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I have a new article on the Comcast/Time Warner Cable merger in the latest edition of the CPI Antitrust Chronicle, which includes several other articles on the merger, as well.

In a recent essay, Allen Grunes & Maurice Stucke (who also have an essay in the CPI issue) pose a thought experiment: If Comcast can acquire TWC, what’s to stop it acquiring all cable companies? The authors’ assertion is that the arguments being put forward to support the merger contain no “limiting principle,” and that the same arguments, if accepted here, would unjustifiably permit further consolidation. But there is a limiting principle: competitive harm. Size doesn’t matter, as courts and economists have repeatedly pointed out.

The article explains why the merger doesn’t give rise to any plausible theory of anticompetitive harm under modern antitrust analysis. Instead, arguments against the merger amount to little more than the usual “big-is-bad” naysaying.

In summary, I make the following points:

Horizontal Concerns

The absence of any reduction in competition should end the inquiry into any potentially anticompetitive effects in consumer markets resulting from the horizontal aspects of the transaction.

  • It’s well understood at this point that Comcast and TWC don’t compete directly for subscribers in any relevant market; in terms of concentration and horizontal effects, the transaction will neither reduce competition nor restrict consumer choice.
  • Even if Comcast were a true monopolist provider of broadband service in certain geographic markets, the DOJ would have to show that the merger would be substantially likely to lessen competition—a difficult showing to make where Comcast and TWC are neither actual nor potential competitors in any of these markets.
  • Whatever market power Comcast may currently possess, the proposed merger simply does nothing to increase it, nor to facilitate its exercise.

Comcast doesn’t currently have substantial bargaining power in its dealings with content providers, and the merger won’t change that. The claim that the combined entity will gain bargaining leverage against content providers from the merger, resulting in lower content prices to programmers, fails for similar reasons.

  • After the transaction, Comcast will serve fewer than 30 percent of total MVPD subscribers in the United States. This share is insufficient to give Comcast market power over sellers of video programming.
  • The FCC has tried to impose a 30 percent cable ownership cap, and twice it has been rejected by the courts. The D.C. Circuit concluded more than a decade ago—in far less competitive conditions than exist today—that the evidence didn’t justify a horizontal ownership limit lower than 60% on the basis of buyer power.
  • The recent exponential growth in OVDs like Google, Netflix, Amazon and Apple gives content providers even more ways to distribute their programming.
  • In fact, greater concentration among cable operators has coincided with an enormous increase in output and quality of video programming
  • Moreover, because the merger doesn’t alter the competitive make-up of any relevant consumer market, Comcast will have no greater ability to threaten to withhold carriage of content in order to extract better terms.
  • Finally, programmers with valuable content have significant bargaining power and have been able to extract the prices to prove it. None of that will change post-merger.

Vertical Concerns

The merger won’t give Comcast the ability (or the incentive) to foreclose competition from other content providers for its NBCUniversal content.

  • Because the merger would represent only 30 percent of the national market (for MVPD services), 70 percent of the market is still available for content distribution.
  • But even this significantly overstates the extent of possible foreclosure. OVD providers increasingly vie for the same content as cable (and satellite).
  • In the past when regulators have considered foreclosure effects for localized content (regional sports networks, primarily)—for example, in the 2005 Adelphia/Comcast/TWC deal, under far less competitive conditions—the FTC found no substantial threat of anticompetitive harm. And while the FCC did identify a potential risk of harm in its review of the Adelphia deal, its solution was to impose arbitration requirements for access to this programming—which are already part of the NBCUniversal deal conditions and which will be extended to the new territory and new programming from TWC.

The argument that the merger will increase Comcast’s incentive and ability to impair access to its users by online video competitors or other edge providers is similarly without merit.

  • Fundamentally, Comcast benefits from providing its users access to edge providers, and it would harm itself if it were to constrain access to these providers.
  • Foreclosure effects would be limited, even if they did arise. On a national level, the combined firm would have only about 40 percent of broadband customers, at most (and considerably less if wireless broadband is included in the market).
  • This leaves at least 60 percent—and quite possibly far more—of customers available to purchase content and support edge providers reaching minimum viable scale, even if Comcast were to attempt to foreclose access.

