Antitrust economics as science after Daubert.
"In crucial areas such as the world economy, or the `microeconomy' of business, markets, producers, and consumers, we hardly have anything yet that deserves to be called folklore, let alone theory."
"[T]here are few areas where right action depends as much on right theory as it does in economics: yet in few areas is accepted theory as inadequate to the demands of practice and policy or to what we actually know."
Antitrust and economics have had a long and interesting relationship, sometimes close, sometimes distant, sometimes hot, sometimes cold, but, as Professor Bork and Professor Drucker illustrate, always provocative. In 1977, for example, the Supreme Court cautioned that "`in the real economic world rather than an economist's hypothetical model,' the latter's drastic simplifications generally must be abandoned."(3) In the 1980s, economics, particularly Chicago school economics,(4) became the primary policy basis for federal antitrust enforcement.(5) Then in 1992, the Supreme Court pulled back by not relying exclusively on economic theory in Kodak.(6)
The 1993 Supreme Court Daubert(7) decision concerns evidence and scientific testimony, and does not specifically involve either antitrust or economics. Nonetheless, it has important and perhaps profound implications for both because economics is a form of scientific testimony.(8)
Daubert changed the standards and procedures for allowing, or excluding, scientific expert testimony. Daubert ended the 70-year-old Frye(9) "let-it-all-in, cross-examination-cures-all" approach that, as a practical matter, granted economists(10) and other scientific experts relatively easy access to the courtroom, and replaced it with a much more practical and restrictive approach: "exclude-the-expert" if the proposed testimony is not shown to be both scientifically valid, and relevant to the particular dispute before the court.
In the Supreme Court's words, "the Rules of Evidence . . . assign to the trial judge the task of ensuring that an expert's testimony both rests on a reliable foundation and is relevant to the task at hand."(11) The Supreme Court's rationale for this landmark change regarding scientific experts was incisive and pragmatic: the courts and the Federal Rules of Evidence, after all, are not designed for the "search for cosmic understanding," but for the "particularized resolution of legal disputes."(12)
This article focuses on some of the practical implications of Daubert for judges and for litigators on both sides of an antitrust case, whether proposing, or opposing, an economic expert's testimony. The article also suggests that Daubert is more simply and more soundly applied by recognizing the fundamental similarity of scientific method and legal method as fact-driven disciplines that rigorously interact with theory.
Finally, the article explores a number of implications of Daubert's requirement that economics meet scientific standards, including the dubious viability in today's economy of the 33-year-old merger presumption that rests on 1950s economics, an alternative to the traditional relevant market analysis (Frederick Rowe has cogently argued that relevant market analysis is a "mirage" that deserves a "decent grave"); the need for a Copperweld-like rule that promotes competition in today's global economy of joint ventures, a call to end the needless misery caused by the Herfindahl-Hirschman index; and the prediction that Daubert may dramatically limit the new economic theories of "unilateral effects" and "innovation markets" because Daubert imposes the threshold requirement that the theories must be scientifically "reliable," "valid" and "trustworthy" to be admissible in federal court.(13)
II. The Daubert case
Daubert was a case brought on behalf of two children with serious birth defects allegedly caused by a drug their mother took before they were born, Bendectin. The district court granted summary judgment to the defendant drug company on the basis of scientific testimony,(14) and the court of appeals affirmed.(15) Both courts relied on the long-established Frye "general acceptance" standard in dealing with scientific experts.(16)
Specifically, the trial court relied on the defendant's expert and excluded the plaintiff's experts. The drug company's expert reviewed the relevant scientific literature in an affidavit, and concluded that maternal use of Bendectin had not been shown to be a risk-factor for human birth defects.
The trial judge excluded all eight of the plaintiff's experts' testimony, citing Frye. The plaintiff's experts testified that Bendectin can cause birth defects, citing animal studies, chemical structure analyses, and an unpublished "reanalysis" of previously published human statistical studies. The trial court determined that this evidence did not meet the Frye "general acceptance" standard for the admission of expert testimony.
The U.S. Supreme Court vacated and remanded, holding that the Federal Rules of Evidence, not Frye, provide the governing legal basis for admitting expert scientific testimony in a federal trial. Specifically, the Court held that the Federal Rules of Evidence, especially rule 702(17) and Rule 104(a),(18) place limits on the admissibility of proffered scientific evidence. In the Court's words, in order to be admissible, scientific evidence must be "reliable" and "valid":
To summarize: "general acceptance" is not a necessary precondition to
the admissibility of scientific evidence under the Federal Rules of
Evidence, but the Rules of Evidence -- specially Rule 702 -- do assign to
the trial judge the task of ensuring that an expert's testimony both
rests on a reliable foundation and is relevant to the task at hand.
Pertinent evidence based on scientifically valid principles will satisfy
As to its new "valid" and "reliable" science requirement, the Supreme Court returned to first principles under the law of evidence. There the fundamental issue is "evidentiary reliability," "that is, trustworthiness."(20) This means "[i]n a case involving scientific evidence," the Court stated, "evidentiary reliability will be based upon scientific validity."(21) Brilliant speculation, and firm belief is not good enough. In the Court's words, "`scientific . . . knowledge'" means "more than subjective belief or unsupported speculation."(22) After all, as noted, the Court pragmatically explained, the courtroom is a place for the "particularized resolution of legal disputes," not a place for the "search for cosmic understanding."(23)
Thus after Daubert, scientific testimony or other evidence must be "reliable," "trustworthy," and "valid." A trial judge, faced with a proffer of economic or other scientific testimony, must make a preliminary assessment of whether the evidence meets this standard. But how, as a practical matter, is a court or litigator to do this?
Seven members of the Court agreed to give practitioners and judges "general observations" on the issue, without being definitive. The fact that this large a majority of the Supreme Court provided what was in effect an advisory opinion on this issue suggests they believe it important for courts to more aggressively exclude unreliable science from federal courts. Specifically, seven members of the Court discussed "four factors" that may be considered in determining what is, and is not, "reliable" science:(24)
1. whether the theory or technique can be, and has been, tested empirically,
2. its error rate, and whether there are standards for its use and operation,
3. whether it has been subjected to peer review and publication, and
4. the degree of acceptance it has within the relevant scientific community.
In addition, the seven Justices provided two examples as further guidance on the issue, both involving the "study of the phases of the moon." One example was "reliable" and admissible, the other was not.
The first "phases of the moon" example had to do with "whether a certain night was dark, and if darkness is a fact in issue, the knowledge will assist the trier of fact," since the study of the phases of the moon, the Supreme Court explained, could "provide valid scientific `knowledge,'" and thus may be admitted.(25)
The second example, on the other hand, involved proposed scientific "evidence that the moon was full on a certain night" in order to prove "whether an individual was unusually likely to have behaved irrationally on that night." This proposed "scientific" testimony, the Court explained, was not admissible without "a valid scientific connection to the pertinent inquiry as a precondition to admissibility."(26)
Notwithstanding its "four factors" and two examples, the Court emphasized that "we do not presume to set out a definitive checklist or test," and that "[m]any factors will bear on the inquiry."(26)
Thus, in summary, the Supreme Court in Daubert made a landmark change in policy by replacing the 70-year-old Frye "general acceptance" test for scientific evidence with a new "reliable," "valid" and "trustworthy" standard. This means that, under Daubert, economic and other scientific evidence must be excluded if it has not advanced to the stage of being "reliable," "valid," and "trustworthy." The "search for cosmic understanding," of course, may be important, but not in the courtroom.
Yet how, as a practical matter, does a trial Judge or litigator apply Daubert? How, specifically, do lawyers as nonscientists determine, in the Supreme Court's words, whether economic or other scientific evidence is valid, reliable, and trustworthy? How does an antitrust litigator proposing an expert prepare an economist to withstand Daubert scrutiny and be allowed to testify? How can a litigator opposing an economic expert's testimony apply Daubert at the "gatekeeper" stage to exclude it?
Since the Supreme Court expressly did not provide a "definitive checklist or test" for its new standard for admitting, or excluding, scientific evidence, the next section suggests that Daubert can best be applied by returning to first principles and the fundamentals of scientific and legal reasoning, because, at bottom, working lawyers and working scientists reason in similar ways. Both disciplines combine a passion for facts, with the rigorous interaction of facts and abstract ideas. This fundamentally similar method of reasoning provides a familiar, and practical, foundation for life as a litigator and judge after Daubert.
III. Back to basics when applying Daubert: the fundamental similarity of scientific and legal reasoning
A. Albert Einstein on scientific validity
What is science and scientific validity? There are many descriptions and theories of science, including the philosophy of science,(28) and it is easy to make science incomprehensible. Lawyers and judges, however, need a practical and rigorous answer. Fortunately, Albert Einstein provides a workable and understandable definition of science for judges and litigators trying to apply Daubert. He also is obviously credible.
Perhaps surprisingly, working lawyers have much in common with scientists like Einstein. Einstein's concept of science is straightforward and powerful:
Science ... is a creation of the human mind, with its freely invented
ideas and concepts. Physical theories try to form a picture of reality
and to establish its connection with the wide world of sense
impressions. Thus the only justification for our mental structures is whether
and in what way our theories form such a link.(29)
Einstein's concept of scientific validity is pointedly set forth in his last sentence: "The only justification for our mental structures is whether and in what way our theories form such a link [to facts]." That is:
First: Does it work? (empirical verification)
Second: Why? (intellectual rigor)
Henry Margenau, a retired working physicist and philosopher of science from Yale University, set forth a similar two-part test of scientific validity:
[S]cientific truth, that is to say the validity of an accepted theory,
depends on two important kinds of factors: ...  guiding principles
[and]  empirical verification.(30)
Thus, in effect Einstein and working scientists relentlessly ask, Does it work? and Why? Scientific and legal reasoning in this respect are similar: both focus on facts, combined with intellectual rigor. Deductive logic is an element of the intellectual rigor common to both methods of reasoning. There are, of course, differences at the detail level. For example, there is no Supreme Court or Congress with the final say in science. Nonetheless, there is a distinct common ground of legal and scientific reasoning: the interplay of fact and theory.
The importance of Einstein's concept of science, and of the method of reasoning that combines "what works" and "why" is deceptively simple. Lest the importance of this method of reasoning be missed, Alfred North Whitehead makes a dramatic comparison: "Since a babe was born in a manger, it may be doubted whether so great a thing has happened with so little stir."(31) It is important to examine further.
Whitehead, a mathematician and philosopher, incisively defined modern scientific method as the interaction of fact and theory: the "union of passionate interest in the detailed facts with equal devotion to abstract generalization," or as he also phrased it, "a vehement and passionate interest in the relation of general principles to irreducible and stubborn facts."(32) Importantly, he distinguished modern science not by its focus on facts or on its pursuit of rigorous abstractions, but on its combination of both:
All the world over and at all times there have been practical men,
absorbed in "irreducible and stubborn facts": all the world over and at
all times there have been men of philosophic temperament who have
been absorbed in the weaving of general principles. It is this union of
passionate interest in the detailed facts with equal devotion to abstract
generalization which forms the novelty in our present society.(33)
Historically, modern science emerged in the 1600s, Whitehead explained, as "a recoil from the inflexible rationality of medieval thought," and involved a "return to the contemplation of brute fact."(34)
Thus, Einstein and Whitehead describe science in simple and readily understandable terms, especially for lawyers that use essentially the same method of reasoning: the interaction of fact and theory.
How does Einstein's two-part test of scientific validity -- empirical verification and intellectual rigor -- work?
1. Empirical Verification: Does it work? The first test is empirical verification, that is, does the theory work? As the Supreme Court stated in Daubert:
Ordinarily, a key question to be answered in determining whether a
theory or technique is scientific knowledge that will assist the trier of
fact will be whether it can be (and has been) tested.(35)
In science, "no amount of elegance can save a wrong theory" Professor Murray Gell-Mann, a Nobel laureate in physics, reminded a Cleveland audience on the last day of the Michelson-Morley Centennial Celebration on October 31, 1987.(36) In science, Einstein explained, there are no eternal theories(37) because every theory eventually is contradicted by new facts:
There are no eternal theories in science. It always happens that some
of the facts predicted by a theory are disproved by experiment. Every
theory has its period of gradual development and triumph, after which
it may experience a rapid decline.(38)
Thus science, unlike mathematics or other purely abstract disciplines, has to fit the facts.39 The history of science offers many examples of elegant, mathematically rigorous theories that did not fit the facts, and were rejected. Several examples illustrate the first test of scientific validity, empirical verification.(40)
(a) Galileo Galileo is generally credited with the birth of modern science.(41) In the early 1600s, Galileo applied a new device, a telescope, to the heavens to see which of two theories best fit the facts.(42) One theory, that the earth was the center of the universe, had been elegantly refined by Ptolemy in 150 A.D. and used with great success for more than 1000 years. The second theory had been proposed by Copernicus about 50 years earlier. Copernicus suggested that the Sun, not the Earth, was the center of the universe. Using a telescope, Galileo gathered the facts that showed that "the Ptolemaic heaven simply did not work," and that "Copernicus's powerful guess had been right."(43)
Another Galileo experiment also illustrates the primacy of fact over theory in science. Galileo dropped a large and a small stone from the Leaning Tower of Pisa to test the prevailing theory with facts.(44) The prevailing and common sense theory was that heavy objects fall faster than light ones. Galileo's experiment showed the large stones and small stones fell to the earth at the same speed. The prevailing theory did not fit the facts, it did not work.
