Perhaps no living person has had greater influence on US antitrust doctrine than Herbert Hovenkamp. In fleshing out the sparse US antitrust statutes over the course of his distinguished career, Professor Hovenkamp has embraced four guiding principles: that antitrust’s goal is to promote consumer welfare by ensuring output-enhancing market competition; that antitrust should preclude the enhancement of market power but not the mere extraction of surplus; that legal directives to prevent market power enhancement should be crafted to minimize the sum of error and decision costs; and that liability rules should require an “enquiry meet for the case,” with elements and proof burdens determined according to our ever-expanding understanding of the economic effects of business practices. At present, a chorus of ideologically diverse voices is calling for legislative reform of US antitrust law to account for “unique” digital markets and a purported market power crisis. The most significant reform proposals disregard one or more of the fundamental principles underlying Hovenkampian antitrust and should be rejected.

Common ownership (also called horizontal shareholding) refers to a stock investor’s owner-ship of minority stakes in multiple competing firms. Recent empirical studies have purported to show that institutional investors’ common ownership reduces competition among commonly owned competitors. This Article considers the legality of “mere” common ownership—horizontal shareholding that is not accompanied by any sort of illicit agreement (e.g., a hub-and-spoke conspiracy) or the holding of control-conferring shares—under the U.S. antitrust laws. Prominent antitrust scholars and the leading treatise have concluded that mere common ownership that has the incidental effect of lessening market competition may violate both Clayton Act Section 7 and Sherman Act Section 1. This Article demonstrates otherwise. Competition-lessening instances of mere common ownership do not violate Section 7 because they fall within the provision’s “solely for investment” exemption, which the scholars calling for condemnation have misinterpreted. Mere common ownership does not run afoul of Section 1 because it lacks the sort of agreement (contract, combination, or conspiracy) required for liability under that provision. From a social welfare standpoint, these legal outcomes are desirable. Condemning mere common ownership under the antitrust laws would likely entail significant marginal costs, while the marginal benefits such condemnation would secure are speculative. Accordingly, courts and enforcers should not, on the current empirical record, stretch the antitrust laws to condemn mere common ownership.

Author(s): Barnett, Jonathan; Baye, Michael R; Cooper, James C; Crane, Daniel A; Elzinga, Kenneth G; Epstein, Richard; Garza, Deborah; Hazlett, Thomas W; Hurwitz, Justin Gus; Klein, Benjamin; Klick, Jonathan; Lambert, Thomas A; Lipsky, Tad; Manne, Geoffrey A; Masten, Scott E; Ohlhausen, Maureen; Rill, James; Rybnicek, Jan; Smith, Vernon L; Teece, David; Willig, Robert; Wright, Joshua D; Yun, John M

As part of their investigation of competition in digital markets, members of the Judiciary Committee of the U.S. House of Representatives solicited the views of a number of antitrust scholars on whether existing U.S. antitrust laws are adequate to address contemporary competition concerns. This submission by Thomas A. Lambert addresses (1) how the existing legal regime is calibrated to optimize antitrust’s effectiveness by minimizing the sum of error and decision costs, (2) whether digital markets require a different approach, (3) whether the United States is experiencing a “market power crisis” that warrants reform of the antitrust statutes, (4) whether antitrust is hamstrung by its exclusive focus on consumer welfare and would better serve society by precluding “abuse of dominance” or otherwise offering greater protection for competitors, and (5) the merits of ten specific reform proposals. The submission concludes that the existing antitrust statutes are optimal for addressing monopolistic conduct and potentially anticompetitive transactions. While some aspects of prevailing antitrust doctrine could be improved, the better approach is to rely on the federal courts to bring about such improvements as they adjust doctrines, in light of economic learning and market developments, through the incremental, common law process.

