Archives For federal trade commission

The Federal Trade Commission’s (FTC) June 23 Workshop on Conditional Pricing Practices featured a broad airing of views on loyalty discounts and bundled pricing, popular vertical business practices that recently have caused much ink to be spilled by the antitrust commentariat.  In addition to predictable academic analyses featuring alternative theoretical anticompetitive effects stories, the Workshop commendably included presentations by Benjamin Klein that featured procompetitive efficiency explanations for loyalty programs and by Daniel Crane that stressed the importance of (1) treating discounts hospitably and (2) requiring proof of harmful foreclosure.  On balance, however, the Workshop provided additional fuel for enforcers who are enthused about applying new anticompetitive effects models to bring “problematic” discounting and bundling to heel.

Before U.S. antitrust enforcement agencies launch a new crusade against novel vertical discounting and bundling contracts, however, they may wish to ponder a few salient factors not emphasized in the Workshop.

First, the United States has the most efficient marketing and distribution system in the world, and it has been growing more efficient in recent decades (this is the one part of the American economy that has been a bright spot).  Consumers have benefited from more shopping convenience and higher quality/lower priced offerings due to the advent of  “big box” superstores, Internet sales engines (and e-commerce in general), and other improvements in both on-line and “bricks and mortar” sales methods.

Second, and relatedly, the Supreme Court’s recognition of vertical contractual efficiencies in GTE-Sylvania (1977) ushered in a period of greatly reduced potential liability for vertical restraints, undoubtedly encouraging economically beneficial marketing improvements.  A new government emphasis on investigating and litigating the merits of novel vertical practices (particularly practices that emphasize discounting, which presumptively benefits consumers) could inject costly new uncertainty into the marketing side of business planning, spawn risk aversion, and deter marketing innovations that reduce costs, thereby harming welfare.  These harms would mushroom to the extent courts mistakenly “bought into” new theories and incorrectly struck down efficient practices.

Third, in applying new theories of competitive harm, the antitrust enforcers should be mindful of Ronald Coase’s admonition that “if an economist finds something—a business practice of one sort or other—that he does not understand, he looks for a monopoly explanation.  And as in this field we are very ignorant, the number of ununderstandable practices tends to be rather large, and the reliance on a monopoly explanation, frequent.”  Competition is a discovery procedure.  Entrepreneurial businesses constantly seek improvements not just in productive efficiency, but in distribution and marketing efficiencies, in order to eclipse their rivals.  As such, entrepreneurs may experiment with new contractual forms (such as bundling and loyalty discounts) in an effort to expand their market shares and grow their firms.  Business persons may not know ex ante which particular forms will work.  They may try out alternatives, sticking with those that succeed and discarding those that fail, without necessarily being able to articulate precisely the reasons for success or failure.  Real results in the market, rather than arcane economic theorems, may be expected to drive their decision-making.   Distribution and marketing methods that are successful will be emulated by others and spread.  Seen in this light (and relatedly, in light of transaction cost economics explanations for “non-standard” contracts), widespread adoption of new vertical contractual devices most likely indicates that they are efficient (they improve distribution, and imitation is the sincerest form of flattery), not that they represent some new competitive threat.  Since an economic model almost always can be ginned up to explain why some new practice may reduce consumer welfare in theory, enforcers should instead focus on hard empirical evidence that output and quality have been reduced due to a restraint before acting.  Unfortunately, the mere threat of costly misbegotten investigations may chill businesses’ interest in experimenting with new and potentially beneficial vertical contractual arrangements, reducing innovation and slowing welfare enhancement (consistent with point two, above).

Fourth, decision theoretic considerations should make enforcers particularly wary of pursuing conditional pricing contracts cases.  Consistent with decision theory, optimal antitrust enforcement should adopt an error cost framework that seeks to minimize the sum of the costs attributable to false positives, false negatives, antitrust administrative costs, and disincentive costs imposed on third parties (the latter may also be viewed as a subset of false positives).  Given the significant potential efficiencies flowing from vertical restraints, and the lack of empirical showing that they are harmful, antitrust enforcers should exercise extreme caution in entertaining proposals to challenge new vertical arrangements, such as conditional pricing mechanisms.  In particular, they should carefully assess the cumulative weight of the high risk of false positives in this area, the significant administrative costs that attend investigations and prosecutions, and the disincentives toward efficient business arrangements (see points two and three above).  Taken together, these factors strongly suggest that the aggressive pursuit of conditional pricing practice investigations would flunk a reasonable cost-benefit calculus.

Fifth, a new U.S. antitrust enforcement crusade against conditional pricing could be used by foreign competition agencies to justify further attacks on efficient vertical practices.  This could add to the harm suffered by companies (including, of course, U.S.-based multinationals) which would be deterred from maintaining and creating new welfare-beneficial distribution methods.  Foreign consumers, of course, would suffer as well.

My caveats should not be read to suggest that the FTC should refrain from pursuing new economic learning on loyalty discounting and bundled pricing, nor on other novel business practices.  Nor should it necessarily eschew all enforcement in the vertical restraints area – although that might not be such a bad idea, given error cost and resource constraint issues.  (Vertical restraints that are part of a cartel enforcement scheme should be treated as cartel conduct, and, as such, should be fair game, of course.)  In order optimally to allocate scarce resources, however, the FTC might benefit by devoting relatively greater attention to the most welfare-inimical competitive abuses – namely, anticompetitive arrangements instigated, shielded, or maintained by government authority.  (Hard core private cartel activity is best left to the Justice Department, which can deploy powerful criminal law tools against such schemes.)