(b) Michelson-Morley A more recent example of the primacy of fact over theory in science, even well-established and deeply loved theory, happened in 1887. In the late 1800s, physicists around the world thought they were secure in their understanding of the physical world. After two centuries, classical Newtonian physics was at the height of its achievement. Then, in 1887, Albert Michelson and Edward Morley performed an experiment in Cleveland, Ohio, in which they bounced light back and forth between mirrors mounted on a 5-foot-square table. Their experiment proved facts that rocked the foundations of classical physics. As a physicist-poet wrote for the Michelson-Morley Centennial Celebration in Cleveland in 1987:
The Michelson-Morley collusion
Forced the world to accept the conclusion:
Since the fringe didn't shift
Then the earth's not adrift
And the ether is just an illusion.(45)
One of the greatest scientific theories the world had ever known, Newtonian physics, did not always fit the facts. In this respect, the theory had to be rejected. New scientific theories were needed. Out of the ashes of Newtonian physics moving at the speed of light, Einstein developed relativity theory. As Einstein later told Michelson, "your marvelous experimental work paved the way of the development of the theory of relativity."(46)
(c) Childbed fever Childbed fever was a major cause of death for women 150 years ago. Dr. Semmelweiss, a young obstetrician, observed that the death rate for mothers seen by doctors was much higher than for mothers treated by midwives. He noticed that, "Doctors themselves literally spread death."(47) Based on these facts, which were contrary to prevailing theory, he made people treating his patients wash their hands. The death rate for his patients dropped dramatically. Dr. Semmelweiss saved thousands of women's lives by rejecting prevailing medical theory when it was contradicted by the facts. Even though it took science 25 years to develop the germ theory of disease that explained how childbed fever was transmitted, Dr. Semmelweiss' factual insights saved many lives that would have been lost if prevailing theories continued to be used.
2. Intellectual Rigor: Why? Empirical verification is a very tough master, but it is not enough for science. What happens if more than one theory works? How do you choose between them? A second test is necessary. In Einstein's words, it is critical "in what way" theories are linked to "the wide world of sense impressions." Einstein's second test is fundamentally a question of intellectual rigor. Henry Margenau, the retired physicist and philosopher of science, elaborated on a number of intellectual requirements, or "guiding principles," for scientific validity:
The guiding principles of science, the criteria employed in the
acceptance as well as rejection of constructs and complexes of constructs
called theories, have been loosely enumerated as simplicity,
extensibility multiple connections, logical fertility, stability, of
interpretation, causality, and elegance.(48)
Extensibility refers to the factual scope or power of the theory, that is, how far does the theory extend, one factual setting or many? The more facts it covers or extends to, the more credible it is. Newtonian physics, for example, "works" magnificently for all sorts of large bodies like rocket ships, satellites, cannonballs and parachutists, but is largely useless for small bodies like atoms and electrons. Quantum physics, on the other hand, extends to both large and small bodies.
Multiple connections refers to the intellectual scope of a theory or idea, that is, is the theory an idea by itself or is it connected to many other scientific ideas? The richer the linkage between scientific theories, the more credibility and confidence there is in the theory.
Logical fertility refers to an idea or theory that deductively leads to many other ideas or theories. A dramatic example is that Newtonian physics can be logically deduced from quantum physics as a special case when the bodies are large.(49)
Stability of interpretation is simply the requirement of consistency, that is, the same fact situation is treated the same way. In contrast, ad hoc results or explanations are not intellectually acceptable nor scientifically credible.
Simplicity, causality and elegance are self-explanatory.
In summary, the Einstein two-part test of scientific validity provides a practical and understandable foundation for applying the Daubert mandate to exclude economic or other scientific testimony if its reasoning or methodology is not scientifically valid or reliable.
It is also useful to note how the Einstein two-part test applies to the four factors cited by the Supreme Court in Daubert. If the order is changed, it is readily seen how the four factors relate to Einstein's two-part test for scientific validity. Two relate to Einstein's first test, empirical verification:
1. whether the theory or technique can be, and has been, tested empirically.
2. its error rate, and whether there are standards for its use and operation.
The other two relate to Einstein's second test, intellectual rigor:
3. whether it has been subjected to peer review and publication.
4. the degree of acceptance it has within the relevant scientific community.
Once reorganized in this way around Einstein's simple but powerful concept of scientific validity, it is suggested that lawyers and the courts can apply the essentially common method of legal and scientific reasoning to generate further questions and to better assess the scientific validity and reliability of proposed scientific expert testimony.
For example, the Supreme Court's "relevant scientific community" factor applied to antitrust economics under basic scientific and legal methods would not be limited to economics, but would include other disciplines like business management and other experts like "the preeminent management thinker of our time," Peter Drucker. This important implication of Daubert for antitrust is further explored in part V of this article.
The next section illustrates the value of Einstein's two-part test of scientific validity by comparing it to different tests suggested by Professor Milton Friedman in his classic essay on economics as science.
B. Professor Friedman's essay on economics as science
Milton Friedman's classic Essay on the Methodology of Positive Economics(50) illustrates both a different test and the value of Einstein's two-part test in evaluating scientific validity under Daubert.
Professor Friedman asserts that "positive economics is, or can be, an `objective science,' in precisely the same way as any of the physical sciences"(51) but suggests two variations of Einstein's two-part test.
Friedman argues that Einstein's first test regarding empirical verification must be used, but takes it one step further. He argues it is the only relevant test: "the only relevant test of the validity of a hypothesis is comparison of its predictions with reality."(52) Curiously, Friedman therefore in effect does not agree to consider or apply Einstein's second test, intellectual rigor, since predictive power alone is his relevant test.
Apparently, Friedman takes this position because he wants to make a second argument that the assumptions underlying a scientific theory are irrelevant. "It is fundamentally wrong and productive of much mischief," Friedman argued, "to expect to test assumptions against reality"; "[t]o be important ... a hypothesis must be descriptively false in its assumptions"; and "the relevant question to ask about `assumptions' of a theory is not whether they are descriptively `realistic', for they never are, but whether they are sufficiently good approximations for the purposes in hand."(53) Actually, much of his essay is devoted to this assumptions-are-irrelevant argument.
Friedman's two variations from Einstein's two-part test of scientific validity are examined further below.
1. ASSUMPTIONS-ARE-IRRELEVANT Friedman's argument that assumptions are irrelevant in determining scientific validity is interesting, but not persuasive. As Milton Handler stated regarding legal reasoning, "no doctrine is any more valid than the postulates from which it is derived, no matter how impeccable may be Its logic."(54) Scientific reasoning and legal reasoning again are alike. Assumptions can be a valuable tool in evaluating scientific validity and reliability.
The importance of assumptions to intellectual rigor, Einstein's second test of scientific validity, is nicely illustrated by the field of geometry, where conclusions vary dramatically with the assumptions used. For example, for over 2000 years, there was one geometry -- Euclidean geometry. It is based on ten assumptions that "were supposed to be unquestionable truths about the real world."(55) From Greek times on, however, mathematicians were uncomfortable with one assumption, the so-called parallel postulate.(56)
Twenty-four-hundred years after Euclid, two 19th-century mathematicians, Gauss and Riemann, thought it would be interesting to see what happened if they made a different assumption. They used nine of Euclid's assumptions, plus a tenth assumption that contradicted the parallel postulate. They created entirely new, so-called non-Euclidean geometries.
Non-Euclidean geometries yield a variety of theorems just as rigorously as Euclidean geometry, but they sometimes directly contradict the theorems of Euclidean geometry. For example, in Euclidean geometry the sum of the angles of a triangle equals 180 degrees. In Gauss' non-Euclidean geometry, however, the sum of the angles of a triangle never equals 180 degrees. In Riemannian geometry, the sum of the angles of a triangle ranges between 180 and 540 degrees.
In the history of science, non-Euclidean geometry was both humbling and liberating. It was humbling in its reminder that mathematics, like economics, is merely a human creation that may, or may not, fit physical reality:
Since for more than 2,000 years, mathematics had been the bastion of
truth, non-Euclidean geometry, the triumph of reason, proved to be an
intellectual disaster. This new geometry drove home the idea that
mathematics, for all its usefulness in organizing thought and
advancing the work of man, does not offer truths, but is a man-made fable
having the semblance of fact.(57)
At the same time, the study of geometry flourished once "it was found not only that other geometries described physical space equally well, but also that geometry was properly the study of all possible spaces."(58)
The importance of assumptions in science is also illustrated 100 years ago by professors Michelson and Morley. They proved experimentally that the speed of light was constant, a fact that contradicted classical physics.(59) rather than try to attempt to save classical theory, Einstein developed an entirely new theory -- the theory of relativity -- that rested, in part, on the empirically determined assumption that the speed of light was constant. "In an ingenious mental turnaround, Einstein turned this puzzle [the fact of the constancy of the speed of light] into a postulate! Instead of worrying, for the moment, bow it might happen, he simply accepted the experimentally irrefutable fact that it does happen."(60)
Interestingly, Bork has argued, in effect contradicting Friedman, that microeconomic theory rests on "a few empirically supported postulates"(61) from which "the rest follows like a proof in geometry."(62) Bork has also argued, presumably tongue-in-cheek, that "[t]he system is entirely circular, which is its strength because circular logic is not rebuttable."(63) Bork, however, does not substantiate his assertion that price theory rests upon a "few empirically supported postulates."
In conclusion, Friedman's argument that assumptions-are-irrelevant is not convincing for purposes of assessing scientific validity and reliability. As seen, it is possible to prove contradictory propositions with rigorous logic by changing the assumptions -- the sum of the angles of a triangle can be proven to be 180 degrees, never 180 degrees or more than 180 degrees. Einstein's second test regarding intellectual rigor thus suggests that examining assumptions may be very helpful in applying Daubert.
2. PREDICTION THE SOLE CRITERIA Professor Friedman's other argument that the only relevant test of economic theory as science is its predictive power, assuming for the moment that economic theory meets this test, also is not enough for Daubert.
Many theories flounder when it comes time to test their predictions against the facts. This is Einstein's first test, and Friedman's only test. But what is a lawyer or judge to do when more than one theory actually works? Use them all? Select "the best"? How?
Selecting among multiple theories that are equally successful at predicting reality is a key element of scientific method. That is one of the reasons for Einstein's second test, intellectual rigor, so that given two or more theories that fit the facts, there is a disciplined way to chose one theory over another.
Consider, for example, the theory the world is flat. In daily living, the world is flat. As a practical matter, the theory the world is flat is a good approximation for most purposes, and far simpler to work with than the theory the world is round and spherical geometry. Both theories fit the facts most of the time in our daily lives. However, we know when not to apply the world is flat theory.(64)
Similarly, consider the theory that the Sun rises every morning because dogs howling at the Moon chase it away. Obviously, the howling-at-the-Moon theory has an excellent record predicting. Just as obviously, there are other theories of why the Sun rises every morning. Friedman's argument provides no basis for choosing the latter over the former -- both have equal predictive powers.
Friedman recognized that there may be "alternative hypotheses equally consistent with the available evidence," and alludes to Einstein-Margenau-like concepts for choosing between them, such as "simplicity" and "fruitfulness."(65) He says:
[T]here is a general agreement that relevant considerations are
suggested by the criteria "simplicity" and "fruitfulness," ... A theory is
"simpler" the less the initial knowledge needed to make a prediction
within a given field of phenomena; it is more "fruitful" the more
precise the resulting prediction, the wider the area within which the
theory yields predictions, and the more additional lines for further
research it suggests.(66)
Nonetheless, Friedman argues that predictive power is the only relevant test for science. However, in assessing the scientific validity prong of Daubert, lawyers and the courts are more likely to find Einstein's second test, intellectual rigor, credible and useful in separating "junk science," as well as promising but unproven science, from reliable science.
In addition to scientific validity and reliability, Daubert imposes a second "gatekeeper" inquiry on proposed economic experts: whether their reasoning or methodology properly can be applied to the facts at issue. This second inquiry is explored next.
IV. Daubert illustrated: Maricopa yesterday and today
The Supreme Court's 1982 decision, Arizona v. Maricopa County Medical Society,(67) is an important antitrust decision involving the nation's $1 trillion health care industry. The Court held, on a summary judgment record from the early 1980s, that a maximum fee schedule developed by physicians was per se illegal as horizontal price fixing.
Before the case was decided by the Supreme Court, then professor, now judge, Easterbrook, wrote an article that applied economic theory to the case.(68) It provides a practical illustration of how Daubert applies to economic argument and testimony.
Easterbrook argued that economic theory showed that Maricopa should not be decided on the summary judgment record and should thus be reversed for trial or further factual development.(69) In applying Daubert to the facts in the record, as will be seen, Easterbrook's arguments would be excluded as economic testimony because they do not fit the facts in dispute before the Court.