Some have also argued that because Comcast has a monopoly on access to its customers, transit providers are beholden to it, giving it the ability to degrade or simply block content from companies like Netflix. But these arguments misunderstand the market.

  • The transit market through which edge providers bring their content into the Comcast network is highly competitive. Edge providers can access Comcast’s network through multiple channels, undermining Comcast’s ability to deny access or degrade service to such providers.
  • The transit market is also almost entirely populated by big players engaged in repeat interactions and, despite a large number of transactions over the years, marked by a trivial number of disputes.
  • The recent Comcast/Netflix agreement demonstrates that the sophisticated commercial entities in this market are capable of resolving conflicts—conflicts that appear to affect only the distribution of profits among contracting parties but not raise anticompetitive concerns.
  • If Netflix does end up paying more to access Comcast’s network over time, it won’t be because of market power or this merger. Rather, it’s an indication of the evolving market and the increasing popularity of OTT providers.
  • The Comcast/Netflix deal has procompetitive justifications, as well. Charging Netflix allows Comcast to better distinguish between the high-usage Netflix customers (two percent of Netflix users account for 20 percent of all broadband traffic) and everyone else. This should lower cable bills on average, improve incentives for users, and lead to more efficient infrastructure investments by both Comcast and Netflix.

Critics have also alleged that the vertically integrated Comcast may withhold its own content from competing MVPDs or OVDs, or deny carriage to unaffiliated programming. In theory, by denying competitors or potential competitors access to popular programming, a vertically integrated MVPD might gain a competitive advantage over its rivals. Similarly, an MVPD that owns cable channels may refuse to carry at least some unaffiliated content to benefit its own channels. But these claims also fall flat.

  • Once again, these issue are not transaction specific.
  • But, regardless, Comcast will not be able to engage in successful foreclosure strategies following the transaction.
  • The merger has no effect on Comcast’s share of national programming. And while it will have a larger share of national distribution post-merger, a 30 percent market share is nonetheless insufficient to confer buyer power in today’s highly competitive MVPD market.
  • Moreover, the programming market is highly dynamic and competitive, and Comcast’s affiliated programming networks face significant competition.
  • Comcast already has no ownership interest in the overwhelming majority of content it distributes. This won’t measurably change post-transaction.

Procompetitive Justifications

While the proposed transaction doesn’t give rise to plausible anticompetitive harms, it should bring well-understood pro-competitive benefits. Most notably:

  • The deal will bring significant scale efficiencies in a marketplace that requires large, fixed-cost investments in network infrastructure and technology.
  • And bringing a more vertical structure to TWC will likely be beneficial, as well. Vertical integration can increase efficiency, and the elimination of double marginalization often leads to lower prices for consumers.

Let’s be clear about the baseline here. Remember all those years ago when Netflix was a mail-order DVD company? Before either Netflix or Comcast even considered using the internet to distribute Netflix’s video content, Comcast invested in the technology and infrastructure that ultimately enabled the Netflix of today. It did so at enormous cost (tens of billions of dollars over the last 20 years) and risk. Absent broadband we’d still be waiting for our Netflix DVDs to be delivered by snail mail, and Netflix would still be spending three-quarters of a billion dollars a year on shipping.

The ability to realize returns—including returns from scale—is essential to incentivizing continued network and other quality investments. The cable industry today operates with a small positive annual return on invested capital (“ROIC”) but it has had cumulative negative ROIC over the entirety of the last decade. In fact, on invested capital of $127 billion between 2000 and 2009, cable has seen economic profits of negative $62 billion and a weighted average ROIC of negative 5 percent. Meanwhile Comcast’s stock has significantly underperformed the S&P 500 over the same period and only outperformed the S&P over the last two years.

Comcast is far from being a rapacious and endlessly profitable monopolist. This merger should help it (and TWC) improve its cable and broadband services, not harm consumers.

