During the recent debate over whether to grant the Obama Administration “trade promotion authority” (TPA or fast track) to enter into major international trade agreements (such as the Trans-Pacific Partnership, or TPP), little attention has been directed to the problem of remaining anticompetitive governmental regulatory obstacles to liberalized trade and free markets.  Those remaining obstacles, which merit far more public attention, are highlighted in an article coauthored by Shanker Singham and me on competition policy and international trade distortions.

As our article explains, international trade agreements simply do not reach a variety of anticompetitive welfare-reducing government measures that create de facto trade barriers by favoring domestic interests over foreign competitors.  Moreover, many of these restraints are not in place to discriminate against foreign entities, but rather exist to promote certain favored firms. We dub these restrictions “anticompetitive market distortions” or “ACMDs,” in that they involve government actions that empower certain private interests to obtain or retain artificial competitive advantages over their rivals, be they foreign or domestic.  ACMDs are often a manifestation of cronyism, by which politically-connected enterprises successfully pressure government to shield them from effective competition, to the detriment of overall economic growth and welfare.  As we emphasize in our article, existing international trade rules have been able to reach ACMDs, which include: (1) governmental restraints that distort markets and lessen competition; and (2) anticompetitive private arrangements that are backed by government actions, have substantial effects on trade outside the jurisdiction that imposes the restrictions, and are not readily susceptible to domestic competition law challenge.  Among the most pernicious ACMDs are those that artificially alter the cost-base as between competing firms. Such cost changes will have large and immediate effects on market shares, and therefore on international trade flows.

Likewise, with the growing internationalization of commerce, ACMDs not only diminish domestic consumer welfare – they increasingly may have a harmful effect on foreign enterprises that seek to do business in the country imposing the restraint.  The home nations of the affected foreign enterprises, moreover, may as a practical matter find it not feasible to apply their competition laws extraterritorially to curb the restraint, given issues of jurisdictional reach and comity (particularly if the restraint flies under the colors of domestic law).  Because ACMDs also have not been constrained by international trade liberalization initiatives, they pose a serious challenge to global welfare enhancement by curtailing potential trade and investment opportunities.

Interest group politics and associated rent-seeking by well-organized private actors are endemic to modern economic life, guaranteeing that ACMDs will not easily be dismantled.  What is to be done, then, to curb ACMDs?

As a first step, Shanker Singham and I have proposed the development of a metric to estimate the net welfare costs of ACMDs.  Such a metric could help strengthen the hand of international organizations (including the International Competition Network, the World Bank, and the OECD) – and of reform-minded public officials – in building the case for dismantling these restraints, or (as a last resort) replacing them with less costly means for benefiting favored constituencies.  (Singham, two other coauthors, and I have developed a draft paper that delineates a specific metric, which we hope will be suitable for public release in the near future.)

Furthermore, free market-oriented think tanks can also be helpful by highlighting the harm special interest governmental restraints impose on the economy and on economic freedom.  In that regard, the Heritage Foundation’s excellent work in opposing cronyism deserves special mention.

Working to eliminate ACMDs and thereby promoting economic liberty is an arduous long-term task – one that will only succeed in increments, one battle at a time (the current principled effort to eliminate the Ex-Im Bank, strongly supported by the Heritage Foundation, is one such example).  Nevertheless, it is very much worth the candle.

In my article published today in The Daily Signal, I delve into the difficulties of curbing Internet-related copyright infringement.  The key points are summarized below.

U.S. industries that rely on copyright protection (such as motion pictures, music, television, visual arts, and software) are threatened by the unauthorized Internet downloading of copyrighted writings, designs, artwork, music and films. U.S. policymakers must decide how best to protect the creators of copyrighted works without harming growth and innovation in Internet services or vital protections for free speech.

The Internet allows consumers to alter and immediately transmit perfect digital copies of copyrighted works around the world and has generated services designed to provide these tools. Those tools include, for example, peer-to-peer file-sharing services and mobile apps designed to foster infringement. Many websites that provide pirated content—including, for example, online video-streaming sites—are located outside the United States. Such piracy costs the U.S. economy billions of dollars in losses per year—including reduced income for creators and other participants in copyright-intensive industries.

