The Antitrust Bulletin

Oliver Williamson's work on transaction cost economics, and more generally on the factors that determine the boundaries between firms and markets, has provided key insights that have significantly expanded our understanding of the attributes of transactions and organizations that lead to vertical integration and vertical contractual relationships more broadly. Transaction cost—based theories of vertical integration focus on the implications of incomplete contracts, asset specificity, information imperfections, incentives for opportunistic behavior, and the costs and benefits of internal organization. These theories focus on efforts by firms to mitigate transaction costs and various contractual hazards that may arise with anonymous spot market transactions by choosing among alternative organizational and contractual governance arrangements that can reduce these costs. There is substantial empirical support for these theories. Property rights—based theories are sometimes interpreted as formalizing some of Williamson's work. However, little empirical work has focused on property rights—based theories per se. Principal-agent theories of vertical integration that are distinguished from other organizational theories primarily by assumed differences in risk aversion between principals and agents and associated moral hazard problems have also been advanced. They add little to the other theories and have limited independent empirical support.

We examine the empirical research on interfirm contracts that has been inspired by Oliver Williamson's work on transaction costs. We eschew the vast and supportive empirical literature on the make-or-buy decision, covered elsewhere, focusing instead on vertical market restrictions. We organize our discussion around specific restrictions, emphasizing the evidence concerning restrictions, such as contract duration and adjustment clauses, that have been studied most through transaction cost lenses, but also the findings from studies of vertical restraints, namely those restrictions that have been the focus of antitrust policy. We conclude with some general thoughts about how what one can learn from these studies can inform antitrust policy regarding vertical market restrictions.

Since Oliver Williamson published Markets and Hierarchies, transaction cost economics (TCE) has claimed an important place in antitrust, avoiding the extremes of the structuralist school, which saw market structure as decisive, and the Chicago school, which found monopoly only infrequently and denied that a monopolist could leverage its power into related markets. Since the 1970s both the structuralist and Chicago positions have moved toward the center, partly as a result of TCE. Already in 1978 Areeda and Turner produced the first volumes of the Antitrust Law treatise, which completely repudiated the leverage theory and abandoned the structuralist and leveraging positions on vertical integration. TCE analysis of contractual restraints recognizes that an important threat to competition is double marginalization, which can occur when market power is held by separate firms with complementary outputs. Nevertheless, one comparative advantage of both structuralism and the Chicago school was their simplicity. TCE analysis is more specific to the situation, demanding close scrutiny when significant market power is either present or realistically threatened.

Predatory pricing is the act of pricing below a rival's costs in order to drive the rival out of the market. Predatory behavior and competitive behavior often look alike, and as such, require appropriate standards to detect truly anticompetitive conduct. A number of standards to identify predation have been offered in the antitrust literature since the 1970s. Oliver Williamson offered an output-based test to detect predation. In this article, I discuss the contribution of Williamson's proposal, relative to the other prominent offerings in the literature. I examine these tests relative to existing Supreme Court precedent, which has adopted a standard resembling the ideas of Areeda & Turner. I provide some analysis of the differences between theoretical predatory pricing and the alleged predatory behavior that has been examined by the Court.

Oliver Williamson's advocacy of a greater role for economists pretrial was prescient. This article explains the value of such pretrial intervention (in aligning incentives and encouraging settlement) from law and economics perspectives, and advocates greater use of court-appointed economic experts. The article also offers a brief critical commentary on Williamson's views with respect to predation.

In a classic article, Oliver Williamson introduced the efficiency defense to antitrust merger analysis. In this article, I extend his analysis to mergers among buyers that may create monopsony power. When such mergers are accompanied by merger-specific efficiencies, there is necessarily a welfare tradeoff. Evaluating the impact of the merger on social welfare requires a comparison of the cost savings that can be realized only without the merger and the allocative inefficiency due to the exercise of monopsony power.