Corporate & Securities Law

Evans and Padilla on Chicago, Neo-Chicago and “Chicago Squared”

In a recent post examining the differences between the Neo-Chicago School, the Chicago School, and an “evidence based” approach to antitrust, Josh offered the following tongue in cheek mathematical “proof” to suggest that Neo-Chicago was really just equivalent to the Chicago School + consideration of error costs (Chicago Squared):

Dan identifies the ?Neo-Chicago School?, a term coined by David Evans and Jorge Padilla, as the optimal ?third way.?  Basically, the Neo-Chicago school is the combination of price theory, empiricism and the error-cost framework to inform the design of antitrust liability rules.  The new addition to the Neo-Chicago label is the addition of the error-cost framework.  As I?ve written elsewhere, while I consider myself a subscriber to the Neo-Chicago approach, I?m not too convinced there is anything ?Neo? about it.  Here?s my mathematical proof of this proposition:

It?s trivial to demonstrate then that Neo-Chicago is really just a double dose of the Chicago School.  QED.

Neo-Chicago = Chicago + Error Cost Framework

Neo-Chicago = Chicago + Intellectual creation of Frank Easterbrook

Neo-Chicago = Chicago + Chicago

Neo-Chicago = 2*Chicago

Like many great jokes this one has dubious premises. Here?s why the theorem fails.

• Neo-Chicago begins with Chicago. The single-monopoly profit theorem, and many other concepts that are associated with the Chicago School, are widely accepted by antitrust practitioners.
• Neo-Chicago, however, also agrees that modern industrial organization theory?what is sometimes called post-Chicago–is also useful. Modern IO theory identifies necessary conditions for firms with significant market power to engage in anticompetitive behavior. Those necessary conditions are useful for fashioning screens?if the necessary conditions for a practice to be anticompetitive fail we can stop the analysis.
• Neo-Chicago recognizes that there are both false positives and false negatives and that the frequency and costs of these is an empirical matter than may vary over time and jurisdiction.

Neo-Chicago can be distinguished from Post-Chicago and Chicago-Squared both of which we take as largely ideological approaches to antitrust:

• Post-Chicago too often says ?it could be anticompetitive? therefore ?it is? anticompetitive. It sweeps up many business practices based on assumption-driven possibility theorems.
• Chicago Squared says Chicago shows that firms do not have the incentive to engage in anticompetitive unilateral conduct in many circumstances and then invokes false positives

Full post as published by Truth on the Market on July 07, 2009 (boomark / email).