Regulaci n econ mica y social

1. Regulación económica y social En este curso diferenciaremos entre dos tipos de regulación gubernamental: Regulación económica – la regulación en el comportamiento de industrias caracterizadas por falta de competencia (tradicionalmente monopolios nacionales). e.g. Tarifas de electricidad. Regulación social – la regulación en el comportamiento de individuos o empresas con respecto a las implicaciones ambientales y de salud, seguridad en la producción y consumo de bienes y servicios (tradicionalmente externalidades). e.g. emisiones de plantas de energía.

2. Objetivo de la Regulación Económica El regulador debe de maximizar el interés nacional sujeto al mandato legislativo. Obstáculos: Información asimétrica. Racionalidad limitada. Errores Típicos: Error tipo I: Regular cuando lo mejor es no regular. Error tipo II: No regular cuando lo mejor es regular. Costo del Error I > Costo del Error II. Otras conductas: Oportunismo “hold up”. Consistencia intertemporal.

3. Ley de Aeropuertos

4. Ley de Aviación Civil

5. Ley de Caminos, Puentes y Autotransporte Federal

6. Ley de Puertos

7. Ley Reglamentaria del Servicio Ferroviario

9. ¿Qué es la regulación de una industria? La regulación gubernamental de la industria limita el comportamiento de una empresa, a través de mecanismos de fijación de precios, el control de la cantidad, la calidad de bienes y servicios producidos o la entrada de nuevas empresas. E.g. Fijando tarifas parta el servicio eléctrico E.g. fijando estándares de calidad para los cinturones de seguridad de los automóviles.

10. Eficiencia y Progreso Tecnológico La regulación económica deberá promover la eficiencia y el progreso tecnológico. La eficiencia esta relacionada con la optimización del uso de los recursos y la tecnología existentes. El progreso tecnológico es un condicionante para la asignación de recursos a la adopción o desarrollo de nuevas tecnologías. La eficiencia es estática, el progreso tecnológico es dinámico. Diferentes tipos de estructuras de mercado pueden impactar la eficiencia y el progreso tecnológico de manera diferenciada.

13. Industrias típicamente reguladas Industria considerada. Electricidad TV restringida Telefonía tradicional Telefonía inalámbrica Autotransporte Ferrocarriles Puertos Aerolíneas Aeropuertos Farmacéutica Distribución de Agua Potable Intervención regulatoria. Regulación de Precios Regulación a la Entrada Regulación de Riesgos Subasta (Licitación) Desregulación Desintegración vertical Subsidios Cruzados Propiedad Intelectual

14. Fallas de Mercado y Falla Regulatoria

15. Credibilidad Regulatoria

16. Teorías de la Regulación Análisis Normativo de la Regulación. En algunos mercados la competencia no es posible o la competencia no necesariamente incrementa el bienestar. e.g. bajo monopolio natural o externalidades Bajo monopolio natural la eficiencia productiva sugiere que debemos tener una empresa y un Precio = Costo Marginal, pero esto no sucede en un mercado sin intervención. El análisis normativo sugiere que en esta circunstancia debemos tener regulación. Esto sugiere un motivo de bienestar social de la regulación.

17. Teorías de la Regulación Teoría Positiva de la Regulación. La regulación redistribuye la riqueza La conducta de los legisladores está dirigida por su deseo de mantener su posición. Los grupos de interés compiten ofreciendo soporte político a cambio de legislación favorable. La regulación es suministrada en respuesta a la propia demanda de la industria por regulación. Las agencias regulatorias son creadas por legislaturas capturadas. Las agencias regulatorias pueden ser controladas por la industria. Se enfoca sólo en los roles de los grupos de interés y asume que compiten entre ellos para ganar mayor influencia en el regulador.

20. Economies of scale Definition: average costs fall with an increase in output Represented by the scale economy index

21. Minimum efficient scale: output at which economies of scale are first exhausted It may be cheaper to have spare capacity than operate up to capacity

24. Natural Monopoly

25. Natural Monopoly

29. Economies of Scope Formal definition

30. Economies of scale and multiple products Definition of economies of scale with a single product.

35. Widely-used Access Pricing Mechanisms Fully-distributed cost mechanism. Entrant pays the incumbent: the incumbent’ marginal cost plus his share in the network maintenance costs Does not discourage entrance of inefficient entrants Incumbent has no incentive to cut cost. Efficient Component Pricing Rule (ECPR): Entrant pays for Incumbent’s marginal loss from losing one call to the entrant. Why is it so efficient? Because it attracts only those entrants who are more efficient than the incumbent!

