Antitrust Beyond Competition: Market Failures, Total Welfare, and the Challenge of Intra-Market Second-Best Tradeoffs

Abstract

Should antitrust law ever sanction the accumulation of market power or permit other restraints of trade if such conduct would increase social welfare? This is the challenge raised by intramarket second-best tradeoffs. In the presence of multiple market failures, it is conceivable that mergers or other restraints traditionally viewed as anti-competitive may be welfare-enhancing. A social planner, given the mandate of maximizing total welfare, would permit such restraints. Could an antitrust judge come to the same result under a defensible application (or extension) of existing legal doctrine? This question highlights the tensions between an antitrust policy dedicated to preserving "competition" and an antitrust policy dedicated to maximizing total welfare.

This Article argues (1) that antitrust law should recognize a defense for private acts that restrain "competition" under the traditional antitrust analysis but advance total welfare, (2) that courts are competent to administer this defense, and (3) that the framework of existing antitrust statutes permits courts to recognize this defense. I suggest that to rebut a finding of illegality based upon a traditional presumption of anticompetitive effects, defendants should have to establish (1) that the challenged conduct is responsive to an identifiable market failure; (2) that the conduct produces a net increase in total welfare (static efficiency); (3) that the conduct will not substantially impair subsequent efforts to address the underlying market failure (dynamic efficiency); and (4) that there is not a less restrictive course of action consistent with the antitrust laws that could achieve the same static efficiency gain. This defense presupposes a total welfare standard of analysis.

Part I examines the theory of intramarket second-best analysis and outlines the parameters of the proposed defense. Part II examines the technical viability of the affirmative defense. Part III explores whether second-best tradeoffs and the total welfare standard underlying them can be reconciled with contemporary understandings of antitrust law and the institutional role of the courts.

JEL Classification: K21, L40