On the other hand, Maricopa is ancient history in health care. Health care today is vastly different from what it was in 1980. Assuming today's facts were properly presented, Easterbrook's arguments as a matter of antitrust law are generally cogent. These arguments can be made by a lawyer as litigator. Under Daubert, it is a separate question whether or not an economist making the same arguments would pass Daubert's tests and be allowed to testify. This separate question is reserved for part V.
A. Cartels unlikely in unconcentrated industries
Easterbrook applied the economic argument that cartel conduct is unlikely in unconcentrated industries. Since physicians largely practice as solo practitioners, he reasoned, "[i]t seems most unlikely that a maximum price agreement is a disguised cartel if the sellers' market is not concentrated":
Because it is costly to reach a cartel agreement, and even more costly
to detect and punish cheating, markets with many sellers cannot easily
be cartelized. It always will be in the interest of some sellers to break
with the cartel, reduce prices, and so claim a greater share of the
Under Daubert's second prong this economic argument would be excluded because the theory does not apply to the facts in the record: "third-party payments [insurance] reduce the incentive for patients to search even when they can do so at low Cost."(71)
As a result, the theoretical argument that it is "always in the interest of some sellers to break with the cartel, [and] reduce prices," does not follow. As the record showed, in the early 1980s third-party insurance generally reduced incentives for patients to seek lower prided physicians, and thus it would be irrational for physicians to reduce prices and "break with the cartel."
Today, on the other hand, in most cities selective contracting and excess capacity make Easterbrook's argument relevant and persuasive.
B. Cartels costly
Similarly, Easterbrook's theoretical argument that it is "costly to reach cartel agreement" and "even more costly to detect and punish cheating" is incorrect for the same reason. As noted in the early 1980s, the record showed that third-party payments effectively eliminated physician price competition. There thus was no need to reach a cartel agreement, or to detect and punish cheating. Physicians generally could charge what they wanted, because third-party payers generally paid what physicians charged.
Today, again, the facts have changed profoundly, and this argument could be made effectively in most locations.
C. Large buyers
Economic theory also asserts that "[w]hen there are several large buyers, this cheating could be especially profitable, because the seller can increase his business dramatically by appealing to a single substantial buyer" and because "[b]uyers have every incentive to encourage cheating by funneling business to sellers who will reduce price."(72) Considerations of this sort, Easterbrook reasoned, indicated that maximum price fixing rarely will be a "cartel in disguise."(73)
On the facts in the record, however, it did not follow that "cheating could be especially profitable" when "several large buyers," presumably insurance companies, "can funnel business to sellers who shave prices."(74) Under the facts in the record, as noted, most third-party payers in the early 1980s did not and could not funnel business to low cost doctors and hospitals.
Today, however, the facts generally are profoundly different, and this argument can be made very convincing in most areas.
D. Low fees
Easterbrook also made the economic argument that, since the physicians' maximum fees were "the same as or lower than the bills submitted by `eighty-five to ninety-five percent of physicians in Maricopa County,'"(75) fees were low and this was "suggestive" of legality.(76) Again the theory does not fit the facts in the record in 1980.
The argument assumes that the comparison was to a market price for physicians' services. Yet the record evidence cited regarding the prevalence of third-party payments again means the comparison could not be to a market price for physician services. Further, no direct record evidence was cited that the physician fee comparison was to competitively determined physician fees. Today, on the other hand, if the proper factual foundation were presented, Easterbrook's argument often will be sound.
In conclusion, Easterbrook's article illustrates Daubert in three ways. First, it illustrates economic testimony that should be excluded under Daubert's second prong, since the arguments are premised on facts that were either not in the record or contradicted by the facts in the record. Second, it illustrates economic arguments may be made as legal arguments by an antitrust lawyer, without an expert. Third, it indicates how much preparation an economic expert probably now requires to satisfy Daubert's two-prong test at the gatekeeper stage. Presenting, or preventing expert economic testimony under Daubert is discussed next.
V. Presenting, and preventing, economic testimony after Daubert
Under Daubert, economic experts must be subjected to a judicial gatekeeper before they are allowed to testify, assessing both the scientific reliability and "fit" of their proposed testimony. Economic testimony is often determinative in antitrust cases. Thus, litigators who are presenting economic experts must carefully prepare their witnesses, or risk having their expert's testimony excluded entirely. On the other hand, opposing litigators have a greater opportunity to exclude an economic expert's testimony that, in antitrust cases particularly, may cripple the other side's case and lead to victory.
This section is intended to illustrate for practitioners on both sides the fundamental and admittedly aggressive lines of inquiry that Daubert suggests be used in opposing an economic expert. Two professors, Mark Blaug and Peter Drucker, provide a rich source of tough questions for potential economic experts at the gatekeeper stage. Professor Mark Blaug of the University of London devotes an entire book to the subject of economics as science.(77)
As noted at the outset of this article, Peter Drucker, the "preeminent management thinker of our time," is sharply various economic theories, remarking "we hardly have anything yet that deserves to be called folklore, let alone theory," and "in few areas is accepted theory as inadequate to the demands of practice and policy or to what we actually know."(78) He provides the litigator preparing to oppose the use of an economic expert with a number of weapons, and the litigator preparing an economic expert a number of challenges. Further, Drucker's ideas are likely to be particularly persuasive to lawyers for two reasons. First, of course, there is his international stature, but second, perhaps most importantly, because his fact-based reasoning is so similar to legal and scientific reasoning.
The following lines of inquiry are intended to be illustrative, not exhaustive, of the questioning of economic methodology and reasoning that Daubert invites, and may even require. It is divided into two parts, general scientific validity questions and questions for specific economic subjects.
A. General scientific validity
1. EMPIRICAL VERIFICATION Litigators should be aware in preparing or opposing an economic expert's testimony that although Professor Friedman asserts that economic theory has been verified in "countless applications," he admits that the "evidence is extremely hard to document."(79) Blaug is more blunt; he states that "this is the most frustrating passage in Friedman's entire essay," since it is "unaccompanied by even a single instance of these `countless applications.'"(80) It seems likely that economic experts will have to do much better to be allowed to testify after Daubert.
Blaug also confirms what most noneconomists perceive.(81) "Clearly," he writes, "there are still serious limitations in the capacity of economists to predict the actual course of economic events and hence ample room for skepticism about mainstream economics."(82)
Blaug contends that "the central weakness of modern economics" is a "reluctance to produce the theories that yield unambiguously refutable implications, followed by a general unwillingness to confront those implications with the facts."(83) Blaug contends that economists "lack both reliable data and powerful techniques for distinguishing sharply between valid and invalid propositions," and that as a consequence, "contradictory hypotheses continue to coexist sometimes for decades or more."(84)
Blaug asserts that "the prevailing methodological mood" in economics is "highly protective of received economic theory." He states that "economists fight tooth and nail when faced with an empirical refutation of a proposition ... involving the assumption of perfect competition," since "the entire conception of economic `efficiency' that gives raison d'etre to the subject of economics is threatened."(85) Blaug further observes that "the tendency to protect falsified theories by ad hoc immunizing stratagems ... has loomed and continues to loom ... large in the history of economics.(86)
MIT economics professor Lester Thurow similarly states: "the intellectual confidence in the price-auction model has not been created by demonstrated success using the model to make predictions, to control events, or to design public policies."(87) Posner admits that, "[i]t is a curiosity, and a source of regret, that to this day very few of Director's ideas [that underlay Chicago school antitrust analysis] have been subjected to systematic empirical examination."(88)
Drucker argues that "[n]o economic theory explains the main economic events of the fifteen years between 1975 and 1989."(89)
In summary, whether the methodology or reasoning that is proposed to be used in testimony has been demonstrated to work, how often, and how well, is a key line of inquiry to establishing scientific validity for Einstein, Friedman and the courts under Daubert. A search for cosmic understanding is meritorious and important, but is not good enough for Daubert.
2. ASSUMPTIONS Drucker contends that the assumptions underlying economics "are no longer tenable," and warns that "[t]he fact that most modern economists make them subconsciously -- where the founding fathers of economics in the last two centuries were acutely conscious of them -- makes it all the more troublesome that these assumptions are no longer valid."(90)
As discussed at length regarding Friedman's essay on economics as science, the assumptions underlying proposed economic testimony are another important subject for examination and preparation of economic experts.
3. MULTIPLE EXPLANATIONS George Stigler has written that economics is sufficiently flexible so that there are few positions that cannot be reached by a competent use of respectable economic theory:
The apparatus of economics is very flexible: without breaking the
rules of the profession -- by being illogical or even by denying the
validity of the traditional theory -- a sufficiently clever person can
reach any conclusion he wishes on any real problem (in contrast to
Blaug similarly contends that economics is "ultrapermissive" within the bounds of its theory. Specifically, he states that "almost any model will do provided it is rigorously formulated, elegantly constructed, and promising of potential relevance of real-world situations."(92) He argues that much of the empirical work in economics "fails utterly to discriminate between competing explanations."(93) He explains:
The journals abound with papers that apply regression analysis to
every conceivable economic problem, but it is no secret that success of
such endeavors frequently relies on "cookbook econometrics": express
a hypothesis in terms of an equation, estimate a variety of forms for
that equation, select the best fit, discard the rest, and then adjust the
theoretical argument to rationalize the hypothesis that is being tested.(94)
In summary, the flexibility of economic theory to support various conclusions, at least according to these sources, suggests that litigators on both sides have another important area of inquiry and preparation. If demonstrated, the proposed economic testimony will violate a fundamental tenet of intellectual rigor and scientific validity.
4. INTERNAL DEBATES Blaug states that there is a "veritable orgy of self-criticism"(95) in economics. For litigators on either side of presenting an economic expert, this. internal self-criticism and debate obviously needs to be carefully reviewed.
5. INDIRECT PROOF Indirect proof in the post-Daubert world is another potential area of inquiry for the litigator proposing or opposing an economic expert in antitrust cases.
Indirect proof, or reductio ad absurdum, is a logical method of establishing propositions indirectly rather than directly.(96) To illustrate, assume you want to establish that a color is white and that you only know that the color in question is not black. If it is proven that there are only two colors, black and white, then indirect proof leads to the conclusion that the color is white. Obviously, this conclusion does not follow if it is known there are a rainbow of possible colors, not just black and white.
The perils of indirect proof in economics are illustrated by Bork in The Antitrust Paradox. He reasons that "price theory enables us to identify, with an acceptable degree of accuracy, those activities whose primary effect is output restricting, leading to the inference that all other activity is either efficiency creating or neutral," and further, "in all cases in which behavior is neutral or in which analysis does not provide a basis for predicting effects upon consumer welfare, tie-breaking considerations indicate that the law should not intervene."(97)
This use of indirect proof is not valid. The logical fallacy in Bork's argument is the "rainbow" fallacy and his assumption that price theory has an acceptable degree of accuracy for antitrust policymaking. As shown above, his assumption has not been credibly established. His policy conclusions may be sound for other reasons using traditional legal and factual analysis, but his reasoning using indirect proof is not correct.
B. Specific economic subjects
1. PROFIT Peter Drucker has insights on economic subjects that may be explored under Daubert. Drucker argues that "profit" is inadequately understood in current microeconomic theory, and that a new microeconomic theory "will, almost certainly, discard altogether the concept of `profit'."(98) He reasons that "we have known for at least 50 years that `profit maximization,'" which is at the core of the theory of the firm, "is a meaningless term if applied to anything other than a unique, non-recurrent trading transaction on the part of an individual and in a single commodity -- that is, to an exceptional, rare, and quite unrepresentative incident" and that "no business is known to apply `profit maximization' to its planning or to its decisions on capital investment or pricing."(99)
He argues that "profit maximization" in the world economy is "the total return over the lifetime of the investment," which is "not what microeconomic theory means by the term."(100) He applies this difference to American and Japanese exporting in the early 1980s, when the dollar increased in value. Americans used the short-term, microeconomic theory concept of short-term profits -- "It was the wrong decision ... within two years they had lost profitability altogether."(101) The Japanese, on the other hand, ignored microeconomic theory, maintained "their markets in America at the expense of their profit margins," and "were again making money by the end of two years."(102)
Drucker explains that "the theories and concepts that govern the actual, as against the theoretical, behavior of firms are t theories of the cost of capital, of market optimization, and of the longrange cost gains (the `learning curve') for maximizing the volume of production rather than from maximizing profitability."(103) Drucker's views go to the foundations of economic theory, suggesting some litigators will want to pursue them under Daubert.
2. PRICE Another line of inquiry that goes to the foundation of economic theory and testimony concerns price. Drucker argues that current economic theory does not provide an adequate understanding of price. "It is impossible [under prevailing theory] ... for an increase in price to result in an increase in demand," and "[y]et this happens everyday in the actual economy."(104)
The economist, when confronted with such a phenomenon, is liable to
talk of the "irrational customer." But this is about as sensible as for
the doctor to talk of an "irrational infection" when a certain strain of
bacteria refuses to yield to an antibiotic. The fact is that something is
happening that is not in accord with what the theory has predicted.
