The influence of economics on antitrust law.

Kovacic, William E.

Economists today play prominent roles in formulating antitrust policy and litigating antitrust cases. This paper explains why economics influences antitrust law and describes how economic theories enter and shape the antitrust system. Antitrust policy and doctrine change over time in response to developments in economic theory, and the decentralization of the antitrust adjudication system and the wide latitude accorded judges in interpreting antitrust statutes ensure that legal rules will reflect advances in the economic literature concerning the appropriate content of standards governing business conduct.

I. INTRODUCTION

Twenty-five years ago, George Stigler [1976] asked whether economists matter in the formulation of public policy. A century of experience with the federal antitrust laws indicates that they do. Whereas assessments of their impact vary, most observers regard economists as important participants in the antitrust system. Eisner [1991] emphasizes the modern imprint of Chicago School economic perspectives upon antitrust enforcement and litigation. Rowe [1984] and Hovenkamp [1989] show that economists and economic theory have influenced antitrust doctrine and policy throughout the period since the passage of the Sherman Act. As a rough contemporary market test, one can simply note the expanding number of economic consulting firms for whom antitrust counselling and litigation are staples of the practice.[1] This allocation of society's resources is a reliable sign that economic analysis is significant in the prosecution and adjudication of antitrust cases.

This paper suggests why economists and economic learning matter to antitrust policy and describes how the work of economists affects antitrust litigation. The discussion is divided into four parts. The first identifies features of the antitrust system that permit or require economic ideas to be taken seriously. The second part considers how antitrust-relevant economic ideas are generated and absorbed into the antitrust system. The third part examines factors that determine how deeply economic ideas influence antitrust adjudication. The paper concludes by discussing how economics will influence the antitrust system in the Sherman Act's second century. II. THE OPENNESS OF THE ANTITRUST

SYSTEM TO ECONOMIC IDEAS

Economic analysis influences antitrust litigation because the federal antitrust system is unusually permeable. This permeability is the result of three important features of the antitrust system. The first is the wide range of analytical criteria that courts are permitted to consider in resolving antitrust disputes. Federal judges play a central role in determining the content of the antitrust statutes- Outcomes under the Sherman Act depend crucially upon the construction of ambiguous terms such as "conspiracy in restraint of trade" and "monopolize." As Salop and White [1988, 37] point out, the decision to cast the statutes in general terms has given judges substantial discretion to determine litigation outcomes by defining the content of the statutes' operative terms.

In conferring this interpretive role upon the federal courts, Congress has allowed judges to devise standards of conduct at least in part by reference to the likely economic effects of various forms of business behavior. Despite sharp disagreement over the weight Congress meant to accord productive and allocative efficiency as judicial decision making criteria,[2] few scholars seriously argue that Congress intended that courts treat such concerns as irrelevant. Economists would play a far less important part in antitrust adjudication if Congress had precluded judicial consideration of efficiency in implementing statutory commands. The open ended language and indeterminate goals of the antitrust statutes allow economists to affect adjudication and rule formulation to a degree unattainable under most other federal regulatory schemes.

The second feature of the antitrust system is the large number of parties who can give a new idea judicial standing. Interpretation of the antitrust statutes occurs in a highly decentralized adjudication framework. Thirteen courts of appeals, ninetyfour district courts, and the Federal Trade Commission (FTC) share power to decide cases and formulate liability standards. One federal district judge or a single court of appeals panel can establish a new theory or a proposed conduct standard as an acceptable basis for decision.3 The Supreme Court hears few antitrust cases, and genuine differences in analytical approaches among the lower federal courts are common. Broadly dispersed adjudicatory power offers a wide array of paths through which litigants can inject new economic theories in the system.

The third feature is the number and diversity of parties who can file antitrust suits. Congress gave antitrust standing to numerous potential claimants. Consumers, private companies, the federal antitrust agencies, and state attorneys general all have standing to pursue antitrust suits. No single gatekeeper controls access to the courts or determines what ideas may be asserted to support antitrust claims. Decentralizing the decision to prosecute means that one entity's rejection of certain theories does not bar others from using those theories.[4]

The relative ease with which new economic concepts can enter the courtroom has major implications for the direction of doctrine and analysis over time. First, the antitrust system's porosity ensures that today's accepted wisdom will face periodic challenges by rival theories that eventually may become the prevailing analytical approaches. Second, owing to the discretion conferred by the antitrust statutes, litigation outcomes in close cases will depend substantially upon the preferences of individual judges. A jurist's receptivity to specific economic arguments will hinge largely upon her tastes, training, and experience. Thus, a president can determine how economics and particular economic views affect antitrust litigation by his choice of judicial nominees.

