By Richard J. Pierce, Jr., the Lyle T. Alverson Professor of Law at George Washington University and Member of the FSF Board of Academic Advisors
Over the past two months, proponents of major changes in antitrust law have introduced numerous bills in Congress that have some degree of bipartisan support. One of the leading proponents of major changes, Lina Khan, is now Chair of the FTC. On July 1, Chair Khan announced major changes in the FTC’s policies and procedures that are explicitly intended to implement major changes in antitrust law with or without Congressional action. These developments make it important to get answers to some questions about the goals and potential effects of the proposed changes.
For fifty years, the Supreme Court, the FTC and the Department of Justice have attempted to interpret and apply the broad language of the existing antitrust statutes in ways that are intended to maximize consumer welfare. This has produced a mix of doctrines in which a few practices, like horizontal minimum price fixing and horizontal allocation of markets, are illegal per se because the courts and enforcement agencies believe that they often have bad effects and rarely have good effects. However, most practices are subject to a rule of reason.
When a practice is subject to the rule of reason, the party who claims that the practice is having bad effects on consumer welfare has the initial burden of proving that the practice is actually having bad effects. If the plaintiff[s] satisfy that burden, the defendant[s] then have the burden of proving that the practice is having good effects on consumer welfare that exceed the bad effects. The rule of reason is based on the belief that most practices can have bad effects in some market conditions and good effects in other market conditions.
Many scholars believe that antitrust law has not been as effective in maximizing consumer welfare as it should be and can be. There are constant debates about ways in which courts and enforcement agencies can make antitrust law more effective and improve its performance as a means of improving consumer welfare.
Chair Khan and the members of Congress who are sponsoring the bills that are now pending in the House and Senate have a completely different agenda. They want to abandon pursuit of the goal of maximization of consumer welfare. They also want to replace the rule of reason with a long list of rules that prohibit firms from engaging in many practices, either in all circumstances or when firms that are above a particular size attempt to engage in the practices.
The first question these initiatives raise is: what is the new goal of the new version of antitrust law that they propose? The proponents of major change explicitly reject the goal of maximization of consumer welfare, but they are not clear about the alternative goal that they want to further. They refer to a wide variety of goals that include: improving the welfare of workers, protecting the viability and profitability of small businesses, reducing the economic power of large firms, and reducing the political power of large firms.
Every time I teach antitrust law, I walk my students through the effects of the efforts that the antitrust enforcement agencies and the courts made between 1890 and the 1970s to further each of these alternative goals. The conclusion that I long ago reached and that most of my students embrace is that it is impossible for antitrust law to further any one of its potential goals without sacrificing pursuit of the others. As a practical matter, the courts and enforcement agencies must either adopt a single goal, or a hierarchy of goals, so that they can then make rational choices about the extent to which we should pursue one goal while sacrificing pursuit of the others.
I have not yet seen any writing in which one of the proponents of major changes in antitrust law has taken the logical first step of identifying the new goal or hierarchy of goals that they would substitute for the present goal of maximization of consumer welfare. Once the proponents take that essential step, they need to explain how their many proposed per se rules would further the new goal or hierarchy of goals.
The proponents should start by explaining how their proposed per se prohibition on predatory pricing will be implemented. Predatory pricing is not a practice that is easy to identify. The practice that triggers concern about predatory pricing is selling a good or service at a price so low that the firm’s competitors object. In most circumstances, low prices have enormous socially-beneficial effects. However, predatory pricing refers to low prices that a firm intends to charge only for a period long enough to drive all of the firm’s competitors out of business in order to allow the firm to earn monopoly prices by charging high prices and reducing the quantity of the good or service that the firm sells.
For decades, antitrust enforcement agencies and courts engaged in aggressive efforts to identify and to punish predatory pricing. The results were not attractive. When a firm angered its competitors by charging low prices, its competitors often filed an antitrust complaint in which they alleged that the firm was engaged in predatory pricing. In many cases, they would even persuade one of the enforcement agencies to file such an action. The defendants knew that they would suffer major economic losses even if they were successful in defending their actions because of the high cost of engaging in antitrust litigation.
The easiest way for a defendant to resolve a claim of predatory pricing was to “settle” the case by entering into an agreement to increase its prices to a level at which they no longer posed any threat to their competitors and to agree not to reduce its prices in the future. If that sounds to you like the creation of a price-fixing cartel, the problem is not in your perception. Of course, the best course of action for any firm that wanted to avoid becoming a defendant in a predatory pricing case was to refrain from charging prices so low that its competitors objected. It could do that by increasing its prices any time that its competitors complained and threatened to file a predatory pricing action.
Over a period of decades, the enforcement agencies and the courts reached agreement that the aggressive position that they had taken in their efforts to eliminate predatory pricing was having serious adverse effects in the form of encouraging firms to charge high prices and deterring them from engaging in competition based on price. After several decades, the Supreme Court announced a new test applicable to claims of predatory pricing that is hard for a complaining party to satisfy. It coupled that new test with antitrust standing rules that make it difficult for competitors to maintain an action against a firm based on a predatory pricing theory. The Court made it clear that it was taking these steps based on its beliefs, supported by the findings of many scholarly studies, that: predatory pricing is rarely attempted; predatory pricing is rarely successful when it is attempted, and; the low prices that trigger claims of predatory pricing are socially desirable.
Before we embark on a new crusade to eradicate predatory pricing, it would be nice to see an explanation of how that new effort will avoid the unintended adverse effects of our prior efforts and to see studies that find that predatory pricing is a common practice that is often successful in allowing a firm to reduce its output and to charge artificially high prices—the primary adverse effects of monopoly.
[This blog is cross-posted at the Yale Journal on Regulation Notice and Comment website.]
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