The article presents a theory of the firm based on the ability to separate the objectives of the firm from those of its owners. The discussion introduces a separation criterion that defines a firm as a transaction institution such that the consumption objectives of the institution’s owners can be separated from the objectives of the institution itself. The separation criterion provides a bright line distinction between firms and other types of transaction institutions. Firms under this criterion include profit-maximizing sole proprietorships, corporations, and limited-liability partnerships. Institutions that are not classified as firms include contracts, clubs, workers’ cooperatives, buyers’ cooperatives, merchants associations, basic partnerships, government enterprises, and government-sponsored enterprises. The separation theory of the firm yields insights into corporate law that extend and complement the standard contractarian approach. The separation theory of the firm places emphasis on shareholder property rights and corporate governance.

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The international market for technology is growing rapidly relative to world GDP. To study the international technology market, I present a model of innovation and international trade in which inventors auction their technology in both domestic and foreign markets. There is monopolistic competition in differentiated products. International trade in technology has number of significant economic effects. Technology trade improves the quality of innovation by increasing the pool of R&D experiments from which the best technology is chosen. Technology trade increases the efficiency of invention while at the same time lowering the total number of inventors relative to the equilibrium without technology trade. Technology trade increases the volume of trade in goods. Technology trade increases product variety at the market equilibrium. Technology trade increases national income in each country and increases total gains from trade.

Antitrust has played a major role in telecommunications policy, demonstrated most dramatically by the equal access mandate imposed during the breakup of AT&T. In this Article we explore the extent to which antitrust can continue to serve as a source of access mandates following the Supreme Court's 2004 Verizon Communications Inc. v. Law Offices of Curtis V. Trinko, LLP decision. Although Trinko sharply criticized access remedies and antitrust courts' ability to enforce them, it is not yet clear whether future courts will interpret the opinion as barring all antitrust access claims. Even more importantly, the opinion contains language hinting at possible bases for differentiating among different types of access, in contrast to previous analyses, which have generally grouped all of the forms of access into a single category. We build upon this language to offer an analytical framework that captures the manner in which different components of a network can interact with one another as parts of a complex system. Our analysis also offers a basis for classifying the different types of access into five categories: retail, wholesale, interconnection, platform, and unbundled. We then employ this framework to analyze a range of policy and doctrinal issues, including the current debate over network neutrality.

The case examines the remarkable international expansion strategy of Cemex, a company that began as a local firm in a developing economy and rose to the top ranks of the global cement industry. Cemex offers a striking example of how a company can take leadership of the process of globalization. The case considers how Cemex took advantage of shifting distribution and communications technologies to establish itself as a market maker in the nascent international trading market for cement. The ability to arbitrage across its many buyer and seller markets, achieved through the acquisition of pivotal assets and investment in superior information technology, has become a key source of competitive advantage for the company. The case illustrates several features of international business, including the design of strategy to meet global competition, modes of entry into international markets, and – more generally – how the forces of globalization are reshaping the general run of industries.

A fundamental transformation is taking place in the basic approach to regulating network industries. Policy makers are in the process of abandoning their century-old commitment to rate regulation in favor of a new regulatory approach known as access regulation. Rather than controlling the price of outputs, the new approach focuses on compelling access to and mandating the price ofinputs. Unfortunately, this shift in regulatory policy has not been met with an accompanying shift in the manner in which regulatory authorities regulate prices. Specifically, policy makers have continued to base rates on either historical or replacement cost. We argue that this fundamental shift in regulatory approach demands an equally fundamentai shift in the approach to setting prices. Economic theory suggests that regulatory authorities should base access prices on market prices. In addition, because compelled access to most telecommunications networks requires that competitors be permitted to place equipment on the network owner's property, access requirements constitute physical takings for which market-based compensation must be paid. Although the unavailability of market-based determinants once justified basing prices on some measure of cost, the shift in regulatory policy (especially when combined with the emergence of direct, facilities-based competition made possible by technological convergence) has caused the justificationsfor refusing to set rates on the basis of market prices to fall away. We then use these insights to analyze access pricing with respect to three emerging regulatory issues: (1) access to unbundled network elements mandated by the Telecommunications Act of 1996, (2) access to utility poles compelled by the 1996 amendments to the Pole Attachments Act, and (3) open access to digital subscriber line (DSL) and cable modem networks providing high-speed broadband services.

