“Theory of Second Best” in Operation: A Comment on the 1976 Modification of the Electrical Equipment Consent Decrees

• Author: Babbaba Epstein
• DOI: 10.1177/0003603X7702200301
• Date: 01 September 1977
• Published date: 01 September 1977
• Subject Matter: Article

"THEORY

OF

SECOND

BEST"

IN

OPERAnON:

A

COMMENT

ON

THE

1976

MODIFICATION

OF

THE

ELECTRICAL

EqUIPMENT

CONSENT

DECREES

by

BARBARA

EpSTEIN-

In

December

1976,

the U.S. Department of Justice filed

stipulations' modifying the

1962

Consent Decrees" accepted

by General Electric Company and Westinghouse Corporation.

The purpose of the Modification is to encourage price

com-

petition by prohibiting "certain pricing practices which have

occurred in the turbine generator industry since 1963." aThe

main provisions of the Modification limit access of the two

companies to market

data;

prices in particular.

The economic and legal possibilities resulting from the

limitations are fascinating in their range and variety.

In

the

discussion of some of these possibilities in this paper, the

question is raised: Does the economic "theory of second best"

apply to law as well as economics fAre there situations under

which satisfaction of fewer of the optimum conditions for

competition produces more desirable or preferable results

than fulfillment of more of the conditions

f'

OPTIMUM

CONDITIONS

FOR

COMPETITION

Economic theory posits, and antitrust enforcement has

adopted, four conditions for perfect competition: (1) many

buyers and sellers, with "many" defined as a sufficient number

that

no one can influence price; (2) a homogeneous (physi-

cally indistinguishable) product; (3) freedom of entry and

exit; and (4) complete knowledge on the

part

of buyers and

sellers of prevailing prices and conditions of sale.

Prior

to

the 1976 Modification of the

1962

Consent Decrees, the first

- Vice President, Horace

J.

DePodwin Associates, New York, N.Y.

503