39. Multiproduct Monopoly Regulation

40. Objetivos de la Regulación Tarifaria

41. Conceptos de Costos para Regulación Tarifaria

42. Efectos de la Regulación Tarifaria

43. Costos Fijos y Regulación With Decreasing Average Cost, a single price at marginal cost (P=MC) loses profits Pricing at Average Cost causes a DWL Separating markets and pricing markets differentially can lead to prices which cover total cost and minimize deadweight loss

44. Cost Based Regulation Rate of Return Regulation = Cost of Service Regulation ROR = (Total Revenue - Total Cost)/Invested Capital or = Net Income /Invested Capital or = Net Income / Equity Pricing at “fair rates” can impart significant risk. What is fair?. After they have sunk their capital they will be limited in the prices they can charge and... They could be subject to possibly onerous obligations to serve and to guarantee security, stability and safety. Profit is the direct index of the private firm’s degree of success. In fact, the evaluation of excess profit is a central task in applying policies and policies affect profits in ways which need to be understood. The rate of return must be at least as high as the cost of capital it uses, which is the return available to investors on other comparable investments. A deficient rate of return will deter investors so that the capital needed to maintain or enlarge the firm cannot be attracted. The rate of return varies with the level of risk. For most firms it is in the range of 8 - 15 percent. Effective competition usually prevents profit rates from being sustained at higher levels. Higher profit rates usually contain an element of excess profits, which is an excess over the cost of capital. For example, if a firms profit is 20 percent while its cost of capital is 12 percent then 7 percent difference is excess profitProfit is the direct index of the private firm’s degree of success. In fact, the evaluation of excess profit is a central task in applying policies and policies affect profits in ways which need to be understood. The rate of return must be at least as high as the cost of capital it uses, which is the return available to investors on other comparable investments. A deficient rate of return will deter investors so that the capital needed to maintain or enlarge the firm cannot be attracted. The rate of return varies with the level of risk. For most firms it is in the range of 8 - 15 percent. Effective competition usually prevents profit rates from being sustained at higher levels. Higher profit rates usually contain an element of excess profits, which is an excess over the cost of capital. For example, if a firms profit is 20 percent while its cost of capital is 12 percent then 7 percent difference is excess profit

45. Regulatory Lag The tendency of regulated rates to adjust slowly to changes in cost. Causes the actual rate of return earned by the utility to diverge from the regulator pre-determined fair rate of return. When prices are fixed utilities can earn a profit by cutting costs. The regulator we have to define… how prices are to be determined what are enough revenues how do we define costs what is a reasonable quality of service what is a fair return

46. How are regulated prices determined Establish the Revenue Requirement R = where: R is equal to the sum of piqi over the entire product set. s is the allowed rate of return. RB is the rate base which is a measure of value of the firm’s investment: Original Cost. Most Efficient Cost. Replacement Cost. Market Value.

47. Equilibrio Económico Donde: K0= Capital Invertido. RR = Ingreso Requerido. OPEX = Gastos Operativos. I = Inversiones periódicas. T = Impuestos. D = Derechos. Kn = Capital Base Regulatoria. t = Rezago Regulatorio. r = tasa interna de retorno.

48. Allowed Rate of Return: Methodology Regulator determines allowed rate of return. Regulator sets prices as a function of firms’ revenue requirements. Operating costs + Rate of Return * Rate base Cost of capital Debt Equity Risk Cost of equity: CAPM

49. Debt or bond finance “Guaranteed” interest payments (before equity holders) Tax deductible Normally lower cost than equity Cost of debt =risk free rate plus risk premium Risk free rate measured by gov's stocks Risk premium depends on rating assessed by rating agencies The perceived rick of debt will depend on the gearing of the company. i.e. ratio of debt to debt plus equity. This limits use of cheaper debt finance.The perceived rick of debt will depend on the gearing of the company. i.e. ratio of debt to debt plus equity. This limits use of cheaper debt finance.

