Introduction: An Antitrust Overview

Although it is difficult to summarize more than a century of antitrust enforcement in one observation, it is undeniably true that the antitrust laws have often been employed against innovative business organizations that have expanded output and lowered prices. That is most obvious in private antitrust cases (90 percent of all antitrust litigation), but it is also evident in the classic government cases as well. Since antitrust regulation (at least the Sherman Act) was allegedly designed to prohibit business activity harmful to consumers’ interests, much of antitrust policy as practiced, appears terribly misguided and might be termed a “paradox.”¹

The alleged paradox can be explained in several ways. One approach is to challenge the “public interest” origins of antitrust policy.² If the laws were originally meant to protect less efficient business organizations from competition rather than to promote the interests of consumers, then there is no paradox. From that perspective, antitrust regulation is just another historical example of protectionist rent-seeking legislation, the overall effect of which is to lessen economic efficiency.³

It can also be argued that there has traditionally existed serious theoretical confusion over the meaning of “competition.” That confusion may have misled the courts and the administrators of antitrust law.⁴ For example, when a firm lowers its price, is that competition or an attempt to monopolize? When a firm gains market share, is that evidence of efficiency or a threat to competition? When business mergers are restricted by law, is competition enhanced or restrained? When a firm engages in expensive research and innovation that competitors cannot easily duplicate, is that monopolization? Faulty theorizing on these issues could explain a public policy attack on economic efficiency in the name of preserving competition.

Economic Theory and Antitrust Policy

The theoretical foundations of antitrust policy developed generally from neoclassical microeconomics and were refined by scholars specializing in industrial organization. And although industrial organization (IO) theory remained deeply rooted in pure competition and pure monopoly models, IO economists in the late 1940s and 1950s increasingly focused their analyses on those industries that lay between pure competition and absolute monopoly. Their goal: to understand the relationships between market structure, business behavior, and overall economic performance.

Early IO economists generally came to accept a deterministic relationship between market structure and economic performance. If markets were competitively structured (small firms, homogeneous products, and ease of entry), then the market process led automatically to an allocation of resources whereby price, marginal cost, and minimum average cost were all equal. Alternatively, high market concentration, collusion among firms, economies of scale, or product differentiation could create barriers to entry and market power that would misallocate economic resources. Early empirical data on market concentration and firm profitability appeared to support the general IO hypothesis that competitively structured markets performed better than concentrated markets.

It was a short step from microeconomic theory, regression analysis, and some engineering studies on optimum plant size to recommendations concerning appropriate public policy. If poor market structure led to economic inefficiency, then government antitrust regulation might correct such “market failures.” For example, antitrust regulation could reduce or restrain industrial concentration (anti-merger policy), restrict predatory practices, prohibit horizontal price and output agreements (anti-collusion rules), and discourage other agreements within and among firms (prohibitions against tying agreements and resale price maintenance) that might restrain trade and competition. Barriers to entry that appeared to shelter so-called dominant firms (product differentiation, for example) could be attacked under the antitrust laws to make the marketplace more efficient.

The structure-conduct-performance perspective became the primary intellectual justification for traditional antitrust policy in the 1950s and 1960s.⁵ Within that framework, several classic antitrust cases were brought to curb price discrimination,⁶ tying agreements,⁷ increasing industrial concentration,⁸ and the “exclusionary” practices and high market share of United Shoe Machinery⁹ and International Business Machines.¹⁰

Theory Revisionism and Policy Reform

Criticism of the structure-conduct-performance framework and of traditional antitrust regulation increased sharply in the 1970s. The so-called “new learning” challenged some of the theoretical assumptions of the older IO paradigm (economic uncertainty generally replaced perfect information in the newer economic analyses, for example) and questioned many of its important empirical predictions.¹¹ New learning theorists such as Harold Demsetz and Yale Brozen argued that increasing market concentration was not necessarily associated with inefficiency or monopoly profits and that increased concentration could lead to an increase in market efficiency that benefited consumers.¹² In addition, careful reexaminations of earlier antitrust cases demonstrated that much of the historical enforcement effort had been entirely misplaced. By the early 1980s, each part of the traditional justification for vigorous antitrust enforcement had come under severe criticism by economists and law professors. That intellectual criticism helped pave the way for some modest changes in antitrust enforcement.

The so-called antitrust revolution of the late 1970s and early 1980s was evidenced by several important factors. First, there was a decided shift in the mix of antitrust cases initiated by the Department of Justice and by the Federal Trade Commission (FTC). Fewer mergers were challenged (under revised merger guidelines) than previously and more price fixing cases were initiated. Second, there was a modest decline in both private and public antitrust activity. Finally, the courts, including the Supreme Court, became increasingly skeptical of traditional antitrust theories of monopoly power.