Antitrust scholars have recently proposed additional interventions — beyond enforcement of traditional rules on hub-and-spoke conspiracies, collusion- facilitating devices, etc. — to police anticompetitive harms purportedly resulting from institutional investors’ common ownership of small stakes in competing firms. They maintain that the current “enforcement passivity” on common ownership is unwarranted. Additional antitrust interventions are not justified, though, if they would create greater welfare losses than they would avert. This article considers the decision and error costs that would result from the interventions that have been proposed for remedying the purported problem of common ownership. It concludes that they would be substantial and would likely outweigh any benefits the interventions would secure.

Recent empirical research purports to demonstrate that institutional investors’ “common ownership” of small stakes in competing firms causes those firms to compete less aggressively, injuring consumers. A number of prominent antitrust scholars have cited this research as grounds for limiting the degree to which institutional investors may hold stakes in multiple firms that compete in any concentrated market. This Article contends that the purported competitive problem is overblown and that the proposed solutions would reduce overall social welfare. With respect to the purported problem, we show that the theory of anticompetitive harm from institutional investors’ common ownership is implausible and that the empirical studies supporting the theory are methodologically unsound. The theory fails to account for the fact that intra-industry diversified institutional investors are also inter-industry diversified and rests upon unrealistic assumptions about managerial decision-making. The empirical studies purporting to demonstrate anticompetitive harm from common ownership are deficient because they inaccurately assess institutional investors’ economic interests and employ an endogenous measure that precludes causal inferences. Even if institutional investors’ common ownership of competing firms did soften market competition somewhat, the proposed policy solutions would themselves create welfare losses that would overwhelm any social benefits they secured. The proposed policy solutions would create tremendous new decision costs for business planners and adjudicators and would raise error costs by eliminating welfare-enhancing investment options and/or exacerbating corporate agency costs. In light of these problems with the purported problem and shortcomings of the proposed solutions, the optimal regulatory approach — at least, on the current empirical record — is to do nothing about institutional investors’ common ownership of small stakes in competing firms.

Nearly a decade has passed since Richard H. Thaler and Cass R. Sunstein published Nudge: Improving Decisions About Health, Wealth, and Happiness (hereinafter, "Nudge"). (1) The bestselling book drew popular attention to "libertarian paternalism," a policy approach Thaler and Sunstein had previously proposed in their academic writing. (2) Though somewhat controversial from the start, (3) the notion of libertarian paternalism quickly gained traction among policymakers all over the world. In the United States, President Barack Obama tapped Sunstein to serve as the administrator of the White House Office of Information and Regulatory Affairs, a position often referred to as the nation's "regulatory czar." (4) The U.S. Congress created a new agency, the Consumer Financial Protection Bureau, that was proposed by academics who were strongly influenced by the behavioral economics underlying Nudge (more about behavioral economics below). (5) The British government went so far as to create a Behavioural Insights Team, commonly referred to as the "Nudge Unit." (6) And in Denmark, the Applied Behavioural Science Group--a.k.a. the Danish Nudge Unit--began operating a popular website, "Error! Hyperlink reference not valid. Given Nudge's success over the last decade in capturing the attention of policymakers and generating concrete policy proposals, it is worth pausing to assess how the libertarian paternalist project is faring. What is working? What is not? How, if at all, should the libertarian paternalist project be adjusted going forward? On October 21, 2016, a group of prominent law professors and economists --some Nudge enthusiasts (including Sunstein himself), some skeptics--convened at the University of Missouri School of Law for a symposium addressing those questions. The bulk of this issue of the Missouri Law Review consists of articles based on the ideas presented at that symposium, Evaluating Nudge: A Decade of Libertarian Paternalism. To provide context for the articles that follow, the remainder of this Foreword explains where libertarian paternalism came from--that is, what are its intellectual underpinnings, and how did they arise? I. FROM GADFLY TO BEHAVIORAL ECONOMICS Before there was libertarian paternalism, there was Gadfly. A thorn in the side of his economics professor, Gadfly often sticks in the memory of those who have taken a college-level economics course. He majored in something liberal artsy (philosophy, English?) or maybe another of the social sciences (psychology, sociology?). He was not a back-row student; he sat toward the front of the lecture hall, and he was an active participant in class discussion. But he was assuredly not buying what his economics professor was selling. Whenever the professor would suggest that the government should do X to induce people to do Y, or that well-meaning policy A is bad because it will just lead people to take undesirable action B, Gadfly's hand would shoot up. "Real people don't behave that way," he would say. "You're assuming people always act rationally. They often don't." The economics professor generally gave Gadfly's remarks short shrift. "Yes, people sometimes act irrationally," she replied. "But most people act rationally most of the time. And we can't build a predictive theory of human behavior if we assume people just dart around making irrational, unpredictable decisions." It turns out both Gadfly and his professor were right. Gadfly was correct in observing that people often act irrationally. The professor was right that people usually act rationally and that economists might as well close up shop if people act in unpredictable ways. But what if people are, to borrow the title of economist Dan Ariely's bestselling book, predictably irrational. (8) That is, what if they generally act rationally but, in certain identifiable contexts, make the same sorts of mistakes over and over again. …

