Franz Böhm. Democracy and Econimc Power

Reader
Competition Theories Lecture
Texts by:
Franz Böhm
Jules Coleman
Richard Posner
F. A. Hayeck
A. Sen
Wouter Wils
Frank Maier-Rigaud
Heike Schweitzer
The Posner/Turner Debate (R. Posner; D. Turner)
F R A N Z BÖHM
DEMOCRACY AND ECONOMIC POWER
Kartelle und Monopole in modernen Recht: Beitrage zum

übernationalen und nationalen europäischen und Amerikanischen
Recht, erstattet f¨rdie Internationale Kartellrechts-Konferenz in
Frankfurt a.M., Juni 1960= Cartel and Monopoly in modern law=
Ententes et Monopoles dans le droit moderne
Institut für Ausländische und internationales Wirtschaftsrecht,
Franlfur, Main
Karlsruhe: C.F. Müller 1961
1
F R A N Z BÖHM
DEMOCRACY AND ECONOMIC POWER
I
It was not always so, but today at any rate it is a f act that any nation which
operates a free market economy, also has an antitrust legislation. If we want to
know the reasons for this development, we shall probably be told that a free market
economy constitutes an economic system, which, although it is incompatible with
economic power, nevertheless engenders economic power and cannot get rid of it of its
own volition. Consequently special laws will have to be enacted either to liberate the
free market economy from economic power or to place the holders of economic power
under the control of the state and thus prevent them from abusing their dominant
position.
To begin with, there are two conclusions in this answer, which are absolutely
indisputable, firstly that the free market economy engenders economic power, and
secondly that it is incapable of eliminating such power once it has been established.
However, we should like to question the third conclusion that the free market economy
constitutes an economic system, which is incompatible with economic power.
In order to judge, whether this statement is true we must first of all come to an
understanding as to what is meant by the term "free market economy" and what
demands we can make on it.
By a free market economy we usually mean an economic system that dispenses
with any official control and instead entrusts control of the interplay of economic
forces to a mechanism - the market price system- which discharges its control
functions automatically. If we proceed from this conception of a free market
economy, it will obviously be wrong to argue that this system is incompatible with
economic power. On the contrary, the market price system controls the interplay of
economic forces automatically even if some market prices are manipulated by
economic power. Admittedly, the production and consumption programmes realized
in this case will differ to some extent from those that would be put into practice if
all prices were strictly competitive. Incomes will be distributed in another way and
the factors of production combined in a rather different manner. However, the
automatic control mechanism of the free market economy will be able to co-ordinate
the entire operational and consumption plans even under such circumstances. In an
economy ruled by monopolistic prices the reacting process develops in exactly the
same way as in an economy ruled by competitive prices. Those who hold no economic
power regard both the competitive and the monopolistic price as a fact which they
have to accept as it is. Each price modification causes the participants in the market to
change their economic dispositions, and it makes no difference, whether this change is
due to the influence of competition or to the deliberate decision of a monopolist guided
by considerations of market strategy. Most participants in the national economy, in
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particular the consumers, are not in the least in-terested in how the prices they are
charged are determined, whether such prices are competitive or monopolistic or fixed
by the government. To them price is price; what matters is that prices are low and, if
possible, will decline still further.
In short, whatever the case may be, whether all markets are competitive, or whether
some of them are monopolistic, the free market economy operates automatically in
both instances. The competitive and the monopolistic price are equally capable of
controlling the productive process. Whether this control will lead to more reasonable
results if prices are monopolistic, remains to be seen. For the moment all that matters
in this respect is that even a monopoly-ridden free market economy is automatically
controlled by the price mechanism.
Consequently we shall have to revise our original hypothesis that the free market
economy is incompatible with economic power. This - as we said -incorrect hypothesis
must be replaced by the following question "Does it make a difference to or is it
irrelevant for the logical content of a free market economy system, whether economic
power establishes itself in a number of markets? Does a free market economy, in
which all markets are competitive, ensure a higher degree of economic efficiency than
a free market economy, in which any markets are more or less monopolized? Is the
distribution of incomes in a strictly competitive economy more reasonable and
economically fair than in a monopoly-ridden free market economy? Does a strictly
competitive economy make better provision for affording all those participating in it
an equal amount of freedom than a free market economy, in which the holders of
economic power exercise an estimable permanent influence on market price
determination and are capable of manipulating the degree of shortage of supply or
demand in a unilateral manner?
The answer to all these questions is not immediately available, but can only be the
result of exact study and deliberation. We cannot even know whether the answer to
each of these three questions will be similar. It might be possible, for instance, that the
question as to the highest degree of efficiency cannot in any way be answered
conclusively, in other words, that we shall find that both the unrestricted and the
monopoly-ridden economy have their specific advantages and that it is a matter of
taste which of these advantages we prefer. The answer to the other two questions
will then perhaps be that the fully competitive economy is the only system of free
market economy that meets the requirements of social justice and freedom. However,
if we decide in favour of a competitive economy, then, of course, the proposition that
the competitive system of economy is incompatible with economic power can be
stated with complete certainty. It would follow already ex definitione, for a
competitive economy is a free market economy, in which competition is unrestricted
in any market either with regard to supply or to demand. The freedom of movement of
a supplier or a prospective customer, however, who is not exposed to any competition
or only to a limited amount of competition is identical with just that condition which
we call economic power.
Once we have decided in favour of a competitive economy, then we shall in fact also
be obliged to spare no effort in order to prevent the rise of economic power and to
eliminate any economic power already established. It has already been stated at the
outset that the automatic operation of the free market economy will be incapable of
effecting such prevention and elimination of power. Hence we shall have no option but
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to avail ourselves of the possibilities offered by the legislation and the political
executive. And in the event that these means, too, will be unable to effect the
complete prevention and elimination of economic power, we shall have to decide
whether to put up with the still remaining rest of economic power as a tribute
to the inevitable imperfection of all human systems and to be satisfied with the
automatic control of the free market economy or whether to prefer charging our
government with the control of monopolized markets by a deliberate economic policy
of official interventions if it should prove that automatic control through the market
price mechanism fails to furnish the expected results.
II
Of the three reasons, which argue in favour of opposing economic power and
encouraging competition, insofar as this is at all possible, the economic reason has
played the most important part, both outwardly and officially. lt has been argued that
monopolies impair the economic efficiency of the free market economy system and
result in the factors of production being imperfectly combined. Monopolies operate
like sand in the control mechanism of the free market eco-nomy. This at least was the
reason, which most governments advanced in order to justify the enactment of antitrust
laws and laws against restraints of competition. For it is obvious that governments
which espouse a free market economy, but nevertheless regard it as necessary to
interfere in the natural developments of the economic process, do not wish to
commit such a violation of the dogma without the blessings of the established
economic theory.
This, however, does not in any way alter the fact that the real motives behind
the enactment of antitrust laws were of a completely different, a more popular nature,
if I may say so. It was not economic efficiency and the effectiveness of economic
control, but social justice and civil liberties which were held to be threatened by
monopolies. In other words, the government was guided by the short-term and
perpetually recurring effects of the monopolists' actions on those immediately
concerned. In this case, however, already a primitive consideration, which does not
require much knowledge of economic theory, will be sufficient to discover a
disquieting fact, namely that some of the many changes in the earning and income
prospects of those participating in the market -which in a free market economy
constantly occur and which must be and usually are accepted by everybody
concerned - are caused by deliberate actions of certain individuals or groups.
Normally the quantity of a commodity supplied or demanded at a certain price is a
factor to which many persons on both sides of the market contribute their share
without any of them considering the possibility of setting the market price in motion
by an increase or reduction of their supply or demand. Each of them acts as if he had
not the slightest influence on the total size of the supply or demand, although he
knows, of course, that this total size is composed of the individual supply and demand.
But since none of them has even an approximate knowledge of the possible
dispositions of the others, nor any chance of influencing such reactions on their part,
the future price must necessarily remain completely unknown to them. If there is
any change in the current price, which has determined their supply and demand
dispositions, they will find themselves compelled to alter their future supply and
demand dispositions, but this compulsion is caused by an event which was completely
inaccessible to the manipulating arbitrariness of the individual parties concerned.
That is why this event -the price modification - is accepted by everybody engaged in
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commerce as fate, as force majeure, the submission and adaptation to which does not
detract from the self-confidence of free human beings. For nobody in his senses is
likely to interpret individual freedom as freedom from nature or freedom from the
law or legitimate commands of legitimate constitutional authorities or freedom from
the helpful or restrictive effects, which the existence, the planning, the actions and
omissions of all his fellow human beings in their entirety exercise on the scope of
his own development. Each of them is convinced to be at the mercy of these natural,
political and social facts without being able or permitted to keep them away from
himself. By freedom he understands no more than the chance and the right to react to
such facts according to his own decision and through such reactions -each of them
having the choice between several kinds of reactions -to contribute one of those grains
of sand, which will form the future pattern of society. However, it is a completely
different matter, if the social facts to which we must submit are deliberately
manipulated by some of our, fellow-beings, in other words, if their condition has to be
attributed to the will of some of our fellow-beings. In this case it is no longer a fate for
which nobody is responsible, that knocks at our door, but the action of an
individual who dares to play fate and to roll a rock in front of our feet, whose
existence affects our personal development, our chances as consumers, our
professional chances, as well as our income. We are not at all willing to accept as fate
such social facts created by spontaneous human actions, all the more when they
exercise a detrimental effect on our existence and our expectation from life. To
argue with real fate would be stupid and hopeless, since there is no responsible
perpetrator whom we can call to account. But where some individuals plant a fate of
their own creation before our eyes, it is responsible perpetrators of flesh and blood,
whom we are dealing with and whom we can charge for the damage inflicted on us,
unless they had the right to act in this way under our constitution and our laws.
Under the constitutions of free countries only those subjects have the right to
manipulate social facts which are expressly legitimised to form the volonté générale or
to execute the already formed volonté générale, and these are none but the
constitutional political authorities, and each of them again within the scope of its
constitutional competence and function. Only such social facts can claim to be
recognized as fate whose realization is attributable to an event we can describe as
being caused by the volonté de tous, in other words, an event consisting in the fusion
of many individual wills, which are independent of each other, provided always that
the result of this fusion cannot be clearly attributed to any of these spontaneous
individual acts involved. This is true at least of such social facts, which are typical
ones, since they are continuously manipulated over longer periods of time by decisions
attributable to the same persons and considerably affect the scope of development
and expectations from life of many people.
If, now, it happens that such typical dominant positions develop in the hands of
persons who are not counted among the constitutional political authorities, in other
words, that such dominant positions have been conferred on them neither by the
political constitution nor by any other law, and if the law and the government are
unable or unwilling to prevent the development of such dominant positions, and if
such positions are used by their holders without due regard to the will of the people for
any kind of purpose, most of all, however, for their own exclusive material benefit,
and nobody exists who can compel them or is competent to compel them to exercise
their powers with due regard to the will of the people, then we shall be faced with a
situation, which every sensible citizen may consider and must consider a threat to
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social justice and civil liberties. Such a situation has all the characteristics of an
arbitrary system, a system of anarchic warfare. Mere accidental external circumstances
decide, who is to hold power, and the will of those who happen to hold power
influences the course and arrangement of production. The question as to who has
access to economic activities and to which of them, if any, and which income he will
derive from such activities, depends only to some extent on the possession of
productive qualities and for the rest on plain arbitrariness and the talents displayed in
the struggle for the survival of the fittest or in economic guerilla warfare.
The specifically economic power is unique insofar as it developed on the soil of
private law, in other words, within the framework of a system which regulates the
contractual and extracontractual relationships between powerless persons, in other
words, which presupposes the lack of power of those involved in such relationships
and whose ru1es and institutions will lose much of their regulating and justice-
engendering force if certain groups among the subjects of private law acquire a
permanent and typical ascendancy over the other subjects of private law, and be it
only on a few markets. It is just as strange that this power is acquired by using the
means, the rights and the liberties, which private law provides for any purpose except
this one. In the beginning one proceeds not by force, but merely by cunning. The free
market economy, as already stated, is controlled by an automatically working control
mechanism, the market price system. Thus the scope of development, the chances of
professional success, the level of income, depend on the control of this anonymous
force which can neither be flattered nor intimidated. Consequently those, who are not
content to accept the chances of fortune allotted to them as if by fate, but instead wish
to succeed more quickly and easily without observing the general rules of the game,
have no other choice but to act like the manipulators of slot machines, by securing
access to the mechanism of this machine, in order to influence the result of the process
through a corresponding manipulation of the clockwork and lever system. Since the
mechanism of the price system resembles a plebiscite all that matters is to manipulate
such plebiscite by getting control of the numerous wills participating in it.
For this purpose two ways are offered by private law, a primitive and direct one, and a
complicated and indirect one. The direct way would be that all those participating in
the plebiscite or at least nearly all of them make a mutual agreement, under which they
arrange how to cast their votes. Whether they come to a direct agreement on their
quotations or on the quantities of each party's supply or demand, in both cases the
machine will produce other prices than it would have done without such manipulation
of the votes polled by all the participants. The complicated way would be that one
participant tries to accumulate, exclusively for himself, such a large quota of the total
supply or demand that his isolated disposition as regards such supply or demand will
itself already constitute the contents of the whole plebiscite. The first way consists in
forming cartels by means of making agreements in restraints of competition between
all or practically all competing suppliers or prospective customers. The second way
consists in expanding capacity, in founding large enterprises or combines with a
uniform control of operations. In this case, however, it will be insufficient to conclude
just a single agreement of relatively simple contents. A multitude of agreements with
all possible suppliers, bankers, workers and customers will be required as well as
numerous extracontractual transactions, in particular, competitive acts. The contents of
the cartel agreement differ in a most significant and alarming manner from those of all
other agreements usually made by any participants in the market. The agreements and
actions, however, which a participant in the market must employ in order to increase
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his personal market share in a monopolistic, partially monopolistic or oligopolistic
manner, differ in no way from any agreements and actions to be employed by
enterprises without any market power, that wish to remain fully competitive. This,
however, implies to state it already at this stage that the legislature can prohibit cartel
agreements without having in the least to worry about the success of a free market
economy. If it does so, it will destroy exactly what it wants to destroy and nothing
else. It is a clean surgical operation completely harmless to the entire economy.
On the other hand, the legislature cannot prohibit agreements or means and ways and
actions used to accomplish an exclusive monopoly of individuals or combinations,
since they are the daily bread even of those participants in the market, who dare not
think or hope of ever acquiring a quota of the total supply or demand likely to
influence the market as a whole.
To state it briefly: Either one sees to it that all users of an automatic machine will use
it in a manner, which has been fully concerted in advance, or one arranges to be the
only supplier or prospective customer, who can use such machine. Tue system of
private law-offers legal possibilities for applying both methods, possibilities, which the
ordinary civil lawyer adores so passionately that he will defend them with his last
ounce of blood, even if they are used for cheating the entire system of private law of
its content of order and justice. This infatuation of legal scholars, judges and lawyers
with the harmonious marvels of the microcosm of private law and their strange
indifference towards the macrocosm of private law, that is to say, the system of
private law in its entirety, this lack of interest in the connexion between the design of
the system of private law as a whole and the designs of its individual components, has
considerably facilitated the rise of economic power within the framework of the free
market economy system. For long periods of time lawyers have failed to notice how
fundamentally a social control system can be changed and deprived of its meaning by
the fact that those controlled by it place coins sanctioned by civil law in a slot
machine also sanctioned by civil law, once they have understood the mechanism of
this machine Practically all economic power is accomplished by a cardsharper
trick within the sphere of civil law.
If we consider the phenomenon of economic power from this view-point, the question
that arises will differ entirely from any question that would arise if we concerned
ourselves exclusively with the problem whether the reorientation of the economic
process caused by the emergence of economic power results in a plus or a minus or
just an aliud of economic efficiency. In this case there will be only one question,
namely: "Does economic power, if viewed from the angle of our political constitution
and from order content of our system of private law constitute legitimate power or not?
Can it be justified from considerations of social justice, as well as the distribution of
political rights in accordance with the way of life of a free people to expose the
citizens to interferences by the holders of such power, just as if the changes in the
scope of their development, their professional chance and their incomes caused
by such interferences were the result of a fate, for which nobody is responsible or
the result of legitimate decision by legitimate political authorities? Can the fact that
human power is at work in this case, be simply ignored as civil lawyers have done for
generations? Or can it be tacitly legitimized in its entirety just as if this had been laid
down in our constitution, in response to demands on the part of those who derive or
hope to derive advantage from the possession of such power?"
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It is obvious that the answer to this question is completely independent of whether on
balance and in the final analysis the possession and use of such economic power will
result in economic advantages or disadvantages and whether, if both should be the
case, the advantages outweigh the disadvantages or vice versa, or whether they
approximately cancel each other out. On the contrary, we must ask: ourselves "Shall
we, as citizens of a democratic state and members of a free system of society based on
the rights of the individual hand over such power to some of our fellow-citizens? What
consequences is this going to have for our liberties and for the content of social justice
inherent in our system of government and society?" If it should prove that serious
dangers to freedom and justice will ensue, we must resolve to place any conceivable
obstacle in the way of the establishment of economic power, and must not allow
ourselves to be deterred from this resolution by any regard for the possible useful
effects of this power any more than we would waver in our resolution to defend our
democratic system, should anybody try to show us how many wonderful projects
could be realized if only we decided to replace our democracy by a totalitarian
dictatorship. Nothing in this world can be had without paying for it, including
freedom. If we want freedom, we have no option but to sacrifice some advantage
which we could obtain only by employing concentrated power.
On the other hand, we are fortunate enough insofar as the results obtained from the
research in our economic theory have shown that a more fully competitive
system of economy also produces greater economic efficiency than a free market
economy pervaded by considerable elements of economic power, which cannot
provide any legal and political protection for competition. In this case, therefore, our
love of freedom is even rewarded by economic benefits, which otherwise
providence would not usually bestow on us. Thus, the advocates of a fully
competitive economic system will have no trouble in confronting those who
regard the interest of the state as the cardinal value, including, for instance, our
historians, who are in the habit of taking a sceptical attitude towards all other
principles, in particular ethical ones, and would just love to banish anybody with an
interest in systems of state and society from the historical arena, and to accommodate
him on the spectators' grandstand.
The problem of economic power is synonymous with the problem of private power.
The latter, however, is by nature a strictly constitutional problem. Right at the
beginning of this study we had to realize that private power does not in any way fit
into a constitutional democracy. It has no legitimate standing either in the system of
government or the system of society of a constitutional democracy. Our system of
government cannot tolerate it, because it knows no other than constitutionally assigned
power with a political purpose. Such power, in turn, is conferred in accurately
determined proportions on specific constitutional authorities, which as regards the use
they make of it are bound not only by limitations and duties, but also burdened with
constitutional responsibility and subject to control by the people. Here there is no
power in private hands, which could be used with the kind of freedom enjoyed by
private individuals as long as they move in the private sphere. The private sphere,
however, that is to say the system of private law, knows no power at all. Even the
state authorities must leave their power and authority in the "cloakroom'', if they want
to move in the private sphere, be it as buyers or sellers, proprietors or patentees.
Within the private sphere each typical and permanent position of power constitutes a
serious element of trouble, since the possession of power is completely
incompatible with the practically immeasurable freedom of movement and action
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which the system of private law allows its subjects on the understanding that they jus t
hold no power at all, but are controlled, and this in a very effective way, by their very
lack of power.
This problem of constitutional policy, however, is the problem, which in the subject of
this formal address has been expressed in the words “Democracy and Economic
Power".
III
On the Continent the term "democracy" is frequently used in a narrow sense by
confining it strictly to the state, and then it signifies a principle under which the whole
authority of the state is to issue from and to be transferred to the sovereign people. lt is
obvious, however, that this narrow conception of democracy does not answer the
purposes of our study. On the contrary, democracy should be interpreted in a wider
sense as a system embracing both state and society, in other words, we should try to
see the principles of our political constitution and the principles ruling our society,
which is founded on the rights of the individual, side by side and in their interplay and
to conceive all processes in state and society as a comprehensive functional whole.
In doing so we shall be in step with that great occidental movement, which led to the
rise of our modern democracy. For this movement, too, had in no way confined itself
to transforming the absolute or limited monarchy into a democratic state, but in
addition had set itself two wider aims, on the one hand to replace the feudal society by
a society ruled entirely by the rights of the individual, and secondly to fix the
relationship between society and state in quite a specific way, by regarding a society
regulated by certain laws and conventions as a perfectly healthy and sound
organisation, which, if necessary, could manage quite well without any executive
power and authorities, but would nevertheless want to equip itself with such
machinery of government in order to employ its services for a few additional purposes
while at the same time being afraid of it because the relationship between master and
servant could be reversed only too easily, if the servant were armed and the master
unarmed.
This third aim - the restriction of the state, in other words the specifically political
society to the role of a mere auxiliary institution for regulating the everyday
relationships between different human beings had been described at a very late period
in history by a Special term, when it was referred to as the principle of government by
law. This principle had previously been developed, under the influence of doctrines
from the 18th century philosophy of natural law, from the unlimited natural wealth of
rights of the individual and the social contract entered into between the individual and
society. However, during the constitutional struggles, which took place in England in
the 13th century and in which for the first time in the history of the occident the rule of
government by law was actually contested and legalised, it was not the natural
individual rights of men that people had in mind, but rather the venerable world of a
society ruled by the common law and its relevant principles, usages and judicial
precedence, and besides, of course, those numerous feudal titles, which, too,
constituted the system of society of that time. It was this self-supporting system of
society, which was to be protected against the arbitrary power and portentous political
caprices of the kings.
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Rule of the people within the state, rule of private law within the society and rule of
law as link between society and state -these are the three great political principles
which together constitute democracy in the Western sense.
IV
If, however, it is a fact that the society which is based on the right of the individual is
joined to and actually supports the democratic state and that the freedom enjoyed by
the citizen, which enables him to exercise his right to vote, as well as his other
rights of political co-determination within the democratic state, originates in the
main from the free system of society based on the rights the individual, then it
will be obvious that democracy is threatened from inside principally by two
dangers -firstly that the democratic legislature and the democratic government
will in time overextend their functions and competences to the prejudice
of the private sphere, and secondly that developments will be started within the
private sphere, which considerably restrict the scope of freedom permanent
dependency of entire groups of citizens and, in addition, create typical and
permanent dependencies.
Thus we are faced with the question whether economic power as it is to be found in
our modern industrial society is likely to create a situation where some of its
members will be permanently and perceptibly dependent on others. Another
question is whether such development might involve the danger that the democratic
legislature and the democratic government could feel themselves compelled or
tempted to interfere increasingly in the social processes within the private sphere in
order to set up permanent barriers against the establishment of power, or to protect the
dependent members of society against the arbitrariness of the economically more
powerful ones, or finally because the economically powerful members of society
acquire a political influence on the mind of the authorities and use this influence in
order to strengthen and to obtain political legitimation for their purely economic
dominant positions with the aid of the law and the executive.
It is obvious that any important shift in the distribution of power within the private
sphere is bound to be followed by a shift also in the distribution of political power
within the democratic society of citizens, and that this other distribution of power
within the people must be reflected in the composition of the parliaments and
governments. Power will always be respected.
If I had to apply a suitable term to the danger that might arise in this respect, I would
call it the danger of a refeudalization of society. A society might develop which
gradually loses its ability to support a democratic state. The state, on its part, would
then change its nature, that is to say the legislature and executive powers would no
longer be exercised in accordance with principles founded on the rule of law, nor with
the tendency of neutrality towards any social systems.
The constitutional authorities would feel less and less obliged to counteract the
emergence of private power, but make it their business to stabilize such dominant
positions by political means and to transform them into individual and group titles of a
political character. Such changes in the structure of society would affect even the
political ideologies. The sciences which attach great importance to the knowledge of
structural connections would have to yield their influence to sociological, historical
and psychological approaches, which interest themselves in lc.ws of historical
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developments, and if I may say so want to hear the historical grass grow. However, the
converse is probably true to an even greater extent. The emergence of doctrines,
which place the main emphasis on the laws of historical developments will
encourage tendencies towards concentration of power, while the occupation with
structural connections rather tends to encourage tendencies towards greater freedom.
At least this is the view that impresses itself on us, if we follow the history of 19th
century ideas and relate them to our own experiences during the 20th century, as
suggested by Ludwig von Mises, who once said that if we wished to understand
contemporary events, we would do well to read the books written some 20 or 30 years
ago. However, the distance of time would probably have to be a little longer than this.
V
Economic power arises within the private sphere. It is established with the means provided by
private law and exercises an effect primarily within the private sphere. The constitution of the
democratic state will only be indirectly affected by the organisational changes within the
private sphere. Hence we would have to examine, first of all, whether the shifts in freedom that
have occurred within the private sphere due to the increase in dominant economic positions are
so extensive as to permit us to talk of a feudalizing process which poses a serious threat to
democracy.
Personally I am inclined to question this insofar as only the use of already existing
economic power for the purpose of attaining maximal monopolistic profits is concerned.
Where a supplier’s monopoly is involved, the monopolist will charge higher prices and restrict
the supply much more than he would do if competition were available. Those who desire his
specific commodity will then be compelled by this act - an act committed and answerable by a
human being - to make changes in their demand dispositions which are prejudicial to their own
interests, and these modified demand dispositions would, in turn, cause shifts, partly favourable
and partly unfavourable, in the incomes and chances of an indefinite additional number of
participants in the market. All this would happen only because one of the participants in the
market has economic power. The distribution of incomes and chances would be different, if he
did not hold such power. To this extent all participants in the market who are affected by the
difference between the monopolistic and the competitive price are dependent on the
monopolist. This dependence is confined only to a single commodity and will probably be
felt only in very rare instances as a permanent social dependence of really large proportions. A
serious interference with the economic conditions of customers might exist, where a
monopolist changes his marketing system from one day to the other, that is to say, where he
eliminates practically the entire wholesale trade. Moreover, the yoke of monopolistic
domination, set up by such use of economic power, is too light as to give us serious cause
for calling to mind any feudal conditions.
Besides, a monopolist who does no more than this will simply provoke competition. Tue mere
fact that he restricts his production, raises his prices and simultaneously realizes considerable
profits, is bound to make operations in this field of trade and industry appear to be extremely
lucrative. Since the monopolist realizes his profits through a conduct which is detrimental to his
customers, he makes it very easy for potential competitors to earn money by appearing on the
same market with a slightly more favourable offer. That, in fact, is what monopolists upbraid
outsiders fo r with a great deal of emotion, when they accuse them of transacting easy business
in the shadow of cartels and monopolies, but they conveniently forget that nobody compels
our cartels and market dominating enterprises to cast any shadow. If economic power,
therefore, were something that a few enterprises in industries with large undertakings
11
could acquire almost automatically, so to speak, the legislature could perhaps justify
leaving such economic power to its own imperiled fate and to the control of the free
market economy system, which is still effective even when competition has ceased to operate
in a few markets. Good reasons could be advanced for abandoning the enactment of special
antitrust laws under such circumstances, in particular , antitrust laws, which provide for a
divesture and break-up even of perfectly sound enterprises and combinations of enterprises and
thus burden the courts and state authorities with an extremely difficult task, besides
providing them with means of intervention, which are none too harmless.
VI
In reality, however, economic power operates in a much more dramatic way. The conventional
idea that monopolists, partial monopolists or oligopolists are people, who thoroughly enjoy
their monopolistic income, as long as a benevolent fortune empties its cornucopia over them, is
probably not very flattering from a human point of view, but politically harmless, if not idyllic.
If the activities of holders of considerable market power were to confine themselves to
exploiting such power to the very limit so as to realize a momentary profit and to tap the
purchasing power of those directly or indirectly dependent on them, these people would hardly
constitute any serious threat to our civil and political liberties. Their existence would be no
obstacle worth speaking of to the civil and political order of democracy, but only affect its
moral prestige, if any. The monopoly capitalists have always been the proverbial villains of our
middle- class democracy, and it is, in particular, the political dictators of the 20th century who
never tire in drawing the attention of the general public to the sinister activities of these modern
"slaveholders and éminences grises".
The real menace to our liberties, our social and political system issuing from the possession of
economic power, however, lies in the fact that monopolistic power is not only exploited, but
desired, contested, defended and expanded with ruthless vehemence. Monopolistic power is
constantly menaced in a free market economy. Those who want to enjoy economic power must
first conquer and then defend and protect it. It is not the monopoly that exploits its power, but
the monopoly that fights for it, which really gives us serious cause for worrying about our
civil and political liberties, our system of society and government. The monopolist who
exploits his monopoly will at least also do quite a number of useful things. The monopolist who
engages in economic warfare, however, causes nothing but damage and destruction. He not
only exploits, but also subjugates and oppresses others and forces them against their own
interest into his never ending campaigns against outsiders, against existing and merely potential
competitors. It is not the possession of a monopoly, but only the fight for it that throws our
system of society out of gear and threatens to corrupt the constitutional life of our democracy.
Not until this war has actually begun will the whole legal cynism of the attacking holders of
power and the whole servility of those who are menaced by and afraid of such power, disclose
itself. And this corruption does not by any means confine itself to the parties directly involved
in this war, but is spreading also to the ranks of the legal and economic advisers and even to the
ranks of the principal ideologists in our contemporary literature.
The brunt of these destructive forces must be sustained by our system of private law. For it is
the fundamental absolute rights of the individual, in particular private property and patent
rights, but also the rights to trade-marks, firm names and other names, it is the party autonomy
and freedom of contract established by our law of contract, it is the liberties to which the
subject of our private law is entitled in extracontractual transactions and in industrial
competition together with all the institutions of private law pertaining to these rights, which to a
12
larger or smaller extent will be hopelessly corrupted in fraudem legis, as soon as they are used
by holders of economic power in order to establish, expand, defend and stabilize such power.
From an economic point of view these destructions of values caused by such warfare - to
mention only the waste and misdirection of productive energies, occurring in supply and
delivery stoppages, in aimed or global cut-throat price wars, cornering and patronage rebate
campaigns -constitute the costs of establishing and maintaining monopolies, costs which, as
a rule, are shifted entirely to foreign shoulders, although, in case of extreme necessity,
especially price wars, they are even shouldered by the monopolist himself , at least to a major
extent. Thus, if already the peaceful use of economic power is likely to impair the efficiency of
a free market economy, we must add to such economic damage the total cost of the fight for
economic power, which is not only unproductive, but also affects and curtails production, in
order to estimate the total economic damage caused by this detrimental development. This
aspect of the problem has in my opinion been neglected to an excessive degree both in the
economic and the legal discussion.
Still more extensive is the damage which such monopolistic warfare inflicts within the sphere
of the system of private law, since the regulating capacity and the logical content of all
civil rights and institutions depends on the fact that the subjects of private law using them have
no power and for that reason find themselves compelled when using their rights and liberties to
give most careful consideration to the interests of their fellow-creatures. Is it not astonishing
to see, how millions of private individuals with no influence whatever make available, day
after day, without any legal compulsion and quite spontaneously, their property, their
working power and a large proportion of their income to the economic production process, in
most cases even with a remarkable devotion and intelligence? Is it not evident that the striving
for individual advantage induces such persons to conduct themselves in a public-spirited
manner, and that it does so in a better and more effective way than the harshest coercive
measure and the most munificent rewards on the part of the authorities could do? All this will
be changed fundamentally, as soon as these rights and liberties pass into the hands of holders of
economic power and are used by them for purposes of economic warfare. No matter whether
property, patents, freedom of contract, the right to refuse completion of a contract,
advertising, possibilities offered by the stock corporation laws or price competition are
involved, all these instruments of exercising the rights of the individual transform themselves
from that very hour into injurious weapons, means of starvation and paralysation, methods
of subjection, dispossession and exploitation of other subjects of private law, into real
instruments of extortion and machinery for the destruction of values.
The contract, this classic bond between free and autonomous individuals changes into an
exquisite instrument for dominating human beings; competition whose purpose in society is to
serve as a peaceful and systematic selective process to be carried out by means of displaying a
superiority in productive qualities, transforms itself into a war of plain force, obstruction, injury
and deliberate dispossession in which the damage sustained by the loser is not the consequence
of his defeat, but his defeat the consequence of previously inflicted destruction and injuries.
A further and quite serious threat issuing from this transformation of the law of contract, as
well as the transformation of competition lies in the fact that such transformation extends to the
establishment and development of enterprises. The size of the enterprises is
increased beyond the limit that appears to be optimal from an economic point of
view. Not only does an enterprise desire to select a size likely to give it a dominant position on
a specific market, but the size is also calculated in such a way that it permits the market
dominating enterprises to protect their dominant economic positions against potential
13
competition, in other words, to conduct economic warfare. This applies not only to the scope
and size of single enterprises; it applies in particular to combinations of enterprises, in other
words, to the concentration of enterprises in the form of trusts. It is obvious that here the initial
aim is to carry out a horizontal concentration. Apart from the cartel method, a partially
monopolistic or oligopolistic market quota will in many fields of industry and commerce be
attainable not by a mere expansion of an enterprise, but by the absorption in a trust of similar,
hitherto competing enterprises. In most cases, however, this horizontal concentration will be
regarded as insufficient. In order to conduct monopolistic warfare, it is necessary to have
reliable assistants and allies in the fields to be found in front and in the rear of industry. Trusts,
therefore, also absorb undertakings on the supplier and customer level, in particular such
enterprises which have monopolised a specific article and are thus able to exert pressure on
firms outside the main enterprise. Here, the optimum which would be expedient merely from
considerations of profitability is well exceeded. In this case, therefore, it is no longer technical
reasons which account for the urge to form gigantic enterprises and combines, but the
requirements of the monopolistic war strategy which are at the back of the establishment
of vertically concentrated trusts organised from consumer to producer level, if not exclusively
though nevertheless and quite noticeably as an additional and highly effective contributory
motive. The reason for the extremely dangerous character of this development is that it will be
impossible to prohibit the means employed for effecting a vertical concentration in the
same way as, for instance, cartel enterprises can be prohibited, because these same means
are widely used in industry also for thoroughly useful and necessary objectives. The subsequent
deconcentration of such trusts will be just as difficult. This development, therefore, urges the
legislative, administrative and judicial defence against the establishment of economic power
into efforts, which, if they are to be effective, require an expenditure that will become
increasingly disproportionate to the success likely to be accomplished as well as into
interventions in the freedom of enterprises which are frequently less alarming to the
monopolistic horizontal and vertical combinations threatened by them than to the legislature,
the cartel authorities and the judges who have to use these heavy and none too harmless
guns, bombs and rockets.
With vertically concentrated trusts we usually find that the considerable amount of economic
power accumulated by any of them for a specific product is not so particularly impressive at all,
and that the trust managements are frequently not in a position to exploit the monopolistic
position of some of their enterprises on certain markets in a reprehensible manner. Frequently
this is not at all the actual reason why such trusts constitute a menace. The real reason for alarm
and anxiety les in the fact that most of the vertically concentrated trusts holding any kind of
dominant position on specific markets are completely erratic protagonists of the monopolistic
cold or hot war. They need not actually go to war. Their mere presence intimidates competition
on practically all markets on which they operate, even on those in which they hold little
economic power.
It is not the material enjoyment, the exploitation of economic power as such, but only the
struggle involved in establishing, maintaining, consolidating and expanding such power that
turns the resultant disturbance of our system of society, which is based on the rights of the
individual, into a thorough denaturing process. Economic power invariably proves to be also a
means to be used for defending and expanding power. Thus we actually have two denaturing
processes. On the one hand our system of private law is being denatured already by the
exploitation of economic power, and on the other, it is being purposely denatured and corrupted
in order that economic power may establish, maintain and consolidate itself.
14
VII
This, however, is undoubtedly a process, whose effects cannot be confined to the sphere of the
system of private law, but will affect also the constitution of the democratic state. The
legislature's obligation to intervene in this development, therefore, is an elementary one.
Moreover, it becomes increasingly evident that we cannot stop at attacking those methods of
establishing power and conducting monopolistic warfare which are more primitive and easy to
prevent, but that one day, whether we like it or not, we must decide to attack the far more
difficult problem of combinations.
The establishment and the use of economic power affect the constitution of the
democratic state and the constitutionally balanced relationship between the private and the
public sphere; the same is true of the manner in which a democratic country attempts to
counteract the danger of economic power by legislation and governmental policy.
It is from this specific viewpoint that we must first examine the two possibilities of a solution
which offer themselves in this respect. One of them consists in the prophylactic prevention of
the establishment of economic power already in its incipient stages with all the means at our
disposal and in taking care that already established economic power is eliminated or reduced.
The only possibility which may lead to success in this respect consists in favouring and
activating competition and eliminating any obstacles obstructing its progress. Competition is
the most remarkable and ingenious instrument for reducing power known in history. All we
have to do is to evoke it, and it will do any other work automatically. Besides, in order to
reduce economic power, it will by no means be necessary that such competition should
conform to the requirements which the modern doctrine of market systems has established for
so-called "full competition". On the contrary, any competition whose effects will be felt by the
holders of economic power will suffice. And even if the struggle between a partial monopolist
and any outsiders or between dyopolists or oligopolists does not in any way have the regulating
and controlling power characteristic for competition on really competitive markets, it
nevertheless has the effect of weakening existing dominant positions and preventing their
reinforcement . This effect, however, is so beneficial that for its sake we can easily put up with
a certain dose of economic disorder. Competition acts like a "strike-breaker" in relation to the
establishment of economic power; as such it should be employed unhesitatingly by the law and
the government, regardless of whether it operates in a somewhat clumsy and unorthodox
manner, as far as its economic controlling power is concerned.
This means of preventing and destroying monopolies by promoting competition has the
advantage of conforming to private law and democracy. It activates the self-controlling power
of the free market economy system and the workability of the system of
private law and simultaneously relieves the machinery of government of official control duties
and freedom-restricting interventions.
The other possibility consists in subjecting economic power to the control of constitutional
state authorities. Its use leads to intervention in the economy in two stages. In the first stage
private holders of economic power intervene in the processes of the free market
economy, whereas in the second stage the state steps in as higher authority and corrects the
private interventions by means of official interventions .
This procedure causes a paralysation of the system of private law, an overburdening of the
machinery of government and an entanglement of an unbalanced private sphere with an equally
unbalanced public sphere threatened by corruption. A feudalizing process takes place within
15
the private sphere which compels the state to reconcile the feudal titles in society with one
another by way of a compromise and thus renders it incapable of impartial government.
The result will be a system of society with a reduced content of justice and freedom, obscured
by indistinct dependent relationships, an unbalanced anarchy of various groups of social
interests, and on top of this denatured society a weak state which -to quote a statement by Carl
Schmitt, Professor of Public Law -can no longer cope with its responsibilities and meddles in
everything. And this interference necessarily proceeds in an amateurish and arbitrary manner
with a great deal of well-meant hustle by the authorities and parliament, but little
efficiency, with a punctilious attention to detail, but a supreme lack of an overall conception.
Many national antitrust laws provide for a mixed system. The main instrument to be used is the
prophylactic prevention of power by activating competition, while the principle of state control
is applied only to those remaining positions of economic power, which competition is unable to
eliminate. However, even such a mixed system is not harmless, since the dangers I referred to
are inherent in the principle of state control even if this principle is used only as a subsidiary
means, as ultima ratio. We could even dispense with this final completion of antitrust policy
without risking that any really effective dangers will arise from the rest of economic power still
unconquered. For even in those cases, in which competition fails and the chances for
restoring it are exhausted there is still one final automatic control left, namely the control
exercised by the interpendence of all markets within the system of a free market economy. And
although this control does not operate as exactly, as accurately and, above all, as promptly as
the control exercised by competition within a specific market, it nevertheless makes itself
felt to a still remarkable degree.
However, it is exactly when we decide to dispense with an administrative control of
monopolistic behaviour that we must try with redoubled energy to carry out to the very limit
the policy of the prophylactic prevention and reduction of economic power. We must create a
climate in which all available competitive energies feel like getting political and ideological
encouragement. Where such a climate exists, there will be no fertile soil for the establishment
and maintenance of economic power.
Moreover, experience has taught us that nothing will contribute more effectively towards
creating such favourable climate than the enactment of a law against restraints oF
competition or an antitrust law, no matter whether it is good or bad, severe or mild, whether it
favours competition or provides for state intervention , for as soon as such a law exists, public
opinion will begin to occupy itself with the problem of economic power by directing its
attention not only to theoretical doctrines and doctrines of social policy on this subject, but
also to practical events currently occurring on specific markets. For laws of this kind have
the strange effect that as soon as they have come into force, the sources of the facts will begin
to flow - not below the surface as before, but above ground so that every passer-by can
see them. Once these facts have become the subject of discussion, we may be sure that within a
few years' time the idea of competition will gain in popularity to a noticeable extent.
This, as I said, has been the case thus far everywhere in the world, at least in the free world.
And if this statement should still require any proof -one look into this room, at this
International Conference on antitrust Law held in Frankfurt am Main in the year 1960 will be
sufficient to furnish this proof. The fact that so many of the most important practicians and
theoreticians of antitrust policy from the different countries of the world have gathered
here during these days is, if I may say so, an event which all of us feel and are firmly
convinced, has something to do with democracy and freedom.
16
HeinOnline -- 8 Hofstra L. Rev. 509 1979-1980
COMPETITION AS A DISCOVERY PROCEDURE
F.A. HAYEK
TRANSLATED BY MARCELLUS S. SNOW
I.
I t would not be easy to defend macroeconomists against the charge that for
40 or 50 years they have investigated competition primarily under
assumptions which, if they were actually true, would make competition
completely useless and uninteresting. If anyone actually knew everything that
economic theory designated as “data,” competition would indeed be a highly
wasteful method of securing adjustment to these facts. Hence it is also not sur-
prising that some authors have concluded that we can either completely
renounce the market, or that its outcomes are to be considered at most a first
step toward creating a social product that we can then manipulate, correct, or
redistribute in any way we please. Others, who apparently have taken their
notion of competition exclusively from modern textbooks, have concluded
that such competition does not exist at all.
By contrast, it is useful to recall that wherever we make use of competi-
tion, this can only be justified by our not knowing the essential circumstances
that determine the behavior of the competitors. In sporting events, examina-
tions, the awarding of government contracts, or the bestowal of prizes for
poems, not to mention science, it would be patently absurd to sponsor a con-
test if we knew in advance who the winner would be. Therefore, as the title of
this lecture suggests, I wish now to consider competition systematically as a
procedure for discovering facts which, if the procedure did not exist, would
remain unknown or at least would not be used.
Marcellus S. Snow is professor emeritus at the University of Hawaii at Manoa;

[email protected]. This is a translation from German of F.A. Hayek’s “Der Wettbewerb als
Entdeckungsverfahren,” a 1968 lecture sponsored by the Institut für Weltwirtschaft at the
University of Kiel. It was published as No. 56 in the series Kieler Vorträge.
THE QUARTERLY JOURNAL OF AUSTRIAN ECONOMICS VOL. 5, NO. 3 (FALL 2002): 9–23
9
10 THE QUARTERLY JOURNAL OF AUSTRIAN ECONOMICS VOL. 5, NO. 3 (SUMMER 2002)
It might at first appear so obvious that competition always involves such

a discovery procedure that this is hardly worth emphasizing. When this is
explicitly underscored, however, conclusions are immediately obtained that
are in no way so obvious. The first is that competition is important only
because and insofar as its outcomes are unpredictable and on the whole dif-
ferent from those that anyone would have been able to consciously strive for;
and that its salutary effects must manifest themselves by frustrating certain
intentions and disappointing certain expectations.
The second conclusion, closely associated with the first, is methodologi-
cal in nature. It is of particular interest in that it has reference to the princi-
pal reason why, during the last 20 or 30 years, microeconomic theory—the
analysis of the fine details of the economy’s structure which alone can teach
us to understand the role of competition—has lost so much of its reputation,
and indeed as a result appears not at all to be understood anymore by those
calling themselves economic theorists. For this reason I would like to begin
here with a few words about the methodological particularity of every theory
of competition that makes the conclusions drawn from it appear suspicious
to all those who habitually decide, on the basis of an excessively simplified
criterion, what they are prepared to recognize as scientific.
The only reason we use competition at all has as its necessary consequence
the fact that the validity of the theory of competition can never be empirically
verified for those cases in which it is of interest. It is of course possible to ver-
ify the theory on preconceived theoretical models; and in principle we could
also conceivably verify the theory in artificially created situations in which all
the facts that competition is to discover are known to the observer in advance.
In such a situation, however, the outcome of the experiment would be of little
interest, and it would probably not be worth the cost of conducting it. When,
however, we do not know in advance the facts we wish to discover with the help
of competition, we are also unable to determine how effectively competition
leads to the discovery of all the relevant circumstances that could have been dis-
covered. All that can be empirically verified is that societies making use of com-
petition for this purpose realize this outcome to a greater extent than do oth-
ers—a question which, it seems to me, the history of civilization answers
emphatically in the affirmative.
The curious fact that the merits of competition cannot be empirically ver-
ified in precisely those cases in which it is of interest is also shared by the dis-
covery procedures of science in general. The advantages of established scien-
tific procedures cannot themselves be scientifically demonstrated; they are
recognized only because they have actually provided better results than alter-
native procedures.1
1See the interesting discussion of these problems in M. Polyani,

The Logic of Liberty
(London, 1951), in which the author is led from a study of the methods of scientific
research to that of economic competition. See also K.R. Popper, Logik der Forschung, 2d.
ed. (Tübingen, 1966), p. 16.
COMPETITION AS A DISCOVERY PROCEDURE 11
The difference between economic competition and the successful proce-

dure of science is that the former exhibits a method of discovering particular
temporary circumstances, while science seeks to discover something often
known as “general facts,” i.e., regularities in events, and is concerned with
unique, particular facts only to the extent that they tend to refute or confirm
its theories. Since this is a matter of general and permanent features of our
world, scientific discoveries have ample time to demonstrate their value,
whereas the usefulness of particular circumstances disclosed by economic
competition is to a considerable extent transitory. It would be as easy to dis-
credit the theory of scientific method by noting that it does not lead to verifi-
able predictions regarding what science will discover, as it has been to dis-
credit the theory of the market by noting that it does not lead to predictions
about particular outcomes of the market process. By the nature of things,
however, the theory of the market is unable to accomplish this in all those
cases in which it is reasonable to make use of competition. As we shall see,
the predictive power of this theory is necessarily constrained to a prediction
of the type of structure or abstract order that will result; it does not, however,
extend to a prediction of particular events.2
II.
Although this will lead me even further from my main topic, I should like to
add a few words about the consequences of the disappointment in microeco-
nomic theory caused by using fallacious methodological criteria of scientism.
Most of all, this disappointment was probably the major reason why a great
number of economists rejected it in favor of so-called macroeconomic theory,
which, since it aims to predict concrete events, appears to correspond better
with the criteria of scientism. In reality, however, it seems to me much less sci-
entific—indeed, in the strictest sense, it can make no claim to the name of a
theoretical science.
The basis for this point of view is the conviction that the coarse structure
of the economy can exhibit no regularities that are not results of the fine struc-
ture, and that those aggregates or mean values, which alone can be grasped
statistically, give us no information about what takes place in the fine struc-
ture. The notion that we must formulate our theories so that they can be imme-
diately applied to observable statistical or other measurable quantities seems
to me to be a methodological error which, had the natural sciences followed it,
would have greatly obstructed their progress. All we can require of theories is
that, after an input of relevant data, conclusions can be derived from them that
can be checked against reality. The fact that these concrete data are so diverse
2See my essay “The Theory of Complex Phenomena” in The Critical Approach in

Science and Philosophy, M. Bunge, ed. (London and New York, 1964). Reprinted in my
Studies in Philosophy, Politics, and Economics (Chicago and London, 1967).
and complex in our area of inquiry that we can never take them all into
account is an unchangeable fact, but not a shortcoming of the theory. A result
of this fact is that we can derive from our theories only very general state-
ments, or “pattern predictions,” as I have called them elsewhere;3 we cannot,
however, derive any specific predictions of individual events from them.
Certainly, however, this does not justify insisting that we derive unambiguous
relationships among the immediately observable variables, or that this is the
only way of obtaining scientific knowledge—particularly not if we know that,
in that obscure image of reality we call statistics, in aggregates and averages
we unavoidably summarize many things whose causal meaning is very
diverse. It is a false epistemological principle to adapt the theory to the avail-
able information, so that the observed variables appear directly in the theory.
Statistical variables such as national income, investment, price levels, and
production are variables that play no role in the process of their determina-
tion itself. We might be able to notice certain regularities (“empirical laws” in
the specific sense in which Carl Menger contrasted them to theoretical laws)
in the observed behavior of these variables. Often these regularities apply, but
sometimes they do not. Yet using the means of macrotheory, we can never for-
mulate the conditions under which they apply.
This should not mean that I regard so-called macrotheory as completely
useless. About many important conditions we have only statistical informa-
tion rather than data regarding changes in the fine structure. Macrotheory
then often affords approximate values or, probably, predictions that we are
unable to obtain in any other way. It might often be worthwhile, for example,
to base our reasoning on the assumption that an increase of aggregate
demand will in general lead to a greater increase in investment, although we
know that under certain circumstances the opposite will be the case. These
theorems of macrotheory are certainly valuable as rules of thumb for gener-
ating predictions in the presence of insufficient information. But they are not
only not more scientific than is microtheory; in a strict sense they do not have
the character of scientific theories at all.
In this regard I must confess that I still sympathize more with the views of
the young Schumpeter than with those of the elder, the latter being responsi-
ble to so great an extent for the rise of macrotheory. Exactly 60 years ago, in
his brilliant first publication,4 a few pages after having introduced the concept
of “methodological individualism” to designate the method of economic the-
ory, he wrote:
If one erects the edifice of our theory uninfluenced by prejudices and out-
side demands, one does not encounter these concepts [namely “national
income,” “national wealth,” “social capital”] at all. Thus we will not be fur-
ther concerned with them. If we wanted to do so, however, we would see
3See my above-cited essay, “The Theory of Complex Phenomena.”

