A Giant Problem: The Influence of the Chicago School on Australian Competition Law, Economic Dynamism and Inequality

Date01 December 2019
AuthorAdam Triggs,Andrew Leigh
DOI10.1177/0067205X19875031
Publication Date01 December 2019
SubjectArticles
FLR875031 696..716 Article
Federal Law Review
2019, Vol. 47(4) 696–714
A Giant Problem: The Influence
ª The Author(s) 2019
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of the Chicago School
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DOI: 10.1177/0067205X19875031
on Australian Competition
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Law, Economic Dynamism
and Inequality
Adam Triggs* and Andrew Leigh**
Abstract
Australia has a competition problem: there is not enough of it. Our industries are concentrated.
Our markets show signs of weak competition. The way Australia’s courts, parliamentarians and
regulators think about competition is partly to blame. Although it has been less influential in
Australia than in the United States, the Chicago School’s views on competition have shaped our
laws, policies and enforcement practices. The Chicago School views market concentration as a
virtue more than a vice. The School contended that barriers to entry are negligible, market power
is temporary, most mergers are good, vertical restraints and predatory pricing are either benign or
efficient. The growing body of research and experience, however, shows that the Chicago School’s
faith in the ability of markets to self-correct and deliver competitive outcomes was misplaced.
There is a strong progressive case for repositioning how we think about competition. Focusing
more on the competitive process, the structure of markets and the incentives those structures
create for firms will play an important role in reducing inequality.
I Introduction
The city of Chicago is no stranger to rivalry. Its big sister, New York, likes to refer to it as ‘The
Second City’, a nickname that goes back to the contest to host the 1893 World’s Fair. Even
Chicago’s better-known nickname, ‘The Windy City’, is a reference to the blow-hard nature of
its politicians, at least according to those from Los Angeles, Houston and Philadelphia. Chicagoans
are a competitive people.
*Crawford School of Public Policy, Australian National University. The author may be contacted at adam.triggs@anu.edu.au.
**Parliament of Australia. The author may be contacted at andrew.leigh.mp@aph.gov.au. This article is based on the Lionel
Murphy Lecture, delivered by the second author at the Australian National University on 31 October 2018 under the title
‘Competition Policy and Inequality: Building on Lionel Murphy’s Legacy’. Our thanks to general editor Ron Levy, the
eagle-eyed student editors, and two anonymous referees. We are also grateful to Caron Beaton-Wells, Craig Emerson,
Allan Fels, Richard Holden, Ray Steinwall and others for feedback on earlier drafts. Naturally, these experts should not be
assumed to agree with the entirety of the article.

