LAW, ECONOMICS AND ANTITRUST: TOWARDS A NEW PERSPECTIVE

Vol. 16 No.2 (February 2006), pp.168-172

LAW, ECONOMICS AND ANTITRUST: TOWARDS A NEW PERSPECTIVE, by Patrick A. McNutt. Cheltenham, UK: Edward Elgar Publishing, 2005. 432pp. Hardcover £75.00/$130.00. ISBN: 1858987857.

Reviewed by Scott E. Graves, Department of Political Science, Georgia State University. Email: polseg [at] langate.gsu.edu.

In the Acknowledgements to LAW, ECONOMICS AND ANTITRUST, author Patrick McNutt states that the book has had “a long gestation period” (p.xxi). That period saw his publication of a 2nd Edition of THE ECONOMICS OF PUBLIC CHOICE, in addition to service as a regulator, consulting on and directing competition policy in the UK and Ireland, and as a private consultant to corporations on antitrust compliance issues. McNutt has also worked as an academic, lecturing at several colleges and universities. This new book reflects all of those experiences, which gives it a refreshing scope and perspective, but will likely frustrate the interests of many potential readers. The author switches focus often and without warning, from abstract philosophical issues most likely to be of academic interest to practical questions concerning the design of enforcement strategies or modeling firm behavior under different legal rules. Unfortunately, many of the gains that might be had from such triangulation are not realized because McNutt’s different perspectives are often not talking to each other. The effect over time is much like watching someone else channel-surfing.

Although described as a textbook on its dust jacket, the book would be useful in its entirety only for a course with very particular goals and for students who are already familiar with most of the issues being addressed. Comprised of twelve chapters and a postscript, the book is less useful as instructional or reference material and more as an extended, very stimulating conversation with an open-minded and knowledgeable thinker on the intersections between economics and law. Many literatures are reviewed in brief or cherry picked for insights, but McNutt appears some of the time to be synthesizing or explaining the fruits of law and economics and at others to be advocating a particular point of view on the subject. The subjects touched upon range far and wide, which makes the book often thought provoking, but sections and subsections within the chapters are too often brief, random, and sometimes problematic treatments. Quite often, it is difficult to follow where McNutt is trying to go.

The first chapter is devoted to introducing the law and economics paradigm and the goals of competition law. Problems with using the book as a course text appear immediately, as McNutt introduces terms and concepts that he characterizes either imprecisely, controversially (without noting the controversy), or not at all. On page 1, he defines transaction costs as “the costs of collecting and evaluating information about alternative options,” which is certainly a part of transaction costs but does not exhaust them. Nevertheless, his subsequent use of the term properly includes many other costs due to [*169] bargaining, enforcement, and other barriers to exchange (cf., p.4) without supplementing his definition. Much of Chapter 1 is devoted to foreshadowing more in-depth discussions presented in the subsequent chapters, but it also has space to touch briefly on very abstract issues, such as the proper criteria upon which to judge different legal rules, contrasting Kantian and utilitarian evaluations of legal imperatives, positive and normative conceptions of law, and incentive-based and duty-based approaches to discouraging socially unacceptable behavior—all this in 30 pages.

Chapter 2 addresses property rights, primarily within the context of the firm. Very little in this chapter relates to competition policy per se. Quite possibly, the interposing of McNutt’s work on the 2nd Edition mentioned above influenced the development of much of this material, as he treats the importance of property rights to efficient outcomes from a very general theoretical level, regularly citing public and social choice theorists. Starting with Coase, he deals with the impact of differing conceptions of property rights, allocation mechanisms and rules, and ownership and governance structures in firms on efficiency. There are references to scholars like Demsetz, Buchanan, and Posner, but McNutt uses them to phrase his own perspectives rather than to summarize theirs.

Chapter 3, which deals with contracting, and Chapter 4, entitled “Liability and Law’s Indeterminacy,” also offer little to the reader looking for detailed analysis of competition policy. Nevertheless, these largely theoretical, highly abstract considerations of property rights, contract law, and liability rules from a law and economics perspective can be related to each other and to antitrust by their shared recognition that efficient economies depend equally on realizing desirable cooperation and desirable competition. That said, these chapters do not deal with the differences between horizontal restraints on trade and vertical arrangements that have been central to antitrust policy for most of its history and that factor significantly in later chapters.

These early chapters are also especially prone to displaying the problem noted above. McNutt’s presentation of ideas is often fragmentary, disjointed, or lacking in foundation. An example can be found near the end of Chapter 3. The first sentence of a three paragraph subsection entitled “Bayesian Influence,” which is itself found in a section called “Neo-Walrasian Theory and Law,” reads, “[b]ayesian equilibrium does not take into account the fact that players may learn their opponents’ types by observing their play, since each move by a player may reveal information on his or her type” (p.92). Assuming he is referring to Perfect Bayesian Equlibrium (PBE), the statement is very curious, since this is exactly what happens in Bayesian games. For instance, equilibria in signalling games, a prominent example of a dynamic Bayesian game of incomplete information, can be divided into separating, partially separating, and pooling equilibria depending on whether the uninformed player can deduce the informed player’s type from the signals contained in the informed player’s [*170] actions (Fudenberg and Tirole 2000). In the rest of this paragraph, McNutt refers to Bayes’ rule and Bayesian updating without explaining either, and the two paragraphs concluding the subsection have no discernable relationship to Bayesian influences. This paragraph is the only mention of Bayesian games or Bayes’ rule in the book.

