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Judge Douglas Ginsburg (D.C. Circuit Court of Appeals; NYU Law) and I have posted “Dynamic Antitrust and the Limits of Antitrust Institutions” to SSRN.  Our article is forthcoming in Volume 78 (2) of the Antitrust Law Journal.  We offer a cautionary note – from an institutional perspective – concerning the ever-increasing and influential calls for greater incorporation of models of dynamic competition and innovation into antitrust analysis by courts and agencies.

Here is the abstract:

The static model of competition, which dominates modern antitrust analysis, has served antitrust law well.  Nonetheless, as commentators have observed, the static model ignores the impact that competitive (or anti-competitive) activities undertaken today will have upon future market conditions.  An increased focus upon dynamic competition surely has the potential to improve antitrust analysis and, thus, to benefit consumers.  The practical value of proposals to increase the use of dynamic analysis must, however, be evaluated with an eye to the institutional limitations that antitrust agencies and courts face when engaged in predictive fact-finding.  We explain and evaluate both the current state of dynamic antitrust analysis and some recent proposals that agencies and courts incorporate dynamic considerations more deeply into their analyses.  We show antitrust analysis is not willfully ignorant of the limitations of static analysis; on the contrary, when reasonably confident predictions can be made, they are readily incorporated into the analysis.  We also argue agencies and courts should view current proposals for a more dynamic approach with caution because the theories underpinning those proposals lie outside the agencies’ expertise in industrial organization economics, do not consistently yield determinate results, and would place significant demands upon reviewing courts to question predictions based upon those theories.  Considering the current state of economic theory and empirical knowledge, we conclude that competition agencies and courts have appropriately refrained from incorporating dynamic features into antitrust analysis to make predictions beyond what can be supported by a fact-intensive analysis.

You can download the paper here.

The DOJ’s recent press release on the Google/Motorola, Rockstar Bidco, and Apple/ Novell transactions struck me as a bit odd when I read it.  As I’ve now had a bit of time to digest it, I’ve grown to really dislike it.  For those who have not followed Jorge Contreras had an excellent summary of events at Patently-O.

For those of us who have been following the telecom patent battles, something remarkable happened a couple of weeks ago.  On February 7, the Wall St. Journal reported that, back in November, Apple sent a letter[1] to the European Telecommunications Standards Institute (ETSI) setting forth Apple’s position regarding its commitment to license patents essential to ETSI standards.  In particular, Apple’s letter clarified its interpretation of the so-called “FRAND” (fair, reasonable and non-discriminatory) licensing terms that ETSI participants are required to use when licensing standards-essential patents.  As one might imagine, the actual scope and contours of FRAND licenses have puzzled lawyers, regulators and courts for years, and past efforts at clarification have never been very successful.  The next day, on February 8, Google released a letter[2] that it sent to the Institute for Electrical and Electronics Engineers (IEEE), ETSI and several other standards organizations.  Like Apple, Google sought to clarify its position on FRAND licensing.  And just hours after Google’s announcement, Microsoft posted a statement of “Support for Industry Standards”[3] on its web site, laying out its own gloss on FRAND licensing.  For those who were left wondering what instigated this flurry of corporate “clarification”, the answer arrived a few days later when, on February 13, the Antitrust Division of the U.S. Department of Justice (DOJ) released its decision[4] to close the investigation of three significant patent-based transactions:  the acquisition of Motorola Mobility by Google, the acquisition of a large patent portfolio formerly held by Nortel Networks by “Rockstar Bidco” (a group including Microsoft, Apple, RIM and others), and the acquisition by Apple of certain Linux-related patents formerly held by Novell.  In its decision, the DOJ noted with approval the public statements by Apple and Microsoft, while expressing some concern with Google’s FRAND approach.  The European Commission approved Google’s acquisition of Motorola Mobility on the same day.

To understand the significance of the Apple, Microsoft and Google FRAND statements, some background is in order.  The technical standards that enable our computers, mobile phones and home entertainment gear to communicate and interoperate are developed by corps of “volunteers” who get together in person and virtually under the auspices of standards-development organizations (SDOs).  These SDOs include large, international bodies such as ETSI and IEEE, as well as smaller consortia and interest groups.  The engineers who do the bulk of the work, however, are not employees of the SDOs (which are usually thinly-staffed non-profits), but of the companies who plan to sell products that implement the standards: the Apples, Googles, Motorolas and Microsofts of the world.  Should such a company obtain a patent covering the implementation of a standard, it would be able to exert significant leverage over the market for products that implemented the standard.  In particular, if a patent holder were to obtain, or even threaten to obtain, an injunction against manufacturers of competing standards-compliant products, either the standard would become far less useful, or the market would experience significant unanticipated costs.  This phenomenon is what commentators have come to call “patent hold-up”.  Due to the possibility of hold-up, most SDOs today require that participants in the standards-development process disclose their patents that are necessary to implement the standard and/or commit to license those patents on FRAND terms.

As Contreras notes, an important part of these FRAND commitments offered by Google, Motorola, and Apple related to the availability of injunctive relief (do go see the handy chart in Contreras’ post laying out the key differences in the commitments).  Contreras usefully summarizes the three statements’ positions on injunctive relief:

In their February FRAND statements, Apple and Microsoft each commit not to seek injunctions on the basis of their standards-essential patents.  Google makes a similar commitment, but qualifies it in typically lawyerly fashion (Google’s letter is more than 3 single-spaced pages in length, while Microsoft’s simple statement occupies about a quarter of a page).  In this case, Google’s careful qualifications (injunctive relief might be possible if the potential licensee does not itself agree to refrain from seeking an injunction, if licensing negotiations extended beyond a reasonable period, and the like) worked against it.  While the DOJ applauds Apple’s and Microsoft’s statements “that they will not seek to prevent or exclude rivals’ products form the market”, it views Google’s commitments as “less clear”.  The DOJ thus “continues to have concerns about the potential inappropriate use of [standards-essential patents] to disrupt competition”.

Its worth reading the DOJ’s press release on this point — specifically, that while the DOJ found that none of the three transactions itself raised competitive concerns or was substantially likely to lessen the competition, the DOJ expressed general concerns about the relationship between these firms’ market positions and ability to use the threat of injunctive relief to hold up rivals:

Apple’s and Google’s substantial share of mobile platforms makes it more likely that as the owners of additional SEPs they could hold up rivals, thus harming competition and innovation.  For example, Apple would likely benefit significantly through increased sales of its devices if it could exclude Android-based phones from the market or raise the costs of such phones through IP-licenses or patent litigation.  Google could similarly benefit by raising the costs of, or excluding, Apple devices because of the revenues it derives from Android-based devices.