Curtailing online infringement will require a combination of litigation, technology, enhanced private-sector initiatives, public education, and continuing development of readily accessible and legally available content offerings. As the Internet continues to develop, the best approach to protecting copyright in the online environment is to rely on existing legal tools, enhanced cooperation among Internet stakeholders and business innovations that lessen incentives to infringe.

The CPI Antitrust Chronicle published Geoffrey Manne’s and my recent paperThe Problems and Perils of Bootstrapping Privacy and Data into an Antitrust Framework as part of a symposium on Big Data in the May 2015 issue. All of the papers are worth reading and pondering, but of course ours is the best ;).

In it, we analyze two of the most prominent theories of antitrust harm arising from data collection: privacy as a factor of non-price competition, and price discrimination facilitated by data collection. We also analyze whether data is serving as a barrier to entry and effectively preventing competition. We argue that, in the current marketplace, there are no plausible harms to competition arising from either non-price effects or price discrimination due to data collection online and that there is no data barrier to entry preventing effective competition.

The issues of how to regulate privacy issues and what role competition authorities should in that, are only likely to increase in importance as the Internet marketplace continues to grow and evolve. The European Commission and the FTC have been called on by scholars and advocates to take greater consideration of privacy concerns during merger review and encouraged to even bring monopolization claims based upon data dominance. These calls should be rejected unless these theories can satisfy the rigorous economic review of antitrust law. In our humble opinion, they cannot do so at this time.

Excerpts:

PRIVACY AS AN ELEMENT OF NON-PRICE COMPETITION

The Horizontal Merger Guidelines have long recognized that anticompetitive effects may “be manifested in non-price terms and conditions that adversely affect customers.” But this notion, while largely unobjectionable in the abstract, still presents significant problems in actual application.

First, product quality effects can be extremely difficult to distinguish from price effects. Quality-adjusted price is usually the touchstone by which antitrust regulators assess prices for competitive effects analysis. Disentangling (allegedly) anticompetitive quality effects from simultaneous (neutral or pro-competitive) price effects is an imprecise exercise, at best. For this reason, proving a product-quality case alone is very difficult and requires connecting the degradation of a particular element of product quality to a net gain in advantage for the monopolist.

Second, invariably product quality can be measured on more than one dimension. For instance, product quality could include both function and aesthetics: A watch’s quality lies in both its ability to tell time as well as how nice it looks on your wrist. A non-price effects analysis involving product quality across multiple dimensions becomes exceedingly difficult if there is a tradeoff in consumer welfare between the dimensions. Thus, for example, a smaller watch battery may improve its aesthetics, but also reduce its reliability. Any such analysis would necessarily involve a complex and imprecise comparison of the relative magnitudes of harm/benefit to consumers who prefer one type of quality to another.

PRICE DISCRIMINATION AS A PRIVACY HARM

If non-price effects cannot be relied upon to establish competitive injury (as explained above), then what can be the basis for incorporating privacy concerns into antitrust? One argument is that major data collectors (e.g., Google and Facebook) facilitate price discrimination.

The argument can be summed up as follows: Price discrimination could be a harm to consumers that antitrust law takes into consideration. Because companies like Google and Facebook are able to collect a great deal of data about their users for analysis, businesses could segment groups based on certain characteristics and offer them different deals. The resulting price discrimination could lead to many consumers paying more than they would in the absence of the data collection. Therefore, the data collection by these major online companies facilitates price discrimination that harms consumer welfare.

This argument misses a large part of the story, however. The flip side is that price discrimination could have benefits to those who receive lower prices from the scheme than they would have in the absence of the data collection, a possibility explored by the recent White House Report on Big Data and Differential Pricing.

While privacy advocates have focused on the possible negative effects of price discrimination to one subset of consumers, they generally ignore the positive effects of businesses being able to expand output by serving previously underserved consumers. It is inconsistent with basic economic logic to suggest that a business relying on metrics would want to serve only those who can pay more by charging them a lower price, while charging those who cannot afford it a larger one. If anything, price discrimination would likely promote more egalitarian outcomes by allowing companies to offer lower prices to poorer segments of the population—segments that can be identified by data collection and analysis.