50. Calculating the cost of capital Weighted average cost of capital = cost of debt ? proportion of debt + cost of equity ? proportion of equity in financing Equity risk premium = market risk premium ? equity “beta” Beta measures the relative risk of the company’s equity with that of the market as a whole For regulated companies Beta should be <1 to calculate the required rate of return on an asset (ki): ki = RF +?i [ E(RM) - RF ] Risk-free rate (RF) Risk premium (?i [ E(RM) - RF ]) The greater the systematic risk, the greater the required return These arithmetic calculations are typically checked against views of City professionals on returns required for regulated companies These arithmetic calculations are typically checked against views of City professionals on returns required for regulated companies

51. Recent examples of the cost of capital

52. Averch-Johnson: Theoretical Model Monopoly firm Production Function with 2 inputs (capital, labor) Objective: profit maximize subject to regulatory constraint gross revenue: R= PQ costs: C= wL + rK benefits: ?= P(Q(K,L))?Q(K,L)-rK-wL ?= ƒ(K,L)

53. Rate of Return Regulation

55. The Averch Johnson Effect

56. Regulación del Monopolio Natural.

57. Summary

58. Non Lineal Tariffs Non-linear price consisting of a fixed fee regardless of consumption and a price per unit. It is possible to have efficient pricing if P=MC and fixed fee covers the fixed cost of a natural monopoly. C = F0 + cq = A + pq = F0/N + cq. If A < (Si – pq) If A > (Si – pq), Solution: Charge different fixed fees to different customers. Optimal two-part tariff comes from balancing efficiency losses due to losing customers from a fixed fee against increased consumption losses as price/unit increases above MC.

59. Two-Part Tariff - identical consumers

60. Two-Part Tariff - different consumers

64. Fixed Cost, Profit Constraint and Two Markets

65.  Ramsey Pricing To Minimize the Deadweight Loss, charge different prices in different markets so that where Pi = price in market segment i MCi = marginal cost in segment i ei = price elasticity in segment i l = chosen to be between 0 and 1 to break even if l = 1, we charge the profit maximizing prices if l = 0, we charge marginal cost prices

67. Ramsey Pricing A. Maximize total surplus with the constraint that the firm must break-even. B. Welfare will be maximized when prices exceed marginal production costs in direct proportion to the value buyers attach to a particular good or service, varies inversely with buyers' elasticity of demand.

68. Ramsey Pricing Example - Two product Natural Monopoly 1. Total Cost: C=1800 + 20X + 20Y 2. Market Demand for goods X and Y are X=100-Px Y=120-2Py Demands are independent 3. MCx=MCy=20; Marginal cost pricing covers variable costs but not 1800 4. So how do we cover the 1800? 5. Increase the price of X and Y until Revenues = Cost.

69. Ramsey Pricing vs Distributed Cost Fully Distributed Cost. “Common Cost distributed on the basis of some physical measure of utilization or in proportion to the cost that can be assigned to the services provided”. Example: 75% attributed to X and 25% attributed to Y. ACx = 1350/x + 20, ACy = 450/y + 20 Px = ACx , Py = ACy X = 55.8, Px = 44.2 Y = 66.5, Py = 26.7 Total revenues equal Total Costs but no basis to efficient prices. Arbitrary cost allocation.

72. Subsidios Cruzados

73. Subsidios Cruzados Stand alone costs: Cx = 1200 + 20x, Cy = 1000 + 20y At X = 55.8 and Y = 66.5 Cx/x = 41.5 and Cy/y = 35 Cx/x < Px and Cy/y > Py Average incremental cost: For X: 800/x + 20 At X = 55.8, AICx = 34.3 AICx < Px For Y: 600/x + 20 At Y = 66.5, AICy = 29 AICy > Py No subsidy free prices ! Ramsey prices = subsidy free prices

74. Subsidios Cruzados

75. Franchise Bidding Demsetz (1968). Competitive bidding to award the provision of service to the lowest bid. Competition for the market as substitute for competition within the market. The government as an auctioneer rather than a regulator. Firm with the lowest AC is the franchise owner, the most efficient outbid the rivals. Considerations for other variables like quality or non linear prices schemes make more complex the winning criteria. Entrants are in disadvantage even when are more efficient. Optimal Auction vs. Optimal Regulation.