III. THE CREATION AND ADOPTION OF NEW ECONOMIC IDEAS

The Sherman Act created an unparalleled opportunity for economists to participate in the evolution of a national regulatory program. This section examines the incentives that spur the creation and application of new antitrust-relevant economic ideas and describes how the antitrust system absorbs them.

Incentives for Creation

Economist as Scientist and Truthseeker. The creation of new economic ideas results from a variety of motivations. One is the economist's ethic of scientific inquiry. The processes of hypothesis formulation and testing spur the discovery, refinement, and displacement of analytical models over time. The antitrust system fuels this process by offering an expansive menu of problems to be analyzed and empirical data (generated by lawsuits and investigations) to be evaluated. The incentives that guide academic economists in devising research agendas ensure that prevailing models face continuing examination and challenge by rival theories. In particular, a persuasive attack on today's accepted wisdom may be an effective means for drawing attention to the researcher's work.

Economist as Advocate. A second stimulus to research in antitrust economics is the demand of various antitrust system participants for useful economic ideas. The needs of corporate plaintiffs and defendants, private attorneys, federal enforcement agencies, and state enforcement bodies generate a demand for theories to support favored policy and litigation outcomes. The largest and most prominent part of the demand is for theories that exculpate defendants. This does not mean that the demand for pro-enforcement theories is trivial.5 Firms sometimes find it useful to press antitrust claims against suppliers, direct rivals, or potential acquirers. Among other motivations, Baumol and Ordover [1985], Hazlett [1986], and Shughart [1990] describe how firms can use antitrust suits strategically to disadvantage competitors. Business plaintiffs willing to make substantial investments in the development of economically sophisticated theory may win significant legal victories using causes of action that ordinarily fare poorly in the federal courts.6

Thus, consumers of antitrust-relevant economic theories have an incentive to support research to generate useful ideas or to take existing ideas and devise applications that support favored litigation outcomes. Since 1970, for example, corporations have extensively funded antitrust research by individual academics, academic institutes, think tanks, and foundations.7 Such inducements undoubtedly affect economists. In particular, the demand for preferred applications of existing models probably accounts for much of the modern increase in the number of economists who provide antitrust consulting services in affiliation with consulting firms or as independent contractors.

Over time, the financial rewards of litigation consulting can render the economist less a truthseeker and more an advocate.8 The imperative to develop and retain clients, rather than the disinterested quest for knowledge, will exert an increasing pull upon the consultant's analysis and research. Discussions about the convergence of law and economics in antitrust cases usually focus on the tendency of attorneys to absorb and apply economic learning. A less noted aspect of this convergence is that industrial organization economists increasingly have assumed ad hoc advocacy functions ordinarily associated with attorneys. For example, in many litigation settings, the economist must make a commitment to consult or testify for a party before a full factual framework of the case is developed. When subsequent investigation and discovery reveal facts that contradict the economist's initial theory, there is a strong incentive for the economist to modify her theory to accommodate new discordant facts, even though the reformulated theory may stray significantly from the economist's original assessment of the case.[9]

The Process of Absorption

Once devised, new economic ideas must be brought to the attention of judges who decide antitrust disputes. In order to observe how judges use economic ideas in their decisions, I have reviewed all fiftythree Supreme Court decisions from 1890 through 1990 involving alleged violations of the Sherman Act Section 2 prohibition upon monopolization, attempted monopolization, and conspiracies to monopolize.[10] Section 2 disputes confront the Court with a rich collection of economic issues involving market definition, market power measurement, and criteria for identifying improper exclusionary conduct. These decisions provide one context for considering how the antitrust system absorbs the ideas of economists.