If this group favored by “personalized pricing” is as big as—or bigger than—the group that pays higher prices, then it is difficult to state that the practice leads to a reduction in consumer welfare, even if this can be divorced from total welfare. Again, the question becomes one of magnitudes that has yet to be considered in detail by privacy advocates.

DATA BARRIER TO ENTRY

Either of these theories of harm is predicated on the inability or difficulty of competitors to develop alternative products in the marketplace—the so-called “data barrier to entry.” The argument is that upstarts do not have sufficient data to compete with established players like Google and Facebook, which in turn employ their data to both attract online advertisers as well as foreclose their competitors from this crucial source of revenue. There are at least four reasons to be dubious of such arguments:

  1. Data is useful to all industries, not just online companies;
  2. It’s not the amount of data, but how you use it;
  3. Competition online is one click or swipe away; and
  4. Access to data is not exclusive

CONCLUSION

Privacy advocates have thus far failed to make their case. Even in their most plausible forms, the arguments for incorporating privacy and data concerns into antitrust analysis do not survive legal and economic scrutiny. In the absence of strong arguments suggesting likely anticompetitive effects, and in the face of enormous analytical problems (and thus a high risk of error cost), privacy should remain a matter of consumer protection, not of antitrust.

Profile-Pic-3-professional-200x300Truth On the Market is pleased to announce that Kristian Stout of the International Center for Law and Economics (“ICLE”) has joined our team of writers. Kristian was recently hired by ICLE as Associate Director for Innovation Policy, bringing with him over ten years of experience as a technology professional and entrepreneur. In his role at ICLE, Kristian’s work is focused on the areas of Innovation, Data, Privacy, Telecom, and Intellectual Property.

Kristian has previously been a lecturer in the computer science department of Rutgers University,  is frequently invited to speak on law and technology topics, and has been published in law journals and legal treatises on intellectual property and innovation policy. Kristian is an attorney licensed to practice law in New Jersey and Pennsylvania, is a partner at A&S Technologies, a software services firm, and sits on the board of CodedByKids, a nonprofit organization that provides STEM education to underprivileged children.

Kristian graduated magna cum laude from the Rutgers University School of law, served on the editorial board of the Rutgers Journal of Law and Public Policy, and was awarded a Governor’s Executive Fellowship from the Eagleton Institute of Politics.

He is excited to join the TOTM team, bringing with him a fusion of technological-optimism and a belief in the power of free markets to enhance the welfare of all humanity.

Yesterday my essay on this topic was published as part of a Heritage Foundation Special Report on Saving Internet Freedom.  The essay reviews threats to copyrighted works posed by the Internet and describes public and private essays to deal with Internet-related copyright infringement.  The essay concludes as follows:

“A variety of approaches—many of which are private, voluntary initiatives requiring no new laws or regulations—have been deployed to combat online copyright infringement, and new ones are being developed. While these efforts have not eliminated infringement, which remains a substantial problem, they are having some success.

There is no “silver bullet.” Curtailing online infringement will require a combination of litigation tools, technology, enhanced private-sector initiatives, public education, and continuing development of readily accessible and legally available content offerings. As the Internet continues to develop, the best approach to protecting copyright in the online environment is to rely on existing legal tools, enhanced cooperation among Internet stakeholders, and business innovations that lessen incentives to infringe.”

Yesterday the Heritage Foundation released a series of essays on “Saving Internet Freedom.”  These analytical essays are an excellent reference work for interested members of the public who seek answers to those who claim the Internet requires new and intrusive government regulation.  The introduction to the essays highlights the topics they cover and summarizes their conclusions:

“1.    Federal “network-neutrality” regulations. Rules adopted by the Federal Communications Commission (FCC) in February 2015 bar Internet access providers from prioritizing the content that is sent through their networks. This ban limits the ability of Internet service providers (ISPs) to innovate, which limits economic freedom, to the detriment of the Internet and its users. In addition to activities clearly prohibited, the new rule also gives the FCC vast discretion. As a result, critical decisions about what practices will be allowed on the Net will be left to the subjective judgment of five unelected FCC commissioners.

