A Critical Evaluation of The Chicago School of Antitrust Analysis

A CRITICAL EVALUATION OF THE
CHICAGO SCHOOL OF ANTITRUST ANALYSIS

STUDIES IN INDUSTRIAL ORGANIZATION
Series Editors
H. W. de Jong, University of Amsterdam, The Netherlands

W. G. Shepherd, University of Michigan, Ann Arbor (Mich.), USA
Advisory Board
W. Adams, Michigan State University, East Lansing (Mich.), USA

R. E. Caves, Harvard University, Cambridge (Mass.), USA
K. D. George, University College, Cardiff, UK
E. Heuss, Friedrich Alexander University, Erlangen-Niimberg, FRG
A. P. Jacquemin, University of Louvain, Belgium
E. Kantzenbach, University of Hamburg, Hamburg, FRG
H. W. Lambers, Erasmus University, Rotterdam, The Netherlands
R. Prodi, University of Bologna, Bologna, Italy
F. M. Scherer, Swarthmore College, Swarthmore (Penn.), USA
Volume 9
A Critical Evaluation of the
Chicago School of
Antitrust Analysis
by
INGO L. O. SCHMIDT
European Association for Law and Economics
and
JAN B. RITT ALER

European Association for Research in Industrial Economics
.....
"
Kluwer Academic Publishers
Dordrecht / Boston / London
Library of Conll"as Cataloging-tn-Publication Data
Sch.ldt. Ingo.
[Chtcago school of antItrust analysIs. EnglIsh]
A crItIcal evaluatIon of the ChIcago schoel of antItrust analysIs
by In90 L.O. Schr.ldt and Jan B. Alttaler.
p. c~. -- (StudIes Ir. Industrial or;janlZatlon : v.l
TranslatIon of, Ole ChIcago schoel of antttrust analysts.
BIblIography, p.
ISBN 902'1737923
1. ChIcago school of econoalcs. 2. Free anterprise.
I. Rlttaler. Jan B. II. TI~le. III. SerIes.
HB98.3.S3513 1988
338.8--dcI9 88-25218
CI?
ISBN-13: 978-94-010-7660-9 e-ISBN-13: 978-94-009-2567-0
DOl: 10.1007/978-94-009-2567-0
This book represents the revised and substantially enlarged version of a book which was first
published in 1986 in Gennan under the title: Die Chicago School of Antitrust Analysis.
Wettbewerbstheoretische und -politische Analyse eines Credos. It has appeared as Volume
85 in the series Wirtschaftsrecht und Wirtschaftspolitik. Nomos VerlagsgeselJschaft, Baden-
Baden, Bundesrepublik Deutschland.
Published by Kluwer Academic Publishers,

P.O. Box 17, 3300 AA Dordrecht, The Netherlands
Sold and distributed in the U.S.A. and Canada

by Kluwer Academic Publishers,
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In all other countries, sold and distributed

by Kluwer Academic Publishers Group,
P.O. Box 322, 3300 AH Dordrecht, The Netherlands
Second Printing
All rights reserved

e 1989 by Kluwer Academic Publishers
Softcover reprint of the hardcover 1st edition 1989
No part of the material protected by this copyright notice may be reproduced or utilized in
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by any infonnation storage and retrieval system, without written pennission from the
copyright owners.
CONTENTS
Preface ix
Introduction xi
I. The Perception o/Competition as a Dynamic Process 1
II. Premises and Assumptions 0/ the Chicago School's Concept

0/ Competition 3
1. Rationality and Autonomy of Economic Agents 3
2. Perfectly Competitive Markets 7
3. Woricability of the Market Mechanism 10
4. Long-run Effectiveness of the Market Process (Time
Horizon) 13
III. Antitrust Theory and Public Policy 17

1. Maricet Structure Interference 17
2. Maricet Behavior Interference 18
IV. The Chicago School's Approach to Antitrust Theory 21

1. Method of Competition Analysis 21
2. Consumer Welfare as Chicago's Antitrust Goal 26
a. Measuring Consumer Welfare: The Efficiency
Criterion (Welfare Indicator) 33
i. Allocative Efficiency 35
ii. Productive Efficiency 36
vi
(1) Economies of Scale 37

(2) Transaction-Cost Efficiencies 43
iii. Monopoly Power and Productive Efficiency:
Williamson's Trade-Off Model 44
b. Allocative and Productive Efficiency as the Sole
Criterion for Consumer Welfare: A Critique 48
i. The Omission of Other Objectives 48
ii. The State of Perfect Competition as a Standard of
Reference (Theory of Second Best) 49
iii. The Failure to Consider External Effects 50
iv. The Profitability Approach as an Alternative
Concept of Efficiency Measurement 51
c. The Omission of Dynamic Efficiency Aspects: The
Case of Technological Progress 57
i. Firm Size and Technological Progress 58
ii. Concentration and Technological Progress 61
iii. The Chicago School and Technological Progress 63
v. Evaluating Concentration/rom the Chicago Point a/View 65

1. Corporate Size and Industry Concentration as Evidence of
Superior Efficiency 65
2. Causes of Monopoly Power 69
a. Control of a Scarce Input 70
b. Legal Protection of Monopoly Power 71
c. Monopoly Power in the Long Run 72
3. Measuring Monopoly Power 72
4. Determinants of Market Structure and the Effectiveness of
Competition 74
a. Barriers to Entry 74
b. Advertising 81
c. The Lack of an Oligopoly Theory 82
5. The Economic Effects of Mergers 84
a. Horizontal Mergers 84
b. Vertical Mergers 85
c. Conglomerate Mergers 86
6. Anticoncentration Policy from the Chicago Point of View 87
a. Merger Control 87
b. Divestiture 89
c. Deregulation 90
vii
VI. The Evaluation of Anticompetitive Behavior 93

1. Explicit and Implicit Collusion 93
2. Exclusionary Practices 95
3. Tying Arrangements 96
4. Predatory Pricing 99
5. Resale Price Mainteilance 101
VII. A Critical Resume of the Chicago Approach to Antitrust

P~ry 1~
1. Underlying Assumptions and Methodology 105
2. The Goals of Antitrust Policy 107
3. The Role of Theory and Empirical Evidence 110
4. Policy Recommendations 112
5. The Chicago School Approach as a Basis for Antitrust
Policy? 114
Bibliography 119
Index 129
PREFACE
The publication of this clinically analytical and trenchantly insightful

volume is felicitously timed. By fortuitous coincidence, it comes at a time
when the Chicago School enjoys a high-water mark of acceptance in U.S.
legal circles, and at a time when the U.S. merger movement of the 1980s is
cresting. It provides a welcome warning against the dangers of translating
abstract theories, based on highly restrictive (and unrealistic) assumptions,
into facile public policy recommendations. As such the Schmidt/Rittaler
study serves as a needed antidote to the currently fashionable predilection to
confuse ideology with science.
In the Chicago lexicon, the only appropriate policy toward business is a
policy of untrammeled laissez-faire. Because there are no market imperfec-
tions (other than government-created or trade-union-generated monopolies),
the market can be trusted to regulate economic activity, inexorably meting
out appropriate rewards and punishments. In this ideal world, corporate size
and power can be safely ignored. After all, corporations become big only
only because they are efficient, only because they are productive, only
because they have served consumers better than their rivals, and only
because no newcomers are good enough to challenge their dominance.
Once an industrial giant becomes lethargic and no longer bestows its
productive beneficence on society, it will inevitably wither and eventually
die. This is the "natural law" that governs economic life. It demands
obedience to its rules. It tolerates no interference by the state.
According to Chicago apologetica, mergers need not cause any public
concern. Merger-induced bigness can be automatically assumed to promote
efficiency, technological progress. and international competitiveness. If a
x
merger did not promise to achieve these objectives, why would a profit-
maximizing firm ever want to consummate it? The fact that it does proves
that the merger is beneficial- not only to the firms involved but, in the long
run, to consumers as well. Hence, there is no need to examine the facts or to
amass voluminous evidence. It must be so; otherwise it would not happen; it
would not be done.
Mergers, the apologists claim, have other virtues. Every time a merger
takes place, a superior management replaces an inferior management. The
market for corporate takeovers protects stockholders against the poor
performance of incumbent managers who, in the absence of takeover
threats, could continue to suboptimize the investment of their owners. How
do we know this? Logic indicates that it must be so. No need to investigate
further.
This kind of argumentation, as Schmidt and Rittaler brilliantly
demonstrate, begs the crucial questions:
Potential antitrust problems are "defined away" by narrowing down the

number of possible antitrust goals and by assuming markets that work
frictionlessly. This inevitably leads to a biased interpretation of theory, as
well as a selective reading of empirical results. The transfer of efficiency
gains to consumers that arise from economies of scale (increase in
consumer welfare) occurs automatically, according to Chicago theorists,
since a sufficient degree of (potential) competition is assumed, no matter
what the concentration. This assumption, which seems to be far removed
from reality, leads to a blurring of the distinction between firm and
overall economic efficiencies.
Moreover, it assumes (without an attempt at empirical proof) that, absent

government intervention, the status quo automatically coincides with the
holy grail of Pareto optimality.
But let Schmidt and Rittaler speak for themselves. Their analysis makes
for rewarding reading. It should be a useful guide for both industrial
economics scholars and public policy makers through the jungle of antitrust
controversies.
East Lansing, Michigan, U.S.A. Walter Adams

February 1988 Distinguished University Professor
Michigan State University
INTRODUCTION
The Chicago School, which was known in the past only within the context
of monetarism (Karl Brunner, Milton Friedman, Alan Meltzer et al.),
developed in the seventies a legal and economic approach to antitrust
policy.! This approach is supported by a group of economists and lawyers
(Bork, Demsetz, Director, Posner et al.) who have gained considerable
influence on U.S. antitrust policy. This is not only shown by the
"turnaround" in antitrust policy announced by former Secretary of Justice,
Smith, in 1981 2 but also by the Merger Guidelines of 1982/84, the Vertical
Restraints Guidelines of 1985, and the Antitrust Law Reform Package of
1986.3 The fact that the judges on the unofficial "waiting list" to be ap-
1 A survey on the development of Chicago Economics is offered by Reder, Melvin

W., Chicago Economics: Permanence and Change, 20 The Journal of Economic
Literature 1 ff. (1982).
2 Cf. the address held by former U.S. Secretary of Justice Smith, CCH Trade
Regulation Reporter Transfer Binder: Current Comment 1969-1983, 50,430, and
Tollison, Robert D., Antitrust in the Reagan Administration, 1 International Journal
ofIndustrial Organization 211 ff. (1983).
3 Cf. Merger Guidelines 1984, CCH Trade Regulation Reports No. 655 (1984),
Pan II; Vertical Restraints Guidelines, issued by the Antitrust Division of the
Department of Justice, January 23, 1985, CCH Trade Regulation Reports No. 687
(1985), Pan II.
For comments cf. Schmidt, lngo, and Ulrich Kirschner, Darstellung und
wettbewerbspolitische Wiirdigung der U.S. Vertical Restraints Guidelines, 35
Wirtschaft und Wettbewerb 781 ff. (1985).
Cf. CCH Trade Regulation Reports No. 744, February 24, 1986, Part II: "Proposed
Legislation - Administration's Antitrust Law Reform Package".
Xll
pointed to the U.S. Federal Supreme Court are Chicago scholars (posner)4
suggests that this is a long-term development.5
The notion that the structure-conduct-performance paradigm of the
Harvard School6 which has dominated U.S. Antitrust a quarter of a century
is unprecise has led to a further acceleration of this development. An
additional factor seems to be the allegedly simple and comprehensive
applicability of the Chicago concept: 7
Chicago School theory has a particular appeal to decision-makers

because it is presented as a closed system, capable of providing rational
answers to any issue. It insists that intractable problems can be solved
without making value judgements.
The present contribution tries to draw out the implications of the Chicago
approach to antitrust theory with its implicit and explicit premises and
discusses its policy recommendations. A critical discussion of the dif-
ferences between various Chicago scholars would be a weighty undertak-
4 The Committee on the Judiciary and the U.S. Senate have refused to appoint
Robert H. Bork, one of the leading representatives of the Chicago School, as a
member of the Federal Supreme Court in November 1987. The majority voted
against him on account of his extreme conservative views in various legal fields.
5 This development is enforced by trainee programs on the subject of Chicago
Economics held by the University of Miami and Emory University in which about
half of the 750 U.S. Federal Judges have participated. These programs are sup-
ported by business; cf. Guzzardi jr., Walter, Judges Discover the World of
Economics, 97 Fortune 58 ff. (1979).
The participation of District Judge Spencer Williams in such a seminar has led to a
request by the plaintiff for disqualification of the Judge in the civil damage suit
Inglis v. m Continental Baking; cf. Khourie, Michael N., and James J. Garrett,
Judicial Attendance at a "Biased" Educational Program: The Inglis v. ITT Continen-
tal Baking Case, 17 Antitrust Law and Economics Review 13 ff. (1985).
6 For a survey of the various antitrust schools in the United States, throughout the
history of the antitrust statutes, cf. Hovenkamp, Herbert, Antitrust Policy after
Chicago, 84 Michigan Law Review 213 ff. (1985), 213-215, and Singleton, Ross
C., Industrial Organization and Antitrust: A Survey of Alternative Perspectives,
Columbus, Ohio 1986.
7 Sullivan, Lawrence A., Antitrust, Microeconomics, and Politics: Reflections on
Some Recent Relationships, 68 California Law Review 1 ff. (1980), 9.
xiii
ing; therefore, we will refer to statements of preeminent Chicago scholars

such as Bork and Posner who are fairly orthodox representatives of this
schools and who have had, and still have, a significant impact on current
U.S. antitrust policy. This does not imply that other Chicago representatives
do not have different views on several issues; however, they are not
considered here for lack of space.
The basic view and the fundamental understanding of the Chicago
School can be characterized as follows:
The market process is seen as the free play of economic moves and
responses without public intervention and as the "survival of the fittest"
(Stigler) - so-called Economic Darwinism. 9
Governmental or public influence has to be repelled and restricted to the
setting of a minimum legal framework.
The self-image of the Chicago School as liberal-conservative is inter-
preted as a pro big-business and anti-union by its critics.
In the view of the Chicago School, the sole objective of antitrust policy is
the maximization of consumer welfare; Bork lO in particular contends that
8 Cf. Posner, Richard A., The Chicago School of Antitrust Analysis, 129 Univer-
sity of Pennsylvania Law Review 925 ff. (1979), and Bork, Robert H., The
Antitrust Paradox: A Policy at War with Itself, New York 1978.
With regard to other schools of thought within the field of antilrust theory there
seems to be a certain similarity between the Chicago School and the (Neo)
Auslrian School (v. Mises, v. Hayek, Kirzner et a1.) as far as the transaction cost
approach is concerned. Both concepts are quite different in terms of their theoreti-
cal approach but they show a considerable amount of similarity with respect to
policy implications and, therefore, are often compared with each other. Cf. Paque,
Karl-Heinz, How Far is Vienna from Chicago? An Essay on the Methodology of
Two Schools of Dogmatic Liberalism, 38 Kyklos 412 ff. (1985); for a survey on
the (Neo-) Auslrian School, cf. Singleton, InduSlrial Organization and Antilrust, op.
cit., 57-65.
9 Cf. Adams, Walter, Public Policy in a Free Enterprise Economy, in: Adams,
Walter (ed.), The Structure of American Induslry, 7th ed., New York, London
1986, pp. 395 ff., 402 ff.: "The Challenge of Economic Darwinism and the New
Laissez-Faire", criticizing the Economic Darwinism approach.
10 Cf. Bork, The Antitrust Paradox ... , op. cit., 81 ff., 89.
xiv
the founding fathers of U.S. antitrust law pursued only this goal. The
objective of antitrust policy, therefore, lies in maintaining market
mechanisms that secure the maximization of consumer welfare. In addition,
Chicago advocates oppose the concept of effective resp. workable competi-
tion, represented by the Harvard School (Adams, Bain, Caves, Mason, D.
Mueller, Scherer, Shepherd, Sullivan et al.) which is based on the structure-
conduct-performance paradigm, as well as a multiple antitrust goal ap-
proach.
Before elaborating on the details of the Chicago viewpoint, we have to
express our own views on the nature and functions of competition and the
competitive process. This is based on the view currently circulating in the
Federal Republic of Germany and the European Economic Community
(BEC).
The aim of this kind of competition policy is to maintain or help to
establish competitive market structures. In this view, competition is the
only means of ensuring that entrepreneurial forces are mobilized and the
full potential of the efficiency of firms is exploited. This process leads not
only to greater overall economic efficiency and competitiveness, but also to
increased consumer welfare. Competition, in this sense, can be viewed as
an unlimited sequence of moves and responses in which profits can be seen
as a motive for initiation and imitation of economic efforts. The time
competition needs to erode these profits indicates the degree of effective-
ness of competition, i.e., determines whether competition itself performs its
function in a sufficient manner and exerts sufficient competitive pressure
which cannot be controlled by the incumbents. This makes obvious that this
view of competition is a dynamic one.
However, competition has a fundamentally different role to play in an
economy during the present period of low economic growth than was the
case in times when economic growth was self-evident. Macroeconomic
management through stabilization and growth policy is no longer sufficient
to solve our present-day economic problems. 11
11 On this point, the German "Sachversmndigenrat zur Begutachtung der

gesamtwirtschaftlichen Entwicklung" (Council of Experts on Economic Affairs),
stated in its annual report for 1986/1987 that it regarded dynamic competition as
the guiding principle of a forward-looking economic policy designed to achieve
growth and employment, cf. BTDr. 10/6562 of November 25, 1986.
According to Professor HelmsUidtcr, a member of the Council of Experts, what
xv
When the economist speaks of competition, he must be aware that this

does not just boil down to competition via product prices, product quantity,
and product qUality. Standardized staple goods and homogeneous economic
textbook goods are of lesser importance in our economies. Therefore, we
have to see competition above all through the lense of innovation and the
development of new products and new processes. This kind of dynamic
view is the only realistic way of looking at competition. It embraces
temporary monopoly positions as a natural part of the competition process,
which is characterized by an originator-follower sequence documented by
initiatory moves and imitative responses. Particular importance is attached
in this context to the problem of market access barriers as will be shown in
the contribution submitted.
Another essential aspect of competition policy is, what came to be called
by the German ordoliberal economists, the "ordnungspolitische" function.
This view emphasizes that competition also has a sociopolitical function
which is to be valued at least as important as its economic function of
enhancing consumer welfare. In this sense, competition, acting as a controll-
ing, selecting, and driving force through decentralized decision-making
processes, becomes the only adequate counterpart and basic economic
principle appropriate for free, democratic states.
To this extent, this view on competition and competition policy coincides
with those that were traditionally put forward by United States antitrust
policy in numerous court cases until the early 1970s. 12 In these court
decisions, based on an unanimous economic fundament, competition law
was understood as a comprehensive charter of economic liberty aimed at
preserving free and unfettered competition as the rule of trade. The un-
restrained interaction of competitive forces, it was argued, would yield the
best allocation of the economic resources, the lowest prices, the highest
quality and the greatest material progress, while at the same time providing
an environment conducive to the preservation of democratic, political, and
social institutions.
matters now is no longer macro-economic management in a growing economy, but

growth through dynamic competition, see Helmstadter, Ernst, Das neue Paradigma,
Wirtschaftswoche, No. 27 of June 26,1987, pp. 78ff.
12 Cf. Northern Pacific Railway Co. v. U.S., 1958 CCH Trade Cases 68,961.
xvi
It seems that everybody is in agreement on these aspects. However, there

are differences on the question of how to actually put the principle of
competition into practice; and this is what the contribution submitted is
about.
The simplest approach seems to be that of the ultra-liberal or "Nihilist"
School. 13 This school advocates dismantling the entire institution of
antitrust since competition develops almost of its own accord if the public,
the government, and its agencies refrain from taking measures to control
and shape it. At the other end of the scale is the "Industrial Policy" School-
called the "Evolutionary" School in economic literature - which calls for
government planning and industrial targeting.
Antitrust policy is allowed only a secondary role, if any, as a means of
ensuring that planning targets are achieved. These two points of view, both
with a strong rejection of a need for an active antitrust policy, are taken up
with varying degrees of intensity by academic circles, business pressure
groups or - as far as the latter school is concerned - mercantilist and
Colbertarian, bureaucratic planning ideologues who advocate central
planning.
Competition policies in the European Community, the Federal Republic
of Germany, and the United States have nothing in common with these two
extreme positions. In both continents, we depart from the assumption, and
accordingly the laws distinctively state as much, that certain forms of
behavior and action by firms are not permissible on grounds of competition
considerations. Both sides, it seems, start from the basic idea that, in
assessing such matters, economic criteria are ultimately of crucial impor-
tance: competition is an economic phenomenon which is taken as fact.
However, legal rules must be drawn up and adopted so as to ensure cer-
tainty and clarity as to the meaning of the law, and to avoid arbitrariness.
Within this context, there seems to be a difference and perhaps a fun-
damental one, between the former and the current U.S. view on antitrust
policy and a difference between U.S. antitrust policy and German and
European competition policy nowadays. 14 Whereas the traditional approach
13 See Audretsch, David, Divergent Views in Antitrust Economics, 33 The
Antitrust Bulletin 135ff. (1988).
14 For a general treatment, cf. Schmidt, Ingo, and Jan B. Rittaler, Die Chicago
School of Antitrust Analysis: Wettbewerbsthcoretische und -politische Analyse
eines Credos, Baden-Baden 1986.
XVll
to antitrust and competition policy was multiple-goal oriented and based on

the structure-conduct-performance paradigm, current policy in the United
States is solely oriented towards the concept of "efficiency" and the former
underlying paradigm of structure, conduct, and performance is rejected.
With respect to this, the following point becomes crucially important.
The hypothesis that an increase - be it actual or potential - in the
efficiency of a business due to cost reductions, leads automatically to higher
growth and greater welfare has not been empirically established, at least in
the Federal Republic of Germany and in the European Community. It has
not been shown that a potential efficiency increase resulting from a merger
would be synonomous with an increase in global efficiency. And increased
efficiency cannot necessarily be inferred from a presumed increase in
profitability in the case of large firms. In such cases, profits may also be
caused by market power. Such market power can in turn be regarded as
almost a guarantee that the potential for efficiency and in particular for
innovation is not being exploited to the fullest and the maximum welfare
possible is not being achieved.
As a matter of fact, an examination of actual or supposed increases in
business efficiency, whether they relate to allocative or productive ef-
ficiency, is a reflection of a comparative-static way of thinking. The aim of
any realistic antitrust policy must be to see that there is sufficient competi-
tive pressure to force firms to be dynamic, innovative and to adjust and also
to compel them to actually pass on their internal welfare gains to the
economy as a whole.
These ideas are incorporated in EEC legislation in Art. 85 para. 3 of the
EEC Treaty. The example of rationalization agreements makes this par-
ticularly clear. Such agreements may be exempted from the general ban on
cartels, provided that a sufficient amount of competition is left intact and
benefits are passed on to consumers. Another point to be emphasized is the
need to keep markets open and to maintain contestability for the same
purpose.
We will try to deal with these fundamental differences in the contribution
submitted, trying to emphasize recent economic developments initiated by
the Chicago School of Antitrust Analysis.
ACKNOWLEDGEMENT
The authors feel obliged to thank David Phillips, B.A., M.A. for polishing
up the English version of this book.
1. THE PERCEPTION OF COMPETITION
AS A DYNAMIC PROCESS
Representatives of the Chicago School such as Bork 1 view competition as a

dynamic process. On the one hand they maintain a certain distance from the
static model of neoclassics, whereas, on the other hand, their idea of
fictitious equilibrium resembles the one developed by neoclassics: 2
If equilibrium were ever reached, the value of marginal product would be

the same in all employments - ( ... ) - and the distribution of resources
would be ideal.
The optimal resource allocation attained in market equilibrium is evaluated

by Bork as follows: 3
This condition has never been and can never be achieved. Changing
wants and technologies are in themselves sufficient to prevent the
attainment of such an equilibrium. But the forces of competition in open
markets cause the actual allocation of resources to be ever shifting in
pursuit of the constantly moving equilibrium point.
This statement clearly expresses that Chicago scholars do not see the
market eqUilibrium of neoclassics as a final state that will actually be
reached. For them, it is more or less a guiding star which has to be followed
in all of its movements. This pursuit is not achieved by conscious public
policy; only competition without any public interference forces the
1 Cf. Bork, The Antitrust Paradox ... , op. cit.

2 Bork. The Antitrust Paradox ... , op. cit., 98.
3 Bork, The Antitrust Paradox ... , op. cit., 98.
2
economy to adapt constantly to this ever-changing equilibrium. Such an

equilibrium is never actually reached but the unhindered competitive
process strives for its attainment ("tight prior equilibrium").4
The view of the Chicago School that the movement towards an equi-
librium state should be examined rather than the conditions required for
maintaining such an eqUilibrium, means that the Chicago School em-
phasizes a classic view close to that of Adam Smith. As will be shown
further on, the analysis of competition perceived in such a specific way is
done in a comparative-static manner, which leads to the omission of the
dynamic aspects of competition. s
4 Cf. on this Paque, How Far is Vienna from Chicago? ... , supra, 435: "Chicago
economists are inclined to see the world through the glasses of tight prior equi-
librium, i.e., they suggest that what we observe in the real world is, by and large, an
economy in long-run general equilibrium, with all profit opportunities seized and
no further adjustments required."
5 Cf. critically on this, Paque, How Far is Vienna from Chicago? .. , supra, 428:
"Of course, predictive power still figures prominently in Chicago rhetoric, but the
research emphasis has clearly shifted towards preserving the consistency of a
theoretical construction solely based on overall equilibrium. In this sense, Chicago
economics has become a mere interpretation rather than a theory of the world."
II. PREMISES AND ASSUMPTIONS OF
THE CHICAGO SCHOOL'S CONCEPT
OF COMPETITION
The premises and assumptions of the Chicago School were largely not
products of the Chicago School but rather of neoclassical price theory. They
are used by the Chicago School within the context of simple basic models
of price theory (polypoly, monopoly) in order to deduce concrete policy
recommendations. Therefore, these premises and assumptions underlying
these models have to be discussed in order to evaluate the soundness of the
policy implications. The following will deal with this.
1. RATIONALITY AND AUTONOMY OF ECONOMIC AGENTS
The representatives of the different schools of antitrust analysis take

differing positions with regard to the question whether participants in the
economic process (suppliers and consumers) act rationally. Posner views
the Harvard School as assuming "that consumers are irrational and manipul-
able". In contrast to this assumption, he emphasizes that "the Chicago
theorist rejects this assumption as inconsistent with the premises of price
theory".l In doing so, he accepts the neoclassic premise of rational behavior
of market participants. This assumption, however, is not unambiguously
defmed.
Furthermore, in addition to the assumption that consumers maximize
utility as well as the assumption that suppliers maximize profits, further
characteristics2 have to be regarded, such as the assumption of autonomous
behavior which means that consumers freely decide which goods and
1Posner, The Chicago School ... , supra, 930.
2 Cf. Henderson, James M., and Richard E. Quandt, Microeconomic Theory: A
Mathematical Approach, 3rd ed., Auckland et al. 1985.6 f.
4
services to purchase within the context of their budget oonstraints and their
preferences (consumer sovereignty).3
The representatives of other approaches to antitrust theory and policy
also assume rational behavior of consumers and suppliers. but as a rule the
assumption of bounded rationality employed by the behavioral sciences is
used. 4
This bounded rationality is described by Herbert Simon: 5
The capacity of the human mind for formulating and solving complex
problems is very small compared with the size of the problems whose
solution is required for objectively rational behavior in the real world.
In comparison. the Chicago School uses the assumption of totally rational

behavior in the sense that agents maximize utilities and profits. a poSition
that we will look at more critically below. 6
The assumption of autonomous behavior has to be regarded as unrealistic
since the preferences of consumers are influenced by external factors. Two
arguments are relevant within this context:
- consumers' preferences and. therefore. the demand of the goods and

services is influenced by the decisions of other consumers (external
consumer effects);
- consumers' decisions are not totally rational because they are influenced
by producers through advertising. This argument takes into consideration
3 On the consumer sovereignty, issue in welfare economies, see Scitovsky, Tibor,

On the Principle of Consumer's Sovereignty, 52 The American Economic Review
262 ff. (1962), and Scitovsky, Tibor, The Joyless Economy, New York 1976.
4 Cf. Williamson, Oliver E., Markets and Hierarchies: Analysis and Antitrust
Implications, New York 1975, 21 f., and Ouchi. William G.. Markets.
Bureaucracies and Clans. 25 Administrative Science Quarterly 129 ff. (1980). 132
f.
5 Simon. Herbert A., Models of Man, New York 1957, 198.
6 An approach that tries to use the behavioral concept of rationality for antitrust
theory is found in ZohlnMfer, Werner, and Horst Greiffenberg, Neuere Entwicklun-
gen in der Wettbewerbstheorie: Die Bcriicksichtigung organisationsstruktureller
Aspekte, in: Cox, Helmut, Uwe Jens and Kurt Markert (eds.), Handbuch des
Wettbewerbs, Munchen 1981. pp. 79 ff.
5
that there are two types of advertising: infonnative and persuasive

advertising.
Although a neat separation between these two components is difficult,
the fact that human beings - also in their roles as consumers - are not
totally rational beings and, therefore, are susceptible to the influence of
persuasive advertising, cannot be denied.
Nevertheless, the Chicago School takes the position that "(t)he rational
consumer will pay for advertisement ... only to the extent that advertising
reduces his costs of search. The services provided by advertising are
therefore real services".7 This might be the case with search goods, but not
with experience goods, which are encountered more frequently, however.
It is sometimes pointed out that only persuasive and infonnative advertis-
ing together can stimulate consumers' interest because the role of the
persuasive component is to break down the barrier of selective perception.
However, this argument does not reflect the core problem, since it is more
or less business-oriented and views advertising within the context of
marketing techniques.
Economic suspicion with regard to the argument that advertising restricts
consumer sovereignty in a free enterprise system cannot be removed by
this.s
On the suppliers' side the rationality of autonomous market participants
is simply reflected in the assumption of profit maximization. But this
assumption does not even differentiate between short-run and long-run
profit maximization and the implications of market behavior that can be
derived from this assumption. 9 Short-run profit maximization can be
7 Posner, The Chicago School ... , supra, 930 f.

