Antitrust Balancing

17 Pages Posted: 7 Nov 2015 Last revised: 21 Jan 2017

Herbert J. Hovenkamp

University of Pennsylvania Law and Wharton Business

Date Written: May 3, 2016

Abstract

Antitrust litigation often confronts situations where effects point in both directions. Judges sometimes describe the process of evaluating these factors as “balancing.” In its e-Books decision the Second Circuit believed that the need to balance is what justifies application of the rule of reason. In Microsoft the D.C. Circuit stated that “courts routinely apply a…balancing approach” under which “the plaintiff must demonstrate that the anticompetitive harm…outweighs the procompetitive benefit.” But then it decided the case without balancing anything.

The term “balancing” is a very poor label for what courts actually do in these cases. Balancing requires that two offsetting effects can each be measured against each other by some common cardinal unit, such as dollars or tons or centimeters. The factors that courts consider under the rule of reason rarely lend themselves to such measurement. Instead, balancing approaches are usually “binary” rather than cardinal. They are more like off and on switches that go in one direction or the other.

The Ninth Circuit’s decision in O’Bannon v. NCAA understood these limitations and performed balancing the way it should be done. In defending its compensation rules the court observed both the NCAA’s and the courts’ longstanding recognition of amateurism in collegiate athletics as requiring uncompensated play. This created a binary rule that a court could readily follow. The district court’s creation of a trust fund for deferred compensation and judicial determination of the payout was simply price regulation by another name.

One place where a more cardinal form of balancing can work is merger analysis, particularly under the 2010 Horizontal Merger Guidelines. The government’s prima facie challenge to a merger is based on a prediction of increased prices. If the test is met then the burden shifts to the defendant to show merger specific efficiencies of sufficient magnitude to reduce the predicted price to no higher than premerger levels.

Stating consumer price increases as the principal concern creates a unit of measure that makes balancing at least conceptually possible. Second, the consumer price test articulated in the Guidelines is easier to administer than a general welfare test. In order to estimate general welfare effects one must be able to quantify consumer harm, which includes not only higher prices but also deadweight loss. This requires information about the shape of the demand curve. In addition, offsetting efficiencies must always be assessed and netted out. This requires a court to look not only at per unit cost savings, but also at the output over which those costs will be spread.

Whether the Merger Guidelines more cardinal approach to balancing can be migrated to general antitrust litigation under the rule of reason depends on the challenged practice. Joint ventures with efficiency potential but threatening higher prices from collusion are a likely candidate. Practices that threaten exclusion will be more difficult to evaluate. Practices whose consequences show up in the longer run will be particularly difficult, as well as practices for which the defense has little to do with measurable prices.

Keywords: antitrust, rule of reason, balancing, mergers, efficiencies, less restrictive alternatives, sherman act

Suggested Citation

Hovenkamp, Herbert J., Antitrust Balancing (May 3, 2016). New York University Journal of Law and Business, Vol. 12, p. 369, 2016; U Iowa Legal Studies Research Paper No. 2017-11. Available at SSRN: https://ssrn.com/abstract=2687453 or http://dx.doi.org/10.2139/ssrn.2687453

Herbert J. Hovenkamp (Contact Author)

University of Pennsylvania Law and Wharton Business ( email )

Philadelphia, PA 19104
United States
319-512-9579 (Phone)

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