U.S. antitrust law focuses primarily on private anticompetitive restraints, leaving the most serious impediments to a vibrant competitive process – government-initiated restraints – relatively free to flourish.  Thus the Federal Trade Commission (FTC) should be commended for its July 16 congressional testimony that spotlights a fast-growing and particularly pernicious species of (largely state) government restriction on competition – occupational licensing requirements.  Today such disciplines (to name just a few) as cat groomers, flower arrangers, music therapists, tree trimmers, frozen dessert retailers, eyebrow threaders, massage therapists (human and equine), and “shampoo specialists,” in addition to the traditional categories of doctors, lawyers, and accountants, are subject to professional licensure.  Indeed, since the 1950s, the coverage of such rules has risen dramatically, as the percentage of Americans requiring government authorization to do their jobs has risen from less than five percent to roughly 30 percent.

Even though some degree of licensing responds to legitimate health and safety concerns (i.e., no fly-by-night heart surgeons), much occupational regulation creates unnecessary barriers to entry into a host of jobs.  Excessive licensing confers unwarranted benefits on fortunate incumbents, while effectively barring large numbers of capable individuals from the workforce.  (For example, many individuals skilled in natural hair braiding simply cannot afford the 2,100 hours required to obtain a license in Iowa, Nebraska, and South Dakota.)  It also imposes additional economic harms, as the FTC’s testimony explains:  “[Occupational licensure] regulations may lead to higher prices, lower quality services and products, and less convenience for consumers.  In the long term, they can cause lasting damage to competition and the competitive process by rendering markets less responsive to consumer demand and by dampening incentives for innovation in products, services, and business models.”  Licensing requirements are often enacted in tandem with other occupational regulations that unjustifiably limit the scope of beneficial services particular professionals can supply – for instance, a ban on tooth cleaning by dental hygienists not acting under a dentist’s supervision that boosts dentists’ income but denies treatment to poor children who have no access to dentists.

What legal and policy tools are available to chip away at these pernicious and costly laws and regulations, which largely are the fruit of successful special interest lobbying?  The FTC’s competition advocacy program, which responds to requests from legislators and regulators to assess the economic merits of proposed laws and regulations, has focused on unwarranted regulatory restrictions in such licensed professions as real estate brokers, electricians, accountants, lawyers, dentists, dental hygienists, nurses, eye doctors, opticians, and veterinarians.  Retrospective reviews of FTC advocacy efforts suggest it may have helped achieve some notable reforms (for example, 74% of requestors, regulators, and bill sponsors surveyed responded that FTC advocacy initiatives influenced outcomes).  Nevertheless, advocacy’s reach and effectiveness inherently are limited by FTC resource constraints, by the need to obtain “invitations” to submit comments, and by the incentive and ability of licensing scheme beneficiaries to oppose regulatory and legislative reforms.

Former FTC Chairman Kovacic and James Cooper (currently at George Mason University’s Law and Economics Center) have suggested that federal and state antitrust experts could be authorized to have ex ante input into regulatory policy making.  As the authors recognize, however, several factors sharply limit the effectiveness of such an initiative.  In particular, “the political feasibility of this approach at the legislative level is slight”, federal mandates requiring ex ante reviews would raise serious federalism concerns, and resource constraints would loom large.

Antitrust law challenges to anticompetitive licensing schemes likewise offer little solace.  They are limited by the antitrust “state action” doctrine, which shields conduct undertaken pursuant to “clearly articulated” state legislative language that displaces competition – a category that generally will cover anticompetitive licensing requirements.  Even a Supreme Court decision next term (in North Carolina Dental v. FTC) that state regulatory boards dominated by self-interested market participants must be actively supervised to enjoy state action immunity would have relatively little bite.  It would not limit states from issuing simple statutory commands that create unwarranted occupational barriers, nor would it prevent states from implementing “adequate” supervisory schemes that are designed to approve anticompetitive state board rules.

What then is to be done?

Constitutional challenges to unjustifiable licensing strictures may offer the best long-term solution to curbing this regulatory epidemic.  As Clark Neily points out in Terms of Engagement, there is a venerable constitutional tradition of protecting the liberty interest to earn a living, reflected in well-reasoned late 19th and early 20th century “Lochner-era” Supreme Court opinions.  Even if Lochner is not rehabilitated, however, there are a few recent jurisprudential “straws in the wind” that support efforts to rein in “irrational” occupational licensure barriers.  Perhaps acting under divine inspiration, the Fifth Circuit in St. Joseph Abbey (2013) ruled that Louisiana statutes that required all casket manufacturers to be licensed funeral directors – laws that prevented monks from earning a living by making simple wooden caskets – served no other purpose than to protect the funeral industry, and, as such, violated the 14th Amendment’s Equal Protection and Due Process Clauses.  In particular, the Fifth Circuit held that protectionism, standing alone, is not a legitimate state interest sufficient to establish a “rational basis” for a state statute, and that absent other legitimate state interests, the law must fall.  Since the Sixth and Ninth Circuits also have held that intrastate protectionism standing alone is not a legitimate purpose for rational basis review, but the Tenth Circuit has held to the contrary, the time may soon be ripe for the Supreme Court to review this issue and, hopefully, delegitimize pure economic protectionism.  Such a development would place added pressure on defenders of protectionist occupational licensing schemes.  Other possible avenues for constitutional challenges to protectionist licensing regimes (perhaps, for example, under the Dormant Commerce Clause) also merit being explored, of course.  The Institute of Justice already is performing yeoman’s work in litigating numerous cases involving unjustified licensing and other encroachments on economic liberty; perhaps their example can prove an inspiration for pro bono efforts by others.

