Applying the Neo-Chicago School’s framework to high-tech markets

To quote this article:
Thibault Schrepel, Applying the Neo-Chicago School’s framework to high-tech markets, May 2016

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The “antitrust law community” loves to argue over which school of thoughts is the best suited to the New Economy. And indeed, it’s a lot of fun. But more than that, determining which school of thoughts provides the best framework is a subject of particular importance because it implies to determine which objectives antitrust law should pursue.

Few academic authors have actually revealed from which school they feel the closer to. Some have raised how out-dated it is. We believe, to the contrary, that it is a necessary step. Here are some insights about the Neo-Chicago School.

I. The Neo-Chicago School: what is it?

1. Definition(s)

The Neo-Chicago School is described by Joshua D. Wright as being “an exercise in marketing—rebranding the Chicago School in light of the criticisms (rightly or wrongly) it has received from the antitrust community, as the “softer, gentler, and new and improved” Chicago School, more friendly to incorporating Post-Chicago insights and with an even greater emphasis upon empirical evidence.”[1]. In short, this school “purportedly adds to the conventional Chicago approach to the error-cost framework”. This school leads to reject per se legality, and “to the extent that this label helps to distinguish calls for presumptions of legality informed by decision-theoretic analysis from those who would argue for per se legality based solely on the Chicago School “impossibility theorems,” it may be a useful addition to the antitrust nomenclature.”[2]

2. Neo-Chicago School v. Neo-Harvard School

The Neo-Harvard School, as described by Crane, “accepts the essential theoretic insights of the Chicago School but acts cautiously in applying them to real cases because of skepticism over the predictive power of theoretic models in litigation”.[3] He added, “the emerging Neo-Harvard School, represented by the canonical Antitrust Law treatise and its principal custodians, Turner, Phillip Areeda, and now Herbert Hovenkamp, articulated a centrist or even conservative approach to antitrust law. Hovenkamp, the reigning dean of the Neo-Harvard School, writes that ‘[t]oday the Harvard School is modestly more interventionist than the Chicago School, but the main differences lie in details.’”[4]

The Neo-Chicago School might be more sympathetic than the Neo-Harvard School with the predictive power of free market models,[5] but requires empirical evidence. If the difference between the two schools lies in details,[6] mainly because both schools agree that the outcome of a case should be based on empirical evidence, some characteristics remain diverging. The Neo-Chicago School is indeed more likely to presume the legality of unilateral practices based on price theory and then to impose high burden on the plaintiff. On the contrary, the Neo-Harvard School is more likely to lessen the burden on the plaintiff whenever strong structural elements characterize the market.

3. The example of the Leegin case

The doctrinal debate over which schools influenced the Leegin ruling illustrates the philosophical difference between the two schools.[7]

Some authors underlined that the Leegin case follows the Harvard School,[8] mainly because the court rejected per se legality, holding that “the rule of reason, furthermore, is not inconsistent with the Consumer Goods Pricing Act. Unlike the earlier congressional exemption, it does not treat vertical price restraints as per se legal.”[9] However, Harvard School’s tenants focused their analyses on structural elements,[10] and the rule of reason proposed by the SCOTUS in the Leegin case can be qualified as “pure” in the sense that the justices didn’t propose a framework based on structural analyzes.

In our view, the Leegin case is a rejection of both classic Chicago and Harvard Schools, because the Court rejected per se legality, and, at the same time, didn’t apply any structural analysis.[11] But is the Leegin case more consistent with the Neo-Chicago or Neo-Harvard School?

In our view, it is not yet possible to address if the Leegin case is in line with the Neo-Chicago School or the Neo-Harvard School. It will, in fact, depend on how the courts will structure the rule of reason in coming cases. Because the Leegin ruling does not take a side on how to apply the structured rule of reason, the case is neutral and cannot be linked to one School or the other.

II. The Neo-Chicago School and high-tech markets

1. Why the Neo-Chicago School?

There are three main reasons why Neo-Chicago School appeared to be better suited than the Neo-Harvard School to answer high-tech market concerns.

The first is based on the fact that the Harvard School and the Neo-Harvard School give too much room for structural analyzes. The emergence of disruptive technologies tends to prove that market structures are not central in these markets.

Additionally, it is not clear if perfect competition or oligopoly better enhances innovation. In other words, courts and judges should not seek any market structure.[12] Lastly, the lifetime of monopolies on high-tech markets is proved to be shorter than in any other markets, the proof that the structure is not as determining as the Harvard School assesses it is[13].

