Optimal Antitrust Penalties and Competitors\u27 Injury

Herbert Hovenkamp\u27s primary target in Antitrust\u27s Protected Classes is the Chicago School\u27s optimal deterrence model of antitrust penalties. Substantive antitrust rules are often overinclusive prohibiting practices even when they are efficient - in order to avoid the costs of error associated with a more case-specific rule. The optimal deterrence model attempts to correct for this overinclusiveness by setting the penalty for antitrust violations at a level just sufficient to deter only inefficient instances of the violation. The task is complicated by, among other things, the myriad effects antitrust offenses can have on economic actors: allocative inefficiencies and efficiencies (the losses and gains, respectively, in value to consumers from reduced or increased output of a product); productive inefficiencies and efficiencies (cost increases or cost savings in production of a product); and wealth transfers from one economic actor to another. William Landes distills the analysis into a formula: the penalty should be equal to the net harm to everyone but the offender. For cartels, the optimal penalty would be equal to the deadweight welfare loss plus the wealth transfer to the cartel from purchasers; this penalty would deter only those instances of the offense in which the deadweight welfare loss exceeded any savings in production costs to the cartel. Since the Sylvania decision, courts have increasingly turned to economic models - particularly those of the Chicago School - to separate monopolistic from competitive harms. By formalizing the effects of antitrust practices on efficiency and on the wealth of various economic actors, the models guide the formulation of substantive rules, the application of rules to particular practices, and the definition of compensable harms. Hovenkamp\u27s notion of WL3 losses offers no such guidance. In the next Part, I argue that the concept of WL3 losses misconceives the socia1 costs of monopolistic exclusion and fails to provide a theoretical link between the competitor\u27s harm and the monopolistic outpμt restriction. In Part III, I argue that competitors\u27 harms should in some instances be compensable as antitrust damages - not because they represent social costs in themselves, but because they can be proxies for the demonstrable costs of monopoly. Competitors are not, I argue, a protected class; their right to recover is purely instrumental to the ultimate standard of consumer welfare

Thurman Arnold\u27s International Antitrust Legacy

In the decades before the World War II, a new economic philosophy favoring cooperation among competitors challenged the competitive model embodied in the antitrust laws. In the United States, the cooperative model had some successes in, for example, the Webb Pomerene Act of 1918, the associational activities of the 1920s, and the NRA codes of the 1930s. And, of course, antitrust law itself, after some false starts, came to recognize that some forms of cooperation are necessary for efficient production. Outside the United States, however, especially in the economic turbulence following World War I, policymakers adopted such an extreme form of the cooperative model that they not only tolerated but actively assisted the formation and operation of international cartels as means of organizing production. Wyatt Wells\u27s fascinating study shows that America\u27s efforts to project its antitrust policies internationally during and after World War II played a critical role in the destruction of this cartel ideal, particularly in Western Europe. This ideological transformation had lasting effects for the development of the world economy

Communication and Concerted Action

It is a familiar scenario in U.S. antitrust litigation: The plaintiffs allege that a pattern of identical pricing (or refusals to deal) is concerted and therefore per se illegal; the defendant responds that the practice is merely consciously parallel or interdependent and therefore legal. Under U.S. law, to avoid summary judgment or judgment as a matter of law, a plaintiff must produce a plus factor, evidence that tends to exclude the possibility that the defendants\u27 actions were merely interdependent. Courts have identified various plus factors-for example, evidence that the alleged conduct was against the defendant\u27s interest unless it was pursuant to an agreement-but they have been notably vague about what exactly constitutes concerted action. Obviously, the Sherman Act does not require the plaintiff to prove that the defendants formed a legally enforceable contract-the Sherman Act, after all, makes agreements illegal and therefore unenforceable. But beyond that, the law tells us little. Courts still quote the Supreme Court\u27s sixty-year-old formulation that a Sherman Act agreement requires only a unity of purpose, a common design and understanding, or a meeting of the minds. Unfortunately, however, this language could easily be interpreted to condemn conscious parallelism. In this article, I argue that concerted action should be defined to require communication among rivals. I begin by describing the development of the distinction in law and theory between consciously parallel and concerted action. I then show that the received definitions of concerted action leave courts and especially juries with inadequate guidance. Economic expert testimony does not fill the void, because economic theory does not distinguish concerted and interdependent conduct. I propose, building on the recent work of Oliver Black, that the distinguishing characteristic of concerted action is communication among rivals, not only of intentions, but also of the firms\u27 reliance on their rivals\u27 actions in choosing a common course of action. I argue that the proposed definition has implications for U.S. antitrust law. First, it is at least consistent with the older Supreme Court cases. Second, it helps us evaluate whether various public announcements or private communications justify the inference that parallel conduct is concerted. Finally, courts applying the standard plus-factors analysis in recent years have implicitly required something like the communications in the proposed definition, even though they continue nominally to apply the received nebulous definitions. Including communication in the definition of concerted action would have limited consequences. Communication is itself an ambiguous term that requires clarification. Even if it can be defined with reasonable clarity, courts will still be required to determine whether proven communications satisfy the definition. Moreover, plaintiffs would not necessarily be required to produce direct evidence of communications that meet the definition, so long as they can offer circumstantial evidence that would permit an inference that the requisite communications have occurred. Thus, the problem of inferring an agreement from ambiguous evidence, including communications of various kinds, will remain under the proposal. But at least courts, juries, and litigants will know better what they are supposed to be inferring

