1 Lindblom, C., Politics and Markets (1977).Google Scholar

2 E.g., when the law forbids cartelistic conduct or false statements in prospectuses, the expectation is better ultimate performance of industrial or capital markets. Both strategies assume that controls will yield the desired result; yet the dynamic and interactive character of industrial organization often causes unexpected and undesirable outcomes. The industrial organization economic “structure-conduct-performance” paradigm in fact predicts that such results will occur if all interactions are not taken account of. The paradigm states that the basic conditions of supply, demand, and legal order set the range of technically feasible industry structures. Structure in turn limits the possible conduct of firms in that industry. The ultimate performance of an industry is a result of the conduct of the firms in the industry measurable in terms of its relative social desirability including efficiency, equity, fairness, and progres-siveness. Primary caustion flows from conditions through structure and conduct to performance. Each stage limits but does not determine the next; hence regulation might be expected to affect performance whether it focuses on elements of performance directly or on the antecedent stages. But change at any stage can also feed back to earlier stages, creating unexpected responses. The paradigm predicts, therefore, that change, including change in regulation, will not always yield a simple linear progression to improved final performance. For a fuller discussion of the paradigm and an illustration of how it can illuminate some of the problems of legal regulation of economic questions, see Carstensen, Antitrust Law and the Paradigm of Industrial Organization, 16 U.C. Davis L. Rev. 487 (1983). For a description of how performance regulation can be frustrated, see Palay, Avoiding Regulatory Constraints: Contracting Safeguards and the Role of Informal Agreements, 1 J. L. Econ. & Org. 155 (1985).Google Scholar

3 Adams, A Chapter of Erie, 109 N. Am. Rev. 30 (1869).Google Scholar

4 A negligently caused accident on one line in the 1870s resulted in more than 500,000 in damage payments and was a strong stimulus to accepting the commission's advice (at 27). But when Adams recommended that the railroads provide their workers with health, accident, and life insurance at railroad expense, the companies refused (at 40–44). It took active unions and enforced rules to achieve those objectives. The roads, having successfully transferred part of their operating costs to their workers in a way that enriched them and burdened the workers, had no reason to reverse that cost allocation unless compelled to.Google Scholar

5 McCraw does make one quite valid point that deserves careful consideration. A key problem in this early period was understanding the economic and business reality of railroads. An investigative commission have largely reporting and recommendation functions provides a good vehicle to educate the public and key legislative decision makers about these matters and to suggest possible solutions to the problems that created the need for regulation. However, McCraw errs by implying such a commission is the ultimate solution to the problems that called it into existence.Google Scholar

6 Adams next spent three years trying to establish a national railroad cartel that would regulate the industry (at 47–52). The failure of this experiment further illustrates the impossibility of making private actors regulate performance in the public interest.Google Scholar

7 McCraw credits Adams with a better understanding of the substantively correct rate and service regulations than subsequent regulators (at 40). If so, and McCraw's claims seem questionable, Adams's failure to define regulatory strategy is even more troublesome.Google Scholar

8 See I. L. Sharfman, The Interstate Commerce Commission (1931).Google Scholar

9 Meyer, J., M. Peck et al., The Economics of Competition in the Transportation Industries (1959); Caves, Christiansen, & Swanson, Economic Performance in Regulated and Unregulated Environments: A Comparison of U.S. and Canadian Railroads, 96 Q.J. Econ. 559 (1981).Google Scholar

10 Modern experience has shown contracting to be an effective device to limit the use of discretionary power. Cf. Palay, Comparative Institutional Economics: The Governance of Rail Freight Contracting, 13 J. Legal Stud. 265 (1984). A more overtly disclosure-oriented regulatory scheme aimed at bad conduct (e.g., secret price cuts or concealed contracts) and at enforcing acceptable conduct (e.g., major penalties for breach of contract) might have allowed a reasonable accommodation between the contending interests. Such, at least, is the tendency of modern transportation law, which has largely eliminated the traditional rate-control powers of the regulatory agencies. Public ownership of the most capital-intensive elements of a system is another model. It explains why trucking and air travel can have much more competitive structures. The public provides the highways and airports that are the equivalent of the railroad's high fixed-cost lines. Public ownership and maintenance of key rail lines might similarly have created a very different market context.Google Scholar