Potential entrants may discern three types of entry barriers that result from three possible competitive advantages of incumbent firms: cost advantage, differentiation advantage, and transaction advantage. Competitive advantages tend to be temporary, due to technological change and changes in customer demand, so that entrants can devise various types of competitive strategies to overcome perceived barriers to entry.

Just as the industrial revolution mechanized the manufacturing functions of firms, the information revolution is automating their merchant functions. Four types of potential productivity gains are expected from business-to-business (B2B) electronic commerce: cost efficiencies from automation of transactions, potential advantages of new market intermediaries, consolidation of demand and supply through organized exchanges, and changes in the extent of vertical integration of firms. The article examines the characteristics of B2B online intermediaries, including categories of goods traded, market mechanisms employed, and ownership arrangements, and considers the market structure of B2B e-commerce.

General Motors's (GM's) acquisition of Fisher Body is the classic example of market failure in the literature on contracts and the theory of the firm. According to the standard account, in 1926 GM merged vertically with Fisher Body, a maker of auto bodies, because of concerns over transaction-specific investment and contractual holdup. That account exhibits errors of historical fact and interpretation. General Motors acquired a 60 percent interest in Fisher Body in 1919. Moreover, the contractual arrangements and working relationship prior to the 1926 merger exhibited trust rather than opportunism. Fisher Body's production technology did not exhibit asset specificity. The merger reflected economic considerations specific to that time, not some immutable market failure. We demonstrate that vertical integration was directed at improving coordination of production and inventories, assuring GM of adequate supplies of auto bodies, and providing GM with access to the executive talents of the Fisher brothers. Citation Copyright 2000 by the University of Chicago.

The competitive transformation of telecommunications and other network industries in the United States has caused governmental policy makers to be increasingly concerned with the 'fairness" of the deregulatory process. In this Essay, Professors Sidak and Spulber offer a set of concrete guidelines that regulators of network industries should follow in removing regulatory controls: To achieve the productive and allocative benefits of competition and to ensure that the transition from regulation to competition is accomplished fairly, regulators should observe the principles of economic incentive, equal opportunity, and impartiality. Only by treating incumbents and entrants symmetrically and resisting the temptation to "manage" competition, Professors Sidak and Spulber argue, will the regulators ensure that the deregulatory process in network industries will yield all of the benefits of market competition.

The regulated firm's choice of capital structure is affected by countervailing incentives: the firm wishes to signal high value to capital markets to boost its market value while also signalling high cost to regulators to induce rate increases. When the firm's investment is large, countervailing incentives lead both high- and low-cost firms to choose the same capital structure in equilibrium, thus decoupling capital structure from private information. When investment is small or medium-sized, the model may admit separating equilibria in which high-cost firms issue greater equity and low-cost firms rely more on debt financing.

We develop a model of retail competition in which retailers select prices and investments in cost reduction. An equilibrium is constructed in which several identical firms enter and then engage in a phase of vigorous price competition. This phase is concluded with a "shakeout," as a low-price, low-cost firm comes to dominate the market. A central feature of the equilibrium is that low prices are complementary with large investments in cost reduction. Even though the dominant firm's price rises through time, and initially may be below marginal cost, we argue that an interpretation of predatory pricing may be inappropriate.

The paper addresses the question of rising access to the network facilities of an incumbent firm after deregulation. Network access pricing continues to be regulated in such industries as telecommunications, railroads, electric power and natural gas. We emphasize that access prices should be set such that they satisfy an individual rationality condition for the incumbent firm so that access is granted voluntarily. We examine the effects of the voluntary access condition on incentives for entry and show that properly chosen access prices provide incentives for efficient entry using several alternative competition models: Bertrand-Nash, Cournot-Nash and Chamberlin competition with differentiated products

A model of market making by firms with heterogeneous consumers, suppliers and price-setting intermediaries is examined. Consumers and suppliers engage in time-consuming search for the best price and discount future returns. There exists a unique symmetric equilibrium pricing strategy. In equilibrium, there are non-degenerate distributions of ask and bid prices that straddle the Walrasian price. As the discount rate goes to zero, the ranges of the bid and ask prices, and the total output approach the Walrasian equilibrium values. As the discount rate becomes large, the ask and bid prices approach the monopoly pricing policies. An increase in the discount rate leads to an increase in the equilibrium number of active firms, profit per firm, the mean spread between ask and bid prices, and the variance of ask and bid prices, while lowering the number of active consumers and suppliers. The model is extended to examine the steady-state market equilibrium with continual entry and exit of consumers and suppliers.

