(8th edition) (the pearson series in economics) robert pindyck, daniel rubinfeld microecon 547
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522 PART 3 • Market Structure and Competitive Strategy
E XA MPLE 13.7
AUCTIONING LEGAL SERVICES
In the United States, plaintiff attorneys often bring
cases in which they represent classes of individuals
who were allegedly harmed by defendants’ actions
that adversely affect human health or well-being.
The attorneys are typically paid on a contingent fee
basis, which means they are paid nothing if they
lose the case, but if they win the case, they receive
a percentage of the amount recovered, typically
around 30%.
In a number of instances, class action cases have
followed successful investigations and prosecutions
by government agencies. For example, after the U.S.
government successfully sued Microsoft and found
that it had monopolized the market for PC operating systems, attorneys representing consumers who
had purchased PCs filed suit to recover damages for
excess payments. Because of the government suit,
the lawyers for the class action plaintiffs had a head
start that greatly simplified their work. Many of the
critical documents had already been uncovered,
and they did not have to prove that Microsoft was a
monopoly in the PC operating systems market.
As a result of cases such as this one, the percentage fee awards have been seen as unreasonably
large relative to the efforts made by the attorneys.
What could be done about this? A number of federal
judges had a solution: hold auctions in which attorneys bid for the right to represent the class of potential plaintiffs. In a typical such auction, attorneys
would offer a percentage fee as part of a sealedbid process. In one unusual auction following on a
criminal verdict against auction houses Sotheby’s
and Christie’s, Judge Lewis Kaplan of the Southern
District of New York allowed law firms to offer a
broader range of payment terms as part of their bids.
It turned out that the winning bidder was the law firm
of Boies, Schiller, & Flexner, which bid a payment of
25 percent of the award on an amount recovered
that is greater than $425 million. Months after taking the case, David Boies settled with defendants for
$512 million, earning the attorneys a $26.75 million
fee (25 percent of the $107 million excess over the
minimum of $425 million) and generating just over
$475 million for members of the class.
EX A M P L E 13.8 INTERNET AUCTIONS
The popularity of auctions has skyrocketed in recent years with the growth of
the Internet. Indeed, the Internet has
lowered transaction costs by so much
that individuals anywhere in the world
can now trade relatively low-value
items without leaving the comfort of
home. Many Internet sites are now
devoted to auctions at which participants can buy and sell a wide variety
of items. Let’s see how these Internet
auctions work.22
The most popular Internet auction site in the United States is
www.ebay.com. It conducts auctions each day for items ranging from
22
For more information on Internet auctions, see Patrick Bajari and Ali Hortaỗsu, Economic Insights
from Internet Auctions,” Journal of Economic Literature 42 (June 2004): 457–86.
