- Baxter's Law
Baxter's law (also known as the Bell Doctrine) is a law of
economicsthat describes how a monopolyin a regulated industry can extend into, and dominate, a non-regulated industry. It is named after law professor
William Francis Baxter Jr.
A monopolist in a regulated industry may face a price cap, or a rate of return type pricing scheme. If this regulated industry serves as an input for another industry which is unregulated, the monopolist may wish to expand into this unregulated industry in order to increase overall profits.
An economic theory referred to as ICE (
internalizing complimentary externalities) suggests that when a monopolist seeks to expand their monopoly into other market levels, such an expansion is pro-competitive, because there is no reason for a monopolist to expand into an upstream or downstream market unless they are more efficient than competitors. See Joseph Farrell & Philip J. Weiser, Modularity, Vertical Integration, and Open Access Policies: Towards a Convergence of Antitrust and Regulation in the Internet Age, 17 Harv. J. Law & Tec. 85, 100-105 (2005). This is because in a multi-level market, customers only gain a single final product, and are willing to pay only one "monopoly price" for this good. If a monopolist already owns one level of the market, then they can extract the entire monopoly price by increasing the prices on their level, and expanding into other levels of the market is unnecessary since they are already getting the entire monopoly prices.
Baxter's Law is an exception to the ICE theory. Under Baxter's law, a monopolist in a regulated industry is unable to capture the entire monopoly price since their prices are regulated. This monopolist will then seek to use its monopoly on one level of the market to expand into another level of the market, one where price is unregulated. Whereas the ICE theory would normally find this acceptable, Baxter's Law explains that the monopolist can use its monopoly position in one level to capture a monopoly in another level, and then capture the monopoly price in this other level of the market. While normal monopolists would suffer losses in their first monopoly level that would offset the gains in the new market level, a regulated monopolist will suffer smaller losses in their first monopoly level due to price regulation, but will still have full gains in the market level, and therefore will seek to expand their monopoly. Joseph Farrell & Philip J. Weiser, Modularity, Vertical Integration, and Open Access Policies: Towards a Convergence of Antitrust and Regulation in the Internet Age, 17 Harv. J. Law & Tec. 85, 105-107 (2005).
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