Abstract
For most of the last half century, economic concepts of efficiency have dominated antitrust law and competition policy. Debates have largely centered around how to apply these concepts to specific types of business conduct, for example, whether a particular merger is efficient or a particular action will exclude equally efficient competitors from the market, while concerns about market structure have largely receded into the background. Business scholarship and practice, however, have begun to place an increasing emphasis on sustainability. Sustainability not only challenges the basic assumption of efficiency analysis that firms rationally pursue profit maximization, sustainability also suggests that overreliance on efficiency may be a trap that renders markets less resilient and more prone to collapse in the face of abrupt changes. Growing concern about the fragility of supply chain networks provides a case in point. To avoid the efficiency trap requires consideration of both efficiency and resilience.
I. Introduction
Sustainability requires a new view of business and a new philosophy on how business should be conducted.
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Efficiency traps are everywhere in the business world.
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Although exclusionary conduct, market structures, and economic concentration were once among the major concerns of antitrust law, in the 1960s a new school of antitrust analysis associated with the University of Chicago emerged that emphasized “consumer welfare,” defined in terms of economic efficiency 3 as the primary goal of antitrust. Chicago School adherents viewed competition primarily as a means to achieve the ultimate goal of efficiency. 4 Today, mainstream antitrust largely accepts the primacy of improving (or at least avoiding harm) to economic efficiency. 5 While courts and policy makers may not unerringly pursue this goal, 6 the debate tends to be about how, not whether antitrust should maximize economic efficiency. 7 Concerns about market structure, except as it may affect efficiency, have largely receded into the background. 8
There are other values that perhaps antitrust should consider, not the least of which is the sustainability of the interrelated social, economic, and environmental systems on which much of the world depends. 9 Although critics have suggested that “the sustainability of business is an aspiration rather than a realistic policy agenda” 10 and “dangerous nonsense,” 11 in practice, businesses are paying increasing attention to sustainability. 12 Sustainability has also generated an enormous outpouring of academic literature 13 and achieved a presence in the business school curriculum. 14
It is tempting to believe that the greater efficiency sought by modern antitrust will lead to sustainability. However, this article suggests that overreliance on efficiency may be a trap if it lead these complex, interdependent systems to lose their resilience and become vulnerable to sudden collapse in the wake of sudden, unexpected events.
II. Efficiency and Antitrust
Net gains or losses in three categories of economic efficiency provide the major focus for modern antitrust analysis: allocative, productive, and dynamic. At the risk of oversimplification, 15 allocative efficiency refers to the distribution of resources that will result in the set of goods and services most valued by consumers, 16 and productive efficiency refers to the production of a particular type of good or service by a firm at the lowest feasible cost. 17 Allocative and productive efficiency are generally thought of as static, providing snapshots of economic activity at a given point in time. The discovery, development, or implementations of innovations that increase productive efficiency or allocative efficiency over time may be referred to as dynamic efficiency. 18 Society may even benefit more from dynamic than static efficiency. 19
III. Sustainability
Focusing antitrust analysis on the question of whether challenged business conduct produces a net gain in economic efficiency has its value, not the least of which is offering a “relatively consistent policy.” 20 Business scholars and practitioners, however, are increasingly asking not just whether a practice is efficient or profitable, but whether it is also sustainable. This, of course, begs the questions of what sustainability is and how it relates to efficiency.
