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A Critical Evaluation of The Chicago School of Antitrust Analysis
A Critical Evaluation of The Chicago School of Antitrust Analysis
A Critical Evaluation of The Chicago School of Antitrust Analysis
Series Editors
Advisory Board
Volume 9
A Critical Evaluation of the
Chicago School of
Antitrust Analysis
by
INGO L. O. SCHMIDT
European Association for Law and Economics
and
.....
"
Kluwer Academic Publishers
Dordrecht / Boston / London
Library of Conll"as Cataloging-tn-Publication Data
Sch.ldt. Ingo.
[Chtcago school of antItrust analysIs. EnglIsh]
A crItIcal evaluatIon of the ChIcago schoel of antItrust analysIs
by In90 L.O. Schr.ldt and Jan B. Alttaler.
p. c~. -- (StudIes Ir. Industrial or;janlZatlon : v.l
TranslatIon of, Ole ChIcago schoel of antttrust analysts.
BIblIography, p.
ISBN 902'1737923
1. ChIcago school of econoalcs. 2. Free anterprise.
I. Rlttaler. Jan B. II. TI~le. III. SerIes.
HB98.3.S3513 1988
338.8--dcI9 88-25218
CI?
ISBN-13: 978-94-010-7660-9 e-ISBN-13: 978-94-009-2567-0
DOl: 10.1007/978-94-009-2567-0
This book represents the revised and substantially enlarged version of a book which was first
published in 1986 in Gennan under the title: Die Chicago School of Antitrust Analysis.
Wettbewerbstheoretische und -politische Analyse eines Credos. It has appeared as Volume
85 in the series Wirtschaftsrecht und Wirtschaftspolitik. Nomos VerlagsgeselJschaft, Baden-
Baden, Bundesrepublik Deutschland.
Second Printing
Preface ix
Introduction xi
Bibliography 119
Index 129
PREFACE
merger did not promise to achieve these objectives, why would a profit-
maximizing firm ever want to consummate it? The fact that it does proves
that the merger is beneficial- not only to the firms involved but, in the long
run, to consumers as well. Hence, there is no need to examine the facts or to
amass voluminous evidence. It must be so; otherwise it would not happen; it
would not be done.
Mergers, the apologists claim, have other virtues. Every time a merger
takes place, a superior management replaces an inferior management. The
market for corporate takeovers protects stockholders against the poor
performance of incumbent managers who, in the absence of takeover
threats, could continue to suboptimize the investment of their owners. How
do we know this? Logic indicates that it must be so. No need to investigate
further.
This kind of argumentation, as Schmidt and Rittaler brilliantly
demonstrate, begs the crucial questions:
The Chicago School, which was known in the past only within the context
of monetarism (Karl Brunner, Milton Friedman, Alan Meltzer et al.),
developed in the seventies a legal and economic approach to antitrust
policy.! This approach is supported by a group of economists and lawyers
(Bork, Demsetz, Director, Posner et al.) who have gained considerable
influence on U.S. antitrust policy. This is not only shown by the
"turnaround" in antitrust policy announced by former Secretary of Justice,
Smith, in 1981 2 but also by the Merger Guidelines of 1982/84, the Vertical
Restraints Guidelines of 1985, and the Antitrust Law Reform Package of
1986.3 The fact that the judges on the unofficial "waiting list" to be ap-
pointed to the U.S. Federal Supreme Court are Chicago scholars (posner)4
suggests that this is a long-term development.5
The notion that the structure-conduct-performance paradigm of the
Harvard School6 which has dominated U.S. Antitrust a quarter of a century
is unprecise has led to a further acceleration of this development. An
additional factor seems to be the allegedly simple and comprehensive
applicability of the Chicago concept: 7
The present contribution tries to draw out the implications of the Chicago
approach to antitrust theory with its implicit and explicit premises and
discusses its policy recommendations. A critical discussion of the dif-
ferences between various Chicago scholars would be a weighty undertak-
4 The Committee on the Judiciary and the U.S. Senate have refused to appoint
Robert H. Bork, one of the leading representatives of the Chicago School, as a
member of the Federal Supreme Court in November 1987. The majority voted
against him on account of his extreme conservative views in various legal fields.
5 This development is enforced by trainee programs on the subject of Chicago
Economics held by the University of Miami and Emory University in which about
half of the 750 U.S. Federal Judges have participated. These programs are sup-
ported by business; cf. Guzzardi jr., Walter, Judges Discover the World of
Economics, 97 Fortune 58 ff. (1979).
The participation of District Judge Spencer Williams in such a seminar has led to a
request by the plaintiff for disqualification of the Judge in the civil damage suit
Inglis v. m Continental Baking; cf. Khourie, Michael N., and James J. Garrett,
Judicial Attendance at a "Biased" Educational Program: The Inglis v. ITT Continen-
tal Baking Case, 17 Antitrust Law and Economics Review 13 ff. (1985).
6 For a survey of the various antitrust schools in the United States, throughout the
history of the antitrust statutes, cf. Hovenkamp, Herbert, Antitrust Policy after
Chicago, 84 Michigan Law Review 213 ff. (1985), 213-215, and Singleton, Ross
C., Industrial Organization and Antitrust: A Survey of Alternative Perspectives,
Columbus, Ohio 1986.
7 Sullivan, Lawrence A., Antitrust, Microeconomics, and Politics: Reflections on
Some Recent Relationships, 68 California Law Review 1 ff. (1980), 9.
xiii
The market process is seen as the free play of economic moves and
responses without public intervention and as the "survival of the fittest"
(Stigler) - so-called Economic Darwinism. 9
Governmental or public influence has to be repelled and restricted to the
setting of a minimum legal framework.
The self-image of the Chicago School as liberal-conservative is inter-
preted as a pro big-business and anti-union by its critics.
In the view of the Chicago School, the sole objective of antitrust policy is
the maximization of consumer welfare; Bork lO in particular contends that
8 Cf. Posner, Richard A., The Chicago School of Antitrust Analysis, 129 Univer-
sity of Pennsylvania Law Review 925 ff. (1979), and Bork, Robert H., The
Antitrust Paradox: A Policy at War with Itself, New York 1978.
With regard to other schools of thought within the field of antilrust theory there
seems to be a certain similarity between the Chicago School and the (Neo)
Auslrian School (v. Mises, v. Hayek, Kirzner et a1.) as far as the transaction cost
approach is concerned. Both concepts are quite different in terms of their theoreti-
cal approach but they show a considerable amount of similarity with respect to
policy implications and, therefore, are often compared with each other. Cf. Paque,
Karl-Heinz, How Far is Vienna from Chicago? An Essay on the Methodology of
Two Schools of Dogmatic Liberalism, 38 Kyklos 412 ff. (1985); for a survey on
the (Neo-) Auslrian School, cf. Singleton, InduSlrial Organization and Antilrust, op.
cit., 57-65.
9 Cf. Adams, Walter, Public Policy in a Free Enterprise Economy, in: Adams,
Walter (ed.), The Structure of American Induslry, 7th ed., New York, London
1986, pp. 395 ff., 402 ff.: "The Challenge of Economic Darwinism and the New
Laissez-Faire", criticizing the Economic Darwinism approach.
10 Cf. Bork, The Antitrust Paradox ... , op. cit., 81 ff., 89.
xiv
the founding fathers of U.S. antitrust law pursued only this goal. The
objective of antitrust policy, therefore, lies in maintaining market
mechanisms that secure the maximization of consumer welfare. In addition,
Chicago advocates oppose the concept of effective resp. workable competi-
tion, represented by the Harvard School (Adams, Bain, Caves, Mason, D.
Mueller, Scherer, Shepherd, Sullivan et al.) which is based on the structure-
conduct-performance paradigm, as well as a multiple antitrust goal ap-
proach.
Before elaborating on the details of the Chicago viewpoint, we have to
express our own views on the nature and functions of competition and the
competitive process. This is based on the view currently circulating in the
Federal Republic of Germany and the European Economic Community
(BEC).
The aim of this kind of competition policy is to maintain or help to
establish competitive market structures. In this view, competition is the
only means of ensuring that entrepreneurial forces are mobilized and the
full potential of the efficiency of firms is exploited. This process leads not
only to greater overall economic efficiency and competitiveness, but also to
increased consumer welfare. Competition, in this sense, can be viewed as
an unlimited sequence of moves and responses in which profits can be seen
as a motive for initiation and imitation of economic efforts. The time
competition needs to erode these profits indicates the degree of effective-
ness of competition, i.e., determines whether competition itself performs its
function in a sufficient manner and exerts sufficient competitive pressure
which cannot be controlled by the incumbents. This makes obvious that this
view of competition is a dynamic one.
However, competition has a fundamentally different role to play in an
economy during the present period of low economic growth than was the
case in times when economic growth was self-evident. Macroeconomic
management through stabilization and growth policy is no longer sufficient
to solve our present-day economic problems. 11
ACKNOWLEDGEMENT
The authors feel obliged to thank David Phillips, B.A., M.A. for polishing
up the English version of this book.
1. THE PERCEPTION OF COMPETITION
AS A DYNAMIC PROCESS
This condition has never been and can never be achieved. Changing
wants and technologies are in themselves sufficient to prevent the
attainment of such an equilibrium. But the forces of competition in open
markets cause the actual allocation of resources to be ever shifting in
pursuit of the constantly moving equilibrium point.
This statement clearly expresses that Chicago scholars do not see the
market eqUilibrium of neoclassics as a final state that will actually be
reached. For them, it is more or less a guiding star which has to be followed
in all of its movements. This pursuit is not achieved by conscious public
policy; only competition without any public interference forces the
4 Cf. on this Paque, How Far is Vienna from Chicago? ... , supra, 435: "Chicago
economists are inclined to see the world through the glasses of tight prior equi-
librium, i.e., they suggest that what we observe in the real world is, by and large, an
economy in long-run general equilibrium, with all profit opportunities seized and
no further adjustments required."
5 Cf. critically on this, Paque, How Far is Vienna from Chicago? .. , supra, 428:
"Of course, predictive power still figures prominently in Chicago rhetoric, but the
research emphasis has clearly shifted towards preserving the consistency of a
theoretical construction solely based on overall equilibrium. In this sense, Chicago
economics has become a mere interpretation rather than a theory of the world."
II. PREMISES AND ASSUMPTIONS OF
THE CHICAGO SCHOOL'S CONCEPT
OF COMPETITION
The premises and assumptions of the Chicago School were largely not
products of the Chicago School but rather of neoclassical price theory. They
are used by the Chicago School within the context of simple basic models
of price theory (polypoly, monopoly) in order to deduce concrete policy
recommendations. Therefore, these premises and assumptions underlying
these models have to be discussed in order to evaluate the soundness of the
policy implications. The following will deal with this.
services to purchase within the context of their budget oonstraints and their
preferences (consumer sovereignty).3
The representatives of other approaches to antitrust theory and policy
also assume rational behavior of consumers and suppliers. but as a rule the
assumption of bounded rationality employed by the behavioral sciences is
used. 4
This bounded rationality is described by Herbert Simon: 5
The capacity of the human mind for formulating and solving complex
problems is very small compared with the size of the problems whose
solution is required for objectively rational behavior in the real world.
