The Chicago School of Antitrust Analysis

The Chicago School of Antitrust Analysis Author(s): Richard A.
Posner Reviewed work(s): Source: University of Pennsylvania Law Review, Vol. 127, No. 4 (Apr., 1979), pp. 925-948 Published by: The University of Pennsylvania Law Review Stable URL: http://www.jstor.org/stable/3311787 . Accessed: 31/01/2013 11:32
Your use of the JSTOR archive indicates your acceptance of the Terms & Conditions of Use, available at . http://www.jstor.org/page/info/about/policies/terms.jsp
.
JSTOR is a not-for-profit service that helps scholars, researchers, and students discover, use, and build upon a wide range of content in a trusted digital archive. We use information technology and tools to increase productivity and facilitate new forms of scholarship. For more information about JSTOR, please contact support@jstor.org.
The University of Pennsylvania Law Review is collaborating with JSTOR to digitize, preserve and extend access to University of Pennsylvania Law Review.
http://www.jstor.org
This content downloaded on Thu, 31 Jan 2013 11:32:52 AM All use subject to JSTOR Terms and Conditions
1979]
THE CHICAGO SCHOOL OF ANTITRUST ANALYSIS

RICHARD A. POSNER t
The use of the term"Chicago" to describea body of antitrust views to which I, among others,am thoughtto subscribeis very common. I shall arguein thispaper thatalthoughtherewas a time when the "Chicago" schoolstood fora distinctive approachto antitrustpolicy,especiallyin regardto economicquestions,and when otherschools,particularly a "Harvard" school, could be discerned and contrasted betweentheseschoolshave with it, the distinctions greatlydiminished. This has occurredlargelyas a result of the maturingof economics as a social science, and, as a corollary the waningof the sortof industrial thatprothereto, organization vided the intellectualfoundations of the Harvard school. More this be can attributed to the factthatthe diversity generally, change in fundamental economists antitrust premises among studying questions has substantially diminished. No longer is it such a simple a Harvardor a Chicago positionon issuesof antithingto identify trust of growing of consensus;partly policy. Partlythisis a matter a shiftfromdisagreement over basic premises, and methodology, toward technical of the sort that would be ideology disagreements foundeven in a totallynonideologicalfield. Part I of this paper recountsthe development of the Chicago schoolof antitrust more of the Harvard school. and, analysis, briefly, The sharpest differences betweenthemare assignableto the 1950's and early 1960's. Part II discusses a numberof areas in whichthe of the school have two since or positions overlapped,converged, to predatory crossedover,with special reference Part III pricing. considers the issue in which traces of the traditionalChicagoare most conspicuous-theissue whetherto Harvard confrontation break up leading firmsin highly concentrated industries. The of is the that is no it paper longerworthtalking generalconclusion schoolsof academicantitrust about different analysis.
I. THE CHICAGO AND HARVARD SCHOOLS: THE FOUNDATIONS
to the workof Aaron Directorin the 1950's. Diare attributable
The basic features of the Chicago school of antitrust analysis
of Chicago. The helpful of Law, University Professor f Lee and BrenaFreeman of Robert Bork, KennethDam, William Landes, George Stigler,and comments Donald Turneron a previousdraftare gratefully acknowledged. (925)
926
UNIVERSITY OF PENNSYLVANIA LAW REVIEW
[Vol. 127:925
rectorformulated the key ideas of the school,1which were then elaboratedon by studentsand colleagues such as Bowman, Bork, a McGee, and Telser.2 These ideas did not,I believe,emergefrom the were full-blown of antitrust. Rather,they product philosophy of ponderingspecific cases,and only questionsraised by antitrust the basis of a in retrospect did it becomeclear thattheyconstituted of of antitrust the policy. In summary generaltheory properscope formthe key ideas may be statedas follows: 1. A tie-in(i.e., requiringa buyerto buy a second productas is not a rational methodof obof buyingthe first) condition the because an increasein profits, taininga secondsourceof monopoly the pricechargedforthe tied productwill, as a first approximation, reduce the price that the purchaseris willing to pay for the tying makessenseonlyas a methodof pricediscriminaproduct. A tie-in tion,based on the factthatthe amountof the tied productbought into more or less elastic decan be used to separate purchasers mandersof the tyingproduct. There is no need to worryabout however,because it does not aggravatethe price discrimination, On the contrary, is a deprice discrimination monopolyproblem. seeks to serve additional vice by which the monopolistin effect elastic the more those demands,who might consumers, i.e., having that the would be chargedin be deterred singlemonopolyprice by the absence of discrimination.Thus, price discrimination brings a to that of closer the monopolist's and market output competitive of monopoly. effects reducesthe misallocative of the manufacturer 2. From the standpoint it, resale imposing a is not rational maintenance method of distribution if its price Yet dealers is to effect if manufacturers, monopolyprofits. give it. The will often is that, impose explanation permitted, by preamong dealers,resale price maintenance ventingprice competition consumers dealersto offer encourages presaleservices (such as point
his ideas mainly 1 Director formulated & Levi, Law and orally. But see Director 51 Nw. U.L. REV.281 (1956). the Future:Trade Regulation, 2 See, e.g., Bork,Vertical and the Sherman Act: The Legal History Integration 22 U. Cm. L. REV. 157 (1954); Bowman,Tying of an EconomicMisconception, 67 YALE L.J. 19 (1957); McGee, Predatory and the LeverageProblem, Arrangements Price Cutting:The StandardOil (N.J.) Case, 1 J.L. & ECON. 137 (1958); Telser, Want Fair Trade?, 3 J.L. & ECON. 86 (1960). For Why Should Manufacturers of the Chicagoposition statement and mostorthodox themostcomplete see R. BORK, in which Chicago writings THE ANTITRUST PARADOX (1978); for an anthology are
heavily represented see THE COMPETITIVE ECONOMY: SELECTED READINGS (Y. LAW (1976). ANTITRUST
but are not identicalto Brozened. 1974). My own views,whichcloselyresemble in R. POSNER, the moreorthodox Chicago positionespousedby Bork,are expressed
1979]
THE CHICAGOSCHOOL OF ANTITRUSTANALYSIS
927
of sale advertising, showroomdisplay,and knowledgeinventory, able sales personnel)up to the point at which the cost of these servicesat the marginjust equals the price fixedby the manufacwhichenhancethevalue of themanufacturer's turer. Such services, and hence the pricehe can chargethe dealers, productto consumers 3 problems-notbe providedif price of "free-rider" might-because were dealers among competition permitted. 3. Selling below cost in orderto drive out a competitor is unin in even in which the the case run, unlikely profitable long except the intendedvictimlacks equal access to capital to financea price war. The predator losesmoneyduringtheperiodof predation and, if he triesto recoup it later by raisinghis price,new entrants will be attracted, the price will be bid down to the competitive level, and the attempt at recoupment will fail.4 Most alleged instances of below-cost be attributable to other factors must, therefore, pricing thana desireto eliminatecompetition. These ideas generated others. The tie-inanalysis, forinstance, was extended to verticalintegration in general. To illustrate, it makesno sensefora monopoly to takeoverdistribution in producer order to earn monopolyprofits at the distribution as well as the level. The productand its distribution are commanufacturing an and in increase the of will reduce plements, price distribution the demand for the product.5 Assumingthat the productand its are sold in fixedproportions, distribution and thus that the price discrimination is the conclusion is reached analysis inapplicable, mustbe motivated thatverticalintegration by a desireforefficiency ratherthan formonopoly. The analysisof resaleprice maintenance generalized readilyto otherrestrictions on distribution, such as exclusiveterritories and exclusive outlets. The predatory-pricing analysis generalized to which firms othermethods were to hurtothersby hurtby thought example, by demanding that purchasers ing themselves-for sign than theydesire,in orderto denya market contracts to longer-term sellers: a rational would demand competing purchaser compensasuch a disadvantageous tion foraccepting term.
