Antitrust Fallacies of Fact and Theory

Josh Wright —  22 August 2008

Steve Hurwitz as a characteristically thoughtful and provocative post over at Austrian Economists on identifying the most dangerous fallacies of fact and theory in economics that a reasonably informed layperson would believe. Steve’s nominations are that the average person believes that the “economic well-being of the average American is on the decline” (fallacy of fact) and (for the fallacy of theory) “that consumption (rather than savings/investment) is the key to economic growth.” The comments are definitely worth a read if you find the topic interesting and include lots of good nominations.

This line of thinking got me mulling over an antitrust-oriented version of the question. I don’t know exactly what to do with “dangerous” in this context, and I’m not sure comparisons with layperson perceptions of antitrust are very interesting, so let me make adjust the question a bit: what are the two fallacies (one fact, one theory) that lead to the most misdirected antitrust law or policy?

Here are a few that come to mind. First, some potential candidates for the most pernicious fallacy of theory:

  • Antitrust enforcers and economists know how to confidently predict welfare outcomes when assessing static v. dynamic efficiencies
  • Optimal antitrust deterrence is either infinite (or error costs are zero) or zero
  • Convergence is always and everywhere a good thing
  • Market concentration is a good predictor of welfare outcomes
  • We don’t need to worry about false positives if we can’t identify them in the litigated cases

Now, some fallacies of fact:

  • Resale Price Maintenance (or other vertical agreements) has similar consequences to horizontal price-fixing in terms of consumer welfare (see, e.g. here)
  • There is strong evidence supporting aggressive antitrust enforcement of single firm conduct generally
  • There is no evidence to support aggressive cartel enforcement
  • There is substantial empirical support for raising rivals’ cost theories of exclusive dealing, bundling, or other vertical contracting practices
  • “Consumer welfare” means the same thing when invoked by US and EU enforcers as a description of the their policy objectives

Historically, the theoretical underpinnings of the positive relationship between concentration and price and been obliterated in economics but still play a significant role in the Merger Guidelines and antitrust policy in general. Its hard to beat the havoc created there. But the question of how to do antitrust enforcement when static and dynamic welfare effects must be weighed with some precision is one that is getting more and more important. Errors in that context also trigger concerns about innovation and economic growth and therefore warrant significant concern. Still, hard to beat concentration and price on this one.

On the fact side, I think the last two are the most problematic and produce the greatest obstacles to more sensible antitrust enforcement. Hard to pick just one. But I’d go with lack of empirical support for exclusionary theories of single firm conduct as the big winner with the superficial level of international discourse at the policy level about the objectives of antitrust policy, how to interpret facts in light of anticompetitive theories on both sides of the Atlantic, and the identifying the real meaning “consumer welfare” as a close second.