Eliminating anticompetitive occupational licensing rules – and, more generally, vindicating economic liberties that too long have been neglected – is obviously a long-term project, and far-reaching reform will not happen in the near term.  Nevertheless, while we the currently living may in the long run be dead (pace Keynes), our posterity will be alive, and we owe it to them to pursue the vindication of economic liberties under the Constitution.

The International Center for Law & Economics (ICLE) and TechFreedom filed two joint comments with the FCC today, explaining why the FCC has no sound legal basis for micromanaging the Internet and why “net neutrality” regulation would actually prove counter-productive for consumers.

The Policy Comments are available here, and the Legal Comments are here. See our previous post, Net Neutrality Regulation Is Bad for Consumers and Probably Illegal, for a distillation of many of the key points made in the comments.

New regulation is unnecessary. “An open Internet and the idea that companies can make special deals for faster access are not mutually exclusive,” said Geoffrey Manne, Executive Director of ICLE. “If the Internet really is ‘open,’ shouldn’t all companies be free to experiment with new technologies, business models and partnerships?”

“The media frenzy around this issue assumes that no one, apart from broadband companies, could possibly question the need for more regulation,” said Berin Szoka, President of TechFreedom. “In fact, increased regulation of the Internet will incite endless litigation, which will slow both investment and innovation, thus harming consumers and edge providers.”

Title II would be a disaster. The FCC has proposed re-interpreting the Communications Act to classify broadband ISPs under Title II as common carriers. But reinterpretation might unintentionally ensnare edge providers, weighing them down with onerous regulations. “So-called reclassification risks catching other Internet services in the crossfire,” explained Szoka. “The FCC can’t easily forbear from Title II’s most onerous rules because the agency has set a high bar for justifying forbearance. Rationalizing a changed approach would be legally and politically difficult. The FCC would have to simultaneously find the broadband market competitive enough to forbear, yet fragile enough to require net neutrality rules. It would take years to sort out this mess — essentially hitting the pause button on better broadband.”

Section 706 is not a viable option. In 2010, the FCC claimed Section 706 as an independent grant of authority to regulate any form of “communications” not directly barred by the Act, provided only that the Commission assert that regulation would somehow promote broadband. “This is an absurd interpretation,” said Szoka. “This could allow the FCC to essentially invent a new Communications Act as it goes, regulating not just broadband, but edge companies like Google and Facebook, too, and not just neutrality but copyright, cybersecurity and more. The courts will eventually strike down this theory.”

A better approach. “The best policy would be to maintain the ‘Hands off the Net’ approach that has otherwise prevailed for 20 years,” said Manne. “That means a general presumption that innovative business models and other forms of ‘prioritization’ are legal. Innovation could thrive, and regulators could still keep a watchful eye, intervening only where there is clear evidence of actual harm, not just abstract fears.” “If the FCC thinks it can justify regulating the Internet, it should ask Congress to grant such authority through legislation,” added Szoka. “A new communications act is long overdue anyway. The FCC could also convene a multistakeholder process to produce a code enforceable by the Federal Trade Commission,” he continued, noting that the White House has endorsed such processes for setting Internet policy in general.

Manne concluded: “The FCC should focus on doing what Section 706 actually commands: clearing barriers to broadband deployment. Unleashing more investment and competition, not writing more regulation, is the best way to keep the Internet open, innovative and free.”

For some of our other work on net neutrality, see:

“Understanding Net(flix) Neutrality,” an op-ed by Geoffrey Manne in the Detroit News on Netflix’s strategy to confuse interconnection costs with neutrality issues.

“The Feds Lost on Net Neutrality, But Won Control of the Internet,” an op-ed by Berin Szoka and Geoffrey Manne in Wired.com.

“That startup investors’ letter on net neutrality is a revealing look at what the debate is really about,” a post by Geoffrey Manne in Truth on the Market.

Bipartisan Consensus: Rewrite of ‘96 Telecom Act is Long Overdue,” a post on TF’s blog highlighting the key points from TechFreedom and ICLE’s joint comments on updating the Communications Act.

The Net Neutrality Comments are available here:

ICLE/TF Net Neutrality Policy Comments

TF/ICLE Net Neutrality Legal Comments

Last Monday, a group of nineteen scholars of antitrust law and economics, including yours truly, urged the U.S. Court of Appeals for the Eleventh Circuit to reverse the Federal Trade Commission’s recent McWane ruling.

McWane, the largest seller of domestically produced iron pipe fittings (DIPF), would sell its products only to distributors that “fully supported” its fittings by carrying them exclusively.  There were two exceptions: where McWane products were not readily available, and where the distributor purchased a McWane rival’s pipe along with its fittings.  A majority of the FTC ruled that McWane’s policy constituted illegal exclusive dealing.

