The basic argument of this paper, which can be found here, is that courts very rarely engage in any balancing even when cases fall under the rule of reason.

Most people who are familiar with Hovenkamp’s work will not be particularly surprised by this argument. The interesting claim in this paper is that he thinks that there can be meaningful balancing in merger control – particularly when determining whether merger-induced efficiencies are sufficient to offset upward pricing pressures created by the merger.

The paper is structured as follows:

  • A first section looks at balancing under the Sherman Act. It points out that “aside from naked price fixing, market division, and a few boycotts, most agreements among competitors are addressed under the rule of reason”. It then explains (as he has done so many times before) that in practice: “the courts pursue rule of reason analyses through a verbal sequence something like this: first, the plaintiff has the burden to show a prima facie anticompetitive restraint, which requires proof of power and a threat of anticompetitive effects. The burden then shifts to the defendant to show some justification for the restraint. If the defendant succeeds, the burden shifts back to the plaintiff, who can then show that the proffered justification was either a pretense or else that a substantially equivalent benefit could be achieved by a less restrictive alternative. If a less restrictive alternative is available, the court condemns the restraint because the same effects could have been achieved in a less anticompetitive manner. If no such alternative is offered or available, the court must balance the anticompetitive effects of the restraint against the non-pretextual defense.” While courts may purport to engage in balancing , this is not actually the case.

Furthermore: ““Balancing” requires values that can be cardinally measured and weighed against each other. The factors that are supposedly balanced in Sherman Act cases almost never fit this description. (…) For example, the decisions referenced above that discuss the need to balance “patent rights” against the “prohibitions of the Sherman Act” provide nothing in the way of a calculus for weighing either of these interests. (…) Even if the things requiring balancing did come in cardinal units, most times the courts would not have the tools necessary to make and apply the measurements.”

  • A second section looks at mergers. It begins by noticing that many years ago the: “law of mergers was much like rule of reason analysis in Sherman Act Section 1 cases. The courts spoke in broad terms about “injury to competition” or “protecting” competition rather than competitors, but the references were vague and never accompanied by a useable unit of measurement. However, over a series of increasingly pointed revisions, the Guidelines have re-defined the goal as proscribing mergers that realistically threaten higher consumer prices. Mergers may also produce offsetting efficiencies, but these efficiencies will be credited only if they are sufficient to offset any price increase that the merger threatens.

This change means that merger control has “something that the Sherman Act rule of reason lacks—namely, an approach that makes balancing at least theoretically possible.” The agencies apply models that predict the likely post-merger price increase after providing a generalized “credit” for efficiencies. “In litigation, that test represents the government’s prima facie challenge to the merger on the theory that prices are likely to rise. If the test is met, then the burden shifts to the defendant to show efficiencies that outweigh the credit. These efficiencies must be both merger-specific, which means that they would not likely occur absent the merger, and also of sufficient magnitude to reduce the predicted price to no higher than premerger levels. (…) A merger is acceptable only if efficiencies are sufficient to ensure that prices after the merger are no higher than they were prior to the merger”. This is said to be an example of “balancing done right”.

  • At this point, he argues for consumer welfare as a unit of measure that makes balancing at least conceptually possible, and that is easier to apply than a general welfare test. While this test has been criticised for unduly favouring the government (who is protecting the interest of consumers, and not the profits of the merging parties), this is unfounded. After all, the information regarding efficiencies is in the possession of the merger parties. If anything, the test may be too lenient – empirical post-merger studies of mergers that were close to being illegal, but were not prohibited, seem to reveal that many led to price increases.

Comment: Hovenkamp’s critique of balancing tests would seem to be applicable almost ipsis verbis to a number of European competition cases where economic effects are balanced against other values (e.g. Wouters or Albany). One can doubt whether antitrust is really only about “consumer welfare”, but I find it hard to disagree with his (longstanding) argument that mixing economic efficiencies with other normative goals risks legal uncertainty and would muddle the standard for identifying anticompetitive conduct.

Perhaps more interestingly for the topic of this blog – if hardly the focus of analysis of this specific paper – is his explanation of how the “rule of reason” or “effects-base assessments” are rarely as simple as comparing pro- and anti-competitive effects. In reality, these tests tend to contain a number of intermediate tests which are much easier to administer than a pure balancing of potential competitive effects. In other words – and with apologies to my economist friends – in practice legal tests are used either to simplify or to discretely ignore economic analysis. But – seeking to gain the favour of my economist friends – the reasons to do so are supported by economic analysis, as was discussed in the paper reviewed above.

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