DOJ AAG Designate Christine Varney on Section 2, Europe, Google & A Puzzling Statement About Error Costs

Josh Wright —  22 February 2009

Predicting what antitrust enforcement regimes in the current economic environment is a tricky business.  I’ve done my best here.  One probably cannot think of a better source for such predictions than those from the soon-to-be AAG Christine Varney, who recently spoke at an American Antitrust Institute panel on Section 2 enforcement (you can hear the panel audio at the link).  I had an RA transcribe Varney’s remarks so please note that all remarks attributed as quotations here may not be exact.

Generally, Varney applauded the AAI report, noting that is “a great framework that starts it and I do endorse the conclusions.” The AAI recommendations relating to monopolization, for those who have not read the report, includes at least the following proposals:

  • Embracing a generally “Post-Chicago” vision of Section 2, including Kodak-style aftermarket claims and “other consumer protection market imperfections”
  • Trimming the scope of Trinko in favor of the unilateral refusal to deal jurisprudence in Aspen and Kodak 
  • Revitalizing the essential facilities doctrine as an independent theory of liability
  • Reject cost-based safe harbors for loyalty and bundled discounts
  • Make predatory pricing law more friendly to plaintiffs
  • More aggressive remedies

Here are a three comments I found the most interesting:

1.  Varney on Google as An Emerging Antitrust Threat.

For me, Microsoft is so last century.  They are not the problem.  I think we’re going to continually see a problem potentially with Google, who I think so far has acquired a monopoly in internet, online advertising lawfully.  I do not think that they have done anything other than be a spectacular and innovative company.  I am deeply troubled by their acquisition of uh, Doubleclick and I am deeply troubled by their deal with Yahoo.  I submit to you that this administration, although they may open a investigation or a review of the Google-Yahoo deal, will do nothing.  I think that this is a classic area to explore how do you apply section 2 in a highly innovative, highly networked not terribly competitive environment.

I find this a difficult area also by the way when it comes to Google, because Google has done so much terrific work and so much of it is IP-based, but as you can see they are quickly gathering market power in what I would call an online computing environment in the clouds and as we move into that environment I think you’re going to see Google has enormous market power there, again, I’m not saying it was anything other than lawfully achieved, but I wonder what’s going to happen when all of our enterprises move to computing in the clouds and there is a single firm that is offering the comprehensive solution that’s not interoperable with other potential solutions.  Now I think you’re going to see the same repeat of Microsoft, there will be companies that will begin to allege, and Ed can tell me why I’m wrong, they will be companies that begin to allege that Google is discriminating, that it is not allowing their products to interoperate with the Google products, and I think that we ought to have learned from the Microsoft experience, what the right standards are, and the problem that we had with Microsoft, I think, as a government we went in too late.

2.  On The Non-Existence of False Positives.

“My view and, you stole my thunder, I was prepared to say there is no such thing as a false positive, you know, let’s get real. I have counseled numerous incumbents who are dominant as well as numerous new entrants. I can tell you, at least in my own experience, there is not a dominant incumbent who hasn’t done something that is lawful because they were afraid that it might be reviewed by the DOJ or a state attorney general or an FTC. I just don’t see it. Ten years back in the private sector I have never once seen it, so I think that this ruse of, you know, we have to be restrained in our enforcement because false positives will chill innovation, take an economic toll on society and overall result in negative economic consequence, slowing output, increasing cost, I just think is false. I think the more people in the bars start rejecting this idea of false positives the better off we’re going to be.”

3. On Convergence with the Europeans and Global Antitrust Leadership.

“Europeans are setting rules, companies that are doing business globally cannot generally distribute two products, cannot generally compete in one manner in Europe and a different manner in the United States. So we may see ourselves, and this is a bad thing, if we don’t have influence on the development of dominant firm behavior, I think the Europeans are much more extreme than even I would be. So unless we have some credibility and can sit at the table and jointly continue to pursue the evolution of what we would call section 2, I think we’re going to cede this territory to the Europeans entirely and we’re not gonna have a whole lot to say about what abusive dominance looks like for a global firm.”

