 The cheating perspective is an overwhelmingly practical problem that faces everybody who would cartilize the market. Now, what does that mean in practical terms? Well, here we run into the market concentration supposition, the idea that the more concentrated the market, the more likely it is to be cartilized by producers who are trying to mimic the cartel's behavior just through price signals, just through setting a high price and sending the message, hey, wake up over there. Can't we do better than we're doing? Don't you get it? Aren't you smart? The notion behind the market concentration supposition is that the more producers we have in the market, the harder it is. Everybody who's ever been on a committee knows that the larger the committee, the less likely it is to get anything done. The less likely it is actually to come to an agreement. So the basic idea here is if there's a large number of competitors, that's very likely to be a highly competitive market, but we start to get worried as the market gets smaller and smaller. Now, antitrust law quantifies this market concentration supposition in merger law. When we think how many mergers are we going to permit in a given market, we realize that judges, again, have got to decide how much is too much, how much loss of competition, how much loss of numbers of competitors, how much increase in competition is permissible before we cross the barrier to illegal concentration. Now, the particular statute involved in merger law is Section 7 of the Clayton Act, but once again, it doesn't say anything very useful in terms of quantitative limits. Judges have had to decide how much is too much in the Clayton Act context as well as in the Sherman Act context. And let me make the point that this supposition, that the more concentration, the greater the risk of collusion, has been controversial. The answer to this question has changed over time. Let me give you two different illustrations of this. One is the Von's grocery case, a merger case from my hometown, Los Angeles, the Los Angeles grocery market. I want to contrast the Von's decision, which is in your materials, from 1966 with Los Angeles grocery markets as of 1999. Now, in Von's, in the Von's grocery case, Von's grocery tried to merge with its competitor, Shopping Bag. They were the number three and the number six firm in the Los Angeles grocery market. Together, the two firms would have made up seven and a half percent of the market. Now, is that big or is that little? The Supreme Court said that's big. That's too much concentration. This is 1966, that's too much concentration for us. The fear was that left unbridled, this level of concentration eventually would end up at a position where grocery stores would be able to cartilize the market by agreeing with each other. Now, the Von's case set down law that has never been questioned by the Supreme Court. If you jeopardize or key site or whatever your technology is these days for checking the legal validity of the Von's decision, it's good law. A Los Angeles grocery merger that creates a firm of seven and a half percent, that's illegal. And yet, I can tell you from Los Angeles, there have been many, many, many grocery store mergers in that market since then. We now have basically three large firms. There's a few other competitors in the market. There's a few oddball specialty grocery firms. Trader Joe's comes in with some special deals. But basically the large firms have between 20 and 30 percent of the market each. Now, how can that be? It's valid on the books, Von's. Allow a grocery market to evolve where each firm has many times the market share that resulted in a finding of illegality in 1966. Well, the short answer is the antitrust division, the merger cop, has allowed this situation to evolve. It has allowed mergers after the Von's grocery decision because it's changed its views about how much concentration is too much. It's partly decided that cartilization is harder than it looks. Another factor that has been important is that the antitrust jurisprudence of the 60s, the Warren Court, has been subjected to ferocious, to withering criticism by the likes of Richard Posner, Robert Bork, Frank Easterbrook, and a lot of other people who are now federal circuit judges or were. Very influential criticism. The argument is, look, mergers are not primarily bad for the economy. Primarily they're good for consumers. The larger the firm, the more possible it is to achieve economies of scale. Anybody who's ever been into a discount superstore, what are some typical examples of... Well, Walmart is the classic example. How many people have got a Walmart near them? All these individuals who know about Walmart on a first-hand basis know exactly how efficient this kind of super-scale production can be. So efficient that it can lead to other controversy about whether this level of efficiency is a good thing or not. Now, that controversy is present in antitrust law, but antitrust authorities have come to an increasing appreciation for the scale economies that large size brings and have increasingly come to view mergers as more and more good things, as positive developments for consumers and much less of a threat than was perceived to be the case in the days of Von's grocery. Okay, so there are changing attitudes about both the threat of cartelization and the benefits of scale from the mid-60s to the present. But there's more going on as well. And this is my third point about how the economics of this situation, the cartel threat, the threat of monopoly pricing, is always in service of larger goals as