The last factor was probably the most significant. In decisions such as those in Sylvania,¹³Brunswick,¹⁴ Illinois Brick,¹⁵ Broadcast Music,¹⁶ Monsanto,¹⁷Zenith Radio,¹⁸ and Sharp¹⁹ the Supreme Court broadened the rule-of-reason perspective in antitrust law. These decisions were based primarily on orthodox microeconomic analysis, and they were by no means entirely consistent or complete. But the clear trend in court decisions during the period definitely represented a shift away from the traditional analyses and decisions of the 1950s, 1960s, and early 1970s.

The New Antitrust Activism

The enforcement revolution was short-lived. New administrators at the Department of Justice and at the FTC during the Bush and Clinton administrations expanded antitrust enforcement.²⁰ For example, Bush appointees James F. Rill (Justice) and Janet Steiger (FTC) both made it clear that they favored a wider and more vigorous enforcement effort than did their Reagan administration predecessors. Investigations and enforcement efforts were also expanded during the Clinton administration under Assistant Attorney General Anne K. Bingaman and her successor at Justice, Joel Klein. Besides the sharp increase in corporate criminal fines collected for alleged price-fixing, the Clinton trust-busters (including the FTC) dramatically expanded the number of merger investigations, initiated questionable cases addressing vertical integration issues, supported the internationalization of antitrust enforcement, and filed high profile cases against firms such as Staples, Intel, and, of course, Microsoft. Antitrust regulation, despite decades of intellectual criticism, was back in business.

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¹For examples of the view that antitrust laws were created to serve consumers, see Hans Thorelli, The Federal Antitrust Policy (Baltimore, Maryland: The Johns Hopkins Press, 1955); and Robert H. Bork, The Antitrust Paradox: A Policy at War with Itself (New York: Basic Books, 1978).

²Thomas J. DiLorenzo, “The Origins of Antitrust: An Interest-Group Perspective,” International Review of Law and Economics 5 (1985): 73–90.

³See, for example, Bruce L. Benson, M.L. Greenhut, and Randall G. Holcombe, “Interest Groups and the Antitrust Paradox,” Cato journal 6 (Winter 1987): 801–18; or William Baumol and Janusz Ordover, “Use of Antitrust to Subvert Competition” journal of Law and Economics 28 (May 1985): 247–65.

⁴See, for example, Thomas J. Dilorenzo and Jack C. High, “Antitrust and Competition, Historically Considered,” Economic Inquiry 26 (July 1988): 423–35.

⁵See, for example, Phillip Areeda, Antitrust Analysis: Problems, Text, Cases, 2nd ed. (Boston: Little, Brown, 1974); or F.M. Scherer, Industrial Market Structure and Economic Performance, 2nd ed. (Boston: Houghton Mifflin, 1980).

⁶In the Matter of the Borden Company, 381 FTC 130 (1958); Borden Company v. FTC, 381 F. 2nd 175 (1967).

⁷Fortner Enterprises, Inc. v. United States Steel Corporation and United States Homes Credit Corporation, 394 U.S. 495 (1969).

⁸Brown Shoe Company v. United States, 370 U.S. 294 (1962); FTC v. Procter & Gamble Company, 386 U.S. 568 (1967).

⁹United States v. United Shoe Machinery Corporation, 110 F. Supp. 295 (1953).

¹⁰United States v. International Business Machines Corporation, Docket no. 69, Civ. (DNE) Southern District of New York (1969).

¹¹ For an early collection of critiques of antitrust policy, see Harvey Goldschmid, H. Michael Mann, and J. Fred Weston, eds., Industrial Concentration: The New Learning (Boston: Little, Brown, 1974).

¹²See, for example, Harold Demsetz, “Industry Structure, Market Rivalry, and Public Policy,” Journal of Law and Economics 16 (April 1973): 1–10; and Yale Brozen, “Concentration and Profits: Does Concentration Matter?” Antitrust Bulletin 19 (1974): 381–99.

¹³Continental T.V., Inc. v. GTE Sylvania, Inc., 433 U.S. 36 (1977).

¹⁴Brunswick Corp. v. Pueblo Bowl-o-Mat, Inc., 429 U.S. 477 (1977).

¹⁵Illinois Brick Co. v. Illinois, 431 U.S. 720 (1977).

¹⁶Broadcast Music, Inc., v. CBS, Inc., 441 U.A. 1 (1979).

¹⁷Monsanto Co. v. Spray-Rite Service Corp., 465 U.S. 752 (1984).

¹⁸Matsushita Electric Indus. Co. v. Zenith Radio Corp., 1067 S. Ct. 1348 (1986).

¹⁹Business Electronics Corp. v. Sharp Electronics Corp. 108 S. Ct. 1115 (1988).

²⁰Janusz A. Ordover, “Bingaman’s Antitrust Era.,” Regulation 20, no. 2 (1997): 21–26.