Law Commons^™

Antitrust Balancing, Herbert Hovenkamp

Herbert Hovenkamp

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 …

Appraising Merger Efficiencies, Herbert Hovenkamp

Herbert Hovenkamp

Mergers of business firms violate the antitrust laws when they threaten to lessen competition, which generally means 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 savings …

The Emergence Of Classical American Patent Law, Herbert Hovenkamp

Herbert Hovenkamp

The Emergence of Classical Patent Law

Abstract

One enduring historical debate concerns whether the American Constitution was intended to be "classical" -- referring to a theory of statecraft that maximizes the role of private markets and minimizes the role of government in economic affairs. The most central and powerful proposition of classical constitutionalism is that the government's role in economic development should be minimal. First, private rights in property and contract exist prior to any community needs for development. Second, if a particular project is worthwhile the market itself will make it occur. Third, when the government attempts to induce …

The Classical Constitution, Herbert Hovenkamp

Herbert Hovenkamp

Conservative and libertarian constitutional writers have often pined for return to a "classical" understanding of American federal and state Constitutions. "Classical" does not necessarily mean "originalist" or "interpretivist." Some classical views, such as the attempt to revitalize Lochner-style economic due process, find little support in the text of the federal Constitution or any of the contemporary state constitutions. Rather, constitutional meaning is thought to lie in a background link between constitution formation and classical statecraft. The core theory rests on the assumption of a social contract to which everyone in some initial position agreed. Like any contract, it would …

Antitrust And Information Technologies, Herbert Hovenkamp

Herbert Hovenkamp

Technological change strongly affects the use of information to facilitate anticompetitive practices. The effects result mainly from digitization and the many products and processes that it enables. These technologies also account for a significant portion of the difficulties that antitrust law encounters when its addresses intellectual property rights. Changes in the technologies of information also affect the structures of certain products, in the process either increasing or decreasing the potential for competitive harm. For example, digital technology affects the way firms exercise market power, but it also imposes serious measurement difficulties. In purely digital markets intellectual property rights are crucial …

Antitrust And The Patent System: A Reexamination, Herbert Hovenkamp

Herbert Hovenkamp

Since the federal antitrust laws were first passed they have cycled through extreme positions on the relationship between competition law and the patent system. Previous studies of antitrust and the patent system have generally assumed that patents are valid, discrete, and generally of high quality in the sense that they further innovation. As a result, increasing the returns to patenting increases the incentive to do socially valuable innovation. Further, if the returns to the patentee exceed the social losses caused by increased exclusion, the tradeoff is positive and antitrust should not interfere. If a patent does nothing to further innovation, …

Progressive Legal Thought, Herbert Hovenkamp

Herbert Hovenkamp

A widely accepted model of American legal history is that classical legal thought, which dominated much of the nineteenth century, was displaced by progressive legal thought, which survived through the New Deal and in some form to this day. Within its domain, this was a revolution nearly on a par with Copernicus or Newton. This paradigm has been adopted by both progressive liberals who defend this revolution and by classical liberals who lament it. Classical legal thought is generally identified with efforts to systematize legal rules along lines that had become familiar in the natural sciences. This methodology involved not …

The Rule Of Reason And The Scope Of The Patent, Herbert Hovenkamp

Herbert Hovenkamp

For a century and a half the Supreme Court has described perceived patent abuses as conduct that reaches "beyond the scope of the patent." That phrase, which evokes an image of boundary lines in real property, has been applied to both government and private activity and has many different meanings. It has been used offensively to conclude that certain patent uses are unlawful because they extend beyond the scope of the patent. It is also used defensively, however, to characterize activities as lawful if they do not extend beyond the patent's scope. In the first half of the twentieth century …

Patents, Antitrust, And The Rule Of Reason, Herbert Hovenkamp

Herbert Hovenkamp

Antitrust law has historically immunized many patent agreements if they fell within the "scope of the patent." Three dissenting Justices in the Actavis case advocated this test: a pharmaceutical pay-for-delay settlement falls within the scope of the patent if it delays a competitor's entry no longer than the remaining life of the patent. In that case the patentee will not be obtaining any more than it would from a valid patent -- namely, the right to exclude infringers for the full patent term.