A. Sustainability Defined
At an elemental level, sustainability may be defined as the “ability to remain intact indefinitely.” 21 Sustainability as business concept has its origins in the 1987 “Brundtland Report” that defined sustainable development as “development that seeks to meet the needs and aspirations of the present without compromising the ability to meet those of the future.” 22 That same year, Edward Barbier suggested that sustainable development should maximize the goals of three interrelated systems: environmental, economic, and social. 23 In the 1990s, John Elkington used the term “triple bottom line” of “profits, planet and people” as a way to apply sustainable development concepts to business practice. 24 While considerable disagreement continues to exist over whether and how firms should pursue these “three pillars of sustainability,” a consensus emerged that for business, sustainability means that the conduct of operations “in the interest of all current and future stakeholders in a manner that ensures the long-term health and survival of the business and its associated economic, social, and environmental systems.” 25
B. Sustainability and Efficiency
Although the so-called “business case” for sustainability rests on the role sustainability may play in improving the firm’s productive efficiency, 26 properly understood, sustainability is “a company-wide goal that permeates through every task, role, department, division, and activity of the company.” 27 In this respect, sustainability challenges one of the basic assumptions of the efficiency model, that is, that “economic behavior is not random but is primarily directed toward the maximization of profits.” 28 The challenge for sustainable companies, however, is to create “synergies and mutuality between different interests,” including the environment and society as well as the shareholder’s interest in making profits. 29
Negative externalities provide another nexus between sustainability and efficiency. The deleterious effect of negative externalities on allocative efficiency is a well understood concept in economics 30 and hardly an alien concept to antitrust. 31 A profit-maximizing firm has no reason to distinguish between shifting its costs to someone else and productive efficiency, but a sustainable business should internalize the environmental and social costs that it could otherwise externalize, 32 leading at least one scholar to suggest that “without such externalities the problem of unsustainability vanishes.” 33 Sustainability, however, “aims at justice in the domain of human–nature relationships,” 34 and therein lies the problem. Internalization of externalities “achieves allocative efficiency, but not necessarily distributive justice and thus not necessarily sustainability.” 35
Finally, unlike sustainability, allocative and productive efficiency tend to be static. Dynamic efficiency adds a temporal perspective, emphasizing the role that innovation plays in the growth of consumer welfare over time. Human history, however, provides no shortage of examples of growth that continued unabated, using resources ever more efficiently to “sustain” growth, until entire system collapsed. 36
IV. The Efficiency Trap, Sustainability, and Antitrust
Sustainability and efficiency, as the preceding suggests, are distinctly different frameworks for understanding business conduct. Although business sustainability has the potential to undermine the efficiency model’s underlying assumption of profit maximization, it is at a the basic level of sustainability, the ability of a complex system such as a market to endure, that antitrust encounters the efficiency trap.
A. The Efficiency Trap
Steve Hallett, a biologist, recently used the term “efficiency trap” to describe ways that overreliance on efficiency may threaten sustainability. 37 For example, the efficient use of a resource, such as gasoline, may increase its consumption due to the “rebound effect.” 38 Efficiency is not conservation, and conflating the two concepts can jeopardize sustainability. 39 Efficiency not only spurs “consumption where it promises conservation, it can also overburden, simplify, and weaken complex systems”; 40 and it is this second efficiency trap, mistaking a complex system’s increased efficiency for stability and strength, that should concern antitrust.
1. Sustainability versus efficiency: The forest metaphor
Forests move through cycles. Consider a piece of land largely absent of vegetation such as a recently abandoned cornfield. Weeds arrive first, for they are ideally suited to uninhabited environments. Eventually, however, weeds must compete with other plants such as bushes and shrubs that may not be as well suited as weeds for entry into new locations; but once they arrive, their larger root systems and canopies render the landscape less hospitable for weeds. Eventually, the competitive environment includes not only weeds and shrubs, but also trees with even larger root systems and canopies. Not surprisingly, trees have competitive advantages over their rivals, both weeds and bushes, for nutrients from the soil and energy from the sun, and they eventually dominate what has now become recognizable as a forest. 41 As trees exploit their competitive advantage, the forest becomes less diverse, leaving it more, not less vulnerable to collapse. For as trees outcompete other plants, the fallen twigs and branches from the trees accumulate on the forest floor, becoming both more concentrated and flammable.