The specific transactions at issue, however, are not likely to substantially lessen competition.  The evidence shows that Motorola Mobility has had a long and aggressive history of seeking to capitalize on its intellectual property and has been engaged in extended disputes with Apple, Microsoft and others.  As Google’s acquisition of Motorola Mobility is unlikely to materially alter that policy, the division concluded that transferring ownership of the patents would not substantially alter current market dynamics.  This conclusion is limited to the transfer of ownership rights and not the exercise of those transferred rights.

With respect to Apple/Novell, the division concluded that the acquisition of the patents from CPTN, formerly owned by Novell, is unlikely to harm competition.  While the patents Apple would acquire are important to the open source community and to Linux-based software in particular, the OIN, to which Novell belonged, requires its participating patent holders to offer a perpetual, royalty-free license for use in the “Linux-system.”  The division investigated whether the change in ownership would permit Apple to avoid OIN commitments and seek royalties from Linux users.  The division concluded it would not, a conclusion made easier by Apple’s commitment to honor Novell’s OIN licensing commitments.

In its analysis of the transactions, the division took into account the fact that during the pendency of these investigations, Apple, Google and Microsoft each made public statements explaining their respective SEP licensing practices.  Both Apple and Microsoft made clear that they will not seek to prevent or exclude rivals’ products from the market in exercising their SEP rights.

What’s problematic about a competition enforcement agency extracting promises not to enforce lawfully obtained property rights during merger review, outside the formal consent process, and in transactions that do not raise competitive concerns themselves?  For starters, the DOJ’s expression about competitive concerns about “hold up” obfuscate an important issue.  In Rambus the D.C. Circuit clearly held that not all forms of what the DOJ describes here as patent holdup violate the antitrust laws in the first instance.  Both appellate courts discussion patent holdup as an antitrust violation have held the patent holder must deceptively induce the SSO to adopt the patented technology.  Rambus makes clear — as I’ve discussed — that a firm with lawfully acquired monopoly power who merely raises prices does not violate the antitrust laws.  The proposition that all forms of patent holdup are antitrust violations is dubious.  For an agency to extract concessions that go beyond the scope of the antitrust laws at all, much less through merger review of transactions that do not raise competitive concerns themselves, raises serious concerns.

Here is what the DOJ says about Google’s commitment:

If adhered to in practice, these positions could significantly reduce the possibility of a hold up or use of an injunction as a threat to inhibit or preclude innovation and competition.

Google’s commitments have been less clear.  In particular, Google has stated to the IEEE and others on Feb. 8, 2012, that its policy is to refrain from seeking injunctive relief for the infringement of SEPs against a counter-party, but apparently only for disputes involving future license revenues, and only if the counterparty:  forgoes certain defenses such as challenging the validity of the patent; pays the full disputed amount into escrow; and agrees to a reciprocal process regarding injunctions.  Google’s statement therefore does not directly provide the same assurance as the other companies’ statements concerning the exercise of its newly acquired patent rights.  Nonetheless, the division determined that the acquisition of the patents by Google did not substantially lessen competition, but how Google may exercise its patents in the future remains a significant concern.

No doubt the DOJ statement is accurate and the DOJ’s concerns about patent holdup are genuine.  But that’s not the point.

The question of the appropriate role for injunctions and damages in patent infringement litigation is a complex one.  While many scholars certainly argue that the use of injunctions facilitates patent hold up and threatens innovation.  There are serious debates to be had about whether more vigorous antitrust enforcement of the contractual relationships between patent holders and standard setting organization (SSOs) would spur greater innovation.   The empirical evidence suggesting patent holdup is a pervasive problem is however, at best, quite mixed.  Further, others argue that the availability of injunctions is not only a fundamental aspect of our system of property rights, but also from an economic perspective, that the power of the injunctions facilitates efficient transacting by the parties.  For example, some contend that the power to obtain injunctive relief for infringement within the patent thicket results in a “cold war” of sorts in which the threat is sufficient to induce cross-licensing by all parties.  Surely, this is not first best.  But that isn’t the relevant question.

There are other more fundamental problems with the notion of patent holdup as an antitrust concern.  Kobayashi & Wright also raise concerns with the theoretical case for antitrust enforcement of patent holdup on several grounds.  One is that high probability of detection of patent holdup coupled with antitrust’s treble damages makes overdeterrence highly likely.  Another is that alternative remedies such as contract and the patent doctrine of equitable estoppel render the marginal benefits of antitrust enforcement trivial or negative in this context.  Froeb, Ganglmair & Werden raise similar points.   Suffice it to say that the debate on the appropriate scope of antitrust enforcement in patent holdup is ongoing as a general matter; there is certainly no consensus with regard to economic theory or empirical evidence that stripping the availability of injunctive relief from patent holders entering into contractual relationships with SSOs will enhance competition or improve consumer welfare.  It is quite possible that such an intervention would chill competition, participation in SSOs, and the efficient contracting process potentially facilitated by the availability of injunctive relief.

The policy debate I describe above is an important one.  Many of the questions at the center of that complex debate are not settled as a matter of economic theory, empirics, or law.  This post certainly has no ambitions to resolve them here; my goal is a much more modest one.  The DOJs policymaking efforts through the merger review process raise serious issues.  I would hope that all would agree — regardless of where they stand on the patent holdup debate — that the idea that these complex debates be hammered out in merger review at the DOJ because the DOJ happens to have a number of cases involving patent portfolios is a foolish one for several reasons.

First, it is unclear the DOJ could have extracted these FRAND concessions through proper merger review.  The DOJ apparently agreed that the transactions did not raise serious competitive concerns.   The pressure imposed by the DOJ upon the parties to make the commitments to the SSOs not to pursue injunctive relief as part of a FRAND commitment outside of the normal consent process raises serious concerns.  The imposition of settlement conditions far afield from the competitive consequences of the merger itself is something we do see from antitrust enforcement agencies in other countries quite frequently, but this sort of behavior burns significant reputational capital with the rest of the world when our agencies go abroad to lecture on the importance of keeping antitrust analysis consistent, predictable, and based upon the economic fundamentals of the transaction at hand.

Second, the DOJ Antitrust Division does not alone have comparative advantage in determining the optimal use of injunctions versus damages in the patent system.

Third, appearances here are quite problematic.  Given that the DOJ did not appear to have significant competitive concerns with the transactions, one can create the following narrative of events without too much creative effort: (1) the DOJ team has theoretical priors that injunctive relief is a significant competitive problem, (2) the DOJ happens to have these mergers in front of it pending review from a couple of firms likely to be repeat players in the antitrust enforcement game, (3) the DOJ asks the firms to make these concessions despite the fact that they have little to do with the conventional antitrust analysis of the transactions, under which they would have been approved without condition.

The more I think about the use of the merger review process to extract concessions from patent holders in the form of promises not to enforce property rights which they would otherwise be legally entitled to, the more the DOJ’s actions appear inappropriate.  The stakes are high here both in terms of identifying patent and competition rules that will foster rather than hamper innovation, but also with respect to compromising the integrity of merger review through the imposition of non-merger related conditions we are more akin to seeing from the FCC, states, or less well-developed antitrust regimes.

