Archives For Structure–conduct–performance paradigm

I’ve just finished a draft of a paper for an upcoming conference on the Roberts Court’s business law decisions. Volokh blogger Jonathan Adler, who directs the Center for Business Law and Regulation at Case Western, is organizing the conference. The other presenters are Adam Pritchard from Michigan (covering the Court’s securities decisions), Brian Fitzpatrick from Vanderbilt (covering pleading standards), and Matt Bodie from St. Louis University (covering labor and employment). My paper discusses the Roberts Court’s antitrust decisions.

I am not the first to analyze the Roberts Court’s antitrust jurisprudence. Both Josh and Einer Elhauge have written terrific papers on the themes underlying the Court’s antitrust decisions. Josh has argued that the Court’s antitrust jurisprudence reflects Chicago School thinking; Elhauge contends that it’s more aligned with the Harvard School. While I’d probably side with Josh in that debate (mainly because I think the “new” Harvard School, having correctly jettisoned the old Structure-Conduct-Performance paradigm, moved so starkly in Chicago’s direction that it should really be called Chicago-Lite), I need not take sides. That’s because the unifying theme I identify in the Roberts Court’s antitrust decisions, one acknowledged by both Josh and Elhauge, is common to both the Chicago and Harvard schools. That theme is a recognition by the Court that antitrust is an inherently limited body of law that must be constrained in its reach — even to the point of allowing some undesirable conduct — if it is to do more good than harm.

Lots of folks are upset by the constraints the Roberts Court has imposed on antitrust. As Josh noted on this blog, Erwin Chemerinsky has complained that the Court’s antitrust decisions exemplify a “sharp turn to the right” and systematically “favor[] business over consumers.” Chemerinsky, of course, is no antitrust expert. But even well-respected members of the antitrust community have sounded a similar refrain. For example, William Kolasky, a former Deputy Assistant Attorney General in the Antitrust Division of the U.S. Department of Justice and an associate editor of the ABA’s Antitrust Magazine, recently (though before the Court’s most recent antitrust decision) wrote that “Our Supreme Court, especially under the leadership of Chief Justice John Roberts, seems equally intent on cutting back on private enforcement. … This record led Antitrust to ask in its last issue whether the Supreme Court’s recent antitrust decisions represent ‘The End of Antitrust as We Know It?'”

In my paper, “The Roberts Court and the Limits of Antitrust,” I argue that anti-consumer/pro-business/”radical shift” meme the Chemerinskies and Kolaskies of the world assert is wrong and reflects a fundamental misunderstanding of the inherent limits of the antitrust enterprise. Below the fold, I describe the paper. Continue Reading…

Simon Johnson argues that the conventional antitrust tools of Sherman Act are outdated and ill-equipped to deal with the power of big banks:

Why are these antitrust tools not used against today’s megabanks, which have become so powerful that they can sway legislation and regulation massively in their favor, while also receiving generous taxpayer-financed bailouts as needed?

The answer is that the kind of power that big banks wield today is very different from what was imagined by the Sherman Act’s drafters – or by the people who shaped its application in the early years of the twentieth century. The banks do not have monopoly pricing power in the traditional sense, and their market share – at the national level – is lower than what would trigger an antitrust investigation in the non-financial sectors.

Effective size caps on banks were imposed by the banking reforms of the 1930’s, and there was an effort to maintain such restrictions in the Riegle-Neal Act of 1994. But all of these limitations fell by the wayside during the wholesale deregulation of the past 15 years.

Now, however, a new form of antitrust arrives – in the form of the Kanjorski Amendment, whose language was embedded in the Dodd-Frank bill. Once the bill becomes law, federal regulators will have the right and the responsibility to limit the scope of big banks and, as necessary, break them up when they pose a “grave risk” to financial stability.

This is not a theoretical possibility – such risks manifested themselves quite clearly in late 2008 and into early 2009. It remains uncertain, of course, whether the regulators would actually take such steps. But, as Representative Paul Kanjorski, the main force behind the provision, recently put it, “The key lesson of the last decade is that financial regulators must use their powers, rather than coddle industry interests.”

And Kanjorski probably is right that not much would be required. “If just one regulator uses these extraordinary powers [to break up too-big-to-fail banks] just once,” he says, “it will send a powerful message,” one that would “significantly reform how all financial services firms behave forever more.”

Regulators can do a great deal, but they need political direction from the highest level in order to make genuine progress. Teddy Roosevelt, of course, preferred to “Speak softly and carry a big stick.” The Kanjorski Amendment is a very big stick. Who will pick it up?

Geoff and I have both offered some skeptical thoughts on introducing too big to fail as an antitrust concept.  For example, Geoff responded to an earlier Johnson column and linked Johnson’s call “new antitrust” to the “old antitrust” of the structure-conduct-performance paradigm — which nearly all modern antitrust scholars agree is not a great predictor of economic performance or consumer welfare.  Geoff also made the important point that, while Johnson is is pretty confident in his assumption that hitting stuff with the “very big stick” of the Kanjorski amendment will make us better off (apparently no matter who does the hitting, so long as the target is big banks), there are certainly social costs to this approach.  As Geoff noted, encouraging “antitrust investigations with the intention of developing new theories of antitrust that can justify the a priori policy conclusion that banks are violating the antitrust laws” is not sound policy advice — especially coming from an economist.

