Fordham Law Review Volume 49 Issue 5 Article 13 1981 Note: Economies of Scale: Weighing Operating Efficiency when Enforcing Antitrust Law Laraine L. Laudati Follow this and additional works at: https://ir.lawnet.fordham.edu/flr Part of the Law Commons Recommended Citation Laraine L. Laudati, Note: Economies of Scale: Weighing Operating Efficiency when Enforcing Antitrust Law, 49 Fordham L. Rev. 771 (1981). Available at: https://ir.lawnet.fordham.edu/flr/vol49/iss5/13 This Article is brought to you for free and open access by FLASH: The Fordham Law Archive of Scholarship and History. It has been accepted for inclusion in Fordham Law Review by an authorized editor of FLASH: The Fordham Law Archive of Scholarship and History. For more information, please contact [email protected]. ECONOMIES OF SCALE: WEIGHING OPERATING EFFICIENCY WHEN ENFORCING ANTITRUST LAW "[I]t has been the law for centuries that a [person] may set up a business in a country town too small to support more than one, although thereby ... [intending] to ruin some one already there and [succeeding in that] intent. In such a case [the competitor] is not held to act 'unlawfully and without justifiable cause .... The reason, of course, is that the doctrine generally has been accepted that free competi- tion is worth more to society than it costs, and that on this ground the infliction of the damage is privileged." * INMODUCION Economists have long recognized the antitrust dilemma that it is impossible to promote perfect competitionI when large economies of scale are present.' Because economists generally believe that anti- trust policy should reinforce the achievement of scale economies,3 they encourage only workable competition when large scale econo- mies exist.4 Courts, although traditionally emphasizing populist goals in antitrust enforcement, such as protecting small business,' recently * Vegelaln v. Guntuer, 167 Mass. 92, 106, 44 N.E. 1077, 1080 (1896) (Holmes, J., dissenting) (citation omitted). 1. Perfect competition is achieved when four conditions exist: the product of each seller is fungible; no buyer or seller has a sufficiently large part of the total market to influence price; all resources can readily enter, leave, or switch uses in the market; and perfect knowledge of relevant economic and technological data exists among all consumers and producers. 2 P. Areeda & D. Turner, Antitrust Law 402a (1978); E. Mansfield, Microeconomics 234-35 (2d ed. 1975); P. Samuelson, Econom- ics 43 (9th ed. 1973). 2. 1 P. Areeda & D. Turner, supra note 1, 103; R. Bork, The Antitrust Para- dox 7-8 (1978); P. Samuelson, supra note 1, at 48; Asch, Industrial Concentration, Efficiency, and Antitrust Reform, 22 Antitrust-Bull. 129, 130-31 (1977); see J. McGee, In Defense of Industrial Concentration 18 (1971) (public policy choice in some industries may lie between fewer firms with lower costs and more firms with higher costs). 3. See 2 P. Areeda & D. Turner, supra note 1, 401; R. Bork, supra note 2, at 192; C. Kaysen & D. Turner, Antitrust Policy (1965); Williamson, Symposium on Antitrust Law and Economics, 127 U. Pa. L. Rev. 918 (1979). 4. P. Samuelson, supra note 1, at 48. Workable competition is reasonably effec- tive competition that has some imperfect elements. Specifically, some buyers or sell- ers in the market may be large enough to influence price. Id. at 47-48. A market is workably competitive if, among others, there are at least as many buyers and sellers as scale economies permit; entry is reasonably free; predatory tactics are not used; inefficient buyers and sellers are not protected; production and distribution opera- tions are efficient; demand controls quantity and quality of production; and profits are at a level sufficient to provide a reasonable return on investment. F. Scherer, Industrial Market Structure and Economic Performance 42 (2d ed. 1980) [hereinafter cited as F. Scherer I]. 5. United States v. Von's Grocery Co., 384 U.S. 270, 274-77 (1966); United States v. Aluminum Co. of Am., 377 U.S. 271, 278-79 & n.6 (1964); United States v. Philadelphia Nat'l Bank, 374 U.S. 321, 362-63 & n.42 (1963); Brown Shoe Co. v. FORDHAM LAW REVIEW [Vol. 49 also have emphasized economic values when interpreting antitrust law, including increased tolerance of aggressive business competition.