Posted by Hanno Kaiser
on Saturday, July 29th 2006 at 10:18 pm under Law and Economics.
The “we can’t predict the future” attitude of courts and most antitrust commentators and the resulting focus on the short run, locks us into methodological conservatism. If our only valid benchmarks are the past and the minimally extrapolated near-future, then we tend to see our world as the best of all worlds. For example, in Trust on Trial, Richard McKenzie claims that (I paraphrase) “in every market that Microsoft entered, prices dropped.” That sounds right. I still remember the $499 price tag for WordStar. The chart below compiles some useful historical information on word processor pricing over time. (If anyone has a more recent overview, please let me know. Today, Word sells for around $200).
But who says that prices would not have dropped to even lower levels or more quickly but for Microsoft’s anticompetitive practices? Worse yet, who says that we would not have seen significant new technologies and innovation such as free, web based word processing similar to
Writely a decade earlier? My point is that the epistemological humility of post-1970s microeconomics has a decidedly conservative bent in the strict sense of the word: It ennobles the status quo. Take as an example the law of predatory pricing. Successful predation proceeds in two steps. In the
investment phase, the predator undersells the competition at a loss. Once the competitors have been vanquished, the predator raises prices above competitive pre-predation levels. That’s the
harvest phase, in which consumer exploitation follows competitor exclusion. A focus on the short run makes predatory pricing seem irrational, as the only certain outcome is a short run windfall for the consumer, while the long run harvest is disregarded as speculative. Herein lies one of the more fundamental philosophical differences between US and European antitrust. We, in the US, have confined the time horizon for antitrust analysis to the past and to a minimally extrapolated short run future. The European Commission, in contrast, exhibits much greater confidence in its ability to predict the future and is thus much more willing to trade off short run consumer benefits against long run welfare losses. In the ideological battle between the past and the future, the past usually wins: better the devil you know than the devil you don’t. I’d be interested in any pointers to recent empirical work on the accuracy of microeconomic predictions.
Note: Cross posted at Law & Society Blog.
Technorati Tags: antitrust, economics, ideology
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July 30th, 2006 at 1:34 pm
Interesting ideas. I am not certain I follow the point on the U.S. view of predatory pricing. Our case law recognizes the anticompetitive practice known as predatory pricing and in fact requires a two step analysis: the sales below a defined cost and then a harvest period. The cases make it clear that intent (as is so often the case in antitrust analysis) is important and it is true that the plaintiff must show that the risk of the harvest is substantial: ie, that the post-predation market will be one where harvesting is capable of being accomplished. That analysis requires consideration of barriers etc (otherwise the harvest supra-competitive prices will draw new entry). In any event, I do not quite see how we are missing the Point”. I did enjoy the piece. (Although I struggle not to quibble with yet another identification of Microsoft with the Devil: think of the quantum of innovation that in fact came about around the Microsoft impetus.) Sutton
July 30th, 2006 at 3:03 pm
I’m not implying that we, in the US, are “missing the point.” Maybe we are, maybe we aren’t. But unquestionably the law on predatory pricing has become significantly more restrictive in the post-Sylvania period, culminating in Brooke Group. The methodological focus on the short run is a contributing factor to that doctrinal change, one that the European Commission, for example, does not share. (At least not to the same extent. The Court of First Instance, in contrast, is somewhat less sanguine about the Commission’s predictive powers). That said, I want to challenge the “quantum innovation” point. Which quantum innovation did originate from Microsoft after the introduction of Windows 95 and Office ‘97? I can’t think of any. In contrast, I can think of quite a number of innovations from other players, but very few in the spaces that Microsoft occuppied, until very recently. It seems plausible to me, that this is at least in part due to Microsoft’s anticompetitive practices. (I substantively agree with most of Bruce Abramson’s discussion of the Mircosoft case in Digital Phoenix).
August 4th, 2006 at 1:56 pm
[...] But what about Frank’s concern that one day Apple might leverage and exploit its monopoly power? Does my approach suggest that we turn a blind eye to the prospect of this future harm? No. There are two important points to be made here. The first is that future anticompetitive harm occurs, unsurprisingly, in the future. In the presence of substantial consumer welfare gains in the present, meaning that there are substantial costs to condemning the conduct today, as well as high error rates in terms of predicting future harm (read Hanno Kaiser’s excellent post on the comparative willingness to predict competitive effects in the US and EU here), antitrust policy ought to err towards the bird in the hand. Second, well … what about the possibility that Apple may exploit its power in the future (and by exploit, I mean do something more than push Apple products in the Apple store)? As I wrote before: Even a monopolist is allowed to allow its salespeople to suggest that you buy their products. In the meantime, Apple is offering substantial benefits to consumers by improving its product and developing complements. If we are truly concerned about the risk of future anticompetitive harm, wouldn’t it be wise to allow consumers to receive those benefits until the risk materializes? We are not talking about the costly “unscrambling” of a merger that turns out to be anticompetitive. [...]
August 6th, 2006 at 11:27 pm
Blawg Review #69…
It’s been sometime since I’ve been actively blawging (or blogging, whichever you prefer). My hectic 2L year and busy summer account for that. Whoever said that the second year of law school is easier lied. Whereas most other Blawg Reviews…
October 10th, 2006 at 10:36 am
[...] These findings are aligned with observations on this blog about the implicit conservatism of epistemological humility in economics and the legal process. [...]