Section 2 Symposium: Bruce Kobayashi on Are Administrable Bright Line Rules Underutilized in Section 2 Analyses?

Bruce Kobayashi —  5 May 2009

kobayashiBruce Kobayashi is a Professor of Law at George Mason Law School.

One of the most important changes in the antitrust laws over the past 40 years has been the diminished reliance of rules of per se illegality in favor of a rule of reason analysis. With the Court’s recent rulings in Leegin (eliminating per se rule for minimum RPM) and Independent Ink (eliminating the per se rule against intellectual property tying), the evolution of the antitrust laws has left only tying (under a “modified” per se rule) and horizontal price fixing under per se rules of illegality. This movement reflects advances in law and economics that recognize that vertical restraints, once condemned as per se illegal when used by firms with antitrust market power, can be procompetitive. It also reflects the judgment that declaring such practices pre se illegal produced high type I error costs (the false condemnation and deterrence of pro competitive practices).

The widespread use of the rule of reason can be problematic, however, because of the inability of antitrust agencies and courts to reliably differentiate between pro and anticompetitive conduct. Conduct analyzed under Section 2 often has the potential to generate efficiencies and be anticompetitive, and finding a way to reliably differentiate between the two has been described as “one of the most vexing questions in antitrust law” (Section 2 Report, p. 12). Under these conditions, applying a rule of reason analysis on a case by case basis may not substantially reduce error costs and can drastically increase the costs of enforcement. Thus, under the decision theory framework widely used by economists and courts, which teaches that optimal legal standards should minimize the sum of error costs and enforcement costs, “bright line” per se rules of legality and illegality can dominate more nuanced but error prone standards under the rule of reason.To its credit, the Section 2 Report has a useful discussion of the use of decision theory and the benefits of using administrable per se rules (pp. 15-18). The Report’s discussion is also balanced, discussing both the utility of bright line per se rules of illegality and safe harbors, including an extended discussion of the most familiar example of a bright line safe harbor, the Court’s Brooke Group rule for predatory pricing. The Section 2 Report provides a succinct analysis of how the Brooke Group rule serves the goal of having an administrable rule, and also provides a safe harbor for above cost pricing in order to protect against type I error costs.

In general, antitrust analyses under Section 2 employ very few bright line rules. As noted above, the use of per se illegality has been effectively eliminated under Section 2 in favor of the rule of reason. And other than the Brooke Group rule, the only safe harbors that come to mind are the extensions of Brooke Group to cover predatory buying in Weyerhaeuser and price-cost squeezes in LinkLine, and the Court’s limitations on sham litigation under Professional Real Estate and Walker Process. While the Section 2 Report suggests the further development of similar conduct specific tests is appropriate (p.47), it does not provide specific guidance on how this should be achieved. Indeed, the report pessimistically notes that while “there is general consensus that clearer and more predictable standards are desirable, legal scholarship and the record from the hearings suggest far less consensus on what those standards should be.” (p. 34).

Thus, there is little evidence that the use of bright line rules in antitrust analyses under Section 2 will expand in the near future. Indeed, there is some reason to believe that their use will be curtailed on the margin. Recent comments from antitrust officials have expressed pessimism regarding the importance of avoiding type I errors in antitrust. Indeed, the new AAG for Antitrust has stated her pessimism regarding the existence of type I errors in antitrust.

Moreover, there is continuing pressure to alter the Brooke Group rule in ways that would narrow the above-cost safe harbor. The Court relied upon the pre 1980 economic literature to conclude that “there is a consensus that predatory pricing schemes are rarely tried, and even more rarely successful” (Brooke Group v. Brown and Williamson Tobacco Corp, 509 U.S. 209 (1993) (citing Matsushita Electric Industrial Co. v. Zenith Radio Corp., 475 U.S. 574 (1986)). Since then, economic studies have challenged this consensus. These include game theoretic models of rational predation, including models of predation that do not require prices below cost. These also include empirical studies presenting evidence consistent with the existence of successful predation, and questioning the conclusions of the earlier empirical studies relied on by the Supreme Court. Based on these analyses, some have called for elimination or curtailment of the Brooke Group safe harbor for above cost pricing (see Section 2 Report at 58).

However, it is far from clear that such a change is warranted. While the recent literature on predatory pricing has demonstrated both the theoretical viability of predatory pricing strategies, and has provided useful analysis and reanalysis of antitrust cases involving predatory pricing, there is still very little conclusive evidence on the rate and success rate of predatory pricing. Moreover, while this literature may have cast doubt on the Court’s assumption that predatory pricing was rare and economically irrational, perhaps the most important reason to keep the above cost safe harbor, the benefits a having an administrable rule, remains. As Areeda & Hovenkamp (Antitrust Law, 2006 Supp. at 324) note:

[t]he reason these tests for predatory pricing were adopted was not because there is widespread consensus that above-cost pricing strategies can never be anticompetitive in the long run. Rather, it is because our measurement tools are too imprecise to evaluate such strategies without creating an intolerable risk of chilling anticompetitive behavior.

Thus, even considering the recent advances in economic theory, the benefits of having an administrable rule provides a strong underlying reason to keep the above-cost safe harbor for pricing behavior, and to seriously consider administrable rules to cover other conduct analyzed under Section 2.

One response to Section 2 Symposium: Bruce Kobayashi on Are Administrable Bright Line Rules Underutilized in Section 2 Analyses?

    Tim Brennan 6 May 2009 at 9:12 am

    I second this and want to add only a comment and a question.

    The comment begins with observing that many contributors to this Symposium have emphasized the role of error costs in constructing standards for burdens of proof in Section 2 cases. Bruce’s comment brings to light another dimension, which is whether investment to reduce error costs through by producing more precise cost and benefit estimates is worth making. One could ask why the Section 2 report and other “Guideline” documents simply say “If a practice increases consumer/total welfare, it escapes liability; if not, it should be blocked.” Beyond some point, trying to get it right isn’t worth the cost. As one somewhat skeptical of the ability of empirical economics to settle empirical questions, I’m an advocate of more use of “bright line” rules. I say this recognizing explicitly something that Bruce doesn’t mention–that a greater use of bright line rules could be consistent with excessive enforcement as well as reducing it.

    The related question is whether anyone knows of a single-firm case where the decision turned on more than a qualitative comparison, e.g., “disproportionate to benefits.” Is there one where quantitative comparison of costs and benefits, e.g., that market power would cost X but the efficiencies are (only) Y, and thus the practice should be accepted (blocked)? I’ve seen analyses of this in merger cases, but not in single-firm cases. The question also pertains to the “rule of reason” invitation the Supreme Court offered for RPM cases in Leegin, although I realize that may be off-topic. Just curious.