The conclusions of the Bertrand model of competition are substantially altered by the presence of asymmetric information about rivals' costs. Asymmetric information eliminates the discontinuity in the Bertrand model and significantly alters the properties of the market equilibrium. In the Bertrand-Nash equilibrium when rivals' costs are unknown, firms price above marginal cost and have positive expected profit. The analysis is extended to franchise competition. The market equilibrium is sensitive to market structure and yields incentives for entry.

The consent decree that restructured the telecommunications industry by breaking up the Bell System assigned long-distance and equipment manufacturing to AT&T while forbidding the Regional Bell Operating Companies from entering these lines of business. These restrictions were justified by arguments that the local exchange network was a natural monopoly, that the carriers benefited from barriers to entry, that they could leverage their monopoly power into other markets, and that they would use revenues from local service to subsidize their entry into other lines of business. In this Article, Professor Spulber shows that these arguments are no longer valid because of technological and market changes in the telecommunications industry.

The author presents an integrated survey of management strategy, which examines organizational design, competitive strategy, and public policy considerations. In addition, he offers suggestions on how economic analysis can be applied in unifying and developing management strategy as a field of study.

Abstract: Federal regulations promoting open-access transportation dramatically altered the organizational structure of the U.S. market for natural gas in the 1980s, generally unbundling the merchant and transport functions of interstate pipelines. An empirical analysis of wellhead spot prices is undertaken to examine the effect of open access on the geographic scope of the spot market. Using monthly spot price data from 1984-91, three statistical tests are applied and compared: price correlations, Granger causality, and cointegration. We find that open access integrated the regional wellhead markets into a national competitive market for natural gas. The effects of unbundling on contracts for natural gas are then investigated. Incentives for long-term contracts between pipelines and producers are shown to be effectively removed by the introduction of competitive buying and selling of gas at the wellhead through open access. Copyright 1994 by the University of Chicago.

We examine the equilibrium price, investment, and capital structure of a regulated firm using a sequential model of regulation. We show that the firm's capital structure has a significant effect on the regulated price. Consequently, the firm chooses its equity and debt strategically to affect the outcome of the regulatory process. In equilibrium, the firm issues a positive amount of debt and the likelihood of bankruptcy is positive. Debt raises the regulated price, thus mitigating regulatory opportunism. However, underinvestment due to lack of regulatory commitment to prices persists in equilibrium.

Although the Guidelines should improve the predictability of the Agency's merger enforcement policy, it is not possible to remove the exercise of judgement from the evaluation of mergers under the antitrust laws. Because the specific standards set forth in the Guidelines must be applied to a broad range of possible factual circumstances, mechanical applicatoin of those standads may provide misleading answers to the economic questions raised under the antitrust laws. Moreover, information is often incomplete and the picture of competitive conditions that develops from historical evidence may provide an incomplete answer to the forward-looking inquiry of the Guidelines. Therefore, the Agency will apply the standards of the Guidelines reasonably and flexibly to the particular facts and circumstances of each proposed merger.

The design of monopoly pricing strategies is examined in a general framework with an unknown population distribution of consumer characteristics and downward-sloping, multi-unit consumer demand. In addition, the monopolist has increasing marginal cost. Three pricing strategies are shown to implement the profit-maximizing allocation: reference point pricing, multi-unit competitive bidding with variable outputs, and generalized priority service. The analysis of pricing also is extended to include random capacity.

Abstract: The survey classifies economic theories of the firm into four categories based on the level of aggregation in economic models: (1) neoclassical, (2) industrial organization, (3) contractual, and (4) organizational incentive. Economic theories of the firm are evaluated on the basis of their potential application to problems of management decision making. The survey suggests that a management perspective can be useful in developing an integrated theoretical analysis of the firm that addresses both competitive strategy and organizational design. Copyright 1992 by MIT Press.

