Enforcing Competition Law in the Presence of Legal Uncertainty: An Economist's Perspective

Abstract

The public enforcement of competition law is a daunting task which has kept generations of lawyers busy. Over the last few decades, many economists have joined their ranks, and it is now a common phenomenon that economists and lawyers interact in testing theories of harm, bringing evidence and crafting legal documents. It seems fair to say that, today, there is a consensus that the proper enforcement of competition law requires a thorough economic analysis of the cases under study.

Nevertheless, lawyers and judges often worry about the growing use of economic analysis in the enforcement of competition law. A particular concern is that the widespread use of economic analysis might cause legal uncertainty, where the latter term typically refers to a (perceived) lack in the "predictability of outcomes in specific cases" (Hawk and Denaeijer 2001,129, emphasis in the original). This concern is particularly relevant for the enforcement of competition law towards vertical restraints, for which economic analysis recommends a rule of reason approach rather than imposing a set of relatively easily administrable but often inadequate per se rules (see e.g., Motta 2004; Rey and Vergé 2008).

The key problem with the rule of reason approach is that it provides business with less guidance than per se rules as to "what is legal and what is not" (Phlips 1995,16), thereby reducing the predictability of law enforcement. In exchange, the rule-of-reason approach offers more accuracy in determining whether a particular vertical restraint is actually anti-competitive. Therefore, if properly executed, the rule-of-reason approach is less error-­prone than per se rules in identifying anti-competitive behavior. Taken together, these statements suggest that there is a tradeoff between predictability and accuracy in the enforcement of competition law.

In this paper, I explore how the growing use of economic analysis might affect the predictability and accuracy of the enforcement of competition law. To do this, I build on Polinsky and Shavell’s (2007) canonical model of public law enforcement. In Section B, I briefly sketch optimal law enforcement when the detection of noncompetitive behavior is uncertain. Next, I show in Section C how two types of errors -­- mistaken acquittal and mistaken conviction, respectively -- impair the accuracy of law enforcement.

Based on this analysis, I argue in Section D that economic analysis serves three important purposes in the context of enforcing competition law: (i) it increases the accuracy of law enforcement by eliminating errors in identifying anti-competitive behavior; (ii) it supports the predictability of law enforcement by providing the foundations for guidelines and notices that inform business about law enforcement under the rule of reason; (iii) it supports the credibility of law enforcement by identifying its potential “chilling” effects (Png 1996; Kaplow 2011) and cautioning against over-deterrence.

Consequently, I conclude in Section E that the growing use of economic analysis is part of the solution rather than the problem when it comes to enforcing competition law in the presence of legal uncertainty.