Too Big To Fail as an Antitrust Concept

Cite this Article
Joshua D. Wright, Too Big To Fail as an Antitrust Concept, Truth on the Market (July 22, 2009),

There has been a lot of talk recently about the possibility that lax antitrust gave rise to the financial crisis or that antitrust could be used as a proactive weapon to prevent mergers and acquisitions that would create entities “too big to fail.”    George Priest recently took AAG Varney to task for suggesting that there was a consensus amongst economists that lax antitrust contributed to the current financial situation.  Simon Johnson has been pushing the idea that antitrust is an appropriate tool for dealing with the type of financial risk imposed by businesses that become so large that their failure would cause substantial damage throughout the economy.  The idea might be catching on.  Frank Pasquale recently cited to Johnson’s work favorably.  The idea has also been favorably cited by Commissioner Rosch.

FWIW, I’m skeptical about the utility of introducing “too big to fail” as an antitrust concept.  Antitrust has come a long way since its economically unprincipled approach several decades ago to its current state.  It has done so largely by staying relatively hinged to microeconomics.  This approach has done antitrust well as evidenced by the evolution of the doctrine over the past 30 or so years.  We now have a substantial body of economic theory and empirical evidence that tells us quite a bit about sensible approaches to at least cartel and merger enforcement that are likely to help rather than harm consumers on net.  Injecting “too big to fail” as an antitrust concept whether under the Clayton Act or otherwise is not a minor tweak to the system.  Too big to fail is not an antitrust concept and attempts to operationalize it within the antitrust framework are likely to cause more harm than good by undermining the progress that has been made by sticking to a disciplined economic approach.  As I commented for a related story in The Deal, and consistent with some of my own research on economic education and complexity in antitrust cases,  “Consumer welfare is complicated enough” for judges and enforcement agencies as is.  But the threat is not just increasing the risk of errors associated with introducing this factor into the antitrust calculus, but also allowing it to substitute for and gradually subsume the economic approach which has served us well.

Obviously, the types of social costs associated with the risks of firms becoming “too big to fail” are real.  The argument is simply that antitrust is an inappropriate vehicle for addressing those problems and its use here would introduce problems of its own that I have not frequently seen discussed in this context.