Typically, fire comes before trees have become too dominant and the combustible has become too concentrated, and the fire “merely cuts through the understory and clears it out.” 42 However, if fire does not come, efficiency will continue to dictate the winners and losers in the quest for sun and soil. When the “forest is at its efficient and productive best,” Hallett points out, it is also “ready to burn.” 43 All it takes to bring down the system is the inevitable lightening on a dry summer day to set off a wildfire and bring down the entire forest. The keys to a sustainable forest include plant diversity and periodic fires. Society can aid sustainability not by preventing forest fires, but by protecting biodiversity and controlled burns.
As the metaphor of the forest suggests, an unchecked quest for efficiency results in more consumption and growth, but it “is anathema to sustainability.” 44 Systems are sustainable when they are resilient (able to bounce back from shocks to the system). 45 Without resilience, a system may simply collapse when subjected to a sudden shock.
2. The elements of resilience
What then makes for a resilient system? Hallett identifies a number of interrelated characteristics of resilient ecosystems that he believes social and economic systems would do well incorporate, including diversity and redundancy. 46 Diversity of competing organisms produces a variety of approaches for adapting to changing conditions. A diverse set of well-represented organisms will result in redundancy. As Hallett points out, a forest of oaks might be more efficient at filtering sunlight than a mixture of oaks, elms and maples, but then the shock from “an epidemic of sudden oak death disease” would cause the forest to collapse. 47
B. The Hypothesis
Sustainability of the modern society in the wake of declining fossil fuels and climate change, not antitrust,
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is Hallett’s overriding concern. Nonetheless, Hallett sees an efficiency trap in business relevant to antitrust:
Like many other systems, including ecosystems, businesses go through cycles. A new business opportunity is like a gap in the forest canopy; the entrepreneurs move in like weeds. Innovation is high, competition low and growth is rapid. Competition eventually begins and there are soon too many companies in the marketplace. Some companies fail and others merge to capture a larger share of the available resources for themselves. Mergers can result in monopolies, and what was once a new opportunity filled with easy productivity gains are no longer available, the dominant companies reach more and more for efficiency to maintain a state of growth. They streamline their businesses, trimming the fat to maintain the bottom line, and they file for bankruptcy.
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C. Anecdotal Evidence
Hallett is not alone in thinking that the emphasis on efficiency has left markets less resilient and, therefore, less sustainable. In his first book, End of the Line, 52 Barry C. Lynn, a business journalist, carefully documents how firms adopted Toyota’s just in time and lean production techniques. For most of the twentieth century, major firms enjoyed a high degree of vertical integration, limited the ability of suppliers to deal with multiple firms within a given industry, and avoided single source suppliers. During the last quarter of the century, however, firms came under increasing pressure to maximize shareholder wealth in the short term even as the entry of new foreign competitors into local markets constrained their ability to raise prices. Firms have dealt with this pressure in part by cutting costs, including outsourcing whatever activities could be done more cheaply by outsiders. Whereas Ford Motor Company mined iron ore at one end of its operations and turned out Model T automobiles at the other in the first quarter of the century, Toyota engaged in vertical disintegration, driving down “the percent of the value added to a Toyota vehicle by Toyota’s own workers fell from 75 percent to 25 percent of the total.” 53 At each stage of the supply chain, firms have emulated Toyota. So not only have manufacturers outsourced more their work to direct or “first-tier” suppliers, these suppliers have outsourced more of their work to second-tier suppliers, who, in turn, have outsourced more to the third tier, and so on. Today an automobile manufacturer primarily designs and assembles cars from components built by its suppliers, who in turn design and assemble the components from subcomponents designed and built by their suppliers. The distance measured by the number of firms between the iron ore in the ground and the car rolling off the assembly line has grown to staggering proportions.
