The Global Limits of Competition Law

D. Daniel Sokol, Ioannis Lianos, D. Daniel Sokol, Ioannis Lianos

• Publisher: Stanford Law Books
• Year: 2012
• ISBN:
  9780804782678
• Edition: 1
• Topic: Diritto
• Subtopic: Antitrust

Over the last three decades, the field of antitrust law has grown increasingly prominent, and more than one hundred countries have enacted competition law statutes. As competition law expands to jurisdictions with very different economic, social, cultural, and institutional backgrounds, the debates over its usefulness have similarly evolved.

This book, the first in a new series on global competition law, critically assesses the importance of competition law, its development and modern practice, and the global limits that have emerged. This volume will be a key resource to both scholars and practitioners interested in antitrust, competition law, economics, business strategy, and administrative sciences.

Part I

The Competition Law Process

1

The Limits of Antitrust and the Chicago School Tradition

George L. Priest

The Chicago School Antitrust Tradition

As is well known, putting aside a few stray endeavors that had no abiding influence, law and economics as a field began with the work of Aaron Director and Ronald Coase centered on papers published in the Journal of Law & Economics, which began publication in the late 1950s. Looking back on those efforts, law and economics as developed by Director and Coase was not exactly ideological, but derived from what might be called a deeply held belief system that political interference in market activities interfered with freedom and reduced societal welfare. The phrase “reduced societal welfare” is a modern, technocratic concept. The opposition of Director and Coase to governmental interference in market activities was much deeper. Director was one of the founding members (along with Milton Friedman, Frank Knight, Ludwig von Mises, and George Stigler, among others) of the Mont Pelerin Society, organized by Friedrich Hayek in 1946. Hayek had published The Road to Serfdom in 1944. Following themes of The Road to Serfdom, the Mont Pelerin Society was, and to some extent still is, dedicated to the proposition that political interference with market activities is harmful to freedom—though the Society avoided a purely libertarian approach—and to broader individual and societal goals. Coase was not present at the first meeting of the Society but became a member two years later, in 1948, and at some later point, a Life Member.

The early volumes of the Journal of Law & Economics illustrate the commitment of the editors—first Director, succeeded by Coase—to the belief in the superiority of the market to political allocation of resources. The first issues contain some articles that might be regarded as economic science, but they also contain numerous articles that are essentially essays in political economy—market-oriented political economy: in volume 2 of the Journal, Hirshleifer’s articles Capitalist Ethics—Tough or Soft?¹ and The Sumptuary Manifesto,² and Buchanan’s Positive Economics, Welfare Economics, and Political Economy;³ in volume 3, Jacob Viner’s The Intellectual History of Laissez Faire;⁴ in volume 4, Stigler’s Private Vice and Public Virtue.⁵ Though these early volumes of the Journal do not ignore the scientific application of economic analysis, they resemble more closely a high-level journal of promarket political philosophy than a journal of economic science.

The political philosophy, however, would not entirely generate the law and economics movement; the philosophy combined with empirical work would. From the earliest issues, the editors—Director and Coase—encouraged articles of an empirical nature critical of specific governmental interventions in the market, first to complement, later to completely supplant, the essays on political economy.

Antitrust law and economic regulation were particular subjects of criticism, though articles in the Journal also addressed the effects, economic and otherwise, of the minimum wage,⁶ unionization,⁷ licensing,⁸ and even the British National Health Service,⁹ among others. In the first issue of the Journal, Director published John McGee’s reanalysis of the Standard Oil case, showing that the basic theory of predatory pricing underlying the Supreme Court’s opinion had misunderstood the economic practices at issue entirely.¹⁰ Rockefeller and associates had created the Standard Oil monopoly not by predatory practices such as undercutting prices or through railroad rebates (hard to distinguish from volume discounts), but by buying out rivals, giving them a share of potential monopoly profits. Note that the point of McGee’s argument is not that the Standard Oil monopoly was not a monopoly and perhaps ripe for dissolution (McGee expressly put aside that question), but rather that the economic analysis of predatory pricing adopted by the Supreme Court and in popular understanding was naive, if not idiotic. McGee’s point, surely encouraged by Director,¹¹ was to demonstrate that the justification given by the Court and accepted in popular opinion for governmental interference in this famous case was basically nonsense.

Most of the other articles criticizing antitrust law solicited or encouraged by Director and Coase were of this nature: Telser’s study of resale price maintenance, criticizing the Supreme Court’s General Electric opinion;¹² Ward Bowman’s¹³ and, later, Ken Dam’s¹⁴ work on tying arrangements; Stigler’s article on the U.S. Steel case;¹⁵ John Peterman’s studies of Brown Shoe and International Salt.¹⁶ Although these articles generated substantial new learning concerning industrial practices, the underlying aim of the antitrust program was only partially scientific advance; more centrally, it was to ridicule the grounds upon which courts interfered with the marketplace.

