Too Big To Fail as an Antitrust Concept

Josh Wright —  22 July 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.

6 responses to Too Big To Fail as an Antitrust Concept


    I’m not sure why you write “certainly.” To the contrary, the adoption of economics into antitrust over the last 30 years (and the increase in knowledge in antitrust economics generally) has been a wonderful development.

    One should not conflate failures in macroeconomics or to explain the current financial crisis with a general failure of all economic disciplines. An objective evaluation of the track record of antitrust economics over a 30-40 year span, I think, would show dramatic advances and (while not without its problems!) some cause for optimism as well.


    Certainly the last 30 years of economic theory haven’t given us much to be optimistic about.


    The critique is not that systemic risk is not a real phenomenon, or even that it might not be created by particular mergers and acquisitions. Its that we don’t know it when we see it, and whatever it is, don’t have a theory of it than can be operationalized and injected into antitrust without undermining much the progress of the last 30 years in developing a coherent economic approach.


    I agree if “too big too fail” means what it sounds like it means — i.e., that it was the scale of the institutions itself that posed the threat to the system.

    But if “too big too fail” refers more generally to the creation of systemic risk, then I think there is a more interesting argument. Highly correlated decisionmaking seems to have been at least part of the cause for the dramatic increase in volatility and rapid unwind.

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