well. When the Von grocery court decided that case, other things were going on besides strictly an evaluation of how likely was cartelization. I'd ask you to, if you've got your materials with you, take a look at the Von's case. I want to read some classic language from the Von's decision that expresses what was the driving factor about this case for this warren court decision. There starts a paragraph from this country's beginnings. Okay, that sounds promising. What's been true since this country's beginnings? From this country's beginnings, there has been an abiding and widespread fear of the evils which flow from monopoly. That is the concentration of economic power in the hands of a few. On the basis of this fear, Congress in 1890, when many of the nation's industries were already concentrated into what were deemed too few hands, passed the Sherman Act in an attempt to prevent further concentration and to preserve competition among a large number of sellers. Several years later, in 1897, this court emphasized this policy, the Sherman Act, by calling attention. Now, this is some language from 1897 that this court is repeating in 1964, 1966. Calling attention to the tendency of powerful business combinations to restrain competition by driving out of business the small dealers and worthy men whose lives had been spent therein and who might be unable to readjust themselves to their altered surroundings. There's a footnote there, footnote 7, that also quotes from another source, Judge Learned Hand in the Alcoa case. Later in 1945, Judge Learned Hand, this is the famous Alcoa case, reviewing the policy of the antitrust laws and other laws designed to foster small business, pardon me, other laws designed to foster small business. Said, throughout the history of these statutes, it has been constantly assumed that one of their purposes was to perpetuate and preserve for its own sake and in spite of possible cost an organization of industry in small units which can effectively compete with each other. Okay, from 1897, then repeated by the great Judge Learned Hand in the famous Alcoa case, we have the policy of the Sherman Act to preserve small business. Now this is a notion of antitrust that sometimes referred to Jeffersonian populism, the notion that it's important to our structure of democratic government that economic might be decentralized, that people be entrepreneurs, that people be self-reliant, that people will not be just a cog in some giant corporate machine. Otherwise, we'll get concentration. Concentration in the economy will lead to concentration in the polity. That kind of centralization, that kind of centralized power, that's anti-American. That's not what this country is about. That's the ideal of Jeffersonian populism that's embraced in the Von's Court case. Now, I want to illustrate how this ideal has been changed and indeed turned on its head through a particular citation from an earlier case, one on which the Von's Court relied, and that was the Brown shoe case. If you get an antitrust case before you, it's more than likely you will get a quotation from this famous merger decision, Brown shoe. So let's take just a very quick look at Brown shoe. There's another quotation that I, before we leave Von's, I can't resist mentioning. That is in the Stuart dissent, Justice Potter-Stewart dissented in the Von's case, and this is nonsense. This is a crazy case. The second most memorable line from Justice Stewart, who after all authored the line, he knows it when he sees it, right? That's the first most famous, but I think the second most famous Potter-Stewart line is from the Von's dissent, in which he says, the sole consistency I can see in these Section 7 cases is that the government always wins. The Warren Court was so vigorously on the side of the government as antitrust plaintiff that Justice Stewart penned that result-oriented line. Why? Well, let's look back at an earlier case, the Brown shoe case. Brown shoe was a merger case. This is a quotation that has to be read in context to appreciate the wonderful irony of the quotation's modern use. And when you hear this Brown shoe quotation, as I'm sure you will, I want you to think back to this session today, and if nothing else take away from today's session, wait a minute, there's more to that Brown shoe quotation that appears on the face of it. What is the Brown shoe quotation? Now, this is another merger case. Here, Brown shoe was merging with Kinney shoe, both sold shoes in retail shoe stores. So the question was, did this merger, which in many markets produced, a combined store with 5% of the local market? 5% had 7.5% in Vons, 5% in Brown shoe, held illegal. Why? A third significant aspect of this merger is that it creates a large national chain which is integrated with a manufacturing operation. Okay, so there's vertical integration, there's shoe manufacturing integrated with now emerged retail sector. Now, what about this integrated function? The retail outlets of the integrated companies by eliminating wholesalers and by increasing the volume of purchases from the manufacturing divisions of the enterprise can market their own brands at prices below those of competing independent retailers. Sound like Walmart? This is baby Walmart. Of course, some of the results of large integrated or chain operations are beneficial to consumers. Their expansion is not rendered unlawful by the mere fact that small independent stores may be adversely affected. And here's the line. It is competition, not competitors, which the Act protects. That's the famous line. It is competition, not