The second is linked to the fact that only the Neo-Chicago School, by introducing the error-cost framework praised by Easterbrook,[14] recognizes that markets have a comparative advantage over courts in taking care of false negative.

As it was described by Thomas A. Lambert and Alden F. Abbott, “the Neo-Chicago approach acknowledges that, under certain circumstances, anticompetitive harm may stem from a number of business practices; yet, it emphasizes that potential anticompetitive harm is only a necessary—never a sufficient—condition for antitrust intervention.”

The third, “Neo-Chicagoans distrust regulation as an alternative to antitrust much more than do the Neo-Harvardians”. The Courts should design legal rules by integrating the experience of past trials. The legislator is further from the practical concerns of economic agents and should then not be involved in the process of guiding the Courts, or it will create Type I and II errors.

2. Which Neo-Chicago School?

The Chicago Schools are not as uniform as they are sometimes presented. For instance, Posner and Esterbrook differed on the treatment to give to predatory pricing[15]. The same was true between Posner and Bork regarding horizontal mergers analyses.[16]

A criticism addressed to both the Chicago School and Post-Chicago School is that there were not based enough on empirical evidence. Yet, the Post-Chicago School was already rejecting any form of per se legality.[17] This school also challenged the founding that companies has no incentive to implement anticompetitive practices by integrating game theories in the theorem. Nonetheless, some ideological aspects remain unjustified.

The Neo-Chicago School must then be the one by which Chicagoan scholars’ trust in the market will be empirically proved. As Daniel A. Crane wrote, “empirical work is a key to the Neo-Chicago School’s future success. But even beyond formal empirical work, Neo-Chicago focuses on testing the veracity of propositions in real market contexts.”[18]

For this purpose, the Neo-Chicago School must also be the one by which innovation will be fully integrated as a primary focus to all analyses. As described by Posner, “the Chicago School has largely prevailed with respect to its basic point: that the proper lens for viewing antitrust problems is price theory.”[19] The Neo-Chicago School must integrate dynamic efficiencies to its analysis. Without holding innovation as a real antitrust standard, empirical analyses will fail to demonstrate the benefit of free markets. Yet, so far, “the main objection to competition law enforcement that takes innovation seriously is that it’s a good idea in theory but too difficult in practice”. In other words, “the idea of promoting or protecting innovation sounds good, but challenging an old-school cartel that fixes high prices is easier.”[20] Neo-Chicago School scholars have all the tools in hand to change that.

It also makes provisions for the agencies and courts to be entitled to protect innovation and charging companies for naked anti-competitive practices aiming at blocking or preventing innovation, as the FTC did in the Intel case under the Section 5 of the FTC Act.[21]

