ANTITRUST HARM AND CAUSATION.

• Author: Hovenkamp, Herbert

TABLE OF CONTENTS INTRODUCTION I. ANTITRUST WELFARE AND HARM A. The Blackboard Economics of Welfare Tradeoff Models B. The Williamson/Bork Welfare Tradeoff Model C. Welfare Tradeoffs in the Statutory Language and History D. Producer Profits as Consumer Welfare E. Identifying Antitrust Harm F. Measuring Relevant Output G. Alternatives to Output H. When Consumer Welfare and Output Diverge I. Antitrust Welfare Tests and Protection of Labor J. Economic Welfare Tradeoffs and Bork's Switch K. The Measurement of Efficiencies II. CAUSATION AND REMEDIES A. Causation in the Antitrust Remedial Provisions B. Restraints on Innovation: Public v. Private Enforcement C. The Relationship of Violation, Causation, and Remedy CONCLUSION INTRODUCTION

This article addresses a question at the core of antitrust enforcement: how should government enforcers or other plaintiffs identify and address harm from antitrust violations? The inquiry naturally breaks into three issues: proof of the kind of harm that antitrust law requires, proof of causation, and formulation of effective remedies. The best criterion for assessing harm is likely or reasonably anticipated market output effects. Robert Bork and the neoliberal critique of antitrust that was prominent in the 1980s and 1990s undermined this view and did severe damage to antitrust policy by equating "consumer welfare" with actions that led to lower output and higher prices. Antitrust law is still recovering from that misstep.

The second issue, the required proof of causation, depends mainly on two things: the identity of the enforcer and the remedy that the plaintiff is seeking. (1) On the enforcer, the statutes settle the issue, requiring proof of causation for private plaintiffs but in most cases not for the government. (2) On the remedy, the statutes say almost nothing. As a policy matter, however, a simple injunction requires the least strenuous proof of causation, particularly where the cost of an erroneous injunction is not very high. By contrast, structural relief is the riskiest, has outcomes that can be difficult to predict, and high error costs. It requires proof not only that harm was caused by anticompetitive conduct, but also that nonstructural relief would be inadequate. (3)

For public enforcers such as the Antitrust Division or the Federal Trade Commission, enforcement involves both the condemnation of past harm and the management of future risks. The concern, as in most areas of public enforcement, is with behavior that is likely to have harmful anticompetitive consequences unless it is restrained. While a showing of actual harm can be important evidence, in most cases the public authorities need not show that harm has actually occurred, but only that the challenged conduct poses an unreasonable danger that it will occur.

By contrast, private enforcers operate under stricter causation standards that require an actual injury to the plaintiff itself for damages actions, or individually threatened injury for an injunction. These differences are explicit in the various federal statutes that authorize enforcement actions. (4) They are also similar to the division of requirements in the legal system generally, particularly between public criminal law and the private law of tortious conduct.

1. ANTITRUST WELFARE AND HARM

   1. The Blackboard Economics of Welfare Tradeoff Models

      Many practices that are challenged under the antitrust laws have effects that can plausibly pull in two directions. On the one hand, they can enhance market power or facilitate its exercise, thus reducing output and harming consumers, labor and other input suppliers, and sometimes others. On the other hand, they can produce efficiencies that benefit consumers as well as the suppliers of labor and other inputs. If a practice plausibly produces only harmful effects but is unlikely to offer benefits, then antitrust law condemns it with only modest analysis. This is true, for example, of naked price fixing or market division, which are then said to be illegal per se. (5) At the other extreme, if a practice is highly unlikely to facilitate the exercise of market power and has a serious potential for beneficial effects, then we can approve it with little analysis. In the middle are worrying cases where the effect of the restraint can go in either direction. These call for more searching inquiry under a rule of reason.

   2. The Williamson/Bork Welfare Tradeoff Model

      In 1968, Oliver Williamson proposed that we think of the offsetting effects in these difficult cases as components in what he called a "welfare tradeoff" model. (6) On the one hand, a practice might facilitate the creation of monopoly, resulting in a harm to consumers that he identified with the "deadweight loss" of monopoly. (7) On the other hand, the practice might also reduce costs, which is a social benefit. Theoretically one can measure both of these effects and trade them off against each other. We could declare a practice as either harmful or beneficial depending on which number is larger.