76. Franchise Bidding The franchise contract resulting from optimal auction in a contract partially contingent on realized costs. Optimal Auction: Franchise awarded to the firm with the lowest cost. A high cost firm makes zero profits. The rent enjoyed by a low cost firm decreases with the numbers of bidders. The prices that the winning firm charges do not depend on the number of bidders. However, it is more relevant to markets closer to contestability. It ignores implications from long-lived sunk cost, asymmetric information, strategic gaming, changing technology, and incomplete contracts. Once-for-all auction lead to inefficient contracts and not credible. Recommendable to repeated fixed price short term contract.

77. Yardstick Competition Definition: The performance of a regulated firm is compared against a group of comparable firms. A. Find comparable firms group and calculate their average unit costs as performance benchmark. B. Firms reap benefits if they can cut costs below the average of the comparable firms. C. Problems Must be a sufficiently large sample of firms Identical demand and cost conditions. Electric Utilities in the US and Water Utilities in UK.

78. Yardstick Competition Price determination under Yardstick.

79. Yardstick Competition

80. Relative price regulation in practice Allowable prices depend on the average profits of other regulated firms rather than own profits (Mayer & Vickers, 1996); this solves the ratchet dilemma. The solution to the ratchet effect is to make better use of the range of comparative information available to regulate firms, not to delay passing on cost efficiencies to consumers through price reductions (e.g. sliding scale, profit sharing etc). Comparative analysis between firms within the same regulatory system Requires similar business in the same market (water & electricity distribution industries) Price cut set equal to the average industry cost in last year The greater the number, the stronger the incentive power for cost reduction Mimics the operation of competitive markets by making companies compete on each other’s cost performance

81. Price Cap Regulation Specifies a rate at which the prices must decline, on average, after inflation. Provide incentives for cost reduction and technological innovation. Rate of prices decline is divorced from firm’s costs and earnings therefore the benefits come from cost reductions. The rate at which inflation-adjusted prices must decline is referred as the X factor or productivity factor. If X factor is too small, the regulated firm will earn excessive profit. If is too large, the financial integrity can be threatened. X factor not linked to firm actual cost.

82. Price Cap Regulation

84. Precios Tope vs. Regulación en base a costos

85. Precios Tope vs. Regulación en base a costos

86. Price Cap Regulation Crucial to guaranteeing strong incentives are: Commitment to not raise or lower prices the firm is allowed to change. The duration price-cap contract should be long enough so the incentive for long-lived investment and reap efficiency gains. Typical form: ?%P = ? - X Generic form: ?%P = ? - X = ? - {[T-Te]+[We-W]} X factor requires computing two growth differentials for the industry and the economy as a whole: The difference between the rate of technical change and the economy total productivity factor. The difference between the rate of change of the input price index and the general index prices.

87. Price Cap Regulation Example: Two inputs: capital and labor Capital price decreases at a rate of 2% annually. Labor price increases at a rate of 4% annually. Capital cost share in the firm: 75%. Capital cost share in the economy: 25%. Industry = 0.75(-2%) + 0.25(4%) = -0.5% Economy = 0.25(-2%) + 0.75(4%) = 2.5% X factor ? 3% If the firm is able to ‘beat the cap’ then it is able to retain those profits until the next review.

88. Price Cap Regulation Example: The expected annual rate of productivity in the regulated sector is 2%. The rate of growth in the economy is 1%. Input prices in the regulated sector increase 0.5% annually. Input prices elsewhere in the economy is 1.5% X factor should be X = (2-1)+(1.5-0.5) = 2% If the regulated firm faces lower input price growth rate and /or capable of archiving higher rates of productivity growth, then the growth rate in regulated prices should be restricted below economy-wide inflation rate.