Substantive discussion of antitrust law begins with Chapter 5, on market entry. This chapter is considerably more coherent than most of what has preceded and some earlier points that seemed isolated or lacking in context are employed profitably. McNutt frames market entry questions in terms of Isaiah Berlin’s distinction between positive and negative liberties. From the perspective of competition policy, incumbent firms can be said to claim the negative liberty of continued market position, or the freedom to use whatever power or resources they have, possibly to deter entry, while potential entrants might claim a positive liberty to market entry aided by a competition agency. The responsibility of such an agency is to balance these positive and negative liberties to produce efficient prices. It is hard to see the value of this lofty framework at first blush, but the language is convenient for the discussion of regulated monopolies and network industries with common carrier requirements. The chapter contains an extended and valuable analysis of the essential facilities doctrine and concise comparisons between European and American approaches to efficient entry policy. Comparatively short, Chapter 6 offers an extension of the efficient entry analysis focused specifically on how incumbent firms might deter entry through reputation effects or predatory pricing. McNutt addresses how courts and regulators might identify these barriers to entry and how to calculate damages that would effectively deter them.

Chapters 7 and 8 address optimal competition policy from the point of view of the regulator (and court, potentially) and the regulated firm, respectively. To a reader more familiar with antitrust enforcement in the United States, these chapters are valuable because they focus more on enforcement regimes in the EU and Canada. McNutt also contrasts enforcement approaches in the EU with the development of American practice, particularly the continued reliance on the “structure-conduct-performance” model in the EU as opposed to the movement toward “transaction cost economics” models in the US. The treatments are considerably more sustained in these chapters than in earlier ones, but the author still has a tendency to jump around a bit. As a concrete example, discussion of Figure 8.3 begins on page 215 (before any mention of Figures 8.1 or 8.2), skips page 216, continues in considerable detail on page 217, is followed by the appearance and discussion of 8.1 and 8.2 on the next few pages, then reappears on page 220, opposite Figure 8.3 on page 221. Practically speaking, this situation is awkward because it requires the reader to turn pages back and forth, but this is just an example of the way subjects often appear and disappear, only to appear again pages later. [*171]

Three more chapters follow addressing competition policy questions at length, but by this point the reader might begin to feel that the author was repeating himself or presenting several different, general perspectives that contradict each other but might still be accurate in certain contexts. In Chapter 9, which returns to many of the non-market economics issues raised in Chapters 2 and 3, McNutt writes that “an efficient use of economic resources is the raison d’être of antitrust and competition policy” and proceeds to stress again the importance of clearly defined property rights, then the balance of positive and negative liberties from Chapter 5 (p.252). On pages 255-256, he writes that the “primary purpose of the competition laws . . . is that ‘it is competition, and not competitors, which the Act protects’” without objection, despite the fact that he has frequently argued throughout the book that it is a mistake to assume that all competition serves the goals of efficiency (cf., pp.178-179). Many of the sentences appearing on pages 255-256 are repeated, in slightly reorganized form, only a few pages later in the next chapter (p.260). Moreover, the points sound familiar from earlier chapters in the book, and in very few instances do repetitions build on those points.

The last chapter is entitled “The Value of Competition Law,” but it does not provide the kind of broad insights that descend clearly from the arguments and materials presented before that one might expect. He offers two propositions for competition policy, the first of which is that some degree of vertical integration “may not necessarily be socially undesirable” (p.319). Possibly, this is an important contribution to European competition law, but in the United States many vertical arrangements, like nonprice restraints have been evaluated under a “rule of reason” for decades (CONTINENTAL T.V. INC v. GTE SYLVANIA). The second proposition, that the definition of legal exemptions for anticompetitive agreements should be flexible, is equally non-specific. A postscript addresses a few recent changes in EU competition law and suggests that competition law in integrated multistate unions like the EU will have to coordinate antitrust policy closely with trade policy. The development of the “state action” exemption in American antitrust law could be illustrative.

As suggested earlier in the review, the book is quite often an interesting read and provokes plenty of unexpected thoughts. Nevertheless, it is not clear why many readers should seek out this book unless they were in the market for some provocative ideas without a great deal of organizational coherence. Scholars familiar with the public choice literature and American antitrust law could benefit from the stimulating questions McNutt raises throughout and for the wealth of examples from European competition law, however.

REFERENCES:

Fudenberg, Drew and Jean Tirole. 2000. GAME THEORY. Cambridge, MA: The MIT Press. [*172]

McNutt, Patrick A. 2002. THE ECONOMICS OF PUBLIC CHOICE (2^nd ed). Cheltenham, UK: Edward Elgar Publishing.

CASE REFERENCES:

CONTINENTAL T.V. v. GTE SYLVANIA, 433 U.S. 36 (1977).

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