Choosing Among Antitrust Liability Standards Under Incomplete Information : Assessments of and Aversions to the Risk of Being Wrong

This essay analyzes the three papers presented on a panel I organized as chair of the AALS Antitrust Section entitled Evolving Antitrust Treatment of Dominant Firms for the 2005 Annual Meetings. Steve Salop’s and Doug Melamed’s papers recommend standards for government intervention while David McGowan argues why the government should not. I create a framework within which to understand the three papers’ relationship to each other, by building on McGowan’s characterization of courts’ antitrust decisions. Since antitrust decisions are based on inherently incomplete real world information, they are subject to “error costs”: Courts are at risk of “false positives” (finding a violation when the behavior is not anticompetitive) and “false negatives” (finding no violation when the behavior is anticompetitive.) In light of these error costs, McGowan acknowledges that whether the court chooses to intervene or not depends on its ideology. He, himself, advocates that courts avoid false positives by not intervening and allow the marketplace to correct antitrust problems. This “market corrections approach” also alleviates concerns for false negatives. Taking a more interventionist view, Melamed recommends a “profit sacrifice test” to determine whether the exit of rivals is essential to exclusionary conduct’s profitability, thereby capturing more of the “false negatives” with little increase in “false positives.” Salop, taking an interventionist view as well, recommends a more comprehensive evaluation to determine the conduct’s impact on consumer welfare – thereby expanding greatly the capture of false negatives. I believe, however, that differences in viewpoints are affected not only by which correction tool a scholar or court finds more effective (the market or the government), but also by the differences in their evaluation of the consequences of the false positives versus the false negatives in the specific instance under consideration. Inherent in any real-world antitrust decision are not just error costs but also a trade-off between the risk of a false positive and the risk of a false negative. Differences in valuation of those consequences may lead scholars and courts to differ in their reluctance to undertake particular outcomes when they choose to guard against one error as opposed to the other in a particular case. Therefore, I suggest that one's antitrust position is not only informed by one's belief in the ability of the marketplace relative to the government to correct anticompetitive problems, but also to the degree, in any particular circumstance, one is more risk-averse to the consequences of one error cost over the other. As a result, we can see a continuum of antitrust approaches rather than a stark categorization into two camps. This allows for a distinction between Melamed's and Salop's interventionist papers. Thus, I would place McGowan's market-place reliance toward one end; Salop's broad and more fine-tuned government evaluation of conduct, toward the other; and Melamed's perspective of specific finite criteria somewhere in the middle