Abstract
Competition policy (antitrust policy in the United States) engages the subfields of microeconomics (price theory), industrial organization, law and economics, and public choice. The last was a latecomer to the list because of the persistence of naïve “public interest” explanations for competition policy’s origins, purposes, and effects. Even after a half-century of policy analyses in general and of public regulation of prices and conditions of entry into myriad industries around the world—showing that such interventions almost always benefit politically powerful special interests rather than society at large—most scholars still carelessly and mistakenly assume that private plaintiffs, attorneys called to the antitrust bar, the public law enforcement agencies, prosecutors, judges and other parties involved in antitrust proceedings have no motivations beyond preserving competitive marketplaces. My aim here is to bring antitrust policy more firmly within the ambit of public choice reasoning, which helps explain why antitrust intervention often either is ineffective or perverse. Competition law enforcement is a first cousin of economic regulation and, hence, should be evaluated as such.
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1 Introduction
The field of law and economics arguably was launched at the University of Chicago when Professor Aaron Director began insisting that his students study the organizations of specific industries and the business practices adopted by the firms within them “through the lens of price theory” (Posner, 1979, p. 928). Although Director himself did not publish his ideas very often (see, e.g., Director & Levi, 1956), he laid the foundations of the (“old”) Chicago School approach to antitrust policy that was carried forward in the work of eminent scholars such as George Stigler, Frank Easterbrook and Richard Posner. Director’s “new learning” (Goldschmid et al., 1977) challenged the then-prevailing structure-conduct-performance (SCP) paradigm, which saw rigid links between industry structure (the number and size distribution of the firms within it), conduct (business strategies and tactics), and performance (prices, profitability and their consequences for consumers’ welfare). That system of belief about industrial organization implied that monopoly and market power are ubiquitous, leading inexorably to outcomes inconsistent with the economists’ textbook model of “perfect” (or “pure”) competition (Demsetz, 1977).
The divergence between theory and actual business practices led to the identification of myriad instances of “market failure”, justifying governmental intervention in the forms of corrective public regulation and antitrust law enforcement to restore or preserve competitive conditions. It was the Chicago School’s signal contribution to show that much of the behavior condemned by the law enforcement agencies and the courts prior to the 1980s as anticompetitive and, hence, meriting the imposition of criminal or civil penalties on law violators, was in fact consistent with the operations of vigorously competitive markets. The shift was most seismic in the theory and legal treatment of mergers of companies at successive stages of the supply chain and other so-called vertical restraints of trade (tie-in sales, commodity bundling, exclusive dealing, exclusive territories, minimum and maximum resale prices).Footnote 1 Chicago’s scholars and their intellectual progeny caused the law enforcement agencies and the courts eventually to begin treating many such business practices as subject to a rule of reason, thereby requiring careful analysis case by case, rather than holding them to be illegal per se and demanding little or no evidence of their actual competitive effects.Footnote 2
But the Chicago School had (and has) a blind spot (McChesney, 1991; McChesney & Shughart, 1995; Shughart, 1995).Footnote 3 In pioneering the theory of economic regulation (Stigler, 1971; Peltzman, 1976), which in turn relied heavily on the logic of collective action (Olson, 1965), Chicagoans explained why and how public regulatory agencies frequently are “captured” by the very firms and industries they are created to superintend. The antitrust laws and their enforcers nevertheless continue to be studied as if vague concepts of the “public’s interest” or the “general welfare” guide governmental interventions into private market exchanges.Footnote 4 Students of antitrust processes routinely fall victim to the “nirvana fallacy” (Demsetz, 1969), judging outcomes in messy real-world markets with unattainable hypothetical ideals.
The standard interpretation of the purposes and effects of antitrust is wrong-headed, perhaps intellectually dishonest. A competitive marketplace is something of a pure (nonrival and nonexcludable) public good that delivers broad social benefits in the form of efficient resource allocation, i.e., prices aligned with production costs. Public-choice reasoning suggests that the interests of the public and private parties involved in the law enforcement process are much more parochial. Adopting that perspective demands, as a first principle, “closing the behavioral system” (Buchanan, 1972), that is, dropping the artless assumption that actors in the public sector are motivated to advance the interests of others (the “public interest”) rather than advancing their own narrower goals.
Commentators expressing unwarranted faith in the capacities of antitrust law enforcers to distinguish monopolizing from competitive behavior and, hence, to generate social welfare gains net of administrative and enforcement costs, studiously ignore the constellations of special interests that always and everywhere shape public policy outcomes. Political pressures frequently are marshaled by individuals or groups perceiving opportunities to exploit antitrust processes strategically, not to promote competition, but to subvert it (Baumol & Ordover, 1985). “Science”, including economic science, is filtered through—and deformed by—political and legal procedures before it finds effect in legislatures, bureaucracies, or courtrooms.
In what follows, I review the antitrust-relevant public choice literature (Sect. 2) and then summarize empirical applications of it (Sect. 3). Section 4 concludes.
2 What do we know and when did we know it?
Although the scholarly literature on competition laws and their enforcement is vast, many of the studies published prior to the mid 1970s focused attention on the outcomes of particular legal cases that began reaching the courts after the Sherman Act—the planet’s first antitrust statute—was passed in 1890.Footnote 5 It is fair to say that the bulk of those case studies questioned the abilities of law enforcers to distinguish competitive business practices from others aimed at acquiring or maintaining monopoly power (see, e.g., Rubin, 1995). Case studies are quite helpful in uncovering institutional details, such as the identities of plaintiffs and defendants, the economic theories and evidence underlying the allegations of anticompetitive behavior and, what is most important, law enforcements’ ex-post effects when plaintiffs win or lose.Footnote 6
That last step is critical because antitrust law enforcement essentially is an exercise in forecasting the future. Will competitive market conditions be preserved or restored if a proposed merger is blocked, or a particular business practice is held to be unlawful (or “unfair” in the language of FTC Act §5)? How will rivals respond to an antitrust ruling favorable (or unfavorable) to the defendant? Will the (structural or behavioral) remedies imposed on law violators in fact achieve their stated purposes? Under which of the two scenarios—clearance to consummate the merger or a federal court injunction stopping itFootnote 7—will consumers benefit from lower prices, improved product quality, or both? Will innovation and Schumpeterian creative destruction flourish or be slowed? Unfortunately, however, retrospective studies of antitrust law enforcement efforts, whether initiated by public or private plaintiffs, rarely are undertaken (Carlton & Israel, 2021).
