Franchise Bidding for Natural Monopoly: Concluding Remarks

Whatever their origins, the cost of good intentions needs to be evaluated. The comparative institutional approach to the study of economic organization is precisely designed to do that. This chapter examines the efficacy of franchise bidding schemes as an alternative to regulation in the provision of public utility services in circumstances where there are

The Oakland CATV Franchise Bidding Experience

Although the case study reported below cannot claim to be representative, it does reveal that many of the franchise concerns disscused in Chapter 13 are not purely imaginary. The study both indicates the importance of evaluating proposals to scrap regulation in favor of market alternatives in more micro-analytic terms and discloses that, in practice,

Antitrust Enforcement: Merger Policy

Changes in public policy toward vertical and conglomerate mergers have been described in Chapters 4 and 11. They do not require repeating here. The proposition that public policy toward mergers had undergone significant transformation is difficult to appreciate, however, without a statement of specifics. I attempt to give some background here. 1. The 1960s 

Antitrust Enforcement: Nonstandard Contracting

The inhospitality tradition to which 1 referred earlier9 held that nonstandard modes of contracting were presumptively anticompetitive. The argument, moreover, was very sweeping. No effort was made to delimit applications to a subset of activity where the anticompetitive concerns were thought to be especially severe. Rather, customer, territorial, and related contract restraints were held

Antitrust Enforcement: Strategic Behavior

The study of strategic behavior—by which 1 mean efforts by established firms to take up advance positions in relation to actual or potential rivals and/or to respond punitively to new rivalry—is enormously complex. The early entry barrier models emphasized ex ante positioning. More recent work on predatory pricing has emphasized ex post responses. Objections

Antitrust Enforcement: Unresolved Dilemmas

The study of strategic behavior has made remarkable progress during the past five years. A number of troublesome problems nevertheless remain. These include (1) whether efforts to curb predation should focus primarily on price and output or if other aspects of rivalry should be included; (2) inasmuch as rules governing predation set up incentives

Antitrust Enforcement: Concluding Remarks

The 1960s was a decade when nonstandard modes of economic organization were presumed to have monopoly purpose and effect. Antitrust was preoccupied with measures of concentration and entry barriers. Such a narrow formulation facilitated easy enforcement, but sometimes at the expense of an informed welfare assessment of the issues. Three factors contributed to this

Conclusions of Transaction Cost Economics

John R. Hicks advises that since economics is concerned with a changing world, “a theory which illumines the right things now may illumine the wrong things another time. [Accordingly], there is … no economic theory which will do for us everything we want all the time. . . . We may [someday] reject our

Transaction Cost in Economics

Transaction cost economics acknowledges that technology and ownership of assets arc both important, but it maintains that neither is determinative of economic organization, nor are both together. Rather, the study of economic organization has to go beyond technology and ownership to include an exam- ination of incentives and governance. Transaction cost economics maintains that

Transaction Cost in Law

Ronald Gilson advances the novel and controversial view that business lawyers should be thought of as “transaction cost engineers” (1984). Such an approach ascribes value enhancement to the job of transaction design, which is a theme advanced repeatedly in this book.15 It emphasizes and gives content to the affirmative side of lawyering. Transaction cost

Transaction Cost in Organization

Unlike economists, sociologists have long been concerned with the puzzle, “Why are there so many kinds of organization?” (Hannan and Freeman, 1977, p. 936). Although numerous interesting explanations for organizational variety have resulted, the explanation favored here—namely, organizational variety arises in the service of transaction cost economizing—was not natural to and is still resisted

Transaction Cost Economics: Postscript

Schumpeter posed the question “Can capitalism survive” to which he ventured the opinion, “No. I do not think that it can” (1942, p. 61). Lack of intellectual support for—indeed, prevailing intellectual skepticism regarding—the merits of capitalist modes of organization was among the factors that led to that negative assessment (Schumpeter, 1942, chap. 13). Forty

Incentives of agency theory – Adam Smith and Incentive Contracts in Agriculture

In his discussion of the determination of wages, Adam Smith (1776, bk. 1, chap. 7) recognized the contractual nature of the relationship between the masters and the workers. He asserted the conflicting interests of those two players and recognized that the bargaining power was not evenly distributed between them; the masters generally had all

Incentives of agency theory – Chester Barnard and Incentives in Management

As we saw above, Smith (1776) already discussed the problems associated with piece-rate contracts in the industry. Babbage (1835) went a step further by under- standing the need for precise measurement of performances to set up efficient piece-rate or profit-sharing contracts: It would, indeed, be of great mutual advantage to the industrious work- man,

Incentives of agency theory – Hume, Wicksell, Groves: The Free-Rider Problem

Hume (1740) may be credited with writing the first explicit statement of the free- rider problem: Two neighbours may agree to drain a meadow, which they possess in common; because it is easy for them to know each others mind; and each must perceive, that the immediate consequence of his failing in his part,

Incentives of agency theory – Borda, Bowen, Vickrey: Incentives in Voting

Since the beginning of the theory on voting, the issue of strategic voting was noticed. Borda (1781) recognized it when he proposed his famous Borda rule: My scheme is only intended for honest men. We have to wait for Bowen (1943) to see a first attempt at addressing the issue of strategic voting. For

Incentives of agency theory – Léon Walras and the Regulation of Natural Monopolies

Walras (1897) defined a natural monopoly as an industry where monopoly is the efficient market structure and suggested, following Smith (1776), to price the prod- uct of the firm by balancing its budget. This led to the Ramsey (1927) and Boiteux (1956) theory of optimal pricing under a budget constraint. After some price cap

Incentives of agency theory – Knight, Arrow, Pauly: Incentives in Insurance

The notion of moral hazard, i.e., the ability of insured agents to affect the proba- bilities of insured events, was well known in the insurance profession.15 However, the insurance writers tended to look upon this phenomenon as a moral or ethical problem affecting their business. Arrow (1963b) introduced this concept in the economic literature

Incentives of agency theory – Sidgwick, Vickrey, Mirrlees: Redistribution and Incentives

The separation of efficiency and redistribution in the second theorem of welfare economics rests on the assumption that lump-sum transfers are feasible. As soon as the bases for taxation can be affected by agents’ behavior, dead-weight losses are created. Then raising money for redistributive purposes destroys efficiency. More redistribution requires more inefficiency. A trade-off

Incentives of agency theory – Dupuit, Edgeworth, Pigou: Price Discrimination

When a monopolist or a government wants to extract consumers’ surpluses in the pricing of a commodity, it faces in general the problem of the heterogeneity of consumers’ tastes. Even if it knows the distribution of tastes, it does not know the type of any given consumer. By offering different menus of price-quality or