The Quiet Revolution in U.S. Antitrust Law

In this paper, I report on a series of recent decisions in antitrust cases by the U.S. Supreme Court. While each decision, read separately, may be only of moderate interest (even to a U.S. audience), the slate of decisions, looked at in its entirety, conveys a significant message, and one that may have meaning for scholars and practitioners in Australia and other jurisdictions outside the U.S. I would suggest that a quiet revolution is occurring in which the arguments economists have been making for nearly fifty years have suddenly been embraced by both the left and the right on the Court. The revolution is not yet complete; there is still substantial tidying up to do. But it will not take long before the entire corpus of antitrust has been transformed to fit the consumer welfare model with the added feature that it has been tailored to a world in which general purpose federal judges and lay juries (unless put on a very tight leash) can make mistakes which not merely can result in an injustice in the particular matter under litigation, but also can have significant dampening effects on the willingness of large, efficient firms to use their efficiency to compete vigorously. The fact that the law is catching up to a body of defendant-friendly economic theory that is fifty years old at about the same time that economic theory has begun to move in a direction that is more plaintiff-friendly is an ironic footnote to the story

Anti-Trust and Economic Theory: Some Observations from the US Experience

Recent developments in US anti-trust can be characterised as reflecting the uneasy interaction of two quite separate phenomena: first, the increased emphasis on economic analysis as the overriding organising principle of anti-trust policy and on economic efficiency as the primary (perhaps only) relevant goal for anti-trust; second, the long-standing reluctance of the federal judiciary to involve itself in any substantive economic analysis, and the preference, instead, for simple rules of thumb or ‘pigeon holes’ to sort out lawful from unlawful conduct. The result has been that while economics has played a major role, it has not influenced American anti-trust as thoroughly or as uniformly as might have been imagined; rather the extent and the nature of its influence have depended on the degree to which the relevant economics could be reduced to the kind of simple rules or pigeon holes that the judiciary favours. The present paper will illustrate that theme, first by reporting on the two developments separately and then by illustrating their joint influence with reference to two important areas of American anti-trust: predatory conduct and so-called vertical restraints. Finally, a contrast will be made between judicial development in those two areas and recent American merger policy which, it is argued, is carried out largely independently of the judiciary, and hence the opportunities for economics to influence the process are less inhibited by the judicial reluctance to undertake extensive economic analysis

Horizontal Agreements: Concept and Proof

It is well established that, absent some very special circumstances, agreements on price or certain other terms of trade by otherwise competing entities (i.e., horizontal agreements ) are unlawful per se under the Sherman Act. In practical effect, once the fact of the horizontal agreement has been established, an adverse impact on competition is presumed, and therefore that the plaintiff is spared the burden of proving such an impact. The principal task for plaintiffs in such cases, therefore, is establishing the existence of an agreement. In the ideal world (from plaintiffs\u27 perspective), there would be hard evidence of a formal agreement. By formal agreement, I mean that the parties actually met or otherwise explicitly communicated agreement on a course of action, and by hard evidence, I mean that there is testimony from a live witness present when the communication occurred, a video or audio recording of the communication, or a document created by one of more of the parties that documents the fact of the agreement. Of course, the world is not always ideal and most of the litigated cases involve situations in which there is no hard evidence of a formal agreement. In such cases, the plaintiff is forced to ask the court to infer an agreement from circumstantial evidence. However, as we shall see, what makes this task difficult for the plaintiff is that it may involve some complex combination of a detective story (what actually happened?), where economic analysis is often an essential ingredient, and a theoretical legal argument (does what happened constitute an unlawful agreement?). It is the possibility of this complex combination of economic evidence and legal theory that also poses challenges for the court, whether in fashioning instructions for the jury or in ruling on motions (typically by defendants) for summary judgment, directed verdict, judgment notwithstanding the verdict and, most recently, motions to dismiss the complaint for failure to state a claim. In what follows, I attempt to identify the challenges and to explain when and how economic analysis may be of assistance, but at the same time, identifying areas where the principal concerns are legal rather than economic, i.e., where legal creativity may be required for an effective solution. In that vein, the article will discuss the concept of facilitating practices and assess whether the concept may be useful in filling an important gap in the coverage of the Sherman Act