No matter how many times Al Franken and Susan Crawford say it, neither the broadband market nor the MVPD market is imperiled by vertical or horizontal integration. The proposed merger won’t create cognizable antitrust harms. Comcast may get bigger, but that simply isn’t enough to thwart the merger.

Trial begins today in the Southern District of New York in United States v. Apple (the Apple e-books case), which I discussed previously here. Along with co-author Will Rinehart, I also contributed an  essay to a discussion of the case in Concurrences (alongside contributions from Jon Jacobson and Mark Powell, among others).

Much of my writing on the case has essentially addressed it as a rule of reason case, assessing the economic merits of Apple’s contract terms. And as I mention in this Reuters article from yesterday on the case, one of the key issues in this analysis (and one of the government’s key targets in the case) is the use of MFN clauses.

But as Josh pointed out in a blog post last year,

my hunch is that if the case is litigated its legacy will be as an “agreement” case rather than what it contributes to rule of reason analysis.  In other words, if Apple gets to the rule of reason, the DOJ (like most plaintiffs in rule of reason cases) are likely to lose — especially in light of at least preliminary evidence of dramatic increases in output.  The critical question — I suspect — will be about proof of an actual naked price fixing agreement among publishers and Apple, and as a legal matter, what evidence is sufficient to establish that agreement for the purposes of Section 1 of the Sherman Act.

He’s likely correct, of course, that a central question at trial will be whether or not this is a per se or rule of reason case, and that trial will focus in significant part on the sufficiency of the evidence of agreement. But because this determination will turn considerably on the purpose and function of the MFN and price cap terms in Apple’s agreements with the publishers, I don’t think there should (or will) be much difference. Nor do I think the government should (or will) win.

Before the court can apply the per se rule, it must satisfy itself that the conduct at issue “would always or almost always tend to restrict competition and decrease output.” But it is not true as a matter of economics — and certainly not true as a matter of law — that MFNs meet this standard.

After State Oil v. Kahn there can be no question about the rule of reason (if not per se legal) status of price caps. And as the Court noted in Leegin:

Resort to per se rules is confined to restraints, like those mentioned, “that would always or almost always tend to restrict competition and decrease output.” To justify a per se prohibition a restraint must have “manifestly anticompetitive” effects, and “lack any redeeming virtue.

As a consequence, the per se rule is appropriate only after courts have had considerable experience with the type of restraint at issue, and only if courts can predict with confidence that it would be invalidated in all or almost all instances under the rule of reason. It should come as no surprise, then, that “we have expressed reluctance to adopt per se rules with regard to restraints imposed in the context of business relationships where the economic impact of certain practices is not immediately obvious.” And, as we have stated, a “departure from the rule-of-reason standard must be based upon demonstrable economic effect rather than . . . upon formalistic line drawing.”

After Leegin, all vertical non-price restraints, including MFNs, are assessed under the rule of reason.  Courts neither have “considerable experience” with MFNs, nor can they remotely “predict with confidence that they would be invalidated in all or almost all instances under the rule of reason.” As a recent article in Antitrust points out,

The DOJ and FTC have brought approximately ten cases over the last two decades challenging MFNs. Most of these cases involved the health care industry and all were resolved by consent judgments.

Even if the court does take a harder look at whether a per se rule should govern, however, as a practical matter there is not likely to be much difference between a “does this merit per se treatment” analysis and analysis of the facts under the rule of reason. As the Court pointed out in California Dental Association,

The truth is that our categories of analysis of anticompetitive effect are less fixed than terms like “per se,” “quick look,” and “rule of reason” tend to make them appear. We have recognized, for example, that “there is often no bright line separating per se from Rule of Reason analysis,” since “considerable inquiry into market conditions” may be required before the application of any so-called “per se” condemnation is justified. “[W]hether the ultimate finding is the product of a presumption or actual market analysis, the essential inquiry remains the same–whether or not the challenged restraint enhances competition.”