One of the more significant papers in antitrust of late has been Professor Kaplow’s Why (Ever) Define Markets?  Kaplow provocatively argues that the entire “market definition/ market share” paradigm of antitrust is misguided and beyond repair.  Kaplow describes the exclusive role of market definition in that paradigm as generating inferences about market power, argues that market definition is incapable of generating reasonable inferences for that purpose as a matter of basic economic principles primarily because one must have a “best estimate” of market power previous to market definition, and concludes that antitrust ought to do away with market definition entirely.  As my description of the paper suggests, and Kaplow recognizes, it is certainly an “immodest” claim.  But it is a paper that has evoked much discussion in antitrust circles, especially in light of the recent shift in the 2010 HMGs toward analysis of competitive effects and away from market definition.

Many economists were inclined to agree with the basic conceptual shift toward direct analysis of competitive effects.  Much of that agreement was had on the basis that the market definition exercise aimed to do a number of things directed toward identifying the potential competitive effects of a merger (identifying market power is certainly one of those things), and that if we had tools allowing for direct inferences we ought to use those instead.  Kaplow’s attack on market definition, however, was by far the most aggressive critique.

Greg Werden has now posted an excellent paper in response, “Why (Ever) Define Markets?  An Answer to Professor Kaplow.”  Here is the abstract:

Professor Louis Kaplow has argued that market delineation in antitrust should be abandoned because it is not useful in assessing market power or evaluating competitive effects. This article takes issue with that view, explaining that market delineation serves purposes overlooked by Professor Kaplow. Most importantly, market delineation separates active forces of competition from those in the background. This separation is significant in the application of economic models and in the narrative of presenting an antitrust case. This article also explains why Professor Kaplow’s proposed analyses dispensing with market delineation would break down in important circumstances.

The entire paper is worth reading.  It provides an important perspective on the debate over the value of market definition not only from an economic perspective, but also with respect to the role of market definition in the law.  I summarize a few of the key points and basic arguments of the paper for readers.

Werden first begins by attacking the presumption in Kaplow’s argument that the exclusive purpose of market definition in the modern antitrust paradigm is to infer market power from market share.  For example, Kaplow claims that “the entire rationale for the market definition process is to enable an inference about market power.”  Werden claims, I think correctly, that Kaplow’s premise is incorrect.  While Werden makes the point that courts use market definition to infer market power even in the absence of market shares, the more important argument is that courts have long recognized the high shares themselves do not establish market power — indeed, the law requires the market power be “durable.”  The durability requirement, in turn, requires some analysis of entry conditions before a court can infer market power and, as Werden points out, market delineation is a useful tool for understanding which products — upon entry — would be sufficiently close substitutes as to preclude a firm from charging supra-competitive prices.  Similarly, of course, courts use market definition to cabin where the relevant antitrust injury might occur.

Keith Hylton makes a related, but distinct, argument about the value of market definition in his paper on the 2010 HMGs published in a symposium in the Review of Industrial Organization (note: Professor Kaplow has a shorter article in the Review of IO symposium previewing his arguments in the longer Harvard Law Review piece; I also have an article (with Judd Stone) on the new Guidelines’ treatment of efficiencies in the same issue).  Hylton objects to the change in focus in the new HMGs on the grounds that courts have used the market definition exercise for a number of valuable functions involving the trading off of error concerns in merger analysis:

In implementing the discretionary test of Brown Shoe, courts have traditionally required a definition of the relevant market. In order to determine whether competition appears to be structurally or operationally intense, or whether entry is easy, courts first have to define a relevant market. The definition of a relevant market has involved a fact intensive inquiry that trades off many concerns, in addition to the strict concern of finding a market which could be monopolized by the defendant (through an acquisition or through some anticompetitive conduct). When courts determine a relevant market, they are taking into account the consequences of that decision for the competitive process itself. If defining a market too narrowly will lead to the replacement of the market process of industrial rationalization with an administrative process, or discourage innovation incentives, courts are likely to take those costs into account. They are aware of the possibility that they could err in the decision, and will therefore tend toward a market definition that minimizes the costs of errors.36 The FTC’s standard would relegate the market definition component of a merger dispute to a lesser status. In so doing, it would constrain the ability of courts to make the tradeoffs that currently go into a market definition finding.37

Werden acknowledges that market definition can be avoided in some cases, such as consummated mergers with evidence of actual anticompetitive effects after the acquisition, or in some cases involving unilateral price effects.  Note that while Werden would likely dispense with market definition in some of these cases, the role Hylton ascribes to market definition as applied by the courts would still provide value in both of these types of cases.  Werden also makes the key point that Kaplow’s “direct” analysis of market power assumes that “all of the competitive action is confined to a single homogenous good, and his analysis goes awry when the sellers of the good have a significant strategic interaction with the sellers of close substitutes.”

A related point is that Kaplow’s analysis implicitly uses perfect competition as a competitive benchmark for inferring market power.  Indeed, the analysis presumes that all sellers other than the producer at issue “behave as price-takers.”   As Werden points out, the direct analysis of market power Kaplow prefers establishes market power as a matter of degree measured by the Lerner Index (i.e. the price – cost margin).  For a number of reasons, setting perfect competition as a competitive benchmark can be problematic; but for present purposes, note that to the extent that courts use the market definition inquiry to incorporate considerations wherein a firm might have high margins but yet face intense competition rendering it incapable of harming the competitive process, this would be yet another valuable function of that market definition inquiry.

Werden ends the paper by offering up some examples of the differences between the “conventional” approach and Kaplow’s analysis that are helpful.  You can go to the paper to read them — but Werden’s key point, as I read the paper, is that market definition is useful not only for allowing the assignment of market shares, but also for separating the important elements of the competitive story of a proposed merger (for example) from unimportant elements.   The distinction between those important and unimportant elements can inform modeling choices in unilateral effects cases, or the likelihood of post-merger coordination, and focuses courts on the competitive process to be investigated for potential harm.  His conclusion in response to Kaplow is direct:

Placing less emphasis on market delineation and market shares would be for the best in many antitrust cases, but market delineation serves analytical and narrative purposes not served by other tools.  Professor Kaplow’s proposal to abandon market definition would bring chaos to antitrust litigation.

Please go do read the whole thing.  There is some narrow sense in which I find the debate trivial.  Courts are highly unlikely to adopt Professor Kaplow’s proposal.  There are a number of barriers to eliminating market definition and there is no demand to do so from courts or agencies.  But that would be far too narrow a viewpoint on the issues raised by the paper.  The debate over market definition in the 2010 HMGs, and now spurred by Kaplow’s provocative and well argued paper, is very useful in helping us understand exactly what we aim to achieve through market definition.  The role of market definition in antitrust analysis is much more flexible under the new Guidelines — even if all agree that the agencies must define markets.  How flexible courts and agencies are and should be with respect to market definition does depend precisely upon the answer to the questions Werden tangles with in his paper, i.e. what does market definition accomplish, how well does it accomplish it, and when might we rely upon other tools to accomplish those ends?