Production, Price, and Inventory Theory

This paper is an attempt to derive empirically testable hypotheses regarding the principal determinants of firms\u27 decisions on production, price, and finished goods inventory. The general approach to the problem is that many of the same factors which affect the optimal value for one variable will also influence decisions on the other two, and that a proper model must take into account the interdependence of these variables and the simultaneous nature of the decisions involving them. This is in contrast to literature on the theory of inventories (see Paul Darling and Michael Lovell) in which the firm is assumed to determine the optimal level of inventories with the rate of production taken as given and with price held constant. Similarly there are theories of price formation (see Otto Eckstein and Gary Fromm) in which the rate of production is assumed to have been determined previously, and in which the level of inventories is often ignored entirely. The present paper will attempt to present an integrated model of firm behavior in which decisions on all relevant variables are assumed to result from a single optimization process. A principal distinction between this study and previous work in this area (see Gerald Childs and Charles Holt) is the inclusion of price as one of the decision variables. In the past the assumption has been made that price is fixed and therefore that quantity demanded is a datum to the firm. In anything but a purely competitive model, however, the firm does exercise some control over price. The rational firm would use its current pricing policy to select the specific price-quantity combination on the demand curve that best contributes to its overall scheme of profit maximization. Thus the firm whose demand curve is not constant over time but fluctuates from period to period on a random and/or seasonal basis might view price adjustments as one means of achieving production stabilization. If this were so we might expect to find that an increase in demand would be met by continuing to produce at or near the previous rate and raising price to clear the market. More realistically, the entire kit of adjustment tools—inventory, backlog, and price—would be used in some combination to absorb all or part of the increased demand, the specific result depending not only on the particular cost structure assumed, but also on the firm\u27s estimates of what demand will be for several periods hence. The important point is that price must certainly be included as one of these tools. In the remainder of the paper we construct a model which includes many of the variables which are important at the individual firm level, and which treats decisions regarding those variables as being essentially interdependent. The subsequent section discusses the behavioral assumptions which underlie the model and expresses the model in mathematical form. The first-order conditions for maximizing expected profits generate a set of linear decision rules for production, price, and finished goods inventory. On the assumption that firms do attempt to maximize expected profits, these decision rules are suitable for empirical investigation with the appropriate data. In Section II, the model is solved numerically with representative cost parameters. The resulting decision rule coefficients provide predictions regarding the actual regression equations which should be fulfilled if the model accurately reflects the working of the real world. Finally, in Section III, the regressions are performed on two industry groups, and the results compared with the predictions

The FTC and Pricing: Of Predation and Signaling

This paper summarizes and comments on two recent FTC cases. The first case involved accusations of predatory pricing against Borden, the manufacturer of ReaLemon, the dominant brand of reconstituted lemon juice. The second involved price-signaling and other so-called facilitating practices by the four makers of lead-based antiknock compounds

Anti-competitive Agreements: The Meaning of “Agreement”

The trend towards convergence of substantive antitrust doctrine means that most jurisdictions now condemn agreements among competitors that fix prices. But that same convergence means that those same jurisdictions must wrestle with the problem of how to establish the existence of an agreement, especially in an oligopolistic industry where high prices could, at least in theory, be the result simply of oligopolistic interdependence. Do we condemn such interdependence? Do we ignore it and require an explicit agreement? Or is there some middle ground? This chapter explores how the U.S. and, to a lesser extent, the EU, have approached the problem of dealing with a cartel when there is no hard evidence of an explicit agreement. The first option is to try to prove the existence of an explicit agreement through circumstantial evidence; a second is to relax somewhat the requirement that there be an explicit agreement. The effort to find the perfect solution continues

The FTC and Pricing: Of Predation and Signaling

This paper summarizes and comments on two recent FTC cases. The first case involved accusations of predatory pricing against Borden, the manufacturer of ReaLemon, the dominant brand of reconstituted lemon juice. The second involved price-signaling and other so-called facilitating practices by the four makers of lead-based antiknock compounds