89. Price Cap Regulation

90. Price Caps en Práctica.

93. Vertical Regulation

94. What’s a margin squeeze? Definition: A vertically integrated firm holding a dominant position in the upstream market prevents its (non-vertically integrated) downstream competitors from achieving an economically viable price-cost margin. Costs yielding benefits over different time periods: Freeserve Nov 2003 decision: ¶ 5.14 65% of innovations in pharmaceuticals…: “The findings of these studies are in accordance with an earlier study performed by the British economists Taylor and Silberston. Based on a survey of UK R&D managers, they estimated that pharmaceutical R&D expenditures would be reduced by 64 percent in the absence of patent protections. By contrast, the corresponding reduction was only 8 percent across all industries. Similar findings were reported by Edwin Mansfield from a survey of the research directors of 100 U.S. corporations…Edwin Mansfield surveyed the R&D directors of 100 U.S. corporations on what fraction of the inventions they introduced between 1981 and 1983 would not have been developed without patent protection. For pharmaceuticals, the value was 60 percent, while the average across all industries was 14 percent.” H. Grabowski, Duke University Working Paper, July 2002; E. Mansfield, "Patents and Innovation: An Empirical Study," 32 Management Science 173, 175 (1986); and Testimony of the Biotechnology Industry Organization on Competition & Intellectual Property Law and Policy in the Knowledge E-Based Economy, US Federal Trade Commission, 2002, at p. 3 and footnote 13. Costs yielding benefits over different time periods: Freeserve Nov 2003 decision: ¶ 5.14 65% of innovations in pharmaceuticals…: “The findings of these studies are in accordance with an earlier study performed by the British economists Taylor and Silberston. Based on a survey of UK R&D managers, they estimated that pharmaceutical R&D expenditures would be reduced by 64 percent in the absence of patent protections. By contrast, the corresponding reduction was only 8 percent across all industries. Similar findings were reported by Edwin Mansfield from a survey of the research directors of 100 U.S. corporations…Edwin Mansfield surveyed the R&D directors of 100 U.S. corporations on what fraction of the inventions they introduced between 1981 and 1983 would not have been developed without patent protection. For pharmaceuticals, the value was 60 percent, while the average across all industries was 14 percent.” H. Grabowski, Duke University Working Paper, July 2002; E. Mansfield, "Patents and Innovation: An Empirical Study," 32 Management Science 173, 175 (1986); and Testimony of the Biotechnology Industry Organization on Competition & Intellectual Property Law and Policy in the Knowledge E-Based Economy, US Federal Trade Commission, 2002, at p. 3 and footnote 13.

95. What’s a margin squeeze? Predation: It can do so by charging a downstream price that is too low relative to the input price, with the result of driving out some or all downstream rivals, or at least significantly weakening their competitive positions. Costs yielding benefits over different time periods: Freeserve Nov 2003 decision: ¶ 5.14 65% of innovations in pharmaceuticals…: “The findings of these studies are in accordance with an earlier study performed by the British economists Taylor and Silberston. Based on a survey of UK R&D managers, they estimated that pharmaceutical R&D expenditures would be reduced by 64 percent in the absence of patent protections. By contrast, the corresponding reduction was only 8 percent across all industries. Similar findings were reported by Edwin Mansfield from a survey of the research directors of 100 U.S. corporations…Edwin Mansfield surveyed the R&D directors of 100 U.S. corporations on what fraction of the inventions they introduced between 1981 and 1983 would not have been developed without patent protection. For pharmaceuticals, the value was 60 percent, while the average across all industries was 14 percent.” H. Grabowski, Duke University Working Paper, July 2002; E. Mansfield, "Patents and Innovation: An Empirical Study," 32 Management Science 173, 175 (1986); and Testimony of the Biotechnology Industry Organization on Competition & Intellectual Property Law and Policy in the Knowledge E-Based Economy, US Federal Trade Commission, 2002, at p. 3 and footnote 13. Costs yielding benefits over different time periods: Freeserve Nov 2003 decision: ¶ 5.14 65% of innovations in pharmaceuticals…: “The findings of these studies are in accordance with an earlier study performed by the British economists Taylor and Silberston. Based on a survey of UK R&D managers, they estimated that pharmaceutical R&D expenditures would be reduced by 64 percent in the absence of patent protections. By contrast, the corresponding reduction was only 8 percent across all industries. Similar findings were reported by Edwin Mansfield from a survey of the research directors of 100 U.S. corporations…Edwin Mansfield surveyed the R&D directors of 100 U.S. corporations on what fraction of the inventions they introduced between 1981 and 1983 would not have been developed without patent protection. For pharmaceuticals, the value was 60 percent, while the average across all industries was 14 percent.” H. Grabowski, Duke University Working Paper, July 2002; E. Mansfield, "Patents and Innovation: An Empirical Study," 32 Management Science 173, 175 (1986); and Testimony of the Biotechnology Industry Organization on Competition & Intellectual Property Law and Policy in the Knowledge E-Based Economy, US Federal Trade Commission, 2002, at p. 3 and footnote 13.

