Games judges don't play: predatory pricing and strategic reasoning in US antitrust

The paper analyzes the last three decades of debates on predatory pricing in US antitrust law, starting from the literature which followed Areeda & Turner 1975 and ending with the early years of the new century, after the Brooke decision. Special emphasis is given to the game-theoretic approach to predation and to the reasons why this approach has never gained attention in courtrooms. It is argued that, despite their mathematical rigor, the sophisticated stories told by strategic models in order to demonstrate the actual viability of predatory behavior fail to satisfy the criteria which guide the decisions of antitrust courts, in particular their preference for easy-to-apply rules. Therefore predation cases are still governed by a peculiar alliance between Chicago-style price theory – which, contrary to game theory, considers predatory behavior almost always irrational – and a Harvard-style attention for the operational side of antitrust enforcement.Antitrust law; predatory pricing; Chicago School; Harvard; game theory

From Wald to Savage: homo economicus becomes a Bayesian statistician

Bayesian rationality is the paradigm of rational behavior in neoclassical economics. A rational agent in an economic model is one who maximizes her subjective expected utility and consistently revises her beliefs according to Bayes’s rule. The paper raises the question of how, when and why this characterization of rationality came to be endorsed by mainstream economists. Though no definitive answer is provided, it is argued that the question is far from trivial and of great historiographic importance. The story begins with Abraham Wald’s behaviorist approach to statistics and culminates with Leonard J. Savage’s elaboration of subjective expected utility theory in his 1954 classic The Foundations of Statistics. It is the latter’s acknowledged fiasco to achieve its planned goal, the reinterpretation of traditional inferential techniques along subjectivist and behaviorist lines, which raises the puzzle of how a failed project in statistics could turn into such a tremendous hit in economics. A couple of tentative answers are also offered, involving the role of the consistency requirement in neoclassical analysis and the impact of the postwar transformation of US business schools.Savage, Wald, rational behavior, Bayesian decision theory, subjective probability, minimax rule, statistical decision functions, neoclassical economics

Reaction curves

A reaction curve RC, also called reaction function or best-reply function, is the locus of optimal, i.e. profit-maximizing, actions that a firm may undertake for any given action chosen by a rival firm. The RC diagram is the standard tool for the graphical analysis of duopoly. In the diagram the market equilibrium is at the intersection of the RCs, one for each firm. The commonest case of RC diagram is that of the Cournot duopoly model.reaction curves; duopoly; Cournot

Mathematics as the role model for neoclassical economics (Blanqui Lecture)

Born out of the conscious effort to imitate mechanical physics, neoclassical economics ended up in the mid 20th century embracing a purely mathematical notion of rigor as embodied by the axiomatic method. This lecture tries to explain how this could happen, or, why and when the economists’ role model became the mathematician rather than the physicist. According to the standard interpretation, the triumph of axiomatics in modern neoclassical economics can be explained in terms of the discipline’s increasing awareness of its lack of good experimental and observational data, and thus of its intrinsic inability to fully abide by the paradigm of mechanics. Yet this story fails to properly account for the transformation that the word “rigor” itself underwent first and foremost in mathematics as well as for the existence of a specific motivation behind the economists’ decision to pursue the axiomatic route. While the full argument is developed in Giocoli 2003, these pages offer a taste of a (partially) alternative story which begins with the so-called formalist revolution in mathematics, then crosses the economists’ almost innate urge to bring their discipline to the highest possible level of generality and conceptual integrity, and ends with the advent and consolidation of that very core set of methods, tools and ideas that constitute the contemporary image of economics.Axiomatic method, formalism, rationality, neoclassical economics