competitors, which the Act protects. In Brown shoe, look at the next word. But, but, we cannot fail to recognize Congress's desire to promote competition through the protection of viable, small, locally owned business. Congress appreciated that occasional higher costs and prices might result from the maintenance of fragmented industries and markets. It resolved those competing considerations in favor of decentralization. We must give effect to that decision. So, it's competition, not competitors, that the Act protects, but we're protecting competitors. The competitors of the integrated Brown, Kinney shoes will be like the competitors of Walnut. They'll find that they won't be able to compete because their costs are higher. Now, competitors will die if we permit this merger. Now, it's true this merger would serve consumers through lower prices, but we must give effect to Congress's decision to protect small business. Commoner question, Your Honor. Can you make an argument that, when they're favoring decentralization, they're really not directed towards prices but towards ease of entry? The two go hand in hand. Yes, you can make that argument. Let me say a few words and see if... Culturally, a lot of this language is directed towards ease of entry in the business for the small. Yes. Culturally, the point was that ease of entry into a market is facilitated if what you're trying to enter against is not Walmart or some giant integrated national shoe chain. If I decide I'd like to get into the shoe retailing business, it's going to be much easier for me to get into this market. If it is not dominated by massive scale. After all, maybe if I'm a billionaire, maybe if I run Microsoft or I'm a huge investor, then I can buy enough shoe factories and retail operations to enter at this massive scale that's required when these behemoths are in the market. But that's unrealistic for your average citizen. If Jefferson would have liked the yeoman citizen to be able to get into retailing if she or he wanted to, it's much easier to enter a market that's more disaggregated, that's more fragmented. So there are two sides to the same coin. Once we allow this super efficient, super scale, it makes entry for your average person much more difficult. And that was a theme that was extremely resonant in the Warren Court. Now, is that responsive? What's happened to that theme today? Today we get a one sentence quotation from Brown shoe. We get simply the line, it is competition, not competitors, that the act protects. Now, I could give you that citation in many different places. One case that very prominently displays it is the Brooke Group case that I list in the materials. I think given the time, I'm not going to go into Brooke Group in any detail. Let me simply say that that was a case about predatory pricing. The antitrust charge there was that one tobacco company had engaged in anti-competitive activities through a strategy of predatory pricing. Pricing below cost with a deliberate strategy of driving competitors out of the market. And the Supreme Court decided in an extraordinary opinion that the jury verdict was against the weight of the evidence. More accurately, let me phrase it more precisely than that, that no reasonable jury could have concluded that there was a successful or viable predatory pricing claim on the facts in that case. You know how unusual it is for the Supreme Court to engage in a review of a factual record. Well, it did in this case. It went through the entire record and said no reasonable jury could have concluded that that was a viable claim. In the course of that analysis, the court had to confront the claim, well, pricing below cost, that's very bad on competitors, and the court's response was to quote Brown's shoe, but to quote only one sentence from Brown's shoe, and to say it is competition not competitors that the act protects. So even if a firm is pricing below cost for a while, what happens in the long run? After all, what is a predatory pricing strategy, really, but a money losing contest? It's me saying to my competitors, okay, everybody, take a dollar out of your pocket. Now light it. I'm selling a dollar below cost. I'm burning up a dollar with every product I sold. So did you like that last round? Let's do it again. Light it. Do it again. How many dollars are you going to burn up? Because I'm going to keep doing it. Do you believe me? Finally, you believe me. The guy's crazy. He's just going to keep pricing below cost. He's going to keep losing money with every product he sells until I leave the market. Okay, all right, I'll leave the market to that crazy person. Okay, I've invested all those burned up dollars in achieving a monopoly by driving all of my competitors out of the market. What's the harm to the consumers so far? None. So far there's no consumer injury at all. Why? Because price has not gone up to that monopoly level. In order for there to be consumer injury, the theory of this particular offense goes, I now have to exploit my monopoly price position by raising price to the monopoly level. But what's that going to do? Once I raise price, aren't I just going to draw all those competitors back into the market? Because now price is above cost. Unless the plaintiff can prove that there is a recoupment potential, a long enough period of monopoly profits for me to reap a payoff big enough to make up for all those burned dollars that I invested to get this strategy position, unless there's that recoupment, there's no consumer injury. So you see how apt the claim was, consumers, well, they may not be hurt yet, but certainly