522 PART • 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