Harvard, Chicago and Transaction Cost Economics in Antitrust Analysis
Herbert J. Hovenkamp
University of Iowa - College of Law
November 10, 2010
Antitrust Bulletin, Vol. 55, p. 613, 2010
U Iowa Legal Studies Research Paper No. 10-35
Since Oliver Williamson published Markets and Hierarchies in 1975 transaction cost economics (TCE) has claimed an important place in antitrust, avoiding the extreme positions of the two once reigning schools of antitrust policy. At one extreme was the “structural” school, which saw market structure as the principal determinant of poor economic performance. At the other extreme was the Chicago School, which also saw the economic landscape in terms of competition and monopoly, but found monopoly only infrequently and denied that a monopolist could “leverage” its power into related markets. Since the 1970s both the structural and Chicago positions have moved toward the center, partly as a result of TCE. For example, already in 1978 Areeda and Turner produced the first volumes of the Antitrust Law treatise, which completely repudiated the leverage theory and abandoned the structural and leveraging positions on vertical integration.
A distinctive feature of TCE is that transactions occur with a limited range of partners depending on limits of knowledge and previous technological commitment, or asset specificity. The question of who trades is at least as important as the terms of trading. TCE analysis of contractual restraints also recognizes that one threat to consumers is double marginalization, which can occur when market power is held by separate firms with complementary outputs. Antitrust is relevant in two ways. First, private arrangements can minimize double marginalization, justifying practices such as tying in markets characterized by single firm dominance or product differentiation. Both tying and bundled discounts operate as a kind of “reverse leveraging,” benefiting consumers. Second, transaction costs sometimes explain why private contracting is inadequate for addressing double marginalization problems and thus justify antitrust intervention.
TCE has also reinvigorated the link between conduct and exclusion, as illustrated by the Williamson/Areeda-Turner dispute over predatory pricing, and the rise of the antitrust literature on raising rivals costs. The RRC literature has attempted to restore a meaningful conception of anticompetitive exclusion without a return to the excesses of the structuralist school.
Nevertheless, one comparative advantage of both structuralism and the Chicago School was their simplicity. For the structuralists concentration explained everything and inferences were drawn in favor of condemnation. Within Chicago School analysis the impossibility of leveraging and the mobility of resources explained everything and inferences were drawn in favor of exculpation. TCE analysis is more specific to the situation, however, demanding close scrutiny when significant market power is either present or realistically threatened.
Number of Pages in PDF File: 36
Keywords: antitrust, law and economics, vertical restraints, transaction cost economics, williamson, coase, bilateral monopoly, double marginalization
JEL Classification: A11, B2, B41, D02, D21, D23, K0, K21, K40, L14, L20, L40, L42Accepted Paper Series
Date posted: April 19, 2010 ; Last revised: December 6, 2010
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