Economic analysis has come to have strong influence on antitrust analysis. Frequently, however, the economist's vision of a “good” industry is animated by the vision of perfect competition, with its assumption of homogeneous products, identical technologies, and firms competing solely on the basis of price, with prices equal to marginal cost, and earning zero economic profits. The chimera of perfect competition, however, is at odds with the reality of highly competitive technology driven industries.

Competition policy and antitrust analysis must begin to think differently about certain “monopoly” issues. The nature of competition in markets exposed to the effects of rapid technological innovation is quite different from competition in other markets. Market power is extremely difficult to calibrate, and the traditional models of competition – be they perfect competition, oligopoly, or monopoly – have limited utility. Accordingly, economists and antitrust lawyers must rethink some basic assumptions and recalibrate some metrics or risk promoting litigation outcomes and public policies that harm competition and consumers.

In many industries today new forms of competition dominate the landscape. In particular, innovation (both technical and organizational) animates the process in many sectors. Products are differentiated, often significantly so, due to differences in the technology employed. True hightech products are rarely commodities.

The introduction of new products and product differentiation accomplished by innovation is key to business success and customer satisfaction. In knowledge-based industries, performance features, quality, reliability, and service take on a special meaning. In the world of high technology, there is high uncertainty and supercharged competition.

Much of our work has examined the logic and empirical support for concepts of lock-in and path dependence. These topics have now entered the realm of public policy in what may be the most important antitrust action, or at least the most famous, since the Standard Oil case almost one hundred years ago.

Network effects occur when the value consumers receive from a product increases as the number of users of that product increases. Archetypal examples are fax machines and telephones, which have virtually no value to a consumer if only one consumer has one, but have increasing value as additional users adopt the product.

As long as other factors, such as increasing costs, do not overpower network effects, larger firms or networks will have advantages over smaller firms or networks. Following through the logic of the model, this leads, naturally enough, to a single winning firm or network. Network effects share an important characteristic with economies of scale. In particular, both confer an advantage on larger firms in an industry, although the former does it by increasing demand and the latter by decreasing costs.

A portion of this literature claims that network effects tend to keep a leading firm's position intact, even if there is a superior product available, a result otherwise known as lock-in. We need to make clear that our definition of lock-in does not just imply that costs of switching make it uneconomic to switch. If it is uneconomic to switch, switching should not occur.

Economics offers at least two classes of explanations of the existence of economic profits (Demsetz 1973). The first, which can be described as a monopoly theory of economic profits, suggests that economic profits emerge as a result of firms acting to reduce output below and increase prices above the competitive level. Several large theoretical and empirical literatures on topics such as tacit and explicit collusion, industry concentration, oligopolies, and vertical and horizontal exclusive agreements (to name just a few) all fall within this broad category of monopolistic theories of economic profit (Scherer 1980).

The second class of explanations, which can be called the capability theory of economic profits (Rumelt 1984; Barney 1986a), suggests that economic profits emerge because some firms are more capable than others. If the cost of developing these capabilities is less than the value they create, they can be a source of economic profit. Though not having spawned as extensive an empirical and theoretical literature as monopolistic theories of economic profits, capability explanations of these profits have received some attention – for example, from evolutionary economists (Nelson and Winter 1982) and some information economists (e.g., Demsetz 1973).

There is little doubt that both these explanations of economic profits are valid in at least some circumstances. Some firms gain economic profits by engaging in monopolistic activities, others by exploiting their superior capabilities. Indeed, a single firm's economic profits might reflect both monopolistic actions and superior capabilities.

When sweeping economic change occurs, new technologies and business methods rapidly replace old ones. Previously unheard-of firms dominate their markets by successfully pioneering new ways of doing things. But a dominant firm also raises fears of monopoly. At what point does a successful competitor cross the line separating proconsumer innovation from anticonsumer monopolization?

During the past decade, scholars and government officials have asked that question more frequently as a “postindustrial” revolution, fueled by information technology and globalization, produces new winners and losers. Conceptually, the answer is simple and stated succinctly in U.S. antitrust law. A firm is engaged in monopolization if it employs “exclusionary” practices, but not if it dominates its market due to “superior skill, foresight, and industry,” or “as a consequence of a superior product, business acumen, or historical accident” (United States v. Alcoa, United States v. Grinnell). Congressional debate surrounding the Sherman Act reveals that the legislation's sponsors never intended antitrust enforcement to apply to a company that “merely by superior skill and intelligence get the whole business because nobody could do it as well” (Congressional Record 1890: 3146–52). This kind of distinction attempts to categorize firms with market power into those which succeed by harming consumers, and those which acquire their market power innocently through superior service to consumers or perhaps dumb luck. Surely, one would think, a highly innovative firm belongs in the second category.

