We favor revision of the Horizontal Merger Guidelines.1 Our preliminary comments in this essay are based on a work in progress that we provisionally entitle, "Favoring Dynamic Competition over Static Competition." The eventual paper will address, in greater detail than we can explore here, how government enforcement agencies and courts would apply a more explicitly dynamic model of competition to merger analysis. We pose the following question: How must competition policy evolve if it is explicitly to favor Schumpeterian (dynamic) competition over neoclassical (static) competition? Of course, one also could ask that question with respect to intellectual property law and sector-specific regulation of network industries. We intend to do so in our eventual paper.
Schumpeterian competition is engendered by product and process innovation. Such competition does more than bring price competition-it tends to overturn the existing order. A framework for antitrust analysis that favors dynamic over static competition would place less weight on market share and concentration in the assessment of market power and more weight on assessing innovation and enterprise-level capabilities. By embedding recent developments in evolutionary economics and the behavioral theory of the firm into antitrust analysis, one can develop a more robust framework for antitrust economics. Such a framework is likely to ease remaining tensions between antitrust and intellectual property. That framework is also likely to reduce confidence in the traditional tools of antitrust economics when the business environment manifests rapid technological change.
It appears that, during the George W. Bush administration, the Antitrust Division ("the Division") gravitated toward a more dynamic approach to analysis. In the Oracle-PeopleSoft merger, the Division advocated a narrow market definition that excluded consideration of dynamic competition. The Division lost.2 By the time of the George Mason Law Review Antitrust Symposium in December 2008, Assistant Attorney General Thomas Barnett argued that innovation is the major source of consumer welfare gain.3 We agree. Innovation entails the creation of new demand curves for new products, which implies the creation of all the consumer welfare beneath those new demand curves. This accretion of consumer welfare is a bigger prize, roughly by an order of magnitude, than are the fruits from haggling over small Harberger deadweight loss triangles that arise from marginal changes in price along the extant demand curve of an established product.4 This theme informs the larger debate over Schumpeterian economics-which posits that competition is a dynamic process and firms can compete for the market and temporarily achieve a position of dominance. This view of competition is distinguished from static competition in which multiple firms compete simultaneously in the market, primarily on the basis of marginal differences in price as opposed to dramatic differences resulting from innovation and quality improvement.
However, the degree to which the Antitrust Division advocated the Schumpeterian vision of competition varied over time and across different doctrinal areas of antitrust law. It remains to be seen whether the Division's advocacy will change course during the Obama administration.
A complicating factor in the transformation of the law is the fact that the federal courts have, by thoroughly embracing the reasoning of the Horizontal Merger Guidelines as promulgated several decades ago by the Antitrust Division and the Federal Trade Commission ("FTC"), caused antitrust case law to coalesce-some might say ossify-around a decidedly static view of antitrust. Put differently, since 1980 the Division and the FTC successfully persuaded the courts to adopt a more explicitly economic approach, yet one that has a static view of competition.
After three decades, the result is not a mere policy preference that can be altered by speeches or statements of prosecutorial discretion by enforcement officials. Rather, the static view of competition is, by application of the imprimatur of the federal judiciary, the law. Curiously, while it relies on the Guidelines as authority, the D.C. Circuit continues-as recently as the FTC v. Whole Foods Market, Inc.5 decision-to assert that "the Merger Guidelines . . . 'are by no means to be considered binding on the court.'"6 All of us like to keep our options open, but this kind of statement reduces the intellectual prestige of the judiciary. We see no reason why anyone would find this ipse dixit to be credible.
To an economist-which is to say, one attuned to the information revealed through the evolutionary processes of institutions, including law- the legitimacy of the Merger Guidelines comes from their survival in the face of sustained attempts to refute them. Legitimacy does not arise from the fact that the Guidelines originated as expressions of bureaucratic authority. If the Merger Guidelines were perceived to be intellectually comparable to the guidelines of the Internal Revenue Service, we believe the D.C. Circuit and other federal courts would regard them quite differently.
Consequently, to change the law to embody a more dynamic view of competition will require a sustained intellectual effort by the enforcement agencies (as well as by scholars and practitioners) that, once more, engages the courts to reexamine antitrust law. A necessary but not sufficient condition for that effort is a public process by the Division and the FTC to revisit and restate the Horizontal Merger Guidelines in a manner that clarifies dynamic competition's role in antitrust analysis. Those revised guidelines (and complementary undertakings, such as generalized guidelines on market power and remedies) then will require leadership by the antitrust enforcement agencies to persuade the courts that antitrust doctrine should evolve accordingly. This process may take a decade or longer to accomplish, but that extended timetable is no reason to procrastinate.
J. Gregory Sidak is an Expert Economist in the fields of Antitrust, Telecommunications Regulation, Commercial and Investment Arbitration, and Intellectual Property Law. Prof. Sidak is the Ronald Coase Professor of Law & Economics at Tilburg University and the Chief Economic Expert at Criterion Economics in Washington, DC. The focus of his research has been regulation of network industries, antitrust policy, the Internet and electronic commerce, intellectual property, and constitutional law issues concerning economic regulation.
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