4J. Schumpeter, Das Wesen und der Hauptinhalt der theoretischen Nationalökonomie
(Leipzig, 1908), p. 97.
how greatly they are afflicted with obscurities and difficulties, and how
closely they are associated with numerous false notions, without yielding
a single truly valuable theorem.
III.
Returning now to my actual topic after having shared my concerns with you
on this matter, I should like to begin with the observation that market theory
often prevents access to a true understanding of competition by proceeding
from the assumption of a “given” quantity of scarce goods. Which goods are
scarce, however, or which things are goods, or how scarce or valuable they are,
is precisely one of the conditions that competition should discover: in each
case it is the preliminary outcomes of the market process that inform indi-
viduals where it is worthwhile to search. Utilizing the widely diffused knowl-
edge in a society with an advanced division of labor cannot be based on the
condition that individuals know all the concrete uses that can be made of the
objects in their environment. Their attention will be directed by the prices the
market offers for various goods and services. This means, among other
things, that each individual’s particular combination of skills and abilities—
which in many regards is always unique—will not only (and not even prima-
rily) be skills that the person in question can recite in detail or report to a gov-
ernment agency. Rather, the knowledge of which I am speaking consists to a
great extent of the ability to detect certain conditions—an ability that individ-
uals can use effectively only when the market tells them what kinds of goods
and services are demanded, and how urgently.
This suggestion must suffice here to clarify the kind of knowledge I am
speaking of when I call competition a discovery procedure. Much more would
have to be added if I wanted to formulate this outline so concretely that the
meaning of this process emerged clearly. What I have said, however, should
be sufficient to point out the absurdity of the conventional approach pro-
ceeding from a state in which all essential conditions are assumed to be
known—a state that theory curiously designates as perfect competition, even
though the opportunity for the activity we call competition no longer exists.
Indeed, it is assumed that such activity has already performed its function.
Nonetheless, I must now turn to another question about which even more
confusion still exists, namely the meaning of the claim that the market spon-
taneously adjusts the plans of individuals to the facts thus discovered; in other
words, the question of the purpose for which the information thus discovered
is used.
The confusion that prevails here can be ascribed above all to the false idea
that the order which the market brings about can be regarded as an economy
in the strict sense of the word, and that the outcome must therefore be judged
according to criteria that in reality are appropriate only for such an individ-
ual economy. But these criteria, which hold for a true economy in which all
effort is directed toward a uniform order of objectives, are to an extent com-

pletely irrelevant for the complex structure consisting of the many individual
economies that we unfortunately designate with the same word “economy.”
An economy in the strong sense of the word is an organization or an arrange-
ment in which someone consciously uses means in the service of a uniform
hierarchy of ends. The spontaneous order brought about by the market is
something entirely different. But the fact that this market order does not in
many ways behave like an economy in the proper sense of the word—in par-
ticular, the fact that it does not in general ensure that what most people regard
as more important ends are always satisfied before less important ones—is one
of the major reasons people rebel against it. It can be said, indeed, that all
socialism has no other aim than to transform catallaxy (as I am pleased to call
market order, to avoid using the expression “economy”) into a true economy
in which a uniform scale of values determines which needs are satisfied and
which are not.
This widely shared wish raises two problems, though. First, as far as the
management decisions of a genuine economy or of any other organization are
concerned, it is only the knowledge of the organizers or managers alone that
can have any impact. Second, all members of such a genuine economy—con-
ceived of as a consciously managed organization—must serve the uniform
hierarchy of objectives in all their actions. Contrast this with the two advan-
tages of a spontaneous market order or catallaxy: it can use the knowledge of
all participants, and the objectives it serves are the particular objectives of all
its participants in all their diversity and polarity.
The fact that catallaxy serves no uniform system of objectives gives rise to
all the familiar difficulties that disturb not only socialists, but all economists
endeavoring to evaluate the performance of the market order. For if the mar-
ket order does not serve a particular rank ordering of objectives, and indeed
if, like any spontaneously created order, it cannot legitimately be said to have
definite objectives, neither is it then possible to represent the value of its out-
come as a sum of individual outputs. What do we mean, then, when we claim
that the market order in some sense produces a maximum or an optimum?
The point of departure for an answer must be the insight that, although
the spontaneous order was not created for any particular individual objective,
and in this sense cannot be said to ser ve a particular concrete objective, it can
nonetheless contribute to the realization of a number of individual objectives
which no one knows in their totality. Rational, successful action by an indi-
vidual is possible only in a world that is to some extent orderly; and it obvi-
ously makes sense to try to create conditions under which any randomly
selected individual has prospects of pursuing his goals as effectively as pos-
sible, even if we cannot predict which particular individuals will benefit
thereby and which will not. As we have seen, the results of a discovery pro-
cedure are necessarily unpredictable, and all we can expect by employing an
appropriate discovery procedure is that it will increase the prospects of
unspecified persons, but not the prospects of any particular outcome for any
particular persons. The only common objective we can pursue in choosing

this technique for the ordering of social reality is the abstract structure or
order that will be created as a consequence.
IV.
We are accustomed to calling the order brought about by competition an equi-

librium—a none-too-felicitous expression, since a true equilibrium presup-
poses that the relevant facts have already been discovered and that the process
of competition has thus come to an end. The concept of order, which I prefer
to that of equilibrium, at least in discussions of economic policy, has the
advantage of allowing us to speak meaningfully about the fact that order can
be realized to a greater or lesser degree, and that order can also be preserved
as things change. Whereas an equilibrium never really exists, one can
nonetheless justifiably claim that the kind of order of which the “equilibrium”
of theory represents a sort of ideal type is realized to a great extent.
This order manifests itself first of all by virtue of the fact that the expec-
tations of particular transactions with other persons, upon which the plans of
all the economy’s participants are based, are to a considerable extent realized.
This mutual adjustment of individual plans is brought about by a process that
we have learned to call negative feedback ever since the natural sciences have
also begun to concern themselves with spontaneous orders or “self-organizing
systems.” Indeed, as even well-informed biologists are now aware,
long before Claude Bernard, Clark Maxwell, Walter B. Cannon or Norbert

Wiener developed cybernetics, Adam Smith perceived the idea just as
clearly in his Wealth of Nations. The “invisible hand” that regulates prices
appears to express this idea. Smith says in essence that in a free market,
prices are determined by negative feedback.5
It is precisely through the disappointment of expectations that a high

degree of agreement of expectations is brought about. This fact, as we shall
see later, is of fundamental importance in understanding the functioning of
the market order. But the market’s accomplishments are not exhausted in
bringing about a mutual adjustment of individual plans. It also provides that
every product is produced by those who can produce it more cheaply (or at
least as cheaply) as anyone who does not in fact produce it, and that goods
are sold at prices that are lower than those at which anyone could offer the
goods who does not offer them. This does not of course prevent some people
from extracting large profits above their costs, as long as these costs are con-
siderably lower than those of the next best potential producer of the good. It
5G. Hardin, Nature and Man’s Fate (New York and London, 1959). Mentor Edition,
1961, p. 54.
means, however, that of the combination of different goods that is actually

being produced, as much is produced as we can manufacture by any method
that is known to us. That is of course not as much as we could produce if in
fact all the knowledge that anyone possessed or could acquire were available
at a central point and from there could be entered into a computer. The cost
of the discovery procedure that we use is considerable. But it is unfair to judge
the performance of the market in a certain sense “from the top down,” namely
by comparing it with an ideal standard that we are unable to attain in any
known way. If we judge the market’s performance “from the bottom up”
(which seems to be the only permissible way), i.e., by comparison with what
we could attain by means of any other method available to us, and in partic-
ular by comparison with what would be produced if competition were pre-
vented—for example, if a good could be produced only by those the authori-
ties allowed to do so—the market’s performance must be judged as most
considerable. We need only recall how difficult it is in an economy with effec-
tive competition to discover ways of providing consumers with better or
cheaper goods than is presently the case. If, for a moment, we believe we have
discovered such unrealized opportunities, we generally find that government
authority or a highly undesirable exercise of private power have hitherto pre-
vented their exploitation.
Of course, we must also not forget that the market can provide no more
than an approximation of any point on the n-dimensional surface by which
pure theory describes the range of possibilities that could conceivably be
attained in the production of any combination of goods and services; but the
market allows the particular combination of various goods and their distri-
bution among individuals to be decided essentially by unforeseeable circum-
stances and in this sense by chance. As Adam Smith realized,6 the situation is
somewhat like agreeing to play a game based partly on skill and partly on
luck. The rules of the game ensure that at the price such that each individual’s
share is left more or less to chance, the real equivalent of each individual’s
share, depending partly on chance, becomes as large as possible. In modern
terminology we can say that we are playing a non-zero-sum game whose rules
have the objective of increasing the payoff but leave the share of the individuals
partly to chance. A mind endowed with full information could of course choose
every point on the n-dimensional surface that appeared desirable to him and
then distribute as he saw fit the product of the combination he chose. But the
only point on (or at least somewhere near) that surface we can reach using a
procedure known to us is the one we reach when we leave its determination up
to the market. The so-called “maximum” we achieve in this manner cannot of
course be defined as a sum of certain quantities of goods, but only by the
opportunity it affords unspecified persons to receive as large an equivalent as
6See A. Smith, Theorie der ethischen Gefühle, W. Eckstein, trans. (Leipzig,, 1926), vol. 2,
pp. 396, 467.
possible for a share determined partly by chance. The fact that this outcome
cannot be evaluated on the basis of a uniform value scale of desired concrete
objectives is one of the main reasons it seems so misleading to me to consider
the outcome of the market order or catallaxy as if it had anything to do with
an economy in the proper sense.
V.
The consequences of this erroneous interpretation of the market order as an

economy whose task is to satisfy the various needs according to a given rank
ordering are reflected in political efforts to correct prices and income in the
service of so-called “social justice.” Notwithstanding the various meanings
with which social philosophers attempted to invest this concept, in practice it
has had virtually only one: protecting some groups of people from having to
descend from the absolute or relative lifestyle they have heretofore enjoyed. Yet
this is a principle that cannot be implemented in general without destroying
the foundations of the market order. Not only continuous growth, but under
certain circumstances even the preservation of the average income level
attained depends on processes of adjustment that require a change not only
of the relative shares but also of the absolute shares of individual persons and
groups, even though such persons and groups are not responsible for the
necessity of that change.
It is useful to recall at this point that all economic decisions are made nec-
essary by unanticipated changes, and that the justification for using the price
mechanism is solely that it shows individuals that what they have previously
done, or can do now, has become more or less important, for reasons with
which they have nothing to do. The adaptation of the total order of human
action to changing circumstances is based on the fact that the compensation
of the various services changes without taking into account of the merits or
defects of those involved.
In this connection the term “incentives” is often used in a way that easily
lends itself to misunderstanding, namely as though their primary purpose
were to induce individuals to exert themselves sufficiently. The most impor-
tant function of prices, however, is that they tell us what we should accom-
plish, not how much. In a constantly changing world, merely maintaining a
given level of welfare requires constant adjustments in how the efforts of many
individuals are directed; and these will only occur when the relative compen-
sation of these activities changes. Under relatively stationary conditions,
however, these adjustments—which are needed simply to maintain the income
stream at its previous level—will not generate a surplus that could be used to
compensate those who are disadvantaged by the price changes. Only in a rap-
idly growing economy can we hope to prevent an absolute decline in the mate-
rial level of particular groups.
Today, customary treatments of these problems often overlook the fact that
even the relative stability of the various aggregates that macroeconomics treats
as data is the result of microeconomic processes in which relative price

changes play a decisive role. It is an outcome of the market mechanism that
someone is induced to fill the gap that arises when someone else does not ful-
fill the expectations on the basis of which a third party has made plans. In
this sense all the collective supply and demand curves that we use so happily
are not really data, but rather outcomes of the constantly ongoing process of
competition. Thus, statistical information can never disclose to us what price
or income changes will be needed to bring about the necessary adjustment to
an unavoidable change of the data.
The decisive point, however, is that in a democratic society it would be
completely impossible, using commands that could not be regarded as just, to
bring about those changes that are undoubtedly necessary, but the necessity
of which could not be strictly demonstrated in a particular case. In such a sys-
tem, a conscious direction of the economy would always have to aim for prices
that are considered fair, and in practice that can only mean preservation of
the existing price and income structure. An economic system in which every-
one received what others felt he deserved could not help but be a highly inef-
ficient system, quite apart from the fact that it would also be an unbearably
tyrannical one. For the same reason, it is also to be feared that any “incomes
policy” would tend more to prevent than to facilitate those adjustments in the
price and income structure required by the adaptation to unanticipated
changes in conditions.
It is one of the paradoxes of our age that the communist countries, in this
regard, are probably less burdened by ideas of “social justice” than are the
“capitalistic” and democratic countries, and are thereby more prone to allow
those who are disadvantaged by development to suffer. In at least some of the
Western countries the situation is as hopeless as it is precisely because the
ideology that determines policy renders impossible those changes that would
be necessary to improve the situation of the working class quickly enough to
make that ideology disappear.
VI.
If even in highly developed economies competition is important primarily as a

discovery procedure whereby entrepreneurs constantly search for unexploited
opportunities that can also be taken advantage of by others, then this is true of
course to an even greater extent as far as underdeveloped societies are con-
cerned. I have intentionally begun by considering the problems of maintain-
ing an order in societies in which most techniques and productive forces are
generally known, but also an order that requires continuous adjustment of
activities to unavoidable small changes simply to maintain the previously
attained level. At this point I do not wish to inquire into the role played by
competition in the progress of available technology. I would like to emphasize,
however, how much more important competition must be wherever the pri-
mary objective is to discover the still unknown possibilities in a society where
competition was previously limited. While for the most part false, it might not
be completely absurd to expect that we can predict and control the develop-
ment of the structure of a society that is already highly developed. But it
seems incredible to me to hold that we can determine in advance the future
structure of a society in which the major problem is still to find out what
kinds of material and human productive forces are present, or that we should
be in a position, in such a country, to predict the particular consequences of
a given measure.
Quite apart from the fact that there is still so much more to discover in
such a country, it seems to me that there is another consideration making the
greatest possible freedom of competition much more important here than in
more highly developed countries. The fact I have in mind is that the necessary
changes in habits and customs will occur only when those who are ready and
able to experiment with new procedures can make it necessary for the others
to imitate them, with the former thereby showing the way; but if the majority
is in a position to prevent the few from conducting experiments, the necessary
discovery procedure will be frustrated. The fact that competition not only
shows how things can be improved, but also forces all those whose income
depends on the market to imitate the improvements, is of course one of the
major reasons for the disinclination to compete. Competition represents a
kind of impersonal coercion that will cause many individuals to change their
behavior in a way that could not be brought about by any kind of instructions
or commands. Central planning in the service of any some “social justice”
may be a luxury that rich countries can afford, but it is certainly no method
for poor countries to bring about the adjustment to rapidly changing circum-
stances on which growth depends.
It might also be worth mentioning in this connection that the more the
available opportunities of a country remain unexploited, the greater its oppor-
tunities for growth; this often means that a high growth rate is more a sign of
bad policies in the past than of good policies in the present. It also seems that
one cannot in general expect a country that is already highly developed to
have as high a growth rate as a country whose full use of its resources has long
been rendered impossible by legal and institutional barriers.
Having seen what I have of the world, it appears to me that the proportion
of people who are prepared to try out new possibilities that promise to
improve their situation—as long as others do not prevent them from doing so—
is more or less the same everywhere. It seems to me that the much-lamented
lack of entrepreneurial spirit in many young countries is not an unchangeable
attribute of individuals, but the consequence of limitations placed on indi-
viduals by the prevailing point of view. For precisely this reason, the effect
would be fatal if, in such countries, the collective will of the majority were to
control the efforts of individuals, rather than that public power limits itself to
protecting the individual from the pressure of society—and only the institution
of private property, and all the liberal institutions of the rule of law associated
with it, can bring about the latter.
VII.
Although competition is by and large a quite resilient specimen as far as pri-

vate firms are concerned—one that continues to resurface in the most unex-
pected manner after efforts to suppress it—its usefulness with respect to the
one omnipresent factor of production, namely human labor, has been ren-
dered more or less ineffective throughout the entire Western world. It is a gen-
erally known fact that the most difficult and indeed the apparently insoluble
problems of present-day economic policy, which have occupied economists
more than all other problems, are the result of the so-called rigidity of wages.
This means in essence that the wage structure as well as the wage level has
become increasingly independent of market conditions. Most economists con-
sider this situation as an irrevocable development that we cannot change and
to which we must adapt our policies. It is hardly an exaggeration to say that
for the past 30 years, discussions of monetary policy in particular have dealt
almost exclusively with problems of circumventing the difficulties created by
inflexible wages. I have long since had the impression that this was a mere
treatment of symptoms. For the moment, we might thereby cover up the fun-
damental difficulties, but this is not only a mere postponement of the moment
at which we must directly confront the primary problem, but it also makes the
eventual solution of the latter increasingly difficult. This is because accepting
these rigidities as unavoidable facts not only results in increasing them, but
also confers an aura of legitimacy on the antisocial and destructive practices
that they cause. I must confess that as a result, I myself have lost all interest
in the ongoing discussions of monetary policy, which was once one of my
major areas of research, because this avoidance of the central issue seems to
me to load the burden onto the shoulders of our successors in a most irre-
sponsible manner. In a certain sense, of course, we are harvesting here only
what the founder of this fashion has sown, since we are naturally already in
that “long run” in which he knew he would be dead.
It was a great misfortune for the world that these theories arose from the
very unusual and, indeed, perhaps unique situation of Great Britain in the
1920s—a situation in which it appeared obvious that unemployment was the
result of too high a real wage level, and that the problem of rigidity of the wage
structure thus had limited significance. As a result of Great Britain’s return to
the gold standard after years of war inflation at the parity of 1914, it could be
claimed with some justification that all real wages in that country were too
high relative to the rest of the world to achieve the necessary volume of
exports. I am not convinced that this was really true even then. Even at that
time, to be sure, Great Britain had the oldest, most deeply rooted, and most
all-encompassing trade union movement, which through its wage policy had
succeeded in conserving a wage structure that was determined much more by
considerations of “justice” than of economic appropriateness. This meant by
and large that the time-honored relationships between the different wages
were maintained, and that any such change in the relative wages of the vari-
ous groups as was required by changed circumstances had become effectively
impossible. As things stood then, full employment could doubtless have been
attained only by bringing some real wages—possibly those of numerous
groups of workers—down from the level they had reached as a result of defla-
tion. It is not certain, however, that this would necessarily have meant a
decrease in the average level of real wages. Perhaps the adjustment of the
structure of the entire economy brought about by the wage changes would
have made this unnecessary. In any event, the emphasis that was customary,
then as now, on the average real wage level of all a country’s workers pre-
vented this possibility from even being considered seriously.
It is perhaps useful to consider the problem from a broader perspective. It
seems to me impossible to doubt that the productivity of a country’s labor,
and thereby the wage level at which full employment is possible, depend on
the distribution of workers among the various branches of industry, and that
this distribution is in turn determined by the wage structure. But if this wage
structure has become more or less rigid, this will prevent or delay the econ-
omy’s adjustment to altered circumstances. It is thus to be assumed that, in a
country where the relationships between the various wages have been kept
rigid for a long period of time, the real wage level at which full employment
can be attained will be considerably below what it would be if wages were
flexible.
It appears to me that a completely rigid wage structure would prevent
adjustment to changes in other conditions, particularly without the rapid
technological progress we are used to today. This also concerns especially the
adjustment to those changes that must occur simply in order to keep the
income level constant. A completely rigid wage structure is therefore liable to
lead to a gradual decrease in the level of real wages at which full employment
can be realized. Unfortunately, I am not familiar with any empirical investiga-
tions of the relationship between wage flexibility and growth. I would expect
such investigations to disclose a high positive correlation between these two
variables—not so much because growth leads to changes in relative wages, but
above all because such changes are the necessary preconditions for that
adjustment to changed conditions that is required by growth.
But the main point, I believe, is that if it is correct that the real wage level
at which full employment is possible depends on the wage structure, and if
the ratios among the various wages remain unchanged as conditions change,
then the real wage level at which full employment comes into existence will
either fall continuously or will not rise as rapidly as would otherwise be pos-
sible. This means that manipulating the real wage level by monetary policy
offers no way out of the difficulties caused by the rigidity of the wage struc-
ture. Nor can a way out be offered by any practically possible “incomes pol-
icy.” Rather, as things turn out, it is precisely the rigidity of the wage struc-
ture brought about by the wage policy of the trade unions in the supposed
interest of their members (or of any notion of “social justice”) that has become
one of the greatest obstacles to an increase in the real income of workers as a
whole; in other words, if the real wages of individuals are prevented from
falling absolutely or at least relatively, the real wage level of workers as a whole
will not rise as quickly as would otherwise be possible.
The classical ideal that John Stuart Mill described in his autobiography as
“full employment at high wages to the whole labouring population” can be
realized only by an economic use of labor, which in turn presupposes freely
fluctuating relative wages. In the place of this ideal, the great man whose
name will probably go down in history as the gravedigger of the British econ-
omy has popularized decreasing the level of real wages through a decrease of
the value of money as a method of attaining full employment while recogniz-
ing the rigidity of the nominal wage structure. In my view, however, the expe-
rience of recent years clearly shows that this method offers only temporary
relief. I believe we should no longer delay attacking the root cause of the prob-
lem. We cannot go on much longer closing our eyes to the fact that the inter-
est of labor as a whole demands that the power of individual trade unions to
maintain the relative position of their members against other workers be
removed. The most important task at present appears to be convincing labor
as a whole that removing the protection of the relative position of individual
groups not only does not threaten the prospects for a rapid increase in the real
wages of labor as a whole, but in fact enhances those prospects.
I will certainly not dispute here that for the foreseeable future it will
remain politically impossible to restore a truly free labor market. Any such
attempt would probably lead to such great conflicts that it could not be seri-
ously considered—at least as long as employers do not collectively guarantee
to maintain their employees’ average real income. But precisely such a guar-
antee, I believe, is the only way of restoring the market to its function of deter-
mining the relative wages of the various groups. Only in this way, it seems to
me, could we hope to induce individual groups of workers to give up the secu-
rity of their particular wage rates, which has become the main obstacle to a
flexible wage structure. Such a collective agreement between employers as a
whole and employees as a whole seems to me a transitional measure deserv-
ing serious consideration, because the outcome would probably show work-
ers how much they could gain from a truly functioning labor market. This
would in turn create the prospect of subsequently eliminating the tedious and
complicated apparatus that would initially have to be created.
What I have in mind is a general contract in which employers as a whole
would promise workers as a whole, initially for a year, their previous real wage
total plus a share of increased profits. Each individual group or individual
worker, however, would receive in his monthly paycheck only a certain part,
say five-sixths, of his previous wage. The rest (together with the agreed-upon
share of the increased total profits of all enterprises) would be distributed in
two additional monthly payments—at the end of the year and after the books
are closed—to the employees of the various firms and branches of the econ-
omy, in proportion to the change in profits that results on the basis on the five-
sixths of wages distributed. I have proposed five-sixths as the share of contin-
uous payments, since this would make possible the payment of a Christmas
bonus at the average level of a month’s income on the basis of a preliminary

estimate of profits, and of a second vacation bonus of approximately the same
amount when the books are closed for the calendar year. For the subsequent
year the average wages of the first year would again be guaranteed, but by the
end of the year every group would be paid only five-sixths of the total amount
paid in the previous year, plus a supplement at the end of the year for each
group based on profits realized in the corresponding industry or firm, and so
on.
Such a procedure would have somewhat the same effect as a restoration
of the free labor market, except that labor would know that its average real
wages could not decrease, but only increase. I would expect that such an indi-
rect re-introduction of the market mechanism for determining the distribution
of workers among industries and firms would bring with it a considerable
acceleration of the increase of the level of average real wages, along with a
stepwise decrease in the real wages of individual groups.
You will believe me when I say that I do not make so unusual a proposal
lightly. But some measure of this kind, I believe, is today the only remaining
way out of the increasing rigidity of the wage structure. This rigidity seems to
me not only the major cause of the increasing economic difficulties of coun-
tries like Great Britain. It also drives such countries deeper and deeper into a
planned and thereby still more rigid economic structure by misleading them
into dabbling with the symptoms through “incomes policies” and the like. It
seems that labor can only gain from such a solution, but I realize of course
that trade union officials would lose through it a large part of their power and
would therefore reject it completely.
Oxford Economic Papers 45 (1993), 519-541
MARKETS AND FREEDOMS: ACHIEVEMENTS

AND LIMITATIONS OF THE MARKET
MECHANISM IN PROMOTING INDIVIDUAL
FREEDOMS
By AMARTYA SEN
1. Introduction
Downloaded from http://oep.oxfordjournals.org/ at Freie Universitaet Berlin on November 4, 2014

USING the perspective of individual freedom, I argue in this paper for a
reinterpretation of what a mechanism of competitive markets is supposed to
do, and a reassessment of what it can be expected to achieve. Forceful use is
often made of the language and rhetoric of 'freedom' in defending the market
mechanism, e.g., in the form of claims that the market system makes people
'free to choose', to use Friedman and Friedman's (1980) evocative words. But
the economic theory of market allocation has tended to be firmly linked with
a 'welfarist' normative framework.1 The successes and failures of competitive
markets are judged entirely by achievements of individual welfare (for example,
in terms of utility-based Pareto optimality), rather than by accomplishments
in promoting individual freedom.
It is natural to suspect that there must be some links between welfare-
achievements and freedom-achievements (and also between failures in the
respective areas), but we have to examine and scrutinize those links. We need
to explore different aspects of individual freedom and their links, if any, with
the nature of competitive market equilibria. The paper distinguishes between
different aspects of freedom, involving in particular (i) substantive opportunities,
and (ii) process considerations, such as decisional autonomy and immunity
from encroachments. The competitive market mechanism is examined in the
context of each of these considerations.
In some respects the freedom-based approaches are more ancient than that
of'economic efficiency' (defined as efficiency in the space of utilities), but it is
the latter that has by now become the standard procedure in economic theory
for assessing what the market does or does not accomplish. This shift in
focus is very clearly identified by John Hicks:
The liberal, or non-interference, principles of the classical (Smithian or Ricardian)

economists were not, in the first place, economic principles; they were an application
to economics of principles that were thought to apply to a much wider field. The
contention that economic freedom made for economic efficiency was no more than a
secondary support What I do question is whether we are justified in forgetting,
as completely as most of us have done, the other side of the argument (Hicks 1981,
p. 138).
1
See Hicks (1939), Samuelson (1947), Arrow (1951b), Debrue (1959), McKenzie (1959), Arrow
and Hahn (1951), among others. For a helpful introduction, see Koopmans (1957).
© Oxford UolToshy Prtsj 1993

520 MARKETS AND FREEDOMS
This paper is partly an attempt to follow the lead suggested by Hicks, to

re-evaluate the market mechanism in terms of its contributions, and limitations,
in promoting individual freedoms.2 Mixing blame with praise is, in general,
fairly inescapable in evaluating the market mechanism,3 and a freedom-based
assessment need not be radically different in that respect. But the questions that
are central in this exercise relate to the particular respects in which praise and
blame are deserved, the reasons for these judgments, and the basis of the
commendations and condemnations.
In the next section, the basis of the standard welfarist evaluation of the
achievements of competitive market equilibria is briefly discussed. In Section
3, different aspects of freedom are distinguished and the conceptual underpin-

nings of this inquiry are explored, commenting on the distinct elements in the
evaluative bases of individual freedoms. The process aspect of freedom,
including consideration of autonomy, immunity, libertarian rights and negative
freedoms, is further discussed in Section 4, with an analysis of the role of the
market mechanism in those contexts.
The next two sections of the paper deal specifically with the opportunity
aspect of freedom. Section 5 is devoted to conceptual issues in the connection
between the opportunity aspect of freedom and the substantive scope for
preference fulfilment. The focus here is on a weak kind of efficiency of freedoms.
It is argued that the shared importance of individual preferences provides the
basis of a connection between the opportunity aspect of freedom and the nature
of the competitive markets (even though that connection is made somewhat
more complex by the need to go well beyond the commodity space to assess
opportunity-freedoms). In Section 6, which is divided into three brief sub-
sections, the claim of welfare-efficiency of competitive market equilibria is
replaced by a related, but substantially distinct, claim of their weak efficiency
in opportunity-freedoms.
Section 7 deals with the limitations of the market mechanism in terms of the
different affirmative claims related to individual freedoms. In the final section,
some concluding remarks are made on the main themes covered in this paper.
2. Markets and welfarist efficiency

The foundational evaluation of the market mechanism in modern economics
is based to a great extent on the so-called 'fundamental theorem of welfare
economics'.* This deals only with markets that are perfectly competitive and
it concentrates on what happens when the markets are in equilibrium rather
than in a state of imbalance. The theorem has two parts. The first proposition
2
On related issues, see Hayek (1960), Nozick (1974), and Buchanan (1986). See also the
symposium, arranged by the European Economic Association, on the perspective of individual
freedom as a general basis of economic assessment: Kornai (1988), Lindbeck (1988) and Sen (1988).
3
See Hahn (1982) and Sen (1987).
*These basic results were established by Arrow (1951b) and Debreu (1959). See also McKenzie
(1959) and Arrow and Hahn (1971). Extensions of the basic results to cases involving public goods
have been discussed by Groves and Ledyard (1977) and Green and Laffont (1979), among others.
A. SEN 521
(I shall call it the 'direct theorem') is that under certain specified conditions
(including the absence of 'externalities', i.e., non-market interdependences),
every competitive market equilibrium is 'Pareto efficient' (also called 'Pareto
optimal'). A state of affairs is defined as Pareto efficient if it is the case that
compared with it, no one's utility can be raised without reducing someone
else's utility. That is, the 'direct theorem' states that under the conditions
specified, no non-conflicting general improvements (judged in terms of indivi-
dual utilities) can be made, starting from any competitive market equilibrium.
The second part of the theorem is a bit more complex. It says that given
some conditions (including no externalities, but also the absence of significant
economies of scale), every Pareto efficient outcome is a competitive equilibrium

at some set of prices and with respect to some initial distribution of the given
resources. That is, no matter which Pareto efficient state we specify, it is possible
to have a competitive market equilibrium yielding precisely that state, by
choosing the initial distribution of resources appropriately. This 'converse
theorem' has typically been seen as a more important claim in favour
of the market mechanism.
The 'direct theorem'—that all competitive market equilibrium are Pareto
efficient—may not appear to be a terrific trophy for the market mechanism
since it is hard to see Pareto efficiency as sufficient for social optimality. Pareto
efficiency is completely unconcerned with distribution of utilities (or of incomes
or anything else), and is quite uninterested in equity. On the other hand, the
motivation behind the 'converse theorem' relates to the necessity of Pareto
efficiency for social optimality. Given consequentialist welfarism (that is
exclusive reliance on individual utilities to judge social goodness and right
actions),5 it is not hard to argue that if a change would move everybody to
higher utility (or someone to higher utility, with everyone having at least as
much utility), then that change should be made. If this is accepted, then a social
optimum must be inter alia Pareto efficient, since a state that is Pareto inefficient
can be socially improved. This elementary presumption gives the second part
of the theorem an immediate relevance. Given consequentialist welfarism, no
matter how we identify the social optimum, we can get to that social optimum
(one of the Pareto efficient points) through a competitive market equilibrium
by having the required initial distribution of resources.
However, this way of looking at the 'converse theorem' is more than a little
deceptive, even within the limitations imposed by exclusively welfarist evalua-
tion. To use the competitive market equilibrium to achieve any social optimum,
we have to get the initial distribution of resources right, and depending on how
equity-conscious our social objectives are, this could require a total reallocation
of ownership patterns from whatever pattern we may have inherited historically.
The 'converse theorem', thus, belongs to a 'revolutionary's handbook'.6 I
J
O n the exact characterizations of 'welfarism' and 'consequentialism', see Sen and Williams
(1982): "Introduction".
6
For a fuller discussion of this diagnosis see Sen (1987).
am not bothered here by the sociological fact that enthusiastic advocates of

the market mechanism are typically not particularly revolutionary in demand-
ing radial redistributions of ownership. More immediately relevant is the
recognition that if we are not able, for political, legal or any other reasons, to
rearrange the resource distributions freely, the converse theorem does not
guarantee even the limited achievement of Pareto efficiency for any given initial
distribution of resources. In contrast, the 'direct theorem' does guarantee just
that—it ensures something rather solid here and now, even if that achievement
is far from adequate. 7

3. Concepts of freedom: process and opportunity
I turn now to the demands of freedom. Freedom has many distinct aspects,
and there is little prospect of obtaining one real-valued index of freedom that
will capture all the aspects adequately. In particular, freedom has at least two
valuable aspects, which I shall respectively call 'the opportunity aspect' and
'the process aspect' of freedom. I have argued elsewhere that a comprehensive
assessment of freedom must take note of both these aspects and the irreducible
importance of each of these respective features.8
First, freedom gives us the opportunity to achieve our objectives—things that
we have reason to value. The opportunity aspect of freedom is, thus, concerned
with out actual capability to achieve. It relates to the real opportunities we
have of achieving things that we can and do value (no matter what the process
is through which that achievement comes about).
Second, importance is also attached to the process of autonomous choice—
having the levers of control in one's own hands (no matter whether this
enhances the actual opportunities of achieving our objectives). The process
aspect of freedom is concerned with the procedure of free decision by oneself.
A straightforward example of complete concentration on 'the opportunity
aspect' of freedom can be found in the implicit attitude to freedom in consumer
theory on the assessment of'budget sets' (Samuelson 1938, 1947; Hicks 1939).
Since this approach takes note of freedom only in instrumental terms (focusing
on the best that we can actually achieve), the freedom to choose any element
of the 'budget set' is valued, by implication, exactly at the value of the
chosen—or 'most preferred'—element of that set; the other elements of the
7
There is also an informational problem in using the 'converse theorem' to achieve social
optimum. The informational economy of the market mechanism does not cover the information
needed to ascertain the set of feasible market outcomes and to pick the socially best from that
class. Indeed, it may not be in the interest of many (particularly those who would end up losing
property and resources in this radical marketization programme) to cooperate in this information
gathering process. The programme of revolutionary equity through the market mechanism may,
thus, have epistemic as well as political barriers. For a discussion of this problem of'informational
incentives', see Sen (1987, pp. 36-8).
8
The distinction and its extensive implications were discussed in my Arrow Lectures 0 Freedom
and Social Choice'), given on May 7-8, 1991, at Stanford University (to be published). This section
of the present paper closely relates to those lectures.
A. SEN 523
menu do not ultimately matter. This way of seeing the opportunity aspect of
freedom entails a fairly simple view of freedom in the absence of uncertainty.
This approach can, however, be importantly extended by introducing
uncertainty about future tastes, as investigated by Koopmans (1964) and Kreps
(1979, 1988), with the result that having a variety of options is valued
substantively, but still for entirely instrumental reasons (to wit, the variability
of future tastes). Their formulations of'the preference for flexibility'—and thus
for substantive freedom—is concerned solely with the opportunity aspect of
freedom, seen in terms of what might turn out to be best under different cases
of future tastes. In Kreps's analysis, the assessment of a menu of future options
is given by the respective expected utilities, taking note of the various utility

functions the person might possibly have in the future, weighted by their
respective probabilities.
The Koopmans-Kreps approach is extremely important for any substantive
theory of freedom, since future uncertainty is a powerful reason for working
towards enhancing freedom of choice.9 However, since uncertainty will not be
introduced in this paper, the Koopmans-Kreps extensions of the instrumental
view of the opportunity aspect of freedom will not come into their own here.
In the absence of uncertainty, the maximal-opportunity view assesses a set of
options simply by the value of the maximal element (or elements) in that set.
It is, however, possible to take a somewhat broader view of the 'opportunity
aspect' even in the absence of uncertainty and pay some attention to the 'range'
of choice (in addition to the most preferred alternative that can be chosen). We
might value the diversity of opportunities, and not reduce the assessment of
opportunities entirely to the value of maximal achievement, even though the
maximal value must figure substantively in that reckoning. How this might be
done will be considered in Section 5.
In contrast with the opportunity aspect, the process aspect has been
emphasized by other writers. Friedrich Hayek (1960) has argued for the process
aspect in quite a pure—and rather extreme—form in a particularly eloquent
passage in 77ie Constitution of Liberty:
... the importance of our being free to do a particular thing has nothing to do with
the question of whether we or the majority are ever likely to make use of that
possibility.... It might even be said that the less likely the opportunity to make use
of freedom to do a particular thing, the more precious it will be for society as a whole.
The less likely the opportunity, the more serious will it be to miss it when it arises,
for the experience it offers will be nearly unique (Hayek I960, p. 31).
There is perhaps an element of 'contrariness' here in Hayek's proposal of
attaching more value precisely to those opportunities that are least likely to be
used. But surely Hayek is right to argue that being 'free to do a particular
thing' can be important for us, even when we are unlikely to use that freedom.
This consideration relates to the process aspect of freedom—Hayek himself has
' I have tried to go into these issues further in my Arrow Lectures ('Freedom and Social
Choice").
particularly emphasized the importance of being unrestrained in the exercise

of individual liberty. The process aspect includes considerations that may not
figure in the accounting of the opportunity aspect. 10
The process aspect, in its turn, would include several distinct features, in
particular, (i) decisional autonomy of the choices to be made, and (ii) immunity
from interference by others. The former is concerned with the operative role
that a person has in the process of choice, and the crucial issue here is
self-decision, e.g., whether the choices are being made by the person herself—not
(on her behalf) by other individuals or institutions. This requires the identifica-
tion of the proper domain of autonomous decisions.
On the other hand, to delineate the content of immunity, it is necessary to

define what constitutes 'interference', and a good deal of libertarian philosophy
has been concerned with that question. Freedom as immunity can be seen as
a 'negative' idea—the absence of encroaching activities. It relates closely to
what has been called 'negative freedom'. Indeed, the concept of negative
freedom can be related to the 'immunity' component in the 'process' aspect of
freedom, and I shall follow that convention here. 11
However, the distinction between 'positive' and 'negative' freedoms, which
has been powerfully explored by Isaiah Berlin (1969), can be interpreted
in several distinct ways.12 Berlin's own classification takes a much more
demanding view of negative freedom. In his analysis, negative freedom takes
note of the various parts that others play in making a person unable to do
something, and therefore goes well beyond the 'immunity' component of the
process (for example, poverty and starvation resulting from insufficient demand
in the labour market could then be seen as a violation of negative freedom).
Correspondingly, Berlin sees positive freedom in narrower terms, particularly
in terms of overcoming the barriers that come from 'within' the person, rather
than from outside.
Others have tended to see positive freedom much more broadly—in terms
of what one is free to do taking everything into account, including interference
or help by others, as well as one's own powers and limitations. 13 This is, in fact,
10
Hayek's reasoning also suggests that in assessing even the opportunity aspect we should not
take an entirely instrumental view. As will be argued in Section 5, even though the opportunity
to achieve what we prefer most among the available alternatives may be the central concern in
evaluating the opportunity aspect, nevertheless a person might not completely neglect the presence
of non-superior and non-chosen alternatives
1
' There are, however, close connections between the assessment of processes and the understand-
ing of the corresponding outcomes, even in the context of immunity. This has been a matter of
particular concern in the 'social choice' theoretic literature on liberty. See, for example, Sen (1970,
1983a, 1992a), Hammond (1982), Suzumura (1983), Wriglesworth (1985), Riley (1987), Gaertner
et cd. (1992).
12
Systematic distinction between 'positive' and 'negative' liberty was also made by Guido De
Ruggiero, the Italian historian of ideas, in his Storia del liberalismo atropeo (1925), though he drew
the line somewhat differently from the way Berlin does. I am most grateful to Stefano Zamagni
for directing me to Ruggiero's study.
13
On various recent uses of the concept of'positive freedom', see Dworkin (1978), Dasgupta
(1982, 1986), Sen (1985b, 1988), Hamlin and Pettit (1989), Helm (1989), among others. On related
distinctions see also Kanger (1971X Nozick (1974), Lindahl (1977), Dworkin (1985), Raz (1986).
A. SEN 525
the direction in which T. H. Green (1889) had pointed. Recent uses of the
distinction between negative and positive freedoms have tended to be focussed
particularly on the role of immunity in negative freedom.14 While I shall use
the expression 'negative freedom' in that, narrower, sense, viz. as immunity
from interference, I need hardly add that nothing substantial, ultimately
depends on how the various relative considerations are classified, provided all
of them receive attention.
To conclude this section on concepts of freedom, we have to be concerned
with at least two distinct aspects of freedom, viz. (i) the opportunity aspect, and
(ii) the process aspect. The opportunity aspect must pay particular attention
to the opportunity of achieving the best that can be achieved, but may extend

that concern by taking some supplementary note of the range of opportunities
offered. The process aspect, being concerned with the freedom of the person's
decisions, must take note of both (iia) the scope for autonomy in individual
choices, and (iib) immunity from interference by others.
4. The process aspect: immunity and autonomy

Following the discussion in the last section, I shall be particularly concerned
with three distinct facets of freedom:
(i) opportunity to achieve,

(ii) autonomy of decisions; and
(iii) immunity from encroachment. 15
The role of the market mechanism in the context of each will have to be
examined.
The libertarian conception of 'rights' (as outlined, for example, by Robert
Nozick 1974) incorporates both (ii) and (iii), but it has, in the usual formula-
tions, less use for the first.16 There is indeed a close correspondence between
libertarian philosophy and 'the process aspect' of freedom. In particular, the
idea of immunity from encroachment is often seen as the core of 'negative
freedom' and a central aspect of the libertarian theory of rights.
I shall presently pursue the implication of this approach for assessing the
market mechanism, but before that I would like to make a general point, which
is sometimes missed, about the correspondence between libertarian rights
(particularly the right against encroachment) and the idea of negative freedom
(see in terms of freedom from encroachment). It is sometimes thought that
negative freedom (in the form of freedom from interference) cannot be denned
without a prior acceptance of libertarian rights. However, while libertarian
rights and negative freedoms share a common domain, the endorsement of the
force and priority of libertarian 'rights' is not, in fact, necessary to define
'*See, for example, Dworkin (1978, Essay 12).

" T h e y correspond respectively to considerations (i), (iia). and (iib), discussed in Section 3.
16
See Buchanan (1986) for a broader view, giving more role to the opportunity aspect of freedom.
negative freedoms, or to see them to be, inter alia, important. Certain types of
interpersonal interferences can be placed in a separate category—that of
'encroachment activities'—and this identification can be taken as the basis of
characterizing the domain of negative freedom, without necessarily pre-asserting
that people have an unequivocal right not to have such encroachment. In this
way of characterizing the connection, neither negative freedoms nor libertarian
rights would be 'prior' to the other (both would draw on the shared concept
of encroachment), and negative freedoms can indeed be identified and valued
without full acceptance of libertarian 'rights'. 17
If the libertarian rights to exchange and transact freely are to be protected,
then market activities must be permitted without let or hindrance by others

(including the state). Markets are then defendable on grounds of the rights
that people have (viz, that they should be free to transact), rather than
because of their welfare-generating effects. Thus, if these rights are accepted as
fundamentally important (as for example in the libertarian theory outlined by
Nozick 1974), then the entire approach to the evaluation of the market
mechanism may have to change. Markets would then be justified by antecedent
rights rather than by consequent outcomes or utilities (such as Pareto
efficiency).
While the assumption of the libertarian rights makes the defence of markets
unqualified and uncomplicated, it also leaves open the question of the accept-
ability of that assumption. The libertarian line of reasoning is indepen-
dent of outcomes, but the persuasive power of that line of reasoning cannot
really be independent of results. The issue becomes particularly important when
the consequences resulting from the exercise of libertarian rights and market
allocation are especially poor in terms of individual well-being, or in terms of
individual freedom judged in the perspective of'opportunity to achieve'. Indeed,
it is possible for even large-scale famines to occur without violating anyone's
libertarian rights and without departing from the operation of a free market
mechanism. 18 The outcome-independent assertion of libertarian rights is, thus,
open to severe questioning in terms of ethical acceptability. 19
However, even when the alleged libertarian rights are not accepted as
unqualified rights, the general case for discouraging encroachment activities—
17
Perhaps there is some advantage in taking freedoms rather than rights as the starting point of
evaluative analysis. This is partly because freedom is, in some ways, a broader concept than rights,
but also because freedom is less vulnerable than the idea of rights, to the suspicion (forcefully
discussed by Bentham 1789 and Marx 1843, 1844) that a post-legal, contingent concept is being
used with pre-legal, universalist pretensions. In this view, rights depend on social and political
arrangements, and these arrangements themselves require a foundational justification—one that
can hardly be provided by the rights that emerge from those arrangements. Arguments can be
presented on each side of this debate, and I shall not attempt here to resolve these complex issues.
18
On this see Sen (1981) and Dreze and Sen (1989). Famines can be caused by insufficient
entitlements of substantial sections of the population, without any violation of libertarian rights
and freedoms of ownership and exchange.
19
Nozick (1974) himself makes an exception in the case of'catastrophic moral horrors', thereby
restricting the domain of his libertarian theory. See also Buchanan (1986) and Nozick (1989).
A. SEN 527
20
and violations of negative freedoms—may remain. The market mechanism
has an obvious role in supporting negative freedom from encroachment, and
this role can well be acknowledged along with other features of the market
mechanism. Recognizing the importance of negative freedom is a much more
general ethical position than asserting the complete priority of the libertarian
right to unqualified immunity.
In fact, the market mechanism has a role in protecting 'autonomy of
decisions' as well as 'immunity from encroachment'. In a competitive market,
the levers of decision and control are in the hands of the respective individuals,
and in the absence of particular types of'externalities' (dealing with the control

of decisions), they are left free to operate them as they choose. Thus, decisional
autonomy as well as encroachment immunity are constitutive of the competitive
market mechanism without externalities.
Emphasizing these aspects of freedom would give an immediate status to the
markets—not conditional on good performance in terms of other achievements,
such as utilities or preference-fulfilments. In making a composite judgment on
the 'overall' role of the market mechanism in promoting freedoms, these process
aspects would have to be considered along with assessments of the success of
the market mechanism in advancing economic opportunities and the freedom
to achieve.
5. The opportunity aspect: preference and freedom

In the traditional 'libertarian' literature, it is the process aspect that has
tended to receive much of the attention. Some have, in fact, argued in favour
of restricting the use of the term 'freedom' to its negative interpretation only.
On the other hand, many writers—people as diverse as Aristotle, Adam Smith,
Karl Marx, Mahatma Gandhi and Franklin Roosevelt (to name a few)—have
been much concerned with the substance of freedom and the actual opportuni-
ties that people have, not just with procedures and processes. It seems
reasonable to argue that if we really do attach importance to the actual
opportunity that each person has, subject to feasibility, to lead the life that he
or she would choose, then the opportunity aspect of freedom must be quite
central to social evaluation.
The market mechanism tends to do well, as we saw, in terms of the process
aspect (involving decisional autonomy and encroachment immunity), in the
absence of particular types of externalities, and the concentration now has to
be specifically on its performance in terms of opportunity-freedom. How may
we evaluate opportunity-freedom? The extent of a person's opportunity to
achieve must relate to the set of alternative achievements from which he or she
can choose any one. This raises two questions:
(i) In terms of what criteria do we evaluate such a set of achievements?