Exactly what is dynamic competition, anyway?

Scholars offer a number of answers to that question, and there is no consensus on which theory of dynamic competition is the most accurate or useful. To underscore the diverse intellectual currents that flow through this volume, our initial chapter offers short synopses of the principal dynamic theories of competition.

By far the most prominent dynamic theory of competition is associated with Joseph Schumpeter. Although Schumpeter did not deny that real-world markets can resemble the perfectly competitive model, he argued that the most significant advances in human well-being come from forms of competition that involve new products, new technologies, new sources of supply, and new forms of business organization.

In addition to Schumpeter, other scholars have also developed dynamic theories of competition. “Evolutionary” competition theorists are perhaps Schumpeter's best-known modern descendants. Some of Schumpeter's fellow Austrian economists developed complementary theories that emphasize competition as a process for the discovery of new knowledge. More recently, the interaction of competition and technological change has prompted interest in theories of path dependence, in which small variations in initial conditions can lead to large and unpredictable changes in the market's evolution. Finally – and less well known in the economics profession – are strategic management theories that explicitly view competition as a dynamic process.

Economics is a conservative discipline. Even its revolutions do not stray far from basic accepted principles, and sometimes they merely reassert basic accepted principles. The Chicago School of antitrust analysis scored victory after victory over the Harvard School by an assiduous application of static neoclassical price theory. A new challenger, the so-called post-Chicago approach, accepts the same basic principles, even as it dresses them up in the elegant if improbable clothes of mathematical game theory. What unites these approaches is a devotion to a concept of competition oriented fundamentally around price and quantity. Other dimensions of competition may sneak in, such as competition for “quality” in the abstract. But price theory deals poorly with what is arguably the central impulse of actually existing competition: technological change. “In capitalist reality as distinguished from the textbook picture,” wrote Joseph Schumpeter (1950), the most important form of competition arises not from competition “within a rigid pattern of invariant conditions, methods of production and forms of industrial organization,” but rather from “the new commodity, the new technology, the new source of supply, the new type of organization … competition which commands a decisive cost or quality advantage and which strikes not at the margins of the profits and the outputs of existing firms but at their foundations and their very lives.”

The existence of a tradeoff between the use of ideas and the incentives for their creation is both a central and recurring theme in the legal and economic analysis of intellectual property rights. It is the primary issue in legal and economic analyses that attempt to define the proper scope of legal protection for intellectual property (Arrow 1962; Easterbrook 1982).

This inquiry is not limited to the scope of property rights contained in federal or state statutory or common law. An integral part of the inquiry into the proper scope of intellectual property laws is how related contracts affect the use-creation tradeoff. Contracts based on use of intellectual property rights are an indispensable complement to intellectual property (Nimmer 1998; Kobayashi and Ribstein 1999; Ginsburg 1997). However, the scope of contracting over intellectual property rights is limited by law in important ways.

First, the intellectual property laws impose limits on contracts. Contracts can be held unenforceable because they are preempted by the federal intellectual property laws. The primary inquiry is one of use versus creation, with preemption resulting if the contract upsets the system of “uniform federal standards” that are “carefully used to promote invention while at the same time preserving free competition.” Second, provisions of the copyright law, such as the first-sale and fair-use doctrines, directly limit copyright holders' ability to control use of their works.

In evaluating markets with relatively homogeneous products and a fixed or slowly evolving technological base, the Antitrust Division of the Department of Justice (DoJ) often focuses on the price effects of potentially anticompetitive behavior. In dynamic industries, however, technological change and innovation receive particular attention. Innovation affects not only the prices that consumers pay for given products but, more important, the quality of products available in the marketplace. Moreover, the force of the innovation process can lead to dramatically higher-quality products being offered at lower prices to consumers in the future. An understanding of the particulars of competition in dynamic industries is, consequently, a vital part of a sound antitrust policy.

Some observers have questioned whether the antitrust laws are adequate to handle the complexities associated with rapidly innovating industries. The antitrust laws, of course, were passed initially to confront issues in “smokestack” industries in which rates of innovation were slow. However, the statutory standard set by Congress is a flexible standard that can be and has been applied to dynamic industries. The specifics of how that standard is to be applied remain open for serious debate. We are of the view that in dynamic innovative industries antitrust enforcement should be forward-looking as much as possible and that accelerated antitrust enforcement must be given serious consideration before the path of innovative activity is set in stone. We believe that this view has been borne out by antitrust activity at the Antitrust Division in recent years.