The theory needs to be changed.(105)
Of course, Drucker strikes at the heart of microeconomics price theory, by asserting it does not work. Obviously the implication is that microeconomic theory is not scientifically reliable under Friedman's, Einstein's and Daubert's tests. Further exploration of this proposition is left to litigators and others.
3. STATIC THEORY Another possibly relevant line of inquiry is Drucker's analysis of the limitation of standard economics as a static theory. He argues that the assumption of "economic equilibrium" is "obsolete":
The assumption is an economy that is briskly standing still.
Qualitative structural change, such as growth and its dynamics, are as much
beyond the ken of economics today as motion was beyond the capacity
of mathematics before the differential calculus.(106)
Since economic theory excludes growth, he argues, economists "grope in the dark on everything that pertains to growth, try this and try that, and go by fads rather than by knowledge."(107)
An economic theory based on growth, rather than equilibrium, Drucker reasons, would be radically different in concepts and implications. It would "start out with a goal in the future and work back to the present," whereas current economic theory "assumes that the structure of the future is identical to the structure of the present."(108) A growth theory would start with a "postulate of innovation," and the goal of economics would be "genuine change in the wealth-producing capacity of the economic resources rather than their rearrangement."(109)
This shift in one assumption, from a static model to a growth model, would "shift the focus of economic theory from cost, where it has always been, to risk,"(110) and would change the very nature of the word "profit."
Drucker argues that in a economics based on growth, "there is no profit at all" as "profit becomes the cost of uncertainty" or "the costs of the future."
Just as we ask with respect to the costs of the past whether there is
enough revenue to cover them, we must ask with respect to the costs
of the future whether there is enough revenue to cover them.(111)
The issue of a static theory leads to another possibly relevant line of inquiry that also goes to the foundations of economics, knowledge and productivity.
4. KNOWLEDGE AND PRODUCTIVITY Drucker asserts that "[k]nowledge has become the economy's central resource."(112) If knowledge is relevant to the dispute before the court, Drucker's insight may be useful and important to the litigator. He asserts that economic theory omits knowledge and technology: "knowledge as a factor of production or of productivity is still unknown to the economist."(113) Technological change, like growth, is simply beyond the scope of current economic theory:
Economists consider technological change something outside of the
economy and an event they cannot deal with, a sort of uncontrollable
and unpredictable catastrophe, like earthquake or pestilence.
Technological change may explain why the forecasts of the economists go
awry with such disconcerting frequency. But the economists do not
know how to anticipate it or how to explain it and are silent regarding
its possible course or consequences.(114)
Since knowledge is omitted from current economic theory, Drucker suggests that "[e]conomic theory needs to be restructured on a brand-new postulate: knowledge creates productivity."(115) He asserts that in all developed countries, knowledge workers have become the "center of gravity" of the labor force.(116) He suggests that the next economic theory will "base itself on the postulate that productivity -- that is, knowledge applied to resources through human work -- is the source of all economic value."(117) Thus, if knowledge is relevant to the dispute before the court, Mr. Drucker's views may be appropriate to consider.
5. PRODUCTIVITY AND CAPITAL Drucker also argues productivity and capital formation are not adequately addressed in reigning microeconomic theory. "We do not have, so far, a microeconomic model that embraces productivity and capital formation," Drucker states, "the terms are largely unknown to available theories, such as the "Theory of the Firm,' which is the microeconomics most commonly taught in our college courses."(118) Thus, Drucker suggests another line of inquiry if capital formation is relevant to the dispute before the court.
6. GLOBAL ECONOMICS If international economic testimony is involved, Drucker again provides a line of questions going to scientific validity. He believes that economics lacks any viable theory of the world economy, and erroneously focuses on domestic economies:
The economic theory we have today centers in the domestic economy
of a national state -- the economist calls it the "macroeconomy." We
have no theory of the world economy, nor do we have enough
knowledge as to how world economy and domestic economy interact.(119)
Drucker argues that, contrary to prevailing economic theory, economic dynamics have shifted from the national economy to the world economy, and that sound economic policy must be based upon the world economy:
From now on any country -- but also any business, especially a large
one -- that wants to prosper will have to accept that it is the world
economy that leads and that domestic economic policies will succeed
only if they strengthen, or at least do not impair the country's
international competitive position.(120)
Drucker further argues that international economic theory requires a "radically different microeconomics at its foundation."
He argues, "[tlhere is urgent need now for an economic theory that starts out with the world economy and then explains the domestic economy as part of the world economy." He therefore argues that the next economic theory must be based on the world economy and link all three: "the microeconomics of the individual and firm, an intermediate economics of the nation-state, and a microeconomics of the world economy."(121)
He asserts that Britain and the United States have applied the economic theory of the national economy in setting economic policy, and have fared poorly by comparison to Germany and Japan which have not. German and Japanese universities teach the prevailing macroeconomic theory, he claims, but have never accepted it in practice. West Germany and Japan "have all along based their economic policies on the world economy," and have done "far better, both economically and socially," than the U.S. or Britain.(122)
Drucker's assertion that we have no theory of the world economy will surprise many familiar with the comparative advantage theory of international trade. He argues it is "elegant theory" that is flatly contradicted by the facts of international trade. Under the theory of international trade, trade should be greatest between complementary countries like the United States and India and least between technologically comparable countries like the United States and Germany. International trade should be predominately "complementary trade" rather than competitive trade. Yet the exact opposite is true: "according to our theory this trade -- the reality of the economic world we live in -- cannot happen."(123) As a result, he argues "the economist and the economic policy maker are probably better off with no economic theory for the world economy" rather than to use an elegant but invalid theory.(124) Further, he argues, "We need to develop an economic theory appropriate to the primacy of a world economy in which knowledge has become the key economic resource and the dominant -- and perhaps even the only -- source of comparative advantage."(125)
Drucker similarly points out that economics lacks any theory that connects macroeconomics with microeconomics. "We have no economic theory regarding the relationship between events in the macroeconomy ... and events in the microeconomy. ..."(126) For example, productivity is a central economic problem today, unlike 50 years ago when Keynes could assume that productivity would take care of itself. "[T]he Keynesian inability to handle productivity within the theoretical structure or within economic policy, is as serious a flaw as was the inability of Ptolemaic astronomy around the time of Copernicus to explain the motion of stars and planets."(127) Similarly, Keynesian macroeconomic theory cannot account for the decline in capital formation in developed countries. Under "Keynesian economics the decline cannot be explained, cannot have happened."(128) Thus Drucker suggests a variety of issues for examination at the gatekeeper stage for experts that may testify on international economics.
7. SYMBOL ECONOMY As a final example, Drucker argues that it is necessary to reject the Keynesian assumption that the symbol economy -- capital movements, exchange rates and credit flow -- drives the real economy, and previous theories that the real economy determines the symbol economy.(129) The facts, Drucker asserts, simply do not fit the theory. World trade, at about $3 trillion a year, is dwarfed by the symbol economy at almost $110 trillion a year.(130) If this area of economic testimony is involved, Drucker's insights may be useful.
In conclusion, under Daubert the litigator seeking to prevent an economic expert from testifying has a large amount of admittedly aggressive and sometimes controversial ammunition to use. Controversy and tough questioning, however, are not new to science or law. Legal and scientific method share a commitment to the pursuit of truth wherever that may lead. In any event, Daubert permits, and probably requires, nothing less.
VI. Further implications of Daubert for antitrust
A. The end of the merger presumption?
Daubert suggests it is time to reexamine the facts and scientific validity of the economic science underlying the merger presumption created in Philadelphia National Bank'(131) 33 years ago. What is the scientific validity, and relevance, under Daubert of the economics underlying the Philadelphia National Bank pre-assumption?(132) Or, using traditional legal analysis to reach the same result, are not the facts underlying the presumption readily distingshable?
Daubert's double-requirement of scientific validity and particularized relevance implies the long-standing presumption of illegality using market shares and industry concentration should either be sharply limited to the facts of the 1950's economic studies that supported it and not applied elsewhere, or eliminated (as a practical matter, the two appear synonymous).
The Supreme Court explained the basis for its market share-concentration presumption of illegality as follows:
[W]e think that a merger which produces a firm controlling an undue
percentage share of the relevant market, and results in a significant
increase in the concentration of firms in that market, is so inherently
likely to lessen competition substantially that it must be enjoined in
the absence of evidence clearly showing that the merger is not likely
to have such anticompetitive effects."(133)
The Court relied on the following economic and legal analyses, primarily from the 1950s:(134)
1. Kaysen & Turner, Antitrust Policy 133 (1959).
2. Stigler, "Mergers and Preventive Antitrust Policy," 104 U. of Pa. L. Rev. 176, 182 (1955).
3. Bok, "Section 7 of the Clayton Act and the Merging of Law and Economics," 74 Harvard L. Rev. 226, 308-316, 328 (1960).
4. Markham, "Merger Policy Under the New Section 7: A Six-Year Appraisal," 43 Va. L. Rev. 489, 521-522 (1957).
5. Comment, "Substantially to Lessen Competition . . . : Current Problems of Horizontal Mergers," 68 Yale L.J. 1627, 1638-1639 (1959).
6. Machlup, The Economics of Sellers' Competition 84-93, 333-336 (1952).
7. Mason, "Market Power and Business Conduct: Some Comments," 46-2 Am. Econ. Rev. 471 (1956).
8. Bain, Barriers to New Competition 27 (1956).
Significantly, Bain's work, cited by the Court, was highly influential and played a seminal role in supporting the Supreme Court's presumption. Many antitrust lawyers, including the author, will be or were surprised to learn that Professor Scherer reports that later economic research showed that Bain's conclusions at the time, were "almost surely spurious:"
[R]ecent work has demonstrated that most, if not all, of the
correlation between profitability and concentration found by Bain and his
descendants (at least for the United States) was almost surely
spurious -- the result of aggregating a positive relationship between
sellers' market shares and profitability to the industry level.(131)
Similarly, the Court cited the following decades-old papers as the basis for the specific market share and concentration numbers it used in applying its presumption:
Kaysen and Turner ... suggest that 20% should be the line of
prima facie unlawfulness;
Stigler suggests that an acquisition by a firm controlling 20% of the
market after the merger is presumptively unlawful; Markham mentions 25%.
Bok's principal test is increase in market concentration, and he
suggests a figure of 7% or 8%.(136)
It does not take a rocket scientist to realize that the American economy today is profoundly different from the 1950s when the economic studies cited by the Supreme Court were done. The FTC, for example, recently described the fundamental changes in the American economy in Anticipating the 21st Century: Competition Policy in the New High-Tech, Global Marketplace:
Only fifty years ago, the United States economy faced the world
from a position of unrivaled strength. It had emerged from World War
II as the only major developed nation with its industrial plant intact
and had benefited from the influx of much of Europe's scientific
talent. Its economy was over eight times larger than its nearest rival,
essentially national in scope, and rather parochial in outlook. Its
potential for growth seemed boundless.
Although the next twenty-five years saw a flurry of export activity
to rebuild the economic infrastructures of Europe and Japan, U.S.
prosperity ultimately flourished in relative isolation. U.S. firms tended
not to consider foreign competition and thrived by fighting to produce
better and cheaper products than their domestic rivals while working
within a common economic climate, be it the costs of capital and
labor, governmental regulation, or the technological challenges and
opportunities that faced the country. For the most part, the key to
success for U.S. firms was large scale production of standardized goods
to satisfy this nation's demand.
That paradigm of competition has since shifted. First, U.S.
companies can no longer be contented with beating domestic competitors,
but often find their fiercest rivals in foreign firms. By the same token.
U.S. firms can compete today in more markets abroad than ever
before. Second, the basis for competition increasingly includes not
only the price at which a given standardized product is sold, but the
ingenuity, variety, and speed of the production, development, and
delivery of new goods and services. Innovation has become crucial to
the survival of a good segment of our economy.(137)
Do either the 1950's facts or economic theory underlying Philadelphia National Bank exist anywhere in today's economy?
In addition, Scherer reports much more recent economic research that seems to decimate the economic foundations of the Philadelphia National Bank presumption:
These conclusions must be leavened with appropriate caveats, for
the results are not uniform, the data have many shortcomings, the
statistical estimates leave much more variation in profitability
unexplained than they explain, and we are still some distance away from
disentangling fully the relative importance of price-raising and
Scherer continues, with commendable candor, to summarize the reliability, or lack thereof, of the current state of economic research on concentration and market shares:
One cannot help recalling the Princeton physics professor who
concluded a research report by noting, "The experiments indicate that the
negative mesons are absorbed only one billionth as rapidly as
calculated by the theoretical physicists. This would be a major error even
for an economist." Against that modest standard, at least, industrial
organization theory has done well.(139)
If its predictions have only on the order of one-in-a-billion accuracy, it appears that current economic research on concentration is still in the "cosmic search for understanding" stage. Under Daubert, this cannot conceivably be sufficient.