3 A "free rider"in this context would be a dealer who undersoldcompeting itself at a lowerpricewhilerelying dealersby sellingtheproduct on themto provide to the customer. the necessary presaleservices 4 Rather than suffer financialloss as a result of a price war, the rational would buy out the competing would-bemonopolist company. 6 This is the same reasonwhy manufacturers would not want theirdealers to Directorsoughtan alternative and why,therefore, cartelizedistribution explanation forresaleprice maintenance.
928
[Vol. 127:925
a conclusionof greatsignificance From thesevarious analyses, firms cannot in generalobtain or enforantitrust policyemerges: unilateral action6-unless,of course,they hance monopoly powerby forposition. Consequently, are irrationally willingto tradeprofits laws should not be on unilateralaction; the focusof the antitrust it should insteadbe on: (1) cartelsand (2) horizontal large mergers as in the classic trust enough eitherto create monopolydirectly, or to facilitate cartelization cases,7 reducingthe numby drastically ber of significant sellersin the market. Since unilateralaction,as I have definedthe term,had been the cuttingedge of antitrust policyfora greatmanyyears,to place it beyondthe reach of antitrustlaw, as Directorand his followers seemed to want to do, ima in the contraction policy. scope of antitrust plied breathtaking What was the source of Director'sheterodoxthinking? Because of Director'sclose personaland professional associations with Milton Friedman,it is common to thinkthat Director'santitrust analysiswas the productof conservative (which is to say, "liberal" in the nineteenth-century sense of the term)antipathy to governin the economy. I questionthisview. I believe mentintervention Director'sconclusions resulted simplyfrom viewingantitrust policy lens of the his Each of ideas was deducible through price theory. from the assumptionthat businessmenare rational profit-maximizers,the deductionproceedingin accordancewith the tenetsof that i.e., thatdemand curvesslope downward, simpleprice theory, an increasein the price of a productwill reduce the demand forits that resources to the areas where theywill complement, gravitate earn thehighest etc. "Simple" and "easy" are not the same return, however. Althoughthe analytictoolsused by Directorwere thing, subtle. Certainly simple,the insights theyyieldedwere extremely formanyyears. theywereresisted Yet it is still fairto ask whythe applicationof price theory to antitrust should have been a novelty. The answer,I believe, is thatin the 1950'sand early1960's,industrial the field organization, of economicsthat studies monopolyquestions,tended to be unand even metaphorical.8 theoretical,descriptive,"institutional,"
6 By thisI mean actionthatdoes not involveagreement witha competitor.It witha customer or supplier, and generally may,of course,involveagreement does: even a sale below cost involvesat least an implicitcontract between seller and purchaser. 7 See, e.g., United States v. AmericanTobacco Co., 221 U.S. 106 (1911); Oil Co. v. UnitedStates, 221 U.S. 1 (1911). Standard 8 Its flavor is well conveyedin the writings of Edward S. Mason. See, e.g., of 1950's-style a representative industrial to antitrust application organization probAND THE MONOPOLYPROBLEM (1957). E. MASON,ECONOMIC CONCENTRATION For
1979]
929
Casual observation of businessbehavior,colorfulcharacterizations to entry"), into sociology as the term "barrier eclecticforays (such and psychology, and verification statistics, by plausibility descriptive took the place of the carefuldefinitions and parsimonious logical of economictheory. The result structure was thatindustrial organization regularly economic advanced propositions that contradicted theory. An example is the "leverage" theoryof tie-insthat Donald in the Edward Mason and Joe Bain Turner, a Harvard economist afterDirectorhad developed his pricetradition, espousedshortly discrimination tie-ins.9 The leveragetheory held thatif a of theory seller had a monopolyof one product,he could and would moas well, so as to get addinopolize its indispensablecomplements tional monopolyprofits. Thus, if he had a patentedmimeograph machine,he would lease the machineat a monopolyprice and also him and requirehis lesseesto buy theink used in themachinefrom howchargethema monopolyprice for the ink. This procedure, ever, makes no sense as a matterof economic theory. The purchaser is buying a service,mimeographing. The pricing of its is a meredetail; it is, rather, the totalpriceof the servcomponents ice thathe cares about. If the seller raises the price of one comwill treatthis as an increasein the ponent,the ink, the purchaser price of the service. If the machineis alreadybeing priced at the optimal monopolylevel, an increasein the price of the ink above the competitive level will raise the total price of the serviceto the consumerabove the optimal monopolylevel and will thereby reduce the monopolist's profits. There was a similarconfusion in the conceptof a "barrierto a conceptthatplayed-and still plays-a large role in thinkentry," ing about competition. Suppose that it costs$10,000,000to build thesmallest efficient then,it was argued, plantto servesomemarket; thereis a $10,000,000"barrierto entry," a hurdle a new entrant would have to overcometo serve the marketat no disadvantage vis-a-vis existingfirms.10But is there really a hurdle? If the $10,000,000plant has a useful life of, for example,ten years,the annual cost to the new entrantis only $1,000,000. Existingfirms bear the same annual cost,assumingthattheyplan to replace their
lems see C. KAYSEN, United States v. United Shoe Machinery Corporation: AN CASE (1956). ECONOMICANALYSISOF AN ANTI-TRUST
10 See C. KAYSEN & D. TURNER,ANTITRUST POLICY 73 & n.33 (1959).
9 See Turner, The Validityof TyingArrangements Under the Antitrust Laws, L. REV.50, 60-62,63 n.42 (1958). 72 HARV.
930
[Vol. 127:925
is not at any cost disadvantage therefore, plants. The new entrant, afterall. to get a similarsituation. A new entrant, Advertising presents an with his productacceptedin the market, may have to launch it expensiveadvertising campaign. Again, this is a capital expendithe because effect of thecampaignwill not be fullyused up in ture, the first year. There is no reasonto expectthe annual cost of this capital expenditureto be any higher than that of firmsin the to keep the market. They too must spend moneyon advertising in in fact, consumerinterested their products. Most advertising, 11 morerapidlythanmostplants; therefore, it is a lesser depreciates "barrierto entry"than having to build a plant (althoughin the traditional analysisit was considereda greaterone). Neither the is a barrierin any usefulsense. plant nor the advertising The Chicago school's view of advertising is especiallynotehad assumedin because of the importance that advertising worthy the Harvard thinkingon antitrust.12 Advertising played a dual role in thatthinking. First,it was one of the mostimportant barriersto entry. Second, it was used as the riposteto the free-rider argumentabout why manufacturers imposed resale price maintenance. The Harvard position was that overcoming the free-rider and the of thereby problem increasing provision presaleservices by the retailerwas not a social benefit, because those serviceswere of advertising, and advertising forms enables themanufacturer more to his differentiate brand from effectively competitors'brands, thereby creatingor enhancingbarriersto entry. The underlying are irrationaland manipulable,and assumptionis thatconsumers this the Chicago theorist as inconsistent withthe rejects assumption premisesof price theory. The rationalconsumerwill pay forad(in the formof a higherprice for the advertisedbrand) vertising the extentthatadvertising to reduceshis costsof search. The only
11 The depreciation rate of advertising has been found to be very high in that advertise industries heavily-such as the cosmetics(13% a year) and cereals and Rate of Return,18 J.L. & ECON. (37%) industries.See Ayanian, Advertising 479, 499 (1975). 12Unlike othertenetsof the old industrial the hostility to adorganization, thoughlargelyabandoned in the new Areeda and Turnertreatise,P. vertising, AREEDA & D. TURNER, ANTITRUST LAW (1978); see note 41 infra,continues to command considerable,though diminished,academic support. See, e.g., W.
and Product Differentiation, position,see Brozen, EntryBarriers:Advertising in

D.
COMANOR& T. WILSON, ADVERTISING AND
MARKET
POWER (1974). 115 (1974);
For the Chicago
and Competition, 72 J. POLITICAL

WORCESTER, WELFARE
INDUSTRIAL
CONCENTRATION:
THE NEW LEARNING
REV. PAPERS & PROC. 392 (1976).
A Surveyof Advertising and MarketStructure, 66 AM. ECON. (1978); Butters,
GAINS FROM ADVERTISING:
ECON. 537 (1964).
THE PROBLEM
For recentdiscussions see