8 On the controversy about the function of advertising in competition, cf. Hopp-
mann, Erich, Wettbewerb und Werbung, 33 Wirtschaft und Wettbewerb 776 ff.
(1983), and the rejoinder by Kantzenbach, Erhard, Zur wirtschaftlichen Beurteilung
der Werbung, 34 Wirtschaft und Wettbewerb 297 ff. (1984), 298 f. For the
differentiation between informative and persuasive advertisement, cf. Greer,
Douglas F., Industrial Organization and Public Policy, 2nd ed. New York 1984,65
ff.
9 For discussion of business management objectives see, ZohlnhOfer and Greiffen-
berg, Neuere Entwicklungen in der Wettbewerbstheorie, op. cit., pp. 83 ff.
6
influenced by a number of factors. For example, it may be restricted by a

policy of limit pricing that seeks to prevent the appearance of innovators
and imitators or whose aim is to avoid irritating public opinion because of
supracompetitive profits (which might lead to unfavorable taxation or
higher wage claims by unions). Such considerations will lead to a short-run
renunciation of profits in order to achieve profit maximization in the long
run.
A further, more general criticism of the profit maximization hypothesis is
that the attainment of the maximum possible profits is not the ultimate
objective of management (especially firms with a non-owner management);
the importance of profit maximization is diminished because of other
objectives like maximization of sales or market share because of aims such
as "empire building" for which a certain level of profit is an indispensable
precondition. 10
Given the differing views on the subject of profit maximization, some
crucial aspects should be kept in mind:
Neither the pure profit maximization assumption nor the non-maximiza-

tion assumption can be verified empirically; in reality there seems to be
more or less a mixture of these two differing objectives.
Profit has to be seen as a bookkeeping-like residual which results from
the difference between revenues and costs; in so far as profit is a derived
objective it can be defmed for different putposes.
- The assumption of relative profit maximization seems to be closer to
reality. The decision-maker faces real-world conditions such as imperfect
information, bounded rationality and the like. This leads to a sort of
profit maximization that is limited by conditions which are formed by
monetary (e.g. financial liquidity, revenue maximization, or preservation
of equity capital) as well as non-monetary objectives (e.g. prestige or
economic power). Non-monetary objectives are much more important
when the economy is in good shape, while monetary objectives gain
importance when economic returns decrease.
Long-run profit maximization limited by supplementary restrictions and
10 Cf. Henderson and Quandt, Microeconomic Theory .... , op. cit., 74 ff.
7
the pursuit of non-monetary objectives stands in opposition to the assump-

tion of the Chicago School that agreements and mergers are carried out for
the sole purpose of increasing efficiency.
2. PERFECILY COMPETITIVE MARKETS
In order to understand the position of the Chicago School it is important to

understand their view of the market and its characteristics. Rejecting the
field of research that is called 'Industrial Organization', Stigler refers to
pure economic theory, i.e., neoclassical price resp. resource allocation
theory. I I He deduces a model of perfect competition which is characterized
by certain conditions: 12
- The first condition is "that the largest firm in an industry makes a trifling
fraction of the industry's sales (or purchases), from which it follows that
there be many firms in the industry".13 It is assumed that the market
share of the biggest firm in a competitive market can be larger the more
elastic the market demand and the easier market entry for newcomers is.
- Since there are so many firms in a market, no firm occupies a significant
market share so that "these many firms ... are assumed to act indepen-
dently".14 This can be viewed as the second condition. No firm has to
respect the market behavior of any other firm (no interdependence -
polypoly).
- The third condition "is complete knowledge of offers to buy and sell by
the participants in the market".15 This means that consumers have perfect
market information (price of goods and services demanded by suppliers)
and that sellers have perfect market information (prices of goods and
services offered in the market). This condition is augmented by the
homogeneity of goods, which means consumers do not prefer the
11 Cf. Stigler, George J., The Organization of Industry, Homewood, Ill., 1968, 1.
12 Cf. Stigler, The Organization of Industry, op. cit., 5 ff. and 16 f.
13 Stigler, The Organization ofIndustry, op. cit., 5.
14 Stigler, The Organization of Industry, op. cit., 6.
8
products of one producer over those of another. This means a lack of

preferences that would not allow finns to differentiate their products. 16
The fourth condition is the divisibility of the commodity or service being
traded: 17 "If the units are lumpy, it is possible that minor dicontinuities
will emerge that allow some small market power to individuals."
Finally, Stigler takes into account the influences and effects between
markets and industries (interindustry competition) and views as addi-
tional prerequisites for perfect competition the mobility of resources
among uses and the infonnation of the owners of the resources as to the
yield in those various uses. The mobility of resources means the absence
of all barriers to entry whatsoever. 1S Equal access to markets becomes an
essential characteristic of the market as it is seen by the Chicago School.
These conditions largely mirror the assumptions of neoclassical price

theory which have been elaborated on by Frank Knight with regard to
perfect competition. 19 In contrast to this model of an ideal market, other
approaches to antitrust theory such as the "concept of workable competi-
tion" elaborated on by 1.M. Clark and even the "theory of monopolistic
competition" developed by E.H. Chamberlin, both of which were still
strongly influenced by traditional price theory, are rejected because "they
lack the analytical clarity of perfect competition".20
The more moderate Chicago advocates, who deny neoclassical price
theory and consider it an inappropriate instrument for analysis, are just a
minority.21
The assumptions of a perfect market have been criticized because they
16 Stigler mentions this extended condition for a perfect market in his "Theory of
Price", 3rd ed., New York 1965, 87f.; however, he does not mention it when he
describes perfect market competition in his book "The Organization of Industry."
This might be the difference between neoclassics and the Chicago School in
viewing perfect markets.
18 Stigler, The Organization ofIndustry, op. cit., 7 and 16.
19 Cf. Knight, Frank H., Risk, Uncertainty and Profit, Boston, New York 1921,76.
21 Cf., e.g., for this position Fink, Richard H., General and Partial Equilibrum
Theory in Bork's Antitrust Analysis, 3 Contemporary Policy Issues 12 ff. (1985).
9
are unrealistic and because "remedial imperfections" are necessary for

competition, as a dynamic process, to evolve:
- Ideal markets with numerous small firms that do not exercise any
influence on the market process (polypoly) can hardly be met in an actual
economy; they are empirically unimportant. The most important markets
in a real economy are characterized by the existence of few large firms;
thus, they are rather structured in an oligopolistic way. Therefore, the
market structure is characterized by firms which can actively influence
the market process because of their relative and absolute size. Since all
firms are aware of this influence, it cannot be assumed that they act
independently (oligolistic interdependence).
The assumption of perfect market information cannot be sustained either.
It is undisputable that market participants have only restricted access to
requisite information and their ability to process this information is
limited. Economic decisions are taken under risk und uncertainty.
Additionally, perfect market transparency in an oligopoly fosters
anticompetitive effects (open price systems).22
Finally, preferences of all kinds like product differentiation, regional
markets, seasonal products as well as personal preferences compromise
the perfection of markets. The divisibility of goods and services, the
mobility of resources, and totally free access to the market are the
exception rather than the rule - therefore, they do not make sense as a
general assumption for real world problems.
Market imperfections like product heterogeneity, a lack of market informa-

tion, a lack of foresight, adjustment lags, etc., are, instead, the prerequisites
and effects of a dynamic competitive process which is characterized by
never-ending phases of moves and responses. 23 The representatives of the
Chicago School do completely neglect this aspect of competition.
22 Cf. Schmidt, Ingo, Markttransparenz als Voraussetzung flir Wett-
bewerbsbeschrankungen, 13 Wirtschaft und Wettbewerb 97 ff. (1963), and the
discussion that was carried out after the appearance of this contribution in the
magazines Wirtschaft und Wettbewerb, Der Betrieb, Der Betriebsberater, and
Wettbewerb in Recht und Praxis in 1963 until 1966. This perception has become
adjudication in the Federal Republic of Germany and the EEC in the meantime.
23 Cf. Schmidt, Ingo, Wettbewerbspolitik und Kartellrecht, 2nd ed., Stuttgart 1987,
10.
10
The more realistic concepts developed by price and competition theory

during the last few decades are given up for the purpose of analytical
clarity. Instead, models far from reality are used which can be interpreted as
a reversion to the time before Chamberlin and Robinson who developed
their theories of monopolistic and imperfect competition in the 1930s.
3. WORKABILITY OF THE MARKET MECHANISM
There is a close link between the problem of perfectly competitive markets

and the workability of the market mechanism. The market mechanism is
characterized by a system of economic incentives and pressures. This
mechanism can be described by the goals of an economic system, such as
coordination of economic activities, the transmission of information, and
the allocation of resources. The result of the market mechanism can be seen
in the balance of demand and supply in all markets, the realization of Pareto
optimal conditions and, therefore, the attainment of a welfare optimum.
As is known from neoclassical price theory, the realization of these
results depends on the fulfIllment of certain conditions:
Since market prices mediate between market participants, the wOIkability

of markets depends essentially on the workability of the price mechanism
which means the flexibility of prices in the face of constantly changing
economic conditions.
- Furthermore, a large number of independent suppliers and consumers is a
prerequisite for the workability of markets. Each of these suppliers and
consumers has to be so small as to be relatively unimportant, that is,
neither can significantly influence market conditions. 24
24 Cf. the premises by Stigler mentioned above under 2. in Stigler, The Organiza-
tion of Industry. op. cit., ch. 2. A different position is held by Bark. The Antitrust
Paradox ... op. cit.. 60 f.: He views Stigler's exceptions of competition such as that
"antitrust must use the model (of perfect competition) and its implications as a
guide to reasoning about actual markets. but the pure model must never be
mistaken for that 'competition' we wish to preserve". In his opinion .:competition
may be read as a shorthand expression, a term of art. designating any state of affairs
in which consumer welfare cannot be increased by moving to an alternative state of
affairs through judicial decree".
11
The goods and services exchanged in markets are private goods. They
are characterized by rivalry in consumption and by the fact that non-
paying consumers can be excluded from consuming these goods and
services at low costs.
Finally, according to the Chicago School the market can only work
perfectly if the government restricts itself to the setting of a minimum
legal framework.
If the workability of markets cannot be assumed or secured, the Chicago

School relies on marketlike mechanisms as a substitute (e.g. auctions in the
case of public contracts). Since the representatives of the Chicago School as
a rule base their concept on workability of markets as a premise it has to be
appraised critically how far this premise is from reality.
The question of workability of markets is usually discussed under the
notion of "market failure". This includes among other issues, the following
topics: external effects, public goals, economies of scale, risk and uncer-
tainty, unstable states of equilibrium, and anomalies of supply and/or
demand.25 A few of these aspects are to be elaborated on shortly.
External effects are said to be existent when an activity undertaken by an
individual or firm benefits or imposes costs on other individuals or firms in
addition to the benefits or costs accruing to the acting party. These results
are typically ,,non-excludable" which means that the acting party is not
being reimbursed or charged for the external benefits or costs generated.
Because of this characteristic, externalities are passed on outside of the
price system. There is no inducement to take that benefit or cost into
consideration when deciding upon the level of activity to be undertaken
and, therefore, on the level of costs. This means that the individual or firm
chooses a level of activity at which the private marginal benefits from the
Bork's denial of Stigler's assumptions seems to be inconsequent in so far as

Bork implicitly refers to Stigler's neo-classic assumptions, when explaining
efficiency which he thinks is the sole legislative intent of antitrust policy. His own
perception of competition, however, cannot contribute to the interpretation of
efficiency.
25 For a survey on the causes of market failure cf., e.g., Scherer, Frederic M.,
Industrial market structure and economic performance, 2nd ed., Chicago 1980,481
f.
12
activity just equal the private marginal costs of undertaking this activity by
ignoring the marginal benefits or costs which accrue to other parties,
simultaneously.
Therefore, the overall marginal costs are higher than the private marginal
costs - in the case of negative externality - the latter being a source of
orientation for the acting party. The level of activity, hence, lies above the
optimal level, which leads to a misallocation of resources. The Pareto
optimum is not achieved. 26
The existence of increasing economies of scale is another reason for
market failure if the realization of such economies demands a level of
production that is incompatible with a competitive market structure. Two
aspects are crucial for this result: 27
First, the underlying conditions of such an industry would not induce

competition. Because of increasing returns, large firms would force
smaller competitors out of the market and the firm left would end up as a
monopolist (natural monopoly) that has the possibility to elevate prices
above marginal costs so that there would be a misallocation of resour-
ces. 28
Secondly, the attempt to maintain competitive structures would lead to
market failure. Increasing returns to scale mean that within the total
section of relevant demand marginal costs are lower than average costs
(see Figure 1).
Independent of market structure, marginal costs (MC = Pc) are less
than average costs. Pricing at marginal costs would be equivalent to
pricing below average cost, hence firms would have to take losses
(rectangle ABCD). In the long run firms would be forced at least to ask
the price that would cover costs ~).
26 Cf. Boadway, Robin, and David E. Wildasin, Public Sector Economics, 2nd ed.,
Boston, Toronto 1984, 14 ff. and 105 ff.
27 Cf. Boadway and Wildasin, Public Sector Economics, op. cit., 14 ff.
28 Cf. Bonbright, James, Principlcs of Public Utility Rates, New York 1961, 10 f.;
Kahn, Alfred E., The Economics of Regulation: Principles and Institutions, vol. 2:
Institutional Issues, New York et aI. 1971, 113 ff.; Shephcrd, William G., Public
Policies Toward Business, 7th ed., Homewood Ill. 1985,326 f.
13
P
LMC
LAC
Pm
Pk
Pc
Fig. 1. Increasing return to scale along relevant demand (D 1).
A deviation from marginal cost pricing means that the Pareto optimal
situation cannot be obtained.
Besides, anomalies oj the market can be caused by features of supply and
demand. 29 For example, supply and demand curves can be parallel to the
quantity-axes so that they will not intersect. On the other hand it is possible
that despite typical supply and demand curves, there is no real equlibrium
because equilibrium price and quantities do not lie within the first quadrant.
Furthermore, instabilities can be the cause of market failure (cf. Cobweb-
theorem).
4. LONG-RUN EFFECTIVENESS OF THE MARKET PROCESS

(TIME HORIZON)
The workability of the market mechanism is seen by the Chicago School in
29 For the violation of the uniqueness of the price-quantity equilibria assumption

cf. Henderson and Quandt, Microeconomic Theory .... , op. cit., 157 ff.
14
tenns of a long-run realization of its basic functions: coordination, infonna-

tion, and allocation. In doing so, it is assumed that the market allows free
entry and exit so that profit and loss expectations provide certain incentives
or exert certain pressures, allowing a sufficient number of competitors to
participate in the market and, therefore, allowing them to perfonn a given
set of economic functions. In dealing with these issues, the Chicago
representatives take up ideas that were originally put forward by Fritz
Machlup in the context of his pliopoly analysis 30 and which later have been
used for the concept of contestable markets. 31
Market processes need a certain amount of time to adjust to changing
economic conditions because the relevant information has to be processed
which, in the view of the Chicago advocates, is responsible for temporary
market frictions. However, this should not be mistaken for barriers to entry.
The core issues can be seen in the evaluation of barriers to entry. Chicago
School representatives only believe in the existence of barriers to entry in
some special cases, which are unlikely to occur in reality. There seems to be
a far-reaching consensus that a company's control of a scarce input is a
barrier against potential competitors. 32 It is disputed, whether a risk
premium that has to be paid by newcomers as an expression of a higher risk
for losses constitutes a barrier to entry.33
In addition to the systematic concept of market barriers originally
developed by Bain34 there are legal barriers to entry, such as the patent
protection or governmental barriers to entry et al. Such market barriers are
30 Cf. Machlup, Fritz, The Economics of Seller's Competition, Baltimore 1952,

211 ff.
31 Cf. Baumol, William J., John C. Panzar and Robert D. Willig, Contestable
Markets and the Theory of Industry Structure, New York et a1. 1982.
32 Cf. Posner, The Chicago School ... , supra, 947; Demsetz, Harold, Economics as
a Guide to Antitrust Regulation, 19 The Journal of Law and Economics 371 ff.
(1976),381 f.
33 Cf. Posner, The Chicago School ... , supra, 945 f.; and Williamson, Oliver E.,
Book Review, 83 The Yale Law Journal 656 ff. (1974), 656: "The uncertainty of
the new entrant's prospects may force him to pay a higher risk premium to obtain
capital than existing firms must pay."
34 Cf. Bain, Joe S., Barriers to New Competition, Cambridge, Mass. 1956, who
differentiates between three kinds of barriers to entry: (1) economies of large scale,
(2) product differentiation advantages, and (3) absolute cost advantages.
15
of permanence and cannot be removed by market forces. The importance of

the different kinds of barriers to entry and their importance for evaluating
the antitrust theory of the Chicago representatives will be discussed in part
V. 4. a, in which the question of industrial concentration will be treated.
III. ANTITRUST THEORY AND PUBLIC POLICY
The Chicago School takes a special view on antitrust policy which is based
on the confidence in the long-run effectiveness of the market mechanism,
which can be interpreted as laissez-faire liberalism. In the following
sections V and VI of this contribution this position will be dealt with in
detail.
According to Posner antitrust policy should only deal with collective
action of competitors which aim at the exclusion of competition: 1
Firms cannot in general obtain or enhance monopoly power by unilateral

action. Consequently, the focus of the antitrust laws should not be on
unilateral action; it should instead be on: (1) cartels and (2) horizontal
mergers large enough either to create monopoly directly ... or to
facilitate cartelization by drastically reducing the number of significant
sellers in the market.
1. MARKET STRUCfURE INTERFERENCE
In general, structural remedies by interference are rejected, based on the

argument that the organization of an industry that has developed over time
without any legal restrictions is the result of the underlying cost situation
("survival of the fittest").2 Consequently, the industry's structure is the
result of differing efficiencies of firms over time. In this context, the
unwarranted assumption is that the improvement of efficiency is the only
1 Posner, The Chicago School .. , supra, 928.

2 Cf. Demsetz, Economics as a Guide ... , supra 375.
18
motivation for concentration. 3 A high degree of concentration is regarded as

the result of superior abilities of entrepreneurs. According to Bork, it is
important whether the firm has reached its efficient size by internal or
external horizontal growth.4
Whereas the representatives of the Chicago School reject market struc-
ture interference - except in the case of some horizontal mergers - they do
agree with market behavior interference. eventually. In the following we
shall scrutinize to what extent Chicago believes market behavior should be
controlled.
2. MARKET BEHAVIOR INTERFERENCE
Building on the idea that competition is characterized by rivalry in produc-

ing and supplying goods and services more efficiently than each of the
competitors, the representatives of the Chicago School follow a so-called
behavior approach. Accordingly, it is not surprising that the School is much
more critical towards anticompetitive behavior than towards concentration.
For example, Stigler and Demsetz consider collusion to be a much more
important problem in antitrust policy than concentration. s
According to Stigler, whether collusive behavior is effective is open to
question. He believes, that collusion which is not enforced by an agreement
is of little effect for "where an agreement cannot be enforced, it will not be
obeyed".6 Therefore, he regards secret price conspiracies as not effective
since they could be undermined easily. On the other hand, he regards joint
sales agencies as the most effective form of collusion. Stigler also regards
3 Cf. Hauptgutachten der Monopolkommission IV: Fortschritte bei der

Konzentrationserfassung, Baden-Baden 1982, ch. VI: motives of concentration,
where the German Monopolies Commission is dealing with the different motives of
concentration (for instance legal framework, imperfect capital market, patents,
striving for market power, etc.).
4 Cf. Bork, The Antitrust Paradox ... , op. cit., 164.
5 Cf. Stigler, The Organization of Industry, op. cit., 267 ff., and Demsetz,
Economics as a Guide ... , supra, 383.
6 Stigler, The Organization of Industry, op. cit., 268; Stigler fails to recognize that
a symmetry of interests can easily substitute a legal mechanism.
19
individual or geographic market division as very efficient. However, both

forms can be identified and their existence can easily be demonstrated by
the Antitrust Division. In this case, Stigler accepts the existence of an
authority that prosecutes collusion. So he comes to the conclusion that
,,(t)he Sherman Act has reduced the availability of the most efficient
methods of collusion and thereby reduced the amount and effects of
collusion".? In this field Stigler apparently regards government policy as
useful.
Demsetz recognizes the danger of price conspiracies and makes "a
modest recommendation that anti trusters again pursue the collusive price
agreement". 8 Bork takes a similar view when he asks for the law to be
anlended so that "(t)he suppression of competition by horizontal agreement,
such as the nonancillary agreement of rivals or potential rivals to fix prices
or divide markets'oC) can be pursued. Moreover, he advocates a per se rule in
case of deliberate predation to prevent output from being restricted. An
exception should take place in those cases in which the conspiracy increases
efficiency. to
Stigler, Demsetz, and Bork take the same view that legislature should
take action only in those fields in which a certain type of conduct causes
horizontal restraints oftrade and, therefore, is likely to restrict output.
According to the view of preeminent representatives of the Chicago
School, government should take action only in case of horizontal restraints
of trade that are primarily caused by different forms of explicit collusion.
Secondarily, government should intervene in horizontal mergers if there is a
very high degree of concentration. ll Beyond that, government should
abstain from antitrust action.
8 Demsetz, Economics as a Guide ... , supra, 383.
9 Bork, The Antitrust Paradox ... , op. cit., 406.
10 Cf. Bork, The Antitrust Paradox ... , op. cit., 263 f. and 278 f.
11 Cf. Stigler, The Organization of Industry, op. cit., 265 and 270, who figures out
a substantial decline of horizontal mergers according to FIC statistics on the
merger activities of the 200 leading firms in the U.S.A. from 1948-1953,
1954-1959, and 1960-1964. He traces this decline to the effect of the amendment
of Sec. 7 Clayton Act in 1950. In the summary of the chapter on the economic
impacts of the antitrust laws he stresses this fact once more without any comment.
It seems that he is in favour of this effect of the amendment of Sec. 7 Clayton Act.
20
From this context it becomes obvious that economic efficiency has

become the dominant social value for judging business practices and
antitrust violations. However, this cannot be interpreted as an "economic
revolution" in the sense that economics has fmally found introduction into
antitrust. 12 Rather, it means that just recently economists have decided to
rely exclusively on an economic approach.
12 Cf. Hovenkamp, Antitrust Policy After Chicago, supra, 217-225, on the role of
economics throughout antitrust history.
IV. THE CHICAGO SCHOOL'S APPROACH
TO ANTITRUST THEORY
1. METHOD OF COMPETITION ANALYSIS
Consumer welfare as the single goal of antitrust is analyzed by means of

neoclassical microeconomics, which means that perfect competition and
monopoly selVe as standards of reference.' Neither perfect competition nor
monopoly in the structural sense are seen as states that should be reached.
They simply selVe as a basis from which to depart for the purpose of
analysis and thereby should contribute to analytical clarity. The guiding
concept of antitrust policy is not an ideal market structure to be reached but
the maximization of consumer welfare as a performance criterion.
In the Chicago view oligopoly models cannot sufficiently contribute to
the explanation of the competitive process and are as a result rejected. In
analyzing the links between economics and law, different approaches to
antitrust theory can be reduced to two core issues, as Bork states: 2
(1) The goals or values the law may legitimately and profitably imple-
ment, and
(2) the validity of the law's vision of economic reality.
With regard to the first point, Bork states, credolike, that the maximization
of consumer welfare is the sole legitimate antitrust objective. Hence, for
Bork, the answer to the second point follows immediately from the first in
that "(a) consumer-oriented law must employ basic economic theory to
judge which market structures and practices are harmful and which benefi-
cial".3
1 Cf. Demsetz, Economics as a Guide, supra, 371 f.
2 Cf. Bork, The Antitrust Paradox, op. cit, 7.
3 Bork, The Antitrust Paradox, op. cit., 7.
22
Bork confinns this point of view in his appraisal of the links between
antitrust, consumer welfare, and the use of traditional microeconomic
concepts.
Antitrust policy, according to Bork, deals with the implications of
economic behavior for consumers. A basic knowledge of these links and
relations can only be gained through the use of basic economic theory. The
models that are used within the context of economic theories are so simple,
therefore, that their implementation in jurisdiction does not pose any
problems. 4
Consumer welfare is viewed as the result of economic behavior.
Economic behavior, therefore, can result in productive and/or allocative
efficiency or inefficiency, and these effects can in tum be represented by
means of neoclassical price theory. It is especially in this context that the
advantages of this kind of price theory can be demonstrated because
... , price theory enables us to identify, with an acceptable degree of

accuracy, those activities whose primary effect is output restricting,
leading to the inference that all other activity is either efficiency creating
or neutral.5
The crucial question, therefore, is whether a certain antitrust goal implies or

