Bill Baxter in the antitrust arena: an economist's appreciation.

• Author: Schmalensee, Richard
• Position: Baxter Symposium

During his career as an academic, a public servant, and an advocate, Professor William F. Baxter had a profound impact on the practice of antitrust law. This article provides an economist's perspective on his various contributions. Professor Richard Schmalensee begins by tracing the evolution of Baxter's thinking about the economics of antitrust. This process ultimately led to a tight, consistent framework which left a lasting imprint on the Antitrust Division of the Department of Justice. Professor Schmalensee highlights some of these contributions and also examines two landmark cases from Baxter's tenure. Finally, his work as an academic and advocate are considered.

Bill Baxter was a first-rate antitrust economist. He mastered the main analytical tools of the trade and used them with exceptional insight and intuition. He advanced antitrust policy by showing that rigorous economic analysis of consumer benefit can and should be at the center of the decision-making process. Those who have learned this lesson from him play major roles in the antitrust community. Bill also provided an example of intellectual integrity that has had an enduring positive impact on antitrust enforcement.

In the large, the organization of this article is chronological. But I do not attempt to provide anything near a complete biography, and the discussion in Part III of Bill's landmark tenure at the Antitrust Division is organized along

thematic lines.

1. THE ROAD TO ANTITRUST

   While Bill was taking a macroeconomics course as a Stanford undergraduate, he was called home briefly because his mother was ill. He missed an exam while away and took it shortly after his return. A few days later, Bill was summoned to the department head's office and confronted by his macroeconomics professor. Bill was given an impromptu oral examination to see if his exam answers reflected mastery of the subject or information provided illicitly by friends in the class. At the end of the interrogation, Bill was offered a job as a teaching assistant. For the next two years, he ran errands in the department and anonymously graded exams in undergraduate courses--sometimes courses he was taking at the same time!

   Despite Bill's demonstrated aptitude for economics, this initial intimate exposure did not produce intellectual infection. His professors must have been sorely disappointed. Bill did not major in economics; his A.B. was in "Pre-Law." After a stint in the Navy, he earned his J.D. from Stanford in 1956 and served for two years on the Stanford Law School faculty.

   In 1958, Bill joined Covington & Burling in Washington, D.C. He entered the antitrust arena less than a year later, when he was sent to New York to represent Upjohn in the so-called "wonder drug" proceeding before an F.T.C. hearing examiner.(1) It became apparent to Bill as the proceeding unfolded that nobody in the hearing room knew the purpose of the antitrust laws nor what outcome would further that purpose.(2) He decided that there was important work he could do in antitrust and that he could do it at Stanford.

2. LEARNING AND TEACHING

   Bill rejoined the Stanford Law School faculty in 1960, determined to learn the economics necessary to make sense out of antitrust issues.(3) Bill's drive to do the hard intellectual work necessary to impose order on complex matters is central to much of the story that follows. When he first turned to the economics literature, however, Bill encountered a thicket of mathematics that usually serves to deter the uninitiated. Bill, of course, was rarely deterred by intellectual challenge. He quietly took mathematics courses at nearby Foothill College during the summer until he had learned enough to penetrate the published literature. In addition, he began attending seminars in the Economics Department. By the time Michael Spence arrived from Harvard as an assistant professor in the early 1970s, Bill was a fixture at the seminars. He had become famous for waiting until near the end to preface a penetrating question or comment with an assertion, perhaps at times disingenuous, that he found himself confused.

   1. If It Ain't Perfect ...

      There is a sense in which Bill learned economics twice. The first time, reading the literature of the 1960s, Bill, like most of us who studied economics outside Cook County in that hopeful period, learned that markets were prone to a variety of failures and that carefully crafted government intervention could generally improve their performance.(4)

      An important product of Bill's first serious brush with economics (and, it would appear likely, of a 1964-1965 visiting appointment at the Yale Law School) was his 1966 Yale Law Journal article on patents.(5) At the start of that article, Bill acknowledges that increasing a patent holder's freedom of action generally increases the reward to innovation and thus enhances the incentive to innovate. However, he also appears hostile to the whole patent system and persuaded that it rewards innovation excessively.(6) The remainder of the article consists of careful economic analyses of possible restrictions on patent licenses, several of which are in the end recommended--including, notably, a ban on royalty structures that are based on the sales of unpatented end-products.(7) The analysis is admirably rigorous and still merits reading, but the implicit assumptions on which it rests show their vintage.