The "scope of the patent" test is not useful for defining the boundaries of antitrust immunity in …

Inventing The Classical Constitution, Herbert Hovenkamp

Herbert Hovenkamp

One recurring call over a century of American constitutional thought is for return to a “classical” understanding of American federal and state Constitutions. “Classical” does not necessarily mean “originalist” or “interpretivist." Some classical views, such as the attempt to revitalize Lochner-style economic due process, find little support in the text of the federal Constitution or any of the contemporary state constitutions. Rather, constitutional meaning is thought to lie in a background link between constitution formation and classical statecraft. The core theory rests on the assumption of a social contract to which everyone in some initial position agreed. Like any …

Coase, Institutionalism, And The Origins Of Law And Economics, Herbert Hovenkamp

Herbert Hovenkamp

ABSTRACT

Ronald Coase merged two traditions in economics, marginalism and institutionalism. Neoclassical economics in the 1930s was characterized by an abstract conception of marginalism and frictionless resource movement. Marginal analysis did not seek to uncover the source of individual human preference, but accepted preference as given. It treated the business firm in the same way, focusing on how firms make market choices, but saying little about their internal workings.

“Institutionalism” historically refers to a group of economists who wrote mainly in the 1920s and 1930s. Their place in economic theory is outside the mainstream, but they have found new energy …

Tying Arrangements And Antitrust Harm, Herbert Hovenkamp

Herbert Hovenkamp

A tying arrangement is a seller’s requirement that a customer may purchase its “tying” product only by taking its “tied” product. In a variable proportion tie the purchaser can vary her purchases of the tied product. For example, a customer might purchase a single printer, but either a contract or technological design requires her to purchase varying numbers of printer cartridges from the same manufacturer. Such arrangements are widely considered to be price discrimination devices, but their economic effects have been controversial.

Price discrimination comes in various “degrees.” In third degree price discrimination the seller isolates two or more different …

Tying, Price Discrimination And Antitrust Policy, Herbert Hovenkamp

Herbert Hovenkamp

ABSTRACT

A tying arrangement is a seller’s requirement that a customer may purchase its “tying” product only by taking its “tied” product. In a variable proportion tie the purchaser can vary her purchases of the tied product. For example, a customer might purchase a single printer, but either a contract or technological design requires her to purchase varying numbers of printer cartridges from the same manufacturer. Such arrangements are widely considered to be price discrimination devices, but their economic effects have been controversial.

Price discrimination comes in various “degrees.” In third degree price discrimination the seller isolates two or more …

Ip And Antitrust: Errands Into The Wilderness, Herbert Hovenkamp

Herbert Hovenkamp

IP AND ANTITRUST: ERRANDS INTO THE WILDERNESS

ABSTRACT

Antitrust and intellectual property law both seek to promote economic welfare by facilitating competition and investment in innovation. At various times both antitrust and IP law have wandered off this course and have become more driven by special interests. Today, antitrust and IP are on very different roads to reform. Antitrust began an Errand into the Wilderness in the late 1970s with a series of Supreme Court decisions that linked the plaintiff’s harm and right to obtain a remedy to the competition-furthering goals of antitrust policy. Today, patent law has begun its …

The Law Of Vertical Integration And The Business Firm, 1880-1960, Herbert Hovenkamp

Herbert Hovenkamp

ABSTRACT

Vertical integration occurs when a firm does something for itself that it could otherwise procure on the market. For example, a manufacturer that opens its own stores is said to be vertically integrated into distribution. Both classical political economy and marginalist economics saw vertical integration and vertical contractual arrangements as much less threatening to competition than cartels or other horizontal arrangements. Nevertheless, vertical integration produced by far the greater amount of legislation at both federal and state levels and motivated many more political action groups. Two things explain this phenomenon. First, while economists prior to the 1930s rarely saw …

