A number of blockbuster mergers have received (often negative) attention from media and competition authorities in recent months. From the recently challenged Staples-Office Depot merger to the abandoned Comcast-Time Warner merger to the heavily scrutinized Aetna-Humana merger (among many others), there has been a wave of potential mega-mergers throughout the economy—many of them met with regulatory resistance. We’ve discussed several of these mergers at TOTM (see, e.g., here, here, here and here).

Many reporters, analysts, and even competition authorities have adopted various degrees of the usual stance that big is bad, and bigger is even badder. But worse yet, once this presumption applies, agencies have been skeptical of claimed efficiencies, placing a heightened burden on the merging parties to prove them and often ignoring them altogether. And, of course (and perhaps even worse still), there is the perennial problem of (often questionable) market definition — which tanked the Sysco/US Foods merger and which undergirds the FTC’s challenge of the Staples/Office Depot merger.

All of these issues are at play in the proposed acquisition of British aluminum can manufacturer Rexam PLC by American can manufacturer Ball Corp., which has likewise drawn the attention of competition authorities around the world — including those in Brazil, the European Union, and the United States.

But the Ball/Rexam merger has met with some important regulatory successes. Just recently the members of CADE, Brazil’s competition authority, unanimously approved the merger with limited divestitures. The most recent reports also indicate that the EU will likely approve it, as well. It’s now largely down to the FTC, which should approve the merger and not kill it or over-burden it with required divestitures on the basis of questionable antitrust economics.

The proposed merger raises a number of interesting issues in the surprisingly complex beverage container market. But this merger merits regulatory approval.

The International Center for Law & Economics recently released a research paper entitled, The Ball-Rexam Merger: The Case for a Competitive Can Market. The white paper offers an in-depth assessment of the economics of the beverage packaging industry; the place of the Ball-Rexam merger within this remarkably complex, global market; and the likely competitive effects of the deal.

The upshot is that the proposed merger is unlikely to have anticompetitive effects, and any competitive concerns that do arise can be readily addressed by a few targeted divestitures.

The bottom line

The production and distribution of aluminum cans is a surprisingly dynamic industry, characterized by evolving technology, shifting demand, complex bargaining dynamics, and significant changes in the costs of production and distribution. Despite the superficial appearance that the proposed merger will increase concentration in aluminum can manufacturing, we conclude that a proper understanding of the marketplace dynamics suggests that the merger is unlikely to have actual anticompetitive effects.

All told, and as we summarize in our Executive Summary, we found at least seven specific reasons for this conclusion:

  1. Because the appropriately defined product market includes not only stand-alone can manufacturers, but also vertically integrated beverage companies, as well as plastic and glass packaging manufacturers, the actual increase in concentration from the merger will be substantially less than suggested by the change in the number of nationwide aluminum can manufacturers.
  2. Moreover, in nearly all of the relevant geographic markets (which are much smaller than the typically nationwide markets from which concentration numbers are derived), the merger will not affect market concentration at all.
  3. While beverage packaging isn’t a typical, rapidly evolving, high-technology market, technological change is occurring. Coupled with shifting consumer demand (often driven by powerful beverage company marketing efforts), and considerable (and increasing) buyer power, historical beverage packaging market shares may have little predictive value going forward.
  4. The key importance of transportation costs and the effects of current input prices suggest that expanding demand can be effectively met only by expanding the geographic scope of production and by economizing on aluminum supply costs. These, in turn, suggest that increasing overall market concentration is consistent with increased, rather than decreased, competitiveness.
  5. The markets in which Ball and Rexam operate are dominated by a few large customers, who are themselves direct competitors in the upstream marketplace. These companies have shown a remarkable willingness and ability to invest in competing packaging supply capacity and to exert their substantial buyer power to discipline prices.
  6. For this same reason, complaints leveled against the proposed merger by these beverage giants — which are as much competitors as they are customers of the merging companies — should be viewed with skepticism.
  7. Finally, the merger should generate significant managerial and overhead efficiencies, and the merged firm’s expanded geographic footprint should allow it to service larger geographic areas for its multinational customers, thus lowering transaction costs and increasing its value to these customers.

Distinguishing Ardagh: The interchangeability of aluminum and glass

An important potential sticking point for the FTC’s review of the merger is its recent decision to challenge the Ardagh-Saint Gobain merger. The cases are superficially similar, in that they both involve beverage packaging. But Ardagh should not stand as a model for the Commission’s treatment of Ball/Rexam. The FTC made a number of mistakes in Ardagh (including market definition and the treatment of efficiencies — the latter of which brought out a strenuous dissent from Commissioner Wright). But even on its own (questionable) terms, Ardagh shouldn’t mean trouble for Ball/Rexam.

As we noted in our December 1st letter to the FTC on the Ball/Rexam merger, and as we discuss in detail in the paper, the situation in the aluminum can market is quite different than the (alleged) market for “(1) the manufacture and sale of glass containers to Brewers; and (2) the manufacture and sale of glass containers to Distillers” at issue in Ardagh.

Importantly, the FTC found (almost certainly incorrectly, at least for the brewers) that other container types (e.g., plastic bottles and aluminum cans) were not part of the relevant product market in Ardagh. But in the markets in which aluminum cans are a primary form of packaging (most notably, soda and beer), our research indicates that glass, plastic, and aluminum are most definitely substitutes.

The Big Four beverage companies (Coca-Cola, PepsiCo, Anheuser-Busch InBev, and MillerCoors), which collectively make up 80% of the U.S. market for Ball and Rexam, are all vertically integrated to some degree, and provide much of their own supply of containers (a situation significantly different than the distillers in Ardagh). These companies exert powerful price discipline on the aluminum packaging market by, among other things, increasing (or threatening to increase) their own container manufacturing capacity, sponsoring new entry, and shifting production (and, via marketing, consumer demand) to competing packaging types.

For soda, Ardagh is obviously inapposite, as soda packaging wasn’t at issue there. But the FTC’s conclusion in Ardagh that aluminum cans (which in fact make up 56% of the beer packaging market) don’t compete with glass bottles for beer packaging is also suspect.

For aluminum can manufacturers Ball and Rexam, aluminum can’t be excluded from the market (obviously), and much of the beer in the U.S. that is packaged in aluminum is quite clearly also packaged in glass. The FTC claimed in Ardagh that glass and aluminum are consumed in distinct situations, so they don’t exert price pressure on each other. But that ignores the considerable ability of beer manufacturers to influence consumption choices, as well as the reality that consumer preferences for each type of container (whether driven by beer company marketing efforts or not) are merging, with cost considerations dominating other factors.

In fact, consumers consume beer in both packaging types largely interchangeably (with a few limited exceptions — e.g., poolside drinking demands aluminum or plastic), and beer manufacturers readily switch between the two types of packaging as the relative production costs shift.

Craft brewers, to take one important example, are rapidly switching to aluminum from glass, despite a supposed stigma surrounding canned beers. Some craft brewers (particularly the larger ones) do package at least some of their beers in both types of containers, or simultaneously package some of their beers in glass and some of their beers in cans, while for many craft brewers it’s one or the other. Yet there’s no indication that craft beer consumption has fallen off because consumers won’t drink beer from cans in some situations — and obviously the prospect of this outcome hasn’t stopped craft brewers from abandoning bottles entirely in favor of more economical cans, nor has it induced them, as a general rule, to offer both types of packaging.

A very short time ago it might have seemed that aluminum wasn’t in the same market as glass for craft beer packaging. But, as recent trends have borne out, that differentiation wasn’t primarily a function of consumer preference (either at the brewer or end-consumer level). Rather, it was a function of bottling/canning costs (until recently the machinery required for canning was prohibitively expensive), materials costs (at various times glass has been cheaper than aluminum, depending on volume), and transportation costs (which cut against glass, but the relative attractiveness of different packaging materials is importantly a function of variable transportation costs). To be sure, consumer preference isn’t irrelevant, but the ease with which brewers have shifted consumer preferences suggests that it isn’t a strong constraint.