even requires a certain method of research. If representatives of the Chicago
School - such as Bork - view consumer welfare as the sole antitrust goal,
do they have to simultaneously accept neoclassic analysis as a method of
research?
Bork's procedure6 reveals that neoclassic analysis offers him a method
by which consumer welfare and thereby the implications of the lack of
competition for consumer welfare can be analyzed. Whether neoclassic
analysis is necessary in order to analyze antitrust policy depends crucially
upon the nature of the objective of consumer welfare. If consumer welfare
as the Chicago School sees it is described solely by the two criteria -
allocative and productive efficiency - then there is a narrowing down of the
possible interpretations of consumer welfare. Nevertheless, the crucial
4 Cf. Bork, The Antitrust Paradox, op. cit, 90.
6 Cf. Bork, The Antitrust Paradox, op. cit., chs. 4 and 5.
23
question remains whether these criteria imply or even require the use of
neoclassics as an analytical tool.
Even if consumer welfare in the narrow sense is seen as the only goal of
antitrust policy, the method of neoclassic analysis does not follow automati-
cally. Rather, efficiency could be described, perhaps even better described,
by characteristics such as the level of prices, costs, profit rates, technologi-
cal progress, the degree of capacity utilization, etc., which can be deter-
mined empirically.7
Furthermore, the interpretation of consumer welfare only in terms of
efficiency, or perhaps as elevated prices and restriction of output, is too
narrow. A crucial failing of neoclassic analysis can be seen in the fact that it
uses static eqUilibrium models, which means that one abstracts from
technological innovation as a dynamic element of competition and, there-
fore, one abstracts from a crucial contribution to consumer welfare by using
these models.
Within this context, Bork only offers vague hints, describing technologi-
cal innovation as "a component of consumer welfare".8 By definition, Bork
includes technological innovation in the definition of consumer welfare
without elaborating it concretely; the implications for the efficiency
criterion that would arise if dynamic aspects were taken into account are not
elaborated on. Scherer, therefore, correctly criticizes in his review of
Posner's book9 that the definition of efficiency used by the Chicago School
is never clearly defined.
The neoclassical efficiency criterion Me = p that is used as a standard of
reference includes explicitly the state of perfect competition, in which p
equals MR and, therefore, the state of competition is taken into considera-
tion. A view that is only cost-orientated abstracts from the state of competi-
tion or has to assurne that through the absence of market barriers there is
7 Two problems in particular emerge in this context: on the one hand there is the
problem of the statistical determination of the outcome of the variables, on the
other hand there is the problem of defining the norm with which efficiency or
consumer welfare as an antitrust goal should be measured.
8 Cf. Bork, The Antitrust Paradox, op. cit., 132 f.
9 Cf. Scherer, Frederic M., The Posnerian Harvest: Separating Wheat from Chaff,
86 The Yale Law Journal 974 ff. (1977),995: Also I have been unable to find an
explicit defmition (of efficiency) ...."
24
always sufficient potential competition. So, the neoclassic instrument is

only used selectively. This becomes even more apparent when - in contrary
to neoclassical price theory - the links between an increasing degree of
competition and the level of profits is denied.
The representatives of the Harvard School are criticized on the grounds
that
... industrial organization, the field of economics that studies monopoly

questions, tended to be untheoretical, descriptive, 'institutional', and
even metaphoricaL.. . The result was that industrial organization
regularly advanced propositions that contradicted economic theory. 10
And furthermore, that ,,(t)he Chicago School has largely prevailed with
respect to its basic point: that the proper lens for viewing antitrust problems
is price theory".11
But Posner has to face the argument that he uses an outdated price theory
for his analysis that has not been used since the 1930s
(Chamberlin/Robinson), and that he neglects all subsequent develop-
ments. 12
Especially the knowledge that the model of perfect competition used by
the neoclassics cannot serve as a guiding concept for antitrust policy,
strongly influenced efforts to develop a theoretical approach that would
take into account competitive reality.13
The following steps in this development can be discerned:
The theory of monopolistic or imperfect competition, in which the

crucial topic 14 was the abandonment of the premise of product
10 Posner, The Chicago School ... , supra, 928.
12 Cf. Nelson, Richard L., Comment on Paper by Posner, 127 University of
Pennsylvania Law Review 949 ff. (1979), 949.
13 A good survey on the steps in the development from price theory to competition
theory is offered by Zohlnhafer, Werner, Wetlbewerb - Modell und Wirklichkeit,
in: Andreae, Clemens-August. and Werner Benisch (eds.), Wettbewerbsordnung
und WettbewerbsrealiUit, Kaln et al. 1982, pp. 15 ff.
14 Cf. esp. Chamberlin, Edward H., The Theory of Monopolistic Competition,
Cambridge, Mass. 1933; Robinson, Joan, The Economics of Imperfect
25
homogeneity and of the pure dichotomy of monopoly and perfect

competition ("small group").
- The concept of workable competition which has brought the realization
that certain market imperfections are necessary for dynamic competi-
tion. ls
- The theory of the optimal intensity of competition, which refers to the
link between market structure, the intensity of competition, and the
fulfillment of certain distinct functions of competition. 16
- The introduction of dynamic aspects by taking into account the stages of
evolution in market processes and, therefore, time as an essential part of
market development. 17
The consideration of organizational aspects, which leads to insights into
intracorporate decision processes and their importance for the market
behavior of the firm.ls
This sUIVey strongly points out that subsequent steps in the development
from price to competition theory are neglected by the Chicago School.
Finally, neoclassical price theory as used by the Chicago School cannot
reflect reality because of the assumptions made: 19
Neoclassical price theory is a powerful theoretical construct because it

simplifies reality. Assumptions such as perfect information, costless
transactions, profit-maximizing firms, and utility-maximizing consumers
can be entirely appropriate in some situations ... (o)ne should be wary,
Competition, London 1933, and Triffin, Robert, Monopolistic Competition and
General Equilibrium Theory, Cambridge, Mass. 1940.
15 Cf. Clark, John M., Toward a Concept of Workable Competition, 30 The
American Economic Review 241 ff. (1940); idem, Competition as a Dynamic
Process, Washington D.C. 1961.
16 On this concept cf. esp. Kantzenbach, Erhard, Die Funktionsfahigkeit des
Wettbewerbs, 2nd rev. ed., Gottingen 1967, refering to Almarin Phillips, Market
Structure, Organization, and Performance, Cambridge, Mass. 1962.
17 Cf. Kuznets, Simon S., Economic Change, New York 1953.
18 Cf. ZohlnhOfer and Greiffenberg, op. cit., pp. 79 ff.
19 Harris, Robert G., and Thomas M. Jorde, Market Definition in the Merger
Guidelines: Implications for Antitrust Enforcement, 71 California Law Review 464
ff. (1983),468.
26
however, of drawing policy inferences from models founded on assump-

tions that are incongruent with reality.
2. CONSUMER WELFARE AS CHICAGO'S ANTITRUST GOAL
The point of departure for any rational antitrust policy are the goals that
should be attained. Therefore, a crucial topic for Bork are the goals which
underlie the antitrust policy of the United States. 20 He criticizes the U.S
Federal Courts because they have not, in over 80 years, been able to settle
for any extended period of time upon a defInite statement of the law's
goals, despite the fact that this ought to be a matter of some importance.
There seems to be extensive confusion that ..... is likely to leave the
impression that antitrust is a cornucopia of social values, all of them rather
vague and undefIned but indefInitely attractive".21
In contrast to those who emphasize a multiple-goal approach, BorIc
contends that the antitrust legislation's sole intent was the maximization of
consumer welfare. Therefore, the expression "competition" describes a
specifIc state of the market in which consumer welfare cannot be increased
by judicial decree. 22
Consumer welfare is set equal to social welfare which leads to an
abstraction from distributional aspects: 23
... (I)t seems clear the income distribution effects of economic activity
should be completely excluded from the determination of the antitrust
legality of the activity. It may be sufficient to note that the shift in income
distribution does not lessen total wealth, ...
Because of the diffIculties of perceiving the ratio legis, not only the legal
wording should be taken into account but also the intentions that are
inherent in the application of the law. As a result Bork concludes: 24
20 Cf. Bork, The Antitrust Paradox, op. cit., 81 ff.
23 Bork, The Antitrust Paradox, op. cit., 111 (emphasis added).
27
The language of the antitrust statutes, their legislative histories, the major
structural features of antitrust law, and considerations of the scope,
nature, consistency, and ease of administration of the law all indicate that
the law should be guided solely by the criterion of consumer welfare.
Bork recognizes that a "mutiple-goal antitrust law" has a certain appeal to

many people; he tries to prove the exclusiveness of the consumer welfare
goal by claiming certain virtues for it:
(A) consumer welfare goal is superior in that it

(1) gives fair warning,
(2) places intensely political and legislative decisions in Congress instead
of the courts,
(3) maintains the integrity of the legislative process,
(4) requires real rather than unreal economic distinctions, and
(5) avoids arbitrary or anticonsumer rules.
A multiple-goal approach can achieve none of these things.25
Point (1) is basically about the legal predictability for business men affected
by the antitrust laws. In Bork's view, the consumer welfare goal leads to a
small number of relatively simple rules, allowing firms to better judicial
opinions because "a consumer welfare orientation makes changes in the law
predictable and less likely to produce unfairness".26
In point (2) Bork returns to the issue of the roles of the legislature and the
courts. In Bork's opinion, the legislature plays the primary role, and the
court the secondary role in correctly enforcing the law. This means that
there is only one goal of antitrust and, therefore, not too much discretion for
the courts. Factually, this means the exclusive application of the per se-rule
instead of the rule of reason since the latter allows too much discretion to
the courts as well as to the enforcement agencies: 27

28
Courts are the wrong institution for these unstructured interpersonal

comparisons both because political choices of this nature should ... , be
made by elected and representative institutions, and because the courts
do not have the facilities for fact-fmding on a broad scale that are
available to the legislature. The admission by a court of goals in conflict
with consumer welfare into the adjudicative process, therefore, involves
a serious usurpation of the legislative function by the judicial arm.
Therefore, consumer welfare is the exclusive goal of antitrust.

The arguments in point (3) run parallel to those of point (2). Bork points
out the fact that the courts force legislature to face and to decide questions
that have been left unanswered. Consumer welfare - a theoretically exact,
but in reality vague antitrust goal - should have the function of making the
legislative process more responsible and not leaving important questions to
the courts.
Reason (4) for the superiority of the consumer welfare goal in com-
parison to other antitrust goals is - according to Bork - based on the fact
that "(t)he policy of consumer welfare provides courts with the principles of
basic price theory as their criteria for decision".28
The consumer welfare goal provides the courts with principles and
concepts which allow them to measure deviations from the guiding concept
of competition. The concept of "efficiency" and the measurement rod of
"output restriction" serve as central elements. 29
Avoiding arbitrary or anticonsumer rules (5) is the final argument in
favour of the consumer welfare goal as seen by Bork. He contends that it is
very unlikely that courts would balance in a case-by-case approach different
values which are partly contrary to consumer welfare because "(t)hey are
much more likely to arrive at rigid rules which will either be arbitrary or
completely anticonsumer".3o This reasoning again tries to justify consumer
welfare as the exclusive goal and denies other goals the protection of small
business (Small Business Act) or the decentralization of economic power.
Whether consumer welfare should be the exclusive goal of antitrust policy

29 Cf. Bork, The Antitrust Paradox, op. cit., 85.
29
implies a nonnative value judgment about the goals of antitrust policy. In

abstracting from distributional aspects by the assumption that monopolists
are simply a different class of consumer, social welfare is set equal to
consumer welfare:31
Those who continue to buy after a monopoly is fonned pay more for the
same output, and that shifts income from them to the monopoly and its
owners, who are also consumers. This is not deadweight loss due to
restriction of output but merely a shift in income between two classes of
consumers. The consumer welfare model, which views consumers as a
collectivity, does not take this income effect into account. If it did, the
results of trade-off calculations would be significantly altered.
With regard to American antitrust policy, it can be shown that the legisla-
tive history, the ratio legis, and the interpretation of the laws by the Federal
Supreme Court contradict the assertion of the Chicago School that the basis
of the American antitrust laws is only the promotion of efficiency. Rather,
the rationale of the American antitrust laws comprises welfare considera-
tions ("efficiency approach"), protection of the economic freedom to
compete, as well as control of economic power ("multiple goal ap-
proach")32, whereby the second goal complex was emphasized, originally.
When the first of the U.S. American antitrust laws was passed in 1890
Senator Shennan made the following remarks with regard to the goal of
antitrust: 33
31 Bork, The Antitrust Paradox, op. cit., 110 (emphasis added).

32 Analogous to Neale, Alan D., and D.G. Goyder, The Antitrust Laws of the USA:
A Study of Competition Enforced by Law , 3rd ed., Cambridge et al. 1980,439 fr.,
who have extricated three different motives of American legislation:
- the so-called radical populist approach (ensuring the freedom to compete and
the control of economic power),
- the small business approach, and
- the economic efficiency approach.
They see "the provision of legal checks to the exercise of economic power as the
mainspring of antitrust" (p. 339). Also the legislative history of the Gesetz gegen
Weubewerbsbeschrlinkungen (Act against Restraints of Competition) in the Federal
Republic of Germany shows the dual goal approach (economic as well as meta-
economic goals); cf. Schmidt, Weubewerbspolitik und Kartellrecht, op. cit., 108.
33 Quoted after Scherer, Separating Wheat from Chaff . .. , supra, 980.
30
If we will not endure a king as political power we should not endure a

king over the production, transportation, and sale of any of the neces-
saries of life. If we would not submit to an emperor we should not submit
to an autocrat of trade, with power to prevent competition and to fix the
price of any commodity.
Senator Kefauver, one of the fathers of the CellerlKefauver Amendment to

Section 7 of the Clayton Act, has described the links between economic and
political order as follows: 34
Through monopolistic mergers the people are losing power to direct their
own economic welfare. When they loose the power to direct their
economic welfare they also loose the means to direct their political
future .... A point is eventually reached, ... where the public steps in to
take over when concentration and monopoly gain too much power.
The non- or meta-economic goals such as the control of economic power

that are based on the legislative history of the Sherman Act, as well as of
the Clayton Act, were repeatedly affirmed by the Courts. This was partly
criticized as a simple deviation from the criterion of economic efficiency.35
In the Alcoa case, Judge Learned Hand declined to differentiate between
good and bad monopolies. As justification, he pointed to the socio-political
goals of the Sherman Act: 36
34 Quoted after Pitofsky, Robert, The Political Content of Antitrust, 127 University
of Pennsylvania Law Review 1051 ff. (1979),1063.
35 Cf. Kauper, Thomas E., The Goals of United States Antitrust Policy - The
Current Debate, 136 Zeitschrift fiir die gesamte Staatswissenschaft 408 ff. (1980),
420 who critically comments on Bork's criticism of the jurisdiction as follows:
"Whether they are 'wrong' or part of a 'deviant' theme (as Bork states), is ul-
timately a question of judgment."
Kauper, though, defends the view that the question of the size at which a firm is
gaining too much political and social power cannot be an issue for judges but has to
be ultimately decided by the legislature.
36 U.S. v. Alcoa, 1944-47 CCH Trade Cases 57,342, pp. 57,682 f. (emphasis
added).
31
... Congress ... did not condone 'good trust' and condemn 'bad' ones; it
forbade all. Moreover, in so doing it was not necessarily actuated by
economic motives alone. '" We have been speaking only of the
economic reasons which forbid monopoly; but as we have already
implied, there are others, based upon the belief that great industrial
consolidations are inherently undesirable, regardless of their economic
results. In the debates in Congress Senator Sherman himself in the
passage quoted in the margin showed that among the purposes of
Congress in 1890 was a desire to put an end to great aggregations of
capital because of the helplessness of individual before them.
In Northern Pacific Railway Company37 and in Brown Shoe38 , the Federal

Supreme Court referred to the dualistic socio-political and economic
preferences of the legislator in order to maintain a large number of inde-
pendent firms. Trying to justify the socio-political preferences of the
legislator for a large number of independent firms, the Supreme Court gives
the following reasoning in the Brown Shoe case: 39
(E)xpansion (of integrated chains) is not rendered unlawful by the mere

fact that small independent stores may be adversely affected. It is
competition, not competitors, which the Act protects. But we cannot fail
to recognize Congress' desire to promote competition through the
protection of viable, small locally owned business. Congress appreciated
that occasional higher costs and prices might result from the maintenance
of fragmented industries and markets. It resolved these competing
considerations in favor of decentralization. We must give effect to that
decision.
The Northern Pacific Railway Company case also reveals the view of the
Federal Supreme Court that the Sherman Act embraces the socio-political
as well as the economic functions of competition: 4o
37 Cf. Northern Pacific Railway Co. v. U.S., 1958 CCH Trade Cases 68,961, pp.
73,862 ff.
38 Cf. Brown Shoe Co. v. U.S., 1962 CCH Trade Cases 70,366, pp. 76,479 ff.
39 Brown Shoe Co. v. U.S., op. cit., pp. 76,500 (emphasis added).
40 Northern Pacific Railway Co. v. U.S., op. cit., pp. 73,864 (emphasis added).
32
The Shennan Act was designed to be a comprehensive charter of

economic liberty aimed at preserving free and unfettered competition as
the rule of trade. It rests on the premise that the unrestrained interaction
of competitive forces will yield the best allocation of our economic
resources, the lowest prices, the highest quality and the greatest material
progress, while at the same time providing an environment conducive to
the preservation of our democratic political and social institutions. But
even were that premise open to question, the policy unequivocally laid
down by the Act is competition.
Both cases prove that the Federal Supreme Court preferred less con-
centrated market structures in the 1950s and 1960s even when they implied
possible efficiency 10sses.41 Recent adjudication by the District Courts and
Courts of Appeal in the 1970s and 1980s is characterized by a stronger
emphasis on an economic analysis. Robert Pitofsky, a fonner Commis-
sioner of the Federal Trade Commission in Washington, D.C., criticizes this
exclusively economic approach to antitrust questions: 42
It is bad history, bad policy, and bad law to exclude certain political
values in interpreting the antitrust laws. By 'political values', I mean,
first, a fear that excessive concentrations of economic power will breed
antidemocratic political pressures, and second, a desire to enhance
individual and business freedom by reducing the range within which
private discretion by a few in the economic sphere controls the welfare of
all. A third and overriding political concern is that if the free-market
sector of the economy is allowed to develop under antitrust rules that are
blind to all but economic concerns, the likely result will be an economy
so dominated by a few corporate giants that it will be impossible for the
state not to playa more intrusive role in economic affairs .... (Fourth,) an
antitrust policy that failed to take political concerns into account would
be unresponsive to the will of Congress and out of touch with the rough
political consensus that has supported antitrust enforcement for almost a
century.
41 Cf. Sullivan, Antitrust, Microeconomics, and Politics ... , supra, 4.

42 Pitofsky, The Political Content of Antitrust, supra, 1051 ff. (emphasis added).
33
With regard to the Gennan cartel law the experience drawn from the
economic policy of the Nazi regime (compulsory cartelization and the role
of big finns in the annament industry) as well as the U.S.-American
approach to antitrust played an important role in the consultations that led
to the creation of a new Gennan antitrust law. In addition to economic
efficiency, the question of securing the adequacy of a free economic system
with a free political order were of utmost importance; the demand for
decentralization of economic power (meta-economic goal of competition)
emerged from this goal. Consequently, the Gennan cartel law can be
understood as a multiple goal approach; efficiency as one of the goals is
secured by means of competition. 43
After having abandoned - obviously as hopeless - the attempt to find
support in the U.S. legislative history of the antitrust laws that the only goal
of antitrust is consumer welfare 44 , Chicago advocates are arguing that two
different kinds of legislation can be distinguished: "public interest legisla-
tion" and "interest group legislation". The first should be interpreted
broadly by the courts since it serves economic efficiency, the latter has to
be interpreted in a narrow sense, since "interest group legislation" is bound
to impair economic efficiency.45
a. Measuring Consumer Welfare: The Efficiency Criterion

(Welfare Indicator)
The use of consumer welfare as the only goal of antitrust policy emerges,
according to the Chicago School, from the efficiency criterion.
This presupposes a close link between consumer welfare and the criterion
of efficiency in the sense that "(b)usiness efficiency necessarily benefits
43 Cf. Mestmacker, Ernst-Joachim, Competition Policy and Antitrust: Some

Comparative Observations, 136 Zeitschrift flir die gesamte Staatswissenschaft 387
ff. (1980).
44 Cf. Hovenkamp, Antitrust Policy After Chicago, supra, 252.
45 Cf. Posner, Richard A., Economics, Politics, and the Reading of Statutes and the
Constitution, 49 University of Chicago Law Review 263 ff. (1982), 269, and
Easterbrook, Frank H., Foreword: The Court and the Economic System, 98 Harvard
Law Review 4 ff. (1984),15.
34
consumers by lowering the costs of goods and services or by increasing the

value of the product or service offered".46
TIlis assumes that consumers benefit from the efficiency increase
automatically, which only occurs if there is at any time sufficient competi-
tive pressure. The crucial problem seems to be that business and overall
economic efficiency are not being distinguished from each other.47 Chicago
critics argue that the Chicago School does not offer an explicit definition of
the efficiency criterion48 , and even Bork has to concede49 that efficiency
cannot be measured and that substitutes have to be used in order to evaluate
whether increases in efficiency have occurred: 50
.. , Posner appears to view the condition for achieving economic ef-

ficiency as the equality of price with long-run marginal costs under
eqUilibrium conditions.
Furthermore, the Chicago School does not conclusively explain how the
efficiency criterion can be operationalized case-by-case. "Efficiency" seems
to become a kind of "black box", with which any kind of restraint on
competition can be justified.
Whereas the customary welfare criteria can be used to evaluate process
innovations, product innovations cannot be explained in terms of allocative
resp. productive efficiency. However, these represent a significant part of
competitive dynamics in a free enterprise system.
In evaluating efficiency, Chicagoans only analyze single-product firms,
but neglect the measurement of efficiency in multi-product firms.
The question of how efficiency should actually be measured also remains
unanswered. The suggestion of Chicago advocates that efficiency can only
be estimated, leaves ample room for judgement. Since efficiency is
composed of productive and allocative efficiency - seen from the Chicago

47 Cf. Kallfass, Hermann H., Die Chicago School - Eine Skizze des "neuen"
amerikanischen Ansatzes flir die Wettbewerbspolitik, 30 Wirtschaft und
Wettbewerb 596 ff. (1980),599 f.
48 Cf. Scherer, Separating Wheat from Chaff ... , supra, 995 f.
50 Scherer, Separating Wheat from Chaff ... , supra, 979.
35
School point of view - there is an additional balancing problcm sincc

productive and allocative efficiency may oppose cach othcr in the case of a
merger, for example: 51
... productive efficiency is one of the two opposing forccs that detcnnine
the degree of consumer well-being (the other one being resource misal-
location due to monopoly power) ...
i. Allocative Efficiency
Consumer welfare depends on "productive efficiency" on the one hand, and

on allocative efficiency on the other: 52
Allocative efficiency, as used here, refers to the placement of resources

in the economy, a question of whether resources are employed in tasks
where consumers value their output most.
The level of consumer welfare in market equilibrium is influenced on the

one hand by the preferences of all individuals which are revealed by total
demand, and on the other hand by the costs that arise from the production of
goods and services that fulfil the demands of society. In order to evaluate
changes in consumer welfare, perfect competition and monopoly serve as
standards of reference. 53
On the background of neoclassic price theory, the Chicago School
contends that in a market characterized by perfect competition, marginal
revenues of a single finn always equal market price. 54 The market power of
a single finn in a market that is characterized by perfect competition,
therefore, can only be small and is, hence, negligible55 , whereas in the case
of monopoly the price is elevated and the output restricted in comparison to
perfect competition. Allocative inefficiency in a monopoly can be ex-
!ItBork, The Antitrust Paradox, op. cit., 7.

53 Cf. Posner, Richard A., Antitrust Law: An Economic Perspective, Chicago
1976,8 ff.
55 Cf. Posner, Antitrust Law", op. cit., 9, whose expression is rather imprecise
since in perfect competition there is no problem of power.
36
pressed in the words of one representative of the Chicago School as

followS: 56
The distinctive feature of the monopoly situation is that the monopolist

has created a gap between marginal costs and price, which means that
social costs and social desires are no longer equated ... (t)he evil of
monopoly, then, is not higher prices or smaller production (though these
are its concomitants) but misallocated resources, or allocation inef-
ficiency.
A theory of oligopoly is denied by the majority of the Chicago repre-

sentatives since" ... there is no very good reason to think that so-called
'concentrated' markets behave in a less satisfactory manner than more
fragmented ones".57
It is assumed that oligopolists have to act in the same way as polypolists
since there is always sufficient potential competition. The Chicago School
denies empirical studies that show a link of causality between concentration
and profits, and views the results as somewhat contradictory.
Oligopolistic markets do not pose any problems with regard to efficiency
and, therefore, they should not be a subject of antitrust policy.
ii. Productive Efficiency
The second factor determining consumer welfare is productive efficiency

which "refers to the effective use of resources by particular firms".58
In this context, representatives of the Chicago School speak of
"competitive effectiveness"; moreover, it is held that this concept does not
only apply to mechanistic or technical processes. Productive efficiency is
not only determined by economies of scale and transaction-cost efficiencies
but also by specialization, ability to obtain capital, management skills etc.
Productive efficiency should not be seen analogous to or even confused
with profitability, since the relative efficiency of a firm is not evaluated by
its profit rates but by its relative success in the market: 59
58 Bork, The Antitrust Paradox, op. cit., 91 fn.
59 Bork, The Antitrust Paradox, op. cit., 104 f.
37
Productice efficiency, like allocative efficiency, is a nonnative concept

and is defined and measured in tenns of consumer welfare. Since a free
market system assumes that consumers define their own welfare, it
follows that productive efficiency consists in offering anything whether
products or services, that consumers are willing to pay for.
The Chicago representatives' view on productive efficiency is largely

detennined by economies of scale and transaction-cost efficiencies.
(1) Economies of Scale. In the context of horizontal market relations,

productive efficiency is determined to a large degree by economies of scale.
The main issue for the Chicago School is the determination of the optimal
finn size because this optimal size represents the contribution to productive
efficiency. In order to determine this optimal firm size, the so-called
survivor technique is utilized that was originally developed by Stigler. The
standard of reference for the underlying cost situation is the structure of an
industry that for a longer period has not been subjected to legal barriers to
entry and, furthermore, has not changed its market position. 60 The survivor
technique
proceeds to solve the problem of determining the optimum firm size as

follows: classify the finn in an industry by size, and calculate the share
of industry output coming from each class over time. If the share of a
given class falls, it is relatively inefficient, and in general is more
inefficient the more rapidly the share falls. 61
This method does not take into consideration - in addition to costs as an

expression of efficiency - that other factors such as, e.g., tax policy, other
public interventions, or international trade can influence competitiveness
and the ability to survive. This means that this approach is methodically
biased. 62
The Chicago School contends that efficiency gains (cost decreases) can
60 Cf. Demsetz, Economics as a Guide, supra, 375.

61 Cf. Stigler, The Organization ofIndustry, op. cit., 73.
62 Cf. Schmidt, Wettbewerbspolitik und Kartellrecht, op. cit., 62 and 68.
38
be attained even at a high degree of concentration - a thesis that is, of

course, in contradiction to most of the empirical studies of the last de-
cades63 which show "that scale economies explain only a relatively small
portion of most of the major dominant-firm positions". 64
Shepherd65 presents a good survey and the main findings on the alterna-
tive methods for measuring economies resp. diseconomies of scale. His
table covers the empirical investigations from 1956 (Bain) until 1976
(Weiss), relying on engineering estimates, cost studies, and the survivor
technique. Evaluating these empirical studies, Shepherd comes to the
conclusion that "economies of scale appear to be limited, so that market
shares above 10 per cent commonly embody mainly excess market
share".66 Besides, the cost gradients are generally low so that the cost
disadvantage of firms using sub MOS-plants are comparatively small and
can be compensated or even overcompensated. 67
With regard to multi-plant economies of scale, Scherer reaches a similar
critical conclusion: 68
63 Although asserting that high industrial concentration is warranted by economies

of large size. in many. if not most cases. it may not be possible to identify or even
quantify these economies. Therefore. Chicagoans ask to have faith that market
structures that result from unrestrained competition are efficient market structures.
cf. Singleton. Industrial Organization and Antitrust ... op. cit., 44. citing Demsetz.
Such faith would presuppose that managers know only one single goal: i.e.,
increasing efficiency!
64 Shepherd, William G., The Treatment of Market Power, New York 1975, 119.
Cf. also Scherer. Industrial market structure ... op. cit.. 94, who states that "with
few exceptions. the minimum optimal plant scale revealed in studies of American
manufacturing industries has been small relative to industry size". Idem at p. 95:
"We conclude then that economies of scale at the plant level do not in the vast
majority of instances necessitate high national concentration levels for U.S.
manufacturing industries."
65 Cf. Shepherd. William G., The Economics of Industrial Organization. 2nd ed.,
Englewood Cliffs, N.J. 1985. 181-185. and Scherer. Industrial market structure ...
op. cit., 91-98.
66 Shepherd. The Economics of Industrial Organization. op. cit.. 193.
67 Scherer, Industrial market structure ... , op. cit., 94: "(T)he long-run cost curves
in most industries are much less steep at suboptimal plant scales than one is led to
believe by typical textbook illustrations."
68 Scherer. Industrial market structure ... op. ciL. 101.
39
The best available evidence on this point, derived from interviews with
125 manufacturing firms, suggests that the managerial and central staff
economies of multi-plant operation are at most slight, and that in many
instances, especially beyond some modest threshold, multi-plant size is
disadvantageous.
Shepherd criticizes that the degree of efficiency gains from cost savings
may be overstated for two reasons: 69
- First, the misallocation burden which can be shown by the welfare

triangle is omitted (cf. infra Williamson's trade-off model).
- Second, the gains of economies of scale are not passed on to consumers
if there is no sufficient competitive pressure forcing the firms to do so.
Therefore, with regard to the basic cost function, Shepherd reaches the
following conclusion: 70
The typical 'industry' cost curve for the firm is dishshaped, with MES at
5 percent of the market or less. The constant-cost range may be wide,
though presumably average cost rises eventually because of (1)
bureaucracy, from absolute size, and/or (2) x-inefficiency caused by the
firm's market power. The constant costs may also mask a significant
amount of pecuniary economies, the typical cost curve may slope upward
instead of being flat.
There is, especially at high levels of concentration, an increased likelihood

of higher costs because of X-inefficiencies that would overcompensate
economies of scale. The concept of the so-called X-inefficiencies was
introduced in 1966 by Leibenstein. He argued that the efficiency-losses due
to monopolies were underestimated by means of traditional microeconomic
instruments.?1 Leibenstein pointed out that a decline of competitive pres-
69 Cf. Shepherd, The Economics of Industrial Organization, op. cit., 195.