Abstract: Nonlinear pricing is extended to allow for demand, cost, and capacity uncertainty. Incentive schedules are developed that implement the Pareto optimal allocation. Consumers choose a reference point, e.g., baseload demand. This determines both their payment level and the state-contingent output allocation. The approximate efficiency of alternative implementation procedures with discrete customer classes and with a linear prorated service rule is also examined. Copyright 1992 by Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association.

We examine the investment decisions of regulated firms in a sequential-equilibrium model under asymmetric information. The regulator is unable to commit to a pricing policy, unlike meachanism-design models, but sets rates after observing the firm's investment. The information conveyed by the firm's investment level alleviates the underinvestment observed under full information with limited regulatory commitment. The equilibrium regulatory strategy can be characterized by a nonlinear rate-of-return schedule. A regulator announcing such a schedule would be able to make a credible commitment.

A sequential equilibrium model of private antitrust enforcement is presented. Consumers have incomplete information about cartel costs and cannot accurately estimate a priori the damage recovery from an antitrust action. Consumers are able to infer cartel costs from the equilibrium pricing strategy of firms. The universal divinity criterion is used to characterize the sequential equilibrium. It is shown that for a sufficiently large damage multiple, antitrust enforcement effectively increases social welfare.

This paper considers the optimal design of antitrust policy when collusive behaviour is unobservable and production costs are private information.1 The analysis shows that asymmetric information can be a significant factor in the decision to tolerate some degree of collusion even though price fixing is illegal per se

This article addresses two significant problems arising from the delegation of law enforcement. First, the policymaker's problem of designing incentives to induce efficient performance by the enforcement agency is examined. Second, the effect of delegation on the enforcer's strategic interaction with potential offenders is specified.

This Article focuses on an assessment of potential costs in natural gas transmission, although its conclusions apply to partial deregulation of other industries, particularly electric power generation and transmission.

A market with free entry monopolistic competition is studied. Nonlinear pricing is shown to be the Bertrand-Nash equilibrium strategy for firms. Given small per capita fixed costs, the nonlinear pricing equilibrium approaches the perfectly competitive equilibrium with marginal cost pricing. Nonlinear pricing is associated with greater product variety than linear pricing. Increased variety leads to efficient pricing.

An economy with a single output and input is considered for the case of economies of scale in production. Equilibria are studied for a cooperative game of joint production in which goods are allocated by a price system. The paper proposes a second best core in which allocations that are feasible for a coalition must be attainable by a price system. Existence is examined and properties of second best core allocations are analysed.

Rate regulation is studied as a bargaining process in which consumers and the firm negotiate output and payments under asymmetric information. The feasible set of transactions given incentive compatibility and individual rationality constraints is characterized. The set of interim incentive efficient mechanisms for the direct revelation game is also characterized. Sufficient conditions are given for efficient mechanisms to be full information efficient. Efficient mechanisms are identified which correspond to nonlinear monopoly pricing, monosony compensation schedules, and the Baron-Myerson regulation model.

A market model of environmental regulation with interdependent production and pollution abatement costs and heterogeneous firms is developed. Firms have private information about costs which have a quadratic form. Firms pursue Bayes–Nash strategies in communication with the regulator. The full information optimum cannot be attained unless gains from trade in the product market net of external damages exceed the information rents earned by firms. Aggregate output and externality levels are lower at the regulated equilibrium than at the full information social optimum.

Sustainable monopoly prices, outputs and producer care are examined in a contestable market setting under alternative liability rules. The market attains a second-best optimum under strict liability, negligence and no liability. The threat of entry is thus sufficient for a monopoly to supply second-best optimal product quality.

A model of endogenous price adjustment under money growth is presented. Firms follow (s,S) pricing policies, and price revisions are imperfectly synchronized. In the aggregate, price stickiness disappears, and money is neutral. The connection between firm price adjustment and relative price variability in the presence of monetary growth is also investigated. The results contrast with those obtained in models with exogenous fixed timing of price adjustment.

