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 thatâ€™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?
Professor Gerla — fair enough, as to your tying/RP distinction. For a variety of reasons, I have RP on the brain these days.
Thanks for your clarification. Your clarification has lead me to clarify my original comment. Specifically, I am not trying to argue that price discrimination without some other adverse impact on competition ought to constitute an antitrust violation. I was merely trying to suggest a strong degree of doubt on the thesis that the ability to price discriminate through a tie in ought to be considered a procompetitive effect of tying arrangements.
I agree with your point that the law of tying arrangements is in some nether world between per se illegality and a full rull of reason analysis. I also agree with you that Independent Ink doesn’t really do anything to change that. This should not be surprising given that Stevens wrote the opinion in the case. After all, he wrote the majority opinion in Jefferson Parish and while he said that the Court had grown more tolerant of tying arrangements, it is a bit much to expect him to write an opinion abandoning his position in that case. I believe Justice Stevens still believes that if a defendant has market power in the tying product (which Stevens equates with the power to cram a tied product down the throat of an unwilling consumer) and the tie in forcloses a substantial amount of commerce in the tied product, the tying arrangement should be “per se” illegal (subject to narrowly cabined justifications–which are, of course, inconsistent with the idea of a per se rule). Independent Ink does not rule out such an approach.
As far as where firms will set prices if they can’t price discriminate, I believe we’re talking about two different things. I really wasn’t adressing the issue of price discrimination under the RP Act. Indeed, given the threat of private litigation under that statute (public enforcement of the Act on the federal level seems to pretty much be a dead letter) I would be surprised if your clients didn’t set prices at a higher level to avoid a realistic possibility of being sued for RP violations. Therefore, I would agree that a firm which could not price discriminate via a tying arrangement might set prices at a level which caused consumers to pay more on balance than they would have had the seller been able to price discriminate.
However, not all firms face a realistic possibility of an RP suit (I wonder if your clients who set the higher prices were a somewhat unrepresentative group because they had been threated with or actually subject to an RP suit). I was merely suggesting that the managers of such firms who could not price discriminate via a tying arrangement might set their prices at a level where consumers on balance paid less in order to avoid “looking bad” by suffering a drop in sales and revenues (even if profits did not change or even increased).
Thanks to both of you for taking the time to respond to my comments.
Harry Gerla writes:
What? Huh? The goal of antitrust is to “allow consumers to pay cheaper prices”?!?!? Cheaper than what? I don’t think one needs to be an evil “Chicago School” devotee to think this is insanity. If we’re interested in transferring wealth from producers to consumers (never mind the serious dynamic problems for consumers of such a state of affairs, as Josh notes) antitrust laws are a poor way to go about doing it. I would think price controls would be far more effective. Or we could just nationalize all production — that might work.There is something to the question swirling around this post of Josh’s (mainly over at Antitrust Review) whether the existence of price discrimination should give rise to an inference of market power and/or whether market power implied by price discrimination should ultimately give rise to a presumption of anticompetitive effect. On this point, however, I side firmly with Josh. As I more or less noted here, these inferences are tenuous at best, and quite costly if (when) mistaken. To the extent, for example, that price discrimination is a cause or consequence of product differentiation, we should praise it rather than condemn it.We get into trouble (and this is all the more true when “legislators and judges” and law professors believe antitrust laws should be narrowly interpreted to confer “cheaper [sic] prices” on consumers) when we try to shortcut the painfully difficult process of identifying actual economic harm resulting from complex business practices.
One minor thought on the original post, and one minor thought on the comment debate:
(1) While I agree with Dan that tying hasn’t really been per se illegal for quite some time, I’m worried that it still falls into some sort of weird middle ground short of full rule of reason treatment. My first read-through of Independent Ink suggests that tying is still likely to be condemned reflexively if a plaintiff can make a showing of market power in the tying good. This would seem to foreclose defendants from arguing that a tie is procompetitive in such situations. There are workarounds (e.g., O’Connor’s “single-product” analysis from Jeff. Parish), but I don’t think we’re yet in a place where courts and/or juries look at the totality of the circumstances in alleged tying cases.
Under most judicial formulations of the rule of reason, the inquiry is focused upon the net competitive effects of a given practice. “Possession of market power in the tying good” is an imperfect and incomplete proxy for that inquiry, but Independent Ink seems to say otherwise.
(2) With respect to Professor Gerla’s suggestion that price discrimination laws push the overall price level down, I respectfully (and tentatively) disagree. Although it is certainly an area begging for empirical research (which I ultimately plan to spend some time thinking about), my ten years as an antitrust practitioner have convinced me that the opposite is usually true. Where my clients cannot legally circumvent R-P, they almost uniformly elect to retain higher pricing levels. Given that this activity takes place almost exclusively at the secondary level, it’s the consumers who ultimately suffer.