20
On this question, see Sen (1985b).
(ii) In what 'space' are achievements considered, that is, achievement of what?
The former question is taken up first.
Several different classes of axioms for comparisons of achievement-sets have
been suggested in the literature. 21 One central issue relates to the relevance of
the individual's preferences and choices in the evaluation of his or her
opportunity-freedom.
One way of putting the question is: how does opportunity-freedom relate to
preference? This formulation may be somewhat ambiguous since the term
'preference' is used in so many different senses.22 There is considerable evidence
that the preferences of people living in societies are not geared exclusively to

the pursuit of personal interests. 23 The sense that would be particularly relevant
here is the one initially outlined by Kenneth Arrow in discussing the informa-
tional basis of social welfare functions. Arrow (1951a) defines the individual
preference ordering as referring broadly to 'the values of individuals rather than
to their tastes' (p. 23), reflecting all the values that may influence choice,
incorporating inter alia the person's 'general standards of equity' and 'the highly
important socializing desires' (p. 18). This is not 'preference' in the narrow
sense of reflecting the person's self-interest, which is frequently the sense that
is invoked in standard microeconomic theory. What Arrow characterized as a
person's preference ordering can be seen as the ordering based on his or her
values that determines and rationalizes his or her choices.24 In this interpreta-
tion, individual preference serves the dual function of reflecting both values and
choices of the persons, since they correspond to choice based on overall values.
It is this concept that will be used in what follows.
Preference and freedom are sometimes contrasted with each other in terms
of their respective contents and demands. Freedom, in this view, is a matter of
the size of the set from which one can choose, whereas preference is a matter
of the element one would choose from each given set. I would like to argue that
this simple contrast between freedom and preference is thoroughly deceptive,
especially in the context of opportunity-freedom. The evaluation of the freedom
I enjoy from a certain menu of achievements must depend to a crucial extent
on how I value the elements included in that menu. The 'size' of a set, or the
'extent' of freedom enjoyed by a person, cannot, except in very special cases,
be judged without reference to the person's values and preferences.
For example, it might be tempting to take the number of alternatives in a
set—what is called the 'cardinality' of the set—as a preference-independent
21
See Sen (1985a, 1991), Suppes (1987), Pattanaik and Xu (1990).
22
On this see Sen (1982a), 'Introduction' and Essays 2 ('Behaviour and the Concept of
Preference1) and 4 ('Rational Fools').
23
Motivational diversity can be important for industrial success as well. On different aspects of
this question, see, among others, Morishima (1982), Akerlof (1984), Dore (1987), Aoki (1989), Wade
(1990).
" C o m p a r e Davidson's (1980) discussion of explanation of behaviour, involving rationalization
of actions in terms of objectives. The concept of freedom used here is that of'agency freedom'—the
overall freedom to achieve what one would promote—rather than the narrower notion of
'well-being freedom'—the freedom to promote one's well-being (on that distinction, see Sen 1985b).
A. SEN 529
way of judging the 'extent' of freedom associated with any set of alternative
achievements.25 But that can lead to most counter-intuitive results, forcing us
to accept that having a choice over three alternative achievements that are seen
as 'bad', 'terrible' and 'disastrous' gives us exactly as much freedom as a choice
over another three alternative achievements which are seen as 'good', 'terrific'
and 'wonderful'. If the latter set is seen as giving us more freedom to
achieve—giving us more opportunity to live the way we would choose to
live—then this is precisely because our preferences are important in the
evaluation of freedom.
I have tried elsewhere (Sen 1985a, 1991) to discuss the type of axiomatics
that is called for in evaluating the freedom to achieve (or opportunity-freedom),

and in relating it to preferences (i.e., choices based on values) of the persons
respectively concerned. I shall not go more into the technicalities here, but must
note that comparisons of opportunity-freedom must frequently take the form
of incomplete orderings. While some set comparisons would be obvious enough,
others would remain undecidable.
A basic criterion of opportunity-freedom comparison of different achievement-
sets is the following (see Sen 1985a):26
Axiom R Set A offers at least as much opportunity-freedom as set B, denoted

ARFB, if there is a one-to-one correspondence between some subset A* of set
A and the other set B such that every element of set A* is regarded as no worse
than the corresponding element of set B.
Since the relationship would typically be quite incomplete, the strict ranking is
best defined separately also, and one that may command some general support,
in the absence of uncertainty, is (see Sen 1991):
Axiom P Set A offers strictly more opportunity-freedom than set B, denoted

APFB, if in the one-to-one correspondence between the subset A* and B defined
in Axiom R, every element of A* is strictly preferred to its corresponding
element.
25
See Pattanaik and Xu (1990) for an interesting and important axiomatization of the assessment
of freedom exclusively in terms of the number of alternatives in the set from which one can choose.
The basic axiom takes unit sets such as {x}, {y}, as all having the same amount of freedom (to
wit, none), irrespective of the individual's preferences over x, y , etc. From that premise, the rule of
counting the elements can be derived on the basis of some supplementary axioms. An alternative
axiomatization of the 'number counting' assessment of freedom is presented in Sen (1991)—not as
a defence, but as a discriminating basis for identifying what may be 'wrong' with this way of seeing
freedom. O n the analytical and evaluative aspects of such axiomatization, see Pattanailc and Xu
(1990) and Sen (1991).
26
Two significant qualifications are in order here. First, there is an important problem of'variety'
(i.e., the dissimilarity between one alternative and another) that is being ignored here. One set may
be valued above another on grounds of its offering 'more variety' of alternatives, and this
consideration cannot be easily captured in terms of one-by-one comparison of the respective
elements of the two sets. This issue is discussed by Pattanaik and Xu (1990). Second, the entire
approach here abstracts from uncertainty, including uncertainty of future tastes (on which see
Koopmans 1974 and Kreps 1979, 1988).
These are, at best, sufficiency conditions, and would be much too demanding
if they were proposed as being necessary. If we agree to concentrate on the
best thing that one can effectively do, we can relax the required conditional in
Axiom P to one focussing on the superiority of only the most preferred element.
Axiom P* Set A offers strictly more opportunity-freedom than set B, denoted
APF*B, if (i) A offers at least as much opportunity-freedom as B, in terms of
Axiom R, and (ii) some element of set A* is preferred to every element of set B.
A necessary condition for being sure that set A has at least as much
opportunity-freedom as B may be taken to be the requirement that some

element of A is at least as good as every element in B. Similarly, to be sure of
an expansion of opportunity-freedom may be seen as requiring that some
element of A is preferred to every element in B. These two requirements, which
make the status of the best opportunity determine necessary conditions for
improving or maintaining freedom, may be axiomatized together.
Axiom 0 (relevance of preferred opportunity) To be sure that A offers more
opportunity-freedom than B (alternatively, at least as much as B), there must
be an element of A that is preferred to (alternatively, regarded as at least as
good as) all the elements of B.
Note that Axiom 0 is a necessity condition, not one of sufficiency. The
necessity requirement for strictly 'more' freedom in this axiom corresponds to
condition (ii) in Axiom P*, without demanding (i). According to this axiom,
we cannot be sure that a set of alternatives gives a person more opportunity-
freedom unless it inter alia gives the person an opportunity to get to a better
alternative. But the converse is not claimed, i.e., the opportunity of getting to
a better alternative need not necessarily give a person more freedom, e.g., if his
or her other significant options are curtailed. The possible insufficiency of this
condition is one important distinction between Axiom 0 and a purely
instrumental view of freedom (including the axiom systems of Koopmans 1964
and Kreps 1979, applied to this special case of no uncertainty). To be sure of
an increase in freedom requires the presence of a more preferred alternative,
but the presence of a more preferred alternative does not necessarily guarantee
an enhancement of freedom.
For example, if a person's strict ordering of valuation (in decreasing order)
is given by: x, y, z, then {y, z} cannot be placed strictly above {x, y}, or even
above {x}, in terms of freedom. On the other hand, while {x, y} can be placed
higher than {y, z} with some plausibility (this is, in fact, entailed by Axiom P
or P*), it does not follow that {x} can be so placed, even though in terms of
preference-fulfilment {x} is strictly better than {y, z). Indeed, if Axiom P or P*
is all that is accepted, then {x} must not be placed above {y, z) in the freedom
ranking.
Similar remarks can be made about the weak relation of at least as much
freedom. To be sure that A gives as much opportunity-freedom as B, it is
necessary that some element of A is at least as good as every element of B, but
A. SEN 531
the latter does not entail the former. It is not surprising that this approach to
the evaluation of freedom would tend to lead to partial orderings with frequent
cases of incompleteness.
It must also be recognized that Axiom 0 is a weak claim regarding what we
can or cannot be sure of. It does not claim that one could never judge that one's
opportunity-freedom is increased without there being an alternative in the new
menu A that is preferred to each element of the old menu B. A person might
well choose to decide that her opportunities are expanded by the addition of
some alternative no better than what she already has in her menu, because it
gives her an additional choice (even though it does not make the opportunity
of achieving the best she can any better).27 Thus, {x, z, z} might be judged to

be offering more opportunity-freedom than {x, y}, even though the most
preferred alternative x is available in either menu.
What Axiom 0 claims is that we cannot be sure that there is an expansion
of opportunity-freedom unless there is an opportunity of getting a better
alternative (and even that is a necessary rather than sufficient condition for that
judgement, as discussed). The addition of a non-superior option need not be
seen as an expansion of opportunity-freedom. The reasoning underlying this
position relates to two distinct issues. First, an alternative that is added to what
is available need not be particularly interesting from the point of view of the
person's opportunity (e.g., having the additional option of being beheaded at
dawn, or having another car much like the one already on offer except for a
defective gear box). It would thus be a mistake to expect that an addition of
options necessarily expands the interesting opportunities to achieve what she
wants to achieve.
Second (and more important), even when the additional option is quite good,
and may even be just as good as the best that is already available, a person
could quite reasonably argue that her opportunities are not strictly expanded
by the addition. She could not possibly do better than she did earlier. She could
thus judge, without being absurdly idiosyncratic, that her opportunities are not
substantively better (though they are not any worse either). In the specific
evaluation of opportunity-freedom (as opposed to process-freedom which is a
separate matter, considered earlier), it is hard to ignore the possibility of
insisting that there is no strict expansion of effective opportunities unless there
is really a better option which one could reasonably choose.
There is, thus, some real 'freedom' that people have in making reasonable
judgments about opportunity-freedom. The weak form of Axiom 0—what we
can or cannot 'be sure of—relates to the acceptance of this variability of
reasonable judgments. I know of no way of'forcing' a uniform requirement on
the judgements of opportunity-freedom in the case of the addition of a no-better
option.
27
A particular class of cases of this type is well axiomatized by Clemens Puppe (1992), relating
the motivation to uncertainty of the Kreps-Koopmans kind.
The weak form of Axiom 0 leads to a correspondingly weak idea of efficiency

of opportunity-freedom.
Weak efficiency of opportunity-freedom A state of affairs is weakly efficient in

terms of opportunity-freedom if there is no alternative feasible state in which
everyone's opportunity-freedom is surely unworsened and at least one person's
opportunity-freedom is surely expanded.
I turn now to the second question, that of the 'space' in which achievements

have to be judged. I have discussed this question fairly extensively elsewhere,
arguing that opportunity-freedom cannot be sensibly judged merely in terms
of possession of commodities, but must take note of the opportunity of doing
things and achieving results one has reason to value. 28 The freedom in question
must include the freedom to live the way one would like, rather than judging
freedom simply by commodity holdings.
The distinction can be very important in dealing with interpersonal com-
parisons. For example, two persons with identical commodity holdings may
have very unequal freedoms to lead the lives they value, because one person
may be disabled, or prone to some disease, while the other is not similarly
disadvantaged. A disabled person with the same commodity bundle may be
just as rich as another, but still lack the capability to move about freely and
to achieve other functionings that are affected by that disability. If freedom is
judged by our capability to live the way we would choose, then the commodity
space is the wrong space for the evaluation of freedom. Even such elementary
freedoms as the capability to be well nourished may vary greatly (despite the
consumption of same amounts of food) depending on the person's metabolic
rate, body size, climatic conditions, parasitic disease, age, gender, special needs
(such as those of pregnancy), and so on. Opportunity-freedom is more sensibly
judged in terms of capability to achieve valued results than simply by
commodity holdings. 29
This does not require any reformulation of the axioms already proposed
(including Axiom 0), but the 'space' in which alternative opportunities are
considered and preferences are defined would have to be modified from the
commodity space to the space of relevant functions and capabilities.30 Cor-
respondingly, preferences too would have to be considered in that space (as
rankings of achievements of functioning n-tuples) rather than in the commodity
space, as in standard general equilibrium theory.
28
On this see Sen (1980, 1987, 1992b).
" O n this and related issues, see Sen (1984, 1985a, 1992b), Sen el al. (1987), Dreze and Sen
(1989), Griffin and Knight (1989), Anand and Ravallion (1992).
30
Strictly speaking the 'space' in question is that of functionings, in which 'capability' would
take the form of a set of feasible n-tuples of functionings (on this see Sen 1985a, 1992b). The
opportunity-freedom judgements are judgements of the ranking of capability sets in that functioning
space.
A. SEN 533
6. Weak efficiency of competitive equilibria in opportunity-freedom

I turn now to the exercise of moving from welfarist efficiency to the efficiency
of opportunity-freedoms, as the criterion of judging competitive market equi-
libria. This is done in three distinct steps: (i) moving from welfare to preference,
(ii) moving from preference to opportunity-freedom in the commodity space,
(iii) moving from the commodity space to the space of functionings and
capabilities.
6.1. Step 1: from welfare to preference

In the standard general equilibrium literature, individual preference orderings

R, play two distinct parts, to wit: (i) they determine individual choices (i.e., the
choice function of each person i takes the form of binary maximization of R,),
and (ii) they represent individual welfares used as the basis of welfarist
evaluations of market equilibria: the welfare function of each person i is taken
to be a real-valued representation of Rt. The two together amount to assuming
that each person's choices are guided solely by the maximization of his or her
own welfare, that is, by the self-interested pursuit of personal welfare.
While this 'double role' of individual preferences paves the way to welfarist
assessment of markets (including the use of the criterion of Pareto efficiency),
it must be noted that the basic analytical results relate directly to the fulfilment
of preferences (in the choice sense), rather than to the individual pursuit of
self-interested welfares. The standard welfarist interpretation of market equi-
libria involve an additional—and thoroughly disputable—construction (to
wit, the invoking of the assumption of act-based self-interest maximization),
but the mathematical basis of the theorem relates more generally to fulfilling
preferences (as the binary relations of choice).
The assumption of self-interested behaviour becomes quite redundant when
we shift our attention from welfarist efficiency to efficiency in preference
fulfilment, and there is no longer any necessity to assume that the maximization
of one's own welfare is the only motive for action for everyone. This extension,
while easy enough, is far from trivial. Suppose that individuals do not maximize
only what they, and others, see as their respective welfares, and that their choices
are guided by other considerations as well.31 Even then the 'fundamental
theorem of welfare economics' would still have substantial content, in terms
of preference fulfilment, taking preference as the binary basis of choice (no
31
Note that the assumption of'no externality' still requires that each person's preference relates
only to his or her own commodity bundle. It is sometimes presumed that the possibility of being
concerned with anything other than one's own welfare cannot arise under these circumstances. This
is not so. For example, when you choose to buy saplings from a nursery, the revealed preference
could be related to your own joy (like Lorenzo's, in seeing 'the sweet wind did gently kiss the
trees'), or alternatively, your preference could relate to your selfless commitment to increase the
tree-population of the world. Similarly, whether your desire for buying more food is related to
your own eating programme, or to your selfless plan to ship it all outside the economy, does not
alter the fact that your preference is defined over a bundle of commodities with preference for more
food.
matter what the underlying motivations for choice are). We could define the
efficiency of preference-fulfilment thus:
Efficiency of preference-fulfilment It is impossible to move any one to a more

preferred position (i.e., a position that the person would choose given the
opportunity), keeping everyone in an equally preferred situation.
The 'direct theorem', thus reinterpreted, indicates (given the other assumptions)
that in a competitive market equilibrium, efficiency of preference-fulfilment will
be achieved. This is, in fact, not an extension of the original direct theorem; it
is the central content of that theorem. On the contrary, the welfarist efficiency

result (as in the standard version of'the fundamental theorem') is simply grafted
on to the efficiency of preference-fulfilment with the supplementary, and
dubious, assumption that everyone maximizes his or her own welfare.
6.2. Step 2: from preference to opportunity-freedom in commodity space

The next move is towards weak efficiency of competitive market equilibria
in terms of opportunity-freedoms (without, yet, removing the focus on the
commodity space). It can be established that given the standard conditions
(including the absence of externalities), efficiency in terms of preference-
fulfilment would entail weak efficiency of opportunity-freedom.
The proposition is easy to establish. Suppose a state of affairs x that is efficient
in terms of preference-fulfilment is not weakly efficient in terms of opportunity-
freedom in the commodity space. So there is an alternative state of affairs y in
which at least one person's opportunity-freedom—let us call him j—is surely
greater, and everyone's opportunity-freedom is surely at least as large. It follows
from Axiom O that person j must have an option in state y that is better than
every option in state x. Furthermore, since choices are congruent with
preference-maximizing behaviour, / must be in a better state of preference
fulfilment in y than in x. Now, given that x is efficient in terms of preference
fulfilment, it follows that at least one person—call her k—must be in a less
preferred situation in y than in x. Again, given preference-maximizing choice
behaviour, clearly k could not have had any option that would have been at
least as good as each option that she had in x. Hence, k's opportunity-freedom
could not be said to be surely at least as large in y as in x. Hence the initial
supposition that the preference-efficient state of affairs x was not weakly efficient
in terms of opportunity-freedoms leads to a contradiction. 32
Taking steps 1 and 2 together, it is clear that, given standard assumptions
(such as no externalities), but without needing the assumption of self-welfare
maximizing behaviour, any competitive market equilibrium is weakly efficient
in opportunity-freedom (in the standard commodity space).
The converse theorem is not extendable in the same way. The bettering of the
321 1It is a corollary that the efficient states of affairs in terras of preference-fulfilment is a subset
of the weakly efficient states in terms of opportunity-freedoms.

A. SEN 535
most-preferred alternative is not sufficient for the sure enhancement of

opportunity-freedom, nor for freedom remaining at least as large, as was
discussed in Section 5. However, as was discussed in Section 2, the converse
theorem, despite its apparently greater relevance, has, in many ways, less interest
for practical economic policy than the direct theorem.
6.3. Step 3: from commodity space to capability space

The need to go beyond the commodity space to the space of actual
functionings and capabilities was discussed earlier (in Section 5). The variability

of the relationship between commodity holdings and actual functionings and
capabilities makes the commodity space not quite the correct field for inter-
personal comparisons of opportunity-freedoms. This deficiency is particularly
serious for the assessment of inequality and for a theory of justice. 33
On the other hand, the efficiency result that a competitive market equilibrium
is weakly efficient in opportunity-freedoms does not involve any interpersonal
comparisons at all. While the relationship between commodity holdings and
capabilities varies with personal parameters, this need not affect, for a given
person, the congruence of the ranking of budget sets in the commodity space
and the ranking of the corresponding capability sets in the functioning space. 34
A disabled person may achieve less capability with the same bundle of
commodities than a more able-bodied person (and this fact is of central
importance in making interpersonal comparisons and in assessing equity and
justice), but for each person—the disabled and the able-bodied—the capabilities
expand with command over commodities. 35
If this relationship is formally axiomatized, then the weak efficiency of
opportunity-freedoms in commodity space can be correspondingly extended to
the weak efficiency of opportunity-freedoms in the space of functionings and
capabilities. Since interpersonal comparisons are not invoked at any stage in
that argument, the interpersonal variability of the commodity-capability rela-
tion, central to the theory of justice, has no direct bearing on this analysis. Thus,
given these standard assumptions, competitive market equilibria are weakly
efficient in opportunity-freedoms in terms of capabilities as well as commodity
holdings.
33
1 have discussed these issues in Sen (1980, 1992b).
34
This is indeed the basis of taking ' i n c o m e ' as a general ' p r i m a r y g o o d ' in the Difference
Principle used by Rawls (1971), even though its interpersonal extension is deeply problematic (Sen
1992b).
35
T h e r e is a different issue as to whether the c o m m o d i t y space includes all the i m p o r t a n t
influences that determine capabilities given the personal parameters. In this respect, it m a y be m o r e
complete to look for all external means to individual opportunities—all of the Rawlsian (1971)
' p r i m a r y g o o d s ' (of which income is only one). S o m e of the m o r e important influences m a y o p e r a t e
outside the c o m m o d i t y space altogether. However, the a s s u m p t i o n o f ' n o externalities' reduces the
scope for non-commodity influences o n capability t o function, for any given person. Also, to the
extent t h a t the influence of c o m m o d i t y holdings is separable from the influence of o t h e r external
factors, the efficiency results would have a natural translation into that m o r e inclusive framework.
7. Inequality and the market mechanism

The discussion of opportunity-freedoms has been confined so far to the
achievement of efficiency only (in fact, weak efficiency). Problems of inequality
of opportunity-freedoms have not been addressed. The 'direct theorem', which
is extended in a weak form to opportunity-freedoms, is really supremely
unconcerned with distributional issues, and the partial justification for the
market mechanism it provides is based entirely on efficiency considerations.
Just as a Pareto efficient outcome may well be thoroughly unequal and nasty,
the corresponding weakly efficient combination of opportunity-freedoms can
also be deeply unattractive.

It should also be noted that inequality is no less possible in the space of
capabilities and opportunity-freedoms than in that of commodities and welfares.
In fact, there may actually be some accentuation of inequality due to the
'coupling' of (i) income inequality and (ii) unequal advantages in converting
incomes into capabilities, the two together intensifying the problem of inequality
in terms of opportunity-freedoms. Those who are disabled, or ill, or old, or
otherwise handicapped may have, on the one hand, problems in earning a
decent income, and on the other, also face greater difficulties in converting
incomes into capabilities to live well. The same factors that may make a person
unable to find a good job and a good income may put the person at a
disadvantage in achieving a good quality of life even for the same job and same
income. 36
This relationship between income-earning ability and income-using ability
is, of course, a well-known phenomenon in poverty studies. 37 Its effect here is
to suggest that the interpersonal income inequality in the market outcome may
tend to be magnified by its coupling with handicaps in converting incomes into
capabilities. While the adoption of the perspective of opportunity-freedoms
(rather than welfares) does not disrupt the efficiency claims of the competitive
market mechanism, it may make the distributional achievements, in some
respects, even more problematic.
8. Concluding remarks
In this paper I have tried to reformulate the problem of evaluation of the
competitive market mechanism in terms of its accomplishments in promoting
individual freedoms, as opposed to the conventional framework of welfarist
assessment (Sections 1 and 2). Different aspects of freedoms were distinguished,
and particular attention was paid to the dichotomy between 'the process aspect'
and 'the opportunity aspect' (Section 3). The former raises issues of decisional
36
On this connection, see Sen (1983b, 1992b).
" S e e , for example, Wedderburn (1961), Atkinson (1970, 1989), Townsend (1979), Sen (1983b,
1984).
A. SEN 537
autonomy and immunity from encroachment, and in these respects (and in

terms of the corresponding ideas of libertarian rights and negative freedoms),
the competitive market mechanism does indeed have much to offer, in the
absence of particular types of externalities (Section 4).
The opportunity aspect of freedoms gives an important role to the respective
individual preferences and to the corresponding assessment of opportunities of
choice (Section 5). That connection is central to an understanding of this
particular aspect of freedom (as opposed to the process aspect). There
are, however, some real possibilities of alternative characterization of the
precise connections. The axiom structure chosen in this paper left room for

variations in the exact formulation and went instead for a weak type of
efficiency, based on necessity conditions for being sure of an expansion of
opportunity-freedom.
A different substantive issue concerns the space in which achievements and
opportunities are to be assessed and opportunity-freedom is to be evaluated.
The need to go beyond holdings of commodities into actual opportunities of
functioning and different ways of living was considered in that context, leading
to a reformulation of the efficiency problem in this space (Section 5).
The welfarist efficiency of competitive market equilibria can be extended to
weak efficiency in terms of opportunity-freedoms (Section 6). This extension is
done in three steps: (i) moving from welfare achievement to preference
fulfilment; (ii) moving from preference fulfilment to opportunity-freedoms in
commodity space; and (ii) moving from commodity space to that of actual
opportunities of functioning and the capability to function. The assumptions
needed for these results are not particularly more demanding than those used
in the standard case of welfarist efficiency (that is, in 'the fundamental theorem
of welfare economies'). Indeed, one of the assumptions used in the standard
formulation (viz. self-welfare maximizing behaviour) can in fact be dropped. It
is, however, important to remember that the standard assumptions (such as no
externalities) are exacting enough.
While the efficiency achievements of competitive market equilibria re-
emerge, in a somewhat weaker form, for opportunity-freedoms (both in terms
of freedom to choose commodity baskets and in terms of capabilities to
function), the equity problems—serious as they are even in the welfarist
framework—tend to become even more difficult and pronounced (Section 1).
This is because of the possibility of coupling of income disadvantages with
disadvantages in converting incomes into opportunities of functioning and ways
of living. While the efficiency advantages of the market mechanism, given the
standard assumptions, tend to translate, in some forms, into the field of
freedoms (even in the space of capabilities, not just that of commodities), the
problems of inequality remain and if anything tend to get magnified in the
process of the translation.
Ultimately, the challenge that the market systems have to face must relate
to problems of equity in the distribution of substantive freedoms. This problem
is additional to the more discussed difficulties in (i) achieving equilibrium,
(ii) ensuring competition, (iii) meeting the special assumptions needed for
efficiency results (such as the absence of non-marketable externalities).38
Finally, is there really anything much gained in moving from the 'welfarist'
interpretation of market efficiency to a freedom-based understanding? I believe
there are at least four substantial gains.
First, there is a real gap between the freedom-invoking rhetoric, often used
in the literature, in defence of the market mechanism (e.g., that it makes people
'free to choose') and the exclusively 'welfarist' treatment of the market
mechanism in conventional welfare economics. It is important to examine the
particular senses in which—and the extent to which—economic analysis can
or cannot sustain that rhetoric.

Second, the idea of freedom involves several distinct issues, including
processes and procedures as well as actual opportunities that people have to
live the way they would choose. It is necessary to distinguish between
the different aspects of freedom to have a better understanding of the
distinct ways in which the promotion of freedom can be judged. While this
exercise was undertaken in this paper as a prelude to an examination of what
the markets can or cannot be expected to do, the exercise itself has more general
interest.39
Third, at a more substantive level, it turns out that freedom-based analyses
of market efficiency make it redundant to assume that the individual pre-
ferences and choices must be taken to be aimed exclusively at one's own
welfare—the pursuit of the respective self-interest. That staple assumption in
welfarist assessment turns out to be essentially irrelevant not only to the
process aspect of freedom, but also for efficiency results in terms of
opportunity-freedoms. A person's freedom to get what he or she prefers (no
matter why) takes us a little away from this limiting, and I believe largely false,
assumption.
Finally, by shifting attention from an exclusive concentration on welfare
achievement to the freedom to achieve in general, the freedom-based approach
can encourage a shift in the perspective of technical economic analysis in a
direction that has considerable ethical and political importance. The relation
between markets and freedoms was seen as a momentous problem by classical
economists (as John Hicks noted), and there are good reasons against ignoring
that connection altogether. This paper has been aimed at sorting out some of
the basic issues in that relationship.
Harvard University
38
The importance of 'public goods' in health, education, social security can, indeed, deeply
compromise the case for relying entirely on the markets for resource allocation. On this see Dreze
and Sen (1989), Griffin and Knight (1989), Anand and Ravallion (1993).
39
The investigation of different aspects of freedom has been carried further in my Arrow Lectures
('Freedom and Social Choice*), 1991; to be published.
A. SEN 539
ACKNOWLEDGEMENTS
Revised version of the John Hicks Lecture given at Oxford on 17 May 1990. The text does not
include some personal remarks made at the beginning of the talk on the late Sir John Hicks, who
was not only a great economist and intellectual leader, but also a wonderful colleague and a warm
friend. In revising this paper, I have greatly benefited from the comments of Jean Dreze, and also
from discussions with G. A. Cohen, A. B. Atkinson, Emma Rothschild, Thomas Scanlon, Nicholas
Stern, Richard Velkley, Stefano Zamagni, and the anonymous referees of this journal. I am grateful
to the National Science Foundation for research support.
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© Wouter P.J. Wils, 2014 - all rights reserved.
The judgment of the EU General Court

in Intel and the so-called 'more economic
approach' to abuse of dominance
Wouter P.J. Wils*
forthcoming in
World Competition, Volume 37, Issue 4, December 2014
and accessible at
http://ssrn.com/author=456087
This paper discusses the judgment of the EU General Court of 12 June 2014 in the
Intel case. It argues that the EU case-law on the use of exclusivity rebate systems by
undertakings occupying a dominant position is economically sound, and that the
criticism directed at this case-law is ill-founded.
* Hearing Officer, European Commission; Visiting Professor, King’s College London. I am grateful to
Henry Abbott, David Bailey, Nicholas Banasevic, Eliana Garcés Tolón, Eric Gippini Fournier,
Alfonso Lamadrid de Pablo, Adrian Majumdar, Eugenio de March, Henri Piffaut, Laura Pignataro,
José Rivas, Freya van Schaik, Heike Schweitzer, Joos Stragier, Richard Whish and Geert Wils for
their comments on an earlier draft of this paper. All views expressed in this paper are strictly personal,
and should not be construed as reflecting the opinion of the European Commission or any of the above
mentioned persons.
TABLE OF CONTENTS
I. INTRODUCTION....................................................................................................... 3
A. The Intel judgment and the EU case-law on exclusivity rebates by
dominant undertakings ...................................................................................... 3
B. The so-called 'more economic approach'........................................................... 6
C. A note on terminology....................................................................................... 8
II. THE PROPER USE OF ECONOMICS IN THE INTERPRETATION OF
ARTICLE 102 TFEU .................................................................................................. 9
A. Lawyers versus economists and quantity versus quality of economics ............ 9
B. Different economic theories of competition.................................................... 10
C. The need for interpretation of Article 102 TFEU and the limits to such
interpretation ................................................................................................... 13
D. The objective of Article 102 TFEU................................................................. 15
E. The way in which Article 102 TFEU must be applied and enforced .............. 17
F. The need to integrate economic and legal analysis ......................................... 19
III. THE EU CASE-LAW ON EXCLUSIVITY REBATES BY DOMINANT
UNDERTAKINGS COMPARED TO THE ALTERNATIVE SO-CALLED
'MORE ECONOMIC APPROACH' ......................................................................... 20
A. The argument that the case-law is 'form-based'............................................... 20
1. All human thinking involves categorization ..................................... 20
2. The EU case-law is based on sound categorization .......................... 21
3. The so-called 'more economic approach' is based on unsound
categorization .................................................................................... 22
B. The argument that the case-law is not 'effects-based'...................................... 23
1. Effects of what and on what? ............................................................ 23
2. The proper way to assess the effects of a business practice
under Article 102 TFEU.................................................................... 23
a. Negative effects ................................................................. 23
b. Pro-competitive justifications............................................ 24
3. All relevant effects of the choice of interpretation should be
considered, including enforcement costs and risk allocation ............ 26
C. The as-efficient-competitor test is not fit for the purpose of assessing
the legality of exclusivity rebates under Article 102 TFEU............................ 27
1. The as-efficient-competitor test is based on unsound
categorization .................................................................................... 28
2
2. The as-efficient-competitor test is based on the assumption
that customers only value price ......................................................... 28
3. It is unsound only to care about equally efficient competitors.......... 29
4. The competitive process is not only harmed if competitors are
forced to sell at a loss but also if their profitability is reduced ......... 29
5. Applying the as-efficient-competitor test is liable to consume
a large amount of resources............................................................... 29
6. The as-efficient-competitor test is fundamentally at odds with
the philosophy underlying the EU Treaties ....................................... 30
IV. CUI BONO ? ............................................................................................................. 31
I. INTRODUCTION
A. The Intel judgment and the EU case-law on exclusivity rebates by dominant

undertakings
In its judgment of 12 June 2014 ("the Intel judgment"),1 the General Court of the
European Union dismissed in its entirety the action brought by Intel, the microchip
manufacturer, against the decision of the European Commission of 13 May 2009
imposing a fine of €1.06 billion on Intel for having abused its dominant position on the
market for x86 central processing units (CPUs), in infringement of Article 102 TFEU
("the Commission's decision").2
According to the Commission's decision, Intel abused its dominant position on the
worldwide market for x86 CPUs from October 2002 to October 2007, by implementing a
strategy aimed at foreclosing from the market its only serious competitor, Advanced
Micro Devices, Inc. (AMD).
The Commission found that Intel was in a dominant position on the ground that it held a
market share of roughly 70%, or more, and that it was extremely difficult for competitors
to enter the market and to expand as a result of the unrecoverable nature of investments
to be made in research and development, intellectual property and production facilities.
1 Judgment of 12 June 2014 in Case T-286/09 Intel v European Commission. An appeal by Intel against
this judgment is currently pending before the Court of Justice: Case C-413/14 P Intel v European
Commission.
2 Decision C(2009) 3726 final of 13 May 2009 relating to a procedure under Article 82 of the EC
Treaty and Article 54 of the EEA Agreement (COMP/C-3/37.990 – Intel).
3
Given its strong dominant position, Intel was an unavoidable supplier of x86 CPUs since
customers had no choice other than to obtain part of their requirements from Intel.
According to the Commission's decision, the abuse was characterised by several

measures adopted by Intel vis-à-vis certain of its own customers (computer
manufacturers) and the European retailer of microelectronic devices, Media-Saturn.
In particular, Intel granted rebates to four major computer manufacturers (Dell, Lenovo,
HP and NEC) on the condition that they purchased from Intel all or almost all of their
x86 CPUs. Similarly, Intel awarded payments to Media-Saturn, which were conditioned
on its selling exclusively computers containing Intel’s x86 CPUs. According to the
Commission's decision, those rebates and payments induced the loyalty of the four
manufacturers listed above and of Media-Saturn and thus significantly diminished the
ability of Intel’s competitors to compete on the merits of their x86 CPUs. Intel’s anti-
competitive conduct thereby resulted in a reduction of consumer choice and in lower
incentives to innovate.3
In the Intel judgment, the General Court upheld the Commission's decision.
On the basis of a comprehensive review of the contested facts, the General Court found
that the rebates granted to Dell, HP, NEC and Lenovo were "exclusivity rebates", that is,
"rebates the grant of which is conditional on the customer's obtaining all or most of its
requirements from the undertaking in a dominant position".4
The General Court reaffirmed the settled case-law of the EU Courts, going back to the
judgment of the Court of Justice of 1979 in Hoffmann –La Roche,5 according to which, in
the absence of an objective justification,6 "an undertaking which is in a dominant
position on a market and ties purchasers – even if it does so at their request – by an
obligation or promise on their part to obtain all or most of their requirements exclusively
from that undertaking abuses its dominant position within the meaning of [Article 102
TFEU], whether the obligation in question is stipulated without further qualification or
whether it is undertaken in consideration of the grant of a rebate".7
The finding that the use of exclusivity rebates by a company in a dominant position
constitutes an abuse of dominance within the meaning of Article 102 TFEU does not
depend on an analysis of the circumstances of the case aimed at establishing a potential
foreclosure effect, because exclusivity rebates by a company in a dominant position are
3 Moreover, Intel awarded three computer manufacturers (HP, Acer and Lenovo) payments which were
conditional upon their postponing or cancelling the launch of AMD CPU-based products and/or
putting restrictions on the distribution of those products. These practices, described as 'naked
restrictions', and their analysis in the Intel judgment and in the Commission's decision, are not further
considered in this paper.
4 Definition in paragraph 76 of the Intel judgment, as note 1 above.
5 Judgment of 13 February 1979 in Case 85/76 Hoffmann-La Roche.
6 See below, text accompanying note 14.
7 Intel judgment, as note 1 above, paragraph 72.
4
considered by their very nature capable of restricting competition.8 There is no need
either to show actual effects of the exclusivity rebates on competition or a causal link
between such effects and the exclusivity rebates.9 Intel's argument that, during the period
in which it applied the contested exclusivity rebates, AMD reported uniquely rapid
growth rates, was thus rejected as irrelevant.10 A fortiori, there is no requirement to prove
either direct damage to consumers or a causal link between such damage and the
exclusivity rebates at issue.11
There was thus also no need for the Commission to conduct an economic analysis of the
capability of the rebates to foreclose a hypothetical competitor as efficient as Intel ("as-
efficient-competitor test").12
The size of the rebate, the short duration of the supply contracts, the smallness of the
parts of the market which are concerned by the exclusivity rebates, or the claim that the
rebates represented a response to requests and to customers' buying power are not
relevant arguments to justify the use of exclusivity rebates by an undertaking in a
dominant position.13
However, the use of exclusivity rebates by a company in a dominant position does not
constitute an abuse within the meaning of Article 102 TFEU if the dominant undertaking
can "justify the use [of such rebates], in particular by showing that its conduct is
objectively necessary or that the potential foreclosure effect that it brings about may be
counterbalanced, outweighed even, by advantages in terms of efficiency that also benefit
consumers".14 Intel did however not put forward any argument in that regard.15
Finally, the General Court, exercising its unlimited jurisdiction, concluded that the fine
imposed on Intel was appropriate.16
8 Intel judgment, as note 1 above, paragraphs 80-93.
12 Intel judgment, as note 1 above, paragraph 140-166; see text accompanying notes 22 to 32 below.
5
B. The so-called 'more economic approach'
The Intel case had been considered a test case for the so-called 'more economic approach'
or 'effects-based approach' to abuse of dominance.17
The Commission adopted its decision in the Intel case shortly after it had published, at
the end of 2008/beginning of 2009, its Guidance on its enforcement priorities in applying
Article 102 TFEU to exclusionary abusive conduct ("the Priorities Paper").18 This
Priorities Paper was the end-product of a review process announced by the then
Competition Commissioner, Neelie Kroes, in a speech in New York in 2005,19 and was
presented as a 'more economic' and 'effects-based' approach to Article 102 TFEU.20
According to the Priorities Paper, the Commission will normally only intervene against
exclusionary conduct by dominant undertakings if, on the basis of cogent and convincing
evidence, the allegedly abusive conduct is likely to lead to foreclosure leading to harm to
consumers.21
17 See, for instance, H. Zenger, 'Intel and the future of Article 102 (CRA Competition Memo, 17 June
2014), at 1, and 'Rebates and Competition Law: An Overview of EU and National Law', in F. Jenny
(ed), EU Competition Case Law Digest (Institute of Competition Law, 2014), available at
http://ssrn.com/abstract=2429138.
18 Communication from the Commission – Guidance on the Commission's enforcement priorities in

applying Article 82 of the EC Treaty to abusive exclusionary conduct by dominant undertakings,
[2009] OJ C45/7. Article 82 of the EC Treaty was the then name of what is now Article 102 TFEU.
While the publication of the Priorities Paper in the Official Journal took place only on 24 February
2009, the Commission had already published the Priorities Paper on its website on 3 December 2008;
see press release IP/08/1877, 'Antitrust: consumer welfare at heart of Commission fight against abuses
by dominant undertakings' (3 December 2008).
19 Neelie Kroes, 'Preliminary Thoughts on Policy Review of Article 82', Speech at the Fordham
Corporate Law Institute, New York, 23 September 2005 (SPEECH/05/537); the speech was followed
by a public consultation on a DG Competition discussion paper on the application of Article 82 of the
Treaty to exclusionary abuse (December 2005); see press release IP/05/1626, 'Competition:
Commission publishes discussion paper on abuse of dominance' (19 December 2005); the speech had
been preceded by a report commissioned from a group of economists: Report by the EAGCP, 'An
economic approach to Article 82' (July 2005); see also D.A. Crane, The Institutional Structure of
Antitrust Enforcement (Oxford University Press, 2011) at 205, and G. Monti, EC Competition Law
(Cambridge University Press, 2007) at 393.
20 See also, apart from the documents mentioned in the two immediately preceding footnotes, the
commentaries by the then Director-General and the then Director for Policy of the European
Commission's Directorate-General for Competition: P. Lowe, 'The European Commission Formulates
its Enforcement priorities as Regards Exclusionary Conduct by Dominant Undertakings', GCP,
www.globalcompetitionpolicy.org (February 2009), and C. Esteva Mosso, 'The More Economic
Approach Paradigm – an Effects-Based Approach to EU Competition Policy' in J. Basedow and W.
Wurmnest (eds), Structure and Effects in EU Competition Law: Studies on Exclusionary Conduct and
State Aid (Kluwer Law International, 2011), 11.
21 Priorities Paper, as note 18 above, paragraphs 19 and 20.
6
With regard to what the Priorities Paper calls "price-based exclusionary conduct", a
category that appears to include exclusivity rebates,22 the Commission "will normally
only intervene where the conduct concerned has already been or is capable of hampering
competition from competitors which are considered to be as efficient as the dominant
undertaking" (as-efficient-competitor test).23 "In order to determine whether even a
hypothetical competitor as efficient as the dominant undertaking would be likely to be
foreclosed by the conduct in question, the Commission will examine economic data
relating to cost and sales prices, and in particular whether the dominant undertaking is
engaging in below-cost pricing".24 "If the data clearly suggest that an equally efficient
competitor can compete effectively with the pricing conduct of the dominant
undertaking, the Commission will, in principle, infer that the dominant undertaking's
pricing conduct is not likely to have an adverse impact on effective competition, and will
therefore be unlikely to intervene".25
The Priorities Paper clearly states that it is not meant to provide a test for assessing
whether or not exclusionary conduct violates Article 102 TFEU (legality test), but only a
test to be used by the Commission to determine, in the context of its priority setting,26
whether or not a case would be a priority case (prioritisation test).27
Nevertheless, many commentators had expressed the hope that the test set out in the
Priorities Paper could serve as inspiration for the EU Courts to change the case-law.28
In its Intel decision, the Commission explained that, because the Priorities Paper sets out
the Commission's priorities for the future, it did not apply to the Intel case, in which
proceedings had already been initiated before the adoption of the Priorities Paper.29
Nevertheless the Commission took the view that its decision was "in line with the
orientations set out in the Priorities Paper",30 and it included in its decision, in addition to
the legal analysis applying the case-law of the EU Courts, a 150-pages long "as efficient
competitor analysis",31 leading to the conclusion "that the Intel payments are capable of
22 Priorities Paper, as note 18 above, paragraph 41.
26 See my paper 'Discretion and Prioritisation in Public Antitrust Enforcement, in Particular EU Antitrust
Enforcement' (2011) 34 World Competition 353.
27 Priorities Paper, as note 18 above, paragraphs 2 and 3.
28 See, for instance, references in note 17 above and in note 34 below, and B. Allan, 'Rule-making in the
context of Article 102 TFEU' (2014) Competition Law Journal 7 at 20-21.
29 Intel decision, as note 2 above, paragraph 916.
31 Intel decision, as note 2 above, paragraphs 1002 to 1575.
7
having or are likely to have anticompetitive foreclosure effects, since even an as efficient
competitor would be prevented from supplying [Dell, HP, NEC and Lenovo]'s x86 CPU
requirements or ensuring that [Media-Saturn] sells PCs based on its x86 CPUs".32
Not surprisingly then, the fact that the General Court in the Intel judgment confirmed the
established case-law, and thus considered the as-efficient-competitor test irrelevant,33 has
been a major disappointment for those who had hoped that the EU Courts would change
their case-law and adopt the test set out in the Priorities Paper as a new test for assessing
the legality of exclusionary conduct under Article 102 TFEU.34
C. A note on terminology
In this paper, when I refer to the "proponents of the so-called 'more economic approach'",
I mean those commentators who want the EU Courts to change the case-law on abuse of
dominance in general and the use of exclusivity rebates by dominant undertakings in
particular and to adopt the test set out in the Priorities Paper35 as a new test for assessing
the legality of exclusivity rebates under Article 102 TFEU. Equally, when I refer to "the
so-called 'more economic approach'", I mean the alternative legality test advocated by
those commentators.
As explained above,36 the Priorities Paper itself clearly states that the test set out in it is
not intended to constitute a statement of the law (legality test), but is merely to be used
for prioritisation purposes (prioritisation test).
33 See above, text accompanying notes 6 to 12.
34 See, for instance, P. Ibáñez Colomo, 'Intel v Commission and the problem with wrong economic
assumptions', Chillin' Competition blog, www.chillingcompetition.com (16 June 2014), and J.S. Venit,
'Case T-286/09 Intel v Commission – The Judgment of the General Court: All Steps Backward and No
Steps Forward' (August 2014) European Competition Journal 203.
35 As note 18 above.
36 Text accompanying notes 26 and 27.
8
II. THE PROPER USE OF ECONOMICS IN THE
INTERPRETATION OF ARTICLE 102 TFEU
A. Lawyers versus economists and quantity versus quality of economics
Proponents of the so-called 'more economic approach' - a self-ascribed label – tend to

present the choice between the EU case-law and the alternative they advocate, as a
choice between, on the one hand, an approach that is not or is less based on economics
and, on the other hand, an approach that is or is more based on economics.
Viewed from this angle, the suspicion easily arises that those who defend the EU case-
law, as I will be doing in this paper, must be lawyers that are economically illiterate and
who may be defending their turf against economists or economically literate lawyers.
To dispel any thought in that direction which the reader may have, I would like to declare
at the outset that I have been educated both as an economist and as a lawyer, and that I
personally tend to agree with Justice Brandeis's statement that "a lawyer who has not
studied economics and sociology is very apt to become a public enemy".37
If Brandeis's statement rings true for the law in general, the importance of economic
thinking is all the more obvious for competition law.
Indeed, the relevance of economics for competition law is so obvious that it is hard to
believe that ever an interpretation or application of competition law could arise that was
not based on economic thinking.
The authors of the 1957 Treaty establishing the European Economic Community
(emphasis added), when writing the then Article 86 EEC, later renamed Article 82 EC
and now Article 102 TFEU, must surely have had economic thoughts.38 Similarly, the
officials at the European Commission and the judges at the Court of Justice who
proposed and created the case-law in the Hoffmann-La Roche case39 and other early
cases, and the academic writers who influenced them, must have had economic thoughts.
Indeed, then as now, competition law very much attracted the interest of economists and
economically literate lawyers.40 No doubt the EU case-law, as confirmed in the Intel
judgment, thus also reflects economic thinking.41
37 L.D. Brandeis, 'The Living Law' (1915-1916) 10 Illinois Law Review 461. Arguably psychology,
history and moral philosophy should be added to the list.
38 See the literature referred to in note 40 below.
39 See note 5 above.
40 See, inter alia, K.K. Patel and H. Schweitzer (eds), The Historical Foundations of EU Competition
Law (Oxford, 2013); H. Schweitzer, 'The History, Interpretation and Underlying Principles of Section
2 Sherman Act and Article 82 EC', in C.D. Ehlermann and M. Marquis (eds), European Competition
9
As to the quantitative comparison suggested by the 'more economic approach' label, it
would also appear obvious that the proper use of economics in the interpretation of
Article 102 TFEU is not a matter of quantity,42 but a matter of quality, i.e. whether the
economic thinking is sound and fit for the purpose for which it is used.43
B. Different economic theories of competition
However much some economists may try to pretend otherwise by wrapping their
thoughts in mathematical formulas,44 economics is not an exact science, like physics or
chemistry, but a social science, like sociology, history or moral philosophy.
Like the other social sciences, economics accommodates a variety of possible approaches
and schools of thought, which offer different perspectives on the object of study and
which, because of the social nature of the object of study, are inevitably always value
Law Annual 2007: A Reformed Approach to Article 82 EC (Hart, 2008) 119; P. Behrens, 'The
"Consumer Choice" Paradigm in German Ordoliberalism and its Impact upon EU Competition Law',
Europa-Kolleg Hamburg Institute for European Integration, Discussion Paper No 1/14 (March 2014);
E.-J. Mestmäcker, 'The development of German and European competition law with special reference
to the EU Commission's Article 82 Guidance of 2008', in L.F. Pace (ed), European Competition Law:
The Impact of the Commission's Guidance on Article 102 (Edward Elgar, 2011) 25.
41 On the general idea that the law embodies the experience and wisdom of past generations, see F.
Hayek, Law, Legislation and Liberty (Routledge, 1982), Volume 1, 'Rules and Order', and O.W.
Holmes, The Common Law (Little Brown, 1881), at 1.
42 As explained below (text accompanying notes 147 and 148), there is one way in which the
quantitative comparison does make sense, namely the impact on the demand for the services of the
economics profession in the application of Article 102 TFEU. In this respect, however, less is better
than more, because, from the perspective of the common good, lower enforcement costs are
preferable; see further text accompanying notes 133 to 138 below.
43 See below, text accompanying notes 44 to 140.
44 Many economists and philosophers of science have criticised the immoderate use of mathematics in
economics as creating an appearance of scientificity while covering a vacuity of thought and
unacknowledged value judgments; see, among others, T. Piketty, Capital in the Twenty-First Century
(Harvard, 2014) at 32 and 574; R.H. Nelson, Economics as Religion: From Samuelson to Chicago and
Beyond (Penn State Press, 2001) at 228-229; D. N. McCloskey, The Rhetoric of Economics
(University of Wisconsin Press, 1985); T. Lawson, Economics and Reality (Routledge, 1997) and
Reorienting Economics (Routledge, 2003); V. Bigo, as note 61 below; R. Skidelsky, John Maynard
Keynes 1883-1946 Economist, Philosopher, Statesman (MacMillan, 2003) at 287; R. Skidelsky,
Keynes – The Return of the Master (Allen Lane, 2009) at 152; see also Ronald Coase, winner of 1991
Nobel Prize in Economics: "In my youth it was said that what was too silly to be said may be sung. In
modern economics it may be put in mathematics" (R.H. Coase, The Firm, the Market and the Law
(University of Chicago Press, 1988), at 185), and D.H. Ginsburg and E.M. Fraser, 'The Role of
Economic Analysis in Competition Law' (2010), available at http://ssrn.com/abstract=1610189, at 28,
reporting that "during his long tenure as the editor of The Journal of Law and Economics (1964-82),
[Ronald Coase] would not publish articles that relied upon mathematical notation (except, perhaps, in
an appendix) on the ground that an author who could not express himself in English probably did not
know what he was talking about".
10
laden.45 The adherence by an economist to one or another approach or school, or the
relative popularity of one or another approach or school in a certain group of economists
or at a certain point in time is not the result of a process of falsification, the other
approaches having been proved wrong. It rather reflects a preference for a way of
looking at things that is found congenial or instrumentally useful for some task at hand,
or, when the approach becomes conventional wisdom, loyalty to the tribe, possibly re-
enforced through peer review and other mechanisms of professional discipline.46
The proponents of the so-called 'more economic approach' to abuse of dominance rely on
one type of economic theory or approach to competition and competition law, namely the
(post-)Chicago (consumer) welfarist approach.47
A quick look at some writings of Nobel Prize winning economists shows that this
approach is far from inevitable:
In his famous 1968 lecture 'Competition as a Discovery Procedure', Friedrich Hayek,

joint recipient of the 1974 Nobel Prize in Economics, proposed "to consider competition
as a procedure for the discovery of such facts as, without resort to it, would not be known
by anyone, or at least would not be utilised".48 "If anyone really knew all about what
economic theory calls the data, competition would indeed be a very wasteful method of
securing adjustment to these facts".49
One consequence of this is that "competition is valuable only because, and so far as, its
results are unpredictable and on the whole different from those which anyone has, or
could have, deliberately aimed at".50
Closely connected with this is a methodological consequence: "The necessary

consequence of the reason why we use competition is that, in those cases in which it is
45 See H.-J. Chang, Economics: The User's Guide (Pelican, 2014), at 3-5, 111-164 and 451-460; R.E.
Backhouse, The Puzzle of Modern Economics: Science or Ideology? (Cambridge University Press,
2010); J. Schlefer, The Assumptions Economists Make (Belknap Harvard, 2012); and E. Fox, in C.D.
Ehlermann and L.L. Laudati, European Competition Law Annual 1997: The Objectives of Competition
Policy (Hart, 1998), Panel Discussion on Competition Policy Objectives, at 11-12.
46 On how economists choose the theories they espouse, see R.H. Coase, Essays on Economics and
Economists (University of Chicago Press, 1994), at 15-33; on conventional wisdom, see J.K.
Galbraith, The Affluent Society (40th Anniversary Edition; Houghton Mifflin, 1998), Chapter 2; on
peer review, see B.S. Frey, 'Publishing as prostitution? – Choosing between one's own ideas and
academic success' (2003) 116 Public Choice 205 and F.S. Lee, X. Pham and G. Gu, 'The UK Research
Assessment Exercise and the narrowing of UK economics' (2013) 37 Cambridge Journal of
Economics 693.
47 See note 72 below.
48 F.A. Hayek, 'Competition as a Discovery Procedure', in New Studies in Philosophy, Politics,