70 Shepherd, The Economics of Industrial Organization, op. cit., 206.
71 Cf. Leibenstein, Harvey, Allocative Efficiency vs. "X-Efficiency", 35 The
American Economic Review 392 ff. (1966).
40
sure would result in additional non-allocative efficiency losses, the source

of which would be motivation problems and divergent goals of the
managers, the owners, and the employees. The assumption of average cost
minimization, as the firm's only goal is not tenable under these cir-
cumstances.
Leibenstein's approach is of crucial importance for the judgment of
productive efficiency, which is mainly determined by economies of scale
and transaction-cost efficiencies. The Chicago School argues that even at
high levels of concentration, decreasing costs are attainable by economies
of scale. However, taking into account Leibenstein's approach we get a
trade-off between economies of scale and X-inefficiencies.
X-inefficiencies can be interpreted as the difference between actual
average costs and minimum average costs: 72
ATe
X-inefficiency
(non-allocative
ine ff ic iency)
X-efficiency
(non-allocative
efficiency)
q
Fig. 2. The X-inefficiency effect.
72 Cf. Schmidt, Wettbewerbspolitik und Kartellrecht, op. cit, 92.

41
ATC
C'
ATC2' ATC2 '
C" ATC2' ,
ATC 1 " ATC2"
ATC2'"
c" ,
ATC2' "
ql q
Fig. 3. X-inefficiencies VS. economies of scale.
If the effects, for example, of a merger are to be demonstrated, it is neces-

sary to separate the "economies of scale"-effects from the "X-inefficiency"-
effects:
qI' ATC I =output and total average costs before the merger (A);
q2' ATC2 ', If, ,ff = output and alternative total average costs after the
merger;
A ~ B = realization of economies of scale by merger;
B ~ C', If, ' " = X-inefficiency due to a lack of competitive pressure and
motivation.
42
It is obviously possible to distinguish three cases: 73
- the "economies of scale"-effect exceeds the "X-inefficiency"-effect

(e"');
- both effects equalize resp. compensate each other (e /'); and
- the "economies of scale" -effect is smaller than the "X-inefficiency"-
effect (e /).
Siegfried and Wheeler present a good survey of empirical studies on "X-

inefficiency", which mostly tested the correlation of concentration ratios
and X-inefficiency.?4 They came to the conclusion that social costs of X-
inefficiency seem to be substantial and to be greater where competitive
forces are weaker.7s
Scherer states with regard to this phenomenon that
(t)he evidence is fragmentary, but it is persuasive. 'X-inefficiency'

exists, and it is more apt to be reduced when competitive pressures are
strong than when firms enjoy insulated market positions. What we do not
know is how large are the differences systematically correlated with
monopoly power. That X-inefficiencies attributable to monopoly are at
least as large as the welfare losses from resource misallocation seems
eminently plausible. And they may well be considerably larger.76
The reviews of Leibenstein's approach took place mainly on theoretical and

semantic grounds. Stigler, for example, argued: 77
When more of one goal is achieved at the cost of less of another goal, the
increase in output due to (say) increased effort is not an increase in
'efficiency' it is a change in output.
73 Cf. Schmidt, Wettbewerbspolitik und Kartellrecht, op. cit., 93.

74 Cf. Siegfried, John I., and Wheeler, Edwin H., Cost Efficiency and Monopoly
Power: A Survey, 2 Quarterly Review of Economics and Business 25 ff. (1981).
75 Cf. Siegfried and Wheeler, Cost Efficiency and Monopoly Power ... , supra, 44.
76 Scherer, Industrial market structure ... , op. cit., 466.
77 Stigler, George J., The X-istence of X-Efficiency, 66 The American Economic
Review 213 ff. (1976), 213.
43
Di Lorenz078 and De AlessF9 criticized that Leibenstein neglected property

rights, the market for corporate control and managerial labor markets and
focused his studies too much on commodity markets.
Despite these criticisms and the fragmentary evidence the phenomenon
of X-inefficiency exists in big firms and in firms not controlled sufficiently
by competition. It can be regarded either as a dead loss in the sense of some
degree of sheer waste or as an involuntary transfer from customers to input
suppliers. 8o
The Chicago School of Antitrust Analysis, however, regards - as a rule -
a merger of two different firms at the same level of production as an
expression of efficiency, if this merger does not lead to a duopoly.81 Even
in highly concentrated markets, and taking this proviso into account, a
merger should not be prevented as long as there are any efficiency advan-
tages associated with it. Hence, not maintaining competition, but efficiency
becomes the sole goal of antitrust (!).
With regard to internal growth firms can attain any market share as long
as this does not occur by means of anticompetitive behavior. 82
(2) Transaction-Cost Efficiencies. The vertical component of productive

efficiency is determined by the transaction-cost advantages that are
generated. The coordination of economic activities and the allocation of
economic resources can be carried out by different mechanisms. According
to the profit maximization principle advocated by the Chicago School, the
firm will choose the most advantageous mechanism. 83 If coordination is
carried out by means of the market, transaction-costs arise since the use of
78 Cf. Di Lorenzo, Thomas J., Corporate Management, Property Rights and the X-
istence of X-efficiency, 48 Southern Economic Joumall16 ff. (1981).
79 Cf. De Alessi, Louis, Property Rights, Transaction Costs, and X-Efficiency: An
Essay in Economic Theory, 73 The American Economic Review 64 ff. (1983).
80 Cf. Shepherd, The Treatment of Market Power, op. cit., 131.
82 Cf. Areeda, Phillip, and Donald F. Turner, Antitrust Law: An Analysis of
Antitrust Principles, vol. 1, Boston, Toronto 1978,9.
83 For a detailed survey on these different mechanisms of coordination cf. Ouchi,
Markets, Bureaucracies, and Clans, supra, 129 ff.; for the basic work on different
mechanisms of economic coordination, cf. Coase, Ronald, The Nature of the Firm,
4 Economica 386 ff. (1937).
44
price mechanism entails costs. If a vertical integration is carried out, costs

of organizing arise: 84
Under certain conditions, markets are more efficient because they can
mediate without paying the costs of managers, accountants, or personnel
departments. Under other conditions, however, a market mechanism
becomes so cumbersome that it is less efficient than a bureaucracy.
For the Chicago School, vertical strategies in general and vertical mergers
especially, are advantageous since the anticipated costs of organization are
lower than the transaction-costs that arise by using the price mechanism.
Hence, "(v)ertical market restrictions should be assumed to be efficiency-
enhancing unless specific structural characteristics exist within the indus-
try.85
Oearly, Chicago's view can be interpreted as an extreme and biased
version of Williamson's approach.
The crucial issue is whether this kind of analysis is practical and whether
it can supply detailed prognoses of what could actually occur in the event of
a merger. The terms transaction-costs and organization costs are difficult to
handle and in specific cases they can neither be determined empirically nor
measured precisely. The terms are largely used in a way that allows to
justify certain phenomena ex post; this leads to the possibility that any
development can be justified - but only ex post and crudely. As a result, the
concept seems to become tautological: a process that can be observed is
efficient because it has developed the way it has!
iii. Monopoly Power and Productive Efficiency:

Williamson's Trade-Off Model
Internal expansion as well as mergers do cause market power on the one

hand and, therefore, allocative inefficiency by allowing the possibility of
84Ouchi, Markets, Bureaucracies, and Clans, supra, 129 f.

85Williamson, Oliver E., Assessing Vertical Market Restrictions: Antitrust
Ramifications of the Transaction Cost Approach, 127 University of Pennsylvania
Law Review 953 ff. (1979), 993.
45
restricting output; but on the other, these forms of concentration offer the
possibility of cost decreases and, therefore, productive efficiency. It is the
view of the Chicago School that these counteracting effects on consumer
welfare imply that the optimal solution calls for these two effects to be
weighed against each other: 86
The whole task of antitrust can be summed up as the effort to improve

allocative efficiency without impairing productive effiCiency so greatly
as to produce either no gain or a net loss in consumer welfare.
Williamson has exemplified the link between possible cost advantages that
can result from concentration and an increase in market power that can
result from increases in concentration by using the example of two merging
duopolists. 87
The counteracting effects of such a merger can be presented by
... , juxtaposing a market situation that is characterized by competition

before a merger occurs to a market situation after the merger has been
consummated. One can determine the effects on the allocation of
resources due to the merger, which means one can present the cost
advantages that arise and the resulting market power, within the context
of a partial equilibrium model .... 88
As indicated earlier, it is assumed that the merger allows resources to be

saved that can be utilized in another sector of the economy. The net balance
between welfare gains and welfare losses shows whether or not such a
merger has increased consumer welfare.
Within the context of Williamson's model it is assumed that the long-run

average total costs - approximated by the marginal costs - of the two
companies can be reduced from MCc to MCm through the merger, that is a
87 Cf. Williamson, Oliver, Economies as an Antitrust Defense: The Welfare
Tradeoffs, 58 The American Economic Review 18 ff. (1968).
88 Bobel, Ingo, Wettbewerb und Industriestruktur: Industrial Organization _
Forschung im Uberblick, Berlin et a1. 1984,210 (translated by the authors).
46
P Me
MCC=p
MCm=P
o q
Fig. 4. Williamson's trade-off model.
new cost function is achieved. However, the merger leads to a restriction of

output so that after the merger the quantity qrn' which was qc before, is
achieved. The Chicago School assumes that the cost savings (rectangle A2)
outweigh by far the welfare losses due to the restriction of output (triangle
AI)89 so that from this point of view merger control - apart from some
extreme cases - is not useful because the trade-off between productive
efficiency and allocative inefficiency implies net welfare gains.
However, the model offered by Williamson shows numerous deficiencies
and shortcomings: 90
(1) One can distinguish different effects on costs due to a merger:

- unchanged costs because, e.g., the minimum efficient size has

90 Cf. esp. Babel, Wettbewerb und Industriestruktur, op. cit., 213 ff., and as well
Maschel, Wemhard, Antitrust and Economic Analysis of Law, 140 Zeitschrift flir
die gesarnte Staatswissenschaft 156 ff. (1984), 164 f.
47
already been reached or the acquired firm is run as before without

any changes (the production function being left unchanged);
- lower costs due to economies of scale (the production function left
unchanged), or because the merged firm achieves a more favorable
production function, or by avoiding X-inefficiencies;
- higher costs due to diseconomies of scale (the production function
left unchanged), or because of the appearance of X-inefficiencies
resulting from a more disadvantageous cost function (e.g., increas-
ing costs of organizing due to a lack of motivation on the part of
co-workers and due to insufficient competitive pressure).
(2) If net welfare gains arise - that is, if rectangle A2 is larger than
triangle Al - distribution problems are ignored, which means that the
welfare gain that is composed by the two rectangles A2 and A3 (drawn
shaded) only accrues to the suppliers. The term consumer welfare gain
is rather misleading in this context because these gains are more or
less additional profits for suppliers. It would be more correct to speak
of supplier instead of consumer welfare.
(3) The model is comparative-static in nature and assumes two cost
functions that can be unambiguously determined. But it does not bear
in mind that in a dynamic view competitive pressure also exerts a
certain kind of cost control (by the introduction of new cost decreasing
production technologies and, therefore, technological progress).
Therefore, the model can only claim validity for the short-run.
(4) The comparison between welfare losses, due to market power, and
cost savings, due to a shifted cost function, presupposes plenty of data
that is generally unknown or unavailable. Therefore, the Williamson
model is difficult to handle, difficult to operationalize, and difficult to
put into practice.
If additional factors are taken into consideration, the model loses its
analytical clarity.
(5) If it is assumed that the market for corporate control is not working
perfectly, an increase in consumer welfare arising from a merger can
be just as well attained by internal growth avoiding possible negative
welfare effects due to a decrease in allocative efficiency.
The Chicago School assumes that the efficiency advantages due to horizon-
48
tal concentration outweigh by far the allocative inefficiency due to market

power (Le . A 2 > AI).
But if rectangle A 3 due to the price increase, is introduced into the
analysis and added to the dead-weight loss. due to the restriction of output.
then. the welfare losses to consumers (expressed by rectangles Al + A3) are
greater than the welfare gain described by rectangle A2. It should critically
be pointed out that in 1978 Bork9I still used the original version of the
model that was developed in 1968 by Williamson92 whereas Williamson
modified his model in 1977. 93 Bork does not take this modified version into
consideration.
b. Allocative and Productive Efficiency as the Sole Criterion for

Conswner Welfare: A Critique
L The Omission of Other Objectives
Critics of the Chicago School advocate the view that consumer welfare is
being falsely emphasized over all other possible objectives that have played
a distinct role during the legislative history:94
... the trend toward use of an exclusively economic approach to antitrust

analysis excludes important political considerations that have in the past
been seen as relevant by Congress and the courts ... Although economic
concerns could remain paramount. to ignore these non-economic factors
would be to ignore the bases of antitrust legislation and the political
consensus by which antitrust has been supported.
Two other possible objectives in particular have been neglected:
(1) The notion of small business protection is neglected by the Chicago
91 Cf. Bork. The Antitrust Paradox. op. cit.. 107 ff.

92 Cf. Williamson. Economies as an Antitrust Defense ... supra. 18 ff.
93 Cl. Williamson. Oliver E . Economies as an Antitrust Defense Revisited. in:
Jacquemin. Alexis p. and Henk W. de Jong (eds.). Welfare Aspects of Industrial
Markets. Leiden 1977. pp. 237 ff.
94 Pitofsky. The Political Content of Antitrust. supra. 1075.
49
School. This is expressed by the rejection of the Small Business Act.

Sec. 9 (d) of this Act is supposed to exempt the cooperation of small
and medium-sized finns to some extent from the application of the
antitrust laws. The reasoning of the Chicago School is, however, that
protection of small enterprises should not generally be a separate
concern.
(2) The prevention of the fonnation of uncontrolled positions of power
and, thereby, the protection of the freedom to compete as the counter-
part to a parliamentarian democracy is ignored by the Chicago School.
Consequently, the danger arises with regard to the economic order that
a decentralized free enterprise system will be replaced by a centralized
oligarchic economic system just as it is in the Soviet Union - the only
remaining difference being the question of ownership (Jan Tinbergen:
convergence of economic systems).
ii. The State of Perfect Competition as a Standard of Reference

(Theory of Second Best)
In the view of some of its critics, the Chicago School uses the criterion of
consumer welfare only in connection with perfect competition as a standard
of reference. The basic problem of the model of perfect competition are the
strict underlying assumptions which can never be fulfilled in reality.95 One
can draw the conclusion that (neoclassical) price theory cannot serve as a
basis for welfare economics which provides evidence for the remaining
question, whether allocative efficiency is increased, decreased, or stays
unchanged by actions that aim at influencing market structure or market
conduct. Harvard School representatives, therefore, use the theory of
second best which takes into consideration that the assumptions of the
model of perfect competition are only partly achieved.
The central issue of the theory of second best is that
... , given that one of the Paretian optimum conditions cannot be fulfilled,
then an optimum situation can be reached out by departing from all other
95 Cf. Sullivan, Lawrence A., Handbook of the Law of Antitrust, St. Paul, Minn.
1977,3.
50
Paretian conditions. The optimum situation finally attained may be

tenned a second best optimum because it is achieved subject to a
constraint which, by definition, prevents the attainment of a Paretian
optimum.96
The theory of second best tries to maximize consumer welfare by taking

into account that one or more Paretian optimum conditions are not being
fulfilled.
The theory of second best is denied by the Chicago School, however.
This theory "should be disregarded and antitrust should concern itself solely
with allocative and productive efficiency".97
iii. The Failure to Consider External Effects
Any modification of the objectives of productive or allocative efficiency is

rejected by the Chicago School. External effects are also dismissed in the
context of antitrust policy.98 The Chicago advocates do concede, though,
that "(e)conomic activity creates social costs in the fonn of externalities
that, by definition, are not taken into account through the price
mechanism".99
Policy instruments designed to bring about increased (allocative) ef-
ficiency could contribute to the increase of "pure" consumer welfare but
this would bring about other welfare losses for society. Since antitrust
legislation did originally concentrate on consumer welfare, in the sense of
productive and allocative efficiency, it lies within the scope of legislation
also to address externalities that influence other goals such as the distribu-
tion of income, etc. 1oo
Chicago School representatives neglect the fact that externalities can be
seen as inefficiencies and that they decrease consumer welfare.
96 Lipsey, R.G., and Kelvin Lancaster, The General Theory of Second Best, 24 The
Review of Economic Studies 11 ff. (1956),11.
98 Cf. Bark, The Antitrust Paradox, op. cit., 109; for a survey on the basic
problems of external effects see Boadway and Wildasin, op. cit., 60 ff. and 105 ff.
51
iv. The Profitability Approach as an Alternative Concept of Efficiency

Measurement
For the Chicago School, profits that have not been eroded over a long time
show that a firm operates efficiently in the market. For the Harvard School,
profits that have not been eroded by competition in the long run indicate
market power in that "they show clearly that there is some impediment to
effective imitation of the firm in question" .101
The Harvard School representatives admit that high profits can persist
over a longer period of time when the observed enterprise has cost advan-
tages in comparison to actual or potential competitors. Originally, the
Harvard School had claimed only costs plus a normal return on capital
ought to be earned in unconcentrated industries. They try to show" ... that
successful (tacit or explicit) collusion would approach joint maximization
and that the ability to collude increases with concentration".l02
In order to measure efficiency, an empirically observable relationship
between factors that determine the structure of an industry and the resulting
profits has to be constructed. In addition to profits, the degree oftechnologi-
cal innovation or technological efficiency is used as a criterion for measur-
ing efficiency. 100 Additional measures can only be determined vaguely. 104
In addition to a number of statistical problems there are three crucial
problems in measuring efficiency, that is in measuring market power by
means of profitability: 105
(1) Operationality problems in measuring profitability.

(2) The existence of market power even at low "excess profits".
(3) The existence of "excess profits" in competitive markets in the short-
run (as an incentive).
101 Schmalensee, Richard, Another Look at Market Power, 95 Harvard Law

Review 1789 ff. (1982),1806.
102 Weiss, Leonard, Quantitive Studies of Industrial Organization, in: Intriligator,
Michael D. (ed.), Frontiers of Quantitative Economics, Amsterdam, Oxford 1971,
pp. 362 ff., 363.
103 Cf. Bain, Barriers to New Competition, op. cit., 434 ff.
104 Cf. Bain, Barriers to New Competition, op. cit., 458 ff.
lOS Cf. Schmalensee, Another Look at Market Power, supra 1805.
52
Contrary to the position of the Chicago School, profits do, however, seem
to be an index of market power; it can be confirmed empirically that profits
often are not eroded in the long-run and, therefore, these profits are not an
expression of efficiency but rather that they result from market power
arising from a restraint on competition. If one evaluates the studies trying to
measure the relationship between market concentration and supracompeti-
tive profits, one reaches the following conc1usion: 106
Almost all of the 32 concentration-profits studies except Stigler's have

yielded significant positive relationships for years of prosperity or
recession, though they have depended on a wide variety of data and
methods.
Rate of return on stockholder's equity. rates of return on assets after tax,

profit after tax relative to sales, and price-cost margins have been used
primarily as dependent variables in these studies. 107 Imperfections affect
each of these profitability measures. Although we are not able to give these
imperfections an indepth treatment, we can nevertheless make some general
statements about the validity of profitability data for the aforementioned
empirical studies. lOS First of all, although data problems are always difficult
106 Weiss, Quantitative Studies, op. cit., 371; because more recent studies found a
negative relationship between profitability and concentration, the emphasis of
recent studies has been on market share and profitability, cf. Gale, Bradley J., and
Ben S. Branch, Concentration vs. Market Share: Which Determines Performance
and Why Does It Matter?, 27 Antitrust Bulletin 83 ff. (1982), and Mueller, Dennis
C., Profits in the Long Run, Cambridge, Mass. 1986.
107 Cf. Greer, Industrial Organization and Public Policy, op. cit., 405-407; and
Weiss, Leonard W., The Concentration-Profits Relationship and Antitrust, in:
Goldschmid, Harvey, et al. (eds.), Industrial Concentration: The New Learning,
Boston, Toronto 1974, pp. 184 ff., 196-200.
A further measure that has been used is the so-called Tobin's q which is based on
capital market evaluation and is supposed to offer the advantage that it
"appropriately incorporates firm risk, corresponds to an equilibrium valuation of
rents and minimizes any distortions introduced by tax laws and accounting
conventions", Smirlock, Michael, et al., Tobin's q and the Structure-Performance
Relationship, 74 The American Economic Review 1054 ff. (1984).
108 Cf. Fisher, Franklin M., and John J. McGowan, On the Misuse of Accounting
Rates of Return to Infer Monopoly Profits, 73 The American Economic Review 82
53
to deal with, attempts to test the robustness of structure-perfonnance

regression results on variations in accounting conventions have shown no
significant sensitivity. 109
This has not silenced critics on the use of accounting data, however,
repeatedly prolonging their initial critique by holding that "the numbers
reported, which are derived from the companies' accounting system, do not
reflect economic market values well".1l0 Aside from the sensitivity argu-
ment, severe scientific carelessness can be documented in empirical studies
that try to reject the profitability approach, emphasizing a sort of worst-case
analysis. I II
Traditional profitability studies suffered from an aggregation bias that
emerged from the relevant data that was supplied on an industry level. The
contaminated data due to aggregation biases has led to attempts to compile
finn and business unit level data. This has been done primarily by the PIMS
(profit impact of marketing strategies) data base and the FTC Line of
Business Program, the latter containing data on revenues, sales, and equity
of 3,007 businesses in 257 industries based on legal grounds. I 12 The fonner
ff. (1983); and Long, William F., and David J. Ravenscraft, The Misuse of
Accounting Rates of Return: A Comment, 74 The American Economic Review 494
ff. (1984).
109 For a survey cf. again Leamer, Edward E., Sensitivity Analysis Would Help, 75
The American Economic Review 308 ff. (1985).
110 Benston, The Validity of Profits-Structure Studies, supra, 64; and the rejoinder,
Scherer, Frederic M., et al., The Validity of Studies with Line of Business Data:
Comment, 75 The American Economic Review 205 ff. (1987),209.
111 Cf. Scherer et al., The Validity of Studies with Line of Business Data: Com-
ment, supra, 215: "Data are fallible. So are scholars. Yet when an article is as
consistently negative as Benston's, one suspects bias, and when it contains as many
demonstrable errors as Benston's, one suspects a degree of carelessness incom-
patible with the burden a scholar must bear when he singles others' work out for
criticism".
112 cr. Bobel, Wettbewerb und Industriestruktur, op. cit., 129; Pautler, Paul A., A
Review of the Economic Basis for Broad-Based Horizontal-Merger Policy, 28 The
Antitrust Bulletin, 571 ff. (1983), 625--633 for an extensive survey. Furthermore,
cf. Buzzell, Robert D., Bradley T. Gale, and Richard Sultan, Market Share - A Key
to Profitability, 52 Harvard Business Review 97 ff. (1975); and Ravenscraft, David
J., Structure-Profit Relationships at the Line of Business and Industry Level, 65
The Review of Economics and Statistics 22 ff. (1983).
54
is supposed to extricate the longrun detenninants of finn profitability

(return on investment, cash flow) among 37 variables and contains data
obtained from large finns, voluntarily contributing line of business data
which is compiled by the Strategic Planning Institute. With regard to the
importance of the individual variables "PIMS-findings indicate that
investment intensity, market share, industry growth rate, life cycle position,
and marketing expense/sales ratios are among the most important factors
affecting ROI and cash flows".113 One of the problems with the data base is
that the finns are free to define their businesses and since the lines of
business are picked by the finns on an arbitrary basis they are not randomly
distributed. Although a number of interpretation problems remains 114, the
studies based on the new sets of data do confinn earlier results on the
predominance of the market share value over simple concentration variables
in the sense that if market share is introduced simultaneously into a regres-
sion equation containing concentration ratios, concentration as an explain-
ing variable loses its significance. II5 These findings have been confinned in
a variety of studies, essentially leading to a converging emphasis.
A study perfonned by Martin for 1975 was based on the FTC Line of
Business, using 4,527 LBs of 475 finns and 275 industries. 116 Inquiring into
the relationships between profitability, market share, corporate structure,
economies of scale, demand characteristics, advertising activities, R&D
activities, capital intensity and internal organizational firm structure, the
following conclusions were drawn:
113 Cf. Abell. Derek F . and John S. Hammond. Strategic Market Planning:
Problems and Analytical Approaches. Englewood Cliffs, N.J . 1979,289.
114 Cf. Pautler, A Review ... , supra. 629 note 162. who mentions the lack of
correspondence to relevant markets; and Scherer. Industrial market structure ... op.
cit.. 270, who emphasizes that due to data secrecies it is impossible to say "what
companies and industries are being studied or what the absolute size of any
business is."
115 Cf. Buzzell et al., Market Share ... supra; Gale/Branch. Concentration versus
Market Share ... , supra; Martin. Steven. Market. Firm and Economic Performance.
New York 1983; and for an early work. Shepherd. William G . The Elements of
Market Structure, 54 The Review of Economics and Statistics 25 ff. (1972).
116 On the following study. cf. Martin. Market. Firm and Economic Performance.
op. cit.
55
- Lines of business with a high market share do have a positive effect on

profitability which is based on an increase in market power as well as on
economies of scale; the relative importance of the two factors varies
from industry to industry.
- Lines of business in concentrated industries have lower rates of return -
on average - than other lines of business. The most likely underlying
reasoning for this is that oligopolists had problems in maintaining and
enforcing collusive agreements in times of recession.
- The absolute size of a line of business seems to be rather significant.
Larger lines of business have larger profits than smaller lines. Lines of
business that are part of a diversified enterprise show higher profits as
well. As a rule, these lines show higher market shares which seems in
accordance with the market share hypothesis.
- If price is primarily used as a competition parameter in a line of business
this tends to induce a search for non-price competition, such as product
differentiation through advertising.
The concurring efficiency differential- and concentration collusion-

hypotheses were tested by Oarke, Davis and Waterson on the basis of
price-cost margins in the U.K., using a model to separate market power
effects from efficiency effects. ll7 The study is based on 147 resp. 155
manufacturing industries on a three digit level for the period from 1971 to
1977, using the ratio of gross profits to sales as the dependent variable.
If the efficiency differential-hypothesis by Demsetz holds, relatively
small firms should be of lower profitability than relatively large firms,
regardless of the level of industry concentration; and the profitability
differences should be larger, the higher the level of concentration. However,
Demsetz' hypothesis is not confirmed by this study. The authors conclude
that "both efficiency and market power effects are at work". 11 8
Amato and Wilder emphasized the relation between profitability, firm
size, and further structural variables for the years 1966 to 1975, including
m Cf. Clarke, Roger, Stephen Davies and Michael Waterson, The Profitability-
Concentration Relation: Market Power or Efficiency?, 32 The Journal of Industrial
Economics 435 ff. (1984).
118 Clarke/Davies/Waterson, The Profitability-Concentration Relation ... , supra,
448.
56
40 manufacturing industries, classified by IRS data. 119 The basic hypothesis

to be tested is that, because of the separation of owner and management,
utility maximization by managers depending on firm size is the correct
variable; furthermore it is tested whether profitability is a non-linear
function of firm size. The result that there is no relationship between firm
size and profit rate - which is in contradiction with most of the previous
studies - is supposed to be due to an improved data base. Demsetz' ef-
ficiency differential-hypothesis is rejected and it is stated that the results of
market share/profitability studies cannot be applied to firm size/profitability
studies.
Stigler's different results can be traced to the fact that high inflation or
price controls occurred in the period of inquiry .120
The few studies, however, that do not find a positive relationship be-
tween profits and concentration are employed by the Chicago School121
(reproach of selective empiricism).
The selective empiricism of the Chicago School becomes especially
evident with regard to the debate on the concentration-profitability relation-
ship just mentioned. Demsetz, for instance, reinterpreted all studies which
supported the traditional findings - a positive correlation between market
concentration and supra-competitive profits of the large firms indicates
market power - in the sense that they had unintended1y discovered a
concentration-efficiency nexus. l22 In 1977 Peltzman tried to verify the
Demsetz hypothesis by holding that
the main result ... is that long period changes in market structure are
accompanied by increased efficiency. This efficiency gain is most
pronounced where concentration is growing. 123
119 Cf. Amato, Louis, and Ronald P. Wilder, The Effects of Finn Size on Profit
Rates in U.S. Manufacturing, 52 Southern Economic Journal 181 ff. (1985).
120 Cf. Weiss, op. cit., 366.
121 Demsetz bases his conclusion on the study by Stigler (cf. Demsetz, Economics
as a Guide, supra, 376 ff.).
122 Cf. Mueller, Willard F., A New Attack on Antitrust The Chicago Case, 18
Antitrust Law and Economics Review 29 ff. (1986),40.
123 Peltzman, Sam, The Gains and Losses from Industrial Concentration, 20 The
Journal of Law and Economics 229 ff. (1977).
57
But a closer look at the data of the Peltzman study reveals a further aspect
of selective empiricism. All of the industries in the study with rather fast
increases in concentration were consumer goods industries with important
product innovations and large-scale advertising campaigns.124 The critique
that the Peltzman study - which most of the Chicago adherents rely on -
was biased by the consumer goods industries was confirmed by further
studies in which data of consumer goods and producer goods industries
were used. These studies showed that Peltzman's findings do not hold for
producer goods industries. l25
The Chicago School does not deny the relations between concentration
and profits but this relationship is reinterpreted. Concentration is seen as an
expression of efficiency (the so-called new learning) and higher profits,
therefore, are an expression of efficiency as well. We will return to this
topic in the following section V.
c) The Omission o/Dynamic Efficiency Aspects: The Case o/Technological