Transportation costs are key

Transportation costs, in fact, are a key part of the story — and of the conclusion that the Ball/Rexam merger is unlikely to have anticompetitive effects. First of all, transporting empty cans (or bottles, for that matter) is tremendously inefficient — which means that the relevant geographic markets for assessing the competitive effects of the Ball/Rexam merger are essentially the largely non-overlapping 200 mile circles around the companies’ manufacturing facilities. Because there are very few markets in which the two companies both have plants, the merger doesn’t change the extent of competition in the vast majority of relevant geographic markets.

But transportation costs are also relevant to the interchangeability of packaging materials. Glass is more expensive to transport than aluminum, and this is true not just for empty bottles, but for full ones, of course. So, among other things, by switching to cans (even if it entails up-front cost), smaller breweries can expand their geographic reach, potentially expanding sales enough to more than cover switching costs. The merger would further lower the costs of cans (and thus of geographic expansion) by enabling beverage companies to transact with a single company across a wider geographic range.

The reality is that the most important factor in packaging choice is cost, and that the packaging alternatives are functionally interchangeable. As a result, and given that the direct consumers of beverage packaging are beverage companies rather than end-consumers, relatively small cost changes readily spur changes in packaging choices. While there are some switching costs that might impede these shifts, they are readily overcome. For large beverage companies that already use multiple types and sizes of packaging for the same product, the costs are trivial: They already have packaging designs, marketing materials, distribution facilities and the like in place. For smaller companies, a shift can be more difficult, but innovations in labeling, mobile canning/bottling facilities, outsourced distribution and the like significantly reduce these costs.  

“There’s a great future in plastics”

All of this is even more true for plastic — even in the beer market. In fact, in 2010, 10% of the beer consumed in Europe was sold in plastic bottles, as was 15% of all beer consumed in South Korea. We weren’t able to find reliable numbers for the U.S., but particularly for cheaper beers, U.S. brewers are increasingly moving to plastic. And plastic bottles are the norm at stadiums and arenas. Whatever the exact numbers, clearly plastic holds a small fraction of the beer container market compared to glass and aluminum. But that number is just as clearly growing, and as cost considerations impel them (and technology enables them), giant, powerful brewers like AB InBev and MillerCoors are certainly willing and able to push consumers toward plastic.

Meanwhile soda companies like Coca-cola and Pepsi have successfully moved their markets so that today a majority of packaged soda is sold in plastic containers. There’s no evidence that this shift came about as a result of end-consumer demand, nor that the shift to plastic was delayed by a lack of demand elasticity; rather, it was primarily a function of these companies’ ability to realize bigger profits on sales in plastic containers (not least because they own their own plastic packaging production facilities).

And while it’s not at issue in Ball/Rexam because spirits are rarely sold in aluminum packaging, the FTC’s conclusion in Ardagh that

[n]on-glass packaging materials, such as plastic containers, are not in this relevant product market because not enough spirits customers would switch to non-glass packaging materials to make a SSNIP in glass containers to spirits customers unprofitable for a hypothetical monopolist

is highly suspect — which suggests the Commission may have gotten it wrong in other ways, too. For example, as one report notes:

But the most noteworthy inroads against glass have been made in distilled liquor. In terms of total units, plastic containers, almost all of them polyethylene terephthalate (PET), have surpassed glass and now hold a 56% share, which is projected to rise to 69% by 2017.

True, most of this must be tiny-volume airplane bottles, but by no means all of it is, and it’s clear that the cost advantages of plastic are driving a shift in distilled liquor packaging, as well. Some high-end brands are even moving to plastic. Whatever resistance (and this true for beer, too) that may have existed in the past because of glass’s “image,” is breaking down: Don’t forget that even high-quality wines are now often sold with screw-tops or even in boxes — something that was once thought impossible.

The overall point is that the beverage packaging market faced by can makers like Ball and Rexam is remarkably complex, and, crucially, the presence of powerful, vertically integrated customers means that past or current demand by end-users is a poor indicator of what the market will look like in the future as input costs and other considerations faced by these companies shift. Right now, for example, over 50% of the world’s soda is packaged in plastic bottles, and this margin is set to increase: The global plastic packaging market (not limited to just beverages) is expected to grow at a CAGR of 5.2% between 2014 and 2020, while aluminum packaging is expected to grow at just 2.9%.

A note on efficiencies

As noted above, the proposed Ball/Rexam merger also holds out the promise of substantial efficiencies (estimated at $300 million by the merging parties, due mainly to decreased transportation costs). There is a risk, however, that the FTC may effectively disregard those efficiencies, as it did in Ardagh (and in St. Luke’s before it), by saddling them with a higher burden of proof than it requires of its own prima facie claims. If the goal of antitrust law is to promote consumer welfare, competition authorities can’t ignore efficiencies in merger analysis.

In his Ardagh dissent, Commissioner Wright noted that:

Even when the same burden of proof is applied to anticompetitive effects and efficiencies, of course, reasonable minds can and often do differ when identifying and quantifying cognizable efficiencies as appears to have occurred in this case.  My own analysis of cognizable efficiencies in this matter indicates they are significant.   In my view, a critical issue highlighted by this case is whether, when, and to what extent the Commission will credit efficiencies generally, as well as whether the burden faced by the parties in establishing that proffered efficiencies are cognizable under the Merger Guidelines is higher than the burden of proof facing the agencies in establishing anticompetitive effects. After reviewing the record evidence on both anticompetitive effects and efficiencies in this case, my own view is that it would be impossible to come to the conclusions about each set forth in the Complaint and by the Commission — and particularly the conclusion that cognizable efficiencies are nearly zero — without applying asymmetric burdens.

The Commission shouldn’t make the same mistake here. In fact, here, where can manufacturers are squeezed between powerful companies both upstream (e.g., Alcoa) and downstream (e.g., AB InBev), and where transportation costs limit the opportunities for expanding the customer base of any particular plant, the ability to capitalize on economies of scale and geographic scope is essential to independent manufacturers’ abilities to efficiently meet rising demand.

Read our complete assessment of the merger’s effect here.

Scolding teacher

I have small children and, like any reasonably competent parent, I take an interest in monitoring their Internet usage. In particular, I am sensitive to what ad content they are being served and which sites they visit that might try to misuse their information. My son even uses Chromebooks at his elementary school, which underscores this concern for me, as I can’t always be present to watch what he does online. However, also like any other reasonably competent parent, I trust his school and his teacher to make good choices about what he is allowed to do online when I am not there to watch him. And so it is that I am both interested in and rather perplexed by what has EFF so worked up in its FTC complaint alleging privacy “violations” in the “Google for Education” program.

EFF alleges three “unfair or deceptive” acts that would subject Google to remedies under Section 5 of the FTCA: (1) Students logged into “Google for Education” accounts have their non-educational behavior individually tracked (e.g. performing general web searches, browsing YouTube, etc.); (2) the Chromebooks distributed as part of the “Google for Education” program have the “Chrome Sync” feature turned on by default (ostensibly in a terribly diabolical effort to give students a seamless experience between using the Chromebooks at home and at school); and (3) the school administrators running particular instances of “Google for Education” have the ability to share student geolocation information with third-party websites. Each of these violations, claims EFF, violates the K-12 School Service Provider Pledge to Safeguard Student Privacy (“Pledge”) that was authored by the Future of Privacy Forum and Software & Information Industry Association, and to which Google is a signatory. According to EFF, Google included references to its signature in its “Google for Education” marketing materials, thereby creating the expectation in parents that it would adhere to the principles, failed to do so, and thus should be punished.

The TL;DR version: EFF appears to be making some simple interpretational errors — it believes that the scope of the Pledge covers any student activity and data generated while a student is logged into a Google account. As the rest of this post will (hopefully) make clear, however, the Pledge, though ambiguous, is more reasonably read as limiting Google’s obligations to instances where a student is using  Google for Education apps, and does not apply to instances where the student is using non-Education apps — whether she is logged on using her Education account or not.

The key problem, as EFF sees it, is that Google “use[d] and share[d] … student personal information beyond what is needed for education.” So nice of them to settle complex business and educational decisions for the world! Who knew it was so easy to determine exactly what is needed for educational purposes!

Case in point: EFF feels that Google’s use of anonymous and aggregated student data in order to improve its education apps is not an educational purpose. Seriously? How can that not be useful for educational purposes — to improve its educational apps!?

