This paper – which can be found here – argues that antitrust, when fostering consumer welfare, should develop a mechanism to address excessive prices.
It is held that, while antitrust says its goal is to promote welfare, in reality it has been devoted merely to promoting competition that can increase consumer welfare: “There is a gap, therefore, between antitrust’s means of prohibiting collusion and exclusion, but not high prices, and its end of promoting consumer welfare”. If the goal to foster consumer welfare is to be taken seriously, then forcing companies with market power to adopt lower prices: “is fully in line with the goal of maximizing welfare in the economic sense that antitrust has embraced starting in the 1970s under the influence of the Chicago School.” (Yes, I can hear Robert Bork rolling in his grave).
The author advances his proposal sequentially. It begins by discussing the gap between antitrust ends and means that opened up when antitrust replaced its old goal of promoting competition with the goal of maximizing welfare in the economic sense. In chapter II, the author argues that the logical consequence of law and economics and antitrust’s focus on maximizing social welfare is to impose a duty on all actors to maximize social welfare. This would seem to require these actors to adopt prices that are just high enough to cover their costs, including just enough profit to make them willing to remain in the market selling their wares. It is argued (somewhat implausibly, to my mind) that: (i) cost-based pricing allows firms access to the profits they need for investment and the rewards they need to invest; (ii) since the cost of research and development is an economic cost, the seller may charge a price high enough to ensure that it is worthwhile for them to make that investment. Chapter III explains how the move in the 1970’s from a focus on promoting competition to promoting consumer welfare: “opened up a gap between ends and means because condemning practices that injure competition does not always maximize welfare.” To fill the gap, antitrust shifted, starting in the 1970s, from per se rules to a rules of reason. Yet, antitrust failed to evolve as regards claims for monopolization – at least in the US, where monopolists will not violate the antitrust laws merely by charging a monopoly price.
Since the author considers that the main obstacles to addressing the “excessive pricing” gap are not normative but purely institutional , Chapter IV reviews judicial practice in relation to prices. In order to address potential objections that courts have neither the expertise nor the resources to engage in continuing supervision of prices charged, he suggests it is important to distinguish between judging whether prices are too high and determining what the correct lower price should be. In his view, courts judge whether prices are too high all the time, both in antitrust cases and in other areas of the law. For example, in civil damages cases a “court must choose a level of damages that equals the value that the plaintiff would have derived from the item if they had been allowed to use it, but no higher level”. Other areas where courts set prices concern restitution for mistaken improvements and the setting of licensing prices in FRAND disputes. Further, courts often review whether prices are set too high or too low by regulatory agencies. Lastly, courts already set acceptable price levels in antitrust cases, particularly when identifying constructive refusals to deal, when dealing with predatory pricing, and when attributing antitrust damages (and, arguably, when defining markets or identifying market power).
In Chapter V it is suggested that, in situations of excessive prices without exclusionary effects, courts should only be able to impose nominal damages (i.e. USD 1) on offenders. Such a sanction would effectively rely on the efficacy of naming and shaming to ensure the effectiveness of antitrust. It is argued that: (i) even if the rule has only a modest effect on prices, it can have a large effect on welfare. In order to demonstrate this, the author relies on research that purports to show that the first reduction in price from monopoly levels brings about the greatest improvement in welfare, since the first buyers to be priced back into the market are those who place the highest value on the good; (ii) the rule is likely to impose a minimal burden on courts because the absence of a meaningful judicial remedy will discourage all but the most important cases from being pleaded. This reduces the possibility of false positives which, given potential welfare gains, makes the proposed rule worthwhile.
In a way, the paper tries to transplant European excessive pricing practices into the US, while limiting the consequences of potential errors that have plagued (and, until recently, virtually killed) European enforcement against excessive pricing. Nonetheless, the proposal is naturally US centric – and, while arguing specifically to not want to return to the days when the structural approach advocated by the Harvard School was the undisputed lord of the antitrust plains, the mere fact that the author feels the need to distance himself from this approach tells its own story.
This is ultimately a variation of attempts to expand the reach of antitrust and curtail the benefits that companies obtain purely from being “big”. However, it does not address the practical difficulties of setting prices on the basis of costs; and it ignores the practical (and very serious) differences between identifying amounts owed to someone and determining whether prices are excessive. Perhaps more importantly, the paper acknowledges but breezily dismisses concerns that its proposals may lead to firms curtailing research and investment – because shaming will not prove a very powerful sanction (even though it is held throughout the paper that shaming may be quite effective).
Nonetheless, the paper has its own logic – and implicitly makes a very important point: imposing an obligation to maximise (consumer) welfare does not fit perfectly with existing competition law provisions (some of which were drafted before such a concept even entered the mainstream). If it goes against our instincts to limit companies’ ability to set prices, maybe we should recognise that there is no logical reason why protecting private autonomy (and free markets) will maximise consumer welfare. Whether this actually occurs in practice over the long term is ultimately an empirical question, regardless of how ideologically charged such a question may be.