Student Blogger - Do Private Antitrust Suits Benefit Consumers? Is There a Better Way?

What's the point of antitrust law? Is it to compensate those that are harmed by monopolistic practices? If so, current law isn't doing a very good job. Economists consider the true harm from monopoly to be deadweight losses arising from foregone consumption - that is, the utility lost when you don't buy a good or service at the monopoly price that you would have bought at competitive price. But victims of this harm are not the plaintiffs in private antitrust suits.

Maybe the aim is deterrence, and we are not so worried about compensation (rhetoric to the contrary aside). If so, antitrust law seems to be failing to achieve this goal also. Antitrust suits take a long time, often longer than the tenure of decisionmakers in their positions. Product line managers who set pricing policies might not care very much about legal costs years down the line. Further, the line between liability and no liability in antitrust is hard to pin down. Unlike someone standing outside a bank and considering whether to rob it, or even someone considering whether to salt their icy sidewalk, those deciding whether to engage in arguably anticompetitive conduct might not be deterred very effectively by criminal or tort liability.

Is this twin failure a problem? If it is, what should we do about it? Professor Daniel Crane tackled these questions in his paper "Optimizing Private Antitrust Enforcement" (itself part of a forthcoming book, "The Institutional Structure of Antitrust Enforcement") at this week's Works in Progress (WiP) talk at the law school.

In the talk and paper, Prof. Crane argues that antitrust law, at least as it is applied in private suits, is failing to achieve its proper goals. The target, he argues, should be market power itself - not compensation (since the true victims can't be effectively compensated) or deterrence (since it doesn't work). Further, he argues that the clean line between permissible conduct and "bad acts" that exists in current antitrust enforcement is an illusion - conduct may have both procompetitive and anticompetitive effects, and the goal should be to minimize the latter (since they cause deadweight loss), not sort conduct taken as a whole into "good" and "bad". As Prof. Crane puts it, the "all-or-nothing nature of the search for a violation adds nothing but confusion, burden, and length to antitrust proceedings."

Prof. Crane goes on to propose a solution - antitrust law should be structured so that private suits target market power directly. To achieve this, he argues, remedies in private suits alleging antitrust violations should be more like those available in public antitrust enforcement. He further offered two specific examples of how this might take place.

First, courts should be empowered to tinker with contracts to excise or revise elements with anticompetive effects. For example, a supplier offering volume discounts might be sued by a competitor for alleged antitrust violations. Under current law, the court would evaluate whether the supplier violated antitrust law (likely going through a great deal of expensive litigation in the process) and either dismiss the case or impose a damages award. Prof. Crane proposes that, instead, the judge be given wide latitude to offer the supplier an opportunity to change terms in the volume discount contract to reduce its anticompetive impact. This would save litigation costs for both parties, enable changes to be made while they still have beneficial effects for both the plaintiff and for consumers, and more closely connect the remedy to the harms. There still seems to be no way for consumers priced out of the market (the victims of deadweight loss) to force restructuring of contracts, but Prof. Crane suggested that this problem might be insoluble.

A second method of targeting market power takes its inspiration from cases in which courts (or consent decrees with the government) have imposed rate-setting mechanisms (via courts or private arbitrators) on firms with market power. The best examples are probably music licensers ASCAP and BMI, who were sued by the government in the 1940s, settled, and have since been governed by this kind of scheme. In practice, there is relatively little actual rate-setting in these cases, since parties bargain privately in its shadow. The outcome is therefore likely to be efficient (since it is privately bargained and enforcement costs are low) and targets the effect of market power on price directly. This kind of regime, Prof. Crane suggests, might be useful in a variety of areas in which a fully competitive market is not feasible, but particularly where the monopoly or quasi-monopoly rights granted to IP holders create tension with antitrust law.

Commenters at the WiP questioned some of Prof. Crane's premises and conclusions, however. One asked whether a better solution might be to simply improve the efficiency of existing antitrust mechanisms, by doing things like cutting out state-level antitrust law and using specialized courts. This would allow players to better predict outcomes (increasing deterrence) and, possibly, give results more in line with compensation goals. It might also help sort out those in the business world with genuine inability to estimate antitrust liability risks from those who are just "playing dumb" for strategic reasons. Prof. Crane responded that, in his opinion, "expertification" of antitrust law would not be all that helpful - as, he claimed, predicting outcomes of antitrust cases under the current regime is difficult even for antitrust scholars.

Other commenters questioned whether Prof. Crane's argument that current private enforcement of antitrust law fails to deter corporate actors is persuasive. If managers (or capital markets) are so bad at predicting and pricing antitrust risk, or especially if they are generally biased in favor of short-term gains over long-term risks (as arguments based on the length of antitrust suits suggest), they have deeper problems. It is hard to believe, the commenters argued, that managers are this ineffective - or else they wouldn't be making any money.

