Overshot the mark? a simple explanation of the chicago school's influence on antitrust

Competition Policy International

Volumn 5, Issue 1, 2009, Pages

  Wright, Joshua D ^a  

^a NONE

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EID: 70349199464     PISSN: 15540189     EISSN: 15546853     Source Type: Journal    
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References (261)

1. George Stigler, Graduate School of Business, University of Chicago, Nobel Memorial Lecture: The Process and Progress of Economics (Dec. 8, 1982), in NOBEL LECTURES, ECONOMICS 1981-1990 (Karl-Göran, Mäler ed., World Scientific Publishing Co., Singapore 1992) at 67.
2. Id. at 67-69.
3. Rhetorical battles over whether economics qualifies as a science aside, there is no serious debate that the antitrust economics literature conforms to the scientific method and that there is universal agreement that economics should inform antitrust analysis.
4. See Daniel P. O'Brien, The Antitrust Treatment of Vertical Restraints: Beyond the Possibility Theorems, in REPORT: THE PROS AND CONS OF VERTICAL RESTRAINTS 40, 80 Konkurrensverket, Swedish Competition Authority, 2008), available at http://www.konkurrensverket.se/upload/Filer/Trycksaker/Rapporter/ Pros&Cons/rap pros and cons vertical restraints.pdf. O'Brien refers to this body of literature as the 1984 Synthesis, rather than the Chicago Synthesis, because the latter has mistakenly come to be associated with an unscientific, non'interventionist view toward the antitrust treatment of vertical practices. While OBriens point is well taken, because one purpose of this review is to confront these mistaken associations directly, we elect to use Chicago School without loss of generality.
5. Robert Pitofsky, Introduction: Setting the Stage, in HOW THE CHICAGO SCHOOL OVERSHOT THE MARK: THE EFFECT OF CONSERVATIVE ECONOMIC ANALYSIS ON U.S. ANTITRUST, at 3, 6 (Robert Pitofsky ed., Oxford Univ. Press 2008).
6. See id. at 5-6, for the assertions that conservative economic analysis has impacted U.S. antitrust enforcement such that it is characterized by "preferences for economic models over facts [and] outright mistakes in matters of doctrine," and that "extreme interpretations and misinterpretations of conservative economic theory (and constant disregard of facts) have come to dominate antitrust," to the detriment of consumers.
7. See O'Brien, supra note 4.
8. President Obama, for instance, has promised to °direct my administration to reinvigorate antitrust enforcement. Posting of Joshua D. Wright to Truth On The Market, http://www.truthonthemarket.com/2008/11/05/ antitrust under president obama i will direct my administration to reinvigorate antitrust enforcement/ (Nov. 5, 2008, 9:53 EST). President Obamas respective nominee to head the Federal Trade Commission, Commissioner Leibowitz, has already cited favorably to OVERSHOT THE MARK in a policy speech. Jon Leibowitz, Commissioner, FTC, Remarks at Section 5 Workshop (Oct. 17, 2008) (available at http://ftc.gov/speeches/leibowitz/081017section5.pdf). Similarly, Christine Varney has publicly applauded the American Antitrust Institute Transition Report, which adopts an explicitly Post Chicago vision of antitrust enforcement, noting that "a great framework that starts it and I do endorse the conclusion. Posting of Joshua D. Wright to Truth On The Market, http://www.truthonthemarket.com/2009/02/22/doj aag designate christine varney on section 2 europe google a puzzling statement about error costs/ (Feb. 22, 2009 21:10 EST).
9. See Bell Atlantic Corp. v. Twombly, 550 U.S. 544 (2007) (for discussion of plausibility standard).
10. JOHAN VAN OVERTVELDT, THE CHICAGO SCHOOL: HOW THE UNIVERSITY OF CHICAGO ASSEMBLED THE THINKERS WHO REVOLUTIONIZED ECONOMICS AND BUSINESS (Agate B2 2007).
11. See, e.g., ROBERT H. BORK, THE ANTITRUST PARADOX: A POLICY AT WAR WITH ITSELF (The Free Press 1993) (1978);
12. Edmund W. Kitch, The Fire of Truth: Remembrance of Law and Economics at Chicago, 1932-1970, 26 J.L. & ECON. 163 (1983);
13. William E. Kovacic & Carl Shapiro, Antitrust Policy: A Century of Economic and Legal Thinking, 14 J. ECON. PERSPECTIVES 43 (2000);
14. Alan J. Meese, Tying Meets the New Institutional Economics: Farewell to the Chimera of Forcing, 146 U. PA. L. REV. 1 (1997);
15. William H. Page, The Chicago School and the Evolution of Antitrust: Characterization, Antitrust Injury, and Evidentiary Sufficiency, 75 VA. L. REV. 1221 (1989);
16. Richard A. Posner, The Chicago School of Antitrust, 127 U. PA. L. REV. 925 (1969).
17. See, e.g., Pitofsky, supra note 5, at 3, 5; Daniel L. Rubinfeld, On the Foundations of Antitrust Law and Economics, in OVERSHOT THE MARK, supra note 5, at 51, 52; Richard Schmalensee, Thoughts on the Chicago Legacy in U.S. Antitrust, in OVERSHOT THE MARK, supra note 5, at 11, 22.