Economics and the History of Ideas (University of Chicago Press, 1978), 179 at 179; see also F.A.
Hayek, 'The Use of Knowledge in Society' (1945) 35 American Economic Review 519.
49 'Competition as a Discovery Procedure', as note 48 above, at 179.
11
interesting, the validity of the theory can never be tested empirically. We can test it on
conceptual models, and we might conceivably test it in artificially created real situations,
where the facts which competition is intended to discover are already known to the
observer. But in such cases it is of no practical value, so that to carry out the experiment
would hardly be worth the expense. If we do not know the facts we hope to discover by
means of competition, we can never ascertain how effective it has been in discovering
those facts that might be discovered. All we can hope to find out is that, on the whole,
societies which rely for this purpose on competition have achieved their aims more
successfully than others. This is a conclusion which the history of civilisation seems
eminently to have confirmed".51
Hayek's insight questions at the most fundamental level the wisdom of the (post-
)Chicago (consumer) welfarist approach, which values the competitive process only
because and to the extent that it delivers positive results in terms of consumer welfare
and which would make the applicability of the competition rules dependent on a case-by-
case analysis of the effects of the conduct on consumer welfare.52
In his 1993 paper 'Markets and Freedoms: Achievements and Limitations of the Market
Mechanism in Promoting Individual Freedoms', Amartya Sen, recipient of the 1998
Nobel Prize in Economics, "reformulate[d] the problem of evaluation of the competitive
market mechanism in terms of its accomplishments in promoting individual freedoms, as
opposed to the conventional framework of welfarist assessment".53 As Sen points out,
many economists have examined the competitive market mechanism from the
perspective of individual freedom, including Adam Smith and many later thinkers.54
Freedom has at least two valuable aspects, which Sen calls 'the opportunity aspect' and
'the process aspect'.55 The opportunity aspect includes not only the value of maximal
achievement, but also the range of choice.56 The process aspect includes decisional
autonomy of the choices to be made and immunity from interference by others.57
Viewed in this light, it becomes clear that the (post-)Chicago (consumer) welfarist
approach to competition takes a unduly narrow view of the benefits of undistorted
competition, by considering only the value of maximal achievement (consumer welfare
or efficiency), while neglecting the process values of undistorted competition (including
52 See below, text accompanying notes 77 and 140; see also H. Schweitzer, 'The Role of Consumer
Welfare in EU Competition Law', in J. Drexl and R.M. Hilty (eds), Technology and Competition:
Contributions in Honour of Hanns Ullrich (Larcier, 2009), 511 at 520-521.
53 A. Sen, 'Markets and Freedoms: Achievements and Limitations of the Market Mechanism in
Promoting Individual Freedoms' (1993) 45 Oxford Economic Papers 519, at 536.
54 Idem, at 521-523.
55 Idem, at 522.
56 Idem, at 522-523.
57 Idem, at 523-525.
12
the right to compete on the merits, and equality of opportunity between economic
operators).58
C. The need for interpretation of Article 102 TFEU and the limits to such
interpretation
The text of Article 102 TFEU does not provide an immediate answer to the question
whether or to what extent or under what conditions or circumstances the use of
exclusivity rebate systems by undertakings in a dominant position constitutes a
prohibited abuse.
Indeed, the prohibition of abuse of a dominant position laid down in Article 102 TFEU
is, to a significant extent, vague or open-textured,59 and thus requires interpretation so as
to specify its precise legal content to be applied in specific cases.60
This raises two questions: Whose task is it to provide the authoritative interpretation of
Article 102 TFEU? And what are the limits to the possible interpretations that can be
chosen?
One could imagine societies or legal systems where the task of providing the
authoritative interpretation of the law is entrusted to some group or profession of
religious or other scholars or wise men,61 to whose dicta law enforcement officials and
judges must defer.
58 See below, text accompanying notes 80 to 83; see also A. Edlin and J. Farrell, 'Freedom to Trade and
the Competitive Process', forthcoming in R.D. Blair and D.D. Sokol, Oxford Handbook of
International Antitrust Economics (Oxford University Press, 2014).
While the (post-)Chicago (consumer) welfarist approach does not necessarily exclude consideration of
the range of choice (variety and consumer choice), in practice this aspect is also often neglected in
favour of an exclusive focus on price and cost; see for instance below, text accompanying note 129, as
to the use of the as-efficient-competitor test.
59 See generally, on vagueness in the law, H.L.A. Hart, The Concept of Law (2nd edition, Oxford
University Press, 1994), Chapter VII; T.A.O. Endicott, Vagueness in Law (Oxford University Press,
2000); V.K. Bhatia, J. Engberg, M. Gotti and D. Heller (eds), Vagueness in Normative Texts (Peter
Lang, 2005); V. Fon and F. Parisi, 'On the optimal specifity of legal rules' (2007) 3 Journal of
Institutional Economics 147; and F. Parisi and V. Fon, The Economics of Lawmaking (Oxford
University Press, 2009), Part I, Chapter 2.
60 See also Judgment of the General Court of 27 June 2012 in Case T-167/08 Microsoft, paragraph 91.
61 On the gender of economics, see M.A. Ferber, 'The Study of Economics: A Feminist Critique', The
American Economic Review, Vol. 85, No. 2, Papers and Proceedings of the Hundredth and Seventh
Annual Meeting of the American Economic Association Washington, DC, January 6-8, 1995 (May,
1995), 357, and V. Bigo, 'Explaining Modern Economics (as a Microcosm of Society)' (2008) 32
Cambridge Journal of Economics 527; on the link between economics and religion, see R.H. Nelson,
Economics as Religion: From Samuelson to Chicago and Beyond (Penn State Press, 2001).
13
In the EU legal system, which is founded on the rule of law,62 it is the task of the Court
of Justice to provide the authoritative interpretation of Article 102 TFEU.63
The European Commission has the task to ensure the application of the Treaties and to
oversee the application of Union law, but it does so under the control of the Court of
Justice,64 whose interpretation of Article 102 TFEU is binding upon the Commission.
As Advocate General Kokott has pointed out, "the Commission [has] to act within the
framework prescribed for it by [Article 102 TFEU] as interpreted by the Court of
Justice".65
This does not mean that the European Commission cannot propose interpretations of
Article 102 TFEU to the Court.66 Indeed, many of the judgments in which the EU Courts
have clarified the interpretation of Article 102 TFEU, such as the Hoffmann–La Roche
judgment,67 concerned appeals against Commission decisions, and the Commission may
thus have been more or less successful in convincing the Courts to adopt the
interpretation which it proposed. Similarly, in cases arising through a preliminary
reference from a national court, the Commission, which makes systematic use of its right
to submit observations to the Court of Justice,68 may be more or less successful in
convincing the Court to adopt the interpretation of Article 102 TFEU which it proposes.
Finally, the European Commission has a broad discretion to select the cases that it
investigates and in which it continues the proceedings up to the stage of a final
decision.69 However, according to the case-law of the Court of Justice, "when deciding
the order of priority for dealing with the complaints brought before it, the Commission
may not regard as excluded in principle from its purview certain situations which come
under the task entrusted to it by the Treaty".70
62 Article 2 TEU.
63 Article 19(1) TEU. The Council also has some legislative powers under Article 103 TFEU.
64 Article 17(1) TEU.
65 Opinions of Advocate General Kokott of 23 February 2006 in Case C-95/04 P British Airways,
paragraph 28, and of 14 April 2011 in Case C-109/10 P Solvay, paragraph 21.
66 See also B. Allan, 'Rule-Making in the Context of Article 102 TFEU' (2014) Competition Law Journal
7 at 14-15: "the rule-making process may be viewed as, primarily, a dialogue in which the
Commission proposes and the Court ultimately disposes".
67 See note 5 above.
68 Article 23 of the Statute of the Court of Justice, Protocol No 3 annexed to the Lisbon Treaty.
69 For a detailed analysis, see my paper 'Discretion and Prioritisation in Public Antitrust Enforcement, in
Particular EU Antitrust Enforcement' (2011) 34 World Competition 353.
70 Judgment of the Court of Justice of 4 March 1999 in Case C-119/97 P Ufex, paragraphs 92 and 93; see
also Judgment of the General Court of 8 July 2008 in Case T-99/04 Treuhand, paragraph 163; D.J.
Galligan, Discretionary Powers – A Legal Study of Official Discretion (Oxford University Press,
1986), at 281-284; and F.W. Bulst, 'Mehr Licht – Zur Anwendung des Art. 82 EG auf
14
As to the second question, concerning the limits to the possible interpretations of Article
102 TFEU that can be adopted, the Court of Justice does not have complete freedom to
adopt any interpretation of Article 102 TFEU, nor the European Commission to propose
any interpretation. Indeed, even if the prohibition of abuse of a dominant position laid
down in Article 102 TFEU is to a significant extent vague, and thus leaves scope for
different interpretations, Article 102 TFEU and the EU Treaties as a whole contain a
number of rules, principles and statements of purpose that are binding upon the Court of
Justice and the European Commission,71 and that could only be altered by changing the
Treaties.
Any proposed interpretation of Article 102 TFEU that is not compatible with these
inherent features of Article 102 TFEU can thus not be adopted, unless the EU Treaties
were to be changed. Two of these inherent features of Article 102 TFEU are of particular
relevance for the discussion at hand: the objective of Article 102 TFEU, and the way in
which Article 102 TFEU must be applied and enforced.
D. The objective of Article 102 TFEU
For several decades there has been a rich debate in the US American literature on the
objective or objectives of US antitrust law, and this debate has had an impact on the
interpretation of the Sherman Act by the US Courts and by the Department of Justice and
the Federal Trade Commission.72 Indeed, the Sherman Act does not specify the objective
of the antitrust prohibitions which it contains. The US Supreme Court can thus ultimately
choose this objective on the basis of its own policy preferences.
The situation in the EU is radically different: The EU Treaties clearly specify the
objective of the EU competition rules. Hence there is no room for the Court of Justice or
the European Commission (or the competition authorities and courts of the EU Member
States, when applying EU competition law,73 or the Council, when exercising its
legislative powers under Article 103 TFEU) to make a different choice.
Behinderungsmissbräuche' (2009) 73 Rabel Journal of Comparative and International Private Law

703 at 716-718.
71 As well as on the Council, when exercising its legislative powers under Article 103 TFEU.
72 See B. Orbach, 'How Antitrust Lost Its Goal' (2013) 81 Fordham Law Review 2253, and M.E. Stucke,
'Reconsidering Antitrust Goals' (2012) 53 Boston College Law Review 551.
73 See Article 3 of Council Regulation (EC) No 1/2003 of 16 December 2002 on the implementation of
the rules on competition laid down in Articles 81 and 82 of the Treaty [2003] OJ L1/1. Statistically,
most of the application of Article 102 TFEU takes place at the level of the EU Member States; see
Commission Staff Working Paper 'Ten Years of Antitrust Enforcement under Regulation 1/2003'
(SWD(2014)230/2, 9 July 2014) and my paper 'Ten Years of Regulation 1/2003 – A Retrospective'
(2013) 4 Journal of European Competition Law & Practice 293.
15
Indeed, it is clear from Protocol No 27 on the internal market and competition, annexed
to the Treaty of Lisbon,74 that the objective of Article 102 TFEU (and of the other EU
competition rules) is a system of undistorted competition, as part of the internal
market established by the EU.75
From an economic perspective, it makes a lot of sense to have a system of undistorted

competition as the objective of Article 102 TFEU and the other competition rules.
Indeed, the focus on the system of competition rather than on this or that specific effect
of competition reflects Friedrich Hayek's fundamental insight, presented above,76 that the
value of competition lies precisely in that it allows results to be obtained that could not
have been aimed at by a central planner or through a case-by-case economic analysis by
a competition authority.77
In any event, a system of undistorted competition as part of the internal market is the
objective of Article 102 TFEU as determined by the EU Treaties. Whatever views this or
that economist or other person or many or most of them may have as to what the
objective of Article 102 TFEU should be78 is irrelevant, unless a debate were to be
opened on changing the EU Treaties.
Article 102 TFEU and the other EU competition rules thus protect the competitive
process as such.79 In doing so, the EU competition rules no doubt have positive effects on
consumer welfare and on efficiency, but the EU Treaties do not allow these effects to be
substituted for the objective of a system of undistorted competition, to the exclusion of
the other benefits of undistorted competition (recognised by many economists, from
Adam Smith to Amartya Sen, as mentioned above80), such as variety and consumer
choice, the right to compete on the merits, and equality of opportunity between economic
operators.81
74 [2010] OJ C 83/309.
75 See Judgments of the Court of Justice of 17 February 2011 in Case C-52/09 TeliaSonera, paragraphs
20-22, and of 17 November 2011 in Case C-496/09 Commission v Italy, paragraph 60; see also Article
3(3) TEU and Articles 119 and 120 TFEU. Before the Lisbon Treaty, the same was clear from initially
Article 3(g) EEC, later Article 3(1)(g) EC.
76 Text accompanying notes 48 to 52.
77 See also text accompanying note 140 below.
78 See for instance J. Padilla, in C.D. Ehlermann and M. Marquis, European Competition Law Annual
2007: A Reformed Approach to Article 82 EC (Hart, 2008), at 7, stating that the "Brussels consensus"
is that the goal of Article 102 TFEU should be aggregate consumer welfare.
79 See Opinion of Advocate General Kokott of 23 February 2006 in Case C-95/04 P British Airways,
paragraphs 68-69, and Judgments of the Court of Justice of 15 March 2007 in Case C-95/04 P British
Airways, paragraphs 106-107, and of 6 October 2009 in Joined Cases C-501/06 P, C-513/06 P, C-
515/06 P and C-519/06 P, GlaxoSmithKline, paragraph 63.
81 See Order of the President of the Court of Justice of 11 April 2002 in Case C-481/01 P(R), NDC
Health v Commission, paragraph 84.
16
Indeed, the right to compete on the merits and equality of opportunity between economic
operators are particularly important aspects of the objective of a system of undistorted
competition as part of the internal market, because they reflect the fundamental idea that
economic operators from any EU Member State should have equal and undistorted
access to the market throughout the EU internal market.82
A right to free competition also appears to be included in Article 16 of the Charter of

Fundamental Rights of the EU.83
Any economic approach that is based on the assumption that the objective to be pursued
is something other than a system of undistorted competition as part of the internal market
is not fit for the purpose of interpreting Article 102 TFEU.
E. The way in which Article 102 TFEU must be applied and enforced
According to Article 102 TFEU and Article 1(3) of Regulation 1/2003, the abuse of a
dominant position within the meaning of Article 102 TFEU is prohibited, no prior
decision to that effect being required.
Undertakings occupying a dominant position must themselves assess, with the help of
their counsel, whether their envisaged practices violate Article 102 TFEU.84
Article 102 TFEU creates direct rights for any person harmed by an abuse of a dominant
position, for instance a customer or a competitor, which can be directly invoked in
litigation in national courts, either in defence against a contractual claim or an
intellectual property infringement claim by the dominant undertaking or offensively to
obtain an injunction stopping or preventing the abuse or to obtain compensation for harm
that has already occurred.85
82 See Intergovernmental Committee of the Messina Conference, Report by the Heads of Delegation to
the Foreign Ministers ("Spaak Report"), 21 April 1956, Title II Chapter 1 – Competition Rules; H.
Schweitzer, as note 52 above; and E.-J. Mestmäcker, as note 40 above, at 27 and 45.
83 See Explanations Relating to the Charter of Fundamental Rights, [2007] OJ C 303/17, at 23; and P.
Oliver, 'What Purpose Does Article 16 of the Charter Serve?', in U. Bernitz, X. Groussot and F.
Schulyok (eds), General Principles of EU Law and European Private Law (Kluwer Law International,
2013), 281 at 286-287.
84 On self-assessment, see my book Principles of European Antitrust Enforcement (Hart, 2005), Section
1.2.3.
85 Judgment of the Court of Justice of 30 January 1974 in Case 127/73, BRT v SABAM, paragraph 16,
and Article 6 and recital 7 of Regulation 1/2003, as note 73 above. Statistically, actions for injunctive
relief are the most important form of private enforcement of Article 102 TFEU; see S. Peyer, 'Myths
and Untold Stories – Private Antitrust Enforcement in Germany', University of East Anglia Centre for
Competition Policy Working Paper 10-12 (July 2010) and B. Rodger (ed), Competition Law:
Comparative Private Enforcement and Collective Redress across the EU (Kluwer Law International,
2014), Part I, Chapter 4.
17
Article 103(2)(a) TFEU and Articles 5 and 23(2)(a) of Regulation 1/2003 provide that
compliance with the prohibition laid down in Article 102 TFEU must be ensured in
particular through fines, to be imposed by the competition authorities of the EU Member
States and by the European Commission.
This enforcement system for Article 102 TFEU is radically different from, for instance,
the system of prior notification and authorisation under the EU Merger Regulation.86
Any proposed interpretation of Article 102 TFEU must be compatible with the way in
which Article 102 TFEU has to be applied and enforced.
The requirement in Article 103(2)(a) TFEU that compliance with Article 102 TFEU must
be enforced through the imposition of fines, combined with the principle of nullum
crimen sine lege, enshrined in Article 49 of the Charter of Fundamental Rights of the EU
and Article 7 of the European Convention on Human Rights, implies that Article 102
TFEU must be interpreted in a way which allows dominant undertakings contemplating a
business practice to assess, in advance, at reasonable cost and with reasonable certainty,
whether or not the envisaged practice violates Article 102 TFEU.87
Similarly, the principle that Article 102 TFEU creates direct rights that victims can
invoke before the national courts implies that Article 102 TFEU must not be interpreted
in ways that make it unnecessarily difficult for customers, competitors or other market
participants confronted with a practice implemented or announced by a dominant
undertaking to assert their rights under Article 102 TFEU.88
Any economic approach that does not allow for enforcement through fines or that
unnecessarily creates obstacles for private enforcement is not fit for the purpose of
interpreting Article 102 TFEU.
86 Council Regulation (EC) No 139/2004 of 20 January 2004 on the control of concentrations between
undertakings, [2004] OJ L 24/1. For an economic analysis of why different enforcement systems are
appropriate for Articles 102 and 101 TFEU, on the one hand, and for merger control, on the other
hand, see my paper 'Notification, Clearance and Exemption in EC Competition Law: An Economic
Analysis' (1999) 24 European Law Review 139, and my book The Optimal Enforcement of EC
Antitrust Law – Essays in Law and Economics (Kluwer Law International, 2002), Chapters 5 and 6.
87 See also Judgment of the Court of Justice of 14 October 2010 in Case C-280/08 P Deutsche Telekom,
paragraph 202; L. Ortiz Blanco and A. Lamadrid de Pablo, 'Expert Economic Evidence and Effects-
Based Assessments in Competition Law Cases', in M. Merola and J. Derenne, The Role of the Court of
Justice of the European Union in Competition Law Cases (Bruylant, 2012), 305; L. Ortiz Blanco and
P. Ibáñez Colomo, 'Evolving priorities and rising standards: Spanish law on abuses of market power in
the light of the 2008 Guidance Paper on Article 82 EC', in L.F. Pace (ed.), European Competition
Law: The Impact of the Commission's Guidance on Article 102 (Edward Elgar, 2011), 63 at 77-78; B.
Allan, as note 66 above, at 8-9; B. Vesterdorf, 'Article 102 TFEU and sanctions: appropriate when?'
(2011) 32 European Competition Law Review 573; Editorial Comments, 'Towards a more judicial
approach? EU antitrust fines under the scrutiny of fundamental rights' (2011) 48 Common Market Law
Review 1405 at 1415; and my paper 'The Compatibility with Fundamental Rights of the EU Antitrust
Enforcement System in Which the European Commission Acts Both as Investigator and as First-
Instance Decision Maker' (2014) 37 World Competition 5 at 6-11.
88 See also Opinion of Advocate-General Kokott of 23 February 2006 in Case C-95/04 P British
Airways, paragraph 70; see further text accompanying notes 133 and 138 below.
18
F. The need to integrate economic and legal analysis
As argued above,89 the interpretation of Article 102 TFEU necessarily requires economic
thinking. As set out above,90 economics, as a social science, accommodates a variety of
possible approaches and schools of thought, which are inevitably always value-laden. As
also explained above,91 while Article 102 TFEU is to some extent vague or open-ended,
and thus leaves room for several possible interpretations, the range of admissible
interpretations is not unlimited, because the EU Treaties contain a number of rules,
principles and statements of purpose that cannot be deviated from, unless the Treaties
were to be changed. Moreover, while the European Commission may propose
interpretations of Article 102 TFEU, it is the ultimately for the Court of Justice to
determine which interpretation is to be retained.
An important implication of all this is that it does not make sense to separate economic
analysis and legal analysis in the interpretation of Article 102 TFEU. Both intellectually
and institutionally, economic and legal analysis should be integrated.92
Legal analysis cannot be separated from economic analysis because interpreting Article
102 TFEU necessarily involves economic thinking. Lawyers should thus themselves
engage in economic thinking.93
Economic analysis that wants to be relevant cannot be separated from legal analysis
either, because any economic analysis that departed from the rules, principles and
statements of purpose laid down with binding force in the EU Treaties would not be fit
for the purpose of interpreting Article 102 TFEU.94
92 While this paper only deals with the interpretation of Article 102 TFEU, the same is probably true for
all areas of the law; see Hayek, as note 41 above, at 4-5. Moreover, especially if staffed by temporary
agents rather than permanent officials, separate units of economists inside competition authorities are
vulnerable to capture by the special interests of the economics profession and of the dominant
companies; see text accompanying notes 141 to 153 below; see also L.M. Froeb, P.A. Paulter and L.-
H. Röller, 'The Economics of Organizing Economists' (2009) 76 Antitrust Law Journal 569; J. Kay,
'Better a distant judge than a pliant regulator – Why overseers are so often captured by their
industries', Financial Times, 2 November 2010 (pointing out that "the most common form of capture
is honest and may be characterised as intellectual capture"); and H.-J. Chang, as note 93 below, at 307.
93 As has been pointed out by H.-J. Chang (Economics: The User's Guide (Pelican, 2014), at 3): "95 per
cent of economics is common sense – made to look difficult, with the use of jargons and
mathematics"; see also note 44 above.
94 See text accompanying notes 71 to 88 above and text accompanying notes 109 to 110, 133 and 138,
and 139 to 140 below.
19
III. THE EU CASE-LAW ON EXCLUSIVITY REBATES BY
DOMINANT UNDERTAKINGS COMPARED TO THE
ALTERNATIVE SO-CALLED 'MORE ECONOMIC
APPROACH'
A. The argument that the case-law is 'form-based'
1. All human thinking involves categorization
It is often said that the EU case-law on abuse of dominance is 'form-based', with the
strong suggestion that this is something undesirable.95
It is far from clear what exactly is meant by the case-law being 'form-based'.96
If it means that the EU case-law per se prohibits the use of exclusivity rebates or other
practices by dominant undertakings, it is based on a misreading of that case-law, because
the case-law always provides for the possibility of objective justification.97
95 See for instance J. Padilla, as note 78 above.
96 The origin of the 'form-based' terminology appears to be in the 1990s debate on the reform of the
block exemption regulations for vertical agreements under initially Article 85(3) EEC and then Article
81(3) EC, now Article 101(3) TFEU; see R. Whish, 'Regulation 2790/99: The Commission's "New
Style" Block Exemption for Vertical Agreements" (2000) 37 Common Market law Review 887 and C.
Esteva Mosso, as note 20 above. The block exemption regulations in force between 1967 and 2000
were (rightly) criticised for being formalistic and not based on sound economics, because they did not
contain market share caps (with the result that for instance exclusive purchasing agreements were
exempted irrespective of the market power of the undertakings concerned; see my book The Optimal
Enforcement of EC Antitrust Law (Kluwer Law International, 2002), at 127) and because they used
'white lists' of exempted clauses that in practice had a 'straight-jacketing' effect. Regulation 2790/99
changed this situation by introducing a 30 % market share cap and by using a 'black list' of restrictions
leading to exclusion from the benefit of the block exemption. The context in which the 'form-based'
terminology emerged in the 1990s is thus very different from the current discussion on the case-law on
abuse of dominance. It should in particular be noted that in the 1990s the more economic approach
meant treating undertakings with market power more strictly than undertakings without market power,
by excluding the former from the benefit of the block exemptions, whereas the so-called 'more
economic approach' in the current debate on Article 102 TFEU tends towards ignoring the difference
between dominant and non-dominant undertakings; see notes 112 and 113 below.
97 On the possibility of objective justification, see text accompanying notes 115 to 118 below. On the
question whether it is right to place upon the dominant undertaking the responsibility of showing an
objective justification, see the discussion on optimal risk allocation in text accompanying notes 122 to
124 below.
20
If it means that the case-law classifies business practices in certain categories, such as
'exclusivity rebates' or 'exclusivity',98 and provides a corresponding test of legality, it is
difficult to see what could be wrong with that.
All human thinking and human language uses categories.99 There is no way this could be
avoided. It is not possible to conceive a workable interpretation of Article 102 TFEU that
would not make some use of categories.
What matters is that the categories used are economically and legally sound, and that
they are clear, foreseeable and administrable.100 Under this test, the EU case-law does
very well, and certainly much better than the alternative advocated by the proponents of
the so-called 'more economic approach'.
2. The EU case-law is based on sound categorization
The category of exclusivity, as used by the EU case-law, is a category that is easily

recognisable for dominant undertakings themselves, as well as for their customers. It is
also conceptually clear for other victims and for competition authorities and courts, even
if it may be difficult to obtain evidence in cases where the dominant undertaking tries to
conceal the practice, as Intel did.101 It is also economically and legally sound, in that
exclusivity constitutes a distinct source of harm to the competitive process.102
3. The so-called 'more economic approach' is based on unsound categorization
Instead of categorizing exclusivity rebates as a form of exclusivity, the proponents of the

so-called 'more economic approach' would rather categorize exclusivity rebates as "price-
based exclusionary conduct",103 together with predatory pricing. This alternative
categorization is clearly inferior.
98 The EU case-law treats exclusivity rebates by dominant undertakings as part of the more general
category of exclusivity by dominant undertakings (whether or not in consideration of the grant of a
rebate); see text accompanying note 7 above.
99 See D. Hofstadter and E. Sander, Surfaces and Essences: Analogy as the Fuel and Fire of Thinking
(Basic Books, 2013).
100 See also M. Adam and F. Maier-Rigaud, 'The Law and Economics of Article 82 EC and the
Commission Guidance Paper on Exclusionary Conduct' (2009) Zeitschrift für Wettbewerbsrecht 131 at
138-139.
101 See Intel judgment, as note 1 above, paragraphs 1540-1551.
102 See further text accompanying notes 109 to 120 below.
103 See above, text accompanying notes 21 to 22 and 35 to 36.
21
Indeed, putting exclusivity rebates in the same category as predatory pricing is
unsound.104
In the case of predatory pricing, any harm to the competitive process can only derive
from the low prices, whereas low prices are normally pro-competitive. In the case of
exclusivity rebates, on the other hand, there is not only a price but also exclusivity, which
is a distinct source of harm to the competitive process.105
As to the price, it would be naive to assume (as the proponents of the so-called 'more
economic approach' seem to do) that the price offered in exchange for the exclusivity
would necessarily be a low price or would necessarily be lower than the price that the
dominant undertaking would charge in the absence of the exclusivity rebate system.
Because the dominant undertaking, by virtue of being dominant, has power over price, its
prices, including the prices reduced by the exclusivity rebate, could be far above cost.
Moreover, because the dominant undertaking's market power increases as a result of the
exclusivity being accepted by many of its customers, the dominant undertaking may be
able to increase its prices, thus cancelling out the rebate. For instance, without the
exclusivity rebate system, the dominant undertaking may have charged a price of 100,
but thanks to the exclusivity rebate system and the resulting increase in market power it
may be able to charge 120, with an exclusivity rebate of 20. In economic reality, there is
then not an exclusivity rebate but rather a non-exclusivity penalty.106
The dominant undertaking may even be able to raise its prices to such an extent that the
customers receiving the exclusivity rebate end up paying a higher price than they would
have paid in the absence of the exclusivity rebate system. Without the exclusivity rebate
system, the dominant undertaking may have charged a price of 100, but thanks to the
exclusivity rebate system and the resulting increase in market power it may be able to
charge 130, with an exclusivity rebate of 20.
As Nicholas Economides has pointed out,107 the exclusivity rebate system thus creates a
prisoners' dilemma for the customers: Each customer is better off by choosing the
exclusivity option, but the result is that all customers end up being worse off.
104 See also Joshua D. Wright (Commissioner, Federal Trade Commission), 'Simple but Wrong or
Complex but More Accurate? The Case for an Exclusive Dealing-Based Approach to Evaluating
Loyalty Discounts' (Remarks at the Bates White 10th Annual Antitrust Conference, Washington, DC,
June 3, 2013), and S.P. Gates, 'Antitrust by Analogy: Developing Rules for Loyalty Rebates and
Bundled Discounts' (2013) 79 Antitrust Law Journal 99.
105 See further text accompanying notes 109 to 120 below; see also A. Edlin and J. Farrell, 'Freedom to
Trade and the Competitive Process', forthcoming in R.D. Blair and D.D. Sokol, Oxford Handbook of
International Antitrust Economics (Oxford University Press, 2014).
106 See N. Economides, 'Tying, bundling and loyalty requirement rebates' in E.R. Elhauge, Research
Handbook on the Economics of Antitrust Law (Edward Elgar, 2012) 121 at 130-131.
107 See N. Economides, as note 106 above, at 132.
22
B. The argument that the case-law is not 'effects-based'
1. Effects of what and on what?
The argument that the case-law is 'form-based' is usually combined with the argument
that it is not 'effects-based', contrary to the so-called 'more economic approach', which is
said to be 'effects-based'.108
Again it is far from clear what is meant by this argument.
Talk about effects raises the question the effects of what and on what are meant.
As to the former (effects of what), it is important not to confuse the effects of the
business practice (for instance, exclusivity rebates) to be assessed under Article 102
TFEU with the effects of the choice of one or another interpretation of Article 102
TFEU.
2. The proper way to assess the effects of a business practice under Article 102
TFEU
a. Negative effects
As to the negative effects of the business practice (for instance, exclusivity rebates) to be
assessed under Article 102 TFEU, what are the relevant negative effects depends on what
is the objective of Article 102 TFEU.
As explained above,109 the objective of Article 102 TFEU (and of the other EU
competition rules) is a system of undistorted competition, as part of the internal market
established by the EU.
The EU case-law is properly effects-based, in that it is considers practices on the basis of

their effects on this objective. In the absence of an objective justification, the use of
exclusivity rebates by a dominant undertaking is prohibited, because, as the General
Court explained in the Intel judgment, "the capability of tying customers to the
undertaking in a dominant position is inherent in exclusivity rebates" and "the grant of
an exclusivity rebate by an unavoidable trading partner makes it structurally more
difficult for a competitor to submit an offer at an attractive price and thus gain access to
the market. The grant of exclusivity rebates enables the undertaking in a dominant
position to use its economic power on the non-contestable share of the demand of the
108 See for instance J. Padilla, as note 78 above; see also note 96 above.
109 Text accompanying notes 72 to 83 above.
23
customer as leverage to secure also the contestable share, thus making access to the
market more difficult for a competitor".110
It is thus because of the distortive effects on the competitive process that, in the absence
of an objective justification, the use of exclusivity rebates by dominant undertakings is
prohibited under Article 102 TFEU.
Unless the EU Treaties were to be modified, so as to replace the objective of Article 102
TFEU as currently laid down in the Treaties by some other objective, the approach of the
EU Courts is the proper effects-based approach.
b. Pro-competitive justifications
The argument most commonly used by the proponents of the so-called 'more economic
approach' against the approach of the EU Courts is that "there are perfectly valid pro-
competitive justifications for exclusive dealing and loyalty rebates. […] Suffice it to
check any textbook on industrial organisation or the economics of competition law.
[…]".111
This argument is unsound, for three reasons:
First, it fails to distinguish between the use of exclusivity rebates by dominant

undertakings and by non-dominant undertakings. The nature and effects of what may
look like the same practice can be very different depending on whether the undertaking
adopting the practice is dominant or not.112 Moreover, by providing for Article 102
TFEU in addition to Article 101 TFEU, the EU Treaties have chosen to treat dominant
undertakings differently from non-dominant undertakings.113
Second, even if one accepts the premise that the use of exclusivity rebates by a dominant
undertaking has some pro-competitive benefits, it does not follow that a prohibition of
exclusivity rebates would result in the loss of these pro-competitive benefits. The pro-
110 Intel judgment, as note 1 above, paragraphs 86 and 93.
111 P. Ibáñez Colomo, as note 34 above; see also H. Zenger, 'Rebates and Competition Law: An Overview
of EU and National Law', as note 17 above, at 5: "the vast majority of real world loyalty rebates are
applied without anti-competitive intent or effect, as is evidenced by the fact that such rebates are a
common form of discounting even in highly fragmented markets, where unilateral exclusion would
hardly be a plausible business objective. Just like other forms of rebates, loyalty rebates are
pervasively used to compete for incremental sales, rather than to pursue exclusionary aims".
112 See text accompanying notes 109 and 110 above and text accompanying notes 114 to 120 and 130 to
132 below, and Intel judgment, as note 1 above, paragraph 89.
113 See also Judgment of the Court of Justice of 9 November 1983 in Case 322/81 Michelin, paragraph
57: "A finding that an undertaking has a dominant position is not in itself a recrimination but simply
means that, irrespective of the reasons for which it has such a dominant position, it has a special
responsibility not to allow its conduct to impair genuine undistorted competition on the common
market."
24
competitive benefits would only be lost if and to the extent that these benefits cannot be
obtained without the use of exclusivity rebates.
If increasing the quantity supplied to a customer results in lower costs for the dominant
undertaking, it can pass on such scale economies to the customer through quantity
rebates, which benefit from a presumption of legality under Article 102 TFEU.114 If the
dominant undertaking otherwise wants to lower its prices, it can surely do so without
using exclusivity rebates. Similarly, if the dominant undertaking wants to improve the
quality of its products or the service it provides to its customers, it is hard to see why it
could not do this without using exclusivity rebates.
Indeed the proponents of the so-called 'more economic approach' have never provided
any example of a pro-competitive benefit which a dominant undertaking could not
deliver otherwise than through the use of exclusivity rebates.
Third, the case-law does not per se prohibit the use of exclusivity rebates by dominant
undertakings.115
Indeed, as the General Court confirmed in Intel,116 "it is open to the dominant
undertaking to justify the use of an exclusivity rebate system, in particular by showing
that its conduct is objectively necessary or that the potential foreclosure effect that it
brings about may be counterbalanced, outweighed even, by advantages in terms of
efficiency that also benefit consumers […]. However, in the case in point, [Intel] has put
forward no argument in that regard."
If the exclusivity rebates applied by Intel had indeed the pro-competitive benefits about
which the proponents of the so-called 'more economic approach' are concerned, Intel
could have justified its practice and escaped condemnation under Article 102 TFEU. The
fact that Intel did not put forward any argument to this effect should give pause for
thought.
It should be noted that the possibility for a dominant undertaking to objectively justify its
use of exclusivity rebates has always existed, since the first judgment of the Court of
Justice in 1979 in Hoffmann-La Roche.117 Since that time, the EU case-law on the use of
exclusivity rebates by dominant undertakings has been applied in a number of cases, by
the European Commission and by the competition authorities of the EU Member States.
In all these cases, the dominant undertaking concerned thus had the opportunity to
demonstrate the pro-competitive benefits of its use of exclusivity rebates. As far as I
115 Indeed, contrary to US antitrust law, EU antitrust law does not contain any per se prohibitions. Article
101 TFEU always allows for the possibility of justification under Article 101(3) TFEU, and the
application of Article 102 TFEU is also always subject to the possibility of objective justification.
117 As note 5 above, paragraph 90.
25
know, in none of these cases have such benefits been put forward and demonstrated.
Again this should give pause for thought.118
A sound economic analysis should aspire to be based not only on theoretical, aprioristic
arguments about the possible benefits of exclusivity rebates, or on generalisations from
the observed use of exclusivity rebates by non-dominant undertakings,119 but should also
pay attention to the available empirical evidence about the use of such rebates by
dominant undertakings.120 One of the merits of the EU case-law is that it generates such
empirical evidence, as it allows dominant companies to justify their use of exclusivity
rebates on grounds of countervailing pro-competitive benefits. The fact that dominant
companies, like Intel, do not provide such justification is telling.
3. All relevant effects of the choice of interpretation should be considered, including

enforcement costs and risk allocation
The effects of the business practice are not the only relevant effects.
When choosing between one or another interpretation of Article 102 TFEU (for instance,
between the existing EU case-law and the so-called 'more economic approach'), all
relevant effects of the choice of interpretation should be taken into account, including
enforcement costs, and the degree of legal uncertainty and the corresponding allocation
of risk.
The costs of applying and enforcing Article 102 TFEU include the costs (in terms of
management time, and cost of legal and economic counsel) for the dominant
undertakings that need to assess the legality of their (intended) practices, and for the
customers and competitors that need to assess whether a dominant undertaking's
practices are legal, and the resources used by competition authorities and courts. These
costs can vary widely depending on which interpretation of Article 102 TFEU is chosen.
An interpretation or approach could be said to be 'more economic' if it minimizes these
costs. In this sense, the EU case-law is undoubtedly much more economic than the so-
called 'more economic approach'.121
Another important (and again also economic) effect of the choice of one or another
interpretation of Article 102 TFEU is the degree of legal uncertainty and the
118 On the question whether it is right to place upon the dominant undertaking the responsibility of
showing an objective justification, see the discussion on optimal risk allocation in text accompanying
notes 122 to 124 below.
119 See (text accompanying) note 111 above.
120 On the more general problem of the aprioristic rather than empirical nature of the (post-)Chicago
(consumer) welfarist approach to antitrust, see D. Arnold and F.P. Maier-Rigaud, 'The enduring
relevance of the model Platonism critique for economics and public policy' (2012) 8 Journal of
Institutional Economics 289.
121 See below, text accompanying notes 133 to 138, as to the large cost of applying the as-efficient-
competitor test.
26
corresponding allocation of risk. Again this can vary widely depending on which
interpretation of Article 102 TFEU is chosen. Some interpretations entail a much higher
degree of legal uncertainty than others.122 As to the allocation of the corresponding risk,
basic economic principles would suggest that the risk should be borne by those who have
more control over the generation of the risk, those who have better access to the relevant
information to assess and manage the risk, and/or those who have the stronger capacity to
bear the risk.123 In this respect also, the EU case law appears economically sound, in that
it provides a clear and easy to apply general prohibition rule, while allocating the
responsibility of showing any possible objective justification to the dominant
undertaking, which chose the exclusivity rebate system, has the best access to all relevant
information, and has a stronger risk-bearing capacity than its smaller competitors
affected by the exclusivity rebate system.124
C. The as-efficient-competitor test is not fit for the purpose of assessing the
legality of exclusivity rebates under Article 102 TFEU
However useful it may be as a prioritisation test,125 the as-efficient-competitor test is not

fit for the purpose of assessing the legality under Article 102 TFEU of the use of
exclusivity rebate systems by undertakings in a dominant position, for the following
reasons.
1. The as-efficient-competitor test is based on unsound categorization
The use of the as-efficient-competitor test for assessing exclusivity rebate systems is
based on the unsound categorization of exclusivity rebate systems as similar to predatory
pricing.
122 See also (text accompanying) note 87 above.
123 See further my books The Optimal Enforcement of EC Antitrust Law – Essays in Law and Economics
(Kluwer Law International, 2002), Section 6.2.2.3, and Principles of European Antitrust Enforcement
(Hart, 2005), Section 1.2.3.
124 It has often been suggested (following F.H. Easterbrook, 'The Limits of Antitrust' (1984) 63 Texas
Law Review 1) that the burden of showing pro-competitive benefits should not be on the dominant
company because in general the costs of antitrust over-enforcement (false positives or, in economists'
jargon, Type I errors) would be higher than the costs of antitrust under-enforcement (false negatives or
Type II errors). There is however no evidence whatsoever for the existence of this claimed asymmetry
in error costs; see also J. Fingleton and A. Nikpay, 'Stimulating or Chilling Competition', in B. Hawk
(ed), Annual Proceedings of the Fordham Corporate Law Institute 2008 (Juris 2009), Chapter 16, and
D.S. Evans, 'Why Different Jurisdictions Do Not (and Should Not) Adopt the Same Antitrust Rules'
(16 February 2009), available at http://ssrn.com/abstract=1342797, at 14.
125 As explained above (text accompanying notes 21 to 27), the Priorities Paper only refers to this test in
the context of the Commission's priority setting. On priority setting, see my paper 'Discretion and
Prioritisation in Public Antitrust Enforcement, in Particular EU Antitrust Enforcement' (2011) 34
World Competition 353.
27
As already explained above,126 exclusivity rebate systems are, in their economic nature
and effects, very different from predatory pricing or other forms of unconditional pricing
that do not involve any conditions of exclusivity or conditions with similar effect.
In the case of predatory pricing, any harm to the competitive process can only derive
from the low prices, whereas low prices are normally pro-competitive. A price-cost test
may then be helpful to distinguish between pro-competitive and anti-competitive low
prices.127
In the case of exclusivity rebates, however, the harm to the competitive process results
from the exclusivity, whereas there is no basis for assuming that the price offered in
exchange for the exclusivity would necessarily be a low price or would necessarily be
lower than the price that the dominant undertaking would charge in the absence of the
exclusivity rebate system.128
2. The as-efficient-competitor test is based on the assumption that customers only

value price
The as-efficient-competitor test is based on the assumption that customers only value
price, and not also quality and variety. There is no sound economic basis for such an
assumption.129
The use of exclusivity rebate systems by dominant undertakings makes it more difficult
to access the market not only for competitors that want to compete on price but also for
competitors that compete on quality or that offer a different variety than the product
offered by the dominant undertaking.
3. It is unsound only to care about equally efficient competitors
In the context of dominance,130 it is unsound only to care about competitors that are as
efficient as the dominant undertaking.
127 See also Intel judgment, as note 1 above, paragraph 152.
128 See text accompanying notes 105 to 107 above.
129 The exclusive focus on price may be unproblematic when a price-cost test is used in the case of
predatory pricing, because in that case price is the only possible source of harm to the competitive
process. However, in the case of exclusivity rebates, exclusivity is the source of harm to the
competitive process; see text accompanying notes 103 to 107 and 126 to 128 above.
130 See also text accompanying note 112 above.
28
Indeed, dominant undertakings have power over price and can thus set their prices well
above cost level. Even less efficient competitors can thus exert competitive pressure, to
the benefit of consumers.131
This is not some exception applicable in certain circumstances, but the general rule.
4. The competitive process is not only harmed if competitors are forced to sell at a
loss but also if their profitability is reduced
The as-efficient-competitor test assumes that there is only harm to the competitive
process if an equally efficient competitor is forced to sell at a loss, not if the competitor's
profits are reduced. There is no sound economic basis for this assumption.
The competitive process is also distorted if the hypothetical equally efficient competitor's
profits are merely reduced by the dominant undertaking's use of exclusivity rebates.
Indeed, the reduced profitability may induce the competitor, who will consider its
opportunity costs, to withdraw from the market on which the exclusivity rebates are
applied, or not to enter that market or to enter on a smaller scale.132
5. Applying the as-efficient-competitor test is liable to consume a large amount of

resources
Applying the as-efficient-competitor test is liable to consume a large amount of

resources.
The reason for this is that, while the test may appear simple and clear on the drawing
board of an academic seminar, it is very complicated in practice. To be convinced of this,
it suffices to read through the 150 pages of the Intel decision devoted to the equally-
efficient-competitor analysis, all the details of which were heavily contested by Intel
before the General Court.133
As mentioned above,134 in the case of predatory pricing, a price-cost test may be helpful
to distinguish between pro-competitive and anti-competitive low prices. The resources
spent on conducting the test may then be justified.
However, for all the reasons mentioned above,135 the as-efficient-competitor test is not fit
for the purpose of assessing the legality of exclusivity rebates. Spending a large amount
131 See also A.S. Edlin, 'Stopping Above-Cost Predatory Pricing' (2002) 111 Yale Law Journal 941.
132 See also Intel judgment, as note 1 above, paragraph 150.
133 Intel decision, as note 2 above, paragraphs 1002 to 1575.
134 Text accompanying note 127.
29
of resources to apply an unnecessary and unhelpful test has several problematic
consequences.
A first consequence is that, if the competition authorities (European Commission and

competition authorities of the Member States) have to conduct an as-efficient-competitor
test every time they want to intervene to stop and punish the abusive use of exclusivity
rebate systems by a dominant undertaking, they will be able to deal with far fewer cases,
given their limited budgets.136 This will severely reduce deterrence.137
A second consequence is that it will take competition authorities much more time to
complete their investigations and adopt a decision putting an end to an ongoing abuse by
a dominant undertaking. Judging by the Intel case, the delay may easily be two years.
Justice delayed is often justice denied. Promising challengers to the dominant company
may be irremediably eliminated or weakened in the meantime.
A third consequence is that private enforcement will be severely hampered. As argued

above,138 the EU Treaties do not allow interpretations of Article 102 TFEU that
unnecessarily create obstacles to private enforcement.
6. The as-efficient-competitor test is fundamentally at odds with the philosophy

underlying the EU Treaties
Finally, the as-efficient-competitor test is fundamentally at odds with the objective of

Article 102 TFEU and the philosophy underlying the EU Treaties.
As explained above,139 Article 102 TFEU aims at a system of undistorted competition, as

part of the internal market established by the EU. Which competitors end up being
successful on the market, and thus truly show themselves to be efficient, is determined by
the free play of undistorted competition, consumers being free to choose and all
producers being equally free to compete on the merits.
The as-efficient-competitor test is profoundly at odds with this philosophy, because it

does not leave it to the free play of undistorted competition to determine which producers
prove themselves to be efficient, but instead allows dominant undertakings to exclude
competitors from the market on the basis of a decision by competition authorities that
136 See also G. Monti, 'Article 82 EC: What Future for the Effects-Based Approach?' (2010) Journal of
European Competition Law & Practice 2 at 10, and J. Steenbergen, 'Has Competition Analysis
Become Too Sophisticated for Its Own Good?', 19th St. Gallen International Competition Law Forum
(7-8 June 2012), accessible at http://papers.ssrn.com/abstract =2179905, at 2.
137 On the problem of the number of cases, see generally my paper 'Ten Years of Regulation 1/2003 – A
Retrospective' (2013) 4 Journal of European Competition Law & Practice 293 at 298-301.
30
those competitors are not sufficiently efficient.140 Like the Gosplan in the Soviet Union,
competition authorities thus decide which producers are deemed efficient enough to be
allowed onto the market. This is fundamentally at odds with the philosophy underlying
the EU Treaties.
IV. CUI BONO ?
The conclusion from all the above is that the EU case-law on the use of exclusivity
rebate systems by dominant undertakings is not only legally but also economically
sound, whereas the alternative so-called 'more economic approach' is unsound and not fit
for the purpose of interpreting Article 102 TFEU.141
This raises the question why the so-called 'more economic approach' enjoys so much
support among antitrust practitioners and practice-oriented academics.142
Part of the explanation may be that the so-called 'more economic approach' serves
powerful special interests, namely those of the dominant companies and of the
economics profession.143
Compared with the alternative of the so-called 'more economic approach', the
beneficiaries of the EU case-law are, apart from the EU general interest, European
consumers and the smaller companies that are the actual or potential competitors of
dominant companies. These benefits are spread out over many beneficiaries, many of
whom may never even become aware of it. They are thus unlikely to defend effectively
140 See also M. Adam and F. Maier-Rigaud, as note 100 above, at 139: "Following an equally efficient
competitor test […] would amount to the paternalistic assumption that consumers are wrongly buying
from less efficient competitors and that dominant firms therefore need to be called in to restore market
efficiency".
141 As defined in the introduction of this paper (text accompanying notes 35 and 36), when I refer to "the
so-called 'more economic approach'", I mean the alternative legality test advocated by those
commentators who want the EU Courts to change the case-law on abuse of dominance in general and
the use of exclusivity rebates by dominant undertakings in particular and to adopt the test set out in the
Priorities Paper (see note 18 above) as a new test for assessing the legality of exclusivity rebates under
Article 102 TFEU. As explained above, (text accompanying notes 26 and 27), the Priorities Paper
itself clearly states that the test set out in it is not intended to constitute a statement of the law (legality
test), but is merely to be used for prioritisation purposes (prioritisation test).
142 See J. Padilla, as note 78 above, referring to a "Brussels consensus" to this effect.
143 See J. Kay, (text accompanying) note 153 below.
31
their interests.144 Indeed, as Dieter Wolf, former President of the Bundeskartellamt, has
pointed out, competition has no lobby.145
On the other hand, the loss to the dominant undertakings that are prevented from abusing
their dominant position is highly concentrated.146 Dominant companies can thus be
expected to lobby strongly against the EU case-law.
Apart from serving the interests of the dominant companies, the so-called 'more
economic approach' also serves the special interests of the economics profession. As
pointed out above,147 applying the as-efficient-competitor test is liable to consume a large
amount of resources. While this is undesirable from the perspective of the common good,
it is advantageous to the economists whom it provides with business and employment.
More generally, the so-called 'more economic approach' increases the demand for the
services provided by the economics profession.148
For antitrust practitioners, dominant companies are the largest and most lucrative clients.
Antitrust practitioners thus have an interest in positioning themselves as proponents of
the so-called 'more economic approach'.
Many antitrust academics are also practitioners, or may want to become practitioners at a
later stage of their career. Large parts of the publication and conference markets are also
run by and for practitioners. Many academics may thus face similar incentives as
practitioners.
Adhering to a 'modern', more 'scientific' and sophisticated way of thinking, rather than to
'old-fashioned' legal thinking no doubt also raises one's self-esteem.149
144 On diffused interests being less able to defend themselves than concentrated interests, see generally
M. Olson, The Logic of Collective Action: Public Goods and the Theory of Groups (Harvard
University Press, 1965) and The Rise and Decline of Nations (Yale University Press, 1982).
145 D. Wolf, in C.D. Ehlermann and L.L. Laudati, European Competition Law Annual 1997: The
Objectives of Competition Policy (Hart, 1998), Panel Discussion on Competition Policy Objectives, at
24, adding: "Institutional safeguards are needed to ensure that competition has at least one clear voice.
[…] economists have learned to be advocates of the interests of their clients, just as lawyers have
learned to do so. Thus, reliance on economic arguments does not protect the process. Independent
institutions combined with judicial review by courts is the best way to guarantee objective results.
Competition authorities must, of course, be staffed with lawyers and economists. However, as long as
competition authorities are not independent, the risk is always present that specific interests will
influence their decisions"; see further note 92 above.
146 As note 144 above.
148 See also note 92 above; D.J. Neven, 'Competition economics and antitrust in Europe' (2006) 21
Economic Policy 741, available at http://ec.europa.eu/dgs/competition/economist/economic_policy.pdf
and R.B. Reich, 'The Antitrust Industry' (1980) 68 Georgetown Law Journal 1053.
149 Compare with R. Van den Bergh, 'Modern Industrial Organisation versus Old-Fashioned European
Competition Law' (1996) 2 European Competition Law Journal 75; and see (text accompanying) note
44 above as to scientificity.
32
Younger generations, even if devoid of the cult of modernity, may uncritically adhere to
the so-called 'more economic approach' because it has become the conventional
wisdom,150 taught by their professors and confirmed in countless publications. If need be,
compliance with the conventional wisdom may be enforced through peer review and
other mechanisms of professional discipline.151
In 2005, in response to Commissioner Kroes's speech in New York,152 the eminent

economist and Financial Times columnist John Kay wrote that bringing EU practice
more in line with American practice would be undesirable, because "business lobbies
[have been able] to emasculate American antitrust law. […] There is not much wrong
with the current status of [Article 102 TFEU] and you should reaffirm it. If it is unclear
today that is mainly because your officials, battered by those lobbyists who have enjoyed
such success across the Atlantic, have lost confidence in its application".153
The General Court and the Commission should be commended for having stood firm and
having reaffirmed the EU case-law on abuse of dominance in the Intel case.
*****
150 On conventional wisdom, see generally J.K. Galbraith, The Affluent Society (40th Anniversary Edition;
Houghton Mifflin, 1998), Chapter 2.
151 See B.D. Frey, 'Publishing as prostitution? – Choosing between one's own ideas and academic success'
(2003) 116 Public Choice 205; see also F.S. Lee, X. Pham and G. Gu, 'The UK Research Assessment
Exercise and the narrowing of UK economics' (2013) 37 Cambridge Journal of Economics 693.
152 See (text accompanying) note 19 above.
153 J. Kay, 'European monopoly laws are already fair and stringent', Financial Times, 4 October 2005. As
Michael Ignatieff has recently argued more generally: "the liberal state is in crisis, basically, because
its regulatory, legal, and political institutions have either been captured, or have been laid siege to, by
the economic interests they were created to control. [The liberal state] was always supposed to keep
the power of big money from suffocating competition and corrupting the political system. This is the
task it struggles to perform today and must recover fully if it is to regain the confidence and support of
the broad mass of its citizens" (M. Ignatieff, 'Are the authoritarians winning?', The New York Review
of Books, 10 July 2014, 53 at 55).
33
.f/!.
The Goals of
Competition Law
Edited by
Daniel Zimmer
Professor of Law, University of Bonn, Germany, and Member
of the German Monopolies Commission
:.'t,·.<
~.~:; ".\
ASCOLA COMPETITION LAW

The Fifth ASCOLA Workshop on Comparative Competition Law
Edward Elgar
Cheltenham, UK • Northampton, MA, USA
Electronic copy available at: http://ssrn.com/abstract=1829023
- - - - - - - - - - - - - - - - - - ...._-----_._-------_ ....
© The Editor and Contributors Severally 2012

