Corporate & Securities Law

Chicago, Neo-Chicago and Chicago Squared: A Comment from David Evans and Jorge Padilla

In a recent post, Josh jokingly offered a mathematical “proof” to demonstrate that the Neo-Chicago approach to antitrust was simply an extension of the basic Chicago School approach:

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:

Neo-Chicago = Chicago + Error Cost Framework

Neo-Chicago = Chicago + Intellectual creation of Frank Easterbrook

Neo-Chicago = Chicago + Chicago

Neo-Chicago = 2*Chicago

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

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.
• In the hands of some 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 to eliminate all exceptions. The bad version of Chicago Squared that we too often see doesn’t treat error costs seriously but merely invokes error costs often, with little analysis or evidence, to reject interventions. In fact we would limit the term Chicago Squared to this ideologically driven version of Chicago to distinguish it from the careful analysis of early error-cost advocates such as Easterbrook and Posner.

Neo-Chicago is a non-ideological evidence-based approach to antitrust that can be used globally to fashion competition policy.  It recognizes that optimal rules vary geographically and over time depending on the facts.  Two examples illustrate:

• There are likely to be valid differences in the likelihood of false positives and false negatives, and the cost of those, across jurisdictions based on business culture, economic history and legal regime. Neo-Chicago implies that optimal rules can vary across jurisdictions.

• Changes in a legal regime could require changes in rules. As the US tightens up class certification standards and adopts heightened pleading standards there is at least an argument that the rate of false positives will decline and therefore rules should be stricter.

We believe the Neo-Chicago approach can lay the basis for a professional antitrust discipline that can provide guidance for the application of antitrust in diverse jurisdictions and circumstances. It also provides a basis for engaging in constructive discourse about antitrust policy.

Full post as published by Truth on the Market on July 27, 2009 (boomark / email).