18. For discussions of Bork's efforts, see Frank H. Easterbrook, The Chicago School and Exclusionary Conduct, 31 HARV. J.L. & PUB. POL'Y 439 (2008);
19. Douglas H. Ginsburg, Judge Bork, Consumer Welfare, and Antitrust Law, 31 HARV. J.L. & PUB. POL'Y 449 (2008);
20. George L. Priest, The Abiding Influence of The Antitrust Paradox, 31 HARV. J.L. & PUB. POL'Y 455 (2008).
21. Joshua D. Wright, The Roberts Court and the Chicago School of Antitrust: The 2006 Term and Beyond, 3 COMPETITION POL'Y INT'L 24 (2007) (arguing that Chicago School economic principles successfully characterize the Roberts Court antitrust jurisprudence).
22. See Steven C. Salop, Economic Analysis of Exclusionary Vertical Conduct: Where Chicago Has Overshot the Mark, in OVERSHOT THE MARK, supra note 5, at 141, 144 (for the claim that "it is important to recognize that [the Post Chicago] approach has its root in the economic analysis of Chicago School commentators," referring to the work of Aaron Director &
23. Edward H. Levi, Law and the Future: Trade Regulation, 51 NW. U. L. REV. 281 (1956);
24. Peter C. Carstensen, Director and Levi After 40 Years: The Anti Antitrust Agenda Revisited, 17 MCLR 37, 40 (1996)
25. (for the proposition that Director and Levi's analysis was a precursor to the raising rivals' costs hypothesis); Comment, Vertical Forestalling Under the Antitrust Laws, 19 U. CHI. L. REV. 583 (1952).
26. See, e.g. Elizabeth Granitz & Benjamin Klein, Monopolization by "Raising Rivals' Costs": The Standard Oil Case, 39 J.L. & ECON. 1 (1996);
27. Dennis Carlton & Michael Waldman, The Strategic Use of Tying to Preserve and Create Market Power in Evolving Industries, 33 RAND J. ECON. 194 (2002).
28. See William E. Kovacic, The Intellectual DNA of Modern U.S. Competition Law for Dominant Firm Conduct: The Chicago Harvard Double Helix, 2007 COLUM. BUS. L. REV. 1 (2007).
29. Einer Elhauge, Harvard, Not Chicago: Which Antitrust School Drives Recent U.S. Supreme Court Decisions?, 3 COMPETITION POL'Y INT'L 59 (2007).
30. For claims that Chicago School economics caused courts to adopt erroneous economic principles and get specific cases wrong, see e.g. Schmalensee, supra note 12, at 19, 20;
31. Thomas E. Kauper, Influence of Conservative Economic Analysis on the Development of the Law of Antitrust, in OVERSHOT THE MARK, supra note 5, at 40, 44;
32. Herbert Hovenkamp, The Harvard and Chicago Schools and the Dominant Firm, in OVERSHOT THE MARK, supra note 5, at 109, 113;
33. Harvey J. Goldschmid, Comment on Herbert Hovenkamp and the Dominant Firm: The Chicago School Has Made Us Too Cautious About False Positives and the Use of Section 2 of the Sherman Act, in OVERSHOT THE MARK, supra note 5, at 123, 126;
34. Warren S. Grimes, The Sylvania Free Rider Justification for Downstream Power Vertical Restraints: Truth or Invitation for Pretext?, in OVERSHOT THE MARK, supra note 5, at 181, 191;
35. Marina Lao, Free Riding: An Overstated, and Unconvincing, Explanation for Resale Price Maintenance, in OVERSHOT THE MARK, supra note 5, at 196, 201.
36. For claims that the Chicago School caused courts to develop sub optimal legal rules, see e.g. Schmalensee, supra note 12, at 19; Kauper, id. at 42;
37. Eleanor M. Fox, The Efficiency Paradox, in OVERSHOT THE MARK, supra note 5, at 77, 79-80;
38. John B. Kirkwood & Robert H. Lande, The Chicago School's Foundation is Flawed: Antitrust Protects Consumers, Not Efficiency, in OVERSHOT THE MARK, supra note 5, at 89, 90; Hovenkamp, id. at 111.
39. For claims that the Chicago School influenced antitrust policy in the wrong direction, see e.g. F.M. Scherer, Conservative Economics and Antitrust: A Variety of Influences, in OVERSHOT THE MARK, supra note 5, at 30, 36-37; Rubinfeld, supra note 12, at 52; Fox, id. at 81; Kirkwood & Lande, supra, at 90; Hovenkamp, id. at 111.
40. Posting of Joshua D. Wright to Truth On The Market, http://www. truthonthemarket.com/2007/07/25/chicago post chicagopost post Chicago on using shorthand labels responsibly/ (July 25, 2007, 13:07 EST).
41. This section relies on my earlier work on the influence of the Chicago School on the Roberts Court's antitrust jurisprudence. See Wright, supra note 14.
42. CHICAGO ESSAYS IN ECONOMIC DEVELOPMENT vii (David Wall, ed., Univ. of Chicago Press 1972).
43. For remarks on how the current financial crisis demonstrates that the Chicago School is "on life support, if it is not dead," see J. Thomas Rosch, Comm'r, Fed. Trade Comm'n, New York Bar Association Annual Dinner: Implications of the Financial Meltdown for the FTC (Jan. 29, 2009), http://ftc.gov/speeches/rosch/090129financialcrisisnybarspeech.pdf.
44. The Chicago School does not deserve all of the credit for this revolution. Kovacic convincingly demonstrates that the intellectual foundations of monopolization doctrine were generated by both Chicago and Harvard, and with substantial convergence between the two. See Kovacic, supra note 17. Additionally, Elhauge argues that the Roberts Court's antitrust jurisprudence represents a shift away from Chicago and toward Harvard. See Elhauge, supra note 18.