Three alternative (?) stories on the late 20th-century rise of game theory

The paper presents three different reconstructions of the 1980s boom of game theory and its rise to the present status of indispensable tool-box for modern economics. The first story focuses on the Nash refinements literature and on the development of Bayesian games. The second emphasizes the role of antitrust case law, and in particular of the rehabilitation, via game theory, of some traditional antitrust prohibitions and limitations which had been challenged by the Chicago approach. The third story centers on the wealth of issues classifiable under the general headline of "mechanism design" and on the game theoretical tools and methods which have been applied to tackle them. The bottom lines are, first, that the three stories need not be viewed as conflicting, but rather as complementary, and, second, that in all stories a central role has been played by John Harsanyi and Bayesian decision theory.game theory; mechanism design; refinements of Nash equilibrium; antitrust law; John Harsanyi

"British economists on competition policy (1890-1920)"

Most late 19th-century US economists gave a rather cool welcome to the Sherman Act (1890) and, though less harshly, to the Clayton and FTC Acts (1914). A large literature has identified several explanations for this surprising attitude, calling into play the relation between big business and competition, a non-neoclassical notion of competition and a weak understanding of anti-competitive practices. Much less investigated is the reaction of British economists to the passing of antitrust statutes in the U.S. What we know is simply that none of them (including the top dog, Alfred Marshall) championed the adoption of a law-based competition policy during the three decades (1890-1920) of most intense antitrust debates in the U.S. The position of three prominent British economists will be examined in this paper: H.S. Foxwell, D.H. MacGregor, and, of course, Alfred Marshall – the latter in two moments at the extremes of our period, 1890 and 1919. It will turn out that they all shared with their American colleagues a theoretical and operational skepticism about the government and judiciary interference with the free working of markets. They also believed that British industrial structure and business habits were so different from those in the U.S. that the urge of interfering with markets in order to preserve competition was much weaker. Among the paper's insights is that Marshall’s key concept of “defending a competitor’s right to compete” foreran the modern characterization of the goal of competition policy as "the protection of the competitive process". Yet Marshall developed his concept without making recourse to the post-1930s neoclassical notion of competition as a static market structure which lies at the foundation of most contemporary antitrust policy: a useful lesson from the history of economic thought for those IO economists who still claim that the classical dynamic view of competition is unsuited as a foundation for an effective competition policy

'Value is not a fact': reproduction cost and the transition from classical to neoclassical regulation in Gilded Age America

The paper draws on Siegel (1984) to argue that, while paving the way for constitutionalizing the free market in Lochner v. New York (1905), the reproduction cost method that the Supreme Court established in Smyth v. Ames (1898) as the preferred technique for assessing the value of a business for regulatory purposes also exposed the conventional character of any valuation exercise, against the claims of objectivity made by classical economists and mainstream jurists. The inconsistency between recognizing that “value is not a fact” and the classical laissez faire philosophy underlying the Court’s jurisprudence did not escape progressive critics, who concluded that government could legitimately fine tune regulation in order to affect a business’s value and pursue alternative socio-economic goals

When law and economics was a dangerous subject

How the early 20th century controversy over railroad regulation embarrassed the University of Chicago and ruined an economist’s career

Mathematics as the role model for neoclassical economics (Blanqui Lecture)

Born out of the conscious effort to imitate mechanical physics, neoclassical economics ended up in the mid 20th century embracing a purely mathematical notion of rigor as embodied by the axiomatic method. This lecture tries to explain how this could happen, or, why and when the economists’ role model became the mathematician rather than the physicist. According to the standard interpretation, the triumph of axiomatics in modern neoclassical economics can be explained in terms of the discipline’s increasing awareness of its lack of good experimental and observational data, and thus of its intrinsic inability to fully abide by the paradigm of mechanics. Yet this story fails to properly account for the transformation that the word “rigor” itself underwent first and foremost in mathematics as well as for the existence of a specific motivation behind the economists’ decision to pursue the axiomatic route. While the full argument is developed in Giocoli 2003, these pages offer a taste of a (partially) alternative story which begins with the so-called formalist revolution in mathematics, then crosses the economists’ almost innate urge to bring their discipline to the highest possible level of generality and conceptual integrity, and ends with the advent and consolidation of that very core set of methods, tools and ideas that constitute the contemporary image of economics