The Limits of Antitrust in the 21st Century: Some details of Frank Easterbrook's classic treatment may be outdated, but its core insights remain sound.

• Author: Lambert, Thomas A.
• Position: ANTITRUST

Antitrust is having a moment. Pundits and policymakers across the political spectrum are calling for increased antitrust enforcement to address all manner of social ills. From technology platforms' power over speech and encroachments on user privacy, to wage stagnation in more concentrated labor markets, to growing income inequality, reduced innovation, and threats to democracy itself, the list of maladies for which antitrust has been proposed as a remedy goes on and on.

Antitrust enforcers have taken note. Last year, the U.S. Federal Trade Commission hosted 14 public hearings to gather feedback on how antitrust might be revamped to address contemporary concerns. The PTC then joined the Antitrust Division of the U.S. Department of Justice in announcing probes of Google, Apple, Facebook, and Amazon. At the state level, nearly every state attorney general has joined antitrust investigations of Facebook (led by New York's attorney general, a Democrat) and Google (led by Texas's attorney general, a Republican).

Given policymakers' heightened interest in antitrust and the recent flurry of bipartisan enforcement activity, it is worth stepping back to ask a couple of big-picture questions: What are antitrust's limits in addressing the social harms that are motivating calls for more aggressive enforcement? And how should enforcers and courts proceed in light of those limits?

These questions are not new. In 1984, Frank Easterbrook addressed them in an influential Texas Law Review article entitled "The Limits of Antitrust." This article revisits his answers in light of the current antitrust moment. It concludes that his overarching prescription remains fundamentally sound but that his view about the relative harms from over- versus under-enforcement, as well as some of the specific screening mechanisms he proposed for optimizing antitrust's effectiveness, require some adjustment. It then suggests four new screening mechanisms that could assist 21st century courts and enforcers in ensuring that antitrust secures as much social welfare as possible given its inherent limitations.

EASTERBROOK'S "LIMITS OF ANTITRUST" APPROACH

The approach Easterbrook set forth in 1984 included three key components. The first was an overarching goal that courts should pursue in crafting antitrust doctrines. Antitrust is concerned with business behaviors that generate market power: coordinated conduct that leads to collusion and exclusionary actions that create monopoly power. The difficulty is that many acts of coordination between firms enhance market output, and many business practices that usurp sales from the actor's rivals--and thus "exclude" them from the market--also generate benefits for consumers. Extremely low prices, for example, may drive rivals from the market, but they offer an obvious and immediate benefit to consumers. Similarly, exclusive dealing agreements by manufacturers may raise their rivals' costs of distribution, but they may also spur manufacturer investment in distributors by reducing free-riding by competing manufacturers.

Regulating these sorts of competitive mixed bags inevitably entails costs. First, there are the costs that result from mistaken judgments. If the law wrongly allows conduct that is, on net, anticompetitive, consumers will face higher prices and/or reduced quality, and a deadweight loss will occur. But if the law wrongly forbids conduct that is, on balance, procompetitive, market out put will be lower than it otherwise would be and, again, consumers will suffer. In addition to these so-called "error costs," regulating competitive mixed bags entails significant "decision costs"--i.e., costs to business planners and courts from deciding whether contemplated or actual conduct is forbidden or permitted.

False conviction error costs, false acquittal error costs, and decision costs are intertwined. If policymakers try to reduce the risk of false conviction by making it harder for a plaintiff to establish liability or easier for a defendant to make out a defense, they will raise the risk of false acquittal. If they ease a plaintiff's burden or cut back on available defenses to reduce false acquittals, they will increase false convictions. And if they make the rule more nuanced in an effort to condemn the bad without chilling the good, thereby reducing error costs overall, they enhance decision costs. As in a game of whack-a-mole, driving down costs in one area will cause them to rise elsewhere.

Given this unhappy situation, Easterbrook proposed an overarching goal for antitrust policies: they should be crafted so as to minimize the sum of error and decision costs. Pursuing such an objective, policymakers would not try to prevent every anticompetitive act, allow every procompetitive one, or keep antitrust rules as simple as possible. They would eschew perfection along any single dimension in favor of overall optimization.

The second key component of Easterbrook's approach was his instruction about how antitrust tribunals should weigh the harms from false convictions versus false acquittals. If a procompetitive behavior is wrongly condemned, the adverse effect--squandered efficiencies--will persist until a subsequent judicial decision overrules the erroneous precedent. By contrast, if anticompetitive conduct is wrongly allowed to persist, the result will be the sort of monopoly pricing that invites market entry and thereby self-corrects. Accordingly, Easterbrook reasoned, false convictions are worse than false acquittals, which suggests that liability rules on questionable practices should be calibrated so as to err in the direction of allowing anticompetitive acts rather than banning or discouraging procompetitive ones.

The third key component of Easterbrook's approach was a set of five screening mechanisms designed to filter out challenges to practices that are likely to be procompetitive:

* Is there market power? The court should dismiss actions in which the defendant(s) lacked market power because anticompetitive harm is unlikely to occur absent such power.

* What is the logical relation between the defendant's profit and reduced competition? Business conduct that injures the perpetrator's rivals but does not enhance its profits is self-deterring, so antitrust intervention is unnecessary. If the challenged practice could enhance the defendant's profits even apart from a reduction in competition, condemnation of the practice could deter procompetitive conduct. Courts should thus dismiss antitrust claims that do not show how the defendant's profits are rising from a reduction in competition.

* Is there widespread adoption of identical vertical restraints? Easterbrook asserted that for trade-restraining agreements between firms operating at different levels in the same supply chain, anticompetitive harm is likely only if the restraints are widely adopted throughout the relevant market. Challenges to vertical restraints employed by only one or a few competitors in an industry should therefore be dismissed.

* What is the effect on the defendant's output? Because an exercise of market power (at least on the seller's side) involves a constriction of output and consequent increase in price, evidence that the defendant's output is increasing despite the challenged conduct suggests that the conduct is procompetitive and the challenge without merit.

* Who is the plaintiff? Because a defendant's customers benefit from enhanced competition in the defendant's market but are harmed when competition is reduced--and its rivals, vice-versa--competitor complaints should be viewed with suspicion.

ASSESSING EASTERBROOK'S APPROACH TODAY

Much has changed in...