Antitrust’s Forensic Tools

Welcome to “Tech Monopoly,” a series where University of Pennsylvania Carey Law School professor Herbert Hovenkamp engages with pressing issues in antitrust policy, with a focus on technology and problems of market dominance. Professor Hovenkamp gives particular attention to identifying markets and situations where antitrust can be beneficial, and the kinds of antitrust remedies that are most likely to succeed. The series is adjacent to his book Tech Monopoly (MIT Press, 2024).

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Abstract: Most areas of law enforcement require investigative tools to provide evidence of violations and harm. Antitrust law’s single-minded focus on prices, output, and innovation explains its selection of economic tools. These tools were pro-enforcement and were embraced consistently by the Supreme Court, including proponents of scientific evidence such as Justice Brandeis.

Most areas of law enforcement require investigative tools to provide evidence of violations and harm. Often the statutes themselves do not identify them. A homocide statute might say nothing about DNA, ballistics, fingerprints, medical examination, or any other procedure that links a suspect to a murder. Nevertheless, they are used routinely to identify and prosecute suspected killers. When a new tool such as DNA analysis becomes available, it is used once it attains acceptance within the relevant scientific community.[1]

1. The Sherman and Clayton Acts

The Sherman and Clayton Acts are more explicit than most statutes about their forensic tools than most statutes. In stating policy goals and identifying violations, they consistently use economic terms, including “restraint of trade,” “monopolize,” and “lessen competition.”[2] As a result, efforts to “de-economize” antitrust are harmful nonsense that ignore statutory language.[3] Further, the courts have consistently called for the use of these tools in furtherance of a particular set of goals–namely, lower prices, higher market output, and unrestrained innovation.[4] The tools the courts have developed were designed to determine when a particular practice threatened these.

These goals are most explicit in the Sherman Act’s “restraint of trade” standard. Congress took that phrase from the common law, where it referred to practices that limited or obstructed trading. Prior to the Sherman Act, state judges applied it to practices that “limit the supply below the demand in order to enhance the price,”[5] or actions that “limit the supply… for the sole purpose of increasing the price.”[6] These judges understood the relationship between limitations on output and higher prices.

Federal judges immediately read these common law interpretations into the Sherman Act, as Congress anticipated they would.^[7] For example, Judge Taft’s 1898 opinion in the Addyston Pipe decision spoke of the cast iron pipe cartel as “restricting competition and maintaining prices” and “restrict[ing] output.”^[8] If the object of an agreement was to “enhance or maintain prices, it would seem that there was nothing to justify or excuse the restraint.” In a private action against that same cartel, Justice Holmes identified the appropriate measure of harm as “the difference between the price paid and the market or fair price.”^[9] This “overcharge”–which identifies the harm with the price increase– has remained the principal measure of purchaser damages in antitrust cases ever since.

One of the first antitrust boycott cases, Montague v. Lowry (1904), condemned an association of tile manufacturers who agreed to charge full list prices and not do business with anyone except other association members.[10] “By reason of this agreement,” Justice Peckham concluded, the market for tile “not only narrowed, but the prices charged … to those not members of the association are more than doubled.” The courts extended this focus on output and price to unilateral conduct under §2 of the Sherman Act. For example, the indictment leading up to the big 1911 Standard Oil monopolization case accused Standard of “limit[ing] the production, output, and markets” for petroleum products.[11]

The Clayton Act’s more specific provisions enacted in 1914 reached practices that threatened substantially to “lessen competition” or “tend to create a monopoly.” The courts continued to apply the same output- and price-focused metrics. Already in 1909, the Supreme Court had equated the phrase “prevent or lessen competition” in a state antitrust provision with conduct that increased prices.[12] In its first big Clayton Act exclusive dealing case, it held that the statute’s purpose was to target agreements that “restrain[ed] the free flow of commerce” and created a monopoly in several cities. It cited the fact that the company controlled two-fifths of the business across the country.[13] An early Clayton Act tying decision concluded that IBM’s tying of its computation machines to data cards was anticompetitive because without the tie “a competing article of equal or better quality would be offered at the same or a lower price.”[14] Merger jurisprudence was more erratic, thanks in part to the Brown Shoe decision, a severe outlier.[15] But overall the Court agreed that the principal purpose of the law was to forbid mergers that result in higher prices.[16]

2. Justice Brandeis, Scientific Evidence and Antitrust

Antitrust law’s single-minded focus on prices, output, or less frequently on innovation explains its selection of assessment tools. Often the output or price effects of a practice were not clear at first glance. Justice Brandeis, who was a pathbreaker in the use of scientific evidence in litigation,[17] also pioneered the use of forensic evidence in complex antitrust cases under the rule of reason. His opinion for the Supreme Court in the 1931 Standard Oil case addressed a patent cross-licensing venture in large-scale “cracking” technology for refining gasoline.[18] The complex case generated a 240-page special master’s report.[19] As Justice Brandeis summarized, the cracking process had been the product of several oil refiners working independently. Each had developed portions of the technology, and they frequently sued one another for patent infringement. The pool settled these disputes and united the patents into a single serviceable technology, which the pool then licensed back to participants as well as others.[20] Justice Brandeis also observed that the pooling agreement did not fix product prices, although it did specify the sharing of royalties in proportion to the value of the patents each participant had contributed.