2.1 Early beginnings
Nearly 40 years ago, Frank (Easterbrook, 1984) criticized public antitrust enforcers for their apparent shift toward regulatory solutions to the perceived failures of markets to sustain competitive conditions, warning that the agencies were ill-equipped to design and ensure compliance with such remedies.Footnote 8 The bureaucratic penchant for imposing conduct rules on law violators, as opposed to ordering “structural” remedies (requiring that assets to be acquired in a proposed merger or that business units combined by a merger consummated already be divested to a third party approved by the reviewing agency—“unscrambling the eggs” as it were), continues to characterize antitrust law enforcement processes (Shughart & Thomas, 2013).
2.1.1 Bureaucrats
Understanding decisions to pursue regulatory or structural remedies against antitrust law violators requires familiarity with theories of bureaucracy, a literature to which public choice scholars have made important contributions, starting with Gordon Tullock (1965).Footnote 9 In sharp contrast to the conventional wisdom of a professional, apolitical “civil service”, supposedly created by the (first) Progressive Era reforms of the then-prevailing “spoils system” under President Woodrow Wilson, Tullock helped spark inquiries into the actual motives and behaviors of public-sector bureaucrats responsible for giving effect to congressional legislation. His analysis of organizational hierarchies, grounded in his own experiences in the US Foreign Service, led Tullock to conclude that employees at lower tiers of the federal bureaucracy mainly want to “please their supervisors”, aiming to secure promotions, pay raises, and access to more of the perquisites of public office (e.g., prestige, corner offices, taxpayer-financed travel), goals that may be unrelated or only loosely related to their bureau’s mission. Tullock’s also emphasized imperfections in bureaucratic communication networks through which information is transmitted up the organizational chain of command and superiors’ orders are transmitted downward.
The more formal theories of bureaucracy that followed Tullock can be divided into two camps. First is what I call the “bureau-dominance” model of William Niskanen (1971), in which the heads of executive branch agencies strive to maximize their budgets by making all-or-nothing offers to their congressional “sponsors”, i.e., the politicians sitting on specialized oversight committees in the US House and Senate. In Niskanen’s theory, the goal of budget maximization is realized because bureaucrats are assumed to possess detailed information about agency operations (“where the bodies are buried”, as it were) that is superior to sponsors’ information, allowing agency heads to extract funding increases in annual appropriations hearings that can be spent discretionally on budgetary line items that benefit themselves and their underlings personally. Continuous growth in the size of the executive branch, measured by total spending and total employment, is the predictable consequence of a budget-maximizing bureaucracy.
A second approach to understanding the principal-agent relations between legislative committees and the executive branch agencies whose operations they oversee has been called the “congressional dominance” model (e.g., Weingast & Moran, 1983). That model recognizes that members of the US House and Senate self-select onto oversight committees that are crucial to their reelection campaigns.Footnote 10 Politicians representing farm states want seats on specialized agriculture committees, others representing districts or states home to large financial institutions want seats on banking committees, and so on. Vote motives thus provide oversight committee members with strong incentives to become informed about the operations of the agencies under their purviews, hence, closing the gap in the information sets of bureaus and their sponsors.
The congressional dominance model implies closer alignment between the policy preferences of the median member-voter on an agency’s oversight committee and actual agency decisions than does the bureau dominance model. Moreover, bureaucrats themselves have strong incentives to cater to the interests of “friendly” oversight committee members, implementing policies that benefit constituents whose support is crucial to the members’ reelection prospects. Oversight committee hearings help control agency “shirking” or “bureaucratic drift” away from the preferences of their congressional sponsors (McCubbins & Schwartz, 1984).Footnote 11
2.1.2 Relevance to antitrust law enforcement
Relying on the responses to interviews conducted during 1971 of about 100 staff members, private attorneys, and other observers of the Antitrust Division of the US Department of Justice, Suzanne Weaver (1977, p. 66) sought to answer the question, “Why does the division choose to bring any particular case?” According to her, events during the 1950s, such as passage of the Celler-Kefauver Act, which closed the “asset loophole” in the original language of Clayton Act §7,Footnote 12 thereby reinvigorating merger law enforcement, and the indictment of multiple electrical equipment manufacturers for price-fixing,Footnote 13 made “antitrust expertise a more valuable commodity to the business community and to law firms serving it”. Because of the greater demand for antitrust-relevant expertise, “experience in the Antitrust Division became newly valuable to a young lawyer who wanted eventually to work in private practice”. And the experience wanted was trial experience in the federal courts (ibid., pp. 38–40).
Weaver's study thus suggests that, at the margin, getting to trial may dominate the merits of a particular case in the decision to prosecute. Her study suffers from the faults common to survey evidence, i.e., what people say frequently diverges sharply from what they in fact do, and from her inability as an outsider to examine internal Antitrust Division documents. Weaver nevertheless helps to pierce the veil of the assumption that antirust law enforcers are motivated by vague conceptions of the public’s interest.
The incentives faced by Federal Trade Commission (FTC) attorneys was examined by Robert Katzman (1980, p. 83), who likewise remarks that the ultimate career goal of most members of the legal staff is a job with a prestigious private law firm after their public service ends. Such goals mean that senior bureaucrats up the FTC’s chain of command will conclude that “structural matters and industrywide cases threaten the morale of the staff because they often involve years of tedious investigation before they reach the trial stage”. In consequence, upper-level Commission executives tend to support “the opening of a number of easily prosecuted matters, which may have little value to the consumer … in an effort to satisfy the staff's perceived needs”.
