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I guess it comes as little surprise that Christine Varney has withdrawn the Section 2 Report.  The comments made in the statement withdrawing the Report indicate . . . well, that Varney isn’t convinced by reading this blog, among other things.  Coming on the heels of our Section 2  Symposium, the news is jarring, although not unexpected.  Moreover, as predicted in Howard Marvel’s first post here, Varney is using “recent events” in the economy as a lever:

Varney said that while there is no question that Section 2 cases present unique challenges, the report advocated hesitancy in the face of potential abuses by monopoly firms. She said that implicit in this overly cautious approach is the notion that most unilateral conduct is driven by efficiency and that monopoly markets are generally self-correcting. “The recent developments in the marketplace should make it clear that we can no longer rely upon the marketplace alone to ensure that competition and consumers will be protected,” Varney added.

She doesn’t say it in this statement (and I haven’t seen the text of her speech yet where she announced this policy), but implicit in this is her ongoing rejection of error-cost analysis and the cost of false positives.  As she has said elsewhere:

“My view and, you stole my thunder, I was prepared to say there is no such thing as a false positive, you know, let’s get real. I have counseled numerous incumbents who are dominant as well as numerous new entrants. I can tell you, at least in my own experience, there is not a dominant incumbent who hasn’t done something that is lawful because they were afraid that it might be reviewed by the DOJ or a state attorney general or an FTC. I just don’t see it. Ten years back in the private sector I have never once seen it, so I think that this ruse of, you know, we have to be restrained in our enforcement because false positives will chill innovation, take an economic toll on society and overall result in negative economic consequence, slowing output, increasing cost, I just think is false. I think the more people in the bars start rejecting this idea of false positives the better off we’re going to be.”

It is a stark reminder that we may, indeed, be living under a new antitrust regime.  I can’t say I’m optimistic about it.

Here’s the full text of the DOJ’s statement:

Christine A. Varney, Assistant Attorney General in charge of the Department’s Antitrust Division, today announced that the Department is withdrawing, effective immediately, a report relating to monopolization offenses under the antitrust laws that was issued in September 2008. As of today, the Section 2 report will no longer be Department of Justice policy. Consumers, businesses, courts and antitrust practitioners should not rely on it as Department of Justice antitrust enforcement policy.

The report, “Competition and Monopoly: Single-Firm Conduct Under Section 2 of the Sherman Act,” raised too many hurdles to government antitrust enforcement and favored extreme caution and the development of safe harbors for certain conduct within reach of Section 2, Varney said. Varney announced the withdrawal of the report today at a speech at the Center for American Progress.

“Withdrawing the Section 2 report is a shift in philosophy and the clearest way to let everyone know that the Antitrust Division will be aggressively pursuing cases where monopolists try to use their dominance in the marketplace to stifle competition and harm consumers,” said Varney. “The Division will return to tried and true case law and Supreme Court precedent in enforcing the antitrust laws.”

The report was issued after a series of joint hearings, involving more than 100 participants, that the Department and the Federal Trade Commission (FTC) held from June 2006 to May 2007 to explore the antitrust treatment of single-firm conduct. The FTC did not join with the Department in its report.

Varney said that while there is no question that Section 2 cases present unique challenges, the report advocated hesitancy in the face of potential abuses by monopoly firms. She said that implicit in this overly cautious approach is the notion that most unilateral conduct is driven by efficiency and that monopoly markets are generally self-correcting. “The recent developments in the marketplace should make it clear that we can no longer rely upon the marketplace alone to ensure that competition and consumers will be protected,” Varney added.

“I want to commend the efforts of those who participated in the Section 2 hearings,” said Varney. “While I do not agree with the conclusions of the Section 2 report, I do believe that the hearings and the report provided a valuable discussion of the enforcement issues involving single-firm conduct.”

TOTM Online Symposium Announcement: Section 2 and the Section 2 ReportGeoffrey Manne is Director, Global Public Policy at LECG and a Lecturer in Law at Lewis & Clark Law School. He is a founder of Truth on the Market.