Nevertheless, the Chicago School takes the position that "(t)he rational
consumer will pay for advertisement ... only to the extent that advertising
reduces his costs of search. The services provided by advertising are
therefore real services".7 This might be the case with search goods, but not
with experience goods, which are encountered more frequently, however.
It is sometimes pointed out that only persuasive and infonnative advertis-
ing together can stimulate consumers' interest because the role of the
persuasive component is to break down the barrier of selective perception.
However, this argument does not reflect the core problem, since it is more
or less business-oriented and views advertising within the context of
marketing techniques.
Economic suspicion with regard to the argument that advertising restricts
consumer sovereignty in a free enterprise system cannot be removed by
this.s
On the suppliers' side the rationality of autonomous market participants
is simply reflected in the assumption of profit maximization. But this
assumption does not even differentiate between short-run and long-run
profit maximization and the implications of market behavior that can be
derived from this assumption. 9 Short-run profit maximization can be
10 Cf. Henderson and Quandt, Microeconomic Theory .... , op. cit., 74 ff.
7
- The first condition is "that the largest firm in an industry makes a trifling
fraction of the industry's sales (or purchases), from which it follows that
there be many firms in the industry".13 It is assumed that the market
share of the biggest firm in a competitive market can be larger the more
elastic the market demand and the easier market entry for newcomers is.
- Since there are so many firms in a market, no firm occupies a significant
market share so that "these many firms ... are assumed to act indepen-
dently".14 This can be viewed as the second condition. No firm has to
respect the market behavior of any other firm (no interdependence -
polypoly).
- The third condition "is complete knowledge of offers to buy and sell by
the participants in the market".15 This means that consumers have perfect
market information (price of goods and services demanded by suppliers)
and that sellers have perfect market information (prices of goods and
services offered in the market). This condition is augmented by the
homogeneity of goods, which means consumers do not prefer the
11 Cf. Stigler, George J., The Organization of Industry, Homewood, Ill., 1968, 1.
12 Cf. Stigler, The Organization of Industry, op. cit., 5 ff. and 16 f.
13 Stigler, The Organization ofIndustry, op. cit., 5.
14 Stigler, The Organization of Industry, op. cit., 6.
15 Stigler, The Organization of Industry, op. cit., 6.
8
- Ideal markets with numerous small firms that do not exercise any
influence on the market process (polypoly) can hardly be met in an actual
economy; they are empirically unimportant. The most important markets
in a real economy are characterized by the existence of few large firms;
thus, they are rather structured in an oligopolistic way. Therefore, the
market structure is characterized by firms which can actively influence
the market process because of their relative and absolute size. Since all
firms are aware of this influence, it cannot be assumed that they act
independently (oligolistic interdependence).
The assumption of perfect market information cannot be sustained either.
It is undisputable that market participants have only restricted access to
requisite information and their ability to process this information is
limited. Economic decisions are taken under risk und uncertainty.
Additionally, perfect market transparency in an oligopoly fosters
anticompetitive effects (open price systems).22
Finally, preferences of all kinds like product differentiation, regional
markets, seasonal products as well as personal preferences compromise
the perfection of markets. The divisibility of goods and services, the
mobility of resources, and totally free access to the market are the
exception rather than the rule - therefore, they do not make sense as a
general assumption for real world problems.
24 Cf. the premises by Stigler mentioned above under 2. in Stigler, The Organiza-
tion of Industry. op. cit., ch. 2. A different position is held by Bark. The Antitrust
Paradox ... op. cit.. 60 f.: He views Stigler's exceptions of competition such as that
"antitrust must use the model (of perfect competition) and its implications as a
guide to reasoning about actual markets. but the pure model must never be
mistaken for that 'competition' we wish to preserve". In his opinion .:competition
may be read as a shorthand expression, a term of art. designating any state of affairs
in which consumer welfare cannot be increased by moving to an alternative state of
affairs through judicial decree".
11
The goods and services exchanged in markets are private goods. They
are characterized by rivalry in consumption and by the fact that non-
paying consumers can be excluded from consuming these goods and
services at low costs.
Finally, according to the Chicago School the market can only work
perfectly if the government restricts itself to the setting of a minimum
legal framework.
activity just equal the private marginal costs of undertaking this activity by
ignoring the marginal benefits or costs which accrue to other parties,
simultaneously.
Therefore, the overall marginal costs are higher than the private marginal
costs - in the case of negative externality - the latter being a source of
orientation for the acting party. The level of activity, hence, lies above the
optimal level, which leads to a misallocation of resources. The Pareto
optimum is not achieved. 26
The existence of increasing economies of scale is another reason for
market failure if the realization of such economies demands a level of
production that is incompatible with a competitive market structure. Two
aspects are crucial for this result: 27
26 Cf. Boadway, Robin, and David E. Wildasin, Public Sector Economics, 2nd ed.,
Boston, Toronto 1984, 14 ff. and 105 ff.
27 Cf. Boadway and Wildasin, Public Sector Economics, op. cit., 14 ff.
28 Cf. Bonbright, James, Principlcs of Public Utility Rates, New York 1961, 10 f.;
Kahn, Alfred E., The Economics of Regulation: Principles and Institutions, vol. 2:
Institutional Issues, New York et aI. 1971, 113 ff.; Shephcrd, William G., Public
Policies Toward Business, 7th ed., Homewood Ill. 1985,326 f.
13
P
LMC
LAC
Pm
Pk
Pc
A deviation from marginal cost pricing means that the Pareto optimal
situation cannot be obtained.
Besides, anomalies oj the market can be caused by features of supply and
demand. 29 For example, supply and demand curves can be parallel to the
quantity-axes so that they will not intersect. On the other hand it is possible
that despite typical supply and demand curves, there is no real equlibrium
because equilibrium price and quantities do not lie within the first quadrant.
Furthermore, instabilities can be the cause of market failure (cf. Cobweb-
theorem).
The Chicago School takes a special view on antitrust policy which is based
on the confidence in the long-run effectiveness of the market mechanism,
which can be interpreted as laissez-faire liberalism. In the following
sections V and VI of this contribution this position will be dealt with in
detail.
According to Posner antitrust policy should only deal with collective
action of competitors which aim at the exclusion of competition: 1
12 Cf. Hovenkamp, Antitrust Policy After Chicago, supra, 217-225, on the role of
economics throughout antitrust history.
IV. THE CHICAGO SCHOOL'S APPROACH
TO ANTITRUST THEORY
(1) The goals or values the law may legitimately and profitably imple-
ment, and
(2) the validity of the law's vision of economic reality.
With regard to the first point, Bork states, credolike, that the maximization
of consumer welfare is the sole legitimate antitrust objective. Hence, for
Bork, the answer to the second point follows immediately from the first in
that "(a) consumer-oriented law must employ basic economic theory to
judge which market structures and practices are harmful and which benefi-
cial".3
1 Cf. Demsetz, Economics as a Guide, supra, 371 f.
2 Cf. Bork, The Antitrust Paradox, op. cit, 7.
3 Bork, The Antitrust Paradox, op. cit., 7.
22
Bork confinns this point of view in his appraisal of the links between
antitrust, consumer welfare, and the use of traditional microeconomic
concepts.
Antitrust policy, according to Bork, deals with the implications of
economic behavior for consumers. A basic knowledge of these links and
relations can only be gained through the use of basic economic theory. The
models that are used within the context of economic theories are so simple,
therefore, that their implementation in jurisdiction does not pose any
problems. 4
Consumer welfare is viewed as the result of economic behavior.
Economic behavior, therefore, can result in productive and/or allocative
efficiency or inefficiency, and these effects can in tum be represented by
means of neoclassical price theory. It is especially in this context that the
advantages of this kind of price theory can be demonstrated because
question remains whether these criteria imply or even require the use of
neoclassics as an analytical tool.
Even if consumer welfare in the narrow sense is seen as the only goal of
antitrust policy, the method of neoclassic analysis does not follow automati-
cally. Rather, efficiency could be described, perhaps even better described,
by characteristics such as the level of prices, costs, profit rates, technologi-
cal progress, the degree of capacity utilization, etc., which can be deter-
mined empirically.7
Furthermore, the interpretation of consumer welfare only in terms of
efficiency, or perhaps as elevated prices and restriction of output, is too
narrow. A crucial failing of neoclassic analysis can be seen in the fact that it
uses static eqUilibrium models, which means that one abstracts from
technological innovation as a dynamic element of competition and, there-
fore, one abstracts from a crucial contribution to consumer welfare by using
these models.
Within this context, Bork only offers vague hints, describing technologi-
cal innovation as "a component of consumer welfare".8 By definition, Bork
includes technological innovation in the definition of consumer welfare
without elaborating it concretely; the implications for the efficiency
criterion that would arise if dynamic aspects were taken into account are not
elaborated on. Scherer, therefore, correctly criticizes in his review of
Posner's book9 that the definition of efficiency used by the Chicago School
is never clearly defined.
The neoclassical efficiency criterion Me = p that is used as a standard of
reference includes explicitly the state of perfect competition, in which p
equals MR and, therefore, the state of competition is taken into considera-
tion. A view that is only cost-orientated abstracts from the state of competi-
tion or has to assurne that through the absence of market barriers there is
7 Two problems in particular emerge in this context: on the one hand there is the
problem of the statistical determination of the outcome of the variables, on the
other hand there is the problem of defining the norm with which efficiency or
consumer welfare as an antitrust goal should be measured.
8 Cf. Bork, The Antitrust Paradox, op. cit., 132 f.
9 Cf. Scherer, Frederic M., The Posnerian Harvest: Separating Wheat from Chaff,
86 The Yale Law Journal 974 ff. (1977),995: Also I have been unable to find an
explicit defmition (of efficiency) ...."
24
And furthermore, that ,,(t)he Chicago School has largely prevailed with
respect to its basic point: that the proper lens for viewing antitrust problems
is price theory".11
But Posner has to face the argument that he uses an outdated price theory
for his analysis that has not been used since the 1930s
(Chamberlin/Robinson), and that he neglects all subsequent develop-
ments. 12
Especially the knowledge that the model of perfect competition used by
the neoclassics cannot serve as a guiding concept for antitrust policy,
strongly influenced efforts to develop a theoretical approach that would
take into account competitive reality.13
The following steps in this development can be discerned:
This sUIVey strongly points out that subsequent steps in the development
from price to competition theory are neglected by the Chicago School.
Finally, neoclassical price theory as used by the Chicago School cannot
reflect reality because of the assumptions made: 19
The point of departure for any rational antitrust policy are the goals that
should be attained. Therefore, a crucial topic for Bork are the goals which
underlie the antitrust policy of the United States. 20 He criticizes the U.S
Federal Courts because they have not, in over 80 years, been able to settle
for any extended period of time upon a defInite statement of the law's
goals, despite the fact that this ought to be a matter of some importance.
There seems to be extensive confusion that ..... is likely to leave the
impression that antitrust is a cornucopia of social values, all of them rather
vague and undefIned but indefInitely attractive".21
In contrast to those who emphasize a multiple-goal approach, BorIc
contends that the antitrust legislation's sole intent was the maximization of
consumer welfare. Therefore, the expression "competition" describes a
specifIc state of the market in which consumer welfare cannot be increased
by judicial decree. 22
Consumer welfare is set equal to social welfare which leads to an
abstraction from distributional aspects: 23
... (I)t seems clear the income distribution effects of economic activity
should be completely excluded from the determination of the antitrust
legality of the activity. It may be sufficient to note that the shift in income
distribution does not lessen total wealth, ...
