases can be implemented using the fundamental economic concepts of opportunity cost and pass-through. Unlike critical loss analysis, our approach analyzes the behavior of a profit-maximizing hypothetical monopolist, as called for in the 1992 Horiz...

We reply here to a comment by Epstein and Rubinfeld to our paper on the antitrust evaluation of horizontal mergers.

We describe a simple initial indicator of whether a proposed merger between rivals in a differentiated product industry is likely to raise prices through unilateral effects. Our diagnostic calibrates upward pricing pressure (UPP) resulting from the merger, based on the price/cost margins of the merging firms' products and the extent of direct subst...

We propose that this measure ("UPP") be used as an indicator of the merger’s likely unilateral effects. Joseph Farrell (FTC) & Carl Shapiro (DOJ).

Consensus standardization often involves bargaining without side payments or substantive compromise, creating a war of attrition that selects through delay. We investigate the tradeoff between screening and delay when this process selects for socially valuable but privately observed quality. Imme-diate random choice may outperform the war of attrit...

Economists at the Federal Trade Commission (FTC) support the agency’s competition and consumer protection missions. In this year’s essay we discuss efforts at the FTC and elsewhere to examine empirically the competitive effects of mergers. This work has ranged from subjective interview-based reports on post-merger behavior to more objective analyse...

We study the welfare economics of probabilistic patents that are licensed without a full determination of validity. We examine the social value of instead determining patent validity before licensing to downstream technology users, in terms of deadweight loss (ex post) and innovation incentives (ex ante). We relate the value of such pre-licensing r...

Introduction: Market definition analysis, which is often central in merger cases, usually claims to follow the 1992 Horizontal Merger Guidelines issued by the U.S. Department of Justice and the Federal Trade Commission (“Guidelinesâ€). The Guidelines describe a relevant product market as a group of products for which a hypothetical monopolist wou...

A widespread “pro-standards view” holds that compatibility standards and modularity are beneficial but are under-supplied by imperfect markets. The author stresses that this view is not unambiguously proven by economic logic, but tentatively concludes that it is more right than wrong, especially where it affects horizontal competition. Introduction...

Switching costs and network effects bind customers to vendors if products are incompatible, locking customers or even markets in to early choices. Lock-in hinders customers from changing suppliers in response to (predictable or unpredictable) changes in efficiency, and gives vendors lucrative ex post market power – over the same buyer in the case o...

Switching costs and network effects bind customers to vendors if products are incompatible, locking customers or even markets in to early choices. Lock-in hinders customers from changing suppliers in response to (predictable or unpredictable) changes in effciency, and gives vendors lucrative ex post market power-over the same buyer in the case of s...

A payment instrument that disproportionately charges merchants (as with high interchange) can take business from others that offer the two-sided customer better deals. This competitive bias arises because merchants internalize cardholders' benefits (even without merchant competition). Use of an instrument with high merchant fees also raises prices...

Time and value are related concepts that influence human behaviour. Although classical topics in human thinking throughout the ages, few environmental economic non-market valuation studies have attempted to link the two concepts. Economists have estimated non-market environmental values in monetary terms for over 30 years. This history of valuation...

Although network effects can make predation more likely to succeed, we find that the leading anti-predation rules may lower or raise efficiency and consumer welfare in network markets. We find that: (a) the extensive debates about the 'correct' measure of cost on which to base price floors are unlikely to be productive; (b) the Ordover-Willig rule...

Corruption in the public sector erodes tax compliance and leads to higher tax evasion. Moreover, corrupt public officials abuse their public power to extort bribes from the private agents. In both types of interaction with the public sector, the private agents are bound to face uncertainty with respect to their disposable incomes. To analyse effect...

In this short comment, I provide my views on "The Effect of Regulatory Intervention in Two-Sided Markets: An Assessment of Interchange-Fee Capping in Australia" (published in this issue) that was presented at the Antitrust Activity in Card-Based Payment Systems: Causes and Consequences conference.

The Journal of Economic Literature (JEL) regularly reviews books of interest to the economics profession. The Economic Report of the President (ERP) falls under that purview and beginning this year, the JEL will be reviewing the ERP. In the reviews that follow, Joel Slemrod reviews the discussion of tax reform. Joe Farrell reviews the ERP's chapter...

