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Antitrust Error Costs, Herbert J. Hovenkamp Nov 2021

Antitrust Error Costs, Herbert J. Hovenkamp

Faculty Scholarship at Penn Law

The idea that consideration of error costs should inform judgments about actions with uncertain consequences is well established. When we act on imperfect information, we consider not only the probability of an event, but also the expected costs of making an error. In 1984 Frank Easterbrook used this idea to rationalize an anti-enforcement bias in antitrust, reasoning that markets are likely to correct monopoly in a relatively short time while judicial errors are likely to persist. As a result, false positives (recognizing a problem when there is none) are more costly than false negatives. While the problem of error cost ...


President Biden's Executive Order On Promoting Competition: An Antitrust Analysis, Herbert J. Hovenkamp Jul 2021

President Biden's Executive Order On Promoting Competition: An Antitrust Analysis, Herbert J. Hovenkamp

Faculty Scholarship at Penn Law

In July, 2021, President Biden signed a far ranging Executive Order directed to promoting competition in the American economy. This paper analyzes issues covered by the Order that are most likely to affect the scope and enforcement of antitrust law. The only passage that the Executive Order quoted from a Supreme Court antitrust decision captures its antitrust ideology well – that the Sherman Act:

rests on the premise that the unrestrained interaction of competitive forces will yield the best allocation of our economic resources, the lowest prices, the highest quality and the greatest material progress, while at the same time providing ...


Vertical Control, Herbert J. Hovenkamp Mar 2021

Vertical Control, Herbert J. Hovenkamp

Faculty Scholarship at Penn Law

Antitrust litigation often requires courts to consider challenges to vertical “control.” How does a firm injure competition by limiting the behavior of vertically related firms? Competitive injury includes harm to consumers, labor, or other suppliers from reduced output and higher margins.

Historically antitrust considers this issue by attempting to identify a market that is vertically related to the defendant, and then consider what portion of it is “foreclosed” by the vertical practice. There are better mechanisms for identifying competitive harm, including a more individualized look at how the practice injures the best placed firms or bears directly on a firm ...


Competitive Harm From Vertical Mergers, Herbert J. Hovenkamp Oct 2020

Competitive Harm From Vertical Mergers, Herbert J. Hovenkamp

Faculty Scholarship at Penn Law

The antitrust enforcement Agencies' 2020 Vertical Merger Guidelines introduce a nontechnical application of bargaining theory into the assessment of competitive effects from vertical acquisitions. The economics of such bargaining is complex and can produce skepticism among judges, who might regard its mathematics as overly technical, its game theory as excessively theoretical or speculative, or its assumptions as unrealistic.

However, we have been there before. The introduction of concentration indexes, particularly the HHI, in the Merger Guidelines was initially met with skepticism but gradually they were accepted as judges became more comfortable with them. The same thing very largely happened again ...


House Judiciary Inquiry Into Competition In Digital Markets: Statement, Herbert J. Hovenkamp Apr 2020

House Judiciary Inquiry Into Competition In Digital Markets: Statement, Herbert J. Hovenkamp

Faculty Scholarship at Penn Law

This is a response to a query from the Judiciary Committee of the U.S. House of Representatives, requesting my views about the adequacy of existing antitrust policy in digital markets.

The statutory text of the United States antitrust laws is very broad, condemning all anticompetitive restraints on trade, monopolization, and mergers and interbrand contractual exclusion whose effect “may be substantially to lessen competition or tend to create a monopoly.” Federal judicial interpretation is much narrower, however, for several reasons. One is the residue of a reaction against excessive antitrust enforcement in the 1970s and earlier. However, since that time ...


Competition Policy For Labour Markets, Herbert J. Hovenkamp May 2019

Competition Policy For Labour Markets, Herbert J. Hovenkamp

Faculty Scholarship at Penn Law

Competition law in many jurisdictions defines its consumer welfare goal in terms of low consumer prices. For example, mergers are challenged when they threaten to cause a price increase from reduced competition in the post-merger market. While the consumer welfare principle is under attack in some circles, it remains the most widely expressed goal of antitrust policy.

We would do better, however, to define consumer welfare in terms of output rather than price. Competition policy should strive to facilitate the highest output in any market that is consistent with sustainable competition. That goal is in most ways the same as ...