Katzman's main point, like Weaver’s, is that one cannot explain antitrust case selection processes by looking only at the characteristics of the companies and industries that end up in law enforcers’ crosshairs. Rather, decisions to prosecute are dominated by factors internal to the agencies themselves, such as staff career objectives, the availability of enforcement resources, congressional oversight committee influence, and so on. The same conclusions are echoed by a contemporaneous collection of studies of the FTC (Clarkson & Muris, 1981). The contributors to that volume focus on internal organizational conflicts, staff incentives, and external constraints. For example, it is suggested that the Commission substituted monopolization cases relying on the market concentration doctrine for matters involving charges of unlawful price discrimination under Clayton Act §2, as amended by the Robinson-Patman Act in 1935, to resolve inhouse conflicts between lawyers and economists,Footnote 14 and because the greater complexity of the caseload supplied human capital benefits to the attorney staff. In addition, Clarkson & Muris’s (1981, pp. 303–304) contributors attribute the FTC's failure to bring many price-fixing cases to the desires of Commission attorneys to differentiate themselves in the private job market from their Justice Department counterparts.Footnote 15
Readers might well wonder why the three books summarized above first saw the light of day in 1980–1981. One answer can be found in the US presidential election of 1980, which propelled Ronald Reagan into the White House as successor to President Jimmy Carter. Reagan’s election widely was anticipated to trigger a sea change in antitrust law enforcement practices. Change indeed was in the air on Pennsylvania Avenue as news broke announcing the appointments of William Baxter, a Stanford University law professor, as Assistant Attorney General for Antitrust and James C. Miller III, a professional economist holding a Ph.D. from the University of Virginia, as Chairman of the Federal Trade Commission. Whether or not Reagan’s policies in the realm of antitrust were revolutionary can be debated (Shughart, 1989), but in hindsight 1980 was one of the defining moments of my life: Chairman Miller soon named his Virginia graduate school classmate Robert Tollison as Director of the FTC’s Bureau of Economics.
Tollison was Head of Texas A&M’s Economics Department while I was finishing my own Ph.D. there after being discharged (honorably) from the US Navy in December 1974. We reconnected in 1981 during a fire drill at the Gelman Building offices of the Bureau of Economics in Georgetown’s “Foggy Bottom”. The rest, as often is said, is history. Tollison and I became lifelong friends, collaborators, and colleagues (sequentially at the FTC, Clemson, George Mason and, near the end, at the University of Mississippi, after which he returned to Clemson before passing away at 73 years of age). He preceded me as president of the Public Choice Society (1994–1996) and of the Southern Economic Association (1984–1985). Tollison surely merits credit for launching the literature bringing the public-choice perspective to the analysis of the antitrust laws and their enforcement.
2.2 Prolegomena to the public-choice perspective on antitrust
Economists and lawyers engaged the antitrust laws and the cases instituted under them early on. Because it combines elements of the law and of price theory, antitrust policy, as a matter of intellectual history, counts among the topics underlying what once was known as the law-and-economics “movement”, but now is a full-fledged field of study. As mentioned at the outset, however, the first contributions to the relevant literature largely were descriptive, focusing attention on individual antitrust cases and drawing normative conclusions about their effects. The conventional wisdom at the time saw the purposes of antitrust laws as beyond controversy, and treated the public law-enforcement agencies, despite their tendency (like all institutions of human design) to err, as well-meaning guardians of the marketplace. Most of the existing studies consisted of efforts to identify good and bad competition laws, good and bad cases, and concluded with suggestions for change—better laws, better judges, and better bureaucrats.Footnote 16
Systematic studies of the effects of antitrust law enforcement began, to the best of my knowledge, with George Stigler (1966). Relying on aggregate data covering roughly 1890 to 1960 and comparing industrial concentration levels in selected US industries with corresponding UK statistics, Stigler found that the Sherman Act had had only modest effects on the market shares of leading American firms.Footnote 17 He reached similar conclusions about the (in)effectiveness of the two nations’ antimerger laws but deduced that the Sherman Act seemed to have eliminated the most efficient methods of collusion.
On the surface, collusion—“naked” price fixing or market division—along with anticompetitive mergers between former rivals (horizontal restraints of trade) are the “bread and butter’ of antitrust law enforcement (Tollison, 1982; 1983), matters on which Chairman Miller wanted to focus the FTC’s resources. Priority likewise was assigned to challenging monopolies created by the public sector itself. Even here, though, the empirical evidence available at the end of the 1970s suggested that the price-fixing cases selected for prosecution by the Antitrust Division and the remedies imposed on colluders at trial or against defendants entering nolo contendere pleas did not effectively deter future law violations: “industries colluding at one point in time often can be found to be colluding at later points in time, in spite of Antitrust action in the interim” (Hay & Kelley, 1974). Colluding producers were found by Asch and Seneca (1976) to be “consistently less profitable” than non-colluders. Earlier, Palmer (1972) had reported that defendants expanding more slowly during a 1966–1970 sample period than other firms were overrepresented in antitrust suits charging horizontal restraint of trade.
The evidence pointed to one of two conclusions: either low profit margins motivate firms to enter into collusive agreements or the antitrust authorities frequently prosecute unsuccessful cartels. The latter interpretation likely would be endorsed by Judge Posner, who criticized federal antitrust law enforcers sharply for focusing on proving the existence of collusive agreements rather than inquiring into the actual effects of such agreements. Why allocate scarce antitrust law enforcement resources to investigating and prosecuting attempts to fix prices, divide markets, or both, if consumer harm cannot be demonstrated?Footnote 18 Price fixing is illegal per se under the Sherman Act, possibly economizing on litigation costs (Easterbrook, 1992). Perhaps recognizing that such agreements are hard to negotiate and require continuous monitoring to ensure compliance (Stigler, 1964), combinations or conspiracies in restraint of trade simply were not enforced by the common law courts (Garber, 2000, p. 36).Footnote 19
In any case, the early empirical literature failed to produce much evidence supporting antitrust’s ostensible aims or that the public agencies created to give effect to the relevant laws behaved “as if” they collectively aimed to fulfill them. Although myriad purposes have been ascribed to antitrust policies, many but certainly not all economists of the day accepted Bork’s (1978) normative conclusion that rational competition law enforcement consistently would keep its eyes focused on consumers’ welfare, not on that of producers.
Even before he stepped onto the ground at the FTC in 1981, Tollison had published coauthored research (Long et al., 1973) casting doubt on the assumption that antitrust law enforcement is guided by efforts to attack sources of allocative inefficiency in the US economy.Footnote 20 The three scholars compared the actual distribution of cases brought by the Justice Department's Antitrust Division with the pattern that would be observed if law enforcers selected cases on the basis of their expected net benefit to society, i.e., composed lists of firms and industries ranked in order of the reduction in welfare loss anticipated, net of the cost of bringing cases, and then moving down the list until the agency’s annual law-enforcement budget had been exhausted. Long, Schramm and Tollison’s basic econometric method was to regress the number of cases instituted by industry in given years on various industry-specific welfare-loss measures. (A key assumption was that the cost of bringing cases was constant across industries.)