The Economics of Information Technology is a concise and accessible review of some of the important economic factors affecting information technology industries. These industries are characterized by high fixed costs and low marginal costs of production, large switching costs for users, and strong network effects. These factors combine to produce s...

This paper was prepared as a companion to the Mattioli Lectures delivered by Hal R. Varian, “Economics of Information Technology,†available at: http://www.sims.berkeley.edu/~hal/Papers/mattioli/mattioli.pdf. Professor Varian’s overview analyzes a variety of competitive strategies used by high-tech companies. These strategies—such as persona...

The principle that it is better to let some guilty individuals be set free than to mistakenly convict an innocent person is generally shared by legal scholars, judges and lawmakers of modern societies. The paper shows why this common trait of criminal procedure is also efficient. It extends the standard Polinsky and Shavell (2007) model of deterren...

This paper contributes empirically to our understanding of informed traders. It analyzes traders' characteristics in a foreign exchange electronic limit order market via anonymous trader identities. We use six indicators of informed trading in a cross-sectional multivariate approach to identify traders with high price impact. More information is co...

Given the limits on Patent Office scrutiny of patent applications, one might hope that ex post litigation can fix at least the important errors. Unfortunately, the often grossly skewed incentives to challenge and to defend issued patents make this view too optimistic. Since litigation cannot fix all errors, we urge better USPTO funding and higher s...

This paper responds to arguments made in filings in the FCC’s broadband openness proceeding (GN Dkt. 09-191) and incorporates data made available since my January 14th filing in that proceeding. Newly available data confirm that there is limited competition in the broadband access marketplace. Contrary to some others’ arguments, wireless broadband...

Essays by leading economic thinkers reflecting the influence of 2001 Nobel Prize winner Joseph E. Stiglitz. Throughout Joseph Stiglitz's long and distinguished career in economics, the focus has been on the real world, with all of its imperfections. His 2001 Nobel Prize recognized his pioneering research in imperfect information; his work in other...

En la UE se ha estimado que los costes de la congesti�n representan el 2% de su PIB y que el coste de la poluci�n del aire y ruido supera el 0,6% del PIB, siendo alrededor del 90% de los mismos ocasionados por el transporte terrestre. Ante este hecho y el continuo aumento de la demanda del transporte privado frente al p�blico para los desplazamient...

We examine the effects of market structure and the internal organization of firms on equilibrium R&D projects. We compare a monopolist's choice of R&D portfolio to that of a welfare maximizer. We next show that Sah and Stiglitz's finding that the market portfolio of R&D is independent of the number of firms under Bertrand competition extends to nei...

We explore the logic of predation and rules designed to prevent it in markets subject to network effects. Although, as many have informally argued, predatory behavior is plausibly more likely to succeed in such markets, we find that it is particularly hard to intervene in network markets in ways that improve welfare. We find that imposition of the...

We consider innovation incentives in markets where final goods are systems comprising two strictly complementary components, one of which is monopolized. We focus on the case in which the complementary component is competitively supplied and innovation is important. We explore ways in which the monopoly may have incentives to extract efficiency ren...

Three years ago, the Antitrust Division and the Federal Trade Commission revised their Horizontal Merger Guidelines to articulate in greater detail how they would treat claims of efficiencies associated with horizontal mergers: claims that are frequently made, as for instance in the recently proposed merger between Heinz and Beech-Nut in the market...

: Standard repeated-interaction theories of oligopoly make collusion seem much easier than a #structural consensus" suggests that it is. I show that more intuitive results can emerge if colluders could renegotiate after a deviation. In repeated Bertrand oligopoly, if agreements are subject to a certain kind of frictionless renegotiation, then full...

JEL#: L4, L1 We consider innovation incentives in markets where final goods comprise two strictly complementary components, one of which is monopolized. We focus on the case in which the complementary component is competitively supplied, and in which innovation is important. We explore ways in which the monopoly may have incentives to confiscate ef...

X-inefficiency is surely among the most important topics in microeconomics. Yet, economists have found it difficult to study. If a given level of X-inefficiency were inevitable and changeless, it would be of little interest (indeed, would not really deserve to be called X-inefficiency at all). So our attention should focus on actual and potential c...

Conventional economic theory assumes that firms always minimize costs given the output they produce. News articles and interviews with executives, however, indicate that firms from time to time engage in cost-cutting exercises. One popular belief is that firms cut costs when they are in economic distress, and grow fat when they are relatively wealt...

