His re-interpretation of predatory pricing and antitrust laws set the stage for a generation of harmful mergers.There are many strange laws in the United States. In Minnesota, it is illegal to grease a pig and chase it, although some sports fans still engage in the practice. In Idaho, cannibalism is banned, although it is fine if the action was taken under extreme life-threatening conditions as the only apparent means of survival. In New York, fortune telling is illegal as a commercial activity, while Marylands Supreme Court struck down a similar law because it violated the First Amendment.
Courts have long been in the business of deciding what laws should be enforced and what constitutes good judgment versus judicial activism.
In constitutional law, Robert Bork is best remembered for his doctrine of original intent. Basically this means that judges need to understand what the framers of the Constitution intended. In his book Coercing Virtue, Bork wrote that activist judges “decide cases in ways that have no plausible connection to the law they purport to be applying, or stretch or even contradict the meaning of that law.” Bork instead advocated restraint, writing, Courts must accept any value choice the legislature makes unless it clearly runs contrary to a choice made in the framing of the Constitution.
To Bork, the alternative to judicial activism was originalism and textualism. His views were shared by fellow conservative Justice Antonin Scalia. Scalia believed that the Constitution is not a living document, declaring, Its dead, dead, dead. He added, The judge who always likes the results he reaches is a bad judge. He further argued in Originalism: The Lesser Evil that originalism seems to me more compatible with the nature and purpose of a Constitution in a democratic system. A democratic society does not, by and large, need constitutional guarantees to insure that its laws will reflect current values.
Bork and Scalia are known as champions of judicial restraint, yet it is ironic that both men were highly activist and unoriginal when it came to the interpretation and enforcement of antitrust and predatory pricing laws.
Still on the federal books, the 1936 Robinson-Patman Act makes it illegal for a business to pursue predatory pricing to drive smaller players out of the market. The law was enacted following the rapid growth of chains like Woolworth and A&P, which have their counterparts today in Walmart and Amazon. Congressman Wright Patman, a Democrat from Texas, held hearings on these retail giants in the summer of 1935, exposing their practices.
During the debate over the Act, Congressman Patman argued, The wide distribution of economic power among many independent proprietors is the foundation of the nations economy. Both Franklin and Jefferson feared that industrialization would lead to labor proletariat without property and without hope. Small business enterprise is a symbol of a society where a hired man can become his own boss. The original intent of the Robinson-Patman Act was clear.
Bork detested the Robinson-Patman Act, which he argued was antitrusts least glorious hour. He declared that predatory pricing was a phenomenon that probably does not exist. The basis for his belief was not any empirical evidence, but his own thought experiment. In The Antitrust Paradox, he wrote:
A firm contemplating predatory price warfare will perceive a series of obstacles that make the prospect of such a campaign exceedingly unattractive. The losses during the war will be proportionally higher for the predator than for the victim…the campaign will have to last until the victims organization and assets are dissolved; ease of entry will be symmetrical with ease of exit….
Other antitrust critics from the University of Chicago agreed that predatory pricing was illogical and therefore impossible. Professor Frank Easterbrook wrote in 1981 that predatory pricing was like dragons, existing in literature but not in practice.
In the 1960s, Bork published a series of highly influential essays in which he attacked the state of antitrust policy in the United States. He opened his article The Goals of Antitrust Policy with a phrase that became a classic: The life of the antitrust law…is…neither logic nor experience but bad economics and worse jurisprudence. Bork argued that the one and only thing that should matter in antitrust is consumer welfare, and that the welfare of the consumer could really only measured by low prices. If monopolies could provide low prices, so be it.
What’s ironic is that Bork, despite being an originalist, conjured consumer welfare out of thin air. When we look at his antitrust views, they are ahistorical and contrary to the original intent of Congress. According to Bork, Congress only enacted the Clayton, Federal Trade Commission, and Sherman Acts in order to achieve lower prices and consumer welfare. Any mergers that promised efficiency and lower prices should be allowed, regardless of the effects on consumers, producers, or competitors.
Many historians have studied these legislation, and none have found the words consumer welfare in their language. Borks views are at odds with original intent and even the text of the acts themselves.
As the Chicago revolution took hold, Borks views crept into the judiciary. Eventually in a fit of activism, the courts did away with the prohibition on predatory pricing. In its 1993 decision in Brooke Group Ltd. v. Brown & Williamson Tobacco Corporation, the United States Supreme Court completely re-imagined the Robinson-Patman Act.
The case originally involved the tobacco oligopoly controlled by six firms. Liggett had introduced a cheap generic cigarette and gained market share. When Brown & Williamson saw that generics were undercutting their shares, it undercut Liggett and sold cigarettes at a loss. Liggett sued, alleging that the predatory behavior was designed to pressure it to raise prices on its generics, thus enabling Brown & Williamson to maintain high profits on branded cigarettes.