  1. Global Internet governance. Many nations, such as China and Russia, have made no secret of their desire to limit speech on the Internet. Even some democratic nations have supported limiting freedoms online. With the U.S. government’s decision to end its oversight of the Internet Corporation for Assigned Names and Numbers (ICANN), the private, nonprofit organization that manages name and number assignments on the Internet, these countries see a chance to fill the vacuum, and to use ICANN’s Internet governance role to limit expression on the Web.
  2. Regulatory barriers to online commerce. The Internet is a true disruptive force in commerce, challenging inefficient ways of business. Often, these challenges conflict with anti-consumer laws that protect middlemen and others with a stake in older, costlier ways of doing business. These harmful laws have eroded in many cases, but have not been erased from the statute books.
  3. Internet taxation. Sales and other taxation also create regulatory barriers to online commerce. Some politicians and state tax collectors are pushing Congress to pass legislation that would allow state governments to force retailers located in other states to collect their sales taxes. They say they want to equalize the tax burdens between so-called brick-and-mortar retailers and their online counterparts. But instead of eliminating differences, the proposal would create new disparities and impose new burdens, as sellers struggle to deal with the tax laws of some 10,000 jurisdictions and 46 state tax authorities.
  4. Intellectual property. The freedom to create without fear that one’s creation will be appropriated by others is fundamental. At the same time, overly restrictive laws limiting the use of intellectual property erodes other freedoms, not least freedom of expression. The challenge to lawmakers is to balance these two opposing values, to protect intellectual property without undue limits on its fair use or on third parties.
  5. Cybersecurity. To enjoy the freedoms made possible by the Internet, a certain amount of security is needed to protect it from cyber theft, vandalism, and other criminal threats. This security cannot simply be achieved by government mandates. Government should remove barriers that hinder private-sector efforts to protect online networks.
  6. Digital privacy. Under current law, communications by Americans via electronic networks enjoy less protection than a letter sent by mail. Government does have a legitimate interest in viewing private communications in limited circumstances in order to apprehend criminals or terrorists and to protect security. But to do so, the government should be required to obtain a search warrant for each case, holding it to the constitutional standards that protect other communications, such as mail.”

Supporters of individual freedom and economic liberty will find much to like in these essays.

On April 17, the Federal Trade Commission (FTC) voted three-to-two to enter into a consent agreement In the Matter of Cardinal Health, Inc., requiring Cardinal Health to disgorge funds as part of the settlement in this monopolization case.  As ably explained by dissenting Commissioners Josh Wright and Maureen Ohlhausen, the U.S. Federal Trade Commission (FTC) wrongly required the disgorgement of funds in this case.  The settlement reflects an overzealous application of antitrust enforcement to unilateral conduct that may well be efficient.  It also manifests a highly inappropriate application of antitrust monetary relief that stands to increase private uncertainty, to the detriment of economic welfare.

The basic facts and allegations in this matter, drawn from the FTC’s statement accompanying the settlement, are as follows.  Through separate acquisitions in 2003 and 2004, Cardinal Health became the largest operator of radiopharmacies in the United States and the sole radiopharmacy operator in 25 relevant markets addressed by this settlement.  Radiopharmacies distribute and sell radiopharmaceuticals, which are drugs containing radioactive isotopes, used by hospitals and clinics to diagnose and treat diseases.  Notably, they typically derive at least of 60% of their revenues from the sale of heart perfusion agents (“HPAs”), a type of radiopharmaceutical that healthcare providers use to conduct heart stress tests.  A practical consequence is that radiopharmacies cannot operate a financially viable and competitive business without access to an HPA.  Between 2003 and 2008, Cardinal allegedly employed various tactics to induce the only two manufacturers of HPAs in the United States, BMS and GEAmersham, to withhold HPA distribution rights from would-be radiopharmacy market entrants in violation of Section 2 of the Sherman Act.  Through these tactics Cardinal allegedly maintained exclusive dealing rights, denied its customers the benefits of competition, and profited from the monopoly prices it charged for all radiopharmaceuticals, including HPAs, in the relevant markets.  Importantly, according to the FTC, there was no efficiency benefit or legitimate business justification for Cardinal simultaneously maintaining exclusive distribution rights to the only two HPAs then available in the relevant markets.