 

 

 

 

 

TOTM Online Symposium Announcement: Section 2 and the Section 2 ReportJosh Wright is Assistant Professor at George Mason University School of Law and a former Scholar in Residence at the FTC. He blogs regularly at Truth on the Market.

 

 

 

 

 

We would like to thank all of our participants and commenters for an outstanding symposium.  This was a truly impressive collection of commentaries on Section 2 and the Section 2 Report, and it should stand for some time as a useful, interesting and provocative collective statement on the issues.  For easy reference, you can access the complete collection of posts here or by clicking on the “section 2 symposium” category on the left side of this page.

We would also like to announce that the symposium will appear in collected form in Global Competition Policy, so be on the lookout for another opportunity to engage with these commentaries there.

Once again, thanks to everyone who participated!

evansDavid Evans is Head, Global Competition Policy Practice, LECG; Executive Director, Jevons Institute for Competition Law and Economics, and Visiting Professor, University College London; and Lecturer, University of Chicago.

I’d like to propose a contest for the greatest intellectual embarrassment of antitrust. Let me name the first contestant—tying, which some of you know has been one of my favorite for years. Here’s why. First, there is no persuasive theoretical or empirical evidence that tying is a business practice that is likely to harm consumers.  (This is not the blog to deal with Professor Elhauge’s provocative paper except to say that it does not alter this view.)  There is work that says it could be, under stringent conditions, and one can point to cases where maybe the practice has been used in a harmful way.  Yet the courts have put tying in the same antitrust category as price fixing when done by a firm with some market power.   Second, the courts, lacking any analytical framework for detecting bad behavior, have developed a mechanical test for tying that doesn’t have any connection whatsoever to any of the plausible theories of when and why tying might be bad.  The test leads to false positives almost by design.  Third, tying has led to one of the most ridiculous antitrust remedies of all time—namely the  European Commission’s insistence that Microsoft expend effort creating and offering a product–a version of Windows that didn’t include Microsoft’s media player technology—that no one wants. Now, I understand that others will have their own candidates. But to beat mine your challenge is you must show a complete lack of theoretical or empirical support; a really bad legal test; and a remedy that better demonstrates the bankruptcy of the law.   The challenge is on.

abbottAlden Abbott is Associate Director, Bureau of Competition, Federal Trade Commission. The views expressed below are solely attributable to the author. They do not necessarily represent the views of the Federal Trade Commission or of any individual Federal Trade Commissioner.

As I indicated in my prior blog entry, U.S. competition policy vis-à-vis single firm conduct (“SFC”) is best viewed not in isolation, but, rather, in the context of other jurisdictions’ SFC enforcement philosophies, and efforts to promote greater SFC policy convergence worldwide.  Given the proliferation of competition law regimes, firms that do business in multiple jurisdictions either may have to:  (1) tailor their business plans (marketing and distributional arrangements, joint ventures, pricing policies, etc.) nation-by-nation to satisfy differences in national competition laws (an approach rife with transactions costs); or (2) adopt a single set of policies that meets the competition law requirements of the “most restrictive” jurisdiction (an approach that could yield selection of a “less than optimally efficient” business plan).  A further complication is caused by transactions whose effects spill across jurisdictional boundaries; a transaction that found favor in one jurisdiction may not find favor in other jurisdictions.  To add to the policy complexity, as private rights of action proliferate around the globe, difficult jurisdictional questions and conflict of law issues may be posed in the future; the greater the divergence among antitrust regimes, the higher will be the costs imposed on businesses associated with (ideally) avoiding and (if necessary) ironing out such complications.  Thus, even though there may be good policy justifications (associated with differences among nations in procedure, private enforcement, and other local factors) for some continued differentiation among national competition regimes – reasons that David Evans (see http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1342797) and others have ably expounded upon – there is a sound basis for efforts (rooted in business efficiency and transactions cost avoidance) to promote gradual convergence and thereby avoid the greatest burdens arising from multinational disharmony in this field. Continue Reading…

pageWilliam Page is a Marshall M. Criser Eminent Scholar in Electronic Communications and Administrative Law at the University of Florida, Levin College of Law.