Commissioner Josh Wright agreed that the policy amounted to exclusive dealing, but he concluded that complaint counsel had failed to prove that the exclusive dealing constituted unreasonably exclusionary conduct in violation of Sherman Act Section 2.  Commissioner Wright emphasized that complaint counsel had produced no direct evidence of anticompetitive harm (i.e., an actual increase in prices or decrease in output), even though McWane’s conduct had already run its course.  Indeed, the direct evidence suggested an absence of anticompetitive effect, as McWane’s chief rival, Star, grew in market share at exactly the same rate during and after the time of McWane’s exclusive dealing.

Instead of focusing on direct evidence of competitive effect, complaint counsel pointed to a theoretical anticompetitive harm: that McWane’s exclusive dealing may have usurped so many sales from Star that Star could not achieve minimum efficient scale.  The only evidence as to what constitutes minimum efficient scale in the industry, though, was Star’s self-serving statement that it would have had lower average costs had it operated at a scale sufficient to warrant ownership of its own foundry.  As Commissioner Wright observed, evidence in the record showed that other pipe fitting producers had successfully entered the market and grown market share substantially without owning their own foundry.  Thus, actual market experience seemed to undermine Star’s self-serving testimony.

Commissioner Wright also observed that complaint counsel produced no evidence showing what percentage of McWane’s sales of DIPF might have gone to other sellers absent McWane’s exclusive dealing policy.  Only those “contestable” sales – not all of McWane’s sales to distributors subject to the full support policy – should be deemed foreclosed by McWane’s exclusive dealing.  Complaint counsel also failed to quantify sales made to McWane’s rivals under the generous exceptions to its policy.  These deficiencies prevented complaint counsel from adequately establishing the degree of market foreclosure caused by McWane’s policy – the first (but not last!) step in establishing the alleged anticompetitive harm.

In our amicus brief, we antitrust scholars take Commissioner Wright’s side on these matters.  We also observe that the Commission failed to account for an important procompetitive benefit of McWane’s policy:  it prevented rival DIPF sellers from “cherry-picking” the most popular, highest margin fittings and selling only those at prices that could be lower than McWane’s because the cherry-pickers didn’t bear the costs of producing the full line of fittings.  Such cherry-picking is a form of free-riding because every producer’s fittings are more highly valued if a full line is available.  McWane’s policy prevented the sort of free-riding that would have made its production of a full line uneconomical.

In short, the FTC’s decision made it far too easy to successfully challenge exclusive dealing arrangements, which are usually procompetitive, and calls into question all sorts of procompetitive full-line forcing arrangements.  Hopefully, the Eleventh Circuit will correct the Commission’s mistake.

Other professors signing the brief include:

  • Tom Arthur, Emory Law
  • Roger Blair, Florida Business
  • Don Boudreaux, George Mason Economics (and Café Hayek)
  • Henry Butler, George Mason Law
  • Dan Crane, Michigan Law (and occasional TOTM contributor)
  • Richard Epstein, NYU and Chicago Law
  • Ken Elzinga, Virginia Economics
  • Damien Geradin, George Mason Law
  • Gus Hurwitz, Nebraska Law (and TOTM)
  • Keith Hylton, Boston University Law
  • Geoff Manne, International Center for Law and Economics (and TOTM)
  • Fred McChesney, Miami Law
  • Tom Morgan, George Washington Law
  • Barack Orbach, Arizona Law
  • Bill Page, Florida Law
  • Paul Rubin, Emory Economics (and TOTM)
  • Mike Sykuta, Missouri Economics (and TOTM)
  • Todd Zywicki, George Mason Law (and Volokh Conspiracy)

The brief’s “Summary of Argument” follows the jump. Continue Reading…

Today the FTC filed its complaint in federal district court in Washington against Amazon, alleging that the company’s in-app purchasing system permits children to make in-app purchases without parental “informed consent” constituting an “unfair practice” under Section 5 of the FTC Act.

As I noted in my previous post on the case, in bringing this case the Commission is doubling down on the rule it introduced in Apple that effectively converts the balancing of harms and benefits required under Section 5 of the FTC Act to a per se rule that deems certain practices to be unfair regardless of countervailing benefits. Similarly, it is attempting to extend the informed consent standard it created in Apple that essentially maintains that only specific, identified practices (essentially, distinct notification at the time of purchase or opening of purchase window, requiring entry of a password to proceed) are permissible under the Act.

Such a standard is inconsistent with the statute, however. The FTC’s approach forecloses the ability of companies like Amazon to engage in meaningful design decisions and disregards their judgment about which user interface designs will, on balance, benefit consumers. The FTC Act does not empower the Commission to disregard the consumer benefits of practices that simply fail to mimic the FTC’s preconceived design preferences. While that sort of approach might be defensible in the face of manifestly harmful practices like cramming, it is wholly inappropriate in the context of app stores like Amazon’s that spend considerable resources to design every aspect of their interaction with consumers—and that seek to attract, not to defraud, consumers.

