Newswires report that a Los Angeles company, Allerca, has announced that by 2007 it will be selling genetically modified cats. The company plans to use RNA interference technology to silence a gene in cats that produces proteins that cause allergies in humans. It will be modifying the British Short Hair breed, and selling them for $3500.

The standard antitrust paradigm, even in the current era where price (or, reciprocally, quantity) is the principal focus, takes for granted that property rights are well defined and enforced. While that assumption may be warranted in the typical case, it does not apply across the board. And when it does not, the antitrust model has proven difficult to apply, sometimes leading to perverse results.

The tension between antitrust and property is well understood in the context of intellectual property. Legal protections afforded by patents, copyrights, and trademarks recognize that creation and enforcement of intellectual property entail a separate cost--the item must not only be produced but first created--that does not apply to the standard widget already in existence. If so, prices above marginal production costs must be charged as an incentive to compensate for the fixed costs of creating the good in the first place. The higher prices necessarily result in lower quantities sold, compared to a price covering just production costs, as in the standard economic model of competition.

This distinction between the static model, with well-defined property rights, and a more dynamic model that takes into account the need to create assets first would seem self-evident. But traditionally it has not been self-evident to antitrust enforcers. In the field of intellectual property, for example, "the history of the Department of Justice enforcement has been one of almost unbroken hostility towards patents."

Although the property-antitrust dichotomy arises most frequently in areas of intellectual property such as patents, it is perhaps best illustrated in the context of more traditional property rights. Take the standard economic example, the fishery. Typically, fish are found in "open access," owned by no one until they are actually caught. Because access to a lake, stream, or ocean is open, over-fishing is a well-recognized problem. The equally well-recognized solution to this so-called "tragedy of the commons" is some form of ownership, either communal or completely private. With private ownership, over-fishing ends.

But in an antitrust world where low prices and high quantities are the goal, establishment of property rights is an objectionable solution. Property rights mean the exclusion of some fishers and ending the exploitation of an open-access resource. As quantities taken diminish, prices naturally rise, a result striking at the core values of modern antitrust. To antitrusters, the result is particularly objectionable when, as is often the case, the solution to over-exploitation of resources available in open access requires a collective agreement among competing fishermen to reduce their catch. Then, it is a "contract, combination, or conspiracy" employed "in restraint of trade," with restricted quantities and higher prices. In the static antitrust world, Sherman Act liability would follow.

And so it has when private agreements have attempted to solve the tragedy of the commons. The Gulf Coast Shrimpers & Oystermans Association (GCSOA) was a private organization that regulated shrimp harvests along the Mississippi coast of the Gulf of Mexico. Its members agreed also to sell only to certain packers, who would pay GCSOA packers a minimum price. The Justice Department ended the GCSOA's private definition of property rights in a criminal action brought under section 1 of the Sherman Act.

And so, an attempt to define private property, thus avoiding the economic waste created by open access, resulted in a criminal conviction.

Just as it has been hostile to private creation of property--intellectual or marine--so has antitrust enforcement been hostile to private enforcement of property rights. To cite some of the better known cases, the government has attacked manufacturers' collective attempts to safeguard their contract rights against fraud, to protect their original fabric designs from being copied by pirates, or to prevent reverse engineering of machinery protected by a web of patents and unpatented trade secrets.

Analyses that would reconcile property (including intellectual property) law with antitrust, though voluminous, thus far have not succeeded in resolving the essential puzzles. Although complex reasons are often offered for the incompatibility of the two systems, simple ones suffice. Both intellectual property and antitrust law (as they are considered today) supposedly seek to maximize social welfare, net of costs. But one system (antitrust) maximizes welfare in a short-run static sense. The other (property) is based on the claim that short-run losses from higher prices are necessary for the long-run existence of the good, and so benefits will ultimately exceed costs. Thus, comparison of welfare benefits net of costs under the two models must by definition be an empirical exercise, comparing streams of benefits and costs over time, appropriately discounted for the time-value of money and for the risks of attaining the supposed net benefits. What is best in any particular situation require empirical data that cannot be expected to emerge, at least not in the context of antitrust litigation.

Judge Easterbrook has proposed two basic tests for determining whether an antitrust case makes sense:

Is there market power?
Are consumers harmed?

But in situations where property rights are poorly defined or enforced these tests are not helpful. The imposition of property rights in settings in which none exist will increase prices and "hurt" consumers in the short run.

The foregoing is not a criticism of Judge Easterbrook's filters. They have exerted an important influence in antitrust thinking since their appearance some 20 years ago, and deservedly so. The point, rather, is that they are effective in the standard antitrust paradigm in which property rights are already well defined and enforced. When antitrust cases arise outside that paradigm, standard antitrust thinking risks diminishing social welfare by applying the tools of maintaining competition when the standard assumptions do not apply.

Two years ago most downloaders did not know that their activities were illegal. Few uploaders felt guilty about making large numbers of songs available for free on the Internet. It was viewed as akin to lending your CDs out to your friends, except that the "friends" here were both anonymous and large in number. "Art should be free," right?

Since the United States lawsuits, there has been a subtle shift of opinion. Many people, especially those beyond their teenage years, are now proud of not being downloaders. They brandish their Apple iPods with pride. The cultural climate has shifted to the point where people, even if they download, are embarrassed to admit as such. Only in the under-twenty crowd is illegal downloading still a badge of honor. And many of these children now face (admittedly imperfect) regulation from their parents.

The music industry knows that the long run will bring a network of free music. It knows that free music may have illegal status, a "grey" status, white status (recorded from the radio), or perhaps be pirate (from abroad) but not illegal in the actionable sense. But there will be two networks, a pay network and a free network.

The pay network stands a good chance of competing against the free network. Perhaps the pay network can offer better sound quality, tie-ins (concert tickets, T-shirts, etc.), upgrades and maintenance service, better information such as album liner notes, song selection services, easier interface, and other benefits. The future course of technology is difficult to predict. Nonetheless it is easy to see why a pay network will have a greater ability to finance these goodies than will a free network.

The music companies - present and future suppliers of the pay network - do not wish to face a ten year period where everyone is used to getting music for free. They do not want an entire generation to grow up thinking of music as a free commodity. They do not want hackers and illegal downloaders to become established as folk heroes.