96. What’s a margin squeeze? Vertical foreclosure / Refusal to deal: It can do so by charging a wholesale price that is too high relative to the downstream price, with the result of driving out some or all downstream rivals, or at least significantly weakening their competitive positions. Costs yielding benefits over different time periods: Freeserve Nov 2003 decision: ¶ 5.14 65% of innovations in pharmaceuticals…: “The findings of these studies are in accordance with an earlier study performed by the British economists Taylor and Silberston. Based on a survey of UK R&D managers, they estimated that pharmaceutical R&D expenditures would be reduced by 64 percent in the absence of patent protections. By contrast, the corresponding reduction was only 8 percent across all industries. Similar findings were reported by Edwin Mansfield from a survey of the research directors of 100 U.S. corporations…Edwin Mansfield surveyed the R&D directors of 100 U.S. corporations on what fraction of the inventions they introduced between 1981 and 1983 would not have been developed without patent protection. For pharmaceuticals, the value was 60 percent, while the average across all industries was 14 percent.” H. Grabowski, Duke University Working Paper, July 2002; E. Mansfield, "Patents and Innovation: An Empirical Study," 32 Management Science 173, 175 (1986); and Testimony of the Biotechnology Industry Organization on Competition & Intellectual Property Law and Policy in the Knowledge E-Based Economy, US Federal Trade Commission, 2002, at p. 3 and footnote 13. Costs yielding benefits over different time periods: Freeserve Nov 2003 decision: ¶ 5.14 65% of innovations in pharmaceuticals…: “The findings of these studies are in accordance with an earlier study performed by the British economists Taylor and Silberston. Based on a survey of UK R&D managers, they estimated that pharmaceutical R&D expenditures would be reduced by 64 percent in the absence of patent protections. By contrast, the corresponding reduction was only 8 percent across all industries. Similar findings were reported by Edwin Mansfield from a survey of the research directors of 100 U.S. corporations…Edwin Mansfield surveyed the R&D directors of 100 U.S. corporations on what fraction of the inventions they introduced between 1981 and 1983 would not have been developed without patent protection. For pharmaceuticals, the value was 60 percent, while the average across all industries was 14 percent.” H. Grabowski, Duke University Working Paper, July 2002; E. Mansfield, "Patents and Innovation: An Empirical Study," 32 Management Science 173, 175 (1986); and Testimony of the Biotechnology Industry Organization on Competition & Intellectual Property Law and Policy in the Knowledge E-Based Economy, US Federal Trade Commission, 2002, at p. 3 and footnote 13.

