Error cost analysis applies a Bayesian decision-theoretic framework designed to address problems of decision-making under uncertainty, which is particularly endemic in antitrust. In antitrust, decision makers are tasked with maximizing consumer welfare. The problem, of course, is that it is never clear in any given case—particularly those that make their way to litigation—what decision will accomplish this objective.
Given this uncertainty, we can recharacterize the effort to maximize consumer welfare in antitrust decision-making as an effort to minimize the loss of consumer welfare from (inevitably) erroneous decisions. The likelihood of error decreases with additional information, but there is a cost to obtaining new information. Thus, the error-cost framework seeks to minimize error for a given amount of information as well as to determine what amount (and type) of information is optimal.
Antitrust decision-making is inherently uncertain because it is rarely apparent whether any particular challenged conduct is anticompetitive or not. Thus, for example, even conduct that leads to supracompetitive prices in the short run may also attract new entry and incentivize innovation by challengers aimed at capturing those supracompetitive profits. A decisionmaker will never know for certain whether the harm to consumers from higher prices in the short term will be outweighed by faster innovation and, ultimately, lower prices and/or higher quality in the long term. The problem is compounded by the need to prescribe rules of broad applicability and by the precedential nature of judicial decisions. “The challenge for an antitrust court lies in stating a general rule for distinguishing between exclusionary acts, which reduce social welfare, and competitive acts, which increase it.” United States v. Microsoft Corp., 253 F.3d 34, 58 (D.C. Cir. 2001)
One important example of the implementation of the error-cost framework is found in the imposition of intermediate, simplifying procedures that impose categorization and filters at various stages in the litigation process. Standing rules, for example, are classic error-cost minimization rules. The availability of standing turns on certain indicia that correlate with the expected likelihood that a plaintiff in a given position will have a justiciable case. Where that likelihood is identifiably low, it is more efficient to curtail adjudication before it even begins by denying standing, even though occasionally this will erroneously prevent the adjudication of meritorious cases.
Evidentiary burdens and standards of proof are particularly important implementations of the antitrust error-cost framework. Presumptions and burdens place an evidentiary “thumb on the scale” of antitrust adjudication, ideally in a manner reflecting underlying economic knowledge and its application to the specific facts at hand. A plaintiff need not prove anticompetitive harm with certainty, or “beyond a shadow of doubt”: such a standard would, in most circumstances, not reflect the inherent uncertainty of conduct challenged under the antitrust laws. Under a “preponderance of the evidence” standard, by contrast, a plaintiff must adduce evidence sufficient only to demonstrate that challenged conduct is “more likely than not” to have anticompetitive effect. Plaintiffs in most civil litigation in the U.S., including antitrust litigation, are held to this standard. Rebuttable presumptions are sometimes employed as cost-saving substitutes for direct evidence when economic theory predicts a relatively high probability of competitive harm.
The choice between engaging in a full-blown rule of reason analysis and truncating review under the per se standard is one of the most important manifestations of the error cost framework. In simple terms, truncated review costs less. When it is apparent to a court that challenged conduct is almost certainly anticompetitive, the risk of erroneously condemning that conduct under a truncated analysis is low, and the administrative cost savings comparatively high.
The dividing line between per se and rule of reason turns on information: the extent to which a court has knowledge that the type of case presented is always or almost always harmful. Thus the U.S. Supreme Court has noted that the per se rule should be applied “only after courts have had considerable experience with the type of restraint at issue” and “only if courts can predict with confidence that [the restraint] would be invalidated in all or almost all instances under the rule of reason.” Leegin Creative Leather Prod., Inc. v. PSKS, Inc., 551 U.S. 877, 886-87 (2007).
Because certain knowledge about the competitive effects of most conduct is not available, condemnation under the per se standard is rarely appropriate. As a result, the error-cost framework leads naturally to a preference for rule of reason analysis for most types of conduct.
Indeed—and not uncontroversially—a commonly understood implication of the error-cost approach is that, all else equal, Type I errors are relatively more costly than Type II errors, and thus decisionmakers should be especially cautious of erroneously condemning what may turn out to be procompetitive conduct. For Judge Frank Easterbrook, who pioneered the application of the error-cost framework to antitrust, Type I errors are more costly than Type II errors because self-correction mechanisms mitigate the latter more readily than the former. As a result, writes Easterbrook, “errors on the side of excusing questionable practices are preferable.” Frank H. Easterbrook, The Limits of Antitrust, 63 Tex. L. Rev. 1, 15 (1984).
Thus, the error-cost approach in antitrust often takes on a more normative objective: a heightened concern with avoiding the over-deterrence of procompetitive activity through the erroneous condemnation of beneficial conduct. Various aspects of antitrust doctrine—ranging from antitrust pleading standards to the market definition exercise to the assignment of evidentiary burdens—have evolved in significant part to constrain the discretion of judges and antitrust enforcers to condemn uncertain, unfamiliar, or nonstandard conduct, lest “uncertain” be erroneously identified as “anticompetitive.” As the U.S. Supreme Court has held: “Mistaken inferences and the resulting false condemnations ‘are especially costly, because they chill the very conduct the antitrust laws are designed to protect.’” Verizon Commc’ns Inc. v. Law Offices of Curtis V. Trinko, LLP, 540 U.S. 398, 414 (2004).
This version of the error-cost framework is not supported by all antitrust scholars, however, and there is a concerted effort today to condemn as too permissive and overly ideological the bias against stringent antitrust enforcement that Judge Easterbrook’s error-cost approach counsels. Nevertheless, the legal status of Judge Easterbrook’s claim is today well-enshrined in antitrust law, and the Supreme Court has effectively written Judge Easterbrook’s principal conclusion about error costs into U.S. antitrust jurisprudence. Error-cost analysis is far less solidified in European law, however, and the European Court of Justice’s deferential “manifest error” standard of review for economic decision-making by the Commission (established in its Holcim ruling, C-28/03 Holcim (Deutschland) v Commission [2005] ECR II-1357) reflects a distinctly diminished concern with minimizing the costs of false positives.