And as my former classmate Tom Nachbar points out in a recent article,

it’s hard to identity much relative simplicity in the per se rule. Indeed, the moniker “per se” has become somewhat misleading, as cases determining whether to apply the per se or rule of reason become as long as ones actually applying the rule of reason itself.

Of course that doesn’t end the analysis, and the government’s filings do all they can to sidestep the direct antitrust treatment of MFNs and instead assert that they (and other evidence alleged) permit the court to infer Apple’s participation as the coordinator of a horizontal price-fixing conspiracy among the publishers.

But as Apple argues in its filings,

The[ relevant] cases mandate an inquiry into the possibility that the challenged contract terms and negotiation approach were in Apple’s independent economic interests. The evidence is overwhelming—not just possible—that Apple acted for its own valid business reasons and not to “raise consumer prices market-wide.”…Plaintiffs ask this Court to infer Apple’s participation in a conspiracy from (1) its MFN and price cap terms and (2) negotiations with publishers.

* * *

What is obvious, however, is that Apple has not fixed prices with its competitors. What is remarkable is that the government seeks to impose grave legal consequences on an inherently pro-competitive act—entry—accomplished via agency, an MFN, and price caps, none of which is per se unlawful.

The government’s strenuous objection to Apple’s interpretation of the controlling Supreme Court authority, Monsanto v. Spray-Rite, notwithstanding, it’s difficult to see the MFN clauses as evidence of Apple’s participation in the publishers’ alleged conspiracy.

An important point supporting Apple’s argument here is that, unlike the “hubs” in the other “hub and spoke” conspiracies on which the DOJ bases its case, Apple has no significant leverage over the alleged co-conspirators, and thus no power to coordinate — let alone enforce — a price-fixing scheme. As Apple argues in its Opposition brief,

The only “power” Apple could wield over the publishers was the attractiveness of a business opportunity—hardly the “make or break” scenarios found in Interstate Circuit and [Toys-R-Us]. Far from capitulating to Apple’s requested core business terms, the publishers fought Apple tooth and nail and negotiated intensely to the very end, and the largest, Random House, declined.

And as Will and I note in our Concurrences article,

MFNs are essentially an important way of…offering some protection against publishers striking a deal with a competitor that leaves Apple forced to price its ebooks out of the market.

There is nothing, that we know of, in the MFNs or elsewhere in the agreements that requires the publishers to impose higher resale prices elsewhere, or prevents the publishers from selling through Apple at a lower price, if necessary. Most important, for Apple’s negotiated prices to dominate in the market it would have to enjoy market power – a condition, currently at least, that is exceedingly unlikely given its 10% share of the ebook market.

The point is that, even if everything the government alleges about the publishers’ price fixing scheme were true, it’s extremely difficult to see Apple as a co-conspirator in such a scheme. The Supreme Court’s holding in Monsanto stands for nothing if not the principle that courts may not infer a vertical party’s participation in a horizontal price-fixing scheme from the existence of otherwise-legal and -defensible interactions between the vertically related parties. Because MFNs have valid purposes outside the realm of price-fixing, they may not be converted into illegal conduct on Apple’s part simply because they might also “sharpen [a publisher's] incentives” to try to raise prices elsewhere.

Remember, we are in a world where the requisite anticompetitive conduct can’t be simply the vertical restraint itself. Rather, we’re evaluating whether the vertical restraint was part of a broader anticompetitive scheme among the publishers. For the MFN clauses to be part of that alleged scheme they must have an identifiable place in the scheme.

First of all, it is unremarkable that Apple might offer terms to any individual publisher (or to all publishers independently) that might be more favorable to the publisher than terms it is getting elsewhere; that’s how a new entrant in Apple’s position attracts suppliers. It is likewise unremarkable that Apple would seek to impose terms (like the MFN) that would preserve its ability to offer a publisher’s books for the same price they are offered elsewhere (which is necessary because the agency agreements negotiated by Apple otherwise remove pricing authority from Apple and confer it on the publishers themselves). And finally it is unremarkable that each publisher would try to negotiate similarly favorable terms with other distributors (or, more accurately, continue to try: bargaining over distribution terms with other distributors hardly started only after the agreements were signed with Apple). What would be notable is if the publishers engaged in concerted action to negotiate these more-favorable terms with other publishers, and what would be problematic for Apple is if its agreement with each publisher facilitated that collusion.