And, according to EFF, the fact that Chrome Sync is ‘on’ by default in the Chromebooks only amplifies the harm caused by the non-Education data tracking because, when the students log in outside of school, their behavior can be correlated with their in-school behavior. Of course, this ignores the fact that the same limitations apply to the tracking — it happens only on non-Education apps. Thus, the Chrome Sync objection is somehow vaguely based on geography. The fact that Google can correlate an individual student’s viewing of a Neil DeGrasse Tyson video in a computer lab at school with her later finishing that video at home is somehow really bad (or so EFF claims).

EFF also takes issue with the fact that school administrators are allowed to turn on a setting enabling third parties to access the geolocation data of Google education apps users.

The complaint is fairly sparse on this issue — and the claim is essentially limited to the assertion that “[s]haring a student’s physical location with third parties is unquestionably sharing personal information beyond what is needed for educational purposes[.]”  While it’s possible that third-parties could misuse student data, a presumption that it is per se outside of any educational use for third-parties to have geolocation access at all strikes me as unreasonable.

Geolocation data, particularly on mobile devices, could allow for any number of positive and negative uses, and without more it’s hard to really take EFF’s premature concern all that seriously. Did they conduct a study demonstrating that geolocation data can serve no educational purpose or that the feature is frequently abused? Sadly, it seems doubtful. Instead, they appear to be relying upon the rather loose definition of likely harm that we have seen in FTC actions in other contexts ( more on this problem here).  

Who decides what ambiguous terms mean?

The bigger issue, however, is the ambiguity latent in the Pledge and how that ambiguity is being exploited to criticize Google. The complaint barely conceals EFF’s eagerness, and gives one the distinct feeling that the Pledge and this complaint are part of a long game. Everyone knows that Google’s entire existence revolves around the clever and innovative employment of large data sets. When Google announced that it was interested in working with schools to provide technology to students, I can only imagine how the anti-big-data-for-any-commercial-purpose crowd sat up and took notice, just waiting to pounce as soon as an opportunity, no matter how tenuous, presented itself.

EFF notes that “[u]nlike Microsoft and numerous other developers of digital curriculum and classroom management software, Google did not initially sign onto the Student Privacy Pledge with the first round of signatories when it was announced in the fall of 2014.” Apparently, it is an indictment of Google that it hesitated to adopt an external statement of privacy principles that was authored by a group that had no involvement with Google’s internal operations or business realities. EFF goes on to note that it was only after “sustained criticism” that Google “reluctantly” signed the pledge. So the company is badgered into signing a pledge that it was reluctant to sign in the first place (almost certainly for exactly these sorts of reasons), and is now being skewered by the proponents of the pledge that it was reluctant to sign. Somehow I can’t help but get the sense that this FTC complaint was drafted even before Google signed the Pledge.

According to the Pledge, Google promised to:

  1. “Not collect, maintain, use or share student personal information beyond that needed for authorized educational/school purposes, or as authorized by the parent/student.”
  2. “Not build a personal profile of a student other than for supporting authorized educational/school purposes or as authorized by the parent/student.”
  3. “Not knowingly retain student personal information beyond the time period required to support the authorized educational/school purposes, or as authorized by the parent/student.”

EFF interprets “educational purpose” as anything a student does while logged into her education account, and by extension, any of the even non-educational activity will count as “student personal information.” I think that a fair reading of the Pledge undermines this position, however, and that the correct interpretation of the Pledge is that “educational purpose” and “student personal information” are more tightly coupled such that Google’s ability to collect student data is only circumscribed when the student is actually using the Google for Education Apps.

So what counts as “student personal information” in the pledge? “Student personal information” is “personally identifiable information as well as other information when it is both collected and maintained on an individual level and is linked to personally identifiable information.”  Although this is fairly broad, it is limited by the definition of “Educational/School purposes” which are “services or functions that customarily take place at the direction of the educational institution/agency or their teacher/employee, for which the institutions or agency would otherwise use its own employees, and that aid in the administration or improvement of educational and school activities.” (emphasis added).

This limitation in the Pledge essentially sinks EFF’s complaint. A major part of EFF’s gripe is that when the students interact with non-Education services, Google tracks them. However, the Pledge limits the collection of information only in contexts where “the institutions or agency would otherwise use its own employees” — a definition that clearly does not extend to general Internet usage. This definition would reasonably cover activities like administering classes, tests, and lessons. This definition would not cover activity such as general searches, watching videos on YouTube and the like. Key to EFF’s error is that the pledge is not operative on accounts but around activity — in particular educational activity “for which the institutions or agency would otherwise use its own employees.”

To interpret Google’s activity in the way that EFF does is to treat the Pledge as a promise never to do anything, ever, with the data of a student logged into an education account, whether generated as part of Education apps or otherwise. That just can’t be right. Thinking through the implications of EFF’s complaint, the ultimate end has to be that Google needs to obtain a permission slip from parents before offering access to Google for Education accounts. Administrators and Google are just not allowed to provision any services otherwise.

And here is where the long game comes in. EFF and its peers induced Google to sign the Pledge all the while understanding that their interpretation would necessarily require a re-write of Google’s business model.  But not only is this sneaky, it’s also ridiculous. By way of analogy, this would be similar to allowing parents an individual say over what textbooks or other curricular materials their children are allowed to access. This would either allow for a total veto by a single parent, or else would require certain students to be frozen out of participating in homework and other activities being performed with a Google for Education app. That may work for Yale students hiding from microaggressions, but it makes no sense to read such a contentious and questionable educational model into Google’s widely-offered apps.

I think a more reasonable interpretation should prevail. The privacy pledge is meant to govern the use of student data while that student is acting as a student — which in the case of Google for Education apps would mean while using said apps. Plenty of other Google apps could be used for educational purposes, but Google is intentionally delineating a sensible dividing line in order to avoid exactly this sort of problem (as well as problems that could arise under other laws directed at student activity, like COPPA, most notably). It is entirely unreasonable to presume that Google, by virtue of its socially desirable behavior of enabling students to have ready access to technology, is thereby prevented from tracking individuals’ behavior on non-Education apps as it chooses to define them.

What is the Harm?

According to EFF, there are two primary problems with Google’s gathering and use of student data: gathering and using individual data in non-Education apps, and gathering and using anonymized and aggregated data in the Education apps. So what is the evil end to which Google uses this non-Education gathered data?

“Google not only collects and stores the vast array of student data described above, but uses it for its own purposes such as improving Google products and serving targeted advertising (within non-Education Google services)”

The horrors! Google wants to use student behavior to improve its services! And yes, I get it, everyone hates ads — I hate ads too — but at some point you need to learn to accept that the wealth of nominally free apps available to every user is underwritten by the ad-sphere. So if Google is using the non-Education behavior of students to gain valuable insights that it can monetize and thereby subsidize its services, so what? This is life in the twenty-first century, and until everyone collectively decides that we prefer to pay for services up front, we had better get used to being tracked and monetized by advertisers.

But as noted above, whether you think Google should or shouldn’t be gathering this data, it seems clear that the data generated from use of non-Education apps doesn’t fall under the Pledge’s purview. Thus, perhaps sensing the problems in its non-Education use argument, EFF also half-heartedly attempts to demonize certain data practices that Google employs in the Education context. In short, Google aggregates and anonymizes the usage data of the Google for Education apps, and, according to EFF, this is a violation of the Pledge:

“Aggregating and anonymizing students’ browsing history does not change the intensely private nature of the data … such that Google should be free to use it[.]”

Again the “harm” is that Google actually wants to improve the Educational apps:  “Google has acknowledged that it collects, maintains, and uses student information via Chrome Sync (in aggregated and anonymized form) for the purpose of improving Google products”

This of course doesn’t violate the Pledge. After all, signatories to the Pledge promise only that they will “[n]ot collect, maintain, use or share student personal information beyond that needed for authorized educational/school purposes.” It’s eminently reasonable to include the improvement of the provisioned services as part of an “authorized educational … purpose[.]” And by ensuring that the data is anonymized and aggregated, Google is clearly acknowledging that some limits are appropriate in the education context — that it doesn’t need to collect individual and identifiable personal information for education purposes — but that improving its education products the same way it improves all its products is an educational purpose.

