I’ve criticized elsewhere what appears to the the FTC’s new “evasion of pricing constraint” theory of monopolization emerging from Ovation (see also here), N-Data, and Rambus. I expressed some concern that this theory had no limiting principles and was detached in important ways from sound economics:
Here are a few examples of conduct the FTC could go after that satisfy the “evading a constraint” theory. Why not a monopolist whose pricing is constrained by current demand. That is, the profit-maximizing monopoly price is $20 but the monopolist would REALLY like to charge $25. It is only the fact that current demand is not high enough to support that price that prevents the monopolist from charging it. So, our monopolist comes up with a plan (lets call it a scheme, it sounds worse) to evade the pricing constraint created by current demand by advertising its product to consumers and touting its virtues. Or perhaps its going to invest in the quality of the product. In either event, the purpose of the advertising is to shift the demand to the right and result in higher prices. No matter that output increases, it doesn’t matter because the monopolist is evading a pricing constraint and presumably has violated Section 2. Evading reputational constraints on demand for X is not analytically any different evasion of the constraints imposed on demand by consumer preferences.
What if Merck evaluated its product line and decided that it would be be better off by dropping some of its product portfolio so that it could increase the price of Indocin? Merck’s decision to drop products from its portfolio, or even the design of those product offerings, are surely an evasion of pricing constraints and a violation of Section 2 if it has monopoly power — and perhaps even if it doesn’t under Section 5. So much for competition as a discovery process. Or what if Merck decided to create a subsidiary to sell Indocin under a different brand name and trade dress to mitigate the reputational costs it would bear from charging a higher price? Or fired the CEO who decided that charging the monopoly price in the first instance would be a bad idea in favor of a new manager who reached a different conclusion and wanted to increase the price? This evasion theory fairly quickly evaporates to the notion that the antitrust law governs prices that are determined to be unreasonable and not the competitive process. This is what happens when antitrust law unhinges itself from economics, which I fear is a trend at the Commission if N-Data and Ovation are representative…. Reliance on the general principle that evasion of pricing constraints through merger or other conduct is a sufficient condition for antitrust liability is misguided and unsound policy precisely because it is without limiting principles, unhinged from sound economic foudnations, and threatens to turn antitrust enforcement into more general regulation of prices and optimal allocation of resources, e.g. which firm should have Indocin?
Here’s another example. The WSJ is running a story on the proposed merger between Live Nation and Ticketmaster:
The combined company would be called Live Nation Ticketmaster, and would merge the world’s biggest concert promoter with the world’s dominant ticketing and artist-management company. The resulting firm would be able to manage everything from recorded music to ticket sales and tour sponsorship. It could package artists in new ways, for example, allowing corporations such as a cellphone provider to sponsor a concert tour and to sell an exclusive download of a song.
Because it would be so vertically integrated, the new company would also be able to muscle out competing concert promoters and have more power to dictate ticket prices to consumers. The boards of both companies have yet to approve the all-stock merger, these people said. Terms of what these people described as a merger of equals have yet to be worked out. It was unclear last night which company would be acquiring the other. Live Nation’s market capitalization, at $390 million, is slightly higher than Ticketmaster’s $351 million. But the concert promoter has more debt and less cash.
Sticking points remain to any deal. Because a merger would concentrate so much power in the music industry under one company, it would require review by antitrust authorities. The deal, which wouldn’t entail any exchange of cash, could be announced as early as next week, these people said.
First, let me say that the first sentence in the second paragraph seems like out of place. Its an economic prediction that ticket prices will go up rather than a fact that the parties will have more power to dictate ticket prices to consumers. In fact, the evidence on vertical mergers suggests that they are predominantly pro-competitive.
But back to the point, it is fairly clear that Ticketmaster and Live Nation are “evading pricing constraints” by attempting to merge in order to do things like “It could package artists in new ways, for example, allowing corporations such as a cellphone provider to sponsor a concert tour and to sell an exclusive download of a song.” Of course, any attempt to circumvent or evade constraints on market prices, e.g. current demand conditions, ranging from quality investments to the use of vertical restraints to facilitate promotional effort from retailers to vertical mergers such as this one run afoul of the definition adopted by some at the Commission as sufficient for antitrust liability. Once one understands the broad swath of conduct that is typically part of the competitive process that would “evade” pricing constraints (advertising, promotion, changing product line composition or mix), it is clear that this definition is not only unhelpful as an economic guide to identifying conduct likely to prove anticompetitive, but also likely to deter procompetitive business practices.
I have no information as to whether any antitrust enforcement agency will challenge this deal, though the WSJ indicates review is likely. But if the FTC does the review, given the endorsement of this evasion theory and in the current antitrust environment, I’d be quite concerned if I were the parties. Based on the evasion theory, I’m not sure how the Live Nation/Ticketmaster deal (or many, many other deals) are not in the same boat as the Ovation/N-Data/Rambus trio. I’m on the record that I think this economic approach is unsound. Kobayashi and I set forth some of the case against this evasion approach in greater detail in our paper on antitrust federalism and patent holdup. I also believe that it is highly unlikely that there is support for this approach from the Bureau of Economics. More generally, the general principle that evasion of pricing constraints through vertical merger or other conduct is a sufficient condition for antitrust liability is misguided and unsound policy precisely because it is without limiting principles, unhinged from sound economic foundations, and threatens to turn antitrust enforcement into more general regulation of prices and optimal allocation of resources.