Because of the diffIculties of perceiving the ratio legis, not only the legal
wording should be taken into account but also the intentions that are
inherent in the application of the law. As a result Bork concludes: 24
20 Cf. Bork, The Antitrust Paradox, op. cit., 81 ff.
21 Bork, The Antitrust Paradox, op. cit., 50.
22 Cf. Bork, The Antitrust Paradox, op. cit., 50 f.
23 Bork, The Antitrust Paradox, op. cit., 111 (emphasis added).
24 Bork, The Antitrust Paradox, op. cit., 57.
27
The language of the antitrust statutes, their legislative histories, the major
structural features of antitrust law, and considerations of the scope,
nature, consistency, and ease of administration of the law all indicate that
the law should be guided solely by the criterion of consumer welfare.
Point (1) is basically about the legal predictability for business men affected
by the antitrust laws. In Bork's view, the consumer welfare goal leads to a
small number of relatively simple rules, allowing firms to better judicial
opinions because "a consumer welfare orientation makes changes in the law
predictable and less likely to produce unfairness".26
In point (2) Bork returns to the issue of the roles of the legislature and the
courts. In Bork's opinion, the legislature plays the primary role, and the
court the secondary role in correctly enforcing the law. This means that
there is only one goal of antitrust and, therefore, not too much discretion for
the courts. Factually, this means the exclusive application of the per se-rule
instead of the rule of reason since the latter allows too much discretion to
the courts as well as to the enforcement agencies: 27
Those who continue to buy after a monopoly is fonned pay more for the
same output, and that shifts income from them to the monopoly and its
owners, who are also consumers. This is not deadweight loss due to
restriction of output but merely a shift in income between two classes of
consumers. The consumer welfare model, which views consumers as a
collectivity, does not take this income effect into account. If it did, the
results of trade-off calculations would be significantly altered.
With regard to American antitrust policy, it can be shown that the legisla-
tive history, the ratio legis, and the interpretation of the laws by the Federal
Supreme Court contradict the assertion of the Chicago School that the basis
of the American antitrust laws is only the promotion of efficiency. Rather,
the rationale of the American antitrust laws comprises welfare considera-
tions ("efficiency approach"), protection of the economic freedom to
compete, as well as control of economic power ("multiple goal ap-
proach")32, whereby the second goal complex was emphasized, originally.
When the first of the U.S. American antitrust laws was passed in 1890
Senator Shennan made the following remarks with regard to the goal of
antitrust: 33
Through monopolistic mergers the people are losing power to direct their
own economic welfare. When they loose the power to direct their
economic welfare they also loose the means to direct their political
future .... A point is eventually reached, ... where the public steps in to
take over when concentration and monopoly gain too much power.
34 Quoted after Pitofsky, Robert, The Political Content of Antitrust, 127 University
of Pennsylvania Law Review 1051 ff. (1979),1063.
35 Cf. Kauper, Thomas E., The Goals of United States Antitrust Policy - The
Current Debate, 136 Zeitschrift fiir die gesamte Staatswissenschaft 408 ff. (1980),
420 who critically comments on Bork's criticism of the jurisdiction as follows:
"Whether they are 'wrong' or part of a 'deviant' theme (as Bork states), is ul-
timately a question of judgment."
Kauper, though, defends the view that the question of the size at which a firm is
gaining too much political and social power cannot be an issue for judges but has to
be ultimately decided by the legislature.
36 U.S. v. Alcoa, 1944-47 CCH Trade Cases 57,342, pp. 57,682 f. (emphasis
added).
31
... Congress ... did not condone 'good trust' and condemn 'bad' ones; it
forbade all. Moreover, in so doing it was not necessarily actuated by
economic motives alone. '" We have been speaking only of the
economic reasons which forbid monopoly; but as we have already
implied, there are others, based upon the belief that great industrial
consolidations are inherently undesirable, regardless of their economic
results. In the debates in Congress Senator Sherman himself in the
passage quoted in the margin showed that among the purposes of
Congress in 1890 was a desire to put an end to great aggregations of
capital because of the helplessness of individual before them.
The Northern Pacific Railway Company case also reveals the view of the
Federal Supreme Court that the Sherman Act embraces the socio-political
as well as the economic functions of competition: 4o
37 Cf. Northern Pacific Railway Co. v. U.S., 1958 CCH Trade Cases 68,961, pp.
73,862 ff.
38 Cf. Brown Shoe Co. v. U.S., 1962 CCH Trade Cases 70,366, pp. 76,479 ff.
39 Brown Shoe Co. v. U.S., op. cit., pp. 76,500 (emphasis added).
40 Northern Pacific Railway Co. v. U.S., op. cit., pp. 73,864 (emphasis added).
32
Both cases prove that the Federal Supreme Court preferred less con-
centrated market structures in the 1950s and 1960s even when they implied
possible efficiency 10sses.41 Recent adjudication by the District Courts and
Courts of Appeal in the 1970s and 1980s is characterized by a stronger
emphasis on an economic analysis. Robert Pitofsky, a fonner Commis-
sioner of the Federal Trade Commission in Washington, D.C., criticizes this
exclusively economic approach to antitrust questions: 42
It is bad history, bad policy, and bad law to exclude certain political
values in interpreting the antitrust laws. By 'political values', I mean,
first, a fear that excessive concentrations of economic power will breed
antidemocratic political pressures, and second, a desire to enhance
individual and business freedom by reducing the range within which
private discretion by a few in the economic sphere controls the welfare of
all. A third and overriding political concern is that if the free-market
sector of the economy is allowed to develop under antitrust rules that are
blind to all but economic concerns, the likely result will be an economy
so dominated by a few corporate giants that it will be impossible for the
state not to playa more intrusive role in economic affairs .... (Fourth,) an
antitrust policy that failed to take political concerns into account would
be unresponsive to the will of Congress and out of touch with the rough
political consensus that has supported antitrust enforcement for almost a
century.
With regard to the Gennan cartel law the experience drawn from the
economic policy of the Nazi regime (compulsory cartelization and the role
of big finns in the annament industry) as well as the U.S.-American
approach to antitrust played an important role in the consultations that led
to the creation of a new Gennan antitrust law. In addition to economic
efficiency, the question of securing the adequacy of a free economic system
with a free political order were of utmost importance; the demand for
decentralization of economic power (meta-economic goal of competition)
emerged from this goal. Consequently, the Gennan cartel law can be
understood as a multiple goal approach; efficiency as one of the goals is
secured by means of competition. 43
After having abandoned - obviously as hopeless - the attempt to find
support in the U.S. legislative history of the antitrust laws that the only goal
of antitrust is consumer welfare 44 , Chicago advocates are arguing that two
different kinds of legislation can be distinguished: "public interest legisla-
tion" and "interest group legislation". The first should be interpreted
broadly by the courts since it serves economic efficiency, the latter has to
be interpreted in a narrow sense, since "interest group legislation" is bound
to impair economic efficiency.45
The use of consumer welfare as the only goal of antitrust policy emerges,
according to the Chicago School, from the efficiency criterion.
This presupposes a close link between consumer welfare and the criterion
of efficiency in the sense that "(b)usiness efficiency necessarily benefits
Furthermore, the Chicago School does not conclusively explain how the
efficiency criterion can be operationalized case-by-case. "Efficiency" seems
to become a kind of "black box", with which any kind of restraint on
competition can be justified.
Whereas the customary welfare criteria can be used to evaluate process
innovations, product innovations cannot be explained in terms of allocative
resp. productive efficiency. However, these represent a significant part of
competitive dynamics in a free enterprise system.
In evaluating efficiency, Chicagoans only analyze single-product firms,
but neglect the measurement of efficiency in multi-product firms.
The question of how efficiency should actually be measured also remains
unanswered. The suggestion of Chicago advocates that efficiency can only
be estimated, leaves ample room for judgement. Since efficiency is
composed of productive and allocative efficiency - seen from the Chicago
... productive efficiency is one of the two opposing forccs that detcnnine
the degree of consumer well-being (the other one being resource misal-
location due to monopoly power) ...
i. Allocative Efficiency
The best available evidence on this point, derived from interviews with
125 manufacturing firms, suggests that the managerial and central staff
economies of multi-plant operation are at most slight, and that in many
instances, especially beyond some modest threshold, multi-plant size is
disadvantageous.
Shepherd criticizes that the degree of efficiency gains from cost savings
may be overstated for two reasons: 69
Therefore, with regard to the basic cost function, Shepherd reaches the
following conclusion: 70
The typical 'industry' cost curve for the firm is dishshaped, with MES at
5 percent of the market or less. The constant-cost range may be wide,
though presumably average cost rises eventually because of (1)
bureaucracy, from absolute size, and/or (2) x-inefficiency caused by the
firm's market power. The constant costs may also mask a significant
amount of pecuniary economies, the typical cost curve may slope upward
instead of being flat.
ATe
X-inefficiency
(non-allocative
ine ff ic iency)
X-efficiency
(non-allocative
efficiency)
q
ATC
C'
ATC2' ATC2 '
C" ATC2' ,
ATC 1 " ATC2"
ATC2'"
c" ,
ATC2' "
ql q
qI' ATC I =output and total average costs before the merger (A);
q2' ATC2 ', If, ,ff = output and alternative total average costs after the
merger;
A ~ B = realization of economies of scale by merger;
B ~ C', If, ' " = X-inefficiency due to a lack of competitive pressure and
motivation.
42
When more of one goal is achieved at the cost of less of another goal, the
increase in output due to (say) increased effort is not an increase in
'efficiency' it is a change in output.
Under certain conditions, markets are more efficient because they can
mediate without paying the costs of managers, accountants, or personnel
departments. Under other conditions, however, a market mechanism
becomes so cumbersome that it is less efficient than a bureaucracy.
For the Chicago School, vertical strategies in general and vertical mergers
especially, are advantageous since the anticipated costs of organization are
lower than the transaction-costs that arise by using the price mechanism.
Hence, "(v)ertical market restrictions should be assumed to be efficiency-
enhancing unless specific structural characteristics exist within the indus-
try.85
Oearly, Chicago's view can be interpreted as an extreme and biased
version of Williamson's approach.
The crucial issue is whether this kind of analysis is practical and whether
it can supply detailed prognoses of what could actually occur in the event of
a merger. The terms transaction-costs and organization costs are difficult to
handle and in specific cases they can neither be determined empirically nor
measured precisely. The terms are largely used in a way that allows to
justify certain phenomena ex post; this leads to the possibility that any
development can be justified - but only ex post and crudely. As a result, the
concept seems to become tautological: a process that can be observed is
efficient because it has developed the way it has!
restricting output; but on the other, these forms of concentration offer the
possibility of cost decreases and, therefore, productive efficiency. It is the
view of the Chicago School that these counteracting effects on consumer
welfare imply that the optimal solution calls for these two effects to be
weighed against each other: 86
Williamson has exemplified the link between possible cost advantages that
can result from concentration and an increase in market power that can
result from increases in concentration by using the example of two merging
duopolists. 87
The counteracting effects of such a merger can be presented by
P Me
MCC=p
MCm=P
o q
The Chicago School assumes that the efficiency advantages due to horizon-
48
Critics of the Chicago School advocate the view that consumer welfare is
being falsely emphasized over all other possible objectives that have played
a distinct role during the legislative history:94
In the view of some of its critics, the Chicago School uses the criterion of
consumer welfare only in connection with perfect competition as a standard
of reference. The basic problem of the model of perfect competition are the
strict underlying assumptions which can never be fulfilled in reality.95 One
can draw the conclusion that (neoclassical) price theory cannot serve as a
basis for welfare economics which provides evidence for the remaining
question, whether allocative efficiency is increased, decreased, or stays
unchanged by actions that aim at influencing market structure or market
conduct. Harvard School representatives, therefore, use the theory of
second best which takes into consideration that the assumptions of the
model of perfect competition are only partly achieved.
