Document Type

Working Paper

Publication Date

2005

Center/Program

Center for Contract and Economic Organization

Center/Program

Center for Law and Economic Studies

Abstract

In the "Three Tenors" case the FTC found an agreement a violation of the antitrust law despite the fact that there was no way it could be anticompetitive. The Commission failed to heed the lessons of Coase's classic paper on the nature of the firm, making a sharp distinction between activities within a firm (legal) and across firm boundaries (not legal). Analytically, there should be no distinction. The decision to integrate activities by contract rather than ownership is a matter of relative transactions costs. Since the boundaries of the firm are, ultimately, an economic decision reflecting the costs and benefits of the alternative arrangements, there is no economic justification for making the legality of any act contingent upon whether it was on the proper side of that boundary. Nor is there any particular virtue in using antitrust rules to alter the relative costs so as to shift that boundary to favor bringing activities within the firm. The paper proposes a "quick look" approach. The first thing to look for is some indication of market power. If antitrust harm is not credible because there is no market power, stop looking.

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