Explicit Reliance on Economic Commentary. Citations to economic scholarship in published opinions provide the most direct way to identify a judge's sources of economic insight and assess how economic ideas came to the judge's attention. Sixteen of the fifty-three Supreme Court Section 2 decisions cite commentators from any academic discipline (law, economics, or otherwise);11 eight of these refer to economists.[12] Most of the Court's pivotal Section 2 decisions[13] cite no economists, and decisions that raise Section 2 issues but focus on other antitrust claims[14] likewise rarely mention economists. As a group, these decisions permit several observations about how economists affect judicial thinking.

Legal Scholars as Intermediaries. The economic references cited in the Court's opinions usually consist of works by economically sophisticated attorneys who have popularized the economic literature.15 In this century, attorneys such as Phillip Areeda, Robert Bork, Frank Easterbrook, Ernest Gellhorn, Milton Handler, Edward Levi, Richard Posner, and Donald Turner (who is also an economist) have made the economic literature accessible to the Supreme Court and lower court judges.16 Legal scholars serve as intermediaries who apply the insights of economists to legal problems in terms that judges can readily comprehend.[17] The influence of these intermediaries stems largely from their attention to the administrability of proposed analytical models. Judges tend to be wary of models whose complexity or sensitive assumptions make such models prone to misapplication in the routine decision of cases.

These legal intermediaries will be increasingly important in the future. Comprehending new microeconomic scholarship increasingly demands quantitative skills that few lawyers or judges possess. If game theory insights are to significantly alter judicial analysis of exclusionary conduct, it first will be necessary for the literature to be translated into what Judge Stephen Breyer has termed "antitrust lingo."[18] The technically exotic quality of modern industrial organization scholarship probably means that the most important translators of the new "new learning" in the future will include attorney-economists such as lan Ayres, Jonathan Baker, and Louis Kaplow who have the technical skills and legal training to evaluate the new learning and convey its significance to judges.

Absorption Lags. The time required for legal scholars to perform the steps of interpretation, evaluation, and reformulation means that there will be a significant lag between the appearance of ideas in economics journals and the acceptance of such ideas by antitrust courts. Judges may be wary of citing state-of-the-art economic literature because today's insight might soon be undercut by opposing views. Rather, judges may prefer to wait until economic theories have undergone testing in the academic debate and have received the endorsement of economically astute legal scholars before citing them as bases for decision.

As Langenfeld and Scheffman [1986] point out, absorption lags also have figured prominently in the evolution of federal enforcement policy. Post-World War II hostility toward industrial concentration originated at the University of Chicago in the 1930s in the work of Henry Simons, who argued that deconcentration was essential to the nation's political and economic well-being.[19] From 1945 until the early 1970s, many economists embraced Simons's enthusiasm for dispersing market power and preventing further concentration via merger. Carl Kaysen's and Donald Turner's Antitrust Policy [1959], the chief "law and economics" antitrust text of its time, elevated deconcentration to the status of a major antitrust goal in the 1960s and early 1970s. President Johnson's White House Task Force Report on Antitrust Policy [1968-69] used the Kaysen-Turner proposals to develop its own deconcentration proposal. Task Force members who endorsed the measure included economists (Paul MacAvoy, James McKie, Lee Preston) and economically astute attorneys (William Baxter, William Jones, James Rahl). As late as 1971, economists such as Roger Sherman and Robert Tollison [1971, 89-90] backed deconcentration and strict antimerger policies.

The consensus among economists supporting deconcentration crumbled, and scholars such as Meehan and Larner [1989] have extensively recounted the demise of the structure-conduct-performance paradigm that supported attacks on corporate size. However, as post-Simon Chicago perspectives gained prominence in the late 1970s and the 1980s, the federal enforcement agencies had started an expansive collection of monopolization and shared-monopoly lawsuits that drew upon structuralist economic theories. Kovacic [1989a] finds that the agencies' commitment of massive resources to deconcentration in the late 1960s and early 1970s would not have occurred without an apparent consensus of support from economists. By the time the deconcentration measures were fully launched, the consensus that inspired them had vanished.

The Role of Litigants. Litigants who appear before the federal courts may themselves influence the degree and speed of absorption of new ideas.[20] The Section 2 case data set and other Supreme Court antitrust decisions indicate that litigants influence what literature judges will consult and cite. Well-conceived briefs can shape the Supreme Court's analytical approach.[21] Briefs in antitrust matters before the Supreme Court infrequently cite economists but do occasionally cite secondary materials written by legal scholars. This underscores the importance of legal scholars as bridges between economists and the courts.