11 Breyer, S., Regulation and Its Reform (1982).Google Scholar

12 Kahn, A., The Economics of Regulation (1970).Google Scholar

13 See Breyer, , supra note 11.Google Scholar

14 Microeconomic price theory declares marginal cost to be the optimal price for all goods and services. The marginal buyer who pays marginal cost exactly covers the direct costs to society of producing that final unit, and the producer of the marginal unit receives only its actual costs. However, this is only a short-run optimum unless additional conditions are satisfied. In the long run, a producer must recover all its costs, fixed and variable, which means price must also equal average total cost. If the marginal cost (price) of the incremental unit is greater than average cost, producers will make positive profits. This will induce either entry or expansion of output by producers. Conversely, if the marginal cost (price) is below average cost, producers will, over time, fail, thus reducing production until price increases to cover average costs.Google Scholar

15 It is possible that those who can most easily alter demand are not those who create the primary impetus for peaks and new construction. This seems true in the electrical and gas situations in some degree. Such situations require that price setters decide whether they want to control demand by raising prices to those who are most sensitive to price changes or to finance expansion of supply equitably, which suggests focusing price changes on those who create the increased demand.Google Scholar

16 See note 14 supra.Google Scholar

17 Kahn, supra note 13, vol. 1 at 63–86, has pointed out that it is impossible to determine true marginal cost, and all real-world efforts are only approximate. This is particularly obvious in the case of utility prices where marginal cost is very illusive and political reality very intrusive (McCraw at 251).Google Scholar

18 If one looks at what was done in, e.g., Madison Gas & Elec. Co., 5 PUR 4th 82 (Wis. Pub. Serv. Comm. 1974), or Re Rate Design for Elec. Corp., 15 PUR 4th 434 (N.Y. Pub. Serv. Com. 1976), as opposed to how it is rationalized, one concludes that average total cost was the basic guide modified by estimated demand elasticity rather than a putative marginal-cost analysis.Google Scholar

19 This illustrates one of Kahn's arguments better than it illustrates marginal-cost principles. Kahn pointed out that if you had uniform price for beef, there would be underconsumption of some parts and overconsumption of others, which might well result in reduced supply (McCraw at 226). It is not ultimately the marginal cost of hamburger that explains why its price is lower than that of steak (I suspect that the marginal cost of hamburger, involving as it does more processing, is greater than that of steak); it is the need to adjust supply and demand through the price system. The marginal cost of specific units is only a threshold consideration in setting prices.Google Scholar

20 Klein, B., Dynamic Economics (1977).Google Scholar

21 E.g., electric power involves three distant stages: power generation, transmission, and distribution. They are often integrated by ownership, and no present policy of market-facilitating regulation seeks to disentangle them. But if they were separated, and if distribution systems were largely or entirely owned by consumers, then a transactional or contractual market could evolve in which such large-scale buyers of power buy from competing power producers. Transmission companies would only deliver power, but might still require some regulation as monopoly common carrier services. Such a restructuring could then remove government and its delay from the basic supply pricing questions, even if government might still serve as a specialized watchdog insuring that there was no unduly abusive exploitation of discretion. See, e.g., Meeks, Concentration in the Electric Power Industry: The Impact of Antitrust Policy, 72 Colum. L. Rev. 64 (1972); Cohen, Efficiency and Competition in the Electric Power Industry, 88 Yale L. Rev. 1511 (1979).Google Scholar

22 See Broadman, , Natural Gas Deregulation: The Need for Further Reform, 5 J. Pol'y Anal. & Mgmt. 496 (1986); see also Trebling, Apologetics of Deregulation in Energy and Telecommunications: An Institutional Approach, 20 J. Econ. Issues 613 (1986).Google Scholar

