Edited by Colin Robinson
Chapter 2: Does antitrust policy improve consumer welfare? Assessing the evidence
2. Does antitrust policy improve consumer welfare? Assessing the evidence* Robert W. Crandall and Clifford Winston Should the United Stales pursue a vigorous antitrust policy? Soon after the passage of the Sherman Antitrust Act of 1890, economists led by John Bates Clark (1901) argued that the enforcement of such laws should be informed by the prevailing economic theory on the merits of competition and the extent to which ﬁrms’ conduct can enhance or weaken competition. However, economic theory since then has proven remarkably fertile in pointing out how various actions by ﬁrms may be interpreted as either procompetitive or anticompetitive. For example, when prices decline sufﬁciently so that no ﬁrm in an industry is earning economic proﬁts and some ﬁrms exit, this outcome may reﬂect a highly competitive market adjusting to a condition of temporary oversupply, or it could indicate that a large competitor is employing a strategy of predatory pricing to drive out its rivals. Similarly, when a ﬁrm builds a large factory, it may be engaged in vigorous competition and new entry, or it may be creating excess capacity as an implicit threat to potential competitors that it may raise output and cut price quickly if circumstances warrant. Although economic theory can help organize analysis of the economic variables affected by antitrust policy, it often offers little policy guidance because almost any action by a ﬁrm short of outright price ﬁxing can turn out to have procompetitive or anticompetit ive consequences. Given this range of...
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