Antitrust Law; The Antitrust Penalties

Antitrust Law: An Economic Perspective, by Richard A. Posner, Chicago: University of Chicago Press, 1976, 262 pp., $15

The Antitrust Penalties: A Study in Law and Economics, by Kenneth G. Elzinga and William Breit, New Haven: Yale University Press, 1976, 160 pp., $10

If you're for good ol' capitalism, surely you're for antitrust laws. No? That's a violation of laissez faire? Then you're obviously not for competition.…And so the argument goes. What in the interplay between economics and legal history supports such confusion?

The issues addressed in the two books under consideration are complementary. Posner reviews the types of business activity that have been subjected to antitrust prosecution and identifies the practices that should have been declared illegal under the assumption that the goal of antitrust law is to promote competition and efficiency. Elzinga and Breit presume that illegal activities already have been identified and investigate the choice of efficient means of prosecuting and penalizing occurrences of those activities. In their view, "the most rational criteria by which antitrust cases might be selected are useless if the violation is neither deterred nor remedied." Such a neat division of the subject matter by anyone other than benign academics would provide the Justice Department with clear evidence of cartel behavior!

Posner's task is more ambitious, and his analysis is more rigorous, although noneconomists would find sections of the book tedious, especially Chapter 4, "Price Fixing and the Oligopoly Problem." His views on implicit collusive pricing by oligopolists have generated controversy in academic journals. Perhaps a nonprotagonist could acquaint lay readers with the controversy without feeling obliged to consider the debate in as much detail as Posner does.

Where Posner is successful is in his demonstration of "the extraordinary unwillingness or inability of most Supreme Court justices to apply economics or any other body of systematic thinking to antitrust problems." His discussion of the court's decisions on price fixing, monopoly pricing, and predatory pricing reveals the dilemma confronting the businessman when he sets a price for his product. To paraphrase the tale in the "Incredible Bread Machine," if the price is too high, monopoly, if the price is too low, unfair competition; if the price is the same as his rivals' prices, collusion.

The confusion results from failure to distinguish between protecting competition and protecting inefficient producers from competition. Posner cites the Supreme Court's view of the distinction in the Brown Shoe case:

Of course, some of the results of large integrated or chain operations are beneficial to consumers. Their expansion is not rendered unlawful by the mere fact that small independent stores may be adversely affected. It is competition, not competitors, which the [Sherman Antitrust] Act protects. But we cannot fail to recognize Congress' desire to promote competition through the protection of viable, small, locally owned businesses. Congress appreciated that occasional higher costs and prices might result from the maintenance of fragmented industries and markets. It resolved these competing considerations in favor of decentralization. We must give effect to that decision.

It would be interesting to know how the Supreme Court became so well informed of Congress' intent. As Posner argues, if Congress does have a taste for small, albeit inefficient, firms, let Congress incorporate that into legislation specifically (and let congressmen shop there, adds a colleague of mine). The approach endorsed by the Court uses the antitrust laws as camouflage.

Posner's analysis leads him to propose several reforms designed to ensure efficient use of resources devoted to antitrust enforcement. The purposes of antitrust law would be satisfied by substituting "for the numerous substantive provisions of antitrust law a simple prohibition against agreements, explicit or tacit, that unreasonably restrict competition." It is, he concedes, unlikely that such simplification will result from congressional action. Since most antitrust law is the result of court decisions, however, the courts themselves can affect most of the changes. "What is required is judicial recognition that many of the existing judge-made rules of antitrust are inconsistent with the fundamental, and fundamentally economic, objectives of the antitrust laws." Posner also proposes a radical alteration in the conduct of antitrust trials in order to reduce the time and paperwork associated with these trials. It is surprising that this does not include charging the parties for the use of the court system.