97. Nihil novum sub sole Margin squeeze Predation Refusal to deal Costs yielding benefits over different time periods: Freeserve Nov 2003 decision: ¶ 5.14 65% of innovations in pharmaceuticals…: “The findings of these studies are in accordance with an earlier study performed by the British economists Taylor and Silberston. Based on a survey of UK R&D managers, they estimated that pharmaceutical R&D expenditures would be reduced by 64 percent in the absence of patent protections. By contrast, the corresponding reduction was only 8 percent across all industries. Similar findings were reported by Edwin Mansfield from a survey of the research directors of 100 U.S. corporations…Edwin Mansfield surveyed the R&D directors of 100 U.S. corporations on what fraction of the inventions they introduced between 1981 and 1983 would not have been developed without patent protection. For pharmaceuticals, the value was 60 percent, while the average across all industries was 14 percent.” H. Grabowski, Duke University Working Paper, July 2002; E. Mansfield, "Patents and Innovation: An Empirical Study," 32 Management Science 173, 175 (1986); and Testimony of the Biotechnology Industry Organization on Competition & Intellectual Property Law and Policy in the Knowledge E-Based Economy, US Federal Trade Commission, 2002, at p. 3 and footnote 13. Costs yielding benefits over different time periods: Freeserve Nov 2003 decision: ¶ 5.14 65% of innovations in pharmaceuticals…: “The findings of these studies are in accordance with an earlier study performed by the British economists Taylor and Silberston. Based on a survey of UK R&D managers, they estimated that pharmaceutical R&D expenditures would be reduced by 64 percent in the absence of patent protections. By contrast, the corresponding reduction was only 8 percent across all industries. Similar findings were reported by Edwin Mansfield from a survey of the research directors of 100 U.S. corporations…Edwin Mansfield surveyed the R&D directors of 100 U.S. corporations on what fraction of the inventions they introduced between 1981 and 1983 would not have been developed without patent protection. For pharmaceuticals, the value was 60 percent, while the average across all industries was 14 percent.” H. Grabowski, Duke University Working Paper, July 2002; E. Mansfield, "Patents and Innovation: An Empirical Study," 32 Management Science 173, 175 (1986); and Testimony of the Biotechnology Industry Organization on Competition & Intellectual Property Law and Policy in the Knowledge E-Based Economy, US Federal Trade Commission, 2002, at p. 3 and footnote 13.

98. The sacrifice fallacy The claim that margin squeeze is different than predation because it involves no sacrifice is incorrect True p1 < w implies no direct losses for vertically integrated firm But there is an opportunity cost, w, for each unit not sold to downstreamcompetitor And that opportunity cost may be very large when the wholesale priceis above the upstream marginal cost And even larger if D2 sells differentiated products and/or is more cost efficient – Chicago critique Costs yielding benefits over different time periods: Freeserve Nov 2003 decision: ¶ 5.14 65% of innovations in pharmaceuticals…: “The findings of these studies are in accordance with an earlier study performed by the British economists Taylor and Silberston. Based on a survey of UK R&D managers, they estimated that pharmaceutical R&D expenditures would be reduced by 64 percent in the absence of patent protections. By contrast, the corresponding reduction was only 8 percent across all industries. Similar findings were reported by Edwin Mansfield from a survey of the research directors of 100 U.S. corporations…Edwin Mansfield surveyed the R&D directors of 100 U.S. corporations on what fraction of the inventions they introduced between 1981 and 1983 would not have been developed without patent protection. For pharmaceuticals, the value was 60 percent, while the average across all industries was 14 percent.” H. Grabowski, Duke University Working Paper, July 2002; E. Mansfield, "Patents and Innovation: An Empirical Study," 32 Management Science 173, 175 (1986); and Testimony of the Biotechnology Industry Organization on Competition & Intellectual Property Law and Policy in the Knowledge E-Based Economy, US Federal Trade Commission, 2002, at p. 3 and footnote 13. Costs yielding benefits over different time periods: Freeserve Nov 2003 decision: ¶ 5.14 65% of innovations in pharmaceuticals…: “The findings of these studies are in accordance with an earlier study performed by the British economists Taylor and Silberston. Based on a survey of UK R&D managers, they estimated that pharmaceutical R&D expenditures would be reduced by 64 percent in the absence of patent protections. By contrast, the corresponding reduction was only 8 percent across all industries. Similar findings were reported by Edwin Mansfield from a survey of the research directors of 100 U.S. corporations…Edwin Mansfield surveyed the R&D directors of 100 U.S. corporations on what fraction of the inventions they introduced between 1981 and 1983 would not have been developed without patent protection. For pharmaceuticals, the value was 60 percent, while the average across all industries was 14 percent.” H. Grabowski, Duke University Working Paper, July 2002; E. Mansfield, "Patents and Innovation: An Empirical Study," 32 Management Science 173, 175 (1986); and Testimony of the Biotechnology Industry Organization on Competition & Intellectual Property Law and Policy in the Knowledge E-Based Economy, US Federal Trade Commission, 2002, at p. 3 and footnote 13.

99. Vertical Regulation