This settlement raises two types of problems.

First, this was a single firm conduct exclusive dealing case involving (at best) questionable anticompetitive effectsAs Josh Wright (citing the economics literature) pointed out in his dissent, “there are numerous plausible efficiency justifications for such [exclusive dealing] restraints.”  (Moreover, as Josh Wright and I stressed in an article on tying and exclusive dealing, “[e]xisting empirical evidence of the impact of exclusive dealing is scarce but generally favors the view that exclusive dealing is output‐enhancing”, suggesting that a (rebuttable) presumption of legality would be appropriate in this area.)  Indeed, in this case, Commissioner Wright explained that “[t]he tactics the Commission challenges could have been output-enhancing” in various markets.  Furthermore, Commissioner Wright emphasized that the data analysis showing that Cardinal charged higher prices in monopoly markets was “very fragile.  The data show that the impact of a second competitor on Cardinal’s prices is small, borderline statistically significant, and not robust to minor changes in specification.”  Commissioner Ohlhausen’s dissent reinforced Commissioner Wright’s critique of the majority’s exclusive dealing theory.  As she put it:

“[E]even if the Commission could establish that Cardinal achieved some type of de facto exclusivity with both Bristol-Myers Squibb and General Electric Co. during the relevant time period (and that is less than clear), it is entirely unclear that such exclusivity – rather than, for example, insufficient demand for more than one radiopharmacy – caused the lack of entry within each of the relevant markets. That alternative explanation seems especially likely in the six relevant markets in which ‘Cardinal remains the sole or dominant radiopharmacy,’ notwithstanding the fact that whatever exclusivity Cardinal may have achieved admittedly expired in early 2008.  The complaint provides no basis for the assertion that Cardinal’s conduct during the 2003-2008 period has caused the lack of entry in those six markets during the past seven years.”

Furthermore, Commissioner Ohlhausen underscored Commissioner Wright’s critique of the empirical evidence in this case:  “[T]he evidence of anticompetitive effects in the relevant markets at issue is significantly lacking.  It is largely based on non-market-specific documentary evidence. The market-specific empirical evidence we do have implies very small (i.e. low single-digit) and often statistically insignificant price increases or no price increases at all.”

Second, the FTC’s requirement that Cardinal Health disgorge $26.8 million into a fund for allegedly injured consumers is unmeritorious and inappropriately chills potentially procompetitive behavior.  Commissioner Ohlhausen focused on how this case ran afoul of the FTC’s 2003 Policy Statement on Monetary Equitable Remedies in Competition Cases (Policy Statement) (withdrawn by the FTC in 2012, over Commissioner Ohlhausen’s dissent), which reserves disgorgement for cases in which the underlying violation is clear and there is a reasonable basis for calculating the amount of a remedial payment.  As Ohlhausen explained, this case violates those principles because (1) it does not involve a clear violation of the antitrust laws (see above) and, given the lack of anticompetitive effects evidence (see above), (2) there is no reasonable basis for calculating the disgorgement amount (indeed, there is “the real possibility of no ill-gotten gains for Cardinal”).  Furthermore:

“The lack of guidance from the Commission on the use of its disgorgement authority [following withdrawal of the Policy Statement] makes any such use inherently unpredictable and thus unfair. . . .  The Commission therefore ought to   reinstate the Policy Statement – either in its original form or in some modified form that the current Commissioners can agree on – or provide some additional guidance on when it plans to seek the extraordinary remedy of disgorgement in antitrust cases.”

In his critique of disgorgement, Commissioner Wright deployed law and economics analysis (and, in particular, optimal deterrence theory).  He explained that regulators should be primarily concerned with over-deterrence in single-firm conduct cases such as this one, which raise the possibility of private treble damage actions.  Wright stressed:

“I would . . . pursue disgorgement only against naked price fixing agreements among competitors or, in the case of single-firm conduct, only if the monopolist’s conduct violates the Sherman Act and has no plausible efficiency justification. . . .  This case does not belong in that category. Declining to pursue disgorgement in most cases involving vertical restraints has the virtue of taking the remedy off the table – and thus reducing the risk of over-deterrence – in the cases that present the most difficulty in distinguishing between anticompetitive conduct that harms consumers and procompetitive conduct that benefits them, such as the present case.”