Judicial Law Clerks. Law clerks affect the type of literature and economic ideas that are reflected in published opinions. Carp and Stidham [1991, 75-79] observe that judges often delegate important research and analysis tasks to their law clerks. A clerk's expertise and interests help shape the amount and content of information that comes to the judge's attention.[22] Judges who hire clerks with training in economics are more likely to be exposed to the relevant

industrial organization literature and to take such research into account in deciding antitrust cases.

Implicit Reliance on Economic Models. Citations to economists and economically oriented legal scholars provide the most readily observable index of the Court's sources of economic insight. The absence of such citations, however, does not mean that judicial decisions are not informed by the jurist's views of economics. Opinions might not specify the grounds for these perceptions, but there is considerable evidence indicating that, despite the paucity of citations to economically oriented literature, the ideas of economists affect how judges resolve antitrust cases.[23] This phenomenon is apparent in the Sherman Act's first decades, when legal formalism disinclined judges to draw upon on other academic disciplines in conceiving legal rules. Hovenkamp [1989, 167] finds that, in the late 1800s and early 1900s, legal formalists believed that "the law generated its own supply of ideas and that lawyers need not look elsewhere." Hovenkamp [1988] and May [1989] show that judicial opinions in economic regulation cases at the turn of the century reflected prevailing views of economists, even though courts did not mention their writings. Consequently, the Court's early antitrust decisions were fact-intensive discourses laden with citations to judicial opinions.[24] Not until 1925, in Maple Flooring Manufacturers' Association v. United States,[25] did the Court mention an economist in an antitrust decision. Maple Flooring appeared amid the ascent of legal realism, and its author (Harlan Fiske Stone) shared the legal realists' willingness to acknowledge contributions from other disciplines in judicial opinion writing. The writings and biographies of Supreme Court justices reveal how the jurists' understanding of economics has shaped antitrust outcomes. Mason [1946, 26] states that Louis Brandeis once complained that judges frequently "came to the bench unequipped with the necessary knowledge of economic and social science," and he warned that "a lawyer who has not studied economics and sociology is very apt to become a public enemy." On the Supreme Court, Brandeis approached antitrust and other economic regulation issues with a fully formed view of the role of business enterprise in society. Brandeisian economics had two basic tenets. First, superior performance never produced persistently large corporate size; predatory conduct invariably did. Thus, doctrines barring dominant firm "exclusionary conduct" benefited society. Second, small firms deserved wide latitude to adopt practices that enabled them to compete with larger companies. Brandeis urged that smaller manufacturers be allowed to set resale prices and that small firms have broad freedom to form trade associations and other collective arrangements.[26]

As suggested above, formal citation patterns may reflect the background and expertise of individual jurists and their law clerks. Judges might omit references to non-lawyers because other disciplines are alien to their academic training and experience. Expertise imparts confidence to rely upon nonlegal analytical tools, including economics.[27] It is unsurprising that the first Supreme Court Section 2 opinion to cite an economist (the Standard Oil patents case[28] in 1931) was written by Brandeis, who was conversant in economic thinking. Justices who have cited economically oriented works in antitrust cases--for example, Harlan Fiske Stone,[29] William Douglas,[30] Thomas Clark,[31] John Paul Stevens,[32] and Antonin Scalia33tend to be former academics who taught economic regulation (Stone, Douglas, Scalia) or former antitrust practitioners (Clark and Stevens).

IV. THE EXTENT OF ECONOMIC'S INFLUENCE IN ANTITRUST ADJUDICATION

To this point, the discussion has focused upon how judges absorb new economic ideas. This section discusses factors that determine how judges will respond to various economic ideas once such ideas are brought to their attention.