23 See Nance, J., Splash of Colors: The Self-Destruction of Braniff International (1984).Google Scholar

24 Such sophistication was often stimulated by state agencies interested in improved efficiency in transportation. See, e.g., Contracting with Railroads (Transcript and Summary of a Workshop) (Wisconsin Dept. of Transportation, Dec. 1984). See generally, Palay, supra note 2.Google Scholar

25 See 49 U.S.C. £ 10709.Google Scholar

26 Caves et al., supra note 9.Google Scholar

27 The ICC's recent rejection of the Southern Pacific-Santa Fe merger (Frank, Santa Fe May Quit Riding the Rails, Bus. Wk., Aug. 11, 1986, at 27); the bankruptcy court's refusal to allow the Chicago Northwestern to buy the Milwaukee Road (Matter of Chicago, Milwaukee, St. Paul & P.R. Co., 756 F.2d 508 (7th Cir. 1985); and the congressional frustration of the Conrail-Norfolk combination on competitive grounds may signal a new sensitivity to this dimension of the problem.Google Scholar

28 E.g., of two travelers on round trips from Madison, Wis., in the same week on the same airline, one paid 278 to go to a destination 225 miles away and the other paid 118 to go to one 400 miles away.Google Scholar

29 Even Kahn has questioned the merits of this policy. Moore, Airline Mergers Creating Strife, 18 Nat'l J. 2260 (Sept. 20, 1986).Google Scholar

30 Spence, Entry Capacity Investment and Oligopolistic Pricing, 8 Bell J. Econ. 534 (1977); see also Steptoe, Tiny Carrier Loses Bid for Independence, Wall Street J., Jan. 29, 1987, at 6, col. 2 (Midwest ed.).Google Scholar

31 In addition, there is a risk of retaliation in other markets from established rivals who are also victims of such conduct.Google Scholar

32 The major airlines have recently announced substantial fare increases that coincide with the elimination by merger of significant numbers of competitors. See Dahl, Brown, After the Mergers: Air Fares Rise, But Era of Bargain Rates Isn't Over, Wall Street J., Feb. 2, 1987, at 17, col. 4 (Midwest Ed.).Google Scholar

33 E.g., P. Strum, Louis D. Brandeis: Justice for the People (1984); L. Baker, Brandeis and Frankfurter: A Dual Biography (1984).Google Scholar

34 McCraw at 94–109; McCraw, Reconsidering the Trust Problem, in McCraw, ed., Historical Perspectives on Regulation 1, 25–55 (1980). See also Brickner, Bibliographic Essay, 54 U. Cinn. L. Rev. 839 (1986).Google Scholar

35 McCraw at 95–100. Another important aspect of his own experience occurred when he served as the coordinator of a successful shoe producer's cartel in the 1890s. McCraw, Reconsidering the Trust Question, supra note 34, at 45. From this he concluded that a small business could survive without seriously harming consumers if it was allowed to collude to avoid the excesses of competition.Google Scholar

36 Chicago Bd. of Trade v. United States, 246 U.S. 231 (1918); Standard Oil Co. (Indiana) v. United States, 283 U.S. 163 (1931).Google Scholar

37 It is true that the rhetoric of his Board of Trade opinion is still the starting point for rule-of-reason analysis in restraint of trade contexts, but it is relatively certain that the standard he propounded has rarely been given the effect he desired. See American Column & Lumber Co. v. United States, 256 U.S. 377, 413–19 (Brandeis, J., dissenting); see also United States v. Trenton Potteries, 273 U.S. 392, 401 (1927) (distinguishing Chicago Board of Trade).Google Scholar

38 Brandeis also had a subsequent, indirect, and much more positive influence on national policy toward competition. In the New Deal period, he advocated through his followers a policy of economic competition rather than cartelization and national control. His influence lies behind the ultimate restoration of competition as fundamental economic policy after the failure of the NRA. Hawley, The Monopoly Problem and the New Deal (1966). At the same time, the befuddled Brandeisian rhetoric, which combined promoting economic competition and open markets with small business protectionism, clung to antitrust, creating a number of analytic gaffs and producing a stream of targets for proponents of antimarket nostrums. See, e.g., Bork, The Rule Reason and the Per Se Concept, 74 Yale L.J. 775 (1965).Google Scholar

