A Case Study of the
Role of Economics
Antitrust Decision Making
Presentation to the
Federal Trade Commission/Antitrust Division Merger Workshop
February 18, 2004
Latham & Watkins LLP
- What are the Economic Issues Relevant to Antitrust Decision Making?
- Who Decides These Issues?
- How Effective is the Use of Economics in Antitrust Decision Making?
Facts, Models and Econometrics
- E.g., it costs $10,000,000 and takes a year to build a widget factory
- E.g., output is lower and price is higher in highly concentrated industries, ceteris paribus
- Statistical Tests
- E.g., the evidence justifies the assumption that 4FCR had no effect on the wholesale price of silicon-based widgets in the U.S. from 1Q 1990 to 4Q 2000 (i.e., the data failed to reject the null hypothesis to the relevant degree of confidence)
Seldom-Discussed Points about Models and Statistical Tests
- The values of the estimated parameters and the validity of the statistical tests are contingent on the truth of the underlying model (I.e., Garbage In/Garbage Out)
- Example: concentration/price and concentration/profit correlations – powerfully suggested by oligopoly models once regarded as canonical – demonstrated in a host of studies now viewed as discredited
- Skepticism regarding the model resulted from “better” analytical work (e.g., Caves & Porter) supported by shift in surrounding approaches and attitudes
Economic Issues in Antitrust
- Decision Makers are Called Upon to Make Specific Findings and Inferences
- Extent of the Market/Market Power
- Procompetitive Justifications and Rationales for Conduct
- Every Litigant Tells a Story, Every Story Has a Model
- “Model”-Based Decisions of the Post-Sylvania Era
- Matsushita – long-term predatory conspiracy
- State Oil v. Kahn – maximum vertical price agreements
- But see: Brooke Group – “oligopolistic disciplinary pricing”
Economists Don’t Decide
- Under the law, agency officials, judges and/or juries decide.
- There is no existing institution that can resolve contending economic explanations on a time scale relevant to litigation
- Peer reviewed scholarship
- Long-term belief formation based on collective experience
- Until all judges become economists, there will be continuing tension between expert assessments and decision making by non-experts
- Judicial dissatisfaction with advocacy economics
- Matsushita – expert report rejected
- Brooke Group – testimony disregarded
- Daubert Quartet – although none is an antitrust decision, arguably this series is extension of antitrust trend
- Justice Breyer
- Remarks to AAAS, AEI regarding need for filtration of expert views – another expression of tension inherent in legal system where ultimate decisions are for non-expert courts
- Judge Posner
- HFCS, an explicit plea for use of Rule 706 appointed experts by lower courts
- Decisions remarking on theory, like Asahi Glass v. Pentech Pharmaceuticals and others too numerous to mention.
Unilateral Effects – A Case Study
- Foundational insight – customers of A can flee to B. If A merges with B, some A customers need a new escape
- Modeling real markets – assumptions hold numerous variables constant
- In any specific case, what econometric evidence would be sufficient to change a view suggested by (informed) intuition?
- Under what circumstances are non-expert decision-makers qualified to assess whether econometric evidence should be accepted as outcome-determinative?
Lessons of Experience
- Judgment on economic issues – market definition, market power, entry, competitive dynamics – is interactive (see testimony of Alfred E. Kahn in New York v. Kraft (Nabisco)
- “ . . . experience is deceptive, reasoning difficult.” – Hippocrates Aphorisms
- Narrow market definitions, focus on isolated time periods and “super slo-mo” dynamics will support theories of competitive harm in broad class of cases
- Tendency of positions to go to extremes – trains passing in the front office
- Enhanced reliance on “neutral” experts
- Agency consultants – excluded from subsequent advocacy role?
- Rule 706 – is this any way to earn a living?
- Peer review
- Experiments and studies
- I.O. faculties
- Federal Judicial Center?
- United States v. Topco: considering justifications throws antitrust and business planners into “the wilds of economic theory.”
- Welcome to the “wilds.”