Progress
Empirical studies by Solow and Denison show that the main part of
productivity growth is attributable to the advance of scientific and tech-
nological knowledge. 126 Technological progress which leads to productivity
improvements is usually defined in terms of process innovation, which is
only one part of technological progress, however; the other consists of
product innovations. Product innovation is not considered in the studies
mentioned above, because there is no satisfactory method for measuring
improvements in the quality of goods. Scherer, therefore, concludes that
124 Cf. Scherer, Frederic M., The Causes and Consequences of Rising Industrial
Concentration, 22 Journal of Law and Economics 191 ff. (1979).
125 Cf. Mueller, Willard F., A New Attack on Antitrust ... , supra, 41 f.
126 Cf. Solow, Robert M., Technical Change and the Aggregate Production
Function, 39 The Review of Economics and Statistics 312 ff. (1957), and Denison,
Edward, Accounting for United States Economic Growth: 1929--69, Washington,
D.C. 1974, 131-137.
58
(a)s a result the overall impact of technological change on consumer

well-being is presumably understated by their (Solow and Denison)
estimates. 127
The view of the Chicago School on technological progress remains unclear.

From Bork's point of view technological progress should not become an
independent goal in addition to consumer welfare. He tries to justify this by
two arguments: 128
First, our knowledge about the relations between market structure and
technological progress is too limited to regard technological progress as
an independent goal; rather, technological progress should only be a
component of consumer welfare.
Second, we do not know how much progress is desirable. as progress
requires the sacrifice of other resources: 129
We are. therefore, necessarily ignorant of the 'proper' rate of progress

and it may be wisest for that reason not to give that matter any weight in
antitrust analysis.
Only the first argument should be considered seriously. Therefore, in the

following two sections the impacts of firm size and concentration on
technological progress and vice versa are presented. 130
i. Firm Size and Technological Progress
Firm size and technological progress may be related in two ways:

The first hypothesis purports that large firms account for more inventive
127 Scherer, Industrial market structure ... , op. cit., 408.

130 Cf. the survey on research methods and results with Shepherd, The Economics
of Industrial Organisation, op. cit., 147-151, and with Scherer, Industrial market
structure ... , op. cit., chs. 15 and 16.
59
efforts than small ones. In this connection finn size is usually measured by
sales volume, assets, or employees, whereas the inventive effort is
measured by R&D expenditures.
Kamien and Schwartz, reviewing the most important empirical studies on
this hypothesis, come to the conclusion that innovational effort increases
overproportionately with finn size only to a certain point; for still larger
finns innovational effort remains constant or even decreases.l3l
Mansfield, however, has criticized the use of aggregated R&D expendi-
tures and has come to the conclusion that
... whereas the biggest finns seem to carry out a disproportionately large
share of the basic research in most industries, there is no consistent
tendency for them to carry out a disproportionately large share of the
relatively risky R&D aimed at entirely new products and processes. 132
Another interesting point is the effect of finn size on inventive output

which has been measured in different empirical studies by awarded patents,
important inventions or innovations, and sales of new productS. 133 Jewkes,
Sawers, and Stillennan134 investigated the sources of 71 important inven-
tions from 1900 until 1968. They found out that the major part of these
inventions came from individuals and small finns. They also argued that
important inventions, patented by large finns, were usually worked out by
relatively small teams. These findings were continned by the Chainnan of
General Motors, Roger B. Smith in 1985: 135
Where is all the great stuff coming from? It's not really coming out of
131 Cf. Kamien, Morton 1., and Nancy L. Schwartz, Market Structure and Innova-
tion: A Survey, 13 Journal of Economic Literature 16 ff. (1975), 16-18.
132 Mansfield, Edwin, Industrial Organization and Technological Change: Recent
Econometric Findings, in: John V. Craven (ed.), Industrial Organization, Antitrust,
and Public Policy, Boston 1983, pp. 129 ff., 131.
133 Cf. Kamien and Schwartz, Market Structure and Innovation, supra, 4.
134 Cf. Jewkes, J., D. Sawers, and R. Stillerman, The Sources of Invention, 2nd ed.,
London, New York 1969, pp. 66 f. and 73.
135 Quoted from Adams, Walter, and James W. Brock, The "New Learning" and
the Euthanasia of Antitrust, 74 California Law Review 1516 ff. (1986), 1560.
60
IBM ... but it's coming out of little two- and three-man companies,
because they're finding out that 40 guys can't do something that three
people can do. It's just the law of human nature.
A further study by the National Science Board, analyzing more than 300
major technological innovations in the United States, stated that for "the
whole 1953-1973 period, the smallest firms produced about 4 times as
many major innovations per R&D dollar as the middle-sized firms and 24
times as many as the largest firms".136 Considering these studies and
statements, it can be concluded that smaller firms do not only produce the
larger part of inventive output, but they also do it more efficiently. Kamien
and Schwartz, reviewing different studies, come to a similar result: beyond
a certain size no increases in inventive output are observable.131 But there
are remarkable differences among various industries. 138
Consequently, the first hypothesis is empirically not tenable.
The second hypothesis purports that technological progress encourages
scale expansion and, therefore, supports the tendency towards larger plant
and firm size.
After reviewing the literature, Blair has come to the conclusion that this
argument was only valid from the late 18th century until the first third of
the 20th century. Since then, we are observing the opposite effect. New
technologies permit effective production with a smaller plant size and
reduced capital requirement. 139 A good example is the steel industry in the
136 National Science Board, Science Indicators 1976, p. 118. This is impressively
illustrated by a statement of the former GM Chairman of the Board, Alfred P.
Sloan: "In practically all our activities we seem to suffer from the inertia resulting
from our great size ... I can't help but feel that General Motors has missed a lot by
reason of this inertia. You have no idea how many things come up for consideration
in the technical committee and elsewhere that are discussed and agreed upon as to
principle well in advance, but too frequently we fail to put ideas into effect ... ",
quoted from Adams and Brock, The "New Learning" ... , supra, 1554.
137 Cf. Kamien and Schwartz, Market Structure and Innovation, supra, 18 f.
139 Cf. Blair, John M., Economic Concentration: Structure, Behavior and Public
Policy, New York 1972, 87-113, and Schmidt, Wettbewerbspolitik und Kar-
tellrecht, op. cit., 97 f.
61
United States. Minimills outperfonn domestic and foreign steel giants by

means of modem technology and an efficient organization. 140
Hence, the second hypothesis is not empirically tenable either: technologi-
cal progress may lead to a larger finn size in certain circumstances (cf.
aircraft, space, or nuclear industry), but very often to a smaller finn size as
well (cf. chemical or electronic industries).
ii. Concentration and Technological Progress
Concentration and technological progress may be related in two ways as

well:
The third hypothesis purports that (1) R&D activities are positively
linked with concentration and (2) that concentration promotes innovative
output. 141
(1) Kamien and Schwartz reviewing empirical studies on these
hypotheses find little consensus with regard to the first part of this
hypothesis: 142
While the diversity of fmdings (Comanor: pos1t1ve correlation for

U.S.A., Phlips: no correlation for Belgium) could be explained on the
grounds that different countries were studied, it seems more prudent to
conclude that the relation between research effort and concentration
warrants more study on a disaggregated basis. Concentration is unlikely
to be a good proxy for the extent of active rivalry in an industry.
(2) For the second part of this hypothesis the same problem arises: the
different empirical studies are too inconclusive to allow a clear answer. So,
Scherer draws only a vague conclusion in this field: 143
140 Cf. Adams and Brock, The "New Learning" ... , supra, 1552 f.
141 Cf. Levin, R. C., W. M. Cohen and D. C. Mowrey, R&D Appropriability,
Opportunity, and Market Structure: New Evidence on some Schumpeterian
Hypothesis, 75 The American Economic Review 20 ff. (1985), which are scrutiniz-
ing the neo-Schumpeterian hypothesis by means of better, more recent data.
143 Cf. Scherer, Industrial market structure ... , op. cit., 438.
62
What is needed for rapid technical progress is a subtle blend of competi-

tion and monopoly, with more emphasis in general on the former than
the latter, and with the role of monopolistic elements diminishing when
rich technological opportunities exist.
Scherer's conclusion may be graphically illustrated: 144
Total Cost. Benefit of an Innovation lSI
Monopolist's
/benefit curve IAI The monopolist
Revenue
extracted extracts this
by the much revenue
competitO\'I---\-.:l~"
.
P
rof,t gamed by_ \
the competitor 'J---\--~ Profit gained by
the monopolist
competitor
"'-Time.cost tradeoff
This benefit curve lei Curve for this
is too low to cause innovation
the innovation to occur
Start Time when Time when the Time

a competitor monopolist will
will innovate innovate
Fig. 5. Time, costs, and benefits for an innovation: a monopolist compared with a
competitor.
The time-cost trade off curve represents the fact that an innovation can be
done quickly at high costs or vice versa. A, B and C are a firm's benefit
curves for an innovation based on alternative market structures.
The monopolist's benefit curve A has the highest level and is sloped
downwards only slightly, because of the market position and the high
barriers to entry.
144 The figure is adapted from Shepherd, The Economics of Industrial Organiza-
tion, op. cit., 146.
63
A higher degree of actual respectively potential competition means a

lower level and a steeper slope of the benefit curve (B and C).
A firm maximizes its profit when the cost and the benefit curve have the
same slope. It is obvious that in the case of a competitive market structure
the consumer gets the innovation earlier and at a lower price.
But it should also be borne in mind that too high a degree of competition
(curve C) may lead to an omission ofinnovation.I 45
Therefore, the third hypothesis on the impact of concentration on R&D is
not tenable either, rather, another threshold approach applies.
The fourth hypothesis purports that the technological progress furthers
economic concentration.
As Blair has worked out in reviewing the relevant literature, improved
technologies do not necessarily encourage concentration due to growing
economies of scale and capital requirements, at least not since the first third
of the 20th century.l46 This thesis is confirmed by a recent empirical study
by Edwin Mansfield. 147
However, R&D and technological progress can result in barriers to entry,
especially when R&D is a major element of interfirm rivalry. Then an
innovation is needed, if entry is to be successful. Costs and risks of research
as well as high selling expenditures represent barriers to entry. A firm
which wants to hold its market position has to maintain a minimum R&D
capacity. This minimum capacity constitutes the minimum size for
entry. 148
Again, the empirical fmdings do not support the fourth hypothesis in
general, though technological progress may create undue and restrictive
barriers to entry for potential competitors.
iii. The Chicago School and Technological Progress
Whereas the Harvard School relies strongly on Industrial Organization

145 Cf. Shepherd, The Economics of Industrial Organization, op. cit., 146 f.
146 Cf. Blair, Economic Concentration, op. cit., 87-113.
147 Cf. Mansfield, Edwin, Technological Change and Market Structure: An
Empirical Study, 73 The American Economic Review 205 ff. (1983), 205-209, esp.
atp.208.
64
School, when developing antitrust recommendations, the Chicago School

more or less abstracts from technological progress and its implications for
antitrust policy. If we recall the importance of technological progress (in the
sense of product and process innovation) for the dynamic development of
an economy this negligence does not seem to be justified. Whether rapid
technological progress is a social wanted goal is not an economic question.
But if it is wanted by parliament and government, economists should be
able to give answers about its determinants and impacts. Shepherd states
that
there is now something like a consensus among the small group of

experts that, at market shares above the 20-25 percent range, the mar-
ginal net productivity of research and development resources tends to
decline .... But as a rule, market shares above 25 percent and high entry
barriers both tend - as a general rule, subject to exceptions - to reduce
the rate of technical progress below the rate the industry's underlying
technological opportunities would yield. 149
Thus the general lesson is that ensuring effective competition is - with

some small exceptions - the best guarantee for invention and innovation,
including the passing-on of their benefits to consumers. If we recall the
conclusions represented above, the argument of the Chicago School that we
do not know enough about market structure and technological progress,
does not seem convincing. Also the point of the Chicago School, that we
should not deal with technological progress in antitrust policy because the
"proper" rate of technical progress cannot be determined, is not satisfying.
Rather, technological progress as a crucial element of productivity
increases is an explicit goal of economic policy of governments all over the
world and should be regarded as an important goal of antitrust policy as
well.
149 Shepherd, The Treatment of Market Power, op. cit., 130. Cf. also Shepherd,
The Economics of Industrial Organization, op. cit., 150 f.
V. EVALUATING CONCENTRATION FROM
THE CHICAGO POINT OF VIEW
l. CORPORATE SIZE AND INDUSTRY CONCENTRATION AS

EVIDENCE OF SUPERIOR EFFICIENCY
The representatives of the Chicago School also take the view that concentra-
tion in markets increases the danger of collusion. However, collusion could
be easily recognized at once, and, therefore, easily prosecuted. The position
of the Harvard School that market concentration is an indication of collu-
sion is criticized by the Chicago School on the grounds that it might
discourage competitive conduct that promotes efficiency.! Firms with a
large market share better satisfy the wants of consumers than smaller firms.
An increasing degree of concentration means aggressive competitive
behavior with prices close to long-run costS.2 Declining concentration
would suggest cartelization or monopolistic price behavior, however, that
stimulates entry of newcomers because of supra-competitive profits. 3
According to the representatives of the Chicago School, concentration is
absolutely necessary in order to achieve economic efficiency. Therefore, the
size of the firm that is achieved through internal growth is also the most
efficient size for the firm.4 Economies of scale, experiences from cumulated
production (learning by doing), and the differences in the quality of
management are used in order to explain concentration. s Whereas the
1 Ct. Demsetz, Economics as a Guide, supra, 383, and Bork, The Antitrust
Paradox, op. cit., 193: "(T)o explain industrial concentration on grounds other than
efficiency, ... will prove difficult or impossible to do ... ".
2 Cf. Kallfass, Die Chicago School ... , supra, 597.
3 Cf. Brozen, Yale, The Concentration-Collusion Doctrine, 46 Antitrust Law
Journal 826 ff. (1977),830.
S Cf. Kallfass, Die Chicago School ... , supra, 598.
66
Harvard School traces durable supra-competitive profits in a market to

barriers to entry, barriers to entry are regarded by the Chicago School as a
reward for high risk and superior efficiency, or as a result of a natural
monopoly.6
The Chicago School does not deny a positive correlation between
concentration and profits. However, it views the relationship as spurious.
According to the Chicago School, different levels of efficiency lead to
weaker competitors being driven out and thereby to concentration
(efficiency causes concentration). So, Demsetz comes to the conclusion that
the positive correlation between concentration and profits is only valid for
firms with a large market share (core of the oligopoly), but not for the
fringe of the small firms in a partial oligopoly.7 Demsetz draws the conclu-
sion that the absolute cost advantages or economies of scale are the reason
for the higher profits; if collusion caused the profits-concentration relation-
ship all competitors in a market should attain supra-competitive profits.
This line of reasoning does not seem to hold, however. Whereas higher
efficiency will lead to increased profitability, the reverse argument that
increased profitability is a secure indicator for higher efficiency does not
necessarily have to be true, since these excess profits can also be the result
of market power, an explanatory approach that is being rejected by the
adherents to the efficiency differential-hypothesis ex definitione on the
grounds that market power would be eroded instantly. We have pointed out
at the beginning that, in the case of large firms, increased efficiency cannot
necessarily be inferred from a presumed increase in profitability. In such
cases, profits may also be caused by market power. Such market power can
in turn be regarded as almost a guarantee that the potential for efficiency
and in particular for innovation is not being exploited to the fullest and the
maximum welfare possible is not being achieved.
6 Cf. Scherer, The Posnerian Harvest ... , supra, 995 ff., and Posner, The Chicago
School ... , supra, 945.
7 Cf. Demsetz, Harold, Industry Structure, Market Rivalry, and Public Policy, 16
The Journal of Law and Economics 1 ff. (1973), 7 f.; although empirical efforts to
verify the structure-conduct-performance paradigm and, therefore, implicitly the
concentration-collusion doctrine are rejected, Chicagoans now heavily draw on
such studies to prove their hypotheses, cf. Singleton, op. cit., 43.
67
Strong empirical evidence for our view is found in our reflections on the
extent of efficiency attainable by technical economies and other ef-
ficiencies. The studies elaborated on show that only small market shares are
necessary in the majority of the markets to exploit attainable economies to
their fullest. There is no plausible evidence put forward by the efficiency
adherents up to this point, however, that residual, nontechnical efficiencies
require increased industry concentration. Even if these efficiencies would
require a minimum level of concentration, overproportionate internal
growth would secure an efficient allocation of economic resources and the
maintenance of the selective function of competition in a much better way
than mergers would, concerning their ambiguous efficiency effects.
The representatives of the Harvard School take the view that the correla-
tion between market share and profit is much more central than the correla-
tion between concentration and profits. 8 According to their view, higher
profits of firms with large market shares are the result of better oppor-
tunities of making use of advantages in product differentiation and price
differentiation, i.e., to exert individual monopoly power and to raise prices
beyond the competitive level, as well as being due to economies of scale or
other cost advantages. Whereas the use of industry overlapping data in
former inquiries lead to aggregation and thereby to a positive correlation
between concentration and profit (overestimation of the profits of market
leaders)9 recent empirical investigations show that the profits of the firms
have to be seen as a function of market share and product differentiation. 10
8 Cf. Scherer, Frederic M., On the Current State of Knowledge in Industrial

Organization, in: de long, Henle W., and William G. Shepherd (eds.), Mainstreams
in Industrial Organization - Book 1, Dordrecht et al. 1986, pp. 5 fr.. 6 f., and
Shepherd, The Economics of Industrial Organization, op. cit., 66, who states that
"(m)arket share is the primary element while concentration and entry barriers are
secondary".
He points out that - as a rule of thumb - "10 percent of the added market share
adds about 2 percent of the profit rate", whereas "the concentration ratio by itself
shows a weaker correlation with profit rates" (at p. 129 with further references).
9 Cf. Scherer, On the Current State ... , op. cit, 6 f.
10 Cf. esp. Ravenscraft, Structure Profit Relationships at the Line of Business and
Industry Level. supra, where product differentiation is measured by the amount of
advertising and a patents-ta-sales ratio.
68
These investigations are based on PIMS- and FTC Line of Business-data

referring to finns instead of to industries. II The results throw quite a
different light on the new learning-hypothesis of the Chicago School
(efficiency causes concentration): 12
It is the combination of selling a differentiated product and having a high

market share that generates greater profitability. Finns with large market
shares in differentiated product industries are more profitable presumably
because they have higher quality products or products which are per-
ceived to be of higher qUality. If one wants to describe the most
profitable finn as being more efficient, they appear to be more efficient
at differentiating their products through advertising or patentable product
improvements.
Due to a high market share, the supplier can take advantage of his
monopolistic discretion to charge higher prices; however, due to the lack of
competitive pressure, it is not guaranteed that the efficiency gains will also
be passed on to consumers. The Chicago School takes the position that the
monopoly problem or the problem of welfare losses due to monopoly only
playa minor role in the U.S.I3; losses of allocation would be more than
compensated by profits due to productive efficiency. This position has to be
criticized since later studies have found higher welfare losses; besides, the
Harberger study, on which the Chicago view is based, has been criticized
on many aspects.I4
The actual situation seems to be characterized by a complex interplay of
price increasing and cost decreasing effects; there seems to be a tendency of
suppliers not to lower their prices as far as gained cost advantages would
11 It is asserted. nevertheless. that the relationship found. is simply the result of
biases in accounting data. cf. Benston. George. The Validity of Profits-Structure
Studies with Particular Reference to the FTC's Line of Business Data. 75 The
12 Mueller, Dennis C., United States' Antitrust: At the Cross-roads, in: de Jong,
Henk W., and William G. Shepherd (eds.), Mainstreams in Industrial Organization
- Book 2, Dordrecht et al. 1986, pp. 215 ff., 225.
13 This view is based on the study of Harberger, Arnold c., Monopoly and
Resource Allocation, 44 The American Economic Review 77 ff. (1954).
14 Cf. B{)bel, Wellbewerb und Industriestruktur ... , op. cit., 179 ff. and 201 ff.
69
allow them to do. A study by Kelton 1S who made an investigation on the

correlation between concentration and prices in the field of food and
tobacco products shows a durable positive and significant correlation
between the two variables in periods without inflation (change of the price
level of 8% when the level of concentration increased by 10%).16
This seems to support the view that the supplier with a high market share
is profiting from lower costs as well as from higher prices; however, the
customers do not gain from these increases in efficiency, which contradicts
the explicit goal of consumer welfare (!).17
2. CAUSES OF MONOPOLY POWER
Since concentration is regarded as posing no risks, as being even desirable,

the Chicago School views the phenomenon of market power as not being
directly related to market share. Rather, the whole attention of this school is
directed at monopoly power. Chicagoans inquire about the causes of
monopoly power and try to remove these causes directly. According to
most representatives of this school, only monopolistic control over
resources and government protection against competition can be the source
of monopoly power: 18
Monopolization has two plausible routes. One follows a circuitous path

through fifty state capitals and Washington D.C. The other is to obtain
very dominant control over resources 'essential' to the production of a
good.
15 Quoted from Weiss, Leonard W., Concentration and Price - A Possible Way out
of the Box, discussion paper of the International Management Institute, Berlin
1984,7 ff.
16 Cf. Weiss, Concentration and Price ... , supra, 8.
17 Cf. the legal wording of Art. 85 para. 3 Treaty of Rome where in case of a
rationalization cartel a fair share of the resulting benefits has to be passed on to
consumers.
18 Demsetz, Economics as a Guide, supra, 381.
70
a. Control of a Scarce Input
The lower output due to restriction and the higher price of monopoly in
comparison to a competitive situation are only regarded as concomitants of
monopoly. The control of a scarce input factor is regarded as a barrier to
entry by the Chicago Schoo1. 19 According to Demsetz20 a monopoly is - in
contradiction to the definition of monopoly in neoclassic price theory - not
characterized by the fact that it controls the whole supply in a relevant
market, but by the dominant position it has due to its control over certain
resources. Demsetz argues that such a position can be achieved by the
control of high-grade raw materials (for instance the aquisition of 90% of
high-grade ore mines by u.s. Steel in the U.S.A.), of patents, of an efficient
team of people, or of an efficient method of organizing experts in a team.
Such resources show the characteristic that it is difficult for competitors to
imitate them. According to Kirzner, the classic case of a monopolistic
producer has no practical importance; only if the monopolistic producer is
also the owner of resources is there a real monopoly.21 If a monopolist is
the sole owner of resources, grave consequences are conceded for produc-
tion. However, the assumption is that such a control is rare and in the long
run the market process will take care of the elimination or substantial
reduction of the dominating position, so that there is no need for antitrust
policy. Besides, the creation of a resource monopoly is regarded as a source
of productivity. In his evaluation of the trade-off between productivity and
market dominance, Demsetz comes to the conclusion that if one balances
the acquisition of a dominant position in the control of a scarce input with
the increase of productivity the danger of punishing such an increase in
productivity is large and the likelihood of reducing unproductive sources of
market dominance is small.22
19 Cf. Posner, The Chicago School ... , supra, 947.

20 Cf. Demsetz, Economics as a Guide, supra, 381 f.
21 Cf. Kirzner, Israel M., Competition and Entrepreneurship, Chicago 1973, 22,
although Kirzner is a (Neo-)Austrian scholar.
71
b. Legal Protection of Monopoly Power
Government protection for some industries is regarded as the second

substantial cause of monopoly power. According to the Chicago School,
those areas that are exempt for political reasons cannot be defended by
economic argument but, along the same line, it is very difficult to attack
them politically. The protection of these industries against competition
should be reduced step by step because this protection against competition
offers, according to the Chicago School, no advantages at all:23
In addition ... it is difficult to see great gains flowing from government

protection of industries from competition, although in some cases, as
with patent protection, such a case can be made.
The policy of the Chicago School aims at deregulating those exempted

areas, which has also become the official policy of the Reagan Administra-
tion. Deregulation has already gone far in the airline industry and in
transportation. However, the Chicago School admits that it is very difficult
to make policy conclusions in fields which have not yet been thoroughly
analyzed. 24 This view is criticized by the Harvard School, especially with
regard to the problems of natural monopoly. In markets in which economies
of scale prevent a competitive market structure, monopoly profits should be
avoided by regulation; in such a case, a policy of deregulation would allow
monopolists to skim off monopoly profits.
If the policy of deregulation is not to become an ideology, the question
arises how regulation is to be handled in order to avoid the costs of regula-
tion which have been pointed out by Stigler and others: 25
The question that naturally follows from Demsetz's analysis is: Can we
regulate insufficiently competitive industries without incurring all the
evils of regulation to which Stigler and others have drawn our attention?

