Common Law, Statute Law, and the Theory of Legislative Choice: An Inquiry into the Goal of the Sherman Act

By Kleit, Andrew N. | Economic Inquiry, October 1993 | Go to article overview

Common Law, Statute Law, and the Theory of Legislative Choice: An Inquiry into the Goal of the Sherman Act


Kleit, Andrew N., Economic Inquiry


I. INTRODUCTION

The Sherman Antitrust Act is now more than a century old, yet debate still continues about its original goals. Previous authors, focusing on the substance of the 1890 debate, have reached various conclusions about these goals, each of which provides different implications for antitrust policy. Currently, the debate focuses on whether the purpose of the Sherman Act is to maximize economic efficiency or the welfare of consumers. My aim is to reach beyond the rhetoric and discuss the institutional context of the Sherman Act to discern between these two hypotheses. I conclude that the primary goal of the Sherman Act was to promote economic efficiency.(1)

The weight of the evidence, however, suggests that, at least in the later years of the Reagan and the Bush Administrations, the Federal government has applied a welfare of consumers standard.(2) Scholarly support for this position is provided by Lande [1982], who uses the context of the Congressional debates to assert that preventing transfers of wealth from consumers to producers was the primary goal of the Sherman Act. In contrast, Bork [1966] infers from the same evidence that economic efficiency was the goal of the Sherman Act.

Section II reviews the difference between an efficiency and a welfare-of-consumers standard. It also discusses the methodology used here to discern between Bork's and Lande's hypotheses. Instead of concentrating on the congressional debates, I examine the structural context of the Sherman Act. Section III argues that the Act is best viewed as a modest statutory extension of the common law, an extension that fits well into the Law and Economics framework.

Section IV reviews the political support for the Act and the manner in which Congress chose to have the act administered. The modern theory of interest groups and legislative choice yields additional insight into the goals of the Act. The common law origins of antitrust, the support for, and implementation of the Act all support the conclusion that the primary goal of the Sherman Act was to maximize economic efficiency.

II. THE DIFFERENCE BETWEEN ECONOMIC EFFICIENCY AND THE WELFARE OF CONSUMERS

Bork, Lande, and the Williamsonian Trade-off

Of course, no government intervention can be expected to generate mathematical optimality. The question addressed here is whether one particular law, the Sherman Act, was designed to reach toward economic efficiency, seeking to maximize the total wealth of society, or simply to maximize the welfare of consumers without considering the effects on producers. This trade-off between market power and economic efficiency was first formally described by Williamson [1968, 21]. Figure 1 is a slightly modified version of Williamson's Figure 1. Assume that there are only two (identical) firms in an industry and that they vigorously compete so that each is selling at price equal to (marginal and) average costs. Each firm has average costs as denoted by the line [AC.sub.1]. Given the demand curve D, industry price equals [P.sub.1] and output equals [Q.sub.1]. Now suppose that the two firms merge. The merger generates efficiencies that lower the combined firm's average costs to [AC.sub.2]. Due to the lack of competition, however, the combined firm raises price to [P.sub.2] (and lowers quantity to [Q.sub.2]).

As a result, consumers lose the rectangle A, which is wealth transferred to producers. They also lose the triangle B, which is the deadweight loss to society resulting from the allocative inefficiency of monopoly. The monopoly firm gains directly from the pockets of consumers the rectangle A. It also gains the rectangle C, which represents the costs savings due to the merger-related efficiencies. If C (the efficiency gain) is of greater size than B (the deadweight loss due to market power) then the merger would increase economic efficiency while decreasing the welfare of consumers.(3)

Following Bork, Williamson assumes [1968, 21-22] that efficiency is the goal of the Sherman Act. …

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