The Coase Theorem And Arthur Cecil Pigou, Herbert Hovenkamp

Herbert Hovenkamp

In “The Problem of Social Cost” Ronald Coase was highly critical of the work of Cambridge University Economics Professor Arthur Cecil Pigou, presenting him as a radical government interventionist. In later work Coase’s critique of Pigou became even more strident. In fact, however, Pigou’s Economics of Welfare created the basic model and many of the tools that Coase’s later work employed. Much of what we today characterize as the “Coase Theorem” was either stated or anticipated in Pigou’s work. Further, Coase’s extreme faith in private bargaining led him to fail to see problems that Pigou saw quite clearly and that …

Complex Bundled Discounts And Antitrust Policy, Herbert Hovenkamp

Herbert Hovenkamp

COMPLEX BUNDLED DISCOUNTS AND ANTITRUST POLICY

ABSTRACT

A bundled discount occurs when a seller conditions a discount or rebate on the buyer’s purchaser or two or more different products. Firms that produce fewer than all the good in the bundle find it difficult to compete because they must amortize the discount across a smaller range of goods. For example, if the dominant firm offers a 10% discount for purchase of both good A and good B, but the rival makes only good B, it will have to offer a discount that is large enough to match the dominant firm’s B …

Neoclassicism And The Separation Of Ownership And Control, Herbert Hovenkamp

Herbert Hovenkamp

NEOCLASSICISM AND THE SEPARATION OF OWNERSHIP AND CONTROL Herbert Hovenkamp ABSTRACT The separation of ownership and control is a phrase that will forever be associated with Adolf A. Berle and Gardiner C. Means The Modern Corporation and Private Property (1932), as well as with Institutionalist economics, Legal Realism, and the New Deal. Neoclassical economists have generally been sharply critical, both of the historical facts that Berle and Means purported to describe and of the conclusions that they drew. In fact, however, the separation of ownership and control had already been an essential element of the neoclassical theory of corporate governance …

United States Competition Policy In Crisis, 1890-1955, Herbert Hovenkamp

Herbert Hovenkamp

UNITED STATES COMPETITION POLICY IN CRISIS,1890-1955 Herbert Hovenkamp ABSTRACT The development of marginalist, or neoclassical, economics led to a fifty-year long crisis in competition theory. Given an industrial structure with sufficient fixed costs, competition always became "ruinous," forcing firms to cut prices to marginal cost without sufficient revenue remaining to pay off investment. Early neoclassicists such as Alfred Marshall were not able to solve this problem, and as a result many economists were hostile toward the antitrust laws in the early decades of the twentieth century. The ruinous competition debate came to an abrupt end in the early 1930's, when …

The Neoclassical Crisis In U.S. Competition Policy, 1890-1960, Herbert Hovenkamp

Herbert Hovenkamp

ABSTRACT The development of marginalist, or neoclassical, economics led to a fifty-year long crisis in competition policy. Given an industrial structure with sufficient fixed costs, competition always became "ruinous," forcing firms to cut prices to marginal cost without sufficient revenue remaining to pay off investment. Early neoclassicists such as Alfred Marshall were not able to solve this problem. As a result many early twentieth century economists were hostile toward the antitrust laws. The ruinous competition debate came to an abrupt end in the early 1930's, when economists Joan Robinson in Great Britain and particularly Edward Chamberlin in the United States …

The Viability Of Antitrust Price Squeeze Claims, Herbert Hovenkamp

Herbert Hovenkamp

ABSTRACT A price squeeze occurs when a vertically integrated firm “squeezes’ a rival’s margins between a high wholesale price for an essential input sold to the rival, and a low output price to consumers for whom the two firms compete. Price squeezes have been a recognized but controversial antitrust violation for two-thirds of a century. We examine the law and economics of the price squeeze, beginning with Judge Hand’s famous discussion in the Alcoa case in 1945. While Alcoa has been widely portrayed as creating a “fairness” or “fair profit” test for unlawful price squeezes, Judge Hand actually adopted a …