But I don’t see any persuasive evidence that the terms of Apple’s deals with each publisher did any such thing. For MFNs to perform the function alleged by the DOJ it seems to me that the MFNs would have to contribute to the alleged agreement between the publishers, just as the actions of the vertical co-conspirators in Interstate Circuit and Toys-R-Us were alleged to facilitate coordination. But neither the agency agreement itself nor the MFN and price cap terms in the contracts in any way affected the publishers’ incentive to compete with each other. Nor, as noted above, did they require any individual publisher to cause its books to be sold at higher prices through other distributors.

On this latter point, the DOJ alleges that the MFNs “sharpen[ed publishers'] incentives” to raise prices:

If a retailer were allowed to remain on wholesale terms, and that retailer continued to price new release e-books at $9.99, the Publisher Defendant would be forced to lower the iBookstore price to match the $9.99 price

Not only does this say nothing about the incentives of the publishers to compete with each other on price (except that it may have increased that incentive by undermining the prevailing $9.99-for-all-books standard), it seems far-fetched to suggest that fear of having to lower prices for books sold in Apple’s relatively trivial corner of the market would have an apreciable effect on a publisher’s incentives to raise prices elsewhere. For what it’s worth, it also seems far-fetched to suggest that Apple’s motivation was to raise prices given that e-book sales generate only about .0005% of Apple’s total revenues.

Beyond this, the DOJ essentially argues that Apple coordinated agreement among the publishers to accept the terms being offered by Apple, with the intent and effect that this would lead to imposition by the publishers of similar terms (and higher prices) on other distributors. Perhaps, but it’s a stretch. And if it is true, it isn’t because of the MFN clauses. Moreover, it isn’t clear to me (maybe I’m missing some obvious controlling case law?) that agreement over the type of contract used amounts to an illegal horizontal agreement; arguably in this case, at least, it is closer to an ancillary restraint or  justified agreement (as in BMI, e.g.) than, say, a group boycott or bid rigging. In any case, if the DOJ has a case at all turning on this scenario, I think it will have to be based entirely on the alleged evidence of direct coordination (i.e., communications between Apple and publishers during dinners and phone calls) rather than the operation of the contract terms themselves.

In any case, it will be interesting to see how the trial unfolds.

Did Apple conspire with e-book publishers to raise e-book prices?  That’s what DOJ argues in a lawsuit filed yesterday. But does that violate the antitrust laws?  Not necessarily—and even if it does, perhaps it shouldn’t.

Antitrust’s sole goal is maximizing consumer welfare.  While that generally means antitrust regulators should focus on lower prices, the situation is more complicated when we’re talking about markets for new products, where technologies for distribution and consumption are evolving rapidly along with business models.  In short, the so-called Agency pricing model Apple and publishers adopted may mean (and may not mean) higher e-book prices in the short run, but it also means more variability in pricing, and it might well have facilitated Apple’s entry into the market, increasing e-book retail competition and promoting innovation among e-book readers, while increasing funding for e-book content creators.

The procompetitive story goes something like the following.  (As always with antitrust, the question isn’t so much which model is better, but that no one really knows what the right model is—least of all antitrust regulators—and that, the more unclear the consumer welfare effects of a practice are, as in rapidly evolving markets, the more we should err on the side of restraint).

Apple versus Amazon

Apple–decidedly a hardware company–entered the e-book market as a device maker eager to attract consumers to its expensive iPad tablets by offering appealing media content.  In this it is the very opposite of Amazon, a general retailer that naturally moved into retailing digital content, and began selling hardware (Kindle readers) only as a way of getting consumers to embrace e-books.

