Affirmative Action: More Efficient than Color Blindness

One of the most compelling reasons against affirmative action is the principle of color blindness, that is, the idea that race is an irrelevant characteristic that should not affect higher education admissions or hiring decisions. Despite its intuitive appeal, this paper shows that adherence to this principle impedes economic efficiency when there has been past discrimination based on color. Past discrimination creates inefficiencies in the economy that persist across generations. Because of this persistence, race is not an irrelevant characteristic for firms and universities looking to hire or admit the best candidates. Affirmative action, not color-blindness, is necessary to reduce or eliminate these inefficiencies. This is true even if the firm or university can observe the economic status of the applicant. That is, affirmative action based on economic disadvantage does not eliminate the need for affirmative action based on race, even if one is only concerned about economic efficiency

Against Simplicity in Antitrust

Comments on Chris Sagers, Apple, Antitrust, and Irony (Harvard University Press, 2018

On the Misuse of the Nash Bargaining Solution in Law and Economics

Bargaining plays a very important role in a great deal of legal scholarship, particularly in law and economics scholarship. Scholars often assume that the Nash bargaining solution determines the bargaining outcome, where the parties equally split the joint benefit created by the agreement. This solution, however, is inappropriate when parties have outside options, alternatives that only provide a payoff if the bargainer terminates the original bargaining. Most legal bargaining problems involve outside options. This article explains why the Nash bargaining solution generates an inappropriate outcome in this situation. Then, it examines several different prior articles that have used the Nash bargaining situation even though the bargaining problems these articles analyzed involved outside options. In particular, it demonstrates how the results from those articles would differ had they used a bargaining solution that was more appropriate for the situation they were analyzing. Finally, it argues that law and economics scholarship could benefit from a more careful modeling of bargaining problems

Robust Exclusion Through Loyalty Discounts

We consider loyalty discounts whereby the seller promises to give buyers who commit to buy from it a lower price than the seller gives to uncommitted buyers. We show that an incumbent seller can use loyalty discounts to soften price competition between itself and a rival, which raises market prices to all buyers. Each individual buyer’s agreement to a loyalty discount externalizes most of the harm of that individual agreement onto all the other buyers. The resulting externality among buyers makes it possible for an incumbent to induce buyers to sign these contracts even if they reduce buyer and total welfare. Thus, if the entrant cost advantage is not too large, we prove that with a sufficient number of buyers, there does not exist any equilibrium in which at least some buyers do not sign loyalty discount contracts, and there exists an equilibrium in which all buyers sign and the rival is foreclosed from entry. As a result, with a sufficient number of buyers, an incumbent can use loyalty discounts to increase its profit and decrease both buyer and total welfare. Further, the necessary number of buyers can be as few as three. These effects occur even in the absence of economies of scale in production and even if the buyers are not intermediaries who compete with each other in a downstream market

A critical analysis of critical loss analysis

Abstract Critical loss analysis is often used to argue that firms with large margins have more to lose from a reduction in sales and hence are less likely to increase prices. This argument ignores the implication of economic theory that profit-maximizing competitors that do not coordinate their pricing only have large margins if their customers are not very price sensitive. We explore the implications of critical loss analysis using an internally consistent model of oligopoly. We show that for a given degree of substitutability between the merging firms' products, firms with larger pre-merger margins will raise prices more than firms with smaller margins. This reinforces the traditional view that mergers are more likely to harm consumers when the merging firms have greater market power, as measured by their margins. We also derive internally consistent formulas for evaluating the profitability of price increases when defining markets and evaluating unilateral competitive effects

An Economic Analysis of Arbitration versus Litigation for Contractual Disputes

This paper considers the efficiency of arbitration clauses when the firm can choose a degree of bias in the arbitration process and only some fraction of consumers can observe this bias. If the proportion of informed consumers is not too small, then there is an equilibrium at which all consumers trade, there is some pro-firm bias, and, as a result, there is excessive breach. The paper then compares the firm’s incentive to include an arbitration clause with the social incentive. The firm’s incentive does not mirror the socially optimal incentive: it could have either an excessive or insufficient incentive to include an arbitration clause, but under fairly broad conditions the firm will not choose an arbitration clause when court adjudication would be more efficient

An Economic Analysis of Arbitration versus Litigation for Contractual Disputes

This paper considers the efficiency of arbitration clauses when the firm can choose a degree of bias in the arbitration process and only some fraction of consumers can observe this bias. If the proportion of informed consumers is not too small, then there is an equilibrium at which all consumers trade, there is some pro-firm bias, and, as a result, there is excessive breach. The paper then compares the firm’s incentive to include an arbitration clause with the social incentive. The firm’s incentive does not mirror the socially optimal incentive: it could have either an excessive or insufficient incentive to include an arbitration clause, but under fairly broad conditions the firm will not choose an arbitration clause when court adjudication would be more efficient