The Fear of Market Concentration, the Legacy of the Chicago School of Antitrust, and Political Influence of Firms – Lessons for Developing Countries

By Francisco Beneke*

The Fall of the Structure-Conduct-Paradigm and the Rise of the Chicago School of Antitrust

In its first decades, the courts and enforcers in the US were skeptical of market concentration and took a wide view of which conducts from dominant firms could be considered unlawful under the antitrust laws. This was in part due to the influence of the structure-conduct-performance paradigm that was widely supported by industrial organization economists of the time.

That changed with the rise of the Chicago School of Antitrust. Some of their main ideas were that market concentration was not always a sign of diminished competition and that the unilateral exercise of market power is almost always self-correcting and does not warrant the costs of antitrust intervention. This thinking took a strong foothold in academia and the courts in the late 1970’s and during the first Reagan Administration. During this time, many key positions in the DOJ, FTC, and the federal bench were filled with Chicago School supporters. The result was a clear break with prevailing rules regarding merger control and unilateral conduct such as predatory pricing.

Since then, some of the considerations that courts made in the past when blocking mergers and punishing dominant firms are now dismissed as making no economic sense. In this post, I analyze one such specific consideration that relates to the desire of a decentralized market structure because of the danger market concentration poses to democracy.

Does Favoring an Economy of Many Producers instead of a few big Efficient Corporations Make No Economic Sense?

In the 1960’s, starting with Brown Shoe Co., the US Supreme Court issued a series of merger decisions blocking transactions that in their most part concerned companies with low market shares. One of the main arguments of the Court was that the intent of Congress in enacting certain amendments to the Clayton Act was to stop the worrisome rising tide of concentration in the American economy. In the words of the Supreme Court: “we cannot fail to recognize Congress’s desire to promote competition through the protection of viable, small, locally owned businesses”. Higher prices could result from curtailing consolidation but the Court interpreted that Congress had stroke a balance in favor of decentralization. Similar arguments were used in 1945 in the Alcoa decision by judge Learned Hand in interpreting section 2 of the Sherman Act.

The decisions mentioned that Congress was worried not only with the economic power of firms controlling large parts of commerce but also with the threat that such control could have on other values of their democratic society. Individuals could find themselves helpless before big corporations. These considerations are now largely dismissed as not grounded on sound economic analysis. Weren’t they though? Under the light of political economy theories it is a valid question to ask.

Some economists argue that market concentration is a predictor of the formation of interest groups, and that dominant firms are more likely to exert political influence independently from their industry peers. That is, a firm with monopoly power is more likely to lobby for its own interests rather than those of the market as a whole. In addition, there is literature that supports an association between campaign donations and policy outcomes favorable to the donating firms. In other words, interest groups are effective in shaping public policy. In an earlier post in this blog, Amine already analyzed how influential firms could shape the adoption and enforcement of antitrust laws.

These theories and empirical studies can provide a framework and foundation on which to analyze a worrisome trend toward concentration of firms in the economy and still fit the analysis under the consumer welfare paradigm. For example, a merger that will lead to a stronger oligopoly can make firms in the industry lobby more effectively in order to entrench their position, especially in regulated markets. The likely result could be lower consumer welfare even in the face of efficiencies associated with the transaction.

These political economy theories are old. Dismissing the concern of the courts in the past regarding concentrated markets and the threat to democracy as based on unsound economic analysis was more a product of not looking outside the boundaries of microeconomics rather than the considerations lacking any economic sense.

Should Developing Countries be Concerned about a Worrisome Trend toward (or a Reality of) Concentrated Markets?

Professor Eleanor Fox advocates for a different focus for competition policies in developing countries. Rather than pursuing consumer welfare, Professor Fox advocates for competition policy as a tool of empowering medium and small enterprises by protecting them from abuses of dominant firms. The theories that link concentrated markets with the formation of interest groups and sub-optimal policies can be another argument in favor of Professor Fox’s approach.

The possibility of entrenching a monopoly or oligopoly position with the help of government policy can also have a long lasting impact in the overall development of the country. Firms that have already made investments in a given technology can oppose the introduction of new ones until they recoup their investment. That in turn would slow the pace with which countries adopt the latest methods of production, affecting productivity and, therefore, the income of workers.

If there is a link between concentrated markets and all of these harms that are usually not considered in antitrust analysis, then developing countries should be concerned with a rising tide or a current predicament of concentrated markets.

Another issue would be to analyze whether competition policy could be an effective tool to achieve this end. Given the already extensive length of this post, that can remain as a topic for future discussion.

*Co-editor, Developing World Antitrust


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3 thoughts on “The Fear of Market Concentration, the Legacy of the Chicago School of Antitrust, and Political Influence of Firms – Lessons for Developing Countries

  1. […] things across time regarding competition policy. As it is known, antitrust enforcement in the US went through a deep overhaul in the late 70’s and all through the 1980’s. Therefore, it is hard to know from the study the effects that the current design […]


  2. […] a good thing for consumers (it can lead to other overlooked problems already analyzed in this blog). Sutton’s theories rely on a set of assumptions that may or may not hold in this specific case. […]


  3. […] who proposed non-mainstream, hipster ideas. Fast forward to the 1980s, and the Chicago School became conventional wisdom. Current antitrust law in the US still reflects a great deal of influence from it. I will not […]


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