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Economic concepts as they apply to law-department management (compound interesting)

A previous post collected some economic concepts that pertain to aspects of running a law department (See my post of March 26, 2006 with 14 other concepts beloved by economists.). Since my supply and your demand are not in equilibrium, I will move up the output curve.

Beta and levels of risk – “any portfolio of cases may be evaluated in terms of levels of risk—a measure that is analogous to the ‘beta’ measure of stock portfolios” (Lester Brickman, “The Market for Contingent Fee-Financed Tort Litigation: Is It Price Competitive?,” 25 Cardozo L.R. 65, 82).

Comparative advantage – even if a more experienced lawyer could do everything that a junior lawyer could do and do it better, comparative advantage says that the junior lawyer should do what that junior lawyer does best.

Marginal cost – if an in-house lawyer works one more hour in a year, there is no marginal cost to the company. It costs nothing additional for that hour. This is why law firms are enthusiastic about squeezing as many hours out of their associates as possible; the marginal cost to the firm is nothing (setting aside possible bonuses for performance), but the incremental cost to law departments is really something.

Monopoly power – if you are the largest firm in Tegucigalpa, Honduras and one of your partners was the former head of the country’s patent and trademark department, you have virtually monopolistic pricing power when it comes to foreign law departments seeking IP services. “Rents” are the term for excess earnings that monopolies and other restrictions on competition bestow on their beneficiaries.

Price elasticity – a senior partner who never discounts her billing rate of $650 per hour demonstrates price inelasticity. If nearly all contingency firms charge 30 percent of the recovery, that is inelasticity. Where firms negotiate on their fees, and commonly grant discounts of varying amounts, there is substantial price elasticity.

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