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Investigations: Douglas Lichtman
The Law School professor asks provocative questions about when and how legal rules should constrain market activity.

image: Research headerDouglas G. Lichtman has news for you: Monopolies are your friend. Or they can be, anyway. In a forthcoming paper, he argues that the right kind of monopoly in the right kind of market can actually work to the benefit of the consumer as well as that of the firm. Not only that, but he thinks we might eventually want to consider rewriting intellectual-property law to encourage the formation of more such arrangements.

Advocating government intervention is hardly what you’d expect from a law and economics scholar at the University of Chicago. But then, the 28-year-old hasn’t exactly taken the typical path to becoming an assistant professor at the Law School.

First, Lichtman went to Duke University to study electrical engineering and computer science. After graduating from Duke in 1994, he went to Yale Law School--viewed by some scholars as the ideological opposite of the U of C’s Law School--where he published three papers as sole author and earned his J.D. in 1997. Next, he turned down an offer to practice with the Chicago office of Jenner & Block to spend another year at Yale Law School, as the first fellow in its Information Society Project. He joined Chicago’s law faculty in fall 1998.

Teaching and researching, Lichtman says, are ideal ways to unite his interests in public policy and new technology with his passion for problem solving, public speaking, and writing. The U of C’s Law School is an especially good match for him, he says, because of the many fellow law and economics scholars.

When he came to law, Lichtman explains, “mathematics was the intuitive way to approach a problem, to get a rough sense mathematically of how it laid out, how the forces worked.” Law and economics, he adds, is an intellectual framework, a way of thinking that’s not necessarily socially or politically conservative. That’s why he’s not shy about recommending government intervention in the free market when his research indicates that would be best.

“In the kinds of things I do, there are two ways law and strategy interact,” explains Lichtman, who’s also into game theory. “One way is to take the current law as given and ask, how do I play within current law? As a business acting in its own self interest, given the set of rules, what’s my best play? That’s one side of what I do, thinking about what the firms should do. Then there’s the other side, thinking about society’s interests and how law should constrain firms. What strategies do firms play that might be troubling? What strategies do they play that law should support in some way?”

The desire to find answers to those questions, coupled with his background in computers and engineering, led Lichtman to the subject of his latest paper, “Property Rights in Emerging Platform Technologies,” which will be published in the June issue of the Journal of Legal Studies. The paper has particular application to new technology markets where one set of firms handles platform products--such as computers--and another set sells peripheral products--such as modems and software programs. For example, firms like Adobe Systems, Electronic Arts, and Novell sell software programs used on computers marketed by firms like Dell Computer Corporation, Apple Computer, and IBM Corporation.

Problems may arise in such markets, Lichtman argues, early in their development, when a peripheral seller can use discretion in setting prices because its product is still unique. Aldus charged plenty for PageMaker, for example, before Quark came out with QuarkXPress. This strategy, says Lichtman, is problematic because the peripheral firms end up hurting their own profits, platform firms’ profits, and the profits of their fellow peripheral sellers.

He reached this conclusion using a model based on the work of 19th-century mathematician Augustin Cournot. Lichtman calculates that if peripheral developers would charge less for their products, everyone would benefit. If Hewlett-Packard dropped the price of its LaserJet 1100xi printer, for example, it might initially lose money. However, the price drop would be the deciding factor in some consumers’ decisions to purchase a new iMac, so platform sales would rise. In addition to the printer, some of those consumers would also get an Iomega Zip drive to go with the new computer, causing Iomega’s sales to go up. And if Iomega would drop its prices, too, the process would work in reverse so that Hewlett-Packard’s sales--and profits--would increase. All that, and consumers save money, too.

Such price coordination, however, is hard to achieve in an emerging market where technology changes quickly and players are constantly entering and exiting. That’s why Lichtman thinks the courts should help the companies in these markets. Though intellectual-property law has traditionally been interpreted to constrain the influence of platform firms--fearing they would try to keep other firms from developing peripherals--Lichtman favors a broader interpretation that would give platform firms more rights and more influence over other firms’ peripheral prices.

It’s a monopoly of sorts, yes, but a good one, Lichtman argues. “Monopolists raise prices, and by raising prices, they take goods away from people who should be getting them. That’s why we’re usually suspicious of allowing firms to coordinate behavior: We think they’ll behave wholly in their own interests, and against society’s interests. This, by contrast, is one of a family of cases where coordination in the firms’ own interests is good for all of us.”

Because he finds the questions surrounding the platform-peripheral market structure so intriguing, Lichtman plans to continue his studies on the topic--by heading to the mall. There, the mall is the platform firm and the retail stores are the peripheral firms. “If everyone lowers their prices by 1 percent below what they’d like to do on their own,” he explains, “they’d get so much more traffic through the mall that they’d all make more money.” Because shopping centers are more stable than emerging technologies, Lichtman expects to find evidence backing his theory, including examples of coordination in the contracts retailers sign with mall owners. He’s started his research by interviewing real-estate attorneys.

But he’s not forgetting computers. Lichtman plans to take an unusual approach to the Internet and the First Amendment. The question, he jokes, is not free speech--it’s “pricey listening.” What he means is that while it once was costly to print and disseminate information, these days the expense comes in accessing and sorting through an overload of information.

“There’s just too much out there,” he says. “It might be in the First Amendment interest to make sure people are exposed to a lot of ideas. And it might be that today, that interest is going to be served by affirmative intervention--the government helping to organize, giving people tools they need to find things and so on.”

That’s not to say he doesn’t think the market should be allowed to handle that task, though. It all depends on what the data reveal.--K.S.

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