39 The word mumpsimus is said to have originated with a medieval priest not well learned in Latin who for 30 years used it in the mass in place of sumpsimus. When, finally, someone pointed out this error to him, he replied: “I will not change my old mumpsimus for your new sumpsimus.” Hence a mumpsimus is clearly wrong idea strongly, even devoutly, adhered to. Webster's New Twentieth Century Dictionary 1182 (2d ed. 1956).Google Scholar

40 E.g., steel making is in all probability an industry with substantial economies resulting from increases in scale and in integration. But this does not mean that it was necessary to combine 50% of the nation's productive capacity into a single enterprise to achieve these economies. U.S. Steel, which was such a consolidation, in fact failed to take advantage of many of its efficiency opportunities. Stocking, The Rule of Reason, Workable Competition, and Monopoly, 64 Yale L.J. 1107, 1129–36 (1955). Cf. Watkins, The Change in Trust Policy (II), 35 Harv. L. Rev. 926, 927–30 (1922).Google Scholar

41 In essence the supplier would have to charge higher prices to those buying in small lots so that the large-lot buyer whose business was more important than that of any other single buyer could get a lower price and would remain loyal.Google Scholar

42 McCraw at 97–98; McCraw's position is very popular among defenders of big business. See, e.g., J. McGee, In Defense of Industrial Concentration (1971).Google Scholar

43 Chandler, A., The Visible Hand: The Managerial Revolution in Modern Business (1977).Google Scholar

44 McCraw at 97–98; He develops this distinction in his earlier essay at greater length, McCraw, Reconsidering the Trust Question, supra.note 34, at 6–24. The implicit value judgments evident in this choice of labels is something one would have thought his study of Brandeis would have cautioned him against.Google Scholar

45 Chandler's analysis relies on the work of Robert Eichner, an economist, who argued that oligopolistic markets are not only inevitable but socially and economically desirable. A critical reading shows that Eichner did not claim that scale economies require the size and market dominance present in many sectors of our industrial economy; rather he argued that private market control, which he believed would bring desirable overall economic stability, required that degree of dominance. For a critical discussion of the Eichner thesis and its policy implications see Carstensen, Antitrust Law, Competition and the Macroeconomy, 14 Mich. J.L. Reform 173 (1983). For an outstanding historical study strongly questioning the Chandler thesis see, N. Lamoreaux, The Great Merger Movement in American Business, 1895–1904, (1985).Google Scholar

46 Economists such as Edith Penrose and Oliver Williamson have developed the theories that explain these events. E. Penrose, The Theory of the Growth of the Firm (1959); O. Williamson, Markets and Hierarchies: Analysis and Antitrust Implications (1975). McCraw to the contrary (at 99–101), there is no evidence that economic efficiency dictated the size, e.g., of U.S. Steel, Standard Oil, American Tobacco, or General Electric. The causes of such size included some need to restructure the scale of industries in which new technologies had created greater scale economies; the obvious private advantage of obtaining the maximum in market dominace; the lack of effective legal prohibitions against achieving unjustified market dominance; and a failure to develop the legal instruments necessary to facilitate alternate means of achieving efficiency and integration.Google Scholar

47 See, e.g., CBS v. BMI, 441 U.S. 1 (1979); Northwest Wholesale Stationers v. Pacific Stationary Supply Corp., 105 S. Ct. 2613 (1985).Google Scholar

48 His subsequent career included a seminal book on the administrative process, a less than happy deanship of Harvard Law School, a brief period as chairman of the CAB, and then a period of aimless-ness that ended when John F. Kennedy had him do a major report on the status of the federal administrative agencies. Unfortunately, Landis had not been paying his income taxes, and so after a renewed moment of glory he plunged into new difficulties and died, perhaps a suicide. McCraw at 203–9.Google Scholar