OF REGULATION
Telser, Advertising
1979]
931
real services. In are therefore servicesprovided by advertising from those yielded by a better fact, they are indistinguishable product-and it is never suggested that making one's product betterthan thoseof competitors or potentialcompetitors genuinely createsa "barrierto entry." A clue to the natureof the Harvardschoolof industrial organization is thatits practitioners wereso fondof doing studiesof comtincans,aluminum, industries-airlines, rayon, petitionin particular and the particularistic etc. These studiesexemplified Douglas firs, non-theoretical of the field. The powerful character simplifications the downwardof economictheory-rationality, maximization, profit in sloping demand curve-were discarded,or at least downplayed, of particular examination of the idiosyncrasies favorof microscopic markets. "cutThe "kinked demand curve," "workable competition," throat competition,""leverage," "administeredprices," and the of this othercharacteristic conceptsof the industrialorganization period had thisin common: theywere not derivedfromand were and in particular witheconomictheory, with the ofteninconsistent of rational maximization. were from derived They premises profit and often of businessbehavior. observation, unsystematic superficial, Director'sapproachwas the opposite. He explained tie-ins, resale and other business behavior described in antiprice maintenance, but by looking foran extrustcases not by studying the practices for that them with basic economic theory.13 squared planation to in When they first the articleswrittenby his began emerge and disciples,Director'sideas made little imcolleagues,students, either on scholarly opinion or on policy. In some quarters pact the Chicago school was regardedas little better than a lunatic fringe. Kaysenand Turner'sAntitrust Policy,the classicstatement of the Harvard school, published in 1959, containsvirtuallyno of the Chicago school.14 traceof any influence Twenty years later, the position is dramaticallychanged. Partly as a result of George Stigler'sattackson the intellectual 15 and partlyas a of traditional foundations industrial organization
13 It is a curiosity, and a sourceof regret, thatto thisday veryfewof Director's ideas have been subjectedto systematic examination. empirical 14 They do offer a briefdiscussion of the price discrimination of tie-ins. theory
See C. KAYSEN& D. TURNER, supra note 10, at 157. Elsewhere, however, the authors seem to be espousing the leverage theory. Id. 154, 157. But the discussion is unclear, as is Turner's brief referenceto the price discriminationtheory in his early article on tie-ins. See Turner, supra note 9, at 63 n.42. :15See G. STIGLER,THE ORGANIZATION OF INDUSTRY (1968) [hereinafter cited as ORGANIZATION OF INDUSTRY], collecting his major articles on industrial organiza-
932
[Vol. 127:925
resultof the growing of economicanalysis, the tradisophistication tional industrialorganization in academic is becomingdiscredited circles. The Chicago school has largelyprevailedwith respectto its basic point: thatthe properlens forviewingantitrust problems is price theory. At the same time,some of the specific ideas first advanced by Aaron Directorhave been questioned,modified, and in a the of new animal: the "diehard refined, resulting emergence Chicagoan" (such as Bork and Bowman) who has not acceptedany of the suggestedrefinements of or modifications in Director's ideas. original The workof Directorand his followers focusedon the question can unilaterally obtain or maintainmonopoly when,if ever,a firm can obtain such power by colpower. The question when a firm laborationwithits competitors receivedless attention. Partly, perfor tactical reasons to haps, (not seem to reject antitrust policy in its entirety), the membersof the Chicago school would sometimes denounce price fixing. But it is unlikelythat theyregardedeven let alone oligopoly, as a seriousproblem. In the clasprice fixing, sical economictradition runningfromSmith to Marshall,the tradition in which the Chicago school operates, a clear recognition of the propensity of sellersto attempt collusionwas conjoined witha an explicitrejectionof, the to, and sometimes generalindifference of imposinglegal sanctionson collusion. This comdesirability placency(if one can call it that) restedon the belief that cartels unstablebecause of the propensity of members were,first, to highly cheat (so long as thecartelwas not legallyenforceable), and, second, in thelong run futilein the absenceof substantial barriers to entry. Collusion mightstill be attempted if it was frequently attempting cheap, but it would rarelysucceed and its overall misallocative effects would be too slightto warrantinevitably costlypublic proceedings. Given thistradition, giventhe Chicagoschool'srejectionof the to entry," expansivenotionof "barriers given the lack of any clear theoretical basis for oligopolytheory(and its accouterments such as thekinkeddemandcurve),givenHarberger's of the tinyestimate welfarecosts of monopoly,16 ad hoc, and given the atheoretical, of character the efforts to avoid the unsupported implicationsof failuresof innovaHarberger's analysisby ascribingto oligopolists tion or cost control,it was not to be expected that the Chicago
tion.
PAPERS& PROC. 77 (1954).
(1970). 16 See Harberger, Monopolyand Resource Allocation,44 AM. ECON. REV.
See also G. STIGLER & J. KINDAHL, THE BEHAVIOROF INDUSTRIAL PRICES
1979]
933
school would attach great importanceto vigorousprosecutionof colluders. But such enforcement in contrastto that diactivity, rectedagainstunilateralmonopolizing acts,was not deplored. workin the late 1950's and early 1960's,howGeorge Stigler's ever,did focuson collusionand thusservedto completethe edifice 17 chipped away of Chicago antitrust thought. A seriesof articles at the apparatus that the traditionalindustrialorganizationhad constructed to analyze collusion. In its place Stiglerproposed a of collusion that embracedoligopoly,i.e., collusion general theory not involvingexplicitcommunication, as a special case.18 He approachedthe question of collusion by asking,in the mannerof a ratherthan an industrial-organization man, when the price theorist of collusion,in higherprofits, benefits exceed the costs(of preventthe elasing cheating)to the individualseller. The rate of entry, of the concentration of and other factors demand, ticity buyers, were identified. Many of these factorshad been noted by the was to show that every oligopoly theorists; Stigler'scontribution facetof the collusion question, includingtacit collusion or oligocould be analyzedusingthe toolsof price theory. polybehavior, of collusion,even Stigler's analysisdid not denythe possibility of the tacit variety. But it did suggestthat tacit collusion would be a problemonly at veryhigh levels of concentration,9 and in so for draconian measures, doing cast grave doubt on the necessity whetherunder section 7 of the Clayton Act or section 2 of the ShermanAct,forpreventing tacitcollusionby arresting or destroying concentration.20 By 1969,then,an orthodoxChicago position(well represented in the writings of RobertBork) had crystallized: only explicitprice fixingand very large horizontalmergers(mergersto monopoly) were worthy of seriousconcern.
II. THE GROWING CONVERGENCE OF THE Two SCHOOLS
The basic tenetof the Chicago school,thatproblemsof competitionand monopolyshould be analyzedusing the tools of general
Oligopoly, INDUSTRY, supra note 15, at 39. 19Id. 57, 59. See also Kessel, A Study of the Effectof in the Competition
Tax-Exempt Bond Market, 79 J. POLITICALECON. 706, 727 (1971).
20 See
17 See articles collected in ORGANIZATION OF INDUSTRY, supra note 15. 18 G. STIGLER, A Theoryof in ORGANIZATION OF
in 1 Small Businessand the Robinson-Patman (1969), reprinted Act: Hearingson H. Res. 66 Before the Special Subcomm.on Small Business and the RobinsonPatmanAct of the House Select Comm. on Small Business,91st Cong., 1st Sess. 271 (1969).
PRESIDENT'S TASK FORCE REPORT ON PRODUCTIVITY AND COMPETITION
934
[Vol. 127:925
industrialorganiratherthan thoseof traditional economictheory zation, has triumphed. The conceptsand methodsof traditional discreditedin economics industrialorganizationare increasingly and thischangeis beginning in universities as practiced theleading law. The in theapplicationof economics to antitrust to be reflected 21 is a notable of newAreedaand Turner treatise this point, example to althoughthe treatise, perhapsbecause it is addressedprimarily does not explicitlyacknowledge ratherthan scholars, practitioners Turner's the modification or abandonmentof many of Professor of the to earlierviews. At the same time, application price theory law has not leftthe pioneeringwork of Directorand his antitrust followers untouched. us considernow how the passageof yearshas affected some Let of the specificcontroversies between the Chicago and Harvard schools. 1. Tie-ins. The leverage theoryof tie-insearly gave way in A tie-inwas said Harvard thinking to a barriers-to-entry theory.22 to complicateentrybecause the new entrantwould have to produce the tied as well as the tyingproduct. When the motivefor however,the producerof the tying tyingis price discrimination, not control overany partof the production need assume of product let it alone all. tied all the that is reInstead, produce product, betweenthe producerand quired is thathe act as an intermediary the ultimateconsumerso thathe can repriceit in accordancewith scheme.23A new entrant will be able to obtain his discriminatory the tied productfromthe same sourcethatthe existing firm obtains it from. One element (and an importantone) of the Chicago analysis is, however, the assumptionthat price dissubject to criticism: is on the whole sociallybeneficial crimination because it movesthe to closer the level and hence recompetitive monopolist'soutput of monopoly. As Joan Robinson duces the misallocativeeffects is not perfect pointedout long ago, if price discrimination (and it
dramatic onlybecause the authoris too youngto have had earlierpublishedviews Antitrust is ErnestGellhorn's Law and Economics. E. GELLHORN, ANTIto recant,
TRUSTLAW AND ECONOMICS257-60, 283-85 (1976). C. KAYSEN & D. TURNER,supra note 10, at 157. supra. 21 P. AREEDA & D. TURNER,supra note 12. Another important example, less
22The barrier-to-entry of tie-ins treatise. theory appearsin Kaysenand Turner's

