This paper – which can be found here – is a reaction to Louis Kaplow’s article “On the relevance of market power” which I discussed here. It provides a much better summary of Kaplow’s article than what I managed to write then, and also a very apt critique of that paper. As such, I think it would be useful if I were to provide you with a summary of this piece.
While seemingly agreeing with the conceptual framework developed by Kaplow, the author (a professor at Stanford) shares some of my critiques (which makes me feel rather relieved, because it means I understood at least parts of Kaplow’s paper). Like me, he reads Kaplow’s paper as implicitly assuming that competition law is ultimately a broad standard directed at maximising economic welfare on each situation. This standard is applied as follows: conduct that reduces economic welfare is unlawful, and conduct that increases economic welfare is lawful. Hence, market power is not really relevant except as a tool to measure the impact of a company’s action on economic welfare – and this, if taken to its ultimate consequences, would require the application of a rule of reason approach to every potential antitrust infringement.
Very much unlike me, though, he goes on to identify four different types of market power: (i) “ex ante market power”, i.e. the market power that existed before the conduct in question; (ii) “ex post market power,” i.e. the market power after the conduct in question; (iii) “increased market power,” i.e. the increase in market power caused by the conduct in question and which is equal to the difference between ex post market power and ex ante market power; and (iv) “but-for market power” i.e. the market power that would exist after the conduct in question if the conduct did not cause any increased market power. The reason he does this is to demonstrate that market power is relevant for legal analysis because it serves as a proxy for the effects of the actions of companies operating in certain circumstances (i.e. it is not a purely economic criterion).
The argument is that U.S. antitrust law makes it illegal to cause an increase in market power by conduct that is not competition on the merits. For this purpose (and Kaplow’s), “competition on the merits” means conduct that on balance increases output. Antitrust law thus embodies the simple idea that we will endure the costs of market power when they are the result of efficient conduct, but not when they are the result of anticompetitive conduct (i.e. conduct that tends to cause an increase in market power for reasons other than competition on the merits). I would point out that EU law does the same thing – the language of the article is reminiscent of EU law, and it is a rare piece of American scholarship that expressly defends EU competition law.
Having established this, he departs from Kaplow’s approach by noting that market power is an independent element of analysis of unilateral conducts because it: “rests on the idea that market power is usually bad and that relatively simple rules can be applied and complied with at lower cost and with fewer errors than a legal regime that requires case-by-case assessment of the implications of market power or application of a broad, multifaceted standard.” (…) Further: “Some conduct is deemed to be unlawful per se — that is, without inquiry into its market power effects. But this rule, too, reflects a categorical judgment about the welfare properties of the conduct.”
The discussion then becomes quite fine-grained regarding why some conducts are prohibited per se, but ultimately the argument is simply that market power is relevant in practice even if it is not explicitly taken into account in every case. This argument builds on the insight that the costs of analysing and committing errors in cases subject to per se prohibitions are higher than the errors created by bright, easy to administer rules. The same goes for the market power requirement; there are some situations in which market power or its absence can be readily determined, and in which it is very difficult to determine whether the conduct is anticompetitive. However, if market power is easily identifiable and has some relation (on average, or usually) to the effect of a conduct, it can then become a very useful tool in determining whether that conduct infringes competition rules or not. For example, bundled or loyalty discounts lead to extensive discussion about whether they are pro- or anti-competitive, but no one would claim that a McDonald’s Happy Meal is illegal since McDonalds obviously does not have market power (his example, not mine).
Ultimately, the author’s argument is that legal rules are not – and cannot be, if nothing else due to their institutional design and enforcement costs – about maximising economic welfare in every situation. Instead, there is a trade-off between choosing rules (pro: clarity, ease of application; con: over- and under-inclusiveness) and standards (pro: fit between goal of the law and cases falling within it; con: costs of enforcement and factual assessments). It is peculiar that this is the main takeaway of a critique of a paper by Kaplow – because Kaplow wrote one of the classics on this trade-off, which I genuinely think everyone in our line of business should read (Louis Kaplow ‘Rules versus standards: An Economic Analysis” 42 Duke Law Journal (1992) 555).