Brandeis, Competition, and Sectorial Regulation

With publication of Louis Brandeis: A Man for This Season by the Colorado Technology Law Journal, Jon Sallet and the Benton Foundation are offering this new series, Updating Antitrust for a New Age, adapted from that article to demonstrate that progressive competition policy incorporated both the goals and the means that Brandeis believed would provide the strongest tools to fight against the trusts and the monopolies of his day. This series is part of an ongoing examination of how to update Brandeis—and, more importantly, antitrust—for the digital age.

In the world of competition law, Louis Brandeis applauded “the introduction of two governmental devices designed to protect the rights and opportunities of the individual.” One was, of course, antitrust. The second was the creation of “[c]ommissions to regulate public utilities.”

Brandeis always preferred competition to regulated monopoly, but he recognized that there were times when sectoral regulation was needed, as, for example with local gas, water, and telephone monopolies. He viewed such instances as “exceptional” but obviously important. For example, Brandeis understood price-setting as a tool to be used only in the context of specific industries where such government involvement was necessary. Brandeis believed there to be a “radical difference between attempts to fix rates for transportation and similar public services and fixing prices for industrial services.”

Brandeis also recognized the importance of sectoral regulation where regulated entities were not monopolies. He supported “effective regulation of railroads as well as of other public-service corporations, whether they be monopolies or competitive concerns,” but he vehemently argued that such sectoral regulation should work to preserve and create competition, not, as in the Theodore Roosevelt view that he opposed in 1912, simply to acquiesce in the existence of non-competitive markets.

His reasoning was quite straightforward; Brandeis recognized the difficulty in achieving regulatory outcomes that would duplicate the advantages of competitive pressure on companies. For example, in opposing a request by railroads that the Interstate Commerce Commission (ICC) approve higher rates in 1910, Brandeis argued just this point: “It would be a most serious danger to the country to establish the principle that if, according to present conditions, they need more money they raise rates instead of doing what in every competitive business it is necessary to do, namely to consider whether you can not make more money by reducing your cost.” Thus, Brandeis emphasized the need to demonstrate that regulation was required to serve “[t]he welfare of the community.” He also took comfort from his observation that regulated industries such as railroads were uniform and stable in ways that industrial sectors were not—yet another nod to the importance of industrial innovation.

Some of Brandeis’s most notable fights for competition came in the context of sectoral regulation. He fought a twenty-year battle against the merger of New England railroads, objecting specifically to the cross-ownership of other means of transportation, such as steamship lines, that he believed would otherwise compete against the railroads. He fought off an attempted railroad rate increase in 1911, and he subsequently served as special counsel to the ICC in a rate proceeding where he surprised some railroad opponents by agreeing that some rates were, in fact, too low—another testament to his desire for factual analysis.

Brandeis used his understanding of the economics of business to suggest solutions, as well. He believed that governmental action could employ scientific methods to achieve his social and economic goals. For example, he famously asserted that railroads seeking a rate increase from the ICC could, by better management, lower their costs $1 million per day; when the railroads challenged him to meet to explain how, he promptly accepted and they retreated.

Brandeis’s endorsement of sectoral regulation where he thought it was warranted did not blind him to a significant danger that the regulated could capture the regulators. He recognized that regulators might be “in collusion with the very interests they had been charged to oversee.”

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