Yet today, the Philadelphia National Bank presumption lives on. The government's recent trial brief in Mercy Health illustrates the practical problem the merger presumption perpetuates today for the economy and innovation, by providing the government and other plaintiffs the leverage of a presumption that celebrates mechanical pigeonholing over economic substance. The Justice Department's brief read as follows.
A combination is presumed to violate section 7 if:
(i) the market is sufficiently concentrated; and
(ii) the combined entity would have a significant market share.
Philadelphia Nat'l Bank, 374 U.S. at 364; University Health, 938 F.2d
at 1218. . . .
* * *
In Philadelphia Nat'l Bank, 374 U.S. at 364, the Supreme Court
held presumptively illegal a merger resulting in a single firm
controlling 30% of a market in which four firms had 78% of the sales. In
Rockford, 898 F.2d at 1283, a hospital merger was held presumptively
illegal that resulted in the two defendant hospitals having a market
share of 64-72% (depending on the measure used). In University
Health, 938 F.2d at 1219, the court ruled presumptively illegal a
merger that would have left the merged firms with 43% of the market
and three smaller hospitals sharing the remainder.
* * *
Likewise, the merger would substantially increase the
Herfindahl-Hirschman Index ("HHI"), another often-used measure of market
concentration. A concentrated market yields a large HHI and an
unconcentrated market yields a smaller HHI; and the greater the rise in
HHI, the greater the change in market concentration. An HHI above
1800 indicates a highly concentrated market. Rockford, 717 F. Supp.
at 1279; Illinois Cereal Meals, 691 F. Supp. at 1137. The proposed
Mercy-Finley combination would raise the HHI in the Dubuque area
by 6676 to 10,000, the highest possible post-consolidation level. Even
considering the seven rural hospitals, the post-merger HHI would
increase by 2305 to 5629. In all events, these levels exceed those
found in many other cases declaring mergers illegal. PPG, 798 F.2d at
1502-03 (post-merger HHI of 3295; increase of 1352); United Tote,
768 F. Supp. at 1069-70 (post-merger HHI of 4640; increase of 700);
Rockford, 717 F. Supp. at 1280 (post-merger HHI of 4603 to 5647;
increase of 2048 to 2621); Illinois Cereal Mills, 691 F. Supp. at 1137
(post-merger HHI of 2606, increase of 480); Tasty Baking, 653 F.
Supp. at 1265 (relying on HHI calculations for several city markets).(140)
Justice Holmes once said: "It is revolting to have no better reason for a rule of law than that it was so laid down in the time of Henry IV. It is still more revolting if the grounds upon which it was laid down have vanished long since, and the rule simply persists from blind imitation of the past."(141) The scientific method of Daubert and traditional legal method combine to imply that the Supreme Court's Philadelphia National Bank's three-decade-plus old presumption that a merger will substantially lessen competition if certain market share and concentration numbers are present should be sharply limited to the facts that support it, or eliminated entirely (the latter is probably synonymous with the former). If we know the world is round, isn't it time to discard the world is flat theory? Alternatively, legal method also provides a well-established way for lower courts to limit or drop the Philadelphia National Bank presumption before the Supreme Court acts: distinguish it on the facts.
B. The end of the HHI?
The Herfindahl-Hirschman index (HHI) has been a mandatory element of merger analysis since it was adopted in the 1982 Merger Guidelines.(142) However, there is no longer any principled reason to continue to use this factually complex, mathematically tedious, and intuitively confusing index. It is also time to put clients, courts and litigators out of the misery of dealing with the HHI.
The economic literature does not demonstrate that the HHI is meaningfully superior to simple measures.(143) Professors Areeda and Hovenkamp point out that "[e]mpirical studies do not dictate a preference for one index over another."(144) They conclude that "the market shares of the parties are probably more useful."(145)
Further, sound antitrust merger analysis obviously requires more than an analysis of numbers. No numerical analysis alone can "substitute for a thorough economic analysis of the market."(146) As Areeda and Hovenkamp concluded, "concentration levels, however measured, cannot alone generate a satisfying prediction of a merger's effects."(147)
At one time, the HHI may have helped change the federal merger guidelines so they came closer to the national and international economic realities of the times. For that purpose, HHIs and those that chose to use them deserve much credit. Today, having served this important purpose, they are a needless and valueless Complexity.(148) It is time to abandon the mandatory use of the HHI in favor of a simpler index, like concentration ratios, that have the same power and thereby relieve clients, courts and antitrust lawyers from the HHI's burdens and complexities. When there are choices of equal power, science and law are again alike: keep it simple.
C. More antitrust experts
Daubert's focus on scientific validity invites a broad range of disciplines that may be helpful in antitrust cases in addition to economics. It would be unscientific to limit antitrust experts and expertise to economics or any other discipline.
Thus, Peter Drucker and similar practitioners are an obvious example of potential experts that may be useful both at the gatekeeper stage to assist in efforts to exclude an opposing expert, as well as to testify at trial.
Further, the history of science suggests that Daubert, by broadening and tightening the standards for antitrust expert witnesses, is likely to lead to significant advances and improvements in antitrust law and practice.
Indeed, one of the ideas developed outside economics may advance and simplify antitrust law by, of all things, eliminating the need to define a "market," as discussed next.
D. Moving beyond the market "mirage"
Nobel laureate George Stigler describes "[t]he typical antitrust case" as "an almost impudent exercise in economic gerrymandering."(149) In a colorful and cogent article, Frederick Rowe asserts that, after decades of trying, we now know that "the `correct' market remains a mirage," that "the manipulation of markets and the massaging of numbers [has] debased antitrust law into farce," that there is no "magic monopoly meter" or "foolproof intervention index," and that the "market" concept has become "a joker, a `bloody mess,' an intellectual black hole."(150)
Rowe's hard-hitting prose details a federal "[a]ntimerger policy concentrated on zapping puny `horizontal' mergers that gained high shares in petty markets" and "piddling acquisitions" that raised concentration levels in "trivial markets," such as "`artificial Christmas trees' or `vandal-resistant plumbing fixtures' used in prisons . . . urological catheters and knockdown caskets parts' [and] . . . a $20 million combination in the condom market."(151)
Rowe then argues that enough is enough, that, "[a]fter all the hand-wringing, finger-pointing, and groaning, why not at last admit what is now so painfully obvious," that "the numerology of market shares and concentration counts as competitive predictors does not work," and that the "quixotic quest" for the market "deserves a decent grave."(152)
But how? First, ending the merger presumption, discussed earlier, would be a great step forward. Second, in addition, or alternatively, both existing precedent and a discipline outside economics may provide a way of moving beyond "market" definition, and its "manipulation, paradox, and numbers games,"(153) to directly measuring net competitive effects.(154)
There is important antitrust law precedent that suggests an alternative approach that can proceed, first, by the plaintiff "assuming a market," that is, presenting, without proving, whatever market definition they want, including market shares and concentration ratios, second, the defendants demonstrating easy entry and other factors that "trumps" high market shares and HHIs. The government's major loss in U.S. v. Baker Hughes(155) involved a 76% market share that was "trumped" by easy entry and other factors. The Supreme Court also avoided market definition and directly analyzed competitive effects in its 1986 opinion in FTC v. Indiana Federation of Dentists.(156)
Professor Michael Porter of the Harvard Business School, from a discipline outside economics but certainly in a discipline relevant to antitrust, has developed a method of analyzing directly the "intensity of competition," the ultimate issue in antitrust merger analysis which does not appear to require litigation over what is the "market."(157) His method measures net competitive effects directly, focusing on "five competitive forces:  the entry of new competitors,  the threat of substitutes,  the bargaining power of buyers,  the bargaining power of suppliers and  the rivalry among the existing competitors."(158)
For practitioners and courts that have struggled with "relevant markets" and other vagaries of economic theory, Porter's definitions and analysis of the five competitive forces" are refreshingly familiar and understandable.
First example, on the entry of new competitors, Porter identifies the following factors for analysis:(159)
1. Economies of scale
2. Product differentiation
3. Capital requirements
4. Switching costs
5. Absolute cost advantages (such as access to necessary inputs,
proprietary learning and proprietary low-cost design)
6. Government policy
7. Expected retaliation
8. Entry deterring price
9. Properties of entry barriers
10. Experience and scale
As to the second competitive force, the threat of substitutes, Porter focuses on three factors:(160)
1. Relative price performance of substitutes
2. Switching costs
3. Buyer propensity to substitute.
On the bargaining power of buyers, a third "competitive force," Porter identifies two basic factors that determine the extent of buyer power -- bargaining leverage and price sensitivity, and facts relevant to evaluating each:(161)
A. Bargaining leverage
1. Buyer concentration versus firm concentration
2. Buyer volume
3. Buyer switching costs relative to firm switching costs
4. Buyer information
5. Ability to backward integrate
6. Substitute products
B. Price sensitivity
1. Price/total purchases
2. Product differences
3. Brand identity
4. Impact on quality/performance
5. Buyer profits
6. Decision makers' incentives
Fourth, on the bargaining power of suppliers, Porter lists eight factors to analyze:(162)
1. Differentiation of inputs
2. Switching costs of suppliers and firms in the industry
3. Presence of substitute inputs
4. Supplier concentration
5. Importance of volume to supplier
6. Cost relative to total purchases in the industry
7. Impact of inputs on cost or differentiation
8. Threat of forward integration relative to threat of backward
integration by firms in the industry
Finally, the fifth "competitive force," rivalry among existing competitors, Porter looks to the following facts:(163)
1. Industry growth
2. Fixed costs/value added
3. Intermittent overcapacity
4. Product differences
5. Brand identity
6. Switching costs
7. Concentration and balance
8. Informational complexity
9. Diversity of competitors
10. Corporate stakes
11. Exit barriers
Porter's analysis, and existing antitrust precedent, suggest a way to move beyond the relevant market "mirage" of current antitrust law.
First, Porter's concept of measuring the intensity of competition in a market can avoid entirely the need to litigate the relevant market issue in proper cases.
Second, his analysis employs standards and concepts that are often more understandable and practical than economic theory or economic concepts adopted by antitrust law, such as the merger presumption and relevant markets.
Third, Porter's approach is also likely to result in a more reliable determination of the ultimate antitrust issue, net competitive effects, than the current market "manipulation, paradox, and numbers games."
Daubert's scientific mandate, and traditional legal method encourage, and may require, nothing less.
E. Daubert, Copperweld and the NCRPA: from an industrial-era control model to the joint venture model of today
In 1984, in Copperweld,(164) the Supreme Court ended one of the longest and arguably silliest episodes in federal antitrust law history, ruling that corporations under common control were in substance one business entity, and thus could not "conspire" with themselves for purposes of section 1 of the Sherman Act as a matter of law. Section 1, of course, requires an agreement by at least two persons: "As one cannot clap with one hand, and as it takes two to tango, so in a [sections] 1 case there must be proof of more than solitary conduct; there must be proof of concerted action."(165) Under Copperweld, companies under common control are one-hand clapping, and cannot violate section 1 of the Sherman Act by "conspiring" among themselves.
Common control was a key form of conducting business in the industrial era that peaked in the 1950s and 1960s. Thus, antitrust's policy of promoting competition was significantly furthered by removing the risk of section 1 litigation and liability for companies operating under common control in various legal entities.
Today, the facts have changed again. The scientific focus of Daubert on facts suggests it is time for a Copperweld-like rule for the new reality of alliances and contractual joint ventures that have replaced entities under common control as the new method of conducting some of the most important and dynamic business in the world. Peter Drucker described this new reality of joint ventures where knowledge, technology and people are key:
[T]he greatest change in corporate structure, and in the way
business is being conducted, may be the largely unreported growth of
relationships that are not based on ownership but on partnership: joint
ventures; minority investments cementing a joint-marketing agreement
or an agreement to do joint research; and semi-formal alliances of all
The legal entity of companies under common control that Copperweld liberated are not as common nor as important. In Drucker's terms:
The legal entity, the company, is a reality for shareholders, for
creditors, for employees, and for tax collectors. But economically, it is
He highlighted the need for a new Copperweld-like rule for a world of joint ventures:
Increasingly ... alliances are becoming the dominant form of
economic integration in the world economy.(168)
He elaborates on how and why these new joint ventures work:
Japanese computer makers are gaining access to software
technology by buying minority stakes in hi-tech Silicon Valley firms. Large
pharmaceutical companies, both American and European, gain access
to research in genetics, medical electronics and biotechnology by
similarly buying minority stakes in start-up firms in these new disciplines,
or by going into partnership with university research labs. Banks gain
access to new investment markets by going into partnership with small,
independent asset managers -- with or without putting in any money.(169)
As an example, Drucker describes the informal alliance between Intel and Sharp:
And there are any number of even less formal "alliances" -- most of
them unreported -- like the one between the world's leading designer
of microchips, Intel, and Sharp, a major Japanese manufacturer. Intel
will do the research and the design, Sharp the manufacturing. Each
company will then separately market the resulting new products -- and
apparently neither firm is investing a penny in the other.(170)
International telecommunications alliances provide yet another current example:
In telecommunications there are the "consortia" in which three or
more big established telephone companies -- one American, one
English, one Swedish for instance -- team up to obtain licenses for
cellular-phone services all over the world, or for cable television, or to
buy together into an old government monopoly system about to be
privatized. Like outsourcing, the trend toward alliances of this sort in
which nobody has control -- that is, the trend toward partnerships -- is
Drucker explains there are a number of reasons for this recent trend away from single entity control to joint ventures.