45. Jonathan B. Baker & Timothy F. Bresnahan, Economic Evidence in Antitrust: Defining Markets and Measuring Market Power 23-26 (Stanford Law School, Working Paper No. 328, 2006).
46. See, e.g., YALE BROZEN ET AL., CONCENTRATION, MERGERS, AND PUBLIC POLICY (The Free Press 1982)
47. (questioning the causal link between market concentration and price, and providing alternative efficiency based explanations for the correlation); HARVEY J. GOLDSCHMID ET AL., INDUSTRIAL CONCENTRATION: THE NEW LEARNING (Little Brown and Co. 1974).
48. Professors Demsetz and Armen Alchian are frequently associated with the Chicago School despite the fact that both spent the bulk of their careers at the University of California, Los Angeles (UCLA). As any UCLA economist should note, the antitrust community has sometimes allowed the Chicago School to take credit for many of the contributions from UCLA economists such as Alchian, Demsetz, Benjamin Klein, and others. The contributions of the UCLA economists to antitrust analysis are discussed by former FTC Chairman, and UCLA alumnus, Timothy J. Muris. See Timothy J. Muris, Improving the Economic Foundations of Competition Policy, 12 GEO MASON L. REV. 1 (2003).
49. Harold Demsetz, Two Systems of Belief About Monopoly, in INDUSTRIAL CONCENTRATION, supra note 26.
50. The contributions of Demsetz and other participants in the famous Airlie House Conference are discussed in Timothy J. Muris, Economics and Antitrust, 5 GEO. MASON L. REV. 303 (1997).
51. See THE NEW PALGRAVE DICTIONARY OF ECONOMICS AND THE LAW 227-33, 601-05 (Peter Newman ed., Macmillan Reference 1998);
52. see also Sam Peltzman, Aaron Director's Influence on Antitrust Policy, 48 J.L. & ECON. 313 (2005).
53. Seminal contributions from the Chicago School literature include, but are not limited to,
54. Robert H. Bork, Vertical Integration and the Sherman Act: The Legal History of an Economic Misconception, 22 U. CHI. L. REV. 157 (1954);
55. Aaron Director &
56. Edward H. Levi, Law and the Future of Trade Regulation, 51 NW. U. L. REV. 281 (1956)
57. (reprinted in 3 COMPETITION POL'Y INT'L 253 (2007);
58. Ward S. Bowman, Tying Arrangements and the Leverage Problem, 67 YALE L.J. 19 (1957);
59. John S. McGee, Predatory Price Cutting: The Standard Oil (NJ) Case, 1 J.L. & ECON. 137 (1958);
60. Lester G. Telser, Why Should Manufacturers Want Fair Trade?, 3 J.L. & ECON. 86 (1960).
61. See, e.g., Louis Kaplow & Carl Shapiro, Antitrust, in 2 HANDBOOK OF LAW AND ECONOMICS 1073 (A. Mitchell Polinsky & Steven Shavell eds., Elsevier B.V. 2007) available at http://faculty.haas.berkeley.edu/shapiro/antitrust2007. pdf.
62. Howard P. Marvel, Exclusive Dealing, 25 J.L & ECON. 1 (1982);
63. Benjamin Klein & Andres V. Lerner, The Expanded Economics of Free Riding: How Exclusive Dealing Prevents Free Riding and Creates Undivided Loyalty, 74 ANTITRUST L.J. 473 (2007);
64. Benjamin Klein & Kevin M. Murphy, Exclusive Dealing Intensifies Competition for Distribution, 75 ANTITRUST L.J. 433(2008).
65. Benjamin Klein & Joshua D. Wright, The Economics of Slotting Contracts, 50 J.L. & ECON. 473 (2007);
66. Joshua D. Wright, Slotting Contracts and Consumer Welfare, 74 ANTITRUST L.J. 439 (2007);
67. Joshua D. Wright, Antitrust Law and Competition for Distribution, 23 YALE J. ON REG. 169 (2006).
68. Benjamin Klein & Kevin M. Murphy, Vertical Restraints as Contract Enforcement Mechanisms, 31 J.L & ECON. 265 (1988).
69. Cont'l T.V., Inc., v. GTE Sylvania, Inc., 433 U.S. 36 (1977); State Oil Co. v. Khan, 522 U.S. 3 (1997); Verizon Commc'ns Inc. v. Law Offices of Curtis V. Trinko, LLP, 540 U.S. 398 (2004); Brooke Group Ltd. v. Brown & Williamson Tobacco Corp., 509 U.S. 209 (1993); Leegin Creative Leather Prods., Inc. v. PSKS, Inc., 551 U.S. 877 (2007); Pac. Bell Tel. Co. v. linkLine Commc'ns., Inc., No. 07 512, 2009 U.S. Lexis 1635 (U.S. Feb. 25, 2009).
70. See, e.g., Frank Easterbrook, The Limits of Antitrust, 65 TEX. L. REV. 1 (1984).
71. Richard A. Posner, The Next Step in the Antitrust Treatment of Restricted Distribution: Per Se Legality, 48 U. CHI. L. REV. 6 (1981).
72. See, e.g., DOMINICK. T. ARMENTANO, ANTITRUST POLICY: THE CASE FOR REPEAL (Ludwig von Mises Institute 2007) (1986).
73. On the Post Chicago approach to antitrust, see Jonathan B. Baker, A Preface to Post Chicago Antitrust, in POST CHICAGO DEVELOPMENTS IN ANTITRUST LAW 60 (Antonio Cucinotta et al. eds., Edward Elgar Publishing 2003).