Today’s complaint occasions a few more observations:

  1. Amazon has a very strong case. Under Section 5 of the FTC Act, the Commission will have to prevail on all three elements required to prove unfairness under Section 5: that there is substantial injury, that consumers can’t reasonably avoid the injury and that any countervailing benefits don’t outweigh the injury. But, consistent with its complaint and consent order in Apple, the Amazon complaint focuses almost entirely on only the first of these. While that may have been enough to induce Apple to settle out of court, the FTC will actually have to make out a case on reasonable avoidance and countervailing benefits at trial. It’s not at all clear that the agency will be able to do so on the facts alleged here.
  2. On reasonable avoidance, over and above Amazon’s general procedures that limit unwanted in-app purchases, the FTC will have a tough time showing that Amazon’s Kindle Free Time doesn’t provide parents with more than enough ability to avoid injury. In fact, the complaint doesn’t mention Free Time at all.
  3. Among other things, the complaint asserts that Amazon knew about issues with in-app purchasing by December of 2011 and claims that “[n]ot until June 2014 did Amazon change its in-app charge framework to obtain account holders’ informed consent for in-app charges on its newer mobile devices.” But Kindle Free Time was introduced in September of 2012. While four FTC Commissioners may believe that Free Time isn’t a sufficient response to the alleged problem, it is clearly a readily available, free and effective (read: reasonable) mechanism for parents to avoid the alleged harms. It may not be what the design mavens at the FTC would have chosen to do, but it seems certain that avoiding unauthorized in-app purchases by children was part of what motivated Amazon’s decision to create and offer Free Time.
  4. On countervailing benefits, as Commissioner Wright discussed in detail in his dissent from the Apple consent order, the Commission seems to think that it can simply assert that there are no countervailing benefits to Amazon’s design choices around in-app purchases. Here the complaint doesn’t mention 1-Click at all, which is core to Amazon’s user interface design and essential to evaluating the balance of harms and benefits required by the statute.
  5. Even if it can show that Amazon’s in-app purchase practices caused harm, the Commission will still have to demonstrate that Amazon’s conscious efforts to minimize the steps required to make purchases doesn’t benefit consumers on balance. In Apple, the FTC majority essentially (and improperly) valued these sorts of user-interface benefits at zero. It implicitly does so again here, but a court will require more than such an assertion.
  6. Given these lapses, there is even a chance that the complaint will be thrown out on a motion to dismiss. It’s a high bar, but if the court agrees that there are insufficient facts in the complaint to make out a plausible case on all three elements, Amazon could well prevail on a motion to dismiss. The FTC’s approach in the Apple consent order effectively maintains that the agency can disregard reasonable avoidance and countervailing benefits in contravention of the statute. By following the same approach here in actual litigation, the FTC may well meet resistance from the courts, which have not yet so cavalierly dispensed with the statute’s requirements.

The Wall Street Journal reports this morning that Amazon is getting — and fighting – the “Apple treatment” from the FTC for its design of its in-app purchases:

Amazon.com Inc. is bucking a request from the Federal Trade Commission that it tighten its policies for purchases made by children while using mobile applications.

In a letter to the FTC Tuesday, Amazon said it was prepared to “defend our approach in court,” rather than agree to fines and additional record keeping and disclosure requirements over the next 20 years, according to documents reviewed by The Wall Street Journal.

According to the documents, Amazon is facing a potential lawsuit by the FTC, which wants the Seattle retailer to accept terms similar to those that Apple Inc. agreed to earlier this year regarding so-called in-app purchases.

From what I can tell, the Commission has voted to issue a complaint, and Amazon has informed the Commission that it will not accept its proposed settlement.

I am thrilled that Amazon seems to have decided to fight the latest effort by a majority of the FTC to bring every large tech company under 20-year consent decree. I should say: I’m disappointed in the FTC, sorry for Amazon, but thrilled for consumers and the free marketplace that Amazon is choosing to fight rather than acquiesce.

As I wrote earlier this year about the FTC’s case against Apple in testimony before the House Commerce Committee:

What’s particularly notable about the Apple case – and presumably will be in future technology enforcement actions predicated on unfairness – is the unique relevance of the attributes of the conduct at issue to its product. Unlike past, allegedly similar, cases, Apple’s conduct was not aimed at deceiving consumers, nor was it incidental to its product offering. But by challenging the practice, particularly without the balancing of harms required by Section 5, the FTC majority failed to act with restraint and substituted its own judgment, not about some manifestly despicable conduct, but about the very design of Apple’s products. This is the sort of area where regulatory humility is more — not less — important.

In failing to observe common sense limits in Apple, the FTC set a dangerous precedent that, given the agency’s enormous regulatory scope and the nature of technologically advanced products, could cause significant harm to consumers.

Here that failure is even more egregious. Amazon has built its entire business around the “1-click” concept — which consumers love — and implemented a host of notification and security processes hewing as much as possible to that design choice, but nevertheless taking account of the sorts of issues raised by in-app purchases. Moreover — and perhaps most significantly — it has implemented an innovative and comprehensive parental control regime (including the ability to turn off all in-app purchases) — Kindle Free Time — that arguably goes well beyond anything the FTC required in its Apple consent order. I use Kindle Free Time with my kids and have repeatedly claimed to anyone who will listen that it is the greatest thing since sliced bread. Other consumers must feel similarly. Finally, regardless of all of that, Amazon has nevertheless voluntarily implemented additional notification procedures intended to comply with the Apple settlement, even though it didn’t apply to Amazon.

If the FTC asserts, in the face of all of that, that it’s own vision of what “appropriate” in-app purchase protections must look like is the only one that suffices to meet the standard required by Section 5′s Unfairness language, it is either being egregiously disingenuous, horrifically vain, just plain obtuse, or some combination of the three.