This article studies pricing for natural monopolies by using a cooperative game of joint production. Outputs are allocated by a price system. We introduce the concept of the second-best core, which is a subset of the set of zero-profit, second-best Pareto-optimal prices. Prices are such that no group of consumers subsidizes the purchase of another group. We consider the relations among the second-best core and sustainability, supportability, and natural monopoly. For specific preferences and technology we demonstrate the existence of the second-best core. We design a market mechanism for franchise allocation, which achieves second-best pricing without price regulation.

The Aumann-Shapley Value allocation is shown to be in the Core of a benefit allocation game with non-decreasing returns to scale. The value coincides with the competitive allocation for a cost function that is homogeneous of degree one.

The long-run efficiency properties of regulatory instruments are examined in a multiple-input framework. The effluent tax and tradeable permit are shown to be efficient with free entry and exit of small firms. The across-the-board effluent standard results in excessive entry and excessive industry pollution.

The paper shows how various features of market organization, such as existence of retail chains, the centralized warehousing of inventories by wholesalers, and the arrangements whereby suppliers partially reimburse sellers for unsold inventories can be explained in terms of optimal contracts for sharing the risks of excess inventories. When retailers face heterogeneous demands, the paper demonstrates the optimality of shared inventories and obtains optimal incentive properties for the risk sharing policy.

Two part pricing by a multiproduct monopoly and a differentiated oligopoly are examined and compared. Two part pricing policies are seen to depend on whether products are complements or substitutes and on whether or not the market is segmented. A principle result is that although competition tends to lower unit prices, there is no corresponding tendency for competition to reduce entry fees. The unit pricing rule is related to the Ramsey pricing rule. Oligopoly equilibrium unit prices equal marginal cost when there is one consumer type.

The size of the firm relative to market demand is crucial to a determination of whether there exist sustainable monopoly prices. In the one product case the size of the firm is its minimum efficient scale. In the multiproduct case size is defined by a set of outputs at which cost complementarities are present. The analysis shows that when the size of the firm is sufficiently large, there exist anonymously equitable Aumann-Shapley prices. Further, at these prices natural monopoly is sustainable against rival entry. The Aumann-Shapley price are also shown to be quantity sustainable in the sense of Brock and Scheinkman.

The properties of the firm's cost function are examined when investment is irreversible and there are costs of capital adjustment. The effects of the firm's initial capital stock on total, marginal and average costs are analysed.

The market allocation of renewable resources is examined when growth rates are affected by random disturbances. Given free access to a renewable resource, environmental disturbances are shown to affect the biological survival of the resource. The optimal solution is then examined and it is shown to be achieved by a competitive allocation when property rights are clearly defined given rational expectations or a complete set of contingent futures markets. The stochastic dynamics are shown in each case to differ considerably from the deterministic model.

Pulse-fishing harvesting policies are shown to be optimal for a competitive firm managing a multicohort fishery subject to environmental disturbances. Selective harvesting and non-selective proportional harvesting policies are examined. It is shown that pulse-fishing implies convergence to a unique, invariant probability distribution on cohort biomass levels and environmental disturbances that is independent of the initial state of the system.

The dynamic effects of regularity lag and deregulation on the behavior of a firm with imperfectly adjustable capital are examined. Given adjustment costs and irreversible investment, the firm reacts in advance to anticipated changes in regulation. In the regulatory lag case, capital increases after regulation is imposed. The Averch-Johnson effect is observed before regulation, but not necessarily afterwards. Sufficient conditions are given for the capital bias to increase. The regulated firm may choose inputs reflecting either a labor or capital bias in anticipation of deregulation. Sufficient conditions are given for the capital bias to be lessened by deregulation.

This paper presents a dynamic model of entry in which established firms pursue a Cournot - Nash (alternatively Stackelberg) strategy toward a potential entrant. The entrant behaves in Cournot-Nash fashion and chooses output on the basis of expected post-entry profits at the equilibrium of the post-entry game. Within this framework, a constant output entry-deterring strategy would in- volve maintenance of an entry-deterring out- put level before and after entry is threatened. An excess capacity entry-deterring strategy would involve holding excess capacity at an entry-deterring level and increasing output to that level after entry is threatened. Special conditions are presented under which the Sylos Postulate or the Excess Capacity Hypothesis will accurately describe optimal entry-deterring strategies. In addition, special conditions are examined under which the established firm maintains a constant output or holds pre-entry excess capacity when large-scale entry does in fact take place. The analysis shows that in general, established firm reactions to entry are quite different from these special cases.

