Network Economic Effects and the Limits of GTE Sylvania's Efficiency Analysis

Abstract

The significant contribution of the Chicago School of antitrust has been to demonstrate persuasively, through the use of economic theory, how some business activities historically viewed with suspicion actually benefited consumers and promoted economic efficiency. The landmark Supreme Court decision in Continental T.V., v. GTE Sylvania Inc. can be fairly read as accepting the argument the courts should not use the antitrust laws to interfere with demonstrably efficient conduct in order to promote broader political goals. The doctrine created by Sylvania, however, does not provide a clear answer in other cases, most notably where conduct by a dominant defendant appears to result in some efficiencies, but simultaneously has demonstrably exclusionary effects. Sylvania suggests that courts are up to the job of balancing the pro-and anticompetitive effects of such conduct, focusing on whether consumers are better or worse off, regardless of the effect on the political goals of antitrust. One important implication of network effects theory is that in a number of situations economic tools (and, a fortiori, courts applying an economic standard) can not practically determine accurately whether the benefits to consumer from challenged practices outweigh the harms. This calls into question the applicability of Sylvania's key assumptions, specifically the objective benchmark that the Court sought in Sylvania in rejecting the use of political goals to condemn efficient business conduct. Where network effects exist, and where ascertaining the net welfare effects of challenged conduct is practically impossible, courts must then determine the appropriate antitrust response. A laissez-faire approach would be to do nothing - to limit antitrust to condemning conduct only where there is a high probability of demonstrably inefficient conduct. This seems to be the approach adopted by the D.C. Circuit in its initial Microsoft opinion. However, for the last 300 years judges interpreting the common law and the Sherman Act have rejected the view that they should do nothing unless a practice is clearly inefficient. This article suggests an alternative approach more consistent with the purposes of the antitrust laws and our nation's antitrust and political traditions. It proposes that, where monopolistic conduct significantly inhibits the ability of rivals to engage in fair competition by means that to some extent frustrate consumer preferences, and network effects suggest that courts cannot practically determine if claimed efficiency benefits outweigh these harms, courts should employ a Jacksonian value of equal economic opportunity to proscribe the conduct and give others a meaningful chance to compete with the dominant firm.