As pointed out above, it is not
clear whether Kaysenand Turneralso espousedthe leveragetheory. See note 14
23It is hardlycredible, forexample, thatthe A.B. Dick Company was trying to of ink in the UnitedStates. See Henryv. A.B. Dick Co., take overthe production 224 U.S. 1, 11 (1911).
1979]
935
never is), it may lead to a smaller,ratherthan a larger,output than single-price monopoly.24 For example, many of the heavy usersof mimeograph machinesmightbe deterredby an ink tie-in of raisingthe price of the machineand the loss thathad the effect of outputmightnot be offset businessfromsmall users, by greater even though on balance themonopolist's werehigher(higher profits rather than the greateroutput,being profits, purpose of price disEven a not result in a smaller larger output may crimination). misallocation. The price-discriminating monopolistbreaksup his demand curve into a seriesof separatedemand curvesfordifferent he sells the groupsof customers. Within each of thesesubmarkets revenueto his marginalcost. The outputthatequateshis marginal total misallocationbroughtabout by the price-discriminating moof in is the sum and the misallocations each submarket, nopolist caused by a monopolist mayeasilyexceedthemisallocation charging a smalleroutput.25 a singlepriceand producing of the Chicago positionhave also been made. Other criticisms has noted thatprice discriminaProfessor Williamson,forinstance, extratransaction tioninvolves thecostsof preventcosts-specifically, from purchasers resellingto the high-price ing the low-price purreduce the welfaregains froma higher chasers(arbitrage)-which output-if output is in facthigher.26It has also been argued that, the expectedgains frommonopolizing, by increasing price discrimiin monopolizing-which nation increasesthe investment may not and maintaining be sociallydesirable. Indeed, the costsof creating costs resultingfromthe monopoliesmay exceed the misallocative smalleroutput of monopolizedcomparedto competitive markets.27 In the lightof such criticism, the originalChicago analysisof of tie-insnow seems a little oversimple. Nevertheless, the effects
thatprice discrimination, even if imperfect, it likely thinks will generally resultin a monopoly. R. BORK, supra note 2, at 397. He largeroutputthan a single-price on Joan Robinson'sanalysis,but I cannotfind relies for this conclusion primarily in her analysisthat supports the output any generalconclusion anything regarding versusnondiscriminatory of discriminatory effects monopoly. 25I am indebted to Dennis Carltonforhavingpointedthisout to me. 27See Posner,Exclusionary Practicesand the Antitrust Laws, 41 U. Cm. L. on the groundthat some Bork criticizes the argument of sociallydesirableactivity, and in e.g., innovation, monopoliesare a byproduct in makingmonopoly of price discrimination those cases the effect more profitable, and hence inducinggreaterresourcesto be expended on obtainingit, need not occasion concern. R. BoRK, supra note 2, at 396. The point is correct. See the pointthatprice discrimination from Posner, supra,at 513-14. But it is different is sociallydesirablebecause it leads to a largeroutputof the monopolized product.
REV. 506, 510-13 (1974).
MARKETS 260. WILLIAMSON, IMPLICATIONS 11-13 (1975). AND HIERARCHIES: ANALYSIS AND ANTITRUST
24 J. ROBINSON,THE ECONOMICS OF IMPERFECT COMPETITION 190-94 (1933). FOUNDATIONS OF ECONOMIC ANALYSIS42-45 (1947). See also P. SAMUELSON, Bork
936
[Vol. 127:925
the conclusionthat tie-ins should not be forbidden seemsboth correct28 and increasingly on academic opinion. influential 2. Vertical was evenintegration.Here too the leveragetheory of economic tuallyreplacedbya barriers-to-entry theory analysis (the vertical as I with that have indicated, integration being, symmetrical
of tie-ins).29 The thinking was that if, for example, supplier A acquires all of his retail outlets, B, in order to compete, will have to open his own chain of outlets. This, in turn,will make B's entry more costly. The steps in this analysis are illogical, however, and evidence of monopolization by such means scant or nonexistent.30 A will find it very costly to buy more outlets than he needs. B, on the other hand, will not have to open his own outlets to enter; if his entry is anticipated, the outlets will be there to greet him. Moreover, even if B did have to open his own retail outlets, the higher capital cost of his entry would still be no greater than the (also higher) capital cost to A of being a retailer as well as a manufacturer. The analysis does not depend on whether retail outlets are cheap or expensive to build or acquire or on whether the integration in question is forward into distribution or backward into raw-material,or other, supply. The essential point is that the cost to the monopolist of integratingis prima facie the same as the cost to the new entrant of having to integrate.31 The validity of this analysis is not affectedeven if the result of integration is completely to deny the new entrant access to some essential input except by dealing with the existing firms in the market. The cost to the existing firmsis still the same as to the new entrant,although now it is in the formof an opportunitycost. Suppose, for example, that kryptoniteis an indispensable input in the manufacture of widgets. A owns all the kryptonite in the universe and also manufactures widgets. He could, of course, refuse to sell kryptoniteto B, a prospective entrant into widget production. The cost to A of this refusal is the price B would have been willing to pay. Stated differently,by his control of kryptoniteA can extract any monopoly
of vertical also espouseda leveragetheory integration.Id. 121-22. 30See Peltzman, Issues in Vertical Integration Policy,in PUBLIC POLICY TowARD
28 See R. POSNER,supra note 2, at 178-83. 29 See C. KAYSEN& D. TURNER,supra note 10, at 120-21. Kaysenand Turner
31This assumes equal access to capital markets and equal cost of obtaining have been criticized by Professor capital. These assumptions Williamson, Williamson, Book Review,83 YALEL.J. 647, 656-57 (1974), amongothers. In onlyone respect, be sustained, and thata minor at least in the absence one, can thisposition however, See text accompanying of evidence that has so far not been forthcoming. note 61 infra.
MERGERS167 (1969).
1979]
937
rentsavailable in the widgetindustry withoutdenyinga place in to othersfirms. If thereis a properantitrust widgetmanufacture it is to the objection, kryptonite monopolyratherthan to vertical integration. it is incorrect to disYet, despitethe forceof thesearguments, missentirely the possibility of monopolistic from verconsequences tical arrangements.The above arguments assume that,as in the case of themanufacturer-retailer, therelevant inputs, e.g.,themanufactured and its are in combined fixedpropordistribution, product tionsto producethe finaloutput(the sale at retail). Suppose,howwith other ever, that some input is used in variable proportions to the final uranium and enrichment e.g., inputs produce output, in the productionof nuclear fuel. If one of the inputsis services monopolized,causing its price to rise in relationto thoseof other will seek to reduce the proportion inputs,the outputmanufacturer in which he uses this input and, instead,use more of the other of such substitution acts as a partialcheck inputs. The possibility on the monopolypower of the input monopolist. Assume,however,thatthe inputproducerbuysthe inputuser. This will eliminate the threatof substitution and so reduce the elasticity of demand forthe input in question.32 Even so, it does not followthat the merger should be prohibited, forone of its effects is thatthe inwill be in now used the proportions that minimizethe true puts social costsofmanufacturing the output. But it cannotbe said that such a merger, because it is vertical, cannotpossibly increase merely I do not mean to suggest thatsuchan equivomonopoly. So saying, 33 danger warrantsreversing cal and perhaps remote the growing in at least academic a for circles, support, permissive policytoward and verticalintegration vertical mergers generally. The change in thinking that has been broughtabout by the is nowhere school more evidentthan in the area of vertical Chicago integration. Kaysen and Turner, writingin 1959, advocated forin whichtheacquiringfirm had twenty merger biddinganyvertical
32See Vernon & Graham, of Monopolization Profitability by Vertical Integration, ECON.924 (1971), discussedin McGee & Bassett, 79 J. POLITICAL Vertical Integra19 J.L. & ECON. 17 (1976). See also Blair & Kaserman, tion Revisited, Vertical Tying,and Antitrust Integration, Policy, 68 AM. ECON. REV. 397 (1978), and cited therein. Blair and Kasermannote that the same resultcan be references obtainedby the inputmonopolist's substitutable tying potentially inputsto the sale of the inputhe controls. They offer no exampleshowingthat this has ever been done. 33A veryrecent on theoretical thatmonopoly paper suggests, grounds, poweris to be increasedsubstantially.See Mallela & Nahata, Theoryof Vertical unlikely in Journal ControlWith Variable Proportions (forthcoming of PoliticalEconomy). is reachedby Bork. See R. BORK, A similarconclusion supra note 2, at 229-31.
938
[Vol. 127:925
percentor more of its market.34Areeda and Turner, writingin from effects 1978, expressverylittle concernwith anticompetitive verticalintegration. In fact,as betweena rule of per se illegality forverticalintegration and a rule of per se legality, by monopolists theirpreference is forthe latter.35 3. Restricted distribution.As noted above, the Harvardreply to the Chicago analysisof resale price maintenancewas that the benefitthat the manufacturer comsoughtto obtain by restricting his was distributors, services, i.e., among petition actuallya presale social evil, because these servicesresultedin "productdifferentiaforhis brand tion,"a barrierto entry.36 Facing no close substitutes because it was differentiated in the consumer's from eyes competing the producercould chargea monopolyprice. If the case brands,37 is put to one side, the conclusion that of fraudulent advertising advertisingand related promotional methods create monopoly power,at least in any sense relevantto antitrust policy,cannot be of economictheory. Consumers derivedfromthe premises will not one brand for another the more for than unless first is cheaper pay can make an advertised brand cheaperby or better.38Advertising reducing the consumer'ssearch costs by an amount greaterthan in nominal price between that brand and nonadthe difference brandsof the same product. The same point can be made vertised with respect to the other presale services,e.g., display, that are distribution. encouragedby restricted which relatesadvertising to The new industrialorganization, evil froma social the costs of search,has transformed advertising and in so doing has fatally underminedthe into a social benefit,39 of resale Comanorriposteto the Director-Telser theory price maindifferences tence. Although inter-school relating to the welfare the position of the Chicago school of advertising effects remain,40