As I wrote in my testimony:

The application of Section 5’s “unfair acts and practices” prong (the statute at issue in Apple) is circumscribed by Section 45(n) of the FTC Act, which, among other things, proscribes enforcement where injury is “not outweighed by countervailing benefits to consumers or to competition.”

And as Commissioner Wright noted in his dissent in the Apple case,

[T]he Commission effectively rejects an analysis of tradeoffs between the benefits of additional guidance and potential harm to some consumers or to competition from mandating guidance…. I respectfully disagree. These assumptions adopt too cramped a view of consumer benefits under the Unfairness Statement and, without more rigorous analysis to justify their application, are insufficient to establish the Commission’s burden.

We won’t know until we see the complaint whether the FTC has failed to undertake the balancing it neglected to perform in Apple and that it is required to perform under the statute. But it’s hard to believe that it could mount a case against Amazon in light of the facts if it did perform such a balancing. There’s no question that Amazon has implemented conscious and consumer-welfare-enhancing design choices here. The FTC’s effort to nevertheless mandate a different design (and put Amazon under a 20 year consent decree) based on a claim that Amazon’s choices impose greater harms than benefits on consumers seems manifestly unsupportable.

Such a claim almost certainly represents an abuse of the agency’s discretion, and I expect Amazon to trounce the FTC if this case goes to trial.

In recent years, antitrust enforcers in Europe and the United States have made public pronouncements and pursued enforcement initiatives that undermine the ability of patentees to earn maximum profits through the unilateral exercise of rights within the scope of their patents, as discussed in separate recent articles by me and by Professor Nicolas Petit of the University of Liege. (Similar sorts of concerns have been raised by Federal Trade Commissioner Joshua Wright.) This represents a change in emphasis away from restraints on competition among purveyors of rival patented technologies and toward the alleged “exploitation” of a patentee’s particular patented technology. It is manifested, for example, in enforcers’ rising enthusiasm for limiting patent royalties (based on hypothetical ex ante comparisons to “next best” technologies, or the existence of standards on which patents “read”), for imposing compulsory licensing remedies, and for constraining the terms of private patent litigation settlements involving a single patented technology. (Not surprisingly, given its broader legal mandate to attack abuses of dominant positions, the European Commission has been more aggressive than United States antitrust agencies.) This development has troubling implications for long-term economic welfare and innovation, and merits far greater attention than it has received thus far.

What explains this phenomenon? Public enforcers are motivated by research that purports to demonstrate fundamental flaws in the workings of the patent system (including patent litigation) and the poor quality of many patents, as described, for example, in 2003 and 2011 U.S. Federal Trade Commission (FTC) Reports. Central to this scholarship is the notion that patents are “highly uncertain” and merely “probabilistic” (read “second class”) property rights that should be deemed to convey only a right to try to exclude. This type of thinking justifies a greater role for prosecutors to “look inside” the patent “black box” and use antitrust to “correct” perceived patent “abuses,” including supposed litigation excesses.

This perspective is problematic, to say the least. Government patent agencies, not antitrust enforcers, are best positioned to (and have taken steps to) rein in litigation excesses and improve patent quality, and the Supreme Court continues to issue rulings clarifying patent coverage. More fundamentally, as Professor Petit and I explain, this new patent-specific interventionist trend ignores a robust and growing law and economics literature that highlights the benefits of the patent system in enabling technology commercialization, signaling value to capital markets and innovators, and reducing information and transaction costs. It also fails to confront empirical studies that by and large suggest stronger patent regimes are associated with faster economic growth and innovation. Furthermore, decision theory and error cost considerations indicate that antitrust agencies are ill-equipped to second guess unilateral exercises of property rights that fall within the scope of a patent. Finally, other antitrust jurisdictions, such as China, are all too likely to cite new United States and European constraints on unilateral patent right assertions as justifications for even more intrusive limitations on patent rights.

What, then, should the U.S. antitrust enforcement agencies do? Ideally, they should announce that they are redirecting their emphasis to prosecuting inefficient competitive restraints involving rival patented technologies, the central thrust of the 1995 FTC-U.S. Justice Department Patent-Antitrust Licensing Guidelines. In so doing, they should state publicly that an individual patentee should be entitled to the full legitimate returns flowing from the legal scope of its patent, free from antitrust threat. (The creation of patent-specific market power through deception or fraud is not a legitimate return on patent rights, of course, and should be subject to antitrust prosecution when found.) One would hope that eventually the European Commission (and, dare we suggest, other antitrust authorities as well) would be inspired to adopt a similar program. Additional empirical research documenting the economy-wide benefits of encouraging robust unilateral patent assertions could prove helpful in this regard.

Government impediments to the efficient provision of health care services in the United States are legion.  While much recent attention has focused on the federal Patient Protection and Affordable Care Act, which by design reduces consumer choice and competition, harmful state law restrictions have long been spotlighted by the U.S. Federal Trade Commission (FTC) and the U.S. Department of Justice (DOJ).  For example, research demonstrates that state “certificate of need” (CON) laws, which require prior state regulatory approval of new hospitals and hospital expansions, “create barriers to entry and expansion to the detriment of health care competition and consumers.

Less attention, however, has been focused on relatively new yet insidious state anticompetitive restrictions that have been adopted by three states (North Carolina, South Carolina, and New York), and are being considered by other jurisdictions as well – “certificates of public advantage” (COPAs).  COPAs are state laws that grant federal and state antitrust law immunity to health care providers that enter into approved “cooperative arrangements” that it is claimed will benefit state health care quality.  Like CONs, however, COPAs are likely to undermine, rather than promote, efficient and high quality health care delivery, according to the FTC.