The sequential search for a backstop energy technology is examined using an optimal growth model with an exhaustible energy resource. It is assumed that an economic planner periodically reviews the outcomes of a stochastic R&D process. A stopping rule for R&D is obtained in terms of a minimum acceptable quality level for the innovation. The dependence of the quality standard upon capital and natural resource stocks and on the state of basic research is analysed.

There exists a unique, non-cooperative equilibrium in output levels for a group of firms which sell differentiated products and are able to practice first degree price discrimination. The equilibrium does not maximize joint profits.

Three mechanisms are considered that extend the standard fixed quantity auction: (I) sole sourcing with output chosen in advance by a buyer with downward-sloping demand; (II) sole sourcing with an output schedule based on revelation of cost parameters; and (III) multiple sourcing with output allocation across suppliers based on revelation of cost parameters. Procedures are characterized for the sole sourcing and multiple sourcing problems that implement the buyer's optimal mechanism.

The chapter presents a theory of two-sided markets. Firms create and operate centralized allocation mechanisms both by matching buyers and sellers and by market making. Buyers and sellers have the option of decentralized search, matching, and bargaining. The chapter applies network theory to examine the transaction costs of alternative centralized and decentralized allocation mechanisms. It examines the efficiency of two-sided markets both for homogeneous products and for differentiated products. Firms employ information systems to improve communication between buyers and sellers and to improve computation through centralized market mechanisms. Centralized allocation mechanisms offered by firms can increase economic efficiency and reduce transaction costs relative to decentralized exchange. Firms play a critical economic role in establishing the microstructure of markets.

The Theory of the Firm seeks to explain (1) why firms exist, (2) how firms are established, and (3) what firms contribute to the economy. The book addresses the foundations of Microeconomics by making institutions endogenous. In the models presented in the book, the following are endogenous: entrepreneurs, firms, markets, and organizations.

The general theory of the firm begins with the individual consumer. The characteristics of consumers are the theory’s exogenous data. Consumers can do practically anything without firms. Consumers can produce goods and services by operating technology. Consumers can transact directly with each other through bilateral exchange. Finally, consumers can form organizations such as clubs, buyers’ cooperatives, workers’ cooperatives, and basic partnerships.

The firm is an economic institution that differs fundamentally from a consumer organization. The book introduces a new definition of the firm that is highly useful in developing the theory: The firm is a transaction institution whose objectives are separate from those of its owners. Consumer organizations such as clubs and basic partnerships are not firms. The objectives of consumer organizations cannot be separated from those of their owners.

Why do firms exist? The Theory of the Firm shows that firms exist only when they improve the efficiency of economic transactions. The efficiency of firms is compared to the alternative of direct exchange between consumers. Direct exchange between consumers involves search, bargaining, barter, and contracts. Direct exchange between consumers also can involve forming consumer organizations. To be economically viable, firms must improve on the efficiency of what consumers can achieve without firms.

How are firms established? Individual consumers can choose to become entrepreneurs and establish firms. The Theory of the Firm thus makes the entrepreneur endogenous in Microeconomics. Because entrepreneurs establish firms, the firm also is endogenous in Microeconomics. Entrepreneurs and firms arise based on the underlying characteristics of consumers who possess the judgment, knowledge, skills, and technology that are needed to set up a firm. Individuals provide the effort, investment, and planning that is needed to start up a business. If firms will enhance economic efficiency, entrepreneurs can earn a return from establishing a firm.

What do firms contribute to the economy? Firms are institutions that coordinate transactions by acting as intermediaries. Among the many instruments that firms use to coordinate transactions are two major ones. First, firms intermediate exchange by creating and operating markets. This makes markets endogenous in the theory of the firm. Firms create markets by marketing and selling goods and services, by setting up facilities such as stores and websites, and by arranging exchanges for commodities, financial assets. Firms adjust prices to balance their purchases and sales and thereby clear markets. Second, firms create and manage organizations that employ personnel and financial capital, intermediate transactions, internally allocate capital, labor, and resources, and carry out production. This makes organizations endogenous in the theory of the firm.