Anticompetitive Mergers In Labor Markets, Ioana Marinescu, Herbert J. Hovenkamp Jan 2019

Anticompetitive Mergers In Labor Markets, Ioana Marinescu, Herbert J. Hovenkamp

Faculty Scholarship at Penn Law

Mergers of competitors are conventionally challenged under the federal antitrust laws when they threaten to lessen competition in some product or service market in which the merging firms sell. Mergers can also injure competition in markets where the firms purchase. Although that principle is widely recognized, very few litigated cases have applied merger law to buyers. This article concerns an even more rarefied subset, and one that has barely been mentioned. Nevertheless, its implications are staggering. Some mergers may be unlawful because they injure competition in the labor market by enabling the post-merger firm anticompetitively to suppress wages or salaries ...


Prophylactic Merger Policy, Herbert J. Hovenkamp Dec 2018

Prophylactic Merger Policy, Herbert J. Hovenkamp

Faculty Scholarship at Penn Law

An important purpose of the antitrust merger law is to arrest certain anticompetitive practices or outcomes in their “incipiency.” Many Clayton Act decisions involving both mergers and other practices had recognized the idea as early as the 1920s. In Brown Shoe the Supreme Court doubled down on the idea, attributing to Congress a concern about a “rising tide of economic concentration” that must be halted “at its outset and before it gathered momentum.” The Supreme Court did not explain why an incipiency test was needed to address this particular problem. Once structural thresholds for identifying problematic mergers are identified there ...


Whatever Did Happen To The Antitrust Movement?, Herbert J. Hovenkamp Dec 2018

Whatever Did Happen To The Antitrust Movement?, Herbert J. Hovenkamp

Faculty Scholarship at Penn Law

Antitrust in the United States today is caught between its pursuit of technical rules designed to define and implement defensible economic goals, and increasing calls for a new antitrust “movement.” The goals of this movement have been variously defined as combating industrial concentration, limiting the economic or political power of large firms, correcting the maldistribution of wealth, control of high profits, increasing wages, or protection of small business. High output and low consumer prices are typically unmentioned.

In the 1960s the great policy historian Richard Hofstadter lamented the passing of the antitrust “movement” as one of the “faded passions of ...


Horizontal Mergers, Market Structure, And Burdens Of Proof, Herbert J. Hovenkamp, Carl Shapiro Jan 2018

Horizontal Mergers, Market Structure, And Burdens Of Proof, Herbert J. Hovenkamp, Carl Shapiro

Faculty Scholarship at Penn Law

Since the Supreme Court’s landmark 1963 decision in Philadelphia National Bank, antitrust challengers have mounted prima facie cases against horizontal mergers that rested on the level and increase in market concentration caused by the merger, with proponents of the merger then permitted to rebut by providing evidence that the merger will not have the feared anticompetitive effects. Although the way that concentration is measured and the triggering levels have changed over the last half century, the basic approach has remained intact. This longstanding structural presumption, which is well supported by economic theory and evidence, has been critical to effective ...


Horizontal Shareholding And Antitrust Policy, Fiona M. Scott Morton, Herbert J. Hovenkamp Jan 2018

Horizontal Shareholding And Antitrust Policy, Fiona M. Scott Morton, Herbert J. Hovenkamp

Faculty Scholarship at Penn Law

“Horizontal shareholding” occurs when one or more equity funds own shares of competitors operating in a concentrated product market. For example, the four largest mutual fund companies might be large shareholders of all the major United States air carriers. A growing body of empirical literature concludes that under these conditions market output in the product market is lower and prices higher than they would otherwise be.

Here we consider how the antitrust laws might be applied to this practice, identifying the issues that courts are likely to encounter and attempting to anticipate litigation problems. We assume that neither the mutual ...


The Shifting Tides Of Merger Litigation, Matthew D. Cain, Jill E. Fisch, Steven Davidoff Solomon, Randall S. Thomas Jan 2018

The Shifting Tides Of Merger Litigation, Matthew D. Cain, Jill E. Fisch, Steven Davidoff Solomon, Randall S. Thomas

Faculty Scholarship at Penn Law

In 2015, Delaware made several important changes to its laws concerning merger litigation. These changes, which were made in response to a perception that levels of merger litigation were too high and that a substantial proportion of merger cases were not providing value, raised the bar, making it more difficult for plaintiffs to win a lawsuit challenging a merger and more difficult for plaintiffs’ counsel to collect a fee award.

We study what has happened in the courts in response to these changes. We find that the initial effect of the changes has been to decrease the volume of merger ...


