Although the judicial system has long played an important role in the competitive process, the economics literature largely has ignored the effects of noise in the legal process. In particular, jury error in predatory pricing and other antitrust cases can result in huge penalties against companies engaged in lawful conduct. In this dissertation, we extend the two-stage Dixit (1980) model to include endogenous, uncertain antitrust damages. This framework reveals that, in general, potential antitrust liability increases entry into otherwise monopoly markets and reduces total social surplus. As the likelihood or magnitude of incumbent liability rises, the incumbent decreases its output, harming consumers and social welfare. The model's predictions are consistent with the effects produced by precedent-setting, predatory pricing cases.This dissertation also explores the potential consequences of uncertain intellectual property protection. We again modify the two-stage Dixit model, except that now the incumbent is the plaintiff and the entrant is the defendant. We assume that the incumbent and entrant produce the same product, both unsure as to whether or not the incumbent's product can be patented at all. Uncertain intellectual property protection increases the range of profitable research and development activities relative to a world of no protection. At the same time, the incumbent is encouraged to curtail output much the same as it does in the antitrust context, leading to lower consumer and social welfare. Finally, uncertain intellectual property protection may encourage some firms to specialize in research and development and other firms to specialize in production, an outcome that generally enhances social welfare.
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