I highlight this third comment because it was an interesting contrast to the rest of the remarks favoring much more interventionist-minded application of Section 2.  Perhaps current Article 82 enforcement places an upper bound on what we can will see in the United States with respect to Section 2?  But it is difficult to know what to make of this comment when placed in the context of the assertion that false positives do not exist, which  I find quite troublesome for a number of reasons.

First, what does it mean to assert that “there is no such thing as a false positive”?  Varney’s evidence in support of the proposition is that from her vast and impressive counseling experience she is not aware of a firm that has refrained from lawful activity because they were afraid of antitrust liability.  That is comforting.  But not responsive to the concern about false positives raised by commentators in the literature.  As one who often argues that errors and their social costs not only exist but should play a central role in how we think about antitrust analysis, let me offer a basic point: false positives are not just when a firm chooses not to engage in lawful activity for fear that it will be mistakenly found to be illegal.  No.  It is not fear that a court will fail to understand the distinction between legal and illegal behavior if given clear rules.  The error need not come from courts merely misapplying clear law and concluding that activity that should be “lawful” violates the Sherman Act.  The concept is broader.  Rather, the false positives commentators are talking about involve when a firm refrains from efficient, pro-competitive behavior because it fears antitrust liability.

The reasons these errors come about is because the task of distinguishing pro-competitive conduct from that which is anticompetitive and harms consumers is incredibly difficult.  For example, does anybody really believe that LePage’s did not result in some chilling on the margin of pro-competitive bundled discount schemes?   What about the FTC’s enforcement action in N-Data?  Varney’s assertion that false positives simply do not exist is either a mistake or wrong.  Antitrust’s history is strewn with false positives, i.e. conduct that antitrust condemned before we learned far later that it was actually typically a normal part of the competitive process.  To be sure, we’ve learned something since then.  But I’ve never heard anybody argue that we’ve learned so much (especially in the single firm conduct arena) that the fear of antitrust liability does not influence business decisions. Consider a thought experiment designing an antitrust policy which takes seriously the belief that there is no such thing as error costs.  Many of my more interventionist minded Post-Chicago friends, who might disagree with me about the relative frequency of false positives, would shudder at the thought.

In either case, the view that we ought to not think about error costs when we think about designing appropriate antitrust enforcement policy (especially in the monopolization context, but also in cartels and mergers) strikes me as one of the most provocative, interventionist, and mistaken statements on this issue that I’ve read.   Error cost analysis is now a mainstream part of antitrust analysis.  It is not a tool that belongs to the Chicago School, Post-Chicagoans, or anybody else.  To be sure, an important debate can be had on the empirical question of the relative frequency and magnitude of type 1 and type 2 errors and their social costs.   Sometimes this debate has taken an oversimplistic approach by merely counting cases.  But there has at least been debate over the relevant theoretical and empirical questions.  This debate should continue.  It is my hope that Varney’s statement was an off the cuff remark in a panel setting (though it doesn’t appear it was) and not a conceptual belief that will drive policy decisions at the Antitrust Division.

5 responses to DOJ AAG Designate Christine Varney on Section 2, Europe, Google & A Puzzling Statement About Error Costs

  1. 

    It is puzzling. There is apparently some sweet spot between where we are now and where the EU is where we have active enforcement and don’t lose credibility but also are less active than the Europeans. But I can’t come up with a model where that middle ground is optimal that is also consistent with belief that the cost of an erroneous enforcement action is zero.

  2. 

    I’m curious about the third comment, re Article 82. On the one hand, she says that the EC is too extreme. On the other, she seems to be suggesting that if the US is not nearly as extreme then it’s going to lose credibility overseas. Surely there’s a third way — on that doesn’t suck.

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