The central issue of the theory of second best is that
... , given that one of the Paretian optimum conditions cannot be fulfilled,
then an optimum situation can be reached out by departing from all other
95 Cf. Sullivan, Lawrence A., Handbook of the Law of Antitrust, St. Paul, Minn.
1977,3.
50
96 Lipsey, R.G., and Kelvin Lancaster, The General Theory of Second Best, 24 The
Review of Economic Studies 11 ff. (1956),11.
97 Bork, The Antitrust Paradox, op. cit., 109.
98 Cf. Bark, The Antitrust Paradox, op. cit., 109; for a survey on the basic
problems of external effects see Boadway and Wildasin, op. cit., 60 ff. and 105 ff.
99 Bork, The Antitrust Paradox, op. cit., 114.
100 Cf. Bork, The Antitrust Paradox, op. cit., 115.
51
For the Chicago School, profits that have not been eroded over a long time
show that a firm operates efficiently in the market. For the Harvard School,
profits that have not been eroded by competition in the long run indicate
market power in that "they show clearly that there is some impediment to
effective imitation of the firm in question" .101
The Harvard School representatives admit that high profits can persist
over a longer period of time when the observed enterprise has cost advan-
tages in comparison to actual or potential competitors. Originally, the
Harvard School had claimed only costs plus a normal return on capital
ought to be earned in unconcentrated industries. They try to show" ... that
successful (tacit or explicit) collusion would approach joint maximization
and that the ability to collude increases with concentration".l02
In order to measure efficiency, an empirically observable relationship
between factors that determine the structure of an industry and the resulting
profits has to be constructed. In addition to profits, the degree oftechnologi-
cal innovation or technological efficiency is used as a criterion for measur-
ing efficiency. 100 Additional measures can only be determined vaguely. 104
In addition to a number of statistical problems there are three crucial
problems in measuring efficiency, that is in measuring market power by
means of profitability: 105
Contrary to the position of the Chicago School, profits do, however, seem
to be an index of market power; it can be confirmed empirically that profits
often are not eroded in the long-run and, therefore, these profits are not an
expression of efficiency but rather that they result from market power
arising from a restraint on competition. If one evaluates the studies trying to
measure the relationship between market concentration and supracompeti-
tive profits, one reaches the following conc1usion: 106
ff. (1983); and Long, William F., and David J. Ravenscraft, The Misuse of
Accounting Rates of Return: A Comment, 74 The American Economic Review 494
ff. (1984).
109 For a survey cf. again Leamer, Edward E., Sensitivity Analysis Would Help, 75
The American Economic Review 308 ff. (1985).
110 Benston, The Validity of Profits-Structure Studies, supra, 64; and the rejoinder,
Scherer, Frederic M., et al., The Validity of Studies with Line of Business Data:
Comment, 75 The American Economic Review 205 ff. (1987),209.
111 Cf. Scherer et al., The Validity of Studies with Line of Business Data: Com-
ment, supra, 215: "Data are fallible. So are scholars. Yet when an article is as
consistently negative as Benston's, one suspects bias, and when it contains as many
demonstrable errors as Benston's, one suspects a degree of carelessness incom-
patible with the burden a scholar must bear when he singles others' work out for
criticism".
112 cr. Bobel, Wettbewerb und Industriestruktur, op. cit., 129; Pautler, Paul A., A
Review of the Economic Basis for Broad-Based Horizontal-Merger Policy, 28 The
Antitrust Bulletin, 571 ff. (1983), 625--633 for an extensive survey. Furthermore,
cf. Buzzell, Robert D., Bradley T. Gale, and Richard Sultan, Market Share - A Key
to Profitability, 52 Harvard Business Review 97 ff. (1975); and Ravenscraft, David
J., Structure-Profit Relationships at the Line of Business and Industry Level, 65
The Review of Economics and Statistics 22 ff. (1983).
54
113 Cf. Abell. Derek F . and John S. Hammond. Strategic Market Planning:
Problems and Analytical Approaches. Englewood Cliffs, N.J . 1979,289.
114 Cf. Pautler, A Review ... , supra. 629 note 162. who mentions the lack of
correspondence to relevant markets; and Scherer. Industrial market structure ... op.
cit.. 270, who emphasizes that due to data secrecies it is impossible to say "what
companies and industries are being studied or what the absolute size of any
business is."
115 Cf. Buzzell et al., Market Share ... supra; Gale/Branch. Concentration versus
Market Share ... , supra; Martin. Steven. Market. Firm and Economic Performance.
New York 1983; and for an early work. Shepherd. William G . The Elements of
Market Structure, 54 The Review of Economics and Statistics 25 ff. (1972).
116 On the following study. cf. Martin. Market. Firm and Economic Performance.
op. cit.
55
the main result ... is that long period changes in market structure are
accompanied by increased efficiency. This efficiency gain is most
pronounced where concentration is growing. 123
119 Cf. Amato, Louis, and Ronald P. Wilder, The Effects of Finn Size on Profit
Rates in U.S. Manufacturing, 52 Southern Economic Journal 181 ff. (1985).
120 Cf. Weiss, op. cit., 366.
121 Demsetz bases his conclusion on the study by Stigler (cf. Demsetz, Economics
as a Guide, supra, 376 ff.).
122 Cf. Mueller, Willard F., A New Attack on Antitrust The Chicago Case, 18
Antitrust Law and Economics Review 29 ff. (1986),40.
123 Peltzman, Sam, The Gains and Losses from Industrial Concentration, 20 The
Journal of Law and Economics 229 ff. (1977).
57
But a closer look at the data of the Peltzman study reveals a further aspect
of selective empiricism. All of the industries in the study with rather fast
increases in concentration were consumer goods industries with important
product innovations and large-scale advertising campaigns.124 The critique
that the Peltzman study - which most of the Chicago adherents rely on -
was biased by the consumer goods industries was confirmed by further
studies in which data of consumer goods and producer goods industries
were used. These studies showed that Peltzman's findings do not hold for
producer goods industries. l25
The Chicago School does not deny the relations between concentration
and profits but this relationship is reinterpreted. Concentration is seen as an
expression of efficiency (the so-called new learning) and higher profits,
therefore, are an expression of efficiency as well. We will return to this
topic in the following section V.
Empirical studies by Solow and Denison show that the main part of
productivity growth is attributable to the advance of scientific and tech-
nological knowledge. 126 Technological progress which leads to productivity
improvements is usually defined in terms of process innovation, which is
only one part of technological progress, however; the other consists of
product innovations. Product innovation is not considered in the studies
mentioned above, because there is no satisfactory method for measuring
improvements in the quality of goods. Scherer, therefore, concludes that
124 Cf. Scherer, Frederic M., The Causes and Consequences of Rising Industrial
Concentration, 22 Journal of Law and Economics 191 ff. (1979).
125 Cf. Mueller, Willard F., A New Attack on Antitrust ... , supra, 41 f.
126 Cf. Solow, Robert M., Technical Change and the Aggregate Production
Function, 39 The Review of Economics and Statistics 312 ff. (1957), and Denison,
Edward, Accounting for United States Economic Growth: 1929--69, Washington,
D.C. 1974, 131-137.
58
First, our knowledge about the relations between market structure and
technological progress is too limited to regard technological progress as
an independent goal; rather, technological progress should only be a
component of consumer welfare.
Second, we do not know how much progress is desirable. as progress
requires the sacrifice of other resources: 129
efforts than small ones. In this connection finn size is usually measured by
sales volume, assets, or employees, whereas the inventive effort is
measured by R&D expenditures.
Kamien and Schwartz, reviewing the most important empirical studies on
this hypothesis, come to the conclusion that innovational effort increases
overproportionately with finn size only to a certain point; for still larger
finns innovational effort remains constant or even decreases.l3l
Mansfield, however, has criticized the use of aggregated R&D expendi-
tures and has come to the conclusion that
... whereas the biggest finns seem to carry out a disproportionately large
share of the basic research in most industries, there is no consistent
tendency for them to carry out a disproportionately large share of the
relatively risky R&D aimed at entirely new products and processes. 132
Where is all the great stuff coming from? It's not really coming out of
131 Cf. Kamien, Morton 1., and Nancy L. Schwartz, Market Structure and Innova-
tion: A Survey, 13 Journal of Economic Literature 16 ff. (1975), 16-18.
132 Mansfield, Edwin, Industrial Organization and Technological Change: Recent
Econometric Findings, in: John V. Craven (ed.), Industrial Organization, Antitrust,
and Public Policy, Boston 1983, pp. 129 ff., 131.
133 Cf. Kamien and Schwartz, Market Structure and Innovation, supra, 4.
134 Cf. Jewkes, J., D. Sawers, and R. Stillerman, The Sources of Invention, 2nd ed.,
London, New York 1969, pp. 66 f. and 73.
135 Quoted from Adams, Walter, and James W. Brock, The "New Learning" and
the Euthanasia of Antitrust, 74 California Law Review 1516 ff. (1986), 1560.
60
IBM ... but it's coming out of little two- and three-man companies,
because they're finding out that 40 guys can't do something that three
people can do. It's just the law of human nature.
A further study by the National Science Board, analyzing more than 300
major technological innovations in the United States, stated that for "the
whole 1953-1973 period, the smallest firms produced about 4 times as
many major innovations per R&D dollar as the middle-sized firms and 24
times as many as the largest firms".136 Considering these studies and
statements, it can be concluded that smaller firms do not only produce the
larger part of inventive output, but they also do it more efficiently. Kamien
and Schwartz, reviewing different studies, come to a similar result: beyond
a certain size no increases in inventive output are observable.131 But there
are remarkable differences among various industries. 138
Consequently, the first hypothesis is empirically not tenable.
The second hypothesis purports that technological progress encourages
scale expansion and, therefore, supports the tendency towards larger plant
and firm size.
After reviewing the literature, Blair has come to the conclusion that this
argument was only valid from the late 18th century until the first third of
the 20th century. Since then, we are observing the opposite effect. New
technologies permit effective production with a smaller plant size and
reduced capital requirement. 139 A good example is the steel industry in the
136 National Science Board, Science Indicators 1976, p. 118. This is impressively
illustrated by a statement of the former GM Chairman of the Board, Alfred P.
Sloan: "In practically all our activities we seem to suffer from the inertia resulting
from our great size ... I can't help but feel that General Motors has missed a lot by
reason of this inertia. You have no idea how many things come up for consideration
in the technical committee and elsewhere that are discussed and agreed upon as to
principle well in advance, but too frequently we fail to put ideas into effect ... ",
quoted from Adams and Brock, The "New Learning" ... , supra, 1554.