Sports Illustrated:

The Federal Trade Commission has concluded and closed a six-month, nonpublic investigation of Zuffa LLC., the owners of the Ultimate Fighting Championship, and will not take further action at this time, an FTC spokesperson confirmed to SI.com on Tuesday.

According to closing letters to parties involved that were made public Tuesday, the FTC Bureau of Competition investigation focused on Zuffa’s March 2011 acquisition of Explosion Entertainment LLC., which owned the rival Strikeforce promotion, and whether the purchase violated Section 7 of the Clayton Antitrust Act or Section 5 of the Federal Trade Commission Act.

Section 7 of the Clayton Act  “prohibits mergers and acquisitions when the effect may be substantially to lessen competition, or tend to a create a monopoly,” according to FTC guidelines.

Section 5 of the Federal Trade Commission Act prohibits “unfair or deceptive acts or practices in or affecting commerce.’’

“No action has been taken in regards to this part of the investigation,” said the FTC spokesperson, though he said the governmental agency reserves the right to revisit the matter in the public’s interest.

Zuffa purchased Explosion Entertainment, established by Scott Coker and Silicon Valley Sports and Entertainment, a sports franchise company, for a reported $40 million. Coker became the general manager for Strikeforce, which plans to hold six events on Showtime this year.

A remarkable set back for the unilateral effects enforcement agenda at the agencies to be sure.

 

As everyone knows by now, AT&T’s proposed merger with T-Mobile has hit a bureaucratic snag at the FCC.  The remarkable decision to refer the merger to the Commission’s Administrative Law Judge (in an effort to derail the deal) and the public release of the FCC staff’s internal, draft report are problematic and poorly considered.  But far worse is the content of the report on which the decision to attempt to kill the deal was based.

With this report the FCC staff joins the exalted company of AT&T’s complaining competitors (surely the least reliable judges of the desirability of the proposed merger if ever there were any) and the antitrust policy scolds and consumer “advocates” who, quite literally, have never met a merger of which they approved.

In this post I’m going to hit a few of the most glaring problems in the staff’s report, and I hope to return again soon with further analysis.

As it happens, AT&T’s own response to the report is actually very good and it effectively highlights many of the key problems with the staff’s report.  While it might make sense to take AT&T’s own reply with a grain of salt, in this case the reply is, if anything, too tame.  No doubt the company wants to keep in the Commission’s good graces (it is the very definition of a repeat player at the agency, after all).  But I am not so constrained.  Using the company’s reply as a jumping off point, let me discuss a few of the problems with the staff report.

First, as the blog post (written by Jim Cicconi, Senior Vice President of External & Legislative Affairs) notes,

We expected that the AT&T-T-Mobile transaction would receive careful, considered, and fair analysis.   Unfortunately, the preliminary FCC Staff Analysis offers none of that.  The document is so obviously one-sided that any fair-minded person reading it is left with the clear impression that it is an advocacy piece, and not a considered analysis.

In our view, the report raises questions as to whether its authors were predisposed.  The report cherry-picks facts to support its views, and ignores facts that don’t.  Where facts were lacking, the report speculates, with no basis, and then treats its own speculations as if they were fact.  This is clearly not the fair and objective analysis to which any party is entitled, and which we have every right to expect.

OK, maybe they aren’t pulling punches.  The fact that this reply was written with such scathing language despite AT&T’s expectation to have to go right back to the FCC to get approval for this deal in some form or another itself speaks volumes about the undeniable shoddiness of the report.

Cicconi goes on to detail five areas where AT&T thinks the report went seriously awry:  “Expanding LTE to 97% of the U.S. Population,” “Job Gains Versus Losses,” “Deutsche Telekom, T-Mobile’s Parent, Has Serious Investment Constraints,” “Spectrum” and “Competition.”  I have dealt with a few of these issues at some length elsewhere, including most notably here (noting how the FCC’s own wireless competition report “supports what everyone already knows: falling prices, improved quality, dynamic competition and unflagging innovation have led to a golden age of mobile services”), and here (“It is troubling that critics–particularly those with little if any business experience–are so certain that even with no obvious source of additional spectrum suitable for LTE coming from the government any time soon, and even with exponential growth in broadband (including mobile) data use, AT&T’s current spectrum holdings are sufficient to satisfy its business plans”).

What is really galling about the staff report—and, frankly, the basic posture of the agency—is that its criticisms really boil down to one thing:  “We believe there is another way to accomplish (something like) what AT&T wants to do here, and we’d just prefer they do it that way.”  This is central planning at its most repugnant.  What is both assumed and what is lacking in this basic posture is beyond the pale for an allegedly independent government agency—and as Larry Downes notes in the linked article, the agency’s hubris and its politics may have real, costly consequences for all of us.

Competition

But procedure must be followed, and the staff thus musters a technical defense to support its basic position, starting with the claim that the merger will result in too much concentration.  Blinded by its new-found love for HHIs, the staff commits a few blunders.  First, it claims that concentration levels like those in this case “trigger a presumption of harm” to competition, citing the DOJ/FTC Merger Guidelines.  Alas, as even the report’s own footnotes reveal, the Merger Guidelines actually say that highly concentrated markets with HHI increases of 200 or more trigger a presumption that the merger will “enhance market power.”  This is not, in fact, the same thing as harm to competition.  Elsewhere the staff calls this—a merger that increases concentration and gives one firm an “undue” share of the market—“presumptively illegal.”  Perhaps the staff could use an antitrust refresher course.  I’d be happy to come teach it.

Not only is there no actual evidence of consumer harm resulting from the sort of increases in concentration that might result from the merger, but the staff seems to derive its negative conclusions despite the damning fact that the data shows that wireless markets have seen considerable increases in concentration along with considerable decreases in prices, rather than harm to competition, over the last decade.  While high and increasing HHIs might indicate a need for further investigation, when actual evidence refutes the connection between concentration and price, they simply lose their relevance.  Someone should tell the FCC staff.

This is a different Wireless Bureau than the one that wrote so much sensible material in the 15th Annual Wireless Competition Report.  That Bureau described a complex, dynamic, robust mobile “ecosystem” driven not by carrier market power and industrial structure, but by rapid evolution and technological disruptors.  The analysis here wishes away every important factor that every consumer knows to be the real drivers of price and innovation in the mobile marketplace, including, among other things:

  1. Local markets, where there are five, six, or more carriers to choose from;
  2. Non-contract/pre-paid providers, whose strength is rapidly growing;
  3. Technology that is making more bands of available spectrum useful for competitive offerings;
  4. The reality that LTE will make inter-modal competition a reality; and
  5. The reality that churn is rampant and consumer decision-making is driven today by devices, operating systems, applications and content – not networks.