The Kindle is essentially a one-trick pony (the latest Kindle notwithstanding), and its focus is on e-books.  By contrast, Apple’s platform (the iPad and, to a lesser degree, the iPhone) is a multi-use platform, offering Internet browsing, word processing, music, apps, and other products, of which books probably accounted–and still account–for a relatively small percentage of revenue.  Importantly, unlike Amazon, Apple has many options for promoting adoption of its platform—not least, the “sex appeal” of its famously glam products.  Without denigrating Amazon’s offerings, Amazon, by contrast, competes largely on the basis of its content, and its devices sell only as long as the content is attractive and attractively priced.

In essence, Apple’s iPad is a platform; Amazon’s Kindle is a book merchant wrapped up in a cool device.

What this means is that Apple, unlike Amazon, is far less interested in controlling content prices for books and other content; it hardly needs to control that lever to effectively market its platform, and it can easily rely on content providers’ self interest to ensure that enough content flows through its devices.

In other words, Apple is content to act as a typical platform would, acting as a conduit for others’ content, which the content owner controls.  Amazon surely has “platform” status in its sights, but reliant as it is on e-books, and nascent as that market is, it is not quite ready to act like a “pure” platform.  (For more on this, see my blog post from 2010).

The Agency Model

As it happens, publishers seem to prefer the Agency Model, as well, preferring to keep control over their content in this medium rather than selling it (as in the brick-and-mortar model) to a retailer like Amazon to price, market, promote and re-sell at will.  For the publishers, the Agency Model is essentially a form of resale price maintenance — ensuring that retailers who sell their products do not inefficiently discount prices.  (For a clear exposition of the procompetitive merits of RPM, see this article by Benjamin Klein).

(As a side note, I suspect that they may well be wrong to feel this way.  The inclination seems to stem from a fear of e-books’ threat to their traditional business model — a fear of technological evolution that can have catastrophic consequences (cf. Kodak, about which I wrote a few weeks ago).  But then content providers moving into digital media have been consistently woeful at understanding digital markets).

So the publishers strike a deal with Apple that gives the publishers control over pricing and Apple a cut (30%) of the profits.  Contrary to the DOJ’s claim in its complaint, this model happens to look exactly like Apple’s arrangement for apps and music, as well, right down to the same percentage Apple takes from sales.  This makes things easier for Apple, gives publishers more control over pricing, and offers Apple content and a good return sufficient to induce it to market and sell its platform.

It is worth noting here that there is no reason to think that the wholesale model wouldn’t also have generated enough content and enough return for Apple, so I don’t think the ultimate motivation here for Apple was higher prices (which could well have actually led to lower total return given fewer sales), but rather that it wasn’t interested in paying for control.  So in exchange for a (possibly) larger slice of the pie, as well as consistency with its existing content provider back-end and the avoidance of having to monitor and make pricing decisions,  Apple happily relinquished decision-making over pricing and other aspects of sales.

The Most Favored Nation Clauses

Having given up this price control, Apple has one remaining problem: no guarantee of being able to offer attractive content at an attractive price if it is forced to try to sell e-books at a high price while its competitors can undercut it.  And so, as is common in this sort of distribution agreement, Apple obtains “Most Favored Nation” (MFN) clauses from publishers to ensure that if they are permitting other platforms to sell their books at a lower price, Apple will at least be able to do so, as well.  The contracts at issue in the case specify maximum resale prices for content and ensure Apple that if a publisher permits, say, Amazon to sell the same content at a lower price, it will likewise offer the content via Apple’s iBooks store for the same price.

The DOJ is fighting a war against MFNs, which is a story for another day, and it seems clear from the terms of the settlement with the three setting publishers that indeed MFNs are a big part of the target here.  But there is nothing inherently problematic about MFNs, and there is plenty of scholarship explaining why they are beneficial.  Here, and important among these, they facilitate entry by offering some protection for an entrant’s up-front investment in challenging an incumbent, and prevent subsequent entrants from undercutting this price.  In this sense MFNs are essentially an important way of inducing retailers like Apple to sign on to an RPM (no control) model by offering some protection against publishers striking a deal with a competitor that leaves Apple forced to price its e-books out of the market.

