Review of Sullivan & Grimes Post-Chicago Hornbook

Lawrence A. Sullivan and Warren S. Grimes
The Law of Antitrust: An Integrated Handbook
St. Paul, Minn.: West Group, 2000
1274 pages
$45

 

A Post-Chicago Hornbook on Antitrust

Reviewed by Albert A. Foer in 15 Antitrust 86 (Fall 2000)

Years ago, back in the Age of Pertschuk,1 back before the University of Chicago had launched its takeover of the antitrust agencies, when I was a young Assistant Director of the FTC's Bureau of Competition, my favorite antitrust reference book was Lawrence A. Sullivan's Hornbook on the Law of Antitrust, published in 1977. What I particularly liked about it was its literary flavor, its eagerness to draw not only on law and economics, but also other sources of wisdom, particularly history, and to emphasize the multiplicity of antitrust's goals, in the face of increasingly strident calls for a singular focus on economic efficiency. The Sullivan treatise provided an easy method for working one's way into an antitrust problem. It was opinionated, supporting an activist approach to antitrust, but seemed to me fair to all sides.

I haven't seen my copy for years, although I still come across its influence in Supreme Court opinions.2 Back in the late '70's, Larry Sullivan was an eminent law professor at Berkeley and Warren Grimes was an Assistant to the General Counsel of the FTC, soon to become Chief Counsel to the House Judiciary Committee's Subcommittee on Monopolies and Commercial Law. The Subcommittee no longer exists, both Larry and Warren have migrated to Southwestern University School of Law, and the Sullivan hornbook has just been superseded by their jointly authored The Law of Antitrust: An Integrated Handbook.

The idea, according to the foreword, was not to revise the 1977 hornbook, but to create a new book that would be "responsive to changes in the economy (e.g., increasing dynamism and globalization), in economic theory (e.g., analysis of network efficiencies), in prevailing attitudes about how theory should be applied (e.g., post-Chicago analysis), in related policy areas (e.g., deregulation) and, reflexively, in antitrust itself."(p.v.) The authors "view current policy debates less as efforts to stake out solid, normative base lines than as parts of the ongoing developmental process."(p. v.) In this book we enter an on-going conversation not only about where the antitrust law has been and where it apparently is, but where the authors contend it should be going.

Perhaps this comprehensive, single-volume "integrated" overview, with its 1274 pages of text, appendices (mostly statutes and various federal antitrust guidelines), and index, is also integrative in the sense that it builds the entire antitrust structure around the effort in this country (and, indeed, in that ever-expanding part of the world where competition policy is flowering) to prevent and control the abusive exercise of market power. "Antitrust," the authors say, "is concerned with the power of market participants to distort the competitive process. This distortion can misallocate resources, transfer wealth from consumers and other protected groups to market participants with power, or stifle new entry or innovation and commercialization." (p. 21.) In other words, antitrust has multiple goals, but they all tend to lead toward a similar concern with the ability of a firm or group of firms to disrupt the competitive process.3

The treatise unpacks the usual antitrust boxes, of course: monopoly, horizontal restraints, foreclosure restraints, mergers, joint ventures, regulated markets, government enforcement, and private enforcement. It also has some chapters that more specifically reflect the authors' effort to be contemporary, encompassing, and policy-influential. Thus there is a separate chapter on price predation that presents the current state of law, one of the ornaments of the Chicago School's triumph. But the chapter also provides a devastating critique of what they call the "narrow view" of price predation. "Despite the acceptance that these orthodox Chicago positions have found in the Supreme Court, they are not consensus views among theorists." (p. 145.) More precisely, "The view that predatory pricing is rare or even fanciful is based on theoretical constructs that ignore the realities of markets in which oligopolistic structure, incomplete information and strategic behavior are commonplace."(Id.)

Sullivan and Grimes criticize both the Areeda-Turner below-cost pricing screen and the recoupment standard and offer in their stead what they call a "structured rule of reason analysis." (p. 157.) Such an inquiry would focus on two pivotal questions: whether the defendant possesses monopoly or oligopoly power; and whether there is a credible theory of predation and facts to sustain it. Intent evidence might be relevant on the latter point.

One might ask, if the predatory pricing debate has been settled by the Supreme Court, why should Sullivan and Grimes spend so much time on it? First, doctrine evolves and the Supreme Court might change its mind. Second, the debate over predation has anything but died, the Supreme Court notwithstanding; and post-Chicago forces are particularly intent on overturning current doctrine. And third, "the involvement of the Antitrust Division in [a] predatory pricing claim [through the case against American Airlines for predation at its Dallas hub] may breathe new life into the law in this area."4 There can be no question that this case, exemplifying the predatory pricing debate, represents a critical boundary between Chicago and post-Chicago thinking.