      In 1978, Robert H. Bork borrowed the idea of the welfare tradeoff and popularized it for use by antitrust lawyers, but he also renamed it the "consumer welfare" model. (8) This was a departure from Bork's previous position, which had seen high output as antitrust's principal goal. (9) Copying from Williamson, Bork illustrated his newly adopted welfare-tradeoff model with the figure below, which is taken straight from his book. (10)

      Bork hypothesized a merger, joint venture, or other practice that simultaneously increased the market power of its participants, producing the shaded deadweight loss area [A.sub.1]; but also "cost savings," or efficiencies, designated by shaded area [A.sub.2]. The unshaded square immediately above the A2 cost savings is a wealth transfer from consumers to producers. Consistent with neoclassical welfare economics generally, both Williamson and Bork deemed this white square to represent a "wash": it impoverished consumers but benefitted producers by the same amount and thus had no effect on overall welfare. Williamson's description of the wealth transfer as a wash was stated as an objection to critics who argued "that purchaser-interests and supplier-interests ought not to be weighted equally." (11) He simply observed that this transfer is "treated as a wash under the conventional welfare economics model." (12) On that proposition he was historically correct. The idea that pure wealth transfers should be treated as welfare neutral was a central premise of neoclassical welfare economics since the 1930s. (13)

      Bork's treatment, which was similar in most respects to Williamson's treatment, has been extremely influential among antitrust writers, cited more than 300 times in law review articles alone. (14) It has also been very controversial. People have firmly defended it, completely rejected it, or attempted to revise it.

      One thing that has been largely missing, however, is serious discussion of the tradeoff model's factual robustness. The question is a simple one: what are the circumstances in which a merger or joint venture produces effects that resemble those in the picture? Or is this drawing simply an example of something that Ronald Coase derisively called "blackboard economics"--a phenomenon that exists in an economist's classroom musings but cannot be found anywhere in the real world? (15)

      The real problem in Bork's figure is not the shaded deadweight loss triangle ([A.sub.1]), the cost savings rectangle ([A.sub.2]), or the unshaded neutral wealth transfer area. All three of these elements were well established in the economic literature. They have come up many times in discussions about the social cost of monopoly or about the magnitude and types of efficiency gains. Rather, the problem appears at the very bottom of Bork's figure, in the relationship between [O.sub.1] and [O.sub.2], which Bork did not separately mention and has received little discussion.

      [O.sub.1] in the figure is the output of the firms involved in this merger or joint venture prior to its formation. [O.sub.2] represents the output of these same firms after the venture has been formed or the merger has occurred. In Bork's figure, [O.sub.2] is roughly halfway between the Origin, or zero output point on the graph, and [O.sub.1]. That is, this particular merger or joint venture produced both consumer harm ([A.sub.1]) and offsetting cost savings ([A.sub.2]), but in the process it reduced the output of the firm or firms involved by roughly one-half. For example, prior to a merger Alpha & Beta may have made 700 units and 300 units, respectively, each in their own plants. After the merger, however, their combined output is reduced to 500 units.

      While the figure suggests a 50% output reduction, the actual amount depends on several assumptions. The relevant variables are the amount of market power both before and after the challenged restraint occurred, the magnitude of the efficiencies, and the slope and shape of the demand curve. I do not know why Bork drew the figure as he did. He could have drawn it any way he wanted because, after all, he was not building a real plant or creating a real merger or joint venture. He was simply pushing some chalk around on a blackboard.

      Nevertheless, a little reflection should have provoked this question: when in the real world does a merger or joint venture reduce a firm's output so significantly at the same time that it produces significant cost savings? In the figure, the output reduction is 50% and the cost savings appear to be in the neighborhood of one-third of the total costs of production. (16) Output prior to the merger or joint venture was at the competitive level. Although costs are lower after this event occurs, output has been reduced to a little more than one-third of the competitive level. (17)

      The most common efficiency associated with a firm's production changes is economies of scale. (18) Historically...