On the Utility of Surrogates for Rule of Reason Cases

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Kevin Caves, Hal Singer, May 15, 2015

We need directions. Without them, we would be lost. Ditto for rules on how firms with market power may behave in the marketplace. How can I set prices inside and outside this bundle without running afoul of the antitrust laws? How can I settle a lawsuit with a generic firm that potentially infringed on my patent? Under what conditions may I establish a minimum retail price for my distributors?

In some circumstances, the law provides a “surrogate” to be used in conjunction with a full-blown rule-of-reason analysis: If A is greater than B, then, all else equal, the likelihood of an antitrust violation increases—at least relative to a world in which A does not exceed B. As the name suggests, a surrogate allows the fact finder to make an inference about market power or anticompetitive effects based on the results of the test.

Most (if not all) surrogates generate at least some false positives and some false negatives. But so long as a surrogate merely shifts the needle—as opposed to triggering automatic violations (or safe harbors)—it provides utility to courts (by separating meritless cases from meritorious ones), to industry participants (by providing general guidance on how to behave), and to attorneys general and antitrust agencies (by offering guidance on the evidence necessary to prosecute a case). No surrogate will get it right all the time, but such instruments remain useful as long as the outcome of the test is sufficiently correlated with the economically correct answer.