Alito and Antitrust (Part II)

Thom Lambert —  18 January 2006

A few weeks back, Josh had a nice post (on Ideoblog) regarding Judge Alito’s antitrust record. He was pretty optimistic, dismissing Judge Alito’s antitrust critics and concluding that “what little Judge Alito has written on antitrust issues is properly described as fastidious analysis complemented by strict application of doctrine.”

Some of Judge Alito’s comments in last week’s hearings cause me to be similarly optimistic. I was particularly pleased with the following exchange between Senator Dewine and Judge Alito regarding LePage’s v. 3M, a terrible en banc decision involving “bundled discounts” (i.e., discounts granted in exchange for purchasing products from multiple product lines):

SENATOR DEWINE: Judge, you had a case that dealt with bundling like this. It was, of course, the 3M v. LePage’s case. In that case, 3M, which sells Scotch tape, was selling it as part of a bundle with other products. The result was that LePage’s, which was offering a cheaper, competing tape, was having a hard time getting stores to sell its tape because if the stores did, they would have to give up the chance to save money on all the other 3M products that they carry.

The majority ruled against 3M, but you dissented. I wonder if you could please explain your reasoning behind that dissent, and explain what type of bundle discounts you think would violate the antitrust laws.

JUDGE ALITO: …3M was selling the product, as I recall — it was selling these products — it was not selling them below its cost. It was selling them above its cost. But 3M, because of its scale or because it was more efficient, was able to produce its product more cheaply.

…[M]y understanding of the state of the scholarship on this issue right now and on the way economists view the issue is that I believe that there are many of them who believe that a situation like this does not involve monopolization, that this is not a way in which a company like that can engage in a predatory practice over a period of time.

But there’s uncertainty, really, about how the monopolization standard applies to issues of bundling. So I think it’s quite up in the air and should it come up again, I think it merits reexamination.

For why Judge Alito was right in saying that LePage’s “merits reexamination,” read on….

The facts of LePage’s were as follows: 3M, which makes Scotch Tape and sells goods across a number of product lines (e.g., automotive products, “Post-It” notes), cut deals with retailers like Wal-Mart, saying it would give them a discount on all their 3M purchases if they would meet certain purchase targets in multiple product lines. 3M’s discounted prices were never below its costs and therefore could be met by any equally efficient rival that sold a similarly diversified product line or was willing and able to team up with other sellers to create a competing bundle. LePage’s, however, claimed to have been excluded by the discounts. It argued that it could not compete with 3M’s multi-product discounts unless it provided a discount the size of 3M’s on its narrower product line, which consisted only of private label transparent tape competing with 3M’s Scotch brand. To give a similarly-sized total discount, it would have to price below its costs. Thus, LePage’s argued, it was being excluded from the market by 3M’s above-cost bundled discounts.

The en banc Third Circuit agreed with LePage’s that 3M’s consumer-friendly discounts could be anticompetitive. Even though LePage’s acknowledged that 3M’s discounted prices were not predatory (i.e., below cost), produced no evidence that it had tried to compete with 3M by crafting a similar bundled discount with other sellers, and (here’s the kicker) admitted that it was a less efficient tape producer than 3M, the en banc court determined 3M’s discounts to be anticompetitive. The court concluded, in other words, that competition may require a company to forego price cuts in order to prevent the “exclusion” of a less efficient competitor that cannot meet those price cuts. Would you call a race where the fastest runner wins “anticompetitive”? Only in the Bizarro World.

Judge Alito’s comments, which hone in on the fact that 3M’s discounted prices were not below cost, suggest that he might adopt a rule of per se legality for above-cost bundled discounts. Dan Crane has argued for that very respectable position (see here). While I’ve argued for a more nuanced approach to evaluating bundled discounts (see here), the position Judge Alito alludes to would certainly represent an improvement from the LePage’s court’s reasoning.

Thom Lambert

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I am a law professor at the University of Missouri Law School. I teach antitrust law, business organizations, and contracts. My scholarship focuses on regulatory theory, with a particular emphasis on antitrust.

4 responses to Alito and Antitrust (Part II)

  1. 

    Nice post Thom. You have certainly identified the central issue here: how antitrust law can sensibly deal with the potential anticompetitive threat of above-cost pricing strategies (in their various forms) foreclosing rivals from achieving minimum efficient scale for a significant period of time.

    I am sympathetic to the approach that you suggest in your paper, and in particular, the requirement that the plaintiff show that it could not achieve a bundled sale with other producers. I plan to post some additional thoughts on the role of antitrust in regulating practices such as bundled discounts, slotting fees, exclusive dealing contracts, and payments for product placement, which I collectively refer to as “competition for distribution.”

  2. 

    Your post is thought provoking. I never thought scotch tape and envelopes could be so stimulating.

Trackbacks and Pingbacks:

  1. TRUTH ON THE MARKET » Bargaining in the Shadow of Justice Alito - February 18, 2006

    […] David Fischer at Antitrust Review posts an excerpt from Information Resources, Inc.’s (IRI) press release issued to explain the recent settlement of their ten year long litigation against VNU (A.C. Nielsen, IMS Health, and Dun and Bradstreet). IRI’s claims were based on an “above cost” bundling theory that Thom has discussed in detail here. In that post, Thom expressed optimism (like me) about Justice Alito’s influence on the Supreme Court’s antitrust jurisprudence in large part because of his sensible dissent in LePage’s. It looks like we do not have to wait long to for evidence of that influence. Notice this section from IRI’s press release: Even if IRI were to prevail at the Second Circuit on the bundling issue, both litigation teams felt there was a significant risk that the Supreme Court would rule against IRI if it accepted the case for appeal, particularly in light of the current make-up of the Supreme Court and the fact that Justice Alito, the newest addition to the Supreme Court, was the author of an appellate court decision in 2002 that was adverse to IRI’s bundling position in this case. Although Justice Alito’s position was overturned on en banc review by the Third Circuit Court of Appeals in 2003, Justice Alito has recently expressed his opinion that his original view of that case was correct. […]

  2. TRUTH ON THE MARKET » Antitrust Law and Competition for Distribution - January 29, 2006

    […] Thom recently posted about Judge Alito’s comments on the recent Lepage’s decision involving bundled discounts offered to retailers. There is presently much debate among antitrust scholars regarding the proper treatment of “above-cost” price cuts, such as the bundled discounts in Lepage’s. The anticompetitive theory in these cases is not that discounts mask what is effectively “predatory pricing.” Rather, the theory is that the payments will deprive rivals from achieving minimum efficient scale for a period of time long enough to prohibit meaningful competition. […]