New paper: Missed Opportunities in Independent Ink

Josh Wright —  1 August 2006

My paper for the 2006 Cato Supreme Court Review, Missed Opportunities in Independent Ink, is now available on SSRN. Justice Stevens’ opinion for the unanimous court in Independent Ink rid antitrust law of the misguided, ill conceived, and universally criticized presumption of antitrust market power in patent tying cases. Very few dispute the wisdom of the Court’s decision. So what is there left to say about it?

Plenty I think. My thesis is that the Court missed a grand opportunity to clarify the role of antitrust law in regulating competitive conduct which facilitates price discrimination, and in particular, to get monopolization law out of the business of condemning competitive price discrimination. This has been a favorite topic of mine on this blog (see, e.g., the posts here, here and here). The abstract is below the fold. The Supreme Court’s opinion in Illinois Tool Works Inc. v. Independent Ink, Inc. rejecting the presumption of market power in antitrust tying cases is unequivocally good for consumers and eminently sensible. The presumption is at odds with the longstanding consensus among antitrust scholars, Congress, and the antitrust agencies that patents do not confer antitrust monopoly power. While Justice Stevens’ opinion should be applauded for taking an important step towards aligning a perplexing and muddled tying jurisprudence with economic sense and empirical reality, that attempt is both undeniably successful and incomplete because the Court fails to adopt the economic reasoning supporting its holding. A burgeoning economic literature demonstrates that a patent right merely confers to the seller the power to exclude perfect substitutes, a sufficient condition for price discrimination, and a power shared by virtually all firms in competitive markets across our modern economy. Unfortunately, both antitrust law and scholars sometimes conflate this power with the ability to influence market conditions which is the focus of modern consumer-welfare focused antitrust enforcement. This confusion is costly because it deters competitive price discrimination, which despite widely perpetuated economic myths, is not generally associated with consumer welfare losses and may benefit all consumers. While antitrust law has come a long way in terms of economic sophistication, the persistent association of anticompetitive inferences with an inherently competitive practice is evidence that it has not yet fully incorporated fundamental lessons from the economic literature.

5 responses to New paper: Missed Opportunities in Independent Ink

  1. 

    This blog is a bit over my head from a legal perspective, however, I am looking for any information that deals with the practice of price discrimination in the rental housing market. Meaning special incentives offered to renters either signing or renewing a lease, the property owner being able to pick and choose which tenants will receive discounting. My contention is that it effectively discriminates by offering the same product to different people at a preferential pricing. All economic speak aside (level 1 level 2 etc etc). Is it not fundamentally illegal with so many housing regulations in place for a renters to accept the economic burden of subsidizing corp. mega giants ( i.e. RREEF types) marketing strategies. Anyone have any information on wheather this issue is being fought legally???
    Linda S. Mason

  2. 

    Keith, thanks again. Let me indulge one last round, not so much in response, but so that I can get in some free advertising for the paper):

    I hope I am saying something slightly more provocative than PD alone is not an antitrust violation except if there is tying, refusal to deal, RPM, etc. To clarify, in Ind. Ink there was indeed tying (printhead, ink), but there was no real disagreement that the tying arrangement was a classic metering device to charge higher package prices to high intensity users. My claim is not just that competitive price discrimination cannot itself be a Sherman Act violation. I am going further to claim that even in the presence of a tie, PD is simply irrelevant to antitrust analysis. We have separate tests for tying, refusals to deal, etc., and should apply them independently of the presence of PD.

    Unfortunately, PD has been associated with antitrust market power and anticompetitive effects. I argue in the paper, relying substantially on the large and growing literature on competitive price discrimination (Klein and Wiley, Baumol and Swanson, Levine, others), that PD has nothing to do with the concept of market power as it is known in antitrust law (not economics textbooks) and that the standard consumer welfare analysis of PD (that the effects are ambiguous) is incomplete and does not support the anticompetitive inferences attached to it in antitrust analysis.

    And I promise, after all of this, I link the claim to the issue squarely before the court in Ind. Ink!

  3. 

    Thanks for following up Josh. I did not remember that the ink case (whose main issue was whether a patent necessarily implies market power) makes this reference to (non R-P) price discrimination. But since apparently it does, your criticism is a good one. Price discrimination should not be relevant to liability under secs. 1 or 2. It may be relevant for calculating damages if there’s (assuming there’s some other basis for liability). But price discrimination should not itself be a Sherman Act violation, absent other circumstances such as tying.

  4. 

    Keith: I appreciate the comment, but the Court did specifically discuss price discrimination and whether it implies antitrust market power. In fact, it responded and ultimately rejected the argument that: because metering ties involve price discrimination, and the economic definition of PD requires market power (i.e. the ability to price above marginal cost), metering must imply antitrust market power. The court was right to reject the argument, but for the wrong economic reasons. Which is what I explore in the paper.

    What I do in the article is show (rather, explain, relying on a substantial economic literature) that economic market power (the ability to price above marginal cost) is distinct from market power in antitrust law. The reason I describe the Ind. Ink opinion as a missed opportunity is precisely because adopting the economic logic underlying the rejection of the market power presumption (patents grant a right to exclude perfect substitutes, a necessary but not sufficient condition for PD, but not control over market output) would go a long way towards clarifying the role of antitrust in governing competitive price discrimination.

    This is a giant area quite separate from the RP Act. As far as the RP Act goes, and as I discuss in the article, much of the conduct that is competitive price discrimination is not under the domain of the RP Act because uniform prices are being charged to buyers (i.e. razors and razor blades, or for that matter, the tie in Independent Ink of printheads to catridges). But the policy discussion of the RP Act is quite simple, and requires far less economic sophistication (as you point out): repeal it.

  5. 

    Josh is right that price discrimination is a badly misunderstood economic phenomenon that often can be pro-consumer. But Independent Ink so far as I recall was not about price discrimination. So it shouldn’t be a surprise that the Court didn’t discuss the subject in its opinion in that case.

    Josh’s criticism perhaps has more bite in regard to Volvo v. Reeder-Simco, a case last term applying the Robinson-Patman Act. This may have been a better place to discuss price discrimination, since that’s what the Robinson Patman Act is all about. The difficulty with having too much candor in this area is that Congress in enacting Robinson-Patman seems itself to have misunderstood the econonomics of price discrimination. Rather than take Congress on directly (which the Court lacks the authority to do), the Court’s pragmatic approach in this area has been to apply the statute narrowly. I would prefer to see more candor. But one can understand what the Court has been up to.