First, "one reason is that no one company, not even the telephone giants, has enough money to swing the deal alone."
Second, "a more important reason is that no one company by itself has the needed technology." The CEO of a major pharmaceutical company explained:
"In ten years, more than half of all we sell -- and we plan on
doubling in volume during that period -- will come from joint ventures,
licenses, alliances, and from products made by companies in which we
have either no investment or only a minority stake, but for which we
are the research and/or marketing partner. It is simply impossible for
us -- and we are among the world's research leaders -- to have enough
scientific expertise in all new fields. It is equally impossible for
us -- and we pride ourselves on our marketing organization -- to serve all
the new channels through which healthcare products will be marketed.
Third, "in many parts of the world, especially in `emerging countries' like coastal China or Malaysia, business cannot be done except through a joint venture or an alliance with a local partner."(173)
Fourth, joint ventures are fundamentally different from the old industrial common control model because of the role of people:
Equally novel are the demands partnerships and alliances make on
managing a business and its relationships. Executives are used to
command. They are used to think through what they want and then to get
acceptance of it by subordinates. * * * But in a partnership -- whether
with an outsourcing contractor, a joint-venture partner, or a company
in which one holds a minority stake -- one cannot command. One can
only gain trust.(114)
Antitrust law has long prided itself for being based on substance, not form. Unfortunately, antitrust law is behind the times on joint ventures in today's economy.(175) The Supreme Court(176) stated the result needed in today's world economy: a joint venture should be viewed as "a single firm competing with other sellers in the market." Professor Bork incisively stated what antitrust policy should be, namely, ownership and contract integration should be symmetrical:
The law of contract integration and of ownership integration should
... be made symmetrical. There is no justification for suspending the
per se rule in one area and not the other.(177)
Two recent developments are encouraging, and moving in the right direction.
First, in 1996 the FTC staff recognized the problem, and recommended that antitrust guidelines for joint ventures be developed:
Nevertheless, it cannot be denied that the articulations of the
essential questions in Supreme Court and other cases differ in ways that
may have significance in particular factual settings. This should not be
surprising, given the wide variations in collaborations that appear for
court review, but it does not help to promote clarity or simplicity. In
addition, informal attempts by the lower courts to override Supreme
Court precedent have not succeeded in reducing concerns among
potential defendants that older case standards indeed may be applied
as a basis for treble damages.
In light of all of these circumstances, we believe that the time has
come for a significant effort to rationalize, simplify, and articulate in
one document the antitrust standards that federal antitrust enforcers
will apply in assessing collaborations among competitors. This effort
should be directed at drafting and promulgating "competitor
collaboration guidelines" that would be applicable to a wide variety of
industry settings and flexible enough to apply sensibly as industries
continue rapidly to innovate and evolve.(178)
Whether the FTC will deliver remains an open issue at the time this article was written.
Second, and most importantly, joint venture law has already moved toward Copperweld as a result of a 1993 federal antitrust law that, to date, has received little notice in general antitrust circles. The National Cooperative Research and Production Act of 1993 (NCRPA),(179) which is a 1993 amendment to a 1984 law, contains specific congressional findings that reflect today's reality and appear to profoundly change antitrust joint venture law.
In 1993, Congress declared that "cooperative arrangements among nonaffiliated businesses in the private sector [joint ventures] are often essential for successful technological innovation," that "the antitrust laws may have been mistakenly perceived to inhibit procompetitive cooperative innovation arrangements, and that clarification serves a useful purpose in helping to promote such arrangements."(180)
Further, the NCRPA statutorily mandates rule of reason treatment and other antitrust relief for a broad range and long list of "joint ventures." Section 3 of the Act mandates rule of reason treatment for qualifying joint ventures as follows:
Sec. 3. Rule of reason standard [[section] 4302]
In any action under the antitrust laws, or under any State law
similar to the antitrust laws, the conduct of any person in making or
performing a contract to carry out a joint venture shall not be deemed
illegal per se; such conduct shall be judged on the basis of its
reasonableness, taking into account all relevant factors affecting
competition, including, but not limited to, effects on competition in
properly defined, relevant research, development, product, process, and
service markets. For the purpose of determining a properly defined, relevant
market, worldwide capacity shall be considered to the extent that it
may be appropriate in the circumstances. (Emphasis added.)
The NCRPA is self-executing and does not require any type of governmental approval before or after the formation of the "joint venture." Section 2 of the Act defines a qualifying "Joint Venture" broadly to be "any group of activities ... by two or more persons for the purpose of" research, development or production of innovative products and services in two subsections, [section] 2(a)(6) and [section] 2(b).(181) The NCRPA, although it is not a model of legislative drafting, specifically includes a long list of activities and purposes that qualify as "joint ventures" under the Act, including, among numerous others:
1. "the production of a product, process, or service" using new facilities, or "existing facilities" if "the production of a new product or technology" is involved. [[section] 2(a)(6)(E) and [section] 2(b)(7)]
2. "the collection, exchange, and analysis of research or production information," if the information is "reasonably required to carry out the purpose" of the joint venture. [[section] 2(a)(6)(F) and [section] 2(b)(5)]
3. "exchanging information among competitors relating to costs, sales, profitability, prices, marketing, or distribution of any product, process, or service" if such information is "reasonably required to carry out the purpose of such venture." [[section] 2(b)(1)]
4. "marketing, distribution, or provision by any person who is a party tb such venture of any product, process, or service" if it involves "the distribution among the parties to such venture, in accordance with such venture, of a product, process, or service produced by such venture." [[sections] 2(b)(2)(A)]
The NCRPA, as a new statute, obviously has many unresolved issues. Nonetheless, it appears to be a major change in law that, in the spirit of Daubert and Copperweld, will promote competition by reducing the antitrust risks facing joint ventures by competitors and others, one of the most important forms of economic activity in the world today.
F. Hostile takeovers and efficient market theory
Leigh Trevor is the Dr. Semmelweiss of hostile takeovers and efficient market theory. If efficient market theory expert testimony is being used in court, Trevor's fact-driven analysis illustrates how Einstein's tests of scientific validity may be used at the Daubert gatekeeper stage.
Trevor, a corporate lawyer in Cleveland who has practiced law in the takeover field for more than 25 years, argues that the facts demonstrate that hostile takeovers have made America, following the Cambodian analogy, into a "Corporate Killing Field."(182)
The facts Trevor marshals on hostile takeovers are stunning. First, from March 1, 1985 through September 15, 1988, a period of 184 weeks, there were 198 major hostile contests for control of American companies, each involving at least $100 million. More than one major American company was put "in play" each and every week. During this same 184-week period, there were no hostile contests for control in Japan or in the Federal Republic of Germany.
Of the 198, the outcome was known in 181 as of September 15, 1988. Of the 181, Trevor reports that 87 percent of them are either dead and gone or have become so burdened with debt incurred in leveraged buyouts or some other defensive maneuver that their ability to withstand the next economic downturn is open to grave doubt."(183) That is, in Trevor's Cambodian terminology, 87% of the takeover target companies are either "dead" or "walking wounded."(184)
Perhaps one Trevor statistic best summarizes the crucial issue for American competitiveness and economic policy. In 1986, for the first time in U.S. history, the total costs of acquisitions -- $177 billion -- exceeded spending on plant and equipment by American manufacturers -- $140 billion.(185)
What are the arguments in favor of hostile takeovers advanced by efficient market theorists (arguments which Mr. Trevor states are advanced "with a ferocity unequalled by Pol Pot himself)"?(186) In general, economic theory has been used to argue that hostile takeovers and other stock market outcomes yield optimal results for society.(187) The basic argument is theoretically deduced from consumer welfare theory, but appears to be circular. In essence, the argument is that a market yields optimal results for society, that the stock market performs like a market, and that therefore hostile takeovers yield optimal results for society because they are part of the market.(188) Specifically, there appear to be two principal arguments.
First, hostile takeovers are "good in the aggregate."(189) That is, hostile takeovers enhance productivity and efficiency, move assets to their highest valued use, "discipline management" and sharpen the "market for corporate control."(190)
Second, hostile takeovers create wealth by making shareholders rich. Peter Drucker casts this argument in rather different terms: he says that a raider "bribes" shareholders and "to be able to pay the bribe he loads a heavy debt on the company ... which ... severely impairs the company's potential for economic performance."(191)
There are a number of generalized short-term stock market studies that are proffered to defend hostile takeovers. In Trevor's words, "They represent the triumph of yuppies over truth."(192) They stand for the proposition that, "If you ask the wrong questions, you will always get the wrong answers."(193) He argues, cogently, that these studies "have nothing to do with the key issues surrounding hostile takeovers: meaningful, sustained and sustainable stockholder wealth on both sides of the deal; productivity; jobs; community and other corporate constituency impacts."(194)
Yale economics professor Robert Shiller agrees: "[t]he efficient market hypothesis is the most remarkable error in the history of economic theory."(195) Peter Drucker similarly contends that hostile takeovers are "a serious disorder," and that "[t]here can be absolutely no doubt ... that they are exceedingly bad for the economy."(196)
In conclusion, proposed efficient market theory expert testimony may not pass the Daubert tests for scientific validity and reliability if Mr. Trevor's and friends' analyses are used effectively.
The article begins by analyzing and then suggesting that Daubert can be best applied by adopting Einstein's two-part test of scientific validity, empirical verification ("does it work?") and intellectual rigor ("why?"), and recognizing the fundamental similarity of scientific and legal method as disciplines characterized by the interaction of fact and theory.
Applied to antitrust economics, this approach to Daubert means that an economic expert's methodology or reasoning at the gatekeeper stage must be shown to be valid and reliable, that is, to be empirically verified "to work" and to be intellectually rigorous. The article then reviews some of the questions that Daubert invites, and may require, at the gatekeeper stage before an economic expert testifies in an antitrust case. Finally, the article explores other implications for antitrust of Daubert's adoption of a scientific standard of validity and reliability, including the dubious continuing validity of antitrust's 33-year-old merger presumption from the 1950s, a call for antitrust to stop using the Herfindahl-Hirschman index, and the need for a Copperweld-like rule that promotes, rather than hinders, the alliances and joint ventures that have replaced the industrial model of a single business entity under common control as a key new business model for the present and future, and the predication that "unilateral effects," "innovation markets" and other new economic theories will have difficulty reaching antitrust courtrooms under Daubert's mandate that the theories must be scientifically "reliable," "valid" and "trustworthy."
"Joint Venture" Under the NCRPA
Sec. 2(a)(6). The term "joint venture" means any group of activities, including attempting to make, making, or performing a contract, by two or more persons for the purpose of --
(A) theoretical analysis, experimentation, or systematic study of phenomena or observable facts,
(B) the development or testing of basic engineering techniques,
(C) the extension of investigative findings or theory of a scientific or technical nature into practical application for experimental and demonstration purposes, including the experimental production and testing of models, prototypes, equipment, materials, and processes,
(D) the production of a product, process, or service,
(E) the testing in connection with the production of a product, process, or service by such venture,
(F) the collection, exchange, and analysis of research or production information, or
(G) any combination of the purposes specified in subparagraphs (A), (B),
(D), (E), and (F), and may include the establishment and operation of facilities for the conducting of such venture, the conducting of such venture on a protected and proprietary basis, and the prosecuting of applications for patents and the granting of licenses for the results of such venture, but does not include any activity specified in subsection (b).
Sec. 2(b). The term "joint venture" excludes the following activities involving two or more persons:
(1) exchanging, information among competitors relating to costs, sales, profitability, prices, marketing or distribution of any product, process, or service if such information is not reasonably required to carry out the purpose of such venture,
(2) entering into any agreement or engaging in any other conduct restricting, requiring, or otherwise involving the marketing, distribution, or provision by any person who is a party to such venture of any product, process, or service, other than
(A) the distribution among the parties to such venture, in accordance with such venture, of a product, process, or service produced by such venture,
(B) the marketing of proprietary information, such as patents and trade secrets, developed through such venture formed under a written agreement entered into before the date of the enactment of the National Cooperative Production Amendments of 1993, or
(C) the licensing, conveying, or transferring of intellectual property, such as patents and trade secrets, developed through such venture formed under a written agreement entered into on or after the date of the enactment of the National Cooperative Production Amendments of 1993,
(3) entering into any agreement or engaging in any other conduct
(A) to restrict or require the sale, licensing, or sharing of inventions, developments, products, processes, or services not developed through, or produced by, such venture, or
(B) to restrict or require participation by any person who is a party to such venture in other research and development activities, that is not reasonably required to prevent misappropriation of proprietary information contributed by any person who is a party to such venture or of the results of such venture,
(4) entering into any agreement or engaging in any other conduct allocating a market with a competitor,
(5) exchanging information among competitors relating to production (other than production by such venture) of a product, process, or service if such information is not reasonably required to carry out the purpose of such venture,
(6) entering into any agreement or engaging in any other conduct restricting, requiring, or otherwise involving the production (other than the production by such venture) of a product, process, or service,
(7) using existing facilities for the production of a product, process, or service by such venture unless such use involves the production of a new product or technology, and
(8) except as provided in paragraphs (2), (3), and (6), entering into any agreement or engaging in any other conduct to restrict or require participation by any person who is a party to such venture, in any unilateral or joint activity that is not reasonably required to carry out the purpose of such venture.
