Rationality analysis in antitrust.

• Author: Leslie, Christopher R.

INTRODUCTION I. ANTITRUST LAW'S ASSUMPTION OF RATIONALITY A. Rationality and Antitrust Conspiracies B. Rationality and Predation C. Rationality in Other Aspects of Antitrust Law II. QUESTIONING THE RATIONALITY ASSUMPTION A. Loss-Inducing Business Behavior B. Distinguishing Unprofitable Conduct from Irrational Conduct C. Antitrust Conspiracies Often Entail Conduct That Appears Irrational D. Even Absent an Antitrust Conspiracy, "Irrational" Conduct Can Be a Rational Predatory Business Move III. THE JUDICIARY'S INABILITY TO EVALUATE BUSINESS RATIONALITY A. Most Judges Lack Relevant Business Experience B. Judges' Absorption of Pertinent Scholarship C. Judges Do Not Appreciate Business Objectives D. Judges Fail to Appreciate How Behaving Irrationally Can Be Rational 1. Creating Credibility Through Facially Irrational Conduct 2. Facially Irrational Conduct Can Deter Funding for Rivals 3. Facially Irrational Behavior as a Barrier to Entry 4. Successful Predation and Other Credible, "Irrational" Threats 5. Summary E. Judges May Not Appreciate Business Constraints 1. Uncertainty 2. Business Confidence F. The Risk of Judicial Cognitive Bias 1. Hindsight Bias 2. Confirmation Bias IV. "IMPLAUSIBLE" ANTITRUST VIOLATIONS A. Predatory Pricing B. Price-Fixing Conspiracies 1. Tobacco 2. Citric Acid 3. Potash C. Group Boycotts of Suppliers D. Conspiracy to Conceal an Invalid Patent V. RECONSIDERING THE ROLE OF RATIONALITY ANALYSIS IN ANTITRUST LITIGATION A. Rationality and Implausibility Analysis--Procedural or Substantive Rules? B. Antitrust Litigation and the Focus on Facts 1. Distinguishing Between Irrational and Strategic Behavior 2. The Evidentiary Burden for Facially Irrational or Implausible Claims C. The Proper Role of Juries CONCLUSION INTRODUCTION

In the game of Chicken, two drivers at opposite ends of a stretch of road face their cars toward each other and accelerate. The rules are simple: the first driver to swerve in order to avoid a head-on collision loses. Game theory teaches that a winning strategy for Chicken requires one driver to convince the other driver that she absolutely will not swerve. Perhaps the clearest way to do this is for one driver to remove her car's steering wheel and disconnect her brakes; thus, once that driver accelerates her car, she can neither swerve nor stop. (1) Short of such mechanical adjustments, a winning strategy for the game of Chicken is to convince the other driver that you are irrational--that you will not swerve, even if it means your death. (2) Because swerving to avoid an oncoming car is rational, the first driver to convince her opponent that she is irrational and will not swerve is most likely to win.

Analyzing the game of Chicken can provide insights into the rationality of apparently irrational behavior. In particular, the game of Chicken can teach a useful lesson about the plausibility of antitrust claims. Antitrust law sets out the rules for competition in the American marketplace. It proscribes certain agreements among competitors and certain anticompetitive conduct by dominant firms. As legal scholars associated with the law and economics movement have achieved significant influence, the concept of business rationality has gained greater traction in antitrust case law. Federal judges are more frequently concluding that some types of anticompetitive conduct are facially irrational or implausible and, therefore, could not have occurred as a matter of law (because it is implausible that a business would act irrationally). This Article challenges the current judicial use of rationality theory and argues that in many cases judges are employing an overly narrow conception of rationality. This conception eliminates potentially valid antitrust claims by elevating theory over fact and by failing to appreciate that behavior that appears irrational can be rational in some circumstances.

Part I describes how the law and economics movement assumes that businesses act as rational profit maximizers and how this assumption now permeates antitrust law. Part II challenges the rationality assumption by discussing examples of apparently irrational business behavior that, upon closer inspection, is rational, even if ultimately not profit maximizing. Part II also examines how facially irrational conduct is often part and parcel of anticompetitive conspiracies and predatory schemes.

