Whinston, Michael. 2007. Antitrust in Innovative Industries.
American Economic Review. 97(5): 1703-1730.
We study the effects of antitrust policy in industries with continual innovation. Antitrust policies that restrict incumbent behavior toward new entrants 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 also show that, in some cases, the tension does not arise, and policies that protect entrants necessarily raise the rate of innovation.
Whinston, Michael. 2003. On the Transaction Cost Determinants of Vertical Integration.
Journal of Law, Economics, & Organization. 19(1): 1-23.
The transaction cost approach to the organization of firms has been among the most significant advances in industrial organization in the last 25 years. Much of this work has taken the transaction cost economics view of Williamson (1975, 1979, 1985) and Klein, Crawford, and Alchian (1978) in which high levels of quasi-rents are taken to increase the likelihood of vertical integration. More recently, however, the more formal property rights theory of Grossman and Hart (1986) and Hart and Moore (1990) has received considerable attention as a theory of integration. This article explores the predictions of property rights theory to assess what the extensive supporting evidence on transaction cost economics tells us about the property rights theory's empirical relevance. The article concludes that this evidence sheds little light on the relevance of the property rights theory and discusses how we might try to learn more.
Whinston, Michael. 2003. Robust Predictions for Bilateral Contracting with Externalities.
Econometrica. 71(3): 757-791.
The paper studies bilateral contracting between one principal and N agents when each agent's utility depends on the principal's unobservable contracts with other agents. We show that allowing deviations to menu contracts from which the principal chooses bounds equilibrium outcomes in a wide class of bilateral contracting games without imposing ad hoc restrictions on the agents' beliefs. This bound yields, for example, competitive convergence as N → ∞ in environments in which an appropriately-defined notion of competitive equilibrium exists. We also examine the additional restrictions arising in two common bilateral contracting games: the "offer game" in which the principal makes simultaneous offers to the agents, and the "bidding game" in which the agents make simultaneous offers to the principal.
Whinston, Michael. 2002. The Mirrlees Approach to Mechanism Design with Renegotiation (with Applications to Hold-up and Risk Sharing).
Econometrica. 70(1): 1-45.
The paper studies the implementation problem, first analyzed by Maskin and Moore (1999), in which two agents observe an unverifiable state of nature and may renegotiate inefficient outcomes following play of the mechanism. We develop a first-order approach to characterizing the set of implementable utility mappings in this problem, paralleling Mirrlees's (1971) first-order analysis of standard mechanism design problems. We use this characterization to study optimal contracting in hold-up and risk-sharing models. In particular, we examine when the contracting parties can optimally restrict attention to simple contracts, such as noncontingent contracts and option contracts (where only one agent sends a message).
Whinston, Michael. 2001. Exclusivity and Tying in U.S. v. Microsoft: What We Know, and Don't Know.
Journal of Economic Perspectives. 15(2): 63-80.
Reprinted in:
Recent Developments In Monopoly And Competition Policy, edited by George Norman, Cheltenham: Edward Elgar, 2008.
Whinston, Michael. 2001. Assessing the Property Rights and Transaction-Cost Theories of Firm Scope.
American Economic Review, Papers and Proceedings. 91(2): 184-188.
Reprinted in:
The International Library Of The New Institutional Economics, edited by Claude Ménard, Cheltenham: Edward Elgar, 2005.
Whinston, Michael. 2000. Exclusive Contracts and Protection of Investments.
RAND Journal of Economics. 31(4): 603-633.
We consider the effect of a renegotiable exclusive contract restricting a buyer to purchase from only one seller on the levels of noncontractible investments undertaken in their relationship. Contrary to some informal claims in the literature, we find that exclusivity has no effect when all investments are fully specific to the relationship (i.e., are purely "internal"). Exclusivity does matter when investments affect the value of the buyer's trade with other sellers (i.e., have "external" effects). We examine the effects of exclusivity on investments and aggregate welfare, and the private incentives of the buyer-seller coalition to use it.
Whinston, Michael. 2000. Naked Exclusion: Comment.
American Economic Review. 90(1): 296-309.
Whinston, Michael. 1998. Incomplete Contracts and Strategic Ambiguity.
American Economic Review. 88(4): 902-932.
Why are observed contracts so often incomplete in the sense that they leave contracting parties' obligations vague or unspecified? Traditional answers to this question invoke transaction costs or bounded rationality. In contrast, we argue that such incompleteness is often an essential feature of a well-designed contract. Specifically, once some aspects of performance are unverifiable, it is often optimal to leave other verifiable aspects of performance unspecified. We explore the conditions under which this occurs, and investigate the structure of optimal contracts when these conditions are satisfied.
