SCOTUS (Almost) Nails Another One …

Cite this Article
Joshua D. Wright, SCOTUS (Almost) Nails Another One …, Truth on the Market (March 01, 2006),

Another 8-0 antitrust decision from SCOTUS. Very interesting. For those of you who have not been following, the Court rejected the longstanding, but almost uniformly criticized, presumption that patents confer market power for the purpose of antitrust analysis. WSJ Law Blog sums up the facts here, concluding with a quote from Steve Sunshine that the trio of cases this term “harmoniz[e] antitrust law presumptions with the economic law and policy that’s been pervasive over the past ten-to-fifteen years.â€? That sounds right.

There is no question that the court got this one right. But the opinion does raise some interesting questions. Dan Crane (who also thinks the decision was correct) raises some of them, accompanied by his reactions to the opinion, at Antitrust Review that are very worth checking out. For instance, Dan opines that the decision marks the end of the “per se” rule for tying — which as Dan points out — was not really per se analysis.

One of the biggest questions for antitrust is how it will regulate practices that facilitate price discrimination. Bundling or tying products, among other pro-competitive justifications, may facilitate price discrimination by metering demand. I have talked about my skepticism regarding the potential for anticompetitive effects arising out of price discrimination before. While a guest at Ideoblog I wrote that:

“[T]he $64,000 antitrust question is about neither leverage theory nor distribution costs, but how antitrust law will treat practices that increase firm profits by linking a complementary good to the tying good, i.e. metering the intensity of demand.”

I also wrote that “the forthcoming SCOTUS opinion in Independent Ink is a valuable opportunity to clarify the law in this area.” So has Independent Ink improved antitrust analysis in this area? The answer, some more thoughts, and a few problems with the opinion below the fold…

It is certainly a step in the right direction. As Dan points out, the argument for patents (or litigated patents for that matter) conferring market power for “requirements ties” goes something like this:

“Chicago has taught us that tying exists in order to facilitate price discrimination; price discrimination requires market power; therefore where tying exists there must be market power. Of course, this would prove that all instances of tying prove the existence of market power, whether or not a patent was involved.”

The upside is that Justice Stevens in the court properly rejected this argument, which would essentially result in per se treatment of tying and bundling for the purpose of metering, which is generally pro-competitive. Like Dan, I agree with the result here, but not the reasoning. The court argues that the patent = market power jurisprudence has its antitrust origins in International Salt, which did not involve such a requirements tie and so cannot form the basis of the distinction desired by the respondent or Amici.
I share Dan’s view that the better route would have been to bolster this analysis by adopting the appropriate economic reasoning and not relying solely on International Salt.
Just after distinguishing International Salt, and rejecting the respondents’ arguments in favor of the presumption, the Court writes:

“While price discrimination may provide evidence of market power, particularly if buttressed by evidence that the patentee has charged an above-market price for the tied package, it is generally recognized that it also occurs in fully competitive markets. We are not persuaded that the combination of these two factors should give rise to a presumption of market power when neither is sufficient to do so standing alone.”

So what is wrong with this language? First, the language adopts the tone that price discrimination is a bad thing. This is not necessarily so. As I wrote previously:

“Metering is a form of price discrimination, which despite its nasty label and disfavored position in antitrust, is quite often good for consumers. The static welfare effects of price discrimination are generally ambiguous as some consumers gain and others lose, but likely to be positive if the metering device allows accurate measurement of the intensity of demand since output will increase. When one also accounts for dynamic consumer welfare gains, price discrimination is likely to benefit consumers unless linked to some independent antitrust wrong.”

The important economic point is that the ability to price discriminate does not arise out of monopoly power (the power to control the market price) but from the power to control one’s own price that is conferred by the downward sloping demand curve faced by virtually all firms in the modern economy. The suggestion that price discrimination + above market prices for the package is evidence of market power is unnecessary. Evidence of supra-competitive market prices is sufficient on this score.

The larger problem is that this logic tells us that there is a better economic reason to reject the presumption. Specifically, the court could have rid antitrust law of the inference that price discrimination is anticompetitive in any manner. Benjamin Klein and John Wiley, Jr., for example, have argued that (70 Antitrust LJ 599 (2003)) price discrimination should be a defense. This sounds right to me. This does not mean that all such practices would be immune from antitrust liability totally. Practices that facilitate price discrimination may be happen to injure competition for other reasons, i.e. a tying arrangement may foreclose a rival from sufficient distribution as to achieve minimum efficient scale for a significant period of time, thus raising barriers to entry. But price discrimination adds nothing to that analysis on its own. Justice Stevens’ opinion emphasizes an interest in aligning modern antitrust jurisprudence with the consensus view of economists, but does not finish the job.

In sum, the decision is a very sensible one which will reduce unnecessary and unwarranted antitrust exposure for firms not capable of producing competitive harm because they lack power over market prices. This is a very good thing. On the other hand, Independent Ink is also an opportunity lost in terms of settling antitrust policy on price discrimination more generally by relying on sound economics.

Lastly, the decision teaches us that outdated and sometimes infamous antitrust decisions are for more than scoffing at. Justice Stevens’ opinion is, at heart, about bringing antitrust jurisprudence into step with economic thought by correcting the doctrine, not by adopting the economic reasoning. The Court suggests that it will continue to do so where “the theoretical underpinnings of those decisions are called into question.” Horizontal merger case, anyone?