In dismissing the complaint, Justice Brandeis observed that “[n]o monopoly, or restriction of competition, in the production of either ordinary or cracked gasoline, has been proved.”[21] The defendants’ aggregate production was approximately 26% of the gasoline produced in the United States, and ordinary gasoline was “indistinguishable from cracked gasoline.” As a result, the defendants lacked market control and could not have reduced market output even if they wanted to. Without “proof that the primary defendants had such control … it is difficult to see how they could by agreeing upon royalty rates control either the price or the supply of gasoline, or otherwise restrain competition.”[22]

Justice Brandeis’ approach to forensic evidence also sheds light on several ancillary tools that went along with the use of economics in antitrust. These included market power, the relevant market and market share, the per se rule, and the rule of reason. All of these provide ways of approaching the question of whether a particular practice is likely to reduce market output, raise prices, or restrain innovation. Because they are factual, they are also subject to revision and updating as better evidence and theory come along. For example, lawyers and economists continue to debate whether “indirect” measures of market power by reference to market share, as Brandeis employed in Standard Oil, are better than more direct measures that look directly at price/cost margins.[23]

3. Has Economics Made Antitrust Conservative?

One issue worth considering is whether economics has made antitrust more conservative. But relative to what? Antitrust economics was hardly conservative when considered against the status quo at the time of the Sherman Act. Anglo-American economics in the nineteenth century was called “political economy.” It was taught by philosophers, natural historians, and even clergy. For the most part, it was a strenuous laissez-faire discipline, arguing for less government intervention in the affairs of the market. Against that backdrop, the antitrust laws represented an enormous increase in government involvement in the economy.

The law did this not by challenging economics but rather by increasing enforcement power to support things that economics had always supported–namely competition, with high output and low prices, and an abhorrence of monopoly that dated back to Adam Smith.[24] While agreements in restraint of trade had simply been unenforceable under the common law, the Sherman Act made them affirmatively unlawful and challengeable by the government or private parties who were injured by them.[25] While “monopoly” had been considered a bad thing, the concerns had been limited to monopolies created by the government. The Sherman Act expanded their scope to include dominant firms that came to power by their own acts.

4. Marginalism and the Clayton Act

The Clayton Act, passed 24 years after the Sherman Act, reflected major, pro-enforcement changes in economic theory. The intervening marginalist revolution in economics upended much of classical political economy, which had assessed costs and benefits by looking at averages taken from the past. [26] In contrast, marginalists saw value as the willingness to pay for or accept the next, or “marginal,” unit of something. Its perspective on value was forward-looking. Under marginalism market entry and growth were dynamic concepts whose ease and likelihood varied from one market to another. Consideration of these complexities was built into the probabilistic assessments contemplated by the Clayton Act’s forward-looking language: “where the effect may be substantially to lessen competition or tend to create a monopoly.”

Marginalist analysis permitted values governing demand, supply, or entry to be “metered,” or quantified. This feature made marginalist economics more technical, with increasing informational demands. It also promised to give Progressive Era economists capabilities far beyond those of their predecessors. Marginalism greatly expanded the use of mathematics in economics, making it attractive to younger economists and social scientists looking to add rigor to their disciplines. It also accounts for some of the resistance from older economists.[27]

The Clayton Act’s emphasis on probable effects turned out to be genius, particularly for the law of mergers. It is doubtful that Congress in 1914, or even in 1950 when § 7 was amended, foresaw the extent of such practices as pre-acquisition evaluation of mergers.[28] Nor did it likely foresee the extent to which merger analysis would involve empirical economic modeling. But the “where the effect may be” language turned out to be tailor-made for it. Under that test the fact finder must estimate the probable effects of a particular practice such as an acquisition. It did not specify the tools or methods to be used, provided that they were designed to identify reasonably probable outcomes. Probabilistic estimates of harm have become conventional in merger analysis.

The initial contributions of economics to Clayton Act antitrust policy were strongly pro-enforcement, particularly when compared with the Sherman Act status quo. While they did not reject markets or come even close, they provided the view that market competition is not inherent and must be protected. Further, the amount and type of protection varies from one market to another, and the metrics for assessing it can be complex. To that extent, the history of antitrust enforcement both reflected and influenced the development of industrial economics.