The FTC’s UMC enforcement principles may not be perfect, but they’re undoubtedly good. Thomas Lambert (University of Missouri School of Law)

In his seminal 1984 article, The Limits of Antitrust, Judge Frank Easterbrook proposed that courts and enforcers adopt a simple set of screening rules for application in antitrust cases, in order to minimize error and decision costs and thereby maximize antitrust's social value. Over time, federal courts in general—and the U.S. Supreme Court in particular, under Chief Justice Roberts—have in substantial part adopted Easterbrook's “limits of antitrust” approach, thereby helping to reduce costly antitrust uncertainty. Recently, however, antitrust enforcers in the Obama Administration (unlike their predecessors in the Reagan, Bush, and Clinton Administrations) have been less attuned to this approach, and have undertaken initiatives that reduce clarity and predictability in antitrust enforcement. Regardless of the cause of the diverging stances on the limits of antitrust, two things are clear. First, recent enforcement agency policies are severely at odds with the philosophy that informs Supreme Court antitrust jurisprudence. Second, if the agencies do not reverse course, acknowledge antitrust's limits, and seek to optimize the law in light of those limits, consumers will suffer.

Unreasonably exclusionary conduct, the element common to monopolization and attempted monopolization offenses under Section 2 of the Sherman Act, remains essentially undefined. Federal courts, including the U.S. Supreme Court, have purported to define the term, but the definitions they have offered are so indeterminate as to be, in the words of one prominent commentator, “not just vague but vacuous.” Seeking to fill the void left by the courts, antitrust scholars have in recent years proposed four universal definitions of unreasonably exclusionary conduct. Each, however, is deficient: One would fail to deter a substantial amount of anticompetitive conduct, and the other three would provide business planners with little guidance and no safe harbors and would likely chill efficient but novel business practices. In light of these deficiencies, some commentators have recently suggested abandoning the search for a universal definition of unreasonably exclusionary conduct and instead adopting non-universal standards. Such an approach, though, would either offend rule of law norms or, if implemented as some non-universalists have suggested, reduce to one of the aforementioned - and deficient - universal definitions.This Article examines the proposed definitions or tests for identifying unreasonably exclusionary conduct (including the non-universalist approach) and, finding each lacking, suggests an alternative definition. The proposed approach would deem conduct to be unreasonably exclusionary if it would exclude from the defendant’s market a “competitive rival,” defined as a rival that is both as determined as the defendant and capable, at minimum efficient scale, of matching the defendant’s efficiency. The “exclusion of a competitive rival” definition identifies the common thread running through instances of unreasonable exclusion, comports with widely accepted intuitions about what constitutes improper competitive conduct, and generates specific safe harbors and liability rules that collectively would maximize monopolization doctrine’s net benefits by minimizing the sum of its “decision” and “error” costs.

