Wednesday, October 26, 2011

Antitrust as Regulation

Posted by D. Daniel Sokol

Alan James Devlin, University of Dublin - Trinity College, University College Dublin (UCD) explores Antitrust as Regulation.

ABSTRACT: Antitrust, properly understood, plays a modest role in constraining commercial behavior. With respect to unilateral conduct, it does not prohibit monopoly or the fortuitous or quality-based acquisition of the same. It generally permits dominant companies to enjoy the fruits of their positions and does not speak to the propriety of excessive pricing. It does not impose service obligations on monopolists; nor does it generally limit their right to price discriminate amongst their consumers. It merely prohibits monopolists’ artificial creation of impediments to competition - so-called “exclusionary practices.” With respect to concerted behavior, the law allows a vast swathe of private agreements, even between rivals and if restrictive of competition, so long as the arrangement sufficiently promotes the well being of consumers. These tenets of competition policy reflect a sound maxim: antitrust is not regulation.

Unfortunately, the judiciary has lost sight of this rudimentary principle. The erosion began subtly, as lower courts rewrote antitrust law’s principal mode of analysis, the rule of reason. According to the Supreme Court’s seminal pronouncement of the rule, if economic analysis reveals that a practice enhances an appropriate measure of consumer welfare, the practice is lawful. That analytic inquiry does not insist that companies calibrate their behavior to maximize efficiency. The U.S. Courts of Appeals, however, have rewritten the rule of reason to require more. Today, an antitrust defendant cannot necessarily prevail by showing that its challenged restraint is welfare enhancing. Instead, if a court finds that a defendant could have achieved comparable efficiency gains in a manner less prejudicial to competition, a violation of the Sherman Act will follow.

Although recent calls for antitrust to require the best have intuitive appeal, policymakers should reject them in most cases. Where welfare analysis requires one to appeal to a hypothetical counterfactual - as it typically the case — courts invariably operate in an error-prone manner. Here, antitrust should play a role founded on incremental improvement over the status quo. Any other function would blur the lines between antitrust and regulation, thus subjecting the courts and agencies to tasks for which they are ill suited. Recent enforcement actions and judicial proceedings reveal the dangers of requiring welfare maximization, as antitrust now threatens to undo desirable gains in a self-defeating pursuit for more.

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