In its decision, the Court held that in order for there to be a violation of the Clayton Act and the Robinson-Patman Act, a plaintiff must show not only that the alleged predator priced the product below the cost of its production but also that the predator would be likely to recoup the losses in the future. The recoupment test dealt a death blow to predatory pricing lawsuits because it is, of course, impossible to prove a future event.
The Supreme Court parroted Bork, noting that predatory pricing schemes are rarely tried, and even more rarely successful. The Court also argued that it was best not to pursue predatory pricing cases because doing so would chill the very conduct the antitrust laws are designed to protect.
The result has been severe. After 1993, no plaintiff alleging predatory pricing has prevailed at the federal level, and most cases are thrown out in summary judgement. The DOJ and FTC have completely ignored the law and ceased enforcing it.
Through judicial activism and executive neglect, the laws regarding antitrust and predatory pricing have become odd relics, like those on greased pigs and cannibalism.
Predatory pricing is symptomatic of the broader problems when it comes to antitrust. Today, except in extreme circumstances such as outright monopoly, courts are unlikely to block mergers over an increase in market concentration. The Supreme Court has now tilted so far the other way that it prefers to allow too much concentration rather than too little. It made this clear in its Verizon Communications Inc. v. Law Offices of Curtis V. Trinko LLP decision, where it stated its preference for minimizing incorrect merger challenges rather than preventing excessive concentration.
In the Trinko case, for example, Justice Scalia suggested that those who enforce antitrust laws ought to be deferential to firms with monopoly power, which are an important element of a free market system.
Scalia continued: Against the slight benefits of antitrust intervention here, we must weigh a realistic assessment of its costs. The opportunity to acquire monopoly power and charge monopoly prices is what attracts business acumen in the first place, he said, and induces risk taking that produces innovation and economic growth. He wrote that the mere possession of monopoly power, and the concomitant charging of monopoly prices, is not only not unlawful; it is an important element of the free-market system.
The result of all this has been an increase of monopolies. Professor John Kwoka reviewed decades of merger cases and concluded that recent merger control has not been sufficiently aggressive in challenging mergers. The overall effect has been approval of significantly more mergers that prove to be anticompetitive.
The Sherman Act and the Robinson-Patman Act may be deeply misguided; perhaps they should even be repealed. But they havent been. Passing new legislation is the proper way to change laws one disagrees with. Getting rid of them in practice via judicial activism or an an unwilling executive is not democratic.
The death of antitrust and predatory pricing reflects not only a failure of jurisprudence but of economics. For all the claims of up-to-the-minute economic sophistication that activist judges have used in the field of antitrust, the scholarship on predatory pricing is wildly out of date. Brooke made Robinson-Patman irrelevant by citing modern economic scholarship, yet the research the Supreme Court relied on goes back to studies by John McGee and Roland Koller, published in 1958 and 1969 respectively.
Predatory pricing has only become more rational in a world where winner-take-all platforms are happy to sustain short-term losses for the sake of long-term market share gains. What they lose on one side with free shipping or below cost products, they make up for in other parts of their business.
The rationality of predatory pricing is not some new economic finding. Almost 20 years ago, Patrick Bolton, a professor at Columbia Business School, wrote that several sophisticated empirical case studies have confirmed the use of predatory pricing strategies. But the courts have failed to incorporate the modern writing into judicial decisions, relying instead on earlier theory no longer generally accepted.
According to Bork, predatory pricing didnt work in theory, but does it work in practice? Antitrust experts remember the Brooke case, but none seem to recall what actually happened to the companies involved in the lawsuit.
After the Supreme Court decision left it without any legal remedy, Liggett succumbed to pressure from Brown & Williamson and raised its prices. The entire industry raised prices too. In the end, Liggett was not able to attract enough market share and ended up selling most of its brands to Phillip Morris a few years later. Ever since, the tobacco oligopoly has raised prices in lockstep twice a year with no competition. No company is foolish enough to lower prices for fear of predatory pricing.
The losers from the judicial activism of Brooke are consumers and the rule of law. The winners are the oligopolies and monopolies who protect their markets.
When it comes to enforcing antitrust, it’s worth remembering the words of Robert Bork. As he wrote in 1971 in his seminal piece “Neutral Principles and Some First Amendment Problems,” If the judiciary really is supreme, able to rule when and as it sees fit, the society is not democratic.
Jonathan Tepper is a founder of Variant Perception, a macroeconomic research company, and co-author ofThe Myth of Capitalism: Monopolies and the Death of Competition. He is also TACs senior fellow on economic concentration issues. This article was supported by the Ewing Marion Kauffman Foundation. The contents of this publication are solely the responsibility of the authors.