Abstract

This Article contends that modern rule of reason analysis, informed by workable competition’s partial equilibrium trade-off paradigm, is suitable for evaluating only a subset of agreements that may reduce transaction costs. The Article distinguishes between “technological” and “non-technological” transaction costs. Technological transaction costs entail the bargaining and information costs first emphasized by Ronald Coase, while non-technological transaction costs result from more fundamental departures from perfect competition, departures creating a risk of opportunism that accompanies relationship-specific investments. Modern law does accurately assess restraints that may reduce technological transaction costs—costs that are analogous to the sort of production costs recognized by the trade-off model. However, this same methodology is poorly suited for analyzing restraints that may reduce non-technological transaction costs. In particular, the model treats nonrestraint price and output as a “competitive” baseline against which to measure a restraint’s impact. As a result, tribunals applying the trade-off model may misinterpret benefits of such restraints, such as increased investment and resulting higher prices, as exercises of market power. Given the baselines that courts use, a test focused on price or output will condemn many restraints that enhance welfare. Several considerations explain courts’ failure to incorporate the lessons of transaction cost economics (“TCE”) when analyzing contracts that may reduce non-technological transaction costs. For one thing, the trade-off paradigm has shed light on important antitrust problems. Practitioners of a successful paradigm do not readily abandon it. Moreover, Coase’s seminal work on TCE focused exclusively on technological transaction costs analogous to ordinary production costs easily recognized within the trade-off paradigm. Furthermore, proponents of TCE actually embraced and refined the trade-off model for analyzing mergers producing technological efficiencies. Finally, lower courts have modified aspects of the modern rule of reason test, staving off anomalies that can undermine a paradigm’s support. Courts should accordingly “reframe” their analysis, selecting a different baseline against which to measure the impact of restraints that may reduce non-technological transaction costs. That is, tribunals should ask whether the restraint produces higher prices (or lower output) compared to the prices or output that would obtain if the defendants made specific investments without a safeguard against opportunism. Such an approach would hold constant the other variables that influence price and output, thereby isolating the impact of the restraint simpliciter on market power and/or transaction costs.

Document Type

Article

Publication Date

2010

Publication Information

62 Hastings Law Journal 457-529 (2010)

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