The deep Chicago School belief in the superiority of markets and in the mistaken views of courts is reflected in the most famous article in the Journal (as well as in the history of law and economics), Ronald Coase’s The Problem of Social Cost.¹⁷ The article is well known, but the political dimension of Coase’s analysis and how his article fits within the Chicago School tradition are often unappreciated. The article is remembered today as vastly changing our understanding of the effects of legal rules. But I do not believe that it was drafted with that ambition in mind, and the article does not remotely pursue the implications for the effects of tort law or even more generally of property law, though his examples come from property law cases. That work was later accomplished by Harold Demsetz, Richard Posner, and others. Coase’s article instead was directed at attacking Pigou and Pigou’s purported demonstration that government, including the courts, could and should intervene in multiple markets to correct what we now call externalities.¹⁸ The point of the article was to show that Pigou’s analysis of correcting externalities was unsupportable.

The political or ideological dimension of the Coase Theorem is often ignored. To Coase, the implication of the proposition that “in the absence of transaction costs, the assignment of liability will have no effect on the allocation of resources” is that courts and the government can do no good by interfering in markets. If government action can somehow reduce transaction costs, that may enhance welfare; otherwise, courts and the government are fooling themselves by attempting to improve upon market outcomes and should stay out. Coase’s ambition was to deflate arguments for more intrusive government, not—as it happened—to revolutionize our understanding of the operation of the legal system. As a demonstration of Coase’s academic program, it is not often remembered that the academic project to which Coase turned after The Problem of Social Cost was not the extension of the Coase Theorem to the analysis of legal rules, but an attack on one of the last major institutional vestiges of socialism in Western societies, the post office.¹⁹

At the time, the character of Coase’s insight seemed and, to some extent, still seems today an incredible demonstration of extraordinary genius. I remember thinking then, “How could a person generate such a counterintuitive idea?,” and discussing the question with Dick Posner and, later, Harold Demsetz, among others. The extraordinary nature of the intuition led many to look back at Coase’s earlier writings to attempt to discover possible precursors of the idea. Important in this respect was Coase’s early article The Nature of the Firm²⁰—an article upon which The Limits of Antitrust importantly relies to show the difficulty courts face in evaluating contractual arrangements in comparison with firm integration, and which influences Easterbrook’s other corporate work. In that article, Coase identifies the transaction costs of using the price mechanism, in contrast to direct ordering within a firm. Many, including the Nobel Prize Committee, have regarded Coase’s early focus on transaction cost reduction as an explanation for the creation of a firm as at one with the recognition of the importance of transaction costs in determining the effects of legal rules.

I am skeptical of this explanation for two reasons. First, Coase’s work after The Nature of the Firm did not generally focus on the implications of transaction costs. Second, there is a more direct source of the analysis in The Problem of Social Cost, consistent more broadly with Coase’s and Aaron Director’s beliefs. Again, the principal ambition of The Problem of Social Cost was to show that Pigou’s rationalization of broad governmental, including judicial, intervention in the marketplace was both foolish and ineffectual. The Coase Theorem follows directly from a belief system that sees market transactions as inherently superior to and dominant over government interventions. If one sees a problem, an externality, that government intervention is attempting to solve, but believes deeply that the market will solve the problem more effectively, the analysis of The Problem of Social Cost becomes more apparent. Market transactions can serve to solve problems among conflicting property uses that governmental interventions cannot hope to equal. The Coase Theorem fits squarely within the Chicago School tradition that views markets as superior means of allocating resources and that, conversely, views governmental interventions as lacking analytical support and harmful in effect.²¹

These two propositions of the Chicago School tradition—(1) that markets are superior to any form of governmental, including judicial, intervention, and (2) that judicial interventions generally have no coherent analytical basis—are central, I believe, to understanding the background of The Limits of Antitrust and the nature of the contribution of that article.

That these two propositions are central to Chicago School analysis is clear. As is well known, Aaron Director, the first editor of The Journal of Law & Economics, did not publish very much. In 1964, however, when Ronald Coase succeeded Director as editor of the Journal, Coase published as the lead article of his first issue, clearly as a tribute to his predecessor, a memorandum that Director had written in 1953 but never published, which (I presume) Coase entitled The Parity of the Economic Market Place.²² That article makes many points, in particular about the different treatment that U.S. liberals give to freedom of speech versus market freedom (which Coase would later pursue), but two stand out:

1.“Laissez faire has never been more than a slogan in defense of the proposition that every extension of state activity should be examined under a presumption of error;”²³ and

2.“It is not essential to demonstrate that there is only one road to serfdom or that a particular road must inevitably lead to a specified destination [distancing himself from Hayek]. Some institutions are more flexible than others. We must choose those which minimize...