Category Archives: Antitrust

Ron Chernow – The House of Morgan: An American Banking Dynasty and the Rise of Modern Finance

Ron Chernow – The House of Morgan: An American Banking Dynasty and the Rise of Modern Finance

More of a corporate history than a history of the Morgan family. But this 1990 book, Chernow’s first, also chronicles the evolution of banking and finance from the Industrial Revolution up to about the 1980s. I picked this up due to an interest in antitrust law, competition, and the rise of big business. While this book is ultimately more useful for financial regulation scholars, I still found it useful. And though its characters are not as compelling as Chernow’s Rockellers in Titan, it is an enjoyable read.


Antitrust Basics: Regulatory Uncertainty

Antitrust laws are not enforced to the letter. They are a matter of regulators’ and judges’ discretion. If they were applied literally, every business transaction would be illegal:

  • A company that sells a product at a lower price than competitors can be charged with predatory pricing.
  • A company that sells a product for the same price as competitors can be charged with collusion.
  • A company that sells a product at a higher price than competitors can be charged with abusing monopoly power.

This exhausts all pricing possibilities. Fortunately, antitrust laws are not enforced consistently, so ordinary businesses do not need to worry. With laws like these on the books, such discretion is a good thing. While regulations do not need to satisfy philosopher Immanuel Kant’s hyper-strict categorical imperative to be acceptable policy, antitrust regulation falls short of any reasonable standard of sound policy.

A century of case law has evolved some antitrust guidelines that companies can try to comply with. But judicial precedents can be overturned with no warning any time a new case is brought. There are few bright-line legislative or judicial standards for antitrust enforcement. Under the “rule of reason” standard that prevailed before the consumer welfare standard took over in the 1970s and 1980s, there were none. Antitrust enforcement is mostly guided by a mix of inconsistent judicial precedents, regulators’ personal discretion, and political factors unrelated to market competition; cases are not always chosen on the merits.

Even the mere threat of antitrust enforcement can have a preemptive chilling effect on innovation, attempts at new business strategies, and potential efficiency-enhancing arrangements. Uncertainty is the enemy of investment. In the long run, this can have significant negative impacts on consumer welfare as fewer new products come to market, and companies seek fewer ways to lower prices.

Discretion does have a place in regulation. Written rules can’t possibly cover every situation, and they should have some flexibility to allow reasonable exceptions. But when an entire branch of law is based almost entirely on discretion, as in antitrust regulation, uncertainty reigns—with all the predictable negative consequences that come with regulatory uncertainty.

For more, see Wayne Crews’ and my study, “The Case against Antitrust Law: Ten Areas Where Antitrust Policy Can Move on from the Smokestack Era.” Further resources are at

Antitrust Basics: Rule of Reason Standard vs. Consumer Welfare Standard

Regulators have used two different standards to judge antitrust cases over the last century or so: the “rule of reason” standard and the “consumer welfare” standard. This post will briefly introduce them both.

The rule of reason standard was used for most of antitrust regulation’s history. It heavily relies on a judge’s discretion—whatever they think is reasonable is the rule. This usually, but not always, contains an implicit big-is-bad ideological bent. The rule of reason standard is less well defined than both the preponderance of evidence standard used in most civil cases and the reasonable doubt standard used in criminal cases. It also gives weaker protections to defendants.

The consumer welfare standard slowly replaced the rule of reason starting in the 1970s, and gained mainstream acceptance by the 1980s. Under the consumer welfare standard, big is OK, so long as no consumers are harmed. This stricter standard has resulted in fewer antitrust prosecutions, and nearly two decades since the last landmark case, which ended in a draw against Microsoft.

In the current populist moment, the pendulum is swinging away from the consumer welfare standard and back towards the old reason of rule standard.

Supreme Court Justice Louis Brandeis is one the intellectual fathers of the rule of reason standard. In 1911, during testimony before the Senate Committee on Interstate Commerce, Brandeis said, “I have considered and do consider, that the proposition that mere bigness can not be an offense against society is false, because I believe that our society, which rests upon democracy, cannot endure under such conditions.”

This feeling that size itself should a prosecutable offense ebbed and flowed over the decades, giving antitrust enforcement a distinct uncertainty and lack of clarity during the rule of reason era. In fact, during the New Deal, President Franklin Roosevelt reversed course almost completely, and wanted the government to actively encourage business cartels. After World War II, the old rule of reason standard resumed. Enforcement peaked in the early 1960s, then gradually receded.