Triggs and Leigh
697
It is perhaps little wonder, then, that Chicago’s economists take a strong interest in competition,
an area in which they have been profoundly influential. Before the rise of the Chicago School in the
1970s, the dominant school of economic thought on competition between firms was the Industrial
Organisation School. According to this view, competition and the performance of markets were
determined by the structure or organisation of an industry.1 An industry with only a few compet-
itors was assumed to be less competitive than an industry with lots of competitors. This School
argued that concentrated markets made it easier for cartels to form and block new entrants through
predatory pricing practices and use their bargaining power against consumers, suppliers and
workers. This allowed firms to hike prices, cut wages, degrade service and reduce quality while
maintaining profits.2
The Industrial Organisation School, traditionally associated with researchers at Harvard from
the 1930s to the 1960s, viewed market concentration and mergers between firms with great
suspicion. If a merger resulted in a market share that was deemed to be too high, then that merger
would be blocked.3 If a merger resulted in what was seen to be a conflict of interest through vertical
integration, such as a dominant manufacturer buying up retailers, then that merger would also be
blocked, fearing it would give that firm an unfair advantage over the other retailers.4
The views of the Chicago School, which emerged in the 1970s, represented a sharp divergence
from the views of the Industrial Organisation School. Represented by US judges such as Richard
Posner and Robert Bork, and economists such as George Stigler, Aaron Director, Harold Demsetz
and Milton Friedman,5 the Chicago School rejected the structuralist approach of the Industrial
Organisation School. The views of the Chicago School were rooted in a deep faith in the efficiency
of markets and recommended minimal government intervention.6 If a firm tried to charge a higher
price, it would be punished by the market. Competitors would quickly take its market share. If
there were no competitors, then new ones would enter. Conversely, if a firm tried to charge a lower
price to predatorily damage their competitors, they would suffer a loss which they could never
recoup since, as soon as they tried to charge higher prices later, new firms would enter. Predatory
pricing without a reasonable prospect of recoupment would be irrational, so it would not take
place.7
The Chicago School correctly identified some flaws in the approach of the Industrial Organisa-
tion School. But it went further. For the Chicago School, market concentration was more of a virtue
than a vice. In this framework, market structures were shaped by the differing efficiencies of firms
over time.8 Accordingly, market concentration was not regarded as a sign of market power. It was
rather the result of superior efficiencies. Large firms are more efficient and have greater economies
of scale, meaning they can produce more with less. Big is beautiful. The fact that new entrants
could only compete by obtaining similar scale was irrelevant. If the market delivered large firms,
then large firms must be the efficient size and did not, therefore, represent a barrier to entry. The
Industrial Organisation School tended to block mergers of firms that possessed only small market
shares and did so even if they led to provable efficiencies. The Chicago School, on the other hand,
was more likely to see mergers as being good and only opposed horizontal mergers that were large
enough to create monopolies directly.9
Unsurprisingly, there has been a search for some middle ground between the Industrial Orga-
nisation School and the Chicago School views.10 This came in the form of the Post-Chicago
School, which emerged in the late-1980s and early-1990s.11 The Post-Chicago School tends to
focus less on theory and more on application. ‘This approach is characterised by a richer factual
analysis of individual cases and the application of more complex rules based on strategic models

698
Federal Law Review 47(4)
rather than reliance on more theoretical models and per se tests,’ writes Kathryn McMahon.12 The
Post-Chicago School emphasises the importance of strategic behaviour of firms, noting that firms
do not just respond passively to structural market conditions; they actively attempt to influence
those conditions through strategic behaviour.13
Such views have even permeated the University of Chicago itself. In 2017, 12 decades after
engineers reversed the Chicago River, the Chicago School held a summit on the threat that
monopolies posed to the American economy. Such an event would have been unheard of in the
last century. The Economist quipped that ‘convening a conference supporting [competition] con-
cerns in the Windy City was like holding a symposium on sobriety in New Orleans’.14
‘What has changed?’ asks The Economist, ‘The facts. The pendulum has swung heavily in
favour of incumbent businesses’.15 The growing body of empirical evidence shows that many of
the views of the Chicago School were misplaced. The Chicago School’s faith in the absolute ability
of markets to self-regulate and deliver competitive outcomes has not stood the test of time.
In this article, we argue that the Chicago School has had a powerful impact on the economic
thinking of Australia’s courts, legislators and regulators. It has helped shape the poor state of
competition in Australia and, most alarmingly, has contributed to rising inequality. The article is
structured as follows. Section II provides a stocktake of the state of competition in Australia. It
shows how concentrated markets and a lack of competition are damaging the Australian economy.
Section III explores the influence of the Chicago School on Australia’s courts, legislators and
regulators. It explores the role that this influence has had in shaping the competitive outcomes in
the Australian economy. Section IV looks at the consequences of these outcomes for rising
inequality in Australia. It explores how the weakening of competition in Australia has
helped increase inequality. Section V concludes by exploring what can be done to strengthen
competition in Australia in the future.
II Australia’s Competition Conundrum
It is hard to think of many Australian industries these days that are not dominated by just a few
behemoths. Whether it is Coles or Woolworths, Lion or Carlton, Caltex or BP, Medibank Private or
BUPA, Qantas or Virgin, consumers often have limited choices when it comes to where they get
their goods and services from.
This is borne out in the numbers. One standard measure of concentration judges an industry to
be concentrated if the top four players control more than one-third of the market.16 We recently
calculated this measure across 481...

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