Judicial Preferences

Judges enjoy considerable discretion to determine the content of antitrust rules. Outcomes in close cases depend significantly upon the policy preferences of judicial appointees. Short of gaining amendments to the antitrust statutes, the power to appoint federal judges is a president's surest means for seeing that his antitrust preferences endure. The judicial nominee's pre-appointment training and ideology influence the nominee's receptivity to various economic arguments and her ability to adjust doctrine through opinion-writing and discussions with colleagues. Preference shaping also can occur in post-appointment training programs such as the Economics Institutes for federal judges conducted by Henry Manne's Law and Economics Center.[34]

Recent experience provides a useful context for assessing the impact of judicial selection upon antitrust doctrine. Ronald Reagan chose three Supreme Court justices and 46 percent of all federal judges holding office in January 1989. The Reagan Administration altered the federal judiciary's ideological perspective by choosing individuals who, among other traits, doubted the efficacy of government economic regulation. Kovacic [1991] has found that Reagan appointees to the courts of appeals have adopted unfavorable positions toward antitrust intervention to bar mergers, single-firm exclusionary conduct, and vertical restraints more often than judges nominated by President Carter. To an unusual extent, President Reagan appointed academics with strong law and economics credentials. Through scholarship and study in antitrust economics, judges such as Robert Bork, Frank Easterbrook, Douglas Ginsburg, Richard Posner, Antonin Scalia, and Ralph Winter are well-positioned to see that appellate decisions reflect careful attention to economic learning and Chicago perspectives in particular. These individuals have written important, economically sophisticated opinions that promise to exert a disproportionately large influence on antitrust doctrine.3s The opinions of Reagan law-and-economics judges demonstrate that an appointee's intellectual capital shapes performance on the bench.

Political Environment

As Rowe [1984], Kaplow [1987], and Kovacic [1989a] observe, the political environment affects how heavily judges and enforcement agencies rely upon economic analysis and the type of economic theory used as a basis for decision making. Changes in the political climate toward business determine whether antitrust enforcement policy and judicial doctrine take expansive or narrow paths. Economic analysis plays essentially two roles in this process. First, economic ideas provide intellectual rationales for adjustments in policy and doctrine. By itself, an intellectual vision may have little impact, but it may offer a goal toward which to divert political currents. An inventory of ideas helps determine whether discontent with existing policies and doctrine will be translated into genuine change. The degree to which public moods shape antitrust doctrine and policy often depends upon the availability of an intellectual justification for change.

Second, broad acceptance of economic analysis retards the adoption of policies that would depart radically from preexisting practice. Since the mid-1970s, law school graduates have absorbed large doses of Chicago School learning, and Chicago's analytical techniques have become well-engrained in the antitrust culture as a result. As Kwoka and White [1989, 5] conclude, future shifts in antitrust thinking are probable, but wholesale abandonment of Chicago perspectives is improbable.

The interrelationship of political forces and economic analysis is apparent in modern antitrust treatment of large firm conduct. In the mid-1970s, the increased competitiveness of foreign companies in world markets raised concerns that the United States no longer was the world's foremost source of technological progress. Large domestic firms whose size and "predatory" conduct once elicited calls for deconcentration either had lost their market leadership or were now seen as valuable sources of innovation. In their study of antitrust decisions from 1975 through 1981 involving claims of anticompetitive exclusion, Hurwitz and Kovacic [1982, 113-28] found that judges stopped reciting the social benefits of curbing dominant firm discretion and disavowed liability rules that might reduce incentives to innovate. Warren-Era Supreme Court antitrust decisions emphasized non-efficiency goals when American firms faced relatively few threats from abroad. By 1980 it was difficult for courts to slight efficiency and vindicate non-economic goals. Economists provided the justifications for giving dominant firms greater discretion to choose pricing and product development strategies, but fundamental change in the political environment made their ideas persuasive to courts and enforcement agencies.

Structure and Leadership of the Public Enforcement Agencies

Several factors determine how seriously economic analysis affects public enforcement. Eisner [1991] shows that one influence is the establishment of economic analysis bureaus within the federal enforcement agencies. At a minimum, such bureaus ensure that the agency will identify and assess the economic consequences of proposed or ongoing enforcement initiatives.36

Elzinga [1987] demonstrates that a second, equally important factor is the background of the agency leadership. The agency's leadership establishes how substantial a role economists and economic analysis will play in the decision to prosecute. The Assistant Attorney General for Antitrust and the FTC Chairman decide when and how much agency economists will participate in case selection and analysis. Economists approach equality with attorneys in this respect only when economists (James Miller at the FTC in the 1980s) or economically oriented attorneys (such as William Baxter and Douglas Ginsburg at the Antitrust Division in the 1980s) run the enforcement agencies. Whether the views of nominally important economic analysis offices will be decisive in the decision to prosecute depends crucially upon the preferences of top management.