Inhalt
All rights reserved. No part of this publication may be reproduced, stofed in a
retrieval system or transmitted in any form or by any means, electronic, List of contributors viii
mechanical or photocopying, recording, or otherwise without the prior Preface x
permission of the publisher.
PART I NORMATIVE FOUNDATIONS OF COMPETITION
Published by LAW
Edward Elgar Publishing Limited
The Lypiatts
15 Lansdown Road On the choice of welfare standards in competition law 3
Cheltenham Louis Kaplow
Glos GL50 2JA 2 What is competition? 27
UK Maurice E Stucke
3 Characteristic aspects of competition and their consequences
Edward Elgar Publishing, Inc.
William Pratt House for the objectives of competition law - comment on Stucke 53
9 Dewey Court Andreas Fuchs
Northampton 4 The multiple personalities of EU competition law: time for a
Massachusetts 01060 comprehensive:p,ebate on its objectives 61
USA Laura Parret ;;;';\
5 The goals of European competition law: some distortions in
the literature - comment on Parret 85
A catalogue record for this book David J Gerber
is available from the British Library 6 Thinking inside the box: why competition as a process is a sui
generis right - a methodological observation 95
Library of Congress Control Number: 2011936414 Oles Andriychuk
7 Legal interpretation and practice versus legal theory: a
reconciliation of competition goals - comment on
Andriychuk 118
Anca Daniela Chirilii
8 On the normative foundations of competition law - efficiency,
political freedom and the freedom to compete 132
Frank Maier-Rigaud
9 Efficiency, political freedom and the freedom to compete-
comment on Maier-Rigaud 169
Heike Schweitzer
ISBN 978 0 85793 660 8 "--<.:
10 Economic content of competition law: the point of regulating
Typeset by Servis Filmsetting Ltd, Stockport, Cheshire preferences 182
Printed and bound by MPG Books Group, UK Adrian Kunzler
Electronic copy available at: http://ssrn.com/abstract=1829023
On the normative foundations of competition law 133
the enforcement practice of competition authorities and even in policy

debates.
As to the ultimate goal of competition law, there appears to be, with the
notable exceptions of the positions discussed here, broad agreement as to
8. On the normative foundation~ the hegemony of an efficiency justification. l This broad agreement has
led to a focus on subsidiary questions, for instance on whether efficiency
of competition law - efficiency,.r should be oriented on a consumer or a total welfare standard or even more
specific and technical issues such as the debate on the 'as efficient competi-
political freedom and the freedom to tor' test in the context of Article 102 of the Treaty on the Functioning of
compete the European Union (TFEU) revie'w. In the enforcement of competition
law by competition authorities, the question of the normative foundations
Frank Maier-Rigaud * has been even further removed than in policy debates.
The day-to-day business of a competition authority consists essentially
in conducting investigations with the aim of detecting, remedying and
In every society conflicts of interest among members of that society must ultimately deterring competition law infringements. In that day-to-day
be solved. The process by which that resolution (not elimination!) occurs is work, the'Tole normative foundations play is necessarily remote. Besides
known as competition. Since, by definition, there is no way to eliminate com- the existence of relevant precedents in law and a sound factual basis for
petition, the relevant question is what kind of competition shall be used in the
resolution of conflicts of interest. t establishing possible infringements, fundamental preconceptions appear
more relevant, than more or less clearly articulated normative goals.
Fundamental 'preconceptions are captured for instance by different politi-
1 INTRODUCTION cal approaches concerning the role of markets on the one side and the role
of market regulators hi ;-§9ciety on the other. Such preconceptions typi-
The advent of a more economic approach to EU competition law has cally encompass a view ~6 what extent markets are intrinsically efficient,
spurred the most substantial debate on the normative justifications of to what extent they require 'intervention' and what constitutes over- and
competition law in recent history. Nevertheless, and despite limited litera- under-enforcement of competition law. 2
ture to the contrary, these are not times of fundamental debate concerning
the ultimate aims of competition policy. This is evidenced by the limited
I The seemingly more differentiated perspective emanating from the ICN
practical importance of the normative foundations of competition law in Unilateral Conduct Working group is superficial as the majority of the goals
identified can be subsumed under an efficiency orientation as understood here. See
International Competition Network (2007) Report on the Objectives of Unilateral
Conduct Laws, Assessment of Dominance/Substantial Market Power, and State-
* Max Planck Institute for Research on Collective Goods, Bonn, Germany; Created Monopolies, presented at the 6th Annual Conference of the lCN, Moscow,
Competition Division, Organisation for Economic Co-operation and Development May 2007.
(OECD), Paris, France. This chapter has benefited from comments and remarks 2 See for instance the statement of Christine A Varney, Assistant Attorney
received from participants during the 5th Academic Society for Competition Law General in charge of the Department of Justice's (DoJ) Antitrust Division in her
(ASCOLA) Conference on the Goals of Competition Law, in Bonn, Germany first speech in that function (US Department of Justice (2009), Vigorous Antitrust
from 27-29 May 2010. I would like to thank in particular Michael Adam, Rainer Enforcement in this Challenging Era, delivered on 11 May, to be found at http://
Becker, Anca Chiri!a, Julia Fischer, Volker Hallwirth, Liza Lovdahl-Gormsen, www.justice.gov/atr/public/speeches/245777.htm and US Department of Justice
Gerhard Maier-Rigaud, Remi Maier-Rigaud, Kay Parplies, Wulf-Henning Roth, (2009), Justice Department withdraws report on antitrust monopoly law, Press
Christian Vollrath, Carl Christian von Weizsacker, Thilo Wienke, Wouter Wils Release of Monday 11 May 2009, to be found at http://www.justice.gov/atr/public/
and Andrea Heiny of the GeI;g1an Federal Ministry of Economics and Technology press_releases/2009/24571Q.htm): 'Withdrawing the section 2 report is a shift in phi-
and the Max Planck Library Team for discussions and comments on earlier ver- losophy and the clearest way to let everyone know that the Antitrust Division will
sions and for help in assembling the necessary documents and literature. be aggressively pursuing cases where monopolists try to use their dominance in the
t AA Alchian Economic Forces at Work (Indianpolis Liberty Press, 1977), 127. marketplace to stifle competition and harm consumers.' The withdrawal is hardly
7~?
134 The goals of competition law On the normative foundations of competition law 135
In addition to such preconceptions concerning the functioning of It has been argued that an efficiency orientation threatens to displace the
markets and the role of economic activity in society, the direct vested inter- central idea of 'freedom to compete' (Wettbewerbsfreiheit) as the ultimate
ests of concerned parties play an important role. 3 Substantial efforts to try normative justification for competition law.? The criticism is twofold.
to influence the decision-making of the authority, either directly or indi- First, according to some of those critics, the ultimate goal of competition
rectly through an effective lobbying of politicians, who in turn intervene law, as supposedly posited by ordoliberals, is not the increase in economic
on behalf of the company in question, can be observed. 4 This influence of efficiency but maintaining the freedom to compete of market actors.8
course varies depending on the authority but also depending onjohe sector Secondly, some argue that adopting an efficiency goal 'would represent a
and the company in question. In any case it is by no means restricted to ~unda~ental change in the goals of Article 82'9 that may not be compat-
the aim of directly influencing the outcome of a competition case but Ible WIth the Treaty on the Functioning of the European Union. 10
extends to the analysis stage, where lawyers and economists alike are hired
to defend but also to reframe and redirect the analysis and present the
conduct in a more favorable light in an effort to convince the authority ~otal welfare apl?~oach or the various efficiency concepts. On this, see W Kerber,
of its benign character. Such efforts have in the past even led to the crea- Should CompetItIon Law Promote efficiency? Some reflections of an economist on
tion of new strands of economic literature not in existence prior to such the normative .foundations of competition law', in J Drexl, L Idot and J Moneger
consultancy efforts. 5 As a result, there is not much left to discuss on the (eds), Economzc Theory and Competition Law (Cheltenham: Edward Elgar 2009)
93-120. ' ,
normative foundations of competition law once a certain level of abstrac-
tion is abandoned. Consequently, the following analysis will remain on a
~ The notion of '~ettbewerbsfreiheit' is closely related to the notion of pro-
tectIOn of t~e competItIve process. It is translated here as 'freedom to compete'.
rather abstract level focusing on three topics all relating to the normative V Vanberg, Consumer Welfare, Total Welfare and Economic Freedom - On the
foundations of competition law. Normati:e \:?undations of Competition Policy' (2009) Freiburg Discussion Papers
In the discussion surrounding the more economic approach to EU com- on Cons~~tuttonal Economics 09/3, or L Lovdahl Gormsen, 'The Conflict between
petition policy, the increasing role of economic analysis and in particular EconomIC Freedom and Consumer welfare in the Modernisation of Article 82 EC',
(2007) 3 European Con:zpetition Journal 2, 329-44 translated 'Wettbewerbsfreiheit'
efficiency as the ultimate goal of competition policy has been attacked. 6 as 'economic freedom'~ '.. '
8 k'
See E Hoppmantt;:: Wirtschaftsordnung und Wettbewerb (Baden Baden
Nomos, 1988); W M?schel, 'Competition Policy from an Or do point of view' i~
A Peacock and H WIllgerodt (eds), German Neo-Liberals and the Social Market
due to a shift in the normative foundations of US competition policy but rather Economy (Macmillan, London, 1989), 142-59' H Willgerodt and A Peacock
reflects different preconceptions associated and brought to bear with a change in
the White House. The report (US Department of Justice (2008), Competition and
A
'German,Liber~lism and Economic Revi:al' in Peacock and H Willgerodt (eds)
Germany s Soclal Market Economy: Origzns and Evolution (St Martin's Press, New
Monopoly: Single Firm Conduct under section 2 of the Sher:nan Act~ to be found at York, NY, 1989); A Peacock and H Willgerodt, 'Overall View of the German
http://www.justice.gov/atr/public/reports/236681.pdf.) was Issued wltho~t su~p?rt Liberal Movement' in A Peacock and H Willgerodt (eds) German Neo-Liberals and
of the Federal Trade Commission (FTC) in September 2008 after a senes of Jomt the Social Market Economy (Macmillan, London, 1989), 1-15; and C Ahlborn and
hearings, involving more than 100 participants, that the DoJ a~d the FTC held from C Grave, 'WaIter Eucken and Ordoliberalism: An Introduction from a consumer
June 2006 to May 2007 to explore the antitrust treatment of smgle-firm conduct. w~l~are perspective', (2006). Competition Policy International 2(2), 197-217; and
3 The influence of such vested interests is not limited to individual cases but
cntIcally P Akman, SearChing for the Long-Lost Soul of Article 82EC' (2009) 29
naturally extends to policy debates where the role of law firm~ .and econo.n?c Oxford Journal of, Legal Studies 2,267-303 or L Lovdahl Gormsen, 'The Conflict
consultancies as almost exclusive direct interlocutors of competItIOn authontles bet~veen EconomIC Freedom and Consumer welfare in the Modernisation of
should not be underestimated. ArtIcle 82 EC' [2007] European Competition Journal 3(2), 329-44.
4 See, e.g., P Marsden, S Kinsella, R McLeod, T !faines, J Lafitte, B Mitchener,
9 DJ Gerber, 'The Future of Article 82: Dissecting the Conflict' in CD
and C Harris (2009) 'Lobbying competition law and policy', Concurrences, 112009, Ehlermann and M Marquis (eds) European Competition Law Annual 2007: A
11-33. . reformed, appro~ch to Article 82 EC (Hart Publishing, Oxford, 2008) cited in P
5 The literature on two-sided markets is possibly the most prominent example
Akman, Searchmg for the Long-Lost Soul of Article 82EC', (note 8 above), 269.
of this. Most of the pioneering work in this area can directly be traced back to con- 10 See.T Eilmansberger, 'How to Distinguish Good from Bad Competition
sultancy contracts aimed at"s's!ablishing an economic justification for interchange under ArtIcle 82 EC: In Search of Clearer and More Coherent Standards for
fees originally concerning check's 'and today credit card payment~. . Anti-comp~titive Abuses' (~005) .42. CMLR 129 or H Schweitzer, 'The History,
6 Efficiency is used as a catch-all concept for a welfare onentatlon of com-
InterpretatIOn and UnderlYIng PnncIples of Section 2 Sherman Act and Article 82
petition law irrespective of the existing subsidiary debates on consumer versus EC', in CD Ehlermann and M Marquis (eds), European Competition Law Annual
This criticism raises several questions. The first question concerns the Linked to the first, the second question concerns the claim that an effi-
issue of whether indeed, the freedom to compete of market participants ciency orientation would represent a fundamental change in EU competi-
was the original goal of competition policy in so-called ordoliberal tion law and that such a change at best creates a tension with the Treaty
thought or whether it is not rather an interpretation of the original ordo- and at worst requires a Treaty modification. This concern is dealt with in
liberal position if not simply a distorted representation of that thought. the second section on the conflict between the efficiency goal and the goal
This question, which of course is independent of the merit df both 'can- of freedom to compete. It is argued that the protection of the freedom to
didates' for ultimate competition goal, is addressed in the fijst section , compete, i.e. the protection of the competitive process, has historically
concerning the content and continuity of ordoliberal thought. It confronts neither been presented as the ultimate goal of competition law during
the ordoliberal with the so-called neoliberaP 1 position on. the normative the deliberations leading up to the German competition law nor, as has
foundations of competition policy. recently been argued convincIngly,13 been invoked in the discussions
It is argued that the original ordoliberal thought concerning the nor- preceding EU competition law. This is not surprising as the focus on the
mative foundations of competition policy as expressed for instance by preservation of the freedom to compete as the ultimate goal of competi-
Eucken, Miksch and B6hm has been narrowed down and reduced to the tion law is a development that took place later in time and therefore could
neoliberal notion of 'freedom to compete'. This development did not take not have been influential during the creation of the German and EU com-
place abruptly but started slowly in the wake of the introduction of the petition laws. As a result, in addition to the fact that the notion of freedom
German competition law in 1958. to compete is a debatable heir of the original ordoliberal position, one
The goal of ordoliberal competition policy is the preservation of a free cannot point to the deliberations and discussions leading up to both laws
society. This is to be achieved by the systematic elimination of private as an argument against a more economic approach. Furthermore, as will
economic power concentrations and more specifically the establishment be discuss,yd, even the influence of ordoliberal thought on EU and German
and enforcement of 'complete competition' (vollstandiger Wettbewerb).12 competitiob law is limited.
Under complete competition, not only the negative repercussions of After having established in the first section the distinction between so-
market power are checked allowing a more efficient allocation but, and called ordolibera('a1i!q. neoliberal thought and having analyzed to what
this is of central importance in ordoliberal thought, a free society is pre- extent the ideas of fr~edom to compete and preservation of a competitive
served as the state can no longer fall prey to powerful private economic process influenced EU and German competition law, the final section
interests. In particular this latter reason for a strong stance vis-a-vis any concerns the neglected original notion of freedom in ordoliberal thought
form of market power has been ignored and replaced by the more or less closely related to Eucken's view of the interdependence of the economic
absolute goal of preserving the freedom to compete as a raison d'etre for and the socio-political order.
competition law by neoliberals. One of the key ordoliberal objections to accumulated private economic
power was its inevitably undesirable impact on the political process
and the stability of democracy. It is argued that the introduction of a
2007: A reformed approach to Article 82 EC (Hart Publishing, Oxford, 2008), 162, more economic approach with the explicit aim of increasing economic
who writes 'EC law cannot make consumer harm the ultimate test of anticompeti- efficiency is not necessarily incompatible with the original goals of ordo-
tive conduct'. liberal competition policy as long as the primary goal of ordoliberal
11 The term neoliberal is not without difficulty. Despite its many meanings, competition policy is not endangered. In light of substantial and often
it is used here as authors such as Moschel, Willgerodt and Peacock use-it to label unrepresentative lobbying efforts being deployed in competition matters
their line of thought. It is also particularly suited as a contrasting term to ordolib-
eral thought as Eucken, the central proponent of ofdoliberal thought, considered and in political decision-making in general, the ordoliberal perspec-
it misleading and rejected it. For him ordoliberalism is a fundamentally different tive, with its emphasis on the dangers of economic power not only for
concept not to be associated with a revival of the liberal tradition. efficiency and consumer welfare but for democracy, remains important
12 Note that complete competition, ie 'vollstandiger Wettbewerb' in Eucken's
work is defined differently than perfect competition in neoclassical price theory. See
W Eucken Grundsiitze der Wirtschaftspolitik (7th edn, Mohr Siebeck, Tiibingen,
2004 [1952]), 228f and W Eucken, Die Grundlagen der NationalOkonomie (Springer 13 See P Akman (2009), 'Searching for the Long-Lost Soul of Article 82EC',
Verlag, Berlin Gottingen Heidelberg, 1950 [1939]), 95ff. (note 8 above), 267-303.
The goals of competition law On the normative foundations of competition law 139
l38
and should be an integral part of the debate on the ultimate goals of 2 THE ORDOLIBERAL VERSUS THE NEOLIBERAL
competition law. POSITION
Besides clarifying some misperceptions and recalling the clear distinc-
tion between neoliberal and ordoliberal t!lOught, the purpose of this This section aims at establishing the key differences between the ordolib-
chapter is to assemble some arguments for the compatibility of a more eral and neoliberal positions concerning the normative foundations of
economic approach to EU law with the TFEU and argue in favor of rein- competition law allowing for a clear distinction between these separate
vigorating the fundamental ordoliberal question concerning t1te dangers lines of thought. It furthermore broadly retraces some of the reasons
of private economic power for society. The chapter does therefore neither for the slow paradigm shift that eventually led to a break and the clear
attempt a complete description of the debate on the more economic distinction between ordoliberal and neoliberal thought today.
approach to EU competition law, nor of ordoliberal or neoliberal posi- Distinguishing neoliberal fr'om ordoliberal thought is difficult because
tions in general. I4 It also does not pretend to fully describe the history the concept of freedom is central to both. The fact that the former is a
and the processes that ultimately led to the first version of German and younger line of thought than the latter does not necessarily help as this
EU competition law. All these topics are only touched upon to the extent largely precluded any direct debate between the advocates of the two and
necessary for developing the arguments. IS the neoliberal one has often been considered the natural and more sophis-
ticated extension of the former. What is often overlooked is that ordoliber-
als never attached intrinsic value to economic freedom and that although
14 Although it certainly contributes to an increased understanding of ordo- the concept was important to them, this importance was embedded in the
liberal thought by clarifying the distinction between both 'schools' and arguing overall purpose of finding a humane order for society, what Eucken 16
against the continuity thesis that views neoliberal thought as the mature and termed ':rp.enschenwu.rdige Ordnung' .17 The economic order was seen as
more sophisticated brother of ordoliberal thought, a picture that has been interdepe'i'ldent with the social political order and the concept of freedom
painted repeatedly throughout the years and has fuelled the current conceptual applied much mqre broadly to the democratic order of society not just to
confusion.
15 This implies for instance that the distinction between the catholic social economic transacti9.,p-s and market participants. In order to guarantee a
school of ordoliberalism and the Freiburg school of ordoliberalism is not made, functioning econoD!iy, a 'Privatrechtsgesellschaft'18 was embraced not
that the controversy between Kantzenbach and Hoppmann is not touched only because of its superior economic properties but due to the perceived
upon, that US influences on German competition law are left largely untreated incompatibility of any other order with the overall aim of establishing a
and that the more economic approach is simply equated with an efficiency goal
free society.19 Ru.stow, for instance, made this argument quite vividly
treating such an orientation as monolithic and discarding not only different
welfare approaches but also the undeniable tensions and inconsistencies of a
consumer-harm approach with, for instance, an as efficient competitor test (on
this see for instance M Adam and F Maier-Rigaud, 'The Law and Economics of 16 W Eucken (2004 [1952]), Grundstitze der Wirtschaftspolitik (note 12 above).
Article 82 EC and the Commission Guidance Paper on Exclusionary Conduct' 17 See L Miksch, 'Walter Eucken' (1950) Kyklos, 4(4), 279-90 and DJ Gerber,
(2009) Journal of Competition Law (ZWeR - Zeitschrift fur Wettbewerbsrecht) Law and Competition in Twentieth Century Europe - Protecting Prometheus (OUP,
1, l31, l39) and the case law of the court (see for example Tomra v Commission Oxford, 1998), 239ff, who provides one of the few extensive English descriptions of
(Case T-155/06) and Deutsche Telekom v Commission (Case T-271/03». Another ordoliberalism in a competition law context.
important, but for present purposes subsidiary, question concerning the level on 18 F B6hm, 'Privatrechtsgesellschaft und Marktwirtschaft' (1966) ORDO,
which economic analysis should be brought into competition law is also treated J ahrbuch fur die Ordnung von Wirtschaft und Gesellschaft, 17, 75-152. See
only briefly. For such a discussion see F Maier-Rigaud, 'Article 82 Rebates: Four also WH Roth, 'Kartell und Wettbewerbsrecht' in K Riesenhuber (ed.),
Common Fallacies' [2006] European Competition Journal, 2(2), 85, 99f, treating in Privatrechtsgesellschaft - Entwicklung, Stand und Verfassung des Privatrechts
particular the question whether a case-by-case analysis is warranted or whether (Mohr Siebeck, Tiibingen, 2007), 186.
economic insights can also be used to design general competition rules. See also V 19 See HO Lenel, 'Walter Euckens ordnungspolitische Konzeption, die wirt-
Vanberg (2009), 'Consumer Welfare, Total Welfare and Economic Freedom - On schaftspolitische Lehre in der Bundesrepublik und die Wettbewerbstheorie von
the Normative Foundations of Competition Policy' (note 7 above), who points heute' (1975) ORDO, Jahrbuch fur die Ordnung von Wirtschaft und Gesellschaft,
to the clear analytical distiIimion to be made between the question of the norma- 26, 22, 49ff, or, for instance, C Mantzavinos, Wettbewerbstheorie. Eine kritische
tive foundations of competition policy and the controversy whether competition Auseinandersetzung (Duncker & Humblot, Berlin, 1994), 72, who writes 'Die
policy should adopt an approach that takes account of the specific effects in each Bedrohung der Freiheit durch private und staatliche Macht ist einer der wich-
particular case. tigsten Griinde damr, dass Eucken die Wettbewerbsordnung vor den anderen
in an article entitled 'The Economy as Servant to Humanity' where he democratically legitimized economic and political power in society and
argued that 'we need to be prepared and would be prepared to defend would in addition entail good economic outcomes. 22
that economic system that for non-economic reasons is the more desirable
one, even if it were less productive than others. We would be prepared and In any case it makes no sense to demand an absolute freedom to compete.
should be prepared to accept economic sacrifices for that.'2o [... ] It has been shown under what conditions complete competition is pos-
More important, however, is the fact that an unconstrairied freedom sible. If these conditions are given or if they can be guaranteed by economic
policy measures, then free competition is the only appropriate organizing
to compete was indeed what separated the ordoliberals fromJ:he liberal principle. 23
tradition. 21 Ordoliberal thought is based on the instrumental value of
competition. The ordoliberal objective was the design of proper rules, The conditionality could n9t be clearer; the freedom to compete
i.e. establishing a constitutional economic order that would allow only can only prevail and develop its positive results under an appropri-
ate framework of rules and in the absence of private economic power.
According to the founding father of the Ordo idea Franz Bohm, the
Ordnungen bevorzugte', i.e. the threat to freedom through private and state power
is one of the most important reasons for Eucken's preference for the competitive basic problem of any economic order is the problem of economic
over all other orders. The interaction between accumulated economic power and power. 24 It is in this context that the idea of competition as instru-
the political process is, however, not to be understood as a fundamental incom- ment to dethrone economic power, 'Entmachtungsinstrument', was
patibility of free markets with dictatorial regimes as for instance C Mantzavinos, born. 'Unsurprisingly, the solution to this problem is 'Riicksichtslose
Wettbewerbstheorie. Eine kritische Auseinandersetzung (Duncker & Humblot, Entmachtung der Privatwirtschaft, Entprivatisierung der dann noch
Berlin, 1994), 75, argues. L Miksch, Wettbewerb als Aufgabe - Grundsiitze einer
Wettbewerbsordnung (2nd edn, Verlag Helmut Kupper, Godesberg, 1947), 216, verbleibenden Marktmacht'25 i.e. the ruthless deconcentration of the
states that 'Ein totaler Staat ist auch ohne Staatswirtschaft moglich, aber die reine economy,.:.~eprivatization of the then remaining market power. 26 From
Staatswirtschaft fUhrt mit Sicherheit zum totalen Staat', i.e. that a dictatorial
regime is possible even without a centrally planned economy whereas a centrally
planned economy necessarily leads to a dictatorial regime. £t,.I,"
20 The original text is 'Wir mussen bereit sein und waren bereit, fUr das aus 22 Ibid at 16: 'Das'/'4iel des wirtschaftlichen Wettkampfes ist es, der besten
uberwirtschaftlichen Grunden vorzugswurdigere Wirtschaftssystem auch dann Leistung den groBten Erfolg zu sichern und so zur Leistung anzuspornen.
einzutreten, wenn es weniger produktiv ware als andere. Wir waren bereit Ein harmonisches Zusammenspiel der wirtschaftlichen Krafte entsteht aus dem
und mussten bereit sein, dafUr wirtschaftliche Opfer zu bringen.' A Rustow, Wettkampf nicht immer, sondern nur dann, wenn er sich innerhalb bestimmter
'Wirtschaft als Dienerin der Menschlichkeit' in W Hoch (ed.) Alexander Riistow Spielregeln vollzieht', i.e., 'the goal of economic competition is to secure the great-
- Rede und Antwort (Ludwigsburg, 1963 [1960]), 76, 79. See also A Rustow, Das est success to the best efforts and to thereby incite for performance. A harmonious
Versagen des Wirtschaftsliberalismus (3rd revised edn, based on the 2nd edn from interaction between market forces not always emerges from competition but only
1950), F Maier-Rigaud and G Maier-Rigaud (eds) (Metropolis-Verlag: Marburg, if the competition takes place within specific rules.'
2001 [1945]), 153. 23 Ibid, 221. The original reads: 'Jedenfalls hat es keinen Sinn, absolute
21 See for example L Miksch, Wettbewerb als Aufgabe ~ Grundsiitze einer Wettbewerbsfreiheit zu fordern. [. . .] Es ist gezeigt worden, unter we1chen
Wettbewerbsordnung (2nd edn, Verlag Helmut Kupper, Godesberg, 1947), 14: Bedingungen vollstandige Konkurrenz moglich ist. Sind diese Bedingungen
'Wir wissen heute oder wissen wieder, daB es unter allen Umstanden die Aufgabe gegeben oder konnen sie durch wirtschaftspolitische MaBnahmen hergestellt
des Staates ist, die Wirtschaft zu ordnen, und zwar durch eine einheitliche und werden, so ist der freie Wettbewerb das allein angemessene Ordnungsprinzip.'
widerspruchsfreie Wirtschaftsverfassung', i.e. 'we know today or know it again 24 See F Bohm, Wettbewerb und Monopolkampl Eine Untersuchung zur Frage
that it is under all circumstances the duty of the state to order the" economy des wirtschaftlichen Kampfrechts und zur Frage der rechtlichen Struktur der gel-
through a uniform and consistent economic constitution.' Or at 12f: 'Man tenden Wirtschaftsordnung (Berlin, 1933) and F Bohm, 'Das Problem der privaten
vergaB, daB eine freie Wirtschaft nur eine vom Staat unter Benutzung freiheitli- Macht. Ein Beitrag zur Monopolfrage', (1928) Die Justiz 3, 324-45, where the idea
cher Prinzipien organisierte Wirtschaft sein kann und entleerte so den Begriff der is first discussed.
Wirtschaftsfreiheit seines positiven Gehalts. Es blieb nur die negative Seite, die 25 F Bohm, 'Kartellauflosung und Konzementftechtung, Spezialistenaufgabe
Abneigung gegen den Staatseingriff. [...] Der Begriff der "Wirtschaftsfreiheit" oder Schicksalsfrage?' (1947) Siiddeutsche Juristenzeitung, Jg. II, 503.
wurde in sein Gegenteil verkehrt, er wurde zum Schlachtruf gegen den Staat, der 26 Bohm, ibid, writes 'Verhinderung, Bekampfung und Ruckbildung des
damit vollends jede Ordnung'sidee einbuBte, nur noch planlos und auf Wunsch Vermachtungsprozesses mit allen zu Gebote stehenden Mitteln des Rechts
der Interessenten eingriff und so in das Schlepptau anonymer Wirtschaftsmachte [...], [urn so] die Marktvermachtung auf das MindestmaB (Machtminimum)
geriet.' zuruckzudrucken. '
an ordoliberal point of view, the threat of accumulated economic power and state granted privileges to the same effect. 31 This led to the ordolib-
is essentially twofold. 27 eral position that the existence of private economic power concentra-
In the economy, market power distorts the allocation of resources as tions is not only economically problematic but also incompatible with a
prices no longer fulfill their role as indicators of scarcity. Ordoliberal think- democratic society. 32
ers not only used direct historical evidence at their disposal to support their In order to avoid repeating the mistakes of the past, competition policy
arguments but also argued theoretically with the effects of mark'et power on - at the time not necessarily institutionally separated from other state func-
prices and the allocation, some also distribution, of resources. ..j" tions - had to combat any form of market power. Only once complete com-
Besides these negative economic aspects of accumulated market power, petition was achieved in most markets and remaining natural monopolies
the ordoliberals saw the danger of the state being captured by powerful were put under public control, could one speak of freedom to compete. 33
private interests undermining the economic order and ultimately threat- For Eucken more than others, the concept of economic freedom in its posi-
ening democracy.28 Again ordoliberals had historical evidence at their tive sense was not only associated with but could only be brought about by
fingertips. According to their perspective, the laisser-faire liberalism of the complete competition. In light of his skepticism regarding the possibilities
late nineteenth and early twentieth century was not only associated with of a competition authority to 'regulate' oligopolies and any government
the formation of cartels29 and monopolies and their negative economic intervention in general, this was of course an elegant albeit theoretical
impact,3D but also, seemingly paradoxically, with increased subsidies solution. 34 If complete competition could be brought about in most sectors
27 This position was also known in the US antitrust world at the time. JS 31 L Miksch (1947), Wettbewerb als Aufgabe - Grundsatze einer
Bain, Industrial Organization (2nd edn, New York, 1968), 37, for instance stated Wettbewerbsordnung (note 20 above), 5: 'Freiheit des Wettbewerbs hieB damals in
in reference to the ordoliberal position that the 'policy conclusion drawn from this erster Reih:~ Freiheit von staatlicher Bevormundung. DaB das Streben nach wirt-
line of theorizing is that concentration of the control of economic affairs, through schaftlicher'Macht, das nicht weniger natiirlich ist als das Wettbewerbsstreben,
concentrated big business or other similar concentrations, should be opposed bei staatlicher ZUrUckhaltung zu einem monopolistischen MiBbrauch der Freiheit
per se as a matter of political principle. Its development should be limited, and fiihren: musse, wurde von vornherein verkannt.'
existing concentration should be reduced as feasible. This is quite aside from the 32 E Gunther, 'Di~';~eistigen Grundlagen des sogenannten Josten-Entwurfs' in
explicit impacts of various forms of industrial organization on the strictly material H Sauermann and EJ Mestmacker (eds), Wirtschaftsordnung und Staatsverfassung,
welfare of the populace. The preservation of (or reversion to) a situation in which Festschrift fur Franz B6hm zum 80. Geburtstag (Mohr-Siebeck, Tubingen, 1975),
economic units are very numerous, individually small, and relatively powerless, 183, 191f, describes this position as follows: 'Wirtschaftliche Macht strebe
becomes an end in itself.' CD Edwards, Big Business and the Policy of Competition, tiber die EinfiuBnahme auf die politische Willensbildung nach Konsolidierung
Cleveland (1956), 4, concludes, 'Thus competition is valued for its own sake, as und Ausweitung, der Staat werde unter dem Druck starker Interessengruppen
the economic equivalent of political democracy, and also as a necessary aid in gezwungen, die selbstgewahlte Abstinenz auf wirtschaftlichem Gebiet zugunsten
preserving that democracy by averting dangerous extension of the power of private eines gruppengesteuerten und destabilisierenden Interventionismus aufzugeben.
organiza tions.' Die Entwicklung fUhre schlieBlich zwangslaufig vom "Wirtschaftsstaat" des
28 W Eucken, 'Staatliche Strukturwandlungen und die Krisis des Interventionismus zur Entstehung autoritarer wirtschafts- und gesellschaftspoli-
Kapitalismus', (1932) Weltwirtschaftliches Archiv, 36(2), and A Rtistow (1963 tischer Systeme, fUr die das Dritte Reich im nationalsozialistischen Deutschland
[1932]), 'Freie Wirtschaft - Starker Staat (Die staatspolitischen Voraussetzungen und die kommunistische Sowjetunion historische Beispiele abgaben.'
des wirtschaftspolitischen Liberalismus)' in W Hoch (ed.) Alexander Rustow - 33 See also e.g. L Miksch (1947), Wettbewerb als Aufgabe - Grundsiitze einer
Rede und Antwort (note 20 above), pp 249-58, made that point quite forcefully Wettbewerbsordnung (note 20 above), 62 ff, who distinguishes between a general
already very early on. competition law and a specific competition law that would deal with natural
29 See e.g. J Basedow, 'Kartellrecht im Land der Kartelle - Zur Entstehung monopolies.
und Entwicklung des Gesetzes gegen Wettbewerbsbeschrankungen' (2006) 58 34 Eucken was criticized for not having seen the difficulties of the 'as if'
Wirtschaft und Wettbewerb 3, 270-73. approach to monopolies and also for having underestimated the intermediate
30 See, however, JR Kinghorn, 'Kartells and Cartel Theory: Evidence from market form of oligopolies that according to him would not require special over-
Early Twentieth Century German Coal, Iron and Steel Industries' (1996) 14 Essays sight as this would be too difficult for the authority and would anyhow not be
in Economic and Business H';':g,tory 339-63, presenting an institutional and trans- necessary as he deemed the threat of falling under monopoly oversight sufficient to
action cost-based analysis in contrast to the received view of negative economic deter deviationsJrom competitive behavior. The idea that the threat of regulatory
consequences at least for the steel and coal cartels in the late nineteenth and early intervention may be sufficient to deter certain conduct can be considered an early
twentieth century in Germany. version of the contestability concept.
of the economy, the state would only need to worry about the regulation The neoliberal position with its ultimate (if not intrinsic) goal of pro-
of residual market power. In Eucken's own words, the policy of the state tecting the freedom to compete was born.39 What the neoliberals shared
should aim at dismantling economic power concentrations or limiting their with the ordoliberals and the liberals was their skepticism of state action.
functioning. 35 For ordoliberals freedom to compete is a description of the What was first neglected and then abandoned was the equal concern the
state reached once these conditions are fulfilled. ordoliberals had vis-a.-vis private economic power positions - irrespective
With the quickly eroding appeal of the concept of complete competi- of whether this power resulted from cartel agreements, internal or external
tion as empirical benchmark, even before the advent of mocijirn indus- (merger) growth or state privileges and subsidies. 4o The idea of a market
trial organization theory, efforts were made to replace this goal. It is in order was, however, maintained although its focus was no longer on trying
this context that the liberal concept of economic freedom was reborn in to achieve a certain market form but to combat and eliminate any 'discre-
its neoliberal guise as a normative foundation for competition policy. tionary' intervention into what 'was considered a free market process. 41
Supported by the works of Hayek and in particular his article on the use This new orientation subsequently led to quite some confusion although
of knowledge in society and more importantly the meaning of competition the break did not remain unnoticed. 42 In more recent times, the original aim
and competition as a discovery procedure, the static notion of complete of competition law i.e. establishing and preserving a free democratic society
competition as an ideal state of the economy was replaced with a more by eliminating market power, irrespective of its origin, has been watered
dynamic process-oriented view. 36 If competition is a discovery process, down, if not abandoned altogether. 43 In contrast to this justification of
then the freedom to discover and the protection of the discovery process is
crucial. While these developments were undeniably important theoretical
leaps forward in the understanding of competition and market behavior 39 One of the reasons for such developments is also the outcome of the debate
more generally, the original idea behind the concept of pomplete competi- focusing on an appropriate replacement for Eucken's concept of complete compe-
tition. Thii.g.iscussion was labeled the Hoppmann-Kantzenbach controversy based
tion, and in particular its important political corollary, was lost. 37 The on the names of the two most prominent adversaries, but cannot be discussed here.
neoliberal position therefore not only provided an appealing substitute 40 See L Miksch (1947), Wettbewerb als Aufgabe - Grundsatze einer
for the ordoliberal concept of complete competition but also rendered Wettbewerbsordnunt (note 20 above), 212: '[Die Wettbewerbsordnung] zerstort
the distinction between the level of market actions and market rules more die Machtstellungen ~4ikal, indem sie aIle Unternehmer dem gleichen Prinzip
salient. Indeed, if the process is viewed as the main goal, one no longer has unterwirft, der freien Konkurrenz im Regefalle, der gebundenen Konkurrenz und
der staatlichen Lenkung in der Form der Monopolaufsicht in Sonderfallen.'
to be too much concerned with the results thereby avoiding discretionary 41 'Solange wir aber nichts Besseres zur VerfUgung haben, stehen wir vor der
temptations at the root. 38 Wahl zwischen zwei Dbeln: Weitere Auslegung des MiBbrauchsprinzips, als sie den
Vertretern des "freien Wettbewerbs" vorschwebt, und damit groBeres Ermessen
des Bundeskartellamts oder Laissez faire gegeniiber dem MiBbrauch wirtschaftli-
35 'Die Politik des Staates sollte darauf gerichtet sein wirtschaftliche cher Macht in wichtigen Bereichen. Ich halte die Gefahren der letzteren Haltung
Machtgruppen aufzulosen oder ihre Funktionen zu begrenzen.' W Eucken, fUr weit groBer als die Gefahr willkiirlicher oder zu weitgehender Entscheidungen
Grundsiitze der Wirtschaftspolitik (7th edn, Mohr Siebeck, Tiibingen, 2004 [1952]), des Bundeskartellamts, zumal es gegen diese hinreichende Rechtsmittel gibt.'
334. HO Lenel (1975), 'Vollstiindiger und freier Wettbewerb als Leitbilder fUr die
36 FA Hayek, 'Der Wettbewerb als Entdeckungsverfahren' in Freiburger Wettbewerbspolitik gegeniiber miichtigen Unternehmen' in H Sauermann and EJ
Studien, (Mohr Siebeck, Tiibingen, 1969 [1968]), 249-65; FA Hayek, 'The Meaning Mestmiicker (eds), Wirtschaftsordnung und Staatsverfassung, Festschrift fiir Franz
of Competition' in FA Hayek (ed.), Individualism and Economic Order (University B6hm zum 80. Geburtstag (note 32 above), 317, 337.
of Chicago Press, Chicago, 1948),92-106; and FA Hayek, 'The Use of Knowledge 42 In an article focusing on Eucken's 'as if concept, HO Lenel (1975) ibid,
in Society' (1945) American Economic Review 35(4),519-30. 317-40, also discusses the criticism 'seitens der Vertreter des "freien Wettbewerbs'"
37 That the concept of the interdependency of the economic and the social and i.e. from those in favor of a free-competition concept, thereby clearly delineating
political order was already neglected in the 1970s has been noted by HO Lenel, Eucken and ordoliberal thought on the one hand and the neoliberal concept of
'Walter Euckens ordnungspolitische Konzeption, die wirtschaftspolitische Lehre freedom to compete on the other.
in der Bundesrepublik und die Wettbewerbstheorie von heute', (1975) ORDO, 43 The most vocal ordoliberal on this aspect was probably Alexander Riistow.
Jahrbuchfiir die Ordnung vOlJ..4Wirtschaft und Gesellschaft, 26, 22, 75. For a specific treatment of his position, see F Maier-Rigaud and R Maier-Rigaud,
38 This was in particular appealing to those concerned with abusive state 'Riistows Konzept der Sozialen Marktwirtschaft: Sozial- und wettbewerbspoli-
power, for instance in regulating natural monopolies that, in the absence of a need tische Dimensionen einer iiberwirtschaftlichen Ordnung' in M ABliinder and
for discretionary policy, could be more effectively constrained. P Ulrich (eds), 60 Jahre Soziale Marktwirtschaft (Haupt Verlag, 2009); A Riistow
.... _."._-----_ _--_
... ...... -------
competition law, more recent authors have proclaimed the freedom to For the ordoliberals such a critique simply misses the point. For ordo-
compete as such to be the ultimate goal of (ordoliberal) competition policy. liberals economic freedom is a direct result of an appropriate market
According for instance to Hoppmann, the freedom to compete is a goal in order. 49 The intrinsic value lies therefore not in the freedom to compete as
itself.44 Moschel,45 insisting on stating an ordoliberal position, writes that such, but in the political, human freedom. Economic freedom is certainly
the 'actual goal of the competition policy of ordoliberalism lies in the pro- considered an essential basis for a democratic society, but this is explicitly
tection of individual economic action as a value in itself. 46 only recognized for the economic freedom that reigns within a constitu-
From that perspective it is only logical that neoliberals cqpsider the tionally constrained market economy such as the social market economy
'special responsibility' of dominant companies to be an unjustified restric- (Soziale Marktwirtschaft). From that perspective it is far-fetched to con-
tion of the freedom to compete. If the goal of competition policy is the sider the freedom to compete to be an argument against any particular
protection of every individual market actor's freedom to compete, domi- legitimate market constitution 'and its competition rules. For Gunther,
nant companies, at least when the dominant position has been obtained the first president of the Bundeskartellamt, this neoliberal focus on the
through legitimate means, should also be protected and be able to benefit 'freedom to compete' is a regression to old liberal ideas. 5o Gunther 51 con-
from this freedom to compete. Mestmacker47 speaks in this context of cludes that the state should not only focus its efforts on the preservation of
a contradiction or 'antinomy of competition policy' suggesting that the the freedom to compete but that a solution also needs to be found for the
ordoliberal founders overlooked the fact that even dominant companies pro blem of economic power. 52
should be entitled to free competition. 48
that such problems are solved on the level of the economic order. It is exactly in
(2001 [1945]), Das Versagen des Wirtschaftsliberalismus (note 20 above); and reaction to classical liberalism and the notion that economic freedom brings about
also F Maier-Rigaud and G Maier-Rigaud (2001), 'Das neoliberale Projekt' in desirable niS:!llts that ordoliberal thought was formed, with its emphasis on the
A Rustow, Das Versagen des Wirtschaftsliberalismus,201-306. decisive role of institutions within which economic activity takes place.
44 The freedom to compete is 'ein Ziel in sich selbst, wei! sich in ihm wirtschaftli- 49 This crucial aspect, obviously equally true for freedom in general, is typically
che Freiheit manifestiert.' E Hoppmann, Wirtschaftsordnung und Wettbewerb overlooked. See L M'tirach-Brand, Antitrust auf deutsch. Der Einfluss der amerika-
(Baden Baden, Nomos, 1988), 199 and at 87: 'Die Wettbewerbspolitik hat [...J nischen Alliierten auf dli1; Gesetz gegen Wettbewerbsbeschriinkungen (GWB) nach
als Ziel die Wettbewerbsfreiheit.' See HO Lenel, 'Walter Euckens ordnungspoli- 1945 (Mohr Siebeck, Tubingen, 2004) for a notable exception also providing a very
tische Konzeption, die wirtschaftspolitische Lehre in der Bundesrepublik und detailed description of the formation of the first German competition law after
die Wettbewerbstheorie von heute' (1975) ORDO, lahrbuchfur die Ordnung von WWII and the Allied influences. According to her, the ordoliberals did not base
Wirtschaft und Geselischaft, 26, 22, 72f, again emphasizing the difference. the concept of freedom on individual rights but rather saw individual freedom as
45 W Moschel, 'Competition Policy from an Ordo point of view' in A Peacock the consequence of the ideal order. 'Eucken grundete die Freiheit also nicht wie
and H Willgerodt (eds) German Neo-Liberals and the Social Market Economy das amerikanische Antitrustrecht auf das Recht des 1ndividuums. Die individuelle
(Macmillan, London, 1989), 142, 147. Freiheit folgte vielmehr als eine Konsequenz aus der idealen Ordnung' L Murach-
46 See V Van berg (2009), 'Consumer Welfare, Total Welfare and Economic Brand (2004) at 106. See also V Vanberg (2009), 'Consumer Welfare, Total
Freedom - On the Normative Foundations of Competition Policy' (note 7 above), Welfare and Economic Freedom - On the Normative Foundations of Competition
for an effort to reinterpret these unscientific categorical imperatives as conditional Policy' (note 7 above), who is somewhat prudent in attributing the goal of protect-
imperatives open to scientific scrutiny. ing 'Wettbewerbsfreiheit' directly to the ordoliberal founding fathers and prefers
47 EJ Mestmacker, Der verwaltete Wettbewerb: eine vergleichende to say that this goal has been stressed in the German ordoliberal tradition.
Untersuchung uber den Schutz von Freiheit und Lauterkeit im Wettbewerbsrecht 50 'Die angedeutete wirtschaftspolitische Entwicklung [... J in Zusammenhang
(Mohr Siebeck, Tiibingen, 1984). mit der unter dem EinfluB des kalten Krieges zunehmenden Polarisierung fiihrten
48 The focalization on individual freedom by neoliberals has spawned an nun jedoch zu einem teilweisen Ruckfall einiger Vertreter des neuen deut-
utterly useless debate on whose freedom to compete one should protect. While it is schen Liberalismus in die Vorstellungswelt des traditionellen Liberalismus, deren
clear that the freedom of one constrains the freedom of the other, questions such Uberwindung gerade die Zielrichtung des Ordo-Liberalismus gewesen war.'
as to whether retail price maintenance (RPM) should be allowed or not can hardly E Gunther (1975), 'Die geistigen Grundlagen des sogenannten Josten-Entwurfs'
be solved under the freedom to compete paradigm as either certain freedoms to (note 32 above), 183,202.
compete on the level of proci.u.2ers (in case of a prohibition) or on the level of retail- 51 E Gunther (1975) (note 32 above), 183, 203f.
ers (in case RPM is allowed) are eurtailed, necessitating additional criteria (I thank 52 The original text reads 'der Staat im Bereich der Wettbewerbsordnung
Carl Christian von Weizsacker for this clear example). The reason ordoliberals did [sich] nicht auf die Sicherung der Wettbewerbsfreiheit beschranken darf. Dies ist
not go down this often-trodden path is not a lack of understanding but the fact nur eine Seite der Medaille. Hinzukommen muB die Losung des Problems der
Freedom undeniably plays the central role in the design of the market Even if monopolistic conduct can be in contradiction to the freedom
order. 53 If that freedom is to be guaranteed, the market order has to bring to compete, as understood by Mestmacker 55 or Hellwi g56 and would
about the freedom to compete, i.e. it has to tackle market power that therefore be prosecuted by a neoliberal competition law, the position of
would eliminate that very freedom. the ordoliberals in their categorical view concerning any accumulation
Some of the ordoliberals have made the subservient role of the eco- of economic power is neither based on the notion of freedom to compete
nomic system and the priority of guaranteeing a free society "ery explicit. nor exclusively on the negative economic consequences of market power
Representative of the view that monopolies and dominant~mpanies but on the threat such concentrated economic power poses to a demo-
cannot be tolerated for the benefit of preserving greater democratic values cratic society. Essential is the fear that the government is captured by
is the following passage from Riistow: interest groups as this would cripple and eventually undermine freedom
in society. In that sense, the ordoliberals are very conscientious of limit-
Unser Kampf gegen die Monopole richtet sich nicht in erster Linie gegen die ing the freedom of companies to compete in particular as they view such
Monopolrenten [...], sondern unser Kampf richtet sich dagegen, dass die limitations as an essential and constitutive element guaranteeing a free
Monopole eine Bedrohung der Freiheit sind. Es ist unter dem Gesichtspunkt society.
der Staatsstruktur nicht ertdiglich, dass man es in einem Land, das demok-
ratische Freiheit auf seine Fahne geschrieben hat, duldet, dass sich private If, however, there is no room for market power in a market economy
Machtpositionen nach privatem Belieben bilden, dass mitten in unserem due to the overarching goal of preserving democracy and liberty and if for
demokratischen Gefilde sozusagen Raubritterburgen errichtet werden, die von ordoliberals the freedom to compete is the state in which economic actors
den voriiberziehenden Kaufieuten und Konsumenten Tribute erheben. Das ist are once a market economy is realized, companies with market power can
ein grundsatzlich unertraglicher Zustand, ganz gleich, wie groB oder wie klein hardly claim an individual freedom to compete in contradiction with the
die Tribute sind; davon hangt es gar nicht ab. 54
market con,~titution. The freedom to compete, as understood by the ordo-
liberals, exists only within the confines of a market order that guarantees
wirtschaftlichen Macht.' According to qiinther it is clear that 'nur iiber die umfas- the absence of market power. The freedom to compete by economic actors
sen de und konsequente L6sung des Machtproblems in einer Marktwirtschaft is clearly subservieri't t.9 the liberty of natural persons and the primacy of
kompetitive Marktstrukturen zu erhalten und wirksamer Wettbewerb zu sichern ~~<
sind.' E Gunther (1975) (note 32 above), 183,204, i.e., competitive market struc-
tures and effective competition can only be maintained through the encompassing
and strict solution of the problem of market power.
53 That Eucken was very much concerned with this aspect becomes clear in the taken up the cause of democratic freedom, private power positions are privately
following passage: 'Today there is the risk that the anarchy of powerful groups formed at will, that robber baron castles are established in the midst of our democ-
leads to the control of more threatening forces than absolutism - in fact to a racy that demand tribute from passing merchants and consumers. This is a funda-
tyranny.' The quote in the original language is 'Heute besteht die Gefahr, daB die mentally unacceptable state irrespective of how big or small the tribute is; in fact it
Anarchie der Machtgruppen zur Herrschaft bedrohlicherer Gewalten fUhrt, als der is fully independent thereof.' The quoted passage continues as follows: 'Es macht
Absolutismus es war - eben zur Tyrannis', W Eucken (2004 [1952]), Grundsiitze auBerdem un sere Front gegenuber der Planwirtschaft unglaubwiirdig. Denn wenn
der Wirtschaftspolitik (note 12 above), 335. The argument is also made by B6hm wir derartige planwirtschaftliche Enklaven zulassen, wo private Monopolinhaber
who argues that the bad economic and political consequences of private economic innerhalb ihres Bereichs nach eigenem Gutdunken Planwirtschaft betreiben,
power concentrations ultimately helped in the rise of the National Socialist party: dann kann man mit Recht sagen: "Hier lasst ihr es ja selbst zu! Aber wenn schon
'Eine solche privatvermachtete Marktwirtschaft, wie es die deutsche Wirtschaft Planwirtschaft, dann soIl wenigstens die 6ffentliche Hand sie betreiben, nicht
vor der Machtubernahme Hiders war, ist eine Vorstufe fUr autoritare politische irgendein beliebiger Unternehmer!" Dagegen lasst sich dann sehr wenig ein-
oder wirtschaftspolitische Systeme, fordert die Entstehung soIcher Systeme gera- wenden.' A Rustow (1963 [1960]), 'Wirtschaft als Dienerin der Menschlichkeit'
dezu heraus und erleichtert Ihnen die Machteroberung und Machtbefestigung (note 20 above), 76, 83f.
auBerordentlich.' F B6hm (1947), 'Kartellaufi6sung und Konzernentfiechtung, 55 EJ Mestmacker (1984), Der verwaltete Wettbewerb: eine vergleichende
Spezialistenaufgabe oder Schicksalsfrage?'(note 25 above) 504. See also L Miksch Untersuchung uber den Schutz von Freiheit und Lauterkeit im Wettbewerbsrecht
(1947), Wettbewerb als Aufgabe - Grundsiitze einer Wettbewerbsordnung (note 21 (note 47 above). '
above), 210. ~'--4 56 M Hellwig, 'Effizienz oder Wettbewerbsfreiheit? Zur normativen
54 A rough translation goes'.as follows: 'Our fight against monopolies is not Grundlegung der Wettbewerbspolitik' in C Engel and W M6schel (eds), Recht und
primarily directed at monopoly profits [...], but our fight concerns the threat spontane Ordnung. Festschrift fur Ernst-Joachim Mestmacker zum 80. Geburtstag
monopolies pose for freedom. [... J it cannot be tolerated that in a country that has (Baden Baden, 2006), 231-68.
150
such freedom remains untouched also by efficiency considerations as will incompatibility, as will be argued below, is of limited relevance and
certainly does not allow the conclusions the authors subsequently draw.
be seen in the next section.
Neither the original German competition law, nor the relevant parts
of the Treaty on the Functioning of the European Union ever focused
3 FREEDOM TO COMPETE VERSUS EFFICIENCY on the protection of the freedom to compete as a competition policy
goal. Surprisingly, the specific justifications given for the draft German
This section indirectly treats the supposed contradiction betw~n a com- law, but also the 'travaux preparatoires' to the Treaty of Rome and
petition law based on efficiency considerations as the ultimate normative the debates at the time, suggest that the focus was much more on effi-
justification and a competition law aimed at preserving the freedom to com- ciency considerations than on the protection of the freedom to compete
pete. 57 It analyzes to what extent the authors that do claim a fundamental and the competitive process .. Indeed, if one goal had to be picked,
inconsistency between the two goals can also claim that the more economic the concern on the EU level was on total welfare and in Germany on
approach is (legally) incompatible with the Treaty on the Functioning of the consumer benefits.
European Union based on the debates that took place leading up to its cre- As has been argued in the previous section, the freedom to compete as
ation. Although, the argument has not been made explicitly, these authors the ultimate (intrinsic) goal of competition law is essentially a later reduc-
are even more likely to claim that introducing efficiency considerations into tion of ordoliberal thought and consequently is not present in its current
German competition policy is incompatible with German competition law form in these early debates. 61 In order to analyze this question, the run-up
based on an analysis of the original intent of the legislator. 58 Assuming first period of both competition laws is considered whereas the focus is mainly
that the posited incompatibility of the goals is true, for the second claim to on Germany.62 The relevant period that would allow an analysis of what
be correct, i.e. that adopting an efficiency goal 'would represent a funda- competitio,p law goals were being discussed are the years between 1948 and
mental change', 59 one presumably would have to demonstrate that it was the coming' into force of the German competition law (GWB)63 and the
the normative goal of protecting the freedom to compete that motivated the Treaty of Rome64 }n 1958.
European and German competition law to begin with. This is not a trivial /Jp
exercise, in particular, as in the previous section it was demonstrated that '\
the protection of the freedom to compete as an individual right is not the 61 This is of cou.rse not incomp~tible with the fact that in Germany, the
(ultimate) goal of ordoliberal competition policy. ~reedoI? to c?mpete IS currently consIdered to be the goal of competition policy
The argument of a fundamental incompatibility of the two approaches m partIcular m the legal community and that indeed the GWB the German com-
has widely been made in literature. 6o However, such a fundamental petit~o~ law, defin~s as its ~o.al the protection of the freedom t~ compete, without
proVl.dmg any specific defirutIOn of the term. In any case, it makes a decisive differ-
ence If the goal to protect the freedom to compete is believed to be achievable for
~n~tance via the implementation of complete competition, or whether the con~ept
57 The treatment is indirect as the section neither addresses the question IS mt~rpr~ted as a dire~t individual right rather than the outcome of an appropriate
whether there is a fundamental incompatibility nor does it address the question constItutIOnal econOmIC order.
which normative foundation should be preferred in the hypothetical that the fun- 62 The reasons for this are twofold. First, if the concept of freedom to compete
~ann~t e~en be traced in Germany, there is arguably not much point in trying to
damental incompatibility of the concepts is correct.
58 In other words, considering that the basis of German competition law is
IdentIfy It on the European leveL Second, a specific analysis of the debates sur-
instrumental also to the EU debate as surely the preservation of the freedom to rounding the Treaty of Rome and supporting the arguments advanced here has
compete and the protection of the competitive process must have been much more already been made so that there is no need to repeat the arguments. See P Akman
clearly articulated in the home country of ordolibetal thought that is said to have (2009), 'Searching for the Long-Lost Soul of Article 82 EC' (note 8 above),
267-303, who, reflecting the literature, does, however, not distinguish between
decisively shaped EU competition law.
59 DJ Gerber, 'The Future of Article 82: Dissecting the Conflict' in CD
ordoliberal and neoliberal thought.
Ehlermann and M Marquis (eds) European Competition Law Annual 2007: A . 63 The German competition law was announced on 27 July 1957 and came
reformed approach to Artic~82 EC (Hart Publishing, Oxford, 2008). mto force on 1 January 1958, the same moment as the EU competition law.
60 In fact the author finds,the arguments concerning a fundamental incom-
64 The Treaties of Rome refer to the European Economic Community (EEC)
patibility rather convincing albeit of no consequence for the question whether an Treaty and the European Atomic Energy Community (EURATOM) Treaty
efficiency goal can be made the ultimate aim ofEU competition law. which both came into force on 1 January 1958. '
152 The goals of competition law
On the normative foundations of competition law 153
As has been convincingly argued by Akman,65 there is a complete
undermined the effectiveness of the market economy and led to social and
absence of neoliberal arguments concerning the protection of the freedom political tensions. These problems are identified as being due to the forces
to compete in the debate leading to the Treaty of Rome. This is also the
inherent in a ma~ket-based economy and to state measures. The analysis
case for Germany itself where the GWB was hotly debated for years before concludes that thIS development has led to consumer harm and economic
it came into force in 1958. Indeed, as will be shown, based on the justifica- stagnation. 69
tions for the law submitted in parliament in 1955 and also based on the
Section IV entitled 'competition order', emphasizes again the central
parliamentary debate, the submissions of the Bund~srat andJ;he p~blic role of the consumer and economic efficiency.7o Furthermore, this time
studies submitted by the 'Beirat', 66 it was rather efficIency consIderatIOns with undeniable ordoliberal traits, it is noted that the proposed economic
that played an important role. With the notable exception of the so-called
order has to be seen as the counterpart of the democratic order where
Josten-draft of 1949, produced under the chairmanship of Franz B5hm
t~e forme: ~uarantees consumer sovereignty and the latter participatory
and clearly revealing an ordoliberal influence,67 traces of ordoliberal nghts of cItIzen:
thought are scarce and neoliberal thought is unsurprisingly inexistent.
In 1955 the draft law against restrictions of competition (GWB) was
Eine de~~rt geordn~t~ Wirtschaftsver~assung bildet das wirtschaftspoIitische
introduced in the German parliament together with a detailed justification ~egenstu~k zu:- pohtlschen Demokratle. Wahrend deren Inhalt als das poli-
(Regierungsbegrundung). That justification is revealing as the first two tIsche MItbestlmmungsrecht jedes Staatsburgers anzusehen ist stellt die
sentences clearly demonstrate that free competition should only be secured Wet,!?ewerbsordnung die wirtschaftlichen "Grundrechte" der Freiheit der
ArbeIt und der Verbrauchswahl sicher.?1
and economic power only be eliminated to the extent that it encroaches
upon the effectiveness of competition and its inherent tendencies for
increasing productivity and the best possible supply of consumers. Section V is. ~lso very explicit on the subservient, efficiency enhancing
role of cOmpetItIOn. In that section it is stated that competition cannot be
Das "Gesetz gegen Wettbewerbsbeschdinkungen" ste~lt eine der wichtigst~n seen as a goal in itself and that it is only a mean to increased efficiency,?2
Grundlagen zur Forderung und Erhaltung der MarktwI~tschaft dar. Es solI ?~e Furthermore, if cOtp.petition policy cannot assure competitive markets as
Freiheit des Wettbewerbs sicherstellen und wirtschafthche Macht da beseItl- such, regulatory mea~l;lres are to be taken as a last resort to constrain the
gen, wo sie die Wirksamkeit .des Wettbe'Yer~.s u~d die ihm .innewoh~en.den behavior of market p~hicipants in order to incite them to strive for cost
Tendenzen zur Leistungsstelgerung beemtrachtlgt und dIe bestmoghche
Versorgung der Verbraucher in Frage stellt. 68
69 ..
. 'Ubervo.rteilung der K~:msumenten und der Hemmung oder gar Erstarrung
In section II of the justification entitled 'The liberal economy' the prob- des :VIrtschafthchen Fortschntts', Deutscher Bundestag (1955) (note 68 above), 21.
lems associated with 'laisser-faire' are discussed. It is argued that towards SectIOn III cO.nt~asts.a centrally planned economy with a market-based economy.
the end of the nineteenth century, Germany saw developments that :rh~ pro~lem IS Id~nt~fied as one of finding a constitutional economic order that is
m hne WIth the pnnciples of a democratic order. The consequences of a centrally
planned economy are not only that the entrepreneurial initiative is eliminated with
the resulting negat~ve impact for. the efficacy of the economy, but also that the
65 P Akman (2009), 'Searching for the Long-Lost Soul of Article 82 Ee', (note
consumer stops bemg the key dnver of economic activity: 'daB der Konsument
8 above), 267-303.
aufuort, Le~ker des Wirtschaftsge~chehens zu sein', Deutscher Bundestag (1955),
66 The 'Wissenschaftlicher Beirat' is the economic advisory board of the
21. The sectl~n concludes ~y statmg that free entrepreneurship, the freedom of
German Federal Ministry of Economics (although created earlier than the
consumer ch01~e and free p:-lCe formation result in the best performing and general
Ministry in 1948) largely composed of economics professors.
67 'Aus dem Kreis der Ordo-Liberalen war ja bekanntlich kein eigener Entwurf ~elfare. en.hancmg econonuc system. '[...] daB die freie Unternehmerwirtschaft,
dIe FreIheIt. der Konsumwahl und die freie Preisbildung das leistungsfahigste und
eines Wettbewerbsschutzgesetzes vorgelegt worden, so daB der Josten-Entwurf
der allgememen Wohlstandsforderung am ehesten dienende Wirtschaftsystem ist'
heute zu Recht als jenes Wirtschaftsordnungskonzept .anzusehen ~st, das ve:s~chte~ Deutscher Bundestag (1955), 21-22. '
das ordo-liberale Modell [... ] auf wettbewerbsrechthchem Geblet zu reallSleren.
.. 70 'Durch die wirtschaftliche Macht [. . .J ergibt sich die Gefahr der
E Gunther (1975), 'Die gei&!igen Grundlagen des sogenannten Josten-Entwurfs' Ubervorteilung des Verbrauchers.', Deutscher Bundestag (1955) 22.
(note 32 above), 183, 202. ", . . 71 Ibid, 22. '
68 Deutscher Bundestag (1955), Begmndung zu dem Entwurf eznes Gesetzes
72 'Wettbewerb [istJ nicht Selbstzweck, sondern Mittel der Leistungssteigerung
gegen Wettbewerbsbeschrankungen, Drucksache Nr 1158,21. und FortschrittsfOrderung [... J', Ibid, 22.
reductions. 73 These are measures that resemble closely the proposals by werden ... Insofern bedeutet dieses Wettbewerbsgesetz ein Korrelat zu der poli-
Eucken, indicating in addition a clear preoccupation with economic effi- tischen Demokratie, weil es die Freiheit des Verbrauchers sicherstellt [.. .]'.77
ciency and the complete absence of any notion of freedom to compete to [...J dieses Gesetz wird dafiir Sorge tragen, daB der Drang und Zwang zu
be protected as such.74 Leistung in der deutschen Wirtschaft lebendig bleiben und daB diese Vorteile _
In the proposed changes to the law introduced by the Bundesrat, urn es ein drittes Mal zu envahnen - dann auch tatsachlich dem gesamten Yolk,
dem Verbraucher, zugutekommen. Das ist der Sinn dieses Gesetzes'.78
(AnderungsvorschHige des Bundesrates), the role of consumers is further
emphasized several times. 75 .01'
References to consumers are also to be found in other speeches by par-
In 1952, on the basis of an earlier draft law, Ludwig Erhard, at that
liamentarians that day. For instance Member of Parliament (MP) Etzel
time Minister of Economics and politically responsible for the legislative
(speaking on behalf of the CPU) mentions the protection of consumers
project, introduced the draft law in the German parliament with a speech
as one of the goals of the law79 and MP Dr Schone (speaking on behalf of
that is of relevance to the argument made here as Erhard is literally ham-
the SPD) elaborates on the need to protect consumers from the abuse of
mering in the consumer orientation as the ultimate goal. Indeed, during
market power. 80 MP Dr Preusker (speaking on behalf of the FDP) among
this initial parliamentarian debate Erhard emphasizes the Leitmotif of
other things makes the ordoliberal point of the interdependence of the eco-
consumer welfare as the goal of the law three times throughout his speech:
nomic and the social and political order: '[ ... Jes dreht sich fur uns urn die
Grundfragen der Erhaltung einer freiheitlichen und sozialen Ordnung'81
Wir wollen durch diese Gesetzgebung dafiir Sorge tragen, daB durch einen wirk-
lich freien und ungehemmten Leistungswettbewerb sich die Fortschritte der and emphasizes that his party sees the introduction of the law as one of the
wirtschaftlichen Entwicklung, der Rationalisierung, der Leistungssteigerung fundamental tenets of a free and social market economy. 82
in einer Verbesserung der Lebenshaltung unseres Volkes auch auswirken In addition, in a passage clearly reminiscent of Rustow, Preusker draws
konnen. 76 a releva~~ parallel between a centrally planned economy and dominant
Die Verbotsgesetzgebung wird dafiir sorgen, daB alIer Fortschritt in firms statIng that business cannot be against governmental paternalism
der Wirtschaft sich in einer Verbesserung der Marktversorgung und der
Lebenshaltung unseres Volkes auswirkt. Der freie Leistungswettbewerb solI ....
sicherstellen, daB a11e Vorteile der Ra tionalisierung, der Leistungsverbesserung,
der hoheren Effizienz der menschlichen Arbeit sich nicht in Monopol- oder
77 'The law based on a prohibition standard will guarantee that all economic
Differentialgewinnen niederschlagen, sondern an den Verbraucher zum
Zwecke der Verbesserung und Erhohung seiner Lebenshaltung weitergegeben advances result in an improved market supply and standard of living of the popu-
lation. Fr.ee perf0rI?ance competition [... J should guarantee that all advantages
[.. :J ~f ?lgher e~~lency [... J are passed on to consumers improving and raising
theIr hvmg condItIOns [... J In that sense the competition law is a correlate to
political democracy because it secures the freedom of the consumer', Deutscher
73 'N6tigenfalls durch Auflagen und Bedingungen das Ve~halt~n der Bundestag (1952), (note 76 above), 9749D-9750A.
Marktbeteiligten so gestaltet wird, daB sie nach Kostensenkung bel stelgender .78 :[... J this law will make sure [...J that these advantages - to say it for a
Le1stung streben.' Ibid, 22. thIrd tIme - are to the benefit of the whole popUlation, the consumers. This is the
74 Additional indications for the lack of the 'freedom to compete' goal can be spirit of this law.' Deutscher Bundestag (1952) (note 76 above), 9750B. Erhard
found for instance in the restrictions of competition that are envisioned in periods later takes the word again and among other things not only declares that the draft
of crisis or in the tolerated exemptions allowing companies to cartelize in order to law is based on the scientific ideas of the Freiburg school - a statement probably
compete on foreign markets where competitors may not be subject to equivalent due to the fact that there was a need to motivate the law as a German product as
competition rules. Ibid, 23. opposed to an Allied or US order - but also that he 'is far away from considering
75 See e.g. para 8, ibid, P 63, but also in paras and 71: 'Da Kartellverst6Be
the competitive process as a holy principle.' Deutscher Bundestag (1952), (note 76
schwerwiegende Auswirkungen auf die Gesamtwirtschaft und die Lage der above), 9756A, B: 'leh bin weit davon entfernt, etwa den Wettbewerb als Prinzip
Verbraucher haben ... ' . heilig zu sprechen.'
76 'Through this legislative act we want to assure that the advances in 79 Deutscher BUndestag (1952) (note 76 above), 9752A.
economic development, the rationalization and productivity incre~ses, 80 Ibid, 9753B.
can result in an impro¥.¥JIlent of the living conditions of our populatIOn', 81 Ibid, 9759B.
Deutscher Bundestag (1952J,·Erste Beratung des Entwurfs eines Gesetzes gegen 82 'Wir sehen [... J ein Gesetz zur Sicherung eines fairen Wettbewerbs als eines
Wettbewerbsbeschrankungen, 220. Sitzung des Deutschen Bundestag, Bonn, der grundlegenden Ordnungsgesetze einer freiheitlichen und sozialen marktwirt-
Donnerstag den 26 Juni 1952, Drucksache Nr 3462, 9749, 9749B. schaftlichen Gesellschafts- und Wirtschaftsordnung an.' Ibid, 9758A.
156 The goals of competition law On the normative foundations oj competition law 157
on the one hand and favor the type of paternalism that would ensue from paragraph 17 however, one of the key arguments of ordoliberal thought is
economic power concentrations on the other: highlighted, namely the interdependence of the social and economic order
and the importance of competition policy for democracy:
Wir miissen [... ] der Wirtschaft sehr deutlich sagen: wenn sie die staatliche
Bevormundung nicht wiinscht und wenn sie selber feststellt, zu we1chen Die Wettbewerbsordnung wurde hier zunachst im Hinblick auf die
verheerenden Folgen die staatlich gelenkte Wirtschaft in der. Vergangenheit Ordnung des wirtschaftlichen Geschehens betrachtet; ein geordneter und
gefUhrt hat, dann muB sie auch konsequent genug sein, urn nicht gegen sich gesicherter Wettbewerb wirkt aber weit iiber den Bereich der Wirtschaft
selbst das MiBtrauen, das dann in noch viel sHirkerem MaBe na.turnotwendig hinaus und erweist sich a1s eine Angelegenheit von verfassungspolitischer
in der Bevolkerung aufkommen muB, zu mobilisieren, indem sie die gleiche Bedeutung. Wirtschaftliche Machtstellungen sind dazu angetan, eine
Vollmacht fUr sich beansprucht. 83 'Verfassungswirklichkeit'" zu schaffen, die der geschriebenen Verfassung
demokratischer Staaten zuwiderlauft und dahin tendiert, die Funktion der ver-
Although this evidence speaks for itself, it may be worthwhile moving fassungsmaBigen Organe zu beeintrachtigen. Indem Wettbewerb wirtschaftli-
chen Machtstellungen entgegenwirkt, sie entweder gar nicht entstehen 1aBt
away from the deliberations in parliament and the political debate that oder schon bestehende durch immer wiederholte Angriffe schwacht, unter
took place prior to the adoption of the law and consider the expert reports Umstanden sogar aufiost, tragt er dazu bei, das gesellschaftliche und staatliche
of the 'Beirat', i.e. the independent scientific board of professors attached Leben vor eigenniitzigen Einfiiissen unkontrollierter Macht zu schiitzen und
to the German Federal Ministry of Economics. das WaIten der allein legitimen, demokratisch kontrollierten Macht zu sichem;
In its report of October 2 1954, the Beirat, just as in its report of July da,:mit sichert er zugleich den Rechtsstaat. 86
24 1949 on competition policy, does not allow the identification of either
specific ordoliberal influences or neoliberal thought and, for instance, In contrast to the draft GWB presented in 1955 to parliament, the
while discussing retail price maintenance, argues for a general prohibition Josten-draft in its introduction starts with the fundamental ordoliberal
with exceptions only in cases that are in the obvious interest of and for the idea:
protection of final consumers. 84
Only in the third report of June 23 1962 is individual freedom dis- Where the economic policy of a state renounces regulating the market,
market participa~ cannot arrogate such regulation. Where the economic
cussed in two paragraphs (3 and 4), although paragraph 8 emphasizes the policy of a state intrusts the order of the markets [Ordnung der Markte] to
role of 'effective competition' for consumers and consumer choice. 85 In competition [Leistungswettbewerb], individual market actors are not entitled
to withdraw ,themselves from such competition [Leistungswettbewerb]. In
83 Ibid, 9758e.
84 'Das Gesetz gegen Wettbewerbsbeschdinkungen sollte die Pfiicht der gibt es Wettbewerb, der die Anbieter zu Leistungen anreizt, auch wenn er seine
Wirtschaftspolitik zum schrittweisen Abbau der Preisbindung zweiter Hand ein- Lenkungsfunktion im Sinne einer verbraucherorientierten Marktwirtschaft nicht
deutig festlegen. Aus den praktischen Erfahrungen mit der MiBbrauchsaufsicht mehr zufriedenstellend erfiiIlt.' See also para 15 where the negative repercussions
werden sich anwendbare Kriterien ergeben, urn das System vertikaler Preisbindung of monopolistic concentrations are described as falling mainly upon consumers.
kiinftig immer starker einzuschdi.nken und die gesetzliche Bekampfung von 86 Wissenschaftlicher Beirat (1962), (note 84 above), para 17. After a discus-
Wettbewerbsbeschrankungen auf diesem Gebiet auf ein System urnzustellen, nach sion of market power and dominance where the Beirat basically discusses the need
dem grundsatzlich die vertikale Preisbindung verboten und etwaige individuelle for merger control, the footnote to para 47 states the minority opinion of one of the
Genehmigungen der Kartellbehorde an die Bedingung gekniipft werden, daB members of the Beirat that such measures are insufficient to also properly address
die Erlaubniserteilung in jedem einzelnen FaIle im offenbaren Interesse und zum the political and constitutional concerns and in particular the abuse of socioeco-
Schutz des Endverbrauchers getroffen wird.' Wissenschaftlicher Beirat (1949), nomic power. 'Ein Mitglied ist der Meinung, daB Regelungen gemaB Ziffem 39 bis
GrundsatzJragen der Monopolgesetzgebung, Gutachten yom 24 Juli 1949, part II, 46 nicht ausreichen, wenn auch den verfassungspo1itischen Bedenken Rechnung
para 12. getragen werden solI, die marktbeherrschenden und zugleich iiberragend groBen
85 'Ein wirksamer Wettbewerb ist auch notwendig fUr eine im Sinne der Unternehmen entgegengehalten werden miissen. In diesen Fallen diirften nicht
Verbraucher mehr befriedigende Steuerung der Produktion.' Wissenschaftlicher nur MaBnahmen gegen miBbrauchliches VerhaIten im Wirtschaftsleben getrof-
Beirat (1962) (note 84 ab~e), para 8. The consumer orientation is also apparent in fen werden. Notig seien vielmehr auch Vorschriften iiber die willensbildenden
para 11 where it is noted tha1'·oligopolistic markets exhibit competition even if the Organe dieser Untemehmen bzw. Konzerne, durch die politischer MiBbrauch
function of competition in the sense of a consumer oriented market economy is no der entstehenden sozialokonomischen Macht verhindert wird, oder gleichwertige
longer satisfactorily met. 'Auch auf unvollkommenen Markten und im Oligopol MaBnahmen.'
158 The goals oj competition law On the normative foundations oj competition law 159
order to bring to bear the principle of competition [Leistungswettbewerb] in substitution into privileged forms entailing economically unjustified
in the market and in order to preserve the population and the state from structural changes. 90
dangers that the formation and exercise of economic power can bring about, Although German competition law and the debates surrounding its
the parliament [... ] 87
introduction should represent the best case scenario for proponents of the
view that efficiency considerations cannot become the goal of German or
It is characteristic of the ordoliberal Josten-draft not to refer to the
EU competition law as this would be in contradiction with the original
freedom to compete but rather to emphasize the dual dange; of economic
intent of the legislator, the exercise fails. 91 Not even traces of neolib-
power for the economy and for democracy. Despite explioit warnings
eral thought, i.e. a focus on the protection of the individual freedom to
that the military government of occupied Germany would not be able
compete, can be found. Nevertheless, the results of the analysis of the his-
to agree to such a law should it include measures of deconcentration of
toric records are mixed. While the actual debates surrounding the GWB
the German economy, the draft explicitly foresees such measures and
at least partially show distinct ordoliberal traits, the main ordoliberal
considers them unavoidable. 88 The committee comes to the conclusion
goals were in the end not included in the law. As Gunther noted, it was
that it would be illogical and economically dangerous not to treat the
in particular the half-hearted treatment of market power (Halbherzigkeit
problem of market power holistically and to only prohibit the creation
gegenuber dem Phanomen der wirtschaftlichen Macht) that rendered the
or exercise of certain forms of market power and otherwise only remedy
first version of the GWB a watered-down political compromise. 92 This is
symptoms without moving to the source of the problem. 89 The authors
in particular due to the fact that existing market power was left untouched
argue that any unequal treatment of market power would inevitably result
and no merger control regime 93 was introduced, both clear contradictions
to the· ordoliberal postulate of equal treatment irrespective of the shape
and form of economic power. 94
87 See Sachverstandigen-Ausschuss der Verwaltung fUr Wirtschaft zur
AusarbeitungeinerdeutschenMonopolgesetzgebung(1949),En twurJzueinemGesetz As a r~sult it is difficult to pinpoint and trace the creation of the GWB
zur Sicherung des Leistungswettbewerbs und zu einem Gesetz iiber das Monopolamt to distinct normative foundations. While ordoliberal thought can clearly
mit Stellungnahme des Sachverstiindigen-Ausschusses und Minderheitsgutachten,
dem Direktor der Verwaltung fUr Wirtschaft, Professor Dr Erhard am 5.7.1949
vorgelegt, 9, also called Josten-Entwurf or Josten-draft. The original quote is:
'Wo die Wirtschaftspolitik des Staates auf Marktregelung verzichtet, durfen 90 'Jede unterschiedliche Behandlung von Tragem wirtschaftlicher Macht
Marktbeteiligte sich Marktregelungen nicht anmaBen. Wo die Wirtschaftspolitik und jede Verhinderung oder Hemmung nur einer ihrer Erscheinungsformen fiihrt
des Staates die Ordnung der Markte dem Leistungswettbewerb anvertraut, durfen notwendig zu einem Ausweichen der Wirtschaft in die begunstigte Form und damit
Marktbeteiligte den Markt dem Ordnungsprinzip des Leistungswettbewerbs nicht zu strukturvedinderungen aus wirtschaftsfremden Ursachen.' Sachverstandigen-
entziehen. Urn dem Grundsatz des Leistungswettbewerbs im Markt Geltung Ausschuss der Verwaltung fUr Wirtschaft zur Ausarbeitung einer deutschen
zu verschaffen und Yolk und Staat vor Gefahren zu schutzen, die Bildung und Monopolgesetzgebung (1949), (note 87 above), 120.
Ausubung wirtschaftlicher Macht auf dem Markte mit sich bringen kennen, hat 91 Obviously this legal debate typically does not primarily refer to the inten-
der Bundestag [... J'. tions of the legislators but rather focuses on the wording of the text and subsequent
88 'Die Einbeziehung der EntmachtungsmaBnahmen gegenuber case law.
Machtgebilden ohne Kartelleigenschaft in die gesetzliche Regelung erscheint aus 92 E Gunther (1975), 'Die geistigen Grundlagen des sogenannten Josten-
sachlichen Grunden unerlaBlich.' Sachverstandigen-Ausschuss der Verwaltung fUr Entwurfs' (note 32 above), 202.
Wirtschaft zur Ausarbeitung einer deutschen Monopolgesetzgebung (1949), (note 93 In fact Germans had to wait until 1973 before merger control was intro-
87 above), 119. duced into the German competition law and the law remains tainted by the
89 '[ . . . ] daB man sich mit dem Problem der wirtschaftlichen Macht als einem possibility of an exemption through the Federal Ministry of Economics and
Ganzen auseinandersetzen musse und daB es unlegisch und volkswirtschaftlich Technology till this day.
gefahrlich ware, nur bestimmte Formen, unter den en wirtschaftliche Macht sich 94 'Dadurch, daB es bestehende wirtschaftliche Machtpositionen jedoch
bildet oder betatigt, zu verbieten, im ubrigen aber Symptome zu behandeln, ohne unangetastet lieB und dem extemen Untemehmenswachstum keine Grenze
zu ihren Ursa chen vorzudringen.' Sachverstandigen-Ausschuss der Verwaltung 109, privilegierte es in gewisser Weise die "Wettbewerbsbeschrankungen durch
fUr Wirtschaft zur Ausarb~itung einer deutschen Monopolgesetzgebung (1949), Zustand" (Fikentscher) und verstieB gegen das ordo-liberale Postulat der wet-
(note 87 above), 120. Interesiingly, the focus on symptoms continues in the current tbewerbsrechtlichen Gleichbehandlung aller Erscheinungsformen wirtschaftlicher
practice of preferring behavioral remedies over structural measures in abuse of Macht.' E Gunther (1975), 'Die geistigen Grundlagen des sogenannten Josten-
dominance/monopolization cases. Entwurfs' (note 32 above), 202.
be found in the 10sten-draft,95 the discussions surrounding the draft GWB that remains and that will be dealt with in the next section is whether such
until its adoption provide only limited evidence of ordoliberal traits.96 This an efficiency orientation is compatible with ordoliberal - as opposed to
is confirmed by those ordoliberals still alive at its adoption. 97 Riistow for neoliberal - thought.
instance, who had already been disappointed with the German competi-
tion law adopted in 1923 and had held high hopes for a less compromising
result, was once again disappointed. 98 4 POLITICAL FREEDOM VERSUS EFFICIENCY
That the freedom of market participants to compete did npt reign at
the center of the debate and that in contrast efficiency argliments and This section deals with the question if the application of modern economic
consumer benefits were dominant make it difficult to maintain the implicit tools and an efficiency orientation of competition law is compatible with
argument that a consumer orientation is incompatible with the GWB. In ordoliberal thought. Although the differences between ordoliberal and
contrast it seems much more plausible that an efficiency goal as articulated neoliberal thought and also the respective influences on these distinct lines
in a consumer welfare orientation is compatible not only with the inten- of thought on the legislative process leading up to the first draft GWB
tions of the authors of the Treaty of Rome, as has been argued by Akman have been described, a confrontation between the ordoliberal founda-
(2009), but also with the founding fathers of the GWB for some of which tions of competition policy and an efficiency foundation has so far only
consumer welfare was even the ultimate aim of the law. 99 The question occurred indirectly. While one may argue that such a treatment is of pure
theoretical interest, as the question whether an efficiency orientation is
compatible with the original legislative intent has already been answered,
95 According to E Gunther (1975), 'Die geistigen Grundlagen des sogenan- the confrontation of the two goals may be instrumental to recall the role of
nten Josten-Entwurfs' (note 32 above), 189f, the Josten-draft came the closest to competition policy for democracy. This is also warranted by the fact that
the original ordoliberal position.
96 This is somewhat in contrast to the claim advanced by Gerber for EU com-
in contra~tto the direct economic tenets of the ordoliberal approach, i.e.,
petition law. According to him, 'Ordoliberal influence has been particularly direct the goal of establishing complete competition, the political repercussions
and obvious [... ] [O]rdoliberal thought set the tone for thinking about competition of market power h3:ve not attracted much scientific research in competi-
law within the Communities. The Rome Treaty reflects this influence', DJ Gerber, tion and appear tdf:I;tave simply vanished from the competition policy
'Constitutionalizing the Economy: German Neo-liberalism, Competition Law and debate.
the "New" Europe', (1994) 42 American Journal of Comparative Law 25, 73. See
also DJ Gerber, Law and Competition in Twentieth Century Europe - Protecting A possible explanation for the prominence of the economic justifications
Prometheus (OUP, Oxford, 1998). In any case, even if the influence of ordoliberal over the political ones that may also be responsible for the lack of atten-
thought is greater than argued here, it would imply that one has to consider the tion this ordoliberal concern has received subsequently has been provided
compatibility of ordoliberal, not neoliberal, thought with efficiency considera- by Miksch. Already in 1947 Miksch was warning of the political forces
tions, an issue that will be raised in the last section. that were traditionally against a strong competition law.lOO According
97 Both, Walter Eucken and also Leonhard Miksch died unexpectedly in 1950.
98 See K Meyer-Rust, Alexander Riistow - Geschichtsdeutung und liber- to him, these forces would try to present any effective competition law
als Engagement (Stuttgart, 1993) and F Maier-Rigaud and GMaier-Rigaud, as an Allied idea against German interests aimed solely at weakening the
'Alexander Rustow: Leben und Werk' in A Rustow, Das Versagen des
Wirtschaftsliberalismus, F Maier-Rigaud and G Maier-Rigaud (eds) (Metropolis-
Verlag, Marburg, 2001),307,308.
99 As Erhard put it, the law is intended to guarantee that the economic che und demokratische Charakter der Wettbewerbsordnung, den keine andere
advantages that emanate from competition result in benefits for consumers. See Wirtschaftsverfassung in gleichem MaBe besitzt.'
Deutscher Bundestag (1952) (note 76 above), 9750B. To some extent a consumer 100 Miksch anticipated not only the fate of the Josten-draft that was par-
orientation can also be found in early ordoliberal works. See, e.g., L Miksch ticularly hated and politically discredited by the Bundesverband der Deutschen
(1947), Wettbewerb als Aufgabe - Grundsatze einer Wettbewerbsordnung, (note 21 Industrie (BDI) not least due to its deconcentration elements but also the whole
above), 14: 'Denn die Wirtschaft hat keine andere Aufgabe als die, die Bedurfnisse debate surrounding the GWB namely on whether competition law should be
des Verbrauchers zu befri~digen.' Or ibid, 214f.: 'Wenn man die wirtschaftliche based on a prohibition standard (Verbots- versus Genehmigungsprinzip) or not.
Macht aus politischen unct<'menschlichen Grunden ablehnt, so muB in erster According to E Gunther (1975), 'Die geistigen Grundlagen des sogenannten
Linie gefordert werden, daB der Verbraucher wieder in seine Rechte eingesetzt Josten-Entwurfs' (note 32 above), 200, and the sources therein, the BDI prided
werde. [... ] Auf dieser Rolle des autonomen Konsumenten beruht der friedli- itself on having eliminated the Josten-draft.
162 The goals of, competition law On the normative foundations of competition law 163
German economy in the spirit of the Morgenthau plan. IOI His hope was come in on a case-by-case leve1. 103 There does not seem to be a reason in
that such developments may be halted by emphasizing the economic ben- ordoliberal thought that would exclude efficiency considerations based
efits and reasons for the elimination of economic power to the detriment on modern economic tools when such considerations are used to inform
of the political ones. I02 and guide the framework within which market transactions take place.
It may therefore be worthwhile not only to speculate to what extent In fact it is not excluded that some of the economic concepts used by the
the specific economic concepts proposed by the ordoliberals'would have ordoliberals can be interpreted as proxies for what at the time could not be
evolved with the advent of modern industrial organization tlLeory, but analyzed more precisely.
also to recall the 'lost role' of protecting democratic processes. The fol- A potential incompatibility is therefore rather to be found in the goal of
lowing section therefore seeks to explore to what extent the shift towards a preserving a functioning democratic order and in particular the categorical
more economic approach and a focus on efficiency is in contradiction with view that accumulations of private economic power, eliminated in a state
ordoliberal thought. of complete competition, are incompatible with a free democratic order.
There can be no doubt that economics and in particular the branch of So whereas ordoliberals are likely to embrace modern economic tools in
industrial organization, both as a theoretical but also as an empirical field, assessing for instance the economic impact of particular pricing practices,
has increased the understanding of market behavior from the time ordo- the risks of market concentrations cannot exclusively be analyzed in
liberalism was conceived. If one disregards the rather static concept of economic categories. 104
complete competition, and considers rather the underlying motivation that
led to a preference for complete competition, it is far from evident that
an efficiency orientation based on modern economic tools is incompatible 103 See V Vanberg (2009), 'Consumer Welfare, Total Welfare and Economic
with ordoliberal concepts. On the contrary, there is much to say in favor Freedom - On the Normative Foundations of Competition Policy' (note 7 above),
for a more elaborated discussion of this issue.
of recurring to modern economics in the design of a competitive market 104 The concern is therefore not with direct negative economic repercus-
order, i.e. the design of general market rules. sions but rather with the threat concentrated economic power poses for the
Although speculative, it is not unreasonable to believe that ordoliberal competitive order (an9. therefore indirectly for economic efficiency) and for
thought would be embracing of modern economic tools as long as those the socio-political ordf~. See, e.g., L Miksch (1947), Wettbewerb als Aufgabe
tools were brought to bear on the appropriate level, i.e., to inform the - Grundsiitze einer Wetibewerbsordnung (note 21 above), 217, who writes that:
'Would one leave the past private accumulations of power in place, these power
proper design of the market rules as opposed to tools being applied on concentrations would certainly be the basis from which efforts to undermine
a case-by-case basis. The key concern from an ordoliberal point of view and destroy the competitive order are made. It is, in particular considering the
would be with the proper distinction between economically informed past experiences, very doubtful if a democratic state is capable of permanently
general competition rules on the one hand, the specific analysis that may resisting such powerful interests and would remain capable of enforcing with
still be needed to decide whether a particular conduct falls under the the necessary vigor the basic tenets of its competition policy on which the
whole order is necessarily based.' Or in the original language: 'Wiirde man
general rule or not on the other, and a situation where the economics only die aus der Vergangenheit stammen den privaten Machtzusammenballungen
als solche bestehen lassen, so wiirde spater von hier aus sicherlich der Versuch
gemacht werden, die Wettbewerbsordnung zu unterminieren und zu sprengen.
101 In his wntmgs, in contrast, Miksch emphasized the political reasons Es ist, wenn man nach friiheren Erfahrungen urteilen darf, sehr zweifelhaft, ob
behind the Allied goal, ie to eliminate political abuse of economic power: ein demokratischer Staat auf die Dauer dem Druck mach tiger Interessenten
'Die Alliierten haben sich die Beseitigung wirtschaftlicher Machtstellungen in gewachsen und imstande sein wiirde, die wettbewerbspolitischen Grundatze,
Deutschland zum Ziele gesetzt, urn ihren politischen MiBbrauch zu unterbinden auf denen die ganze Ordnung beruhen muB, ihnen gegeniiber mit jener unnach-
und eine freiheitliche demokratische Entwicklung zu sichern.' L Miksch (1947), sichtigen Strenge anzuwenden, auf die es ankommt.' See also Miksch at 210,
Wettbewerb als Aufgabe - Grundsiitze einer Wettbewerbsordnung (note 21 above), stating that 'only the competitive order (Wettbewerbsordnung) is capable of
210f. preventing a concentration of economic power. Both, the negative defense
102 'Bine derartige auBerst bedenkliche Bntwicklung kann vermieden werden, of an economically and politically dangerous accumulation of power and
wenn die aus politischen G~nden gewiinschte Beseitigung der Machtstellungen the positive foundation of a uniform and performing economic constitution
durch die Begriindung einer 'Wettbewerbsordnung erfolgt, da durch diese die [...J' or in the original language: 'Nur die Wettbewerbsordnung ist fahig,
Leistungskraft der deutschen Wirtschaft nicht geschadigt, sondern im Gegenteil eine Konzentration wirtschaftlicher Macht wirksam zu unterbinden. Beides,
erh6ht wird.' L Miksch (1947) (note 21 above), 212. die negative Abwehr einer wirtschaftspolitisch und politisch gefahrlichen
A government constrained by law can only carry through, if in addition to its If, however, the ordoliberal concern with private economic power,
laws, an adequate economic constitution is realized. Monopolies are not com- both for economic and for political reasons, is taken seriously, there is
patible with a government constrained by law and should therefore not be part
of such an economic order. [... J In addition there exists the major problem of no reason to postulate a fundamental incompatibility. Interpreted in
how the political structure of a modern state in general and in particular the this fashion, both the impact on the economic sphere but also the impact
formation of policy is influenced by monopolies. 105 of private economic power on the political sphere are open to scientific
analysis. While the immediate historical experience of the ordoliberals led
The concern with private economic power, as described };)reviously, them to be very suspicious of private economic power, the question how
emanates from the risk that such power transgresses from the economic far one has to go in the elimination of private economic power in order to
to the political sphere where it potentially undermines not only the com- prevent the threats articulated by the ordoliberals is in principle an empiri-
petitive order - resulting again in negative repercussions in the economic cal question open to scientific investigation. While this is at least partly the
sphere - but ultimately threatens the democratic polity.l06 This concern approach that was undertaken in the economic sphere, where the impact
is quite independent of the direct economic welfare or efficiency effects of of market power has been analyzed in much more detail than was possible
private market power and would therefore not vanish if certain forms of before, an equivalent analysis for the more important political repercus-
private economic power were found to be welfare increasing or at least not sions of the existence of powerful economic groups is lacking in the field
welfare reducing. In fact the concern with the political impact of economic of competition policy.
power may even be detached from market power as such. 107 As a,'result, there are: good reasons to believe that at least some if not all
ordoliberals would remain open to the usage of modern economic tools
and to an economic analysis of competition problems as long as the threat
Machtzusammenballung und die positive Fundierung einer einheitlichen und of econom~~ power for the democratic polity is taken into account. lOS
leistungsfcihigen Wirtschaftsverfassung [... r. Riistow is nht the only one who argues that the increase in productivity is
105 W Eucken (2004 [1952]), Grundstitze der Wirtschaftspolitik (note 12 a supra-economic" a social, and an ethical demand 109 and would therefore
1.',0:"
above), 52f. The original text is: 'Der Rechtsstaat kann sich nur dort voll-
stiindig durchsetzen, wo zugleich mit seiner rechtlich-staatlichen Ordnung eine
"adtiquate" Wirtschaftsordnung verwirklicht ist. Monopole und Teilmonopole aber competitive, the economic power that Nokia is likely to have in Finland, even
sind dem Rechtsstaat nicht adaquat, diirfen also nicht Bestandteile einer so1chen without market power, can hardly be disputed. Similar considerations apply to
Wirtschaftsordnung sein. [... ] Dariiber hinaus besteht das groBe Problem, wie die rating agencies. Second, industry organizations and lobby groups may unite sub-
politische Struktur des modernen Staates iiberhaupt, vor all em :die Willensbildung stantial economic power in jurisdictions where its individual members exert no
des Staates durch Monopole beinfluBt wird.' After this passage Eucken continues market power. Such organizations may indirectly have similar economic power,
by stating that this influence reaches very far and that it has transformed the state. and therefore similar effects on the political process, as firms with substantial
106 Ibid, 188f, voices the concern that the state 'zunehmend in die Hand market power.
wirtschaftlicher Machtgruppen gerat, die nicht nur seine Willensgebung maBge- 108 The distinction to be drawn within the ordoliberal tradition concerns those
bend bestimmen sondern ihm auch wichtige Bereiche seiner friiheren Tatigkeit ordoliberals that would have been able to agree to an economic analysis as long
abnehmen,' i.e. that the state is more and more dependent on powerful economic as two conditions are fulfilled: (a) that the overarching goal of preserving liberty
groups that not only decisively influence its policy but also take over large parts as discussed above is met; and (b) that the economic analysis comes in at the level
of its former activities. 'Sobald aber Machtgruppen vorhanden waren, machte of the competition rules and not in a discretionary fashion at the case level. There
sich ein circulus vitiosus geltend. Die Machtgruppen gewannen wirtschafts- und are arguments that would put Eucken, B6hm and Grossmann-Doerth into this
rechtspolitisch EinfluB [. . . ] Der Interventionismus ist eine Fortsetzung und category whereas Miiller-Armack, Miksch, Riistow and R6pke would have been
Steigerung der Politik des Laissez Faire. In dem die Machtgruppen vom Staat more open also to less general rules.
gestiitzt wurden, gewannen sie neue Macht - auch auf staatliche Willensbildung', 109 A Riistow (1963 [1960]), 'Wirtschaft als Dienerin der Menschlichkeit'
W Eucken, 'Die Wettbewerbsordnung und ihre Verwirklichung', (1949) ORDO, (note 20 above), 80, writes: 'die Steigerung der Produktivitat [ist] eine iiberwirt-
lahrbuchfur die Ordnung von Wirtschaft und Gesellschaft 2,6. schaftliche Forderung, eine soziale Forderung, eine ethische Forderung'. See also,
107 There are essentially two reasons why the ordoliberal concern with market e.g., HO Lenel (1975), 'Walter Euckens ordnungspolitische Konzeption, die wirt-
power has to be interpreteq more broadly today. First of all, market power and schaftspolitische Lehre in der Bundesrepublik und die Wettbewerbstheorie von
economic power may not c~1respond in cases where economic power arises on heute' (note 37 above) 71, who notes that Eucken's efforts towards a realization of
the national level while competition in the respective industry is global and highly complete competition is not exclusively motivated by the good economic results it
competitive. While the market for cell phones for instance is global and highly produces.
166
not disagree with the usage of modern economic tools to the extent that antitrust investigations. No attentive observer or competition practitioner
the primary goal of competition law, the preservation of the democratic either on the side of an authority or defending clients is able to overlook
order, is guaranteed. Economic arguments concerning efficiency or con- the highly political nature of large antitrust and merger cases. But if com-
sumer welfare would, however, just as arguments concerning an absolute panies, even under antitrust scrutiny, can mobilize such support, what
economic liberty or freedom to compete, not be allowed to undermine the does that say about the scope for influencing policy more widely when no
overarching goal of a democratic and free society. procedure against the company is ongoing?
Whether competition law currently fulfills this conditionjs difficult If political interventions in individual competition cases are a sound
to assess in the almost absolute absence of research concerning the link proxy for the latent political power of companies or industry associations
between market power, economic power, trade associations and lobby with economic power, the question of the role of competition policy for a
groups on both the decision-making of competition authorities but also free society certainly remains topical and in need of empirical analysis. 112
political decision-making more generally.110
As discussed, one of the key historical lessons so prominently advanced
by the ordoliberals was the concern of the repercussions of concentrated 5 CONCLUSION
market power on the democratic functioning of society and the role
competition policy plays in maintaining a free society. Modern economic This chapter set out three theses with respect to the normative foundations
tools can be used to refine competition law on the level of the general of competition law.
market rules, i.e., influencing the economic constitution within which The first section showed that the normative foundations of ordoliberal
market transactions take place. The danger that remains concerns the thought as expressed by eminent representatives such as Eucken, Miksch,
impact of economic power on the democratic process. The ordoliberal Bohm and ~iistow are different from the neoliberal concept and its focus
stance concerning such accumulation of economic power may have been on the protection of the freedom to compete. The fact that the paradigm
categorically harsh but the desirability of an undistorted functioning of shift, already noted. with concern for instance by Lenel and Gunther in the
democratic processes remains and the question necessitates study. Such an 1970s, took place ove~, almost half a century is one of the possible reasons
analysis would not only have to take into consideration the direct effects why the concept of fif~dom to compete as understood today is wrongly
that large and powerful globally operating companies may have on the associated with ordoliberal thinking. It was argued that while the neolib-
political process 1l1 but also the power such firms have in the context of eral approach to competition policy may be viewed by some as the natural
and superior successor of the ordoliberal concept, the lines of thought are
distinct and on decisive points incompatible with each other.
110 For a related discussion of possible institutionally induced biases con- The second section analyzed the perceived conflict between the neo-
cerning EU merger enforcement see F Maier-Rigaud and K Parplies, 'EU liberal goal of competition law, i.e., the preservation of the freedom to
Merger Control Five Years after the Introduction of the SIEC test: What compete, and the reorientation ofEU competition law in the context of the
Explains the Drop in Enforcement Activity?' (2009) 11 European Competition more economic approach. It was argued that the protection of the freedom
Law Review (ECLR) 565-79. For US merger enforcement see LM Frankel, 'The
Flawed Institutional Design of U.S. Merger Review: Stacking the Deck Against to compete was not and could not have been presented as the ultimate
Enforcement' (2008) Utah Law Review 159-219. goal of EU and German competition law in the deliberations and debates
111 The banking sector, where the view that some banks are too big to fail leading up to the Treaty of Rome and the GWB as the deformation of
prevailed for years only for taxpayers to learn the hard way that in moments of the ordoliberal thought, which in turn only had a limited impact on the
crisis they are also too big to be allowed to fail for systemic reasons, is certainly an competition law itself, had not yet taken place. On the contrary, efficiency
additional concern. Of relevance in the current crisis are certainly also the views
expressed by A Riistow, Zwischen Kapitalismus und Kommunismus (Godesberg, considerations, and in particular a focus on consumer welfare, apparently
1949) concerning limited liability companies. Riistow is strongly opposed to the played a more important role in these debates than ordoliberal thought.
concept as according to him it tends to privatize profits and socialize losses in cases
of bankruptcy. The analo~to the use of state aid in saving banks and other com-
panies in times of economic crisis without a corresponding transfer of company
112 See I Schmidt, Wettbewerbspolitik und Kartellrecht (6th edn Lucius &
shares to the government is obvious. See also on this PI Blumberg, 'Limited
Liability and Corporate Groups' (1986) Journal of Corporation Law 573-631. Lucius, Stuttgart, 1999),35. '
168 The goals of competition law
Traces of neoliberal thought could not be found, putting the credibility ~f