At the same time, firms following Toyota’s lead adopted single sourcing of components in order to achieve economies of scale from their suppliers. In the 1990s, for example, GM sought to “rationalize” its purchases, “which meant buying as much as possible from one supplier, even if far away, in order to enjoy the efficiencies of bigger production runs.” 54 The drive toward single sourcing represented a radical departure from earlier purchasing strategies that relied on multisourcing “to ensure supply no matter the contingency.” 55 The vertical disintegration of firms at each level of the supply chain and the abandonment of multiple sourcing, once a key tenet of American management, 56 has also meant that managers of a company downstream in the supply chain could be “blissfully ignorant of the true extent of their firm’s dependence on a few key suppliers” 57 until the consequences from a sudden and unexpected closing of a distant supplier cascaded down the supply chain. For example, an earthquake in Taiwan in 1999 shut down Dell’s assembly lines in the United States because, unbeknownst to Dell’s management, Dell was ultimately dependent on a single Taiwanese supplier for hundreds of millions of dollars’ worth of chips in component parts. 58
As supply chains have lengthened, it has become increasingly difficult for competitors not to have overlapping supply chains. It is one thing for Toyota to forbid its spark plug supplier from selling spark plugs to Nissan. It is quite another for Toyota to prohibit the manufacturer of a ceramic component used by Toyota’s spark plug supplier from also selling ceramic components to a supplier of a supplier of Nissan. Today, it is not uncommon to find suppliers “locating the product runs of even the most vicious rivals right next to each other on the factory floor” since “such pooling of people and machines reduces the cost manufacturing by between 10 and 20 percent compared to dedicating a plant to a single company.” 59
When the unknown single source of one firm also becomes the unknown single source for its competitors through overlapping supply chains, a shock to a single remote supplier of a seemingly minor good or service can cascade through an entire industry. Lynn offers numerous examples of this, but nothing better illustrates this than a 1993 explosion at a chemical factory in Niihama, Japan, that, it turned out, manufactured half of the world’s supply of a glue “used in the plastic casing of semiconductor chips.” 60 Within a month, the consequences had cascaded though the entire personal computer industry. Similarly, as Lynn reports in his second book, Cornered, 61 Ford lobbied the federal government to rescue its rivals, GM and Chrysler, in 2008 precisely because Ford feared the cascading effect through its own supply chain from the bankruptcy of its rivals. Ford’s then CEO, Alan Mulally, testified before Congress that “with 90% commonality among our suppliers,” should either GM or Chrysler go out of business, “the effect on Ford’s production operations would be felt within days—if not hours.” 62
Aggressive outsourcing at each stage of the supply chain to more efficient and overlapping suppliers combined with single sourcing to achieve economies of scale have resulted in truly remarkable increase in overall efficiency, as Lynn is quick to point out. 63 The problem, he argues, is that one industry after another is “all but guaranteed to collapse in in a precipitous and potentially catastrophic chain reaction” when subjected a unexpected external shock, regardless of whether that shock comes from a natural event, such as an earthquake, or human conduct, such as an embargo of rare earth metals for political leverage, a run on the banks, or an act of terrorism. 64 In other words, to achieve greater efficiency, markets have lost their resiliency. 65
D. Evidence from the Academic Literature of Supply Disruption
Recent business scholarship tends to confirm Hallett’s insights and Lynn’s observations, at least with respect to modern supply chain networks. Until recently, both scholars and practitioners of supply chain management focused on improving efficiency. 66 Events such as 9/11, 67 however, raised concerns that the supply chain networks had become too fragile. 68
It is important to distinguish between “operational risks” of interruption that arise “from business as usual incidents, such as machine breakdowns and power outages” and unexpected, severe “disruption risks” that arise “from natural and man-made disasters such as earthquakes, floods, hurricanes, terrorist attacks, etc.” 69 Most “companies develop plans to protect against recurrent low impact events, but they neglect high-impact low likelihood disruptions,” 70 even though supply chain networks are “inherently vulnerable to disruption, and the failure of anyone one element in [a supply chain] could cause the whole network to fail.” 71 Not only are firms generally unprepared for such “Black Swan” supply chain disruptions, 72 researchers have also found “strong evidence that such catastrophic events are become more frequent [and greater] in their magnitude.” 73 In the wake of these observations and concerns, a new body of academic research on supply chain disruptions has emerged. 74
As one would expect from reading Hallett or Lynn, the supply chain disruption literature has found that the emphasis on efficiency exacerbates fragility. For example, Zsidisin et al. noted that “as managers continue to lean out their supply chains in search of better responsiveness and lower cost they must recognize that these systems are increasingly becoming fragile—more sensitive to the effects of potential changes and unanticipated disruptions.” 75 Similarly, Kleindorfer and Saad found that “[e]xtreme leanness and efficiency may result in increasing the level of vulnerability, at both the individual firm level and across the supply chain.” 76 The literature suggests that an over emphasis on efficiency increases the probability 77 and severity 78 of supply chain disruption.
