Harvard v. Chicago on Vertical Restraints

Josh Wright —  1 July 2008

In a new article in the June 2008 issue of Antitrust Source, Howard Marvel discusses what the rule of reason could and should look like in the Post-Leegin world as well as the different proposals to a rule of reason approach articulated by the states and the FTC in the recent Nine West consent order modification. For interested readers, Marvel is much more generous to the FTC decision than co-blogger Thom who not to long ago posted a harsh (and in my view, fairly devastating on both legal and economic grounds) critique of the Commission’s approach.

As interesting as the issue of identifying the appropriate post-Leegin rule of reason RPM framework is, I want to focus instead on an interesting historical and analytical point Professor Marvel makes about the intellectual foundations of the Leegin decision and its approach to the law and economics of vertical restraints:

The antitrust treatment of non-price vertical restraints is a much compressed mirror of that of vertical price restraints. In 1963, no broad condemnation of non-price restraints was deemed appropriate because “too little was known about the competitive impact of such vertical limitations to warrant treating them as per se unlawful.” Apparently, however, this perceived lack of knowledge did not extend to those teaching or trained at Harvard. Within four years, the Court faced a similar challenge to exclusive territories in Schwinn and responded with a per se rule against the practice. The arguments for imposition of per se status came from impeccable sources—the Assistant Attorney General for Antitrust, Donald Turner, supported a brief written by a young Harvard-trained lawyer in the Solicitor General’s office, one Richard A. Posner. The Court thus was encouraged to endorse “then prevailing thinking of the economics profession [to bear] on restricted distribution.”

Posner, benefiting from remedial training at the University of Chicago, soon came to see the errors of the Harvard view, flaws well summarized by Oliver Williamson: Alas, what Turner and Posner took to be the then prevailing thinking of the economics profession was deeply confused. . . . [T]he prevailing thinking was self-limiting in three respects: (1) there was little appreciation for the possibility that product differentiation (as opposed to homogeneous product market exchange) might be the source of economic benefits, (2) there was even less appreciation for the possibility that the integrity of a distribution system could be compromised by subgoal pursuit among the parts (in this case, the individual franchisees), and (3) there was a preference for internal organization (hierarchy) over market organization (interfirm contract) if vertical restrictions, for whatever reason, were to be applied.

Marvel’s analysis supports my view that Leegin is perhaps the best example of the Roberts Court adopting a Chicagoan view of antitrust analysis (and not adopting the Harvard School view, contra Professor Elhauge). Along those lines, I’ve recently posted to SSRN a paper forthcoming in the Elgar Companion to Transaction Cost Economics further exploring the link between the The Chicago School, Transaction Cost Economics, and the Roberts Court’s Antitrust Jurisprudence.