Old Lady charm:

explaining the persistent appeal

of Chicago antitrust
Nicola Giocoli
Department of Economics
University of Pisa
http://ssrn.com/author=92886
http://pisa.academia.edu/NicolaGiocoli

From classroom to courtroom

Traditional story: starting from end of 1970s, Chicago antitrust
law & economics (ALE) replaced old-style ALE (based on
structural approach, SCP), due to its theoretical superiority.
Chicago ALE as best example of the power of good economics to
migrate from classroom to policy- or court-room.
Assume this story is true. Today Post-Chicago approach (esp.
based on Bayesian game theory) offers a better answer to many
antitrust problems than Chicago. But
these answers are largely ignored by US antitrust courts.
My question is: how to explain Chicagos enduring success in US
courts? Why theoretical superiority isnt working this time?
An interesting episode to understand how, when and why
economic theories may influence policy- or law-makers.
How economists persuade as central issue for history of economics.
See Mankiw(2006) for similar story in macroeconomics.

What is Chicago antitrust?

Key Chicago ideas:

1950s/1960s price theory (esp. market theory)

Tight prior equilibrium (TPE) assumption
Sole value approach (antitrust law is economic policy)
Efficiency (= consumer/social welfare) as benchmark
Hospitality tradition wrt unusual business practices
Potential competition as trump card
Wrong convictions more harmful for welfare than wrong
acquittals (market will still find a way)

A set of ALE propositions/prescriptions descended from

these ideas. US courts at all levels endorsed them.
Examples: rejection of per se illegality rules; predatory pricing
doesnt exist; tying & RPM are pro-efficiency.

Post-Chicago ideas
Game-theoretic revolution in IO (since 1980s).
Push further characterization of agents strategic
rationality (see my previous works).
Game-theory shows that several business practices may
cause competitive harm.
Examples: predatory pricing; leverage theory of monopoly
profit; RRC paradigm
Even rescue some pre-Chicago per se prohibitions.

But... less than meager success in US courtrooms:

Just one Supreme Court precedent (Kodak 1992), totally
abandoned today;
A few lower courts applications (AMR 2003);
No Post-Chicago works quoted by federal courts (compare
scores of quotes from Chicago & Harvard).

Why the failure?

Many possible explanations

1.
2.
3.
4.
5.
6.
7.
8.
9.

The real Chicago, or Your problem doesnt exist

Chicago never won (completely)
The power of (legal) status quo
The fairy tale, or Its the ideology, stupid!
Adam Smith knew it all
Long run vs short run effects (model selection problem)
Judges dont believe in fables
A matter of economic (il)literacy
On a level with dentists (Daubert/Twombly combo)

1. Your problem doesnt exist

New fad is to reduce Chicago ALE to a methodology, rather than a set

of positive and normative propositions (e.g. Wright 2012).
Chicago three methodological principles:
Price theory (taken as synonymous with neoclassical economics).
Commitment to empiricism.
Error cost framework.

Today every approach to ALE must (or should) obey these principles.
So it is not a matter of Chicago vs Post-Chicago anymore.
Two implications:
Chicago has won forever as far as ALE right method is concerned.
Chicago is still by far the approach providing the best empirical validation to
antitrust propositions. Chicago enduring success is empirically grounded. So my
problem doesnt exist because Post-Chicago is not superior, after all!

But this is not a proper picture of Chicago antitrust.

Chicago is not just a methodology (nor a bottom-up approach: think of TPE!).

Its empirical successes are few and over-valued (some were not even its own).
Price theory neoclassical economics.
Error cost analysis is premised on the market will still find a way principle.

2. The power of (legal) status quo

In late 1970s: weak status quo.
Warren Court antitrust was not really SCP; it was just Modern
Populism (= use ALE to pursue socio-political goals).
Easy game for Chicago: first real application of robust and
consistent antitrust law & economics.

In 2000s: powerful status quo.

Chicago is the new status quo.
Why do all the bounces go Chicagos way? (Crane 2009).
Post-Chicago answers are never clearly superior to dislodge
Chicago ones (Ties always go to the status quo).
Esp. because non-intervention is default rule for enforcers, if
aware of their own (and the laws) limits. See expl. #8.

3. Chicago never won (completely)

Two versions of this explanations:

3.1 Chicago never completely conquered US courts; resistance always
existed and still does.
3.2 Modern ALE is not 100% Chicago; it is the outcome of a HarvardChicago joint venture (Hovenkamp; Kovacic).
Both versions are questionable.
Against 3.1: same authors (= some Modern Populists) supporting it
today conceded defeat to Chicago back in 1980s!
Against 3.2: this is a very convincing, well-documented thesis. But
is it really a joint venture or a takeover (= Harvard surrender to
Chicago key ideas)?
Clear links here with expl. #1: We are all Chicagoans now.

Note: 3.2 may now include the Neo-Chicago variant (Evans &
Padilla 2005), i.e. modern ALE as a moderate version of Chicago.
But: look at Neo-Chicago key ideas. Is it a softer, gentler Chicago or a
Chicago squared? Or is it just a smart marketing label?

4. The fairy tale

Chicago triumph was not a matter of theoretical superiority, but
just the intended outcome of late 1970s early 1980s rise of
conservative ideology in American society.
Same story, with opposite enforcement pattern, during 1960s: the Warren
Court antitrust was equally ideological.

Chicago has a strong ideological belief in the superiority of market

solutions over State or judicial intervention.
Appointed judges and Justices share that belief, much like big business!

