Knowledge that Transforms

This paper examines bargaining among firms to mitigate rent dissipation following the major oil discoveries of 1926-35. Because of high bargaining costs, firms chose prorationing instead of consolidation and unitization, and success varied. The analysis also shows that prorationing took the form it did because concession, such as per well quotas, were required to draw in small operations and the quotas led to predictable responses regarding rent dissipation. Prorationing, despite its costs, controlled total field production and costs, conserved natural reservoir energies, and lengthened field life. When private agreements failed, the parties successfully appealed for state enforcement. Since similar heterogeneities influnce regulations elsewhere in the economy, detailed analysis of bargaining among firms is essential for insight into the emergence of various institutional forms. 33 references, 3 tables.

The potential of an incumbent firm to retain its dominant position in a market is a focal point of the modem theory of industrial organization. A recent literature examines this issue for markets in which challengers threaten an incumbent's position by engaging in research for a new technology. Richard Gilbert and David Newbery (1982) show that an incumbent firm with a firstmover advantage will preempt potential entrants by inventing a new technology slightly earlier than would its rivals. In a stochastic R D therefore its introduction does not alter the decision to research. When the pre-innovation market is characterized by an incumbent and potential entrants, Stephen Salant (1984) shows that licensing ex post to innovation can alter the research decision as anticipation of the returns from future licensing encourages research by the entrant. As a counterpoint to the Salant result, I find that licensing ex ante to research may discourage further research by the entrant. Indeed, this strategic incentive for licensing may be so strong as to persuade the incumbent as well as the entrant to terminate research activity. To isolate this incentive for licensing from the one discussed by Salant, a simple model is constructed in which licensing of future technologies is not desirable. Anecdotal evidence suggests that the strategic incentive does lead innovators in some markets to license their technologies. Examples of this information sharing are prevalent in markets where technological change is rapid. In the 1940's, Standard Oil of New Jersey discovered a process for synthetic rubber. It traded patent rights on this process for a synthetic oil production process discovered by Farben, a German rubber company. In both the synthetic oil and synthetic rubber markets, rival companies were *Department of Economics, Scarsborough College, University of Toronto, Toronto, Ontario, Canada, M5S lAl. I thank Jon Cohen and Ron Saunders for discussions that inspired this paper. I am also grateful to Yehuda Kotowitz, Andy McLennan, Jennifer Reinganum, Ralph Winter, Myma Wooders, two anonymous referees, and seminar participants at the University of Toronto for helpful comments on earlier drafts.

Protection provided to declining industries is generally explained as founded in the judgement that specific factors, which do not have the opportunities for adjustment available to mobile factors,1 ought be cushioned against income losses due to falls in the world price of their industry's output. The argument is that moral hazard causes private insurance markets for income maintenance to fail, so obligating governments to provide social insurance against income losses; or, alternatively, some form of altruistic notion of fairness is viewed as underlying protection of individuals' incomes in face of exogenous change. Whether the social insurance or altruism view is taken, the authorities are seen as responding to social justice considerations in providing industries adversely affected by changes in world prices with compensating protection, at least temporarily to ease difficulties in adjustment-although the industry itself may influence the level and timing of protection by lobbying to make its plight known.2 This paper presents an alternative to social justice perspectives on declining industry protection. Protective responses for declining industries are considered when the authorities, rather than seeking social welfare objectives, pursue their own self-interest motives to maximize political support.? An adaptation of the Stigler-Peltzman regulatory model is used herein to describe a political support equilibrium for a protected industry. Section I reviews their model for background purposes, and reinterprets the gainers and losers from government intervention in a Ricardo-Viner setting. Section II introduces a distinction in the evocation of political-support response between changes in the gainers' and losers' welfare that derive from administrative decisions and changes that are the consequence of exogenous market forces. The authorities' self-interest response to declines in the world price of an industry's output is then established. Section III presents a brief concluding summary and contrasts social justice perspectives on declining industry protection with the outcome when political self-interest motives underly intervention.