2S Rosenbluth, Gideon, Comment on a Paper by Demsetz, 19 The Journal of Law
and Economics 389 ff. (1976), 391.
72
According to the Harvard School, establishing competition in exempted

areas makes it necessary to balance the costs and benefits - a problem
which is not raised by the Chicago School.
c. Monopoly Power in the Long Run
Chicagoans admit that the likelihood of collusion increases with growing

concentration because of the substantial interdependence between firms.
However, exertion of monopoly power would become well-known to
potential competitors and could be prosecuted easily in the case of horizon-
tal conspiracies. Newcomers would immediately erode monopoly power
that is not based on efficiency. What looks like a resource monopoly in the
short run, is actually an expression of competition in the long run; therefore,
such a monopoly position cannot be maintained. 26
Whereas private monopoly power is eroded during the time the Chicago
School regards the government protection of certain industries as the real
monopoly problem. Such monopolies which, due to government protection,
are durable should be deregulated.
3. MEASURING MONOPOLY POWER
In measuring monopoly or market power, perfect competition is again used

as standard of reference: 27
The term 'market power' refers to the ability of a firm (or a group of
firms, acting jointly) to raise price above a competitive level without
losing so many sales so rapidly that the price increase is unprofitable and
must be rescinded.
The evaluation of market power follows from the definition of monopoly.

The existence of market power as such is of smaller importance; with
26 Cf. Kirzner, Competition and Entrepreneurship, op. cit., 205 ff.

27 Landes, William M., and Richard A. Posner, Market Power in Antitrust Cases,
94 Harvard Law Review 937 ff. (1981), 937.
73
regard to antitrust policy the question of the extent of market power is much
more important. In order to measure market power the representatives of
the Harvard School have used different measures and criteria, for instance
market share, the Lerner index, profit rates in the relevant market, over-
capacity, certain forms of market conduct, and different concentration
ratios. 28 Some of the Chicagoans doubt that such measures are suitable and,
therefore, reject them for that reason: 29
Concepts such as the Lerner index of monopoly, relating price to

marginal cost, reflect the adoption of these criteria, criteria which have
become widely adopted principles of antitrust economics. Nonetheless
these are incorrect criteria upon which to constitute standards of antitrust
policy.
While other representatives of the Chicago School accept such measures of

market power in principle, they stress the problems of using those
measures. For instance, Landes and Posner emphasize the difficulty of
measuring the elasticity of demand which is used in the Lerner index: 3o
More important is the difficulty that would face a court or an enforce-

ment agency in estimating elasticities of demand for purposes of using
(the) approach in antitrust enforcement and adjudication.
The dead-weight loss, which has already been mentioned, seems to be the
only concept that is accepted by all representatives of the Chicago School.
This measurement is the monetary loss which results in an economy by
virtue of the fact that a monopoly offers a smaller quantity than would be
offered under competitive conditions. 31
2S Cf. Schmalensee, Another Look at Market Power, supra, 1804 ff., and Landes
and Posner, Market Power in Antitrust Cases, supra, 938.
30 Landes and Posner, Market Power in Antitrust Cases, supra, 943.
31 Cf. the critique with regard to this measurement concept by Schmalensee,
Another Look at Market Power, supra, 1793.
74
4. DETERMINANTS OF MARKET STRUcrURE AND THE EFFEC-

TIVENESS OF COMPETITION
a. Barriers to Entry
As has already been shown above in sec. 11.4 there are, according to the
Chicago School, no relevant or important barriers to entry except legal
barriers.32 Factors that are regarded as barriers to entry by the repre-
sentatives of the Harvard School are denied by the Chicago School: 33
Alleged barriers to entry such as advertising, venical integration, and

capital requirements all fall into the class of competitive tactics more
likely to be associated with productive rivalry than unproductive
monopolization ... (t)he current flurry of concern over such 'barriers to
entry' reflects the poor guidance that is too often offered to anti trusters
by economists.
Summarizing the different positions of the Chicago School, we come to a

classification covering three different kinds of barriers to entry:
(1) Economies of large scale production and product differentiation

advantages of established over potential entrant firms (cf. Joe S. Bain)
are regarded as natural barriers to entry by the Chicago School.
According to Bork natural barriers to entry exist,
(w)hen existing firms are efficient and possess valuable plants,

equipment, knowledge, skill, and reputation. (Therefore,)
potential entrants will find it correspondingly more difficult to
entry the industry, since they must aquire those things.34
32 Cf. Williamson, Oliver E., Symposium on Antitrust Law and Economics, 127
University of Pennsylvania Law Review 918 ff. (1979),919: "The strong version
of the Chicago position asserts that meaningful entry barriers do not exist."
34 Bork, The Antitrust Paradox, op. cit., 310 f.
75
The Chicago School views these difficulties to enter a market as

natural and competitive in nature. It regards them as a form of ef-
ficiency and not as a barrier to entry. 35
(2) Bork believes that the only question for antitrust policy is whether
artificial barriers to entry exist. Exclusionary practices and predation
are regarded as artificial barriers to entry:
These must be barriers that are not forms of superior efficiency

and which yet prevent the forces of the market ... from operating
to erode market positions not based on efficiency.36
The representatives of the Chicago School regard this kind of action as

a barrier to entry but, according to their view, such unilateral action
would be detrimental to the firm undertaking it and, therefore, would
not make sense.
In the case of such unilateral action the firm must be aware of an
immediate entry of newcomers because the lack of barriers would
stimulate entry if the firm tried to abuse its monopolistic discretionary
power. Such conduct "would be foolish and selfdefeating behavior"37
and, therefore, unlikely.38
According to the Chicago School, artificial barriers to entry cannot
hinder market forces in the long run, a view that it sees confirmed by
two arguments:
(a) First, existing barriers to entry lose their importance the more
optimistic potential newcomers are about future profits. As time
goes on, the probability increases that a potential newcomer
regards the profits that will be realized in a market as sufficiently
high in order to justify entry into this market.
(b) Second, barriers to entry are eroded in the long run (for instance
by the expiration of patents, the development of new products or
methods).
36 Bork, The Antitrust Paradox, op. cit., 311; cf. 328 f. as well.
38 Cf. Bork, The Antitrust Paradox, op. cit., 144 f., 153 and 160.
76
(3) Barriers to entry erected by government, such as patents, legal

restrictions of admission to certain occupations or professions, and
similar regulations, are deliberately established by government;
therefore, they are durable and cannot be removed by market forces. 39
Barriers to entry as defined by the Harvard School such as advertising,

minimum capital requirements, or vertical integration are regarded as
competitive behavior or the outcome of economic efficiency by repre-
sentatives of the Chicago School. 4o Consequently, the long-run effective-
ness of market processes is determined by this assumption since the absence
of significant barriers to entry is assured. A sufficiently large number of
potential competitors always exists.
The discussion on barriers to entry is reduced to a question of efficiency
by the Chicago School. According to this position, entry into a market is
impossible for a newcomer only when there are enough firms in the
relevant market producing at the minimum optimum scale so as to imply no
need for newcomers in order to increase welfare. 41 Referring to Stigler's
definition of barriers to entry, Posner comes to the following conclusion: 42
Once 'barriers to entry' was redefined as a differentially higher cost

borne by the new entrant, the plausibility of supposing that barriers to
entry are common, or commonly substantial, diminished sharply.
Even taking as given the separation into natural and artificial barriers to
entry, made by Bork, there are doubts with regard to the policy conclusions
drawn by the Chicago School. Of course, it is possible to regard natural
barriers to entry as an expression of superior efficiency. However, in such a
view only the short-run aspect of realizing efficiency is taken into account;
3} Cf. Posner, The Chicago School ... , supra, 947 note 65: "Legal barriers to entry
such as patents are quite properly ignored as beyond the reach of antitrust policy."
40 Cf. for instance Demsetz, Economics as a Guide, supra, 382, and Posner, The
Chicago School ... , supra, 929 f.
41 Cf. Kirchner, Christian, "Okonomische Analyse des Rechts" und Recht der
Wettbewerbsbeschrankungen (antitrust law and economics), 144 Zeitschrift fUr das
gesamte Handelsrecht und Wirtschaftsrecht 563 ff. (1980), 576.
77
the long-run aspect of maintaining competition as an anonymous control

mechanism which forces the firms to produce in an efficient way and at the
same time to pass on the efficiency gains to consumers is totally dis-
regarded, even if barriers to entry are only understood as a manifestation of
efficiency. The possible conflict between the realization of short-run
efficiency gains and the long-run elimination of competition as an
anonymous control mechanism is denied by the Chicago School, since it
relies on the force of potential competition.
This can be viewed as an approach quite similar to the one performed by
the contestability-adherents43 , asserting that under conditions of ultra free
entry and ultra free exit even monopolies would perform as competitive
markets do. 44 Contestability in the sense of Bailey, Baumol, Panzar, Willig
is based on three explicit conditions serving also as a basis for the policy
conclusions. These conditions have to be considered pure in nature which
means that policy conclusions become speculative if the conditions do not
hold. Presenting these conditions seems to be of importance since they
seem to be as extreme as the ones underlying the Chicago position and a
rejection of these extreme circumstances strongly invalidates the policy
conclusions drawn - as is the case with Chicago policy conclusions: 45
First, entry is assumed to be free and without limit which means that the
entrant can readily imitate and replace incumbent firms and that there are
no irretrievable costs or significant time lags. 46
43 Cf., e.g., Baumol, William J., Contestable Markets: An Uprising in the Theory
of Industry Structure, 70 The American Economic Review 1 ff. (1982); and
Baumol, William J., et al., Contestable Markets and the Theory of Industry
Structure, San Diego 1982.
44 Cf. Shepherd, William G., "Contestability" vs. Competition, 72 The American
Economic Review 572 ff. (1984), 572: "Such ultra-free entry provides efficient
outcomes .. , not only in theory but in actual markets. Among the desirable results
are said to be zero profits, Ramsey optimal prices, efficient production and market
structure, innovation, and an avoidance of cross subsidies in pricing: all this even in
pure monopolies."
45 Cf. Shepherd, "Contestability" vs. Competition, supra, 575: "Baumol et al.'s
optimism about efficiency appears to exceed even Chicago School levels."
46 Cf. Baumol, William J., et aI., Contestable Markets and the Theory of Industry
Structure, op. cit., 5: "Entrants can, without restriction, serve the same market
demands and use the same productive techniques as those available to the incum-
bent firms."
78
Second, entry is seen to be absolute which means that a newcomer might

outcompete an incumbent firm before there is any response by that firm.47
Third, entry is believed to be completely reversible which assumes the
non-existence of sunk costs that are irretrievably lost by an entry decision
of a potential entrant (assumption of costlessly reversible entry).
The contestability discussion falsely shifts away attention from entry
conditions to a non-existing post-entry struggle which means that "external
conditions are assumed to dominate internal conditions"48. Along with the
assumption of zero sunk costs and ultra-free entry, the contestability
approach reflects rather extreme assumptions and cannot be applied except
in extreme cases. It is more or less a sort of 'Gedankenexperiment', as
Shepherd puts it and, therefore,
may have value in the microeconomic theory curriculum, ... offers little
so far to industrial organization research and teaching and gives no
persuasive reason to shift attention away from competition within the
market. 49
The different view of the 1.0. School tries to resolve this conflict and views
natural barriers to entry in a different way. The Harvard School emphasizes
the workability of competition as a control mechanism and starts from the
assumption that the coordination, information, and allocation function of
competition is lessened by high barriers to entry.
The original concept can be traced back to Joe S. Bain who inquired into
the question of potential competition in the case of oligopolistically
structured markets.50 Bain extricated three different sources responsible for
the observation that in some industries excess profits do not necessarily lead
to entries of potential competitors, eroding excess profits. These sources
47 Cf. Shepherd, "Contestability" vs. Competition, supra, 573.

48 Cf. Shepherd, "Contestability" vs. Competition, supra, 575.
49 Shepherd, "Contestability" vs. Competition, supra, 585, who notes that the
extreme set of conditions is probably found in no real markets and that virtually
nothing has been added to the preexisting entry and exit analysis by the contes-
tability approach.
50 Cf. Bain, Joe S., Barriers to New Competition, Cambridge, Mass. 1956.
79
were tenned barriers to entry and, originally, encompassed three condi-

tions: 51
Newcomers have to be able to attain unit average costs comparable to the

ones of their competitors because the competitors otherwise experience
absolute cost advantages which can serve as a shield of protection
against potential competitors.
In the case of product heterogeneity or the inability of potential com-
petitors to offer equivalent products on the bases of comparable
price/quantity relationships, incumbents have product differentiation
advantages.
If size advantages are neither negligible for nor attainable by potential
competitors, advantages due to economies of scale are said to exist.
If at least one of these conditions is not fulfilled, easy entry for potential
competitors into a market is not possible. Hence, the height of barriers to
entry is perceived to depend on the extent of absolute cost advantages,
product differentiation advantages, and economies of scale. 52
Entry into a market presupposes that the natural and artificial barriers to
entry, as well as the existing profit opportunities in a relevant market are
well-known and that there are enough competitors possessing spirit of
competition to allow these profit chances to be exploited by entering the
market. If there is too little infonnation on profit opportunities and/or little
spirit of competition, there will be no market entry even in the case of low
barriers to entry. Besides, the product life cycle plays an important role in
deciding whether to enter a market or not.
Therefore, the Harvard School takes the view that barriers to entry resist
the erosion of powerful positions as time goes on. 53
51 Cf. Bain, Barriers to New Competition, op. cit.; and idem, Structure versus
Conduct as Indicators of Market Power, in: 18 Antitrust Law and Economics
Review 27 ff. (1986), 27.
For a recent restructuring of the conditions into structural and strategic barriers to
entry resp. exit and private resp. governmental barriers, cf. Schmidt,
Wettbewerbspolitik und Kartellrecht, op. cit., 68-70.
52 Cf. Bain, Barriers to New Competition, op. cit., 13 f.
53 Cf. Shepherd, William G., The Economics of Industrial Organization, 2nd ed.,
Englewood Cliffs, N.J. 1985,71 ff.
80
Consequently, barriers to entry fonn a kind of protective shield against

competition and keep dominant finns from passing on efficiency gains to
the purchasers or to consumers, which leads to increased profits for the
dominant finns.
Structural barriers to entry, which are linked with sunk costs, and
strategic barriers to entry, which have been erected by established finns in
order to keep potential competitors from entering the market, are an
obstacle to the interindustrial mobility of de novo competition. Such
barriers to entry allow extra costs of entry, extra costs that established
competitors do not or did not have to pay in order to enter the market.
Recent empirical studies show that the market entrance and exit is nega-
tively influenced by these kinds of barriers. 54
Shepherd55 provides evidence with results on a study on erosion or
change of the position of dominant finns during the period 1910-1973 in
the USA and in the United Kingdom. An important result of his
investigation is that ,,(t)he 'natural' decline of dominant finns was much
more in 1910-1935 than in 1948-1973"56.
In addition, increasing concentration in most industries underlines the
existence of barriers to entry, especially since market entrance in the sense
of "net new capacity added by a new finn"57 has little significance. The
figures of the Fifth Main Report of the Gennan Monopolies Commission
show that between 1979 and 1981, a period of low economic activity,
concentration in 23 industries (57.5%) was increasing, in 8 industries (20%)
decreasing, and in 9 industries (22.5%) fluctuating or constant. 58
54 Cf. Masson, Robert T., and Joseph Shaanan, Stochastic-Dynamic Limit Pricing:
An Empirical Test, 64 The Review of Economics and Statistics 413 ff. (1982);
Neumann, Manfred, Ingo Bobel and Alfred Raid, Innovations and Market Structure
in West German Industries, 4 Managerial and Decision Economics 131 ff. (1982);
Yip, George S., Barriers to Entry, Lexington, Mass. 1982.
ss Cf. Shepherd, William G., The Treatment of Market Power: Antitrust, Regula-
tion, and Public Enterprise, New York, London 1975, 113 f.
S6 Shepherd, The Treatment of Market Power ... , op. cit., 115.
S7 Shepherd, The Treatment of Market Power ... , op. cit., 101.
S8 Cf. Hauptgutachten der Monopolkommission V: Okonomische Kriterien filr die
Rechtsanwendung, Baden-Baden 1984, para. 40.
81
b. Advertising
Whereas the representatives of the Harvard School59 see a positive correla-

tion between advertising and concentration the Chicago School regards
advertising as a means of intensifying competition: 60
To any casual observer, it would seem that advertising is a means of

competing. Most importantly, advertising is much more a means of entry
than a barrier to entry.
Whereas a preference for established products based on the effects of

accumulated, long-term advertising was considered by the Harvard School
a barrier to entry, for Chicagoans the real barrier to entry are high informa-
tion costs for consumers that have to be overcome by advertising. 61 In this
sense
... , existing firms have incurred the costs necessary to overcome that
barrier and have thereby gained a certain degree of consumer loyalty.62
A similar line is adopted by Bork who asserts that advertising should be

considered a capital asset for it does have long-lasting effects. 63
According to Posner, the rational consumer will pay for advertising only
to the extent that his search costs in selecting products are diminished.
Therefore, he characterizes advertising as a service to customers. Besides,
59 Cf. Mann, H. Michael, Advertising, Concentration, and Profitability: The State

of Knowledge and Directions for Public Policy, in: Goldschmid, Harvey J., H.
Michael Mann and J. Fred Weston (eds.), Industrial Concentration: The New
Leaming, Boston, Toronto 1974, pp. 137 ff., 140.
60 Brozen, Yale, Entry Barriers, Advertising, and Product Differentiation, in:
Goldschmid, Harvey J., H. Michael Mann and J. Fred Weston (eds.), Industrial
Concentration: The New Learning, Boston, Toronto 1974, pp. 115 ff., 115.
61 Demsetz, Harold, Barriers to Entry, 72 The American Economic Review 50 ff.
(1982).
62 Singleton, Industrial Organization and Antitrust ... , op. cit., 45.
63 Cf. Bork, Robert H., No ... Antitrust and the Theory of Concentrated Markets,
in: American Bar Association (ed.) , Industrial Concentration and the Market
System, Chicago 1979, pp. 81 ff., 88.
82
this service cannot be separated from the services that are part of the
product itself. 64
Posner also admits that the fundamental Chicago assumption applies, that
the consumer is an absolutely rational human being. 65
On the other hand he must be criticized, since the representatives of the
Harvard School concede as well that advertising contains information in
many cases. Nelson puts the question, however,
what kind of information 'great balls of comfort' is meant to convey. Is it

really information for me to know that 'if I'm out of Schlitz, I'm out of
beer? '66
He argues that advertising tends more to set signals than to provide informa-
tion when the industry is conscious that consumers are uncertain about
selecting products. 67 As we have already mentioned, the informative
component of advertising plays an important role with regard to search
goods. However, it does not do so with regard to experience goods, where
advertising shifts from information to persuasion. The latter kinds of goods
are, however, in the majority in an economy.
c. The Lack of an Oligopoly Theory
Although the Chicago School concedes that concentration facilitates

collusion, concentration is in fact of little importance for antitrust policy in
their view. The Chicago School acknowledges that real markets are
characterized by oligopolistic structures. 68 However, the representatives of
64 Cf. Posner, The Chicago School ... , supra, 930 f. and 938: Advertising can make
an advertised brand cheaper by reducing the consumer's search costs by an amount
greater than the difference in nominal price between that brand and non-advertised
brands of the same product."
65 Cf. Posner, The Chicago School ... , supra, 938 note 38.
66 Nelson, Comments on a Paper by Posner, supra 950.
67 Nelson, Comments on a Paper by Posner, supra 950.
68 Cf. Bark, The Antitrust Paradox, op. cit., 101 f.
83
this school argue that there is no clear theoretical basis for a general
oligopoly theory.69
Due to changing conditions with regard to demand, technology, and
different cost situations, collusion that is favored by oligopolistic interdepen-
dence between the firms, is in practice very difficult to deal with: 70
Conventional oligopoly theory, however, is little more than a guess about

the ways in which firms might be able to behave in a market composed
of a few sellers.
The fact that oligopolies neither act as pure collective monopolies, nor act
competitively, does not permit the conclusion - according to the view of the
lawyers of the Chicago School- that oligopolists do not have to behave like
competitors. 71
There is an exemption, however, in the case of Stigler who was among
the first to deal with problems of competition in an oligopoly.72 Though
Stigler is in favour of an oligopoly theory, he has not succeeded in develop-
ing a coherent economic and legal approach to oligopoly.73
Due to the assumption of ideal markets without any frictions, there is
always effective competitive pressure, which leads to the result that market
conduct is not influenced by (oligopolistic) market structure.
However, if we start from the more realistic assumption of market
imperfections and, if we assume furthermore, that with increasing concentra-
tion and a decreasing number of competitors the interdependence between
the firms increases, Le., that every supplier has to take account of the
behavior of his competitors as a reaction on his own behavior, then a single
supplier has monopolistic discretion, which he has neither under the
conditions of perfect competition (price being given) nor in a (partial)
monopoly (where the fringe of the small competitors has no influence on
the market activities).
However, accepting the correlation between concentration and the
70 Bork, The Antitrust Paradox, op. cit, 92.
71 Cf. Bork, The Antitrust Paradox, op. cit., 102 and 104.
72 Cf. esp. Stigler, The Organization ... , op. cit., 39 ff.
73 Cf. Kirchner, "6konomische Analyse des Rechts" ... , supra, 565.
84
interdependence of finns is not enough to settle the question of whether

oligopolists have to behave in a competitive way or not. In order to answer
this question, the existing structural conditions of the market have to be
looked into as well (for instance product life cycle, product homogeneity or
heterogeneity, degree of infonnation - these being factors which qualify the
importance of the number of the finns). Structural conditions which lead to
oligopolistic behavior cannot be established in general. Significant and
empirically meaningful statements can be made only by showing a correla-
tion between specific market structures and the likelihood of oligopolistic
behavior.
Consequently, a classification of specific oligopolistic forms of behavior
restraining competition becomes necessary.7 4
5. THE ECONOMIC EFFECTS OF MERGERS
a. Horizontal Mergers
As we have already shown above in section IV. 2. a. ii. (1), firms should be
allowed to achieve by internal growth any market share as long as this takes
place in a non-predatory way.
The evaluation of horizontal mergers is perfonned by trading off the
welfare loss caused by restriction of output against the cost savings of a
merger. Williamson discusses the conflict between welfare losses by
monopolization (= skimming off the consumer's surplus) and welfare gains
due to cost savings. 75 According to Williamson, the antitrust authorities
should make a trade-off between these effects in judging horizontal merger
cases.
Bork doubts whether mergers would lead to substantial restraints of
output and believes that "the effect would usually be outweighed by cost
savings".76 However, he admits that with monopolistic structures, the
74 Cf. ZohlnhOfer, Werner, Wettbewerbspolitik im Oligopol: Erfahrungen der
amerikanischen Antiuustpolitik, Basel and Ttibingen 1968,26 ff.
75 Cf. Williamson, Economies as an AntiUUst Defense ... , supra, 18 ff. Cf. also the
graph of this model on p. 46.
85
restraints of output may outweigh the efficiency gains so that "we are in an
area of uncertainty".77 Therefore, Bork comes to the preliminary conclusion
that mergers up to 60 or 70% market share should be legal per se. However,
(p)artlyas a tactical concession to current oligopoly phobia and partly in

recognition of section 7's intended function of tightening the Sherman
Act rule, I am willing to weaken that conc1usion.78
Posner explicitly refers to Bork on the subject of the limits of horizontal

concentration. 79 He only expresses in a very vague form that antitrust
policy should deal mainly with horizontal mergers that lead directly to
monopolies or which contribute to cartelization by a large reduction of the
number of firms in a market. 80
b. Vertical Mergers
If a firm compares market transaction and internal organization costs the

best strategy that follows for a firm is to merge vertically only when the
transaction-costs are higher than the organization costs (cf. sec. IV. 2.a. ii.
(2) above). According to the Chicago School, vertical strategies only serve
to increase productive efficiency and not to obtain monopoly power; since
... firms cannot in general obtain or enhance monopoly power by

unilateral action - unless, of course, they are irrationally willing to trade
profits for position. 81

79 cr. Posner, The Chicago School ... , supra, 933.
80 cr. Posner, The Chicago School ... , supra, 928; taken to its logical extreme, the
notion that no meaningful barriers to entry exist, and the assertion that there will
not be any form of collusion, no matter how concentrated the industry is, the
minimum number of firms in an industry necessary to insure competition and,
therefore, competitive performance, is one, cf. Singleton, Industrial Organization
and Antitrust ... , op. cit., 44.
86
According to Bork, U.S. antitrust policy has dealt with the effects of
vertical mergers for more than 60 years without having succeeded in
developing an adequate theory that demonstrates the negative effects of
such mergers on competition in a clear way:82
Vertical merger does not create or increase the firm's power to restrict
output. The ability to restrict output depends upon the market share of
the market occupied by the firm. Horizontal mergers increase marl<:et
share. but vertical mergers do not.
Posner emphasizes that at least in academic circles a positive evaluation of

vertical mergers is gaining ground. 83 He regards the dangers that vertical
mergers pose. such as hindering established or potential competitors. as
small or only rarely forthcoming. 84 However. Williamson correctly points
to the fact that striving for increased efficiency may have the effect of
hindering competitors: 85
Thus. although forward integration may represent an effort to realize

private gains with resulting economies at one stage, it may constitute an
unneeded restraint at a later stage and indeed may serve strategically to
disadvantage rivals if it is continued.
c. Conglomerate Mergers
By appealing to the position made in the case of vertical mergers. con-

glomerate mergers are also not regarded as harmful to competition: 86
It seems quite clear that antitrust should never interfere with any con-
glomerate merger. Like the vertical merger. the conglomerate merger
does not put together rivals, and so does not create or increase the ability
82 Bode. The Antitrust Paradox, op. cit. 231.
83 cr. Posner. The Chicago School .... supra, 937.
84 cr. Posner, The Chicago School .... supra, 938.
85 Williamson. Assessing Vertical Market Restrictions ... supm. 965.
86 Bode, The Antitrust Paradox, op. cit, 248.
87
to restrict output through an increase in market share. Whatever their

other virtues or sins, conglomerates do not threaten competition, and they
may contribute valuable efficiencies.
Bork refers to the theories that have been developed by the Harvard School
for determining the negative effects of conglomerate mergers and comes to
the conclusion that such mergers should in no case be impeded: 87
We have examined all the major theories of the ways in which con-
glomerate mergers may injure competition and found that none of them
( ... ) bears analysis. The conclusion must be, therefore, that conglomerate
mergers should be prohibited by judicial interpretation of Section 7 of
the Clayton Act.
However, this position is not held unanimously. Moderate representatives

of the Chicago School regard conglomerate mergers in specific situations as
a problem. Those representatives who take an intermediate position
between the Harvard and the Chicago School emphasize this point: 88
Public policy will be served by identifying specific instances where

conglomerates pose problems rather than by mounting a broadscale
attack. Specific abuses ( ... ) ought to be challenged, but conglomerate
acquisitions ought not to be arrested on this account.
A uniform position in this field has not yet emerged.
6. ANTICONCENTRATION POLICY FROM THE CHICAGO POINT

OF VIEW
a. Merger Control
The representatives of the Chicago School reject government interference in

market structures, except in the case of some horizontal mergers. This
position follows the view that vertical or conglomerate mergers do not
87Bork, The Antitrust Paradox, op. cit, 262.

88Williamson, Oliver E., Markets and Hierarchies: Analysis and Antitrust
Implications, New York 1975, 170.
88
cause restrictions of output and that at the same time, however, the con-
sumer's welfare is served by the increased efficiency after a merger.
According to this argument, the government should not interfere in market
structures in the case of small horizontal and all vertical or conglomerate
mergers, since all these activities are productive from the economic point of
view.
In the case of horizontal mergers, the effects of output restriction out-
weigh the efficiency gains only if the merger results in a very high degree
of concentration. Consequently, Bork regards
presumptively lawful all horizontal mergers up to the market shares that

would allow for other mergers to similar size in the industry and still
leave three significant companies. 89
Bork takes the view that the maximum market share realized by a merger
should be about 40%.90 Although, he objects that "even at these levels the
law would certainly be preventing the realization of some efficiencies",91 he
supports this proposal for horizontal mergers in his recommendations. 92
Since the Reagan Administration has taken over responsibility for
antitrust policy, the enforcement agencies have rarely attacked mergers.
Even in the case of horizontal mergers there is a very generous interpreta-
tion of the antitrust law - especially in the oil industry, so that the concentra-
in this industry has been strengthened. The four biggest firms: Exxon,
Mobil Oil, Standard Oil of California, and Texaco have become much
bigger than all the other firms, so that the oligopolistic nucleus in this
industry has even become stronger. The break-up of Standard Oil in 1911
into different competing firms has been offset as a result.
89 Bork, The Antitrust Paradox, op. cit, 221 f.

