Truth on the Market

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Archive for August, 2008

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Life After Dr. Miles

Posted by Thom Lambert on August 18, 2008

An article in today’s WSJ, Price-Fixing Makes Comeback After Supreme Court Ruling, reports that minimum resale price maintenance (i.e., the setting of minimum retail prices by product manufacturers) is increasing in light of last summer’s Leegin decision. That’s great news for me, because I’ve spent most of the summer cranking out an article on how exactly such price-fixing should be evaulated now that the Dr. Miles rule of per se legality is dead.

While there is an abundance of academic writing on the economic question of whether and under what conditions RPM may be anticompetitive, very little has been written on the legal question of exactly how courts should evaluate instances of RPM to determine their legality. My article aims to fill in that gap.

The article proceeds in three parts. Part I summarizes the economic literature on RPM, setting forth the anticompetitive risks the practice may pose, the procompetitive benefits it may provide, and the economic conditions that would support the various effects. Part II then summarizes and critiques six legal approaches to RPM that may conceivably govern in a post-Leegin world. The six approaches that have been proposed are: (1) an unstructured rule of reason (i.e., an approach based on Justice Brandeis’s famous “all things considered” version of the rule of reason); (2) a rule of per se legality (suggested by Judge Posner); (3) the approach proposed by a group of states attorneys general (it would require a procompetitive justification for RPM if the practice resulted in a price increase); (4) the approach set forth by the FTC in the Nine West matter (it would require a procompetitive justification if certain “Leegin factors” were present); (5) the approach proposed by economists William Comanor and F.M. Scherer (it would condemn dealer-initiated RPM and would subject all other RPM to a quantitative foreclosure test); and (6) the approach set forth in the Areeda/Hovenkamp treatise (it would allow a challenger to set forth a prima facie case on the basis of certain structural criteria and would then provide for an affirmative defense that the practice is procompetitive). Finding all of these approaches deficient, I set forth, in Part III of my article, an alternative approach. I’ll provide more detail on my approach in a subsequent post.

I wonder if I’ve left out any proposed rules of reason. Has anyone seen another proposal for how RPM should be evaluated post-Leegin? If so, I’d love to know!

Posted in antitrust, federal trade commission, law and economics, regulation | 1 Comment »

Why Antitrust?

Posted by Josh Wright on August 16, 2008

As the start of the new academic year inches closer, and students are deciding what courses to take, I thought I’d give a little plug to antitrust law. I’ve seen enrollment in antitrust courses vary dramatically over the past 10 years or so since I was a student and now as a professor. I certainly know the case against taking antitrust: “its not a bar course,” “you have to know a bunch of economics, right?”, and “its really difficult.”  But I hear this question from students frequently and I thought I’d share my typical answer to the titular question here:

First, make no mistake, antitrust is flat out interesting stuff.  We’re talking cartel arrangements in rooms filled with smoke, complex collusive arrangements, all sorts of unsavory business practices, rent-seeking and use of government restrictions to exclude rivals, and all forms of cutthroat competition between firms to stay alive in a competitive marketplace.  For some reason antitrust has earned the reputation of being a “boring” class for specialists who are interested in economics.  Wrong, wrong, wrong.  Sure, antitrust will force you to learn some economics because the law itself has incorporated economic concepts (see, e.g. the Merger Guidelines).  But this is a feature, not a bug.  Economics can help one understand how the world works and provide some interesting insight on business practices that we observe in the world and impact us everyday at the gas pump, the grocery store, the computers we all work on, and just about everywhere else.  Supply and demand graphs might be boring to some, and I don’t mean to suggest that antitrust is for everyone, but its pretty fun to think about questions like how the Sirius-XM merger will impact prices, or market definition in Whole Foods/ Wild Oats.

Second, antitrust law is become an increasingly important component of the international business landscape.  Take a look at this photo (the countries in red have antitrust laws on the books). Over 100 countries currently have passed antitrust laws (see here). Having at least a passing knowledge of antitrust is increasingly an important asset for corporate lawyers generally.  With antitrust enforcement now in India, China, Hong Kong, Singapore, and the EU-US antitrust convergence/divergence debate growing in importance, challenging legal and economic debates will continue to rage in the antitrust space for years to come (Between you and I, these changing market conditions have also increased demand for antitrust law professors in recent years).

Third, the bar exam issue.  While its true that antitrust law is not going to help you on the bar, neither are a bunch of interesting courses. And one shouldn’t conflate inclusion on the bar exam with general importance in terms or, of course, intellectual interest (which so far as I can tell, is still an acceptable reason for enrolling in courses).  Besides, there is at least some evidence that courseload choices have little to do with bar passage rates.  On top of all that, in light of #2, it is a good time to pursue a career as an antitrust lawyer.