- As a result, courts faced with a choice between limit- ing the size of a firm to achieve a competitive market structure and preserving and protecting operating efficiency are increasingly likely to protect efficiency.7 Even the National Commission for the Review of Antitrust Laws and Procedures, which rejects standard rule of reason analysis, expressly suggests efficiency as the sole defense to a proposed no-fault actual monopolization charge.8 To be meaningful, United States, 370 U.S. 294, 315-17 (1962); United States v. Trans-Missouri Freight Ass'n, 166 U.S. 290, 322-23 (1897); United States v. Aluminum Co. of Am., 148 F.2d 416, 428-29 (2d Cir. 1945); R. Bork, supra note 2, at 4. This emphasis is consistent with congressional intent expressed prior to enactment of the Sherman Act, 15 U.S.C. § 2 (1976), H. Thorelli, The Federal Antitrust Policy (1955); Bork, Legislative Intent and the Policy of the Sherman Act, 9 J.L. & Econ. 7 (1966); Sullivan, Eco- nomics and More Humanistic Disciplines: What Are the Sources of Wisdom for Anti- trust?, 125 U. Pa. L. Rev. 1214, 1219-20 (1977) [hereinafter cited as Sullivan 1], the Clayton Act, 15 U.S.C. § 18 (1976), Bok, Section 7 of the Clayton Act and the Merging of Law and Economics, 74 Harv. L. Rev. 226, 306-08 (1960); Turner, Con- glomerate Mergers and Section 7 of the Clayton Act, 78 Harv. L. Rev. 1313, 1326 (1965), and the Celler-Kefauver Act, 15 U.S.C. §§ 18, 21 (1976). 96 Cong. Rec. 16444, 16448, 16450, 16452, 16503 (1950); 95 Cong. Rec. 11486, 11489, 11494-95, 11498 (1949). But see Brown Shoe Co. v. United States, 370 U.S. 294, 319 (1962) (supporters of § 7 in congressional debates stated that it would not impede a merger between two small companies to enable the combination to compete more effec- tively); 1 P. Areeda & D. Turner, supra note 1, 104 (courts have given efficiency priority over populist goals). See generally R. Bork, supra note 2, at 5. 6. E.g., Berkey Photo, Inc. v. Eastman Kodak Co., 603 F.2d 263, 273-75 (2d Cir. 1979), cert. denied, 444 U.S. 1093 (1980); California Computer Prods., Inc. v. IBM Corp., 613 F.2d 727, 732 (9th Cir. 1979); GTE Sylvania, Inc. v. Continental T.V., Inc. 537 F.2d 980, 997 (9th Cir. 1976), aff'd, 433 U.S. 36 (1977); Telex Corp. v. IBM Corp., 510 F.2d 894, 927-28 (10th Cir.), cert. dismissed, 423 U.S. 802 (1975); Transamerica Computer Co. v. IBM Corp., 481 F. Supp. 965, 1008-10 (N.D. Cal. 1979); ILC Peripherals Leasing Corp. v. IBM Corp., 458 F. Supp. 423, 433-34 (N.D. Cal. 1978), affd sub nom. Memorex v. IBM Corp., Nos. 78-350, 78-3236, slip op. at 992 (9th Cir., Nov. 10, 1980); E.I. DuPont de Nemours & Co., [1980] Anti- trust & Trade Reg. Rep. (BNA), No. 987, F-i, F-10 (F.T.C. Oct. 30, 1980); Sullivan, Antitrust, Microeconomics, and Politics: Reflections on Some Recent Relationships, 68 Cal. L. Rev. 1 (1980) [hereinafter cited as Sullivan II]; Comment, Draining the Alcoa "Wishing Well": The Section 2 Conduct Requirement After Kodak and Cal- comp, 48 Fordham L. Rev. 291 (1979). Traditional antitrust enforcement downplayed the significance of abusive practices and emphasized the mere existence of monopoly power. United States v. Aluminum Co. of Am., 91 F. Supp. 333, 340-41 (S.D.N.Y. 1950). The change in emphasis by the courts in recent cases results in part from their greater emphasis on overt abusive acts and a toleration of monopoly power in the absence of such acts. 7. 1 P. Areeda & D. Turner, supra note 1, 104. 8. National Commission for the Review of Antitrust Laws and Procedures, Re- port to the President and the Attorney General 152 (1979) [hereinafter cited as National Commission Report]. The Commission was created to consider " revision . of substantive [antitrust] law needed to expedite the resolution of 1981] ECONOMIES OF SCALE IN ANTITRUST LAW 773 however, legal standards based on efficiency concepts must more carefully consider the work of economists.9 This Note argues that scale economies should be considered when determining liability and relief under section 2 of the Sherman Act" complex cases and . proposals for making the remedies available in such cases more effective.' " Id. at 143 (footnote omitted) (quoting Exec. Order No. 12,022, § 2(a)(1), 3 C.F.R. 155-56 (1977 Compilation), as amended by Exec. Order No. 12,052, 43 Fed. Reg. 15,133 (daily ed. Apr. 11, 1978)). The National Commission felt "that doctrinal changes in antitrust should be made primarily on the basis of their rela- tionship to the fundamental goals of antitrust-including economic efficiency, con- sumer welfare, and dispersion of social, economic, and political power-rather than solely, or even mainly, for purposes of expediting litigation or making relief more effective." Id. at 143 (emphasis added). The Commission's no-fault proposal would require divestiture once persistent monopoly power was shown unless divestiture was shown to destroy substantial scale economies or benefits accruing from a patent. Id. at 152. 9. Enforcement of the antitrust laws should be aimed at controlling imperfec- tions in the free market system. R. Bork, supra note 2, at 7 C'T]he only legitimate goal of antitrust is the maximization of consumer welfare."); C.