Part III argues that federal courts are generally not effective arbiters of whether alleged business conduct is implausible. This Part explains how most federal judges have no relevant business experience, do not keep abreast of the pertinent economics and historical scholarship, do not appreciate the full range of business objectives or how businesses operate, and are subject to cognitive biases. As a result, courts often label plaintiffs' allegations of anticompetitive conduct as implausible because the plaintiffs' theory of the case does not comport with judges' constrained conception of business rationality.

Part IV examines specific antitrust cases in which federal courts improperly granted defendants' motions for summary judgment or overturned jury verdicts based on judges' assertions that the plaintiffs' theory of the case entailed irrational or implausible conduct by the defendant. These cases--which examine predatory pricing, price-fixing cartels, group boycotts, and other antitrust conspiracies--illustrate the various judicial shortcomings and biases presented in Part III. In many of these cases, the conduct labeled implausible by the court undoubtedly occurred. In each of them, the court discounted robust fact patterns that indicated either an antitrust conspiracy or illegal predatory conduct. This is disquieting given the procedural posture of the cases--namely that the court should have viewed the evidence in the light most favorable to the antitrust plaintiff.

Finally, Part V advocates a more limited role for rationality theory in antitrust litigation. Over time, a procedural rule regarding evidentiary burdens has evolved into a substantive rule of antitrust law whereby valid claims are improperly rejected. Judges should focus more on the facts presented by the plaintiff than on any economic theory championed by the defendant or held by the judge. While this may result in more jury trials in antitrust cases, jurors may be less likely to make the mistakes--detailed in Parts III and IV--that judges are currently committing.

1. ANTITRUST LAW'S ASSUMPTION OF RATIONALITY

   The law and economics movement has firmly taken root in antitrust jurisprudence. The debate today is no longer about whether the law and economics approach should affect antitrust law but only about how it should do so. (3) The movement deserves much praise for introducing greater precision and philosophical clarity into antitrust thinking, but its influence has also created problems.

   As a result of the dominating influence of law and economics scholars, antitrust law now worships at the shrine of rationality. Rationality serves as the foundation for most model building and policy prescriptions within the law and economics school, as evidenced by such concepts as the rational actor theory and rational choice theory. Professor Herbert Hovenkamp has opined that "[t]he entire antitrust enterprise is dedicated to the proposition that business firms behave rationally." (4) Prominent scholars defend this rationality assumption as "an accurate description of firms." (5) Rational choice theory does allow for some irrational behavior, so long as it is randomly distributed. (6) Subject to this caveat, however, "rational-choice theory has become a routine and almost unexamined part of every economist's intellectual tool kit." (7)

   The term "rationality" itself, however, is ambiguous and loaded, subject to different interpretations. (8) To date, scholars have advanced over seventy varying definitions, though few are actually used in practice. (9) Because rationality is taken as a given, "there is rarely a discussion in the legal literature about what, exactly, constitutes rational behavior." (10) But the most prominent concepts of rationality focus on the internal consistency of the actor's conduct, including whether the actor chooses appropriate means through which to pursue her self-interest. (11)

   In the context of business decisionmaking, law and economics scholars define rationality as acting to maximize profits. (12) For theorists associated with the Chicago School, this assumption of profit-maximizing behavior is "crucial" to their rational choice theories and subsequent policy prescriptions. (13) The logic of the assumption lies in the argument that firms must maximize profits or else they will be driven from the market. (14) As courts have imported the profit-maximizing rationality assumption into substantive antitrust law, the assumption has fundamentally reshaped antitrust doctrine as well as the course of antitrust litigation.

   1. Rationality and Antitrust Conspiracies

      Section 1 of the Sherman Act condemns agreements that unreasonably restrain trade. (15) Several categories of agreements--such as price-fixing conspiracies, agreements among competitors to allocate markets, and some group boycotts--are per se illegal, which means that the agreements are unreasonable as a matter of law. (16) Other restraints of trade are evaluated under the rule of reason, in which the factfinder balances the anticompetitive and procompetitive effects of the challenged agreements. (17) Concerted action with a net anticompetitive effect is held to be unreasonable. (18) Regardless of the method of determining the reasonableness of a trade restraint, the plaintiff must prove the existence of an agreement. The rationality assumption has played a critical role in this element of section 1 litigation.

      Courts employ rationality analysis to determine whether antitrust plaintiffs alleging anticompetitive conspiracies are entitled to have a jury decide...