This short article serves as an introduction to the full-length version available on SSRN.
The current antitrust conversation is dominated by neo conservative propositions. The neobrandesian agenda wants to reinstate early 20th-century antitrust doctrine. It is based on the view that large firms, their attorneys, lobbyists, and hired academics enjoy the power to influence not just market outcomes but also political processes, just like in the Gilded Age. On the other side, antitrust as applied by Federal courts clings to 1970s legal precedent. The doctrine’s foundations are that false positives justify a cautious stance towards antitrust enforcement and high burdens on plaintiffs.
Both perspectives are equally conservative. They regurgitate old principles, refusing to consider that economic, legal and technological transformation may require de novo reconsideration of established doctrine, not just a reversion to previous paradigms.
Dynamic competition core ambition is to define an improvement path for the antitrust policy conversation. The way forward for antitrust enforcement under the dynamic competition paradigm is innovation-oriented, empirical, enforcement-friendly, and interdisciplinary.
True, at a high level, the dynamic competition approach may come across as a twenty-first-century reenactment of the Chicago School of Antitrust. A recent article we co-authored shows that the analogy is only partially correct. This short contribution introduces the main reasons why dynamic competition is an evolution beyond Chicago.
1. Situating the Chicago School
The Chicago School of Antitrust is anchored in four fundamental economic ideas: promoting consumer welfare, fostering enterprise efficiency, understanding the impact of market power, and addressing the resource misallocation caused by monopoly pricing. This is, however, not a very distinctive agenda. Scholars that define themselves as Post Chicagoans also adhere to most, if not all four principles.
Rather, the main contribution of the Chicago School of Antitrust compared to other schools lies in the adherence to several distinctive principles intended to simplify the fact-finding and analytical tasks required in antitrust cases. They consist of descriptive and normative propositions about firms, markets, and institutions. Here are the key principles that characterize the Chicago School:
- Economic concentration is an outcome, not a determinant, of the conditions of competition;
- Entry barriers are rare and short-lived. Antitrust must concern itself with “artificial barriers” that stem from deliberate predation, Government regulation, or both in a case of “capture.” All other entry obstacles are “natural barriers” that reflect forms of efficiency;
- Divisions of any surplus to the advantage of sellers arise when buyers face transactions and mobility/switching costs. Inframarginal rents caused by market imperfections other than market power are beyond the reach of antitrust policy;
- The pursuit of efficiency by business firms is the handmaiden of stronger competition and higher consumer welfare. Innovation is rarely featured explicitly, and Chicagoans are not hostile to innovation, but it is best modeled as an efficiency (in economic analysis).
- Antitrust policy should protect competition, not competitors. When a business rival sues, it is safe to infer that the impugned practice benefits consumers;
- The function of antitrust policy is to improve allocative efficiency without impairing productive efficiency so greatly as to nullify or undermine consumer welfare;
- Neither Congressional intent, nor economic wisdom support a model of antitrust law directed at the promotion of small business welfare, or the protection of “small dealers”;
- Antitrust policy should not prohibit durable and widespread business practice and transactions whose effects are uncertain. Survival and diffusion of “complex practices” indicate that they serve a socially beneficial function. Neither should the absence of a justification for market behavior be looked at with inhospitality or suspicion. Firms try dozens of practices. Most of them fail, and firms must try something else or disappear.
- Merger policy should be permissive. Most mergers are efficient, unless the transaction involve large firms or leads to a monopoly;
- Antitrust enforcement is for the marginal case. It is valuable because in some special situations it can achieve results more rapidly than market forces. These circumstances are rare in judicialized systems, because on average the costs of type 1 errors that make institutions prohibit procompetitive conduct will exceed the costs of type 2 errors that exonerate anticompetitive conduct. Type 1 errors are irreversible and reproduced on third parties through the effect of judicial precedent, while the latter are phased out by market processes.
- Observable market trends should not be ignored on the ground of idealized alternative states of the world. Clear price and output trends can be dispositive of the need for counterfactual evidence;
- Price, and output, reveal the preferences of utility maximizing consumers. For example, the concentration of output in one firm will say that consumers prefer its products. Similarly, rising prices and output indicate that external events other than market power are at play;
- No antitrust policy should prohibit above cost prices on suspicion of anticompetitive exclusion.
2. Situating Dynamic Competition in Relation to the Chicago School
Despite its differences, dynamic competition does share common ground with the Chicago School. This includes a shared skepticism towards conventional market narratives, reliance on economic theory as a foundational method, a focus on welfare as the primary function of antitrust law, and the use of efficiency (in the broad sense) as a key guideline in the application of antitrust principles.
However, dynamic competition diverges from the Chicago School in several significant aspects. It advocates for more active institutional intervention in dynamically evolving technological markets and emphasizes the importance of interdisciplinary insights in understanding market dynamics. This approach challenges the traditional Chicagoan principles, such as the concept of market self-correction and the reliance on simplistic economic models. It proposes a more complex and nuanced understanding of market dynamics, particularly emphasizing the role of innovation in shaping market behavior and policy. Below is a short elaboration on several key areas of divergence.
