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Book Title: Post-Chicago Developments in Antitrust Law
Editor(s): Cucinotta, Antonio; Pardolesi, Roberto; Van den Bergh, J. Roger
Publisher: Edward Elgar Publishing
ISBN (hard cover): 9781843760016
Section: Chapter 1
Section Title: The Reckoning of Post-Chicago Antitrust
Author(s): Hovenkamp, Herbet
Number of pages: 33
Extract:
1. The reckoning of post-Chicago antitrust
Herbert Hovenkamp
INTRODUCTION: THE LONG HISTORY OF ECONOMICS
IN ANTITRUST
Antitrust in the United States has seldom suffered from a shortage of economic
theories suggesting why certain behavior should be unlawful. Beginning in the
decade that the Sherman Act was passed, litigants began to rely on prevailing
economic theories to explain why a particular act was or was not anticompeti-
tive. In the 1890s, economists struggling with the first marginalist models in
economics models that incorporated such conceptions as marginal cost and
marginal revenue had difficulty explaining how a competitive enterprise could
ever recover its fixed costs. Finding no adequate explanation, several econo-
mists argued that firms with significant fixed costs would be driven to `ruinous
competition' that would invariably yield low returns, bankruptcy and harmful
destruction of assets.1 John Bates Clark, who was perhaps the most important
American economist of his generation, argued in 1887 that certain industries
subject to high fixed costs and economies of scale were so prone to overpro-
duction that the firms in them must either collude or face `widespread ruin'.2
The defendants in the earliest Sherman Act cases involving mainly railroad
cartels quickly appropriated these theories, arguing that unregulated railroads
would face ruinous competition unless given permission to fix their rates.
Justice Rufus Peckham, who wrote for the Supreme Court in both the Trans-
Missouri and Joint Traffic cases, did not cite any of the economic literature,
but he was completely familiar with the argument. ...
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URL: http://www.austlii.edu.au/au/journals/ELECD/2002/87.html