” Dynamic Competition” Does Not Excuse Monopolization

Jonathan Baker, Nov 01, 2008

In the 2004 Trinko decision, Justice Antonin Scalia, writing for the Supreme Court, depicted “monopoly power, and the concomitant charging of monopoly prices” as “an important element of the free-market system.” Scalia argued that “the opportunity to charge monopoly prices—at least for a short period . . . induces risk taking that produces innovation and economic growth.” According to Scalia, this benefit of monopoly explains a long-standing element of the antitrust prohibition against monopolization: “To safeguard the incentive to innovate, the possession of monopoly power will not be found unlawful unless it is accompanied by an element of anticompetitive conduct.” In that brief passage, Justice Scalia made two controversial claims, one about economics and the other about antitrust law.

He argued first that the prospect of achieving monopoly fosters innovation, and, second, that this economic proposition explains one important aspect of antitrust doctrine. The provocative new article by David S. Evans and Keith N. Hylton offers a detailed justification for Scalia’s claims (though, surprisingly, without reference to Scalia’s views). Neither Justice Scalia nor Professors Evans and Hylton draw out the implication of these claims for antitrust policy. Indeed, it is difficult for Evans and Hylton to say more about how they would change antitrust law while simultaneously relying on the “revealed preferences” of policy-makers to infer the goals of antitrust, as that method subtly equates “is” with “ought.” But it is evident that the argument will in practice be deployed to justify, on innovation-promoting grounds, the exercise of market power, and, consequently, to call for a relaxation in antitrust enforcement, particularly against monopolization.

This implication was drawn by Assistant Attorney General Thomas Barnett, the current head of the Justice Department’s Antitrust Division (“DOJ”). In a recent article on antitrust and innovation, Barnett endorsed Scalia’s economic argument from Trinko, stating that “the ability to charge monopoly prices, at least for a short while, can be what induces firms to take the risks that produce innovation and other efficiencies, which ultimately benefits consumers.” Barnett saw that argument as a reason to call for “appropriate caution in enforcement of the antitrust laws against single firm conduct.” Consistent with his views, the DOJ has brought no monopolization cases during the George W. Bush administration. This comment critically evaluates Evans and Hylton’s defense of Justice Scalia’s legal and economic claims, and the policy implication drawn by Assistant Attorney General Barnett. It shows, first, that the legal claim is at best only partially correct, as the conduct requirement for the monopolization offense was importantly prompted by concerns other than for innovation. Second, it shows that the economic claim misleads unless qualified by the observation that the push of competition generally spurs innovation more than the pull of monopoly. Third, it explains why greater attention to fostering innovation does not call for relaxing antitrust enforcement, contrary to the policy implication. As Evans and Hylton emphasize, innovation is important, and an appropriate concern of antitrust policy. But considerations of “dynamic competition” do not argue against antitrust enforcement. To the contrary: nothing is more important to economic welfare than innovation and growth, and competition and antitrust enforcement are essential for fostering them.

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