Analyzing Monopoly Power Ex Ante

Abstract:     
The law governing monopolization is in dire need of correction. Antitrust rules governing unilateral behavior can be characterized by intellectual incoherence and logical vacuity. The shortcoming has arisen from a judicial inability to espouse qualitative tests that logically distinguish objectionable from benign instances of unilateral conduct. Failure to highlight a single definitional metric by which to dichotomize the meaning of pro- and anti-competitive behavior has exacerbated the problem. Yet, despite decades of academic and judicial effort, no satisfactory solution has emerged. In seeking to accomplish two goals, this article first advocates the use of aggregate welfare as a guiding narrative to section 2 enforcement. Introducing such a qualitative standard would inject much-needed definitional clarity into the conceptual distinctions between “desirable” and “objectionable” monopolization. Having addressed the issues underlying the normative case for such a lodestar, the article seeks to tackle a far more onerous challenge. This involves articulating a rule that would enable jurists coherently and correctly to sanction desirable unilateral conduct. While the subjectivity that so ubiquitously plagues jurisprudence in the section 2 arena is unlikely to dissipate even in the presence of the most perspicacious test, the article presents a novel solution by which to bypass this problem. It does so by turning to the sole element of the Grinnell test that is conducive to relatively objective application, namely, the requirement of monopoly power. The courts currently adopt an ex post approach to market power analysis in actual monopolization cases, considering a defendant’s economic might at the time of suit. If sufficient power is demonstrated, the courts proceed to the subjective, and hence probabilistic, constituent of the test, pursuant to which the desirability of the monopoly is assessed according to the vacuous stan dards referenced above.

It is inevitable in this context that some desirable business conduct will be both erroneously punished and deterred. Given the increasing importance of new economy markets displaying powerful network effects and a concomitant predisposition to monopolization, the incidence of Type I errors in antitrust enforcement is likely to proliferate. To insulate desirable behavior from judicial scrutiny under section 2, an ex ante approach to market power analysis should be adopted. Under this view, a defendant would have its power assessed as of the initiation of the practice alleged to have led to the monopoly in question. Such a rule, heretofore unconsidered by either the judiciary or academy, would largely remove desirable unilateral conduct from the stochastic oversight of section 2.

Number of Pages in PDF File: 54

Accepted Paper Series