Herbert Hovenkamp

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Citation: Herbert Hovenkamp, Antitrust’s Forensic Tools​, Network Law Review, Winter 2025.

References:

• [1] E.g., Fugate v. Commonwealth, 993 S.W.2d 931 (Ky. 1999) (admitting DNA evidence in homicide case). Federal law is controlled by the Supreme Court’s decision in Daubert v. Merrell Dow Pharmaceuticals, Inc., 509 U.S. 579 (1993).
• [2] 15 U.S.C. §§ 1, 2, 13, 14, 18.
• [3] E.g. Daniel A. Hanley, De-Economizing Antitrust Law Starts with Market Definition, The Sling (Apr. 28, 2023), https://www.thesling.org/de-economizing-antitrust-law-starts-with-market-definition/.
• [4] Herbert Hovenkamp, Antitrust’s Goals in the Federal Court (SSRN, 2024), https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4519993.
• [5] Morris Run Coal Co. v. Barclay Coal Co., 68 Pa. 173, 183 (Pa. 1871).
• [6] Santa Clara Val. M. & L. Co. v. Hayes, 76 Cal. 387, 389 (1888)
• [7] See 21 Cong. Rec. 3152 (1890) (Sen. George Hoar: purpose of Sherman bill “is to extend the common-law principles, which protected fair competition in trade in old times in England, to international and interstate commerce in the United States”). See Edward A. Adler, Monopolizing at Common Law and Under Section Two of the Sherman Act, 31 Harv. L. Rev. 246 (1917).
• [8] United States v. Addyston Pipe & Steel Co., 85 F. 271, 274, 282-283 (6th Cir. 1898). See Donald Dewey, The Common-Law Background of Antitrust Policy, 41 Va. L. Rev. 759, 778 (1955) (noting importance of “restricting output” as a metric).
• [9] Chattanooga Foundry & Pipe Works v. City of Atlanta, 203 U.S. 390, 396 (1906).
• [10] W.W. Montague & Co. v. Lowry, 193 U.S. 38, 45 (1904).
• [11] United States v. Standard Oil Co., 173 F. 177 (E.D. Mo. 1909), aff’d, 221 U.S. 1 (1911).
• [12] Waters-Pierce Oil Co. v. Tex., 212 U.S. 86, 99, 107 (1909).
• [13] Standard Fashion Co. v. Magrane-Houston co., 258 U.S. 346, 357 (1922).
• [14] IBM v. United States, 298 U.S. 131, 139 (1936).
• [15] See Herbert Hovenkamp, Did the Supreme Court Fix “Brown Shoe”? (Promarket, May 12, 2023), https://www.promarket.org/2023/05/12/did-the-supreme-court-fix-brown-shoe/.
• [16] United States v. El Paso Nat. Gas Co., 376 U.S. 651 (1964) (condemning merger that limited low price bidder); United States v. Continental Can Co., 378 U.S. 441, 465-466 (1964) (condemning merger that threatened to “raise price above the competitive level.”).
• [17] See Noga Morag-Levine, Facts, Formalism, and the Brandeis Brief: the Origins of a Myth, 2013 Univ. Ill. L. Rev.
• [18] Standard Oil Co., Ind. V. United States, 283 U.S. 163 (1931).
• [19] The Special Masters’ Report is discussed in Brief for the United States, Standard Oil, 1931 WL 32215 (Jan. 9, 1931).
• [20] Id. at 166-167.
• [21] Id. at 176.
• [22] Id. at 179.
• [23] See Herbert Hovenkamp, Federal Antitrust Policy: the Law of Competition and its Practice §§3.3 – 3.9 (7^th ed. 2024).
• [24] On Adam Smith’s critique of monopoly, see E.G. West, The Burdens of Monopoly: Classical versus Neoclassical, 44 S. Econ. J. 829 (1978).
• [25] See Herbert Hovenkamp, The Sherman Act and the Classical Theory of Competition, 74 Iowa L. Rev. 1019 (1989).
• [26] On marginalism and the reaction to classical political economy, see Mark Blaug, Economic Theory in Retrospect277–310 (5th ed. 1997). In American law, see Herbert Hovenkamp, The Marginalist Revolution in Legal Thought, 46 Vand. L. Rev. 305 (1993).
• [27] See Dorothy Ross, The Origins of American Social Science 98–140 (1991); Mary O. Furner, Advocacy and Objectivity: A Crisis in the Professionalization of American Social Science, 1865–1905 (1975).
• [28] Hart-Scott-Rodino Antitrust Improvements Act, Pub. L. No. 94-435, 90 Stat. 1383 (1976) (codified as amended at 15 U.S.C. § 18a (2018)).