International trade and competition policy

With the completion of the Uruguay Round of international trade negotiations, attention turns to plausible next steps. One question on the agenda of possibilities is the adoption of competition policies that complement or substitute for the remedies traditionally used to deal with international trade distortions. This paper examines three cases --industrial diamonds, potash from Saskatchewan, and cement from Greece

International competition policy and economic development

During the past half century many nations have adopted policies whose function is to discourage cartels and other restrictive practices. Industrialized nations led the movement toward pro-competition policies, but more recently, developing nations have begun to join the parade. Initial steps have also been taken toward the implementation of competition policies spanning national borders, and proposals for their extension have been made. This paper analyzes the consequences national and international competition policies would have for developing nations. Topics covered include the dependence of LDCs on cartelized commodity exports, the terms on which intermediate goods and technology are imported by LDCs, access to the markets of industrialized nations, the consequences of substituting predatory pricing standards for the criteria traditionally used to combat dumping in international trade, and the links between domestic and international market structure and the absorption of advanced technology. --

The size distribution of profits from innovation

The research reported in this paper seeks to determine how skewed the distribution of profits from technological innovation is --i.e., whether it conforms most closely to the Paretian, log normal, or some other distribution. The question is important, because high skewness makes it difficult to pursue risk-hedging portfolio strategies. This paper examines data from several sources

Parallel R&D Paths Revisited

This paper revisits the logic of pursuing parallel R&D paths when there is uncertainty as to which approaches will succeed technically and/or economically. Previous findings by Richard Nelson and the present author are reviewed. A further analysis then seeks to determine how sensitive optimal strategies are to parameter variations and the extent to which parallel and series strategies are integrated. It pays to support more approaches, the deeper the stream of benefits is and the lower is the probability of success with a single approach. Higher profits are obtained with combinations of parallel and series strategies, but the differences are small when the number of series trial periods is extended from two to larger numbers. A "dartboard experiment" shows that when uncertainty pertains mainly to outcome values and the distribution of values is skew-distributed, the optimal number of trials is inversely related to the cost per trial

Standard Oil as a Technological Innovator

A century ago, in 1911, the U.S. Supreme Court issued its path-breaking decision in the monopolization case against the Standard Oil Companies. Standard pleaded inter alia that its near-monopoly position was the result of superior innovation, citing in particular the Frasch-Burton process for refining the high-sulphur oil found around Lima, Ohio. This paper examines the role of Hermann Frasch in inventing and developing the desulphurization process, showing that Standard failed to recognize his inventive genius when he was its employee and purchased his rights and services only after he had applied the technique in his own Canadian company

Financial Mergers and Their Consequences

This paper, written for a Columbia Law School - American Bar Association conference, analyzes the massive merger wave that has led to substantially increased concentration of banking activity in the United States. One consequence is the rise of banks "too big to fail." The structural changes have also been associated with a striking increase in financial institutions' share of all U.S. corporate profits along with employee compensation out of line with norms for individuals of comparable ability. Data on concentration in well-defined banking markets are quite scarce, but fragmentary evidence suggests appreciable monopoly pricing power potential in some product markets. Mergers that lead to concentration have for decades been the focus of antitrust activity. But a review of the record shows an emphasis on mergers that raise local banking market concentration and nearly total neglect of other important lines, on which data are lacking. If antitrust actions were to be taken against the concentration of power in those lines, offsetting advantages in the form of realized scale economies would have to be weighed. A review of the most recent evidence suggests that difficult tradeoffs might be confronted

A Perplexed Economist Confronts 'Too Big to Fail'

This paper, written for a conference at the Fordham University Law School, examines various facets of the “too big to fail” debate. It notes that in the current context, “too big to fail” may imply systemic risks from large financial institution size, compensating economies of scale, political power, and (within narrower markets) power to set prices above competitive levels. It examines three stylized facts: the contours of the recent merger wave among financial institutions, the concomitant increase in the concentration of financial institution assets, and the impressive rise in financial institutions’ profits as a share of all U.S. corporate profits,. It argues that rising aggregate concentration of financial institutions’ assets may imply rise in the power to set above-competitive prices in individual relevant banking markets – i.e., in segments of what economists call “product characteristics space.” There is not much solid economic evidence on this last conjecture for investment banking firms, but supporting evidence from the large number of studies focusing on commercial banks is marshaled. The evidence on economies of scale is also imperfect, but it implies that breakup of the largest banks need not cause great efficiency losses

Abuse of Dominance by High-Technology Enterprises: A Comparison of U.S. and E.C. Approaches

This paper compares how the United States and the European Community dealt with competition policy challenges by two firms operating at the frontiers of technology: Microsoft and Intel. The U.S. Microsoft case was broadly targeted but largely unsuccessful in implementing remedies once violation was found. The European case was more narrowly focused, failing in its media player unbundling remedy but fighting hard to implement its interoperability information remedy. The European case on Intel was also tightly focused, leading to the highest damages judgment in E.C. competition policy history and a mandate to avoid quantity-linked rebates. The newest U.S. case regarding Intel is only in its early stages, but if its ambitious claim for remedies is sustained, difficult monitoring problems will be faced. The paper ends with critical comments on E.C. adjudication procedures

R&D Costs and Productivity in Biopharmaceuticals

This article characterizes the activities required to launch a new pharmaceutical molecule into the market, summarizes studies that have attempted to pinpoint the research and development costs incurred per approved new molecule, and analyzes the various critiques levied against published R&D cost estimates. It finds that by any reckoning, R&D costs per approved molecule have risen sharply over time, most likely at a rate of approximately 7 percent per year after stripping out the effects of general economic inflation

The Dynamics of Capitalism

This paper, written for a larger compendium edited by Dennis Mueller, examines key dynamic features of capitalistic economies and how prominent economists such as Schumpeter, Marx, Keynes, and von Mises perceived them. The emphasis is on the growth in real per capita income achieved by capitalistic economies during the past two centuries. A Gedankenexperiment exploring what might have happened if the growth experience began earlier, in the year 800, shows how astonishing the record has been. Technological innovation, in large part endogenous to the capitalist system, is a key explanation for the growth achieved. A briefer discursion deals with breaks in growth trajectories, notably, in the form of business downturns and business fluctuations more generally. They are shown to be small relative to the longer-term growth pattern. An equally important issue is how the gains from growth have been distributed. Contrary to Marx's "immiserization" prediction, the gains have for the most part been widely shared among capitalists and workers alike. However, stagnation of real income growth for American production workers since the 1970s introduces new and troubling questions, several of whose provisional explanations are investigated