The same commenters also pointed out that Prof. Crane might strengthen his argument by pointing out why antitrust, unlike other areas of law in which there is both private and public enforcement, should have the same remedies in both contexts. Even if private antitrust suits are an imperfect remedy, might they be a useful part of a larger system of enforcement that includes public suits (civil and criminal) as well? Are we sure that changing the remedies in private suits will have positive effects for the antitrust system as a whole? Workplace safety, for example, is managed through both private tort suits and OSHA regulation. Changing the remedies in private tort suits might or might not be a good idea, but it would surely be a mistake to consider them in isolation. While surely valid, this criticism might be addressed elsewhere in Prof. Crane's book - the chapter presented at the WiP focused only on private antitrust suits.

Generally speaking, I suspect the devil is in the details here. Prof. Crane's case for failings of private antitrust suits under current law is convincing, and his suggested remedies seem to target these failings effectively. It is possible that judges' decisions on rewriting contracts and setting rates (and bargains made in the shadow of these moves) would ultimately produce better outcomes for consumers than the decisions made by managers (ex ante) and judges and juries (ex post) in the current system, but this is not certain. Certainty isn't necessary to make a policy change, of course, but (as always), more data - particularly real-world data from future designed experiments or past natural ones - would be helpful.

The problems raised in the paper and talk also go directly to the heart of philosophical debates about antitrust - questions about what it should seek to prevent or punish and who it should seek to benefit. Since agreement on those issues, both domestically and internationally, seems elusive, it will likely be difficult to implement sweeping proposals like Prof. Crane's that adopt a particular view, however persuasive, about the ultimate aims of antitrust.

Comments

[Kimballcorson]

Current antitrust law does not do its job because it was almost single handedly gutted by Prof. Richard Posner who persuaded the world that the Sherman Act was written and intended to protect competition and not competitors thereby permitting aggressively competing big boys to annihilate the small fry in their industry without consequences. Fair trade practice acts are as big a joke as the anti-trust laws are now.

So of course the antitrust laws are ineffective.

There. Now that my basic thoughts are on the table, I´ll read the article and probably comment.

[Dan Crane]

The void of data is largely created by the lack of natural experiments in private antitrust enforcement. Although many other jurisdictions have long-standing antitrust regimes (Canada's antitrust act was adopted in 1889--a year before the Sherman Act) almost no other country in the world has a system of rigorous private enforcement like that in the U.S. Many jurisdictions formally allow a private right of action, but such actions are exceedingly rare because of a combination of restrictive standing rules, procedural hurdles (such as a lack of discovery rights), administrative preemption, limitations on damages, and generally a legal culture averse to a strong private litigation system.

It's certainly true that very little of what I propose in terms of substituting forward-looking private remedies for the current compensation/deterrence framework is likely to see the light of day in the U.S. any time soon. On the other hand, many jurisdictions around the world are beginning to consider private enforcement as a necessary adjunct to public enforcement. The model they naturally consider is the U.S. So it is important to present the successes and failures of the U.S. private litigation system and imagine how it could be better--even though the most likely impact will be beyond our borders.

[Kimball Corson]

I think that Prof. Crane is absolutely correct when he argues, as explained here, that “ . . . antitrust law, at least as it is applied in private suits, is failing to achieve its proper goals. The target, he argues, should be market power itself - not compensation (since the true victims can't be effectively compensated) or deterrence (since it doesn't work).”

Indeed his idea is not only correct, but it is subject to greatly needed expansion. I have watch market power work first hand in many third world countries and also in some developed nations as well. I have done so from the perspective of both a trained lawyer and a trained economist (Chicago, in both instances). In the guise of global capitalism and in many third world countries, it is nothing more than a 21st century global imperialism in very thin disguise. But it has adverse effects in developed nations as well. Some of the effects I observe of widespread market power are these:

-- it seriously concentrates the world's wealth
-- it seriously concentrates the world's income
-- it strongly leverages exploitation and injures the non-rich
-- it leverages the financial system excessively
-- it unduly concentrates control of productive resources
-- it aids price fixing and conscious parallelism
-- it corrupts and then controls political systems
-- it corrupts and controls higher education
-- it leverages privileges for those at the top
-- it runs strongly counter to environmentalism
-- it results in private standing armies and armed forces
-- it operates uniformly rather than legally across countries
-- it is an ambassador of ill-will to the world

We had better wake up and fast. The camel’s nose, head and neck are all under the tent and we remain largely clueless.