Taking the error out of 'error cost' analysis: what's wrong with antitrust's right

• Date: 01 January 2015

TAKING THE ERROR OUT OF “ERROR COST”

ANALYSIS: WHAT’S WRONG WITH

ANTITRUST’S RIGHT

J

ONATHAN

B. B

AKER

*

A generation ago, conservative antitrust commentators associated with the

Chicago School offered a comprehensive critique of the antitrust doctrines

that then prevailed.

1

That critique helped define the Supreme Court’s antitrust

agenda for the decades that followed.

2

The resulting transformation of anti-

trust offered much to like, as the prior rules, for all their merits, likely chilled

cost reductions and other efficiency enhancing business conduct.

3

* Professor of Law, American University Washington College of Law. The author is grateful

to Harry First, Andy Gavil, Rajesh James, Barak Orbach, Eric Rasmusen, Steve Salop, and Spen-

cer Waller.

1

E.g., R

OBERT

H. B

ORK

, T

HE

A

NTITRUST

P

ARADOX

: A P

OLICY AT

W

AR WITH

I

TSELF

(1978);

R

ICHARD

A. P

OSNER

, A

NTITRUST

L

AW

: A

N

E

CONOMIC

P

ERSPECTIVE

(1976). Cf. George L. Priest,

The Limits of Antitrust and the Chicago School Tradition, 6 J. C

OMPETITION

L. & E

CON

. 1

(2009) (emphasizing the Chicago School’s political goal of seeking to constrain governmental

intervention). The Chicago School of antitrust analysis, an intellectual movement of lawyers and

economists loosely associated with the University of Chicago, has dominated antitrust thinking

since the mid- to late-1970s. Some economists who belonged to that movement were also part of

the similarly named Chicago School of industrial organization economics, which flourished until

the mid-1970s. Cf. Richard Posner, The Chicago School of Antitrust Analysis, 127 U. P

A

. L. R

EV

.

925 (1979) (tracing the influence of Chicago School industrial organization economists (includ-

ing Ward Bowman, Aaron Director, John McGee, George Stigler, and Lester Telser) on Chicago

School antitrust thinking but drawing no distinction between the economic school and the anti-

trust school (which also reflected important contributions from others, including Robert Bork and

Richard Posner)).

2

The transition from antitrust’s structural era to the Chicago School era that began during the

late 1970s is described in Jonathan B. Baker, A Preface to Post-Chicago Antitrust,in P

OST

-

C

HICAGO

D

EVELOPMENTS IN

A

NTITRUST

L

AW

60 (Antonio Cucinotta, Roberto Pardolesi & Roger

Van den Bergh eds., 2002). The Chicago School’s economic critique of the prior rules comple-

mented the Harvard School’s administrability critique. See generally William E. Kovacic, The

Intellectual DNA of Modern U.S. Competition Law for Dominant Firm Conduct: The Chicago/

Harvard Double Helix, 2007 C

OLUM

. B

US

. L. R

EV

. 1 (2007).

3

Jonathan B. Baker, Economics and Politics: Perspectives on the Goals and Future of Anti-

trust, 81 F

ORDHAM

L. R

EV

. 2175, 2185 (2013).

1

2

A

NTITRUST

L

AW

J

OURNAL

[Vol. 80

When contemporary conservatives defend this transformation and call for

rule modifications that would further insulate business conduct from antitrust

intervention, however, they are working from a doctrinal starting point vastly

different, and far more hospitable to defendants, than the competition doc-

trines that prevailed during the 1970s. As discussed below, today’s antitrust

conservatives’ advocacy of further changes to antitrust rules is based on a

series of erroneous assumptions about markets and institutions. These as-

sumptions systematically overstate the incidence and significance of false

positives, understate the incidence and significance of false negatives, and

understate the net benefits of various rules by overstating their costs. Collec-

tively, these errors inappropriately tilt the application of a neutral economic

tool, decision theory, against antitrust intervention.

I.THE CONSERVATIVE ANTITRUST PROGRAM AND THE ERROR

COST FRAMEWORK

In The Antitrust Paradox, arguably the most influential and comprehensive

statement of the Chicago School vision, Robert Bork asserted that antitrust

law should be reformed and refocused to strike at only three classes of behav-

ior: “naked” horizontal agreements to fix prices or divide markets,

4

horizontal

mergers to duopoly or monopoly, and a limited class of exclusionary conduct

(consisting primarily of predation by abuse of governmental processes).

5

A

reformed and refocused antitrust would “abandon its concern with such bene-

ficial practices as small horizontal mergers, all vertical and conglomerate

mergers, vertical price maintenance and market division, tying arrangements,

exclusive dealing and requirement contracts, ‘predatory’ price-cutting, price

‘discrimination,’ and the like.”

6

This agenda largely targeted exclusionary

conduct offenses for abandonment: when the practices that Bork identified

harm competition, they often do so by excluding actual or potential rivals.

7

4

Bork defined a “naked” agreement as one that is not ancillary to cooperative productive

activity engaged in by the firms, B

ORK

,supra note 1, at 263, and so does nothing more than

eliminate competition. Id. at 264. Bork provided an extensive and sympathetic discussion illus-

trating the possible efficiencies arising from agreements among rivals to fix prices or divide

markets. Id. at 429–40.

5

Id. at 406; see id. at 347–64 (describing concern with abuse of process); see also Posner,

supra note 1, at 933 (“By 1969 . . . an orthodox Chicago position (well represented in the

writings of Robert Bork) had crystallized: only explicit price fixing and very large horizontal

mergers (mergers to monopoly) were worthy of serious concern.”).