This reader provides a unique mix of American and European contributions to the study of particular markets, often combined with a critical evaluation of antitrust regulations, decisions or judgments. Part I explains market structure as a function of sunk costs and market size. Part II illustrates the central role of pricing schemes (including para...

This reader provides a unique mix of American and European contributions to the study of particular markets, often combined with a critical evaluation of antitrust regulations, decisions or judgments. Part I explains market structure as a function of sunk costs and market size. Part II illustrates the central role of pricing schemes (including para...

The Telecommunications Act of 1996 was supposed to usher in a new era of competition in U.S. telecommunications markets in which advanced services were made available to all consumers. In this article, we discuss how policies designed to promote competition, investment, and universal deployment may conflict with each other. We do not believe that t...

We discuss two contrasting styles of vertical organization of complementary activities or components in an industry: systems competition versus component competition. When firms' competencies differ, systems competition is not a perfect substitute for component competition, even with Bertmnd behavior. Costs, prices, industry profits, and the distri...

The FCC and state regulators have been working hard since the 1996 passage of the Telecommunications Act to restructure regulation to make it more compatiable with competition. Dergulation remains an especially complex problem for telecommunication, given such factors as its dependence on carrier-to-carrier cooperation, tendency toward a natural mo...

Economists often ask how private information is shared through markets, costly signaling, and other mechanisms. Yet most information sharing is done through ordinary, informal talk. Economists are inconsistent in their view of such 'cheap talk': sometimes it is supposed that communication generally leads to efficient equilibria; other times it is s...

Formal standardization - explicit agreement on compatibility standards - has important advantages over de facto standardization, but is marred by severe delays. I explore the tradeoffs between speed and the quality of the outcome in a private-information model of the war of attrition and alternative mechanisms, and show that the war of attrition ca...

An abstract is not available.

We consider a problem in which a buyer has private information about the efficient scale or nature of a relationship-specific investment by a producer. We show that reducing the producer's ex post bargaining power may enhance efficiency by providing incentives for the buyer to reveal his private information before the investment is made. This consi...

We test for Nash equilibrium in the results of a nationwide investment game, and show that, at a very high confidence level, the hypothesis of Nash equilibrium can be rejected. Either players did not respond to the considerable incentives to win, or they failed to reach an equilibrium.

In a network industry, each firm must decide whether or not it wants its product to be compatible with those of rivals. This horizontal compatibility strategy determines whether competition is a battle to establish a standard or the more conventional competition within a standard. The two forms of competition involve different tactics and may diffe...

The diffusion of a technological advance is seldom smooth. Typically, some users hesitate to adopt a new technology until others have done so. And even when a new technology is adopted, different early users often choose distinct and perhaps incompatible versions of the new technology – either because these users differ in some relevant way, or jus...

I define neologism-proofness, a refinement of perfect Bayesian equilibrium in cheap-talk games. It applies when players have a preexisting common language, so that an unexpected message′s literal meaning is clear, and only credibility restricts communication. I show that certain implausible equilibria are not neologism-proof; in some games, no equi...

Converters, emulators, or adapters can often make one technology partially compatible with another. The authors analyze the equilibrium market adoption of otherwise incompatible technologies when such converters are available and the incentives to provide them. While market outcomes without converters are often inefficient, the availability of conv...

This article argues that the historic pre- eminence of the ITU in setting international telecommunications standards is likely to be increasingly threatened by the regional standards organizations (RSOs) and by formal or informal coordination among the RSOs. The interests the RSOs represent are powerful enough that the ITU cannot ignore agreements...

We report on a two-stage experiment in which i) we first elicit the social network within a section of undergraduate students and ii) we then measure their altruistic attitudes by means of a standard Dictator game. We observe that more socially integrated subjects are also more altruistic, as betweenness centrality and reciprocal degree are positiv...

Recently, economists have begun to analyze market issues raised by compatibility problems. In this paper I summarize, for non-economists, economists' recent thinking about standards. I describe several economic questions about standards, and say briefly how we economists think about them. Then I explain why standards-related problems may suggest so...

The authors argue that, although decentralization has advantages in finding low-cost solutions, these advantages are accompanied by coordination problems, which lead to delay or duplication of effort or both. Consequently, decentralization is desirable when there is little urgency or a great deal of private information, but it is strictly undesirab...