The resulting analysis is stilted and stale, and describes a wireless industry that exists only in the agency’s collective imagination.

There is considerably more to say about the report’s tortured unilateral effects analysis, but it will have to wait for my next post.  Here I want to quickly touch on a two of the other issues called out by Cicconi’s blog post. Continue Reading…

One of the most controversial merger policy decisions during the Bush administration was the DOJ’s failure to bring a complaint against the Whirlpool/Maytag merger.  Indeed, the decision was even criticized by Carl Shapiro, the economic expert retained by the DOJ on the case.   Jonathan Baker and Carl Shapiro summarize this conclusion as follows:  “The March 2006 decision by the DOJ not to challenge Whirlpool’s acquisition of Maytag was a highly visible instance of underenforcement.”   Orley Ashenfelter, Daniel Hosken and Matthew Weinberg have now posted a working paper that estimates the price effects of the merger.  Using scanner data, the authors compare the prices of Whirlpool and Maytag appliances to price changes in the appliance markets most affected by the merger to other markets less or not affected.  They find large significant price increases for clothes dryers and dishwashers, but not for refrigerators and washing machine.

Yale’s George Priest authored an op-ed in the WSJ on September 6th in which he raised a few of the arguments discussed here at TOTM over the past several weeks regarding the proposed AT&T / T-Mobile merger.  For example, we’ve focused upon the tension between the DOJ complaint’s theories of competitive harm (coordinated and unilateral effects) and the reaction of Sprint’s stock price.  Along these lines, Priest writes:

If the acquisition would lead to increased prices and lower quality products as the Justice Department has claimed, Sprint would be better off after the acquisition. Sprint would be able to add subscribers, not lose them, because of AT&T’s higher prices and lower quality. Sprint would oppose the acquisition—as it has—only if it thought that the merger would put it in a worse position by increasing the competitive pressures that it already faces.

The market—though not the Obama administration—understands this point. On the day that the Justice Department announced its opposition to the acquisition, Sprint’s share price rose 5.9%, reflecting investors’ belief that Sprint will be in a better competitive position without the acquisition.

As we’ve pointed out, Sprint’s stock price reaction is simply not consistent with the DOJ theories.  To find a theory of harm more consistent with the market reaction, critics of the merger have abandoned the DOJ’s theories in favor for a new one — that the merger will facilitate future exclusion of rivals from access to critical inputs like backhaul or handsets.

The AAI’s Rick Brunell makes this point in our comments.  The basic point is that under an exclusion theory Sprint benefits from the challenge to the merger because it prevents its future exclusion.   Brunell also argued in that comment that Verizon’s stock price movement supported exclusion theories of the merger, pointing out that its stock price fell 1.2% (with a .7% drop in the S&P 500) upon announcement of the challenge.

We challenged the economic logic of Brunell’s claim that Verizon’s non-reaction was consistent with exclusionary theories in a follow up post.  Put simply, assuming the merger will result in successful exclusion of rivals in the future, Verizon would be a gigantic winner from its successful completion:

The relevant economics here are not limited to the possibility that post-merger AT&T would successfully exclude Verizon.  Think about it: both Verizon and the post-merger firm would benefit from the exclusionary efforts and reduced competition.  However, Verizon would stand to gain even more!  After all, it isn’t paying the $39 billion purchase price for the acquisition (or any of the other costs of implementing an expensive exclusion campaign).  Thus, an announcement to block the would-be exclusionary merger — the one that would allow Verizon to outsource the exclusion of its rivals to AT&T on the cheap — wouldn’t happen.  Verizon stock should fall relative to the market in response to this lost opportunity.  The unilateral and coordinated effects theories in the DOJ complaint are at significant tension with the stock market reactions of firms like Sprint (and its affiliated venture, Clearwire).  The exclusion theory predicts a large decrease in stock price for Verizon with the announcement.  None of these comfortably fit the facts.  Verizon more or less tracks the S&P with a slight drop.  What about the smaller carriers?  Take a look at the chart.  MetroPCS barely moved relative to the market (in fact, may have increased relative to the market over the relevant time period); Leap is down a bit more than the market.  Here, with the smaller carriers there is not a lot of movement in any direction.  But, contra NB’s comment (“Verizon, a larger and far more significant competitor, had its stock drop sharply in that same period you show Sprint “surging”. MetroPCS’s stock also dropped.”), Verizon’s small fall relative to the market is nowhere near the magnitude of the positive effect on Sprint and Clearwire.

In other words, contra Brunell and other proponents of the exclusion theory, its not just that Verizon has “nothing to fear” from exclusion but that it has much to gain from it.  If the merger is likely to exclude Verizon’s rivals at a price tag of at least $39 billion paid with its chief competitor’s dollars, the announcement of a challenge should have resulted in a substantial loss for Verizon not one barely detectable beyond market trends. Excluding rivals and gaining market power with other people’s money is good work if you can get it.  If proponents of the exclusionary theory believe exclusion is worth $39 billion for AT&T and is the purpose of the merger, surely they also believe it is worth something quite significant to Verizon who would reap the benefits of exclusion and get it for free.

Unfortunately, AAI (through Brunell) ignores this point in a Letter to the Editor to the WSJ filed in response to Priest’s op-ed:

Mr. Priest ignores the fact that Sprint would be harmed if the merger enhanced AT&T’s (and Verizon’s) ability to exclude Sprint from the market (or raise its costs) through increased control over the best handsets, roaming and backhaul services that Sprint needs to compete effectively in the market, as Sprint alleges in its own lawsuit challenging the merger. Sprint also benefits, from the merger’s demise, as a potential acquirer of T-Mobile.

Mr. Priest also ignores the stock-price movement of Verizon, AT&T’s chief rival, which has no reason to fear exclusion from the market, and would be harmed the most if the merger made AT&T a more efficient competitor. In the two days following the merger announcement in March, Verizon’s stock price jumped 3.1% (compared to the S&P 500’s increase of only 1.1%), while in the two days after the Justice Department’s suit was announced, Verizon’s stock fell by 1.2% (compared to a .7% drop in the S&P 500). Verizon has not opposed the merger.

Event studies of stock-price movements are notoriously inconclusive. However, the data here are entirely consistent with investors’ expectation that the merger will result in less price and quality competition in the industry and higher costs for AT&T’s smaller rivals, all to the detriment of consumers.

If you are keeping score at home: Priest 1  –  AAI 0.  Once again, the exclusion theories don’t seem to hold up to these data.  On the other hand, the DOJ theories are embarrassingly confronted by the response of the rival’ stock price surging upon the announcement of a challenge.  For what its worth, I agree with Brunell that event studies are not dispositive of a merger’s likely effects — though query what data available to predict merger outcomes are?  But event studies and stock-price movements produce valuable information.  In this case, financial market responses cut against the the exclusionary theory favored by AAI and Sprint and the conventional DOJ theories.

