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College of William & Mary Law SchoolWilliam & Mary Law School Scholarship RepositoryFaculty PublicationsFaculty and Deans2003Price Theory, Competition Product-Life-Cycle-Accounting-Reporting-Standard_041613n, and the Rule of ReasonAlan J. MeeseWi/Jram & Mary Law Schữữỉ. ajtnees^wm^duRepository Citation.Meese, Ahn J., "Price Theory, Competition, and the Rule of Reason* (2003). Huulty PubUaituw. SS3.https://scholarship.hw.wnvedu’facpubs/$S3Cep) Tight c 2003 by the authors. ĩhd ortfcfc is brought to you Product-Life-Cycle-Accounting-Reporting-Standard_041613by the William & Mary Law School Scholarship Repository.https://xhoiinh>pliu>.u'ni«du/lácpubsPRICE THEORY, COMPETITION, AND THE RULE OF REASONAlan J.Product-Life-Cycle-Accounting-Reporting-Standard_041613
Meese*Challenging traditional antitrust jurisprudence, Professor Alan J. Meese argues that the present structure of Rule of Reason analysis, applied pCollege of William & Mary Law SchoolWilliam & Mary Law School Scholarship RepositoryFaculty PublicationsFaculty and Deans2003Price Theory, Competition Product-Life-Cycle-Accounting-Reporting-Standard_041613ory, an economic paradigm that assumes that legitimate competition consists of unbridled technological rivalry, unconstrained by nonstandard contracts. Recently, however, the Supreme Court has begun to apply a competing paradigm—Transaction Cost Economics—when determining whether a contract is unrea Product-Life-Cycle-Accounting-Reporting-Standard_041613sonable "per se” or instead deserving of Rule of Reason scrutiny. Professor Meese argues that Transaction Cost Economics more accurately reflects markProduct-Life-Cycle-Accounting-Reporting-Standard_041613
et realities with the result that courts should also apply the teachings of this new paradigm when conducting Rule of Reason analysis.Accordingly, ProCollege of William & Mary Law SchoolWilliam & Mary Law School Scholarship RepositoryFaculty PublicationsFaculty and Deans2003Price Theory, Competition Product-Life-Cycle-Accounting-Reporting-Standard_041613e treatment because they plausibly produce nontechnological efficiencies by overcoming a market failure. In such cases, proof that a contract results in prices or other terms of trade different from those that preexist a restraint should not suffice to establish a prima facie case. Further, proof th Product-Life-Cycle-Accounting-Reporting-Standard_041613at contractual integration combats a market failure should, in any event, rebut a prima facie case, eliminating the need for courts to balance “anticoProduct-Life-Cycle-Accounting-Reporting-Standard_041613
mpetitive harms” against procompetitive benefits. Finally, because the less restrictive alternative element of Rule of Reason analysis rests upon an aCollege of William & Mary Law SchoolWilliam & Mary Law School Scholarship RepositoryFaculty PublicationsFaculty and Deans2003Price Theory, Competition Product-Life-Cycle-Accounting-Reporting-Standard_041613s that purportedly combat market failure.* Ball Professor of Law. Wiiluun and Mary School of Law. J.D., The Universừy of Chicago; A .B., The College of William and Mary.The author thanks Pau! Mahoney, Steven Salop, and participants in a faculty workshop at the University of Virginia for heJpfid comm Product-Life-Cycle-Accounting-Reporting-Standard_041613ents on an earlier version of this article. The William and Mary School of I MW supported this project with a generous summer research grant. I'elidaProduct-Life-Cycle-Accounting-Reporting-Standard_041613
Burton assisted in preparation of the manuscript.7778UNIVERSITY OF ILLINOIS LAW REVIEW [Vol. 2003Everyone knows that antitrust law should protect and College of William & Mary Law SchoolWilliam & Mary Law School Scholarship RepositoryFaculty PublicationsFaculty and Deans2003Price Theory, Competition Product-Life-Cycle-Accounting-Reporting-Standard_041613sely claiming that her own beef is more nutritious. She might also price below her own costs or those of her rival, driving him out of business and taking over the market, at least for a time. A firm that makes film might compete against its rivals by inventing a belter film or by redesigning a popu Product-Life-Cycle-Accounting-Reporting-Standard_041613lar camera to use only its brand of film, expanding its own market share as a result.While each of these practices is competitive in one sense, any raProduct-Life-Cycle-Accounting-Reporting-Standard_041613
tional society should distinguish among them. All would applaud the invention of a new film, but most would agree that slander and false advertising aCollege of William & Mary Law SchoolWilliam & Mary Law School Scholarship RepositoryFaculty PublicationsFaculty and Deans2003Price Theory, Competition Product-Life-Cycle-Accounting-Reporting-Standard_041613itimate) competition. Most, however, would adopt a more instrumental definition, distinguishing among various practices based upon their perceived social utility. Such an approach would treat as competitive any practice that, under the circumstances, would seem to further society’s welfare when comp Product-Life-Cycle-Accounting-Reporting-Standard_041613ared to the status quo.If competition, however defined, is our desideratum, then it might seem that its antithesis, “cooperation,” is a bad thing. NotProduct-Life-Cycle-Accounting-Reporting-Standard_041613
