Rent Increasing Costs: The Antitrust Implications from a Paradox in Value Theory

Authors:
James A. Langenfeld and John R. Morris
Working Paper:
182

This paper explains the anticompetitive consequences of horizontal restraints by analyzing how restrictions affect the cost conditions faced by individual members of the group. Our analysis assumes that the firms cannot collude to directly restrict output or raise price . A group of firms. however, may agree on restrictions that affect the costs of individual firms. By accepting restraints which raise the incremental costs of each firm, competitors can raise their profits. If the group has the ability to force entrants to join. then entry drives profits to zero but price is not reduced . If the group cannot force entrants to join the group, then entry forces price to minimum average cost for nonmembers . The analysis also demonstrates how advertising restrictions can act as a cost increasing device that raises profits of competing firms. The analysis produces new insights suggesting which kinds of horizontal restraints are likely to harm consumers and which are likely to produce efficiencies.