6

B

ORK

, supra note 1, at 406; see also id. at 157 (With respect to exclusive dealing, “The real

danger for the law is less that predation will be missed than that normal competitive behavior

will be wrongly classified as predatory and suppressed.”); cf. Richard A. Posner, The Next Step

in the Antitrust Treatment of Restricted Distribution: Per Se Legality, 48 U. C

HI

. L. R

EV

. 6

(1981) (calling for the abandonment of antitrust prohibitions on all restrictions on distributors

imposed by manufacturers, including exclusive sales territories and resale price maintenance).

7

Jonathan B. Baker, Exclusion as a Core Competition Concern, 78 A

NTITRUST

L.J. 527,

533–35 (2013). Bork recognized that disruption of optimal distribution patterns could, in theory,

2015]

T

AKING THE

E

RROR

O

UT OF

“E

RROR

C

OST

” A

NALYSIS

3

Since the publication of The Antitrust Paradox, the Supreme Court has sub-

stantially reduced the antipathy that antitrust law previously held toward the

practices that Judge Bork targeted.

8

The Court has done so through a series of

Chicago School-influenced antitrust landmarks. These decisions, among other

things, relaxed the rule governing non-price vertical restraints,

9

raised barriers

to plaintiffs seeking to prove predatory pricing,

10

and overruled the nearly

century-old rule declaring resale price maintenance illegal per se.

11

Although

harm competition, but he suggested that anticompetitive outcomes were implausible. See B

ORK

,

supra note 1, at 156 (noting limits to the anticompetitive theory and a further complication).

Notwithstanding Bork’s general skepticism about the merits of suits challenging exclusionary

conduct, including unilateral refusals to deal, see id. at 156, 346, he concluded that the Supreme

Court had properly decided Lorain Journal Co. v. United States, 342 U.S. 143 (1951). B

ORK

,

supra note 1, at 344–46. Years after writing The Antitrust Paradox, Bork found another example

of anticompetitive exclusionary conduct in United States v. Microsoft Corp., 253 F. 3d 34 (D.C.

Cir. 2001) (en banc) (per curiam), where he represented one of Microsoft’s excluded rivals,

Netscape. Judge Posner, writing at about the same time as Judge Bork, was more receptive to the

likelihood of anticompetitive exclusion and the value of antitrust enforcement against it. Com-

pare, e.g., P

OSNER

,supra note 1, at 186 (predatory pricing is not inevitably irrational), with

B

ORK

,supra note 1, at 155 (predatory pricing is “most unlikely to exist”).

8

The Court did so mainly by modifying prior antitrust rules incrementally. William H. Page,

Legal Realism and the Shaping of Modern Antitrust, 44 E

MORY

L.J. 1, 51 (1995) (The Supreme

Court altered doctrine primarily by formulating “subsidiary decisional rules that govern the ap-

plication of the rules of liability, that define the types of harms that are compensable in private

suits, and that determine the sufficiency of evidence to go to the jury”); id. at 70 (“The Court’s

hesitancy to formulate rules of per se legality based upon Chicago’s theoretical insights reflects

the response of legal process jurisprudence to the realist critique of judging. . . . The Court has

chosen to defer to its established Sherman Act precedents, adapting the existing fabric of doc-

trine to current economic wisdom, but leaving sweeping legal change to Congress.”); see Bruce

H. Kobayashi & Timothy J. Muris, Chicago, Post-Chicago, and Beyond: Time to Let Go of the

20th Century, 78 A

NTITRUST

L.J. 147, 153 (2012) (“The courts have not . . . adopted rules of per

se legality or broad safe harbors, as some associated with the Chicago School have advocated.”).

Indeed, on several occasions, the Court modified rules in small steps when the government had

advocated larger ones. In Monsanto v. Spray-Rite Service Corp., 465 U.S. 752 (1984), the Court

declined to reconsider the per se rule against resale price maintenance, although the Solicitor

General urged it to do so. See id. at 761 n.7. Similarly, the Court did not adopt the “no economic

sense” test that the government proposed in its Trinko amicus brief. Brief for the United States

and the Federal Trade Commission as Amici Curiae Supporting Petitioner at 15–20, Verizon

Commc’ns Inc. v. Law Offices of Curtis V. Trinko, LLP, 540 U.S. 398 (2004) (No. 02-682),

available at www.justice.gov/atr/cases/f201000/201048.pdf.

9

Cont’l T.V., Inc. v. GTE Sylvania Inc., 433 U.S. 36 (1977).

10

Brooke Grp. Ltd. v. Brown & Williamson Tobacco Corp., 509 U.S. 209 (1993); Matsushita

Elec. Indus. Co., v. Zenith Radio Corp., 475 U.S. 574 (1986); Pac. Bell Tel. Co. v. linkLine

Commc’ns, Inc., 555 U.S. 438 (2009).These Chicago-oriented decisions were also influenced by

antitrust’s Harvard School. Phillip Areeda & Donald F. Turner, Predatory Pricing and Related

Practices Under Section 2 of the Sherman Act, 88 H

ARV

. L. R

EV

. 697 (1975).

11

Leegin Creative Leather Prods., Inc. v. PSKS, Inc., 551 U.S. 877 (2007) (overruling Dr.

Miles Medical Co. v. John D. Park & Sons Co., 220 U.S. 373 (1911)). The majority opinion in

Leegin cited Posner four times and Bork three times (and the dissent cited each twice). See

Leegin, 551 U.S. at 889 & 897; id. at 913–14 (Breyer, J., dissenting). Although Leegin represents

a doctrinal shift toward reduced antitrust enforcement, it expressly endorses one basis for anti-

trust enforcement that the Court’s prior resale price maintenance decisions did not: Leegin articu-

lates and accepts exclusionary theories of anticompetitive effect in addition to collusive theories.

Leegin, 551 U.S. at 893–94. Other landmark Supreme Court decisions advancing the Chicago