Inefficient Equilibria & Antitrust Law

 In our discussion of contract curves, we showed how any point on a contract curve is an equilibrium. Therefore, any movement from elsewhere towards the contract curve is a Pareto efficient move, but once you get to this line, you’re effectively stuck. Because every point on the contract curve is an equilibrium, any proposed movement along the line will be vetoed since you cannot make any party better off without hurting another. This means that the first equilibrium you reach is the one that you will stay at, at least under the rule of unanimity. The situation described can be illustrated as seen below - 

Recent lectures in my Antitrust class have reminded me of this contract curve phenomenon. We have been studying the potential anticompetitive effects of mergers, and the way the Clayton Act attempts to reduce these harmful consequences. We read Brown Shoe Co. v. United States, a case in which the court blocked a merger between two shoe manufacturing companies. The court stepped in to block this merger, though the companies both had relatively small market shares, because they saw a trend towards concentration in the market that they felt the need to reverse “in its incipiency.” This forward-looking statute is unusual, since it requires that courts estimate the potential dangers of a merger and make decisions based on these predictions, rather than certainties. The reason courts will accept this level of uncertainty has to do with this phenomenon of getting stuck at an equilibrium. Once markets become concentrated, existing law gives the FTC very little power to un-concentrate them. In fact, efforts to try to reintroduce competition into oligopolistic markets have been blocked by the courts, as in Dupont & Ethyl v. FTC. Because of the FTC’s lack of power in this area, once the markets reach an oligopolistic equilibrium, they are effectively stuck there, like A and B got stuck at S1 in the earlier example. Though the situations described here differ - since in the first, market parties are blocking each other’s movement, while in the second, a regulatory agency is unable to force movement of market parties - the phenomenon underlying them is the same.