There is no question that antitrust policy, at any time, is highly influenced by the prevailing economic thinking. Equally unquestionable is the fact that economic thinking is highly influenced by one’s political philosophy. With these principles established, the current debate over the purpose of the antitrust laws, and thus the standards they ought to employ, seems an inevitable conclusion to the shifting economic and political tides that have taken place over the last several decades. In this installment in our series, The antitrust revolution is coming? The antitrust revolution is here?, we discuss the continued evolution of antitrust through the 1990s and 2000s and the arguments for and against retaining “consumer welfare” as the prime or sole objective of the antitrust laws.

The rise of the Chicago School

Antitrust policy in the 1950s, 1960s and 1970s continued to be dominated by the “Harvard School” of economic thought. This school of thought took an interventionist approach to antitrust policy and sought to create more bright-line rules against anticompetitive conduct. “Market power” was viewed skeptically, almost irrespective of how that power was obtained.

But during the 1960s and 1970s, a new school of thought – the “Chicago School” – began to emerge. This approach believed in the supremacy of the “market” and its ability to self-correct. It assumed that people are rational actors and will always seek to maximize their own self-interest. Additionally, market efficiency was seen as something that must be protected. The Chicago School therefore advocated for a laissez-faire economy and markets free of government intervention because government interference will lead to less, rather than more, efficient markets. As a corollary, the Chicago School saw no evil in market power per se as dominant firms may be more efficient. And as long as there was some competition, consumers will enjoy the benefits of both efficient markets and competition.

While this school of thought was rising through the ranks of academics and being adopted by public officials, the country was undergoing major political changes. It is no understatement to call the 1970s a tumultuous time. Economically, it became synonymous with “stagflation” – an economy that is experiencing a simultaneous increase in inflation and stagnation of economic output. Toward the end of the decade, people felt government was the problem, not the solution. This, of course, dovetailed perfectly with the Chicago School’s way of thinking.

As a result, “big” was no longer bad; rather, inefficiency was the evil from which we need to be protected. As long as the market was allowed to work, even monopolies would not endure as others entered the fray and competed away any supra-competitive profits. Perhaps most importantly, non-economic goals were no longer seen as being within the purview of antitrust. Gone was the view that the antitrust laws existed to eradicate President Franklin D. Roosevelt’s notion of an “industrial dictatorship,” and a market with numerous small competitors was not seen as more desirous than a market with only a handful of large competitors. Indeed, many felt the latter was better because scale efficiencies allowed them to operate at lower cost, allowing those savings to be passed on to the consumer in the form of lower prices and better services.

The consumer welfare standard

The antitrust laws describe conduct that is unlawful but does not set forth the criteria for assessing when that conduct becomes unlawful. For instance, over 100 years ago the U.S. Supreme Court recognized that Section 1 of the Sherman Act did not literally mean to make every contract in restraint of trade unlawful because every contract, by definition, is a restraint of trade. Thus was born the “rule of reason,” where a particular conduct’s anticompetitive effects are measured against its procompetitive benefits. But therein lies the rub. What is anticompetitive? What is procompetitive? What is the standard by which conduct will be measured?

Under the Chicago School, that standard became “consumer welfare,” a term coined by the late Judge Robert Bork, who was a leading proponent of the Chicago School. As it has come to be employed, consumer welfare views the purpose of the antitrust laws as ensuring that prices are as low as possible. As the theory goes, low prices mean output is maximized, resources are being allocated efficiently and competition is thriving. And because the Chicago School saw markets as self-correcting, not every conduct that increased prices would be unlawful. Rather, only the most egregious forms of anticompetitive conduct – e.g., price-fixing, market division – that distorts the functions of the market and prevents market self-correction would be condemned. Additionally, if the conduct under examination produced economic efficiencies, those efficiencies must be balanced against the higher prices to determine whether the net effect on welfare was positive or negative. As a result, many believe that enforcers took a benign view of conduct that helped firms grow larger (such as mergers) because: a) the market will compete away any supra-competitive prices; and b) large firms tend to be more efficient and those efficiencies will either translate to lower prices or outweigh the harm to welfare caused by any increase in prices.