74. A seminal paper in this literature is Michael D. Whinston, Tying, Foreclosure, and Exclusion, 80 AM. ECON. REV. 837 (2000).
75. See Thomas G. Krattenmaker & Steven C. Salop, Anticompetitive Exclusion: Raising Rivals' Costs to Achieve Power over Price, 96 YALE L.J. 209 (1986).
76. See, e.g., Whinston, supra note 40; Carlton & Waldman, supra note 16; see also Bruce Kobayashi, Does Economics Provide A Reliable Guide to Regulating Commodity Bundling By Firms? A Survey of the Economic Literature, 1 J. COMPETITION L. & ECON. 707 (2005) (surveying the bundling literature);
77. Eric B. Rasmusen, Mark J. Ramseyer & John Shepard Wiley Jr., Naked Exclusion, 81 AM. ECON. REV. 1137 (1991);
78. Douglas Bernheim & Michael Whinston, Exclusive Dealing, 106 J. POL. ECON. 64 (1998);
79. John Simpson & Abraham L. Wickelgren, Naked Exclusion, Efficient Breach, and Downstream Competition, 97 AM. ECON. REV. 1305 (2007);
80. Patrick Bolton, Joseph F. Brodley & Michael H. Riordan, Predatory Pricing: Strategic Theory and Legal Policy, 88 GEO. L.J. 2239 (2000).
81. Eastman Kodak Co. v. Image Technical Servs., Inc., 504 U.S. 451 (1992).
82. In aftermarket "lock-in" cases most closely resembling the Post-Chicago theories in Kodak, lower courts have "bent over backwards to construe Kodak as narrowly as possible." See Herbert Hovenkamp, The Reckoning of Post-Chicago Antitrust, in POST-CHICAGO DEVELOPMENTS IN ANTITRUST, supra note 39, at 8;
83. see also David A.J. Goldfine & Kenneth M. Vorrasi, The Fall of the Kodak Aftermarket Doctrine: Dying A Slow Death in the Lower Courts, 72 ANTITRUST L.J. 209 (2004);
84. Bruce H. Kobayashi & Joshua D. Wright, Federalism, Substantive Preemption, and Limits on Antitrust: An Application to Patent Holdup, J. COMPETITION L. & ECON. (forthcoming 2009) (extending Goldfine and Vorrasi's analysis through 2007 and confirming their results).
85. William E. Kovacic, The Modern Evolution of Competition Policy Enforcement Norms, 71 ANTITRUST L.J. 377 (2003).
86. See Kovacic, supra note 17. Kovacic's primary theme is that the Chicago/Post Chicago narrative minimizes the contributions of the Harvard School scholars such as Professors Phillip Areeda and Donald Turner, as well as Justice Stephen Breyer.
87. A view endorsed by one of the Chicago School's more prominent contributors. See Richard A. Posner, Keynote Address: Vertical Restrictions and "Fragile" Monopoly, 50 ANTITRUST BULL. 499, 500 (2005).
88. See, e.g., Pitofsky, supra note 5, at 4-5;
89. Irwin M. Stelzer, Some Practical Thoughts About Entry, in OVERSHOT THE MARK, supra note 5, at 24, 28-29;
90. Fox, supra note 19, at 82, 86, 88;
91. Lao, supra note 19, at 199.
92. See supra text accompanying note 15.
93. See Granitz & Klein, supra note 16.
94. Tom Hazlett, Predation in Local Cable TV Markets, 40 ANTITRUST BULL. 609 (1995).
95. George J. Stigler, The Theory of Oligopoly, 72 J. POL. ECON. 44 (1964).
96. Carlton & Waldman, supra note 16.
97. Posner, Chicago School of Antitrust, supra note 11, at 928;
98. accord BORK, THE ANTITRUST PARADOX, supra note 11, at 117.
99. See, e.g., Posner, Chicago School of Antitrust, supra note 5, at 928-29:
100. It is still fair to ask why the application of price theory to antitrust should have been a novelty. The answer, I believe, is that in the 1950s and early 1960s, industrial organization, the field of economics that studies monopoly questions, tended to be untheoretical, descriptive, "institutional," and even metaphorical. Casual observations of business behavior, colorful characterizations (such as the term "barrier to entry"), eclectic forays into sociology and psychology, descriptive statistics, and verification by plausibility took the place of the careful definitions and parsimonious logical structure of economic theory. The result was that industrial organization regularly advanced propositions that contradicted economic theory.
101. See Bruce H. Kobayashi, Game Theory and Antitrust, A Post Mortem, 5 GEO. MASON L. REV. 411, 412 (1997) (criticizing the application of game theory in antitrust on the grounds that "game theoretic models of [industrial organization] have not been empirically verified in a meaningful sense").
102. See also David Evans & Jorge Padilla, Designing Antitrust Rules for Assessing Unilateral Practices: A Neo Chicago Approach, 72 U. CHI. L. REV. 73, 98 (2005) ("it has yet to demonstrate a capacity to produce what we would call identification theorems-useful descriptions of the circumstances determining whether a practice is procompetitive or anticompetitive").
103. See, e.g., Alan J. Meese, Price Theory and Vertical Restraints: A Misunderstood Relation, 45 UCLA L. REV. 143 (1997);
104. Alan J. Meese, Exclusive Dealing, The Theory of the Firm, and Raising Rivals' Costs: Toward a New Synthesis, 50 ANTITRUST BULL. 371 (2005);
105. Alan J. Meese, Price Theory, Competition, and the Rule of Reason, 2003 U. ILL. L. REV. 77 (2003);
106. Alan J. Meese, Market Failure and Non-Standard Contracting: How the Ghost of Perfect Competition Still Haunts Antitrust, 1 J. COMPETITION L. & ECON. 21 (2005).