The DOJ’s Section 2 Report speaks in general terms about the costs and benefits of various remedies for monopolization. It prefers “prohibitory” remedies, but holds open the possibility of “additional relief,” including “affirmative-obligation remedies. The Report specifically mentions the protocol-licensing requirement of the Microsoft final judgments (§ III.E, entered in November 2002) as an example of a challenging and controversial affirmative-obligation remedy. In this post, I’d like to comment on the protocol-licensing program and its implementation. In doing so, I draw on my previous work with Jeff Childers, particularly Software Development as an Antitrust Remedy: Lessons from the Enforcement of the Microsoft Communications Protocol Licensing Requirement, and Measuring Compliance with Compulsory Licensing Remedies in the American Microsoft Case.

Section III.E requires Microsoft to “make available” to software developers the communications protocols that Windows client operating systems use to interoperate “natively” with Microsoft’s server operating systems in corporate networks or on the Internet. The short-term goal of the provision is to allow developers to write applications for non-Microsoft server operating systems that can interoperate as easily with Windows client computers as can software written for Microsoft’s server operating systems. The long-term goal is to preserve, in the network context, the “middleware threat” to the Windows monopoly. The idea is that middleware applications running on non-Microsoft servers might become a rival platform that could erode the “applications barrier to entry” as Netscape and Java had threatened to do.

Judge Kollar-Kotelly placed special emphasis on this provision as the “most forward-looking” one in the final judgments. It was, she believed, necessary to assure that the other provisions do not become “prematurely obsolete” as computing moves to corporate networks and the Internet. In practice, however, the provision has done little to advance the goals of the decree. Equally important, as I explain below, its implementation (by two sets of plaintiffs, with the aid of a Technical Committee and technical consultant) has been Kafkaesque. Continue Reading…

brennanTim Brennan is a professor of public policy and economics at UMBC and a senior fellow with Resources for the Future (RFF).

When I first started working in antitrust at the Justice Department over thirty years ago—there’s a hard reality to accept—the Antitrust Division was then embroiled in an effort to reform the regulation of oil pipelines. The argument on this now obscure issue was that effective prevention of the exercise of market power by natural monopoly pipelines required both clear pricing standards and effective separation of control of the pipeline capacity from the shippers who often owned the pipeline as well. Among other things, this led the Division to take an active role in the proceeding to set the rates to send oil through the Trans-Alaska Pipeline.

This largely forgotten issue had a much more consequential successor—the AT&T divestiture in 1984, settling an antitrust case filed a decade before. That case took the hard line that to prevent anticompetitive abuses, regulated monopolies and competitive services that rely upon them should rest in completely separate companies. Although the 1996 Telecommunications Act superseded that settlement, the principle of separating control of regulated assets from firms that compete in services that use those assets survives. The prominent example is electricity. Many state regulators ordered local distribution utilities to divest power plants, and federal regulators require that power transmission be supplied by regional organizations independent of the control of the competing generators that use them.

When Assistant Attorney General William Baxter announced the AT&T divestiture in 1982, he also announced that he was dropping, with prejudice, the even older antitrust case against IBM. The distinction was that AT&T operated in both regulated and unregulated sectors, while IBM did not. AT&T had an incentive to evade regulatory price constraints by creating an artificial competitive advantage by impeding its competitive market rivals’ access to its local service monopolies (“discrimination”). Moreover, depending on the form that regulation might take, the ability to shift costs from unregulated to regulated sectors may allow cost shifting enable a regulated firm may to make predatory threats credible (“cross-subsidization”). In the old AT&T case, this was called “pricing without regard to cost”.

Mr. Baxter’s distinction rested on the crucial point that regulation is a complement to antitrust, not a substitute. Absent regulation, refusals to deal are not presumptively harmful, and may be beneficial, while predatory threats are notoriously difficult to validate. This is why Mr. Baxter, no great hero to antitrust activists, famously pledged to litigate U.S. v. AT&T “to the eyeballs.” Continue Reading…

hovenkampHerbert Hovenkamp is Professor of Law at The University of Iowa College of Law.