Commissioner Wright also shared Commissioner Ohlhausen’s concern about the lack of meaningful FTC guidance regarding when and whether it will seek disgorgement, and agreed with her that the FTC should reinstate the Policy Statement or provide new specific guidance in this area.  (See my 2012 ABA Antitrust Source article for a more fulsome critique of the antitrust error costs, chilling effects, and harmful international ramifications associated with the withdrawal of the Policy Statement.)

In sum, one may hope that in the future the FTC:  (1) will be more attentive to the potential efficiencies of exclusive dealing; (2) will proceed far more cautiously before proposing an enforcement action in the exclusive dealing area; (3) will avoid applying disgorgement in exclusive dealing cases; and (4) will promulgate a new disgorgement policy statement that reserves disgorgement for unequivocally illegal antitrust offenses in which economic harm can readily be calculated with a high degree of certainty.

The FCC’s proposed “Open Internet Order,” which would impose heavy-handed “common carrier” regulation of Internet service providers (the Order is being appealed in federal court and there are good arguments for striking it down) in order to promote “net neutrality,” is fundamentally misconceived.  If upheld, it will slow innovation, impose substantial costs, and harm consumers (see Heritage Foundation commentaries on FCC Internet regulation here, here, here, and here).  What’s more, it is not needed to protect consumers and competition from potential future abuse by Internet firms.  As I explain in a Heritage Foundation Legal Memorandum published yesterday, should the Open Internet Order be struck down, the U.S. Federal Trade Commission (FTC) has ample authority under Section 5 of the Federal Trade Commission Act (FTC Act) to challenge any harmful conduct by entities involved in Internet broadband services markets when such conduct undermines competition or harms consumers.

Section 5 of the FTC Act authorizes the FTC to prevent persons, partnerships, or corporations from engaging in “unfair methods of competition” or “unfair or deceptive acts or practices” in or affecting commerce.  This gives it ample authority to challenge Internet abuses raising antitrust (unfair methods) and consumer protection (unfair acts or practices) issues.

On the antitrust side, in evaluating individual business restraints under a “rule of reason,” the FTC relies on objective fact-specific analyses of the actual economic and consumer protection implications of a particular restraint.  Thus, FTC evaluations of broadband industry restrictions are likely to be more objective and predictable than highly subjective “public interest” assessments by the FCC, leading to reduced error and lower planning costs for purveyors of broadband and related services.  Appropriate antitrust evaluation should accord broad leeway to most broadband contracts.  As FTC Commissioner Josh Wright put it in testifying before Congress, “fundamental observation and market experience [demonstrate] that the business practices at the heart of the net neutrality debate are generally procompetitive.”  This suggests application of a rule of reason that will fully weigh efficiencies but not shy away from challenging broadband-related contractual arrangements that undermine the competitive process.

On the consumer protection side, the FTC can attack statements made by businesses that mislead and thereby impose harm on consumers (including business purchasers) who are acting reasonably.  It can also challenge practices that, though not literally false or deceptive, impose substantial harm on consumers (including business purchasers) that they cannot reasonably avoid, assuming the harm is greater than any countervailing benefits.  These are carefully designed and cabined sources of authority that require the FTC to determine the presence of actual consumer harm before acting.  Application of the FTC’s unfairness and deception powers therefore lacks the uncertainty associated with the FCC’s uncabined and vague “public interest” standard of evaluation.  As in the case of antitrust, the existence of greater clarity and a well-defined analytic methodology suggests that reliance on FTC rather than FCC enforcement in this area is preferable from a policy standpoint.

Finally, arguments for relying on FTC Internet policing are based on experience as well – the FTC is no Internet policy novice.  It closely monitors Internet activity and, over the years, it has developed substantial expertise in Internet topics through research, hearings, and enforcement actions.