92 Cf. Bork, The Antitrust Paradox, op. cit., 406 (3) (b).
89
b. Divestiture
Competition is regarded as a free play of market forces and interference in

market structure is generally rejected. How divestiture in the case of
disproportionate internal growth is evaluated by Chicago, seems to be
apparent, therefore. Divestiture would harm consumers by forcing subop-
timal sizes upon the firms and depriving the firms of the incentive to grow
by means of efficiency.93 Bork says
that any size achieved by internal growth without predation is the most
efficient size for that firm. This, in tum, leads to the conclusion that the
dissolution of any such firm will always create an efficiency loss.
[Therefore] the law should never attack such structures since they
embody the proper balance of forces for consumer welfare.94
Again, this argument presupposes that (disproportionate) internal growth

only occurs because of superior efficiency. According to estimates of
representatives of the Chicago School, a divestiture of concentrated in-
dustries with CR4 more than 50% would result in cost increases of about
20% and price increases of about 15%.95 This aspect of economic power is
a result of superior efficiency and efficiency is the goal for antitrust policy.
An abuse of power in concentrated industries would result in a natural
deconcentration of the iildustry since efficient newcomers would enter the
market by virtue of the non-existence of barriers to entry.96 Even leaving
aside the issue of efficiency, the divestiture of industries does not seem to
be practicable: 97

94 Bork, The Antitrust Paradox, op. cit, 194 and 164.
95 Cf. Peltzman, The Gains and Losses from Industrial Concentration, supra.
97 Posner, The Chicago School ... , op. cit., 79. Cf. also Schmidt, Ingo, Different
Approaches and Problems in Dealing with Control of Market Power: A Com-
parison of German, European, and U.S. Antitrust Policy Towards Market Dominat-
ing Enterprises, 28 The Antitrust Bulletin 417 ff. (1983), who reviews the great
difficulties in divesting fIrms.
90
Any proceeding to deconcentrate an industry by reorganizing the major

firms into smaller units would probably be cumbersome, protracted and
indeed unmanageable.
Effective divestiture presupposes a knowledge of the optimal market

stucture, which does not exist on account of the complexity of market
forces. Therefore, divestiture could not be carried out in a constitutional
way.
Due to this philosophy, the divestiture proceedings partly pending for
more than 10 years against Exxon Corp., Kellogg et al., and IBM have been
dropped; the case against AT & T has been settled by consent decree. 9&
c. Deregulation
According to the view of the representatives of the Chicago School,

industries which are exempted from competition should be deregulated,
which comes close to deconcentration. With regard to deregulation the
Harvard and the Chicago School take a similar view although the motives
for deregulation are somewhat different. Whereas the Harvard School
stresses the necessity of restoring competition as far as possible in all
markets the Chicagoans first look at abolishing government interference,
thereby creating a free enterprise system in unregulated markets. This
policy aims at abolishing the regulation of prices and market access in
industries in which a competitive structure is possible. 99 However, the
representatives of the Harvard School contend that the Chicago School
wants to extend deregulation to industries which need government protec-
tion: 1OO
But much of the political energy first generated by ... consensus goals is
98 Cf. FTC v. Exxon Corp., CCH Trade Regulation Reporter Transfer Binder: FTC
Complaints and Orders 1979-83 21,866, and FTC v. Kellogg Co. et aI., op. cit.,
21,899. Cf. U.S. v. IBM Corp., 4 CCH Trade Regulation Reporter 45,070 Case
2039, and U.S. v. AT & T, 4 CCH Trade Regulation Reporter 45,070 Case 2416.
99 Cf. Sullivan, Antitrust, Microeconomics, and Politics ... , supra, 5.
100 Sullivan, Antitrust, Microeconomics, and Politics ... , supra, 5.
91
now being harnessed in support of fundamentally different proposals.

'Deregulation' is becoming a political euphemism for halting governmen-
tal responses to environmental, health and safety, consumer protection
problems that market cannot handle. Indeed, many of the current
'deregulators' would stifle antitrust as well.
The Harvard scholars stress the need, in the case of unavoidable regulation
of an industry, to avoid the disadvantages arising from deregulation; in case
of deregulation the advantages and disadvantages should be weighed: 101
It may well be worthwhile to force more competition on an industry at

some cost, if the benefits expected from greater competition are high
enough. These benefits are greater the less faith we have in regulation.
101 Rosenbluth, Comment on a Paper by Demsetz, supra, 391.

VI. THE EVALUATION OF ANTICOMPETITIVE
BEHAVIOR
After having dealt with the problem of concentration in the preceding

section, we shall now deal with certain anti competitive forms of behavior.
Explicit or implicit collusion, exclusionary practices, tying arrangements,
predatory pricing, and resale price maintenance are at the core of this
evaluation.
The Chicago School starts from the premise that firms cannot achieve or
maintain monopoly power by unilateral, i.e., by non-concerted action with
competitors "unless of course, they are irrational willing to trade profits for
position".l
l. EXPLICIT AND IMPLICIT COLLUSION
The representatives of the Chicago School judge explicit collusion, i.e.,

conspiracy or concerted action (cf. Section 1 Sherman Act), and implicit
collusion or spontaneous coordination (cf. Art. 86 Treaty of Rome), which
is not covered by U.S. antitrust law, in a different manner.2
(1) In order not to reject American antitrust policy in toto Chicagoans

express the opinion - partly for tactical reasons 3 - that horizontal price
conspiracies should be prohibited, since collective monopolies have
the same effect on price and output as an individual monopoly does.
The tendency towards conspiracy increases when concentration

2 Cf. Posner, The Chicago School ... , supra, 932 f. and 944-946.
3 Posner, The Chicago School ... , supra, 932: "Partly, perhaps, for lactical reasons
(not to seem to reject antitrust policy in its entirety), the members of the Chicago
School would sometimes denounce price fixing."
94
increases and the number of competitors decreases. The necessity of

public policy and legislation is accepted at least to this extent. 4
According to Bork vertical arrangements have to be judged in a
different way:5
Vertical price fixing (resale price maintenance), vertical market

division (closed dealer territories), and, indeed, all vertical
restraints are beneficial to consumers and should for that reason
be completely lawful.
(2) Neglecting the position of Stigler, who regards tacit or implicit

collusion, i.e., spontaneous coordination as a problem in markets with
high interdependence due to a high degree of concentration, the other
representatives of the Chicago School deny that implicit collusion
actually restrains competition (Harvard School: conscious paral-
lelism).6 The Chicago School does not deny that concentration is an
important factor in facilitating collusion, but juxtaposes the question
of how excessive profits can exist without attracting newcomers in the
long run; the entry of newcomers would cause a price decline.
According to the Chicago School, supra-competitive profits that have not

been caused by efficiency but rather by implicit collusion, would have the
effect of lowering concentration because of entry by newcomers or would
force firms to lower their prices in order to prevent newcomers from
entering the market (limit pricing).
This reasoning takes for granted ideal markets without any barriers to
entry - an assumption which we have already dealt with critically in the
preceding section.
4 Cf., e.g., Demsetz, Economics as a Guide, supra, 383, and Bork, The Antitrust
Paradox, op. cit., 406.
6 Cf. the omnibus volume on the economic and legal problems of conscious
parallelism, in: 13 The Journal of Reprints for Antitrust Law and Economics 581 ff.
(1982).
95
2. EXCLUSIONARY PRACfICES
Bork takes the following position towards exclusionary practices:
The law of exclusive dealing and requirements contracts, whether

applied through Sherman 1, Clayton 3, or Federal Trade Commission Act
5, operates on the theory that competition may be injured through
foreclosure of rivals when a firm integrates vertically by contract. This is
precisely the same foreclosure theory that supports the law of vertical
mergers under Clayton 7, Sherman I, and Federal Trade Commission
Act 5. It is fallacious in this context for the same reason it is fallacious
there. Exclusive dealing, being a form of vertical integration, creates
efficiencies and does not create restriction of output. It should, therefore,
generally be lawfuI.7
So, all exclusionary practices are justified by the increases in efficiency

they bring about. Dealers will be encouraged to offer presale services,8
through which the value of the products offered by the firms is enhanced,
and thereby benefiting consumers. The opportunities for economies by
vertical restraints or vertical intergration (so-called transaction-cost
economies) has been stressed in the past, especially by Oliver Williamson. 9
Though these possible economies are acknowledged in antitrust
economics, there is at the same time the danger that actual or potential
competitors are substantially hindered due to:
the market position of the firm imposing the restriction,

the extent of exclusionary practices on the relevant market (the so-called
quantitative substantiality test), and
the market share which is thereby foreclosed to other firms (the so-called
actual foreclosure test).

8 Cf. Posner, The Chicago School . . . , supra, 926 f. and 938, who mentions
showroom display, knowledgeable sales personnel, advertising and related
promotional methods as kinds of presale services offered to consumers.
9 Cf. Williamson, Assessing Vertical Market Restrictions ... ,supra, 953 ff.
96
This conflict between possible economies and disadvantaging rivals has

been characterized by Oliver Williamson in the following way:
The principle hazard that should concern the antitrust enforcement

agencies in enforcing the law on vertical restrictions is if restraints are
introduced with the strategic purpose and effect of disadvantaging rivals.
Exclusive dealing restraints by dominant firms or tight oligopolies can
have this effect. lO
The Chicago School denies the danger that competitors will be foreclosed
from entering the market by the argument that market entry is free to
everyone so that other firms cannot be hindered from entering the market:
The essential point is that the cost to the monopolist of integrating is

prima facie the same as the cost to the new entrant of having to inte-
grate.1 1
Again, the Chicago School is relying on an ideal market without any barrier
to entry - a premise which has been criticized already for abstracting from
the real world.
3. TYING ARRANGEMENTS
The differences between the Harvard School and the Chicago School
become even more apparent in the matter of tying agreements. Those
agreements "make the conclusion of contracts subject to acceptance by the
other parties of supplementary obligations which, by their nature or accord-
ing to commercial usage, have no connection with the subject of such
contracts" (cf. Art. 85 para. I lit. e Treaty of Rome). Whereas the Harvard
School stresses that tie-ins are used to extend existing market power in the
market "a" to a still competitive market "b" (monopolizing of other markets
by the so-called leverage effect) the Chicago School looks at the two
10 Williamson, Assessing Vertical Market Restrictions ... , supra, 992.

97
products "a" and "b" as one economic unit; therefore, the price increase of
one of the two products is regarded as a price increase of the whole
economic unit:
A second - and fatal- weakness of the leverage theory is its inability to

explain why a firm with a monopoly of one product would want to
monopolize complementary products as well. It may seem obvious that
two monopolies are better than one, but since the products are by
hypothesis used in conjunction with one another to produce the final
product or service in which the consumer is interested (duplication, or
computation, or whatever), it is not obvious at all. If the price of the tied
product is higher than the purchaser would have had to pay on the open
market, the difference will represent an increase in the price of the final
product or service to him, and he will demand less of it, and will there-
fore buy less of the tying product.l2
This quotation shows that the two products "a" and "b" are regarded as one
economic product which is sold to different customers for different prices
according to the price elasticity of demand. This view disregards totally that
- even if there is one single product - it has been made from two different
products by market power; this can be regarded as per se illegal. Posner 13
concedes a negative effect on competition only in the case where the tied
product "b" represents a substantial part of the market and, thereby,
independent producers of product "b" are foreclosed from entering the
market (parallel to the so-called market foreclosure effect in the field of
exclusive dealing).
In order to give a better economic understanding of the position of the
Chicago School we shall deal with a classic tie-in case that has been
decided by the Berlin Court of Appeals. This case Meto Handpreisauszeich-
ner (price-marker)14 was characterized by a patent monopoly for price-
markers, for which clients were forced to buy the necessary labels from
Meto as well. There was a free market for labels, in which the clients could
buy labels much cheaper without a tie-in than from Meto. Apparently, the
12 Posner, Antitrust Law ... , op. cit., 173.
13 Cf. Posner, Antitrust Law ... , op. cit., 175.
14 Cf. Meto Handpreisauszeichner, Wirtschaft und Wettbewerb/E OLG 995 ff.
98
tie-in was used to raise prices and profits by foreclosing other finns from
selling labels to its customers of price-markers for a lower price (distinct
market foreclosure effect). The successful tie-in was regarded as an in-
dicium of monopoly power which was used to get higher prices for the tied
product (the labels) than without the tie-in. However, the Chicago School
looks at the tied product "b" always as a (technical) complementary product
to the monopoly product "a" - which may sometimes be the case but must
not always be the case, as assumed by Chicago School.
The assumption of Posner that the price increase for the product "b"
caused by the tie-in increases the price for the whole product (a + b) and ,
therefore, that consumers will buy less of the whole product abstracts from
reality. A supplier of product "a" who has a monopoly protected by patents,
may often have clients who in fact have no alternative as in the case of the
price-marker case (elasticity of demand ~ 0).
In addition, Posner tries to justify tie-ins as a method of price discrimina-
tion. He tries to demonstrate his position with a case where the producer of
computers forces his clients to buy the necessary punch cards for a supra-
competitive (monopolistic) price:
Tying can be used as a method of price discrimination, and discrimina-

tion, as we know from an earlier discussion, enables a monopolist to earn
higher profits. By providing the computer at cost and selling each card at
a monopoly price, the computer monopolist can vary the charge for
computation according to the amount of each purchaser's use. The
purchaser who uses a thousand cards a month pays a good deal more for
the use of the business machine than the user of a hundred cards a month
(though the additional cost imposed by his greater use, in machine wear
and tear, may be slight), but he is also getting much more value out of
the machine so that, assuming an absence of competitive machines, he
will be willing to pay more. 15
Posner tries to justify tie-ins by referring to the differing willingness of

consumers to pay according to the theory of horizontal price discrimination.
Taking Posner's view of one product which is composed of two complemen-
15 Posner, Antitrust Law ... , op. cit., 173 f.

99
tary components "a" and "b" as given, his reference to the method of price
discrimination in order to skim off the consumer's surplus remains incom-
prehensible. The main problem is not that the product - according to
different elasticities of demand - is offered to different buyers at different
prices; rather, the problem is that actual or potential competitors are
foreclosed from entering the market for product "b" or are driven out of this
market. In addition, the assumption that the computer is sold at cost and the
punch cards at the monopoly price relies on the benevolence of the
monopolist in the computer market; this assumption is contrary to the
hypothesis of profit maximization that is generally adopted by the Chicago
School, however.
Besides, the results of an effective tie-in can be seen in the fact that there
will be a monopolistic price for the tied product "b" which is not based on
genuine performance, but on monopoly power. Whether other firms are
substantially foreclosed from entering the market, or are driven out of the
market, depends on the extent of the foreclosed market share and the
duration of the tie-in (analogous to the situation with exclusive contracts).
4. PREDATORY PRICING
Predatory pricing can be defined as hindering competitors by pricecutting

which aims at disciplining them or driving them out of the market. Such a
price policy can result in crowding out of the hindered firm and, at the same
time, in a disproportionate internal growth of the hindering firm. Non-
realized profits or losses of the first period can be compensated by in-
creased profits in the second period after having disciplined the other firm
or after the disappearance of this firm.
If the external horizontal growth becomes more difficult or is even
prohibited by merger control, the firms will try to crowd out their com-
petitors by price competition and try to grow disproportionately. Then the
question of operational criteria arises that would allow to distinguish
between anticompetitive crowding out of competitors and competitively
lowering prices as a result of superior efficiency. The decisive issue is the
intention, i.e., whether the low price policy is purely the expression and the
result of a better cost situation so that the crowding out of competitors
100
producing at higher costs would contribute to an overall increase in ef-

ficiency, or if the low price policy aims at monopolizing the market.
In the U.S.A., the discussion on evaluating predatory pricing has been
influenced by a leading article by Areeda and Turner. 16 Areeda and Turner
have proposed that price below short-run marginal costs should be regarded
as predatory. Since calculating marginal costs is hard because of
operationality problems, they propose that total variable costs be used as a
standard of reference. These proposals by Areeda and Turner have stimu-
lated a lively discussion on the question of which criteria should be applied
by the courts in order to separate predatory from non-predatory conduct.
Since the Chicago School denies the existence of barriers to entry in
general, a manager would act irrationally if he used resources for crowding
out competitors in the first period and would gain no advantage by this
policy because newcomers would enter the market, which would prevent
him from skimming off his well-earned monopolistic profit in the second
period. However, Posner modifies this position represented by McGee by
taking into account strategic considerations: 17
One of McGee's major arguments - that the trust would not have used
predatory pricing because it is cheaper to buy a competitor than to sell
below cost - was vulnerable to the criticism of being irrelevant to
present-day circumstances, since aquiring a major competitor is clearly
and unconcealably unlawful whereas predatory pricing may be difficult
to detect. There is, however, a deeper problem with the McGee argu-
ment: it neglects strategic considerations. Assume that it is lawful to buy
a rival. It does not follow that a firm will never resort to predatory
pricing. After all, it wants to minimize the price at which it buys its
rivals, and that price will be lower if it can convince them of its willing-
ness to drive them out of business unless they sell out on its terms. One
way to convince them of this is to engage in predatory pricing from time
to time.
16 Cf. Areeda. Phillip. and Donald F. Turner. Predatory Pricing and Related
Practices under Sec. 2 of the Sherman Act. 88 Harvard Law Review 697 ff. (1975).
and the conclusions at p. 732. which have been formulated as comprehensible rules
for the courts.
17 Posner, The Chicago School ... supra. 939.
101
Bork regards the strategic disciplining of rivals as possible1 8 , but not very
likely. Therefore, he comes to the conclusion that the antitrust law
should abandon its concerns with such beneficial practices as

... 'predatory' price cutting, price 'discrimination', and the like. 19
5. RESALE PRICE MAINTENANCE
The Chicago School presents unanimously the position that resale price
maintenance (RPM) as a mere vertical restraint should be legal per se due to
the increase of distributive efficiency. Posner offers the following explana-
tion for this position:
From the standpoint of the manufacturer imposing it, resale price

maintenance is not a rational method of distribution if its effect is to give
dealers monopoly profits. Yet manufacturers if pennitted, often will
impose it. The explanantion is that, by preventing price competition
among dealers, resale price maintenance encourages dealers to offer
consumers pres ale services (such as point of sale advertising, inventory,
showroom display, and knowledgeable sales personnel) up to the point at
which the cost of these services at the margin just equals the price fixed
by the manufacturer. Such services, which enhance the value of the
manufacturer's product to consumers and hence the price he can charge
the dealers, might - because of 'free-rider' problems - not be provided if
price competition among dealers were pennitted. 2O
18 Cf. Bork, The Antitrust Paradox, op. cit., 148: "Given equal access to capital,
rivals can be killed or disciplined if the predator is able to inflict diproportionately
large losses on his victim."
20 Posner, The Chicago School ... , supra, 926 f.
102
The Chicago School concedes that intrabrand competition for the product
in question is restrained between the dealers (which is justified by increas-
ing the distributive efficiency!), however, interbrand competition with other
products would remain effective. The Chicago School seems to have the
idea that there is only a marginal effect on interbrand competition. If there
are, for instance, 50 competitors and one of them introduces RPM for a
product, whereas the other 49 competitors do not make use of this instru-
ment, there will be no or only a marginal horizontal effect on competition,
taking as given that RPM is not used - explicitly or implicitly - in a
collective way.
The Gennan experience with resale price maintenance which was legal
until to the end of 1973 shows, however, that RPM facilitates actual
coordination between producers and dealers as well. 2 ! The Chicago School
abstracts from the problem that by allowing the vertical resale price
maintenance, horizontal restraints may be induced. It claims that proof of an
explicit price conspiracy between producers and dealers is needed. The
Chicago School overlooks the danger of a strong horizontal price effect by
conscious parallelism in introducing vertical resale price maintenance in a
relevant market as all producers and all dealers have the same economic
and financial interest to restrain price competition. The fact, that such actual
behavior is not covered by the existing American antitrust laws does not
justify a proposal to make legal per se an instrument with such obvious
detrimental horizontal effects. 22 The possible increase in distributive
21 Cf. the economic and legal arguments pro and contra resale price maintenance in
the Comment of the Federal Government of Germany on the Proposals of the
Economic Advisory Board to the Federal Ministry of Economic Affairs for
reforming the German Act against Restraints of Competition (in: Bundestagsdruck-
sache IV/617, pp. 21-55).
22 Bork, The Antitrust Paradox, op. cit., 292: "It seems unlikely, therefore, that
vertical restraints are usually disguised horizontal restraints imposed by a reseller
conspiracies.", and on p. 294 f.: "In fact, the presence of an industrywide pattern of
resale price maintenance should, as in the case of the dealer cartel, attract govern-
ment attention and make easier the discovery of the basic manufacturer cartel .... It
is not certain that resale price maintanance is never actually used for the purpose
for policing a manufacturer cartel, but it appears reasonably certain that such use
will be so rare and the ease of detection so great that this objection should not stand
in the way of the legality of truly vertical restraints."
103
efficiency must at least be balanced against the negative effect on price

competition.
The attempt of the U.S. Antitrust Division to influence the Federal
Supreme Court in a friend-of-the-court brief (amicus curiae-proceeding) to
give up the per se-rule for resale price maintenance 23 has been stopped by
Congress through means of budgetary regulations which prevent the
Department of Justice from using its resources to try to abolish the per se-
rule for RPM.
With regard to the anti-competitive effects of resale price maintenance,
the long-standing rule holds. In a case where a liquor retailer, who was
penalized by state liquor regulators for selling items at less than the man-
dated 112% markup over wholesalers' posted bottle prices, the Federal
Supreme Court has affirmed the opinion submitted that RPM has negative
horizontal effects and, hence, constitutes a per se antitrust violation, by
holding that "industrywide resale price fixing is virtually certain to reduce
both interbrand and intrabrand competition, because it prevents wholesalers
from allowing or requiring retail price competition".24
Regarding unilateral action by competitors, such as the business practices
just mentioned, Chicago critics hold that strategic behavior in the sense of
"conduct designed by the actor to reduce the attractiveness of the offers
against which it must compete"25, is either neglected or is being under-
stated. 26 Neither credible threats through sunk cost nor raising rival's cost
are appreciated as forms of strategic behavior. 27
23 Cf. the controversy on per se-rule or rule of reason in the Monsanto case
between Baxter and FfC Commissioner Pertschuk, CCH Trade Regulation Reports
No. 597, May 24,1983, p. 8 f.
24 CCH Trade Regulation Reports No. 791, January 14, 1987, p. 1, and for the
case, cf. Liquor Corp. v. McLaughlin, et al., Docket No. 84-2022, decided January
13,1987, text of the Court's opinion still to appear.
25 Hovenkamp, Antitrust Policy After Chicago, supra, 261.
26 Cf. Hovenkamp, Antitrust Policy After Chicago, supra, 260-280.
27 For the basic works, cf., e.g., Dixit, Avinash K., The Role of Investment in
Entry-Deterrence, 90 Economic Journal 95 ff. (1980), and Salop, Steven c.,
Strategic Entry Deterrence, 69 The American Economic Review 335 ff. (1979).
VII. A CRITICAL RESUME OF THE CHICAGO
APPROACH TO ANTITRUST POLICY
The Chicago School, which was known in the past largely within the
context of monetarism (Karl Brunner, Milton Friedman, Alan Meltzer et
al.), has developed a legal and economic approach to antitrust policy during
the seventies. This approach is supported by a group of economists and
lawyers (Bork, Demsetz, Director, Posner et al.) who have gained con-
siderable influence on U.S. antitrust policy. This is not only shown by the
"turnaround" in antitrust policy announced by former Secretary of Justice
Smith in 1981 but also by the New Merger Guidelines of 1982/84, the
Vertical Restraints Guidelines of 1985, the Antitrust Law Reform Package
of 1986, and by the fact that judges on the inofficial "waiting list" to be
appointed to the U.S. Federal Supreme Court are Chicago scholars (e.g.,
Posner).
What has come to be called the Chicago School of antitrust analysis
bases its policy recommendations on an allegedly consistent concept of
antitrust theory. The assumptions and the methodology that underlie this
theory need to be understood in order to allow an evaluation of the recom-
mendations.
1. UNDERLYING ASSUMPTIONS AND METHODOLOGY
The body of antitrust theory and policy constructed by the Chicago School
is based on the same considerations and convictions as supply side
economics: limitation of governmental influence. It can be called economic
Darwinism since the market process is viewed as the free play of economic
forces without governmental or public intervention, in which the healthiest
and best will survive (Stigler: "survival of the fittest"). The realization that
governmental influence has to be repelled and restricted to the setting of a
106
minimum legal framework has become an ideology. Since some of the

Chicago positions can be seen within a "system of belief' the school of
thought is called "Chicago Church" by some critics.
Chicago scholars tend to apply economics even to sociopolitical areas
(e.g., the "economics of marriage" and the "economics of crime").
The basic assumptions underlying the concept cannot be met in the real
world and have often been criticized:
- total rationality of decision-makers,