Binding wage labor contracts offered nineteenth-century English employers significant economic benefits, but contracting was only a useful strategy for reducing turnover and monitoring costs if employers were able to enforce contracts quickly and cheaply. But for this ability to enforce contracts simply and cheaply, employers would have had to pursue cost reduction in other ways, and the contract system would not have assumed the importance it did in English wage labor relations. In the northern United States, a summary criminal remedy to enforce labor contracts was not normally available against native-born white adult wage workers at any time during the nineteenth century. This very real constraint, however, did not eliminate the value to northern employers of using binding contracts with wage workers, largely because they had available a reasonable substitute for penal sanctions, wage forfeiture. Wage forfeiture made labor contract enforcement inexpensive and effective. Because wage forfeiture was available in the United States, contracting could play a role in nineteenth-century American wage labor relations not completely unlike the one it played in English wage labor relations. The American practice had the added virtue that it was less vulnerable to the charge that it turned contracts of service into contracts of slavery, even though it confronted wage workers, depending on the circumstances, with a very disagreeable alternative to continued performance.

ENTIRETY

In England, the system of penal sanctions had been established by Parliament. In the United States, state legislatures were not prepared in most cases to follow a similar course, perhaps because of the broadened suffrage legislators confronted.

Although the main concern of this book is wage labor in the nineteenth century, I want to begin by approaching the subject through the back door, as it were. The conventional view is that wage labor is one of a small number of standard labor types. Each form of labor is thought to possess its own timeless characteristics. Freedom from physical or other nonpecuniary forms of coercion is considered to be wage labor's most notable characteristic. Imported contract labor represents another of these standard types. Its most salient feature, however, is thought to be that it is compelled by threats of confinement or corporal punishment. In this chapter I ask whether, as a matter of historical practice, contract labor has always been unfree in the sense that it has been enforced through nonpecuniary threats. If it has sometimes been “free” labor in the sense that only pecuniary sanctions have been available to employers, this would raise difficulties for the assumption that a particular labor “type” is invariably either “free” or “unfree.” It would also make necessary a revision of the view that the history of labor should be understood in terms of fixed types used only at particular stages of social and economic development.

Until about 1830 the American experience with imported labor conformed to the conventional wisdom. Throughout the seventeenth and eighteenth centuries land was readily available in the American colonies, and hired labor was expensive and difficult to retain. During this time, Americans did import large numbers of unfree workers (indentured servants and slaves) to satisfy their labor needs.

The traditional account of the rise of free labor is backwards. The advent of freer markets in England during the late eighteenth and nineteenth centuries did not produce “free labor,” but rather, by modern standards, a form of “coerced” contractual labor, similar to, although less harsh than, the contract labor used in the colonial periphery. For English elites who worked to make markets freer during this period, penal sanctions were an integral aspect of reform, guaranteeing that markets organized on the basis of private agreements would function properly. When they possessed the political power to do so, the English employing classes enacted and used penal sanctions to enforce the contracts of wage workers. It was only as a result of the greatly increased power of labor later in the nineteenth century that the regime of contract rules we refer to as modern free labor was fought for and enacted into law.

Modern free labor in England must be seen as a product of labor's struggle to improve its position in a market society. In general, labor pursued three broad strategies of legal reform, which admittedly were not always consistent with one another. First, labor worked to enact rules that would increase its bargaining power by giving it legal permission to engage collectively in a broader range of activities designed to bring employers to terms. Second, labor supported rule changes that would improve the main alternatives to wage labor by establishing, for example, social insurance programs, unemployment compensation, and old age pensions. Third, labor also supported efforts to restrict freedom of contract in certain areas through the passage of, for example, maximum hours and minimum…

English legal history is generally of two kinds, common law and statutory. The history of common law is usually devoted to following the development of legal doctrine in the decisions of the common law courts. Statutory history is generally quite different, devoted to parliamentary politics or to politics in the country, with the object of laying bare the circumstances mat produced a particular piece of legislation. Often the legislation is described in detail, and its subsequent history (amendments, repeals, etc.) is retold. Rarely does one find a statutory history in which the common law courts play a significant role. Almost never does one find a statutory history in which parliament repeatedly reacts to modify judicial interpretations of a previously passed statute. One supposes that this convention of English legal history flows from the fact of parliamentary sovereignty, which makes the legislative body supreme and the courts subservient to it, at least insofar as legislation is concerned. In the case of the Master and Servant acts, this convention of legal history writing has obscured an important part of the story. For centuries, the common law courts played a significant role in the legal development of the Master and Servant acts, and in a number of instances Parliament took steps to try to reverse court decisions by passing additional legislation.

From the late seventeenth century on, we find a steady stream of cases devoted to the question of whether justices of the peace possessed jurisdiction under the Tudor Statute of Artificers to hear wage recovery complaints brought by workers against employers.