the competitors have been hurt, and we're one of the competitors. We're suing to stop this predatory pricing strategy. Supreme Court rejected that claim, saying until we see proof that recoupment either did happen or is plausible, we're not going to allow this theory to attack price cutting, because price cutting normally is good for consumers. And to the claim that, wait, we're being injured as competitors, we'll quote Brown shoe. It's competition, not competitors, that the act protects, leaving, of course, the next sentence that starts with the but unquoted. Okay, silently, through omission, really, rather than affirmative articulation, the Supreme Court has drastically changed what this area of law is all about from the 60s. In the 60s, we had Brown shoe, Vons, and other cases, strongly in favor of Jeffersonian populism. These days, there is no announced shift. Those cases are bad law, new cases have taken their place, but there is a dramatic change in emphasis. These days, consumer welfare and consumer sovereignty are very much the bywords of modern antitrust jurisprudence. That leaves federal district courts throughout the country in a tough situation, because you're being asked to apply law that is 30 years old and that in some sense is not good law in the sense that it's very doubtful that those same cases would be decided the same way today, but there's no modern precedence that says, ignore them. So what I've tried to do today is to drive home really three points. First of all, federal judges are the architects of this area of law. It's a common law area by virtue of the brevity of the statute, Congress in effect has delegated the policy problem to the federal judiciary. Second, you must appreciate some fundamentals of economics to understand what this area of law is about. The first thing to understand is simply price setting is fundamentally different than competitive price setting. Competitive price setting is cost-based price setting and that's the antitrust ideal. We like cost-based price setting that gives consumers the benefits of prices that are driven down to cost. Monopolized price setting is the evil and where competitors try to mimic that cartel result, they'll be prosecuted these days, likely on a criminal basis. However, when competitors try to mimic that cartel result, it's harder than it looks. In fact, it can be very tough even in the most concentrated of all markets where there's only two producers, a duopoly, even to make cartelization work. As we go to larger and larger numbers of competitors, the cartelization cooperation problem gets more and more severe. Where is the dividing line in merger law where deciding how many firms are allowed to remain in the market between unacceptable concentration and permissible mergers? My answer there is the answer to that question has changed over time. In the 60s, merger law was extremely strict, even 7.5%, even 5% of the market was thought to be too much. Now, today we're in the midst of one of the greatest merger waves of all history and yet there's no wave of merger litigation. Why? Because the law has changed. Today, the antitrust division through its merger guidelines has a drastically different and more relaxed view of merger law that it had in the 60s. Part of that is a change in economics. My third point is, in large measure, there's a change in goals, a change in policy, a change in philosophy that is motivating this change in law. And that is the courts have shifted away from the view of Jeffersonian populism as an ideal, much more towards the notion that it is competition, not competitors, that antitrust law protects. The courts or isn't the government? Well, it's both. We don't go out and look for cases. We don't go out and look for cases. No, you don't go out and look for cases, because the litigants can bring merger cases, although it's rare for them to do so. Now, it's very much a matter that is in the hands of the prosecution, the antitrust division in particular. These days, Joel Klein, as an administrative official, is very much the architect of current merger enforcement. So courts have reacted, but you're absolutely correct that this player is prosecutorial decision-making, the attitudes of the antitrust division. Is that responsive to your point? Yes, your honor. This relaxation by the Justice Department in direct response to the local economy that has emerged in the 1960s, the desire of our country, in a sense, to compete effectively with what are monopolistic and its overseas. Excellent point. That a key change in our economy since the days of the Warren Court and previously national markets have gone international. Now we can't talk about the Big Three in Detroit. They're not even in Detroit anymore. They've merged internationally, and it's just crazy to think about the car market without thinking about Toyota, Nissan, Honda, and all the rest. So yes, a lot of markets that used to be more insular are now global and subject to much more competition, and so that itself may mean there's more competition, even under an old paradigm. There's no denying the significance of international competition where it's possible. Now in some markets, geography is crucial, and we'll never have international competition. For example, in hospitals, people are never going to go to Paris for an emergency medicine situation. So that's one reason that, for example, hospital merger litigation has continued to be a very active area where other markets, car markets, and so forth, aircrafts, and so on, are much less. Any other comments or questions? Thank you very much.