107. See, e.g., George J. Stigler, The Economics of Information, 69 J. POL. ECON. 213 (1964) (analyzing the economics of information from a search cost perspective, whereas search costs would not exist under perfect competition);
108. Telser, supra note 30 (analyzing resale price maintenance);
109. Klein & Murphy, supra note 34;
110. Benjamin Klein, Market Power in Aftermarkets, 17 MANAGERIAL & DECISION ECON. 143 (1996);
111. Klein & Lerner, supra note 32 (analyzing the role of exclusive dealing contracts in preventing dealer free riding).
112. See Harold Demsetz, 100 Years of Antitrust: Should We Celebrate?, Brent T. Upson Memorial Lecture, George Mason University School of Law, Law and Economics Center (Sept. 21, 1989).
113. See James C. Cooper, Luke M. Froeb, Dan O'Brien & Michael G. Vita, Vertical Antitrust Policy as a Problem of Inference, 23 INT'L J. INDUS. ORG. 639 (2005);
114. Francine Lafontaine & Margaret Slade, Exclusive Contracts and Vertical Restraints: Empirical Evidence and Public Policy (Sept. 2005) (unpublished paper, available at http://www2.warwick.ac.uk/fac/soc/economics/ staff/faculty/slade/wp/ecsept2005.pdf).
115. See Brozen, supra note 26;
116. Demsetz, supra note 28
117. R.H. COASE, George J. Stigler, in ESSAYS ON ECONOMICS AND ECONOMISTS (University of Chicago Press 1995).
118. Harold Demsetz, George J. Stigler: Midcentury Neoclassicalist with a Passion to Quantify, 101 J. POL. ECON. 793 (1993).
119. Press Release, The Royal Swedish Academy of Sciences, The Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel 1982 (Oct. 20, 1982), http://nobelprize.org/nobel prizes/economics/laureates/1982/press.html.
120. See, e.g., George J. Stigler, The Economist and the State, 55 AM. ECON. REV. 1, 17 (1965):
121. It will become inconceivable that the margin requirements on securities markets will be altered once a year without knowing whether they have even a modest effect. It will become impossible for an import-quota system to evade calculus of gains and costs . . . . Studies will inevitably and irresistibly enter into the subject of public policy, and we shall develop a body of knowledge essential to intelligent policy formation.
122. George J. Stigler, The Economic Effects of the Antitrust Laws, 9 J.L. & ECON. 225 (1966).
123. George J. Stigler, United States v. Loew's: A Note on Block Booking, 1963 SUP. CT. REV. 152 (1963).
124. George J. Stigler, The Economies of & Scale, 1 J.L. & ECON. 54 (1958).
125. GEORGE J. STIGLER, MEMOIRS OF AN UNREGULATED ECONOMIST 97-100 (University of Chicago Press 1988).
126. See Muris, supra note 27, at 17.
127. The seminal article from Klein & Murphy, supra note 34, includes a detailed discussion of Coors' use of vertical restraints to solve dealer free riding problems.
128. Easterbrook, supra note 36.
129. See, e.g., Evans & Padilla, supra note 55; C. Frederick Beckner III & Steven C. Salop, Decision Theory and Antitrust Rules, 67 ANTITRUST L.J. 41 (1999);
130. Keith N. Hylton & Michael Salinger, Tying Law and Policy: A Decision Theoretic Approach, 69 ANTITRUST L.J. 469 (2001);
131. Luke Froeb et al., Vertical Antitrust Policy as a Problem of Inference, 23 INT'L J. INDUS. ORG. 639 (2005).
132. Evans & Padilla, supra note 55
133. Others have applied the error-cost framework in a similar manner. See supra note 71.
134. See id. at 88.
135. See id. at 75.
136. See Kovacic, supra note 17.
137. PHILLIP AREEDA & DONALD TURNER, ANTITRUST LAW 31-33 (1978).
138. Barry Wright Corp. v. ITT Grinnell Corp., 724 F.2d 227, 234 (1st Cir. 1983).
139. See Fox, supra note 19, at 79-80, 82, 86, 88;
140. Lao, supra note 19, at 199, 208.
141. See also Stephen Calkins, Wrong Turns in Exclusive Dealing Law, in OVERSHOT THE MARK, supra note 5, at 156, 165-67.
142. We exclude mergers from our analysis here for a number of reasons. The first is that OVERSHOT THE MARK largely ignores mergers with the exception of Baker & Shapiro, Reinvigorating Horizontal Merger Enforcement. One of the primary points made in that article is that, during the George W. Bush administration, the Department of Justice did not vigorously enforce the Clayton Act. Jonathan B. Baker & Carl Shapiro, Reinvigorating Horizontal Merger Enforcement, in OVERSHOT THE MARK, supra note 5, at 235, 246-7.
143. Baker & Shapiro offer some evidence that the percentage of merger challenges relative to transactions identified by the Hart Scott Rodino filing requirements fell. Id. at 246. The second is that others have defended against, discussed, and picked apart these claims in great detail. See, e.g., Timothy J. Muris, Facts Trump Politics: The Complexities of Comparing Merger Enforcement over Time and Between Agencies, ANTITRUST, Summer 2008, at 37;
144. John D. Harkrider, Antitrust Enforcement During the Bush Administration-An Econometric Estimation, ANTITRUST, Summer 2008, at 43.