Most recently, for example, the FTC sued AT&T in federal court for allegedly slowing wireless customers’ Internet speeds, although the customers had subscribed to “unlimited” data usage plans.  The FTC asserted that in offering renewals to unlimited-plan customers, AT&T did not adequately inform them of a new policy to “throttle” (drastically reduce the speed of) customer data service once a certain monthly data usage cap was met. The direct harm of throttling was in addition to the high early termination fees that dissatisfied customers would face for early termination of their services.  The FTC characterized this behavior as both “unfair” and “deceptive.”  Moreover, the commission claimed that throttling-related speed reductions and data restrictions were not determined by real-time network congestion and thus did not even qualify as reasonable network management activity.  This case illustrates that the FTC is perfectly capable of challenging potential “network neutrality” violations that harm consumer welfare (since “throttled” customers are provided service that is inferior to the service afforded customers on “tiered” service plans) and thus FCC involvement is unwarranted.

In sum, if a court strikes down the latest FCC effort to regulate the Internet, the FTC has ample authority to address competition and consumer protection problems in the area of broadband, including questions related to net neutrality.  The FTC’s highly structured, analytic, fact-based approach to these issues is superior to FCC net neutrality regulation based on vague and unfocused notions of the public interest.  If a court does not act, Congress might wish to consider legislation to prohibit FCC Internet regulation and leave oversight of potential competitive and consumer abuses to the FTC.

Understanding the nature and extent of the growth of the federal regulatory state is vital to sound policymaking.  Taking that to heart, over the last decade the Heritage Foundation has issued a series of reports measuring trends in federal regulatory activity.  On May 11 of this year, Heritage released its most recent regulatory study, “Red Tape Rising: Six Years of Escalating Regulation Under Obama” (RTP).  RTP, as the title suggests, paints a grim picture of rapidly escalating federal regulation unmoored from sound cost-benefit analysis – regulatory policy that is detrimental to American economic health.  Fortunately, RTP also suggests potential prescriptions to tame the federal regulatory virus.  You should read the entire study, but a few key excerpts from RTP, highlighted below, merit particular attention:

“The number and cost of government regulations continued to climb in 2014, intensifying Washington’s control over the economy and Americans’ lives. The addition of 27 new major rules last year pushed the tally for the Obama Administration’s first six years to 184, with scores of other rules in the pipeline. The cost of just these 184 rules is estimated by regulators to be nearly $80 billion annually, although the actual cost of this massive expansion of the administrative state is obscured by the large number of rules for which costs have not been fully quantified. Absent substantial reform, economic growth and individual freedom will continue to suffer.”

“President Barack Obama has repeatedly demonstrated his willingness to act by regulatory fiat instead of executing laws as passed by Congress. But regulatory overreach by the executive branch is only part of the problem. A great deal of the excessive regulation in the past six years is the result of Congress granting broad powers to agencies through passage of vast and vaguely worded legislation. The misnamed Affordable Care Act and the Dodd–Frank financial-regulation law top the list.”

“Many more regulations are on the way, with another 126 economically significant rules on the Administration’s agenda, such as directives to farmers for growing and harvesting fruits and vegetables; strict limits on credit access for service members; and, yet another redesign of light bulbs.”

“In many respects, the need for reform of the regulatory system has never been greater. The White House, Congress, and federal agencies routinely ignore regulatory costs, exaggerate benefits, and breach legislative and constitutional boundaries. They also increasingly dictate lifestyle choices rather than focusing on public health and safety.”

“Immediate reforms should include requiring legislation to undergo an analysis of regulatory impacts before a floor vote in Congress, and requiring every major regulation to obtain congressional approval before taking effect. Sunset deadlines should be set in law for all major rules, and independent agencies should be subject—as are executive branch agencies—to the White House regulatory review process.”

In light of its findings, RTP makes eight specific recommendations:

  1. Require congressional approval of new major regulations issued by agencies.
  2. Require regulatory impact assessments of proposed legislation.
  3. Establish a sunset date for regulations.
  4. Subject “independent” agencies to executive branch regulatory review.
  5. Codify stricter information-quality standards for rulemaking.
  6. Reform “sue and settle” practices (under which regulators work in concert with advocacy groups to produce settlements to lawsuits that result in greater regulation).
  7. Increase professional staff levels within the Office of Information and Regulatory Affairs (OIRA) (the small White House agency charged with reviewing proposed regulations).
  8. Codify the requirement now imposed by Executive Order 12866 mandating agencies to assess the costs and benefits of proposed rules and to consider alternatives.