Both theory and empirical evidence (including evidence of retailing trends) suggest that instances of minimum RPM are more likely to be pro- than anticompetitive. Thomas Lambert & Michael Sykuta (Univ. of Missouri)

The battle over the proper legal treatment of minimum resale price maintenance (RPM) continues to rage in the United States. While the U.S. Supreme Court’s 2007 Leegin decision abrogated the per se rule of the 1911 Dr. Miles decision and required that RPM be evaluated under antitrust’s Rule of Reason, policy makers and commentators have divided over what a Rule of Reason inquiry should look like. Many have pushed for a “quick look” approach that would effectively deem instances of minimum RPM to be presumptively unreasonable in numerous situations. Others, including one of the authors here, have advocated a full-blown Rule of Reason that places a heavy burden on RPM challengers. At the state level, a number of states have declined to follow Leegin and will continue to deem minimum RPM to be per se illegal under state antitrust law. A recent study by University of Chicago economists Alexander MacKay and David Aron Smith purports to show that states following Leegin, rather than maintaining their old rules of per se illegality, have experienced anticompetitive effects in the form of higher prices for, and reduced output of, household consumer goods. The study thus provides ammunition to those advocating state rules of per se illegality and a federal “quick look” approach. Examined closely, the MacKay & Smith study fails to establish that adherence to stricter RPM rules results in procompetitive benefit. It therefore cannot overcome the persuasive theory- and evidence-based arguments for assessing minimum RPM under a full-blown Rule of Reason. This essay summarizes those arguments and explains why the MacKay & Smith study cannot refute them.

In 2012, the U.S. Supreme Court ruled that the Affordable Care Act’s health insurance mandate is constitutional because its penalty for non-insurance is a de facto tax. This article argues that the ruling may have preserved the ACA legally, but it likely doomed the law economically. Legal and legislative limits on the tax, coupled with the ACA’s prohibition on health insurers discriminating against preexisting conditions, results in a perverse incentive for non-low-income households to forgo insurance coverage until they face a high-cost medical problem, and then drop the insurance once the problem has been resolved. This perverse incentive extends to many employers, who would be financially better off to pay the tax and increase employee pay, rather than provide health insurance. As a result, insurance costs will likely soar while many people will go uncovered.

Proponents of the Patient Protection and Affordable Care Act of 2010 (ACA) set forth two primary goals: (1) to constrain health care costs and (2) to expand health insurance coverage. In its June 28, 2012 decision upholding the constitutionality of the ACA, the U.S. Supreme Court effectively re-wrote the statute so that it will attain neither of those objectives. By placing constitutional limits on the penalties (which it construed as “taxes”) for failure to carry health insurance, the Court exacerbated the adverse selection problem created by the ACA’s imposition of “guaranteed issue” and “community rating” restrictions on health insurers. That adverse selection problem, which now cannot be corrected by significantly increasing the penalties for failure to carry insurance, will substantially increase health insurance premiums. Those higher premiums will not be reduced by ACA provisions aimed at decreasing the cost of medical services, for the cost-reducing provisions in the Act are anemic, and the Act ignores altogether the primary driver of medical inflation: the absence of price competition among service providers, a problem created by a tax code that encourages overly generous third-party insurance arrangements. Finally, the Act, as modified by the Supreme Court, is unlikely to enhance insurance coverage by nearly as much as its proponents claimed and expected. The ACA’s provision of large subsidies for employees who lack access to employer-provided health insurance encourages employers to drop insurance coverage, but many employees who lose employer-provided coverage will, because of the ACA’s deficient “no insurance” penalties, lack adequate incentives to purchase their own insurance. In addition, the Supreme Court’s reduction of the sanctions on states that decline to expand their Medicaid rolls substantially disabled the main driver of coverage expansion. In sum, the ACA, as modified by the Supreme Court’s June 28, 2012 ruling, will increase health insurance premiums, will fail to reduce underlying medical costs, and will enhance insurance coverage by far less than the Act’s proponents promised.