There is nothing, that I know of, in the MFNs or elsewhere in the agreements that requires the publishers to impose higher resale prices elsewhere, or prevents the publishers from selling throughApple at a lower price, if necessary.  That said, it may well have been everyone’s hope that, as the DOJ alleges, the MFNs would operate like price floors instead of price ceilings, ensuring higher prices for publishers.  But hoping for higher prices is not an antitrust offense, and, as I’ve discussed, it’s not even clear that, viewed more broadly in terms of the evolution of the e-book and e-reader markets, higher prices in the short run would be bad for consumers.

The Legal Standard

To the extent that book publishers don’t necessarily know what’s really in their best interest, the DOJ is even more constrained in judging the benefits (or costs) for consumers at large from this scheme.  As I’ve suggested, there is a pretty clear procompetitive story here, and a court may indeed agree that this should not be judged under a per se liability standard (as would apply in the case of naked price-fixing).

Most important, here there is no allegation that the publishers and Apple (or the publishers among themselves) agreed on price.  Rather, the allegation is that they agreed to adopt a particular business model (one that, I would point out, probably resulted in greater variation in price, rather than less, compared to Amazon’s traditional $9.99-for-all pricing scheme).  If the DOJ can convince a court that this nevertheless amounts to a naked price-fixing agreement among publishers, with Apple operating as the hub, then they are probably sunk.  But while antitrust law is suspicious of collective action among rivals in coordinating on prices, this change in business model does not alone coordinate on prices.  Each individual publisher can set its own price, and it’s not clear that the DOJ’s evidence points to any agreement with respect to actual pricing level.

It does seem pretty clear that there is coordination here on the shift in business models.  But sometimes antitrust law condones such collective action to take account of various efficiencies (think standard setting or joint ventures or collective rights groups like BMI).  Here, there is a more than plausible case that coordinated action to move to a plausibly-more-efficient business model was necessary and pro-competitive.  If Apple can convince a court of that, then the DOJ has a rule of reason case on its hands and is facing a very uphill battle.

Do the 2010 Horizontal Merger Guidelines require market definition?  Will the agencies define markets in cases they bring?  Are they required to do so by the Guidelines?  By the Clayton Act?

Here is Commissioner Rosch in the FTC Annual Report (p.18):

“A significant development in 2010 was the issuance of updated Horizontal Merger Guidelines by the federal antitrust agencies. The 2010 Guidelines advance merger analysis by eliminating the need to define a relevant market and determine industry concentration at the outset.”

Compare with Commissioner Rosch’s reported remarks at the Spring Meeting:

“I want to emphasise: I don’t care what the 2010 guidelines say, you can never do away with market definition,” Rosch said.

Does the latter statement assert that the HMGs do not require market definition at all?  If so, the statement in the former that the agencies don’t need to do it first certainly follows.  And why is it an “advance” to eliminate the need to define a market first but seems to be a bad thing to eliminate it altogether in certain cases?   Of course, as DOJ (and, importantly, UCLA Bruin) economist Ken Heyer points on in his remarks at the same Spring Meeting event, and I’ve written about here and here, most expect the agencies to continue defining markets because federal courts expect it, may require it, and failure to do so will harm the agencies’ ability to successfully bring enforcement actions.  Nonetheless, the statements do not provide much clarity on the Commissioner’s (or, for that matter, Commission’s) views with respect to the new HMGs and the role of market definition.

Over at the DOJ, on the other hand, former Chief Economist Carl Shapiro — congratulations to the newly appointed Fiona Scott Morton —  made clear that agencies’ stance on the role of market definition:

“The Division recognizes the necessity of defining a relevant market as part of any merger challenge we bring.”