How are the harms enhanced by Chrome Sync? Honestly, it’s not really clear from EFF’s complaint. I believe that the core of EFF’s gripe (at least here) has to do with how the two data gathering activities may be correlated together. Google has ChromeSync enabled by default, so when the students sign on at different locations, the Education apps usage is recorded and grouped (still anonymously) for service improvement alongside non-Education use. And the presence of these two data sets being generated side-by-side creates the potential to track students in the educational capacity by correlating with information generated in their non-educational capacity.

Maybe there are potential flaws in the manner in which the data is anonymized. Obviously EFF thinks anonymized data won’t stay anonymized. That is a contentious view, to say the least, but regardless, it is in no way compelled by the Pledge. But more to the point, merely having both data sets does not do anything that clearly violates the Pledge.

The End Game

So what do groups like EFF actually want? It’s important to consider the effects on social welfare that this approach to privacy takes, and its context. First, the Pledge was overwhelmingly designed for and signed by pure education companies, and not large organizations like Google, Apple, or Microsoft — thus the nature of the Pledge itself is more or less ill-fitted to a multi-faceted business model. If we follow the logical conclusions of this complaint, a company like Google would face an undesirable choice: On the one hand, it can provide hardware to schools at zero cost or heavily subsidized prices, and also provide a suite of useful educational applications. However, as part of this socially desirable donation, it must also place a virtual invisibility shield around students once they’ve signed into their accounts. From that point on, regardless of what service they use — even non-educational ones — Google is prevented from using any data students generate. At this point, one has to question Google’s incentive to remove huge swaths of the population from its ability to gather data. If Google did nothing but provide the hardware, it could simply leave its free services online as-is, and let schools adopt or not adopt them as they wish (subject of course to extant legislation such as COPPA) — thereby allowing itself to possibly collect even more data on the same students.

On the other hand, if not Google, then surely many other companies would think twice before wading into this quagmire, or, when they do, they might offer severely limited services. For instance, one way of complying with EFF’s view of how the Pledge works would be to shut off access to all non-Education services. So, students logged into an education account could only access the word processing and email services, but would be prevented from accessing YouTube, web search and other services — and consequently suffer from a limitation of potentially novel educational options.

EFF goes on to cite numerous FTC enforcement actions and settlements from recent years. But all of the cited examples have one thing in common that the current complaint does not: they all are violations of § 5 for explicit statements or representations made by a company to consumers. EFF’s complaint, on the other hand, is based on a particular interpretation of an ambiguous document generally drafted, and outside of the the complicated business practice at issue. What counts as “student information” when a user employs a general purpose machine for both educational purposes and non-educational purposes?  The Pledge — at least the sections that EFF relies upon in its complaint — is far from clear and doesn’t cover Google’s behavior in an obvious manner.

Of course, the whole complaint presumes that the nature of Google’s services was somehow unfair or deceptive to parents — thus implying that there was at least some material reliance on the Pledge in parental decision making. However, this misses a crucial detail: it is the school administrators who contract with Google for the Chromebooks and Google for Education services, and not the parents or the students.  Then again, maybe EFF doesn’t care and it is, as I suggest above, just interested in a long game whereby it can shoehorn Google’s services into some new sort of privacy regime. This isn’t all that unusual, as we have seen even the White House in other contexts willing to rewrite business practices wholly apart from the realities of privacy “harms.”

But in the end, this approach to privacy is just a very efficient way to discover the lowest common denominator in charity. If it even decides to brave the possible privacy suits, Google and other similarly situated companies will provide the barest access to the most limited services in order to avoid extensive liability from ambiguous pledges. And, perhaps even worse for overall social welfare, using the law to force compliance with voluntarily enacted, ambiguous codes of conduct is a sure-fire way to make sure that there are fewer and more limited codes of conduct in the future.

China’s Anti-Monopoly Law (AML) was enacted in 2007, and a stock-taking exercise is now appropriate.  Recently, the Chinese University of Political Science and Law released a questionnaire soliciting public comments on the possible revision of the AML.  On December 10, 2015, George Mason University Law School’s (GMULS) Global Antitrust Institute (GAI, ably managed by FTC Office of International Affairs alumna Koren Wong-Ervin, with academic input from GMULS Professors Douglas Ginsburg, Joshua Wright, and Bruce Kobayashi), submitted a very thoughtful response to the solicitation, recommending that China reform the AML by:

  • Deleting References to Use of Non-Competition Factors in Competition Analysis.  The GAI recommended that references to non-competition goals such as “promoting the healthy development of the socialist market economy,” be deleted, explaining that competition law and policy is most effective when it focuses exclusively upon competition and consumer welfare rather than attempting to achieve simultaneously multiple goals, some of which may be in conflict with others.
  • Deleting Exemptions for State-Owned Enterprises (SOEs). The GAI recommended that SOEs be fully subject to the AML, including liability and fines, explaining that conferring upon SOEs privileges and immunities that are not available to their privately-owned competitors, or based on superior performance or efficiency, distorts competition in the market between state-owned and privately-owned rivals, and that SOEs generate increased agency problems relative to privately owned firms.
  • Recognizing that Vertical Restraints are Generally Procompetitive or Benign and As Such Should Be Analyzed Under an Effects-Based Approach. The GAI recommended that, given the state of economic learning regarding the competitive effects of vertical restraints (i.e., that they rarely harm competition and often benefit consumers by reducing price, increasing demand, and/or creating a more efficient distribution channel), reliance on theoretical models alone to infer competitive harm should generally be insufficient to satisfy the heavy burden on the plaintiff to prove that a particular restraint is anticompetitive.
  • Deleting the Prohibition on Charging “Unfairly High” or Purchasing at “Unfairly Low” Prices. The GAI recommended that this prohibition be deleted in its entirety or, at the very least, revised to explicitly provide an exception for matters involving intellectual property rights.  Among other things, the GAI explained that price regulation risks punishing vigorous competition, and that government-imposed prices that are too high or too low encourage misallocation of resources, soften incentives to engage in efficient conduct, reduce incentives to innovate, and distort markets.  In addition, excessive pricing cases are considered to be among the most difficult and complex cases for competition authorities in terms of standards for assessment, analysis of data, and the design and implementation of suitable remedies.  These difficulties create a substantial risk of both Type I (false positives) and Type II (false negatives) errors.
  • Limiting the Prohibition on Refusals to Deal to Conduct that Creates or Maintains a Monopoly. The GAI explained that, without such a limitation, the prohibition could be interpreted to impose an antitrust-based duty to deal on firms, to micromanage the terms of trade between firms, and to require courts and agencies to administer a burdensome remedy with substantial risk of causing more harm to competition and to consumers than benefits.
  • Deleting the Presumptions Concerning Collective Dominance. The GAI explained that such a presumption may harm rather than promote competition and discourages more rigorous effects-based economic analyses in favor of relying upon easier to apply but less accurate forms of analysis.
  • Clarifying the Definition of Concentration of Undertakings and Exempting Transactions From the Mandatory Premerger Approval Process That Do Not Have a Material Nexus with China. Among other things, the GAI recommended clarification of the terms “control over other undertakings and the ability capable of exerting a decisive influence . . . by virtue of contract or any other means.”
  • Deleting Provisions That Limit AML Enforcement Against Administrative Agencies or Organizations. The GAI recommended the deletion of the provision that grants “superior government agencies,” as opposed to the AML agencies, the authority to remedy anticompetitive conduct by administrative agencies and seemed to except administrative agencies from fines or other AML remedies.  Among other things, the GAI noted the robust economic evidence that regulation often benefits producers and harms consumers and results in efficiency losses from rent-seeking efforts by market participants to influence regulation.
  • Limiting the Requirement that Disgorgement or a Minimum Fine Be Imposed Upon a Finding of an AML Violation and Limiting Fines to Sales Directly Obtained in the Relevant Product and Geographic Market in China Affected By the Violation.
  • Limiting Disgorgement to Naked Price-Fixing Agreements Among Competitors or, In the Case of Unilateral Conduct, to Conduct that Has No Plausible Efficiency Justification.
  • Specifying that the Legitimate Use of Intellectual Property Rights Includes the Right to Exclude.