Areeda and Turnerare rather thanby merger, but their vertical expansion by internal integration discussing form. towardeither attitude impliesa tolerant analysis 36See textaccompanying note 12 supra. and CustomerRestrictions: White Motor 37See Comanor,VerticalTerritorial L. REV. 1419, 1425-33 (1968). 81 HARV. and Its Aftermath, 38 This assumes, is rational. That is one of the of course,that the consumer thatthe to assuming of economic standard theory. It is not equivalent assumptions consumeris omniscient. Indeed, the existenceof consumersearch costs is an as Information, reasonwhythereis advertising.See Nelson,Advertising important 40This is indicated on thispaper which RichardNelson'scomments by Professor follow.
82 J. POLITICALECON. 729 (1974). 39 See references in D. WORCESTER, supra note 12, at 209.
34 C. KAYSEN & D. TURNER, supra note 10, at 133. 726b. 35 3 P. AREEDA & D. TURNER,supra note 12, jf
1979]
939
on restricted distribution has become the orthodoxacademic position.41 The decision in ContinentalT.V., Inc. v. GTE Sylvania Inc.42suggests thatit is well on its way to becomingthe legal positionas well. 4. Predatory pricing. McGee's famousarticleon the Standard Oil Trust43 combinedthe startling thatthe trust, empiricalfinding to and had academic not belief, contrary popular engaged in prefor with theoretical datory pricing, arguments doubting the raof thepractice. One of McGee's majorarguments-that the tionality it trustwould not have used predatory because is pricing cheaper to buy a competitor than to sell below cost-was vulnerableto the since criticismof being irrelevantto present-day circumstances, a is and unlawful unconcealably acquiring major competitor clearly to detect. There is, howwhereaspredatory pricingmaybe difficult ever, a deeper problem with the McGee argument: it neglects considerations. Assume that it is lawful to buy a rival. strategic will neverresort to predatory It does not followthata firm pricing. Afterall, it wantsto minimizethe priceat whichit buys its rivals, and thatpricewill be lowerif it can convincethemof itswillingness to drivethemout of businessunlesstheysell out on its terms. One pricingfrom way to convincethemof thisis to engagein predatory time to time. Since classical(or, one mightadd, modern)economicscontains of strategic no generally behavior,it is not surprisacceptedtheory should not have been particularly school that the Chicago ing consideraconcernedwith predatory pricing. Eliminate strategic a rationalmotivation tions,and it becomesimpossibleto construct to a for predatory pricingwithoutassuming (veryuncongenially access to the capital marketsfor financing Chicagoan) asymmetric consideraa period of below-cost selling. But to ignore strategic tions is not satisfactory.Even without having a well-developed behavior,one can easily imagine circumstances theoryof strategic at least in the absence of legal prohibiin whichpredatory pricing, seller to be a would tion, plausible policy fora profit-maximizing
41The new Areeda and Turnertreatise essentially adopts the Chicago position as a barrier of advertising the significance in the courseof discounting on advertising, 409d. For Turner's to entry. See 2 P. AREEDA & D. TURNER,supra note 12, ?[ 26 FED. B.J. 93 and Competition, views see Turner,Advertising earliercontrary (1966). 42433 U.S. 36 (1977), discussed in Posner,The Rule of Reason and the on the SylvaniaDecision,45 U. Cm. L. REV. 1 EconomicApproach:Reflections (1977). 43McGee, supra note 2.
940
[Vol. 127:925
follow. Suppose that he sells in manymarkets, and his rivals sell in only one or a few markets each. If he sells below cost in one that will be recouped market,his losses there are an investment withinterest in his othermarkets in theform ofmoretimidcompetition fromthe rivals in those markets. Knowing that the multimarket seller can obtain substantialgains from a demonstrated willingnessto sell below cost for an extendedperiod of time in one market, the local victimmay not thinkit worthwhile to tryto outlasthim. and error costs of tryingto To be sure, the administrative this of sort thingmay outweighits dangersto the competiprevent tive process. That, however,is a different point. My point is thatpredatory pricingis not irrational. It is not in the same catefor with, example, attemptingto get a second monopoly gory Bork is able to place predatory pricingin the irrathrough tying. of strategic tionalcategory onlyby failingto mentionthe possibility behavior.44 Additional evidence for the decline of "schools" of antitrust economics is the position that Areeda and Turner (both of the Harvard Law School) have takenon predatory pricing. Their inof the artiarticle on the subject (and the amplification fluential cle in their new treatise)is an essay in price theory.45Strategic industrial the sortof thingthe traditional considerations, organizain are not mentioned, tion embracedeagerly, e.g., oligopolytheory, of the likelihoodof predatory and skepticism pricingis registered.46 Areedaand Turner of basic classical the pricetheory, premises Using as predatory is that be condemned should the that only price argue cost. an one below short-run Any higherprice implies marginal more fullyby loweringprice resources utilize scarce to opportunity and expanding output. This is pure textbookprice theoryunof traditional industrial adornedby anyof theconcepts organization. a leading adherent that Professor It is not surprising Scherer, launcheda sweeping industrial of traditional organization thinking, or that Professor the Areeda-Turner attackon Williamson article,47
44R. BopK,supranote2, at 144-55. 45Areeda & Turner, Pricingand Related PracticesUnder Section2 Predatory
3 P. AREEDA & D. TURNER,
711. supranote 12, ff 46 A curiosity is that no theory of the Areeda and Turnertreatment of why would everoccuris suggested. pricing predatory 47Scherer, Act: A Comment, 89 HARV. L. Predatory Pricingand the Sherman Schereron Predatory REv. 869 (1976); see Areeda & Turner, Pricing:A Reply,89 Some Last Words on Predatory HARV.L. REV. 891 (1976); Scherer, Pricing,89 L. REV.901 (1976). HARV.
of the Sherman Act, 88 HARV. L. REV. 697 (1975);
1979]
941
considerations Areeda and Turner for ignoringstrategic criticized in designinga rule againstpredatory pricing.48What is, perhaps, and Turner as unduly perI attacked Areeda is that surprising attack missive.49Unfortunately, boggeddown in a terminologmy of predatory ical dispute. I said that the propercriterion pricing with cost ratherthanshort-run was sellingbelow long-run marginal an equally or more efficient rival and thatshortintentto destroy run marginalcost is lower than long-run marginalcost even when because some of is operating at its full (optimal)capacity, the firm elementsof long-runmarginal cost are fixed in the short run. marAreeda and Turner pounced on the assertionthat short-run full below cost at cost is long-run marginal capacity. They ginal fora firm at alreadyoperating pointedout thatit would be costlier full capacityto expand in the shortrun than in the long run, for make the adjustments in plant only in the long run could the firm a to at level.50 I scale, etc.,necessary optimizeproduction higher acceptthiscriticism. AlthoughI continueto be troubledby cases, in the predatory-pricing context,in which potentiallysignificant cost be to exceed short-run marmight thought long-run marginal these cases can be dealt ginal cost even withoutexcess capacity,51 of the relevantterms. with by carefuldefinition
48See Williamson, Pricing:A Strategicand WelfareAnalysis,87 Predatory YALEL.J. 284 (1977). 49 See R. POSNER, supranote2, at 191-93. 503 P. AREEDA & D. TURNER, supranote 12, f715a, at 168 n.7. 51To illustrate very simplythe kind of problemthat led me to my original thatat its current level of production makes 100 units formulation, imaginea firm of (1) a rentalof $500.00 forthe at a total cost of $1,000.00,thiscost consisting and (2) labor and materials (short-run premises variable) costsof $5.00 per factory decides to cut price and expand outputfor the sole purpose of unit. The firm rivalout of the market. The firm's a moreefficient new production level is driving whichis greater thanoptimal, 101 units. At thislevel of production, the labor and cost of the last unit is, say, $5.50; but rent,a fixeddebit,is unchanged. materials short-run The firm's marginalcost is then $5.50. What is its long-run marginal cost? We mustask what the landlordwould chargewhen the lease comes up for has risen. Presumably, the rental renewalif the outputof the firm will be higheris not particularly so long as it important, supposeit is $5.00 higher. (The figure cost curve of the firm is large enoughto make the long-run marginal higherthan cannotbe optimal.) the present at the current outputof the firm level; if it is lower, costof expanding thatin the longrunthe laborand materials Assumefurther output marginal cost,that is, the cost in by one unitwould be $5.10. Then the long-run is $10.10. But the short-run 100 to 101 units, from the longrunof expanding output is from the level of cost is only$5.50 despitethe factthatthe expansion marginal thatis optimalgiventhe firm's existing plant,workforce,etc. production who divide theirtime As anotherexample,suppose there are some workers and maintenance. To expand output,the firmshiftsthese between production intoproduction. In the shortrun,the increasedlabor cost of proworkers entirely in maintenance offset ductionmay be completely by the reduction expense;in the higher. expenseis, if anything, long run,the maintenance