Whinston, Michael. 1998. Exclusive Dealing.
Journal of Political Economy. 106(1): 64-103.
Reprinted in:
Recent Developments In Monopoly And Competition Policy , edited by George Norman, Cheltenham: Edward Elgar, 2008.
In this paper, we provide a conceptual framework for understanding the phenomenon of exclusive dealing, and we explore the motivations for and effects of its use. For a broad class of models, we characterize the outcome of a contracting game in which manufacturers may employ exclusive dealing provisions in their contracts. We then apply this characterization to a sequence of specialized settings. We demonstrate that exclusionary contractual provisions may be irrelevant, anticompetitive, or efficiency-enhancing, depending on the setting. More specifically, we exhibit the potential for anticompetitive effects in noncoincident markets (i.e., markets other than the ones in which exclusive dealing is practiced), and we explore the potential for the enhancement of efficiency in a setting in which common representation gives rise to incentive conflicts. In each instance, we describe the manner in which equilibrium outcomes would be altered by a ban on exclusive dealing. We demonstrate that a ban may have surprisingly subtle and unintended effects.
Spier, Kathryn E. and
Michael Whinston. 1995. On the Efficiency of Privately Stipulated Damages for Breach of Contract: Entry Barriers, Reliance, and Renegotiation.
RAND Journal of Economics. 26(2): 180-202.
Reprinted in:
Economics Of Contract Law, edited by Douglas G. Baird, Cheltenham: Edward Elgar, 2007.
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 the entrant has market power and the seller's 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 entrant's 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.
Whinston, Michael. 1993. Incomplete Contracts, Vertical Integration, and Supply Assurance.
Review of Economic Studies. 60(1): 121-148.
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?
Whinston, Michael. 1992. Entry and Competitive Structure in Deregulated Airline Markets: An Event Study Analysis of People Express.
RAND Journal of Economics. 23(4): 445-462.
Reprinted in:
Empirical Industrial Organization, edited by Paul L. Joskow and Michael Waterson, Cheltenham: Edward Elgar, 2004.
While recent studies of deregulated airline prices considerably advance our understanding of competitive structure in this industry, they suffer from several weaknesses that could potentially undermine their inferences. In this article, we consider an alternative approach to this issue that uses the reactions of incumbent airlines' stock prices to announcements of entry by People Express to shed light on competitive structure. These stock reactions reveal significant route-specific profits or sunk costs (rejecting, for example, the contestable market model) and also provide evidence on the degree of competitive localization present in the industry. We also examine the price, sales quantity, and schedule changes that followed entry. These changes corroborate the conclusions emerging from our analysis of stock price reactions.
Whinston, Michael. 1991. The "Foreclosure" Effects of Vertical Mergers.
Journal of Institutional and Theoretical Economics. 147(1): 207-226.
Whinston, Michael. 1991. Patent Expiration, Entry, and Competition in the U.S. Pharmaceutical Industry.
Brookings Papers on Economic Activity. Microeconomics. 1991: 1-66.
Whinston, Michael. 1990. Multimarket Contact and Collusive Behavior.
RAND Journal of Economics. 21(1): 1-26.
Reprinted in:
Pricing Tactics, Strategies, And Outcomes, edited by Michael Waldman and Justin P. Johnson, Cheltenham: Edward Elgar, 2007.
Cartels, edited by Margaret C. Levenstein and Stephen W. Salant, Cheltenham: Edward Elgar, 2007.
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.
Whinston, Michael. 1990. Tying, Foreclosure, and Exclusion.
American Economic Review. 80(4): 837-859.
Reprinted in:
Pricing Tactics, Strategies, And Outcomes, edited by Michael Waldman and Justin P. Johnson, Cheltenham, UK: Edward Elgar, 2007.
Economics Of Antitrust Law, edited by Benjamin Klein and Andres V. Lerner, Cheltenham, UK: Edward Elgar, 2008.
In recent years, the "leverage theory" of tied good sales has faced heavy and influential criticism. In an important sense, though, the models used by its critics are actually incapable of addressing the leverage theory's central concerns. Here I reconsider the leverage hypothesis and argue that tying can indeed serve as a mechanism for leveraging market power. The mechanism through which this leverage occurs, its profitability, and its welfare implications are discussed in detail.