The NY Times starts its op-ed against the AT&T / T-Mobile transaction with a false proposition about antitrust analysis of mergers: “The analysis begins with a mathematical formula for calculating the deal’s effect on competition.”  Any antitrust lawyer or economist will recognize the error.  A major change from the 1997 Horizontal Merger Guidelines to the 2010 version is that the former observes that agency analysis must begin with market definition and evaluation of concentration:

First, the Agency assesses whether the merger would significantly increase concentration and result in a concentrated market, properly defined and measured

However, the it is widely recognized that the 2010 Guidelines shed the cookie cutter, algorithmic approach to merger analysis in favor of a fact-intensive analysis involving multiple tools of which market definition and calculating market shares and evaluating concentration levels and changes is just one.  Indeed, the 2010 Guidelines expressly state:

The Agencies’ analysis need not start with market definition.

This is not trivial detail; these changes were at the very core of the changes in the new Guidelines promulgated by the Obama administration’s antitrust enforcement agencies.  The NYT analysis simultaneously relies exclusively upon market concentration statistics while appealing to the 2010 Guidelines which rejected that approach as authority.  Odd.  But not unsurprising.

What is more surprising is Professor Hovenkamp’s quote, whom we certainly can expect more from than the NYT.  Hovenkamp observes:

“It’s only a slight overstatement to say that if they weren’t going to block this one, the Justice Department might as well just throw the antitrust guidelines out the window,” said Herbert Hovenkamp, professor of law at the University of Iowa, who is considered by many to be the dean of American antitrust law. “This merger clearly seems to violate them.” …

“It was becoming legendary that the Bush administration wasn’t enforcing the old guidelines,” Mr. Hovenkamp said. “What good is a guideline that doesn’t provide any guidance? The Obama administration conceded that perhaps the old guidelines were too strict. So it made it easier, but at the same time said, ‘We’re going to enforce this.’ ”

I’ve got to believe Hovenkamp was quoted out of context here because, frankly, this doesn’t make much sense.  I doubt Hovenkamp would argue that the Guidelines’ thresholds were treated as gospel by any administration regardless of political ideology.   But what is absent from Hovenkamp’s discussion is the primary reason why the Guidelines expressly shifted away from concentration and toward direct analysis of competitive effects.  The answer doesn’t lie in politics.  Put simply, antitrust economists and lawyers at the agencies and elsewhere simply do not believe the HHI thresholds in the Guidelines provide a useful predictor for competitive effects.  The persistence of the HHI thresholds are at least somewhat a result of path dependency; despite some prodding, it proved too tempting for the agencies to keep the thresholds in given their appeal and general acceptance in merger precedent emerging in the 1960s and 70s.  But that was the age when those types of market structure arguments were in fact the economic state of art.  That is no longer true — and rejection of that general approach is a key (if not they key) component of the Guidelines’ evolution toward the current approach.

The theme of the NY Times article and the omission of any sense at all that the shift at the agency level has been the polar opposite of what is claimed — that is, away from treating HHI thresholds as gospel or even related to analysis of competitive effects and toward an analysis more directly focused upon competitive effects — I’m left puzzled by a few things in Hovekamp’s quote.  When the agencies have screamed from the rooftops that competitive effects and not market structure and market definition is what matters in merger analysis, the idea that not blocking a merger that nominally crosses otherwise meaningless thresholds in agency Guidelines threatens the rule of law or means that we ought not have Guidelines is at the very least overstated.  Of course, one could interpret the statement as a critique of leaving the thresholds in the Guidelines at all if one is not going to enforce them.  I agree with that.  But they’ve always been there and often been ignored when the agencies’ analysis concluded the merger would not harm consumers.

And of course, that interpretation is difficult to square with the statement that this “merger clearly seems to violate them.”    Violate them?  The Guidelines do not have the force of law.  If this merely means something like “the merger appears to be one that the agencies’ analytical framework articulated in the Guidelines indicates that they will challenge” — that’s fine.  But, that statement suffers the same analytical flaws described above. Violating the Guidelines would require a showing that the merger was likely to create market power and produce anticompetitive effects — to do so under the new Guidelines requires more than a simply counting the number of firms.  That type of analysis no longer passes muster in antitrust analysis at the agencies.  To claim a merger “clearly seems to violate” the Guidelines  by sole reference to the HHI thresholds at the same time the agencies have distanced themselves from them(in favor of more fact-intensive and direct analysis of competitive effects) is not consistent with the economic letter or spirit of the new Guidelines.

So, the AT&T / T-Mobile transaction gets more and more interesting.  Sprint has filed a complaint challenging the transaction.  I’ve been commenting on the weakness of the DOJ complaint and in particular, its heavy reliance on market structure to make inferences about competitive effects. The heavy dose of structural presumption in the DOJ complaint — especially in light of the DOJ / FTC’s new Horizontal Merger Guidelines which stress reducing that emphasis because it is grounded in outdated economic thinking in favor of analysis of actual competitive effects — reads more like a 1960s complaint than a modern post-2010 Guidelines approach.

There is a question that jumps out here.  What does Sprint get for jumping into full litigation mode rather than free-riding upon the DOJ’s case?  They could certainly free-ride and retain some influence over the DOJ case with economic submissions.   The DOJ is not a passive plaintiff.  This is the DOJ of “reinvigorated” antitrust enforcement.  There is an even more obvious cost to getting involved.  The conventional antitrust wisdom requires skepticism of private suits by rivals for the reasons I discussed here.   Rivals often have a financial incentive to sue more efficient competitors.  Various substantive and procedural stands of antitrust attempt to minimize the costs of providing rivals with generous remedies and a private right of action under the antitrust laws.  Suffice it to say, a rival suit doesn’t get the same attention as one brought by the DOJ or FTC.

So why do it?

I think the answer is pretty clear.  There are at least two important inferences to draw from Sprint’s complaint.

The first is that it is a sign that the DOJ’s structure-based complaint is pretty weak sauce.  David Balto described the complaint as missing “the red meat.”   Its heavy on reliance on outdated structural presumptions, strays far from the intellectual foundations of the new Merger Guidelines, doesn’t acknowledge efficiencies, and has been embarrassingly shown up by the market reaction.   I certainly agree with Balto that the DOJ complaint isn’t the agency’s best work.  So, apparently did the market  — with Sprint’s stock price surging instead of the decline predicted by various theories of competitive harm posited in the complaint.

