Tuesday, July 15, 2008

What Are The Goals of Antitrust Law?

I just took my Antitrust final exam last night and think things went well. I enjoyed the class thoroughly and find the topic fascinating. It's particularly interesting how undefined American Antitrust law is in many ways and yet it still ranks as one of the best in the world. It's also quite interesting how it interacts with intellectual property rights. (Antitrust law is law that tries to protect competition whereas intellecutal property rights are government grants of temporary monopoly power to promote innovation.) These laws come into tension with one another and the courts seek to balance the two against each other.

In honor of my class finishing up, here is an interesting Antitrust reading recommendation:

If you read one article on antitrust this year, make it Maurice Stucke's Better Competition Advocacy, 82 St. John's L. Rev. 951 (2008). In this work, he convincingly argues that "The goals of antitrust law enforcement are subsumed by, but not necessarily co-extensive with, the goals of competition policy." Stucke's article not only extends an impressive line of work on competition law, but also offers some insights on the dangers of over-specialization for legal scholars generally. I'll offer some excerpts now, and try to apply the piece to some current controversies later this week.

Stucke addresses four main questions in his article:

Prevailing competition advocacy glosses over four fundamental questions: First, what is competition? Second, what are the goals of a competition policy? Third, how does one achieve, if one can, the objectives of such desired competition? Fourth, how does one know if the economy is progressing toward these goals?

Stucke argues that conventional competition policy based on the work of the Chicago School answers all these questions in narrow and unsatisfying ways.

After surveying considerable diversity of opinion on the definition of "competition," Stucke argues that it cannot be an "end in itself," but might better be thought of as "a policy tool to achieve broader government objectives for the economy." These objectives include much more than gross measures of "consumer welfare" or "wealth maximization." The goals of competition policy are necessarily diverse--only an ideologue would try to subordinate all its objectives to one overriding end.

Read the whole post and also check out the article.


jeremy h. said...

This is somewhat off-topic, but I'd be interested to here your thoughts on this (or perhaps you could verify if it is true since you're at the FTC):

"When Jim Miller, a University of Virginia Ph.D. economist, was head of the FTC during the Reagan administration he tried to put the Bureau of Competition to good use by suing local governments for creating taxicab monopolies with licensing regulation. The federal courts (you know, the ones the Beltway Liberventionsts say "save" us from tyranny) prohibited him from laying a finger on any government-created monopolies (the only real kind, of course)."

Brian Hollar said...

Hey Jeremy,

Good question. According to the Hoover Institution’s website, James Miller was Chairman of the FTC from 1981 to 1985. I don’t know the background facts of what you mentioned, but can find it quite believable. There is a “state exemption doctrine” in Antitrust law that says the Sherman Act did not intend to regulate the action of states, therefore states are not liable to antitrust violations. Based on what I know about both the FTC and Antitrust law, I can believe both that a) Miller tried to go after the taxicab monopolies; and b) that the federal courts ruled that the taxi monopolies were granted by the states in question and therefore exempt from antitrust liability.

See Parker v. Brown (1943) for more on this.

The Supreme Court limited this exemption in Cal. Liquor Dealers v. Midcal Aluminum, Inc. (1980) by ruling that a state had to:

1) explicitly affirm the behavior in question (such as by statute), and

2) had actively monitor the behavior in question.

If the state in question fails either of these points, then the exemption does not hold and antitrust action can take place.

Antitrust laws have historically been driven by a more populist school of thought which strove to keep things “fair” in the marketplace between competitors, restricting many economically efficient outcomes based on fears of “robber barons” and excessive power by “big industry”. Increasingly, however, the “Chicago” school of thought has come to dominate most antitrust policy today, focusing on consumer welfare rather than effects on competitors when analyzing antitrust action. The Chicago School is so named because the thinking originated in the University of Chicago’s law and economics departments.

Here are a few quick observations:

1) My professor mentioned that we should not underestimate the effect the Great Depression had on shaping antitrust law and policy up until recently.

2) Antitrust law is increasingly analyzed and applied in terms of Chicago-style economic principles.

3) I believe antitrust law has been far better applied in recent years than it has historically. Major changes have come about though judicial rulings even in the last 5-10 years that seem to be shaping things for the better.

4) Both the Sherman Act and Clayton Act are poorly defined and give little direction to the courts. What they have been left with is a series of hodge-podge rulings that have tried to make sense out of ill-defined statutes. As judge’s understanding of competition and the economy have changed, the laws have to. This is a critical reason for economists to be involved in trying to influence the courts and the major role Chicago has played for improving antitrust policy.

