On the Relationship between Antitrust and Strategy

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The antitrust policy is an important component of the institutional environment in which firms establish their perpetual struggle to achieve sustained competitive advantages.

Transcript of On the Relationship between Antitrust and Strategy

  • 1. 1 ON THE RELATIONSHIP BETWEEN ANTITRUST AND STRATEGY: TAKING STEPS AND THINKING AHEAD Guilherme Fowler A. Monteiro* Working paper [This version: august, 2013] I. INTRODUCTION The antitrust analysis is widely recognized as an interdisciplinary field of research and practice, within which economics and the law establish a fruitful dialogue. As an ultimate expression of this synergy, it is common to find economics professors teaching antitrust courses in law schools, mainly in Europe and the US. Building on this interdisciplinary perspective, the present paper argues that in addition to economics and the law, the antitrust analysis can draw inspiration from a third discipline, strategy. Although this claim is not fundamentally new1 , it is proposed here that much of the previous discussion on antitrust and strategy has been narrowly based on the theoretical approach proposed by Professor Michael Porter2 . The objective of this perspective paper is then twofold: (i) to undertake a review of the debate between antitrust and strategy and (ii) to present a framework inspired by the resource-based view of strategy3 , which can shed light on new aspects so far disregarded by the traditional antitrust analysis. In general terms, the importance of this theoretical exercise should not be underestimated. The antitrust policy is an important component of the institutional environment in which firms establish their perpetual struggle to achieve sustained competitive advantages. The economic theory usually applied to antitrust analysis, in turn, is a limited analytical tool since it is more * Professor of Institutional Economics and Business Strategy, Insper Institute of Education and Research (guilhermefam@insper.edu.br). 1 See Albert A. Foer, The Third Leg of the Antitrust Stool, Journal of Public Policy & Marketing, v. 21, n. 2 (Fall, 2002), pp. 227-231; Albert A. Foer, The Third Leg of the Antitrust Stool: What the Business Schools Have to Offer to Antitrust, 47 N. Y. L. Sch. L. Rev. 21 (Spring, 2003), pp. 21-49; Norman W. Hawker, Antitrust Insights from Strategic Management, 47 N. Y. L. Sch. L. Rev. 21 (Spring, 2003), pp.67-85; Felix Oberholzer-Gee & Dennis A. Yao, Antitrust What Role for Strategic Management Expertise?, Boston University Law Review, v. 90, pp. 1457-1477. 2 Notably Michael E. Porter, Competition and Antitrust: Towards a Productivity-based Approach to Evaluating Mergers and Joint Ventures, 33 U. West L. A. L. Rev., 2001, pp. 17-34. 3 See generally Jay B. Barney, Firm Resources and Sustained Competitive Advantage, Journal of Management, v. 17, 1991, pp. 99-120; Margaret A. Peteraf, The Cornerstones of Competitive Advantage: A Resource-Based View, Strategic Management Journal, v. 14, 1993, pp. 179-191.