Par Thibault Schrepel

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• [1]     Joshua D. Wright, Abandoning Antitrust’s Chicago Obsession: The Case for Evidence-Based Antitrust, 78 ANTITRUST L.J. 241 (2012).
• [2]     Joshua D. Wright, The Roberts Court and the Chicago School of Antitrust: The 2006 Term and Beyond, 3 COMPETITION POL’Y INT’L 25 (2007).
• [3]    Daniel A. Crane, Chicago, Post-Chicago, and Neo-Chicago, 76 U. CHI. L. REV. 1911, 1912 (2009).
• [4]     Daniel A. Crane, A Neo-Chicago Perspective on Antitrust Institutions, 78 ANTITRUST L.J. 43 (2012).
• [5]     Thomas A. Lambert & Alden F. Abbott, Recognizing the Limits of Antitrust, forthcoming: “Neo-Chicagoans reason that “market self-regulation is often superior to government regulation, which frequently is a solution in search of a problem.”
• [6]     Herbert Hovenkamp, The Antitrust Enterprise: Principle and Execution (2008): “Today the Harvard School is modestly more interventionist than the Chicago School, but the main differences lie in details.”
• [7]     Wouter P. J. Wils, The Judgment of the EU General Court in Intel and the So-Called ‘More Economic Approach’ to Abuse of Dominance, 37 WORLD COMPETITION 405 (2014): “All human thinking and human language uses categories. There is no way this could be avoided. It is not possible to conceive a workable interpretation of Article 102 TFEU that would not make some use of categories.”
• [8]     Einer R. Elhauge, Harvard, Not Chicago: Which Antitrust School Drives Recent U.S. Supreme Court Decisions?, 3 COMP POLICY INTL 59, 60 (2007).
• [9]     Leegin Creative Leather Prods., Inc. v. PSKS, Inc., 551 U.S. 877, 886-87 (2007).
• [10]    The same is true for the Ordoliberal School. See on this subject Thibault Schrepel, Friedrich Hayek’s Contribution to Antitrust Law and its Modern Application, GAR 199 (2014): “Ordoliberalism theories that appeared in the 1930’s with the Freiburg School give the state a great credit to organize the market in order to reach a predefined competition structure. Hayek called these theories ‘restrained liberalism’. Even if Hayek was in favour of a legal framework settled by the government, in which competition could be optimized, he always rejected the idea of a market structure as a way to achieve a particular outcome. It is all about ‘playing a non-zero-sum game whose rules have the objective of increasing the payoff but leave the share of the individuals partly to chance’.”
• [11]    On the distinction between the two Schools, please note that some authors reject it. See Thomas J. Horton, Unraveling the Chicago/Harvard Antitrust Double Helix: Applying Evolutionary Theory To Guard Competitors and Revive Antitrust Jury Trials, 41 U. BALT. L. REV. 615 (2012) : “The Chicago/Harvard antitrust philosophy”
• [12]    Joshua D. Wright, Antitrust, Multi-Dimensional Competition, and Innovation: Do We Have an Antitrust-Relevant Theory of Competition Now?, in Regulating Innovation: Competition Policy and Patent Law under Uncertainty (2011): “Many scholars have recognized that our empirical knowledge of the relationship between market structure and innovation, as well between market structure and consumer welfare, is limited relative to our understanding of static price effects in conventional product markets.”
• [13]    For empirical data on the subject, see Thibault Schrepel, L’innovation de rupture : de nouveaux défis pour le droit de la concurrence, 42 RLC 141 (2015).
• [14]    Su Sun, Antitrust Law Journal 2012 Symposium: Neo-Chicago, Antitrust Editor’s Note: Schools of Antitrust––A Parallelogram of Forces, 78 ANTITRUST L.J. 37 (2012): “There also seems to be little disagreement on Judge Easterbrook’s error-cost framework, whether this is considered as part of Chicago already, or is only formally adopted in Neo-Chicago.”
• [15]    Bruce H. Kobayashi & Timothy J. Muris, Chicago, Post-Chicago, and Beyond: Time to Let Go of the 20th Century, 78 ANTITRUST L.J. 147 (2012): “For example, Posner and Easterbrook, two of the most prominent jurists in the Chicago School, differ on the appropriate treatment of predatory pricing. While Easterbrook would apply a broad rule of per se legality, Posner has criticized the Areeda/Turner cost rule as too permissive and would apply an equally efficient competitor standard.”
• [16]    Daniel A. Crane, Chicago, Post-Chicago, and Neo-Chicago, 76 U. CHI. L. REV. 1911, 1912 (2009): “Bork believed that mergers should be broadly permissible as long as an industry contained three viable competitors; Posner would have presumed illegality either when four firm concentration levels exceeded 60 percent or when a merger significantly increased concentration in a market predisposed to collusive pricing.”
• [17]    John E. Lopatka & William H. Page, Economic Authority and the Limits of Expertise in Antitrust Cases, 90 CORNELL L. REV. 617, 621 (2005), see for instance what the court did in the Kodak case by rejecting “the proposed rule that firms lacking market power in an equipment market can never exercise market power in aftermarkets for parts and service.”
• [18]    Daniel A. Crane, A Neo-Chicago Perspective on Antitrust Institutions, 78 ANTITRUST L.J. 43 (2012).
• [19]    Richard A. Posner, The Chicago School of Antitrust Analysis, 127 U. PENN. L. REV. 925, 925-26 (1979).
• [20]    Tim Wu, Taking Innovation Seriously: Antitrust Enforcement if Innovation Mattered Most, 78 ANTITRUST L.J. 313 (2012).
• [21]    Without taking side on whether this particular charge was or not justified, see the administrative complaint by the FTC in the Intel case (December 16, 2009): “Intel’s conduct adversely affects competition and consumers by, including but not limited to: reducing competition to innovate in the relevant CPU and GPU markets by Intel and others; (…) reducing the incentive and ability of OEMs to innovate and differentiate their products in waysthat would appeal to customers”. https://www.ftc.gov/sites/default/files/documents/cases/091216intelcmpt.pdf . Please note that this case would not have violated the Sherman Act. The European Commission under the article 102 of the TFUE charged a similar case against Intel. The European Guidelines of this text indeed states that “the Commission considers that consumer harm may, for instance, arise where the competitors that the dominant undertaking forecloses are, as a result of the refusal, prevented from bringing innovative goods or services to market and/or where follow-on innovation is likely to be stifled.”.