The empirical model performed best in predicting case-bringing activities when industry size, as measured by sales, was entered as a proxy for welfare loss. Overall, however, the evidence failed to support the hypothesis that the Antitrust Division's behavior was grounded on a benefit–cost calculus. Specifically, the results suggested that “the composite measures of the potential benefits from antitrust action … tested—the welfare-loss triangle alone or together with excess profits—appear to play a minor role in explaining antitrust activity” (Ibid., p. 361). In subsequent comments on Long, Schramm and Tollison, Asch (1975) and Siegfried (1975) presented additional evidence that enforcement efforts by the antitrust bureaucracy did not follow the welfare-loss model. Asch regressed the number of cases brought per year by industry on average annual industry sales, the number of firms as of 1967, and average annual sales per firm. Relying separate estimates for the FTC and the Antitrust Division, he concluded that “case-bringing activity cannot be characterized as predominantly ‘rational’ or predominantly ‘random’…” (Asch, 1975, pp. 580–581). Similarly, examining a sample of industries significantly less aggregated than that of Long, Schramm and Tollison, Siegfried (1975) found that “the conclusions of Long et al. remain unchanged. It appears that greater levels of excess profits and lower levels of welfare losses are associated with more antitrust cases.” Moreover, when he refined his reduced-form equation to include a better measure of the benchmark rate of return, and to control for the possible number of cases in each industry, coefficient signs were reversed, and the explanatory power of the regressions plummeted. Siegfried (1975, p. 573) concluded that “economic variables have little influence on the Antitrust Division.”
In sum, the evidence available at the end of the 1970s suggests that the federal antitrust bureaucracy had not selected cases to prosecute based on their potential net social benefits. The stage was set for Robert Tollison to start bringing public choice reasoning to bear in developing a better understanding of the purposes and effects of antitrust policy.
3 The public-choice perspective on competition policy
The state—the machinery and power of the state—is a potential resource or threat to every industry in the society. With its power to prohibit or compel, to take or give money, the state can and does selectively help or hurt a vast number of industries. (Stigler, 1971, p. 3).
When confronted by claims that a particular law or policy serves the public’s interest, public choice scholars are provoked to ask, “what public and whose interest”? In what follows, it is important to keep three stylized facts in mind. First, unlike traditional economic regulation of prices and entry conditions into specific industries (the commercial airlines; over-the-road truckers; taxicab operators; radio and television signals transmitted over the airways or by satellite or cable, landline or cellular telephony, including voice, data and text messages; electricity, water, sewerage and other public utilities), the antitrust laws’ enforcers are given broad mandates to investigate and sanction anticompetitive business practices wherever they may be suspected.Footnote 21 Because the reach of antitrust policy is not confined to particular industries or markets, identifying the “winners” and “losers” from it not always is as straightforward as it is with more traditional regulatory regimes.Footnote 22
Second, the term “monopoly” is used much too loosely in most of the extant literature on antitrust law enforcement. A pure monopolist in the context of neoclassical price theory is the only seller of a product having (in the eyes of consumers) no close substitutes. The less ambiguous and more helpful term is market power, which refers to a seller’s ability to raise the prices it charges to customers (in a properly defined market) without losing so many sales that the price increase becomes unprofitable, i.e., “to deviate profitably from marginal cost pricing” (Hovenkamp, 2017, p. 62).
Third, identifying monopoly or market power requires defining a relevant antitrust market in which the competitive effects of a merger or business practice will be analyzed. Relevant antitrust markets normally are seen as having two dimensions, a product (or a set of closely related products) and a geographic area in which buyers and sellers of that product or products interact. Market definition is the first and often decisive step in all antitrust investigations. Depending on how narrowly or broadly the boundaries of the relevant market are drawn, a defendant either is or is not a “monopolist”. Many of the critics of antitrust law enforcement over its more than century-long history frequently single out the often too-narrow market definitions adopted by prosecutors as causes of concern for the law enforcement process.Footnote 23
It also is important to recognize that the FTC not only was granted authority to investigate and prosecute “unfair methods of competition” under the original language of FTC Act §5, but that its mandate was extended to consumer-protection matters (advertising, product warranties, and so on) by the Wheeler-Lea Act (1938), which expanded §5 by adding “unfair or deceptive acts or practices in or affecting commerce” to the Commission’s authorizing statute. The Clayton Act of 1914, passed the same year as the FTC Act, explicitly empowered the Commission to enforce that law’s provisions, most noteworthily §7. Unlike the Justice Department’s Antitrust Division, the FTC thus is at the same time a competition law enforcer and a regulatory agency, thus blurring the functional distinction between two areas of public policy important to Easterbrook (1984) and other commentators (e.g., Shughart & Thomas, 2013).Footnote 24
Robert Tollison was sworn in as the Director of the FTC’s Bureau of Economics in 1981. As was his modus operandi as a productive scholar and contributor to myriad applications of price theory, Tollison quickly began assembling a team of economists, some already at the Commission, others from amongst his graduate students and colleagues who remained in academic posts,Footnote 25 to begin thinking deeply about antitrust’s purposes and effects. He insisted on positive economic analysis of antitrust law enforcement behavior and empirical testing of the hypotheses about that behavior derived from bringing a public-choice perspective to the activities of the Federal Trade Commission then or soon to be underway.
Tollison and his collaborators soon got to work, following up on ideas percolating in his fertile mind, adumbrated in two of his first post-1981 writings on the political economy of antitrust policy (Tollison 1982, 1983, 1985). Many of the contributions to the literature originating during the early 1980s eventually were collected and published in book form (Mackay et al., 1987); McChesney & Shughart (1995) represents the most comprehensive statement of the public-choice perspective on antitrust to date (also see McChesney & Shughart, 2010).