During the rule of reason era, a company could never be quite sure if it was violating the law or not. An acceptable practice one year might not be if power changes hands in the next election, or if a new judge rules differently on a case than his predecessor would have.

Antitrust regulation had long been dominated by lawyers. Economists dating back to Adam Smith believed that monopolies were unsustainable without government help, with real-life examples limited to the Dutch East India Company and similar government-backed enterprises. If a company raises prices, another company can make a nice profit by undercutting it. If companies collude to restrict output to raise prices, the temptation to cheat is too strong to resist, and the cartel collapses on its own. As such, on-the-ground antitrust policy was of limited interest to economists. For them, this rarity was mostly a theoretical construct that existed in blackboard models.

Justice Department and Federal Trade Commission lawyers resented economists and their analysis both for ideological reasons and the fact that economic analysis, if consistently applied to antitrust law, would put most antitrust lawyers out of a job. After Arthur C. Pigou’s 1920 book “The Economics of Welfare” came out, welfare economics became all the rage. In this subfield, economists weigh a policy’s costs and benefits to the welfare of everyone involved and judge it accordingly. A welfare economist looking at antitrust isn’t going to care one way or the other about a company’s size. The question he is looking at is, does the current market structure benefit consumers or not? This approach led to the coining of the consumer welfare standard sometime in the 1960s.

By this time, a growing law and economics movement began to apply economic reasoning and methodology to antitrust regulation. A few economists were even able to get jobs at the Justice Department and Federal Ttrade Commission, though they likely won few popularity contests at first.

The new law and economics movement was at first largely centered at the University of Chicago, though law and economics departments now exist at most major universities. Early Chicago figures such as Ronald Coase, Aaron Director, and Frank Knight influenced a new generation of competition scholars who made the consumer welfare standard the mainstream practice in antitrust law. These scholars include Richard Posner, George Stigler, Yale Brozen, Robert Bork, Harold Demsetz, and Sam Peltzman, among others.

The most famous defense of the consumer welfare standard remains Robert Bork’s 1978 book “The Antitrust Paradox,” which was one of the first major law books to heavily incorporate economic analysis.

As the consumer welfare standard slowly and informally supplanted the rule of reason standard, antitrust activity greatly slowed. In 1981, the federal government dropped a 13-year long antitrust case against IBM after more than a decade of technological advancement and market competition rendered the case moot. In 1984, the government broke up the AT&T monopoly it had previously enforced, and the last hurrah for old school antitrust came with the Microsoft case, which ended with a settlement mostly in Microsoft’s favor. Since then, some mergers have been blocked, but always on consumer welfare grounds rather than the fear of bigness that had motivated Justice Brandeis.

Contrary to stereotype, most advocates of the consumer welfare standard do not oppose antitrust law. Even Robert Bork defends antitrust enforcement, arguing on p. 311 of “The Antitrust Paradox” that “Antitrust is valuable because in some cases it can achieve results more rapidly than can market forces. We need not suffer losses while waiting for the market to erode cartels and monopolistic mergers.”

This ignores both knowledge problems and public choice-style incentive problems facing regulators, as numerous scholars have noted. The best antitrust policy is no antitrust policy. But so long as antitrust regulations remain on the books, it is best to rein in their harm as much as possible with a strict consumer welfare standard for enforcement.

For more, see Wayne Crews’ and my paper, “The Case against Antitrust Law: Ten Areas Where Antitrust Policy Can Move on from the Smokestack Era.” Further resources are at

Competing Antitrust Ideologies

Over at Liberty Fund’s EconLog, Pierre Lemieux has a thoughtful post on antitrust and ideology:

That antitrust legislation was a product of the first populist era (the end of the 19th century) and the succeeding progressive era (the beginning of the 20th) should raise a red flag.

A more general question can be asked: Isn’t as blindly ideological to claim that the market is nearly always efficient as it would be to claim that government intervention is nearly always efficient? This is a valid question, but I would argue the negative.

Read the whole thing.

Antitrust Basics: Misleading Herfindahl-Hirschman Index

This is the third entry in the “Antitrust Basics” series. See below for previous posts.

Market concentration is the most common reason for antitrust intervention. If a company has too large a market share, it can abuse that market power to raise prices, restrict output, and engage in all manner of anti-competitive business practices. A merger that would create a dominant player or significantly reduce the number of competitors is likely to be blocked. But how should market concentration be measured? Should it be by number of firms? Or by how much market share the biggest players control?