the argument that the legislative intent of ?~th ~U a~d German competI-
tion law was the protection of free competItion, III senous dou~t. .
The third section dealt with the original notion of freedom III ordol~b
eral thought and the necessarily speculative question of how t~e ordohb- 9. Efficiency, political freedom and the
eral position would have evolved in light of modern. economIC tools ..In
particular the question of the compatibility of ord~llberal th~ught wIth freedom to compete - comment on
an efficiency approach to competition law was c~~sIdered'.It was argued Maier-Rigaud
that the fundamental ordoliberal goal of competItlOn law, 1.e. ~he preser-
vation of a free society, continues to be of relevan~e today, whIle some of Heike Schweitzer*
the answers given by the ordoliberals, such as for mstance the con~ept of
complete competition, would warrant revision. While the a~swers glV.en by
the ordoliberals may no longer be convincing, the underIymg .ordollberal In his interesting contribution on the 'Normative Foundations of
questions remain relevant. In particular the impact of eco~o~IC po~er on Competition Law', Maier-Rigaud tries to array important intellectual
the body politic in general and competition law and pollcy m particular schools of competition policy with a view to their guiding goals. The 'more
remains of high relevance today where economic power and market power economic approach' - the approach which Maier-Rigaud seems to follow
are often dissociated. - takes efficiency to be the predominant goal of EU competition law. The
debate which has evolved around the 'more economic approach' has fre-
quently been described as a 'battle of goals', namely of 'efficiency versus
freedom', where the 'freedom to compete' (or 'Wettbewerbsfreiheit') marks
a widely recogniZed normative reference point in the German tradition
of competition law. ~ccording to Maier-Rigaud, the focus on 'economic
freedom' is, however, "Inot truly 'ordoliberal' - it is, rather, a 'neoliberal'
aberration from the original ordoliberal position. The 'real' ordoliberals
were not, or so he claims, concerned with economic liberties. They were
concerned with fighting economic power with a view to protecting the
foundations of democracy. According to Maier-Rigaud, the much debated
'more economic approach' is compatible with the early ordoliberal focus
on economic power. It merely breaks with the 'neoliberaI' tradition - which
never had a strong basis in German or EU competition law anyway.
This comment takes issue with Maier-Rigaud's reconstruction of the
history of German and EU competition law. More importantly, it strives
to present a more nuanced picture of the lines of conflict which the debate
surrounding the 'more economic approach' has brought to the fore, and
which are not adequately captured by the catchy headline of 'efficiency
versus freedom'. In the first section, the efficiency goal and consumer ori-
entation of EU competition law will be considered: are they truly contro-
versial, as Maier-Rigaud suggests, and if so, in what respects? The second
* Professor of Law (University of Mannheim), LLM (Yale).