As summarized by Shughart & Tollison (1985), in one of the initial fruits of the Tollisonian era at the FTC, Faith et al. (1982) hypothesized that the interests served by antitrust are those of the Members of Congress sitting on committees having budgetary or oversight mandates with respect to the Commission.Footnote 26 Specifically, they asked whether a geographic bias could be found in the FTC’s case-bringing activities such that enforcement favored firms operating in the jurisdictions of the members sitting on relevant congressional committees. Relying on information documenting the antitrust cases initiated by the Commission over the 1961–1979 period, the three coauthors reported evidence supporting a geographical bias: antitrust complaints brought against companies located in the jurisdictions of FTC oversight committee members—especially cases involving firms headquartered in districts represented by the members of key House subcommittees—were more likely to be dismissed than matters involving firms located in other jurisdictions. Overall, their results lent “support to a private-interest theory of FTC behavior …” in which “representation on certain committees is apparently valuable in antitrust proceedings” (Ibid., p. 342).
Similarly, Weingast & Moran (1983) explained the FTC’s significant late-1970s’ policy reversal on the consumer protection front (withdrawing a proposal to ban the advertising of ready-to-eat breakfast cereals during cartoon programs televised on Saturday mornings) as a function of seat turnover on the congressional committees overseeing the Commission. Their purpose was to test “two opposing approaches about regulatory agency behavior. The first assumes that agencies operate independently of the legislature and hence exercise discretion; the second assumes that Congress controls agency decisions” (Ibid., p. 765). Weingast and Moran presented evidence favoring the latter hypothesis. That is, the FTC drew back from its activist posture in 1979 because key committee members in Congress were replaced by individuals opposed to such activism. The authors concluded that their “results show that FTC activity is remarkably sensitive to changes in the subcommittee composition” (Ibid., p. 793).Footnote 27
The research projects launched by Tollison focused on the Federal Trade Commission rather than the Antitrust Division because his directorship of the Bureau of Economics provided him and his FTC colleagues with unique access to internal agency records and direct contact with the people and procedures involved in the Commission’s law enforcement activities. The FTC’s democratic decision-making process also was of singular interest to a public choice scholar, at least in comparison with the more dictatorial organization of the Antitrust Division, which is headed by one assistant attorney general (Goff et al., 1986; Miller et al., 1984).
Ever since the Hart-Scott-Rodino Antitrust Improvement Act (HSR) was passed in 1976, reviews of proposed mergers and acquisitions have dominated the workloads of both federal agencies. HSR requires the companies involved in such transactions (if they exceed certain sizes) to notify the FTC and the Antitrust Division simultaneously of their plans (“premerger notification”) and stipulates deadlines for the reviewing agency to decide to challenge the merger or not, i.e., grant clearance for consummating the proposed combination (for details, see, e.g., Shughart, 1990a. If congressional “intent” has any meaning—public choice scholars deny it—HSR’s premerger notification rules allow the Clayton Act’s enforcers to block anticompetitive mergers beforehand rather than undoing them (“unscrambling the eggs”) after the fact.Footnote 28
Coate et al., (1990) examined evidence gathered by the FTC’s staff from prospective merger partners in response to “second requests” issued between June 14, 1987, and January 1, 1987, under the authority of the Hart-Scott-Rodino Act.Footnote 29 The sample contained 70 Commission decisions. In 27 of them, a majority of the commissioners voted to issue complaints alleging that, if consummated, the mergers would violate Clayton Act §7; the others were cleared to proceed. Coate, Higgins and McChesney’s empirical model of the Commission’s decisions to oppose proposed mergers or not suggested that challenges were significantly more likely when the relevant antitrust market was concentrated ex ante, the firms remaining in the market were more likely to collude, and barriers to entry into the market were high. All such findings are consistent with neoclassical economic theories applicable to the analysis of the competitive effects of mergers.
What is of more interest here is that bureaucratic and political interests also were entered into Coate, Higgins and McChesney’s empirical model, while still controlling for the economic variables discussed above. The key findings were that when the FTC’s legal and economics staffs disagreed about the competitive issues raised by a proposed merger, the commissioners more often than not sided with its attorneys. Political pressures on the Commission’s decisions were proxied by two explanatory variables: the number of articles published in the Wall Street Journal devoted to the proposed merger prior to the FTC’s vote on a second request and the number of times Commission officials were called to testify before congressional committees during the 12 months centered on the date a second request was issued. Both variables raised the probability of a merger challenge significantly.,Footnote 30Footnote 31
Coate, Higgins & McChesney (1990, pp. 23–24) conclude that,
there is a constellation of identifiable interests who benefit from the FTC’s stopping mergers. Politicians, their organized constituents opposed to mergers, and agency attorneys apparently are among the principal beneficiaries…. [T]his combination of special interests creates an upward bias in the way the Merger Guidelines [first promulgated jointly by the Commission and the Antitrust Division in 1968 and modified several times since] are applied, resulting in a greater propensity to challenge mergers in the marginal case.
To that list of beneficiaries, I would add the merger partners’ rivals, who would be disadvantaged if the proposed combination creates a larger, more efficient competitor. The threat that combining the assets of two formerly independent companies under common ownership will result in lower costs (and prices) supplies strong incentives for rivals to complain to the antitrust agency responsible for reviewing the transaction, hoping to instigate a merger challenge.Footnote 32 The waiting periods mandated by Hart-Scott-Rodino open windows for organizing such self-serving opposition. Examples of the influence of rivals on antitrust law enforcers are legion, including the Antitrust Division’s prosecution of Microsoft, the first monopolization case of the digital age instigated by a coalition of tech companies spearheaded by the CEO of Netscape (McKenzie & Shughart, 1998) and the FTC’s opposition to Staples’ two attempts to acquire Office Depot (Shughart, 2021), the first of which was triggered by Office Max, then the nation’s third largest office supply “superstore”, headquartered in Ohio, and represented at the time by Senator Howard Metzenbaum, chair of the Senate’s Judiciary Committee. The Biden administration’s recent efforts to launch antitrust investigations of “price gouging” by US oil companies in a runup of retail gasoline prices and the role of corporate “greed” in rising rates of domestic inflation provide further evidence, if more were needed, of political influences on antitrust law enforcement.
