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The birth of US antitrust law dates back to the Sherman Anti-Trust Act of 1890 expressed such concerns, although it was so vague and poorly worded that it had only modest effects–although it did provide sufficient force to break up the Standard Oil Trust in 1911. The Clayton Antitrust Act of 1914, along with the creation of the Federal Trade Commission that same year, put teeth into antitrust enforcement. But as Panhans points out, at this time the issues of antitrust were typically discussed one firm or one industry at a time. It isn’t until the 1930s that “industrial organization” develops as a field of economics, with the notion that these concerns about how the structure of an industry could lead to lack of competition in a way that would manifest itself in higher prices could be formulated in general framework.

Although a number of economists were involved in developing these insights, the work of Joe S. Bain was especially prominent. Back when I was entering graduate school in economics in 1982, Bain was named a Distinguished Fellow of the American Economic Association. The prize citation read:

Joe S. Bain is the undisputed father of modem Industrial Organization Economics. (Edward S. Mason and Edward H. Chamberlin were its two grandparents; but Joe Bain was the father.) His classic text, Industrial Organization, published twenty-three years ago, gave the field the rationale and structure that it retains to this day. … Bain’s theoretical and empirical work on market concentration and the condition of entry, culminating in his ” barnbuster,” Barriers to New Competition, offered the possibility of new, determinate solutions to the oligopoly problem, and added important new insights into the relationship between industry structure, behavior and performance …”

The Structure-Conduct-Performance paradigm, as it was broadly known, was the starting point for industrial organization analysis from the 1950s up into the 1970s. There are some, including antitrust authorities in the Biden administration, who seem to believe it should still be the main starting point. But even back in the early 1980s, we were being taught that the “SCP paradigm” had become outdated. Matthew T. Panhans provides an overview of this evolution in The Rise, Fall, and Legacy of the Structure-Conduct-Performance Paradigm” (Journal of the History of Economic Thought, 46: 3, September 2024).

The basic idea of SCP involved doing comparisons across industries. The theory suggested that as the structure of an industry became more concentrated, with fewer firms, the result would be less competition. The relatively small number of firms would find it easier to raise prices, either with implicit or explicit agreement. These firms would earn higher profits, while consumers would pay higher prices.

The theory surely seems plausible enough to justify investigation, and industrial organization economist back in the 1950s and ’60s spent much of their time trying to measure and estimate these relationships. But in seeking a common pattern across all industries, they soon ran into troubles.

One issue discussed by Panhaus, and earlier by Bain, involved the rise of grocery store chains in the 1940s and 1950s and how these chains displaced small independent grocery stores. But as Bain pointed out, this displacement happened in substantial part because the large chains were more efficient. They had the scale to invest in supply chains that led to lower prices for consumers. In turn, the remaining independent groceries responded to incentives and became more efficient as well. As Bain recognized, it clearly wasn’t automatic that an industry structure of fewer firms automatically led to higher prices for consumers.

Thus, Bain supported an antitrust policy that would allow active competition between medium-sized firms that could take advantage of economies of scale. Hwoever, he suggested that antitrust authorities should be empowered to break up very large firms just on the grounds that they were very large, without any particular evidence that the firm was raising prices. In turn, the large firm could offer as a legal defense that it was large because of economies of scale or technological efficiencies–and benefiting consumers as a result. The antitrust lawsuit to break up IBM, initiated in 1969, was a classic example of this approach. However, Supreme Court decisions in the 1960s commonly interpreted the antitrust law to mean that any movement toward greater concentration, even a merger between two small shoe companies or two small grocery store chains, should be presumptively illegal.

There had always been academic challenges to the SCP approach, but two main concerns emerged in force by the 1970s. As Panhaus explains, one concern was that “structure-conduct-performance” has the causality backward: that is, it wasn’t that concentration of industry led to certain conduct by firms, but instead that innovative firms tended to succeed. From this view, concentration should often be viewed as a sign of success, not a concern about exploitation of consumers. The other critique was that if a successful firm was earning high profits, it would typically attract new entry, which would tend to restore competition. From this point of view, antitrust authorities should focus on explicit price-fixing agreements between firms and on large mergers that led to near-monopoly outcomes, but otherwise get out of the way.

My own sense is that while the old-school structure-conduct-performance approach focused heavily on “structure,” and specifically on whether a firm had a large market share, the new-school antitrust approach has come to focus on “conduct.” Thus, the Microsoft antitrust case from early in the 21st century wasn’t primarily about whether Microsoft was large (spoiler alert: it was) but instead whether Microsoft was taking advantage of its dominant position in operating systems to pressure people to use the Microsoft Internet Explorer browser, and thus blocking the use of the Netscape Navigator browser. Of course that particular browser battle does not look especially significant in retrospect.

But similarly, the current antitrust case against Google (GOOGL) is not primarily about whether Google is big (it is), but whether Google is blocking competition from other search engines by entering into agreements with firms like Apple (AAPL) to become the default browser on Apple’s smartphones. The recent antitrust case against Amazon (AMZN) is not over whether Amazon is big (it is), but whether the ways in which Amazon lists third-party firms in its search results, and whether it pressures them to use Amazon’s delivery service, should be viewed as an anticompetitive practice. Still, another issue is whether existing successful firms should be able to buy firms in differnet but industries, like the antitrust case scheduled to go to trial in a few months over whether Facebook acted in an anticompetitive manner by purchasing Instagram and WhatsApp.

I don’t mean to take a position here on the merits of these cases, which I suspect may ultimately lead to negotiated settlements over details of the agreements at stake. My point here is that when people harken back to antitrust authorities breaking up Standard Oil, or IBM, or AT&T, they are channelling the old structure-conduct-performance paradigm, where the focus was to break up a structure. But modern antitrust is focused on the idea that society should want large and technologically successful firms to keep making innovative investments, and the goal of antitrust is to encourage investments in greater productivity by discouraging the large successful firms from a focus on blocking new competitors. It is reasonable to have controversy about just how to draw that line in particular cases.

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