Elzinga and Breit provide some entertaining light reading in their early chapters, particularly in Chapter 2, "The Rejected Penalties: A Historical Survey." Penalties originally proposed for violations of the Sherman Act range from denying violators the use of the federal courts to a fine for not keeping a copy of the act prominently posted. Denying violators access to the federal postal system was contemplated also—perhaps evidence of the efficiency of the postal services then. An interesting surviving relic of these penalties can be found in the Panama Canal Act, which prohibited canal access to ships owned by violators of antitrust law. Not surprisingly, remark Elzinga and Breit, this has "hardly become the mainstay of vigorous antitrust enforcement." Elzinga and Breit reveal that, when the first antitrust statutes were considered, some legislators expressed concern about the constitutionality of the proposed interference with market activity. Such concern, needless to say, is no longer prominent in congressional debates on current legislation.

Violators of antitrust laws are now subject to three types of penalty: fines for corporations together with fines and jail sentences for corporate executives, forced sale of segments of the corporation (delightfully dubbed "corporate surgery"), and private damage suits. Elzinga and Breit provide careful analysis of why the available penalties are either inefficient or ineffective. The maximum fine is trivial for many corporations, and the fines imposed are usually significantly below the maximum. Jail sentences for violators are seldom imposed, and in fact they are frequently not sought by the prosecution in cases where they are available. More to the point, they are socially inefficient. Why should taxpayers provide room and board (and perhaps golf courses) for corporate executives who are alleged to have deceived consumers already? Corporate surgery results in confusion at best; it may further compound the problem. Even if we accept the ability of judges and lawyers to make and interpret law, we need have little respect for their ability to dissect corporations in any fashion other than a random one. Private damage suits result in crowded court schedules and out-of-court settlements. There is little evidence about the size of such settlements, their role as a deterrent, and the role of private attorneys in initiating and pursuing those suits.

Elzinga and Breit argue carefully that, in principle, some fine is equivalent to any other penalty. Since economic efficiency implies that the optimum fine depends on both the damages caused by the violation and the probability of detecting the offense, setting the level of the payment is a complex matter. It is disappointing that, following such detailed analysis of the problem, the level of the fine they recommend is chosen arbitrarily. They suggest a fine of 25 percent of the firm's pretax profits for each year that the offense was committed and admit that "the 25 percent figure is not sacrosanct, but it does represent our judgment of a penalty that would deter in an evenhanded fashion." It is difficult to believe that their judgment ensures the efficient solution that they promised to deliver.

On a more general level, both of these books contain a basic inconsistency common to many prescriptions for improving government performance. Consider the actors in the antitrust farce. On the one hand, we have the businessmen, each of whom is a cunning seeker of ways, legal or illegal, moral or immoral, to improve his lot in society. On the other hand are their adversaries: judges, politicians, and bureaucrats. Some of these—the judges—may have difficulty applying any "body of systematic thinking," but almost all of the businessman's adversaries are altruists, unselfishly seeking to improve the lot of society as a whole. Granted, selection and survival biases may result in employees of private enterprise having characteristics different from, even less pure than, those of employees of government. But should we base prescriptions for improved government action on such differences? To do so smacks more than a little of "what we need is, not less government, but better people in government."

None of this suggests that Posner or Elzinga and Breit are unaware of the incentives of the bureaucrats and politicians. For example, Posner reveals that most price-fixing cases brought by the government allege that the defendants conspired in an attempt to fix prices. Whether those attempts were successful is almost incidental. Why? Because lawyers and judges have developed a set of rules governing the proof of conspiracy, and thus those cases are easy to argue in court! Elzinga and Breit recognize that, as a result of the incentives of lawyers, little attention is paid to the outcome of corporate supervision and surgery ordered by the courts. Why? Because the lawyers' future promotion and careers depend heavily on their courtroom successes, not on their ability to supervise wayward enterprises.

Both books contain prescriptions based on arguments that almost entirely ignore the incentives of judges, politicians, and bureaucrats to interpret and enforce the law for purposes that suit them rather than society. Until we have a theory about how a particular law will be interpreted and enforced (as opposed to how it should be), we have little basis for deciding whether we support or oppose that law. What is the proper role and scope of antitrust law in a free society? Neither of these books provides the answer because neither contains a political theory of antitrust law. Both books do, however, provide sound economic discussion of issues frequently obscured by emotion and rhetoric. They warrant attention by anyone who wishes to determine what constitutes an economic approach to antitrust law.

Mr. Leftwich is nearing completion of his Ph.D. at the Graduate School of Management, University of Rochester.