Vertical Restrictions and Antitrust Policy: What About the Evidence?

Abstract

Theories of vertical restraints have shown that vertical practices have the potential to harm competition. Although (or because) they are based on more realistic market structures and account explicitly for strategic interactions among competitions, the predictions of these models are necessarily more fragile than those of the earlier models. Practitioners who rely mainly on economic theory to assess the competitive impact of vertical restraints in any given setting face a formidable inferential problem: Not only must they decide which model best applies to the particular factual circumstances in which the restraint has been adopted, they also must then determine whether the model chosen has the particular combination of parameters that would result in an anticompetitive equilibrium. The theory of vertical control tells us that anticompetitive effects are possible, but until theory can be used to determine how likely it is that a restraint will lead to an anticompetitive outcome, decision makers will be left with a considerable amount of uncertainty. In this world, enforcement decisions should be guided by prior beliefs and loss functions. The authors' review of the existing empirical evidence - which informs their priors - suggests that vertical restraints are likely to be benign or welfare-enhancing.