145. The third reason is that, even if one accepts the questionable statistical foundation of Baker and Shapiro's claims that the Bush II Department of Justice (and to a lesser extent the FTC) gave a pass to anticompetitive mergers, there is little evidence to support that such a result (including the split between the DOJ and FTC on merger enforcement) is attributable to Chicago School economics. Finally, there is growing convergence on the relevant antitrust economics of mergers. This literature focuses on empirical methods designed to improve post merger pricing predictions and is not inherently ideological. For a survey of the state of empirical evidence on the competitive effects of mergers, see Matthew Weinberg, The Price Effects of Horizontal Mergers, 4 J. COMPETITION L. & ECON. 433 (2008);
146. Dennis W. Carlton, Why We Need to Measure the Effect of Merger Policy and How to Do It (Nat'l Bureau of Econ. Research, Working Paper No. 14719, Feb. 2009);
147. Paul Paulter, Evidence on Mergers and Acquisitions, 48 ANTITRUST BULL. 119 (2003);
148. Kaplow & Shapiro, supra note 32, at 1152-57.
149. See also Orley Ashenfelter & Daniel Hosken, The Effect of Mergers on Consumer Prices: Evidence from Five Selected CaseStudies (Nat'l Bureau of Econ. Research, Working Paper No. 13859, Mar. 2008);
150. Graeme Hunter, Gregory K. Leonard & G. Steven Olley, Merger Retrospective Studies: A Review, ANTITRUST, Fall 2008, at 34.
151. Leegin, 127 S. Ct. 2705. On Leegin and its antitrust implications, see Wright, supra note 14.
152. See Thomas A. Lambert, Dr. Miles is Dead. Now What?: Structuring a Rule of Reason for Evaluating Minimum Resale Price Maintenance, WM. & MARY L. REV. (forthcoming 2009).
153. Leegin, 127 S. Ct. at 2709. The Supreme Court overruled the per se rule against maximum RPM ten years earlier in State Oil v. Khan, 522 U.S. at 3. See Benjamin Klein, Distribution Restrictions Operate by Creating Dealer Profits: Explaining the Use of Maximum Resale Price Maintenance in State Oil v. Kahn, 7 SUP. CT. ECON. REV. 1 (1999).
154. See Brief of Amici Curiae Economists in Support of Petitioner at 16, Leegin Creative Leather Prods. V. PSKS, Inc, 127 S. Ct. 2705 (No. 06-480), 2007 WL 173681 (stating that "[i]n the theoretical literature, it is essentially undisputed that minimum RPM can have procompetitive effects and that under a variety of market conditions it is unlikely to have anticompetitive effects"). The best estimate of the prevalence of collusion allegations in RPM cases is no greater than 15 percent. See Pauline Ippolito, Resale Price Maintenance: Empirical Evidence from Litigation, 34 J.L. & ECON. 263, 270 (1991).
155. Warren S. Grimes, The Path Forward After Leegin: Seeking Consensus Reform of the Antitrust Laws of Vertical Restraints, 75 ANTITRUST L.J. 467 (2008).
156. See, e.g., Grimes, supra note 19, at 182, 189, 191, 195;
157. Lao, supra note 19, at 199, 203, 209.
158. Discount Pricing Consumer Protection Act, S. 148, 111th Cong. (2009).
159. Sylvania, 433 U.S. at 55.
160. This economic rationale for RPM is typically associated with Telser, supra note 30.
161. Robert Pitofsky, Why 'Dr. Miles' Was Right, 8 REGULATION 27, 29 (1984).
162. Robert Pitofsky, Are Retailers Who Offer Discounts Really "Knaves"?: The Coming Challenge to the Dr. Miles Rule, ANTITRUST, Spring 2007, at 61, 63;
163. Grimes, supra note 19 at 187.
164. Benjamin Klein, Competitive Resale Price Maintenance in the Absence of Free Riding (Feb. 10, 2009) (draft for FTC Hearings on Resale Price Maintenance, Feb. 17, 2009), available at http://ftc.gov/opp/workshops/rpm/docs/bklein0217. pdf.
165. See, e.g. Robert L. Hubbard, Protecting Consumers Post Leegin, ANTITRUST, Fall 2007, at 41.
166. Leegin Creative Leather Products., Inc. v. PSKS, Inc., 127 S. Ct. 2705, 2733 (2007).
167. Grimes, supra note 19, at 195.
168. Lao, supra note 19, at 203.
169. Id. at 15.
170. A second critical economic question is why the compensation for the desired promotional services takes its particular form, e.g. RPM, a lump sum per unit time payment such as a slotting fee, or a wholesale price discount. For a discussion of the relative merits of volume based payment schemes such as RPM and wholesale price discounts in comparison to slotting fees, see Klein and Wright, supra note 33.
171. Leegin, 127 S. Ct. at 2716 (citing Klein & Murphy, supra note 34, at 295. Klein has recently revisited the economics of resale price maintenance as first articulated by Klein and Murphy, in Klein, supra note 900.
172. This is not the case where the services desired have significant inter-retailer demand effects and consumers shift their purchases from one retailer to another in response to the retailer's supply of the service. However, these large inter retailer demand effects are not likely to be present for many desired services, such as the provision of premium shelf space. A more complete economic analysis of the incentive conflict based inter-retailer demand effects is presented in Ralph Winter, Vertical Control and Price Versus Nonprice Competition, 108 Q. J. ECON. 61 (1993),
173. and in Klein & Wright, supra note 33.