A Neo-Chicago Approach to Concerted Action

In this article, I offer an approach to concerted action that builds on traditional Chicago School analyses of the issue, but adds a focus on the role of communication. Chicago scholars uniformly identify cartels as the primary target of antitrust enforcement. They have also established much of the framework within which courts and economists analyze concerted action. George Stigler’s seminal theory of oligopoly, which sought to identify the determinants of effective collusion, has spawned an enormous literature in game theory that models the pricing behavior of oligopolists. Richard Posner’s early analysis of tacit collusion - rivals’ coordination of noncompetitive pricing without express communication - extended Stigler’s analysis to the domain of law and policy. His approach to oligopoly pricing drew on economic theory and evidence both to define tacit collusion as concerted action and to identify structural and behavioral characteristics of markets that suggested its presence. I argue that Posner’s approach, refocused on the role of communication, provides the most promising way forward in the analysis of concerted action. After recounting the history of the Chicago School’s analysis of concerted action, I propose a modified definition of concerted action and suggest how the change might affect the search for instances of concerted action. I argue that Section 1 does not reach tacit collusion, but neither does it require a verbal agreement; instead, actions are concerted if rivals coordinate them in part by communicating their intentions. I argue that this focus on communicative concerted action, despite its departure from Posner’s legal position, is consistent with the Chicago tradition, particularly error cost analysis. Its neo-Chicago character lies in its reliance on the most recent economic literature on the role of communication in collusion. In the last part of the article, I examine a small but important subset of that literature: studies of how real-world cartels use communication and facilitating practices to achieve their aims. Based on these studies, I suggest how plaintiffs and enforcement agencies might discover concerted action by examining changing patterns in the use of facilitating practices

Communication and Concerted Action

It is a familiar scenario in U.S. antitrust litigation: The plaintiffs allege that a pattern of identical pricing (or refusals to deal) is concerted and therefore per se illegal; the defendant responds that the practice is merely consciously parallel or interdependent and therefore legal. Under U.S. law, to avoid summary judgment or judgment as a matter of law, a plaintiff must produce a plus factor, evidence that tends to exclude the possibility that the defendants\u27 actions were merely interdependent. Courts have identified various plus factors -- for example, evidence that the alleged conduct was against the defendant\u27s interest unless it was pursuant to an agreement -- but they have been notably vague about what exactly constitutes concerted action. Obviously, the Sherman Act does not require the plaintiff to prove that the defendants formed a legally enforceable contract -- the Sherman Act, after all, makes agreements illegal and therefore unenforceable. But beyond that, the law tells us little. Courts still quote the Supreme Court\u27s sixty-year-old formulation that a Sherman Act agreement requires only a unity of purpose, a common design and understanding, or a meeting of the minds. Unfortunately, however, this language could easily be interpreted to condemn conscious parallelism. In this article, I argue that concerted action should be defined to require communication among rivals. I begin by describing the development of the distinction in law and theory between consciously parallel and concerted action. I then show that the received definitions of concerted action leave courts and especially juries with inadequate guidance. Economic expert testimony does not fill the void, because economic theory does not distinguish concerted and interdependent conduct. I propose, building on the recent work of Oliver Black, that the distinguishing characteristic of concerted action is communication among rivals, not only of intentions, but also of the firms\u27 reliance on their rivals\u27 actions in choosing a common course of action. I argue that the proposed definition has implications for U.S. antitrust law. First, it is at least consistent with the older Supreme Court cases. Second, it helps us evaluate whether various public announcements or private communications justify the inference that parallel conduct is concerted. Finally, courts applying the standard plus-factors analysis in recent years have implicitly required something like the communications in the proposed definition, even though they continue nominally to apply the received nebulous definitions. Including communication in the definition of concerted action would have limited consequences. Communication is itself an ambiguous term that requires clarification. Even if it can be defined with reasonable clarity, courts will still be required to determine whether proven communications satisfy the definition. Moreover, plaintiffs would not necessarily be required to produce direct evidence of communications that meet the definition, so long as they can offer circumstantial evidence that would permit an inference that the requisite communications have occurred. Thus, the problem of inferring an agreement from ambiguous evidence, including communications of various kinds, will remain under the proposal. But at least courts, juries, and litigants will know better what they are supposed to be inferring