- Institutional Perspectives: The dynamic competition approach questions the Chicago School’s skeptical view of antitrust institutions’ abilities to manage economic complexity. Instead, it promotes the idea that antitrust agencies and courts can effectively intervene in fast-moving, technologically dynamic markets. This requires a shift from traditional dogmas to a reevaluation of market dynamics in the context of digital platforms and other rapidly evolving sectors.
- Rethinking Rivalry and Regulation: Dynamic competition proposes a different view of market rivalry and antitrust law enforcement. Unlike the Chicago School, which strictly applies antitrust law to protect only efficient competition, dynamic competition acknowledges that today’s inefficient rivals might evolve into competitive threats tomorrow. This nuanced understanding extends to the regulation of market dynamics, where dynamic competition envisions antitrust laws as rules for a more complex game that evolves with the market itself.
- The Role of Innovation: A key departure from the Chicago School is the emphasis dynamic competition places on innovation. It argues that technological innovation is a critical determinant of industry performance, business conduct, and market structure, and thus should be central to antitrust analysis. This approach contrasts with the Chicago School, which has generally treated innovation as an external factor with little significance in antitrust considerations.
3. Dynamic Competition in Practice
What is dynamic competition in practice? We can use a merger review context to illustrate. Protecting dynamic competition means a concern against the adverse impacts of mergers on long-term competition. Under current law, merger agencies remedy harms within a period of two years. In practice, the time horizon may occasionally be extended.
Chicagoans would view a general extension of the time dimension as an insurmountable challenge. No intelligence—even a computational one—can forecast the long-term strategic price effects of mergers or the change in parties’ ability and incentives to foreclose. Prediction and control in a timeframe of 10 to 15 years is a fool’s errand.
A dynamic competition approach to mergers, however, poses a different question: can the relevant firms grow equally absent the merger? If the answer is no, the merger should be allowed. If the answer is yes, the merger should be challenged. All merger laws are based on a preference for organic growth rather than growth by amalgamation.
Below are several key issues to be addressed in operationalizing dynamic competition.
- Longer Time Horizon: Dynamic competition challenges the traditional view that antitrust enforcement should primarily focus on immediate market impacts, such as price and output. Instead, it argues for a broader view that considers how business practices and mergers affect the market’s evolutionary path, including impacts on innovation, industry structure, and consumer welfare over a longer horizon.
- Integration of Interdisciplinary Insights: A significant aspect of dynamic competition is its call for integrating insights from various disciplines, including economics, technology studies, and business management. This interdisciplinary approach is crucial for understanding the complexities of modern markets, particularly in sectors characterized by rapid technological change and innovation.
- Using Capabilities to Operationalize Dynamic Competition: To operationalize dynamic competition, the approach suggests a focus on capabilities evaluation as a means to understand the potential long-term impacts of business decisions. This involves assessing the technological, managerial, and financial strengths of firms to determine their ability to innovate and compete effectively in the future. The approach advocates for using capabilities assessments in merger reviews and other antitrust analyses to ensure that decisions are made with an eye toward fostering dynamic, long-term competition.
- Agency Roles and Responsibilities: Dynamic competition assigns a more proactive role to antitrust agencies. Rather than merely reacting to market failures, agencies are encouraged to actively monitor and manage market dynamics, using a variety of tools, including market studies, interim measures, and sector inquiries. This proactive stance is seen as essential for ensuring that markets remain competitive and innovative over time.
- Judicial Adaptability and Learning: Dynamic competition also implies a need for judicial adaptability. Courts and agencies must be willing to learn and evolve their understanding of markets and competition. This includes being open to new economic theories and empirical evidence and the willingness to revise legal doctrines in light of new insights into market dynamics and innovation.
A new school of antitrust thought focused on the economic study of dynamic competition and its protection by legal and policy implementation is emerging. The approach is new, but familiar. It shares common blood with what the Chicago school of antitrust sought to achieve in the second half of the twentieth century. The dynamic competition approach does not take for granted mainstream descriptions of the economy, ascribes a welfare function to antitrust law, adopts economics as a method, and uses efficiency as a guideline.
The dynamic competition approach also differs substantially from the Chicago school of antitrust. It is more confident in the ability of antitrust intervention to deliver welfare-increasing impacts, less naive about the self-correcting properties of markets in the economy, and more explicitly concerned with the protection of innovation. Last, but not least, dynamic competition considers a base of enforcement of antitrust law across instruments to be necessary, if only to build evidence in favor or against government intervention in a changing economy. Allowing marginally more intervention by decision makers might be the price to pay to derive empirical learning from the cases, increase our collective stock of knowledge, and answer if, and how, antitrust limits deserve renovation.
Nicolas Petit, Bowman Heiden & Thibault Schrepel
Reminder: this short article serves as an introduction to the full-length version available on SSRN.