Tuesday, July 14, 2009
posted by Shubha Ghosh
Readers might be interested in Alan Devlin's article Antitrust in an Era of Market Failure, soon to be appearing in the Harvard Journal of Law & Public Policy, available at http://ssrn.com/author=1271852
This is an unsettling time for those who support rigorous economic analysis in antitrust cases. Over the past four decades, numerous assumptions underlying the operation of free markets had developed to the point of being virtually unassailable. Rational profit-maximizing behavior on the part of many leads to optimal, self-sustaining equilibria. Markets self-correct, such that many (indeed most) distortions will be ephemeral. In cases of uncertainty, enforcers should err on the side of false negatives. Financial markets are efficient, which means that even large-scale entry in capital-intensive markets can safely be presumed where supracompetitive prices await. In short, the free market works. Certain of these assumptions now lie in ruins. For the antitrust proponent who has developed his thinking based on such principles, the global market meltdown poses an unprecedented predicament.
Yet, when all the dust has settled, it is not clear what the objective lessons of the crisis will be for competition policy. The global recession certainly teaches that assumptions of efficiency are misplaced where systemic uncertainty pervades the marketplace. It questions the wisdom of a financial system that becomes concentrated to a point where the failure of one key player portends the catastrophic collapse of others. It reveals that macroeconomic fluctuations cannot be controlled by monetary policy alone. It begs fundamental questions about the role of regulation, not just in terms of scope, but in efficacy and global reach too. But, for all this, it does not say much about antitrust analysis.
This point has been missed, and missed badly. Competition enforcers, politicians, and commentators are falling prey to an alluring, yet simplistic and myopic view. They posit that the economic dogma that ushered today’s extraordinary global recession is inextricably linked to the tenets of price theory that inform antitrust doctrine. They are mistaken.
This Article explores the normative repercussions of the global recession for competition policy, and explains that minimal readjustment is counseled under the rubric of economics. Nevertheless, past shifts in substantive policy have coincided with larger changes in political thinking. The crisis has undermined U.S. faith in the free market, which portends a dramatic deviation from the law’s cautious approach to conduct of indeterminate long-run competitive effect. Such a shift is difficult to justify, but is surely inevitable.