Sullivan and Grimes are also on the frontier when they criticize the federal Horizontal Merger Guidelines. Their discussion of the incipiency doctrine provides justification for its revival: "The incipiency doctrine... reminds us that Congress was concerned with all of the threatened anticompetitive consequences of industry concentration, not merely those involving allocative efficiencies, as one might conclude from reading the Guidelines." (pp. 599-601.) For instance, they say, a trend toward concentration might have an adverse impact on the dynamic element of competition, even if it does not adversely affect allocation. They criticize the Guidelines for focusing on allocative efficiencies to the exclusion of dynamic efficiencies, and provide concise advice as to how the Guidelines could be improved. (pp. 601-603.)

Another chapter that pushes the envelop is devoted to franchise antitrust claims. The stated justification for spending fifty-nine detailed (and sometimes repetitious) pages on this topic is that more than one third of the dollars spent on retail transactions is now paid to franchisees. (p. 451.) An unstated justification would appear to be that the law is currently unstable, leaning too much in favor of the franchisor. Much of the chapter focuses on the economics of franchising, paying special attention to "franchisor relational market power," a topic that Warren Grimes has explored in many of his articles. The authors argue that once the franchisee has committed its investment to the franchise, the franchisee may be locked into the relationship by high sunk costs and by the franchisor's control over the franchisee's operating costs and benefits. As a result, the franchisor has a kind of market power that can be abused and should be subject to the antitrust laws. In other words, they say, apply the landmark Kodak case.5 Others argue, and the authors give them their day in court, that this is an example of economic power, but not market power. The franchisee entered into a contractual relationship and should be held bound to it. The authors reply, "The franchisee is unable at the precontractual stage to engage in accurate life-cycle assessments of costs and benefits of a franchise that may endure for the business life of the investment." Informational inequalities should carry weight in antitrust analysis.

Along with the issue of defining market power in the franchise context comes the question of market definition. In the 1970s, the courts often assumed that the relevant market was the franchisor's trademarked line of goods or services, which worked to the advantage of complaining franchisees. By the late 1980s, however, courts were more likely to accept broader market definitions that tended to preclude antitrust relief. Summarizing, the authors say, "Although the Supreme Court has yet to provide its own full economic analysis of a franchise antitrust claim, the need for such a framework is a policy matter that the Court should not ignore. But many economic precepts applicable to franchising remain controversial, contributing to the unsettled nature of the lower court decisions." (p. 473.)

Sullivan and Grimes devote eighty-six pages to antitrust and intellectual property. The borderland between these two legal specialties has, of course, become a war zone in the New Economy. The authors describe the benefits of each area of the law, calling for a balancing inquiry that accounts for both the benefits and harm caused by the particular utilization of exclusivity (market power) conferred by the intellectual property.

Another hot topic is antitrust in global markets, to which the treatise commits fifty-two pages. The authors say that no other area of antitrust "signifies greater hazard nor hope of constructive development than do conflicts in national competition policies in a global economy."(p. 969.) "It may, indeed, be that as more and more transactions cross national borders and can no longer be managed as national antitrust issues, all issues upon which the views and interests of trading nations are discordant will have to be settled either like conventional trade disputes in give-and-take packages worked out amid threats of trade aggression or through lengthy WTO litigation. That would be a costly outcome, but may be one that can be avoided only if antitrust can be more effectively internationalized through substantive harmonization or a workable set of choice of law principles [for deciding what national antitrust regime should govern particular global market transactions]." (p. 1015.)

It has been nearly a quarter of a century since the first Sullivan hornbook, and the antitrust world has changed dramatically. The Antitrust Paradox, Robert H. Bork's influential critique of antitrust policy came out only one year after Sullivan, contributing to a shift of critical importance in the history of antitrust. On the outs in the 1980's and early 90's, Sullivan helped keep alive the activist flame during the years of exile. Now, a post-Chicago restoration of antitrust activism appears to be gaining momentum, not as a return to 1970s policies but as something largely new, incorporating the realities of globalization, the computer age, deregulation, and advancing economic knowledge. Sullivan & Grimes have captured the spirit of post-Chicago antitrust, elucidating a dialectical process that has moved from a mild populism through laissez faire to an emerging synthesis of state authority and market initiative that is still being worked out.

 


 

1 Michael Pertschuk was the activist Chairman of the Federal Trade Commission during the Carter Administration (1976-1980).

2 The original Sullivan treatise has been cited in over twenty Supreme Court majority, concurring, and dissenting opinions. The book continues to be sold both in the United States and abroad.

3The authors define market power as involving inelasticity of demand that is both nontransitory and covers more than a narrow range of prices. (p. 24.)

4 The treatise provides a citation for this case, which has not yet been tried, to an internet address. I think it is reasonable to include in a treatise a potentially significant current case, even though no court has ruled. The treatise also gives a large amount of attention to the Microsoft case, in its status prior to Judge Jackson's ruling. These cases are too important as an indication of government policy not to be mentioned, but obviously it will be necessary for readers to do the up-dating. I also think it is reasonable for a treatise to use internet citations, although when a reader tries to visit the location in the future, there may be no one home and no forwarding address. The treatise, incidentally, includes an appendix on how to use the Westlaw system for computer research.

5 Eastman Kodak Co. v. Image Technical Service, Inc., 504 U.S. 451, 463-64 (1992).