Lectures on Antitrust Economics

"When I was Chairman of the Council of Economic Advisers, one of my outgoing staff members gave me this book as a present on their last day. Lectures on Antitrust Economics is definitely not light reading. But this book of lectures by MIT economist Michael Whinston is important reading, and it played an important role for me. Get the weekly Five Books newsletter These lectures help readers understand the role of “industrial organization” in market competition. Stepping back, Bork’s economics came largely from an oral tradition in Chicago. Much of it was not formalized in models; even less was empirically tested. In the ensuing decades, the study of markets with imperfect competition was revolutionized by game theory , which takes into account how the different firms strategically take into account the actions of others, and also by modern empirical methods. It turns out many of the simple economic propositions that Bork built his theories on were actually special cases that relied on specific assumptions. For example, more general models, and empirical evidence, found that there was indeed reason to be concerned about exclusionary vertical contracts (e.g., an exclusive distributor). Horizontal mergers are when two companies competing in the same market merge, often with one buying the other. This could be United buying Continental, or one local hospital buying another. These arrangements have the potential for efficiency improvements, but also the potential for higher prices (in contrast, price fixing collusion generally does not lead to this sort of tradeoff and only results in higher prices). Whinston largely frames the issue, is mostly supportive of the Justice Department’s approach, but recognizes that the empirical evidence on the question is severely limited, especially retrospective studies of what actually happened to prices and efficiency after a merger was concluded. He challenged economists to come up with more of this evidence and in the more than a decade since it was published, they have obliged. A good summary of the evidence from retrospectives is in John Kwoka’s Mergers, Merger Control and Remedies which finds that mergers were generally followed by price increases with relatively little of the promised efficiency improvements showing up. This is the same conclusion that many of the experienced economists and practitioners in this area have reached. And this is why there is a shift in the discussion towards more aggressive merger enforcement. Although a real change would likely require either decades to shift the views of judges or legislation making it clear how mergers should be evaluated."