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De-Economizing Antitrust Law Starts with Market Definition

Over the last 40 years, antitrust cases have been increasingly onerous and costly to litigate, yet if plaintiffs can prevail on one single issue, they dramatically enhance their chances of obtaining a favorable judgment. That issue is market definition.

Market definition is straightforward to explain because it’s just what it sounds like. Litigants and judges must be able to delineate the market in question in order to determine how much control a corporation exercises over it. Defining a relevant market essentially answers, depending on the conduct courts are analyzing, whether computers that run Apple’s MacOS operating system or Microsoft Windows are in the same market or, similarly, if Coca-Cola competes with Pepsi.

A corporation’s degree of control over any particular market is then typically measured by how much market share it has. In antitrust litigation, calculating a firm’s market share is the simplest and most common way to determine a firm’s ability to adversely affect market competition, including its influence over output, prices, or the entry of new firms. While the issue may seem mundane and even somewhat technocratic, defining a relevant market is the single most important determination in antitrust litigation. Indeed, many antitrust violations turn on whether a defendant has a high market share in the relevant market.

Market definition is a throughline in antitrust litigation. All violations that require a rule of reason analysis under Section 1 of the Sherman Act, such as resale price maintenance and vertical territorial restraints, require a market to be defined. All claims under Section 2 of the Sherman Act require a relevant market. And all claims under Sections 3 and 7 of the Clayton Act require a relevant market to be defined.

Defining relevant markets stems from the language of the antitrust laws. Section 2 of the Sherman Act states that monopolization tactics are illegal in “any part of the trade or commerce[.]” Sections 3 and Section 7 prohibit exclusive deals and tyings involving commodities and mergers, respectively in “any line of commerce or…in any section of the country[.]” “[A]ny” “part” or “line of commerce” inherently requires some description of a market that is at issue.

As I more thoroughly described in a newly released working paper, the process of defining relevant markets has a long and winding history stemming from the inception of the Sherman Act in 1890. Between 1890 and 1944, the Supreme Court took a highly generalized approach, requiring as it stated in 1895, only a description of “some considerable portion, of a particular kind of merchandise or commodity[.]” In subsequent cases during this initial era, the Supreme Court provided little additional guidance, maintaining that litigants merely needed to provide a generalized description of “any one of the classes of things forming a part of interstate or foreign commerce.”

In 1945, after Circuit Court Judge Learned Hand found the Aluminum Company of America (commonly known as ALCOA) liable for monopolization in a landmark case, the market definition process started to become more refined, primarily focusing on how products were similar and interchangeable such that they performed comparable functions. At the same time market definition took on more complexity, antitrust enforcement exploded and courts became flooded with antitrust litigation. Given the circumstances, the Supreme Court felt that it needed to provide litigants with more structure to the antitrust laws, not only to effectuate Congress’s intent of protecting freedom of economic opportunity and preventing dominant corporations from using unfair business practices to succeed, but also to assist judges in determining whether a violation occurred. Throughout the 1940s and 1950s, the Supreme Court repeatedly expressed its frustration that there was no formal process for litigants to help the courts define markets.

It took until 1962 for the Supreme Court to comprehensively determine how markets should be defined and bring some much-needed structure to antitrust enforcement. The process, known as the Brown Shoe methodology after the 1962 case, requires litigants to present information to a reviewing court that describes the “nature of the commercial entities involved and by the nature of the competition [firms] face…[based on] trade realit[ies].” With this information, judges are required to engage in a heavy review of the information they are presented with and make a reasonable decision that accurately reflects the actual market competition between the products and services at issue in the litigation.

Constructing a relevant market for the purposes of antitrust litigation using the Brown Shoe methodology can be made using a variety of commonly understood and accessible information sources. For example, previous markets in antitrust litigation have been constructed from reviewing consumer preferences, consumer surveys, comparing the functional capabilities of products, the uniqueness of the buyers or production facilities, or trade association data. In a series of cases between 1962 to the present, the Supreme Court has rigorously refined its Brown Shoe process to ensure both litigants and judges had sufficient guidance to define markets. Critically, in no way did the Supreme Court intend for its Brown Shoe methodology to restrict or hinder the enforcement of the antitrust laws, and the fact that the process relies on readily accessible and commonly understood information is indicative of that goal.

But 1982 was a watershed year. Enforcement officials in the Reagan administration tossed aside more than a decade of carefully crafted jurisprudence from the Supreme Court in favor of complex, unnecessary, and arbitrary tests to define a relevant market. The new test, known as the hypothetical monopolist test (HMT), which is often informed by econometric models, asks whether a hypothetical monopolist of the products under consideration could profitably raise prices over competitive levels. It is tantamount to asking how many angels can dance on the head of a pin. They primarily accomplished this economics-laden burden through the implementation of a new set of guidelines that detailed how the Department of Justice would analyze mergers, determine whether to bring an enforcement action, and how the agency would conduct certain parts of antitrust litigation, one of those aspects being the market definition process.

From the 1982 implementation of new merger guidelines to the present, judges and litigants, predominantly federal enforcers, have ignored the Brown Shoe methodology and instead have embraced the HMT and its navel-gazing estimation of angels. As a result, courts now entertain battles of econometric experts, over what should amount to a straightforward inquiry.