5) As mentioned in my post, antitrust seeks to balance several goals – one of which is economic efficiency. Another is to try to keep a level playing field for competitors.

6) Antitrust is an evolving body of law, similar to common law. It is not entirely articulated and is shaped and further refined by each judicial decision pertaining to it. Legal theories attempt to give explanation to it, but do not capture the entirety of it.

7) Despite the poor wording (and often poor application) of the Sherman Act, it is far better than it could be and is surprising how good it actually is relative to other places – such as Europe (who is trying to slowly come closer to following American antitrust policy). Any attempt to change the statute would likely make it far worse than it is now as politicians try to use any modifications to the statute as a means of rent-seeking.

8) There does seem to be some social benefit gained from having an antitrust policy that gives consumers confidence that they are protected from abuses by large industry. Whether or not the benefits exceed the cost is a long discussion. I do think there are both benefits and costs in this type of system.

9) Courts are bound by the process of stare decisis (following precedent) and also bound by following the statutes made by lawmakers. As such, these limitations set boundaries (a good thing) for judges and for how antitrust law evolves and is applied. I don’t see the laws getting changed anytime soon and the courts able to only change things slowly over time.

10) Antitrust law is in far better shape today than it was 20-30 years ago and seems to be trending in a generally positive direction.

Just a few thoughts. This is a new area of the law for me and I am slowly getting up to speed on it and get better informed. I find it quite fascinating and look forward to learning more about it.

Hope this helps answer your question.

jeremy h. said...

Thanks for the detailed response! Two quick points/questions.

1.) While I have no doubt that state monopolies are legally exempted from anti-trust, is there any justification for this in the literature? Either from a utilitarian or a natural rights perspective?

2.) This statement confused me: "Antitrust laws have historically been driven by a more populist school of thought which strove to keep things 'fair' in the marketplace between competitors." Are you talking about the rhetoric behind early antitrust, or the reality?

My understanding is that the reality was that they were driven by lobbying from less successful competitors, not some "populist" theory, either about consumer protection or preserving "fair" competition. But that is obviously a generalization on my part (see e.g. Libecap "Rise of the Chicago Packers" for one early example).

Brian Hollar said...


Sorry for the tardy reply. To answer your questions:

1) I think the best way to explain the exemption is that the Supreme Court reasoned that the Sherman Act not designed to regulate the action of the state. They said that Congress could have chosen under Commerce Clause power to make antitrust applicable to states, but did not, allowing states to violate antitrust laws with impunity. We studied the cases in which this came about in class, but I'm afraid I haven't read anything deeper about the analysis. Unfortunately, judicial opinions can often be very esoteric and difficult to follow. Judges also sometimes don't follow a readily identifiable philosophical logic in their decisions. Most legal theories try to find patterns in judicial options ex post, rather than judges applying clear theories ex ante to make their rulings. (Instead, judges typically try their best to follow and integrate rulings of prior cases. This is called the principle of "stare decisis" -- "to stand by things decided".)

2) I would say the application of antitrust laws in the past followed a populist school of thought. The Sherman Act is so vaguely written, a direct reading of it could be interpreted to restrict any and all contracts. The courts wisely determined that could not have been Congress' intent in passing the Act, but were left with zero legislative guidance for how to apply the statute. During the early years of application, the courts were influenced by the prevailing economic perceptions of the day and felt that having more companies in a given market was more competitive than having fewer, often taking this to an extreme and leading to perverse results (preventing small companies from merging, punishing companies for taking market-share from their competitors, etc.). Over time, the Chicago School of thought became much more prevalent and rather than looking at effects on competitors, courts now tend to evaluate antitrust on the basis of the effect on consumers.

There have certainly been cases where less successful companies have brought antitrust cases against their competitors to try to prevent them from succeeding in the marketplace, but I'm not sure if that's what initially led to the development of the Sherman Act itself? I could be wrong on this and will have to check out the paper you linked to.

One thing my professor said that really stood out was "Don't underestimate the effect the Great Depression had on American law." The Depression (1929+) was obviously after the passage of the Sherman Act (1890), but the application of antitrust law was greatly impacted by it. (Just as econ was.)

Because courts are generally bound by the principle of "stare decisis", decisions made during the Great Depression had long-lasting effects on the law that still affect things today. Recently, the Supreme Court (and other high-level courts) has been hearing some high-level antitrust cases, helping shape antitrust into what I believe is a more positive direction.

Hope this answers your questions. I'm still in the process of learning about this stuff and find it all quite fascinating.

jeremy h. said...

I would also recommend: Troesken, "The Letters of John Sherman," plus many of the references therein.