174. See Wright, supra note 33.
175. See Benjamin Klein & Keith B. Leffler, The Role of Market Forces in Assuring Contractual Performance, 89 J. POL. ECON. 615 (1981).
176. See Klein, supra note 90 (describing how RPM facilitates self-enforcement).
177. See, e.g., Grimes, supra note 84, at 477-78.
178. Lao, supra note 19, at 209.
179. Id. at 210.
180. Id. at 211.
181. See Klein, supra note 90, at 42.
182. See Dan O'Brien, supra note 4, for an excellent and extensive discussion of the relevant theoretical and empirical literature on RPM and vertical restraints generally.
183. Cooper et al., supra note 59.
184. Francine Lafontaine & Margaret Slade, Empirical Assessment of Exclusive Contracts, in HANDBOOK OF ANTITRUST ECONOMICS (Paolo Buccirossi ed., The MIT Press 2008).
185. Cooper et al., supra note 59, at 18 (emphasis added).
186. Lafontaine & Slade, supra note 59, at 22.
187. O'Brien, supra note 4, at 72-73
188. (citing Sofia Berto Villas-Boas, Vertical Relationships between Manufacturers and Retailers: Inference with Limited Data, 74 REV. ECON. STUD. 625 (2007);
189. Julie H. Mortimer, Vertical Contracts in the Video Rental Industry, 75 REV. ECON. STUD. 165 (2008);
190. Giorgio Zanarone, Vertical Restraints and the Law: Evidence from Automobile Franchising, 52 J.L. & CON. (forthcoming 2009)).
191. Id. at 15.
192. O'Brien, supra note 4, at 82.
193. This section relies on the discussion in Alden F. Abbott & Joshua D. Wright, Antitrust Analysis of Tying Arrangements and xclusive Dealing (George Mason Law & Economics Research Paper No. 08-37) (forthcoming in ANTITRUST LAW AND ECONOMICS, Keith N. Hylton, ed., Edward Elgar Publishing, 2009).
194. Salop, supra note 15, at 142-44. Salop also acknowledges that the RRC concept has its roots in the work of earlier Chicago commentators such as Aaron Director and Edward Levi, who recognized the potential for anticompetitive effects arising from exclusive dealing contracts. Id. at 144.
195. This anticompetitive strategy using exclusive contracts belongs to the more general class of strategies analyzed in the raising rivals' costs literature. See Krattenmaker & Salop, supra note 41; Stephen C. Salop & David T. Scheffman, Raising Rivals' Costs, 73 AM. ECON. REV. 267 (1983).
196. This line of reasoning is conventionally associated with Robert Bork. See, e.g., BORK, supra note 11, at 309 ("A seller who wants exclusivity must give the buyer something for it. If he gives a lower price, the reason must be that the seller expects the arrangement to create efficiencies that justify the lower price. If he were to give a lower price simply to harm his rivals, he would be engaging in deliberate predation by price cutting, and that, as we have seen in Chapter 7, would be foolish and self defeating behavior on his part").
197. This analogy is explored and used to derive the economic conditions necessary for exclusive contracts to cause anticompetitive effects in Benjamin Klein, Exclusive Dealing as Competition for Distribution on the Merits, 12 GEO. MASON L. REV. 119, 122-28 (2003).
198. See Granitz & Klein, supra note 16.
199. Bernheim & Whinston, supra note 42, formally derive this result.
200. See Carlton & Waldman, supra note 16.
201. An alternative, but related, theory of exclusion operates by driving out competing retailers and allowing S to monopolize distribution and also collect its monopoly price on the distribution of rival products. See Whinston, supra note 40. This alternative theory also requires substantial economies of scope or scale in the supply of distribution services. Economies of scope in distribution may be present if, for example, S's product is essential to the economic viability of R.
202. Rasmussen, Ramseyer & Wiley, supra note 42.
203. Ilya R. Segal & Michael D. Whinston, Naked Exclusion: Comment, 90 AM. ECON. REV. 296 (2000).
204. But see id., and MICHAEL D. WHINSTON, LECTURES ON ANTITRUST ECONOMICS (MIT Press, 2008), for arguments that the ability to make discriminatory or sequential offers to buyers increases the support for exclusion.
205. See, e.g., Chiara Fumagalli & Massimo Motta, Exclusive Dealing and Entry When Buyers Compete, 96 AM. ECON. REV. 785 (2006) (exclusion is not likely with downstream retail competition where potential entrant can achieve scale through distribution with a small number of retailers);
206. Simpson & Wickelgren, supra note 42 (exclusion is possible with downstream retail competition because each individual retailer has little to gain from holding out from the exclusive and the increased benefits of upstream competition are largely passed on to final consumers);
207. John Simpson & Abraham L. Wickelgren, Exclusive Dealing and Entry, When Buyers Compete: Comment (mimeo, June 2005) (same).
208. Fumagalli & Motta, supra note 126.
209. Simpson & Wickelgren, supra note 126.
210. A description of other commonly accepted justifications for exclusive dealing is presented in Jonathan M. Jacobson, Exclusive Dealing, "Foreclosure," and Consumer Harm, 70 ANTITRUST L.J. 311, 357-60 (2002).
211. Marvel, Exclusive Dealing, supra note 32.
212. 823 F.2d 1215 (8th Cir. 1987). See also Klein & Lerner, supra note 32, at 481-83 (discussing Ryko as an example of this type of free-riding).
