Antitrust law and Market Structure

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Antitrust law and Market Structure

Antitrust law, practice, and policy are the outcome of a long and productive interdisciplinary collaboration between law and economics. This topic addresses an essential perspective of that collaboration: the practice of courts can and should produce two forms of education in experimental industrial organization economics, as the academic discipline has emerged over the few decades. The examples, related to the practices, concentrate on the US experience, which is known best. With confidence, it can be stated that the overall considerations discussed implement to any competition policy administration.

 

The first body of economic knowledge discussion includes techniques of differentiating among alternative analyses for market results or firm conduct. It is termed as the obstacle of ‘‘identification’’ in experimental economics. Descriptions of how courts can implement what economists acquired about identification to the problems of establishing markets and discovering whether market power has been utilized are made. The same analytic issues appear despite whether the evidence on the following ideas is quantitative or qualitative. The second consistent body of economic knowledge originates from the empirical economics research literature. It is taken as a complex. That literature demonstrates that inequalities among industries are necessary, making the sector a suitable unit of analysis for labeling economic concerns associated with competition policy. A comparable outcome reached a long time back in antitrust law when market definition grew central to the intelligent critique. However, as explained, the research literature goes further in a process which has not yet been fully recognized in antitrust: it suggests generalizations over closely related industries which can be exploited to help assess proof and settle cases. We conclude by considering ways of enhancing the institutional range of the judicial system to utilize the following two concepts of economic learning. Moreover, these include a possible limited role for neutral financial specialists in prosecution and a role for the antitrust enforcement agencies in recognizing and classifying appropriate generalizations about industries from the empirical economic literature to make that knowledge accessible to courts.

 

More than the most legal fields, antitrust law looks like a boundary of economics. Today, competition policy decision-makers rely exceedingly on economic theories, evidence, and philosophy. Economic terms like marginal cost, oligopoly behavior, and elasticity of demand have grown part of the antitrust language. The essence of economics is most apparent when antitrust cases are resolved in litigation. In picking individual cases, courts routinely engage a comprehensive economic analysis into the creation of competition and the effect of stimulated practices on that particular competition. It is most apparent in merger analysis, where modern examples are diverse.

 

Economic evidence, reasoning, and, concepts are fundamental to modern antitrust analysis outside the merger context as well. In antitrust litigation as well as enforcement agency investigations, the expansion, and analysis of proof about conditions of entry and industry market power, and about the likely impacts of a merger or business practice, are essential practices in applied economics. Economic reasoning also strikes a significant role in constructing legal rules. When economists invent new tools and methodological strategies, the antitrust department pays great attention. For instance, as advances in computerization have promoted the collection and manipulation of data, and as new observational methods of distinguishing and measuring market power have been developed, practical economic tools have frequently been applied to estimate market power in antitrust litigation and implementation. Just as antitrust infused with economics, industrial organization economics— the economic fields most closely associated with antitrust— turned its regard to the legal system. Many of the problems and issues marked in the research literature on industrial organization economists, over the past few decades, have been proposed or enclosed by antitrust proceedings.

 

In one extensively used undergraduate industrial organization text, for instance, the index listing legal cases most including antitrust goes on for three pages. Moreover, many academic economists undertake litigation-related consulting projects involving antitrust issues in the industrial organization field.  Most modern competition law regimes have economic goals, such as promoting economic efficiency or consumer welfare, in whole or substantial part. An emphasis on economic aims unavoidably brings economics to sustain leading courts to frame antitrust issues in terms of economic concepts. For example, competitive effects, entry, market power, and efficiencies, and to interpret the detailed facts involving a particular industry and specific challenged practices through the application of the logical framework is supplied by economics. Courts have become analytically severe about the effects of the challenged conduct on the competition: classifying the market or markets in which competition has or will likely cripple and the device by which the questioned regulation does so. In US antitrust law, the application of an economic framework was supported by the development of the ‘‘antitrust injury’’ theory, which requires plaintiffs in many cases to explain how their damage flows from the antitrust violation they have claimed. This doctrine executes the essential analytical analysis from economics between protecting competition and merely protecting competitors. It secures that plaintiffs may not recover damages simply because they have been harmed.

 

The antitrust investigation also displays the interests of the legal system, at times leading judges to approach issues in ways that differ from how economists might act on their own. For example, courts may undertake the step of defining markets even in settings where the competitive influences of business conduct can be regulated straightly; settings where economists might discover market definition irrelevant. Economists usually prefer to bring all the available information to sustain, whereas at times courts choose truncated analyses that eliminate specific relevant inquiries to reduce the costs of controlling the legal system and to specify clear and simple precepts that give more direction to courts and firms. The legal system will not fine-tune environmental industries to obtain specific economic goals through regulatory purposes, as some economists have advised. Antitrust policy accurately rejects common suggestions that courts or regulators try to determine a particular price be obtained, a specific competitor come in, or that an appropriate industry structure is efficient. The legal system – instead, to the extent possible – believes the competitive mechanism to attain economic goals. For instance, merger law does not endeavor to identify and create the most efficient industry structure. It solely attempts to discover whether a particular merger in an industry would hurt competition.

Relating Price to Market Structure

The apparent magnitude of demand substitution in the event of a price rise is sometimes evaluated quantitatively, using a modified type of identifying experiment, which involves changes in the market structure. One example of such an investigation stands if there is a cartel that

was an influence for only a given period or only in particular places. A similar identifying experiment can be used if the market structure differs across comparable locations or changes over time. If prices rise when the number of firms selling the products in a candidate market drop, then it may be sensible to assume that a hypothetical monopolist of those products would find it profitable to raise the price at locations where the number of firms has not declined. This approach was employed in the Staples litigation to interpret market definition and the likelihood of one-sided competitive effects of the merger.

A correlation of prices across markets, which are thought to be alike except for differences in market structure, likewise does not invariably need complex data analysis. For example, the court opinion in Staples assesses this evidence-based solely on party pricing documents, without relating to the econometric evidence in the record interpreting pricing orderly. The classification problem in these survey contexts, whether the evidence is qualitative or quantitative, would be approached with an argument as to why the reported buyer responses are reliable guides to future buyer conduct under the conditions likely then to prevail in the marketplace. The purpose of reasonableness standards in antitrust decision-making and the modern empirical literature in industrial organization economics have an essential commonality: both treat the industry as the appropriate unit of observation. Both fields acknowledge that a one-size-fits-all approach to interpreting business strategy won’t do since so much disparity in outcomes awakes from factors specific to each industry. Both antitrust law and industrial organization economics have come to recognize that related industries often are adequately similar to present useful guidance. Many of the same legal and economic questions arise, for example, during understanding firm behavior in markets which products are sold at retail, in markets for high-tech products sold in aftermarkets, in markets for primary metals with cyclical demand, and in any number of similar categories.

 

One significant difficulty for both antitrust analysis and empirical industrial organization economics going forward is to utilize similarities among related industries. Focused inquiry involving the industry besides the firms under study is not acknowledged in antitrust to the extent it is perceived in economics. For instance, it remains broadly known that product-differentiated industries as a class present specific general analytical problems and behaviors. However, several economists would argue that any particular product-differentiated industry could be examined for market power, competitive effects, or demand substitution without industry-specific analysis. What the research literature has done is to identify a set of industries in which broadly the same tool kit can be used to examine market power. Within this set of industries, an inquiry that looks only at demand substitution to address the market definition and identify market power, ignoring supply-side factors like costs and strategic conduct, is in general likely to be mainly right.

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