Market Failure and Non-Standard Contracting: How the Ghost of Perfect Competition Still Haunts Antitrust
38 Pages Posted: 8 May 2006 Last revised: 4 Jun 2012
Date Written: June 4, 2012
During antitrust's "inhospitality era," courts and expert agencies condemned any number of non-standard agreements as "unlawful per se" or nearly so. More recently, courts and agencies have repudiated or softened many such per se rules. In so doing courts and agencies have invoked the lessons of Transaction Cost Economics (TCE), which holds that most non-standard agreements are efforts to economize on the cost of relying upon the market to conduct economic activity.
At the same time, courts and agencies continue to enforce other per se rules against conduct that TCE deems presumptively beneficial. Moreover, courts and agencies conduct rule of reason analysis in a manner that is unduly hostile to claims that a restraint is in fact an effort to reduce transaction costs and overcome market failure. Finally, current standards governing alleged monopolization are unduly biased against non-standard contracts that disadvantage a monopolist's rivals. Where antitrust doctrine is concerned, the transaction cost revolution is hardly complete.
This article seeks an explanation for antitrust's original and continued hostility toward non-standard agreements. The article finds that explanation in price theory's model of perfect competition. Some have attributed the inhospitality tradition to price theory's "technological" conception of the firm and a resulting belief that efficiencies necessarily arose within individual firms. While descriptively accurate, this account does not explain why economists failed to recognize that agreements between firms could overcome market failure and thus generate non-technological efficiencies. The article finds the explanation in the inhospitality era's methodological habit of assuming that "perfect competition" and "market failure" could coexist, and that market failure could thwart the optimal allocation of resources that perfect competition would otherwise produce. This habit equated market failure with a failure of a perfectly competitive market to produce efficient outcomes. By eliminating market failure, then, the state could restore the optimal allocation of resources that perfect competition would otherwise produce. Thus, this methodological habit framed the problem to be solved in a way that blocked the recognition that non-standard contracts could overcome market failure, since such contracts themselves caused a departure from one or more of perfect competition's assumptions and also facilitated activities, like advertising, that were not necessary under the perfect competition model.
To be sure, Professor Ronald Coase's "Problem of Social Cost" undermined the assumption that market failure and perfect competition can co-exist. Coase and other practitioners of TCE such as Oliver Williamson, also explained how non-standard contracts could make an imperfectly competitive economy more competitive by overcoming market failure. Nonetheless, the perfect competition model still haunts much antitrust thinking. Discussion of "the economics of antitrust" almost always begin with the perfect competition model, and departures from perfect competition are viewed as sources of market power that can only be justified by some offsetting efficiency. While non-standard contracts are often viewed as potentially beneficial, they are rarely characterized as methods of overcoming market failure but are instead characterized as methods of reducing costs, analogous to the realization of technological efficiencies. This oversight helps explain the lingering bias against such restraints.
Keywords: Antitrust, Market Failure, Perfect Competition, Ronald Coase, Oliver Williamson, Transaction Costs, Transaction Cost Economics, Rule of Reason
JEL Classification: B21, B41, D23, D41, D62, K21, L14, L22, L41, L42
Suggested Citation: Suggested Citation