Tomorrow, Geoffrey Manne, Executive Director of the International Center for Law & Economics, will be a panelist at the Cato Institute’s Policy Forum, “The ITC and Digital Trade: The ClearCorrect Decision.”  He will be joined by Sapna Kumar, Associate Professor, University of Houston Law Center and Shara Aranoff, Of Counsel, Covington and Burling LLP, and former Chairman of the U.S. International Trade Commission (“ITC”).

The forum is focused on a recent Federal Circuit decision, ClearCorrect v. ITC, in which a divided three judge panel overturned a 5-1 majority decision of the ITC holding that the Tariff Act granted it the power to prevent the importation of digital articles that infringe a valid U.S. patent. Key to the Federal Circuit’s decision was a hyper-textualist parsing of the term “article” as understood in 1929–a move that stands in stark contrast to the Federal Circuit’s recent en banc decision in Suprema, which was crucially based on a wider reading of the context of the Tariff Act in order to understand the the full meaning of the phrase “articles … that infringe” as contained therein.

Critics of the ITC’s interpretation in this matter contend that such jurisdiction would somehow grant the ITC the power to regulate the Internet. However, far from being an expansive power grab, the ITC’s decision was in fact well reasoned and completely consistent with the Tariff Act and Congressional intent. Nonetheless, this remains an important case because the cost of the Federal Circuit’s error could be very high given the importance of IP to the national economy.

Full details on the event:

“The ITC and Digital Trade: The ClearCorrect Decision”
Wednesday, December 9, 2015 at 12 PM EDT.
F. A. Hayek Auditorium (located on the lobby level of the Cato Institute)
1000 Massachusetts Ave., N.W.
Washington, D.C.

Registration begins at 11:30 a.m.

 

More from us on this and related topics:

False Teeth: Why An ITC Case Won’t Chew Up The Internet (Forbes)

Suprema v. ITC: The Case for Chevron Deference

The Federal Circuit Misapplies Chevron Deference (and Risks a Future “Supreme Scolding”) in Suprema Inc. v. ITC

 

This blurb published yesterday by Competition Policy International nicely illustrates the problem with the growing focus on unilateral conduct investigations by the European Commission (EC) and other leading competition agencies:

EU: Qualcomm to face antitrust complaint on predatory pricing

Dec 03, 2015

The European Union is preparing an antitrust complaint against Qualcomm Inc. over suspected predatory pricing tactics that could hobble smaller rivals, according to three people familiar with the probe.

Regulators are in the final stages of preparing a so-called statement of objections, based on a complaint by a unit of Nvidia Corp., that asked the EU to act against predatory pricing for mobile-phone chips, the people said. Qualcomm designs chipsets that power most of the world’s smartphones, licensing its technology across the industry.

Qualcomm would add to a growing list of U.S. technology companies to face EU antitrust action, following probes into Google, Microsoft Corp. and Intel Corp. A statement of objections may lead to fines, capped at 10 percent of yearly global revenue, which can be avoided if a company agrees to make changes to business behavior.

Regulators are less advanced with another probe into whether the company grants payments, rebates or other financial incentives to customers in returning for buying Qualcomm chipsets. Another case that focused on complaints that the company was charging excessive royalties on patents was dropped in 2009.

“Predatory pricing” complaints by competitors of successful innovators are typically aimed at hobbling efficient rivals and reducing aggressive competition.  If and when successful, such rent-seeking complaints attenuate competitive vigor (thereby disincentivizing innovation) and tend to raise prices to consumers – a result inimical with antitrust’s overarching goal, consumer welfare promotion.  Although I admittedly am not privy to the facts at issue in the Qualcomm predatory pricing investigation, Nvidia is not a firm that fits the model of a rival being decimated by economic predation (given its overall success and its rapid growth and high profitability in smartchip markets).  In this competitive and dynamic industry, the likelihood that Qualcomm could recoup short-term losses from predation through sustainable monopoly pricing following Nvidia’s exit from the market would seem to be infinitesimally small or non-existent (even assuming pricing below average variable cost or average avoidable cost could be shown).  Thus, there is good reason to doubt the wisdom of the EC’s apparent decision to issue a statement of objections to Qualcomm regarding predatory pricing for mobile phone chips.

The investigation of (presumably loyalty) payments and rebates to buyers of Qualcomm chipsets also is unlikely to enhance consumer welfare.  As a general matter, such financial incentives lower costs to loyal customers, and may promote efficiencies such as guaranteed purchase volumes under favorable terms.  Although theoretically loyalty payments might be structured to effectuate anticompetitive exclusion of competitors under very special circumstances, as a general matter such payments – which like alleged “predatory” pricing typically benefit consumers – should not be a high priority for investigation by competition agencies.  This conclusion applies in spades to chipset markets, which are characterized by vigorous competition among successful firms.  Rebate schemes in dynamic markets of this sort are almost certainly a symptom of creative, welfare-enhancing competitive vigor, rather than inefficient exclusionary behavior.

A pattern of investigating price reductions and discounting plans in highly dynamic and innovative industries, exemplified by the EC’s Qualcomm investigations summarized above, is troubling in at least two respects.

First, it creates regulatory disincentives to aggressive welfare-enhancing competition aimed at capturing the customer’s favor.  Companies like Qualcomm, after being suitably chastised, may well “take the cue” and decide to avoid future trouble by “playing nice” and avoiding innovative discounting, to the detriment of future consumers and industry efficiency.

Second, the dedication of enforcement resources to investigating discounting practices by successful firms that (based on first principles and industry conditions) are highly likely to be procompetitive points to a severe misallocation of resources by the responsible competition agencies.  Such agencies should seek to optimize the use of their scarce resources by allocating them to the highest-valued targets in welfare terms, such as anticompetitive government restraints on competition and hard-core cartel conduct.  Spending any resources on chasing down what is almost certainly efficient unilateral pricing conduct not only sends a bad signal to industry (see point one), it suggests that agency priorities are badly misplaced.  (Admittedly, a problem faced by the EC and many other competition authorities is that they are required to respond to third party complaints, but the nature of that response and the resources allocated could be better calibrated to the likely merit of such complaints.  Whether the law should be changed to grant such competition authorities broad prosecutorial discretion to ignore clearly non-meritorious complaints (such as the wide discretion enjoyed by U.S. antitrust enforcers) is beyond the scope of this commentary, and merits separate treatment.)

A proper application of decision theory and its error cost approach could help the EC and other competition enforcers avoid the problem of inefficiently chasing down procompetitive unilateral conduct.  Such an approach would focus intensively on highly welfare inimical conduct that lacks credible efficiencies (thus minimizing false positives in enforcement) that can be pursued with a relatively low expenditure of administrative costs (given the lack of credible efficiency justifications that need to be evaluated).  As indicated above, a substantial allocation of resources to hard core cartel conduct, bid rigging, and anticompetitive government-imposed market distortions (including poorly designed regulations and state aids) would be consistent with such an approach.  Relatedly, investigating single firm conduct, which is central to spurring a dynamic competitive process and is often misdiagnosed as anticompetitive (thereby imposing false positive costs), should be deemphasized.  (Obviously, even under a decision-theoretic framework, certain agency resources would continue to be devoted to mandatory merger reviews and other core legally required agency functions.)

Today the International Center for Law & Economics (ICLE) submitted an amicus brief to the Supreme Court of the United States supporting Apple’s petition for certiorari in its e-books antitrust case. ICLE’s brief was signed by sixteen distinguished scholars of law, economics and public policy, including an Economics Nobel Laureate, a former FTC Commissioner, ten PhD economists and ten professors of law (see the complete list, below).

Background

Earlier this year a divided panel of the Second Circuit ruled that Apple “orchestrated a conspiracy among [five major book] publishers to raise ebook prices… in violation of § 1 of the Sherman Act.” Significantly, the court ruled that Apple’s conduct constituted a per se unlawful horizontal price-fixing conspiracy, meaning that the procompetitive benefits of Apple’s entry into the e-books market was irrelevant to the liability determination.