I’ll start with those three.  Feel free to add your own in the comments.

Posted in antitrust, economics, law school | 1 Comment »

Antitrust Source: Required Antitrust Reading for the Next Administration

Posted by Josh Wright on August 8, 2008

In the current issue of Antitrust Source, including my own submission which I blogged about here.

Posted in antitrust, politics | Comments Off

Optimal Regulatory Design, Fragmentation, and Abolition

Posted by Josh Wright on August 7, 2008

In response to my post about the optimal institutional design for merger enforcement and the problems associated with dual federal enforcement, a reader points me to this related paper by Jon Klick, Francesco Parisi, and Norbert Schulz in the International Review of Law and Economics which models alternatives for allocating decision-making across multiple agencies. One of the fundamental insights is that fragmented regulatory authority can result in actions that produce various sorts of externalities in regulatory competition. For example, in concurrent regulation, one might think of the first agency’s decision to approve a merger as increasing the size of the rents that can be extracted by the second actor. This might be a good model of the sizeable extraction achieved by the FCC in the satellite radio merger.

One way to deal with, or at least mitigate, the inefficiencies associated with this sort of fragmentation is cooperation between agencies (e.g. the FTC and DOJ on merger enforcement. The solution I discussed in my post was eliminating the FCC’s jurisdiction (with Danny Sokol’s friendly amendment in the comments with respect to other agencies adopted).  But these solutions are really just tinkering on the margins aren’t they?  3 agencies or 2?  2 or 1?  Bryan Caplan raises another option: abolish antitrust. Ok, Bryan is talking about antitrust in Hong Kong, but I believe I’m not mischaracterizing his position. Bryan writes:

Even if you’re a mainstream economist who thinks my general critique of antitrust is overblown, you should still grant that for Hong Kong, I’m right. And doesn’t the fact that Hong Kong’s made it this far without antitrust give you a moment’s pause about the domestic benefits of these laws?

I don’t know if I’m a mainstream economist. But I do think Bryan has overestimated the case in favor of abolition, or at least should take a more nuanced stance. In evaluating the social benefits and costs of antitrust enforcement (including rent-seeking, error and administrative costs) I think one really has to distinguish between cartel enforcement, mergers, and monopolization. The evidence that antitrust can generate net benefits in the first category is much stronger than that it is for either mergers or monopolization. Reasonable minds can differ about the state of evidence in those latter categories, as well as whether “real” antitrust enforcement in those categories results in social costs that swamp potential benefits.

Lets just take cartels as an example.  It would be tough to argue, based on the evidence, that there is enough there to support abolition of cartel prosecution.  And cartel prosecution is a substantial part of the modern competition policy landscape.  Nor do I believe that the fact that Hong Kong is a small open economy or that it has gone a long time without antitrust means that cartel prevention is ineffective in the U.S. or cannot be in Hong Kong.  This is not an optimistic or utopian view of antitrust.  I don’t think I’ve ever been accused of that.  I’m written quite skeptically about enforcement in the single firm conduct area and how little we know in these areas should inform our policy.  One can argue that in practice, cartel enforcement really amounts to consumer welfare decreasing activity by overzealous regulators. But thats an empirical question. And I think the evidence pretty strongly suggests that cartel enforcement is good for consumers. The evidence with respect to mergers is a mixed bag and there is no general consensus. The picture is much more bleak with respect to single firm conduct, where not much is known and there is very little empirical evidence to suggest that antitrust enforcement is producing the types of outcomes that would justify the social costs of enforcing and administering those laws.

Bottom line: the position for abolishing antitrust, if we are are basing this on the current state of theory and evidence, is weakest against cartels, uncertain with respect to mergers, and much stronger for single firm conduct.

Posted in antitrust, economics, federal trade commission, regulation | 2 Comments »

International Antitrust Explosion in the FT

Posted by Josh Wright on August 6, 2008

Financial Times (HT: Danny Sokol) highlights the problem of multi-jurisdictional antitrust enforcement, emphasizing the rise of India and China.  The article repeats the basic point, worth repeating, that international cooperation can help avoid bad outcomes with multiple regulatory stakeholders with different incentives and institutional environments:

That is not a criticism of the new competition rules in either country – both are modernising laws on which the legal profession has been consulted. If enforced both promptly and evenhandedly, strong antitrust laws will mark a step towards competitive capitalism, rather than crony capitalism, in both countries. Local consumers will benefit. 

On international deals, however, China and India (and the US and European Commission) should leave mergers to the one jurisdiction best placed to handle them. If a merged company would have $200m sales and a 5 per cent market share in India, but $10bn sales and a 30 per cent share in the US, it is obvious who should take the lead. A forum to co-ordinate regulators – the International Competition Network – already exists. China should join it.

