Hovenkamp on Antitrust and Syndication

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The idea is very intriguing. The bilateral monopoly problem between the entrepreneur and funder looks potentially quite serious. Creating a multiplicity of funders will certainly change the dynamic, assuming that the funders behave competitively, although the entrepreneur would still be a monopolist insofar as funders are locked in by virtue of irreversible previous investments. That still gives the entrepreneur some monopoly leverage, including a possible incentive to withhold or manipulate information. As you point out, some of these problems can be addressed.

One interesting issue is whether a multiplicity of funders would behave competitively. If they simply form a cartel, then the situation will not be much different than in the case of the individual funder. Since the funders are all investing in the same project the dangers of collusion could be significant, particularly if the number of funders is not very large. That is, cartels generally function better when the market is more homogenous.

Another interesting question concerns potential antitrust liability if they should fix prices or coordinating their investing. “Naked” price fixing is illegal per se and can even be a criminal violation. At the opposite extreme, joint bidding on a common project is generally lawful even though the joint bidders must agree on a bid and how the price is allocated among them. For example, a group of six real estate developers who agree to develop a shopping mall jointly have a legitimate incentive to control costs, and ordinarily the antitrust laws would permit them to get together and submit a bid on, say, a parcel of land for development. In that case the price and output decisions of the group would be the same as those of a single firm and the opportunities for lock-in and strategic behavior would remain. A court in an antitrust case would have to characterize the arrangement in question as either collusion or joint investing.


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