Apple filed a petition for certiorari with the Supreme Court seeking review of the ruling on the question of

Whether vertical conduct by a disruptive market entrant, aimed at securing suppliers for a new retail platform, should be condemned as per se illegal under Section 1 of the Sherman Act, rather than analyzed under the rule of reason, because such vertical activity also had the alleged effect of facilitating horizontal collusion among the suppliers.

Summary of Amicus Brief

The Second Circuit’s ruling is in direct conflict with the Supreme Court’s 2007 Leegin decision, and creates a circuit split with the Third Circuit based on that court’s Toledo Mack ruling. ICLE’s brief urges the Court to review the case in order to resolve the significant uncertainty created by the Second Circuit’s ruling, particularly for the multi-sided platform companies that epitomize the “New Economy.”

As ICLE’s brief discusses, the Second Circuit committed several important errors in its ruling:

First, As the Supreme Court held in Leegin, condemnation under the per se rule is appropriate “only for conduct that would always or almost always tend to restrict competition” and “only after courts have had considerable experience with the type of restraint at issue.” Neither is true in this case. Businesses often employ one or more forms of vertical restraints to make entry viable, and the Court has blessed such conduct, categorically holding in Leegin that “[v]ertical price restraints are to be judged according to the rule of reason.”

Furthermore, the conduct at issue in this case — the use of “Most-Favored Nation Clauses” in Apple’s contracts with the publishers and its adoption of the so-called “agency model” for e-book pricing — have never been reviewed by the courts in a setting like this one, let alone found to “always or almost always tend to restrict competition.” There is no support in the case law or economic literature for the proposition that agency models or MFNs used to facilitate entry by new competitors in platform markets like this one are anticompetitive.

Second, the negative consequences of the court’s ruling will be particularly acute for modern, high-technology sectors of the economy, where entrepreneurs planning to deploy new business models will now face exactly the sort of artificial deterrents that the Court condemned in Trinko: “Mistaken inferences and the resulting false condemnations are especially costly, because they chill the very conduct the antitrust laws are designed to protect.” Absent review by the Supreme Court to correct the Second Circuit’s error, the result will be less-vigorous competition and a reduction in consumer welfare.

This case involves vertical conduct essentially indistinguishable from conduct that the Supreme Court has held to be subject to the rule of reason. But under the Second Circuit’s approach, the adoption of these sorts of efficient vertical restraints could be challenged as a per se unlawful effort to “facilitate” horizontal price fixing, significantly deterring their use. The lower court thus ignored the Supreme Court’s admonishment not to apply the antitrust laws in a way that makes the use of a particular business model “more attractive based on the per se rule” rather than on “real market conditions.”

Third, the court based its decision that per se review was appropriate largely on the fact that e-book prices increased following Apple’s entry into the market. But, contrary to the court’s suggestion, it has long been settled that such price increases do not make conduct per se unlawful. In fact, the Supreme Court has held that the per se rule is inappropriate where, as here, “prices can be increased in the course of promoting procompetitive effects.”  

Competition occurs on many dimensions other than just price; higher prices alone don’t necessarily suggest decreased competition or anticompetitive effects. Instead, higher prices may accompany welfare-enhancing competition on the merits, resulting in greater investment in product quality, reputation, innovation or distribution mechanisms.

The Second Circuit presumed that Amazon’s e-book prices before Apple’s entry were competitive, and thus that the price increases were anticompetitive. But there is no support in the record for that presumption, and it is not compelled by economic reasoning. In fact, it is at least as likely that the change in Amazon’s prices reflected the fact that Amazon’s business model pre-entry resulted in artificially low prices, and that the price increases following Apple’s entry were the product of a more competitive market.

Previous commentary on the case

For my previous writing and commentary on the the case, see:

  • “The Second Circuit’s Apple e-books decision: Debating the merits and the meaning,” American Bar Association debate with Fiona Scott-Morton, DOJ Chief Economist during the Apple trial, and Mark Ryan, the DOJ’s lead litigator in the case, recording here
  • Why I think the Apple e-books antitrust decision will (or at least should) be overturned, Truth on the Market, here
  • Why I think the government will have a tough time winning the Apple e-books antitrust case, Truth on the Market, here
  • The procompetitive story that could undermine the DOJ’s e-books antitrust case against Apple, Truth on the Market, here
  • How Apple can defeat the DOJ’s e-book antitrust suit, Forbes, here
  • The US e-books case against Apple: The procompetitive story, special issue of Concurrences on “E-books and the Boundaries of Antitrust,” here
  • Amazon vs. Macmillan: It’s all about control, Truth on the Market, here

Other TOTM authors have also weighed in. See, e.g.:

  • The Second Circuit Misapplies the Per Se Rule in U.S. v. Apple, Alden Abbott, here
  • The Apple E-Book Kerfuffle Meets Alfred Marshall’s Principles of Economics, Josh Wright, here
  • Apple and Amazon E-Book Most Favored Nation Clauses, Josh Wright, here

Amicus Signatories

  • Babette E. Boliek, Associate Professor of Law, Pepperdine University School of Law
  • Henry N. Butler, Dean and Professor of Law, George Mason University School of Law
  • Justin (Gus) Hurwitz, Assistant Professor of Law, Nebraska College of Law
  • Stan Liebowitz, Ashbel Smith Professor of Economics, School of Management, University of Texas-Dallas
  • Geoffrey A. Manne, Executive Director, International Center for Law & Economics
  • Scott E. Masten, Professor of Business Economics & Public Policy, Stephen M. Ross School of Business, The University of Michigan
  • Alan J. Meese, Ball Professor of Law, William & Mary Law School
  • Thomas D. Morgan, Professor Emeritus, George Washington University Law School
  • David S. Olson, Associate Professor of Law, Boston College Law School
  • Joanna Shepherd, Professor of Law, Emory University School of Law
  • Vernon L. Smith, George L. Argyros Endowed Chair in Finance and Economics,  The George L. Argyros School of Business and Economics and Professor of Economics and Law, Dale E. Fowler School of Law, Chapman University
  • Michael E. Sykuta, Associate Professor, Division of Applied Social Sciences, University of Missouri-Columbia
  • Alex Tabarrok, Bartley J. Madden Chair in Economics at the Mercatus Center and Professor of Economics, George Mason University
  • David J. Teece, Thomas W. Tusher Professor in Global Business and Director, Center for Global Strategy and Governance, Haas School of Business, University of California Berkeley
  • Alexander Volokh, Associate Professor of Law, Emory University School of Law
  • Joshua D. Wright, Professor of Law, George Mason University School of Law

I received word today that Douglass North passed away yesterday at the age of 95 (obit here). Professor North shared the Nobel Prize in Economic with Robert Fogel in 1993 for his work in economic history on the role of institutions in shaping economic development and performance.

Doug was one of my first professors in graduate school at Washington University. Many of us in our first year crammed into Doug’s economic history class for fear that he might retire and we not get the chance to study under him. Little did we expect that he would continue teaching into his DoughNorth_color_300-doc80s. The text for our class was the pre-publication manuscript of his book, Institutions, Institutional Change and Economic Performance. Doug’s course offered an interesting juxtaposition to the traditional neoclassical microeconomics course for first-year PhD students. His work challenged the simplifying assumptions of the neoclassical system and shed a whole new light on understanding economic history, development and performance. I still remember that day in October 1993 when the department was abuzz with the announcement that Doug had received the Nobel Prize. It was affirming and inspiring.

As I started work on my dissertation, I had hoped to incorporate a historical component on the early development of crude oil futures trading in the 1930s so I could get Doug involved on my committee. Unfortunately, there was not enough information still available to provide any analysis (there was one news reference to a new crude futures exchange, but nothing more–and the historical records of the NY Mercantile Exchange had been lost in a fire).and I had to focus solely on the deregulatory period of the late 1970s and early 1980s. I remember joking at one of our economic history workshops that I wasn’t sure if it counted as economic history since it happened during Doug’s lifetime.

Doug was one of the founding conspirators for the International Society for New Institutional Economics (now the Society for Institutional & Organizational Economics) in 1997, along with Ronald Coase and Oliver Williamson. Although the three had strong differences of opinions concerning certain aspects of their respective theoretical approaches, they understood the generally complementary nature of their work and its importance not just for the economic profession, but for understanding how societies and organizations perform and evolve and the role institutions play in that process.