- autonomous behavior of consumers,
- perfectly competitive (polypolistic) market structure,
- perfect information for sellers and buyers,
- absence of preferences over goods in a market and, hence, homogeneity
of goods, and
- divisibility and mobility of economic resources.
The individual consumer is seen as a pure utility maximizer, and the
company as a pure profit maximizer. But in fact, both are characterized by
bounded rationality in the sense that in the long run profits are maximized
under all kinds of restrictions on the supplier's side, and the autonomous
behavior of consumers is restricted by external effects and by persuasive
advertising.
Adjustment lags and/or costs for the workability of markets and the
resulting frictions are denied or regarded as a purely temporary problem.
The assumption of a perfectly competitive market leads to a denial or
playing down of the existence of barriers to entry. Therefore, there are
numerous competitors who assure sufficient (potential) competitive
pressure. Hence, the Chicago School views competition as a "self-maintain-
ing" mechanism which would only be disturbed by public intervention.
Therefore, market power can - if it exists at all- only be temporary.
"Old-fashioned price theory" is used as an instrument of analysis, thereby
neglecting the newer price theory which started in the 1930s (Chamberlin,
Robinson, I.M. Clark et al.), and surrendering real world market concepts
for the analytic clarity of an unreal model which is accepted for sake of
legal predictability (according to Stigler and Posner).
The research being done on crucial topics within the field of workability
of markets and hierarchies is either neglected or understated. Neoclassical
107
price theory, which is used by the Chicago School as an analytical instru-

ment, views the market price resulting from perfect competition (price
equals marginal costs: p = MC) as a measure of efficiency, whereas the
Chicago School itself - inconsistently - views the internal organization of a
company (e.g., lower costs) as a factor determining efficiency. Whereas the
intensity of competition is taken into account by the criterion MC = P =
MR, the emphasis on costs abstracts from the state of competition. Neoclas-
sical price theory, therefore, is only partially and selectively used (reproach
of selective use of price theory).
The welfare approach of the Chicago School based on price theory relies
on the assumption of effective competition, and hence, on the existence of
competitive prices. If the welfare implications of different policy recommen-
dations are taken into account without worrying about the effects on the
workability of the market mechanism, such markets tend towards self-
destruction. By assuming a per se-workability of the market mechanism,
Chicago advocates effectively "define conflicts away".
The vast majority of Chicago theorists measure the effectiveness of
competition by means of "perfect competition" and "monopoly" as stan-
dards of reference. A net welfare gain or loss is achieved by comparing
allocative inefficiency due to restricted output (dead-weight loss) with
productive efficiency due to a more efficient use of resources. Productive
efficiency in the sense of economies of scale and transaction-cost ef-
ficiencies leads to increased concentration since resources arc better
utilized. This comparison between allocative inefficiency and productive
efficiency is done by means of comparative-static analysis and lacks a
dynamic character. Since there are presumably no barriers to entry, Chicago
theorists believe that net welfare gains are not only achieved but also passed
on to consumers. The term efficiency seems to become a black box which is
used to justify all kinds of restraints of trade.
2. THE GOALS OF ANTITRUST POLICY
The determination of the goals of antitrust is a central topic for the deduc-
tion of certain policy recommendations from antitrust theory.
By reducing the possible number of goals to the maximization of the
consumer welfare as the only goal of antitrust policy, the Chicago School
108
alters the policy recommendations as well. Critics of the Chicago School

are in agreement that the initiators of U.S. antitrust legislation did not
intend to promote only efficiency. Congress' records are unambiguous on
this point. Furthermore, there are several reasons for supporting a multiple
goal approach:
(1) The "imprecise" wording leads to the conclusion that legislators did
not feel in a position to quantify social and political considerations
and, therefore, left the solution of possible conflicting goals to the
judiciary.
(2) Whereas the effects on income distribution of monopolies were
largely known by the time fundamental antitrust legislation was
passed, not much was known about the issue of economic efficiency
(Marshall's first edition was published in 1890).
(3) When introducing the bill which was later named after him Senator
Sherman pointed out the possible political implications of economic
power. This supports the view that Congress considered "diffusion
and decentralization of power as an end in itself'.
(4) Furthermore, the Chicago School has to accept the following inconsis-
tency in its argument: if the courts had misused and misinterpreted the
original legislative intent, Congress could have drafted new legisla-
tion. Rather, has Congress confirmed the multiple-goal approach
passing the Celler-Kefauver Act in 1950.
The Antitrust Law Reform Package that was presented to Congress
by the Reagan Administration on February 19, 1986 has no chance
politically to be passed.
The definition of consumer welfare used by the Chicago School is inap-
propriate. Their measure of consumer welfare is based solely (and simply)
on price and quantity relationships. A broader measure of consumer welfare
that includes the quality of life can be affected by industry structure as well.
The preservation of local shopping facilities, for example, might lead to a
(not measurable) increase in consumer welfare though there may be a
(quantitatively measurable) decrease in productive efficiency; furthermore,
undue concentration is avoided and, thereby, competitive pressure is
maintained in the long run. Consumer and supplier welfare are counted
equally which ignores income distribution effects. Suppliers are only seen
as a different class of consumers.
109
According to the Chicago School, economic power only stems from price
and quantity relations. The interdependence of a free and decentralized
economic order with a free and democratic political system is ignored. The
protection of the workability of competition as an anonymous instrument
for controlling and steering economic processes is not a fundamental topic
for Chicago theorists because - in the absence of barriers to entry - there is
always sufficient potential competition to force actual competitors to pass
on supra-competitive profits to consumers by means oflower prices, greater
quality, etc.
The omission of non-economic objectives can have serious effects, since
highly concentrated markets lead to a decreased flexibility of large com-
panies and to an increase in their (potential) political influence. 1 This may
lead to the use of economic power to exercise political pressure in order to
get protection from competition or direct government subsidies. Adams and
Brock, for instance, have stressed the close links between politics and
economic organization, referring to "voluntary" export quotas in the U.S.
steel and automobile industries or government subsidies like in the
Lockheed or Chrysler case, as follows: 2
Contrary to current apologetics, bigness does not meekly submit to the

rules of the global competitive game when confronted with the conse-
quences of delinquent economic perfonnance. Instead, giant corporations
- often in concert with allied interest groups - reach out to manipulate
the state in order to change the rules of the game, to avoid the competi-
tive market's sanctions for poor perfonnance, and to shift them onto
society. In reality, bigness mobilizes the vast political resources at its
command - funds, employees, executives, labor unions, subcontractors,
1 Considering the close links between the Chicago School and the Public Choice
approach it seems to be curious that Chicagoans often overlook the contradictions
between these two mainstreams.
Mancur Olson, one of the leading representatives of the Public Choice School,
has pointed to the important macro-economic policy implications for micro-
economic policy in his contribution on "The Rise and Decline of Nations", New
Haven, Conn. 1982, at p. 232, as follows:
"If combinations dominate markets throughout the economy and the government
is always intervening on behalf of special interests, there is no macroeconomic
policy that can put things right."
2 Adams and Brock, The "New Learning" ... , supra, 1562.
110
suppliers, governors and mayors, senators and representatives,

Republicans and Democrats - to neutralize global competition through
government-imposed import quotas, tariffs, 'voluntary export' restraints,
'orderly' marketing agreements, and the like.
This kind of cooperation between industry, labor, and government leads to

an economic oligarchy that strongly resembles a centralized planning
economy (Jan Tinbergen: "Do communist and free societies show a
converging pattern?").
The alleged intelligibility of the efficiency criterion and its presumed
simple applicability seem to make this goal of simple welfare maximization
attractive. However, it is the expression of a comparative-static way of
thinking and does not take into account that maintaining workable
competition must be the main goal of antitrust policy for securing efficiency
increases, as well as other objectives, in the long run.
3. THE ROLE OF THEORY AND EMPIRICAL EVIDENCE
Potential antitrust problems are "defined away" by narrowing down the

number of possible antitrust goals and by assuming markets that work
frictionlessly. This inevitably leads to a biased interpretation of theory, as
well as a selective reading of empirical results.
The transfer of efficiency gains to consumers that arise from economies
of scale (increase in consumer welfare) occurs automatically, according to
Chicago theorists, since a sufficient degree of (potential) competition is
assumed, no matter what the concentration. This assumption, which seems
to be far removed from reality, leads to a blurring of the distinction between
firm and overall economic efficiencies.
In particular, new empirical research leads to different results. The use of
disaggregated data (Ravenscraft, Porter) reveals that market share and
product differentiation are together responsible for supra-competitive
profits (e.g., Aspirin which is a psychically differentiated brand named
product with high market share and substantially higher price than the
generic product, acidum acetylosalicylicum).
These results can be interpreted as evidence that a dominant firm or a
tight oligopoly can exercise monopoly power. Therefore, concentration
111
involves both lower costs and higher price. This supports the traditional
view concerning the link between concentration or market share and profits.
The relationship between lower costs and higher prices is stronger in
markets that are characterized by numerous frictions (consumer goods) than
in more or less competitive markets (industrial goods).
If the research results taken as a whole do not fit the theoretical
framework of the Chicago School, they are simply ignored or
"reinterpreted", especially in the field of concentration and profits and in
the measurement of welfare losses (reproach oj selective empiricism).
Since market structure - contrary to market behavior - plays a negligible
role in the Chicago approach, specific structural aspects of single industries
are ignored. The minimum efficient size which implies a degree of con-
centration that does not result in further economies of scale, is different
from industry to industry. Therefore, it does not make sense to assume
increases in efficiency with every increase of concentration.
The treatment of technological progress and innovation is only done in an
implicit manner - if at all. Technological progress and innovation lead to
cost reduction; but only sufficient competitive pressure makes technological
progress likely.3 Whether sufficient competitive pressure remains when
concentration increases is highly disputable.
Because of the assumption of perfectly competitive markets, the role of
barriers to entry is not a major antitrust topic. Economies of scale are seen
as creating efficiency and not as erecting barriers to entry, whereas they
might simultaneously be doing both. The assertion that concentration does
not necessarily lead to collusion since oligopolies are rather fragile does not
sufficiently take into account the fact that there is often a symmetry of
interest within a small group of competitors substituting legal sanctions
(e.g., penalties for breach of contract).
Real industry structures are often characterized by loose or tight (partial)
oligopolies. Chicago School lawyers in particular reject a "theory of
3 Villard, Henry H., Competition, Oligopoly, and Research, 64 The Journal of

Political Economy 483 ff. (1958),491: "The basic point is that progress is likely to
be rapid (1) when firms are large enough or few enough to afford and benefit from
research and (2) when they are under competitive pressure to innovate - utilize the
results of research." Cf. as well the more recent confirmation by Scherer, Industrial
market structure ... , op. cit., 438.
112
oligopoly" (for a different view: see Stigler). It is the view of Chicago

theorists that oligopolists are always endangered by newcomers and,
therefore, potential competition leads to sufficient competitive pressure.
This conclusion depends on the absence of barriers to entry.
Certain Chicago assumptions also lead to a particular view of unilateral
actions. The assumption of ideal markets leads in the case of predatory
pricing, for example, to the judgement that unilateral action is irrational
since driving competitors out of the market would inevitably attract
newcomers.
4. POLICY RECOMMENDATIONS
The policy conclusions drawn by Chicago scholars are influenced by the

basic understanding and the assumptions made about the competitive
process, and the deducible theoretical and empirical results. Therefore,
since the Chicago School starts with incorrect assumptions, it ends up with
incorrect conclusions.
The Chicago School considers it possible to reduce quantity and elevate
price jointly only by means of explicit collusion; only this behavior implies
a decrease in consumer welfare (collective monopoly). Hence, the public
policy has to resist explicit collusion.
With regard to horizontal mergers, the potential problem of diseconomies
of scale or X-inefficiencies that accompany highly concentrated markets
(Leibenstein) is understated by the Chicago theorists. They do not explicitly
take into account that weak competitive forces in concentrated markets do
not force competitors to pass on efficiency gains to consumers, nor that
these weak forces fail to force on competitors to contribute to technological
progress. The Chicago School has a peImissive attitude concerning merger
policy in general. An allocative effect on quantity and price will most likely
not occur until a high degree of concentration is reached. The Chicago
School views productive efficiency at a lower degree of concentration as
outweighing allocative inefficiency. Hence, only at a high degree of
concentration should public policy interfere. This seems to be logically
inconsistent, since even at a high rate of concentration (including the
monopoly) newcomers and potential competition should be able to maintain
113
competitive prices and workable competition due to the assumptions of an

ideal market.
Vertical mergers are undertaken as long as the acquiring company
perceives the anticipated costs of intracompany organizing as lower than
the transaction costs of the market mechanism. Contrary to Williamson,
Chicagoans abstract from the possibility of increasing costs of organization
since the assumption of perfect information on relevant data makes a direct
comparison between organization and transaction-costs feasible. Market
foreclosure effects are conceded but understated by the Chicago advocates.
Since vertical mergers are only regarded as increasing efficiency, there is
no need for public intervention.
Since consumer welfare is only seen against the background of price and
quantity relationships, conglomerate mergers do not pose a problem to the
Chicago School because they seldom lead to a restriction of output and an
increase in price. Market foreclosure and entry-deterring effects are underes-
timated or neglected. Maintaining a decentralized economic as well as
political order is not a goal for Chicagoans.
Unilateral action by a competitor cannot have any effects on prices and
quantities. Hence, the only intention of a competitor is to increase ef-
ficiency and not to restrain competition (cf. Vertical Restraints Guidelines
1985).
Unilateral actions like predatory pricing, tie-ins, and/or resale price
maintenance can only be explained by the strive for efficiency, since they
do not yield any competitive advantage in the long run. In general, public
policy should abstain from interfering in those actions. If one ignores the
assumption of perfect markets, unilateral actions can be anti competitive ,
however.
The main economic goal of the Chicago School is not maintaining the
competitive process, but rather increasing efficiency by different restraints
of trade. Thus, there is no sufficient distinction between firm and overall
efficiencies. Efficiency becomes a black box to justify all kinds of restraints
of trade.
Finally, the conclusion can be drawn that the alleged consistent and
comprehensive theoretical edifice of the Chicago School is a giant with feet
of clay. The adaption of Chicago's policy recommendations to varying,
more realistic assumptions has grave implications for the statics of this
114
edifice. The whole concept succeeds or fails with the assumption of the
non-existence of barriers to competition and a long-run view of market
processes.
5. THE CHICAGO SCHOOL APPROACH AS A BASIS FOR

ANTITRUST POLICY?
The Chicago approach to antitrust cannot be seen as a viable alternative to

existing antitrust philosophy and policy in the Federal Republic of Gennany
and the EEC because of fundamental differences.
In Gennan and EEC antitrust philosophy, competition is regarded as an
anonymous control and steering mechanism which does not only force
competitors to gain efficiency advantages but also to pass them on to
consumers. 4 Thereby. the freedom to compete is secured for competitors
and consumers alike - an aspect that is of no importance to the Chicago
School. The European Commission has underlined this view in its Fifteenth
Report on Competition Policy published in 1986 as follows: s
The Member States of the European Community share a common

commitment to individual rights. to democratic values and to free
institutions. It is those rights, values and institutions at the European and
national levels that provide necessary checks and balances in our
political systems. Effective competition provides a set of similar checks
and balances in the market economy system. It preserves the freedom
and right of initiative of the individual economic operator and it fosters
the spirit of enterprise. It creates an environment within which European
industry can grow and at the same time take account of social goals.
Competition policy should ensure that abusive use of market power by a
few does not undennine the rights of the many; it should prevent artifi-
cial distortions and enable the market to stimulate European enterprise to
innovate and to remain competitive on a global scale.
The primary task of antitrust policy has to be the maintenance of competi-

4 Cf. the wording of Act. 85 para. 3 Treaty of Rome about the passing-on of
efficiency gains.
5 Commission of the European Communities, Fifteenth Report on Competition
Policy, Brussels, Luxembourg 1986, 11.
115
tive market structure so that within a given framework competition is self-

maintaining. This minimizes the necessity of ex post corrective action (e.g.,
regulation or abuse control).
The maintenance of competitive structures requires merger restrictions,
which should be pre-merger control, as well as a legal instrument for
deconcentrating industries. Until now there has been no divorcement
instrument under German or European antitrust law; the EEC law contains
practically no merger control at all, though the European Court of Justice
has just recently pointed out in the Reynolds/BAT case that Art. 85 Treaty
of Rome might be applied to mergers as well.6
A possible conflict between the goal of maintaining and securing
effective competition and the goal of realizing economies of scale or
transaction-cost economies can be resolved by raising the threshold for anti-
merger action (for instance "creating or strengthening a market dominating
position" under sec. 24 German Act against Restraints of Competition).
Under a high threshold conflicts are rather unlikely.
However, in doubt priority should be given to maintaining effective
competition which is the instrument with which to gain and ensure ef-
ficiency and other goals in the long run (under a dynamic view).
With regard to horizontal mergers, dominant firms as well as tight
oligopolies have to be prevented.
Vertical integration has to be considered in the light of the foreclosure
effect for actual and potential competitors when the firms have considerable
market shares and in the light of the possibility that undue barriers to entry
are being erected. Whereas horizontal and vertical mergers can have
positive outcomes with regard to performance, conglomerate advantages
(economies of scope) are unlikely or negligible; possible diseconomies of
scope have also to be taken into consideration. Moreover, conglomerate
mergers bear the danger of financial and strategic superiority against small
and medium-sized competitors.
They put an end to the decentralized steering and controlling mechanism
of a market economy. With regard to the adequacy of economic and
6 Cf. BNA. Antitrust & Trade Regulation Report No. 1343. December 3. 1987.
p.863.
Parallel to this new interpretation of Art. 85 Treaty of Rome the European Commis-
sion is urging on the Ministerial Council and the EEC Member Countries to adopt a
merger control system.
116
political order, conglomerates are undesireable and should be limited per se

to a certain size to be fixed by parliament. 7
Vertical restraints of competition by contract have to be dealt with in the
same manner as vertical mergers. This means that these restraints have to be
viewed under the following criteria:
- the market poSition of the involved finns and the extent of these
restraints,
- the degree of exclusivity,
- the height of barriers to entry, and
- the extent of the market share thereby foreclosed to actual and potential
competitors, and, besides,
- the length of the contract. 8
The following table presents a comparative survey on the antitrust concepts

of the Chicago and Harvard School.
7 cr. Schmidt. Ingo, 1st GrliBe an sich gefiihrlich?, 36 Wirtschaft und Wettbewerb
193 ff. (1986).
8 Cf. Schmidt and Kirschner, supra, 781 f., evaluating vertical restraints of trade
from the point of competition policy.
117
Table I. A comparative survey on thc antitrust concepts of the Chicago School and
Harvard School
Chicago School Harvard School
Goals economic goal: economic goals, like:

consumcr welfare in the sense of - equitablc income
price-quantity relations which distribution
are favorable for consumers - consumer sovereignty
- technological progress
meta-economic goals are excluded meta-economic goals:
decentralization and control
of economic power
Research neoclassic analysis for the sake empirical studies and legal
method of "analytic clarity" and for cases for further development
legal certainty of price and competition
theory
Time horizon long run short and medium run
Selection of behaviorism (not concentration, structure, conduct, and'perfor-
the appropriate but collusion is the main mance paradigm
economic antitrust problem)
criterion
Mcasurement 1. allocative efficicncy in the structure, conduct, and perfor-
concept sense of optimal resource mance which should cor-
allocation in the single firm respond to normative givcn
2. productive efficiency in the goals ("competitive" struc-
sense of an dficient use of ture, conduct, or performance
resources in the single firm - so-called categorical ap-
(for instance using economics proach)
of scale or transaction-cost
efficiencies)
Antitrust relying on market mechanism antitrust policy towards
policy ("survival of the fittest"): concentration (merger control
- merger control only in ex- and divestiture), COllusion,
treme cases as the market is and restnctIve practices;
self-maintaining partly per se-rule, partly rule
- divestiture only in the field of of reason
exempted areas (cf. AT & T
case)
per se-rule only with regard to
horizontal conspiracies, per se-
legality with regard to all kinds
of vertical restrainL~ except in
the case of substantial negative
horizontal effects (~ rule of
reason)
dcregulation of exempted areas
Exempted for abolishing government for restoring competition as
Areas interference ( .. frcc" enterprise in far a~ possible in all markeL~
an unregulated market)
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23, 1985, Part II.
INDEX
A Branch 52, 54
Brock 59 ff., 109
Abell 54
Brown Shoe case 31
Adams XIII, 59 ff., 109
Brozen 65, 81
advertising 81 f.
Buzzell 53 f.
Alcoa case 30
allocative efficiency 35 f.
Amato 56 C
American Bar Association 81
Andreae 24 Chamberlin 24
antitrust goals 26 ff., 48 f., 107 ff., Clark 25
114 f. Clarke 55
Areeda 43, 100 Coase43
assumptions Cohen 61
- cf. premises and assumptions collusion 18 f., 65, 72, 85,93 f.
AT&T case 90 Commission of the EEC 114
Audretsch XVI competition 1 f., 7 ff., 49, 72 f.
autonomy of economic agents 3 ff. concenuation 61 ff., 65 ff.
conglomerates
- cf. mergers
B conscious parallelism 94
Bain 14,51,78 f. consumer welfare 26 ff., 48 f., 113
barriers to entry 8, 14 f., 63, 66, 70, 74 consumer sovereignty 4 f.
ff., 79 ff., 89, 94, 96, 115 contestable markets 14,77
Baumo114,77 Cox 4
Benisch 24 Craven 59
Benston 53,68
Blair 60, 63
D
Boadway 12,50
BlSbe145 f., 53, 68, 80 Davies 55
Bonbright 12 De Alessi 43
Bock: XII f., I, 10 f., 18 f., 21 ff., 26 Demsetz 14, 17 ff., 21, 37 f., 56, 65 f.,
ff., 34 ff., 43, 45 f., 48, 50, 58, 65, 69 ff., 73 f., 76, 81, 89, 94
74 f., 81 ff., 94 f., 101 f. Denison 57
bounded rationality 4, 6 deregulation 71 f., 90 f.
130
Di Lorenzo 43 Harvard School XII, 3,24,49,51,63,

diseconomies of scale 38, 112 65 ff., 71 ft., 76, 79, 81 f., 87, 90 f.,
diseconomies of scope 115 94,96,117
divestiture 89 f. Hayek, von xm
Dixit 103 Helmstlldter XIV f.
Henderson 3, 6,13
Hoppmann 5
E
horizontal mergers
Easterbrook 33 - cf. mergers
Economic Advisory Board 102 Hovenkamp XII, 20, 33, 103
economies of scale 12 f., 37 ff., 74,
115
I
economies of scope 115
efficiency 20, 57 ff., 65 ff.,113 IBM Corp. case 90
- cf. also allocative and productive Inglis! lIT Continental Baking case
efficiency XII
exclusionary practices 95 f. interbrand competition 102 f.
external effects 11 f., 50 intrabrand competition 102 f.
Exxon Corp. case 90 Intriligator 51
F J
Fink 8 Jacquemin 48
frrm size 58 ff. Jens4
Fisher 52 Jewkes 59
de Jong 48, 67 f.
Jorde 25
G
Gale 52 ff.
K
Garrett XII
Goldschmid 52, 81 Kahn 12
Goyder29 Kallfass 34,65
Greer 5,52 Kamien 59 ff., 63
Greiffenberg 4 f., 25 Kantzenbach 5, 25
Guzzardi jr. XII Kauper30
Kellogg Co. case 90
KhourieXII
H
Kirchner 76, 83
Haid 80 Kirschner XI, 116
Hammond 54 Kinner XIll, 70, 72
Harberger 68 Knight 8
Harris 25 Kuznets 25
131
L N
Lancaster 50 National Science Board 60
Landes 72 f. natural monopoly 12. 66. 71
Learner 53 Neale 29
Leibenstein 39 f. Nelson 24. 82
Levin 61 neo-Schumpeter hypothesis 58 ff.
Lipsey 50 non-economic goals
Liquor Corp./McLaughlin case 103 - cf. antitrust goals
Long 53 Neumann 80
Northern Pacific Railway Co. case
M
XV. 31
Machlup 14
Mann 81 o
Mansfield 59. 63
Markert 4 oligopoly theory 36, 82 ff.
market Olson 109
- behavior 18 ff. organization costs 113
- failure 11 ff. Ouchi 4. 43 f.
- foreclosure 113
- performance 51 ff. 115 P
- structure 17 f . 74 ff. Panzar 14
Martin 54 Paque XIII. 2
Masson 80 Pareto optimum 10 f . 49 f.
McGowan 52 Pautler 53 f.
merger control 87 f.. 115 Peltzman 56, 89
merger guidelines XI perfect competition 7 ff., 23, 35,49,
mergers. economic effects of 84 ff.. 72
112 f. Phillips 25
Mestmiicker 33 Pitofski 30, 32, 48
Meto Handpreisauszeichner case 97 Posner XIII, 3, 5,14. 17,24,33.35,
Mises. von XIII 66,70,72 f . 76. 82 f . 85 f . 89. 93,
Ml1schel46 95 ff., 100 f.
Monopolkommission 18.80 predatory pricing 99 ff.
monopoly (power) 35 f . 39 ff.. 62, premises and assumptions 3 ff.. 105 ff.
67 f . 69 ff. productive efficiency 36 ff.
Monsanto case 103 profit maximization 5 ff.
Mowrey 61 profitability approach 51 ff.
Mueller, Dennis C. 52. 68 public choice school 109
Mueller, Willard F. 56 f.
multiplant economies of scale 38 f. Q
multiple goal approach
- cf. antitrust goals Quandt 3. 6. 13
132
R time horizon 13 ff., 72

Tinbergen 49, 110
rationality 3 ff.
Tollison XI
Ravenscraft 53, 67
transaction-cost efficiencies 43 f.,
Reder XI
85 f., 113, 115
regulation 71 f., 90 f.
Triffm25
resale price maintenance 101 ff.
Turner 43, 100
Rittaler XVI
tying arrangements 96 ff.
Robinson 24
Rosenbluth 71, 91
V
S vertical mergers
- cf. mergers
Sachverstiindigenrat (Council of
vertical restraints guidelines XI
Experts on Economic Affairs) XIV
Villard 111
Salop 103
Sawers 59
Scherer 11,23,29,34,38,42,53 f., W
57f., 61, 66 f., 111
Waterson 55
Schmalensee 51, 73
Weiss 51 f., 56, 69
Schmidt XI, XVI, 9, 29,37,40 f., 60,
Weston 81
79,89,116
Wheeler 42
Schwartz 59 ff., 63
Wildasin 12,50
Scitovsky4
Wilder 56
second best 49 f.
Williamson 4, 14,44 ff., 48,74,84,
Shanaan 80
86 f., 95 f.
Shepherd 12, 38 f., 43, 54, 58, 62 ff.,
Williamson's trade-off model 44 ff.,
67 f., 77 ff.
84
Siegfried 42
Willig 14
Simon 4
Singleton XII f., 38, 66, 81
Sloan 60 X
Smirlock 52
X- inefficiencies 39 ff., 112
Smith XI
Solow 57
Stigler 7 f., 10 f., 18 f., 37,42,56,83 y
Stillerman 59
Yip 80
Sullivan XII, 32,49,90
Sultan 53
Z
T Zohlnhofer 4 f., 24 f., 84
technological progress 57 ff.

A Critical Evaluation of The Chicago School of Antitrust Analysis

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A CRITICAL EVALUATION OF THE

CHICAGO SCHOOL OF ANTITRUST ANALYSIS

H. W. de Jong, University of Amsterdam, The Netherlands

W. Adams, Michigan State University, East Lansing (Mich.), USA

JAN B. RITT ALER

Published by Kluwer Academic Publishers,

Sold and distributed in the U.S.A. and Canada

In all other countries, sold and distributed

All rights reserved

I. The Perception o/Competition as a Dynamic Process 1

II. Premises and Assumptions 0/ the Chicago School's Concept

III. Antitrust Theory and Public Policy 17

IV. The Chicago School's Approach to Antitrust Theory 21

(1) Economies of Scale 37

v. Evaluating Concentration/rom the Chicago Point a/View 65

VI. The Evaluation of Anticompetitive Behavior 93

VII. A Critical Resume of the Chicago Approach to Antitrust

The publication of this clinically analytical and trenchantly insightful

Potential antitrust problems are "defined away" by narrowing down the

Moreover, it assumes (without an attempt at empirical proof) that, absent

East Lansing, Michigan, U.S.A. Walter Adams

1 A survey on the development of Chicago Economics is offered by Reder, Melvin

Chicago School theory has a particular appeal to decision-makers

ing; therefore, we will refer to statements of preeminent Chicago scholars

11 On this point, the German "Sachversmndigenrat zur Begutachtung der

When the economist speaks of competition, he must be aware that this

matters now is no longer macro-economic management in a growing economy, but

It seems that everybody is in agreement on these aspects. However, there

to antitrust and competition policy was multiple-goal oriented and based on

Representatives of the Chicago School such as Bork 1 view competition as a

If equilibrium were ever reached, the value of marginal product would be

The optimal resource allocation attained in market equilibrium is evaluated

1 Cf. Bork, The Antitrust Paradox ... , op. cit.

economy to adapt constantly to this ever-changing equilibrium. Such an

1. RATIONALITY AND AUTONOMY OF ECONOMIC AGENTS

The representatives of the different schools of antitrust analysis take

In comparison. the Chicago School uses the assumption of totally rational

- consumers' preferences and. therefore. the demand of the goods and

3 On the consumer sovereignty, issue in welfare economies, see Scitovsky, Tibor,

that there are two types of advertising: infonnative and persuasive

7 Posner, The Chicago School ... , supra, 930 f.

influenced by a number of factors. For example, it may be restricted by a

Neither the pure profit maximization assumption nor the non-maximiza-

Long-run profit maximization limited by supplementary restrictions and

the pursuit of non-monetary objectives stands in opposition to the assump-

2. PERFECILY COMPETITIVE MARKETS

In order to understand the position of the Chicago School it is important to

products of one producer over those of another. This means a lack of

These conditions largely mirror the assumptions of neoclassical price

are unrealistic and because "remedial imperfections" are necessary for

Market imperfections like product heterogeneity, a lack of market informa-

The more realistic concepts developed by price and competition theory

3. WORKABILITY OF THE MARKET MECHANISM

There is a close link between the problem of perfectly competitive markets

Since market prices mediate between market participants, the wOIkability

If the workability of markets cannot be assumed or secured, the Chicago

Bork's denial of Stigler's assumptions seems to be inconsequent in so far as

First, the underlying conditions of such an industry would not induce

Fig. 1. Increasing return to scale along relevant demand (D 1).

4. LONG-RUN EFFECTIVENESS OF THE MARKET PROCESS

The workability of the market mechanism is seen by the Chicago School in

29 For the violation of the uniqueness of the price-quantity equilibria assumption

tenns of a long-run realization of its basic functions: coordination, infonna-