As one would also expect from reading Hallett and Lynn, the academic literature suggests that supply chains need to be resilient if they are to survive Black Swan events. Much like Hallett, supply disruption literature defines resilience as the ability to “bounce back” 79 or, more precisely, “the ability of the system to re-establish [a] steady state and to correct the negative effects on the system after disruptions occurs.” 80 However, “trade-off between supply chain resilience and cost efficiency is also well acknowledged in the literature.” 81 The same techniques that improve efficiency also reduce redundancy and diversity, 82 two of the major components of resilience identified by Hallett.
Rather than establishing redundancies and diversity into their supply chains, firms may try to avoid some of the trade-off between resiliency and efficiency by designing supply chains with the “flexibility” to redeploy previously committed capacity in response to a disruption. 83 However, a careful reading of the literature suggests that flexibility may be difficult to create and of limited utility in the event of genuine disruption as opposed to less severe operational risks.
Sole sourcing provides a case in point. Consistent with Hallett’s point about the role diversity and redundancy in the creation of resiliency, purchasing from multiple suppliers is the “logical way to manage the risk of supply disruptions” since “some material will flow in the event of a disruption if at least one supplier is still operating”; but firms may still choose to forgo the diversity and redundancy that comes with multiple suppliers since there are “clear savings available from making a firm’s supply base more lean (reducing the number of suppliers).” 84 Flexibility might provide an alternative way to achieve resilience, but the task of creating flexibility in supply single source suppliers deep within the supply chain are often invisible and difficult to control when they are seen. 85
Toyota’s experiences with supply chain disruptions illustrates the problematic nature of flexibility as an alternative to the comparatively inefficient redundancy and diversity. Toyota, having pioneered efficiency in supply chain management, successfully weathered the loss of a first tier supplier due to fire in 1997 and another in 2007 due to earthquake and became convinced of the superiority of flexibility over less efficient means of resilience. 86 However, when the Tohoku earthquake and ensuing tsunami struck Japan on March 11, 2011, Toyota found itself unable to cope with the loss of previously unknown single source suppliers deep within its supply chain. Nearly all of its “first tier suppliers purchased the same [microcontroller units] from a single company, Renesas Electronics, and to make the matter worse, from a single Naka plant, which was severely damaged by the earthquake.” 87 The impact of the Tohoku earthquake on Renesas cascaded not only vertically through Toyota’s supply chain but horizontally across the industry in Japan, as it turned out that Renesas was also the sole source for this key subcomponent for Toyota’s competitors. 88 Toyota attempted to improve the visibility and control of distant single source suppliers in the summer of 2011, but these improvements did not go deep enough into the supply chain to deal with the loss of suppliers in Thailand when they were hit with major floods in the fall of 2011. 89
V. Implications for Antitrust
Hallett and Lynn as well as the academic literature of supply chain disruption suggest that modern business and, by implication, the markets in which these firms compete have become increasingly efficient. However, this same body of work also suggests that overreliance on efficiency may render complex systems such as markets vulnerable to collapse in the wake of sudden, unexpected shocks. Hallett, Lynn, and the supply chain literature all point to the need for resiliency. While it would be wrong to conclude that modern antitrust has made markets less resilient, many of practices and issues identified by Hallett, Lynn, and the supply chain literature, including exclusive dealing, market foreclosure and concentration, were once largely condemned by antitrust law. Modern antitrust analysis, however, tends to tolerate these practices because they may create economic efficiencies.