4 Retrospect and prospect
Public choice scholars have had much to say about antitrust law enforcement over the past 40 years. That they have done so largely can be credited to Robert Tollison, President of the Public Choice Society (1994–1996) and Director of the Federal Trade Commission’s Bureau of Economics during most of Ronald Reagan’s first term in the White House. It was my privilege to participate in the policy revolution at the FTC under Chairman Miller and Bob Tollison, a revolution that was, unfortunately, only transitory because it depended entirely on the people in leadership positions and was not institutionalized in amendments to the Commission’s authorizing statute (Shughart, 2000).
Political and popular interest in antitrust law enforcement has waxed and waned since the Sherman Act was passed in 1890. Antitrust is back in the headlines nowadays because of worries expressed in some quarters about the rise of tech giants—Amazon, Google, Facebook—thought to wield excessive power in digital markets, power defined not necessarily in the traditional antitrust sense of elevating prices above costs, but rather dominance of speech and access to public-opinion-relevant information (see, e.g., Munger, 2021). Proposals are being considered to rein such power in legislatively or by bold antitrust and regulatory action, especially so at the FTC. The still widely accepted view is that the federal agencies charged with enforcing laws ostensibly meant to ensure that marketplaces remain competitive will act selflessly to fulfill their missions in today’s brave new virtual world.
However, examining antitrust law enforcement processes through the lens of public choice, as I have tried to do in the present essay, casts considerable doubt on the conventional wisdom. Antitrust policy, like traditional regulation of specific industries or economic activities, is vulnerable to capture by special interests having stakes in its outcomes and, moreover, is influenced by the preferences of the politicians responsible for overseeing the two federal law enforcement agencies. Attorney generals at the US state level and coalitions thereof also enforce the antitrust laws, but less scholarly attention has been paid to their activities than I think is warranted. Public choice reasoning suggests that they, too, whether elected to office or appointed by a governor, are animated by parochial motives like those helping to explain the behaviors of federal antitrust authorities.
The Virginia School of antitrust, as I have defined it herein, shares Chicago’s insistence on modeling the behaviors of individuals and firms in price theoretic terms. Although the methodological frameworks of the two schools differ sharply—Virginians start by assuming behavioral symmetry, i.e., that the same model of rational choice applies to all human beings, whether in or out of government; Chicagoans do not inquire into policymakers’ motives except when studying traditional economic regulation—we, I think, agree on bringing analytical mindsets to the public policy analysis table. Echoing Easterbrook (1992, p. 119), “the hallmark of the Chicago approach is skepticism. Doubt that we know the optimal organization of industries and markets. Doubt that government could use that knowledge, if it existed, to improve things, given the ubiquitous private adjustments that so often defeat public plans, so that by the time knowledge had been put to good use the world has moved on.” A hallmark of the Virginia approach is doubt that government officials are motivated to use knowledge about the operations of real, admittedly imperfect markets in ways that do not make things worse overall by catering to the interests of politically powerful individuals and firms.
It is a scholarly trope to close with a plea for more research on the topic at hand. Such an appeal is perhaps more appropriate here than in studies of public policy areas other than antitrust. Ever since the untimely passings of Bob Tollison and Fred McChesney, I have been something of a lone wolf in arguing for adopting a public choice perspective in investigating competition laws and their enforcement. If ordinary economic regulation now is seen as shaped by politics and influenced by special interests, how has antitrust policy escaped the same hard-nosed conclusions? Is it too troubling to recognize that prosecutors, judges and antitrust agencies largely are guided by their own self-interests like everyone else? Is blind faith in antitrust experts comforting? If the public-interest theory of antitrust policy has any explanatory power, then one can only be surprised when it fails to promote the welfare of consumers and instead demonstrably advances the interests of some producers.
Notes
The transfer-pricing theorem (Hirshleifer 1956) implies that a monopoly of an input is as good as (creates no more market power than) a monopoly of an output. Combining successive stages of production or adopting contractual arrangements to coordinate activities at two links in the supply chain – lowering transaction costs and avoiding double marginalization – thus should raise no antitrust concerns. That normative conclusion is under attack nowadays: Responding to the Federal Trade Commission’s (FTC’s) 2021 decision unliterally to withdraw the vertical merger guidelines (VMGs) it had promulgated jointly with the Department of Justice’s (DOJ’s) Antitrust Division the year before, Shapiro and Hovenkamp (2021) write that the majority statement accompanying the Commission’s announcement “is flatly incorrect as a matter of microeconomic theory.” Moreover, because the Justice Department, which along with the FTC’s own Bureau of Economics apparently were not consulted in the matter, said at the same time that it would continue to follow the 2020 guidelines, despite the FTC’s “specious” and “baffling” action baldly denying the pro-competitive (efficiency) effects of vertical mergers (e.g., Williamson, 1968); “law enforcement policy regarding vertical mergers [thus is] in disarray, creating wholly unnecessary uncertainty for the business community.”.
On the tradeoffs, see, e.g., Easterbrook (1992, p. 130): “Per se rules conserve on information and on the costs of litigation”, but also threaten to condemn “conduct that is beneficial [to consumers], and inducing firms to steer clear of potentially beneficial practices that create risks of condemnation (or costly litigation).”.
Of course, not all Chicagoans are so blind. Channeling Hayek (1945), Easterbrook (1992, p. 119) writes that “the hallmark of the Chicago approach is skepticism. Doubt that we know the optimal organization of industries and markets. Doubt that government could use that knowledge, if it existed, to improve things, given the ubiquitous private adjustments that so often defeat public plans, so that by the time knowledge had been put to good use the world has moved on.” Also see Easterbrook (1984, 1986).
Shortly before his death, Nobel Laureate George Stigler regarded the Sherman Act of 1890 as “a public-interest law … in the same sense in which I think having private property, enforcement of contract, and suppression of crime are public interest phenomena…. I like the Sherman Act” (quoted in Hazlett, 1984, p. 46). That pollyannish conclusion was echoed by Judge Posner (1976, p. 4), who once opined that the importance of economic efficiency as a social value “establishes a prima facie case for having an antitrust policy.” Elzinga and Breit (1974, p. ix), staunch critics of antitrust policy in some of its actual practice, nevertheless saw support for competition laws as beyond the bounds of partisanship: “antitrust enforcement is one of those rare issues that cuts across even the most formidable of ideological barriers.”.