Appraising Merger Efficiencies, Herbert J. Hovenkamp Jan 2017

Appraising Merger Efficiencies, Herbert J. Hovenkamp

Faculty Scholarship at Penn Law

Mergers of business firms violate the antitrust laws when they threaten to lessen competition, which generally refers to a price increase resulting from a reduction in output. However, a merger that threatens competition may also enable the post-merger firm to reduce its costs or improve its product. Attitudes toward mergers are heavily driven by assumptions about efficiency gains. If mergers of competitors never produced efficiency gains but simply reduced the number of competitors, a strong presumption against them would be warranted. We tolerate most mergers because of a background, highly generalized belief that most or at least many produce cost ...


Antitrust Balancing, Herbert J. Hovenkamp Apr 2016

Antitrust Balancing, Herbert J. Hovenkamp

Faculty Scholarship at Penn Law

Antitrust litigation often confronts situations where effects point in both directions. Judges sometimes describe the process of evaluating these factors as “balancing.” In its e-Books decision the Second Circuit believed that the need to balance is what justifies application of the rule of reason. In Microsoft the D.C. Circuit stated that “courts routinely apply a…balancing approach” under which “the plaintiff must demonstrate that the anticompetitive harm…outweighs the procompetitive benefit.” But then it decided the case without balancing anything.

The term “balancing” is a very poor label for what courts actually do in these cases. Balancing requires that ...


Re-Imagining Antitrust: The Revisionist Work Of Richard S. Markovits, Herbert J. Hovenkamp Jan 2016

Re-Imagining Antitrust: The Revisionist Work Of Richard S. Markovits, Herbert J. Hovenkamp

Faculty Scholarship at Penn Law

This review discusses Richard Markovits’ two volume book "Economics and the Interpretation" and "Application of U.S. and E.U. Antitrust Law" (2014), focusing mainly on Markovits’ approaches to antitrust tests of illegality, pricing offenses, market definition and the assessment of market power, and his important work anticipating unilateral effects theory in merger cases. Markovits argues forcefully that the Sherman and Clayton Acts were intended to employ different tests of illegality. As a result, even when they cover the same practices, such as mergers, exclusive dealing, or tying, they address them under different tests. He then shows how he would ...


Competition Policy And The Technologies Of Information, Herbert J. Hovenkamp Jun 2014

Competition Policy And The Technologies Of Information, Herbert J. Hovenkamp

Faculty Scholarship at Penn Law

When we speak about information and competition policy we are usually thinking about oral or written communications that have an anticompetitive potential, and mainly in the context of collusion of exclusionary threats. These are important topics. Indeed, among the most difficult problems that competition policy has had to confront over the years is understanding communications that can be construed as either threats to exclude or as offers to collude or facilitators of collusion.

My topic here, however, is the relationship between information technologies and competition policy. Technological change can both induce and undermine the use of information to facilitate anticompetitive ...


Harm To Competition Under The 2010 Horizontal Merger Guidelines, Herbert J. Hovenkamp Jan 2014

Harm To Competition Under The 2010 Horizontal Merger Guidelines, Herbert J. Hovenkamp

Faculty Scholarship at Penn Law

In August, 2010, the Antitrust Division and the Federal Trade Commission issued new Guidelines for assessing the competitive effects of horizontal mergers under the antitrust laws. These Guidelines were long awaited not merely because of the lengthy interval between them and previous Guidelines but also because enforcement policy had drifted far from the standards articulated in the previous Guidelines. The 2010 Guidelines are distinctive mainly for two things. One is briefer and less detailed treatment of market delineation. The other is an expanded set of theories of harm that justify preventing mergers or reversing mergers that have already occurred.

The ...


Merger Policy And The 2010 Merger Guidelines, Herbert J. Hovenkamp Jan 2014

Merger Policy And The 2010 Merger Guidelines, Herbert J. Hovenkamp

Faculty Scholarship at Penn Law

New Horizontal Merger Guidelines were issued jointly by the Antitrust Division and the Federal Trade Commission in August, 2010, replacing Guidelines issued in 1992 that no longer reflected either the law or government enforcement policy. The new Guidelines are a striking improvement. They are less technocratic, accommodating a greater and more realistic variety of theories about why mergers of competitors can be anticompetitive and, accordingly, a greater variety of methodologies for assessing them.

The unifying theme of the Horizontal Merger Guidelines is to prevent the enhancement of market power that might result from mergers. The 2010 Guidelines state that “[a ...


