This is an unsettling time for those who support rigorous economic analysis in antitrust cases. Over the past four decades, numerous assumptions underlying the operation of free markets had developed to the point of being virtually unassailable. Rational profit-maximizing behavior on the part of many leads to optimal, self-sustaining equilibria. Markets self-correct, such that many (indeed most) distortions will be ephemeral. Financial markets are efficient, which means that even large-scale entry in capital intensive markets can safely be presumed where supracompetitive prices await. In cases of uncertainty, enforcers should err on the side of false negatives by presuming the existence of competitive markets. In short, the free market works. Certain of these assumptions now lie in ruins. For the antitrust proponent who developed his thinking based on such principles, the global market meltdown poses an unprecedented predicament.
Yet, when all the dust has settled, it is not clear what the objective lessons of the crisis will be for competition policy. The global recession certainly teaches that assumptions of efficiency are misplaced where systemic risk and uncertainty pervade the marketplace. It questions the wisdom of a financial system that becomes concentrated to a point where the failure of one key player triggers the collapse of others. It reveals that monetary policy alone cannot control all macroeconomic fluctuations. It raises fundamental questions about the role of regulation, not just in terms of domestic scope, but in efficacy and global reach too. But for all this, it does not say much about antitrust analysis.
Many have missed this point, and missed badly. Competition enforcers, politicians, and commentators are falling prey to an alluring, yet simplistic and myopic view. They posit that the economic dogma that ushered in today's extraordinary global recession is inextricably linked to the tenets of price theory that inform antitrust doctrine. They are mistaken.
This Article explores the normative repercussions of the global recession for competition policy and explains that minimal readjustment is counseled under the rubric of economics. Nevertheless, past shifts in substantive policy have coincided with larger changes in political thinking. The crisis has undermined U.S. faith in the free market, a development that portends a deviation from the law's cautious approach to economic conduct of indeterminate long-run competitive effect. Such a shift is difficult to justify, but is likely inevitable.
INTRODUCTION I. FREE-MARKET ECONOMICS AND THE EVOLUTION OF MODERN ANTITRUST DOCTRINE A. Antitrust Without Economics? The Sherman Act from Inception to the Warren Court B. A Price-Theoretic Approach to Competition Law C. Chicago and the Deregulatory Movement II. CHICAGO AND THE GLOBAL FINANCIAL CRISIS A. Chicago as a False Ideology? B. The Causes of the Crisis Have Little to Do with Price Theory in Antitrust Markets 1. Concerted Conduct 2. Merger Policy 3. Unilateral Behavior by the Dominant Firm 4. Political Repercussions CONCLUSION INTRODUCTION
The collapse of the global financial system in 2008 and the ensuing recession through 2009 raise fundamental questions about the future of free-market economics. Although macro-economic policy and regulation of the financial sector are the most obvious candidates for revision in light of the meltdown, antitrust law--given its explicit reliance on price theory--may also be implicated. This Article surveys the worst recession in a generation and explores the normative insights the crisis provides for proper competition policy.
The market meltdown that began in the U.S. housing sector and tore through the world economy has laid bare a number of economic principles. In particular, the deregulatory movement that swept through myriad industries was premised on the notion that market forces produce results superior to government intervention. This movement relied on the assumption that rational choice theory fairly encapsulates real-world behavior, such that companies and consumers act in their best interests. So informed, this theory suggested that markets self-correct, economic distortions are ephemeral and rational behavior produces desirable outcomes. In light of the calamitous global recession, certain of these assumptions were obviously misplaced.
Assumptions of capital-market efficiency, rational behavior, and market self-correction play at least as central a role in antitrust jurisprudence as they played in regulatory policy toward financial markets. If these assumptions have been at least partially discredited in the latter setting, what does that say about the former?
