Life is uncertain. So is merger analysis. There is a well-developed set of tools to deal with decision making under uncertainty. Experience suggests that the federal antitrust agencies and the courts have yet to take full advantage of those tools. This chapter suggests ways that decision theory could be applied to merger analysis to improve enforcement and its impacts on consumer welfare.

There has been considerable debate concerning whether consumer surplus or total surplus should be the welfare standard for antitrust. This debate misses two critical issues. First, antitrust is not straightforwardly welfarist—it does not maximize but protects, and it does not forbid all actions that seem likely to lower some welfare measure. Rather, antitrust enforcement has both process and consequence components: “anticompetitive” actions that harm consumers are illegal but other actions that harm consumers are not. Second, the enforcement process involves multiple steps and multiple decision makers. Mergers, for instance, are proposed by the merging parties, reviewed and perhaps challenged by antitrust agencies, and reviewed by courts. Hence, a full discussion of what standard is or should be applied must specify by whom and how it fits in the overall process. We conclude that, while some popular arguments for a consumer surplus standard are weak, other arguments have some merit.

Many products—including microprocessors, telecommunications devices, computer software and on-line auction services—make use of multiple technologies, each of which is essential to make or sell the product. The owner of one technology benefits from the existence of complementary technologies. We show that, despite this externality, the structure of payoffs that support efficient R&D investment by duopolists racing to discover a single innovation generalizes to the structure that supports efficient investment for complementary innovations. The paper also examines how alternative intellectual property regimes and legal institutions affect R&D investment in complementary technologies. The results have policy implications for the organization of R&D, the assessment of damages for patent infringement, and allocations of value in patent pools.

Both senders and receivers of telecommunications messages derive benefits, creating the possibility of externalities. We explore whether intercarrier compensation (i.e., access charges) can induce carriers to internalize these external effects. In important settings, access charges are irrelevant. Where they are relevant, access charges can induce an efficient ratio of off-net send and receive prices--taking their sum as given--but cannot induce the correct sum. The latter requires a mechanism for cross-carrier internalization, such as repeat play or pricing policies contingent on one another. Lastly, non-zero access charges can be efficient even in highly symmetrical situations.

We examine the welfare effects of product-line restrictions, such as those called for by some proponents of network neutrality regulation. We find that restricting a monopoly supplier to a single product has the following effects: (a) consumers who would otherwise have consumed a low-quality variant are excluded from the market; (b) consumers "in the middle" of the market consume a higher and more efficient quality; and (c) consumers at the top of the market consume a lower and less efficient quality. Total surplus may rise or fall. We also examine a duopoly model and find that imposition of a single-product restriction always reduces welfare. Absent the restriction, the two firms engage in head-to-head competition across full product lines. In some circumstances, the restriction induces the two firms to offer identical products. The resulting loss of variety reduces welfare. In other circumstances, the restriction induces the firms to offer non-overlapping, or vertically differentiated, products. Here, the resulting loss of competition harms both consumers and economic efficiency. Lastly, we find that, to the extent that the regulation is intended to eliminate low-quality products, it may fail. Even though any one firm can offer only a single product, various firms can collectively offer a menu of products.

We examine situations in which a party must make a sunk investment prior to contracting with a second party to purchase an essential complementary input. We study how the resulting old-up problem is affected by the seller’s information about the investing party’s likely returns from its investment. Our principal focus is on the effects of the investment’s being observable by the non-investing party. We establish conditions under which the seller’s ability to observe the buyer’s investment harms the seller, benefits the buyer, and reduces equilibrium investment and total surplus. We also note conditions under which investment and welfare rise when investment is observable.