Robert bork's forgotten role in the transaction cost revolution

• Author: Alan J. Meese
• Position: Ball Professor of Law and Cabell Research Professor of Law, William and Mary Law School
• Pages: 953-982

ROBERT BORK’S FORGOTTEN ROLE IN THE

TRANSACTION COST REVOLUTION

A

LAN

J. M

EESE

*

The last few decades have witnessed a scientific revolution in the field of

industrial organization in the form of transaction cost economics (TCE). This

revolution has radically altered economists’ understanding and interpretation

of both partial and complete economic integration. Not surprisingly, this sea

change has substantially influenced antitrust law and policy, impelling the

Supreme Court to reverse or greatly modify various precedents.

This essay supplements the received historiography of the TCE revolution.

It contends that Robert Bork played a hitherto underappreciated role in that

revolution. In particular, the essay contends that in 1966, before the official

onset of the transaction cost revolution, Bork helped rediscover Ronald

Coase’s 1937 article, The Nature of the Firm,

1

and employed Coase’s reason-

ing to offer TCE justifications for various forms of partial integration. Bork

explained how exclusive territories, customer restrictions, and horizontal min-

imum price fixing that accompanied otherwise valid joint ventures were vol-

untary efforts to overcome the social costs of reliance on atomistic markets. In

so doing, Bork articulated and applied numerous tools of TCE, tools that re-

flected departures from the then-dominant applied price theory version of in-

dustrial organization.

* Ball Professor of Law and Cabell Research Professor of Law, William and Mary Law

School. The William and Mary Law School provided a summer research grant in support of this

project. The author thanks Matt Sawchak and Adam Di Vincenzo for very helpful comments on

an earlier draft.

1

R.H. Coase, The Nature of the Firm, 4 E

CONOMICA

(n.s.) 386 (1937) [hereinafter Coase,

Nature of the Firm].

953

954

A

NTITRUST

L

AW

J

OURNAL

[Vol. 79

I. APPLIED PRICE THEORY AND THE INHOSPITALITY

TRADITION

Robert Bork graduated from law school in 1953 and published his first

article on antitrust law soon thereafter.

2

At the time, much antitrust doctrine,

including the doctrine governing various forms of partial integration,

3

re-

flected what would later be known as the “inhospitality tradition” of antitrust:

an instinctive hostility to business conduct other than moment-by-moment ri-

valry in the spot market.

4

For instance, courts frowned on tying contracts be-

cause they prevented “competition on the merits”—that is, head-to-head

rivalry for sales based solely on a product’s price and attributes—without pro-

ducing any apparent redeeming virtues.

5

Some have attributed this hostility to judicial rejection of economics.

6

In

fact, however, the inhospitality tradition reflected a straightforward applica-

tion of the then-contemporary teachings of industrial organization, the subset

of economic theory addressed to the behavior of firms and the performance of

the industries in which they participate. While nominally a separate economic

discipline, industrial organization during this period was little more than “ap-

plied price-theory.”

7

Price theory, in turn, examined the impact of markets on

2

See Robert H. Bork, Vertical Integration and the Sherman Act: The Legal History of an

Economic Misconception, 22 U. C

HI

. L. R

EV

. 157 (1954).

3

In this article, the term “partial integration” refers to contractual coordination of the eco-

nomic activities of otherwise independent units, not including outright cartels. See Alan J.

Meese, Intrabrand Restraints and the Theory of the Firm, 83 N.C. L. R

EV

. 5, 55–56 (2004); see

also Robert Bork, The Rule of Reason and the Per Se Concept: Price Fixing and Market Divi-

sion—Part II, 75 Y

ALE

L.J. 373, 384 n.29 (1966) [hereinafter Bork, Price Fixing and Market

Division II] (adopting similar definition of “contractual integration”). By contrast, this article

will employ the term “complete integration” to refer to coordination of economic activities

within a single firm. See O

LIVER

E. W

ILLIAMSON

, M

ARKETS AND

H

IERARCHIES

82 (1975) (defin-

ing (complete) vertical integration as “placing technologically separable production units under

common direction”).

4

See, e.g., O

LIVER

E. W

ILLIAMSON

, T

HE

E

CONOMIC

I

NSTITUTIONS OF

C

APITALISM

19 (1985)

[hereinafter W

ILLIAMSON

, E

CONOMIC

I

NSTITUTIONS

] (describing the inhospitality tradition of an-

titrust); Frank H. Easterbrook, Is There a Ratchet in Antitrust Law?, 60 T

EX

. L. R

EV

. 705, 715

(1982) (same); see also Alan J. Meese, Price Theory, Competition, and the Rule of Reason, 2003

U. I

LL

. L. R

EV

. 77, 124 n.245 [hereinafter Meese, Rule of Reason] (collecting authorities that

refer to the inhospitality tradition).

5

See Meese, Rule of Reason,supra note 4, at 127–28 (describing judicial hostility to tying

contracts during this era).

6

See Richard A. Posner, The Chicago School of Antitrust Analysis, 127 U. P

A

. L. R

EV

. 927,

928 (1979) [hereinafter Posner, Antitrust Analysis] (claiming that mainstream antitrust analysis

ignored price theory during this era).

7

R.H. Coase, Industrial Organization: A Proposal for Research,in 3 E

CONOMIC

R

ESEARCH

:

R

ETROSPECT AND

P

ROSPECT

:P

OLICY

I

SSUES AND

R

ESEARCH

O

PPORTUNITIES IN

I

NDUSTRIAL

O

R-

GANIZATION

59, 62 (Victor R. Fuchs ed., 1972) [hereinafter Coase, Industrial Organization]. In

support of this assertion, Coase cited leading texts on industrial organization. See id. at 61–62.

Each cited text described then-contemporary industrial organization as applied price theory. See

J

OE

S. B

AIN

, I

NDUSTRIAL

O

RGANIZATION

25–27 (1959) (describing the critical role of price the-

ory as the foundation of industrial organization); R

ICHARD

E. C

AVES

, A

MERICAN

I

NDUSTRY

: