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Market Failure and Government Intervention

Managers frequently feel uncomfortable with the antitrust mind set.  While managers operate in an atmosphere in which maximizing market share is a desirable goal, few managers are caught announcing their success in achieving greater market share in testimony on an antitrust case.  Many goals and values held by managers within the firm, must be modified when managers face the community outside of a firm, particularly the antitrust agencies.  Advertising which prevents potential entrants from entering a market may be a wonderful tool in the mind of a manager, but proclaiming such a strategy in an antitrust case would suggest anticompetitive effects and barriers-to-entry.  High profitability may be the ultimate goal of a manager's strategy, but "excessive" profits in an antitrust case may provide evidence of market power. Market share has a close relation to the measures (concentration and the Herfindahl index) which are used by the federal agencies as measures of market power which might help to convict a firm of an antitrust violation.

A manager must learn the language and the point of view of the government, must design a strategy for complying with the antitrust law, and must effectively direct a firm to conform to this strategy.  In fact a manager may have to learn to argue different points of view.  For example, in trying to merge with another firm, a manager might wish to define market boundaries very narrowly so that the firm will not be viewed as a competitor of its proposed partner in "any line of commerce."  On the other hand, such narrow market boundaries might make the market appear to have a high concentration ratio and the firm appear to have significant market share which could be interpreted as significant market power.

A manager must also keep abreast of continuous evolution of the law.  In some areas such as the legality of vertical territorial restraints2, tying, and mergers, the courts have reversed themselves on what is legal behavior.  Congress has written amendments to the antitrust laws and has used its budget making authority to change antitrust enforcement efforts.  Each new president alters the policy and enforcement efforts of the antitrust agencies.  

Particularly in the antitrust cases, the law typically sets out what must be proved in a case.  If the law specifically prohibits a type of behavior then that behavior is called a per se violation of the law.  The only issue is whether there is enough evidence to show that such behavior occurred. However, in 1911 the Supreme Court established a concept referred to as the rule of reason in its Standard Oil judgment.3  Some violations require a rule of reason to be applied in which the effects of an action must be weighed.  The rule of reason standard is a much more difficult case to make both for prosecuting and defending attorneys. The biggest problem with the rule of reason is that it may not be possible in advance to determine what is legal and what is not legal.  

When a firm goes to court and the rule of reason standard is applied, the issue becomes more than just the evidence to prove a firm committed illegal behavior.  Under the rule of reason, the court must also weigh whether the behavior is illegal in light of the firm's intent and other mitigating circumstances.  Predicting the court's judgment is not a game a manager can hope to play very successfully.  Some decisions by a manager may simply purchase a lottery ticket with respect to future antitrust litigation.  Because the antitrust laws are evolving and involve after-the-fact judgments which are inherently unpredictable, a firm often is left with uncertainty about what behavior is permissible and what is prohibited.  This uncertainty amounts to greater costs to the firm

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