A Litigator's Perspective on the Evolving Role of Economics in Antitrust Litigation
| Publication year | 2021 |
| Author | By Daniel M. Wall |
By Daniel M. Wall1
The first substantial assignment I had as an antitrust lawyer dropped me into the deep end of the law and economics pool. It was 1981 and I was a first-year lawyer in the DOJ Antitrust Division's Honors Program and I had been assigned to the trial team for United States v. AT&T, the landmark case that resulted in the breakup of the Bell System. After the government rested its case in chief, AT&T filed a comprehensive motion to dismiss. One part of that motion challenged the legal sufficiency of the government's predatory pricing theory on the ground that the government had not proven that AT&T had charged long distance rates below its average variable costs.
It would be difficult to overstate how intimidated I was when asked to respond to this particular part of AT&T's motion. AT&T's brief was strong and grounded in what was arguably the seminal article fusing antitrust law and economics into "one thing": Phillip Areeda and Donald F. Turner's Predatory Pricing and Related Practices Under Section 2 of the Sherman Act.2 The "Areeda and Turner test" that originated in this article required the plaintiff in a predatory pricing case to show that the defendant's prices were below short run marginal costs or (as a proxy for marginal costs) average variable costs, and in the six years between the publication of that article and AT&T's motion numerous courts had already adopted that standard. The momentum behind the Areeda and Turner test was strong enough that AT&T boldly proclaimed that the "only accepted test for predatory pricing is whether rates were intentionally set at a level below marginal costs." AT&T also argued, for the most part correctly, that the government had not made a case under that test.
But that is not what made this assignment so intimidating. The fear I felt was because I had no idea whether AT&T's arguments were correct, whether they correctly described the Areeda and Turner test, whether there were alternatives, and most of all how I was supposed to figure that out.
I had no choice but to start reading law and economics articles, of which I discovered there were many. This led to the discovery that as well as the Areeda and Turner average variable cost test was doing in the courts, it was actually getting consistent negative
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criticism from economists and other academics.3 Some of that criticism went right to the core point of whether short run cost measures were appropriate indicators of predatory pricing in markets, such as telecommunications, with high fixed costs.
The government's predatory pricing theory was, let us say, unusual. We argued that AT&T had priced its long distance services "without regard to costs" and that because it could subsidize unprofitable rates with profits made during the same period in another monopolized service, its conduct did not fall within the "lose money now, recoup later" model of the traditional predatory pricing claim. History has not been kind to this theory, and it is doubtful that any court would take seriously a similar argument made today. But history was not my concern in the Summer of 1981. I just wanted to beat a motion dismiss predicated on a clear overstatement about the role of short-run cost standards in the law. I recalled the advice I had received a year earlier when I was an extern for Judge David Bazelon of the D.C. Circuit, that "sometimes it is easier to say that the other side's argument is wrong rather than that your side's is right." And therefore I drafted an opposition brief that primarily said that AT&T was wrong: that the Areeda and Turner test was not the "only accepted test for predatory pricing"; that it was not appropriate for the telecommunications industry with its high fixed-costs; and that consequently AT&T's motion to dismiss could be denied without making a definitive determination of whether the government's "pricing without regard to costs" theory was right.
It worked. In September 1981, Judge Harold H. Greene denied AT&T's motion to dismiss across-the-board.4 With regard to the predatory pricing claims, Judge Greene held that "defendants overstate the extent to which the marginal cost test (or its surrogate, the average variable cost test), advanced by Areeda and Turner ... has become the sole legal standard for identifying non-compensatory pricing."5 He reserved judgment on whether the government's theory could prevail ultimately. Judge Greene's denial of AT&T's motion to dismiss is widely regarded as the determinative moment in this historic litigation. Just four months later, in January 1982, AT&T agreed to be broken up.