One interesting aspect of the DOJ Report on Section 2 is the scant, episodic treatment of IP issues. The Report rejects the presumption of market power for patent ties (p. 81); has a very brief discussion of refusal to license patented parts in which it properly rejects the reasoning of the Ninth Circuit’s Kodak decision and aligns itself with the Federal Circuit’s Xerox decision (p. 121-122). The Walker Process case, which held that an infringement action based on an improperly acquired and unenforceable patent could violate §2, is cited in a footnote, and only for the proposition that market power is required in a §2 case (p. 25 n. 53). Finally, the Report contains a brief discussion of the presence of intellectual property in measuring incremental cost for purposes of analyzing predatory pricing (p. 63).

I suggest that the Antitrust Division and the case law develop a theory about the unreasonably exclusionary use of patents that generally divides the territory between pre-issuance and post-issuance conduct. This division has much less to do with the exclusionary power of patents than with the presence or absence of a relevant regulatory agency. The patenting process is characterized by very intensive agency regulation up to the time that a patent issues, but almost no regulation thereafter. This suggests a rather sharp line between pre-issuance and post-issuance conduct. The one exception is for pre-issuance conduct that the agency did not supervise adequately, mainly because it was never presented to the agency in the first place. This is consistent with the general theory of “implied immunity,” under which regulated conduct is immune from the antitrust laws only to the extent that it is within the jurisdiction of a federal agency, was actually made known to the agency, and assessed under criteria that took competitive conseqeunces into account. Continue Reading…

kolaskyWilliam Kolasky is a partner in WilmerHale’s Regulatory and Government Affairs Department, a member of the firm’s Antitrust and Competition Practice Group, and a former Deputy Assistant Attorney General in the Antitrust Division at the Department of Justice.

The market power section of the Department’s Single Firm Conduct report is one of the strongest sections of the report.  It provides an exceptionally clear discussion of the market power element under Section 2.  It recognizes, in particular, that a violation of Section 2 requires more than mere market power, but rather a finding of substantial and durable market power – “an extreme degree of market power” as the Fifth Circuit expressed it in Beauville v. Federated Dep’t Stores.

In addition, the report make a persuasive argument that agencies and courts should rely principally on market shares and entry conditions as the primary means of evaluating whether a firm has monopoly power or a dangerous probability of achieving it.  As the report notes, courts often say that monopoly power can also be shown through direct evidence, but when one examines those decisions, one finds that courts almost never (and perhaps never) find monopoly power or a dangerous probability in section 2 cases without first finding that the firm has a very large market share.  Even in section 1 cases, while the Supreme Court held in NCAA and Indiana Federation that market power can be shown by direct evidence “without a detailed market analysis,” in both cases the defendants’ market shares of the likely relevant market were very high.

The report explains quite persuasively the problems with relying on direct evidence as a basis for finding monopoly power.  One type of direct evidence that is frequently mentioned are large price-cost margins, but as the report notes the economics literature raises serious doubt as to whether one can infer anything about the presence or absence of monopoly profits from a company’s profits as reported in its accounting records.  Similarly, while some have suggested that the presence of price discrimination might be used to infer monopoly power, most economists now recognize that price discrimination is common in markets in which firms do not have durable, long-run monopoly power.

In this regard, the Justice Department’s views appear consistent with those of the FTC staff, at least as reflected in the FTC staff reports that the FTC has posted on its website.  What both agencies seem to believe is that direct evidence may be useful in addition to, but not as a substitute for, an examination of market structure and entry conditions.

wrightJosh Wright is a Professor of Law at George Mason Law School, a former FTC Scholar in Residence and a regular contributor to Truth on the Market.

The primary anticompetitive concern with exclusive dealing contracts is that a monopolist might be able to utilize exclusivity to fortify its market position, raise rivals’ costs of distribution, and ultimately harm consumers.  The unifying economic logic of these anticompetitive models of exclusivity is that the potential entrant (or current rival) must attract a sufficient mass of retailers to cover its fixed costs of entry, but that the monopolist’s exclusive contracts with retailers prevent the potential entrant from doing so.   However, the exclusionary equilibrium in these models are relatively fragile, and the models also often generate multiple equilibria in which buyers reject exclusivity. At the exclusive dealing hearings where I testified, a sensible consensus view emerged that a necessary condition for exclusive dealing or de facto exclusive contracts such as market-share discounts or loyalty discounts to cause competitive harm is that they deprive rivals of the opportunity to compete for access to distribution sufficient to achieve minimum efficient scale.  The Report (p. 137) reflects this consensus:

