Market Imperfections, Equity, and Efficiency in Antitrust

AuthorWilliam B. Tye
DOI10.1177/0003603X9203700101
Published date01 March 1992
Date01 March 1992
Subject MatterArticle
The Antitrust Bulletin/Spring1992
Market
imperfections, equity,
and efficiency in antitrust
BY WILLIAM B. TYE*
1
...
therecordis
complete,
inmy
opinion,
withself-contradictory
evidence,
omissions andjust plainfuzziness, purposeful or otherwise....
Likea
house
of
cards,
every
solution
[tothe
anticompetitive
consequences
of
the
merger]
ultimatelyfalls from its own
weight.
Commissioner
Malcolm
M.B.
Sterrett,
explaining
why
a
majority of the ICC voted to reject the merger
of
the Santa Fe-
Southern Pacific (previously considered by industry experts to
be a"sure thing"). Wastler &Poos, Santa Fe-Southern Pacific
Merger Rejected by ICC as Anticompetitive, TRAFFIC
WORLD,
Jul. 28, 1986, at 8.
* The Battle Group, Cambridge, MA.
AUTHOR'S NOTE: As this articleis the product
of
almost
lO-years' worth
of
puzzling over some of the most
central
issues in antitrust analysis, I cannot
hope to thankall that haveaffected my
thinking.
Nevertheless, special
thanks
go to:
William
Hogan,
Robert
Lande,
Thomas
Leary, John R.
Meyer,
John
Strong,
A. Lawrence
Kolbe,
Judge
Vaughn
R.
Walker,
Thomas
Horton,
and
Stephen
Calkins.
whohave
commented
on thisspecific article.
e1992 by Federal Legal Publications, Inc.
2 : The antitrust bulletin
I. Introduction
The permissive model of antitrust enforcement (often ascribed
to the Chicago school) promises to provide determinate results to
difficult antitrust questions by choosing efficiency goals over
equity goals, perfect markets over imperfect markets and (in more
cases than not) private contractual solutions over enforcement of
antitrust laws by public authorities. Specifically with regard to
vertical restraints (resale price maintenance, exclusive territories,
mergers, etc.), the permissive model faults antitrust prohibitions
of such activities. The logic is that firms with monopoly power at
one stage of a vertical market relationship can exploit whatever
market power they have through high prices.
If
such firms engage
in vertical restraints of competition, these restraints can only be
explained as motivated to achieve efficiency gains, according to
the theory. If one accepts the notion that economic efficiency is
the chief objective
of
antitrust policy, the result is a permissive
view toward vertical restraints.
This logic of the permissive model of vertical restraints is
valid as far as
it
goes, but in practice it is sometimes difficult to
apply the model without confronting difficult contradictions. The
basic problem is that the market imperfections asserted in the sec-
ond part
of
the argument often undercut the assumption
of
perfect
pricing mechanisms in the first part.
Indeed, recent experience in applying the principles of the per-
missive model to difficult antitrust issues in numerous practical
situations has produced a series of logical and practical difficul-
ties:
1. Even if one accepts the efficiency goal as paramount in antitrust
matters, the assumption of perfect markets may produce indeter-
minate policy prescriptions to many difficult antitrust issues; in
practice, the real choice often is between contending views of the
most significant market imperfections, not a choice between a
perfect market and an imperfect market;
2. In practical applications of the permissive model, the market
imperfections necessary to sustain the model at certain crucial
points may contradict the market perfections assumed at other
stages of the argument; and
Market imperfections :3
3. Contrary to the logic often assumed in the permissive model, a
"feedback loop" may be needed; the choice of the most appropri-
ate policy goal (equity versus efficiency) cannot be made without
knowledge of the market imperfections believed to be the most
significant.
The logical difficulties sometimes encountered in applying the
permissive model can produce serious consequences, as illus-
trated by the introductory quote concerning the proposed Santa
Fe/Southern Pacific (SFSP) merger. In this proceeding, a merger
that was considered a"chip in" was rejected because the appli-
cants could not rationalize the inconsistencies in the permissive
model.
These difficulties will be further illustrated via other practical
examples that demonstrate that these issues are of more than theo-
retical interest. For the purpose of illustration, the examples will
often rely on applications of the theory to the railroad industry.
While railroads represent some of the more advanced applications
of the theory, industry-specific knowledge should not be neces-
sary to follow the logic. Indeed, practitioners
of
these theories
should be able to recognize elements of the arguments that are
common to all industries and a variety of vertical restraints cases.
These examples show that the permissive model has failed to
gain more widespread acceptance because its policy conclusions
do not follow consistently from its assumptions. A more compre-
hensive "rule of reason" approach is then developed to cure these
defects.
Status
of
the
current
debate
No practicing attorney or economic expert would even think
of not considering the efficiency properties of a practice in evalu-
ating a rule of reason defense in an antitrust proceeding. Every
defendant's attorney is probably now aware that one should not
simply rely on "free trader values"! to defend a market practice. A
convincing efficiency explanation of the firm's behavior, despite
United States v. Colgate Co., 250 U.S. 300 (1919).

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