The opportunity to work around these individuals, particularly with North and Coase, strongly shaped and influenced my understanding not only of economics, but of why a broader perspective of economics is so important for understanding the world around us. That experience profoundly affected my own research interests and my teaching of economics. Some of Doug’s papers continue to play an important role in courses I teach on economic policy. Students, especially international students, continue to be inspired by his explanation of the roles of institutions, how they affect markets and societies, and the forces that lead to institutional change.

As we prepare to celebrate Thanksgiving in the States, Doug’s passing is a reminder of how much I have to be thankful for over my career. I’m grateful for having had the opportunity to know and to work with Doug. I’m grateful that we had an opportunity to bring him to Mizzou in 2003 for our CORI Seminar series, at which he spoke on Understanding the Process of Economic Change (the title of his next book at the time). And I’m especially thankful for the influence he had on my understanding of economics and that his ideas will continue to shape economic thinking and economic policy for years to come.

In Collins Inkjet Corp. v. Eastman Kodak Co. (2015) (subsequently settled, leading to a withdrawal of Kodak’s petition for certiorari), the Sixth Circuit elected to apply the Cascade Health Solutions v. PeaceHealth “bundled discount attribution price-cost” methodology in upholding a preliminary injunction against Kodak’s policy of discounting the price of refurbished Kodak printheads to customers who purchased ink from Kodak, rather than from Collins.  This case illustrates the incoherence and economic irrationality of current tying doctrine, and the need for Supreme Court guidance – hopefully sooner rather than later.

The key factual and legal findings in this case, set forth by the Sixth Circuit, were as follows:

Collins is Kodak’s competitor for selling ink for Versamark printers manufactured by Kodak. Users of Versamark printers must periodically replace a printer component called a printhead; Kodak is the only provider of replacement “refurbished printheads” for such printers. In July 2013, Kodak adopted a pricing policy that raised the cost of replacing Versamark printheads, but only for customers not purchasing Kodak ink. Collins filed suit, arguing that this amounts to a tying arrangement prohibited under § 1 of the Sherman Act, 15 U.S.C. § 1, because it is designed to monopolize the Versamark ink market. Collins sought a preliminary injunction barring Kodak from charging Collins’ customers a higher price for refurbished printheads. The district court issued the preliminary injunction, finding a strong likelihood that Kodak’s pricing policy was a non-explicit tie that coerced Versamark owners into buying Kodak ink and that Kodak possessed sufficient market power in the market for refurbished printheads to make the tie effective.

On appeal, Kodak challenges both the legal standard the district court applied to find whether customers were coerced into using Kodak ink and the district court’s preliminary factual findings. In evaluating the likelihood of success on the merits, the district court applied a standard that unduly favored Collins to determine whether customers were coerced into buying Kodak ink. The court examined whether the policy made it likely that all or almost all customers would switch to Kodak ink, but did not examine whether this would be the result of unreasonable conduct on Kodak’s part. A tying arrangement enforced entirely through differential pricing of the tying product contravenes the Sherman Act only if the pricing policy is economically equivalent to selling the tied product below cost. The record makes it difficult to determine conclusively Kodak’s ink production costs, but the available evidence suggests that Kodak was worse off when customers bought both products, meaning that it was in effect selling ink at a loss. Thus, Collins was likely to succeed on the merits even under the correct standard.  Furthermore, the district court was correct in its consideration of the other factors for a preliminary injunction. Accordingly, the preliminary injunction was not an abuse of discretion.

The Sixth Circuit’s Collins Inkjet opinion nicely illustrates the current unsatisfactory state of tying law from an economic perspective.  Unlike in various other areas of antitrust law, such as vertical restraints, exclusionary conduct, and enforcement, the Supreme Court has failed to apply a law and economics standard to tying.  It came close on two occasions, with four Justices supporting a rule of reason standard for tying in Jefferson Parish, and with a Supreme Court majority acknowledging that “[m]any tying arrangements . . . are fully consistent with a free, competitive market” in Independent Ink (which held that it should not be presumed that a patented tying product conveyed market power).  Nevertheless, despite the broad scholarly recognition that tying may generate major economic efficiencies (even when the tying product conveys substantial market power), tying still remains subject to a peculiar rule of limited per se illegality, which is triggered when:  (1) two separate products or services are involved; (2) the sale or agreement to sell one is conditioned on the purchase of the other; (3) the seller has sufficient economic power in the market for the tying product to enable it to restrain trade in the market for the tied product; and (4) a “not insubstantial amount” of interstate commerce in the tied product is affected.  Unfortunately, it is quite possible for plaintiffs to shoehorn much welfare-enhancing conduct into this multipart test, creating a welfare-inimical disincentive for efficiency-seeking businesses to engage in such conduct.  (The U.S. Court of Appeals for the D.C. Circuit refused to apply the per se rule to platform software in United States v. Microsoft, but other appellate courts have not been similarly inclined to flout Supreme Court precedent.)

Courts that are concerned with the efficient application of antitrust may nonetheless evade the confines of the per se rule in appropriate instances, by applying economic reasoning to the factual context presented and finding particular test conditions not met.  The Sixth Circuit’s Collins Inkjet opinion, unfortunately, failed to do so.  It is seriously problematic, in at least four respects.

First, the Sixth Circuit’s opinion agreed with the district court that “coercive” behavior created an “implicit tie,” despite the absence of formal contractual provisions that explicitly tied Kodak’s ink to sale of its refurbished printheads.

Second, it ignored potential vigorous and beneficial ex ante competition among competing producers of printers to acquire customers, which would have negated a finding of significant economic power in the printer market and thereby precluded per se condemnation.

Third, it incorrectly applied the PeaceHealth standard to the facts at hand due to faulty economic reasoning.  For a finding of anticompetitive (“exclusionary”) bundled discounting, PeaceHealth requires that, after all discounts are applied to the “competitive” product, “the resulting price of the competitive product or products is below the defendant’s incremental cost to produce them”.  In Collins Inkjet, all that was known was that Kodak “stood to make more money if customers bought ink from Collins and paid Kodak’s unmatched printhead refurbishment price than if they bought Kodak ink and paid the matched printhead refurbishment price.”  Absent additional information, however, this merely supported a finding that Kodak’s tied ink was priced below its average total cost, not below its (far lower) incremental cost.  (Applying PeaceHealth, the Collins Inkjet court attributed the printhead discount entirely to Kodak’s ink, the tied product.)  In short, absent this error in reasoning (ironically, the court justified its flawed cost analysis “as a matter of formal logic”), the Sixth Circuit could not have based a finding of anticompetitive conduct on the PeaceHealth precedent.

Fourth, and more generally, the Sixth Circuit’s opinion, in its blinkered search for a “modern” (PeaceHealth) finely-calibrated test to apply in this instance, lost sight of the Supreme Court’s broad teaching in Reiter v. Sonotone Corp. that antitrust law was designed to be “a consumer welfare prescription.”  Kodak’s pricing policy that offered discounts to buyers of its printheads and ink yielded lower prices to consumers.  There was no showing that Collins Inkjet would likely be driven out of business, or, even if it were, that consumers would eventually be harmed.  Absent any showing of likely anticompetitive effects, vertical contractual provisions, including tying, should not be subject to antitrust challenge.  Indeed, as Professor (and former Federal Trade Commissioner) Joshua Wright and I have pointed out:

[T]he potential efficiencies associated with . . . tying . . . and the fact that [tying is] prevalent in markets without significant antitrust market power, lead most commentators to believe that [it is] . . . generally procompetitive and should be analyzed under some form of rule of reason analysis. . . .  [T]he adoption of a rule of reason for tying and presumptions of legality for [tying] . . . under certain circumstances may be long overdue.  

In sum, it is high time for the Supreme Court to take an appropriate case and clarify that tying arrangements (whether explicit or “coerced”) are subject to the rule of reason, with full recognition of tying’s efficiencies.  Such a holding would enable businesses to engage in a wider variety of efficient contracts, thereby promoting consumer welfare.

