Dominant Firms and the Organizational Failures Framework

The implicit reliance on the organizational failures framework in preceding sections of this chapter will be made explicit here. That chance event and default failures directly relate to the framework is reasonably obvious; the interpretation of business acumen, by contrast, is somewhat more involved. The conduct approach to the enforcement of section 2 of the Sherman Act and the feasibility of fashioning structural remedies can also be interpreted in organizational failure terms. Consider these seriatim.

 1. Chance Event Failure 

By definition, chance events are attributable to uncertainty. But the mere fact that decisions are made in the face of uncertainty does not establish that failure obtains. Rather, it is chance outcomes which involve a considerable element of “surprise” or are due to an unusual sequence of chance events that pose the problem.

Surprise outcomes are attributable to the conjunction of bounded rationality with uncertainty. Thus, it is not that low probability outcomes with high payoffs carrying only fair (risk adjusted) expected returns have eventuated. The outcomes in question, rather, are those which, in a conscious commitment sense, were completely unanticipated. It is unrealistic and even disingenuous to impute rational choice to participants who plainly lack the capacity to assess and position themselves strategically with respect to the complex situation of which they are a part: where all the participants are severely limited in bounded rationality respects, differential outcomes are explained, to a large extent, by luck.

2. Default Failure 

The assumption that markets have self-policing properties rests implicitly on a large numbers assumption. Where instead the responsibility for effective rivalry falls on a very few actual and potential rivals, the performance of each becomes critical. Should these firms fail to perform in a creditable way and should this failure persist, what might otherwise have been a relatively competitive oligopoly may become a dominant firm industry instead. A small- numbers condition at the outset thus places the assumption of self-policing markets in jeopardy.

What is essential for default failure, however, is not that one or a few firms fail to grasp a single opportunity, but that this failure occurs repeatedly. Persistent failure to discern and/or realize its profit opportunities is involved. That this should ever occur is a reflection of internal ineptitude and failures in the capital market. With respect to the latter, interested outsiders either fail to perceive the foregone opportunities (on account of information impactedness) or are unable to effect takeover except at great cost (because stockholders cannot take representations of ineptitude on the part of the incumbent at face value, on account of the risk of opportunism: because displaying the evidence in a compelling way and getting stockholders or their agents to evaluate it is costly, given bounded rationality: and because incumbent managements may opportunistically throw up a series of obstacles to takeover). Issues of these kinds are familiar from treatments of competition in the capital market in preceding chapters.

3. Business Acumen 

The existence of a business acumen advantage implies a differential distribution of strategic decision-making or organizational talents. Pre- sumably, however, the marginal productivity of high talent experiences diminishing returns. Except, therefore, as these talents may be associated with a single, unique individual, what is it that explains the failure of the market to redistribute this talent among rival firms? Put differently, will the market process on which Kaysen and Turner rely for reallocating management talent operate smoothly?

At least two factors impede this. First, there is the problem of discerning who the really talented managers are. Business performance is the result of collective decision-making in what is commonly a complex system. Who is responsible for what? Information incompleteness conditions obtain. Many managers are involved, but the exceptional ones can be discerned only with difficulty.46 Moreover, this cannot be easily overcome by asking the high talent managers to come forward. For one thing, they may not really know. Also, the less talented can make the same representations (opportunistically) and the market cannot confidently distinguish between them.

Second, there is the problem of team considerations. This is a mani- festation of idiosyncratic group experience, as discussed earlier in connection with the employment relationship in Chapter 4 and in Section 2.2 above. Although recognition that team factors can be important goes back some two hundred years,47 the issue has been widely disregarded among academic economists.

4. The Conduct Approach 

Whether the reliance by the enforcement agencies on conduct complaints to bring suits against dominant firms should be regarded as opportunistic might be disputed. Given that chance event and default failures are apparently inadmissible grounds upon which to base a section 2 complaint, the enforcement agencies face a dilemma: either the dominant firm condition is outside the reach of the antitrust laws or they must proceed in a contrived way by attributing the dominance condition to unlawful conduct. Following the latter course may then be regarded as simply maximizing enforcement effectiveness subject to constraint. The failure is not one of enforcement: the interpretation by the judiciary of the law is at fault.

This, however, implicitly assigns a narrow and passive role to the enforcement agencies. A more ambitious interpretation of their responsibility is to correct judicial failures by bringing good cases supported with good arguments. The court is there to be convinced. At least, therefore, until such an effort has been made and failed, reliance by the enforcement agencies on contrived conduct offenses seems opportunistic.

However, a further question is raised: Why have the agencies been successful in employing the conduct strategy? I submit that bounded rationality and information impactedness are the critical factors. None of the parties — complainant, defendant, or court — has a sufficiently rich model to sort out the quantitative consequences of the conduct in question (which is a manifestation of bounded rationality), and the requisite data in any event are apt to be deeply impacted. Given that the courts regard dominant firm outcomes apprehensively, a showing that certain conduct practices were engaged in and could have had some, however slight, structural effect has been sufficient to prevail.

5. Remedy 

Remedy issues of two types arise in connection with the dominant firm condition. First, will unassisted market processes reliably undo dominant firm outcomes in any short period of time? Second, what problems are presented if the grounds for bringing a dominant firm complaint are expanded in the manner suggested?

That unassisted market processes may not suffice is due in large measure to first-mover advantages. Dominance conditions, once achieved, are for this reason resistant to undoing. But it does not follow that an effort to achieve remedy by dissolution is warranted. This depends on the capacity of the judicial system to address the dominant firm condition in a timely and competent fashion.

As presently constituted, neither the enforcement agencies nor the courts have the manpower and the necessary expertise to assess the issues in a determinative fashion. Institutional reform designed to mitigate these bounded rationality limits ought thus to accompany any effort by the judiciary to address the dominant firm issue along the lines of the suggested market failures argument.

Source: Williamson Oliver E. (1975), Markets and hierarchies: Analysis and antitrust implications, A Study in the Economics of Internal Organization, The Free Press.

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