This paper estimates the risk preferences of cotton farmers in Southern Peru, using the results from a multiple-price-list lottery game. Assuming that preferences conform to two of the leading models of decision under risk--Expected Utility Theory (EUT) and Cumulative Prospect Theory (CPT)--we find strong evidence of moderate risk aversion. Once we...

We study the effects of changes in the ownership or productive assets in a concentrated industry. Using a Cournot model, we analyze (1) investment by an oligopolist, (2) the sale of capital goods by one oligopolist to another, and (3) stock market purchases, whereby one firm acquires a partial interest in a rival firm. In each case, we determine ho...

The authors analyze horizontal mergers in Cournot oligopoly. They find general conditions under which such mergers raise price, and show that any merger not creating synergies raises price. The authors develop a procedure for analyzing the effect of a merger on rivals and consumers and, thus, provide sufficient conditions for profitable mergers to...

We report a general theorem on sustaining cooperation in infinitely-repeated games when the possibility of renegotiation constrains punishments not to harm both players. This result generalizes observations recently reported by E. van Damme (Renegotiation-proof equilibria in repeated prisoner's dilemma, J. Econ. Theory47 (1989), 206–217) for the Pr...

Recently, biologists have explored evolutionary explanations of apparently altruistic behavior in situations of conflict, often modeled as the “Prisoner's Dilemma.” Certain simple cooperative strategies, notably TIT-FOR-TAT, have been successful in computer simulations of the evolution of populations of individuals who interact according to the Pri...

This paper describes an intuitive way in which cheap talk can matter in a two-stage bargaining game in which talk may be followed by serious negotiation. The intuition that all buyers would claim to have low reservation prices is incorrect in our model. Instead, if good-faith participation is endogenously determined then the parties can use talk to...

We consider the effect of team size, the observability of effort, and the competitiveness of the team's environment in determining team-members' allocations of effort between team-oriented and selfish efforts.

In repeated games, subgame-perfect equilibria involving threats of punishment may be implausible if punishing one player hurts the other(s). If players can renegotiate after a defection, such a punishment may not be carried out. We explore a solution concept that recognizes this fact, and show that in many games the prospect of renegotiation strict...

The authors analyze incomplete long-term contracts when buyers incur relationship-specific set-up costs and sellers choose product or service quality that is not verifiable to third parties. If set-up costs are observable, the first-best outcome can be achieved even though contracts cannot enforceably specify quality; this does not even require lon...

For many years experimental observations have raised questions about the rationality of economic agents--for example, the Allais Paradox or the Equity Premium Puzzle. The problem is a narrow notion of rationality that disregards fear. This article extends the notion of rationality with new axioms of choice under uncertainty and the decision criteri...

I note a methodological problem in studying the role of pre-play communication in ensuring equilibrium. To deal with this problem, I define a solution concept for the extended game (in which talk is followed by play) that is intermediate between Nash equilibrium and rationalizability. In some games our solution concept implies a Nash outcome, while...

We analyze an overlapping-generations model of duopolistic competition in the presence of consumer switching costs. Competition for established buyers is continually intermingled with competition for new, uncommitted buyers. In equilibrium the firm with attached customers typically specializes in serving them and concedes new buyers to its rival. T...

We discuss three common mechanisms for achieving coordination, with particular reference to the choice of compatibility standards. The first involves explicit communication and negotiation before irrevocable choices are made: It represents what standardization committees do. The second mechanism, by contrast, involves no explicit communication and...

A partnership is a coalition that divides its output equally. We show that when partnerships can form freely, a stable or “core” partition into partnerships always exists and is generically unique. When people differ in ability, the equal-sharing constraint inefficiently limits the size of partnerships. We give conditions under which partnerships c...

We show that a new product monopolist may benefit from (delayed) competition if consumers incur setup costs. Setup costs create a dynamic consistency problem: the monopolist cannot guarantee low future prices once customers have incurred those costs. We show that, if customers anticipate this problem, the monopolist's profits can be improved throug...

This installment of Puzzles includes answers to all the puzzles presented. The puzzles are titled: “Competition as a Welfare Minimum”; “Externalities Galore”; “The Utility of Ice Cream”; “Congestion Pricing”; and “Are There Pareto Improvements?”