Law, Economics and Antitrust: Towards a New Perspective

Citation

Kühn, K. (2006), "Law, Economics and Antitrust: Towards a New Perspective", International Journal of Social Economics, Vol. 33 No. 12, pp. 860-862. https://doi.org/10.1108/03068290610714698

It is hard to think of any area of applied microeconomics in which academic economists have been more influential in policy implementation than in the areas of merger policy, antitrust, and regulation. Indeed, policy practices have converged dramatically between the US and Europe over the last ten years. Criteria of economic evaluation, including most recently the widespread use of econometrics for merger simulation, are dominating enforcement practice. A very comprehensive overview of this prevailing consensus approach is given in Motta's (2004) recent textbook on competition policy.

Where there is so much fundamental consensus about the framework for policy it is always healthy to take an opportunity to step back and reconsider the issues from a different perspective. Patrick McNutt promises to do just this in his book Law, Economics, and Antitrust: Towards a New Perspective. As someone who has straddled the worlds of an academic, regulator, and consultant, he seems in an excellent position to provide just such a reality check. For example, academic economists often overlook the importance of procedural matters in designing effective antitrust and regulatory policies on which lawyers and administrators often have much deeper insight[1]. A careful analysis of procedural and institutional constraints on antitrust, merger, and regulatory policies would be a timely contribution to the debate in this area. But there are also challenges to antitrust orthodoxy that could be mounted at a more fundamental level: the current policy consensus concentrates almost exclusively on efficiency enhancing and/or consumer surplus increasing interventions. However, the roots to competition policy and antitrust go back to concerns about transactional, relationship‐specific, and procedural fairness as is still manifested in many legal approaches to vertical contracting. Given that the modern literature on experimental economics has shown us the importance of fairness considerations for real economic actors (Bolton and Ockenfels, 2000; Fehr and Schmidt, 1999; Bolton, et al., 2005; Fehr and Gachter, 2000), it may be time to revisit the question whether such concerns should be recognized in antitrust policies, especially vertical restraints.

I am sure there are many more perspectives one could take to present a well‐focused new perspective on law, economics, and antitrust. Unfortunately, the book by McNutt does not seek the discipline of such a unified framework. Instead the author takes the reader on a roller coaster ride of philosophical and economic ideas as well as frequent surprising (and often baffling) mental leaps. The frantic pace is more reminiscent of an MTV video clip than that of a carefully laid out academic argument.

A good example for the style of the book is given by Chapter 5, characteristically titled: “Liberties, essential facilities, and workable competition”. The chapter starts with a reference to Isiah Berlin and the definitions of positive and negative liberties and then applies them to regulation: “There is an unmistakable tendency amongst regulators to focus on the positive liberty of the entrant at the expense of protecting the negative liberty of the incumbent”. But just as the reader settles in for an interesting (if unorthodox) analysis of competition policy from the perspective of positive and negative liberties, McNutt jumps in the next paragraph to a different topic: geographic market definition, the SSNIP test, and the Elzinga‐Hogharty shipment test with details of its implementation in specific case.

If that jump was not disorienting enough, the author takes us on the next page (section heading “Liberties and Remedies”) to a brief discussion of property rights followed by the statement:

We go further and argue that a regulatory policy change must take cognizance of the liberties of both incumbent and entrant and work to ensure that there is efficient entry defined in terms of a pro‐entry access price, which reflects not only the tangible cost accruing to the incumbent in lost market share post‐entry but also the opportunity cost (profits forgone) of the entrant.

A reader may be excused for missing the connection between liberties and access pricing, especially since the term “essential facility” has not been mentioned in the chapter yet. In the same style the chapter and the whole book continue. Before one can even formulate an objection like: “Why should regulatory policy ensure efficient entry?” we are off to the theory of natural monopoly regulation.

The hectic pace does, however, not prevent a reader who teaches microeconomic theory to stumble over some rather puzzling statements. “Pareto equilibrium of an exchange economy” may simply be attributable to poor proof reading. But what does the sentence “Consider the prices to be imitated sufficiently often in a Markovian learning process by the entrant and incumbent to become one and the same price” mean? And in the same Appendix 5.1 the author differentiates on both sides of an inequality, assuming that the inequality is preserved. He finally stipulates that two terms are equal that are assumed to be strictly different at the beginning of the proof. Other discussions are just very misleading to anyone not familiar with the original literature. For example, on page 92 under the heading of “Bayesian Influence” the author claims that “Bayesian equilibrium does not take into account the fact that players may learn their opponents types […]”. What the author refers to is the literature on herding and informational cascades that starts from the observation that learning from others involves an externality if there are private costs to taking actions that reveal more information to others in the economy. Bayesian equilibrium does, of course, take into account the learning from others. However, it is inefficient due to asymmetric information as is typical for equilibrium in markets with asymmetric information. What that has to do with a Walrasian equilibrium (where full information is assumed) or the law (the section title is: neo‐Walrasian theory and law) remains a puzzle. The loose interpretation of theoretical models is also apparent where the author invents his own terms like “contest competition” which he defines as: “the market is unequally partitioned in that some firms are content with their market share while others are not”. Why an off‐the‐shelf model from the population dynamics literature that he presents on page 293 fits this definition remains unclear. In fact, the model is interpreted by the author as one of growth for a single firm but the solution path is interpreted in terms of competition, which is not modeled. Here is a classical case where the model provides no insight for the discussion of the issues except for the appearance of rigor.

This book is designed to cover a frighteningly broad range of economic and philosophical issues related to antitrust and regulation. It seems like the author has been overwhelmed by this sweeping approach. Unfortunately, this has led to a book that will be utterly confusing and even bewildering for the average reader instead of providing a new perspective on an important set of issues.

Notes

Burnside (2002) provides an excellent example in the context of merger policy.