Sprint, by filing this claim, reveals its view that the DOJ is not likely to prevail on the merits on those claims.   Or at a minimum that Sprint’s involvement increases the likelihood.  Given the skepticism about rival suits, I’m skeptical.  To reconcile these views one must read the Sprint complaint.  It heavily pushes an “exclusionary theory” of the merger (i.e. “vertical effects”) omitted by the DOJ in its own complaint.  The basic theory is that the post-merger firm will deprive rivals from access to backhaul or handsets.  I’ve argued that the exclusionary theory doesn’t fare much better in explaining the market reaction to the DOJ’s challenge.  But it at least has going for it that it can explain the Sprint’s stock price reaction: if the merger successfully prevents exclusion, it should improve outcomes for rivals.  The problem is that this explanation doesn’t square too nicely with the market reaction of other rivals likely to suffer from exclusion (smaller carriers) and big guys like Verizon who would benefit from watching AT&T bear the full cost of excluding rivals (an expensive strategy) while it reaped the benefits.

Thus, I think the second lesson is that its pretty clear that Sprint views the omission of these exclusionary theories as a critical weakness in the DOJ’s complaint — critical enough to take the relatively rare step of filing a separate private challenge.  Given large increase in Sprint’s stock in reaction to the news of challenge — its got a lot at stake here and its willing to spend some of that rather than free-riding on the DOJ challenge for the chance to prove it is right.  I remain skeptical; but its an interesting development nonetheless.

I don’t think so.

Let’s start from the beginning.  In my last post, I pointed out that simple economic theory generates some pretty clear predictions concerning the impact of a merger on rival stock prices.  If a merger is results in a more efficient competitor, and more intense post-merger competition, rivals are made worse off while consumers benefit.  On the other hand, if a merger is is likely to result in collusion or a unilateral price increase, the rivals firms are made better off while consumers suffer.

I pointed to this graph of Sprint and Clearwire stock prices increasing dramatically upon announcement of the merger to illustrate the point that it appears rivals are doing quite well:

The WSJ reports the increases at 5.9% and 11.5%, respectively.  In reaction to the WSJ and other stories highlighting this market reaction to the DOJ complaint, I asked what I think is an important set of questions:

How many of the statements in the DOJ complaint, press release and analysis are consistent with this market reaction?  If the post-merger market would be less competitive than the status quo, as the DOJ complaint hypothesizes, why would the market reward Sprint and Clearwire for an increased likelihood of facing greater competition in the future?

A few of our always excellent commenters argued that the analysis above was either incomplete or incorrect.  My claim was that the dramatic increase in stock market prices of Sprint and Clearwire were more consistent with a procompetitive merger than the theories in the DOJ complaint.

Commenters raised three important points and I appreciate their thoughtful responses.

First, the procompetitive theory does not explain the change in all stock market prices.  For example, readers pointed out that Verizon’s stock barely ticked downward, while smaller carriers MetroPCS and Leap both fell (.8% and 2.3%, respectively, according to the WSJ).  The procompetitive theory, the commenters argued, implies that Verizon and these other rivals should move upward.

Second, they argue that perhaps an exclusionary theory of the merger better explains these stock price reactions.  Indeed, the new 2010 Horizontal Merger Guidelines included (not without controversy) potential exclusionary effects (“Enhanced market power may also make it more likely that the merged entity can profitably and effectively engage in exclusionary conduct. “).  Rick Brunell of AAI writes:

Although the smaller carriers may gain in the short run due from a merger that raises prices, they also may lose in the long run due to its exclusionary effects, a theory that was front and center of Sprint’s opposition (and the smaller carriers’). Notably Verizon, which has no reason to fear exclusion and would have the most to lose if the merger were actually efficient, has not opposed the merger.”

Similarly, Matt Bodie writes:

Why wouldn’t the market’s reaction be a sign of this: (a) the AT&T/T-Mobile merger will give the new entity strong market power, (b) there are strong anticompetitive as well as efficiency gains from being bigger and having more market size, (c) the newly merged company would use that power to crush its weakest competitors, i.e. Sprint? After all, isn’t there a traditional story where monopolists cut prices to drive other competitors out, but then gradually raise price once their market power allows it, especially in industries with high barriers to entry?”

The basics of the exclusionary theory of the merger is that the anticompetitive harm is not coordination or unilateral price increases from the direct acquisition of market power, i.e. the elimination of competition from a close rival.  Rather, the exclusionary theory posits that the post-merger firm will have sufficient market power to exclude rivals from access to a critical input (e.g. backhaul) and, as Matt has it, “crush its weakest competitors.”  So to Matt, yes, there is that theory in antitrust.  But note that the post-merger share of the combined entity here would be nowhere close to traditional monopoly power standards required to make out a monopolization claim under Section 2 of the Sherman Act.  The new Guidelines do quasi-endorse the possibility of a Minority-Report like merger enforcement search for exclusion that doesn’t reach Section 2 standards post-merger, but might someday, but also needs to be stopped now.  But it is decidedly not standard in merger analysis. And this case is probably not a good test case for that theory; at least the DOJ thinks so.  But no, I don’t think the market reaction is reflecting concerns about exclusion.  More on that in a second.  But for now note that this is not simply a legal point.  While the law requires the demonstration of monopoly power for a Section 2 claim, the economic literature focusing upon exclusion also considers market power a necessary but not sufficient condition for competitive harm.  For the same reasons the exclusion claim would be rejected post-merger on legal grounds if we accept the market definition alleged by the DOJ, exclusion is unlikely as a matter of economics.

Put simply, the exclusionary theory’s proponents argue that it can explain the increase in Sprint’s stock price (reduced likelihood of future exclusion because of the DOJ challenge) and Verizon’s inconsequential reaction (it has “no reason to fear exclusion”).

Just so everybody is seeing the same thing — here is a chart with 5 days of trading including Verizon, Sprint, Clearwire, MetroPCS, Leap and the S&P 500.

Third, commenters argue that this simple analysis doesn’t account for other important factors.  NB writes:

Why did you choose Sprint particularly? Verizon, a larger and far more significant competitor, had its stock drop sharply in that same period you show Sprint “surging”. MetroPCS’s stock also dropped.

So what does it mean when a weak competitor’s stock jumps but two other competitors who are doing well have their stock drop? Other than that there are clearly more factors in play here?

Enough questions; time for answers.

Why Didn’t I Include the Exclusionary Theory of Harm?

I plead guilty.  Or at least guilty with an explanation.  I didn’t discuss the possibility of exclusion and whether it would better explain these market reactions than the theory that the merger is efficient or anticompetitive because it will facilitate coordination or unilateral price increases.  As it turns out, however, the reason is that the post was motivated by the following question:

How many of the statements in the DOJ complaint, press release and analysis are consistent with this market reaction?

Turns out, I’m in pretty good company in omitting this theory.  The DOJ didn’t allege it either.  As discussed above, the DOJ specifically alleged that the merger would result in coordinated effects in the national market and/or unilateral price increases.  Rick Brunell accurately points out that Sprint and AAI have both made these arguments.  Indeed, when I testified in the House on the merger, there were a lot of questions raised about exclusionary concerns.   But the bottom line is that they are not in the Complaint.  Apparently, those arguments did not persuade the Justice Department.  I have no intention on running from the interesting question posed by the commenters that the exclusion theory does a better job of explaining market price reactions.  That’s next.  But for now, let me say that I think there is a good reason the DOJ did not accept the Sprint / AAI invitation to adopt the exclusion theory.