942
[Vol. 127:925
But thisis a side issue thatonlyobscuresthe seriousproblems of the short-run marginal cost standard. The lesser problem is thatthe standard an incentive to maingivesthewould-bepredator tain excesscapacity and thereby reducehis short-run marginalcosts, an incentivethe predatormighthave anyway in orderto make his threatto sell below cost more credible.52 The greaterproblemis that the administrative of basing the legal rule on the difficulties concept of short-run marginal cost are so acute as to have led Areeda and Turner themselves to rejectshort-run marginalcost as theoperational and insteadsubstitute standard averagevariablecost. Yet theycontinueto defendthatstandardby reference to the argusuch as theyare, forallowingfirms to cut price to short-run ments, marginalcost. Averagevariable cost could be much below shortrun marginalcost.53 A standardof averagevariable cost should be defendedon its own merits, ratherthan by reference to a different standardfor which it is the crudestpossible proxy. But Areeda and Turner do not attempt to defendan averagevariablecoststandard, save as a proxyforshort-run marginalcost. What is the point of havingsuch a low price floor? It would be unusual fora firm thatwantedto engagein predatory pricingto set a priceequal to or onlyslightly above zero. It would set a price businessunprofitable at minimum designedto make itscompetitors' cost to itself. Any firmthat sells at a price equal to its average variable costs,a price that doesn't cover any of its fixedcosts (let alone generate any return on investment), will be unprofitable. even if the competitor is somewhatmore efficient than Therefore, the predator,a price equal to the predator'svariable costs,and hence close to the competitor's variable costs,should be an effective predatory price. Areeda and Turner allude to this possibility in a cryptic footnote. They write: One can posit a case in which (1) one rival has lower variablecostsbut highertotalcoststhantheother, (2) their
The second example suggeststhe way to reconcilemy analysis with the conventional textbook formulation. We can say thatthe added future maintenance cost resulting from the shiftof workers frommaintenance to production is actually one of the short-run costs of steppingup production marginal and that the higher rentalthatwill be negotiated forthe future periodis actuallya short-run marginal cost of the presentincreasein production. 52See Spence, Entry,Capacity,and Oligopolistic Pricing,8 BELL J. ECON. 534 (1977). 53 In myexample, see note51 supra,Areedaand Turner would,I takeit, regard short-run marginalcost as somewhereabove $10.10 (since that is the long-run cost at the higher level of output). But the averagevariablecost is only marginal a shade over $5.00.
1979]
943
exceedsthe demandat a price thatwould be joint capacity to profitable both,and hence (3) marginal-cost pricingby the first rival would drive out the second, which is the more efficient producer in the long run when capital facilities have to be replaced. But even in such a case, the solution is productionby the rival appropriateshort-run with the lowestvariablecosts. Obviously,one would not want thatfirm to replace its facilities, but a rationalfirm would not do so if the cheaper techniquewere available to it, or if otherscould freely enterusing thattechnique.54 The last sentencein effect denies the possibility of predatory prica that rational firm would not ing by asserting replace its facilities if the cheaper technique were available to it or if otherscould enter"withthattechnique. The first the availalternative, "freely of the the premiseof the ability cheapertechnique, simplyretracts discussion-thatthere is a competitor who is "the more efficient producer in the long run when capital facilitieshave to be rein the long run as his placed." If a predatoris alwaysas efficient thereis little reason to forbidpredatory competitors, pricing. A more efficient can exclude a less efficient one without competitor and below cost in the run. short To pricing thereby losingmoney have a rational basis, a rule against predationmust assume that firms sometimes want to cling to theirmarkets althoughtheyare less efficient than theirrivals,i.e., the "cheaper technique" is not available to them. The second alternative is freeentryby firms as effisuggested cient as the excludedcompetitor. There are two waysin which to the meaningof freeentry here. One is that thereis no interpret need to worry about predatory pricingif thereare manypotential in entrants the waiting wings: the predatorcannot possiblydeter themall. If so, thereis littlereasonto have anyrule againstpredaAreeda and Turner may be suggesting torypricing. Alternatively, that predatory is pricing possible only where thereare barriersto which do considerations, entry. This, however,neglectsstrategic not depend on the existence of barriers to entry.55 The quoted passage fails to take the problem of predatory would engagein pricingseriously. It impliesthatno rationalfirm pricingif its long-runmarginalcosts were higher than predatory thoseof its victims. If this is so (whichI question on the basis of
54 3 P. AREEDA & D. TURNER,supra note 12, I 715a, at 168 n.7. 55 See 0. WILLIAMSON,MARKETSAND HIERARCHIES:ANALYSISAND ANTITRUST IMPLICATIONS 145-48 (1975).
944
[Vol. 127:925
the strategic to considerations suggested earlier),whyis it necessary forbid predatory pricing? Predatorypricing against less efficient firms is not a seriousdangersince theycan be excluded by pricing at or above cost. Areeda and Turner may thinkthatbusinessirrais sufficiently commonto warrant a rule againstpredatory tionality In if there is sufficient event, pricing.6 any danger of predatory to warrant a and Turner for as Areeda pricing having legal rule, whatever reason believe, thatdanger is triggered when a firmthat is less efficient than its rivals cuts its price to its variable costs in orderto make it unprofitable forthoserivalsto enteror remainin the market. Indeed, to repeat an earlier point, it is hard to see would everhave to price below thatlevel in order whya predator to discouragerivals. Whoever is correctin the debate over predatory pricing,one thing is clear: the debate is no longer one between schools that different and ideologicallytinged premisesto employconsistently reach predictably oppositeresults.
III. REMAINING DIFFERENCES
There is one veryimportant area in which tracesof the traditional differences betweenChicago price theorists and Harvard industrialorganizationists persist:the twoschoolscontinueto disagree over the significance of concentration and the wisdomof a policy of deconcentration.Williamsonand manyotherlawyers and economistscontinue to believe that persistently in high concentration an industry warrants breakingup the leading firms. Brozen,Demsetz, Stigler,Baxter, and othersdisagree (the last two named, it should be noted,are defectors fromthe ranksof the deconcentrators).57 Areeda and Turner, as will be seen, appear to take an intermediate position. The heartof the difference is not over the strength of the posifoundin manystudies,betweenconcentration tive correlation, and over the for it. but The Harvard school, profitability explanation as suchon thisissue,contends stillidentifiable thatthecorrelation is in highlyconcentrated explained by the factthat the leading firms industries employ "consciousparallelism"to avoid price competiearn abnormalprofits. The Chicago school does tion and thereby
56It is difficult theirpreciseposition to determine because theydo not explain to occur. underwhat circumstances theywould expectpredatory pricing 57 IndustrialConcentration: The New Learning containsa very full version H. Mann & J.Westoneds. 1974).
THE NEW LEARNING(H. Goldschmid, INDUSTRIAL CONCENTRATION:
of this debate.
1979]
945
collusion of is a factorthat facilitates not deny that concentration to a sort difficult to detect,although it attachesless significance concentrationper se than do the oligopoly theorists. It asks, can persistwithout rather,how it is that excessiveprofitability fall to the competitive that cause to new will prices attracting entry level. The Harvard school,afterall, wantsto restructure only the in such firms If industries. the leading concentrated persistently to obtain supraindustriesare able, by virtue of concentration, a as these should act magnet to other competitive profits, profits the indusin the economyand theirentry will deconcentrate firms in the yearsfoltry. That is what happened to the steel industry Persistent of U.S. Steel in 1901.58 the formation lowing Corporation concentration implies either that the marketin question simply of scale) or thatsome does not have roomformanyfirms (economies to obtain abnormalprofits firms are able persistently by cost reducand new entrants that competitors tions or productimprovements one for are unable to duplicate.59 Neither case is an attractive to the market structure. intervention designed change public The Harvard replyis that thereis an alternative explanation in particular industries:barriersto for persistent concentration of a barrierto entry, as a cost entry. Because Stigler'sdefinition affects new entrants thatdifferentially alreadyin comparedto firms is now generally the market,60 the search is for costshavaccepted, this The characteristic. most ing sophisticatedquester, Oliver has one: found the of the new entrant's Williamson, uncertainty him force to a risk may pay higher prospects premiumto obtain than firms must This is a legitimate existing capital pay."' point. But it is difficult to believe that such a difference in the cost of if the firms in a market capital would be enough to prevententry were chargingprices substantially above their costs. The risk premiumis unlikelyto be a large fractionof the new entrant's and profit are rarely costs. Interest morethanten percent of a mansales and firm's often are a much smaller ufacturing price they percentage. Thus, even if a new entranthad to pay a ten percent rate and (expected)returnto shareholders to attract higherinterest its total costs would thenecessary be about one capital, only percent alreadyin the market. There is no higherthan thoseof the firms risk premiumis smallerif the new endoubt thatthe differential