Harry, I appreciate your comments. Let me be increasingly clear and honest about what I meant and see if we cannot get somewhere.
First, my analysis certainly does not assume that consumer welfare means total wealth. I understand the debate in the terminology stemming from Bork’s original use of the term. My analysis adopts the position that even under a true consumer welfare standard, the current status of practices that facilitate price discrimination are inappropriately dealt with. From a total welfare perspective, this is obviously the case.
I agree with you that whether price discrimination increases or decreases consumer welfare is an important empirical question. But notice that my analysis expressly adopts the position that firms with the power to control market prices who engage in practices that reduce consumer welfare would not be immune under the antitrust laws if they, for example, foreclosed rivals.
The post, which you accuse of blithely running over these important questions, is not a full primer on price discrimination, so I apologize for its shortcomings.
However, as long as we are clarifying debates that I skipped over, the conventional analysis that third degree price discrimination has ambiguous welfare implications an important first step in the analysis and leads you to your conclusion that perhaps we should be worried. But I raise the following two points. First, that analysis does not take into account the dynamic consumer welfare gains resulting from increased firm profits, which leads to additional entry our investment. Second, much of metering and price discrimination looks much more like second degree price discrimination than third, and is even more likely to increase consumer welfare.
Another point that I skip over is that if we truly believe that price discrimination in competitive markets is evidence of the type of power that antitrust policy should be concerned with, we are led to some pretty bizarre results. We can find this type of price discrimination in the most competitive of markets: restaurants that underprice appetizers and overprice main courses, movie theaters with overpriced popcorn and underpriced tickets, supermarkets handing out coupons. Taken to its logical conclusion, the position that price discrimination is an evil that antitrust law should be concerned with is troublesome.
Notice, of course, that this leads back to my original point. Some practices engaged in by firms with monopoly power might truly be anticompetitive and result in unambiguous consumer welfare losses for other reasons. My position would be to prosecute those firms for the conduct which injures consumers, not price discrimination.
Lastly, I cannot and would not speak for any of my co-bloggers, but I am not indifferent to the distributional aspects of antitrust policy. I think antitrust is an unequivocally bad tool for achieving distributional goals.
Josh’s post blithely glides over some important disputes, the most important of which is the meaning of the term “consumer welfare.” The term can mean simple output maximization. However, it can also mean maximization of consumer surplus, i.e., the aggregate difference between what consumers actually pay for a good or service and the amount that would be paid if the seller could price at the reservation price of each consumer. I believe the latter definition happens to better comport with the one of the main goals of the antitrust laws, viz, the prevention of transfers of wealth from consumers to producers via the diminution of competition. The latter definition is also a more honest use of the term consumer welfare. I wonder what the reaction of legislatures and even courts would be to the term “consumer welfare” if the proponents of the former definition came right out and openly and clearly stated that as long as output was maximized they really didn’t care if consumers, on the whole, paid more for a product or service?
The evil connotations of “price discrimination,” which so trouble Josh, arise because most people (including legislators and judges) would probably say that they view one of the key goals of antitrust law to be allowing consumers to pay cheaper prices for goods and services (i.e., the second definition of consumer welfare).
Whether price discrimination via metering/tying arrangements transfers income from buyers to sellers is an empirical question. The principal post glides over the problem by saying price discrimination causes some consumers to lose and others to gain. First, this begs the question of the aggregate size of consumer gain or loss. Even more important, it assumes that seller, in the absence of the ability to price discriminate, will generally set their prices toward the middle of the range of reservation prices held by consumers. There is no empirical evidence that real world sellers actually price that way. Indeed, given the tendencies of managers to want increases in sales and revenues (even sometimes at the expense of profits), there is reason to believe that sellers, in the absence of the ability to price discriminate, will price their products or services toward the low end of the range of consumer reservation prices If this is correct, then a tying arrangement which enables a seller to “price discriminate” will generally diminish consumer welfare in the second sense.
I realize that I am wandering into the lion’s den because many of the bloggers on this site are “Chicago School” oriented and basically indifferent to the distributive consequences of antitrust policies. I do not expect to change any of the habitues of this blogs minds about the desirability of price discrimination. However, I do hope that those who view price discrimination as benign, if not actually beneficial, be clear and honest about what they are trying to achieve via antitrust policy, and about the distributive consequences of their preferred antitrust rules, even if they themselves are indifferent to those consequences.