Since Oliver Williamson published Markets and Hierarchies, transaction cost economics (TCE) has claimed an important place in antitrust, avoiding the extremes of the structuralist school, which saw market structure as decisive, and the Chicago school, which found monopoly only infrequently and denied that a monopolist could leverage its power into related markets. Since the 1970s both the structuralist and Chicago positions have moved toward the center, partly as a result of TCE. Already in 1978 Areeda and Turner produced the first volumes of the Antitrust Law treatise, which completely repudiated the leverage theory and abandoned the structuralist and leveraging positions on vertical integration. TCE analysis of contractual restraints recognizes that an important threat to competition is double marginalization, which can occur when market power is held by separate firms with complementary outputs. Nevertheless, one comparative advantage of both structuralism and the Chicago school was their simplicity. TCE analysis is more specific to the situation, demanding close scrutiny when significant market power is either present or realistically threatened.
This article offers some thoughts about the present place of transaction cost economics (TCE) in antitrust law, focusing particularly on contract arrangements involving vertically related firms or complementary products. At this writing, thirty-five years have passed since Oliver E. Williamson published Markets and Hierarchies: Analysis and Antitrust Implications.' At that time vertical price and nonprice restraints as well as tying were unlawful per se. (2) While not per se unlawful, both exclusive dealing and vertical mergers were treated much more harshly than they are now, and so was vertical integration by dominant firms. (3) TCE analysis of these practices lay largely in the future, but it was destined to develop a line of thinking that avoided the extreme positions of the two reigning schools of antitrust policy.
At one extreme was the "structural" school, which drew its impetus from a number of sources, including the passage of the Clayton Act in 1914 and the expansion of section 7 of that statute in 1950 to cover vertical mergers. (4) At its origins lay the Great Depression and the rise of monopolistic competition theory in the early thirties,s which in different ways undermined our confidence that markets for manufactured, product-differentiated goods would perform competitively. The industrial organization theory of the structural school developed the structure-conduct-performance (S-C-P) paradigm, which saw firm structure as the principal determinant of anticompetitive behavior and poor economic performance." Under the model, structure entailed conduct of a certain kind, and the conduct entailed poor performance. As a result conduct dropped out as a variable of interest and one could reason directly from structure to performance.
The promoters of the S-C-P paradigm tended to believe that monopoly power was widespread, as were the opportunities for its exercise. (4) Building on a neoclassical model in which sellers placed their goods on the market and purchasers bought them mainly in single-shot transactions, they were suspicious of any type of "irregularity" or deviation from common law contract models for distribution, generally seeing these as...