Contributors ix
Adrian Kiinzler, Dr iur (Zurich), Branco Weiss Fellow of Society in

Science at Yale Law School, New Haven, United States of America.
Frank Maier-Rigaud, Dr rer pol (Bonn), OECD Competition Division,
Paris, France, and Max Planck Institute for Research on Collective
Contributors Goods, Bonn, Germany.
.". Carlos Pablo Marquez, PhD in Law (Oxford), Superintendent for
Thomas Ackermann, Dr iur (Bonn), Professor of Law, University of Antitrust and Competition Policy, Government of Colombia.
Munich, Germany. Matteo Negrinotti, Assistant Professor of Law, Tilburg University, The
Abayomi AI-Ameen, Swansea University, United Kingdom. Netherlands.
Oles Andriychuk, PhD in Law, Post-Doctoral Research Fellow, ESRC Paul Nihoul, Dr iur (Louvain), Professor of Law, University of Louvain,
Centre for Competition Policy, University of East Anglia, United Kingdom. Louvain-La-Neuve, Belgium, and University of Groningen, The
Netherlands.
Mor Bakhoum, Dr iur (Lausanne), Max Planck Institute for Intellectual
Laur~ Parret, Dr iur (Tilburg), Belgian Competition Council and Senior
Property and Competition Law, Munich, Germany.
Lecturer of Law, Tilburg University, The Netherlands.
Josef Bejcek, Dr iur (Brno), Professor of Law, Masaryk University Brno,
Czech Republic, Member of the Remonstrance Commission of the Czech Heike Schweitzer, Dr iur (Hamburg), Professor of Law, University of
Mannhei~, Germany.
Antitrust Authority.
Anca Daniela Chirita, Dr iur (Saarland), Lecturer in Law, Durham Law Maurice E Stucke, Associate Professor, University of Tennessee College
of Law, and Senior Fellow, American Antitrust Institute, United States
School, United Kingdom.
of America.
Karounga Diawara, LLD (Laval), Professor of Law, Laval University,
Iwakazu Takahashi, PhD in Law (Tokyo), Professor of Law, Meiji
Quebec City, Canada.
University, Tokyo, Japan.
Andreas Fuchs, Dr iur (G6ttingen), Professor of Law, University of
Osnabruck, and Judge at the Court of Appeals CelIe, Germany. Jorg Philipp Terhechte, Dr iur (Bielefeld), Professor of Law, University of
Siegen and Research Fellow, Europa Kolleg Hamburg, Germany.
Michal S Gal, JSD (Toronto), Associate Professor of Law, University of
Lubos Tichy, Dr iur (Prague), Professor of Law, Charles University,
Haifa, Israel.
Co-author: Eran Fish, LLM (NYU), LLB (Haifa). Prague, Czech Republic.
David J Gerber, Distinguished Professor of Law, Chicago-Kent College Xiaoye Wang, Dr iur (Hamburg), Distinguished Professor of Law,
Graduate University of Chinese Academy of Sciences, China.
of Law, Chicago, United States of America.
Co-author: Jessica Su, PhD (London), Postdoctoral Fellow, Chinese
Juan David Gutierrez Rodriguez, Professor of Law, Universidad Javeriana, Academy of Social Sciences, China.
Bogota, Colombia, and Advisor to the Minister of Justice of Colombia.
Daniel Zimmer, Dr iur (G6ttingen), Professor of Law, University of Bonn,
Deborah Healey, Senior Lecturer of Law, University of New South Wales, and Member of the German Monopolies Commission, Germany.
Sydney, Australia.
Louis Kaplow, Finn M W (#spersen and Household International Professor
of Law and Economics, flarvard University, and Research Associate,
National Bureau of Economic Research, United States of America.
(Slip Opinion) OCTOBER TERM, 2006 1
Syllabus
NOTE: Where it is feasible, a syllabus (headnote) will be released, as is

being done in connection with this case, at the time the opinion is issued.
The syllabus constitutes no part of the opinion of the Court but has been
prepared by the Reporter of Decisions for the convenience of the reader.
See United States v. Detroit Timber & Lumber Co., 200 U. S. 321, 337.
SUPREME COURT OF THE UNITED STATES
Syllabus
LEEGIN CREATIVE LEATHER PRODUCTS, INC. v.
PSKS, INC., DBA KAY’S KLOSET . . . KAY’S SHOES
CERTIORARI TO THE UNITED STATES COURT OF APPEALS FOR

THE FIFTH CIRCUIT
No. 06–480. Argued March 26, 2007—Decided June 28, 2007

Given its policy of refusing to sell to retailers that discount its goods
below suggested prices, petitioner (Leegin) stopped selling to respon
dent’s (PSKS) store. PSKS filed suit, alleging, inter alia, that Leegin
violated the antitrust laws by entering into vertical agreements with
its retailers to set minimum resale prices. The District Court ex
cluded expert testimony about Leegin’s pricing policy’s procompeti
tive effects on the ground that Dr. Miles Medical Co. v. John D. Park
& Sons Co., 220 U. S. 373, makes it per se illegal under §1 of the
Sherman Act for a manufacturer and its distributor to agree on the
minimum price the distributor can charge for the manufacturer’s
goods. At trial, PSKS alleged that Leegin and its retailers had
agreed to fix prices, but Leegin argued that its pricing policy was law
ful under §1. The jury found for PSKS. On appeal, the Fifth Circuit
declined to apply the rule of reason to Leegin’s vertical price-fixing
agreements and affirmed, finding that Dr. Miles’ per se rule rendered
irrelevant any procompetitive justifications for Leegin’s policy.
Held: Dr. Miles is overruled and vertical price restraints are to be
judged by the rule of reason. Pp. 5–28.
(a) The accepted standard for testing whether a practice restrains
trade in violation of §1 is the rule of reason, which requires the fact-
finder to weigh “all of the circumstances,” Continental T. V., Inc. v.
GTE Sylvania Inc., 433 U. S. 36, 49, including “specific information
about the relevant business” and “the restraint’s history, nature, and
effect,” State Oil Co. v. Khan, 522 U. S. 3, 10. The rule distinguishes
between restraints with anticompetitive effect that are harmful to
the consumer and those with procompetitive effect that are in the
consumer’s best interest. However, when a restraint is deemed
2 LEEGIN CREATIVE LEATHER PRODUCTS, INC. v.
PSKS, INC.
Syllabus
“unlawful per se,” ibid., the need to study an individual restraint’s

reasonableness in light of real market forces is eliminated, Business
Electronics Corp. v. Sharp Electronics Corp., 485 U. S. 717, 723. Re
sort to per se rules is confined to restraints “that would always or al
most always tend to restrict competition and decrease output.” Ibid.
Thus, a per se rule is appropriate only after courts have had consid
erable experience with the type of restraint at issue, see Broadcast
Music, Inc. v. Columbia Broadcasting System, Inc., 441 U. S. 1, 9, and
only if they can predict with confidence that the restraint would be
invalidated in all or almost all instances under the rule of reason, see
Arizona v. Maricopa County Medical Soc., 457 U. S. 332, 344. Pp. 5–
7.
(b) Because the reasons upon which Dr. Miles relied do not justify a
per se rule, it is necessary to examine, in the first instance, the eco
nomic effects of vertical agreements to fix minimum resale prices and
to determine whether the per se rule is nonetheless appropriate.
Were this Court considering the issue as an original matter, the rule
of reason, not a per se rule of unlawfulness, would be the appropriate
standard to judge vertical price restraints. Pp. 7–19.
(1) Economics literature is replete with procompetitive justifica
tions for a manufacturer’s use of resale price maintenance, and the
few recent studies on the subject also cast doubt on the conclusion
that the practice meets the criteria for a per se rule. The justifica
tions for vertical price restraints are similar to those for other verti
cal restraints. Minimum resale price maintenance can stimulate in
terbrand competition among manufacturers selling different brands
of the same type of product by reducing intrabrand competition
among retailers selling the same brand. This is important because
the antitrust laws’ “primary purpose . . . is to protect interbrand
competition,” Khan, supra, at 15. A single manufacturer’s use of ver
tical price restraints tends to eliminate intrabrand price competition;
this in turn encourages retailers to invest in services or promotional
efforts that aid the manufacturer’s position as against rival manufac
turers. Resale price maintenance may also give consumers more op
tions to choose among low-price, low-service brands; high-price, high-
service brands; and brands falling in between. Absent vertical price
restraints, retail services that enhance interbrand competition might
be underprovided because discounting retailers can free ride on re
tailers who furnish services and then capture some of the demand
those services generate. Retail price maintenance can also increase
interbrand competition by facilitating market entry for new firms
and brands and by encouraging retailer services that would not be
provided even absent free riding. Pp. 9–12.
(2) Setting minimum resale prices may also have anticompetitive
Cite as: 551 U. S. ____ (2007) 3
Syllabus
effects; and unlawful price fixing, designed solely to obtain monopoly

profits, is an ever present temptation. Resale price maintenance
may, for example, facilitate a manufacturer cartel or be used to or
ganize retail cartels. It can also be abused by a powerful manufac
turer or retailer. Thus, the potential anticompetitive consequences of
vertical price restraints must not be ignored or underestimated.
Pp. 12–14.
(3) Notwithstanding the risks of unlawful conduct, it cannot be
stated with any degree of confidence that retail price maintenance
“always or almost always tend[s] to restrict competition and decrease
output,” Business Electronics, supra, at 723. Vertical retail-price
agreements have either procompetitive or anticompetitive effects, de
pending on the circumstances in which they were formed; and the
limited empirical evidence available does not suggest efficient uses of
the agreements are infrequent or hypothetical. A per se rule should
not be adopted for administrative convenience alone. Such rules can
be counterproductive, increasing the antitrust system’s total cost by
prohibiting procompetitive conduct the antitrust laws should encour
age. And a per se rule cannot be justified by the possibility of higher
prices absent a further showing of anticompetitive conduct. The anti
trust laws primarily are designed to protect interbrand competition
from which lower prices can later result. Respondent’s argument
overlooks that, in general, the interests of manufacturers and con
sumers are aligned with respect to retailer profit margins. Resale
price maintenance has economic dangers. If the rule of reason were
to apply, courts would have to be diligent in eliminating their anti-
competitive uses from the market. Factors relevant to the inquiry
are the number of manufacturers using the practice, the restraint’s
source, and a manufacturer’s market power. The rule of reason is de
signed and used to ascertain whether transactions are anticompeti
tive or procompetitive. This standard principle applies to vertical
price restraints. As courts gain experience with these restraints by
applying the rule of reason over the course of decisions, they can es
tablish the litigation structure to ensure the rule operates to elimi
nate anticompetitive restraints from the market and to provide more
guidance to businesses. Pp. 14–19.
(c) Stare decisis does not compel continued adherence to the per se
rule here. Because the Sherman Act is treated as a common-law
statute, its prohibition on “restraint[s] of trade” evolves to meet the
dynamics of present economic conditions. The rule of reason’s case-
by-case adjudication implements this common-law approach. Here,
respected economics authorities suggest that the per se rule is inap
propriate. And both the Department of Justice and the Federal
Trade Commission recommend replacing the per se rule with the rule
PSKS, INC.
Syllabus
of reason. In addition, this Court has “overruled [its] precedents

when subsequent cases have undermined their doctrinal underpin
nings.” Dickerson v. United States, 530 U. S. 428, 443. It is not sur
prising that the Court has distanced itself from Dr. Miles’ rationales,
for the case was decided not long after the Sherman Act was enacted,
when the Court had little experience with antitrust analysis. Only
eight years after Dr. Miles, the Court reined in the decision, holding
that a manufacturer can suggest resale prices and refuse to deal with
distributors who do not follow them, United States v. Colgate & Co.,
250 U. S. 300, 307–308; and more recently the Court has tempered,
limited, or overruled once strict vertical restraint prohibitions, see,
e.g., GTE Sylvania, supra, at 57–59. The Dr. Miles rule is also incon
sistent with a principled framework, for it makes little economic
sense when analyzed with the Court’s other vertical restraint cases.
Deciding that procompetitive effects of resale price maintenance are
insufficient to overrule Dr. Miles would call into question cases such
as Colgate and GTE Sylvania. Respondent’s arguments for reaffirm
ing Dr. Miles based on stare decisis do not require a different result.
Pp. 19–28.
171 Fed. Appx. 464, reversed and remanded.
KENNEDY, J., delivered the opinion of the Court, in which ROBERTS,

C. J., and SCALIA, THOMAS, and ALITO, JJ., joined. BREYER, J., filed a
dissenting opinion, in which STEVENS, SOUTER, and GINSBURG, JJ.,
joined.
Cite as: 551 U. S. ____ (2007) 1
Opinion of the Court
NOTICE: This opinion is subject to formal revision before publication in the

preliminary print of the United States Reports. Readers are requested to
notify the Reporter of Decisions, Supreme Court of the United States, Wash
ington, D. C. 20543, of any typographical or other formal errors, in order
that corrections may be made before the preliminary print goes to press.

_________________
No. 06–480
_________________
LEEGIN CREATIVE LEATHER PRODUCTS, INC.,
PETITIONER v. PSKS, INC., DBA KAY’S
KLOSET . . . KAY’S SHOES
ON WRIT OF CERTIORARI TO THE UNITED STATES COURT OF
APPEALS FOR THE FIFTH CIRCUIT
[June 28, 2007]
JUSTICE KENNEDY delivered the opinion of the Court.

In Dr. Miles Medical Co. v. John D. Park & Sons Co.,
220 U. S. 373 (1911), the Court established the rule that it
is per se illegal under §1 of the Sherman Act, 15 U. S. C.
§1, for a manufacturer to agree with its distributor to set
the minimum price the distributor can charge for the
manufacturer’s goods. The question presented by the
instant case is whether the Court should overrule the per
se rule and allow resale price maintenance agreements to
be judged by the rule of reason, the usual standard applied
to determine if there is a violation of §1. The Court has
abandoned the rule of per se illegality for other vertical
restraints a manufacturer imposes on its distributors.
Respected economic analysts, furthermore, conclude that
vertical price restraints can have procompetitive effects.
We now hold that Dr. Miles should be overruled and that
vertical price restraints are to be judged by the rule of
reason.
I
Petitioner, Leegin Creative Leather Products, Inc.
PSKS, INC.
(Leegin), designs, manufactures, and distributes leather

goods and accessories. In 1991, Leegin began to sell belts
under the brand name “Brighton.” The Brighton brand
has now expanded into a variety of women’s fashion acces
sories. It is sold across the United States in over 5,000
retail establishments, for the most part independent,
small boutiques and specialty stores. Leegin’s president,
Jerry Kohl, also has an interest in about 70 stores that sell
Brighton products. Leegin asserts that, at least for its
products, small retailers treat customers better, provide
customers more services, and make their shopping experi
ence more satisfactory than do larger, often impersonal
retailers. Kohl explained: “[W]e want the consumers to
get a different experience than they get in Sam’s Club or
in Wal-Mart. And you can’t get that kind of experience or
support or customer service from a store like Wal-Mart.” 5
Record 127.
Respondent, PSKS, Inc. (PSKS), operates Kay’s Kloset,
a women’s apparel store in Lewisville, Texas. Kay’s Kloset
buys from about 75 different manufacturers and at one
time sold the Brighton brand. It first started purchasing
Brighton goods from Leegin in 1995. Once it began selling
the brand, the store promoted Brighton. For example, it
ran Brighton advertisements and had Brighton days in
the store. Kay’s Kloset became the destination retailer in
the area to buy Brighton products. Brighton was the
store’s most important brand and once accounted for 40 to
50 percent of its profits.
In 1997, Leegin instituted the “Brighton Retail Pricing
and Promotion Policy.” 4 id., at 939. Following the policy,
Leegin refused to sell to retailers that discounted Brighton
goods below suggested prices. The policy contained an
exception for products not selling well that the retailer did
not plan on reordering. In the letter to retailers establish
ing the policy, Leegin stated:
Cite as: 551 U. S. ____ (2007) 3
“In this age of mega stores like Macy’s, Blooming-

dales, May Co. and others, consumers are perplexed
by promises of product quality and support of product
which we believe is lacking in these large stores.
Consumers are further confused by the ever popular
sale, sale, sale, etc.
“We, at Leegin, choose to break away from the pack
by selling [at] specialty stores; specialty stores that
can offer the customer great quality merchandise, su
perb service, and support the Brighton product 365
days a year on a consistent basis.
“We realize that half the equation is Leegin produc
ing great Brighton product and the other half is you,
our retailer, creating great looking stores selling our
products in a quality manner.” Ibid.
Leegin adopted the policy to give its retailers sufficient
margins to provide customers the service central to its
distribution strategy. It also expressed concern that dis
counting harmed Brighton’s brand image and reputation.
A year after instituting the pricing policy Leegin intro
duced a marketing strategy known as the “Heart Store
Program.” See id., at 962–972. It offered retailers incen
tives to become Heart Stores, and, in exchange, retailers
pledged, among other things, to sell at Leegin’s suggested
prices. Kay’s Kloset became a Heart Store soon after
Leegin created the program. After a Leegin employee
visited the store and found it unattractive, the parties
appear to have agreed that Kay’s Kloset would not be a
Heart Store beyond 1998. Despite losing this status, Kay’s
Kloset continued to increase its Brighton sales.
In December 2002, Leegin discovered Kay’s Kloset had
been marking down Brighton’s entire line by 20 percent.
Kay’s Kloset contended it placed Brighton products on sale
to compete with nearby retailers who also were undercut
ting Leegin’s suggested prices. Leegin, nonetheless, re
PSKS, INC.
quested that Kay’s Kloset cease discounting. Its request

refused, Leegin stopped selling to the store. The loss of
the Brighton brand had a considerable negative impact on
the store’s revenue from sales.
PSKS sued Leegin in the United States District Court
for the Eastern District of Texas. It alleged, among other
claims, that Leegin had violated the antitrust laws by
“enter[ing] into agreements with retailers to charge only
those prices fixed by Leegin.” Id., at 1236. Leegin
planned to introduce expert testimony describing the
procompetitive effects of its pricing policy. The District
Court excluded the testimony, relying on the per se rule
established by Dr. Miles. At trial PSKS argued that the
Heart Store program, among other things, demonstrated
Leegin and its retailers had agreed to fix prices. Leegin
responded that it had established a unilateral pricing
policy lawful under §1, which applies only to concerted
action. See United States v. Colgate & Co., 250 U. S. 300,
307 (1919). The jury agreed with PSKS and awarded it
$1.2 million. Pursuant to 15 U. S. C. §15(a), the District
Court trebled the damages and reimbursed PSKS for its
attorney’s fees and costs. It entered judgment against
Leegin in the amount of $3,975,000.80.
The Court of Appeals for the Fifth Circuit affirmed. 171
Fed. Appx. 464 (2006) (per curiam). On appeal Leegin did
not dispute that it had entered into vertical price-fixing
agreements with its retailers. Rather, it contended that
the rule of reason should have applied to those agree
ments. The Court of Appeals rejected this argument. Id.,
at 466–467. It was correct to explain that it remained
bound by Dr. Miles “[b]ecause [the Supreme] Court has
consistently applied the per se rule to [vertical minimum
price-fixing] agreements.” 171 Fed. Appx., at 466. On this
premise the Court of Appeals held that the District Court
did not abuse its discretion in excluding the testimony of
Leegin’s economic expert, for the per se rule rendered
Cite as: 551 U. S. ____ (2007) 5
irrelevant any procompetitive justifications for Leegin’s

pricing policy. Id., at 467. We granted certiorari to de
termine whether vertical minimum resale price mainte
nance agreements should continue to be treated as per se
unlawful. 549 U. S. ___ (2006).
II
Section 1 of the Sherman Act prohibits “[e]very contract,
combination in the form of trust or otherwise, or conspir
acy, in restraint of trade or commerce among the several
States.” Ch. 647, 26 Stat. 209, as amended, 15 U. S. C. §1.
While §1 could be interpreted to proscribe all contracts,
see, e.g., Board of Trade of Chicago v. United States, 246
U. S. 231, 238 (1918), the Court has never “taken a literal
approach to [its] language,” Texaco Inc. v. Dagher, 547
U. S. 1, 5 (2006). Rather, the Court has repeated time and
again that §1 “outlaw[s] only unreasonable restraints.”
State Oil Co. v. Khan, 522 U. S. 3, 10 (1997).
The rule of reason is the accepted standard for testing
whether a practice restrains trade in violation of §1. See
Texaco, supra, at 5. “Under this rule, the factfinder
weighs all of the circumstances of a case in deciding
whether a restrictive practice should be prohibited as
imposing an unreasonable restraint on competition.”
Continental T. V., Inc. v. GTE Sylvania Inc., 433 U. S. 36,
49 (1977). Appropriate factors to take into account include
“specific information about the relevant business” and “the
restraint’s history, nature, and effect.” Khan, supra, at 10.
Whether the businesses involved have market power is a
further, significant consideration. See, e.g., Copperweld
Corp. v. Independence Tube Corp., 467 U. S. 752, 768
(1984) (equating the rule of reason with “an inquiry into
market power and market structure designed to assess [a
restraint’s] actual effect”); see also Illinois Tool Works Inc.
v. Independent Ink, Inc., 547 U. S. 28, 45–46 (2006). In its
design and function the rule distinguishes between re
PSKS, INC.
straints with anticompetitive effect that are harmful to

the consumer and restraints stimulating competition that
are in the consumer’s best interest.
The rule of reason does not govern all restraints. Some
types “are deemed unlawful per se.” Khan, supra, at 10.
The per se rule, treating categories of restraints as neces
sarily illegal, eliminates the need to study the reasonable
ness of an individual restraint in light of the real market
forces at work, Business Electronics Corp. v. Sharp Elec
tronics Corp., 485 U. S. 717, 723 (1988); and, it must be
acknowledged, the per se rule can give clear guidance for
certain conduct. Restraints that are per se unlawful in
clude horizontal agreements among competitors to fix
prices, see Texaco, supra, at 5, or to divide markets, see
Palmer v. BRG of Ga., Inc., 498 U. S. 46, 49–50 (1990) (per
curiam).
Resort to per se rules is confined to restraints, like those
mentioned, “that would always or almost always tend to
restrict competition and decrease output.” Business Elec
tronics, supra, at 723 (internal quotation marks omitted).
To justify a per se prohibition a restraint must have
“manifestly anticompetitive” effects, GTE Sylvania, supra,
at 50, and “lack . . . any redeeming virtue,” Northwest
Wholesale Stationers, Inc. v. Pacific Stationery & Printing
Co., 472 U. S. 284, 289 (1985) (internal quotation marks
omitted).
As a consequence, the per se rule is appropriate only
after courts have had considerable experience with the
type of restraint at issue, see Broadcast Music, Inc. v.
Columbia Broadcasting System, Inc., 441 U. S. 1, 9 (1979),
and only if courts can predict with confidence that it would
be invalidated in all or almost all instances under the rule
of reason, see Arizona v. Maricopa County Medical Soc.,
457 U. S. 332, 344 (1982). It should come as no surprise,
then, that “we have expressed reluctance to adopt per se
rules with regard to restraints imposed in the context of
Cite as: 551 U. S. ____ (2007) 7
business relationships where the economic impact of

certain practices is not immediately obvious.” Khan,
supra, at 10 (internal quotation marks omitted); see also
White Motor Co. v. United States, 372 U. S. 253, 263 (1963)
(refusing to adopt a per se rule for a vertical nonprice
restraint because of the uncertainty concerning whether
this type of restraint satisfied the demanding standards
necessary to apply a per se rule). And, as we have stated,
a “departure from the rule-of-reason standard must be
based upon demonstrable economic effect rather than . . .
upon formalistic line drawing.” GTE Sylvania, supra, at
58–59.
III
The Court has interpreted Dr. Miles Medical Co. v. John
D. Park & Sons Co., 220 U. S. 373 (1911), as establishing a
per se rule against a vertical agreement between a manu
facturer and its distributor to set minimum resale prices.
See, e.g., Monsanto Co. v. Spray-Rite Service Corp., 465
U. S. 752, 761 (1984). In Dr. Miles the plaintiff, a manu
facturer of medicines, sold its products only to distributors
who agreed to resell them at set prices. The Court found
the manufacturer’s control of resale prices to be unlawful.
It relied on the common-law rule that “a general restraint
upon alienation is ordinarily invalid.” 220 U. S., at 404–
405. The Court then explained that the agreements would
advantage the distributors, not the manufacturer, and
were analogous to a combination among competing dis
tributors, which the law treated as void. Id., at 407–408.
The reasoning of the Court’s more recent jurisprudence
has rejected the rationales on which Dr. Miles was based.
By relying on the common-law rule against restraints on
alienation, id., at 404–405, the Court justified its decision
based on “formalistic” legal doctrine rather than “demon
strable economic effect,” GTE Sylvania, supra, at 58–59.
The Court in Dr. Miles relied on a treatise published in
PSKS, INC.
1628, but failed to discuss in detail the business reasons

that would motivate a manufacturer situated in 1911 to
make use of vertical price restraints. Yet the Sherman
Act’s use of “restraint of trade” “invokes the common law
itself, . . . not merely the static content that the common
law had assigned to the term in 1890.” Business Electron
ics, supra, at 732. The general restraint on alienation,
especially in the age when then-Justice Hughes used the
term, tended to evoke policy concerns extraneous to the
question that controls here. Usually associated with land,
not chattels, the rule arose from restrictions removing real
property from the stream of commerce for generations.
The Court should be cautious about putting dispositive
weight on doctrines from antiquity but of slight relevance.
We reaffirm that “the state of the common law 400 or even
100 years ago is irrelevant to the issue before us: the effect
of the antitrust laws upon vertical distributional re
straints in the American economy today.” GTE Sylvania,
433 U. S., at 53, n. 21 (internal quotation marks omitted).
Dr. Miles, furthermore, treated vertical agreements a
manufacturer makes with its distributors as analogous to
a horizontal combination among competing distributors.
See 220 U. S., at 407–408. In later cases, however, the
Court rejected the approach of reliance on rules governing
horizontal restraints when defining rules applicable to
vertical ones. See, e.g., Business Electronics, supra, at 734
(disclaiming the “notion of equivalence between the scope
of horizontal per se illegality and that of vertical per se
illegality”); Maricopa County, supra, at 348, n. 18 (noting
that “horizontal restraints are generally less defensible
than vertical restraints”). Our recent cases formulate
antitrust principles in accordance with the appreciated
differences in economic effect between vertical and hori
zontal agreements, differences the Dr. Miles Court failed
to consider.
The reasons upon which Dr. Miles relied do not justify a
Cite as: 551 U. S. ____ (2007) 9
per se rule. As a consequence, it is necessary to examine,

in the first instance, the economic effects of vertical
agreements to fix minimum resale prices, and to deter
mine whether the per se rule is nonetheless appropriate.
See Business Electronics, 485 U. S., at 726.
A
Though each side of the debate can find sources to sup
port its position, it suffices to say here that economics
literature is replete with procompetitive justifications for a
manufacturer’s use of resale price maintenance. See, e.g.,
Brief for Economists as Amici Curiae 16 (“In the theoreti
cal literature, it is essentially undisputed that minimum
[resale price maintenance] can have procompetitive effects
and that under a variety of market conditions it is
unlikely to have anticompetitive effects”); Brief for United
States as Amicus Curiae 9 (“[T]here is a widespread con
sensus that permitting a manufacturer to control the price
at which its goods are sold may promote interbrand com
petition and consumer welfare in a variety of ways”); ABA
Section of Antitrust Law, Antitrust Law and Economics of
Product Distribution 76 (2006) (“[T]he bulk of the eco
nomic literature on [resale price maintenance] suggests
that [it] is more likely to be used to enhance efficiency
than for anticompetitive purposes”); see also H. Hovenk
amp, The Antitrust Enterprise: Principle and Execution
184–191 (2005) (hereinafter Hovenkamp); R. Bork, The
Antitrust Paradox 288–291 (1978) (hereinafter Bork).
Even those more skeptical of resale price maintenance
acknowledge it can have procompetitive effects. See, e.g.,
Brief for William S. Comanor et al. as Amici Curiae 3
(“[G]iven [the] diversity of effects [of resale price mainte
nance], one could reasonably take the position that a rule
of reason rather than a per se approach is warranted”);
F.M. Scherer & D. Ross, Industrial Market Structure and
Economic Performance 558 (3d ed. 1990) (hereinafter
PSKS, INC.
Scherer & Ross) (“The overall balance between benefits

and costs [of resale price maintenance] is probably close”).
The few recent studies documenting the competitive
effects of resale price maintenance also cast doubt on the
conclusion that the practice meets the criteria for a per se
rule. See T. Overstreet, Resale Price Maintenance: Eco
nomic Theories and Empirical Evidence 170 (1983) (here
inafter Overstreet) (noting that “[e]fficient uses of [resale
price maintenance] are evidently not unusual or rare”); see
also Ippolito, Resale Price Maintenance: Empirical Evi
dence From Litigation, 34 J. Law & Econ. 263, 292–293
(1991) (hereinafter Ippolito).
The justifications for vertical price restraints are similar
to those for other vertical restraints. See GTE Sylvania,
433 U. S., at 54–57. Minimum resale price maintenance
can stimulate interbrand competition—the competition
among manufacturers selling different brands of the same
type of product—by reducing intrabrand competition—the
competition among retailers selling the same brand. See
id., at 51–52. The promotion of interbrand competition is
important because “the primary purpose of the antitrust
laws is to protect [this type of] competition.” Khan, 522
U. S., at 15. A single manufacturer’s use of vertical price
restraints tends to eliminate intrabrand price competition;
this in turn encourages retailers to invest in tangible or
intangible services or promotional efforts that aid the
manufacturer’s position as against rival manufacturers.
Resale price maintenance also has the potential to give
consumers more options so that they can choose among
low-price, low-service brands; high-price, high-service
brands; and brands that fall in between.
Absent vertical price restraints, the retail services that
enhance interbrand competition might be underprovided.
This is because discounting retailers can free ride on
retailers who furnish services and then capture some of
the increased demand those services generate. GTE Syl
Cite as: 551 U. S. ____ (2007) 11
vania, supra, at 55. Consumers might learn, for example,

about the benefits of a manufacturer’s product from a
retailer that invests in fine showrooms, offers product
demonstrations, or hires and trains knowledgeable em
ployees. R. Posner, Antitrust Law 172–173 (2d ed. 2001)
(hereinafter Posner). Or consumers might decide to buy
the product because they see it in a retail establishment
that has a reputation for selling high-quality merchandise.
Marvel & McCafferty, Resale Price Maintenance and
Quality Certification, 15 Rand J. Econ. 346, 347–349
(1984) (hereinafter Marvel & McCafferty). If the con
sumer can then buy the product from a retailer that dis
counts because it has not spent capital providing services
or developing a quality reputation, the high-service re
tailer will lose sales to the discounter, forcing it to cut
back its services to a level lower than consumers would
otherwise prefer. Minimum resale price maintenance
alleviates the problem because it prevents the discounter
from undercutting the service provider. With price compe
tition decreased, the manufacturer’s retailers compete
among themselves over services.
Resale price maintenance, in addition, can increase
interbrand competition by facilitating market entry for
new firms and brands. “[N]ew manufacturers and manu
facturers entering new markets can use the restrictions in
order to induce competent and aggressive retailers to
make the kind of investment of capital and labor that is
often required in the distribution of products unknown to
the consumer.” GTE Sylvania, supra, at 55; see Marvel &
McCafferty 349 (noting that reliance on a retailer’s repu
tation “will decline as the manufacturer’s brand becomes
better known, so that [resale price maintenance] may be
particularly important as a competitive device for new
entrants”). New products and new brands are essential to
a dynamic economy, and if markets can be penetrated by
using resale price maintenance there is a procompetitive
PSKS, INC.
effect.
Resale price maintenance can also increase interbrand
competition by encouraging retailer services that would
not be provided even absent free riding. It may be difficult
and inefficient for a manufacturer to make and enforce a
contract with a retailer specifying the different services
the retailer must perform. Offering the retailer a guaran
teed margin and threatening termination if it does not live
up to expectations may be the most efficient way to ex
pand the manufacturer’s market share by inducing the
retailer’s performance and allowing it to use its own initia
tive and experience in providing valuable services. See
Mathewson & Winter, The Law and Economics of Resale
Price Maintenance, 13 Rev. Indus. Org. 57, 74–75 (1998)
(hereinafter Mathewson & Winter); Klein & Murphy,
Vertical Restraints as Contract Enforcement Mechanisms,
31 J. Law & Econ. 265, 295 (1988); see also Deneckere,
Marvel, & Peck, Demand Uncertainty, Inventories, and
Resale Price Maintenance, 111 Q. J. Econ. 885, 911 (1996)
(noting that resale price maintenance may be beneficial to
motivate retailers to stock adequate inventories of a
manufacturer’s goods in the face of uncertain consumer
demand).
B
While vertical agreements setting minimum resale
prices can have procompetitive justifications, they may
have anticompetitive effects in other cases; and unlawful
price fixing, designed solely to obtain monopoly profits, is
an ever present temptation. Resale price maintenance
may, for example, facilitate a manufacturer cartel. See
Business Electronics, 485 U. S., at 725. An unlawful cartel
will seek to discover if some manufacturers are undercut
ting the cartel’s fixed prices. Resale price maintenance
could assist the cartel in identifying price-cutting manu
facturers who benefit from the lower prices they offer.
Cite as: 551 U. S. ____ (2007) 13
Resale price maintenance, furthermore, could discourage a

manufacturer from cutting prices to retailers with the
concomitant benefit of cheaper prices to consumers. See
ibid.; see also Posner 172; Overstreet 19–23.
Vertical price restraints also “might be used to organize
cartels at the retailer level.” Business Electronics, supra,
at 725–726. A group of retailers might collude to fix prices
to consumers and then compel a manufacturer to aid the
unlawful arrangement with resale price maintenance. In
that instance the manufacturer does not establish the
practice to stimulate services or to promote its brand but
to give inefficient retailers higher profits. Retailers with
better distribution systems and lower cost structures
would be prevented from charging lower prices by the
agreement. See Posner 172; Overstreet 13–19. Historical
examples suggest this possibility is a legitimate concern.
See, e.g., Marvel & McCafferty, The Welfare Effects of
Resale Price Maintenance, 28 J. Law & Econ. 363, 373
(1985) (hereinafter Marvel) (providing an example of the
power of the National Association of Retail Druggists to
compel manufacturers to use resale price maintenance);
Hovenkamp 186 (suggesting that the retail druggists in
Dr. Miles formed a cartel and used manufacturers to
enforce it).
A horizontal cartel among competing manufacturers or
competing retailers that decreases output or reduces
competition in order to increase price is, and ought to be,
per se unlawful. See Texaco, 547 U. S., at 5; GTE Sylva
nia, 433 U. S., at 58, n. 28. To the extent a vertical
agreement setting minimum resale prices is entered upon
to facilitate either type of cartel, it, too, would need to be
held unlawful under the rule of reason. This type of
agreement may also be useful evidence for a plaintiff
attempting to prove the existence of a horizontal cartel.
Resale price maintenance, furthermore, can be abused
by a powerful manufacturer or retailer. A dominant re
PSKS, INC.
tailer, for example, might request resale price mainte

nance to forestall innovation in distribution that decreases
costs. A manufacturer might consider it has little choice
but to accommodate the retailer’s demands for vertical
price restraints if the manufacturer believes it needs
access to the retailer’s distribution network. See
Overstreet 31; 8 P. Areeda & H. Hovenkamp, Antitrust
Law 47 (2d ed. 2004) (hereinafter Areeda & Hovenkamp);
cf. Toys “R” Us, Inc. v. FTC, 221 F. 3d 928, 937–938 (CA7
2000). A manufacturer with market power, by compari
son, might use resale price maintenance to give retailers
an incentive not to sell the products of smaller rivals or
new entrants. See, e.g., Marvel 366–368. As should
be evident, the potential anticompetitive consequences
of vertical price restraints must not be ignored or
underestimated.
C
Notwithstanding the risks of unlawful conduct, it cannot
be stated with any degree of confidence that resale price
maintenance “always or almost always tend[s] to restrict
competition and decrease output.” Business Electronics,
supra, at 723 (internal quotation marks omitted). Vertical
agreements establishing minimum resale prices can have
either procompetitive or anticompetitive effects, depending
upon the circumstances in which they are formed. And
although the empirical evidence on the topic is limited, it
does not suggest efficient uses of the agreements are
infrequent or hypothetical. See Overstreet 170; see also
id., at 80 (noting that for the majority of enforcement
actions brought by the Federal Trade Commission be
tween 1965 and 1982, “the use of [resale price mainte
nance] was not likely motivated by collusive dealers who
had successfully coerced their suppliers”); Ippolito 292
(reaching a similar conclusion). As the rule would pro
scribe a significant amount of procompetitive conduct,
Cite as: 551 U. S. ____ (2007) 15
these agreements appear ill suited for per se condemna

tion.
Respondent contends, nonetheless, that vertical price
restraints should be per se unlawful because of the admin
istrative convenience of per se rules. See, e.g., GTE Sylva
nia, supra, at 50, n. 16 (noting “per se rules tend to provide
guidance to the business community and to minimize the
burdens on litigants and the judicial system”). That ar
gument suggests per se illegality is the rule rather than
the exception. This misinterprets our antitrust law. Per
se rules may decrease administrative costs, but that is
only part of the equation. Those rules can be counterpro
ductive. They can increase the total cost of the antitrust
system by prohibiting procompetitive conduct the anti
trust laws should encourage. See Easterbrook, Vertical
Arrangements and the Rule of Reason, 53 Antitrust L. J.
135, 158 (1984) (hereinafter Easterbrook). They also may
increase litigation costs by promoting frivolous suits
against legitimate practices. The Court has thus ex
plained that administrative “advantages are not sufficient
in themselves to justify the creation of per se rules,” GTE
Sylvania, 433 U. S., at 50, n. 16, and has relegated their
use to restraints that are “manifestly anticompetitive,” id.,
at 49–50. Were the Court now to conclude that vertical
price restraints should be per se illegal based on adminis
trative costs, we would undermine, if not overrule, the
traditional “demanding standards” for adopting per se
rules. Id., at 50. Any possible reduction in administrative
costs cannot alone justify the Dr. Miles rule.
Respondent also argues the per se rule is justified be
cause a vertical price restraint can lead to higher prices
for the manufacturer’s goods. See also Overstreet 160
(noting that “price surveys indicate that [resale price
maintenance] in most cases increased the prices of prod
ucts sold”). Respondent is mistaken in relying on pricing
effects absent a further showing of anticompetitive con
PSKS, INC.
duct. Cf. id., at 106 (explaining that price surveys “do not
necessarily tell us anything conclusive about the welfare
effects of [resale price maintenance] because the results
are generally consistent with both procompetitive and
anticompetitive theories”). For, as has been indicated
already, the antitrust laws are designed primarily to
protect interbrand competition, from which lower prices
can later result. See Khan, 522 U. S., at 15. The Court,
moreover, has evaluated other vertical restraints under
the rule of reason even though prices can be increased in
the course of promoting procompetitive effects. See, e.g.,
Business Electronics, 485 U. S., at 728. And resale price
maintenance may reduce prices if manufacturers have
resorted to costlier alternatives of controlling resale prices
that are not per se unlawful. See infra, at 22–25; see also
Marvel 371.
Respondent’s argument, furthermore, overlooks that, in
general, the interests of manufacturers and consumers are
aligned with respect to retailer profit margins. The differ
ence between the price a manufacturer charges retailers
and the price retailers charge consumers represents part
of the manufacturer’s cost of distribution, which, like any
other cost, the manufacturer usually desires to minimize.
See GTE Sylvania, 433 U. S., at 56, n. 24; see also id., at
56 (“Economists . . . have argued that manufacturers have
an economic interest in maintaining as much intrabrand
competition as is consistent with the efficient distribution
of their products”). A manufacturer has no incentive to
overcompensate retailers with unjustified margins. The
retailers, not the manufacturer, gain from higher retail
prices. The manufacturer often loses; interbrand competi
tion reduces its competitiveness and market share because
consumers will “substitute a different brand of the same
product.” Id., at 52, n. 19; see Business Electronics, supra,
at 725. As a general matter, therefore, a single manufac
turer will desire to set minimum resale prices only if the
Cite as: 551 U. S. ____ (2007) 17
“increase in demand resulting from enhanced service . . .

will more than offset a negative impact on demand of a
higher retail price.” Mathewson & Winter 67.
The implications of respondent’s position are far reach
ing. Many decisions a manufacturer makes and carries
out through concerted action can lead to higher prices. A
manufacturer might, for example, contract with different
suppliers to obtain better inputs that improve product
quality. Or it might hire an advertising agency to promote
awareness of its goods. Yet no one would think these
actions violate the Sherman Act because they lead to
higher prices. The antitrust laws do not require manufac
turers to produce generic goods that consumers do not
know about or want. The manufacturer strives to improve
its product quality or to promote its brand because it
believes this conduct will lead to increased demand de
spite higher prices. The same can hold true for resale
price maintenance.
Resale price maintenance, it is true, does have economic
dangers. If the rule of reason were to apply to vertical
price restraints, courts would have to be diligent in elimi
nating their anticompetitive uses from the market. This is
a realistic objective, and certain factors are relevant to the
inquiry. For example, the number of manufacturers that
make use of the practice in a given industry can provide
important instruction. When only a few manufacturers
lacking market power adopt the practice, there is little
likelihood it is facilitating a manufacturer cartel, for a
cartel then can be undercut by rival manufacturers. See
Overstreet 22; Bork 294. Likewise, a retailer cartel is
unlikely when only a single manufacturer in a competitive
market uses resale price maintenance. Interbrand compe
tition would divert consumers to lower priced substitutes
and eliminate any gains to retailers from their price-fixing
agreement over a single brand. See Posner 172; Bork 292.
Resale price maintenance should be subject to more care
PSKS, INC.
ful scrutiny, by contrast, if many competing manufactur

ers adopt the practice. Cf. Scherer & Ross 558 (noting
that “except when [resale price maintenance] spreads to
cover the bulk of an industry’s output, depriving consum
ers of a meaningful choice between high-service and low-
price outlets, most [resale price maintenance arrange
ments] are probably innocuous”); Easterbrook 162 (sug
gesting that “every one of the potentially-anticompetitive
outcomes of vertical arrangements depends on the uni
formity of the practice”).
The source of the restraint may also be an important
consideration. If there is evidence retailers were the
impetus for a vertical price restraint, there is a greater
likelihood that the restraint facilitates a retailer cartel or
supports a dominant, inefficient retailer. See Brief for
William S. Comanor et al. as Amici Curiae 7–8. If, by
contrast, a manufacturer adopted the policy independent
of retailer pressure, the restraint is less likely to promote
anticompetitive conduct. Cf. Posner 177 (“It makes all the
difference whether minimum retail prices are imposed by
the manufacturer in order to evoke point-of-sale services
or by the dealers in order to obtain monopoly profits”). A
manufacturer also has an incentive to protest inefficient
retailer-induced price restraints because they can harm its
competitive position.
As a final matter, that a dominant manufacturer or
retailer can abuse resale price maintenance for anticom
petitive purposes may not be a serious concern unless the
relevant entity has market power. If a retailer lacks
market power, manufacturers likely can sell their goods
through rival retailers. See also Business Electronics,
supra, at 727, n. 2 (noting “[r]etail market power is rare,
because of the usual presence of interbrand competition
and other dealers”). And if a manufacturer lacks market
power, there is less likelihood it can use the practice to
keep competitors away from distribution outlets.
Cite as: 551 U. S. ____ (2007) 19
The rule of reason is designed and used to eliminate

anticompetitive transactions from the market. This stan
dard principle applies to vertical price restraints. A party
alleging injury from a vertical agreement setting mini
mum resale prices will have, as a general matter, the
information and resources available to show the existence
of the agreement and its scope of operation. As courts
gain experience considering the effects of these restraints
by applying the rule of reason over the course of decisions,
they can establish the litigation structure to ensure the
rule operates to eliminate anticompetitive restraints from
the market and to provide more guidance to businesses.
Courts can, for example, devise rules over time for offering
proof, or even presumptions where justified, to make the
rule of reason a fair and efficient way to prohibit anticom
petitive restraints and to promote procompetitive ones.
For all of the foregoing reasons, we think that were the
Court considering the issue as an original matter, the rule
of reason, not a per se rule of unlawfulness, would be the
appropriate standard to judge vertical price restraints.
IV
We do not write on a clean slate, for the decision in Dr.
Miles is almost a century old. So there is an argument for
its retention on the basis of stare decisis alone. Even if Dr.
Miles established an erroneous rule, “[s]tare decisis re
flects a policy judgment that in most matters it is more
important that the applicable rule of law be settled than
that it be settled right.” Khan, 522 U. S., at 20 (internal
quotation marks omitted). And concerns about maintain
ing settled law are strong when the question is one of
statutory interpretation. See, e.g., Hohn v. United States,
524 U. S. 236, 251 (1998).
Stare decisis is not as significant in this case, however,
because the issue before us is the scope of the Sherman
Act. Khan, supra, at 20 (“[T]he general presumption that
PSKS, INC.
legislative changes should be left to Congress has less

force with respect to the Sherman Act”). From the begin
ning the Court has treated the Sherman Act as a common-
law statute. See National Soc. of Professional Engineers v.
United States, 435 U. S. 679, 688 (1978); see also North
west Airlines, Inc. v. Transport Workers, 451 U. S. 77, 98,
n. 42 (1981) (“In antitrust, the federal courts . . . act more
as common-law courts than in other areas governed by
federal statute”). Just as the common law adapts to mod
ern understanding and greater experience, so too does the
Sherman Act’s prohibition on “restraint[s] of trade” evolve
to meet the dynamics of present economic conditions. The
case-by-case adjudication contemplated by the rule of
reason has implemented this common-law approach. See
National Soc. of Professional Engineers, supra, at 688.
Likewise, the boundaries of the doctrine of per se illegality
should not be immovable. For “[i]t would make no sense
to create out of the single term ‘restraint of trade’ a
chronologically schizoid statute, in which a ‘rule of reason’
evolves with new circumstance and new wisdom, but a line
of per se illegality remains forever fixed where it was.”
Business Electronics, 485 U. S., at 732.
A
Stare decisis, we conclude, does not compel our contin
ued adherence to the per se rule against vertical price
restraints. As discussed earlier, respected authorities in
the economics literature suggest the per se rule is inap
propriate, and there is now widespread agreement that
resale price maintenance can have procompetitive effects.
See, e.g., Brief for Economists as Amici Curiae 16. It is
also significant that both the Department of Justice and
the Federal Trade Commission—the antitrust enforce
ment agencies with the ability to assess the long-term
impacts of resale price maintenance—have recommended
that this Court replace the per se rule with the traditional
Cite as: 551 U. S. ____ (2007) 21
rule of reason. See Brief for United States as Amicus