Despite a common reliance on free-market forces, the principles of economics that underlie competition law are highly distinct from the norms that justified deregulation in the financial sector. Antitrust law understands the market to self-correct where monopoly conditions attract capital, thus yielding competition, lower prices, and greater social welfare. (1) In contrast, in the financial sector, the incentive to maximize profits spurs excessive leverage, creating systemic risk, which triggers the need for regulation. Thus, the market failure in the banking industry need not reveal an intellectual frailty underlying antitrust jurisprudence. Were one to infer, however, that the market failure associated with the credit crisis has normative repercussions for the faith properly placed in capitalist forces generally, one might reasonably revisit substantive antitrust doctrine. This Article explores whether we should in fact interpret the recession in this manner.
Over the past several decades, competition regimes of ever-growing sophistication have played an important role in the regulation of Western economies. (2) In the United States, the Chicago and post-Chicago Schools of thought have placed price theory at the heart of substantive policy. (3) U.S. courts and enforcement agencies have developed an intricate body of jurisprudence that arguably renders the United States the world's most mature antitrust jurisdiction. (4) The European Union has slowly, but inexorably, followed suit, adopting the consumer welfare paradigm and implementing rules of growing economic sophistication. (5) Substantive interjurisdictional differences remain, of course, especially with respect to the question of the proper level of constraints to be placed on dominant firms. (6) Despite these differences, a belief in the power of economic analysis has largely transcended national borders. (7)
Although the global financial meltdown demonstrates that unqualified support for the free market was dogmatic, (8) it has revealed no systemic market failure that suggests or supports a shift in substantive antitrust policy. Competition law is concerned with the tendency of capital to flow to its highest-value uses. This phenomenon emanates from firms" incentive to maximize profits. If the banking crisis has taught us anything, it is that financial actors are myopic in their avid pursuit of short-run gains. This practice highlights the presence of incentives that justify the pre-crisis approach to competition law.
Unfortunately, it seems clear that the U.S. and EU authorities are using the crisis as a launching pad for far more aggressive enforcement against unilateral behavior and merger activity. (9) Coupled with the possible expansion of Section 5 beyond the traditional scope of antitrust law, (10) it appears that the United States is headed on an interventionist path more akin to Brussels than Chicago. (11)
America's two enforcement agencies have gone so far as to speak of market concentration itself as an appropriate object of antitrust condemnation, even absent price effects. (12) This view, most prevalent during the Warren Court era, has been resoundingly rejected by U.S. courts for more than thirty years. (13) Long-run efficiency is the exclusive goal of modern competition enforcement. (14) Without the guiding norm of efficiency, antitrust policy would become untethered from any cognizable policy foundation. (15) It would become a malleable tool subject to the idiosyncratic whim of whoever wished to enforce it. (16) Courts would lack a well-defined standard by which to judge challenged conduct.
This Article explores the events leading up to the global recession, construing them in light of the revolutionary political and economic factors that yielded dramatic historical change in antitrust doctrine. It also explains the specific lessons of the crisis for modern principles of competition law. Clearly, the global recession has created a challenge for antitrust policy, but a critical inquiry into the genuine lessons of the global credit crisis reveals that little alteration is needed. An economically informed body of law focused purely on maximizing dynamic and allocative efficiency is necessary to help propel the economy back into recovery and sustainable growth.
The global crisis, properly construed, does have significant repercussions for the larger political landscape within which competition law is defined and informed. Revolutionary moments in the development of this area of law have been characterized by a broader socioeconomic context that predisposes the courts, the public, and academics toward adopting an alternative view. From the 1940s through the 1960s, for instance, the global marketplace was characterized by relatively weak competition, which surely tempered the need for the U.S. economy to emphasize efficiency. Instead, U.S. competition law reflected populist goals that included the dispersion of economic power and the protection of commercial liberty. In the 1980s, when the law evolved to reflect principles of economic efficiency, the global economy had become far more competitive. In this setting, an efficiency-based approach to antitrust policy made far more sense. More important still, the...