In particular, exclusive dealing may be harmful when it deprives rivals “of the necessary scale to achieve efficiencies, even though, absent the exclusivity,” more than one firm “would . . . be large enough to achieve efficiency.”68 In other words, exclusive dealing can be a way that a firm acquires or maintains monopoly power by impairing the ability of rivals to grow into effective competitors that erode the firm’s position. As one panelist put it, “the exclusive dealing case that you ought to worry about” is where exclusivity deprives rivals of the ability to obtain economies of scale.

The Report also goes on to note the competitive justifications for exclusive dealing, ranging from the variety of ways in which exclusive dealing can prevent free-riding, facilitate relationship-specific investments, and intensify manufacturer competition for scarce retailer shelf space or access to distribution with the benefits of that intensified competition passed on to consumers in the form of lower prices or higher quality.

The situation antitrust enforcers find themselves in with respect to exclusive dealing is not unfamiliar.  On the one hand, there are a set of possibility theorems which indicate that exclusive dealing and de facto exclusives can lead to anticompetitive outcomes under some specified conditions, including substantial economies of scale or scope.  On the other, there are a set of sensible and economically rigorous pro-competitive justifications for the practice.  On top of that is the casual empiricism that we observe exclusive dealing contracts in competitive markets and adopted by firms without significant market power.  As David Evans noted on the first day of our symposium, quite a bit can be learned about the relative probabilities of anticompetitive and pro-competitive uses of certain types of business behavior by understanding the incidence of use by competitive firms.  Exclusive dealing is no different.

Still, we find ourselves between battling theories.  The standard error cost approach to this problem, an approach discussed by many in this symposium as a powerful tool to ensure that our liability rules do not do not needlessly harm consumers by overdeterring pro-competitive conduct or under-deterring anticompetitive conduct, is to turn to the evidence.  What do we know about the incidences of anticompetitive exclusive dealing and de facto exclusive dealing contracts?  The question is not one of the logical validity of any of the competing theories.  It is one of their empirical (and therefore policy) relevance.  A sensible approach to designing antitrust liability rules for exclusive dealing would be to design a conduct-specific standard sensitive to the particular relative risks of Type I and Type II errors informed by the best available existing evidence.  Of course, it should be noted that more evidence is always better and there is certainly a need for more empirical research about single firm conduct.  But the limited nature of the evidence does not mean we have zero information to update our priors on the critical policy question.

So what does the evidence say?  What approach would it lead to?  And how does that approach compare with that endorsed in the Section 2 Report?  I’ll focus on those issues in the remainder of the post. Continue Reading…

brennanTim Brennan is a professor of public policy and economics at UMBC and a senior fellow with Resources for the Future (RFF).

As evidenced by this on-line symposium, the handling of cases under the rubrics “monopolization,” “single firm conduct”, or “abuse of dominance” continues to be debated by the competition policy community. This debate, as evidenced by the Antitrust Division’s Sept. 2008 single firm conduct report and the FTC responses, is not restricted within the U.S. The European Union has published “Guidance Papers” on standards for exclusionary conduct under Article 82, and the Canadian Competition Bureau recently issued draft guidelines for prosecuting conduct under the abuse of dominance provisions of Sec. 79 of its Competition Act.

Almost any significant antitrust case will engender controversy over the facts, e.g., damages resulting from cartel conduct or market definition for mergers. The controversy over single firm conduct runs deeper. Much of this contention arises because the direct focus of the conduct, harm to rivals, is also the byproduct of vigorous competition. Despite everyone having learned to utter the mantra “protect competition, not competitors,” we find a line drawn between two sides. To caricature the bifurcation only slightly, one side, which I’ll call the skeptics, would set the burden of proof very high, with harms to competitors presumptively competitive. The other, here called the activists finds enforcement lax, is more willing to protect competition by protecting competitors.

I propose to resolve the controversy by positing that both sides are right-but within separate categories of monopolization cases. Continue Reading…