See Shughart (2021) for a summary of the literature engaging the origins of the US antitrust laws. Two explanations are highlighted there. One is found in political lobbying by organized farm interests (the Grangers and Farmers’ Alliance) against the railroads, which began at the US state level and then shifted to Washington (also see Stigler, 1985). The other centers on the national election of 1912, pitting (Theodore) Rooseveltian “trust-busters” against progressive Brandeisian “expert” regulators, ultimately producing the Clayton and Federal Trade Commission acts in 1914.
Private parties are granted standing to sue by the Sherman and Clayton acts, allowing plaintiffs to recover monetary damages if they prevail in court, trebled in Sherman Act cases. Criminal penalties against antitrust law violators can be sought only by the US Department of Justice. The Federal Trade Commission is limited to imposing civil remedies (orders to “cease and desist” acts or business practices deemed unlawful), followed by fines against defendants who fail to comply. Measured by the number of cases instituted, private antitrust enforcement actions have dominated much of antitrust’s legal history; more than 90% of them are settled out of courts (Posner 1970; case numbers updated in Shughart 1990b).
If the Federal Trade Commission reviews the transaction and a majority of its five members deems it to be anticompetitive, the Commission’s legal staff must apply for an injunction in federal court to block it. See Higgins, Shughart and Tollison 1987) for a general discussion of the origins and consequences of the United States’ unique system of dual antitrust enforcement, which morphed from interagency rivalry into a cartel-like “gentlemen’s agreement” in 1948, explicitly dividing law-enforcement responsibilities according to the specific industry (e.g., telecommunications, commercial airlines, oil & gas) wherein a merger is proposed, or an unlawful business practice is alleged.
As a matter of fact, the remedies imposed on antitrust law violators often are ill-conceived afterthoughts once cases have been resolved at trial or in out-of-court settlements. Careful studies suggest that many of the law enforcement agencies’ victories, especially so in challenging mergers successfully, are “pyrrhic” (Adams, 1951; Elzinga, 1969; Rogowsky, 1986). Also see Elzinga and Breit (1976). The fines levied by the Federal Trade Commission in implementing its consumer protection mission also tend to be regressive, falling more heavily on small firms than larger ones, the latter presumably being more able to pay them (Altrogge and Shughart, 1984).
Reprinted in part as Tullock (2005).
In addition to the committee seat-assignment preferences of House and Senate members, submitted at the start of every new Congress, the majority and minority party leaders in both chambers fill key oversight committee seats based on seniority and on demonstrated loyalty to respective party lines in votes cast while serving on lesser ranked legislative committees (Coker and Crain, 1994).
Federal judges, too, have been found to be influenced by parochial motives in deciding antitrust cases. Cohen (1989, 1992) presents evidence that trial judges are more likely to side with the Antitrust Division when more opportunities for promotion to seats on higher courts are open (the recommendations of the Justice Department are decisive in securing nomination to the federal bench). Judges also impose harsher penalties on guilty antitrust defendants when the queues of cases awaiting trial before them are longer, thereby inducing more defendants to settle out of court and lightening their own workloads. It apparently pays to be a “hanging judge”!
By failing to mention any means of acquiring an ownership interest in a rival other than by purchasing “share capital”, §7 allowed many mergers proposed prior to 1950 to escape legal challenge. See Ekelund, MacDonald and Tollison (1985), who ask whether Congress’s omission of asset acquisitions was international or not. The creation of stock holding companies (“trusts”) was, of course, the primary means of establishing America’s great industrial enterprises in the late nineteenth and early twentieth centuries.
The conspiracy came to light in 1959 (Lean, Ogur and Rogers, 1982), but court decisions were not handed down until the early 1960s, after hearings on the matter before the Subcommittee on Antitrust and Monopoly of the Senate’s Judiciary Committee (US Senate, 1961). See City of Philadelphia v. Westinghouse Electric, 210 F. Supp. 483 (1961) and Final Judgment, United States v. General Electric Co., et al., Civil No. 28288 (1 October 1962). Also see Sultan (1974).
The FTC issued hundreds of complaints during the 1950s and 1960s charging defendants with violating Clayton Act §2. Congressional intent aside, the law allows small “Mom-and-Pop” retailers to mute competitive pressures from larger, more cost-efficient chain stores, one of the key commercial innovations of the 1930s. Few economists have anything good to say about the Robinson-Patman Act. See Ross (1984).
One obvious explanation for the substitution is that price-fixing allegations often lead to criminal penalties, which only the Antitrust Division can impose on guilty defendants.
“Better” here meaning more knowledge of microeconomic theory and its implications for the behaviors of market actors.
One nearly insurmountable roadblock to empirical studies of antitrust law’s effects in the aggregate is that relevant information typically is available only at industry levels, such as reported in the US Department of Commerce’s Census of Manufacturers, wherein industries are classified into categories, now by the North American Industrial Classification System (NAICS), formerly by Standard Industrial Classification (SIC) codes, at five-year intervals. The categories created for data collection and reporting purposes do not define markets as understood by most economists.
See Eichenwald (2001) for evidence on the lengths to which the Antitrust Division has gone to prove “agreement” amongst the parties to a “great lysine conspiracy”, which may have spanned the globe, but targeted Archer-Daniels-Midland (ADM), one of the United States’ major agribusinesses, after the whistle was blown by one of its executives. Some of ADM’s officers eventually were sentenced to prison, although the effects of the conspiracy on lysine consumers seem ambiguous.
The history of the common law is replete with disputes requiring judges to determine whether a “restraint of trade” is reasonable or unreasonable. Because that phrase was inserted into the antitrust statute enacted in 1890, some commentators assert that the Sherman Act merely codified the common law’s treatment of monopolies or attempts to monopolize. However, one of the common law’s singular advantages over statutory law is that it allows the parties involved to “contract around” court rulings that interfere with efficient resource allocations (De Alessi and Staff, 1991; De Alessi, 2001). Reversing precedents that barred third parties from attacking contracts or combinations restraining trade – although such agreements could be undermined from within (Letwin, 1965, p. 49) – the Sherman Act also granted standing in antitrust cases to a plaintiff (the US Department of Justice) with very deep pockets.
