Antitrust and Positional Arms Races

Article excerpt

The idea of "winner take all" markets, or harmful "positional races" as the phenomenon is sometimes called, (1) directly clashes with the philosophy of antitrust regulation. (2) Antitrust law advocates competition as the means of achieving its ultimate goal of maximizing welfare. (3) "Positional" competition, however, often produces suboptimal results. (4) Should antitrust law apply to winner-take-all markets, or should this field be left to other governmental regulation?

This Note addresses the relevance of antitrust regulation to winner-take-all markets and proceeds as follows: Part I describes the phenomenon of suboptimal winner-take-all markets, sometimes called "arms races" because they spur participants to race for supremacy. Part II draws the basic lines of relevant antitrust law and considers "arms control agreements" as a tool for mitigating this kind of market failure. Part III is dedicated to a short, positive analysis of such agreements under Section 1 of the Sherman Act. In Part IV, some thoughts on normative and institutional reasons underlying the analysis in Part III are presented. Finally, Part V outlines the conclusions.

I. HARMFUL RACE TO THE TOP

Everybody loves a winner, and the market often agrees, granting enormous rewards for those who win. While the best players win big, others are left behind, reaping rewards that bear little relationship to how close they were to winning or to the magnitude of the difference between their talents and those of the winners. The phenomenon of winner-take-all markets has received extensive attention since the 1980s. (5) In these markets, a large number of entities compete for a relatively small number of positions that offer the possibility of financial rewards far exceeding those that await less successful competitors. (6) Absent significant spillovers, the outcome in many such markets is socially undesirable: new entrants produce a negative externality by reducing the chances of other participants to receive a reward. (7) Markets for sports, entertainment, legal services, and education have many features of winner-take-all markets. (8)

Why is the outcome produced by these markets inefficient? It might be beneficial from a productive point of view because fierce competition produces the best talents and products. Absent such high rewards, the pools of candidates to become the next Michael Jordan, Tiger Woods, or Madonna would be considerably smaller, meaning the top performers would be inferior in comparison with the current level. (9) This outcome, however, is inefficient from an allocative perspective: human resources, money, and time invested in the "race to the top" cost more than the marginal value of the top players' improved performance. (10) This situation is known as an "arms race:" although perfectly rational from the private perspective, the choice to put in additional effort in hopes of becoming the best produces a socially inefficient outcome when the costs of the "race" are at least partially non-recoupable. (11) Why would individuals enter the market? The rational explanation is that before entry occurs, the expected benefit is higher than real and opportunity costs given the existing level of salaries and competition. (12) Post-entry, continuing to invest in improved performance is also perfectly rational--the expected marginal benefit of effort is, indeed, higher than the cost. (13) The irrational explanation for market entry is an overestimation of one's chances to win, which is quite typical for human beings. (14)

From an economic standpoint, a market for positional goods presents another application of zero-sum games. (15) Once individuals are in the market and relative positions are established, additional investment in positional goods is mutually offsetting because the value derived from pure positional goods comes entirely from the relative positioning. In aggregate, the additional investment is waste. …