so fast. To be sure, Ford and General Motors should not cooperate when setting prices. But what if the same two firms merge, eliminating competition College of William & Mary Law SchoolWilliam & Mary Law School Scholarship RepositoryFaculty PublicationsFaculty and Deans2003Price Theory, Competition Product-Life-Cycle-Accounting-Reporting-Standard_041613 Similarly, two or more employers should not cooperate when setting the wages of their respective employees. However, what if a college sports league adopts a rule forbidding members to pay theừ “student-athletes” more than tuition plus room and board, claiming that the policy prevents “college” foo Product-Life-Cycle-Accounting-Reporting-Standard_041613tball from deteriorating into semi-pro football?’ Finally, grocers should not divide territories among themselves. Nevertheless, what if dozens of smaProduct-Life-Cycle-Accounting-Reporting-Standard_041613
ll grocers pool their resources to form a joint venture that develops a private label brand and assigns each member a particular territory in which itCollege of William & Mary Law SchoolWilliam & Mary Law School Scholarship RepositoryFaculty PublicationsFaculty and Deans2003Price Theory, Competition Product-Life-Cycle-Accounting-Reporting-Standard_041613mpetition often requires some cooperation, cooperation that reduces or even eliminates rivalry between the cooperating parlies. Indeed, when we speak of “a firm” engaged in “unilateral” activities, we arc almost always referring to what economists call a “nexus of contracts” between employees, manag Product-Life-Cycle-Accounting-Reporting-Standard_041613ers, and suppliers of capital, contracts that snuff out competition between the parties to them. (Partners at large law firms do not bid against eachProduct-Life-Cycle-Accounting-Reporting-Standard_041613
other for the labor of associates.) If society defines as competitive all marketplace activity that enhances its welfare, then many forms of coop-1SeeCollege of William & Mary Law SchoolWilliam & Mary Law School Scholarship RepositoryFaculty PublicationsFaculty and Deans2003Price Theory, Competition Product-Life-Cycle-Accounting-Reporting-Standard_0416139eration, even those that eliminate competition between cooperating parties, are competitive in the sense that is relevant for antitrust purposes.A society that seeks to encourage useful competition must construct an institutional framework that channels individual initiative in competitive directio Product-Life-Cycle-Accounting-Reporting-Standard_041613ns.’ Thus, society must prevent those unilateral acts, like slander, that reduce welfare. It must also enforce those contracts that implement useful cProduct-Life-Cycle-Accounting-Reporting-Standard_041613
ooperation. Finally, it must forbid those agreements that entail “undue” or “harmful” cooperation and thereby undermine society’s welfare.3 4Section 1College of William & Mary Law SchoolWilliam & Mary Law School Scholarship RepositoryFaculty PublicationsFaculty and Deans2003Price Theory, Competition Product-Life-Cycle-Accounting-Reporting-Standard_041613titive”) cooperation.5 Like “competition,” the term “restraint of trade” docs not define itself; all contracts, like all cooperation, restrain trade or competition in some sense. For nearly a century, then, courts have expressly held that the Sherman Act forbids only unreasonable restraints, usually Product-Life-Cycle-Accounting-Reporting-Standard_041613 purporting to judge “reasonableness” according to economic effect.6 In modern parlance, courts applying this “Rule of Reason” ask whether a contractProduct-Life-Cycle-Accounting-Reporting-Standard_041613
“promotes” competition or, instead, “destroys” it, by creating or exercising market power.7 8Some contracts are so plainly harmful that courts condemnCollege of William & Mary Law SchoolWilliam & Mary Law School Scholarship RepositoryFaculty PublicationsFaculty and Deans2003Price Theory, Competition Product-Life-Cycle-Accounting-Reporting-Standard_041613 under what courts (redundantly) call “the Rule of Reason.”9 Courts, scholars, and the enforcement agencies have articulated a three-step test to govern analysis under this Rule of Reason. First, a plaintiff must establish a prima facie case by showing that the restraint produces tangible anticompet Product-Life-Cycle-Accounting-Reporting-Standard_041613itive harm, a showing that usually consists of proof of “actual detrimental effects” such as increased price or reduced output.10 Second, the defendanProduct-Life-Cycle-Accounting-Reporting-Standard_041613
ts must prove that theừ agreement produces “procompetitive” benefits that outweigh the harm implicit in plaintiff’s prima facie case.11 Third, even ifCollege of William & Mary Law SchoolWilliam & Mary Law School Scholarship RepositoryFaculty PublicationsFaculty and Deans2003Price Theory, Competition Product-Life-Cycle-Accounting-Reporting-Standard_041613 Hayek, “Free" Enterprise and Competitive Order, in Individualism and Economic Order 107.110-14 (Henry Regncry 1972) (1948); see also Ronald H. Coase. The Institutional Structure of Production, 82 Am. Econ. Rev. 713, 717-18 (1992) (showing that the background structure of legal entitlements can affe Product-Life-Cycle-Accounting-Reporting-Standard_041613ct the nature of economic activity and thus the allocation of resources).4See Hayek, supra note 3. at 115 (‘‘We cannot regard ‘freedom of contract’ asProduct-Life-Cycle-Accounting-Reporting-Standard_041613
a real answer to our problems if we know that not all contracts ought to be made enforceable and in fact arc bound to argue that contracts ‘in restraGọi ngay
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