Interestingly, how Judge Bork used the term “consumer welfare” and how that term has been employed differ fairly significantly. Many antitrust scholars have pointed out that Judge Bork really proposed analyzing a particular activity’s effect on total welfare – namely, the effects on both the consumer and producer. As we have pointed out, however, as applied to antitrust the term focuses almost exclusively on the consumer and almost exclusively on the prices the consumer paid. The confusion on this point stems from the fact that Judge Bork used “perfect competition” as the model for his starting point, such that consumer and general welfare are both maximized, resulting in no difference between them. (Note: We apologize for transporting our readers back to Microeconomics 101)

Post-Chicago School

In the 1990s, antitrust policy shifted towards the so-called post-Chicago School approach. The basic underpinnings of the Chicago School view on economics and antitrust remained, including a focus on consumer welfare, but incorporated more strategic thinking and realism into the approach. The post-Chicago School no longer assumed perfect competition as a starting point and understood that free markets are affected by social, political and economic realities. Low prices and efficiencies remain chief objectives, but concerns about the acquisition and results of market power also were taken into account. From an analytical perspective, enforcers sought to uncover market imperfections (via behaviorism, game theory and modeling) instead of assuming those imperfections away. And so the antitrust pendulum, which began the 20th Century with progressive ideals, then swung toward its polar opposite, conservative economics, at the close of 1990s, had now begun to work its way back to the other extreme in the 21st century.

New Brandeisians

The pendulum continues back to where it began. Beginning in the 2010s, academics started to question the foundations of the Chicago School and its approach to antitrust enforcement. Aligned with progressive political thought, the New Brandeisians are concerned about growing market concentration and power and what they perceive as lax antitrust enforcement. They seek to do away with consumer welfare as an antitrust standard and re-establish other political considerations as a legitimate objective for the antitrust laws. As a Biden-Sanders Unity Task Force recommendation stated prior to the 2020 election, they sought to “[c]harge antitrust regulators with systematically incorporating broader criteria into their analytical considerations, including in particular the impact of corporate consolidation on the labor market, underserved communities, and racial equity.”

The Chicago School’s approach to antitrust enforcement and analysis was rooted in a belief that courts and agencies were ineffective regulators of competitive conduct. This basis has led to the popular belief that the Chicago School has “systematically relaxed antitrust law enforcement” and that tougher antitrust legislation and enforcement was needed, a key rallying cry for New Brandeisians. As the late U.S. Supreme Court Justice Louis Brandeis once said: “I have considered and do consider, that the proposition that mere bigness cannot be an offense against society is false, because I believe that our society, which rests upon democracy, cannot endure under such conditions.” True to their name, New Brandeisians believe that recent administrations have not sufficiently enforced the antitrust laws and have allowed the country’s economy to be dominated by fewer firms with greater market power.

Antitrust enforcement – too little, too much or just right?

With all due respect to Goldilocks and her quest for the prefect bowl of porridge, whether there has been too little or too much antitrust enforcement in the last couple of decades depends on one’s perspective. Early in March 2021, Senate Democrats, led by Sen. Amy Klobuchar (D-MN), introduced the Competition and Antitrust Law Enforcement Reform Act. This legislation reflects the popular belief that antitrust laws are structurally weak and allow for unregulated and uninvestigated mergers. In support of this belief, one study found that in the last two decades, “over 75% of U.S. industries have experienced an increase in concentration levels.” That study goes on to conclude that: “We find that firms in industries with the largest increases in product market concentration have enjoyed higher profit margins and more profitable M&A deals. At the same time, we do not find evidence of a significant increase in operational efficiency, which suggests that market power is becoming an important source of value.”

On the other side of the spectrum, another study found that data supports the notion that the Federal Trade Commission (FTC) and Department of Justice (DOJ) are more likely to challenge proposed mergers, at least during the 1979-2017 timeframe.  Enforcement data that was evaluated to form this conclusion includes formal challenges to mergers, and enforcement indicators such as consent decrees following an intent to challenge. This data points to a fairly consistent merger policy and agency enforcement.

While the sheer number of merger enforcements appears to grow rapidly in 1994 and peak in 1998, coinciding with the Clinton Administration, the ratio of annual merger enforcement challenges under the Clayton Act from 1997 to 2017 remains between 1.0 percent to 4.5 percent. The lower percentages of merger challenges expectedly coincide with economic recessions and other global crises. Contrary to the popular view emphasizing politicization of agencies, there appears to be little difference between merger enforcement intensity even amid different political administrations and changing political affiliations of the FTC and DOJ heads.

Of course, there are limits to this data. And it may be the case that numbers do not tell the whole story. The types of mergers and acquisitions that were undertaken in the 2000s may have been more strategic in nature and thus more capable of allowing whole industries to be dominated by just a few firms. In that case, the lack of a corresponding increase in merger enforcement may, indeed, translate into less enforcement.

The antitrust revolution

Whether or not enforcement was sufficiently rigorous in the past, and whether or not the antitrust laws need boosting, there is no questioning the fact that we are on the verge of an antitrust revolution. In our upcoming articles, we will spell out what that revolution is starting to look like and how that may play out in various industries.

Stay tuned.

Antitrust Revolution Series