Optimal Antitrust Penalties and Competitors’ Injury

Herbert Hovenkamp’s primary target in Antitrust’s Protected Classes is the Chicago School’s optimal deterrence model of antitrust penalties. Substantive antitrust rules are often overinclusive prohibiting practices even when they are efficient – in order to avoid the costs of error associated with a more case-specific rule. The optimal deterrence model attempts to correct for this overinclusiveness by setting the penalty for antitrust violations at a level just sufficient to deter only inefficient instances of the violation. The task is complicated by, among other things, the myriad effects antitrust offenses can have on economic actors: allocative inefficiencies and efficiencies (the losses and gains, respectively, in value to consumers from reduced or increased output of a product); productive inefficiencies and efficiencies (cost increases or cost savings in production of a product); and wealth transfers from one economic actor to another. William Landes distills the analysis into a formula: the penalty should be equal to the net harm to everyone but the offender. For cartels, the optimal penalty would be equal to the deadweight welfare loss plus the wealth transfer to the cartel from purchasers; this penalty would deter only those instances of the offense in which the deadweight welfare loss exceeded any savings in production costs to the cartel. Since the Sylvania decision, courts have increasingly turned to economic models – particularly those of the Chicago School – to separate monopolistic from competitive harms. By formalizing the effects of antitrust practices on efficiency and on the wealth of various economic actors, the models guide the formulation of substantive rules, the application of rules to particular practices, and the definition of compensable harms. Hovenkamp’s notion of WL3 losses offers no such guidance. In the next Part, I argue that the concept of WL3 losses misconceives the socia1 costs of monopolistic exclusion and fails to provide a theoretical link between the competitor’s harm and the monopolistic outpμt restriction. In Part III, I argue that competitors’ harms should in some instances be compensable as antitrust damages – not because they represent social costs in themselves, but because they can be proxies for the demonstrable costs of monopoly. Competitors are not, I argue, a protected class; their right to recover is purely instrumental to the ultimate standard of consumer welfare.