I’m pleased to see the FT calling attention to this issue.   Its an important one.  Perhaps one the most important on the antitrust enforcement policy landscape.  Joining the ICN and the international antitrust community more broadly is one way to generate cooperation and avoid bad outcomes.  But count me a skeptic with respect to the proposition that assigning jurisdiction to the competition policy agency with the greatest dollar value interest in the activity at issue will solve the problem.  The problem of mitigating the costs of multiple international competition agencies is a complex one with a lot of moving parts (Chairman Kovacic’s recent speech is a must-read on these issues).

I’ve argued previously that the policy discussion ought not emphasize “convergence or divergence per se, but jurisdictional competition combined with facilitation of superior substantive analytical norms.”  In other words, lets talk about getting optimal substantive standard adopted, say what we mean when we use code words like “convergence” (e.g. in the U.S. this appears to mean, movement to the standards adopted by our courts, and in particular, the Supreme Court), and respectfully but firmly and consistently hold competition agencies accountable for their decisions and enforcement philosophies.  This means that there is a lot of work to be done by economists and lawyers in figuring out the competitive effects of various forms of conduct, both in theory and testing these theories with data, in order to come to some sort of agreement about the design of optimal standards with sensitivity to important institutional differences between countries.

To be sure, jurisdictions will disagree about the state of the evidence of strength of opposing theories.  Differences in legal institutions and history will also drive divergence.   The optimal level of divergence is not zero.  But the substantial current level of divergence, in my view, could be reduced to the benefit of consumers with international agreement on a few important and (to my mind at least) not-so-controversial principles, e.g. the adoption of the error-cost framework as an appropriate lens through which to evaluate optimal antitrust rules.  The ICN and the international antitrust community can and do make substantial efforts to instigate this type of discussion and so must be, along with other institutions which facilitate cooperation, part of the solution.  But my sense is that the current debates focus too little on the actual state of economic theory and evidence and too much on everything else.

Posted in antitrust, business, economics, international politics, international trade, regulation | Comments Off

Wolfers on the Decline of Happiness Inequality

Posted by Josh Wright on August 6, 2008

Part 1, Part 2, and Part 3. Here is the paper with Betsey Stevenson.

Posted in economics, scholarship | Comments Off

Corporate Assassinations and Antitrust

Posted by Josh Wright on August 5, 2008

Over at Overcoming Bias, they are asking the following question:

Given how little it seems to cost to have someone killed, why don’t more corporations have their competitors’ leaders knocked off?

There are interesting answers in the comments suggesting that perhaps these killings or rival firms’ leaders are more common or more costly than commonly thought. Here’s a different question that only an antitrust junkie would ask: Would such a corporate assassination give rise to an antitrust violation? I usually discuss this issue with my antitrust classes in the context of examining the overlaps and distinctions between tort and antitrust (usually in the context of the Conwood case, which I have written about in some detail here), but criminal law seems to work just as well and provides more interesting hypos to work with. To make the question more interesting, assume that Firm X has a 90% market share and its CEO hires an assassin to kill the very important and productive CEO of its leading and up and coming rival Firm Y. Has X violated any antitrust laws? Does the price of the assassination services matter? What if the victim was not productive but was a bad CEO and was replaced by a more productive and effective executive?

Posted in antitrust, musings | Comments Off

Antitrust Survey

Posted by Josh Wright on August 4, 2008

Danny Sokol is conducting a survey of private practitioners for an empirical project examining how antitrust law shapes compliance.  The survey is here.

Posted in antitrust | Comments Off

More Milton Friedman Institute Commentary

Posted by Josh Wright on August 4, 2008

While much has been said about the recent Milton Friedman Institute scuffle at the University of Chicago (including here at TOTM here), Chicago GSB Professor John Cochrane’s scathing comments on the original Protest letter have stirred up some additional commentary worth reading.  In particular, Craig Newmark (who adds the new fact that apparently the Protest letter was not sent to the economics department, the GSB, or the Institute — does this mean it was sent to the law school?) and Steve Horwitz, who quiet nicely turns the Protesters complaints about the negative externalities imposed on “other” Chicago faculty by the university’s free-market reputation on its head:

I’d like the Chicago humanities faculty to tell me how I’m supposed to feel when these students ask me why so many US humanities faculty, including some of my colleagues at SLU, still think Marxism and socialism have social value when those ideas were the inspiration, even if wrongly interpreted, for thugs who engaged in the killing of tens of millions of innocent people and the destruction of the economies of billions. I’d like them also to tell me how I’m supposed to feel when a Cuban refugee who risked his life to come to the US asks me why some US college students, including some at SLU, think it’s cool to wear Che Guevara t-shirts, implicitly honoring a murder and torturer.

