Common sense on antitrust

It is hard to improve on the words of Richard Epstein. He tells us that antitrust law should be directed against cartellizing behavior, not unilateral business practices designed to gain competitive advantage:

One theoretical social response to cartels would be to follow the libertarian line that treats them as ordinary contracts to be enforced against private defection. At this point, the only relief comes from new entry – unless the cartel extends its reach to include them as well. Unhappy with this response, the traditional common law refused to enforce cartel agreements in the hope that a healthy dose of cheating will lead the cartel to crumble. The antitrust laws turned up the heat by exposing members of cartels to criminal sanctions and, later, treble damage actions.

Thus far the antitrust law looks intelligible enough, but a big monkey wrench is thrown into the works by Section 2 of the Sherman Act, which reads as follows:

Every person who shall monopolise, or attempt to monopolise, or combine or conspire with any other person or persons, to monopolise any part of the trade or commerce among the several States, or with foreign nations, shall be deemed guilty of a felony,…

Here it is critical to note that Section 2 only deals with criminal responsibility. The right to bring private actions was only added into the Clayton Act some 25 years later. But that switch makes all the difference. Looked at through the prism of criminal law, Section 2 could be read to import the criminal law of attempts into the antitrust law. Anyone who tries to form a cartel but fails can be hit with heavy criminal sanctions, on the simple parallel to the law of attempted murder or attempted robbery. The only thing that distinguishes the attempt from the success are circumstances beyond the control of the actor; and if the level of punishment is insufficient for successful wrongs, then we get a bit more deterrence by allowing punishment for the attempts that did not hurt anyone as well.

Unfortunately, the introduction of private actions has worked a real revolution in the theory of antitrust, as Section 2 liability is paraded in all sorts of cases, in both high-tech and traditional industries, in which the unilateral decisions of companies on pricing and marketing are said to support hefty treble damage actions. Here the cold logic of cartels does not identify the misallocations that the law seeks to correct. Rather, the tough-minded structural thinking of the antitrust lawyer yields to so-called “intent” evidence, which usually amounts to some incautious statement or e-mail to the effect that some large company such as Microsoft is out to “crush” its rivals by adopting such nefarious strategies for its product as lower prices, better services, or more convenient terms. After all, the most effective way to exclude a rival is to offer a good or service for free.

In this new non-Euclidian world of potential liability, harm to competitors is no longer treated as a sure sign that market processes have weeded out inefficient competitors. Now a low cost for goods becomes a form of predation, the language here suggesting that a company that goes after another is like a wolf that chases a rabbit. Low costs, or zero costs, which provide immediate short-term benefit for consumers, are treated as though they hold a long-term peril to our general economic well-being. The upshot is that we develop fine-spun theories to explain why Microsoft has committed some ultimate market sin by securing a prominent place for its Internet Explorer icon on its desktop. All this is not to say that there is not some place for state intervention in network industries, because mandated interconnections on non-discriminatory terms seem to be as important here as they are in telecommunications and transport. But once we get beyond that important set of obligations, then the relentless application of the antitrust laws will sap the vitality of the very competition that these laws are supposed to preserve.

The simplest way to see the point is that it is always costly to find any set of business practices that violate Section 2. The types of arrangement used by the dominant company are often identical to those used by its other rivals. Their common use therefore provides us all the evidence of their efficiency we need. When we prevent dominant companies from using these practices, then from the start we make them balkier than their rivals. Consumers have to pay a hefty price. Yet it is most unclear that they receive anything in return.

My take: His take.

Here is the link.

And you can’t go wrong with this conclusion:

The most dangerous threats to market innovation are government restrictions on entry, which are always difficult to erode even over time.

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