As the FTC has pointed out, federal antitrust law already permits joint activity by health care providers that benefits consumers and is reasonably necessary to create efficiencies.  A framework for assessing such activity is found in joint FTC and DOJ Statements of Antitrust Enforcement in Health Care, supplemented by subsequent agency guidance documents.  Moreover, no antitrust exemption is needed to promote efficient cooperative arrangements, because the antitrust laws already allow procompetitive collaborations among competitors.

While COPA laws are not needed to achieve socially desirable ends, they create strong incentives for unnecessary competitive restrictions among rival health care providers, which spawn serious consumer harm.  As the bipartisan Antitrust Modernization Commission observed, “[t]ypically, antitrust exemptions create economic benefits that flow to small, concentrated interest groups, while the costs of the exemption are widely dispersed, usually passed on to a large population of consumers through higher prices, reduced output, lower quality and reduced innovation.”  In short, one may expect that well-organized rent-seekers generally will be behind industry-specific antitrust exemptions.  This is no less true in health care than in other sectors of the economy.

Legislators should not assume that competitive problems created by COPAs can be cured by active supervision carried out by state officials.  Such supervision is difficult, costly, and prone to error, particularly because the supervised entities will have every incentive to mischaracterize their self-serving actions as welfare-enhancing rather than welfare-reducing.  In effect, state supervision absent antitrust sanction may devolve into a form of ad hoc economic regulation, subject to all the imperfections of regulation, including regulatory capture by special interests.

A real world example of the difficulties in regulating COPA arrangements is outlined in a 2011 state-commissioned economic analysis (2011 Study) of the 1995 COPA agreement (NC-COPA) between the State of North Carolina and Mission Health Systems (MHS).  In 1993 the State of North Carolina enacted a COPA statute, which grants federal and state antitrust immunity to parties that submit their cooperative agreements to active supervision by the State of North Carolina.  In 1995, to forestall a DOJ antitrust investigation into the merger of the only two acute-care hospitals in Asheville, North Carolina, MHS, the parent of the acquiring hospital, sought and was granted a COPA by the State.  (This COPA agreement was the first in North Carolina and the first in the nation.)  MHS subsequently expanded into additional health care ventures in western North Carolina, subject to state regulatory supervision specified in NC-COPA and thus free from antitrust scrutiny.  The 2011 Study identified a number of potentially harmful consequences flowing from this regulatory scheme:  (1) by regulating MHS’s average margin across all services and geographic areas, NC-COPA creates an incentive for MHS to expand into lower-margin markets to raise price in core markets without violating margin cap limitations; (2) NC-COPA’s cost cap offers only limited regulatory protection for consumers and creates undesirable incentives for MHS to increase outpatient prices and volumes; and (3) NC-COPA creates an incentive and opportunity for MHS to evade price or margin regulation in one market by instead imposing price increases in a related, but unregulated, market.  Moreover, the 2011 Study concluded that the NC-COPA was unnecessary to address competitive concerns attributable to the 1995 merger.  The State of North Carolina has not yet responded to recommendations in the Study for amending the NC-COPA to address these ills.  What the Study illustrates is that even assuming the best of intentions by regulators, COPAs raise serious problems of implementation and are likely to have deleterious unanticipated effects.  State governments would be well advised to heed the advice of federal (and state) antitrust enforcers and avoid the temptation to substitute regulation for competitive market forces subject to general antitrust law.

In sum, state legislatures should resist the premise that health care competitors will somehow advance the “public interest” if they are freed from antitrust scrutiny and subjected to COPA regulation.  Efficient joint activity can proceed without such special favor, whose natural effect is to incentivize welfare-reducing anticompetitive conduct – conduct which undermines, rather than promotes, health care quality and the general welfare.

Credit where it’s due — the FTC has closed its investigation of the Men’s Warehouse/Jos. A. Bank merger. I previously wrote about the investigation here, where I said:

I would indeed be shocked if a legitimate economic analysis suggested that Jos. A. Banks and Men’s Warehouse occupied all or most of any relevant market. For the most part — and certainly for the marginal consumer — there is no meaningful difference between a basic, grey worsted wool suit bought at a big department store in the mall and a similar suit bought at a small retailer in the same mall or a “warehouse” store across the street. And the barriers to entry in such a market, if it existed, would be insignificant. Again, what I said of Whole Foods/Wild Oats is surely true here, too:

But because economically-relevant market definition turns on demand elasticity among consumers who are often free to purchase products from multiple distribution channels, a myopic focus on a single channel of distribution to the exclusion of others is dangerous.

Let’s hope the FTC gets it right this time.

The FTC’s blog post on closing the investigation notes that:

Despite limited competition from the Internet, the transaction is not likely to harm consumers because of significant competition from other sources. As in all transactions, FTC staff examined which product markets were likely to be affected and what the competitive landscape looks like in those markets. There were two such markets in this matter: (1) the retail sale of men’s suits and (2) tuxedo rentals. With respect to men’s suits, there are numerous competitors that sell suits across the range of prices of the suits the merging parties offer, including Macy’s, Kohl’s, JC Penney’s, Nordstrom, and Brooks Brothers, among others. The two firms also have different product assortments that reflect their different customer bases. Men’s Wearhouse, which sells branded and private-label suits, has a younger, trendier customer set, while Jos. A. Bank, which sells private-label suits only, has an older, more traditional customer base.