137 Cf. Kamien and Schwartz, Market Structure and Innovation, supra, 18 f.
138 Cf. Kamien and Schwartz, Market Structure and Innovation, supra, 19.
139 Cf. Blair, John M., Economic Concentration: Structure, Behavior and Public
Policy, New York 1972, 87-113, and Schmidt, Wettbewerbspolitik und Kar-
tellrecht, op. cit., 97 f.
61
(2) For the second part of this hypothesis the same problem arises: the
different empirical studies are too inconclusive to allow a clear answer. So,
Scherer draws only a vague conclusion in this field: 143
140 Cf. Adams and Brock, The "New Learning" ... , supra, 1552 f.
141 Cf. Levin, R. C., W. M. Cohen and D. C. Mowrey, R&D Appropriability,
Opportunity, and Market Structure: New Evidence on some Schumpeterian
Hypothesis, 75 The American Economic Review 20 ff. (1985), which are scrutiniz-
ing the neo-Schumpeterian hypothesis by means of better, more recent data.
142 Cf. Kamien and Schwartz, Market Structure and Innovation, supra, 22.
143 Cf. Scherer, Industrial market structure ... , op. cit., 438.
62
Monopolist's
/benefit curve IAI The monopolist
Revenue
extracted extracts this
by the much revenue
competitO\'I---\-.:l~"
.
P
rof,t gamed by_ \
the competitor 'J---\--~ Profit gained by
the monopolist
competitor
"'-Time.cost tradeoff
This benefit curve lei Curve for this
is too low to cause innovation
the innovation to occur
Fig. 5. Time, costs, and benefits for an innovation: a monopolist compared with a
competitor.
The time-cost trade off curve represents the fact that an innovation can be
done quickly at high costs or vice versa. A, B and C are a firm's benefit
curves for an innovation based on alternative market structures.
The monopolist's benefit curve A has the highest level and is sloped
downwards only slightly, because of the market position and the high
barriers to entry.
144 The figure is adapted from Shepherd, The Economics of Industrial Organiza-
tion, op. cit., 146.
63
149 Shepherd, The Treatment of Market Power, op. cit., 130. Cf. also Shepherd,
The Economics of Industrial Organization, op. cit., 150 f.
V. EVALUATING CONCENTRATION FROM
THE CHICAGO POINT OF VIEW
The representatives of the Chicago School also take the view that concentra-
tion in markets increases the danger of collusion. However, collusion could
be easily recognized at once, and, therefore, easily prosecuted. The position
of the Harvard School that market concentration is an indication of collu-
sion is criticized by the Chicago School on the grounds that it might
discourage competitive conduct that promotes efficiency.! Firms with a
large market share better satisfy the wants of consumers than smaller firms.
An increasing degree of concentration means aggressive competitive
behavior with prices close to long-run costS.2 Declining concentration
would suggest cartelization or monopolistic price behavior, however, that
stimulates entry of newcomers because of supra-competitive profits. 3
According to the representatives of the Chicago School, concentration is
absolutely necessary in order to achieve economic efficiency. Therefore, the
size of the firm that is achieved through internal growth is also the most
efficient size for the firm.4 Economies of scale, experiences from cumulated
production (learning by doing), and the differences in the quality of
management are used in order to explain concentration. s Whereas the
1 Ct. Demsetz, Economics as a Guide, supra, 383, and Bork, The Antitrust
Paradox, op. cit., 193: "(T)o explain industrial concentration on grounds other than
efficiency, ... will prove difficult or impossible to do ... ".
2 Cf. Kallfass, Die Chicago School ... , supra, 597.
3 Cf. Brozen, Yale, The Concentration-Collusion Doctrine, 46 Antitrust Law
Journal 826 ff. (1977),830.
4 Cf. Bork, The Antitrust Paradox, op. cit., 192.
S Cf. Kallfass, Die Chicago School ... , supra, 598.
66
6 Cf. Scherer, The Posnerian Harvest ... , supra, 995 ff., and Posner, The Chicago
School ... , supra, 945.
7 Cf. Demsetz, Harold, Industry Structure, Market Rivalry, and Public Policy, 16
The Journal of Law and Economics 1 ff. (1973), 7 f.; although empirical efforts to
verify the structure-conduct-performance paradigm and, therefore, implicitly the
concentration-collusion doctrine are rejected, Chicagoans now heavily draw on
such studies to prove their hypotheses, cf. Singleton, op. cit., 43.
67
Strong empirical evidence for our view is found in our reflections on the
extent of efficiency attainable by technical economies and other ef-
ficiencies. The studies elaborated on show that only small market shares are
necessary in the majority of the markets to exploit attainable economies to
their fullest. There is no plausible evidence put forward by the efficiency
adherents up to this point, however, that residual, nontechnical efficiencies
require increased industry concentration. Even if these efficiencies would
require a minimum level of concentration, overproportionate internal
growth would secure an efficient allocation of economic resources and the
maintenance of the selective function of competition in a much better way
than mergers would, concerning their ambiguous efficiency effects.
The representatives of the Harvard School take the view that the correla-
tion between market share and profit is much more central than the correla-
tion between concentration and profits. 8 According to their view, higher
profits of firms with large market shares are the result of better oppor-
tunities of making use of advantages in product differentiation and price
differentiation, i.e., to exert individual monopoly power and to raise prices
beyond the competitive level, as well as being due to economies of scale or
other cost advantages. Whereas the use of industry overlapping data in
former inquiries lead to aggregation and thereby to a positive correlation
between concentration and profit (overestimation of the profits of market
leaders)9 recent empirical investigations show that the profits of the firms
have to be seen as a function of market share and product differentiation. 10
Due to a high market share, the supplier can take advantage of his
monopolistic discretion to charge higher prices; however, due to the lack of
competitive pressure, it is not guaranteed that the efficiency gains will also
be passed on to consumers. The Chicago School takes the position that the
monopoly problem or the problem of welfare losses due to monopoly only
playa minor role in the U.S.I3; losses of allocation would be more than
compensated by profits due to productive efficiency. This position has to be
criticized since later studies have found higher welfare losses; besides, the
Harberger study, on which the Chicago view is based, has been criticized
on many aspects.I4
The actual situation seems to be characterized by a complex interplay of
price increasing and cost decreasing effects; there seems to be a tendency of
suppliers not to lower their prices as far as gained cost advantages would
11 It is asserted. nevertheless. that the relationship found. is simply the result of
biases in accounting data. cf. Benston. George. The Validity of Profits-Structure
Studies with Particular Reference to the FTC's Line of Business Data. 75 The
American Economic Review 37 ff. (1985).
12 Mueller, Dennis C., United States' Antitrust: At the Cross-roads, in: de Jong,
Henk W., and William G. Shepherd (eds.), Mainstreams in Industrial Organization
- Book 2, Dordrecht et al. 1986, pp. 215 ff., 225.
13 This view is based on the study of Harberger, Arnold c., Monopoly and
Resource Allocation, 44 The American Economic Review 77 ff. (1954).
14 Cf. B{)bel, Wellbewerb und Industriestruktur ... , op. cit., 179 ff. and 201 ff.
69
15 Quoted from Weiss, Leonard W., Concentration and Price - A Possible Way out
of the Box, discussion paper of the International Management Institute, Berlin
1984,7 ff.
16 Cf. Weiss, Concentration and Price ... , supra, 8.
17 Cf. the legal wording of Art. 85 para. 3 Treaty of Rome where in case of a
rationalization cartel a fair share of the resulting benefits has to be passed on to
consumers.
18 Demsetz, Economics as a Guide, supra, 381.
70
The lower output due to restriction and the higher price of monopoly in
comparison to a competitive situation are only regarded as concomitants of
monopoly. The control of a scarce input factor is regarded as a barrier to
entry by the Chicago Schoo1. 19 According to Demsetz20 a monopoly is - in
contradiction to the definition of monopoly in neoclassic price theory - not
characterized by the fact that it controls the whole supply in a relevant
market, but by the dominant position it has due to its control over certain
resources. Demsetz argues that such a position can be achieved by the
control of high-grade raw materials (for instance the aquisition of 90% of
high-grade ore mines by u.s. Steel in the U.S.A.), of patents, of an efficient
team of people, or of an efficient method of organizing experts in a team.
Such resources show the characteristic that it is difficult for competitors to
imitate them. According to Kirzner, the classic case of a monopolistic
producer has no practical importance; only if the monopolistic producer is
also the owner of resources is there a real monopoly.21 If a monopolist is
the sole owner of resources, grave consequences are conceded for produc-
tion. However, the assumption is that such a control is rare and in the long
run the market process will take care of the elimination or substantial
reduction of the dominating position, so that there is no need for antitrust
policy. Besides, the creation of a resource monopoly is regarded as a source
of productivity. In his evaluation of the trade-off between productivity and
market dominance, Demsetz comes to the conclusion that if one balances
the acquisition of a dominant position in the control of a scarce input with
the increase of productivity the danger of punishing such an increase in
productivity is large and the likelihood of reducing unproductive sources of
market dominance is small.22
The question that naturally follows from Demsetz's analysis is: Can we
regulate insufficiently competitive industries without incurring all the
evils of regulation to which Stigler and others have drawn our attention?
The term 'market power' refers to the ability of a firm (or a group of
firms, acting jointly) to raise price above a competitive level without
losing so many sales so rapidly that the price increase is unprofitable and
must be rescinded.
regard to antitrust policy the question of the extent of market power is much
more important. In order to measure market power the representatives of
the Harvard School have used different measures and criteria, for instance
market share, the Lerner index, profit rates in the relevant market, over-
capacity, certain forms of market conduct, and different concentration
ratios. 28 Some of the Chicagoans doubt that such measures are suitable and,
therefore, reject them for that reason: 29
The dead-weight loss, which has already been mentioned, seems to be the
only concept that is accepted by all representatives of the Chicago School.
This measurement is the monetary loss which results in an economy by
virtue of the fact that a monopoly offers a smaller quantity than would be
offered under competitive conditions. 31
2S Cf. Schmalensee, Another Look at Market Power, supra, 1804 ff., and Landes
and Posner, Market Power in Antitrust Cases, supra, 938.
29 Demsetz, Economics as a Guide, supra, 373.
30 Landes and Posner, Market Power in Antitrust Cases, supra, 943.
31 Cf. the critique with regard to this measurement concept by Schmalensee,
Another Look at Market Power, supra, 1793.
74
a. Barriers to Entry
As has already been shown above in sec. 11.4 there are, according to the
Chicago School, no relevant or important barriers to entry except legal
barriers.32 Factors that are regarded as barriers to entry by the repre-
sentatives of the Harvard School are denied by the Chicago School: 33
32 Cf. Williamson, Oliver E., Symposium on Antitrust Law and Economics, 127
University of Pennsylvania Law Review 918 ff. (1979),919: "The strong version
of the Chicago position asserts that meaningful entry barriers do not exist."
33 Demsetz, Economics as a Guide, supra, 382.
34 Bork, The Antitrust Paradox, op. cit., 310 f.
75
(a) First, existing barriers to entry lose their importance the more
optimistic potential newcomers are about future profits. As time
goes on, the probability increases that a potential newcomer
regards the profits that will be realized in a market as sufficiently
high in order to justify entry into this market.