V. CONCLUSION: ECONOMICS AND ANTITRUST'S SECOND CENTURY

Modern adjustments in policy and doctrine are simply the latest signs of how changing economic visions affect the antitrust system. Antitrust law and industrial organization economics have evolved in tandem, with doctrine and enforcement policy lagging behind the formation of a consensus among economists about appropriate liability rules. This process will continue as developments in economic learning, debate among researchers about the proper interpretation of business phenomena, and changes in the political environment move courts and enforcement agencies to modify doctrine and policy. The evolution will be gradual, as the interaction of these elements generally discourages dramatic swings in doctrine.

In the Sherman Act's second century, the interaction of supply and demand in the marketplace for ideas will yield changes in the intellectual equilibrium concerning important antitrust issues such as merger control, vertical restraints, and single-firm conduct. As Baker [1989] points out, Chicago captured the dominant intellectual market share in the 1980s, but Chicago views today face extensive challenge in economic commentary. The antitrust system's permeability means that new perspectives can gain a foothold with no more than a persuasive opinion by one federal court or a single enforcement decision by a government agency.

Recent years have featured the emergence of a new industrial organization literature (largely rooted in game theory) that identifies ways in which conduct such as predation and leveraging can decrease efficiency.[37] The policy implications of this literature dictate greater concern, in devising liability standards and public enforcement policy, with conduct that Chicago deems benign or procompetitive. However, the complexity of this literature raises basic questions about the capability of courts and enforcement agencies to apply its ideas skillfully in adjudication and case selection.

One must begin by asking whether courts can absorb and apply correctly the insights from the new generation of complex, quantitatively sophisticated economic models. Three considerations suggest that judges will absorb the new game theoretic literature relatively slowly. First, most judges will be put off by the mathematical orientation of modern microeconomics, and few will feel comfortable applying this literature without extensive analysis and restatement by legal scholars. Second, if judges are to use new analytical approaches widely, intermediaries must provide administrable standards that can be applied in the courtroom environment of incomplete facts, disputed interpretations, and limited judicial economic training.[38] Third, applying game theory to antitrust disputes will pose significant informational demands that courts may be reluctant to compel litigants to satisfy. Not only may judges doubt their (or a jury's) ability to interpret such information properly, but the time needed to collect and assimilate the required data may mean that the industry in question changes significantly between the date the complaint is filed and a decision on liability is rendered.

Issues of institutional competence also arise with regard to the capability of the government enforcement agencies to use the insights of game theory in formulating antitrust policy. The modern track record of the Justice Department and FTC in applying state-of-the-art economic theory dealing with exclusionary conduct and interdependent behavior has been decidedly unimpressive. In the 1970s, the FTC pursued ambitious, innovative cases involving strategic entry deterrence and market signalling. Despite the commitment of some of the agency's best human capital to these matters, the resulting cases fared poorly.[39] The agencies' poor performance when going beyond the Chicago School agenda of prosecuting explicit horizontal output restrictions and large horizontal mergers requires one to explain why a new round of state-of-the-art initiatives will do better.

The future influence of economics upon antitrust policy will depend upon how successfully economists and attorneys come to grips with the institutional incentives that determine whether new economic ideas are translated into cases.

Upper-level government managers rarely hold office for more than a few years, and they have weak incentives to invest resources in activities that may not yield full appropriable returns during their tenure. Detailed industry analysis, theory development, and post-litigation evaluations are the research and development on which sound antitrust programs are built, but they generate outputs that are not readily appropriable by individual managers and therefore want for adequate levels of support. By contrast, initiating new cases or announcing new enforcement programs are events for which the agency manager can claim credit immediately.

Today's manager probably will be gone when the new initiatives reach their end, and there are too few incentives for the manager to take precautions to ensure that heralded take-offs ultimately are followed by smooth landings.[40] During antitrust revivals, credit-claiming generates a surplus of innovative enforcement ventures that yield few enduring successes and excessive failures. Thus, the challenge for economists goes well beyond distilling the teachings of game theory or other new models into operational enforcement principles. An equally important and difficult task is to cure weaknesses in the enforcement mechanism through which new models will be applied.

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