I noted in a diary in late July that Christine A. Varney, the Justice Department's antitrust chief, made an important signal in how she was going to determine the scope and purpose of antitrust action:

In my view, we cannot develop sound antitrust policy merely on a case-by-case basis. Instead, as I have charged the Division's staff, we must consider the overall state of competition in the industries in which we are reviewing potentially anticompetitive conduct or mergers, or providing guidance to regulatory agencies charged with industry oversight. We thus must consider market trends and dynamics, and not lose sight of the broader impacts of antitrust enforcement.

In my opinion, she signaled a departure from the dominant philosophy that has governed competition law in the United States since the Reagan Administration. To simplify, there are basically two schools of thought:

Traditional trust-busting: You've got too much market concentration.



Judge Robert Bork's consumer oriented philosophy: Market concentration is okay, as long as prices are cheap.

As I wrote in this diary, the two different approaches lead to starkly different sorts of antitrust cases that are brought against industries. Professor Zephyr Teachout of Duke argues that we turn away from the Bork philosophy (which leads to "too big to fail," imo):

We now have an economy that we don't understand and can't seem to control even when we want to. Having created corporations, we have let some of them become "too big to fail"--a dangerous state of affairs, both economically and politically. Perhaps there are some companies that are simply too big to exist. One way to avoid a similar problem in the future could be an antitrust law that limits how big corporations can become. This is not a new idea; at the time the modern antitrust statutes took shape in our country about a century ago, political leaders were concerned directly with corporate size and power. In the last several decades, however, legal economists have sharply narrowed antitrust law, leaning heavily on the assumption that larger companies can be more efficient. This view has some merit; after all, efficient companies can produce cheaper consumer products, and everyone shares in the savings. But the recent crisis should make us consider whether these economists have been leading us astray. ... There are also reasons to think an antitrust policy focused on size and power makes good economic sense. Despite economic theorizing, bigger companies are not always more efficient companies. And even if they were, there are important societal efficiencies that go beyond whether individual companies operate cheaply or produce low-cost products. As Bert Foer of the American Antitrust Institute recently testified before Congress, we can choose to use competition policy to help prevent much of the systemic risk that has crippled our economy. By focusing more on size and concentration, we might be able to avoid collapse, unplanned nationalization, and bailouts.

Professor Teachout makes a point I agree with entirely. While it may be great that we get cheap stuff from Wal-Mart because of its illusory efficiencies, it cannot be a good thing for capitalism when any one company becomes so large that it crowds out challengers and endangers the economic system as a whole. We have to turn away from the Judge Bork (yes..THAT Judge Bork) philosophy and return to basic Teddy Roosevelt trustbusting. Simply put, we have to make it a bad thing to be too big.

Over the past few decades, in part under the increasing influence of free-market economic theory, antitrust enforcement by the Department of Justice has become more tolerant of size and concentration in themselves, and has focused instead on whether mergers will benefit or harm consumers. On the one hand, increased concentration increases the ability of large firms to raise prices, hurting consumers; on the other hand, or so the argument goes, larger firms gain economies of scale that enable them to reduce costs and therefore reduce prices to consumers. (If you believe that, take a look at the price of text messaging on your mobile phone bill.) Economics Blogger James Kwok

The Bush Administration adopted the antitrust philosophy that even Judge Bork's antitrust philosophy was out of bonds. They had one policy: no enforcement whatsoever. I had thought the incoming Obama Administration would revert back to the Borkian phiolosophy that was the default during the Clinton Administration, but the above mentioned announcement is now causing me to believe their intentions are much more expansive.

By adopting the Herfindahl-Hirschman Index the Antitrust Division would signal that it will go back (almost) to the basics of Antitrust, discarding the Bork philosophy for the first time in almost 30 years. If the department intends to analyze markets according to this measure, and not simply if "consumers have a choice", it is going to cause a lot of groaning in merger-minded corporate America.

Here is a quick example of how the HHI works:

For instance, two cases in which the six largest firms produce 90 % of the output: * Case 1: All six firms produce 15% each, and

* Case 2: One firm produces 80 % while the five others produce 2 % each. We will assume that the remaining 10% of output is divided among 10 equally sized producers. The six-firm concentration ratio would equal 90 % for both case 1 and case 2, but in the first case competition would be fierce where the second case approaches monopoly. The Herfindahl index for these two situations makes the lack of competition in the second case strikingly clear: * Case 1: Herfindahl index = 6 * 15%2 + 10 * 1%2 = 13.6%

* Case 2: Herfindahl index = 80%2 + 5 * 2%2 + 10 * 1%2 = 64.3% This behavior rests in the fact that the market shares are squared prior to being summed, giving additional weight to firms with larger size. The index involves taking the market share of the respective market competitors, squaring it, and adding them together (e.g. in the market for X, company A has 30%, B, C, D, E and F have 10% each and G through to Z have 1% each). If the resulting figure is above a certain threshold then economists consider the market to have a high concentration (e.g. market X's concentration is "0.142" or "14.2%"). This threshold is considered to be "0.18" in the US,[4] while the EU prefers to focus on the level of change, for instance that concern is raised if there's a "0.025" change when the index already shows a concentration of "0.1".[5] So to take the example, if in market X company B (with 10% market share) suddenly bought out the shares of company C (with 10% also) then this new market concentration would make the index jump to "0.172". Here it can be seen that it would not be relevant for merger law in the U.S. (being under 0.18) but would in the EU (because there's a change of over 0.025). Put simply, now two firms control half the market, so serious competition questions are raised.

This would be a very significant decision in Antitrust law. I'm quite sure a lot of industries in this country if placed under this analysis would come out extremely concentrated. Even by adopting the European delta standard, we'd still have a great deal of excess concentration across many, many markets, especially if considered on a regional rather than national basis.

Some of you may be thinking "The Health Insurance Industry!" Well, no. As I have written here often, the Insurance industry is exempt from antitrust action because of the God awful McCarran-Ferguson Act.