Selected HHI Mathematical Properties
This appendix shows the graph of the HHI in a two-firm and three-firm market, and proves that the minimum HHI occurs when all the companies in a market have the same or equal market shares.(*) That is, it proves that if there are n companies in a market, the HHI is the lowest when each have the same market share, E = 100/n, with HHI - 10,000/n.
This result is proven in two ways, graphically when two and three firms in the market, and algebraically for any number of firms, n.
First, consider a two-firm market with market shares a and b. The HHI = [a.sup.2] + [b.sup.2], and a + b = 100%.
Since b = 100 - a, we can substitute b = 100 - a in the formula for HHI:
HHI = [a.sup.2] + (100 - a)[.sup.2]
= [2a.sup.2] - 200a + 10,000.
The graph of the HHI in a two-firm market is a parabola. The graph shows that the HHI is at a minimum when each company has the same market share, 50%.
Next consider a three-firm market, with market shares a, b and c, where a + b + c = 100%, and the HHI = [a.sup.2] + [b.sup.2] + [c.sup.2]. The graph of the three-firm HHI interesting. It is a like a "hammock," hanging from three points where the HHI is 10,000 (where each of the three firms has 100% of the market, and the other two firms have 0%). The graph similarly shows that the HHI is lowest when the three companies have an equal market share, 33%, with an HHI = 10,000/3 = 3,333.
Generalizing to a market with n-firms, the minimum HHI occurs when all companies have the same market shares, E. This can be proven using algebra, and rewriting the market shares of each company, [x.sub.i] in terms of the difference from E.
For example, in a ten-company market, the market shares of all the companies are the same when E = 10. Every other possible market share can be rewritten relative to E, e.g., 40 = 10 + 30, and 8 = 10 - 2.
Generalizing, if [x.sub.i] = E + [d.sub.i], where [d.sub.i] is the difference from E, then
HHI = sum (E + [d.sub.i])[sup.2] for n companies = sum ([E.sup.2] + 2[d.sub.i]E + [d.sub.i.sup.2]) = sum [E.sup.2] + 2E sum [d.sub.i] + sum [d.sub.i.sup.2]. (1)
The second term in formula (1), 2E sum [d.sub.i], equals zero, because we can prove sum [d.sub.i] = 0. We can prove sum [d.sub.i] = 0 as follows.
The sum of the market shares of all the companies in the market is, of course, 100, that is, sum [x.sub.i] = 100. Rewriting each company's market share in terms of its difference from E, we have:
Sum [x.sub.i] = 100 = sum (E + [d.sub.i]) = sum E + sum [d.sub.i]
The first term, sum E, is 100, since it is the sum of the market shares of all the companies when they have equal market shares, E.
Substituting 100 for sum E, we have
100 + sum [d.sub.i] = 100, and thus
sum [d.sub.i] = 0.
Thus the second term in formula (1) is zero, which reduces it to:
HHI = sum [E.sup.2] + sum [d.sub.i.sup.2] (2)
This formula shows why the HHI is smallest when all companies have equal market shares, E, that is, when the second term is 0.
The first term of this formula is the HHI when all the companies have the same market share, sum F. The HHI can never be smaller than this number by examining the second term in the formula, sum [d.sub.i.sup.2]. This term can never be negative, since it is squared. As a result, the HHI is smallest when [d.sub.i] is zero.
When [d.sub.i] is zero, of course, all the companies in the market with n-firms have equal market shares, E.
Finally, the HHI when n firms have the same market share, E = 100/n, is 10,000/n. This can be shown as follows:
HHI = sum [E.sup.2] = [nE.sup.2]. Since E = 100/n,
HHI = [nE.sup.2] = n(100/n)[.sup.2] = 10,000n/[n.sup.2] = 10,000/n.
(1) R. Bork, The Antitrust Paradox 118, 117 (1978).
(2) P. Drucker, The Age of Discontinuity 142, 137 (1968). Peter Drucker is "the preeminent management thinker of our time" according to Theodore Levitt, then editor of the Harvard Business Review. (Quoted in Bennett, Management Guru, Wall St. J., July 28, 1987, at 1.) He has been called "the seminal thinker on 20th-century business organization." Gendron, Flashes of Genius, 18 Inc. 30 (1996).
(3) Illinois Brick Co. v. Illinois, 431 U.S. 720, 741-42 (1977), quoting Hanover Shoe, Inc. v. United Shoe Machinery Corp., 392 U.S. 481, 493 (1968).
(4) See, e.g., Posner, The Chicago School of Antitrust Analysis, 127 U. Pa. L. Rev. 925, 932 (1979) ("the proper lens for viewing antitrust problems is price theory").
(5) Rule & Meyer, An Antitrust Enforcement Policy to Maximize the Economic Wealth of All Consumers, 33 Antitrust Bull. 677, 679 (1989).
(6) Eastman Kodak Co. v. Image Technical Services, 504 U.S. 451 (1992).
(7) Daubert v. Merrell Dow Pharmaceuticals, Inc., 125 L.Ed.2d 469 (1993). See generally Levy, Scientific Evidence After Daubert, 22 Litigation 48 (1995).
(8) Daubert was the basis for excluding economic expert testimony in two antitrust cases, for example, In re Aluminum Phosphide Antitrust Litigation, 893 F. Supp. 1497 (D. Kan. 1995) and City of Tuscaloosa V. Harcros Chemicals, Inc., 877 F. Supp. 1504 (N.D. Ala. 1995). See also Hockett & Hinman, Admissibility of Expert Testimony in Antitrust Cases: Does Daubert Raise a New Barrier to Entry for Economists?, 10 Antitrust 40 (1996).
(9) Frye v. United States, 293 F. 1013, 1014 (D.C. Cir. 1923).
(10) Bork, supra note 1, at 8 ("Basic microeconomic theory is of course a science"); M. Friedman, Essay on the Methodology of Positive Economics, Essays in Positive Economics 3, 4 (1953) (economics "is, or can be, an `objective science,' in precisely the same way as any of the physical sciences"); R. Posner, Antitrust Analysis: An Economic Perspective 3 (1976) (the "science of economics").
(11) Daubert, 125 L.Ed.2d at 485 (footnote omitted).
(12) Id. (footnote omitted).
(13) Application of Daubert to "unilateral effects" and "innovation markets" theories is beyond the scope of this article. For a summary of the "unilateral effects" theories, see 11 Antitrust 4, 31 (1997).
(14) 727 F. Supp. 570 (S.D. Cal. 1989).
(15) 951 F.2d 1128 (9th Cir. 1991).
(16) Frye v. United States, 293 F. 1013, 1014 (D.C. Cir. 1923).
(17) Rule 702, governing expert testimony, provides:
If scientific, technical, or other specialized knowledge will assist the trier of fact to understand the evidence or to determine a fact in issue, a witness qualified as an expert by knowledge, experience, training, or education, may testify thereto in the form of an opinion or otherwise.
(18) Rule 104(a) provides:
Preliminary questions concerning the qualification of a person to be a witness, the existence of a privilege, or the admissibility of evidence shall be determined by the court, subject to the provisions of subdivision (b) [pertaining to conditional admissions]. In making its determination it is not bound by the rules of evidence except those with respect to privileges.
As to burden of proof, the Supreme Court stated, "[t]hese matters should be established by a preponderance of proof." Daubert, 125 L.Ed.2d at 482 n.10.
(19) Id. at 485. (Emphasis added.)
(20) Id. at 481. (Emphasis added and citations omitted.)
(22) Id. at 480-81. (Emphasis added.)
(23) Id. at 485. (Footnote omitted.)
(24) Id. at 482-84.
(25) Id. at 482.
(26) Id. (Emphasis added.)
(28) See, e.g., C. Hempel, Philosophy of Natural Science (1966) and K. Popper, Conjectures and Refutations: The Growth of Scientific Knowledge (5th ed. 1989) (cited in Daubert, 125 L.Ed.2d at 483); M. Blaug, The Methodology of Economics, or How Economists Explain (1980) (summarizes various current views of scientific method). For example, falsifiability is currently popular in the philosophy of science. Falsifiability appears to be a negative way of asking the question Einstein asks directly. Working scientists and lawyers are likely to ask directly, Does it work?
(29) A. Einstein & L. Infeld, The Evolution of Physics 294 (1938). (Emphasis added.)
(30) L. Leshan & H. Margenau, Einstein's Space and Van Gogh's Sky 83 (1982). See also H. Margenua, The Nature of Physical Reality (1950).
(31) A. Whitehead, Science and the Modern World 2 (1925).
(32) Id. at 3. (Emphasis added.)
(33) Id. at 3.
(34) Id. at 9. Black Letter Law and modern legal reasoning share a similar distinction, with Black Letter Law being a form of pure abstraction, and modern legal reasoning requiring the interaction of fact and theory.
(35) Daubert, 125 L.Ed.2d at 482-83.
(36) The author was present at his lecture.
(37) Isaac Newton, despite his astounding achievements, was similarly humble:
I seem to have been only like a boy playing on the sea-shore, in diverting myself in now and then finding a smoother pebble or a prettier shell than ordinary, while the great ocean of truth lay all undiscovered before me.
Quoted in J. Bronowski, The Ascent of Man 236 (1973).
(38) Einstein & Infeld, supra note 29, at 75. Cardozo describes legal method with stunning similarity:
I have grown to see that the process in its highest reaches is not discovery, but creation; and that the doubts and misgivings, the hopes and fears, are part of the travail of mind, the pangs of death and the pangs of birth, in which principles that have served their day expire, and new principles are born.
B. Cardozo, The Nature of the Judicial Process 166-67 (1921).
(39) The Russian geneticist Lysenko provides an extreme example of the suppression of facts and scientific method, in his case on ideological grounds. See, e.g., L. Grahma, Science, Philosophy and Human Behavior in the Soviet Union (1987).
(40) Other examples of the perils of relying on prevailing theories include a New York Times editorial in 1921 that explained that Goddard's space rockets cannot possibly work because in space there is nothing for the exhaust to push against; Admiral Clark Woodward's testimony in 1926 that: "As far as sinking a ship with a bomb is concerned, you just can't do it"; Admiral Leahy's advice to President Truman in 1945: "The bomb will never go off, and I speak as an expert in explosives"; King Ferdinand's commission of a 4-year study that concluded in 1490 that a voyage by Columbus to the West Indies was impossible; a New York Times article that ridiculed the notion of human flight -- a week before the Wright Brothers lifted off at Kitty Hawk; Charles Duell, the Patent Office Director in 1899, opined, "Everything that can be invented has been invented"; and Robert Milliken, a 1923 Nobel Prize winner, who stated: "There is no likelihood man can ever tap the power of the atom."
(41) See, e.g., Whitehead, supra note 31, at 9 and Bronowski, supra note 37, at 202.
(42) Id. at 164, 194-218.
(43) Id. at 204.
(45) Perris, Light Fantastic, Northern Ohio Live, Aug. 1987, at 65. Classical physics had demonstrated that light was a wave. It was therefore necessary that the waves moved through a medium called the luminiferous (light-carrying) ether, like waves move through water. Michelson, the first American to win the Nobel Prize in physics, explained his experiment with two light waves as being like two swimmers, "one struggling upstream and back, while the other, covering the same distance, just crosses the river and returns. The second swimmer will always win, if there is any current in the river." Id. at 67. There wasn't. There was no ether.
(46) Id. at 69.
(47) E. Robin, Matter of Life and Death: Risks vs. Benefits of Medical Care 67 (1987).
(48) Leshan & Margenau, supra note 30, at 81. See also Margenau, supra note 30. at 75-99.
(49) Margenau, supra note 30, at 383-86.
(50) Friedman, supra note 10, at 30. It is "the centerpiece of post war economic methodology." Blaug, supra note 28, at 103.
(51) Friedman, supra note 10, at 4.
(52) Id. at 8-9. (Emphasis added.) He also claimed that economic theory has an excellent track record predicting reality in "countless applications." Id. at 22. As discussed in part IV, economic experts must be able to prove their methods or reasoning "works" before they are allowed to testify under Daubert.
(53) Id. at 14-15. Many lawyers are familiar with a humorous critique of this assumptions-are-irrelevant contention. The well-known "assume a can opener" joke about economists -- about the economist on a desert isle assuming the facts necessary, in that case, a can opener, to survive -- originated with this argument. See Blaug, supra note 28, at 103.
(54) Handier, Some Misadventures in Antitrust Policymaking -- Nineteenth Annual Review, 76 Yale L. Rev. 92 (1966).
