A significant turning point in antitrust thinking began in the mid-1970s with the formal integration of microeconomic analysis into both antitrust policy and antitrust litigation. At that time, the Department of Justice and the Federal Trade Commission dramatically expanded their in-house economics staffs and ever since have increasingly relied on those staffs for strategic advice as well as technical analysis in policy and litigation.
For the most part, this integration of economics into antitrust thinking has been highly positive. It has been instrumental to ensuring that the antitrust laws focus on what they are intended to do – promote consumer welfare. Forty years later, however, economics has gone beyond its role as the intellectual undergirding of antitrust policy. Today, no litigant tries an antitrust case without utilizing one or more economists as expert witnesses, as economic analysis has become the dominant evidence in antitrust enforcement. In this regard, the pendulum may have swung too far.
Prior to the mid-1970s, economists, though creating a sizable academic literature, were largely absent in setting antitrust policy and rarely participated in litigation. The result was that, for much of the history of antitrust, the enforcement agencies and the courts often condemned business practices that intuitively looked bad, but without much further consideration. Good economics, however, is sometimes counter-intuitive. Many of these older decisions did more to protect competitors from legitimate competition than protect competition itself. Integrating sound economic thinking into enforcement policy was thus an important corrective.
Economic thinking has been most impactful on antitrust policy in two areas: unilateral business conduct and horizontal mergers. Older antitrust thinking often conflated protecting competitors with protecting competition. The most devastating critique of this confusion came from the so-called “Chicago School” of economics, and manifested itself to the larger antitrust legal community through Robert Bork’s seminal 1978 book, The Antitrust Paradox. It is hard to exaggerate the impact that this book had on enforcement policy and on the courts. Today, it is rare that unilateral conduct is challenged successfully, the courts having placed a de facto presumption of legality on such conduct and a heavy burden on plaintiffs to show otherwise.
Horizontal merger policy likewise had a checkered history prior to the mid-1970s. Basically, any merger that increased market concentration, even if only slightly, was considered bad. The courts by and large rubber-stamped this view. This rigid thinking began to change, however, with the expanded roles of the economists at the DOJ and FTC. The economists pointed out that, although change in market concentration is important, it is not dispositive in assessing whether a merger is anticompetitive. Other factors must be considered such as the incentives for outside firms to divert existing capacity into the relevant market, the degree to which there are barriers to the entry of new capacity, the potential for the merger to create efficiencies, and the ability of post-merger firms to coordinate pricing. Consideration of each of these economic factors was eventually formalized in merger guidelines issued in 1982 by the Reagan Administration’s DOJ. These guidelines were joined by the FTC ten years later and amended to consider mergers that might be anticompetitive regardless of firms’ ability to coordinate prices.
Each of these developments led to far more sensible antitrust policy over the past four decades. Today, however, economic thinking no longer merely provides broad policy guidance but, in the form of highly sophisticated statistical modeling, increasingly serves to be the principal evidence in specific cases. Here, policy-making may now be exceeding the limits of economic science. Friedrich Hayek famously described the difference between science and scientism, noting the pretentiousness of believing that economics can generate the kind of precision that the natural sciences can. Yet, the enforcement agencies are approaching a point where their econometric analysis of market data in certain instances may be considered sufficiently “scientific” to determine enforcement decisions without needing to know much else about the businesses or products at issue.
Much of this is driven by advancements in cheap computing coincident with the widespread adoption of electronic data storage by businesses. These developments have yielded a rich set of market data that can be readily obtained by subpoena, coupled with the ability to use that data as input into econometric estimation that can be done cheaply on a desktop. So, for example, if it is possible to estimate the competitive effects of a merger directly, why bother with more traditional (and tedious) methodology that includes defining relevant markets and calculating concentration indexes? In principle, even traditional documentary and testimonial evidence might be dispensed with, being unnecessary when there is hard “scientific” evidence available.
This view is worrisome for two reasons: The first is the already stated Hayekian concern about the pretense of economic precision. Any good statistician will tell you that econometrics is as much art as science. Apart from this concern, however, an equally important worry is that antitrust enforcement policy is becoming too arcane in its attempt to be ever more economically sophisticated. This means that it is increasingly difficult for businesspersons and their counsel to evaluate whether some specific conduct or transaction could be challenged, thus making even lawful business strategies riskier. A basic principle of the rule of law is that the law must be understandable to those subject to it.
Regrettably, the Obama Administration has exacerbated this problem. For example, some officials have indicated sympathy for so-called “Post-Chicago Economics,” whose proponents have set out highly stylized models that purport to show the possibility of anticompetitive harm from conduct that has not yet been reached by antitrust law. Administration officials also rescinded a Bush Administration 2008 report that attempted to lay out clearer guidelines regarding when unilateral conduct might be challenged. Although these developments have been mostly talk and not much action in the way of bringing novel cases, even mere talk increases legal uncertainty.
The Administration’s merger policy actions are more concrete. The DOJ and FTC issued new guidelines in 2010 that, in an effort to be even more comprehensive, proliferated the number of variables that can be considered in merger analysis. In some instances, these variables will be resistant to reliable measurement and relative weighting. The consequence is that the new guidelines largely defeat the purpose of having guidelines – helping firms assess whether a prospective merger will be challenged. Thus, firms considering a merger must often do so in the face of substantially more legal uncertainty and must also expend substantial funds on attorneys and consultants to navigate the maze of the guidelines. These factors likely deter at least some procompetitive mergers, thus forgoing potential social gains.
Antitrust policy certainly must remain grounded in good economics, and economic analysis is certainly probative evidence in individual cases. But it is nonetheless appropriate to keep in mind that no legal regime can achieve perfection, and the marginal benefits from efforts to obtain ever greater economic sophistication must be weighed against the marginal costs of doing so. When litigation devolves into simply a battle of expert witnesses whose testimony is based on arcane modeling that neither judges nor business litigants grasp well, something is wrong.
It is time to consider a modest return to simpler and more transparent enforcement policy that relies less on black box economics that pretends to be more scientific than it really is. To be sure, clearer enforcement rules would not be without enforcement risk. Some anticompetitive transactions could escape challenge. But, procompetitive transactions that otherwise might have been deterred will be a social gain. Moreover, substantial social cost savings can be expected when business decisions are made under greater legal clarity, when antitrust enforcement is administered more efficiently, and when litigation costs are substantially lower. The goal of antitrust policy should not be perfection, but to maintain an acceptable level of workable competition within markets while minimizing the costs of doing so. Simpler, clearer rules are the route to this end.
Theodore A. Gebhard is a law & economics consultant. He advises attorneys on the effective use and rebuttal of economic and econometric evidence in advocacy proceedings. He is a former Justice Department economist, Federal Trade Commission attorney, private practitioner, and economics professor. He holds an economics Ph.D. as well as a J.D. Nothing in this article is purported to be legal advice. You can contact the author via email at email@example.com.