Also, I have no idea why Johnson would advocate a major antitrust investigation of the banks — while apparently recognizing that the banks conduct does not violate current law.  It is one thing to call for a change in current law to make illegal things that are currently legal.  But what, exactly, are the gains from announcing to the world that the antitrust enforcers are willing and able to threaten prosecution of conduct they know falls outside the scope of that prohibited by the Sherman Act?  These laws apply to non-financial firms as well.  The chilling effects of such an approach to law enforcement would be significant.

I’ve also been critical of 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.

The debate about too big to fail as an antitrust metric has much in common with the case against the expansion of Section 5 as articulated by some of its proponents.

Simon Johnson is at it again, advocating the use of antitrust to break up the banks because they are, you know, big, and antitrust is about busting up big companies, right?

As Josh suggested back in July, the idea is gaining momentum, it seems.  The Financial Times is also pushing the idea.  What’s remarkable about both the FT’s and Simon Johnson’s “analysis” is that it is actually largely devoid of modern antitrust analysis.  It reflects the outdated, non-economic (dare I say anti-economic?) logic of the structure-conduct-performance paradigm of the 1960s.  Here, for example, is the FT:

The issue is not just market share in deposits, which attracts public attention. Many corners of the financial services market with a lower profile are highly concentrated and highly profitable.

Concentrated markets can still be competitive and high profits are not in themselves proof of anti-competitive behaviour. Market concentration is high in many industries – including new areas of the economy such as web search.

Anti-trust investigation would focus only on areas where critics allege anti-competitive behaviour, for example, the puzzle of why investment banks charge standard rates to raise equity capital for businesses. But even where there is no suspicion of collusion, regulators could examine market structures and practices that create barriers to entry.

Or, the administration could simply float the idea of a wide-ranging push on competition in banking and use it to gain leverage over big banks on issues such as regulatory reform and whether or not they pass on the cost of the financial levy to their customers.

So, yes, there is a nod (“concentrated markets can still be competitive . . .”) toward recognition that Demsetz does, indeed, exist and he did write Industry Structure, Market Rivalry, and Public Policy in 1973.  But the thrust is pure SCP.

Here’s Johnson:

There are definite elements of oligopoly in wholesale markets, underwriting new issues, and mergers and acquisitions both in the United States and around the world. This is part of the explanation for very high profits in banks — particularly big banks — over the past decade.

The question becomes: Is there evidence that our leading banks have used their pricing power or other aspects of their market muscle to keep out competition or otherwise distort behavior in very profitable arenas, like over-the-counter derivatives?

I don’t even know what that means:  “pricing power or other aspects of their market muscle to keep out competition?” Huh? It’s just hand waving.  And my favorite part:

We may also need new theories of antitrust.

Sure. Why not? Here “new” seems to mean “old,” but by all means we should launch antitrust investigations with the intention of developing new theories of antitrust that can justify the a priori policy conclusion that banks are violating the antitrust laws.  That’s some sound policy advice from the IMF’s former chief economist.

His “analysis” has not changed, as far as I can tell, since the last time he advocated bank busting, so I can hardly do better than repeat what Josh said back in July:

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.

This kind of hubris–that would throw out restrained and rigorous policy analysis precisely because it is restrained and rigorous and therefore not necessarily supportive of one’s preferred outcomes–is pernicious.  And, unfortunately, endemic.

Cardozo professor Dan Crane and I are living parallel lives. We both attended Wheaton College and the University of Chicago Law School (Dan was two years ahead of me). We began teaching at the same time. We both teach antitrust law and have written on bundled discounts. Like Josh, we’re both presenting at the DOJ/FTC hearings on single-firm conduct. And we’ve both recently written reviews of Herbert Hovenkamp’s terrific new book, The Antitrust Enterprise: Principle and Execution. Dan’s review, forthcoming in Michigan Law Review, is entitled Antitrust Modesty. Mine, forthcoming in Texas Law Review, is called Tweaking Antitrust’s Business Model.

As both titles indicate, Hovenkamp’s book does not call for radical change to existing antitrust rules. In that sense, the book differs from the famous antitrust expositions by Robert Bork (The Antitrust Paradox, 1978) and Richard Posner (Antitrust Law: An Economic Perspective, 1976). The difference in tone, though, does not reflect a difference in underlying philosophy. Like his Chicagoan predecessors, Hovenkamp rejects the Warren Court-era’s focus on protecting competitors rather than competition, and he defines “competition” in a manner that focuses not on the number of firms in a market but on the degree to which the market generates low prices, high output, and innovation. He maintains that

Antitrust is a defensible enterprise only if intervention into the market is economically justified. That entails that the market be “bigger” in some sense as a result of the intervention—whether “bigger” is measured by higher output, improved quality, lower prices, or more innovation. Furthermore, the increase must be enough to justify the high cost of operating the antitrust machinery.

Hovenkamp can afford to be “modest” and call for a mere “tweaking” of antitrust because the Chicago School largely succeeded in transforming antitrust doctrine. It is therefore curious that Hovenkamp takes pains to distance himself from the Chicago School, ultimately aligning himself with the competing Harvard School. Continue Reading…