(55) Kline, Geometry, Scientific American, Sept. 1964, at 60, 66.
(56) This is the assumption that given a line and a point not on the line, there is one, and only one line in the same plane that passes through the point and does not meet the other line.
(57) Kline, supra note 55, at 67.
(58) Id. at 60.
(59) For a very readable explanation, see G. Zukac, The Dancing Wu Li Masters 136-37 (1979).
(60) Id. at 135.
(61) Bork, supra note 1, at 117.
(62) Bork, Judicial Precedent and the New Economics, in Changing Antitrust Standards 10 (Conference Board Research Bulletin No. 144, 1983).
(63) Id. "Microeconomic theory rests upon a few empirical premises. For example, other things being equal, more of a product is demanded as price falls. That is an empirical proposition that nobody has even successfully rebutted. Once a few such basic premises are accepted, the rest follows like a proof in geometry. The system is entirely circular, which is its strength because circular logic is not rebuttable. A judge can understand and reason with the system."
(64) There still are people who believe the world is flat. According to the founder of the Flat-Earth Society, the Voyager spacecraft was a hoax. "All they are doing is flying in a circle around the magnetic north" of a platter-shaped earth. Cleveland Plain Dealer, Dec. 22, 1986, at 7A.
(65) Friedman, supra note 10, at 10, 40-41.
(66) Id. at 10.
(67) 457 U.S. 332 (1982).
(68) Easterbrook, Maximum Price Fixing, 48 Chi. L. Rev. 886, 903 n. 50 (1981).
(69) See generally, Weller, "Free Choice" as a Restraint of Trade in American Health Care Delivery and Insurance, 69 Iowa L. Rev. 1351 (1984).
(70) Easterbrook, supra note 68, at 902.
(71) Id. at 894.
(72) Id. at 902.
(75) Id. at 903 n.50.
(76) Id. at 903.
(77) Blaug, supra note 28.
(78) Drucker, supra note 2 at 142, 137. Drucker has also warned: There is no greater obstacle to learning than to be the prisoner of totally invalid but dogmatic theories. The economists are where the theologians were in 1300: prematurely dogmatic. P. Drucker, The Frontiers of Management 13 (1986).
(79) Friedman, supra note 10, at 22.
(80) Blaug, supra note 28, at 116.
(81) To many people, the predictive success of economics is poor. Herman of the Wall Street Journal remarked that, "[e]conomists frequently joke that they can predict anything but the future." Herman, Business as Usual, Wall St. J., Mar. 23, 1987, at 33. See also, Cox, You Want to Get Paid for Predicting the Future, You Can Sacrifice a Goat and Study Its Entrails. On the Other Hand, You Can Become an Economist, Regardie's July 1984, at 70.
(82) Blaug, supra note 28, at 263.
(83) Id. at 254.
(84) Id. at 261.
(85) Id. at 153.
(87) L. Thurow, Dangerous Currents: The State of Economics 3, 236 (1983).
(88) Posner, supra note 4, at 931 n.13.
(89) P. Drucker, The New Realities 156 (1989).
(90) P. Drucker, supra note 2, at 142-43.
(91) G. Stigler, Essays in the History of Economics 63 (1965). (Emphasis added.)
(92) Blaug, supra note 28, at 128.
(93) Id. at 257.
(94) Id. at 256-57.
(95) Id. at 253.
(96) See, e.g., R. Courant & H. Robbins, What Is Mathematics? 86, 97 (1941), and Margenau, supra note 30, at 83.
(97) Bork, supra note 1, at 116.
(98) P. Drucker, Toward the Next Economics and Other Essays 14-15 (1981).
(99) Id. at 13.
(100) Drucker, supra note 89, at 165.
(101) Id. at 164.
(102) Id. at 164-65.
(103) Drucker, supra note 98, at 14.
(104) Drucker, supra note 2, at 164.
(106) Id. at 143.
(107) Id. at 144.
(108) Id. at 145.
(111) Id. at 146.
(112) Id. at 152.
(114) Id. at 148.
(115) Id. at 150.
(116) Drucker, supra note 78, at 779.
(117) Drucker, supra note 98, at 17-18. MIT economics professor Robert Solow similarly has stated: "The main problem facing the country now to which legislation might make a contribution is to restore the growth of productivity." Tall Orders, N.Y. Times, Jan. 24, 1988, [section] 4, at 1.
(118) Drucker, supra note 98, at 13.
(119) Drucker, supra note 2, at 153.
(120) Drucker points out that Keynes abandoned the nation-state as the microeconomy in 1942. Drucker, supra note 98, at 15.
(121) Id. at 17.
(122) Drucker, supra note 78, at 48-49.
(123) Drucker, supra note 2, at 159.
(124) Id. at 156.
(125) Id. at 271.
(126) Id. at 162.
(127) Drucker, supra note 98, at 11.
(129) Id. at 17.
(130) Id. at 13.
(131) U.S. V. Philadelphia National Bank, 374 U.S. 321, 356, 370 (1963).
(132) This part of the article does not attempt an exhaustive analysis of this issue. That will be left to litigators and other forums.
(133) 374 U.S. at 363. (Emphasis added.)
(134) Id. at 363 nn.38-39.
(135) F. Scherer & D. Ross, Industrial Market Structure and Economic Performance 411 (3d ed. 1990).
(136) 376 U.S. at 365 n.41.
(137) Competition at the Close of the Century, A Report by Federal Trade Commission Staff, vol. I, chap. 1, at 1 (1996) (footnote omitted).
(138) Scherer & Ross, supra note 135, at 446.
(140) Trial Brief of the United States, at 18-19. Mercy Health Services (E.D. Iowa, Sept. 16, 1994). See generally, United States v. Mercy Health Services, 902 F. Supp. 968, 973 (N.D. Iowa, Oct. 27, 1995). See also Gruley & McGinley, Rebuke in Dubuque, Wall St. J., Jan. 4, 1996, at 1-A.
(141) Holmes, The Path of the Law, 10 Harv. L. Rev. 457, 469 (1897).
(142) I had the misfortune as a practitioner of counseling a client on a series of acquisitions at the time Herfindahl analysis became mandatory. In order to deal in the real world with the lack of data and the trivial yet tedious computations required before personal computers and spreadsheet programs were available, I developed a means of estimating a maximum HHI. For example, if the two largest firms have 20% and 10% market shares, then the maximum HHI possible is when each of the remaining firms have 10% market shares. In the example, the maximum HHI would be 400 plus 8 x 100, or 1200. I named this technique the Herfindahl EstimatoR at Peak Extremes ("HERPES"). Appendix 2 contains interesting mathematical properties of the HHI that were developed in an unpublished paper by the author with Betty Bock.
(143) Professor John Kwoka, for example, concluded that there is "no real basis for the belief that the Herfindahl is a better explanation of industry performance than is the concentration ratio." Kwoka, The Herfindahl Index in Theory and Practice, 30 Antitrust Bill. 915, 946-47 (1985). Accord Scherer & Ross, supra note 135, at 72-73.
(144) P. Areeda & H. Hovenkamp, Antitrust Law: 1988 Supplement 753.
(145) Id. at 755.
(146) Kwoka, supra note 143.
(147) Areeda & Hovenkamp, supra note 144, at 755.
(148) "Those of ripe experience in any craft rejoice in every opportunity to surround their skills with an air of mystery, by using an esoteric terminology; lawyers who are specialists in patent, admiralty, and antitrust cases are no exception to the general run of mankind." U.S. v. Morgan, 118 F. Supp. 621, 688 (S.D.N.Y. 1953).
(149) G. Stigler, The Economist as Preacher 51 (1985), quoted in Rowe, Market as Mirage, 75 Cal. L. Rev. 991 (1985).
(150) Rowe, supra note 140, at 991, 992, 995.
(151) Id. at 993, 994 (footnotes omitted). See also Rowe, The Decline of Antitrust and the Delusions of Models: The Faustian Pact of Law and Economics, 72 Geo. L. Rev. 511 (1984).
(152) Rowe, supra note 149, at 993, 995, 996.
(153) Id. at 991-92.
(154) This part of the article does not attempt an exhaustive analysis of this issue. That will be left to litigators and other forums.
(155) 908 F.2d 981 (D.C. Cir. 1990). See also the views of the current chair of the Federal Trade Commission, Robert Pitofsky, in his Proposals for Revised United States Merger Enforcement in a Global Economy, 81 Geo. L. Rev. 195, 201 (1992) ("mergers above the threshold levels would nevertheless be permitted where barriers to entry into the market were exceptionally low . . .").
(156) 476 U.S. 447 (1986) (no market definition or analysis need always be done in rule of reason cases).
(157) M. Porter, Competitive Strategy 3, 33 (1980) [hereinafter Porter (1980)], and M. Porter, Competitive Advantage 4, 11 (1985) [hereinafter Porter (1985)).
(158) Porter (1985), supra note 157, at 4.
(159) Porter (1980), supra note at 157, at 3-17.
(160) Id. at 23-24; Porter (1985), supra note 157, at 6.
(161) Porter (1980), supra note 157, at 24-27; Porter (1985), supra note 157, at 6.
(162) Porter (1980), supra note 157, at 27-29.
(163) Id. at 17-23.
(164) Copperweld Corp. v. Independence Tube Corp., 467 U.S. 752, 768 (1984).
(165) Tose v. First Penn. Bank, 648 F.2d 879, 893 (3d Cir. 1981).
(166) P. Drucker, Managing in a Time of Great Change 69-70, 72 (1995).
(167) Id. at 126.
(168) Id. at 72.
(169) Id. at 70.
(174) Id. at 72.
(175) Chicago Professional Sports Ltd. Partnership v. NBA, 95 F.3d 593 (7th Cir. 1996) is a recent analysis of the basic issue by Judge Easterbrook.
(176) Arizona v. Maricopa County Society, 457 U.S. 332 (1982).
(177) Bork, supra note 1, at 264.
(178) Joint Ventures Anticipating the 21st Century: Competition Policy in the New High-Tech Global Marketplace, A Report by Federal Trade Commission Staff, vol. I, chap. 10, at 16-17 (May 1996) (footnotes omitted).
(179) 15 U.S.C. [sections] 4301 et seq. See generally Weller, Siehl & Bono, NCRPA Spells Immediate Antitrust Relief for Health Care Providers, 5 Health L. Rep. (BNA) 1433 (Sept. 26, 1996), and Weller, New Antitrust Relief for Health Care Joint Ventures: The National Cooperative Research and Production Act of 1993, 9 Health Law. 1 (1997).
(180) National Cooperative Production Amendments of 1993, [sections] 2(a)(2) and [sections] 2(a)(3).
(181) See appendix 1 for the definition of "joint venture" under the NCRPA.
(182) Trevor, Hostile Takeovers -- the Killing Field of Corporate America (Mar. 11, 1986) [hereinafter Killing Field]. See also Trevor, Takeovers -- the "Dance," Defense and Deal (Feb. 11, 1987) [hereinafter Takeovers]; Hostile Takeovers: An American Falkland Islands Where the Argies Always Win (Sept. 1988) [hereinafter Kent State] (unpublished papers available from the author or Mr. Trevor).
(183) Trevor, Kent State, supra note 182, at 10.
(184) For example, of the companies involved in the first year, March 1985 to March 1986, Trevor lists as "dead" or "walking wounded" as of the date of his 1986 paper: ACF, AMF, American Hospital, CBS, Cluett-Peabody, Crown, Datapoint, Hilton Hotels, Informatics General, Pacific Lumber, Revlon, H. H. Robertson, SCM, Sea-Land, Southland Royalty, Storer Communications, Unocal, Warner Communications, and Zellerbach. See Trevor, Killing Field, supra note 182, at 2-7.
(185) Trevor, Takeovers, supra note 182, at 17.
(186) Trevor, Killing Field, supra note 182, at 9.
(187) See, e.g., Amanda Acquisition Corp. v. Universal Foods Corp., 877 F.2d 496, 500-502 (7th Cir. 1988) (Judge Easterbrook) (includes citations to factual and legal sources).
(188) Princeton economics professor Uwe Reinhardt finds this "worship ... at the feet of latter-day deities" misplaced. He argues that Wall Street experts "pride themselves on being rational, efficient and omniscient, but ... are usually none of the above." He goes so far as to call them "mindless traders" and the "Great Fools on Wall Street." Reinhardt, Will Health Care Become a Burnt Offering?, Hospitals, Jan. 15, 1989, at 17.
(189) Trevor, Killing Field, supra note 182, at 9.
(190) Id. at 10. See also Trevor, Kent State, supra note 182, at 12-15.
(191) Drucker, supra note 78, at 244.
(192) Trevor, Kent State, supra note 182, at 21.
(193) Id. at 23.
(194) Id. at 21.
(195) Donnelly, Efficient Market Theorists Are Puzzled By Recent Gyrations in Stock Market, Wall St. J., Oct. 23, 1987, at 80.
(196) Drucker, supra note 78, at 243.
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|Author:||Weller, Charles D.|
|Date:||Dec 22, 1997|
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