Transaction Costs and Competition Policy

Posted by Social Science Research Network

Transaction Costs and Competition Policy

By Dennis W. Carlton (University of Chicago)

This paper studies how current competition policy should be altered in order to take into account our understanding of how transaction costs influence the ability of firms and consumers to deal with market power. Ever since Coase (1937) first established the importance of transaction costs to understand the theory of the firm, the study of transaction costs has been central to understanding several aspects of firm organization. Coase’s article (1960) on social costs underscored the importance of transaction costs in understanding why certain externalities exist. There has been a large literature exploring externalities and their relation to transaction costs in the field of public finance. There has been no corresponding literature in the field of competition policy despite the fact that a distortion of competition is an externality. The externality that competition authorities typically study is the one caused by the gap between price and marginal cost that arises from the existence of market power. Surprisingly, antitrust scholars have not spent as much time as warranted to think through how transaction costs should affect an assessment of market power and competition policy. This paper aims to fill that gap. The paper shows how current thinking about horizontal mergers, vertical mergers and vertical restrictions, Nash-in Nash bargaining models, two-sided markets, and control of data all need to be modified if one wants to avoid incorrect competition policy prescriptions.

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