By: Michael L. Katz (Pro Market)
eginning in the 1970s, economics has played an increasingly large and explicit role in US antitrust decision making. This trend began under the influence of the Chicago School, which used price theory to argue that prevailing antitrust enforcement was far too interventionist. And it has continued even as other scholars—often making use of game theory—have pushed back on many of the claims made by the Chicago School.
Many people believe that the joint ascent of economics and the consumer welfare standard—which critics characterize as focusing on short-term price effects, although many proponents take a broader view—has led to a fall in the vigor of antitrust enforcement. While proponents of this view, such as Lina Khan, the current Chair of the US Federal Trade Commission, and Tim Wu of the National Economic Council, have primarily focused on attacking the consumer welfare standard, they have also implicitly and explicitly called for economics to play a more limited role in antitrust. Indeed, populist antitrust advocate Matt Stoller has asserted that “[t]he demand for quantitative models—which are often garbage and yet trusted by judges trained to believe in economics expertise—is just a smokescreen for replacing the rule of law with the rule of economists.”
Abandoning economics would be a mistake. Economics has a valuable role to play in antitrust enforcement, whether or not the courts continue to apply the consumer welfare standard. Economics does not tell us what the goals of antitrust policy should be. But whatever the goals, economics provides a valuable set of tools for predicting how various policy choices will affect market participants’ conduct and how that conduct will affect market outcomes and the degree to which the goals of antitrust will be attained.
This is not to say that there are no problems with the current use of economics in antitrust—there are. Courts, particularly at appellate levels, often base their antitrust decisions on unfounded empirical claims or the misapplication and misinterpretation of economics. For example, based on pronouncements regarding the economics of competition made by the US Supreme Court in Ohio v. American Express, the judge in US v. Sabre Corp., et al. reached the nonsensical conclusion that, even though the merging parties competed “as a matter of real-world economic reality,” the firms did “not compete in a relevant market.” In the Ohio opinion itself, the court failed to apply even the most basic empirical techniques when it observed that credit-card transactions volume has risen over the course of many years and concluded that American Express’s business model had spurred competition and increased transactions quantities—even though the Court made no attempt to determine what volume would have been absent American Express’s challenged conduct…