58 See ORGANIZATION OF INDUSTRY,
J.L. & ECON. 229 (1977). 60 See ORGANIZATION OF INDUSTRY, supra note 15, at 67-70.
supranote 15, at 108. 59See, e.g., Peltzman, The Gains and Losses from Industrial 20 Concentration, 61See Williamson, supranote31, at 656-59.
946
[Vol. 127:925
as will typically firmin other markets, trantis a well-established the risk be the case, and, to the extentthatthe riskis diversifiable, Another will be still smaller or even premium disappearentirely. rather sourceof new entry, important viewingthe termfunctionally in smallfirms thanlexicographically, is theexpansionof theexisting a the market. In responseto supracompetitive pricing, fringeof small firms in a marketmay be able to expand output moderately withoutincurring significantly highercapital coststhan thoseborne firms in the market. All in all, it seemsfar-fetched to the by larger base a policyof deconcentration on the allegedlyhigherborrowing in concentrated costsof new entrants markets. Williamsonhas also argued thatif a firm once growsbig, for to reason to it declineas a result whatever there is no reason, expect of the random shocks to which it and other marketparticipants a crucialfactor. The will be subjectedovertime.62But he neglects firm a is by hypothesis charging supracompetitive price as a result of the interdependence or collusion fostered by the concentrated in which it findsitself. That price will attract marketstructure new firms(or, what amountsto the same thing,expansionby the in the market)and the oligopolistwill eitherhave to smallerfirms cut priceor surrender market share. In theformer will case,profits will decrease. The persistence fall and in the latter, concentration with excessprofitability of high concentration remainsto together be accountedfor. Deconcentration policy,then,is critically dependentupon bein manyindusbarriers to entry lief in the existenceof substantial tries. Once "barrier to entry"was redefinedas a differentially the plausibility of supposing highercost borne by the new entrant, are common, or commonly to entry diminthatbarriers substantial, are thus arguing from an ished sharply. The deconcentrators abandoned premise. This can be seen most clearlyby comparing in Kaysenand Turner'sAntitrust of barriers to entry thediscussion in Areeda and Turner's and Antitrust Law. Both books are Policy concernedover the anti-competitive consequencesof deconcentramuchmorequalifiedly so, and onlyat much tion,althoughthelatter of view levels concentration.63 The of barriersto entry, higher in different the two is books.64 To Kaysen and however, very
62 See Williamson, Dominant Firmsand the Monopoly Problem:Market Failure L. REV. 1512, 1518-19 (1972). 85 HARV. Considerations, 63 Compare C. KAYSEN & D. TURNER,supra note 10, at 27, 72, 104 n.6 with 2 P. AREEDA & D. TURNER,supra note 12, f[f 406b, 407d & 408c. 64 Compare C. KAYSEN& D. TURNER,supra note 10, at 73-74 with 2 P. AREEDA & D. TURNER, supra note 12, I 409.
1979]
947
Turner theyare numerousand include economiesof scale, capital and inputs,and productdifferentiascarceknow-how requirements, tion. No rigorousdefinition nor do of barrierto entryis offered; the authors deduce the concept of barriersto entryfromthe asmaximizers. The act as rationalprofit sumptionthatbusinessfirms is that,believingbarriers to entry to be important point,however, numerousand prevalent, the authorshave a rationalbasis forwantmarkets. Areeda and Turner concentrated ing to deconcentrate to entry. Because theyutilize greatly pare down the list of barriers definition of a barrier to Stigler's entry,theyare led to exclude barrieris economies of scale entirely. The related size-of-capital is discounted on the discarded also and product differentiation basis of a view of advertising thatis close to the Chicagoview. The thatremainare: (1) theWilliamsonrisk-premium veronlybarriers sion of the capital barrierand (2) controlof scarceinput.65 Thus, Areeda and Turner largelydiscardthe conceptof barrierto entry, invalid and othersemfindingsome of the barrierstheoretically as remainsurelycannot such "pure" barriers piricallyunimportant; much concentration. And although Areeda and Turner explain do not expressly discussthe dependenceof deconcentration theory on the belief in the existenceof high and pervasivebarriersto concerning entry, theydo draw quite different policy implications fromKaysenand Turner. Whereas high concentration persistent a policyof deconcentration, the later the earlierbook recommended under existing remedialaction,whether antitrust book recommends provisionsor new legislation,only where there is proof of nonThere is more than a nuance of difcompetitive performance.66 evidence ferencebetweenthese two views. Here, then,is further area where distinctive "Harvard" that even in the most important
65Legal barriers to entry such as patentsare quite properly ignoredas beyond Areeda and Turnerare wrongto the reach of antitrust policy. As a detail,I think to entry into the outputmarket. See 2 of a scarce inputas a barrier treatcontrol 409b. To treatit so is a version of the P. AREEDA & D. TURNER, supra note 12, [f an indispensable inputinto widget leveragefallacy. If a sellerof widgetscontrols to restrict he will have littleincentive intothe call it manganium, entry production, will enable him to extractall of the widget market. His controlof manganium in the widgetmarket without rents obtainable let alone economic sellinganywidgets, the widgetmarket. (To be sure,I am ignoring to control considerations of trying in the variable-proportions case and of price discrimination, but inputsubstitution and are in any eventnot the basis on which considerations these are second-order of a key inputa barrier to entry.) Alternatively, Areeda and Turnerdeem control if the scarce inputis not a good but, say, the servicesof an extraordinarily skilled extract all (or morerealistically he will presumably most) of the benefits manager, on the firm, in the formof a rent;consequently, the firm's thathis servicesconfer in the market, or of prospective costsmay be littlelowerthanthoseof otherfirms entrants. 66See, e.g., 3 P. AREEDA & D. TURNER, 840. supranote 12, ff
948
[Vol. 127:925
and "Chicago" approachesremain discernible, the processof convergenceis well under way.67
CONCLUSION
canvassof an exhaustive Althoughthispaper has not attempted it has, I hope, said enough to rival theoriesof antitrust analysis,68 and most persistent reader that the oldest the stereotype persuade in antitrust of that the economics, Chicago school,bears littlerelationshipto the currentstate of academic thinking. Changes of mind withinboth the Chicago school and its principalrival,which I have called the Harvard school, have produced a steady trend towardconvergence. Differences remain,but increasingly theyare technicalratherthan ideological.69
67A further arises difference on deconcentration aspect of the Chicago-Harvard betweenthe deep distrust that is fromthe difference of government intervention associatedwiththe Chicago School of Economics(in the broader, MiltonFriedman towardsuch intervention assosense) and the (rapidly diminishing) complacency ciated with traditional Harvard-M.I.T.economicthinking. Deconcentration is a form of public control moreambitious enforcethan is usuallyinvolvedin antitrust ment,so one's attitudestoward the capabilitiesof regulatory-type governmental interventions of the Chicagoschool come intoplay. That is whyadherents naturally on the assumption believe it unsoundto base a policy of deconcentration that a is a swifter methodthan entry deconcentration itselfof deconcentrating proceeding in whichthereare no barriers to entry in the technical markets sense but in which at minimum cost requires time. substantial entry 68I have not,forinstance, discussedthe "transactional cost" analysisassociated withOliverWilliamson. That analysiscombines elements of Harvardthinking with elementsof the thoughtof Ronald Coase and elementsof the Carnegie-Mellon school. I have also notmentioned Richard who has revivedChamberlain's Markovits, brand of old-fashioned industrial the populistschool associatedwith organization, Willard Mueller and others,or the diehard industrialorganizationists such as Michael Mann. 69Professor RichardNelson,whose comments on this paper follow,evidently of my worknor of the recentjournal disagrees. But he is a carefulreaderneither to summarize. He suggests, literature thathe purports forexample, thatthe recent denies the possibility of adjustment lags or costs in new entry Chicago writing into a concentrated of that possibility is in fact an industry. But a recognition see ORGANIZATION OF INDUSTRY, aspectof the workof Stigler, important supranote 15, at 108, and of me, see, e.g., Posner,supra note 2, at 29; note 66 supra. He and search impliesthat the Chicago school has ignoreduncertainty, information, interest in these subjectsstems fromGeorge the current costs: on the contrary, articleon the economicsof information. See G. Stigler,The Stigler'spioneering OF INDUSTRY, in ORGANIZATION Economicsof Information, supra note 15, at 171. differs of advertising from the traditional And the Chicagoschool'sanalysis Harvard in bringing consumer searchcostsintothe analysis. See, e.g., Nelson, view precisely costs in explaining verticalintegration, alsupra note 38. The role of transaction stemsfromthe early articleby associatedwith Oliver Williamson, thoughlatterly 506 (1937). Coase. Coase, The Natureof the Firm,4 ECONOMICA Nelson argues that some of the very recent while Professor More important, the Chicago school's or refines the economictheory modifies literature underlying a more active antitrust nowheredoes he state that the literature supports analysis, or forthatmatter a different recommends, antitrust policythanthe Chicago analysis appearsto have no policyimplications. policy. His analysis