      In December 1967, Bill agreed to serve as one of six professors of law (along with three practicing lawyers and three economists) on a White House Task Force on Antitrust Policy chaired by Dean Phil C. Neal. The product of that group's deliberations, generally known as the Neal Report, was submitted to President Johnson in July 1968 and published in May 1969.(8) The Neal Report was controversial when it was released; it makes extraordinary reading three decades later. The Report recommended new federal legislation designed to attack instances of high market concentration regardless of conduct patterns. If a firm were found to account for more than fifteen percent of a market with high and stable concentration, it would be given a year to reduce its market share, presumably by raising price and reducing output. If the market were still too concentrated, the firm would be at risk of divestiture. The Neal Report is so concerned with market shares and so unconcerned with consumer welfare that it recommends that in "unusual situations," which it neglects to describe, a court could order a firm with a stubbornly high share to "restrict output or advertising expenditures."(9) A second legislative recommendation would have prohibited large conglomerate firms from acquiring leading firms in any concentrated industry. Bill played an important role in the Task Force deliberations, serving as an effective advocate for what became the majority position.(10)

      Two months after the Neal Report was published, Bill turned forty. If the tide of antitrust scholarship and policy debate had kept running in the Neal Report's direction, and if Bill's views had not changed radically, he might have been known to history primarily as a leader in the development of an activist antitrust policy--a policy dedicated to perfecting imperfect markets wherever they might be found and, in particular, to imposing strict limits on the conduct of patentholders.

   2. A More Complex World

      But the tide did turn, and, independently, Bill essentially learned economics a second time. After the Neal Report was written, as Bill read, listened, and observed, he became more skeptical of the ability of administrative regulation and antitrust litigation to improve market outcomes in complex situations. In addition, he gained a deeper appreciation of the power of market forces to induce good performance even in concentrated markets. He remembers this shift in his views as gradual, with no great "Aha!" moments. At least part of the shift seems to have happened quickly, however. Tom Kauper, then Assistant Attorney General for Antitrust, invited Bill to an Antitrust Division retreat in 1972 because he admired Bill's scholarly writings. Tom remembers vividly that Bill was extremely critical of much of what the Division was doing at the time.(11)

      A description of the fascinating intellectual journey that Bill Baxter took from the Neal Report to the Reagan Administration would no doubt be of considerable interest, but I believe only Bill could have provided it. Thus I will devote myself to a brief discussion of a few of Bill's noteworthy scholarly contributions from this period.(12)

      In 1977, Bill published a thoughtful review article devoted to Richard Posner's Antitrust Law: An Economic Perspective.(13) The review is written for professional economists concerned with antitrust, and it is still worth reading. In this article, Bill persuasively argues that Posner's contention that monopoly rents are generally dissipated as waste is both empirically unproven (and perhaps unprovable) and theoretically dubious.(14) In commenting on Posner's critique of the Neal Report's deconcentration proposal, he notes his role in bringing that proposal forward and then states: "Everything that has been learned in the intervening years has dragged me to the reluctant conclusion that Posner's ... probably represents the sounder position."(15) Bill's discussion of the roles of explicit agreements and unilateral behavior in effecting monopolistic outcomes in concentrated markets is insightful and thoroughly modern.(16) Overall the review is kind, except when it deals with an error in the description of the relationship between short-run and long-run marginal cost and another error in the characterization of second-order conditions for an optimum!(17)

      A few years earlier Bill had begun his work on payment systems, particularly electronic funds transfer systems. In 1977, he, Paul Cootner, and Ken Scott published their pioneering monograph, Retail Banking in the Electronic Age...