213. Klein & Lerner, supra note 32.
214. See Klein & Wright, supra note 33,
215. which extends the original analysis of inadequate dealer incentives to promote and the use of vertical restraints in solving this dealer incentive problem in Klein & Murphy, supra note 34.
216. Klein & Lerner, supra note 32, at 497-502.
217. Id. at 502-04.
218. Joyce Beverages of N.Y., Inc. v. Royal Crown Cola Co., 555 F. Supp. 271, 276-77 (S.D.N.Y. 1983).
219. See also Hendricks Music Co. v. Steinway, Inc., 689 F. Supp. 1501 (N.D. Ill. 1988) ("it is perfectly legitimate and, in fact, procompetitive, for manufacturers to insist that their dealers devote undivided loyalty to their products and not to those of their competitors").
220. Roland Mach. Co. v. Dresser Indus., Inc., 749 F.2d 380 (7th Cir. 1984).
221. Klein & Lerner, supra note 32, at 507-18.
222. See generally United States v. Dentsply Int'l, Inc., 277 F. Supp. 2d 387 (D. Del. 2003), rev'd, 399 F.3d 181 (3d Cir. 2005), cert. denied, 126 S. Ct. 1023 (2006).
223. Klein and Lerner conclude that creating "undivided dealer loyalty" was a plausible justification in Dentsply, but that "we do not know if a more complete analysis would have found the net effect of Dentsply's exclusive dealing to be procompetitive or anticompetitive," and "what is clear is that further analysis of the undivided loyalty rationale for exclusive dealing should have been undertaken." Klein & Lerner, supra note 32, at 518.
224. See Klein & Murphy, supra note 32. This explanation is related to, and provides the economic basis for, the argument that exclusives "instigated" by customers should enjoy a presumption of legality.
225. See also Richard M. Steuer, Customer Instigated Exclusive Dealing, 68 ANTITRUST L.J. 239 (2000).
226. Joshua D. Wright, Antitrust Analysis of Category Management: Conwood Co. v. United States Tobacco Co., 17 SUP. CT. ECON. REV. (forthcoming 2009).
227. Calkins, supra note 78, at 156-57.
228. For example, Professor Calkins criticizes the trend in lower courts toward presuming legality for distribution contracts of less than one year. See also Salop, supra note 15.
229. But see Wright, supra note 33 (providing a defense of presumptive legality for short term contracts).
230. Calkins, supra note 78, at 167.
231. Jan B. Heide et al., Exclusive Dealing and Business Efficiency: Evidence from Industry Practice, 41 J.L. & ECON. 387 (1988).
232. See John Asker, Diagnosing Foreclosure Due to Exclusive Dealing (NYU Working Paper No. EC 04-36, 2005);
233. Tim R. Sass, The Competitive Effects of Exclusive Dealing: Evidence from the US Beer Industry, 23 INT'L J. INDUS. ORG. 203 (2005).
234. Lafontaine & Slade, supra note 108.
235. See supra text accompanying note 19.
236. Fox, supra note 19, at 83.
237. See also Robert Pitofsky, supra note 5, at 6 ("Because extreme interpretations and misinterpretations of conservative economic theory (and constant disregard of facts) have come to dominate antitrust, there is reason to believe that the United States is headed in a profoundly wrong direction")
238. Fox, supra note 19, at 81.
239. Brooke Group, 509 U.S. 209.
240. California Dental Ass'n v. FTC, 526 U.S. 756 (1999).
241. Trinko, 540 U.S. 398.
242. Leegin, 127 S. Ct. 2705.
243. Fox, supra note 19, at 82.
244. Id. at 15.
245. Fox, supra note 19, at 82
246. (citing Joseph F. Brodley, Predatory Pricing: Strategic Theory and Legal Policy, 88 GEO. L.J. 2239 (2000)).
247. But see Kenneth G. Elzinga & David E. Mills, Predatory Pricing and Strategic Theory, 89 GEO.. L.J. 2475, 2475 (2001)
248. ("Although strategic theories of predatory pricing are exemplary in their coherence and rigor, their potential to add value to antitrust policy is much more modest than the authors admit."). Indeed, the economic literature does provide some evidence of profitable predation. See, e.g., U.S. DEP'T OF JUSTICE, COMPETITION AND MONOPOLY: SINGLE-FIRM CONDUCT UNDER SECTION 2 OF THE SHERMAN ACT (2008), at 56, note 85 (collecting studies).
249. See generally Bruce H. Kobayashi, The Law and Economics of Predatory Pricing (forthcoming in ANTITRUST LAW AND ECONOMICS, supra note 114).
250. Fox, supra note 19, at 84.
251. Id. at 15.
252. Id. at 86.
253. See supra text accompanying notes 81, 82.
254. Leah Brannon & Douglas H. Ginsburg, Antitrust Decisions of the U.S. Supreme Court, 1967-2007, 3 COMPETITION POL'Y INT'L 3 (2007).
255. Id. at 20.
256. Id. at Table 4.
257. See Einer Elhauge, supra note 18, at 64 (speculating that the fact that -Breyer's dissent referred no less than six times to the stare decisis considerations that were cited in an abortion case made it hard to avoid the conclusion that this case had gotten mixed up with abortion politics.
258. Linkline, No. 07-512, 2009 U.S. Lexis 1635.
259. See Cooper, et al, supra note 59;
260. Hylton & Salinger, supra note 71;
261. David S. Evans & Michael A. Salinger, Why Do Firms Bundle and Tie? Evidence from Competitive Markets and Implications for Tying Law, 22 YALE J. ON REG. 37 (2005).