"There is Little Evidence that Economic Analysis of Law Has Changed [Antitrust] in Any Noticeable Way"

Cite this Article
Joshua D. Wright, "There is Little Evidence that Economic Analysis of Law Has Changed [Antitrust] in Any Noticeable Way", Truth on the Market (December 12, 2006), https://truthonthemarket.com/2006/12/12/there-is-little-evidence-that-economic-analysis-of-law-has-changed-antitrust-in-any-noticeable-way/

Huh? This statement appears in this article by Professor Anthony D’Amato (Northwestern) on the failure of interdisciplinary scholarship in the legal academy. HT: Brian Leiter. Quite frankly, I was very surprised to see a claim like this in a paper written after 1970 or so. Even in corners of the academy hostile to economic analysis, antitrust is conventionally distinguished as a special case where economics is useful, typically along with some statement about the uniqueness of antitrust. D’Amato reserves no such special treatment for antitrust, criticizing that field in the context of a more general critique of what he describes as the “interdisciplinary turn” in the legal academy on three grounds:

First is the unlikelihood that the joint-degreed persons who join the law faculty will happen to be the ones that their colleagues will end up collaborating with. Second is the even greater unlikelihood that any given discipline can communicate usefully with another discipline. Third is the opportunity-cost factor: that the new interdisciplinary courses will crowd out an essential part of the legal discipline, namely, an understanding of the foundations and dialectical evolution of its forms of language.

Those who study antitrust might be surprised to read the claim that economics has not changed antitrust in any significant way. To give some context, this claim comes as part of D’Amato’s rebuttal case against law and economics as an example of successful interdisciplinary scholarship. D’Amato’s conclusion? Economic analysis earns a “gentlemanly C+” on its report card and claims of success are “misleading if not false.” The rebuttal case consists largely of claims that economic analysis has not been fruitful in many areas of law: contracts (see Eric Posner), torts, criminal law, and includes the statement that the Coase theorem “is hardly helpful to lawyers.” I admit that I found the argument about criminal law difficult to follow (it consists largely of a response to hypothetical examples of crimes that Richard Posner could have but apparently did not write and the obligatory mention of Posner’s comments on the potential benefits of a market in parental rights.

My disagreement is somewhat predictable, as someone engaged in law and economics. But I want to focus on D’Amato’s claim that economic analysis has not even been successful in areas that are “ideal for the division of labor between lawyer and economist,” like antitrust. D’Amato offers as support for the words in the title to this post the following analysis (p.65):

The focus on the quantitative aspects of antitrust — such as Robert Bork’s reductionism of antitrust to the goal of delivering the lowest prices to the consumer — has had a distorting effect on the field. The original impetus for antitrust legislation — combating an incipient fascist tendency of huge corporate combinations to overwhelm and run the government — seems to be an inconvenient memory for those who would like economic analysis to place a price tag on every legal value.

I respectfully dissent. I discuss an objection to D’Amato’s characterization of the antitrust endeavor and ten reasons to think that D’Amato’s claim in the title of this post are wrong below the fold.

Let’s start with the purposes of the antitrust laws. Virtually every antitrust scholar to examine the goals of the Sherman Act, including those who disagree with Bork’s “consumer welfare” (read: total welfare) interpretation, have concluded that the antitrust laws represented a myriad of goals including: economic efficiency, protection of (a la Steve Salop) “true” consumer welfare, and political concerns. It cannot be accurately said that the original impetus of the antitrust laws was solely concern about corporations gaining political power. Economic efficiency has always been part of the analysis. So has true consumer welfare. Economics provides a number of useful analytical tools to inform antitrust analysis in terms of how various forms of conduct will influence these metrics.

Now one might believe that these tools do not perfectly measure the tradeoffs between all goals of antitrust. But it is worth pointing out that understanding how practices impact consumers and total welfare and designing policy accordingly is much better than understanding nothing and designing policy randomly. Robert Lande, a leading opponent of the Bork view, writes about the uses of economics in antitrust under the “true” consumer welfare standard:

Recent advances in economic theory provide the methodology that can help determine when market power is likely to harm consumers, as opposed to those times when free market forces that will best ensure consumers’ protection are operating. This sophistication should lead to increasingly precise implementations of Congress’ commands that all purchasers, whether consumers or businesses, be given the right to purchase products priced at no more than the competitive level and that all sellers be given the right to compete against products priced at no less than that level.

