An Attempt at Defining the Core Concepts of Antitrust
At the risk of engaging in what Karl Popper would surely have dismissed as a pointless exercise in essentialist definitions, let me propose a conceptual sketch of what antitrust (as practiced today before the agencies and in court) is all about.
At its most basic level, antitrust is concerned with consumers being overcharged by businesses that are both “big and bad.” To put it somewhat more technically: Antitrust is concerned with consumers being charged supra-competitive prices by firms that through anticompetitive conduct, collusive or exclusionary in nature, create, maintain or enhance some significant measure of market power. This definition contains the three related concepts that (for better or worse) are at the heart of modern antitrust law: consumer welfare, anticompetitive conduct, and market power.
“Bigness,” or the possession of market power, is not a problem as such. If acquired in a competitive manner, the “ability to profitably raise prices” (i.e., market power) is simply a reflection of the value created by a firm (e.g., the production of a unique drug). Also, with the exception of per se offenses, “badness” without bigness is of no concern to the antitrust laws, as firms without market power are simply unable to overcharge customers.
Market power is a measure of a firm’s ability to profitably charge prices above the competitive level for a sustained period of time. The lower the price elasticity of demand, the greater the firm’s market power. Sometimes, there is direct evidence, of the anticompetitive exercise of market power, such as reduced output, higher prices, stifled innovation, actual exclusion of similarly efficient competitors, etc. If direct evidence is not available, an often-used proxy for market power, circumstantial evidence in other words, is market share. From a firm having a significant share of a properly defined market, we infer that the firm possesses significant market power. The reason that the inference works is that the methods that make a market definition proper, e.g., the SSNIP test, ensure that the boundaries of a market are, in fact, reflections of the price elasticity of demand.
Anticompetitive conduct is always aimed at increasing market power, because market power is what enables a firm to charge supra-competitive prices. Of course, not all conduct that increases market power is anticompetitive. Product innovation, for example, often provides the first mover with significant market power, at least for a while. I would thus propose the following working definition.
Anticompetitive conduct is (i) aimed at increasing market power by (ii) reducing competitive options (iii) through means other than increased efficiency.Element (ii) filters out market power gains based on innovation or product differentiation. Element (iii) ensures that driving a competitor out of business by making a better product, or the same product at a lower cost, is not caught by the definition.
As previously discussed, anticompetitive conduct comes in two flavors, collusive and exclusionary. Collusive behavior reduces competitive options and thereby increases market power either by an agreement not to compete (e.g., a cartel) or by acquisition. As a result, the consumer pays more than he or she would in a (fully) competitive market. Exclusionary behavior reduces competitive options in a one-two punch. First, the offender knocks out a rival (e.g., through predatory pricing or vertical agreements with third parties), whose presence in the market protects the consumer. Once the rival has left the scene, the offender is free to use its increased market power to raise price.
Technorati Tags: antitrust, core concept, market power, overcharge, anticompetitive, exclusion
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February 23rd, 2006 at 5:15 pm
[…] There is more to the story, I think, and I’m not quite ready to give up the argument. A big part of the problem in antitrust is that we need not only to decide what conduct is anticompetitive, but also what conduct can be defined legally so that antitrust enforcement does not sweep up competitive conduct. […]
February 24th, 2006 at 3:49 pm
This definition of antitrust completely ignores pre-1970s antitrust thinking expressed in both case law and legislative history. Historically antitrust has also served to protect the right of competitors to get access to markets, to protect political values, etc.
I realize that since the late 1970s, antitrust has been dominated by neo-classical economics, but a broader and historically more accurate definition would be that “antitrust is concerned with the creation and excerise of economic power to the detriment of society as a whole.”
If antitrust is nothing more than the Wal-Mart of law (always low prices), I sincerely doubt that Congress would have adopted the Sherman Act in 1890, a period of time characterized by the deflation.
February 24th, 2006 at 4:09 pm
I don’t disagree with Glendon’s comment. My outline was meant to capture the salient features of antitrust law as it is applied today before the agencies and in court. (I added a clarification to the first sentence of the post to that effect.) For better or worse, non-efficiency goals such as decentralization, political rights, quality of life, diversity, and protectionism have played an increasinly less significant role in antitrust enforcement in the last 30 years. This is not to say that at some point in the future the pendulum won’t swing back. And if that day comes, legislative history and pre-Sylvania case law will provide fertile ground for a more populist reading of the antitrust laws. To be sure, efficiency was not foremost on Senator Sherman’s mind when he introduced the bill. But alas, even Supreme Court justices who profess to feel bound by “original intent,” which is a truly silly notion, tend to apply the concept - shall we say - “selectively.”
February 25th, 2006 at 5:25 pm
[…] In a previous post, I tried to outline the core concepts of antitrust law as it is practiced today. This post attempts to reconstruct some of the foundations on which the concepts of antitrust law discussed in that post are built. […]
February 27th, 2006 at 3:53 pm
[…] Following up on my previous posts about the conceptual foundations of antitrust law (here and here), the chart below illustrates the relationship between the ultimate goal of economic policy (consumer welfare), the primary means of achieving it (free markets, competition), and the mission of the antitrust laws (prohibiting conduct having significant anticompetitive effects) as a policy tool for promoting competition and therefore consumer welfare. Moreover, the chart depicts the two most important proxies for anticompetitive conduct, market power (the ability and the incentive to raise prices) and market concentration (e.g., HHI measures), as well as the evidence typically introduced in proving anticompetitive effects directly or circumstantially by establishing the factual predicates for one of the two proxies. Against this backdrop, it is apparent that much of the traditional merger analysis involves the least direct evidence of anticompetitive effects. Delineating markets, identifying market participants, and computing market shares all contribute to establishing a market concentration measure. That measure, in turn, permits the inference of market power (Step 1). Market power permits the inference of anticompetitive effects (Step 2). The diminution of competition, finally, permits the inference of a consumer welfare loss (Step 3).Technorati Tags: antitrust, inference, competitive effects, consumer welfare, economic policy You can also bookmark this on del.icio.us or check the cosmos […]