Curiae 6. In the antitrust context the fact that a decision
has been “called into serious question” justifies our re
evaluation of it. Khan, supra, at 21.
Other considerations reinforce the conclusion that Dr.
Miles should be overturned. Of most relevance, “we have
overruled our precedents when subsequent cases have
undermined their doctrinal underpinnings.” Dickerson v.
United States, 530 U. S. 428, 443 (2000). The Court’s
treatment of vertical restraints has progressed away from
Dr. Miles’ strict approach. We have distanced ourselves
from the opinion’s rationales. See supra, at 7–8; see also
Khan, supra, at 21 (overruling a case when “the views
underlying [it had been] eroded by this Court’s prece
dent”); Rodriguez de Quijas v. Shearson/American Ex
press, Inc., 490 U. S. 477, 480–481 (1989) (same). This is
unsurprising, for the case was decided not long after en
actment of the Sherman Act when the Court had little
experience with antitrust analysis. Only eight years after
Dr. Miles, moreover, the Court reined in the decision by
holding that a manufacturer can announce suggested
resale prices and refuse to deal with distributors who do
not follow them. Colgate, 250 U. S., at 307–308.
In more recent cases the Court, following a common-law
approach, has continued to temper, limit, or overrule once
strict prohibitions on vertical restraints. In 1977, the
Court overturned the per se rule for vertical nonprice
restraints, adopting the rule of reason in its stead. GTE
Sylvania, 433 U. S., at 57–59 (overruling United States v.
Arnold, Schwinn & Co., 388 U. S. 365 (1967)); see also 433
U. S., at 58, n. 29 (noting “that the advantages of vertical
restrictions should not be limited to the categories of new
entrants and failing firms”). While the Court in a footnote
in GTE Sylvania suggested that differences between
vertical price and nonprice restraints could support differ
ent legal treatment, see 433 U. S., at 51, n. 18, the central
PSKS, INC.
part of the opinion relied on authorities and arguments

that find unequal treatment “difficult to justify,” id., at
69–70 (White, J., concurring in judgment).
Continuing in this direction, in two cases in the 1980’s
the Court defined legal rules to limit the reach of Dr. Miles
and to accommodate the doctrines enunciated in GTE
Sylvania and Colgate. See Business Electronics, supra, at
726–728; Monsanto, 465 U. S., at 763–764. In Monsanto,
the Court required that antitrust plaintiffs alleging a §1
price-fixing conspiracy must present evidence tending to
exclude the possibility a manufacturer and its distributors
acted in an independent manner. Id., at 764. Unlike
Justice Brennan’s concurrence, which rejected arguments
that Dr. Miles should be overruled, see 465 U. S., at 769,
the Court “decline[d] to reach the question” whether verti
cal agreements fixing resale prices always should be
unlawful because neither party suggested otherwise, id.,
at 761–762, n. 7. In Business Electronics the Court fur
ther narrowed the scope of Dr. Miles. It held that the per
se rule applied only to specific agreements over price levels
and not to an agreement between a manufacturer and a
distributor to terminate a price-cutting distributor. 485
U. S., at 726–727, 735–736.
Most recently, in 1997, after examining the issue of
vertical maximum price-fixing agreements in light of
commentary and real experience, the Court overruled a
29-year-old precedent treating those agreements as per se
illegal. Khan, 522 U. S., at 22 (overruling Albrecht v.
Herald Co., 390 U. S. 145 (1968)). It held instead that
they should be evaluated under the traditional rule of
reason. 522 U. S., at 22. Our continued limiting of the
reach of the decision in Dr. Miles and our recent treatment
of other vertical restraints justify the conclusion that Dr.
Miles should not be retained.
The Dr. Miles rule is also inconsistent with a principled
framework, for it makes little economic sense when ana
Cite as: 551 U. S. ____ (2007) 23
lyzed with our other cases on vertical restraints. If we

were to decide the procompetitive effects of resale price
maintenance were insufficient to overrule Dr. Miles, then
cases such as Colgate and GTE Sylvania themselves
would be called into question. These later decisions, while
they may result in less intrabrand competition, can be
justified because they permit manufacturers to secure the
procompetitive benefits associated with vertical price
restraints through other methods. The other methods,
however, could be less efficient for a particular manufac
turer to establish and sustain. The end result hinders
competition and consumer welfare because manufacturers
are forced to engage in second-best alternatives and be
cause consumers are required to shoulder the increased
expense of the inferior practices.
The manufacturer has a number of legitimate options to
achieve benefits similar to those provided by vertical price
restraints. A manufacturer can exercise its Colgate right
to refuse to deal with retailers that do not follow its sug
gested prices. See 250 U. S., at 307. The economic effects
of unilateral and concerted price setting are in general the
same. See, e.g., Monsanto, 465 U. S., at 762–764. The
problem for the manufacturer is that a jury might con
clude its unilateral policy was really a vertical agreement,
subjecting it to treble damages and potential criminal
liability. Ibid.; Business Electronics, supra, at 728. Even
with the stringent standards in Monsanto and Business
Electronics, this danger can lead, and has led, rational
manufacturers to take wasteful measures. See, e.g., Brief
for PING, Inc., as Amicus Curiae 9–18. A manufacturer
might refuse to discuss its pricing policy with its distribu
tors except through counsel knowledgeable of the subtle
intricacies of the law. Or it might terminate longstanding
distributors for minor violations without seeking an ex
planation. See ibid. The increased costs these burden
some measures generate flow to consumers in the form of
PSKS, INC.
higher prices.
Furthermore, depending on the type of product it sells, a
manufacturer might be able to achieve the procompetitive
benefits of resale price maintenance by integrating down
stream and selling its products directly to consumers. Dr.
Miles tilts the relative costs of vertical integration and
vertical agreement by making the former more attractive
based on the per se rule, not on real market conditions.
See Business Electronics, supra, at 725; see generally
Coase, The Nature of the Firm, 4 Economica, New Series
386 (1937). This distortion might lead to inefficient inte
gration that would not otherwise take place, so that con
sumers must again suffer the consequences of the subop
timal distribution strategy. And integration, unlike
vertical price restraints, eliminates all intrabrand compe
tition. See, e.g., GTE Sylvania, 433 U. S., at 57, n. 26.
There is yet another consideration. A manufacturer can
impose territorial restrictions on distributors and allow
only one distributor to sell its goods in a given region. Our
cases have recognized, and the economics literature con
firms, that these vertical nonprice restraints have impacts
similar to those of vertical price restraints; both reduce
intrabrand competition and can stimulate retailer ser
vices. See, e.g., Business Electronics, supra, at 728; Mon
santo, supra, at 762–763; see also Brief for Economists as
Amici Curiae 17–18. Cf. Scherer & Ross 560 (noting that
vertical nonprice restraints “can engender inefficiencies at
least as serious as those imposed upon the consumer by
resale price maintenance”); Steiner, How Manufacturers
Deal with the Price-Cutting Retailer: When Are Vertical
Restraints Efficient?, 65 Antitrust L. J. 407, 446–447
(1997) (indicating that “antitrust law should recognize
that the consumer interest is often better served by [resale
price maintenance]—contrary to its per se illegality and
the rule-of-reason status of vertical nonprice restraints”).
The same legal standard (per se unlawfulness) applies to
Cite as: 551 U. S. ____ (2007) 25
horizontal market division and horizontal price fixing

because both have similar economic effect. There is like
wise little economic justification for the current differen
tial treatment of vertical price and nonprice restraints.
Furthermore, vertical nonprice restraints may prove less
efficient for inducing desired services, and they reduce
intrabrand competition more than vertical price restraints
by eliminating both price and service competition. See
Brief for Economists as Amici Curiae 17–18.
In sum, it is a flawed antitrust doctrine that serves the
interests of lawyers—by creating legal distinctions that
operate as traps for the unwary—more than the interests
of consumers—by requiring manufacturers to choose
second-best options to achieve sound business objectives.
B
Respondent’s arguments for reaffirming Dr. Miles on the
basis of stare decisis do not require a different result.
Respondent looks to congressional action concerning verti
cal price restraints. In 1937, Congress passed the Miller-
Tydings Fair Trade Act, 50 Stat. 693, which made vertical
price restraints legal if authorized by a fair trade law
enacted by a State. Fifteen years later, Congress ex
panded the exemption to permit vertical price-setting
agreements between a manufacturer and a distributor to
be enforced against other distributors not involved in the
agreement. McGuire Act, 66 Stat. 632. In 1975, however,
Congress repealed both Acts. Consumer Goods Pricing
Act, 89 Stat. 801. That the Dr. Miles rule applied to verti
cal price restraints in 1975, according to respondent,
shows Congress ratified the rule.
This is not so. The text of the Consumer Goods Pricing
Act did not codify the rule of per se illegality for vertical
price restraints. It rescinded statutory provisions that
made them per se legal. Congress once again placed these
restraints within the ambit of §1 of the Sherman Act.
PSKS, INC.
And, as has been discussed, Congress intended §1 to give

courts the ability “to develop governing principles of law”
in the common-law tradition. Texas Industries, Inc. v.
Radcliff Materials, Inc., 451 U. S. 630, 643 (1981); see
Business Electronics, 485 U. S., at 731 (“The changing
content of the term ‘restraint of trade’ was well recognized
at the time the Sherman Act was enacted”). Congress
could have set the Dr. Miles rule in stone, but it chose a
more flexible option. We respect its decision by analyzing
vertical price restraints, like all restraints, in conformance
with traditional §1 principles, including the principle that
our antitrust doctrines “evolv[e] with new circumstances
and new wisdom.” Business Electronics, supra, at 732; see
also Easterbrook 139.
The rule of reason, furthermore, is not inconsistent with
the Consumer Goods Pricing Act. Unlike the earlier con
gressional exemption, it does not treat vertical price re
straints as per se legal. In this respect, the justifications
for the prior exemption are illuminating. Its goal “was to
allow the States to protect small retail establishments
that Congress thought might otherwise be driven from the
marketplace by large-volume discounters.” California
Retail Liquor Dealers Assn. v. Midcal Aluminum, Inc., 445
U. S. 97, 102 (1980). The state fair trade laws also appear
to have been justified on similar grounds. See Areeda &
Hovenkamp 298. The rationales for these provisions are
foreign to the Sherman Act. Divorced from competition
and consumer welfare, they were designed to save ineffi
cient small retailers from their inability to compete. The
purpose of the antitrust laws, by contrast, is “the protec
tion of competition, not competitors.” Atlantic Richfield
Co. v. USA Petroleum Co., 495 U. S. 328, 338 (1990) (in
ternal quotation marks omitted). To the extent Congress
repealed the exemption for some vertical price restraints
to end its prior practice of encouraging anticompetitive
conduct, the rule of reason promotes the same objective.
Cite as: 551 U. S. ____ (2007) 27
Respondent also relies on several congressional appro

priations in the mid-1980’s in which Congress did not
permit the Department of Justice or the Federal Trade
Commission to use funds to advocate overturning Dr.
Miles. See, e.g., 97 Stat. 1071. We need not pause long in
addressing this argument. The conditions on funding are
no longer in place, see, e.g., Brief for United States as
Amicus Curiae 21, and they were ambiguous at best. As
much as they might show congressional approval for Dr.
Miles, they might demonstrate a different proposition:
that Congress could not pass legislation codifying the rule
and reached a short-term compromise instead.
Reliance interests do not require us to reaffirm Dr.
Miles. To be sure, reliance on a judicial opinion is a sig
nificant reason to adhere to it, Payne v. Tennessee, 501
U. S. 808, 828 (1991), especially “in cases involving prop
erty and contract rights,” Khan, 522 U. S., at 20. The
reliance interests here, however, like the reliance interests
in Khan, cannot justify an inefficient rule, especially
because the narrowness of the rule has allowed manufac
turers to set minimum resale prices in other ways. And
while the Dr. Miles rule is longstanding, resale price
maintenance was legal under fair trade laws in a majority
of States for a large part of the past century up until 1975.
It is also of note that during this time “when the legal
environment in the [United States] was most favorable for
[resale price maintenance], no more than a tiny fraction of
manufacturers ever employed [resale price maintenance]
contracts.” Overstreet 6; see also id., at 169 (noting that
“no more than one percent of manufacturers, accounting
for no more than ten percent of consumer goods purchases,
ever employed [resale price maintenance] in any single
year in the [United States]”); Scherer & Ross 549 (noting
that “[t]he fraction of U.S. retail sales covered by [resale
price maintenance] in its heyday has been variously esti
mated at from 4 to 10 percent”). To the extent consumers
PSKS, INC.
demand cheap goods, judging vertical price restraints

under the rule of reason will not prevent the market from
providing them. Cf. Easterbrook 152–153 (noting that
“S.S. Kresge (the old K-Mart) flourished during the days of
manufacturers’ greatest freedom” because “discount stores
offer a combination of price and service that many cus
tomers value” and that “[n]othing in restricted dealing
threatens the ability of consumers to find low prices”);
Scherer & Ross 557 (noting that “for the most part, the
effects of the [Consumer Goods Pricing Act] were imper
ceptible because the forces of competition had already
repealed the [previous antitrust exemption] in their own
quiet way”).
For these reasons the Court’s decision in Dr. Miles
Medical Co. v. John D. Park & Sons Co., 220 U. S. 373
(1911), is now overruled. Vertical price restraints are to
be judged according to the rule of reason.
V
Noting that Leegin’s president has an ownership inter
est in retail stores that sell Brighton, respondent claims
Leegin participated in an unlawful horizontal cartel with
competing retailers. Respondent did not make this allega
tion in the lower courts, and we do not consider it here.
The judgment of the Court of Appeals is reversed, and
the case is remanded for proceedings consistent with this
opinion.
It is so ordered.
Cite as: 551 U. S. ____ (2007) 1
BREYER, J., dissenting

_________________
No. 06–480
_________________
LEEGIN CREATIVE LEATHER PRODUCTS, INC.,
PETITIONER v. PSKS, INC., DBA KAY’S
KLOSET . . . KAY’S SHOES
ON WRIT OF CERTIORARI TO THE UNITED STATES COURT OF
APPEALS FOR THE FIFTH CIRCUIT
[June 28, 2007]
JUSTICE BREYER, with whom JUSTICE STEVENS, JUSTICE

SOUTER, and JUSTICE GINSBURG join, dissenting.
In Dr. Miles Medical Co. v. John D. Park & Sons Co.,
220 U. S. 373, 394, 408–409 (1911), this Court held that
an agreement between a manufacturer of proprietary
medicines and its dealers to fix the minimum price at
which its medicines could be sold was “invalid . . . under
the [Sherman Act, 15 U. S. C. §1].” This Court has consis
tently read Dr. Miles as establishing a bright-line rule
that agreements fixing minimum resale prices are per se
illegal. See, e.g., United States v. Trenton Potteries Co.,
273 U. S. 392, 399–401 (1927); NYNEX Corp. v. Discon,
Inc., 525 U. S. 128, 133 (1998). That per se rule is one
upon which the legal profession, business, and the public
have relied for close to a century. Today the Court holds
that courts must determine the lawfulness of minimum
resale price maintenance by applying, not a bright-line per
se rule, but a circumstance-specific “rule of reason.” Ante,
at 28. And in doing so it overturns Dr. Miles.
The Court justifies its departure from ordinary consid
erations of stare decisis by pointing to a set of arguments
well known in the antitrust literature for close to half a
century. See ante, at 10–12. Congress has repeatedly
PSKS, INC.
found in these arguments insufficient grounds for over

turning the per se rule. See, e.g., Hearings on H. R. 10527
et al. before the Subcommittee on Commerce and Finance
of the House Committee on Interstate and Foreign Com
merce, 85th Cong., 2d Sess., 74–76, 89, 99, 101–102, 192–
195, 261–262 (1958). And, in my view, they do not war
rant the Court’s now overturning so well-established a
legal precedent.
I
The Sherman Act seeks to maintain a marketplace free
of anticompetitive practices, in particular those enforced
by agreement among private firms. The law assumes that
such a marketplace, free of private restrictions, will tend
to bring about the lower prices, better products, and more
efficient production processes that consumers typically
desire. In determining the lawfulness of particular prac
tices, courts often apply a “rule of reason.” They examine
both a practice’s likely anticompetitive effects and its
beneficial business justifications. See, e.g., National Col
legiate Athletic Assn. v. Board of Regents of Univ. of Okla.,
468 U. S. 85, 109–110, and n. 39 (1984); National Soc. of
Professional Engineers v. United States, 435 U. S. 679,
688–691 (1978); Board of Trade of Chicago v. United
States, 246 U. S. 231, 238 (1918).
Nonetheless, sometimes the likely anticompetitive
consequences of a particular practice are so serious and
the potential justifications so few (or, e.g., so difficult to
prove) that courts have departed from a pure “rule of
reason” approach. And sometimes this Court has imposed
a rule of per se unlawfulness—a rule that instructs courts
to find the practice unlawful all (or nearly all) the time.
See, e.g., NYNEX, supra, at 133; Arizona v. Maricopa
County Medical Soc., 457 U. S. 332, 343–344, and n. 16
(1982); Continental T. V., Inc. v. GTE Sylvania Inc., 433
U. S. 36, 50, n. 16 (1977); United States v. Topco Associ
Cite as: 551 U. S. ____ (2007) 3
ates, Inc., 405 U. S. 596, 609–611 (1972); United States v.

Socony-Vacuum Oil Co., 310 U. S. 150, 213–214 (1940)
(citing and quoting Trenton Potteries, supra, at 397–398).
The case before us asks which kind of approach the
courts should follow where minimum resale price mainte
nance is at issue. Should they apply a per se rule (or a
variation) that would make minimum resale price mainte
nance always (or almost always) unlawful? Should they
apply a “rule of reason”? Were the Court writing on a
blank slate, I would find these questions difficult. But, of
course, the Court is not writing on a blank slate, and that
fact makes a considerable legal difference.
To best explain why the question would be difficult were
we deciding it afresh, I briefly summarize several classical
arguments for and against the use of a per se rule. The
arguments focus on three sets of considerations, those
involving: (1) potential anticompetitive effects, (2) poten
tial benefits, and (3) administration. The difficulty arises
out of the fact that the different sets of considerations
point in different directions. See, e.g., 8 P. Areeda, Anti
trust Law ¶¶1628–1633, pp. 330–392 (1st ed. 1989) (here
inafter Areeda); 8 P. Areeda & H. Hovenkamp, Antitrust
Law ¶¶1628–1633, pp. 288–339 (2d ed. 2004) (hereinafter
Areeda & Hovenkamp); Easterbrook, Vertical Arrange
ments and the Rule of Reason, 53 Antitrust L. J. 135, 146–
152 (1984) (hereinafter Easterbrook); Pitofsky, In Defense
of Discounters: The No-Frills Case for a Per Se Rule
Against Vertical Price Fixing, 71 Geo. L. J. 1487 (1983)
(hereinafter Pitofsky); Scherer, The Economics of Vertical
Restraints, 52 Antitrust L. J. 687, 706–707 (1983) (herein
after Scherer); Posner, The Next Step in the Antitrust
Treatment of Restricted Distribution: Per Se Legality, 48
U. Chi. L. Rev. 6, 22–26 (1981); Brief for William S. Co
manor and Frederic M. Scherer as Amici Curiae 7–10.
On the one hand, agreements setting minimum resale
prices may have serious anticompetitive consequences. In
PSKS, INC.
respect to dealers: Resale price maintenance agreements,

rather like horizontal price agreements, can diminish or
eliminate price competition among dealers of a single
brand or (if practiced generally by manufacturers) among
multibrand dealers. In doing so, they can prevent dealers
from offering customers the lower prices that many cus
tomers prefer; they can prevent dealers from responding to
changes in demand, say falling demand, by cutting prices;
they can encourage dealers to substitute service, for price,
competition, thereby threatening wastefully to attract too
many resources into that portion of the industry; they can
inhibit expansion by more efficient dealers whose lower
prices might otherwise attract more customers, stifling the
development of new, more efficient modes of retailing; and
so forth. See, e.g., 8 Areeda & Hovenkamp ¶1632c, at
319–321; Steiner, The Evolution and Applications of Dual-
Stage Thinking, 49 The Antitrust Bulletin 877, 899–900
(2004); Comanor, Vertical Price-Fixing, Vertical Market
Restrictions, and the New Antitrust Policy, 98 Harv.
L. Rev. 983, 990–1000 (1985).
In respect to producers: Resale price maintenance agree
ments can help to reinforce the competition-inhibiting
behavior of firms in concentrated industries. In such
industries firms may tacitly collude, i.e., observe each
other’s pricing behavior, each understanding that price
cutting by one firm is likely to trigger price competition by
all. See 8 Areeda & Hovenkamp ¶1632d, at 321–323; P.
Areeda & L. Kaplow, Antitrust Analysis ¶¶231–233, pp.
276–283 (4th ed. 1988) (hereinafter Areeda & Kaplow).
Cf. United States v. Container Corp. of America, 393 U. S.
333 (1969); Areeda & Kaplow ¶¶247–253, at 327–348.
Where that is so, resale price maintenance can make it
easier for each producer to identify (by observing retail
markets) when a competitor has begun to cut prices. And
a producer who cuts wholesale prices without lowering the
minimum resale price will stand to gain little, if anything,
Cite as: 551 U. S. ____ (2007) 5
in increased profits, because the dealer will be unable to

stimulate increased consumer demand by passing along
the producer’s price cut to consumers. In either case,
resale price maintenance agreements will tend to prevent
price competition from “breaking out”; and they will
thereby tend to stabilize producer prices. See Pitofsky
1490–1491. Cf., e.g., Container Corp., supra, at 336–337.
Those who express concern about the potential anticom
petitive effects find empirical support in the behavior of
prices before, and then after, Congress in 1975 repealed
the Miller-Tydings Fair Trade Act, 50 Stat. 693, and the
McGuire Act, 66 Stat. 631. Those Acts had permitted (but
not required) individual States to enact “fair trade” laws
authorizing minimum resale price maintenance. At the
time of repeal minimum resale price maintenance was
lawful in 36 States; it was unlawful in 14 States. See
Hearings on S. 408 before the Subcommittee on Antitrust
and Monopoly of the Senate Committee on the Judiciary,
94th Cong., 1st Sess., 173 (1975) (hereinafter Hearings on
S. 408) (statement of Thomas E. Kauper, Assistant Attor
ney General, Antitrust Division). Comparing prices in the
former States with prices in the latter States, the Depart
ment of Justice argued that minimum resale price main
tenance had raised prices by 19% to 27%. See Hearings on
H. R. 2384 before the Subcommittee on Monopolies and
Commercial Law of the House Committee on the Judici
ary, 94th Cong., 1st Sess., 122 (1975) (hereinafter Hear
ings on H. R. 2384) (statement of Keith I. Clearwaters,
Deputy Assistant Attorney General, Antitrust Division).
After repeal, minimum resale price maintenance agree
ments were unlawful per se in every State. The Federal
Trade Commission (FTC) staff, after studying numerous
price surveys, wrote that collectively the surveys “indi
cate[d] that [resale price maintenance] in most cases
increased the prices of products sold with [resale price
maintenance].” Bureau of Economics Staff Report to the
PSKS, INC.
FTC, T. Overstreet, Resale Price Maintenance: Economic

Theories and Empirical Evidence, 160 (1983) (hereinafter
Overstreet). Most economists today agree that, in the
words of a prominent antitrust treatise, “resale price
maintenance tends to produce higher consumer prices
than would otherwise be the case.” 8 Areeda & Hovenk
amp ¶1604b, at 40 (finding “[t]he evidence . . . persuasive
on this point”). See also Brief for William S. Comanor and
Frederic M. Scherer as Amici Curiae 4 (“It is uniformly
acknowledged that [resale price maintenance] and other
vertical restraints lead to higher consumer prices”).
On the other hand, those favoring resale price mainte
nance have long argued that resale price maintenance
agreements can provide important consumer benefits.
The majority lists two: First, such agreements can facili
tate new entry. Ante, at 11–12. For example, a newly
entering producer wishing to build a product name might
be able to convince dealers to help it do so—if, but only if,
the producer can assure those dealers that they will later
recoup their investment. Without resale price mainte
nance, late-entering dealers might take advantage of the
earlier investment and, through price competition, drive
prices down to the point where the early dealers cannot
recover what they spent. By assuring the initial dealers
that such later price competition will not occur, resale
price maintenance can encourage them to carry the new
product, thereby helping the new producer succeed. See 8
Areeda & Hovenkamp ¶¶1617a, 1631b, at 193–196, 308.
The result might be increased competition at the producer
level, i.e., greater inter-brand competition, that brings
with it net consumer benefits.
Second, without resale price maintenance a producer
might find its efforts to sell a product undermined by what
resale price maintenance advocates call “free riding.”
Ante, at 10–11. Suppose a producer concludes that it can
succeed only if dealers provide certain services, say, prod
Cite as: 551 U. S. ____ (2007) 7
uct demonstrations, high quality shops, advertising that

creates a certain product image, and so forth. Without
resale price maintenance, some dealers might take a “free
ride” on the investment that others make in providing
those services. Such a dealer would save money by not
paying for those services and could consequently cut its
own price and increase its own sales. Under these circum
stances, dealers might prove unwilling to invest in the
provision of necessary services. See, e.g., 8 Areeda &
Hovenkamp ¶¶1611–1613, 1631c, at 126–165, 309–313; R.
Posner, Antitrust Law 172–173 (2d ed. 2001); R. Bork, The
Antitrust Paradox 290–291 (1978) (hereinafter Bork);
Easterbrook 146–149.
Moreover, where a producer and not a group of dealers
seeks a resale price maintenance agreement, there is a
special reason to believe some such benefits exist. That is
because, other things being equal, producers should want
to encourage price competition among their dealers. By
doing so they will often increase profits by selling more of
their product. See Sylvania, 433 U. S., at 56, n. 24; Bork
290. And that is so, even if the producer possesses suffi
cient market power to earn a super-normal profit. That is
to say, other things being equal, the producer will benefit
by charging his dealers a competitive (or even a higher-
than-competitive) wholesale price while encouraging price
competition among them. Hence, if the producer is the
moving force, the producer must have some special reason
for wanting resale price maintenance; and in the absence
of, say, concentrated producer markets (where that special
reason might consist of a desire to stabilize wholesale
prices), that special reason may well reflect the special
circumstances just described: new entry, “free riding,” or
variations on those themes.
The upshot is, as many economists suggest, sometimes
resale price maintenance can prove harmful; sometimes it
can bring benefits. See, e.g., Brief for Economists as Amici
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Curiae 16; 8 Areeda & Hovenkamp ¶¶1631–1632, at 306–

328; Pitofsky 1495; Scherer 706–707. But before conclud
ing that courts should consequently apply a rule of reason,
I would ask such questions as, how often are harms or
benefits likely to occur? How easy is it to separate the
beneficial sheep from the antitrust goats?
Economic discussion, such as the studies the Court
relies upon, can help provide answers to these questions,
and in doing so, economics can, and should, inform anti
trust law. But antitrust law cannot, and should not,
precisely replicate economists’ (sometimes conflicting)
views. That is because law, unlike economics, is an ad
ministrative system the effects of which depend upon the
content of rules and precedents only as they are applied by
judges and juries in courts and by lawyers advising their
clients. And that fact means that courts will often bring
their own administrative judgment to bear, sometimes
applying rules of per se unlawfulness to business practices
even when those practices sometimes produce benefits.
See, e.g., F.M. Scherer & D. Ross, Industrial Market
Structure and Economic Performance 335–339 (3d ed.
1990) (hereinafter Scherer & Ross) (describing some cir
cumstances under which price-fixing agreements could be
more beneficial than “unfettered competition,” but also
noting potential costs of moving from a per se ban to a rule
of reasonableness assessment of such agreements).
I have already described studies and analyses that
suggest (though they cannot prove) that resale price main
tenance can cause harms with some regularity—and
certainly when dealers are the driving force. But what
about benefits? How often, for example, will the benefits
to which the Court points occur in practice? I can find no
economic consensus on this point. There is a consensus in
the literature that “free riding” takes place. But “free
riding” often takes place in the economy without any legal
effort to stop it. Many visitors to California take free rides
Cite as: 551 U. S. ____ (2007) 9
on the Pacific Coast Highway. We all benefit freely from

ideas, such as that of creating the first supermarket.
Dealers often take a “free ride” on investments that others
have made in building a product’s name and reputation.
The question is how often the “free riding” problem is
serious enough significantly to deter dealer investment.
To be more specific, one can easily imagine a dealer who
refuses to provide important presale services, say a de
tailed explanation of how a product works (or who fails to
provide a proper atmosphere in which to sell expensive
perfume or alligator billfolds), lest customers use that
“free” service (or enjoy the psychological benefit arising
when a high-priced retailer stocks a particular brand of
billfold or handbag) and then buy from another dealer at a
lower price. Sometimes this must happen in reality. But
does it happen often? We do, after all, live in an economy
where firms, despite Dr. Miles’ per se rule, still sell com
plex technical equipment (as well as expensive perfume
and alligator billfolds) to consumers.
All this is to say that the ultimate question is not
whether, but how much, “free riding” of this sort takes
place. And, after reading the briefs, I must answer that
question with an uncertain “sometimes.” See, e.g., Brief
for William S. Comanor and Frederic M. Scherer as Amici
Curiae 6–7 (noting “skepticism in the economic literature
about how often [free riding] actually occurs”); Scherer &
Ross 551–555 (explaining the “severe limitations” of the
free-rider justification for resale price maintenance);
Pitofsky, Why Dr. Miles Was Right, 8 Regulation, No. 1,
pp. 27, 29–30 (Jan./Feb. 1984) (similar analysis).
How easily can courts identify instances in which the
benefits are likely to outweigh potential harms? My own
answer is, not very easily. For one thing, it is often diffi
cult to identify who—producer or dealer—is the moving
force behind any given resale price maintenance agree
ment. Suppose, for example, several large multibrand
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retailers all sell resale-price-maintained products. Sup

pose further that small producers set retail prices because
they fear that, otherwise, the large retailers will favor
(say, by allocating better shelf-space) the goods of other
producers who practice resale price maintenance. Who
“initiated” this practice, the retailers hoping for consider
able insulation from retail competition, or the producers,
who simply seek to deal best with the circumstances they
find? For another thing, as I just said, it is difficult to
determine just when, and where, the “free riding” problem
is serious enough to warrant legal protection.
I recognize that scholars have sought to develop check
lists and sets of questions that will help courts separate
instances where anticompetitive harms are more likely
from instances where only benefits are likely to be found.
See, e.g., 8 Areeda & Hovenkamp ¶¶1633c–1633e, at 330–
339. See also Brief for William S. Comanor and Frederic
M. Scherer as Amici Curiae 8–10. But applying these
criteria in court is often easier said than done. The
Court’s invitation to consider the existence of “market
power,” for example, ante, at 18, invites lengthy time-
consuming argument among competing experts, as they
seek to apply abstract, highly technical, criteria to often
ill-defined markets. And resale price maintenance cases,
unlike a major merger or monopoly case, are likely to
prove numerous and involve only private parties. One
cannot fairly expect judges and juries in such cases to
apply complex economic criteria without making a consid
erable number of mistakes, which themselves may impose
serious costs. See, e.g., H. Hovenkamp, The Antitrust
Enterprise 105 (2005) (litigating a rule of reason case is
“one of the most costly procedures in antitrust practice”).
See also Bok, Section 7 of the Clayton Act and the Merg
ing of Law and Economics, 74 Harv. L. Rev. 226, 238–247
(1960) (describing lengthy FTC efforts to apply complex
criteria in a merger case).
Cite as: 551 U. S. ____ (2007) 11
Are there special advantages to a bright-line rule?

Without such a rule, it is often unfair, and consequently
impractical, for enforcement officials to bring criminal
proceedings. And since enforcement resources are limited,
that loss may tempt some producers or dealers to enter
into agreements that are, on balance, anticompetitive.
Given the uncertainties that surround key items in the
overall balance sheet, particularly in respect to the “ad
ministrative” questions, I can concede to the majority that
the problem is difficult. And, if forced to decide now, at
most I might agree that the per se rule should be slightly
modified to allow an exception for the more easily identifi
able and temporary condition of “new entry.” See Pitofsky
1495. But I am not now forced to decide this question.
The question before us is not what should be the rule,
starting from scratch. We here must decide whether to
change a clear and simple price-related antitrust rule that
the courts have applied for nearly a century.
II
We write, not on a blank slate, but on a slate that begins
with Dr. Miles and goes on to list a century’s worth of
similar cases, massive amounts of advice that lawyers
have provided their clients, and untold numbers of busi
ness decisions those clients have taken in reliance upon
that advice. See, e.g., United States v. Bausch & Lomb
Optical Co., 321 U. S. 707, 721 (1944); Sylvania, 433 U. S.,
at 51, n. 18 (“The per se illegality of [vertical] price restric
tions has been established firmly for many years . . .”).
Indeed a Westlaw search shows that Dr. Miles itself has
been cited dozens of times in this Court and hundreds of
times in lower courts. Those who wish this Court to
change so well-established a legal precedent bear a heavy
burden of proof. See Illinois Brick Co. v. Illinois, 431 U. S.
720, 736 (1977) (noting, in declining to overrule an earlier
case interpreting §4 of the Clayton Act, that “considera
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tions of stare decisis weigh heavily in the area of statutory

construction, where Congress is free to change this Court’s
interpretation of its legislation”). I am not aware of any
case in which this Court has overturned so well-
established a statutory precedent. Regardless, I do not see
how the Court can claim that ordinary criteria for over
ruling an earlier case have been met. See, e.g., Planned
Parenthood of Southeastern Pa. v. Casey, 505 U. S. 833,
854–855 (1992). See also Federal Election Comm’n v.
Wisconsin Right to Life, Inc., ante, at 19–21 (SCALIA, J.,
concurring in part and concurring in judgment).
A
I can find no change in circumstances in the past several
decades that helps the majority’s position. In fact, there
has been one important change that argues strongly to the
contrary. In 1975, Congress repealed the McGuire and
Miller-Tydings Acts. See Consumer Goods Pricing Act of
1975, 89 Stat. 801. And it thereby consciously extended
Dr. Miles’ per se rule. Indeed, at that time the Depart
ment of Justice and the FTC, then urging application of
the per se rule, discussed virtually every argument pre
sented now to this Court as well as others not here pre
sented. And they explained to Congress why Congress
should reject them. See Hearings on S. 408, at 176–177
(statement of Thomas E. Kauper, Assistant Attorney
General, Antitrust Division); id., at 170–172 (testimony of
Lewis A. Engman, Chairman of the FTC); Hearings on
H. R. 2384, at 113–114 (testimony of Keith I. Clearwaters,
Deputy Assistant Attorney General, Antitrust Division).
Congress fully understood, and consequently intended,
that the result of its repeal of McGuire and Miller-Tydings
would be to make minimum resale price maintenance per
se unlawful. See, e.g., S. Rep. No. 94–466, pp. 1–3 (1975)
(“Without [the exemptions authorized by the Miller-
Tydings and McGuire Acts,] the agreements they author
Cite as: 551 U. S. ____ (2007) 13
ize would violate the antitrust laws. . . . [R]epeal of the fair

trade laws generally will prohibit manufacturers from
enforcing resale prices”). See also Sylvania, supra, at 51,
n. 18 (“Congress recently has expressed its approval of a
per se analysis of vertical price restrictions by repealing
those provisions of the Miller-Tydings and McGuire Acts
allowing fair-trade pricing at the option of the individual
States”).
Congress did not prohibit this Court from reconsidering
the per se rule. But enacting major legislation premised
upon the existence of that rule constitutes important
public reliance upon that rule. And doing so aware of the
relevant arguments constitutes even stronger reliance
upon the Court’s keeping the rule, at least in the absence
of some significant change in respect to those arguments.
Have there been any such changes? There have been a
few economic studies, described in some of the briefs, that
argue, contrary to the testimony of the Justice Depart
ment and FTC to Congress in 1975, that resale price
maintenance is not harmful. One study, relying on an
analysis of litigated resale price maintenance cases from
1975 to 1982, concludes that resale price maintenance
does not ordinarily involve producer or dealer collusion.
See Ippolito, Resale Price Maintenance: Empirical Evi
dence from Litigation, 34 J. Law & Econ. 263, 281–282,
292 (1991). But this study equates the failure of plaintiffs
to allege collusion with the absence of collusion—an equa
tion that overlooks the superfluous nature of allegations of
horizontal collusion in a resale price maintenance case
and the tacit form that such collusion might take. See H.
Hovenkamp, Federal Antitrust Policy §11.3c, p. 464, n. 19
(3d ed. 2005); supra, at 4–5.
The other study provides a theoretical basis for conclud
ing that resale price maintenance “need not lead to higher
retail prices.” Marvel & McCafferty, The Political Econ
omy of Resale Price Maintenance, 94 J. Pol. Econ. 1074,
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1075 (1986). But this study develops a theoretical model

“under the assumption that [resale price maintenance] is
efficiency-enhancing.” Ibid. Its only empirical support is
a 1940 study that the authors acknowledge is much criti
cized. See id., at 1091. And many other economists take a
different view. See Brief for William S. Comanor and
Frederic M. Scherer as Amici Curiae 4.
Regardless, taken together, these studies at most may
offer some mild support for the majority’s position. But
they cannot constitute a major change in circumstances.
Petitioner and some amici have also presented us with
newer studies that show that resale price maintenance
sometimes brings consumer benefits. Overstreet 119–129
(describing numerous case studies). But the proponents of
a per se rule have always conceded as much. What is
remarkable about the majority’s arguments is that noth
ing in this respect is new. See supra, at 3, 12 (citing arti
cles and congressional testimony going back several dec
ades). The only new feature of these arguments lies in the
fact that the most current advocates of overruling Dr.
Miles have abandoned a host of other not-very-persuasive
arguments upon which prior resale price maintenance
proponents used to rely. See, e.g., 8 Areeda ¶1631a, at
350–352 (listing “ ‘[t]raditional’ justifications” for resale
price maintenance).
The one arguable exception consists of the majority’s
claim that “even absent free riding,” resale price mainte
nance “may be the most efficient way to expand the manu
facturer’s market share by inducing the retailer’s per
formance and allowing it to use its own initiative and
experience in providing valuable services.” Ante, at 12. I
cannot count this as an exception, however, because I do
not understand how, in the absence of free-riding (and
assuming competitiveness), an established producer would
need resale price maintenance. Why, on these assump
tions, would a dealer not “expand” its “market share” as
Cite as: 551 U. S. ____ (2007) 15
best that dealer sees fit, obtaining appropriate payment

from consumers in the process? There may be an answer
to this question. But I have not seen it. And I do not
think that we should place significant weight upon justifi
cations that the parties do not explain with sufficient
clarity for a generalist judge to understand.
No one claims that the American economy has changed
in ways that might support the majority. Concentration in
retailing has increased. See, e.g., Brief for Respondent 18
(since minimum resale price maintenance was banned
nationwide in 1975, the total number of retailers has
dropped while the growth in sales per store has risen);
Brief for American Antitrust Institute as Amicus Curiae
17, n. 20 (citing private study reporting that the combined
sales of the 10 largest retailers worldwide has grown to
nearly 30% of total retail sales of top 250 retailers; also
quoting 1999 Organisation for Economic Co-operation and
Development report stating that the “ ‘last twenty years
have seen momentous changes in retail distribution in
cluding significant increases in concentration’ ”); Mamen,
Facing Goliath: Challenging the Impacts of Supermarket
Consolidation on our Local Economies, Communities, and
Food Security, The Oakland Institute, 1 Policy Brief, No.
3, pp. 1, 2 (Spring 2007), http://www.oaklandinsti
tute.org/pdfs/facing_goliath.pdf (as visited June 25, 2007,
and available in Clerks of Court’s case file) (noting that
“[f]or many decades, the top five food retail firms in the
U. S. controlled less than 20 percent of the market”; from
1997 to 2000, “the top five firms increased their market
share from 24 to 42 percent of all retail sales”; and “[b]y
2003, they controlled over half of all grocery sales”). That
change, other things being equal, may enable (and moti
vate) more retailers, accounting for a greater percentage of
total retail sales volume, to seek resale price maintenance,
thereby making it more difficult for price-cutting competi
tors (perhaps internet retailers) to obtain market share.
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Nor has anyone argued that concentration among manu

facturers that might use resale price maintenance has
diminished significantly. And as far as I can tell, it has
not. Consider household electrical appliances, which a
study from the late 1950’s suggests constituted a signifi
cant portion of those products subject to resale price main
tenance at that time. See Hollander, United States of
America, in Resale Price Maintenance 67, 80–81 (B.
Yamey ed. 1966). Although it is somewhat difficult to
compare census data from 2002 with that from several
decades ago (because of changes in the classification sys
tem), it is clear that at least some subsets of the household
electrical appliance industry are more concentrated, in
terms of manufacturer market power, now than they were
then. For instance, the top eight domestic manufacturers
of household cooking appliances accounted for 68% of the
domestic market (measured by value of shipments) in
1963 (the earliest date for which I was able to find data),
compared with 77% in 2002. See Dept. of Commerce,
Bureau of Census, 1972 Census of Manufacturers, Special
Report Series, Concentration Ratios in Manufacturing, No.
MC72(SR)–2, p. SR2–38 (1975) (hereinafter 1972 Census);
Dept. of Commerce, Bureau of Census, 2002 Economic
Census, Concentration Ratios: 2002, No. EC02–31SR–1,
p. 55 (2006) (hereinafter 2002 Census). The top eight
domestic manufacturers of household laundry equipment
accounted for 95% of the domestic market in 1963 (90% in
1958), compared with 99% in 2002. 1972 Census, at SR2–
38; 2002 Census, at 55. And the top eight domestic manu
facturers of household refrigerators and freezers ac
counted for 91% of the domestic market in 1963, compared
with 95% in 2002. 1972 Census, at SR2–38; 2002 Census,
at 55. Increased concentration among manufacturers
increases the likelihood that producer-originated resale
price maintenance will prove more prevalent today than in
years past, and more harmful. At the very least, the
Cite as: 551 U. S. ____ (2007) 17
majority has not explained how these, or other changes in

the economy could help support its position.
In sum, there is no relevant change. And without some
such change, there is no ground for abandoning a well-
established antitrust rule.
B
With the preceding discussion in mind, I would consult
the list of factors that our case law indicates are relevant
when we consider overruling an earlier case. JUSTICE
SCALIA, writing separately in another of our cases this
Term, well summarizes that law. See Wisconsin Right to
Life, Inc., ante, at 19–21. (opinion concurring in part and
concurring in judgment). And every relevant factor he
mentions argues against overruling Dr. Miles here.
First, the Court applies stare decisis more “rigidly” in
statutory than in constitutional cases. See Glidden Co. v.
Zdanok, 370 U. S. 530, 543 (1962); Illinois Brick Co., 431
U. S., at 736. This is a statutory case.
Second, the Court does sometimes overrule cases that it
decided wrongly only a reasonably short time ago. As
JUSTICE SCALIA put it, “[o]verruling a constitutional case
decided just a few years earlier is far from unprece
dented.” Wisconsin Right to Life, ante, at 19 (emphasis
added). We here overrule one statutory case, Dr. Miles,
decided 100 years ago, and we overrule the cases that
reaffirmed its per se rule in the intervening years. See,
e.g., Trenton Potteries, 273 U. S., at 399–401; Bausch &
Lomb, 321 U. S., at 721; United States v. Parke, Davis &
Co., 362 U. S. 29, 45–47 (1960); Simpson v. Union Oil Co.
of Cal., 377 U. S. 13, 16–17 (1964).
Third, the fact that a decision creates an “unworkable”
legal regime argues in favor of overruling. See Payne v.
Tennessee, 501 U. S. 808, 827–828 (1991); Swift & Co. v.
Wickham, 382 U. S. 111, 116 (1965). Implementation of
the per se rule, even with the complications attendant the
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exception allowed for in United States v. Colgate & Co.,

250 U. S. 300 (1919), has proved practical over the course
of the last century, particularly when compared with the
many complexities of litigating a case under the “rule of
reason” regime. No one has shown how moving from the
Dr. Miles regime to “rule of reason” analysis would make
the legal regime governing minimum resale price mainte
nance more “administrable,” Wisconsin Right to Life, ante,
at 20 (opinion of SCALIA, J.), particularly since Colgate
would remain good law with respect to unreasonable price
maintenance.
Fourth, the fact that a decision “unsettles” the law may
argue in favor of overruling. See Sylvania, 433 U. S., at
47; Wisconsin Right to Life, ante, at 20–21 (opinion of
SCALIA, J.). The per se rule is well-settled law, as the
Court itself has previously recognized. Sylvania, supra, at
51, n. 18. It is the majority’s change here that will unset
tle the law.
Fifth, the fact that a case involves property rights or
contract rights, where reliance interests are involved,
argues against overruling. Payne, supra, at 828. This
case involves contract rights and perhaps property rights
(consider shopping malls). And there has been consider
able reliance upon the per se rule. As I have said, Con
gress relied upon the continued vitality of Dr. Miles when
it repealed Miller-Tydings and McGuire. Supra, at 12–13.
The Executive Branch argued for repeal on the assump
tion that Dr. Miles stated the law. Ibid. Moreover, whole
sectors of the economy have come to rely upon the per se
rule. A factory outlet store tells us that the rule “form[s]
an essential part of the regulatory background against
which [that firm] and many other discount retailers have
financed, structured, and operated their businesses.”
Brief for Burlington Coat Factory Warehouse Corp. as
Amicus Curiae 5. The Consumer Federation of America
tells us that large low-price retailers would not exist with
Cite as: 551 U. S. ____ (2007) 19
out Dr. Miles; minimum resale price maintenance, “by

stabilizing price levels and preventing low-price competi
tion, erects a potentially insurmountable barrier to entry
for such low-price innovators.” Brief for Consumer Fed
eration of America as Amicus Curiae 5, 7–9 (discussing,
inter alia, comments by Wal-Mart’s founder 25 years ago
that relaxation of the per se ban on minimum resale price
maintenance would be a “ ‘great danger’ ” to Wal-Mart’s
then-relatively-nascent business). See also Brief for
American Antitrust Institute as Amicus Curiae 14–15, and
sources cited therein (making the same point). New dis
tributors, including internet distributors, have similarly
invested time, money, and labor in an effort to bring yet
lower cost goods to Americans.
This Court’s overruling of the per se rule jeopardizes
this reliance, and more. What about malls built on the
assumption that a discount distributor will remain an
anchor tenant? What about home buyers who have taken
a home’s distance from such a mall into account? What
about Americans, producers, distributors, and consumers,
who have understandably assumed, at least for the last 30
years, that price competition is a legally guaranteed way
of life? The majority denies none of this. It simply says
that these “reliance interests . . . , like the reliance inter
ests in Khan, cannot justify an inefficient rule.” Ante, at
27.
The Court minimizes the importance of this reliance,
adding that it “is also of note” that at the time resale price
maintenance contracts were lawful “ ‘no more than a tiny
fraction of manufacturers ever employed’ ” the practice.
Ibid. (quoting Overstreet 6). By “tiny” the Court means
manufacturers that accounted for up to “ ‘ten percent of
consumer goods purchases’ ” annually. Ibid.. That figure
in today’s economy equals just over $300 billion. See
Dept. of Commerce, Bureau of Census, Statistical Abstract
of the United States: 2007, p. 649 (126th ed.) (over $3
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trillion in U. S. retail sales in 2002). Putting the Court’s

estimate together with the Justice Department’s early
1970’s study translates a legal regime that permits all
resale price maintenance into retail bills that are higher
by an average of roughly $750 to $1000 annually for an
American family of four. Just how much higher retail bills
will be after the Court’s decision today, of course, depends
upon what is now unknown, namely how courts will decide
future cases under a “rule of reason.” But these figures
indicate that the amounts involved are important to
American families and cannot be dismissed as “tiny.”
Sixth, the fact that a rule of law has become “embedded”
in our “national culture” argues strongly against overrul
ing. Dickerson v. United States, 530 U. S. 428, 443–444
(2000). The per se rule forbidding minimum resale price
maintenance agreements has long been “embedded” in the
law of antitrust. It involves price, the economy’s “ ‘central
nervous system.’ ” National Soc. of Professional Engineers,
435 U. S., at 692 (quoting Socony-Vacuum Oil, 310 U. S.,
at 226, n. 59). It reflects a basic antitrust assumption
(that consumers often prefer lower prices to more service).
It embodies a basic antitrust objective (providing consum
ers with a free choice about such matters). And it creates
an easily administered and enforceable bright line, “Do
not agree about price,” that businesses as well as lawyers
have long understood.
The only contrary stare decisis factor that the majority
mentions consists of its claim that this Court has “[f]rom
the beginning . . . treated the Sherman Act as a common-
law statute,” and has previously overruled antitrust prece
dent. Ante, at 20, 21–22. It points in support to State Oil
Co. v. Khan, 522 U. S. 3 (1997), overruling Albrecht v.
Herald Co., 390 U. S. 145 (1968), in which this Court had
held that maximum resale price agreements were unlaw
ful per se, and to Sylvania, overruling United States v.
Arnold, Schwinn & Co., 388 U. S. 365 (1967), in which this
Cite as: 551 U. S. ____ (2007) 21
Court had held that producer-imposed territorial limits

were unlawful per se.
The Court decided Khan, however, 29 years after
Albrecht—still a significant period, but nowhere close to
the century Dr. Miles has stood. The Court specifically
noted the lack of any significant reliance upon Albrecht.
522 U. S., at 18–19 (Albrecht has had “little or no rele
vance to ongoing enforcement of the Sherman Act”).
Albrecht had far less support in traditional antitrust
principles than did Dr. Miles. Compare, e.g., 8 Areeda &
Hovenkamp ¶1632, at 316–328 (analyzing potential harms
of minimum resale price maintenance), with id., ¶1637, at
352–361 (analyzing potential harms of maximum resale
price maintenance). See also, e.g., Pitofsky 1490, n. 17.
And Congress had nowhere expressed support for
Albrecht’s rule. Khan, supra, at 19.
In Sylvania, the Court, in overruling Schwinn, explicitly
distinguished Dr. Miles on the ground that while Congress
had “recently . . . expressed its approval of a per se analy
sis of vertical price restrictions” by repealing the Miller-
Tydings and McGuire Acts, “[n]o similar expression of
congressional intent exists for nonprice restrictions.” 433
U. S., at 51, n. 18. Moreover, the Court decided Sylvania
only a decade after Schwinn. And it based its overruling
on a generally perceived need to avoid “confusion” in the
law, 433 U. S., at 47–49, a factor totally absent here.
The Court suggests that it is following “the common-law
tradition.” Ante at 26. But the common law would not
have permitted overruling Dr. Miles in these circum
stances. Common-law courts rarely overruled well-
established earlier rules outright. Rather, they would
over time issue decisions that gradually eroded the scope
and effect of the rule in question, which might eventually
lead the courts to put the rule to rest. One can argue that
modifying the per se rule to make an exception, say, for
new entry, see Pitofsky 1495, could prove consistent with
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this approach. To swallow up a century-old precedent,

potentially affecting many billions of dollars of sales, is
not. The reader should compare today’s “common-law”
decision with Justice Cardozo’s decision in Allegheny
College v. National Chautauqua Cty. Bank of Jamestown,
246 N. Y. 369, 159 N. E. 173 (1927), and note a gradualism
that does not characterize today’s decision.
Moreover, a Court that rests its decision upon econo
mists’ views of the economic merits should also take ac
count of legal scholars’ views about common-law overrul
ing. Professors Hart and Sacks list 12 factors (similar to
those I have mentioned) that support judicial “adherence
to prior holdings.” They all support adherence to Dr. Miles
here. See H. Hart & A. Sacks, The Legal Process 568–569
(W. Eskridge & P. Frickey eds. 1994). Karl Llewellyn has
written that the common-law judge’s “conscious reshap
ing” of prior law “must so move as to hold the degree of
movement down to the degree to which need truly
presses.” The Bramble Bush 156 (1960). Where here is
the pressing need? The Court notes that the FTC argues
here in favor of a rule of reason. See ante, at 20–21. But
both Congress and the FTC, unlike courts, are well-
equipped to gather empirical evidence outside the context
of a single case. As neither has done so, we cannot con
clude with confidence that the gains from eliminating the
per se rule will outweigh the costs.
In sum, every stare decisis concern this Court has ever
mentioned counsels against overruling here. It is difficult
for me to understand how one can believe both that (1)
satisfying a set of stare decisis concerns justifies over
ruling a recent constitutional decision, Wisconsin Right to
Life, Inc., ante, at 19–21 (SCALIA, J., joined by KENNEDY
and THOMAS, JJ., concurring in part and concurring in
judgment), but (2) failing to satisfy any of those same
concerns nonetheless permits overruling a longstanding
statutory decision. Either those concerns are relevant or
Cite as: 551 U. S. ____ (2007) 23
they are not.

* * *
The only safe predictions to make about today’s decision
are that it will likely raise the price of goods at retail and
that it will create considerable legal turbulence as lower
courts seek to develop workable principles. I do not be
lieve that the majority has shown new or changed condi
tions sufficient to warrant overruling a decision of such
long standing. All ordinary stare decisis considerations
indicate the contrary. For these reasons, with respect, I
dissent.

Franz Böhm. Democracy and Econimc Power

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Competition Theories Lecture

Kartelle und Monopole in modernen Recht: Beitrage zum

TRANSLATED BY MARCELLUS S. SNOW

Marcellus S. Snow is professor emeritus at the University of Hawaii at Manoa;

It might at first appear so obvious that competition always involves such

1See the interesting discussion of these problems in M. Polyani,

The difference between economic competition and the successful proce-

2See my essay “The Theory of Complex Phenomena” in The Critical Approach in

3See my above-cited essay, “The Theory of Complex Phenomena.”

effort is directed toward a uniform order of objectives, are to an extent com-

particular persons. The only common objective we can pursue in choosing

We are accustomed to calling the order brought about by competition an equi-

long before Claude Bernard, Clark Maxwell, Walter B. Cannon or Norbert

It is precisely through the disappointment of expectations that a high

means, however, that of the combination of different goods that is actually

The consequences of this erroneous interpretation of the market order as an

as data is the result of microeconomic processes in which relative price

If even in highly developed economies competition is important primarily as a

Although competition is by and large a quite resilient specimen as far as pri-

bonus at the average level of a month’s income on the basis of a preliminary

MARKETS AND FREEDOMS: ACHIEVEMENTS

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The liberal, or non-interference, principles of the classical (Smithian or Ricardian)

© Oxford UolToshy Prtsj 1993

This paper is partly an attempt to follow the lead suggested by Hicks, to

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2. Markets and welfarist efficiency

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am not bothered here by the sociological fact that enthusiastic advocates of

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particularly emphasized the importance of being unrestrained in the exercise

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4. The process aspect: immunity and autonomy

(i) opportunity to achieve,

'*See, for example, Dworkin (1978, Essay 12).

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5. The opportunity aspect: preference and freedom

(i) In terms of what criteria do we evaluate such a set of achievements?

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Axiom R Set A offers at least as much opportunity-freedom as set B, denoted

Axiom P Set A offers strictly more opportunity-freedom than set B, denoted

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The weak form of Axiom 0 leads to a correspondingly weak idea of efficiency

Weak efficiency of opportunity-freedom A state of affairs is weakly efficient in

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6. Weak efficiency of competitive equilibria in opportunity-freedom

6.1. Step 1: from welfare to preference

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Efficiency of preference-fulfilment It is impossible to move any one to a more

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6.2. Step 2: from preference to opportunity-freedom in commodity space

of the weakly efficient states in terms of opportunity-freedoms.

most-preferred alternative is not sufficient for the sure enhancement of

6.3. Step 3: from commodity space to capability space

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7. Inequality and the market mechanism

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autonomy and immunity from encroachment, and in these respects (and in