(b) Second, barriers to entry are eroded in the long run (for instance
by the expiration of patents, the development of new products or
methods).
35 Cf. Bork, The Antitrust Paradox, op. cit., 310.
36 Bork, The Antitrust Paradox, op. cit., 311; cf. 328 f. as well.
37 Bork, The Antitrust Paradox, op. cit., 309.
38 Cf. Bork, The Antitrust Paradox, op. cit., 144 f., 153 and 160.
76
Even taking as given the separation into natural and artificial barriers to
entry, made by Bork, there are doubts with regard to the policy conclusions
drawn by the Chicago School. Of course, it is possible to regard natural
barriers to entry as an expression of superior efficiency. However, in such a
view only the short-run aspect of realizing efficiency is taken into account;
3} Cf. Posner, The Chicago School ... , supra, 947 note 65: "Legal barriers to entry
such as patents are quite properly ignored as beyond the reach of antitrust policy."
40 Cf. for instance Demsetz, Economics as a Guide, supra, 382, and Posner, The
Chicago School ... , supra, 929 f.
41 Cf. Kirchner, Christian, "Okonomische Analyse des Rechts" und Recht der
Wettbewerbsbeschrankungen (antitrust law and economics), 144 Zeitschrift fUr das
gesamte Handelsrecht und Wirtschaftsrecht 563 ff. (1980), 576.
42 Posner, The Chicago School ... , supra, 946.
77
43 Cf., e.g., Baumol, William J., Contestable Markets: An Uprising in the Theory
of Industry Structure, 70 The American Economic Review 1 ff. (1982); and
Baumol, William J., et al., Contestable Markets and the Theory of Industry
Structure, San Diego 1982.
44 Cf. Shepherd, William G., "Contestability" vs. Competition, 72 The American
Economic Review 572 ff. (1984), 572: "Such ultra-free entry provides efficient
outcomes .. , not only in theory but in actual markets. Among the desirable results
are said to be zero profits, Ramsey optimal prices, efficient production and market
structure, innovation, and an avoidance of cross subsidies in pricing: all this even in
pure monopolies."
45 Cf. Shepherd, "Contestability" vs. Competition, supra, 575: "Baumol et al.'s
optimism about efficiency appears to exceed even Chicago School levels."
46 Cf. Baumol, William J., et aI., Contestable Markets and the Theory of Industry
Structure, op. cit., 5: "Entrants can, without restriction, serve the same market
demands and use the same productive techniques as those available to the incum-
bent firms."
78
may have value in the microeconomic theory curriculum, ... offers little
so far to industrial organization research and teaching and gives no
persuasive reason to shift attention away from competition within the
market. 49
The different view of the 1.0. School tries to resolve this conflict and views
natural barriers to entry in a different way. The Harvard School emphasizes
the workability of competition as a control mechanism and starts from the
assumption that the coordination, information, and allocation function of
competition is lessened by high barriers to entry.
The original concept can be traced back to Joe S. Bain who inquired into
the question of potential competition in the case of oligopolistically
structured markets.50 Bain extricated three different sources responsible for
the observation that in some industries excess profits do not necessarily lead
to entries of potential competitors, eroding excess profits. These sources
51 Cf. Bain, Barriers to New Competition, op. cit.; and idem, Structure versus
Conduct as Indicators of Market Power, in: 18 Antitrust Law and Economics
Review 27 ff. (1986), 27.
For a recent restructuring of the conditions into structural and strategic barriers to
entry resp. exit and private resp. governmental barriers, cf. Schmidt,
Wettbewerbspolitik und Kartellrecht, op. cit., 68-70.
52 Cf. Bain, Barriers to New Competition, op. cit., 13 f.
53 Cf. Shepherd, William G., The Economics of Industrial Organization, 2nd ed.,
Englewood Cliffs, N.J. 1985,71 ff.
80
54 Cf. Masson, Robert T., and Joseph Shaanan, Stochastic-Dynamic Limit Pricing:
An Empirical Test, 64 The Review of Economics and Statistics 413 ff. (1982);
Neumann, Manfred, Ingo Bobel and Alfred Raid, Innovations and Market Structure
in West German Industries, 4 Managerial and Decision Economics 131 ff. (1982);
Yip, George S., Barriers to Entry, Lexington, Mass. 1982.
ss Cf. Shepherd, William G., The Treatment of Market Power: Antitrust, Regula-
tion, and Public Enterprise, New York, London 1975, 113 f.
S6 Shepherd, The Treatment of Market Power ... , op. cit., 115.
S7 Shepherd, The Treatment of Market Power ... , op. cit., 101.
S8 Cf. Hauptgutachten der Monopolkommission V: Okonomische Kriterien filr die
Rechtsanwendung, Baden-Baden 1984, para. 40.
81
b. Advertising
... , existing firms have incurred the costs necessary to overcome that
barrier and have thereby gained a certain degree of consumer loyalty.62
this service cannot be separated from the services that are part of the
product itself. 64
Posner also admits that the fundamental Chicago assumption applies, that
the consumer is an absolutely rational human being. 65
On the other hand he must be criticized, since the representatives of the
Harvard School concede as well that advertising contains information in
many cases. Nelson puts the question, however,
He argues that advertising tends more to set signals than to provide informa-
tion when the industry is conscious that consumers are uncertain about
selecting products. 67 As we have already mentioned, the informative
component of advertising plays an important role with regard to search
goods. However, it does not do so with regard to experience goods, where
advertising shifts from information to persuasion. The latter kinds of goods
are, however, in the majority in an economy.
64 Cf. Posner, The Chicago School ... , supra, 930 f. and 938: Advertising can make
an advertised brand cheaper by reducing the consumer's search costs by an amount
greater than the difference in nominal price between that brand and non-advertised
brands of the same product."
65 Cf. Posner, The Chicago School ... , supra, 938 note 38.
66 Nelson, Comments on a Paper by Posner, supra 950.
67 Nelson, Comments on a Paper by Posner, supra 950.
68 Cf. Bark, The Antitrust Paradox, op. cit., 101 f.
83
this school argue that there is no clear theoretical basis for a general
oligopoly theory.69
Due to changing conditions with regard to demand, technology, and
different cost situations, collusion that is favored by oligopolistic interdepen-
dence between the firms, is in practice very difficult to deal with: 70
The fact that oligopolies neither act as pure collective monopolies, nor act
competitively, does not permit the conclusion - according to the view of the
lawyers of the Chicago School- that oligopolists do not have to behave like
competitors. 71
There is an exemption, however, in the case of Stigler who was among
the first to deal with problems of competition in an oligopoly.72 Though
Stigler is in favour of an oligopoly theory, he has not succeeded in develop-
ing a coherent economic and legal approach to oligopoly.73
Due to the assumption of ideal markets without any frictions, there is
always effective competitive pressure, which leads to the result that market
conduct is not influenced by (oligopolistic) market structure.
However, if we start from the more realistic assumption of market
imperfections and, if we assume furthermore, that with increasing concentra-
tion and a decreasing number of competitors the interdependence between
the firms increases, Le., that every supplier has to take account of the
behavior of his competitors as a reaction on his own behavior, then a single
supplier has monopolistic discretion, which he has neither under the
conditions of perfect competition (price being given) nor in a (partial)
monopoly (where the fringe of the small competitors has no influence on
the market activities).
However, accepting the correlation between concentration and the
69 Cf. Posner, The Chicago School ... , supra, 932.
70 Bork, The Antitrust Paradox, op. cit, 92.
71 Cf. Bork, The Antitrust Paradox, op. cit., 102 and 104.
72 Cf. esp. Stigler, The Organization ... , op. cit., 39 ff.
73 Cf. Kirchner, "6konomische Analyse des Rechts" ... , supra, 565.
84
a. Horizontal Mergers
As we have already shown above in section IV. 2. a. ii. (1), firms should be
allowed to achieve by internal growth any market share as long as this takes
place in a non-predatory way.
The evaluation of horizontal mergers is perfonned by trading off the
welfare loss caused by restriction of output against the cost savings of a
merger. Williamson discusses the conflict between welfare losses by
monopolization (= skimming off the consumer's surplus) and welfare gains
due to cost savings. 75 According to Williamson, the antitrust authorities
should make a trade-off between these effects in judging horizontal merger
cases.
Bork doubts whether mergers would lead to substantial restraints of
output and believes that "the effect would usually be outweighed by cost
savings".76 However, he admits that with monopolistic structures, the
74 Cf. ZohlnhOfer, Werner, Wettbewerbspolitik im Oligopol: Erfahrungen der
amerikanischen Antiuustpolitik, Basel and Ttibingen 1968,26 ff.
75 Cf. Williamson, Economies as an AntiUUst Defense ... , supra, 18 ff. Cf. also the
graph of this model on p. 46.
76 Bork, The Antitrust Paradox, op. cit., 221.
85
restraints of output may outweigh the efficiency gains so that "we are in an
area of uncertainty".77 Therefore, Bork comes to the preliminary conclusion
that mergers up to 60 or 70% market share should be legal per se. However,
b. Vertical Mergers
According to Bork, U.S. antitrust policy has dealt with the effects of
vertical mergers for more than 60 years without having succeeded in
developing an adequate theory that demonstrates the negative effects of
such mergers on competition in a clear way:82
Vertical merger does not create or increase the firm's power to restrict
output. The ability to restrict output depends upon the market share of
the market occupied by the firm. Horizontal mergers increase marl<:et
share. but vertical mergers do not.
c. Conglomerate Mergers
It seems quite clear that antitrust should never interfere with any con-
glomerate merger. Like the vertical merger. the conglomerate merger
does not put together rivals, and so does not create or increase the ability
82 Bode. The Antitrust Paradox, op. cit. 231.
83 cr. Posner. The Chicago School .... supra, 937.
84 cr. Posner, The Chicago School .... supra, 938.
85 Williamson. Assessing Vertical Market Restrictions ... supm. 965.
86 Bode, The Antitrust Paradox, op. cit, 248.
87
Bork refers to the theories that have been developed by the Harvard School
for determining the negative effects of conglomerate mergers and comes to
the conclusion that such mergers should in no case be impeded: 87
We have examined all the major theories of the ways in which con-
glomerate mergers may injure competition and found that none of them
( ... ) bears analysis. The conclusion must be, therefore, that conglomerate
mergers should be prohibited by judicial interpretation of Section 7 of
the Clayton Act.
a. Merger Control
cause restrictions of output and that at the same time, however, the con-
sumer's welfare is served by the increased efficiency after a merger.
According to this argument, the government should not interfere in market
structures in the case of small horizontal and all vertical or conglomerate
mergers, since all these activities are productive from the economic point of
view.
In the case of horizontal mergers, the effects of output restriction out-
weigh the efficiency gains only if the merger results in a very high degree
of concentration. Consequently, Bork regards
Bork takes the view that the maximum market share realized by a merger
should be about 40%.90 Although, he objects that "even at these levels the
law would certainly be preventing the realization of some efficiencies",91 he
supports this proposal for horizontal mergers in his recommendations. 92
Since the Reagan Administration has taken over responsibility for
antitrust policy, the enforcement agencies have rarely attacked mergers.