The Herfindahl-Hirschman Index (HHI) accounts for both factors. It also gives analysts a single numerical score they can work with, ranging from 0 to 10,000. It is also easy to calculate; the Justice Department shares the HHI formula here. A market with a large number of companies, in which each has an equally small market share, will have a low score. A market with few companies and one dominant player will have a high score.

For example, imagine two different markets, each with four companies. In one case, each company has an equal 25 percent market share. This market has an HHI score of 2,500. In the second case, one company has a 97 percent market share, and the other three each have a one percent market share. This yields a 9,412 HHI score, and quite possibly an antitrust case.

According to the Justice Department and Federal Trade Commission’s joint Horizontal Merger Guidelines, an HHI of over 2,500 constitutes a highly concentrated market. The HHI is usually used in mergers to decide whether or not to allow a deal to go through—under the Hart-Scott Rodino Act of 1976, all mergers over a certain size have to be reviewed by regulators before they can be consummated.

According to the guidelines, Mergers in a moderately concentrated market (HHI score of 1,501 to 2,500) that increases HHI by more than 100 points “potentially raise significant competitive concerns and often warrant scrutiny.”

Mergers in a highly concentrated market (HHI of more than 2,500) raising HHI by more than 200 points “will be presumed to be likely to enhance market power.”

These guidelines are not binding. The decision to block such a merger can vary with which party holds power, if a company is receiving bad publicity, or any other factor besides a predictable law. This uncertainty can have a chilling effect on deals that could benefit consumers.

This kind of quantitative analysis makes it easier for the Justice Department or the Federal Trade Commission to decide whether or not to bring a case against a company, or to block a proposed merger.

The HHI has a fatal flaw, though: the relevant market fallacy. The person crunching the numbers can define the relevant market any way they please, and can thus come up with nearly any HHI score they desire. This makes it analytically useless. In fact, during the fact-finding phase of a merger investigation, opposing counsel routinely fight over the relevant market size to be used in that case’s HHI calculations. Whatever decision is reached is arbitrary, and often depends more on the judge’s political views than anything else.

The fact that the Herfindahl-Hirschman Index is so easy to game is by itself fatal. But that is not its only significant problem. As Judge Richard Posner observed in the second edition of his book “Antitrust Law,” “There is no sound basis in economic theory for thinking that if there are just a few major sellers in a market, competition will disappear automatically.” That is an empirical question, and one that regulators are incapable of answering.

This is not necessarily their fault; no one can predict the future. Even the merging companies themselves are unsure how their deal would work out. AOL and Time Warner found this out the hard way. By giving the illusion of quantitative rigor, the HHI often fools regulators into thinking they have solved the knowledge problem that vexes so many policymakers’ plans. This false confidence is dangerous to consumer welfare.

The Herfindahl-Hirschman Index is useless in answering the question of whether a merger or a given level of concentration would cause consumer harm. It should barred from use in antitrust cases.

For more, see Wayne Crews’ and my study, “The Case against Antitrust Law: Ten Areas Where Antitrust Policy Can Move on from the Smokestack Era.” Further resources are at

Previous posts in Ryan Young’s “Antitrust Basics” series:

Antitrust Basics: The Relevant Market Fallacy

This is the second entry in the “Antitrust Basics” series. See below for previous posts.

If a firm is charged with having market power, the question naturally arises: in which market? Does Facebook have a monopoly over social networking, especially now that it owns additional networks such as Instagram and WhatsApp? Or does Facebook compete with other uses of leisure time such as movies, television, books, sports, concerts, and countless other ways people can spend their time? Which is the more relevant market? The answer is subjective—a significant problem for a legal case with multi-billion dollar stakes.

Antitrust regulators often try to make their case appear stronger by using an unrealistically narrow definition of a company’s relevant market. I call this tactic the relevant market fallacy. The relevant market fallacy is one of the easiest mistakes to make in all of antitrust analysis. It is also one of the easiest to avoid. Thinking along the different parts of a spectrum illustrates why.

At one end of the spectrum, every individual product can be seen as its own relevant market. A sandwich at one restaurant is different from a similar sandwich sold at another restaurant next door, even if they are the same price. One restaurant might offer better service, better ambience, or some other nonprice characteristic that differentiates it from its competitor. In that sense, there are two different products operating in different markets appealing to different sets of consumer preferences.

