Harvard, Chicago, and Transaction Cost Economics in Antitrust Analysis

• Date: 01 September 2012
• Author: Herbert Hovenkamp
• Published date: 01 September 2012
• DOI: 10.1177/0003603X1205700305
• Subject Matter: Article

Harvard, Chicago, and

transaction cost economics

in antitrust analysis

BYHERBERT HOVENKAMP*

Since Oliver Williamson published Markets and Hierarchies,

transaction cost economics (TCE) has claimed an important place in

antitrust, avoiding the extremes of the structuralist school, which saw

market structure as decisive, and the Chicago school, which found

monopoly only infrequently and denied that a monopolist could

leverage its power into related markets. Since the 1970s both the

structuralist and Chicago positions have moved toward the center,

partly as a result of TCE. Already in 1978 Areeda and Turner

produced the first volumes of the Antitrust Law treatise, which

completely repudiated the leverage theory and abandoned the

structuralist and leveraging positions on vertical integration. TCE

analysis of contractual restraints recognizes that an important threat

to competition is double marginalization, which can occur when

market power is held by separate firms with complementary outputs.

Nevertheless, one comparative advantage of both structuralism and

the Chicago school was their simplicity. TCE analysis is more specific

to the situation, demanding close scrutiny when significant market

power is either present or realistically threatened.

THE ANTITRUST BULLETIN:Vol. 55, No. 3/Fall 2010 :613

* Ben V. & Dorothy Willie Professor of Law, University of Iowa.

AUTHOR’S NOTE: Thanks to Erik Hovenkamp for reading a draft.

© 2010 by Federal Legal Publications, Inc.

I. INTRODUCTION

This article offers some thoughts about the present place of transac-

tion cost economics (TCE) in antitrust law, focusing particularly on

contract arrangements involving vertically related firms or comple-

mentary products. At this writing, thirty-five years have passed since

Oliver E. Williamson published Markets and Hierarchies: Analysis and

Antitrust Implications.1At that time vertical price and nonprice

restraints as well as tying were unlawful per se.2While not per se

unlawful, both exclusive dealing and vertical mergers were treated

much more harshly than they are now, and so was vertical integration

by dominant firms.3TCE analysis of these practices lay largely in the

future, but it was destined to develop a line of thinking that avoided

the extreme positions of the two reigning schools of antitrust policy.

614 :THE ANTITRUST BULLETIN:Vol. 55, No. 3/Fall 2010

1OLIVER E. WILLIAMSON, MARKETS AND HIERARCHIES: ANALYSIS AND

ANTITRUST IMPLICATIONS (1975). One of Williamson’s best pieces on the use of

transaction cost economics in antitrust was actually published a year earlier.

Oliver E. Williamson, The Economics of Antitrust: Transaction Cost Considera-

tions, 122 U. PA. L. REV. 1439 (1974).

2Dr. Miles Med. Co. v. John D. Park & Sons Co., 220 U.S. 373 (1911)

(RPM unlawful per se), overruled by Leegin Creative Leather Prods., Inc. v.

PSKS, Inc., 551 U.S. 877 (2007) (RPM to be governed by rule of reason);

Albrecht v. Herald Co., 390 U.S. 145 (1968) (maximum RPM unlawful per se),

overruled by State Oil Co. v. Khan, 522 U.S. 3 (1997) (maximum RPM brought

under rule of reason); United States v. Arnold, Schwinn & Co., 388 U.S. 365

(1967) (vertical nonprice restraints unlawful per se), overruled by Cont’l T.V. v.

GTE Sylvania, Inc., 433 U.S. 366 (1977) (vertical nonprice restraints governed

by rule of reason); Times-Picayune Publ’g Co. v. United States, 345 U.S. 594

(1953) (stating per se rule for tying arrangements in the presence of tying

market power); Jefferson Parish Hosp. Dist. v. Hyde, 466 U.S. 2 (1984) (dicta

reaffirming per se tying rule).

3Standard Oil Co. (Cal.) v. United States, 337 U.S. 293 (1949) (condemn-

ing exclusive dealing under harsh test); Brown Shoe Co. v. United States, 370

U.S. 294 (1962) (condemning vertical merger on modest market shares). On

vertical integration de novo, see United States v. Am. Tobacco Co., 221 U.S.

106 (1911) (condemning vertical integration into collateral goods such as foil

used in manufacturing tobacco products); United States v. Yellow Cab, 332

U.S. 218 (1947) (reversing dismissal of complaint challenging cab manufac-

turer’s acquisition of operating licenses); United States v. Paramount Pictures,

334 U.S. 131 (1948) (same; vertical integration from motion picture produc-

tion into distribution).

At one extreme was the “structural” school, which drew its

impetus from a number of sources, including the passage of the

Clayton Act in 1914 and the expansion of section 7 of that statute in

1950 to cover vertical mergers.4At its origins lay the Great Depres-

sion and the rise of monopolistic competition theory in the early

thirties,5which in different ways undermined our confidence that

markets for manufactured, product-differentiated goods would per-

form competitively. The industrial organization theory of the struc-

tural school developed the structure-conduct-performance (S-C-P)

paradigm, which saw firm structure as the principal determinant of

anticompetitive behavior and poor economic performance.6Under

the model, structure entailed conduct of a certain kind, and the con-

duct entailed poor performance. As a result conduct dropped out as

a variable of interest and one could reason directly from structure to

performance.

The promoters of the S-C-P paradigm tended to believe that

monopoly power was widespread, as were the opportunities for its

exercise.7Building on a neoclassical model in which sellers placed

their goods on the market and purchasers bought them mainly in sin-

gle-shot transactions, they were suspicious of any type of “irregular-

ity” or deviation from common law contract models for distribution,

generally seeing these as instances of monopolistic conduct. This ani-

mosity showed up in competition policy in various ways. One was

discomfort with product differentiation and the blunting of competi-

HARVARD, CHICAGO AND TCE : 615

415 U.S.C. § 18 (2006); Cellar–Kefauver Act of 1950, Pub. L. No. 81-899,

64 Stat. 1225. On the amendments, see Derek C. Bok, Section 7 of the Clayton

Act and the Merging of Law and Economics, 74 HARV. L. REV. 226, 234–36 (1960);

Herbert Hovenkamp, Derek Bok and the Merger of Law and Economics, 21 U.

MICH. J.L. REFORM 515, 516 (1988).

5EDWARD CHAMBERLIN, THE THEORY OF MONOPOLISTIC COMPETITION

(1933).

6See Herbert Hovenkamp, The Neal Report and the Crisis in Antitrust, 5

COMPETITION POL’YINT’L217 (2009).

7See, e.g., CARL KAYSEN & DONALD F. TURNER, ANTITRUST POLICY: ANECO-

NOMIC AND LEGAL ANALYSIS (1959); JOE S. BAIN, INDUSTRIAL ORGANIZATION

(1959); JOE S. BAIN, BARRIERS TO NEW COMPETITION: THEIR CHARACTER AND CON-

SEQUENCES IN MANUFACTURING INDUSTRIES (1956).