As scholar Louis Schwartz aptly described, the relegation of the Brown Shoe methodology and its brazen replacement with econometrics under the 1982 guidelines represented a “legal smuggling” of byzantine economic criteria into antitrust litigation.

Besides facilitating the de-economization of antitrust enforcement, abandoning the econometric process would have other notable benefits. First, relying entirely on the Brown Shoe methodology would restrict the power of judges, lawyers, and economists by making the law more comprehensible to litigants. Giving power back to litigants would contribute to making antitrust law less technocratic and abstruse and more democratically accountable. For example, in some cases, economists have great difficulty explaining their findings to judges in intelligible terms. In extreme cases, judges are required to hire their own economic experts just to decipher the material presented by the litigants. Simply stated, the law is not just for economists, judges, or lawyers; it is also for ordinary people. Discarding the econometric tests for market definition facilitates not only the understanding of antitrust law, but also how to stay within its boundaries.

Second, reverting to the Brown Shoe methodology would make antitrust law fairer and promote its enforcement. The only parties that stand to gain from employing econometric tests are the economists conducting the analysis, the lawyers defending large corporations, and corporations who wish to be shielded from the antitrust laws. Frequently charging more than a $1,000 dollars an hour, economists are also extraordinarily expensive for litigants to employ, creating an exceptionally high barrier to otherwise meritorious legal claims.

Since 1982, market definition in antitrust litigation has lingered in a highly nebulous environment, where both the econometric tests informing the HMT and the Brown Shoe methodology co-exist but with only the Brown Shoe methodology having explicit approval by the Supreme Court. Even in its highly contentious and confusing 2018 ruling in Ohio v. American Express, the Supreme Court did not mention or cite the econometric processes currently employed by courts and detailed in the merger guidelines to define relevant markets. In fact, in a brief statement, the Court reaffirmed the controlling process it developed in Brown Shoe, yet lower courts continue to cite the failure of plaintiffs to meet the requirements of the econometric market definition process as one of the primary reasons to dismiss antitrust cases. Putting it aptly, Professor Jonathan Baker has stated that the “outcome of more [antitrust] cases has surely turned on market definition than on any other substantive issue.”

While the econometric process is not the exclusive process enforcers use to define markets in antitrust litigation and is often used in conjunction with the Brown Shoe methodology, completely abandoning it is critical to de-economizing antitrust law more generally. Since the late 1970s, primarily due to the work published by Robert Bork and other Chicago School adherents, economics and economic thinking more generally have become deeply entrenched in antitrust litigation. Chicago School thought has essentially made antitrust enforcement of nearly all vertical restraints like territorial limitations per se legal, and since the 1970s, the Supreme Court has overturned many of its per se rules. Contravening controlling case law on vertical mergers, Chicago School thinking has resulted in judges viewing them as almost always benign or even beneficial and failing to condemn them by applying the antitrust laws. Dubious economic assumptions have significantly restricted antitrust liability for predatory pricing, a practice described by the Supreme Court in 1986 as “rarely tried, and even more rarely successful.” As a result, economic thinking and econometric methodologies, though running contrary to Congress’s intent, have served to undermine the enforcement of the antitrust laws. This is not to say there is no role for economists. Economists can engage in essential fact gathering activities or provide scholarly perspective on empirical data that shows how specific business conduct can adversely affect prices, output, consumer choice, or innovation. For example, economic research has found that mergers and acquisitions habitually lead to higher prices and increased corporate profit margins – repudiating the idea that mergers are beneficial for consumers. But economists have little value to add when it comes to market definition.

Reinstituting many of the overturned per se antitrust rules all but require a change of precedent from the Supreme Court, which appears highly unlikely given the ideology of most of the current justices. However, modifying the process that enforcers use to determine relevant markets does not require overcoming such a seemingly insurmountable hurdle. Ridding antitrust litigation of the econometric process would simply require enforcers, particularly those at the Federal Trade Commission and the Department of Justice, to completely abandon the process altogether in their enforcement efforts (particularly in the merger guidelines) and instead exclusively rely on the Brown Shoe methodology. Neither the law nor the jurisprudence would need to be modified to effectuate this change—although it might be helpful, before unilaterally disarming, to first explain the new policy in the agencies’ forthcoming revision to the merger guidelines.

While some judges currently ignore or dismiss the Brown Shoe methodology, were enforcers to completely abandon the econometric process for defining markets, courts effectively would have no choice but to rely on the controlling Brown Shoe process. Unlike other aspects of antitrust law, enforcement officials can and should fully embrace the controlling law, in this case Brown Shoe, and use it readily, leaving private litigants to employ the econometric process if they so chose. Nevertheless, history indicates that courts are highly deferential to the methods used by federal enforcers—especially when explicated in the merger guidelines—and private litigants would likely follow the lead of federal enforcers in deciding which method to use to define relevant markets.

Currently, the Department of Justice and the Federal Trade Commission are redoing and updating their merger guidelines. To continue facilitating the progressive antitrust policy that began with President Biden’s administration and to start broadly de-economizing antitrust litigation, both agencies should seize the opportunity to jettison the econometric-heavy market definition tests and enshrine this change within the updated merger guidelines. Enforcers should instead exclusively rely on the sensible, practical, and fair approach the Supreme Court developed in Brown Shoe.

Daniel A. Hanley is a Senior Legal Analyst at the Open Markets Institute. You can follow him on Mastodon @danielhanley@mastodon.social or on Twitter @danielahanley.

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