49 But see Manning, Book Review, 67 Yale L. Rev. 1477, 1485 (1958) (“twenty-five years of reform had not appreciably changed the situation”).Google Scholar

50 McCraw equates the “sunshine” imposed by the SEC on corporate financial affairs with that produced by Adams's Railroad Commission. This strikes me as a false analogy. The SEC is regulating certain conduct, the scope and detail of disclosure to be made between buyers, sellers, and issuers. This directly controls a major element of otherwise discretionary market conduct. Adams, on the other hand, sought to influence railroad discretionary choice by the threat of disclosure to legislators who might react by legislating new performance rules. The link between disclosure and a market reaction is therefore very different.Google Scholar

51 See Loss, L., Fundamentals of Securities Regulation 130–31 (1983).Google Scholar

52 Id.Google Scholar

53 In one case a firm tried to follow the statutes and in subsequent litigation that fact was almost proof that there was fraud in the issue. Las Vegas Hawaiian Dev. Co. v. SEC, 466 F. Supp. 923 (D. Hawaii 1979).Google Scholar

54 See Rules 430 and 431, 17 C.F.R. £ 230.430, 230.431. See also, J. Hazen, The Law of Securities Regulation 41–50 (1984); Loss, supra note 51, 113–16.Google Scholar

55 E.g., the drafters, especially of the 1934 Exchange Act, did not anticipate the important role that private litigation would play in enforcing the law. As a result they made no general provision for liability and the standards that might govern such claims. There were some selectively focused private remedies especially in the 1933 Securities Act. See, e.g., £ 11 of 1933 act. One result is that the courts have fashioned most of the liability law out of a provision in the 1934 act, £ 10b, which was intended, if the scanty legislative record is any guide, as a catchall to allow substantive agency jurisdiction over innovative efforts to evade jurisdiction. Yet £ 10b and its implementing rule have become the source of most of the private damage law in the field.Google Scholar

56 At the same time, one of the important statutory innovations in the 1933 act, which McCraw does not note, was the use in £ 4 of a general requirement that all sellers of securities must provide a prospectus limited by a series of exceptions. Thus in any transaction, the seller had to fit an exception or provide a prospectus. This insured greater control over marginal cases than would the more usual approach of listing a limited set of transactions for which a prospectus is required.Google Scholar

57 McCraw has enlarged on the theme of the importance of this leadership and how its sensitivity and strategic decisions effected the agency's development and effectiveness in McCraw, With Consent of the Governed: SEC's Formative Years, 1 J. Pol'y Anal. Mgmt. 346 (1982).CrossRefGoogle Scholar

58 Wang, Some Arguments That the Stock Market Is Not Efficient, 19 U.C.D. L. Rev. 341 (1986).Google Scholar

59 Easterbrook & Fischer, The Proper Role of a Target's Management in Responding to a Tender Offer, 94 Harv. L. Rev. 1161 (1981).Google Scholar

60 Lowenstein, Professor, among others, has suggested this explanation for the discrepancy between stock market prices and takeover bids. Lowenstein, Pruning Deadwood in Hostile Takeovers: A Proposal for Legislation, 83 Colum. L. Rev. 249 274–76 (1983).Google Scholar

61 Of course, such an emphasis on the predominance of investor interests raises another and even more fundamental problem: Should large publicly held corporations operate solely in the interest of maximizing shareholder wealth? It is arguable that corporate expenditures in being more efficient or innovative are not very productive for shareholders since other firms will respond with similar invest-merits resulting in lower prices and more competition, but such conduct serves very important social economic interests such as increasing consumer welfare and stimulating innovation. This is to some extent the antitrust problem revisited.Google Scholar

62 For an example of how careful evaluation of strategic considerations can produce quite novel regulatory proposals, see, Weiss, Social Regulation of Business Activity: Reforming the Corporate Governance System to Resolve an Institutional Impasse, 28 UCLA L. Rev. 343 (1981).Google Scholar