Monopolization, Exclusion and the Theory of the Firm

105 Pages Posted: 16 Jul 2006


This article examines and critiques the distinction that courts currently draw under Section 2 of the Sherman Act between "competition on the merits," on the one hand, and contractual exclusion, on the other. The article finds the source of this distinction in neoclassical price theory, its theory of the firm, and the derivative model of "workable competition" that most economists embraced from about 1940 onward. Workable competition, it is shown, privileged property-based, "unilateral" technological competition by a fully-integrated firm over "concerted" non-standard agreements, i.e., partial integration. Various antitrust scholars embraced workable competition as a proper guide to antitrust policy, endorsing the distinction between "competition on the merits," on the one hand, and contractual exclusion, on the other, and the distinction found its way into modern law in United States v. United Shoe Machinery Co., 110 F. Supp. 295 (D. Mass. 1953), aff'd United Shoe Machinery v. United States, 347 U.S. 521 (1954) (per curiam). Moreover, the distinction survives to this day. "Competition on the merits" by a monopolist is lawful per se, even if such conduct completely excludes rivals from the market and regardless of the conduct's ultimate impact on consumers. By contrast, exclusionary agreements that hamper rivals in a non-trivial way are presumptively unlawful and only survive if a court believes they are the least restrictive means of producing significant benefits.

Transaction cost economics (TCE), offers a competing theory of the firm as well as a new and benign interpretation of partial integration in the form of various non-standard contracts. In particular, TCE undermines price theory's conclusion that single-firm conduct produces special technological benefits that partial integration cannot produce. Instead, TCE shows that technological considerations cannot explain complete integration, and that both complete and partial integration can be methods of reducing the transaction costs that reliance upon the market would otherwise entail. Because both complete and partial integration can produce significant benefits, there is no reason to privilege one form of integration over the other. As a result, courts should relax the intrusive scrutiny they currently apply to exclusionary agreements entered by monopolists.

Keywords: Monopoly, Price Theory, Competition on the Merits, Transaction Cost Economics, Partial Integration, Vertical Integration

JEL Classification: B21, D23, D42, L12, L22, L41

Suggested Citation

Meese, Alan J., Monopolization, Exclusion and the Theory of the Firm. Minnesota Law Review, Vol. 89, 2005, Available at SSRN:

Alan J. Meese (Contact Author)

William & Mary Law School ( email )

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