Category Archives: Antitrust

On the Radio: Antitrust

On Sunday morning from 8-9 AM PT, I’ll be on the Bob Zadek Show talking antitrust regulation. He has a promo article with a link to listen live here. See also Wayne Crews’ and my antitrust paper.

Antitrust Basics: Think Long Term, Not Just Short Term

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

Moore’s Law states that computing power doubles every year and a half or so. An antitrust case against IBM, by contrast, lasted for 13 years, never reached a decision, and was eventually dropped because the original issue had long become obsolete. Markets are ongoing-long-term processes but antitrust cases are often short-term reactions to temporary situations—even if they sometimes last so long as to outlive the problem they seek to address.

Today’s Neo-Brandeisians and right-wing populists calling for an antitrust revival are not the only analysts prone to short-termism. Robert Bork, famous for his antitrust skepticism, writes on p. 311 of his 1978 book “The Antitrust Paradox”:

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.

Bork’s statement focuses on short-term results while ignoring long-term underlying processes, and has several other problems besides. How do regulators and judges know which cases are causing consumer harm and which are not? How do they ensure cases are chosen on the merits and not for politically-motivated reasons?

Cases also often take years to resolve. Assuming regulators do identify a valid case, how would they, and the judges who hear the case, know if market activity could address the problem by the time the case is decided? Do the benefits of regulatory action exceed the court and enforcement costs? Are the affected companies in a position to capture the regulators?

More to the point, does the short-term benefit come at a greater long-term cost? An enforcement action now could have an unforeseen deterrent effect on future mergers, contracts, and innovations, including in unrelated industries. The consumer harm from these could well exceed the short-term benefits of a short-term improvement on market outcomes—assuming that regulators are consistently capable of such a feat.

In the 1969-1982 IBM case, regulators eventually gave up, however belatedly. But this is not guaranteed to happen in every case. And who knows what consumer-benefiting innovations IBM could have developed with the time and resources it ended up devoting to defending itself in this case?

As the Justice Department and Federal Trade Commission conduct their investigations into Facebook, Google, Amazon, and Apple, they should keep their limited abilities to answer such questions in mind—as well as their bosses’ short-term focus, which rarely extends beyond the next election cycle.

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

Previous blog posts in the Antitrust Basics series:

Antitrust Basics: Corruption and Rent-Seeking

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

Rent-seeking is economics jargon for chasing after unfair special favors from government. Businesses and individuals have a large menu of rent-seeking options to choose from, and antitrust regulations are one of the items. Licensing regulations and other restrictions can make it harder for startups to enter a market, favoring incumbent businesses. Bailouts, such as General Motors and several large financial firms have received in recent years, are another form of rent-seeking. Cash subsidies, such as many green energy producers receive, are rent-seeking examples. Special financing, as through agencies like the Export-Import Bank or the Overseas Private Investment Bank, enable rent-seeking by Boeing and many farm and construction equipment manufacturers such as John Deere and General Electric.

All told, it is a minor miracle that corporate welfare is only about a $100 billion problem. Standard economic theory predicts that it should be much larger. Competitive Enterprise Institute founder Fred Smith and I wrote a paper arguing that virtue is an important limiting factor, though incomplete. Antitrust regulation provides another temptation to seek unfair rents, and would not improve the business world’s moral climate.

Neo-Brandeisians and other progressives rightfully oppose rent-seeking, but err when they propose increased antitrust policies as a solution.Tim Wu, a prominent neo-Brandeisian analyst, correctly points out how numerous companies game government policies to reduce competition, but then goes on to advocate for more government power as the solution. Even now, in a relatively restrained antitrust environment, roughly 95 percent of antitrust lawsuits are brought privately by competitors, not by the Justice Department or Federal Trade Commission. Repealing antitrust regulation would not eliminate rent-seeking—there are many other avenues rent-seekers can take—but it would reduce it.

Neo-Brandeisians advocating antitrust regulation as a way to promote virtue have a common misunderstanding of how governments work in practice. Government employees do not operate with only the public interest in mind. They are human beings, with the same incentives, flaws, and self-interested tendencies as other human beings.

Agency employees want to increase their budgets and power, and often enjoy the publicity that accompanies big cases. Regulators are also vulnerable to what is known as a Baptist-and-bootlegger dynamic. In Clemson University economist Bruce Yandle’s classic example, a moralizing Baptist and a profit-seeking bootlegger will both favor a law requiring liquor stores to close on Sundays, though for different reasons. A morally-motivated Baptist does not want people drinking on Sundays and a bootlegger would gain a lucrative monopoly every Sunday. They may find themselves strange bedfellows, and bootleggers may even hide themselves in Baptist clothing.

Applying this dynamic to antitrust regulation, a true-believing “Baptist” in Congress or at the Justice Department or the FTC would be inclined to listen seriously to the entreaties of corporate “bootleggers” who can come up with virtuous-sounding reasons for why regulators should give their businesses special favorable treatment.

Oracle, one of Microsoft’s rivals, ran its own independent Microsoft investigation during that company’s antitrust case, for what it alleged were Baptist-style reasons. “All we did is try to take information that was hidden and bring it to light,” said Oracle CEO Larry Ellison. “I don’t think that was arrogance. I think it was a public service.” Former Sen. Orrin Hatch (R-UT), who counted Oracle among his constituents, was one of the loudest anti-Microsoft voices in Congress. Around that time, he also received $17,500 donations from executives at Netscape, AOL, and Sun Microsystems.

Perhaps heeding Hatch’s admonition that, “If you want to get involved in business, you should get involved in politics,” Microsoft expanded its presence in Washington from a small outpost at a Bethesda, Maryland, sales office to a large downtown Washington office with a full-time staff, plus multiple outside lobbyists. Microsoft quickly went from a virtual non-entity in Washington to the 10th largest corporate soft money campaign donor by the 1997-1998 election cycle. Sen. Hatch’s campaign was among the beneficiaries.

The lines between Baptist and bootlegger can be blurry, and some actors play both parts. But such ethical dynamics are an integral part of antitrust regulation in practice.

The best way to reduce rent-seeking and regulatory capture is to have a system of government with few rents that can be sought, and fewer regulations that can be captured. Neo-Brandeisians, just like the rest of us, have to deal with the government we have, rather than an idealized abstraction. A more aggressive antitrust policy would increase rent-seeking, and should not be put forward as a solution to the problem.

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

Previous blog posts in the Antitrust Basics series:

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.