Even in the case of horizontal mergers there is a very generous interpreta-
tion of the antitrust law - especially in the oil industry, so that the concentra-
in this industry has been strengthened. The four biggest firms: Exxon,
Mobil Oil, Standard Oil of California, and Texaco have become much
bigger than all the other firms, so that the oligopolistic nucleus in this
industry has even become stronger. The break-up of Standard Oil in 1911
into different competing firms has been offset as a result.
b. Divestiture
that any size achieved by internal growth without predation is the most
efficient size for that firm. This, in tum, leads to the conclusion that the
dissolution of any such firm will always create an efficiency loss.
[Therefore] the law should never attack such structures since they
embody the proper balance of forces for consumer welfare.94
c. Deregulation
But much of the political energy first generated by ... consensus goals is
98 Cf. FTC v. Exxon Corp., CCH Trade Regulation Reporter Transfer Binder: FTC
Complaints and Orders 1979-83 21,866, and FTC v. Kellogg Co. et aI., op. cit.,
21,899. Cf. U.S. v. IBM Corp., 4 CCH Trade Regulation Reporter 45,070 Case
2039, and U.S. v. AT & T, 4 CCH Trade Regulation Reporter 45,070 Case 2416.
99 Cf. Sullivan, Antitrust, Microeconomics, and Politics ... , supra, 5.
100 Sullivan, Antitrust, Microeconomics, and Politics ... , supra, 5.
91
The Harvard scholars stress the need, in the case of unavoidable regulation
of an industry, to avoid the disadvantages arising from deregulation; in case
of deregulation the advantages and disadvantages should be weighed: 101
4 Cf., e.g., Demsetz, Economics as a Guide, supra, 383, and Bork, The Antitrust
Paradox, op. cit., 406.
5 Bork, The Antitrust Paradox, op. cit., 297.
6 Cf. the omnibus volume on the economic and legal problems of conscious
parallelism, in: 13 The Journal of Reprints for Antitrust Law and Economics 581 ff.
(1982).
95
2. EXCLUSIONARY PRACfICES
The Chicago School denies the danger that competitors will be foreclosed
from entering the market by the argument that market entry is free to
everyone so that other firms cannot be hindered from entering the market:
Again, the Chicago School is relying on an ideal market without any barrier
to entry - a premise which has been criticized already for abstracting from
the real world.
3. TYING ARRANGEMENTS
The differences between the Harvard School and the Chicago School
become even more apparent in the matter of tying agreements. Those
agreements "make the conclusion of contracts subject to acceptance by the
other parties of supplementary obligations which, by their nature or accord-
ing to commercial usage, have no connection with the subject of such
contracts" (cf. Art. 85 para. I lit. e Treaty of Rome). Whereas the Harvard
School stresses that tie-ins are used to extend existing market power in the
market "a" to a still competitive market "b" (monopolizing of other markets
by the so-called leverage effect) the Chicago School looks at the two
products "a" and "b" as one economic unit; therefore, the price increase of
one of the two products is regarded as a price increase of the whole
economic unit:
This quotation shows that the two products "a" and "b" are regarded as one
economic product which is sold to different customers for different prices
according to the price elasticity of demand. This view disregards totally that
- even if there is one single product - it has been made from two different
products by market power; this can be regarded as per se illegal. Posner 13
concedes a negative effect on competition only in the case where the tied
product "b" represents a substantial part of the market and, thereby,
independent producers of product "b" are foreclosed from entering the
market (parallel to the so-called market foreclosure effect in the field of
exclusive dealing).
In order to give a better economic understanding of the position of the
Chicago School we shall deal with a classic tie-in case that has been
decided by the Berlin Court of Appeals. This case Meto Handpreisauszeich-
ner (price-marker)14 was characterized by a patent monopoly for price-
markers, for which clients were forced to buy the necessary labels from
Meto as well. There was a free market for labels, in which the clients could
buy labels much cheaper without a tie-in than from Meto. Apparently, the
12 Posner, Antitrust Law ... , op. cit., 173.
13 Cf. Posner, Antitrust Law ... , op. cit., 175.
14 Cf. Meto Handpreisauszeichner, Wirtschaft und Wettbewerb/E OLG 995 ff.
98
tie-in was used to raise prices and profits by foreclosing other finns from
selling labels to its customers of price-markers for a lower price (distinct
market foreclosure effect). The successful tie-in was regarded as an in-
dicium of monopoly power which was used to get higher prices for the tied
product (the labels) than without the tie-in. However, the Chicago School
looks at the tied product "b" always as a (technical) complementary product
to the monopoly product "a" - which may sometimes be the case but must
not always be the case, as assumed by Chicago School.
The assumption of Posner that the price increase for the product "b"
caused by the tie-in increases the price for the whole product (a + b) and ,
therefore, that consumers will buy less of the whole product abstracts from
reality. A supplier of product "a" who has a monopoly protected by patents,
may often have clients who in fact have no alternative as in the case of the
price-marker case (elasticity of demand ~ 0).
In addition, Posner tries to justify tie-ins as a method of price discrimina-
tion. He tries to demonstrate his position with a case where the producer of
computers forces his clients to buy the necessary punch cards for a supra-
competitive (monopolistic) price:
tary components "a" and "b" as given, his reference to the method of price
discrimination in order to skim off the consumer's surplus remains incom-
prehensible. The main problem is not that the product - according to
different elasticities of demand - is offered to different buyers at different
prices; rather, the problem is that actual or potential competitors are
foreclosed from entering the market for product "b" or are driven out of this
market. In addition, the assumption that the computer is sold at cost and the
punch cards at the monopoly price relies on the benevolence of the
monopolist in the computer market; this assumption is contrary to the
hypothesis of profit maximization that is generally adopted by the Chicago
School, however.
Besides, the results of an effective tie-in can be seen in the fact that there
will be a monopolistic price for the tied product "b" which is not based on
genuine performance, but on monopoly power. Whether other firms are
substantially foreclosed from entering the market, or are driven out of the
market, depends on the extent of the foreclosed market share and the
duration of the tie-in (analogous to the situation with exclusive contracts).
4. PREDATORY PRICING
One of McGee's major arguments - that the trust would not have used
predatory pricing because it is cheaper to buy a competitor than to sell
below cost - was vulnerable to the criticism of being irrelevant to
present-day circumstances, since aquiring a major competitor is clearly
and unconcealably unlawful whereas predatory pricing may be difficult
to detect. There is, however, a deeper problem with the McGee argu-
ment: it neglects strategic considerations. Assume that it is lawful to buy
a rival. It does not follow that a firm will never resort to predatory
pricing. After all, it wants to minimize the price at which it buys its
rivals, and that price will be lower if it can convince them of its willing-
ness to drive them out of business unless they sell out on its terms. One
way to convince them of this is to engage in predatory pricing from time
to time.
16 Cf. Areeda. Phillip. and Donald F. Turner. Predatory Pricing and Related
Practices under Sec. 2 of the Sherman Act. 88 Harvard Law Review 697 ff. (1975).
and the conclusions at p. 732. which have been formulated as comprehensible rules
for the courts.
17 Posner, The Chicago School ... supra. 939.
101
Bork regards the strategic disciplining of rivals as possible1 8 , but not very
likely. Therefore, he comes to the conclusion that the antitrust law
The Chicago School presents unanimously the position that resale price
maintenance (RPM) as a mere vertical restraint should be legal per se due to
the increase of distributive efficiency. Posner offers the following explana-
tion for this position:
18 Cf. Bork, The Antitrust Paradox, op. cit., 148: "Given equal access to capital,
rivals can be killed or disciplined if the predator is able to inflict diproportionately
large losses on his victim."
19 Bork, The Antitrust Paradox, op. cit., 406.
20 Posner, The Chicago School ... , supra, 926 f.
102
The Chicago School concedes that intrabrand competition for the product
in question is restrained between the dealers (which is justified by increas-
ing the distributive efficiency!), however, interbrand competition with other
products would remain effective. The Chicago School seems to have the
idea that there is only a marginal effect on interbrand competition. If there
are, for instance, 50 competitors and one of them introduces RPM for a
product, whereas the other 49 competitors do not make use of this instru-
ment, there will be no or only a marginal horizontal effect on competition,
taking as given that RPM is not used - explicitly or implicitly - in a
collective way.
The Gennan experience with resale price maintenance which was legal
until to the end of 1973 shows, however, that RPM facilitates actual
coordination between producers and dealers as well. 2 ! The Chicago School
abstracts from the problem that by allowing the vertical resale price
maintenance, horizontal restraints may be induced. It claims that proof of an
explicit price conspiracy between producers and dealers is needed. The
Chicago School overlooks the danger of a strong horizontal price effect by
conscious parallelism in introducing vertical resale price maintenance in a
relevant market as all producers and all dealers have the same economic
and financial interest to restrain price competition. The fact, that such actual
behavior is not covered by the existing American antitrust laws does not
justify a proposal to make legal per se an instrument with such obvious
detrimental horizontal effects. 22 The possible increase in distributive
21 Cf. the economic and legal arguments pro and contra resale price maintenance in
the Comment of the Federal Government of Germany on the Proposals of the
Economic Advisory Board to the Federal Ministry of Economic Affairs for
reforming the German Act against Restraints of Competition (in: Bundestagsdruck-
sache IV/617, pp. 21-55).
22 Bork, The Antitrust Paradox, op. cit., 292: "It seems unlikely, therefore, that
vertical restraints are usually disguised horizontal restraints imposed by a reseller
conspiracies.", and on p. 294 f.: "In fact, the presence of an industrywide pattern of
resale price maintenance should, as in the case of the dealer cartel, attract govern-
ment attention and make easier the discovery of the basic manufacturer cartel .... It
is not certain that resale price maintanance is never actually used for the purpose
for policing a manufacturer cartel, but it appears reasonably certain that such use
will be so rare and the ease of detection so great that this objection should not stand
in the way of the legality of truly vertical restraints."
103
23 Cf. the controversy on per se-rule or rule of reason in the Monsanto case
between Baxter and FfC Commissioner Pertschuk, CCH Trade Regulation Reports
No. 597, May 24,1983, p. 8 f.
24 CCH Trade Regulation Reports No. 791, January 14, 1987, p. 1, and for the
case, cf. Liquor Corp. v. McLaughlin, et al., Docket No. 84-2022, decided January
13,1987, text of the Court's opinion still to appear.
25 Hovenkamp, Antitrust Policy After Chicago, supra, 261.
26 Cf. Hovenkamp, Antitrust Policy After Chicago, supra, 260-280.
27 For the basic works, cf., e.g., Dixit, Avinash K., The Role of Investment in
Entry-Deterrence, 90 Economic Journal 95 ff. (1980), and Salop, Steven c.,
Strategic Entry Deterrence, 69 The American Economic Review 335 ff. (1979).