No such announcement from the FTC.   And Commissioner Rosch’s remarks do not clarify matters.  On the one hand they seem to indicate the FTC will always define markets; on the other, they imply that they do so despite the fact that the Guidelines say they don’t have to.  With Shapiro gone, the DOJ view is unclear at the moment.  Perhaps all of this is much ado about nothing as a practical matter — though I’m not sure of that.  But if the Agencies both consider market definition a “necessity,” why not just say so?  Why not write: “market definition is required by Section 7 of the Clayton Act and the agencies will, at some point in the analysis, define a relevant market”?

Market definition requirement aside, my views on the positive developments in the new Merger Guidelines and the larger problem they present — asymmetrically updating theories of competitive harm without doing so on the efficiencies side — articulated in this forthcoming paper.

Carl Shapiro to CEA

Geoffrey Manne —  24 February 2011

The WSJ reports that Carl Shapiro, deputy assistant attorney general for economics in the DOJ’s antitrust division, has been nominated by President Obama to his Council of Economic Advisers.  Also worth noting is that Phil Weiser, also a former deputy assistant attorney general in the antitrust division, is now senior advisor for technology and innovation at the National Economic Council.

Congratulations to both, and I’m delighted to have them out of the DOJ and in the White House where they can do less damage.  Kidding.  Actually, I think both will (and in Phil’s case, already do) offer much-needed and valuable input in the White House.

 

The DOJ has posted the transcript from the recent DOJ/USDA hearings on antitrust in agriculture here.  I figured our readers might be especially interested in seeing Christine Varney’s comments (especially without having to slog through all 350 pages to find them!).  I have bolded some of the most interesting parts of her comments.

As a special bonus, at the end of this post, I also reprint some of the particularly choice comments on Chicago economics by one of the farmer panelists.  I leave it to readers to decide whether the juxtaposition has any deep meaning.  I will say this: Technological innovation, increasing economies of scale, shifts in international trade and its restraints, and demographic changes–among other things–have no doubt wreaked havoc on many small farmers and farm communities.  The same can be said of the buggy whip makers, Atari game system manufacturers, and polio hospital administrators, to name but a few.  It is probably impossible to separate the populist impulse to serve (or, for politicians, to appear to serve) the Jeffersonian farmer from the enforcement of the antitrust laws, and this is why antitrust in agriculture will continue to be so contentious and so problematic.

Do be sure to check out the farmer’s comments at the end of the post. Continue Reading…

Bill Northey, IA Ag Sec’y, sounds a bit like an economist (ah, turns out he has a degree in ag business and an MBA . . . ).  Yes, price of seeds has gone up, but so has yield, and so has overall value.  The issue, he says, is how to divide the surplus, and he suggests that it’s dividing the pie that drives farmer concerns.  That’s not at all a surprise, but it’s also not much of an antitrust issue.  Unless the pie could be bigger absent, say, Monsanto’s huge investment in seeds and the resulting relatively-concentrated market structure (and basing enforcement on the theoretical possibility of that counter-factual is a perilous enterprise, as Josh and I have suggested many times), this is just a question of pecuniary transfers.  Sure, they matter a lot to the parties involved and there’s always an incentive to deputize the government to put a thumb on the scale of that dispute, but that’s not a matter of allocative efficiency, and not a matter for the antitrust laws.

Now we hear Iowa AG Miller pushing for the development of “the non-antitrust laws to deal with concentration.”  By which he means the Packers and Stockyards Act.  Maybe the DOJ has their Section 5 after all!

As if on cue, AG Miller trots out the pendulum story of antitrust enforcement–”how to bring the antitrust law back to the middle.”  This is not really an accurate description, unfortunately.  Even worse, it’s not an economically-sensible concept, and measuring the efficiency of antitrust enforcement by counting enforcement actions (or looking at rhetoric) is usually just flimsy cover for an essentially-political determination.  Combine that with Miller’s suggestion that the P&S Act’s “unfair practices” language should be enlisted in the service of dealing with concentration, and the risk of false positives is much magnified.  Which, of course, is a perfect lead-in for Christine Varney. Continue Reading…