2. 2 concerned with understanding the structure and functioning of specific markets, casting a macroscopic look at firms strategies. For that reason, the strategy scholarship has the potential to help the advancement of the antitrust analysis. The present article is divided into three parts besides this introduction. Section 2 makes a broad review of the literature on antitrust and strategy, stressing its potentialities and weaknesses. Section 3 then explores new analytical venues on the subject, specifically presenting a complementary framework for the antitrust analysis of market rivalry. Section 4 concludes the discussion, posing questions for future research. II. TAKING STEPS: WHAT DO WE KNOW ABOUT THE RELATIONSHIP BETWEEN ANTITRUST AND STRATEGY? The idea of incorporating concepts from strategy and more generally from management in the antitrust analysis is not unprecedented. Albert Foer4 , for example, usually resorts to the image of antitrust as a three-legged stool, which has been resting precariously on only two of them. These two legs are the Law School and the Department of Economics. The third missing leg is the Business School. The underlying claim is that the antitrust analysis does not take into account the firm itself and the individual decision makers within the firm. More importantly, the Business School would be a counterpoint to what is understood as the analytical limitations imposed by neoclassical economics. As noted by Norman Hawker5 , in the heart of the Chicago approach to antitrust is the hypothesis (arising from the neoclassical price theory) that firms rationally seek to maximize their profit6 . The focal point of strategic management, however, is not the maximization of profit per se, but obtaining a sustained competitive advantage. The concept of sustained competitive advantage is associated with the idea of corporate success in terms of above-normal performance (i.e., economic rents) for an indefinite period of time. 4 The American Antitrust Institute, whose president is Albert Foer, sponsored a symposium in 2002 on the relationship between business schools and antitrust policy. The proceedings of the symposium were published in the New York Law School Law Review in 2003. See Foer, supra note 1. 5 Supra note 1. 6 Oliver Hart presents this topic in a didactic way. The author notes that: [n]eoclassical theory [...] views the firm mainly in technological terms. A single-product firm is represented by a production function which specifies the output level Q that is obtained when given levels of n inputs x1,, xn are chosen. It is supposed that the firm is run by a selfless manager, M, who chooses input and output levels to maximize profit. This in turn implies that the manager minimizes costs. See Oliver Hart, Firms, Contracts and Financial Structure, New York: Oxford University Press, 1995, at p. 15. 3. 3 According to Jay Barney7 , a firm has a competitive advantage when establishing a strategy of value creation that is not simultaneously implemented by any competitor. This advantage is, moreover, sustained when actual and potential competitors are unable to duplicate the benefits associated with the strategy8 . Because the building of sustained competitive advantage is a tentative process, Albert Foer9 argues that business schools have the ability to help the antitrust to move beyond the neoclassical abstractions of the economic man i.e., the perfectly rational individual found in the ideas espoused by the Chicago approach10-11 . In addition, business schools have something important to say about competitive dynamics, which are not fully captured by neoclassical assumptions12-13 . Despite this potential, Oberholzer-Gee and Yao14 find that the influence of strategic thinking in the antitrust field is virtually zero15-16 . According to the authors, while numerous factors probably contribute to this limited influence, three aspects deserve special consideration. 7 Supra note 3. 8 Implicitly to Barneys definition, one can find five "core concepts" that inspire the business scholarship as proposed by Oberholzer-Gee and Yao (2010): (i) The differences in the long-term performance of companies reflect more than pure chance or fortunate circumstances, being the result of plans, choices and deliberate decisions aimed at higher profitability; (ii) Firms are successful in capturing value if they are able to create more value compared to competitors; (iii) Strategy is different from operational excellence. As noted by Porter (1996), good operations move the firm closer to its efficient production frontier, while a strategic plan provides a distinct value to consumers, suppliers and companies producing complementary goods and services; (iv) Resources held by the firm and dynamic capabilities can be a source of sustainable competitive advantage (these ideas will be further addressed in the second section of the paper); (v) A clear understanding of how a firm will compete is a necessary, but not sufficient condition for strategic success. Managers must also align the set of activities of an organization with the overall strategy that they aim to pursue. 9 Supra note 1, Albert A. Foer, The Third Leg of the Antitrust Stool, Journal of Public Policy & Marketing, v. 21, n. 2 (Fall, 2002), pp. 227-231. 10 Thomas B. Leary notes that [a]ll I will say here, in summary, is that I believe our present methods of antitrust analysis are still mired too much in an obsolete view of what competition is all about and that they are likely to become increasingly unrealistic. See Thomas B. Leary, The Dialogue between Students of Business and Students of Antitrust, 47 N. Y. L. Sch. L. Rev. 21 (Spring, 2003). 11 Gundlach et al. note that Marketing as an academic discipline can contribute to the development of antitrust, providing a basis for understanding the thinking of managers as well as the motivations and buying patterns of consumers. See Gregory T. Gundlach, Joan M. Phillips & Debra M. Desrochers, Antitrust and Marketing: A Primer and Call to Research, Journal of Public Policy and Marketing, v. 21(2), Fall 2002, p. 232-236. 12 Oberholzer-Gee and Yao (supra note 1) note that while microeconomics is generally well equipped to evaluate the static price effects associated with a firm being acquired by its competitor, it is relatively less able to analyze how M&A will impact product quality and the rate of innovation of the firm. 13 Pleatsikas and Teece undertake an analysis on the definition of relevant markets and the examination of market power in the context of rapid innovation. See Christopher Pleatsikas & David Teece, The Analysis of Market Definition and Market Power in the Context of Rapid Innovation, International Journal of Industrial Organization, v. 19, 2001, pp. 665-693. 14 Supra note 1. 15 In order to analyze the influence of strategic management in antitrust, the authors measure the prevalence of "strategic ideas" in antitrust policies and procedures. To do so, the authors conducted a comparison of numbers of citations. First, they compare the number of times that judicial decisions and 4. 4 (i) In an essential level, antitrust law is prim