Knowledge that Transforms

My assignment here is to assess the implications of recent theoretical work in industrial economics for antitrust in the United States. I don't have space enough to present a comprehensive survey of that work, nor even to catalog all recent developments with apparent antitrust implications. I attempt instead to describe the general character of those implications, limiting myself to a few illustrative specifics. Industrial economics affects antitrust policy in three different ways. First, it is used in positive analysis aimed at determining whether or not current law has been violated in specific cases and at assessing damages due injured parties. Second, it should be used in evaluating the desirability of relief that might be imposed in particular cases in order to alter structure or conduct if a violation is found. Finally, the tools and results of industrial economics are important inputs in the formulation of general rules of law. I argue here that the new industrial economics can contribute a lot to the positive analysis of individual cases, but it has much less to say about the desirability of particular relief or of general rules of law. A final section briefly examines some implications of this situation.

The Arrow-Debreu analysis of decentralized resource allocation in a Walrasian economy assumes constant or decreasing returns to scale in production. Recently, several authors have extended this analysis to economies with a public monopoly, that is, a firm with increasing returns to scale. In this literature, the salient feature is the characterization of increasing returns to scale technologies as nonconvex production sets, so that under this definition both single and multiproduct firms may exhibit increasing returns. Here, our intended model is an economy with a competitive sector consisting of households and firms with convex technologies, and a public sector consisting of firms with nonconvex technologies. A special case is a single multiproduct firm which produces products for regulated markets (with a nonconvex technology) and produces products for unregulated markets (with a convex technology), for example, ATT firms with constant or decreasing returns are maximizing profits; the public monopoly is pricing at marginal cost, where potential losses are covered by the lump sum taxes; and all markets clear. An average cost-pricing equilibrium is a family of consumption plans, production plans and prices such that households are maximizing utility subject to their budget constraint; firms with constant or decreasing returns are maximizing profits; the public monopoly is pricing at average cost, that is, breaking even or making zero profits; and all markets clear. Unfortunately, all of the extant proofs of existence of a MCP or an ACP equilibrium are somewhat technical in nature and lack the transparency of counting equations and unknowns which many economists accept as an intuitive, if not formally correct, proof of existence. In view of this, one of the purposes of this paper is to demonstrate the existence of a MCP and an A CP equilibrium in a simple economy with increasing returns, where the equilibrium notions are characterized by systems of behavioral equations and market-clearing conditions. We give both an intuitive proof of existence by counting equations and unknowns, and a formal argument that these systems of equations have a solution by use of a simple fixed-point argument. In addition, we review several of the standard partial equilibrium prescriptions for the regulation of a public monopoly and show that in a general equilibrium model they can be interpreted as MCP or A CP equilibria.

In our 1980 paper we tested the joint hypothesis that prices are determined by the mean-variance (MV) capital asset pricing model (CAPM) and that beliefs are stationary. By focusing on the Invariance Law of Prices we avoided the questionable practice of estimating ex ante expectations with ex post returns. Moreover, we circumvented the need to identify the true market portfolio and hence avoided the ambiguity, noted by Richard Roll (1977), in the traditional security market line (SML) tests of the same joint hypothesis. However, Stuart Turnbull and Ralph Winter (T-W) and Richard Sweeney point to a further inconsistency in the joint hypothesis, that they believe can be removed by relaxing the stationarity assumption. This new concern is fundamental in that it applies to all empirical tests which assume stationarity of the return distribution, whether they are simply tests of the CAPM or tests employing the CAPM. The concern would apply a fortiori to tests that assume stationary betas as well. Both comments also suggest that the ad hoc addition of a random error term to our Invariance Law equation and the subsequent statistical tests of it are unnecessary. We first address these two criticisms and then address some further criticisms raised separately by T-W and Sweeney.

The Environmental Protection Agency is introducing bubbles, offsets, and banks as a way of controlling pollution with market incentives to obtain standards for each source and guide the reallocation of emissions. The new method is not a true market because polluters must go through the permitting procedure in order to trade emission allowances. This study examines whether an efficient market without source-by-source review is feasible. It considers the importance of enough participants, competitiveness, sensitivity to geographic emission patterns, and trading flexibility to sustain marketable permits. The design features that address these problems are permit life, market definition, market initiation, and market operation. A stable permit market eliminates some of the uncertainties in decision making because it allows firms to select a preferred level of risk. 9 references. (DCK)

This paper presents a theoretical and empirical analysis of the short-run employment, layoff, and inventory strategies of firms. On average, more than two-thirds of all layoffs in American manufacturing end in a rehire by the employer of origin (Martin Feldstein, 1975; David Lilien, 1980). These layoffs have recently accounted for about half of all ongoing employer-initiated spells of unemployment in that sector (see Table 1), and have led to a revised interpretation both of the involuntary nature of these separations (Costas Azariadis, 1975; Feldstein, 1976; Martin Baily, 1977) and of the durability of employment relationships. Evidently, a significant proportion of unemployed workers know that the conditions that generated their separations are temporary, and so they expect to be recalled within some reasonable time. The point of departure for this paper is in interpreting these findings as evidence of a privately and socially efficient stock of excess capacity held against contingent future demands; that is, as an inventory of a productive input. This view leads to empirically refutable hypotheses regarding both the role of temporary layoffs and the circumstances under which they will be important. In particular, both excess capacity (idle resources) and inventories are devices by which firms may economize on the costs of rapid adjustments when faced with unstable market conditions (George Stigler, 1939). In such an environment, the demands for layoffs and for other buffer stocks are jointly determined elements of long-run technology: the choice among alternative stocks will depend on relative profitabilities, and firms may choose to hold stocks of inputs as a substitute for inventory accumulation, especially if the costs of varying capacity or of storage are important. This reasoning implies that (i) the structure of short-run employment and layoff decisions will vary across firms and industries and, (ii) differences in these structures will be systematically related to the role of inventories in firms' dynamic strategies. Some perspective is warranted. At least since Charles Holt et al. (1960), economists have recognized the production smoothing role of inventories and the necessity of predicting future demand in making current decisions (David Belsley, 1969; Gerald Childs, 1967; Michael Ward, 1978). Similarly, one of the contributions of recent work on implicit labor contracts is in viewing the exchange of labor services as a bilateral and durable commitment. Both these lines of analysis are concerned with the methods firms use to respond to fluctuating demand, yet the underlying, interrelated nature of employment and inventory decisions has rarely been recognized (Roger Miller, 1968; M. Ishaq Nadiri and Sherwin Rosen, 1973; R. G. Crawford, 1979; Robert Hall, 1972). This paper aims to provide a framework for evaluating these decisions, and in so doing to explain some interesting features of observed labor markets. The notion of substitution between inventories of human and physical capital suggests a more disaggregated look at the data. Table 2 shows the importance of temporary layoffs in the distribution of unemployment among manufacturing industries. It reports layoff and total unemployment rates for twelve representative industries over the period 197376, and average layoff rates and recall frequencies for 1958-76. Among all (21) twodigit manufacturing industries the correlation between layoff and rehire rates is .6, and the table illustrates this. Evidently, industries with larger than normal layoff rates also tend to have larger rehire frequencies from firm-initiated spells of unemployment. This *University of Chicago. I am indebted to Gary Becker, Robert Cotterman, Sherwin Rosen, Jose Scheinkman, Michael Ward, Finis Welch, the managing editor, and an anonymous referee for discussions and comments at various stages. The usual disclaimer applies.