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Consensus standardization often involves bargaining without side payments or substantive compromise, creating a war of attrition that selects through delay. We investigate the trade‐off between screening and delay when this process selects for socially valuable but privately observed quality. Immediate random choice may outperform the war of attrition, or vice versa. Allowing an uninformed neutral player to break deadlocks can improve on both mechanisms. Policies that reduce players' vested interest, and hence delays, can strengthen the ex ante incentive to improve proposals.

We reply here to a comment by Epstein and Rubinfeld to our paper on the antitrust evaluation of horizontal mergers.

We describe a simple initial indicator of whether a proposed merger between rivals in a differentiated product industry is likely to raise prices through unilateral effects. Our diagnostic calibrates upward pricing pressure (UPP) resulting from the merger, based on the price/cost margins of the merging firms' products and the extent of direct substitution between them. As a screen for likely unilateral effects, this approach is practical, more transparent, and better grounded in economics than are concentration-based methods.

We study the welfare economics of probabilistic patents that are licensed without a full determination of validity. We examine the social value of instead determining patent validity before licensing to downstream technology users, in terms of deadweight loss (ex post) and innovation incentives (ex ante). We relate the value of such pre-licensing review to the patent's strength, i.e., the probability it would hold up in court, and to the per-unit royalty at which it would be licensed. We then apply these results using a game-theoretic model of licensing to downstream oligopolists, in which we show that determining patent validity prior to licensing is socially beneficial. (JEL D82, K11, L24, O34)

We propose a simple, new test for making an initial determination of whether a proposed merger between rivals is likely to reduce competition and thus lead to higher prices. Under current antitrust policy, the government can establish a presumption that a proposed horizontal merger will harm competition by defining the relevant market and showing that the merger will lead to a substantial increase in concentration in that market. However, this approach can perform poorly in markets for differentiated products, where market boundaries are unclear and the proximity of the products sold by the merging firms is a key determinant of the merger's effect on competition. Our test looks for upward pricing pressure (UPP) resulting from the merger. We develop a simple diagnostic for UPP based on the price/cost margins of the products sold by the merging firms and the magnitude of direct substitution between the two firm's products. We argue that our approach is well grounded in economics, workable in practice, and superior to existing methods in a substantial class of mergers.

Conventional economic theory assumes that firms minimize costs given output, but news articles and managers indicate that firms cut costs when they are in economic distress and grow fat when they are relatively wealthy. Under conventional theory, firm value is convex in the price of a competitively supplied input or output, but we find that the stock values of many gold‐mining companies are concave in the price of gold. We show that this is consistent with fat accumulation when a firm grows wealthy. We then address alternative explanations and discuss where fat in these companies might reside.

Introduction: Market definition analysis, which is often central in merger cases, usually claims to follow the 1992 Horizontal Merger Guidelines issued by the U.S. Department of Justice and the Federal Trade Commission ("Guidelines"). The Guidelines describe a relevant product market as a group of products for which a hypothetical monopolist would profitably impose a "small but significant and non-transitory increase in price" ("SSNIP"). Seeking relatively simple approaches to market definition that are consistent with the Guidelines, courts and agencies often rely on Critical Loss Analysis. For example, the FTC recently challenged the proposed merger between Whole Foods and Wild Oats, two chains of grocery stores, alleging that the relevant market was "premium natural/organic supermarkets" ("PNOS"). In that market, the merger was very highly concentrating in a number of geographic areas where Whole Foods and Wild Oats operated nearby stores. But the merging parties successfully argued that PNOS was too narrow a grouping of products and that the relevant market included all supermarkets. In that broader market, there were many other competitors and the merger was not highly concentrating. Arguing that PNOS was not a relevant market, the merging firms echoed the Guidelines by asking whether a hypothetical PNOS monopolist would find a SSNIP profitable, or whether a SSNIP would deter enough sales to make it unprofitable. Critical Loss Analysis calculates the hypothetical monopolist's Critical Loss, meaning the magnitude of lost sales that would (just) make it unprofitable for the hypothetical monopolist to impose a SSNIP, and compares it against the so-called Actual Loss of sales that would result from the SSNIP. If the Actual Loss would be less than the Critical Loss, the SSNIP would be profitable, so PNOS would form a relevant market. Whole Foods and Wild Oats argued that the Actual Loss would instead exceed the Critical Loss: a hypothetical PNOS monopolist who imposed a SSNIP would lose enough business to make the SSNIP unprofitable. Merging parties have used Critical Loss Analysis regularly, and with considerable success, to argue in court for a broader market than the government asserts. Estimating a hypothetical monopolist's Actual Loss is difficult, so that a substantial range of estimates could seem plausible. Incentives in litigation may push parties toward exploiting that range. Thus it is highly desirable, if possible, to anchor estimates of Actual Loss and to facilitate reality checks based on actual pre-merger conduct. When it comes to demand responsiveness, economics suggests that it is particularly helpful to examine firms' own pre-merger pricing conduct. It has been suggested, however, that pre-merger pricing is so remote from the hypothetical monopolist question that these reality checks are unhelpful. In this paper we examine that claim. We find that leading suggestions of how pre-merger pricing may be uninformative about a hypothetical monopolist's incentives are not compelling. As a result, we are able to offer two powerful new tests to determine, using Critical Loss Analysis, whether a candidate group of products forms a relevant market. These tests extract information from the gold standard for evidence about competitive conditions in antitrust cases: firms' actual business decisions made in the normal course of business.