VII. A CRITICAL RESUME OF THE CHICAGO
APPROACH TO ANTITRUST POLICY
The Chicago School, which was known in the past largely within the
context of monetarism (Karl Brunner, Milton Friedman, Alan Meltzer et
al.), has developed a legal and economic approach to antitrust policy during
the seventies. This approach is supported by a group of economists and
lawyers (Bork, Demsetz, Director, Posner et al.) who have gained con-
siderable influence on U.S. antitrust policy. This is not only shown by the
"turnaround" in antitrust policy announced by former Secretary of Justice
Smith in 1981 but also by the New Merger Guidelines of 1982/84, the
Vertical Restraints Guidelines of 1985, the Antitrust Law Reform Package
of 1986, and by the fact that judges on the inofficial "waiting list" to be
appointed to the U.S. Federal Supreme Court are Chicago scholars (e.g.,
Posner).
What has come to be called the Chicago School of antitrust analysis
bases its policy recommendations on an allegedly consistent concept of
antitrust theory. The assumptions and the methodology that underlie this
theory need to be understood in order to allow an evaluation of the recom-
mendations.
The body of antitrust theory and policy constructed by the Chicago School
is based on the same considerations and convictions as supply side
economics: limitation of governmental influence. It can be called economic
Darwinism since the market process is viewed as the free play of economic
forces without governmental or public intervention, in which the healthiest
and best will survive (Stigler: "survival of the fittest"). The realization that
governmental influence has to be repelled and restricted to the setting of a
106
The determination of the goals of antitrust is a central topic for the deduc-
tion of certain policy recommendations from antitrust theory.
By reducing the possible number of goals to the maximization of the
consumer welfare as the only goal of antitrust policy, the Chicago School
108
According to the Chicago School, economic power only stems from price
and quantity relations. The interdependence of a free and decentralized
economic order with a free and democratic political system is ignored. The
protection of the workability of competition as an anonymous instrument
for controlling and steering economic processes is not a fundamental topic
for Chicago theorists because - in the absence of barriers to entry - there is
always sufficient potential competition to force actual competitors to pass
on supra-competitive profits to consumers by means oflower prices, greater
quality, etc.
The omission of non-economic objectives can have serious effects, since
highly concentrated markets lead to a decreased flexibility of large com-
panies and to an increase in their (potential) political influence. 1 This may
lead to the use of economic power to exercise political pressure in order to
get protection from competition or direct government subsidies. Adams and
Brock, for instance, have stressed the close links between politics and
economic organization, referring to "voluntary" export quotas in the U.S.
steel and automobile industries or government subsidies like in the
Lockheed or Chrysler case, as follows: 2
involves both lower costs and higher price. This supports the traditional
view concerning the link between concentration or market share and profits.
The relationship between lower costs and higher prices is stronger in
markets that are characterized by numerous frictions (consumer goods) than
in more or less competitive markets (industrial goods).
If the research results taken as a whole do not fit the theoretical
framework of the Chicago School, they are simply ignored or
"reinterpreted", especially in the field of concentration and profits and in
the measurement of welfare losses (reproach oj selective empiricism).
Since market structure - contrary to market behavior - plays a negligible
role in the Chicago approach, specific structural aspects of single industries
are ignored. The minimum efficient size which implies a degree of con-
centration that does not result in further economies of scale, is different
from industry to industry. Therefore, it does not make sense to assume
increases in efficiency with every increase of concentration.
The treatment of technological progress and innovation is only done in an
implicit manner - if at all. Technological progress and innovation lead to
cost reduction; but only sufficient competitive pressure makes technological
progress likely.3 Whether sufficient competitive pressure remains when
concentration increases is highly disputable.
Because of the assumption of perfectly competitive markets, the role of
barriers to entry is not a major antitrust topic. Economies of scale are seen
as creating efficiency and not as erecting barriers to entry, whereas they
might simultaneously be doing both. The assertion that concentration does
not necessarily lead to collusion since oligopolies are rather fragile does not
sufficiently take into account the fact that there is often a symmetry of
interest within a small group of competitors substituting legal sanctions
(e.g., penalties for breach of contract).
Real industry structures are often characterized by loose or tight (partial)
oligopolies. Chicago School lawyers in particular reject a "theory of
4. POLICY RECOMMENDATIONS
edifice. The whole concept succeeds or fails with the assumption of the
non-existence of barriers to competition and a long-run view of market
processes.
- the market poSition of the involved finns and the extent of these
restraints,
- the degree of exclusivity,
- the height of barriers to entry, and
- the extent of the market share thereby foreclosed to actual and potential
competitors, and, besides,
- the length of the contract. 8
7 cr. Schmidt. Ingo, 1st GrliBe an sich gefiihrlich?, 36 Wirtschaft und Wettbewerb
193 ff. (1986).
8 Cf. Schmidt and Kirschner, supra, 781 f., evaluating vertical restraints of trade
from the point of competition policy.
117
Table I. A comparative survey on thc antitrust concepts of the Chicago School and
Harvard School
MONOGRAPHS
Sullivan, Lawrence A., Handbook of the Law of Antitrust, St. Paul, Minn.
1977.
Triffm, Roben, Monopolistic Competition and General Equilibrium
Theory, Cambridge, Mass. 1940.
Williamson, Oliver E., Markets and Hierarchies: Analysis and Antitrust
Implications, New York 1975.
Yip, George S., Barriers to Entry, Lexington, Mass. 1982.
Zohlnhl>fer, Werner, Wettbewerbspolitik im Oligopol: Erfahrungen der
amerikanischen Antitrustpolitik, Basel and Tubingen 1968.
OMNIBUS VOLUMES
Adams, Walter, and James W. Brock, The "New Learning" and the
Euthanasia of Antitrust, 74 California Law Review 1516 ff. (1986).
Amato, Louis, and Ronald P. Wilder, The Effects of Finn Size on Profit
Rates in U.S. Manufacturing, 52 Southern Economic Journal 181 ff.
(1985).
Areeda, Phillip, and Donald F. Turner, Predatory Pricing and Related
Practices under Sec. 2 of the Shennan Act, 88 Harvard Law Review 697
ff. (1975).
Audretsch, David, Divergent Views in Antitrust Economics, 33 The
Antitrust Bulletin 135 ff. (1988).
Bain, Joe S., Structure versus Conduct as Indicators of Market Power, 18
Antitrust Law and Economics Review 27 ff. (1986).
Baumol, William J., Contestable Markets: An Uprising in the Theory of
Industry Structure, 70 The American Economic Review 1 ff. (1982).
Benston, George, The Validity of Profits-Structure Studies with Particular
123
Lipsey, RG., and Kelvin Lancaster, The General Theory of Second Best,
24 The Review of Economic Studies 11 ff. (1956).
Long, William F., and David J. Ravenscraft, The Misuse of Accounting
Rates of Return: A Comment, 74 The American Economic Review 494
ff. (1984).
Mansfield, Edwin, Technological Change and Market Structure: An
Empirical Study, 73 The American Economic Review 205 ff. (1983).
Masson, Roben T., and Joseph Shaanan, Stochastic-Dynamic Limit Pricing:
An Empirical Test, 64 The Review of Economics and Statistics 413 ff.
(1982).
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126
OFFICIAL PUBLICATIONS
A Branch 52, 54
Brock 59 ff., 109
Abell 54
Brown Shoe case 31
Adams XIII, 59 ff., 109
Brozen 65, 81
advertising 81 f.
Buzzell 53 f.
Alcoa case 30
allocative efficiency 35 f.
Amato 56 C
American Bar Association 81
Andreae 24 Chamberlin 24
antitrust goals 26 ff., 48 f., 107 ff., Clark 25
114 f. Clarke 55
Areeda 43, 100 Coase43
assumptions Cohen 61
- cf. premises and assumptions collusion 18 f., 65, 72, 85,93 f.
AT&T case 90 Commission of the EEC 114
Audretsch XVI competition 1 f., 7 ff., 49, 72 f.
autonomy of economic agents 3 ff. concenuation 61 ff., 65 ff.
conglomerates
- cf. mergers
B conscious parallelism 94
Bain 14,51,78 f. consumer welfare 26 ff., 48 f., 113
barriers to entry 8, 14 f., 63, 66, 70, 74 consumer sovereignty 4 f.
ff., 79 ff., 89, 94, 96, 115 contestable markets 14,77
Baumo114,77 Cox 4
Benisch 24 Craven 59
Benston 53,68
Blair 60, 63
D
Boadway 12,50
BlSbe145 f., 53, 68, 80 Davies 55
Bonbright 12 De Alessi 43
Bock: XII f., I, 10 f., 18 f., 21 ff., 26 Demsetz 14, 17 ff., 21, 37 f., 56, 65 f.,
ff., 34 ff., 43, 45 f., 48, 50, 58, 65, 69 ff., 73 f., 76, 81, 89, 94
74 f., 81 ff., 94 f., 101 f. Denison 57
bounded rationality 4, 6 deregulation 71 f., 90 f.
130
F J
Fink 8 Jacquemin 48
frrm size 58 ff. Jens4
Fisher 52 Jewkes 59
de Jong 48, 67 f.
Jorde 25
G
Gale 52 ff.
K
Garrett XII
Goldschmid 52, 81 Kahn 12
Goyder29 Kallfass 34,65
Greer 5,52 Kamien 59 ff., 63
Greiffenberg 4 f., 25 Kantzenbach 5, 25
Guzzardi jr. XII Kauper30
Kellogg Co. case 90
KhourieXII
H
Kirchner 76, 83
Haid 80 Kirschner XI, 116
Hammond 54 Kinner XIll, 70, 72
Harberger 68 Knight 8
Harris 25 Kuznets 25
131
L N
Lancaster 50 National Science Board 60
Landes 72 f. natural monopoly 12. 66. 71
Learner 53 Neale 29
Leibenstein 39 f. Nelson 24. 82
Levin 61 neo-Schumpeter hypothesis 58 ff.
Lipsey 50 non-economic goals
Liquor Corp./McLaughlin case 103 - cf. antitrust goals
Long 53 Neumann 80
Northern Pacific Railway Co. case
M
XV. 31
Machlup 14
Mann 81 o
Mansfield 59. 63
Markert 4 oligopoly theory 36, 82 ff.
market Olson 109
- behavior 18 ff. organization costs 113
- failure 11 ff. Ouchi 4. 43 f.
- foreclosure 113
- performance 51 ff. 115 P
- structure 17 f . 74 ff. Panzar 14
Martin 54 Paque XIII. 2
Masson 80 Pareto optimum 10 f . 49 f.
McGowan 52 Pautler 53 f.
merger control 87 f.. 115 Peltzman 56, 89
merger guidelines XI perfect competition 7 ff., 23, 35,49,
mergers. economic effects of 84 ff.. 72
112 f. Phillips 25
Mestmiicker 33 Pitofski 30, 32, 48
Meto Handpreisauszeichner case 97 Posner XIII, 3, 5,14. 17,24,33.35,
Mises. von XIII 66,70,72 f . 76. 82 f . 85 f . 89. 93,
Ml1schel46 95 ff., 100 f.
Monopolkommission 18.80 predatory pricing 99 ff.
monopoly (power) 35 f . 39 ff.. 62, premises and assumptions 3 ff.. 105 ff.
67 f . 69 ff. productive efficiency 36 ff.
Monsanto case 103 profit maximization 5 ff.
Mowrey 61 profitability approach 51 ff.
Mueller, Dennis C. 52. 68 public choice school 109
Mueller, Willard F. 56 f.
multiplant economies of scale 38 f. Q
multiple goal approach
- cf. antitrust goals Quandt 3. 6. 13
132