Assessing the Revolution in Antitrust: New learning and evidence on market concentration do not justify a return to the dark ages of antitrust and regulation.

• Author: Carlton, Dennis W.
• Position: ANTITRUST

This essay discusses the major changes that have occurred in antitrust thinking and practice over the past half century. We approach the issue from somewhat varied backgrounds. Since the 1970s, Carlton has been a professor at the University of Chicago, been affiliated with the antitrust consulting firm Compass Lexecon, and been an adviser to the Federal Trade Commission and the Justice Department's Antitrust Division, where he also served as the deputy assistant attorney general. Heyer joined the Antitrust Division in 1982, where he served as its director of economics, and also served as deputy to the chief economist in the FTC's Bureau of Economics. Together, our experiences provide us with a useful vantage point from which to assess the antitrust revolution. It also means that certain of the cases and firms mentioned in this article are ones for which the authors may have worked or are working.

In this article, we evaluate the effects of the antitrust revolution and the growing role played by economic analysis. The next section describes what we believe that revolution was. Indeed, there were actually two revolutions. The first was the use and development by economists and other academics of economic insights to improve the understanding of market structure and firm behaviors. This included the increased application of advanced empirical techniques to large data sets. The second was a revolution in legal jurisprudence, as both the federal competition agencies and the courts increasingly accepted and relied on the insights emanating from the economic research.

The following section asks whether the revolution has been successful and whether, as some critics claim, it has gone too far. Our view is that it has generally been beneficial, though--as with any policy--it can be improved. After that, we discuss some of the hot issues in antitrust today and, in particular, what some critics say about the state of the revolution. The final section concludes with the hope that those wishing to turn back the clock to the antitrust and regulatory policies of 50 years ago more closely study that experience. Otherwise, they risk having its demonstrated deficiencies be repeated by throwing out the revolution's baby with the bathwater.

WHAT WAS THE REVOLUTION?

As just noted, there were really two antitrust revolutions. The first involved advances in economists' thinking about the effects of high and / or increasing concentration, the efficiency of business practices, the goals of antitrust, and the economic effects of regulation. We date this revolution as beginning in earnest in the 1950s and continuing to the present. The second had to do with the application of price theory and economic evidence to antitrust issues by federal agencies and the courts. We date this revolution as beginning about 1969 and continuing to the present. We use that year as a touchstone in telling our story.

Pre-1969 / The use of price theory and its application to antitrust cases was a hallmark of what came to be called "the Chicago School" of thought, dating back to University of Chicago economist Aaron Director in the 1950s. As applied by Director and many of his students, as well as by academics at other institutions, especially Harvard, economic analysis often revealed that the logic employed by courts in evaluating antitrust cases was flawed, frequently confusing harm to competitors with harm to competition and consumers.

The basic antitrust doctrine pre-1969 can somewhat crudely be summarized as the belief that "big is bad" and that constraints imposed upon some firms by others likely reduce competition and harm consumers. As Ronald Coase wryly observed in his 1972 article "Industrial Organization: A Proposal for Research," "One important result of this preoccupation with the monopoly problem is that if an economist finds something--a business practice of one sort or other--that he does not understand, he looks for a monopoly explanation. And as in this field we are very ignorant, the number of ununderstandable practices tends to be rather large, and the reliance on a monopoly explanation, frequent." Furthermore, the standards applied by courts in interpreting the antitrust laws contained a confusing and often internally inconsistent amalgam of objectives.

Regarding horizontal mergers, the U.S. Supreme Court in Brown Shoev. U.S. (1962) blocked a merger combining two firms that made and distributed shoes, ruling that though their combined market share would be small, a combined market share of as little as 5% sufficed to trigger antitrust liability. In U.S. v. Von's Grocery (1966), the Court blocked a merger of two supermarket chains that would have had a combined market share of 7.5%. In U.S. v. Philadelphia National Bank (1963), the Court circumscribed efficiencies defenses and established a subsequently widely used presumption of harm from fairly modest post-merger concentration levels.

The Supreme Court's decision in FTC v. Proctor and Gamble (1967) reflected the confused state of antitrust thinking at the time and went further than Philadelphia National Bank in dismissing efficiencies. P&G ruled that efficiencies generated by the proposed merger did not constitute a legally cognizable defense, stating, "Potential economies cannot be used as a defense to illegality, as Congress struck the balance in favor of protecting competition." Indeed, the Court found that the transaction might make entry more difficult because an entrant would face a larger rival, and that was a reason to block the merger.

In 1968, the Department of Justice issued guidelines stating that horizontal mergers in unconcentrated markets would be challenged if each firm had 5% of the market. For vertical mergers, a firm with a 6% market share would not be allowed to purchase a supplying firm with a 10% share. By today's standards, these shares are extremely low and would not raise anticompetitive concerns. Of course, if efficiencies cannot justify a merger, one might logically argue that virtually all mergers should be blocked.

For civil non-merger practices involving contractual restrictions, there was general hostility. Exclusive territories, resale price maintenance, tying, and other vertical practices were either treated as illegal per se or, at a minimum, assumed to be highly suspicious.

With respect to the...