One could argue that the issue of resilience belongs to the private sector. Business sustainability emphasizes voluntary adoption of the three pillars of sustainability, and supply chain management focuses on how firms can make supply chains more resilient; but resilience is a sort of commons, and just as each farmer has an incentive to let his cattle graze a bit too much in the common pasture, so too each business has an incentive to trade-off a bit too much resiliency in favor of more efficiency. 90 The incentives of managers within firms also militate against resiliency. As one manager told Rice and Caniato, “[n]obody gets credit for solving a problem that did not happen.” 91 One could also argue that resilience should be dealt with by some other area of law. However, antitrust almost uniquely has the tools to deal with private attempts to alter the structure of markets. 92 Although antitrust can no more force businesses to be resilient than it can force them to be efficient, antitrust may be in the best position to prevent private behavior from jeopardizing the sustainability of markets.
If antitrust is to play a role in avoiding the efficiency trap, it will need to employ an alternative to the current efficiency framework for analyzing business conduct. Looking for more efficiency cannot identify, let alone solve, problems created by too much emphasis efficiency. Business sustainability is one such alternative. As a relatively new discipline, business sustainability does not yet have tools of equal precision to those found in economics, but development of the tools necessary to assess sustainability are under way. 93
The exact contours of an antitrust policy that incorporates sustainability are difficult to predict, but at the very least antitrust should no longer ignore or accept economic concentration in the quest for economic efficiency. The resilience needed for sustainable markets requires diversity and redundancy. Multiple firms provide the market provide a diversity of options “from which [a market] can choose as the pressures upon it shift and change.” 94 Multiple firms may also provide redundant capacity to meet the demand previously fulfilled by a failing firm, and if antitrust took the next step of considering the impact of overlaps within supply chain networks, multiple firms have the potential to “prevent shocks from spreading throughout the system, like firebreaks in the forest.” 95 Diversity and redundancy, however, are structural concerns resulting from concentration largely ignored even in the world of “post-Chicago” economics, but at the center of pre-Chicago antitrust analysis. Of course, antitrust need not reject efficiency concerns entirely simply because it incorporates sustainability. Surely, there must be a middle ground between the Supreme Court’s recent praise of monopoly as a positive good due its potential for dynamic efficiency 96 and its treatment of efficiency as a vice in the 1950s and 1960s. 97
VI. Conclusion
For antitrust, “other than efficiency, what else counts?” asked Kenneth Elzinga nearly a half century ago. 98 If antitrust is to avoid the efficiency trap, it might do well to follow the lead of business and consider sustainability as one of the answers. Since the ascendency of the Chicago School in the late 1970s and early 1980s, antitrust has focused primarily, if not exclusively, on efficiency, and there is reason to believe that businesses have become more efficient. But efficiency has come at a cost as markets have become more concentrated and vulnerable to sudden external shocks. Structural concerns carry the risk of mistaking protection of competitors for protection of competition, as the Supreme Court warned in Brown Shoe, yet the Court went on to say that antitrust “cannot fail to recognize Congress’ desire to promote competition through the protection of viable, small, locally owned businesses” even if “occasional higher costs and prices might result from the maintenance of fragmented industries and markets.” 99 This is the language of sustainability that beckons antitrust to avoid the efficiency trap.
Footnotes
Authors’ Note
The comments and suggestions from the participants at the American Antitrust Institute’s 2014 Invitational Symposium, A Multidisciplinary Examination of Efficiency, on an early draft of this work have greatly improved what is contained herein. The authors also want to express their gratitude to Dennis S. Kent for his invaluable research assistance. Errors are solely the fault of the authors. Please email comments to
Declaration of Conflicting Interests
The author(s) declared no potential conflicts of interest with respect to the research, authorship, and/or publication of this article.
Funding
The author(s) received no financial support for the research, authorship, and/or publication of this article.