This explains both success & persistence of Chicago ALE: the right
approach & the right persons at the right time in the right places.
By demolishing the false certainties of Chicago approach without
gaining ground in courts, Post-Chicago highlights the role of
ideology in driving enforcement.
Normative beliefs in US (at least in many US courts) are still pro-market,
while Post-Chicago has no clear alternative ideology to offer.
Implicit idea: economics as just a veil covering normative values.

This explanation is strongly rejected by supporters of expl. #1.

5. Adam Smith knew it all

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Classical view: competition as a process, which is promoted by

freedom of contract.
Neoclassical view: competition as a state, which warrants
freedom from market power.
The thesis: Chicago taught courts to view competition as a state
(static efficiency view). This made judges blind to the richer
dynamic implications of Post-Chicago approach.
But: history of economics contradicts this explanation!
It was Harvard SCP that brought static neoclassical view
(competition as a market structure) to ALE.
Basic SCP idea: use antitrust to engineer a competitive market.
At its core, Chicago rejects this idea: markets (with their
dynamics) always know better than judges or policy-makers!
Moreover, freedom of contract is more important for Chicago
than freedom from market power because it allows potential
competition to fully work its magic (again, a Classical idea).

6. Long run vs short run effects

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Most business practices have opposite short run (SR) & long run
(LR) welfare effects. Economics cant really tell which is bigger.
Examples: predatory pricing; essential facilities; learning curve

When a given practice shows opposite SR & LR effects, law

enforcers must trespass theory and adopt normative evaluations.
Its a typical model selection problem, but with no empirical or theoretical
grounds to solve it. Economicss own limits force normativeness in.
Were back to ideology, but this time the ideological dispute is not
about any grand scheme of society. The normative choice is simply between
alternative economic models.

US courts side with Chicago principle: always trust the markets

ability to generate LR gains. Model selection is anti-intervention.
Post-Chicago: free markets do not warrant max welfare. Model
selection is pro-intervention.
This is also a normative premise of European competition policy. Hence EU
antitrust may be more receptive to Post-Chicago ideas.

7. Judges dont believe in fables

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Generalizing vs exemplifying models (Fisher 1989).

Generalizing models: from broad assumptions to inevitable consequences; they
describe what must happen.
Exemplifying models: highly sensitive to specific assumptions; they describe
what may happen.

Chicago approach (often) employs generalizing models.

Post-Chicago models are always exemplifying ones. They just
describe possible worlds, where a certain business practice may be
anti-competitive.
In general, all game-theoretic models are fables (Rubinstein 2006)
Like fables, they typify & stylize a given situation; like fables, they (usually)
teach a lesson with universal validity, but no specific applicability.

Do judges believe in fables? Can they?

Note: some Chicago doctrines (e.g. free riding argument for RPM, single
monopoly profit theory for tying) fare quite well in US courts despite their
being more fable-like than Post-Chicago counterarguments.

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8. A matter of economic (il)literacy

Administrability is key (Hovenkamp)
Law must be administrable, but judges lack the ability to handle
complicated theories. (Justice Breyer).
In the spirit of explanation 3.2, emphasis on administrability is
Harvard Law School main contribution to modern ALE (Kovacic).
Administrability as informal forerunner of Chicago error cost analysis.

Which approach is more administrable for real-world judges?

Chicago price theory is well-established, easy to understand & with
clear prescriptions/catchwords. Cant say the same of Post-Chicago!
Price theory is the kind of Economics 101 taught to would-be/present judges,
at least in the not-so-distant past (say, until the late 1980s).
How many active judges know how irrelevant Chicago price theory is for
contemporary industrial economics?

Perhaps the simplest explanation of Chicago success & resilience.

If this is true, things should change when & if we teach more Bayesian game
theory in law schools. Great news for economists, but

9. On a level with dentists

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but for the Daubert + Twombly combo.

Daubert (1993): Supreme Courts two criteria for expert testimony
(say, by an economist) to be admitted in court.
Expert testimony must be relevant and reliable.
Relevant = based on the facts of the case.
Reliable = based on a scientific theory (where scientific means falsifiable &
widely accepted).

Does modern economics pass the Daubert test? What ALE approach
fares better? As a lawyer, what economist would you hire as expert?
Post-Chicago fails under both criteria: exemplifying models are hardly
falsifiable & with little relation to facts. Chicago generalizing models
have a big edge here (so they are most frequently used in courts).
Hardly a new issue: If economists could manage to get themselves
thought of as humble, competent people on a level with dentists,
that would be splendid (Keynes 1931).
Viz. a dentist would be admitted as expert testimony. What about economists?

Add Twombly (2007): dismiss private litigations if plaintiffs argument

lacks factual elements making it economically plausible.
Again, it is hard for Post-Chicago models to satisfy this requirement.

And the winner is

15

What is the best explanation? I dont know. Each captures a bit of the
story, but none is entirely convincing.
The reason of US antitrusts enduring fascination with Chicago is still
a secret like an Old Lady charm.
What I know is that all explanations highlight the difficulty (or
undesirability) of dislodging Chicago from US courtrooms.
Take explanation #6 (LR vs SR effects). Economists could/should
provide better measurements of these effects. This captures Chicago
call for more empirics, but good fact checking is difficult and costly.
Is there room for more empirical analysis in courtrooms?
Should antitrust institutions be re-designed to allow enforcers to make more
evidence-based model selection?

Or take explanation #8 (judges illiteracy). Again, an institutional way

out exists: either teach judges more modern economics, or, better,
create specialized antitrust courts.
But under explanations #7-9 (fables & dentists), that would fail too. Is
there room in adjudication for (possibly right) exemplifying theories
to prevail over (possibly wrong) generalizing ones? I doubt that.

Thank you!