This initial, formative experience in AT&T taught me that economics, like everything else in litigation, is contestable. Economics may be antitrust's lodestar, but it is an unstable star at best, and often appears to be more like the binary star system in which two stars orbit around an unseen common center of mass. There is a constant push and pull between today's accepted wisdom and the next great idea. There is more to it than the witticism that "no one ever got tenure by saying that everyone else was right," but that is part
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of it. Economists advance their careers by advancing the state of the art in economics, which necessarily takes the existing literature as a baseline and argues for a better way of addressing the chosen topic, be it predatory pricing, merger analysis, or anything else. Since industrial organization economics is a "soft" science, no one is ever proven definitively right, leaving plenty of room to criticize even major advancements like the Areeda and Turner article.
Lawyers then enter the picture to operationalize (or weaponize) the latest economic thinking. William Kovacic has noted how "[e]conomically astute attorneys such as [Robert] Bork, [Richard] Posner, Frank Easterbrook, and Ernest Gellhorn" were largely responsible for the influence of Chicago School economics on antitrust law because they "took new Chicago School analytical precepts and translated them into operational principles that judges readily could apply."6 On the other side of the ledger, lawyers arguing for more expansive (i.e., restrictive) antitrust rules regularly cite the economic literature that favors the more expansive rule. I experienced this in the well-known Kodak case,7 discussed below, in which the plaintiffs successfully used economics arguments credited to Steven Salop to convince the Supreme Court not to adopt a rule that a competitive "foremarket" precludes "aftermarket" monopolization claims.8 Today, it is routine for litigants in Supreme Court cases to solicit amicus support from ad hoc groups of economists. In most cases, economists support both sides.9 Lawyers, of course, write the briefs.
In my teaching, I illustrate the contestability of antitrust economics with the evolution of merger law and economics from the 1960s to the present day. There is a tendency to dismiss the discredited Supreme Court cases of the 1960s, the likes of Von's10 or Brown Shoe,11 as economics-free expressions of a populist antipathy to mergers. In reality, those decisions and the merger challenges that led to them were grounded in the prevailing economics of the day, in particular the "structure-conduct-performance paradigm" developed by Joe Bain and others. As Leonard Weiss summarized in 1979, "The main predictions of the structure-conduct-performance paradigm are: (1) that concentration will facilitate collusion, whether tacit or explicit, and (2) that as barriers to entry rise,
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the optimal price-cost margin of the leading firm or firms likewise will increase."12 Economists of the day were also very skeptical about the capacity of mergers to create efficiencies. It was therefore easy to reason that "[w]ith a considerable amount to lose and apparently nothing much to gain," a tough anti-merger policy was appropriate.13 This was the economic mindset that led to successful challenges to mergers creating single-digit market shares, as in Von's, and to the Philadelphia National Bank rule that mergers leading to combined market share of 30% or more are presumptively unlawful.14
Then economists figured out that many of these assumptions were wrong. The Chicago School is given (and takes15) much of the credit for this, especially in challenging the assumption that mergers do not generate efficiencies.16 Equally important was the work by empirical economists testing the predictions of the structure-conduct-performance paradigm. That work provided no support for the view that small increases in concentration led to increases in prices or profits. Eventually, consensus emerged that it was much more important to focus on already-concentrated markets and on mergers that increased concentration "at the top," e.g., combinations of market leaders. Courts began retreating from the 1960s cases, most notably in United States v. General Dynamics Corp.,17 in which the government suffered its first Supreme Court loss in a merger case since the 1950 amendments to the Clayton Act. "General Dynamics ... shifted the evaluation of proposed mergers from a strict market-share-based approach to a functional approach under which a single ultimate question—whether there would be a substantial lessening of competition if the merger went forward—took center stage."18 By 1984, the government itself proclaimed in its Merger Guidelines that it "will not challenge mergers solely on the basis of concentration and market share data without considering other relevant factors...."19 The 1984 Merger Guidelines also adopted the Herfindahl-Hirschman Index, a measure of concentration that gives more weight to the larger firms in a market, and is therefore particularly attuned to potential coordinated effects from mergers that create or strengthen oligopolies. The 1984 Gu...
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