Second, and less importantly, nothing about Bork’s definition of consumer welfare demands the lowest prices for consumers. In fact, using Bork’s definition of consumer welfare, it is a justification under the antitrust laws to use contractual mechanisms to facilitate the delivery of promotional services which increase price and output. We know that certain contractual mechanisms facilitate the supply of promotional services, and prevent a number of types of dealer free-riding, because of advances in the economic theory of vertical restraints which have been subject to empirical testing. Now, all reductionism aside (of or by Bork), there are some seriously complex tradeoffs to be made in designing antitrust rules, i.e. tradeoffs between different dimensions of competition that are often at tension with one another (innovation and price competition are the most easily understood example), and these problems should be attacked with analytical rigor. But economics is a very useful way for addressing these problems as well. And, perhaps as only an economist would suggest, these tools have withstood the market test as those who design antitrust policy now nearly uniformly agree that economics provides an incredibly useful basis for this task.

Third, one not need examine the legislative history of the Sherman Act in order to critique the claim that economics has not changed antitrust law. Here are a list of ten contributions of economics to antitrust that I jotted down while drafting this post. I invite our readers to quarrel with my list or add their own.

  1. The 1982 horizontal merger guidelines and subsequent revisions. These guidelines incorporated economic analysis into merger analysis in terms of understanding the potential unilateral and coordinated effects of proposed mergers. Subsequent revisions incorporated efficiencies analysis. There is simply no doubt that the Guidelines, written together by lawyers and economists, have had a remarkable impact not only on agency practice, but case law. See, e.g., Staples, Oracle, Heinz, Arch-Coal …
  2. The relationship between concentration and price and antitrust policy. A classic example of the contribution of economics to antitrust policy and law is the disintegration of the academic consensus against market concentration had a substantial impact of antitrust thinking in the agencies, and later, in court decisions. This “New Learning” has been felt across antitrust, and perhaps led to the advances already mentioned in #1.
  3. Independent Ink and the economics of price discrimination. Independent Ink explicitly references the economic literature on price discrimination, and an attempt to square the law of tying with this literature (as I discuss in this article). While an understanding of competitive price discrimination has not yet resulted in the repeal of the Robinson-Patman Act, this decision explicitly addresses and ultimately rejects the argument that “metering ties,” as a form of price discrimination, are particularly worthy of antitrust scrutiny in rejecting the presumption that a patent should confer monopoly power … wait a minute …
  4. Patents do not confer market power. I do not want to double count Independent Ink, but the court’s holding here is explicitly based on the economic notion that the patent confers only a downward sloping demand curve and not the power to control market conditions.
  5. Tying law has explicitly adopted the economic analysis of such arrangements and the role of tying in preventing brand-name free riding (especially in the franchise tying context, see e.g., Klein & Saft (1985)).
  6. Merger simulation. Some very important work is being done by economists in predicting the impact of mergers of rivals selling differentiated products. These merger simulation models have had considerable impact in agency analysis of proposed mergers.
  7. Raising Rivals’ Costs. Again, it is incredibly difficult to argue that the economic literature discussing the conditions under which unilateral conduct might raise rivals’ costs and ultimately injure consumers has not influenced antitrust doctrine in tying, refusals to deal, and exclusive dealing.
  8. Modern collusion analysis. The modern antitrust approach to tacit coordination owes its influence to Stigler’s “Theory of Oligopoly.”
  9. The antitrust analysis of vertical restraints. A few lines here cannot do justice to the contribution that economic analysis has made to the antitrust analysis of vertical restraints such as RPM, exclusive territories, exclusive dealing, bundling, and others. But suffice it to say that the discourse of modern antitrust analysis does indeed require economic analysis and understanding concepts like eliminating double marginalization, the various forms of dealer free-riding, hold-up, etc. Without a proper understanding of the economics of various practices, we are vulnerable to ignoring Coase’s warning not to mindlessly adopt the default position that all practices we do not understand must be monopolistic in nature.
  10. Predatory pricing analysis. The recoupment prong of the predatory pricing analysis is certainly informed by economic analysis. A cursory look at recent antitrust cases in this area suggest that economic analysis has indeed “changed” the law in this area. By the way, the presentation materials for predatory pricing at the Section 2 hearings are very worth checking out.

Suffice it to say, I strongly believe that economic analysis has changed antitrust analysis (including antitrust doctrine itself, not to mention enforcement policy). I welcome your thoughts. In particular, can you think of areas of antitrust analysis that I have missed that are clearly influenced by economic analysis? Do you disagree with my examples? What about other traditional areas of law where economic analysis pre-existed “law and economics” (D’Amato mentions insurance and banking)?