Whatever the flaws of free market capitalism as it was applied in the real world, its sins pale in comparison to those of really-existing socialism. When the Chicago humanities faculty have to explain to these students why my colleagues and students have sympathy for the ideas that motivated the impoverishment and death of millions of their fellow citizens, then maybe I’ll some sympathy for them having to explain away sweet old Milton Friedman.

Posted in business, economics, law school, universities | 3 Comments »

The Price of Merger Approval and Triple Federal Enforcement

Posted by Josh Wright on August 2, 2008

Geoff and Thom (see the comments) continue to have the Whole Foods litigation covered.  I don’t and can’t have anything to add to their comments about the particulars of the litigation.  I will note, playing off my previous post on bad case law out there looking to be overturned, that there is significant demand for some guidance from the Supreme Court on horizontal mergers and market definition in particular.

Anyway, that “other” merger, Sirius/XM, has finally been approved after 17 months of delay and well after DOJ approval (see here for comments on the DOJ press release).  Wall Street Journal gives its take on the list of concessions the FCC was able to extract from the merging parties in order to obtain approval, including a 3 year price freeze, a la carte offerings, and setting aside 8% of programming for educational and minority broadcasters:

It’s hard to fathom the need for any of these preconditions. Even combined, the two companies are just 5% of the audio marketplace. Neither one has turned a profit, and last year they posted losses of $1.2 billion. Mr. Martin seems to think he’s dealing with Microsoft or Google. And in his zeal to extract political rents from Sirius XM, he’s only making it more difficult for satellite radio to survive.

This particular merger raises some interesting questions about what institutional structures would be optimal for merger enforcement.  Play along.  Assume both that there exist some anticompetitive mergers out there and that federal agencies and the courts can potentially  identify them and prosecute them at a cost that is exceeded by the benefits to consumers from enhanced competition.  I happen to believe both of those propositions.  But if you don’t, assume them for now.  What would the merger enforcement institution look like?

There are obvious problems with the current system.  Most obviously, the dual federal enforcement issue in the merger context is an issue that gets some play whenever antitrust institutions are reviewed or scrutinized.  Rightly so.  Its an odd set up.  Most conversations about it start with the concession, “well if we had to re-do it today, obviously it wouldn’t be done this way …. BUT.”  Along those lines, here’s what the AMC Report and Recommendations had to say about the dual federal enforcement question:

This system of “dual enforcement” has been the subject of periodic debate. Critics contend that having two agencies enforce the federal antitrust laws entails unnecessary duplication and can result in inconsistent antitrust policies, additional burdens on businesses, or other obstacles to efficient and fair federal antitrust enforcement. Some have suggested eliminating the FTC’s antitrust authority; others propose reallocating nearly all antitrust enforcement authority to the FTC, with the DOJ prosecuting only criminal violations of the The Commission recommends no comprehensive change to the existing system in which both the FTC and the DOJ enforce the antitrust laws.  There appears to have been little, if any, duplication of effort between the two agencies, and they typically have worked together to develop similar, if not identical, approaches to substantive antitrust policy.  Although
concentrating enforcement authority in a single agency generally would be a superior institutional structure, the significant costs and disruption of moving to a single-agency system at  this point in time would likely exceed the benefits. Furthermore, there is no consensus as to which agency would preferably retain antitrust enforcement authority.

There is no mention of the FCC.  I think it is no doubt true that the FTC and DOJ have had substantial success in developing informal mechanisms that reduce many of the costs associated with duplicative enforcement agencies.  Much of this is due to the fact that the FTC and DOJ share the same mission, agree on the right framework for the antitrust analysis, and have significant expertise in applying that analysis to mergers.  Perhaps the costs of consolidating merger control into one entity, if that were the desirable thing to do, would be greater than the benefits of such a move.  But none of those arguments appear to apply to the continued involvement of the FCC in merger control.  Where the FCC has some regulatory jurisdiction over the parties’ proposed merger, we can get results like what appears to have happened here: the DOJ (the agency with expertise in antitrust economics) approves the merger but the agency without that expertise imposes a price freeze as a remedy.  Even for those who believe the DOJ got it wrong, its pretty clear that this is a loss for principled antitrust analysis.

If I were re-designing the merger enforcement system from scratch, there would be a lot of tough calls to make.  Scrapping the FCC of authority to impose these sorts of conditions on mergers isn’t a tough call.  At least, I don’t think so.  Does anybody know of a principled economic argument in favor of FCC enforcement in addition to the dual federal structure?

Posted in antitrust, business, federal trade commission, markets, mergers & acquisitions, regulation | 1 Comment »

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