Whinston, Michael. 1989. Multiproduct Monopoly, Commodity Bundling, and Correlation of Values.
Quarterly Journal of Economics. 104(2): 371-383.
Reprinted in:
Pricing Tactics, Strategies, And Outcomes, edited by Michael Waldman and Justin P. Johnson, Cheltenham: Edward Elgar, 2007.
Whinston, Michael. 1988. Exit with Multiplant Firms.
RAND Journal of Economics. 19(4): 568-588.
Using an extension of Ghemawat and Nalebuff's (1985) model, I analyze the outcome of industry decline when firms have multiplant operations. The analysis reveals that no natural generalization of their strong empirical prediction, that the larger of two single-plant duopolists exits first, holds in a multiplant setting. The results also highlight a number of factors that affect the pattern of capacity removal during industry decline and lead to a discussion of the strategic implications of firms' plant size choices. In general, the factors determining the pattern of capacity reduction can be quite complex, and prediction in such settings often requires intimate knowledge of industry structure.
Whinston, Michael. 1987. Coalition-Proof Nash Equilibria I. Concepts.
Journal of Economic Theory. 42(1): 1-12.
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.”
Whinston, Michael. 1987. Coalition-Proof Nash Equilibria II. Applications.
Journal of Economic Theory. 42(1): 13-29.
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.
Whinston, Michael. 1986. Common Agency.
Econometrica. 54(4): 923-942.
We extend the principal-agent framework with risk-neutral principals to situations in which several principals simultaneously and independently attempt to influence a common agent. We show that implementation is, in the aggregate, always efficient (cost-minimizing), and that noncooperative behavior induces an efficient (potentially second-best) action choice if and only if collusion among the principals would implement the first-best action at the first-best level of cost. We also investigate the existence of equilibria, the distribution of net rewards among principals, the characteristics of actions chosen in inefficient equilibria, and potential institutional remedies for welfare losses induced by noncooperative behavior.
Whinston, Michael. 1986. Free Entry and Social Inefficiency.
RAND Journal of Economics. 17(1): 48-58.
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.
Whinston, Michael. 1986. Menu Auctions, Resource Allocation, and Economic InfluenceMenu Auctions, Resource Allocation, and Economic Influence.
Quarterly Journal of Economics. 101(1): 1-32.
In many examples of competitive bidding (e.g., government construction contracting) the relevant object is either partially divisible or ill-defined, in contrast to much of the recent theoretical work on auctions. In this paper we consider a more general class of auctions, in which bidders name a "menu" of offers for various possible actions (allocations) available to the auctioneer. We focus upon "first-price" menu auctions under the assumption of complete information, and show that, for an attractive refinement of the set of Nash Equilibria, an efficient action always results. Our model also has application to situations of economic influence, in which interested parties independently attempt to influence a decision-maker's action.
Whinston, Michael. 1985. Common Marketing Agency as a Device for Facilitating Collusion.
RAND Journal of Economics. 16(2): 269-281.
Reprinted in:
Cartels, edited by Margaret C. Levenstein and Stephen W. Salant, Cheltenham: Edward Elgar, 2007.
In a variety of markets firms voluntarily and independently delegate control over certain aspects of marketing to common agents. In this article we present an explicit model of agency delegation where firms noncooperatively select agents, name output prices, and choose compensation schemes. We exhibit an equilibrium in which all strategic variables-not merely the marketing choices delegated to agents, but prices as well-are selected perfectly cooperatively. This cooperative equilibrium is very simple and attractive: each firm sets the collusive output price, and employs a commission scheme to compensate the agent. Although each firm has the ability to condition compensation on the agent's action (as well as on sales), firms choose to forego this opportunity. In essence, common agency provides an indirect mechanism through which competing firms may "sell out" to a single party, thereby creating incentives which generate a collusive outcome.
Whinston, Michael. 1983. Moral Hazard, Adverse Selection, and the Optimal Provision of Public Goods.
Journal of Public Economics. 22(1): 49-71.
The single-period social insurance model of Diamond and Mirrlees is extended to allow for a diversity of types (in the probability of becoming disabled). When individual type is observable, the utilitarian optimum has both consumption when working and disability benefits increasing with the probability of disability. When type is not observable (adverse selection is present), the optimum is a single ‘pooling’ policy over a wide range of welfare weights which includes the utilitarian case. These results also provide insights into the potential distributional effects of moral hazard and the ways moral hazard and adverse selection problems may interact.