These excellent recommendations merit serious consideration by federal policymakers.

In a recent post, I presented an overview of the ICN’s recent Annual Conference in Sydney, Australia.  Today I briefly summarize and critique a key product approved by the Conference, a new chapter 6 of the ICN’s Workbook on Unilateral Conduct, devoted to tying and bundling.  (My analysis is based on a hard copy final version of the chapter, which shortly will be posted online at internationalcompetitionnetwork.org.)

Chapter 6 is the latest installment in the ICN’s continuing effort to present an overview of how different types of single firm conduct might be assessed by competition authorities, taking into account potential efficiencies as well as potential theories of competitive harm.  In particular, chapter 6 defines tying and bundling; focuses primarily on theories of exclusionary anticompetitive effects; lays out potential evaluative criteria (for example, when tying is efficient, it is likely to be employed by a dominant firm’s significant competitors); and discusses the characteristics of tying/bundling.  It then turns to theories of anticompetitive leveraging and foreclosure and price discrimination (avoiding taking a position as to whether price discrimination is a basis for condemning tying), and discusses how possible and actual anticompetitive effects might be observed.  It then turns to justifications and defenses for tying and bundling, including reduced manufacturing and distribution costs; reduced customer transaction and search costs; improved product performance or convenience; and quality and safety assurance.  The chapter then proclaims that “[t]he burden of demonstrating the likelihood and magnitude of actual or potential efficiencies generally is placed on an accused infringer”; states that “agencies must examine whether those claimed efficiencies actually arise from the tying arrangement, and whether there are ways to achieve the claimed efficiencies through less restrictive means”; and implicitly lends support to rule of reason balancing, noting that, “[i]n many jurisdictions if the party imposing the tie can establish that its claimed efficiencies would outweigh the anticompetitive effects then the conduct would not be deemed an infringement.”  The chapter ends with a normative suggestion:  “When the harm is likely materially greater than the efficiencies, the practice should be condemned. When the harm and the efficiencies both seem likely to be at the same rough magnitude, the general principle of non-interference in the market place may suggest that the practice not be condemned.”

Overall, chapter 6 presents a generally helpful discussion of tying and bundling, avoiding the misguided condemnations of these frequently efficient practices that characterized antitrust enforcement prior to the incorporation of modern economic analysis.  This good chapter, however, could be enhanced by drawing upon sources that explore the actual effects of tying, such as a literature review that explains there is very little empirical support for the proposition that tying or bundling are actually anticompetitive.  Chapter 6 could also benefit by setting forth a broader set of efficiency explanations for these practices, and by addressing the fact that using tying or bundling to gain market share at rivals’ expense need not imply consumer harm (the literature review noted above also addresses these points).  If chapter 6 is revised, it should discuss these issues, and also include footnote and bibliographic evidence to the extensive law and economics literature on bundling and tying.

More generally, chapter 6, and the entire Workbook, could benefit by evincing greater recognition of the limits of antitrust enforcement, in particular, the inevitability of error costs in enforcement (especially since welfare-enhancing unilateral practices may well be misunderstood by enforcers), and the general desirability of avoiding false positives that discourage aggressive but efficiency-enhancing unilateral conduct.  In this regard, chapter 6 could be improved by taking a page from the discussion of error costs in the U.S. Justice Department’s 2008 Report on Single Firm Conduct (withdrawn in 2009 by the Obama Administration).  The 2008 Report also stated, with regard to tying, “that when actual or probable harm to competition is shown, tying should be illegal only when (1) it has no procompetitive benefits, or (2) if there are procompetitive benefits, the tie produces harms substantially disproportionate to those benefits.”  As the 2008 Report further explained, the disproportionality test would make a good “default” standard for those forms of unilateral conduct that lack specific tests of illegality.  Moving toward a default disproportionality standard, however, is a long-term project, which requires rethinking of unilateral conduct enforcement policy in the United States and most other jurisdictions.