At the other end of the spectrum, the only relevant market is as big as the entire global economy. That sandwich also competes against all other types of food in a global supply chain—and any non-food item a person might spend their money on instead. Whichever point on the spectrum an analyst decides is right for a given case is an arbitrary decision. It is largely a matter of semantics, and often analytically useless in determining consumer benefits.

As with most things in the real world, most relevant markets fall somewhere in between these two extremes. Amazon controls roughly half of online retail, but a much smaller fraction of total retail. Which is the proper relevant market? Amazon’s success with online retail has also caused traditional retailers such as Walmart and Target to massively change their business strategies to match consumer desires. The relevant market is not only debatable in size and scope, but it is constantly changing shape. And that change is happening far faster than the speed of litigation.

When satellite radio companies Sirius and XM merged, critics argued that the combined firm would have a monopoly on satellite radio, and the merger should have been blocked. Once again, they defined the relevant market too small. Satellite radio competes with terrestrial radio, streaming radio, on-demand music streaming, podcasts, audio books, and more.

As political candidates, pundits, and activists tout statistics for this or that company’s market dominance, keep in mind they are often committing the relevant market fallacy. It doesn’t take long to check, and it’s well worth the small effort.

For more, see Wayne Crews’ and my study, “The Case against Antitrust Law: Ten Areas Where Antitrust Policy Can Move on from the Smokestack Era.” Further resources are at

Previous posts in Ryan Young’s “Antitrust Basics” series:

Introducing Antitrust Basics

Often, a drips-and-drabs approach to learning an issue over a period of time is as effective as a single intense cram session. To that end, this post inaugurates a series to familiarize readers over time with the basics of antitrust regulation. This is important because the current antitrust revival is reaching a fever pitch. This could have multi-billion dollar consequences in the next few years for everything from the future of 5G networks to online retail to the structure of social networks.

The Justice Department and the Federal Trade Commission recently carved out their respective turf for upcoming investigations of tech companies. Justice will handle Google and Apple, and the FTC will handle Amazon and Facebook. Congress is also launching its own investigation. At the state level, somewhere from 12 to 20 state attorneys general are mulling their own joint investigation. Other industries from hospitals to concert tickets are also on some target lists.

Progressives have spent years advocating a neo-Brandeisian approach of more active antitrust enforcement. Now they are gaining unexpected conservative allies in President Trump and a newly visible right-wing populist movement. There has not been a major antitrust case since the late-1990s Microsoft case, but given current political winds, that may soon change.

Oscar Wilde observed that “The emotions of man are stirred more quickly than man’s intelligence.” Fortunately, it will likely be more than a year before any of the just-announced investigations result in court cases—if they do at all. That will hopefully be enough time for passions to cool, and more reasoned analysis to prevail. Part of that process is taking some time to study the main principles, history, and applications of antitrust policy.

To that end, Wayne Crews and I recently wrote a paper, “The Case against Antitrust Law: Ten Areas Where Antitrust Policy Can Move on from the Smokestack Era.” Our colleagues Jessica Melugin and Iain Murray are offering regular antitrust analysis as well. CEI also maintains a microsite,, that collects our antitrust scholarship in one place.

This series will start with the big picture and progressively narrow down to more specific issues. Initial posts will sketch out broader themes of antitrust regulation and the main sides of the debate. After that, the series will go through a “Terrible Ten” list of failed antitrust policies that should be abolished.

Larger themes in upcoming posts include the relevant market fallacy; the importance of treating competition as a spectrum rather than an on/off switch; regulatory uncertainty; the Brandeis-era big-is-bad standard vs. the consumer welfare standard; and antitrust enforcement’s tendency to entrench incumbent companies and increase rent-seeking; and the importance of thinking long-term.

From there, we will apply those themes and principles to specific policy areas that Congress and regulators should reform. In case after case, antitrust regulation protects incumbent companies from competition, encourages rent-seeking, erodes the rule of law, and slows innovation. This is a high price to pay for a policy that also works against its advocates’ goals regarding concentrated power, economic inequality, democracy, and other values.

Given antitrust regulation’s lack of redeeming qualities, we favor abolishing it outright. Short of that, regulators and courts should defend the consumer welfare standard against neo-Brandeisian and Trumpian populism. In the current political climate, preserving the consumer welfare standard may be the best possible near-term outcome.