The 1960s was a decade when nonstandard modes of economic organization were presumed to have monopoly purpose and effect. Antitrust was preoccupied with measures of concentration and entry barriers. Such a narrow formulation facilitated easy enforcement, but sometimes at the expense of an informed welfare assessment of the issues. Three factors contributed to this condition. First, it was widely believed that oligopolistic collusion was easy to effectuate. Second, wherever entry barriers were discovered they were held to be anticompetitive and antisocial, there being a great reluctance to acknowledge tradeoffs. And third, the business firm was thought to be adequately described as a production function to which a profit maximization objective had been assigned.
These views had two unfortunate consequences. For one thing, anything that contributed to market power—offsetting benefits notwithstanding—was held to be unlawful. For another, nonstandard or unfamiliar business practices that departed from autonomous market contracting were also held to be pre-sumptively unlawful. If the “natural” way by which to mediate transactions between technologically separable entites was through markets, surely any effort by the firm to extend control beyond its natural (technological) boundaries must be motivated by strategic purpose.
Matters changed in the 1970s as a greater appreciation for efficiency benefits developed and as the conception of the firm as a governance structure took hold. The perverse hostility with which efficiency differentials were once regarded gave way to an affirmative valuation of efficiency benefits.26 And business practices that were previously suspect, because they did not fit comfortably with the view of the firm as a production function, were rein- terpreted in a larger context in which—implicitly, if not explicitly transaction cost economizing was introduced. As a consequence, antitrust errors and enforcement excesses that characterized the treatment of nonstandard con- tracting in the 1960s were removed or reversed in the 1970s.
Despite progress with these matters, antitrust cannot settle back to a quiet life. Other difficult antitrust issues relating to strategic behavior have recently surfaced, and existing criteria for assessing the lawfulness of strategic practices are actively under dispute. Significant headway with a number of strategic behavior issues has nevertheless been made and more is in prospect. The study of strategic behavior has been clarified in the following significant respects: (1) Severe structural preconditions in both concentration and entry barrier respects need to be satisfied before an incentive to behave strategically can be claimed to exist; (2) attention to investment and asset characteristics is needed in assessing the condition of entry— specifically, nontrivial irreversible investments of a transaction specific kind hate especially strong deterrent effects; (3) history matters in assessing rivalry—both with respect to the leadership advantage enjoyed by a sitting monopolist as well as in the incidence. and evaluation of comparative costs; and (4) reputation effects are important in assessing the rationality of predatory behavior.
This last has a bearing on two crucial aspects of strategic behavior. For one thing, those who argue that strategic behavior can be disregarded unless “full information” credible threat conditions are fulfilled have overstated the case. This is not to suggest that the study of credible threats cannot usefully inform the analysis of strategic behavior. But if knowledge is imperfect, then dominant firms can alter expectations by posturing (as well as by objectively fulfilling credibility conditions), in which event pre-commitments need not be as extensive as the credible threat literature would indicate. Second, myopic assessments of strategic behavior understate the incentives to engage in predation. Those who focus on the incentive to kill a specific rival are ignoring what may often be the stronger incentive—namely, to develop a reputation that will subsequently help to deter this and other firms in later periods, in other geographic markets, and in other lines of commerce.
Source: Williamson Oliver E. (1998), The Economic Institutions of Capitalism, Free Press; Illustrated edition.