Antitrust’S State Action Doctrine And The Ordinary Powers Of Corporations, Herbert J. Hovenkamp Oct 2012

Antitrust’S State Action Doctrine And The Ordinary Powers Of Corporations, Herbert J. Hovenkamp

Faculty Scholarship at Penn Law

The Supreme Court has now agreed to review the Eleventh Circuit's decision in Phoebe-Putney, which held that a state statute permitting a hospital authority to acquire hospitals implicitly authorized such acquisitions when they were anticompetitive – in this particular case very likely facilitating a merger to monopoly. Under antitrust law’s “state action” doctrine a state may in fact authorize such an acquisition, provided that it “clearly articulates” its desire to approve an action that would otherwise constitute an antitrust violation and also “actively supervises” any private conduct that might fall under the state’s regulatory scheme.

“Authorization” in the ...


Markets In Merger Analysis, Herbert J. Hovenkamp Jan 2012

Markets In Merger Analysis, Herbert J. Hovenkamp

Faculty Scholarship at Penn Law

Antitrust merger policy suffers from a disconnect between its articulated concerns and the methodologies it employs. The Supreme Court has largely abandoned the field of horizontal merger analysis, leaving us with ancient decisions that have never been overruled but whose fundamental approach has been ignored or discredited. As a result the case law reflects the structuralism of a bygone era, focusing on industrial concentration and market shares, largely to the exclusion of other measures of competitive harm, including price increases. Only within the last generation has econometrics developed useful techniques for estimating the price impact of specific mergers in differentiated ...


Mergers, Market Dominance And The Lundbeck Case, Herbert J. Hovenkamp Dec 2011

Mergers, Market Dominance And The Lundbeck Case, Herbert J. Hovenkamp

Faculty Scholarship at Penn Law

In Lundbeck the Eighth Circuit affirmed a district court’s judgment that a merger involving the only two drugs approved for treating a serious heart condition in infants was lawful. Although the drugs treated the same condition they were not bioequivalents. The Eighth Circuit approved the district court’s conclusion that they had not been shown to be in the same relevant market.

Most mergers that are subject to challenge under the antitrust laws occur in markets that exhibit some degree of product differentiation. The Lundbeck case illustrates some of the problems that can arise when courts apply ideas derived ...


Analyzing Horizontal Mergers: Unilateral Effects In Product-Differentiated Markets, Herbert J. Hovenkamp Mar 2009

Analyzing Horizontal Mergers: Unilateral Effects In Product-Differentiated Markets, Herbert J. Hovenkamp

Faculty Scholarship at Penn Law

This essay offers a brief, non-technical exposition of the antitrust analysis of horizontal mergers in product differentiated markets where the resulting price increase is thought to be unilateral - that is, only the post-merger firm increases its prices while other firms in the market do not. More realistically, non-merging firms who are reasonably close in product space to the merging firm will also be able to increase their prices when the post-merger firm's prices rise. The unilateral effects theory is robust and has become quite conventional in merger analysis. There is certainly no reason for thinking that it involves any ...


Mergers And Market Dominance, Herbert J. Hovenkamp Feb 2009

Mergers And Market Dominance, Herbert J. Hovenkamp

Faculty Scholarship at Penn Law

Mergers involving dominant firms legitimately receive close scrutiny under the antitrust laws, even if they involve tiny firms. Further, they should be examined closely even in markets that generally exhibit low entry barriers. Many of the so-called "unilateral effects" cases in current merger law are in fact mergers that create dominant firms. The rhetoric of unilateral effects often serves to disguise this fact by presenting the situation as if it involves the ability of a small number of firms (typically two or three) in a much larger market to increase their price to unacceptable levels. In fact, if such a ...


The Fair Value Of Cornfields In Delaware Appraisal Law, Lawrence Hamermesh, Michael L. Wachter Oct 2005

The Fair Value Of Cornfields In Delaware Appraisal Law, Lawrence Hamermesh, Michael L. Wachter

Faculty Scholarship at Penn Law

The Delaware Supreme Court’s opinions in Weinberger and Technicolor have left a troublesome uncertainty in defining the proper approach to the valuation of corporate shares. That uncertainty – increasingly important as going private mergers become more frequent – can be resolved by a blend of financial and doctrinal analysis. The primary problem—the potential opportunism by controlling shareholders in timing going private mergers—can be addressed by a more complete understanding of corporate finance. The definition of fair value must include not only the present value of the firm’s existing assets, but also the future opportunities to reinvest free cash ...