Finally, while it is at it, the Court should also consider taking a loyalty discount case, to reduce harmful uncertainty in this important area (caused by such economically irrational precedents as LePage’s, Inc. v. 3M) and establish a clear standard to guide the business community.  If it takes a loyalty discount case, the Court could beneficially draw upon Wright’s observation that “economic theory and evidence suggest[s] that instances of anticompetitive loyalty discounts will be relatively rare,” and his recommendation that “an exclusive dealing framework . . . be applied in such cases.”

My Office Door

Thom Lambert —  12 November 2015

University professors often post things on their office doors—photos, news clippings, conference posters, political cartoons.   I’ve never been much for that.  The objective, I assume, is to express something about yourself: who you are, what interests you, what values you hold.  I’ve never participated in this custom because I haven’t wanted to alienate students who might not share my views.  That’s not to suggest that I’m shy about those views.  I will—and regularly do—share them with students, even those who I know disagree with me.  But if posting my views on the door were to dissuade students from coming to me to discuss those views (and contrary ones), I would be losing the opportunity to have a meaningful dialogue.  Plus, my tastes veer toward minimalism, and doors covered with postings are ugly. Thus, no postings.

Until today.  My institution, the University of Missouri, is at a crossroads.  We can be a place where ideas—even unpopular ones—are  freely expressed, exchanged, and scrutinized.  Or we can be a place where everyone’s feelings are protected at all times.   It’s one or the other.

Tuesday morning, I opened an email and thought, “What a great prank. It looks so official!”  The email, which was from the MU Police, read as follows:

To continue to ensure that the University of Missouri campus remains safe, the MU Police Department (MUPD) is asking individuals who witness incidents of hateful and/or hurtful speech or actions to:

  • Call the police immediately at 573-882-7201. (If you are in an emergency situation, dial 911.)
  • Give the communications operator a summary of the incident, including location.
  • Provide a detailed description of the individual(s) involved.
  • Provide a license plate and vehicle descriptions (if appropriate).
  • If possible and if it can be done safely, take a photo of the individual(s) with your cell phone.

Delays, including posting information to social media, can often reduce the chances of identifying the responsible parties. While cases of hateful and hurtful speech are not crimes, if the individual(s) identified are students, MU’s Office of Student Conduct can take disciplinary action.

As it turns out, it was no joke.  Anyone on my campus who witnesses “hurtful speech” is directed to call campus police—individuals who carry guns, drive squad cars, and regularly arrest people. Now rest assured, “cases of hateful and hurtful speech are not crimes.”  They can give rise to, at most, “disciplinary action” by the MU Office of Student Conduct.  But still, isn’t it a bit unsettling—chilling, even—to think that if you say something “hurtful” at Mizzou (e.g., gay marriage is an abomination, affirmative action is unfair and hurts those it is ostensibly designed to help, Christians who oppose gay marriage are bigots, Islam is not a religion of peace, white men are privileged in a way that leads to undeserved rewards, culture matters in cultivating success, Republicans are dumb), the police may track you down and you may be required to defend yourself before the student conduct committee?  Perhaps the MU Police, or whoever crafted that email (let’s get real…it wasn’t the police), didn’t really mean that all hurtful speech is potentially problematic.  But if that’s the case, then why did they word the email as they did?  Pandering to an unreasonable element, maybe?

Contrast Mizzou’s approach to that taken by Purdue University.  The day after the Mizzou email, Purdue president Mitch Daniels reminded members of the Purdue community that their school actually stands for both tolerance AND free speech.  Here’s his letter:

Purdue Letter

 

The contrast between Mizzou and Purdue couldn’t be starker.  And it really, really matters.  I hope that posting these two documents on my door (along with this spot-on Wall Street Journal editorial) will not dissuade students from engaging in dialogue with me.  But I can’t be demure on this one.  So I now have—much to my aesthetic chagrin—a decorated office door.  Please come in and talk, even if you think I’m wrong.

 

Today, thirty-nine different companies and policy experts from a wide swath of the political spectrum signed a letter urging lawmakers to create a “portable benefits” platform that will enable sharing economy companies to continue innovating while simultaneously providing desirable social safety net benefits to workers. This is well timed, as there is a growing consensus among lawmakers (such as Senator Warner) that “something must be done” to provide benefits to workers in the so-called “gig economy.”

In total, the thirty-nine signatories to the letter are pushing for changes to existing law based on a set of principles holding that benefits should be:

  1. Independent;
  2. Flexible and pro-rated;
  3. Portable;
  4. Universal; and
  5. Supportive of innovation

In a nutshell, this would effectively mean that there is some form of benefits available to gig economy workers that follows them around and is accessible regardless of who employs them (or, ostensibly, whether they are employed at all).

Looking past the text of the letter, this would likely entail a package of changes to existing law that would allow individual workers to utilize some form of privately created platform for managing the benefits that are normally obtained in a traditional employee-employer relationship. Such benefits would include, for instance, workers’ compensation, unemployment, disability, professional development, and retirement. A chief advantage of a portable benefits platform is that–much as in an underlying justification of the ACA–workers would no longer be tied to particular companies in order to enjoy these traditionally employer-based benefits.

Although platform-based work facilitated by smartphone apps is cutting edge, there is historical precedent for this approach to the provision of benefits. Unions have long relied upon multi-employer plans for providing benefits, and the healthcare industry developed portable health savings accounts as a means to free individuals from employer-bound health insurance plans. And the industry has been seeking fully private solutions to these sorts of problems for some time. For instance, Uber recently partnered with Stride Health to provide health insurance benefits to verified drivers.

There will, of course, be some necessary legislative changes in order to make these portable benefits platforms a reality. First, there probably needs to be a provision in the tax code that allows for workers’ contributions to their own plans to receive the same tax-favored treatment that traditional employer-based benefits receive (or, even better, the political give-away would need to be removed from employer-based benefits). Additionally, companies would need to be able to make optional matching contributions with a similar tax treatment. And lurking in the background of all of this is the specter of a large number of employer obligations. Thus, a necessary quid pro quo to get sharing economy companies to pay into these platforms will be some form of safe harbor shielding them from further obligations.

This is a win for both companies and workers. The truth is that our labor market is very fractured–labor force participation rates are at a low, and those who are working remain chronically underemployed. Coupled with this reality, the technology that enables work is becoming ever more flexible and, as shown by their expressed preferences, individuals are clearly interested in the gig economy as a means of easily obtaining work as needed. A portable benefits platform could provide the sort of support to make flexible work a viable alternative to employee status.

And for many employers–sharing economy and non-sharing economy alike–removing antiquated legal strictures from the employment relationship promises a number of increased efficiencies. Particularly in the context of sharing economy companies, this will include the ability to exert some form of control over platform workers without being sucked into an onerous employer-employee relationship.

For instance, Instacart recently moved a number of its platform workers to part-time employee status. Although the decision was very likely multi-faceted, a big part of it had to be Instacart’s desire to give training and guidance to the shoppers who provided services to the platform’s consumers (for instance, instructing them on the best sequence in which to pick groceries in order to ensure maximum freshness). However, to provide any modest degree of oversight would likely mean that Instacart would move from empowering contractors to directing employees, and thereby run into a thicket of labor laws.

Yet why should this particular employee classification be necessary? Platform-based work is a revolutionary way to defeat the traditional transaction costs that justified large, centrally-organized firms. Companies like Uber and Instacart enable what otherwise would have been fallow resources–spare labor, unused cars, and the like–to be fitted to consumer demand.

Moreover, forcing rigid employee classifications upon sharing economy workers will only reintroduce inefficiency into the worker-company relationship. Instead of allowing workers to sign on just for the amount of work they are willing to do, and allowing consumers just to purchase the amount of work they desire, an employee classification essentially requires companies to purchase labor in blocks of hours. At scale, this necessarily introduces allocation and pricing errors into the system. If a smart safe harbor is included in any legislative push for a portable benefits platform, companies could have much more flexibility in directing platform workers.

I am excited to see this development emerging from the industry and from policy makers, and I look forward to the response of our lawmakers (although, this being election season, I don’t expect too much from that response — at least not yet). There is understably a lot of concern about the welfare of workers in the new economy. But it’s important not to lose the innovative new ways of working, producing, and consuming that the modern digital economy affords by resorting to ill-fitted legal regimes from the past.