Faculty Research Working Papers Series
How Conservative Economics Has Influenced Antitrust
F. M. Scherer
John F. Kennedy School of Government - Harvard University
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conference in April 2007, addresses the allegation that
"conservative" economic analyses have had a disproportionate
influence on the substance and vigor of U.S. antitrust
enforcement and adjudication. It acknowledges the significant
impact of research associated with the University of Chicago and
its satellites, much of it inspired by the critical suggestions
of Aaron Director. It argues that the "Chicago" efforts have
for the most part been beneficial, helping to illuminate
weaknesses in accepted antitrust doctrines. Thus, a vigorous
academic debate has been stimulated. To the extent that biases
have resulted, they stem more from one-sided judicial
interpretations of the extent theories and evidence and from the
appointment of antitrust enforcement officials who take a one-
sided view of the academic debate and/or who believe that
"government is the problem, not the solution."
HOW CONSERVATIVE ECONOMICS HAS INFLUENCED ANTITRUST
F. M. Scherer
This paper, written for a Georgetown University Law School
influence conservative economics has had on the enforcement and
adjudication of antitrust in the United States. I assume it to
be proven, without undertaking the arduous task of providing
support, that the economic doctrines underlying the corpus of
judicially accepted antitrust law have gravitated during the
past half century in a more conservative direction.
This statement of the problem immediately demands a deeper
level of analysis. Antitrust is accomplished through
enforcement, and what gets done depends in significant measure
on the laws Congress passes and how the courts, especially the
higher courts, interpret statutes whose implications and intent
are often not precisely stated. What gets written into the
statutes and how they are interpreted by the courts depend in
part upon economic analysis, although to be sure, much else is
thrown into the stew. If there has been a change in emphasis
over time, the cause may lie in the underlying economics. But
it is much more probable in my opinion that changes are
attributable to how antitrust enforcers and the courts read what
economics has to say, that is, on which among conflicting
propositions they have placed emphasis and which ones they have
downplayed. And those choices depend importantly upon the
values the decision-makers -- typically, lawyers rather than
economists -- bring to the table. As Paul Samuelson wisely
quipped, "Economists should be on tap, not on top."
No one can deny that there are conflicting economic
analyses. That, in my opinion, is an unmitigated blessing.
Knowledge advances through the juxtaposition of alternative
theories and testing against evidence to determine which ones
are more nearly correct. "More nearly correct" is as close as I
dare come in characterizing what economics can add to the
debate, because economic propositions are among the least
provable of those addressed in the various sciences.
Economists' subject matter is intrinsically complex,
HOW CONSERVATIVE ECONOMICS HAS INFLUENCED ANTITRUST
F. M. Scherer
May 2007 Revision
The conference task, as I interpret it, is to evaluate the
sometimes it needs a helping hand, among other things, from
antitrusters limiting barriers to competitive entry by firms
with superior new ideas.
Here I address a narrower but important point. Half a
century ago, antitrust enforcement took a generally skeptical
view of restrictive patent agreements. Reviewing the findings
of the Temporary National Economic Committee, George Stigler
(then at the University of Minnesota, not Chicago) found the
patent policies of the Hartford-Empire Company to be "an
eloquent example of an evil demanding correction" and concluded
that "The case for limitation of restrictive [patent] licensing
is surely irrefutable."38 The antitrust case waged against
Hartford-Empire provided an important precedent for tough-minded
compulsory licensing of patents used to monopolize industries
and sustain their monopolization.39 In the ensuing decade and a
half, more than 100 compulsory licensing orders were issued
under antitrust proceedings.40
Attempting to ascertain how such governmental intervention,
and in particular the 1956 decrees that ordered compulsory
licensing of all patents held by innovative giants AT&T and IBM,
affected investment in research and development, eight
colleagues and I at the Harvard Business School interviewed and
administered mail questionnaires to 91 companies. We found to
our surprise that the decrees had little adverse impact on R&D
investment, and more generally, that for established
corporations, the expectation of patent protection was in most
cases unimportant to R&D commitments.41 This finding has been
validated by several more ambitious studies, among others, by
38 . George J. Stigler, "The Extent and Bases of Monopoly," American Economic Review,
vol. 32 supplement (June 1942), p. 14.
39 . U.S. v. Hartford-Empire Co. et al., 46 F. Supp. 541 (1942), 323 U.S. 386 (1944), 324
U.S. 570 (1944).
40 . Marcus A. Hollabaugh and Robert Wright, Compulsory Licensing Under Antitrust
Judgments, staff report, Subcommittee on Patents, Trademarks, and Copyrights, Senate
Committee on the Judiciary (1960), pp. 2-5.
41 . F. M. Scherer et al., Patents and the Corporation, 2nd edition, privately published
Edwin Mansfield42 and by the current president of Yale
University, Richard Levin.43
Ignoring this literature but echoing the empirically
unsupported arguments in a book by a Chicago-affiliated lawyer,44
Reagan Administration appointees to the Antitrust Division back-
pedalled significantly, staking out a broad area in which
restrictive patent licensing agreements would not be challenged.
Underlying the policy reversal was an assumption that:45
Efforts to appropriate as much as possible of the
surplus -- the social value in excess of marginal cost --
lying under the demand curve for patented technology do not
harm competition. Indeed, the potential for appropriating
those rents is the engine [emphasis added] that drives the
The increased rent appropriation, I hardly need to add, was to
be accomplished through a variety of practices extending the
duration and (e.g., through tying practices) the scope of patent
grants. This premise is quite inconsistent with the large body
of empirical evidence on the conditions under which well-
established corporations are willing to invest in innovation.
And yet it was used, despite the great Chicago tradition of
supporting one's findings with empirical evidence, to justify a
substantial policy change. And since that time, there have been
very few antitrust cases in which compulsory licensing of
patents has been ordered. A correction in the intellectual
foundations of U.S. policy toward intellectual property is
42 . "Patents and Innovation: An Empirical Study," Management Science, vol. 173 (1986),
43 . R. C. Levin, Alvin Klevorick, Richard R. Nelson, and Sidney Winter, "Appropriating the
Returns from Industrial Research and Development," Brookings Papers on Economic Activity
(1987: Microeconomics), pp. 783-820.
44 . Ward Bowman, Patent and Antitrust Law: A Legal and Economic Appraisal (University
of Chicago Press: 1973), especially pp. 64 and 254-255.
45 . Remarks by Abbott P. Lipsky Jr. before the American Bar Association November 5,
1981, reproduced in CCH Trade Regulation Reporter para. 13,129.