Sounds right — and good to see.

The American Bar Association’s (ABA) “Antitrust in Asia:  China” Conference, held in Beijing May 21-23 (with Chinese Government and academic support), cast a spotlight on the growing economic importance of China’s six-year old Anti-Monopoly Law (AML).  The Conference brought together 250 antitrust practitioners and government officials to discuss AML enforcement policy.  These included the leaders (Directors General) of the three Chinese competition agencies (those agencies are units within the State Administration for Industry and Commerce (SAIC), the Ministry of Foreign Commerce (MOFCOM), and the National Development and Reform Commission (NDRC)), plus senior competition officials from Europe, Asia, and the United States.  This was noteworthy in itself, in that the three Chinese antitrust enforcers seldom appear jointly, let alone with potential foreign critics.  The Chinese agencies conceded that Chinese competition law enforcement is not problem free and that substantial improvements in the implementation of the AML are warranted.

With the proliferation of international business arrangements subject to AML jurisdiction, multinational companies have a growing stake in the development of economically sound Chinese antitrust enforcement practices.  Achieving such a result is no mean feat, in light of the AML’s (Article 27) explicit inclusion of industrial policy factors, significant institutional constraints on the independence of the Chinese judiciary, and remaining concerns about transparency of enforcement policy, despite some progress.  Nevertheless, Chinese competition officials and academics at the Conference repeatedly emphasized the growing importance of competition and the need to improve Chinese antitrust administration, given the general pro-market tilt of the 18th Communist Party Congress.  (The references to Party guidance illustrate, of course, the continuing dependence of Chinese antitrust enforcement patterns on political forces that are beyond the scope of standard legal and policy analysis.)

While the Conference covered the AML’s application to the standard antitrust enforcement topics (mergers, joint conduct, cartels, unilateral conduct, and private litigation), the treatment of price-related “abuses” and intellectual property (IP) merit particular note.

In a panel dealing with the investigation of price-related conduct by the NDRC (the agency responsible for AML non-merger pricing violations), NDRC Director General Xu Kunlin revealed that the agency is deemphasizing much-criticized large-scale price regulation and price supervision directed at numerous firms, and is focusing more on abuses of dominance, such as allegedly exploitative “excessive” pricing by such firms as InterDigital and Qualcomm.  (Resale price maintenance also remains a source of some interest.)  On May 22, 2014, the second day of the Conference, the NDRC announced that it had suspended its investigation of InterDigital, given that company’s commitment not to charge Chinese companies “discriminatory” high-priced patent licensing fees, not to bundle licenses for non-standard essential patents and “standard essential patents” (see below), and not to litigate to make Chinese companies accept “unreasonable” patent license conditions.  The NDRC also continues to investigate Qualcomm for allegedly charging discriminatorily high patent licensing rates to Chinese customers.  Having the world’s largest consumer market, and fast growing manufacturers who license overseas patents, China possesses enormous leverage over these and other foreign patent licensors, who may find it necessary to sacrifice substantial licensing revenues in order to continue operating in China.

The theme of ratcheting down on patent holders’ profits was reiterated in a presentation by SAIC Director General Ren Airong (responsible for AML non-merger enforcement not directly involving price) on a panel discussing abuse of dominance and the antitrust-IP interface.  She revealed that key patents (and, in particular, patents that “read on” and are necessary to practice a standard, or “standard essential patents”) may well be deemed “necessary” or “essential” facilities under the final version of the proposed SAIC IP-Antitrust Guidelines.  In effect, implementation of this requirement would mean that foreign patent holders would have to grant licenses to third parties under unfavorable government-set terms – a recipe for disincentivizing future R&D investments and technological improvements.  Emphasizing this negative effect, co-panelists FTC Commissioner Ohlhausen and I pointed out that the “essential facilities” doctrine has been largely discredited by leading American antitrust scholars.  (In a separate speech, FTC Chairwoman Ramirez also argued against treating patents as essential facilities.)  I added that IP does not possess the “natural monopoly” characteristics of certain physical capital facilities such as an electric grid (declining average variable cost and uneconomic to replicate), and that competitors’ incentives to develop alternative and better technology solutions would be blunted if they were given automatic cheap access to “important” patents.  In short, the benefits of dynamic competition would be undermined by treating patents as essential facilities.  I also noted that, consistent with decision theory, wise competition enforcers should be very cautious before condemning single firm behavior, so as not to chill efficiency-enhancing unilateral conduct.  Director General Ren did not respond to these comments.

If China is to achieve its goal of economic growth driven by innovation, it should seek to avoid legally handicapping technology market transactions by mandating access to, or otherwise restricting returns to, patents.  As recognized in the U.S. Justice Department-Federal Trade Commission 1995 IP-Antitrust Guidelines and 2007 IP-Antitrust Report, allowing the IP holder to seek maximum returns within the scope of its property right advances innovative welfare-enhancing economic growth.  As China’s rapidly growing stock of IP matures and gains in value, it hopefully will gain greater appreciation for that insight, and steer its competition policy away from the essential facilities doctrine and other retrograde limitations on IP rights holders that are inimical to long term innovation and welfare.