Does Exclusion Do A Better Job of Explaining Verizon’s Non-Movement or Slight Fall? 

I think proponents of the exclusion theory of the merger have a tough task here.  Notice that the prediction of the exclusionary theory is NOT that Verizon’s stock price will stay put or fall.  Instead, it is that it will increase post-merger.  While Brunell observes that Verizon need not fear post-merger exclusion itself, it would certainly be happy to free-ride on the allegedly imminent exclusionary efforts of the newly merged firm.  Post-Chicagoans often invoke the argument that “competition is a public good” when explaining why a downstream input provider has reason to go along with an upstream firm’s attempt to monopolize.   Bork argued that the downstream firm had no reason to engage in a contract with the upstream provider that would increase the likelihood that he would be facing an upstream monopolist (and thus worse terms of trade) tomorrow.  The classic Post-Chicago response is that each downstream firm doesn’t take into account the impact of his private decision to enter into such a contract with the would-be monopolist — that is, competition is a public good.  The flip side of this argument is that exclusion is a public good too!   To put it more concretely, if the post-merger combination of AT&T / T-Mobile were able to successfully exclude Sprint and smaller carriers such as MetroPCS and Leap, and thereby reduce competition, the clear implication of this theory is that Verizon would benefit.

The relevant economics here are not limited to the possibility that post-merger AT&T would successfully exclude Verizon.  Think about it: both Verizon and the post-merger firm would benefit from the exclusionary efforts and reduced competition.  However, Verizon would stand to gain even more!  After all, it isn’t paying the $39 billion purchase price for the acquisition (or any of the other costs of implementing an expensive exclusion campaign).  Thus, an announcement to block the would-be exclusionary merger — the one that would allow Verizon to outsource the exclusion of its rivals to AT&T on the cheap — wouldn’t happen.  Verizon stock should fall relative to the market in response to this lost opportunity.  The unilateral and coordinated effects theories in the DOJ complaint are at significant tension with the stock market reactions of firms like Sprint (and its affiliated venture, Clearwire).  The exclusion theory predicts a large decrease in stock price for Verizon with the announcement.   None of these comfortably fit the facts.  Verizon more or less tracks the S&P with a slight drop.  What about the smaller carriers?  Take a look at the chart.  MetroPCS barely moved relative to the market (in fact, may have increased relative to the market over the relevant time period); Leap is down a bit more than the market.   Here, with the smaller carriers there is not a lot of movement in any direction.  But, contra NB’s comment (“Verizon, a larger and far more significant competitor, had its stock drop sharply in that same period you show Sprint “surging”. MetroPCS’s stock also dropped.”), Verizon’s small fall relative to the market is nowhere near the magnitude of the positive effect on Sprint and Clearwire.

But what about competition?  Isn’t it true that if the merger was procompetitive a challenge announcement would likely mean less competition for Verizon and also predict an increase in stock price?  AAI’s comment tries to have this both ways.  If Verizon’s price stays still, its because it has nothing to fear from exclusion (contra the economics above); if it goes down, the DOJ announcement has decreased the likelihood of those coordinated effects Sprint and AAI argued were so likely (but then there is Sprint’s big jump); and if Verizon prices increase then it just means that we weren’t right in the first instance than they were safe from exclusion.  One is reminded of Tom Smith and his incredible bread machine.   But this leads to an interesting point.  Brunell and AAI (and perhaps other proponents of the DOJ challenge), as pointed out in the comments, appear to agree with me that stock market reactions are probative evidence of competitive effects.  Perhaps they believe that the exclusionary theory is a better explanation of the facts — I obviously don’t think so.  But we are where we are.  That theory is not alleged.  Now that we’ve observed the quite significant stock market reaction of Sprint to the challenge announcement.  Do we at least agree those facts are in tension with the coordinated effects theory made so prominent in the DOJ complaint???

Couldn’t There Be Other Important Factors Explaining Stock Price Movements Unrelated to the Competitive Implications of the DOJ’s Challenge?

To write the question is to answer it.  You bet there could be.  And indeed, I wrote in the first post that while the fairly dramatic stock price reactions of Sprint and Clearwire were probative, the post was not a full-blown event study that would account for those events, formulate a market model, and test for the abnormal returns surrounding the announcement controlling for other important events.  Further, not all competitors are created equal.  Under the efficiency story, the distribution of benefits will accrue proportionately to the rivals who were most likely to face increased competition post-merger (and now are more likely not to).  I certainly agree with Rick Brunell’s summary comment that the stock price evidence is somewhat “mixed.”  There are small and relatively ambiguous effects — once one includes the market performance — on the stock prices of Metro and Verizon.  Leap is more clearly down, even if by a small amount relative to the market.   There may well be a variety of factors unrelated to the announcement confounding effects here.  This is the reason we do real event studies in practice and why I do not believe the simple collection of evidence here warrants sweeping conclusions about the merits of the merger.

However, the DOJ complaint tells us that the important competitive players in the market — the “Big Four” — are AT&T, T-Mobile, Sprint, and Verizon.  Focusing upon the non-merging big 4, we see Sprint’s price going up dramatically and Verizon’s staying put.  The former is simply more consistent with procompetitive theories than the coordinated effects and unilateral effects theories alleged in the DOJ complaint.  One might expect an announcement to block a procompetitive merger to have a greater positive impact on Verizon stock.  But, as many have observed in the press, the impact of the merger upon Verizon is complicated by a number of factors, not the least of which is that the challenge announcement increases the likelihood that the DOJ is committed to challenging any future attempts to merger by Verizon.  Unless spectrum capacity is increased dramatically (see this excellent Adam Thierer post on this score) in the very near future it is difficult to see how the reduced ability to exercise that significant and valuable option would not also impact Verizon.  Thus, while not a slam dunk by any means, the procompetitive theory of the merger does a pretty decent job on the Big Four.   It certainly beats the coordination theory trumpeted in the Complaint.  As for the attempt of AAI and Sprint to salvage the DOJ complaint with the exclusionary theory — perhaps it is not too late to amend, but it isn’t there now and I’d warn the DOJ against including it.  With respect to the DOJ’s Big Four, the exclusionary theory is not only new and relatively controversial in the Guidelines, but also makes a strong prediction concerning a Verizon stock price increase that is inconsistent with the data.

There will certainly be more data as we move along.  And it should interesting to watch how things unfold both in the market and between the DOJ and FCC as well.  For now, however, color me unconvinced by the heavy reliance upon the structural, “Big 4 collusion” story leading the Complaint and the attempts to save it with exclusionary theories.