The Justice Department's Antitrust Bomb

As if commandeering the banking, finance and auto industries weren't enough, a couple of weeks ago the Obama administration decided to throw a bomb at modern antitrust law.

Assistant Attorney General for Antitrust Christine Varney claims that the Justice Department can aid economic recovery by prosecuting businesses that have been successful in gaining large market shares. In her announcement last month she argued that "many observers agree" that our current recession reflects "a failure of antitrust" and "inadequate antitrust oversight."

This is news to most economists. The cause of the recession is not easy money by the Fed, or the bursting of the housing bubble, or excessive risk-taking through complicated financial instruments? It's insufficient antitrust prosecution? The claim is hardly plausible. Prosecuting successful businesses will help the recovery? Again, hard to believe.

The principal reasons American and European approaches to antitrust diverge are that the operative legal standards are different and that the Europeans have not adopted a tradition of rigorous economic analysis.

Why prosecute firms whose products large majorities of consumers have found most valuable? Ms. Varney gives no principled reason. She defends the change in policy on the grounds that it contradicts recommendations of a Justice Department report issued during the Bush administration, and because it appears consistent with the European approach to antitrust.

On her first point, the Justice department, aided by the Federal Trade Commission, issued a report in 2008 addressing the appropriate antitrust approach to potential monopoly behavior. It's fair enough for a succeeding administration to reject policies of its predecessor. But the Justice Department report was not authored by John Yoo or Alberto Gonzales. It was the work of a year-long study that considered recommendations from 29 panels and 119 witnesses, most of them critical of the minimalist Chicago School approach to antitrust law. The report's conclusions basically track Supreme Court law with modest extensions in areas where the Supreme Court has not ruled. Ms. Varney denounced the report in its entirety.

What does Ms. Varney propose as an alternative approach? Not much. Her basic proposal is to transform American antitrust law to more closely resemble that of Europe. She states that American antitrust policies have "diverged too frequently" from those of the Europe, and that "[w]e will focus our efforts on working through our previously divergent policies regarding single-firm conduct and pursuing vigorous enforcement on the [monopolization] front."

This is a huge mistake. The principal reasons American and European approaches to antitrust diverge are that the operative legal standards are different and that the Europeans have not adopted a tradition of rigorous economic analysis.

U.S. antitrust laws condemn practices that are "in restraint of trade," which has been interpreted to mean harm to competition. The European Union, in contrast, condemns practices that constitute "abuse of a dominant position."

The European emphasis on "dominance" has consistently led to confusion. A good example is the way the proposed GE-Honeywell merger was treated in 2001. It was uncontested both in the U.S. and in Europe that the proposed merger would create economic efficiencies, lowering product costs to the benefit of consumers. In the U.S. this was reason to approve--if not applaud--the merger. But in Europe the expected cost savings would make the merged firms even more dominant. The EU blocked the merger, to the harm of U.S. and European consumers.

Another example is the recent $1.45 billion fine levied by the EU against Intel. Although the EU has not released its full report documenting what violations it found, it appears that the principal concern was Intel's practice of giving "loyalty discounts" to repeat customers, presumably increasing Intel's dominance in the microprocessor business.

Should a firm be punished for giving discounts? A discount to a repeat customer is a ubiquitous business practice from local delis to auto repair shops, hardly monopolists in any sense. At various points in her presentation Ms. Varney stated that the ambition of antitrust law is to secure low prices for consumers.

Intel, of course, operates on a different scale than a deli. But the fact that it has been able to maintain roughly an 80% market share for decades provides strong evidence that it is producing a valuable product. The antitrust questions with regard to dominant firms should be: What is the source of dominance and how has it survived over time?

The EU complaint claims that Intel has practiced a variation of predatory pricing. As is well-established in U.S. law, predatory pricing claims are highly questionable in the intellectual property field. Although the EU competition unit has added economists to its staff since GE-Honeywell, its antitrust theories are roughly 30 years behind those in the U.S.

The antitrust problem is likely to become increasingly troublesome over time. In a dynamic economy we should expect the development of novel business practices as firms attempt to attract consumers in order to maximize product sales. In the U.S.--Ms. Varney's views aside--success in competition is rewarded. In Europe it is suspect, a particularly perverse presumption given that national and international competition has been increasing and will continue to increase.

The saving grace here is that, unlike her European counterpart Neelie Kroes (who is antitrust prosecutor and judge at once), Ms. Varney is only the director of an administrative agency. She and her department can prosecute cases but they cannot convict. The positions put forth in the now-rejected 2008 Justice Department study derive largely from opinions of the Supreme Court. And in the last three monopolization cases considered by the Supreme Court (spanning over a decade) there were no dissenting opinions. Even if President Obama makes the court more liberal the court's antitrust opinions are secure.

Ms. Varney's proposed change in direction of antitrust policy may impose extraordinary litigation costs on the government and on her targets. It is unlikely to have a significant effect on U.S. antitrust law.

George L. Priest is a member of AEI's Council of Academic Advisers.

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About the Author

 

George L.
Priest
  • George L. Priest is the Edward J. Phelps Professor of Law and Economics and Kauffman Distinguished Research Scholar in Law, Economics, and Entrepreneurship at Yale Law School. Over the past two decades, he has focused his research on antitrust, the operation of private and public insurance, and the role of the legal system in promoting economic growth. Priest joined Yale Law School in 1981 and is co-director of the John M. Olin Center for Law, Economics and Public Policy. Earlier, he taught law at the University of Chicago; the University at Buffalo–State University of New York; and the University of California, Los Angeles. Priest is also chairman of AEI’s Council of Academic Advisers.

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