Professor Einer Elhauge’s highly acclaimed article, Tying, Bundled Discounts, and the Death of the Single Monopoly Profit Theory, 123 Harv. L. Rev. 397 (Dec. 2009), contests two propositions on which efficiency-minded antitrust scholars have largely agreed: (1) that there should be no tying liability absent substantial tied market foreclosure (a position contrary to the legal status quo), and (2) that courts should recognize a safe harbor for any bundled discount that results in above-cost pricing that could be matched by an equally efficient, single-product rival. Elhauge maintains that tie-ins that do not cause substantial tied market foreclosure may nonetheless occasion adverse “power” effects that the U.S. Supreme Court has properly deemed to be anticompetitive. Those power effects may also result, Elhauge argues, from bundled discounts (even “above-cost” bundled discounts) that involve artificial inflation of the unbundled “linking” product price. These conclusions lead Elhauge to defend prevailing tying doctrine and to advocate a bundled discount rule that eschews price-cost comparisons and instead focuses on whether the discounter has raised the unbundled price of its linking product above but-for levels.

Antitrust is back in vogue at the U.S. Supreme Court. Whereas the Rehnquist Court decided few antitrust cases in its latter years (only one from 1993 to 1995, one each year from 1996 through 1999, and none from 2000 to 2003), the Roberts Court issued seven antitrust decisions in its first two years alone. Numerous commentators have characterized the Roberts Court's antitrust decisions as radical departures that betray a pro-business, anti-consumer bias. While some of the decisions do represent significant changes from past practice (see, e.g., Leegin, which overruled the 1911 Dr. Miles rule of per se illegality for minimum resale price maintenance, and Twombly, which abrogated the infamous "no set of facts" pleading standard set forth in the 1957 Conley v. Gibson decision), the "pro-business/anti-consumer" characterization of the Roberts Court's antitrust decisions is inaccurate. The characterization - caricature, really - fails to appreciate the fundamental limits of antitrust, a body of law that requires judges and juries to make fine distinctions between procompetitive and anticompetitive behaviors that frequently resemble each other. While false acquittals of anticompetitive conduct may harm consumers, so may false convictions of procompetitive actions. And efforts to eliminate errors in liability judgments are themselves costly. Optimal antitrust rules will therefore aim to minimize the sum of decision costs (the costs of reaching a liability decision) and expected error costs (the social losses from false convictions and false acquittals). Each of the Roberts Court's antitrust decisions can be defended in light of this "decision-theoretic" approach, an approach calculated to maximize the effectiveness of the antitrust enterprise, to the ultimate benefit of consumers. This Article first describes the fundamental limits of antitrust and the decision-theoretic approach such limits inspire. It then analyzes the Roberts Court's antitrust decisions, explaining how each coheres with the decision-theoretic model. Finally, it predicts how the Court will address three issues likely to come before it in the future: tying, loyalty rebates, and bundled discounts.

In holding that minimum resale price maintenance (RPM) is not per se illegal but should instead be evaluated under the rule of reason, the Leegin Court directed lower courts to craft a structured liability analysis that will separate pro- from anticompetitive instances of the practice. Thus far, courts, regulators, and commentators have proposed four types of approaches for evaluating instances of RPM: (1) approaches focused on the effects on consumer prices; (2) approaches focused on the identity of the party initiating the RPM (i.e., manufacturer or dealer(s)); (3) approaches focused on whether the product at issue is sold along with dealer services that are susceptible to free-riding; and (4) an approach, favored by the Federal Trade Commission, that mechanically applies factors the Leegin Court deemed to be relevant to the liability question. Reasoning from a decision-theoretic perspective that seeks to minimize the sum of the error costs and decision costs expected to result from the governing liability rule, this article critiques these four sets of proposed approaches. Finding each deficient, the article sets forth an alternative evaluative approach that would minimize the sum of decision and error costs, thereby maximizing the net social benefits of RPM regulation.

The debate over insider trading usually proceeds in all-or-nothing terms: either all insider trading should be permitted by law or none should. This article argues that the law should permit insider trading that decreases the price of an overvalued security or equity, but should prohibit insider trading that would increase that price. The reason for the different treatments is that over-valued equities often have a long-term negative effect on shareholders while the long-term effect on undervalued equities is ambiguous.