The Chicago School of Antitrust Analysis

Hochgeladen von

Dokumentinformationen

Copyright

Verfügbare Formate

Dieses Dokument teilen

Dokument teilen oder einbetten

Freigabeoptionen

Stufen Sie dieses Dokument als nützlich ein?

Sind diese Inhalte unangemessen?

Copyright:

Verfügbare Formate

The Chicago School of Antitrust Analysis

Hochgeladen von

Copyright:

Verfügbare Formate

The Chicago School of Antitrust Analysis Author(s): Richard A.

THE CHICAGO SCHOOL OF ANTITRUST ANALYSIS

to the workof Aaron Directorin the 1950's. Diare attributable

The basic features of the Chicago school of antitrust analysis

UNIVERSITY OF PENNSYLVANIA LAW REVIEW

THE CHICAGOSCHOOL OF ANTITRUSTANALYSIS

UNIVERSITY OF PENNSYLVANIA LAW REVIEW

THE CHICAGO SCHOOL OF ANTITRUST ANALYSIS

UNIVERSITY OF PENNSYLVANIA LAW REVIEW

and Product Differentiation, position,see Brozen, EntryBarriers:Advertising in

COMANOR& T. WILSON, ADVERTISING AND

POWER (1974). 115 (1974);

For the Chicago

and Competition, 72 J. POLITICAL

THE NEW LEARNING

REV. PAPERS & PROC. 392 (1976).

A Surveyof Advertising and MarketStructure, 66 AM. ECON. (1978); Butters,

GAINS FROM ADVERTISING:

ECON. 537 (1964).

For recentdiscussions see

THE CHICAGO SCHOOL OF ANTITRUST ANALYSIS

UNIVERSITY OF PENNSYLVANIA LAW REVIEW

PAPERS& PROC. 77 (1954).

(1970). 16 See Harberger, Monopolyand Resource Allocation,44 AM. ECON. REV.

See also G. STIGLER & J. KINDAHL, THE BEHAVIOROF INDUSTRIAL PRICES

THE CHICAGO SCHOOL OF ANTITRUST ANALYSIS

PRESIDENT'S TASK FORCE REPORT ON PRODUCTIVITY AND COMPETITION

UNIVERSITY OF PENNSYLVANIA LAW REVIEW

22The barrier-to-entry of tie-ins treatise. theory appearsin Kaysenand Turner's

clear whether Kaysenand Turneralso espousedthe leveragetheory. See note 14

THE CHICAGO SCHOOL OF ANTITRUST ANALYSIS

UNIVERSITY OF PENNSYLVANIA LAW REVIEW

THE CHICAGO SCHOOL OF ANTITRUST ANALYSIS

UNIVERSITY OF PENNSYLVANIA LAW REVIEW

THE CHICAGO SCHOOL OF ANTITRUST ANALYSIS

UNIVERSITY OF PENNSYLVANIA LAW REVIEW

of the Sherman Act, 88 HARV. L. REV. 697 (1975);

THE CHICAGO SCHOOL OF ANTITRUST ANALYSIS

UNIVERSITY OF PENNSYLVANIA LAW REVIEW

THE CHICAGO SCHOOL OF ANTITRUST ANALYSIS

UNIVERSITY OF PENNSYLVANIA LAW REVIEW

THE CHICAGO SCHOOL OF ANTITRUST ANALYSIS

UNIVERSITY OF PENNSYLVANIA LAW REVIEW

THE CHICAGO SCHOOL OF ANTITRUST ANALYSIS

UNIVERSITY OF PENNSYLVANIA LAW REVIEW

Das könnte Ihnen auch gefallen