Pure monopolists and other firms acquiring and exercising market power are not worrisome because of the supranormal profits they earn but because of the associated deadweight social welfare losses (Harberger, 1954). Deadweight losses materialize whenever market prices exceed marginal production costs; resource allocations then are inefficient compared to the competitive ideal. Consumers accordingly are denied opportunities to buy units of output for which they are willing to pay more than it would cost the producer to offer to the market. Economists saw the Harberger (1954) “triangle” as the only social cost of monopoly until Gordon Tullock (1967) published his insight that the monopoly profit rectangle (formerly conceived merely as a wealth transfer from consumers to producers) could be transmogrified into a social cost by resources wasted in efforts to gain access to above-normal returns (rents). As such, the social cost of monopoly could loom as large as the trapezoid combining deadweight losses and rent-seeking costs. The by-now familiar term “rent seeking” (it appears regularly in the pages of the Wall Street Journal without further explanation) was coined by Krueger (1974).
Over time, many industries and economic activities have been exempted from the antitrust laws, either explicitly by Congress (mainly when the business also is subject to state or federal regulation) or by the courts, such as granted to Major League Baseball in Federal Baseball Club of Baltimore v. National League, 259 U.S. 200 (1922). See Shughart (1997a) for an analysis of baseball’s exemption and Shughart (1997b, pp. 333–334) for a list of all such exemptions as of 1982. In an empirical test of one antitrust-law exemption, coincidently supporting the congressional dominance model of bureaucratic behavior, Stigler (1966) examined the congressional vote on the Capper-Volstead Act (1922), which placed agricultural cooperatives beyond the antitrust laws’ reach. He regressed the percentage of each state’s US House delegation voting “yea” on Capper-Volstead on two variables measuring farming’s importance to their respective states’ economic well-being. Representatives from states where larger percentages of their populations lived on farms tended to support the exemption.
A more general interest-group theory of government (McCormick and Tollison 1981) conceives of legislatures as brokers of wealth transfers between well-organized pressure groups and unorganized (“latent” in the terminology of Olson, 1965) voter-taxpayers. See Shughart (2004) and Shughart and Thomas (2015) for overviews of the theories and evidence on regulation in an interest-group context.
A thorough review of the methods adopted to define relevant antitrust markets is beyond the scope of the present essay. For detailed discussions, see, for example, Shughart (1997a, 1997b, ch. 7), Rubin (1995), Hovenkamp (2017), and Shughart (2021), who, along with many other scholars, cite specific instances in which antitrust market definitions arguably have been deficient. Instructive representatives of that large literature are Peterman (1975), on the infamous Brown Shoe case (“the evidence was weak and at times bordered on fiction”), Reksulak and Shughart (2011, 2012), on Standard Oil, the “mother of all antitrust cases” (Elhauge, 2003, p. 290), McChesney and Shughart (2007) on Addyston Pipe, and summaries of more recent cases in Shughart and Thomas (2013) and Shughart (2021).
The FTC’s legal staff accordingly is divided into a Bureau of Competition (antitrust) and a Bureau of Consumer Protection; corresponding areas of law enforcement responsibility are assigned to the separate units within the FTC’s Bureau of Economics. Nevertheless, all decisions about antitrust and consumer protection are forced to the top, to be taken by a majority of the five-member Commission, only three of whom can be affiliated with the same political party at any one time.
The members of Tollison’s scholarly antitrust team were, among others, Malcomb Coate, Robert Ekelund, Richard Higgins, Robert Mackay, Fred McChesney, Robert McCormick, Michael Munger, Robert Rogowsky, Paul Rubin, Bruce Yandle, and me. Chairman Miller served ex officio. More than 40 years on, my memory may be defective; if so, I apologize to anyone I have forgotten to name.
An earlier, largely unsuccessful attempt to probe the political economy of antitrust is Baxter (1980).
Congressional influence on bureaucratic policymaking – referred to as the congressional dominance model above – has been identified many times since for other executive branch agencies, including income-tax-return auditing by the Internal Revenue Service (Young, Reksulak and Shughart, 2001) and declarations of disasters by the sitting president, along with payments for relief therefrom funneled through the Federal Emergency Management Agency (Garrett and Sobel, 2004).
The Clayton Act, especially §7, rests on an “incipiency doctrine”, under which blocking mergers or restraining the use of certain business practices in their infancy help “stem the rising tide of industrial concentration” that seemed to worry policymakers during the late nineteenth and early twentieth centuries. The doctrine was taken to its extreme in United States v. Von’s Grocery, 384 U.S. 270 (1966), when a Supreme Court majority voted to sustain the Justice Department’s plea to enjoin the merger of two Los Angeles grocery store chains, whose combination would amount to about 7% of the LA “grocery market”.
Second requests, euphemisms for subpoenas (or “compulsory process”), are issued when the Commission votes to compel the production of additional information from the merger partners its staff deems necessary to review the transaction’s competitive effects in greater detail. Second requests extend HSR’s statutory review timelines.
Coate and McChesney (1992) subsequently reported additional evidence that while economic variables also matter and the Commission’s lawyers and economists influence decisions to challenge mergers, the opinions of the former dominate the review process. What was more important to them is that empirical models explain more of the variation in Commission decision making when political variables are entered alongside economic variables.
Weir (1992) found that the only variable influencing decisions by Britain’s Monopolies and Mergers Commission to challenge a proposed ownership combination between 1974 and 1990 was whether the company targeted for takeover contested the acquisition. Surprisingly to Weir, but not to a public choice scholar, the anticipated economic effects on costs and prices carried little, if any, weight in those decisions. See Reksulak, McChesney and Shughart (2015) for discussion of the differences in competition laws and their enforcement in the United States and the European Union, by which the UK’s competition laws were absorbed until Brexit.
Because they have been given standing by the Sherman and Clayton acts, competitors are, of course, free to challenge mergers in court by filing private antitrust lawsuits seeking injunctions to block them, and they do so frequently. However, convincing the Antitrust Division or the FTC to sue the merger partners shifts the legal costs of opposition fully onto the shoulders of the taxpayers.
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Presidential address to the 59th annual meeting of the Public Choice Society, Nashville, TN, USA, March 12, 2022.
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Shughart, W.F. On the Virginia school of antitrust: Competition policy, law & economics and public choice. Public Choice 191, 1–19 (2022). https://doi.org/10.1007/s11127-022-00967-5
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DOI: https://doi.org/10.1007/s11127-022-00967-5