Use and Misuse of Empirical Methods in the Economics of Antitrust

Dennis Carlton, Mar 14, 2011

The application of economics to issues involving competition policy has always required a mixture of economic theory and empirical analysis. As any good lawyer knows, an economic analysis typically must rely on the facts of the industry under study to be credible. As a result, empirical analysis is often a crucial component of any economic analysis of competition issues. Of course, any empirical analysis has to be grounded in some theoretical structure. Over the last decades, there have been tremendous advances in both economic theory and empirical applications related to antitrust analysis. The law, although initially quite divorced from economics, has come to rely heavily on such analysis. In this paper, I discuss some of the theoretical and empirical strengths and weaknesses of the approaches to antitrust analysis, including a critique of some of the recent methods.

Section II discusses two of the most basic concepts in antitrust analysis, market definition and price cost margins, and highlights some relatively unrecognized subtleties that lead to common and serious errors. Section III discusses some insights that alter how we think about competition and emphasizes limitations of traditional analysis when competition involves something other than price. Section IV discusses some of the most recent advances in empirical economics including the estimation of demand systems. The main use of these advances has been in the area of mergers, especially in the use of merger simulation and the recent discussions in the United States about the use of an analysis called “upward pricing pressure” (“UPP”). The bottom line is that these new techniques can be helpful but should not displace some others without more research. Finally in Section V, I conclude with a discussion of how one could study the effectiveness of various methods of empirical analysis related to antitrust, but such a study would likely require the cooperation of competition authorities around the world.

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