Search Results For RPM

The American Antitrust Institute has announced plans to draft a comprehensive set of jury instructions for antitrust trials.  According to AAI president Bert Foer:

In Sherman Act Section 1 and Section 2 civil cases, judges tend to gravitate towards the ABA Model Instructions as the gold standard for impartial instructions. … The AAI believes the ABA model instructions are, in some situations, confusing, out of date, or do not adequately effectuate the goals of the antitrust laws. To provide an alternative, the AAI will develop a set of jury instructions that can be widely disseminated to lawyers and judges.

Foer is certainly right about existing jury instructions.  They’re often confusing and frequently provide so little guidance that jurors are effectively invited simply to “pick a winner.”  Crafting clearer, more concrete jury instructions would benefit the antitrust enterprise and further AAI’s stated mission “to increase the role of competition [and] assure that competition works in the interests of consumers.”

But clarity alone is not enough.  Any new jury instructions should set forth (in clear terms) liability standards whose substance enhances the effectiveness of the antitrust.  Here’s where I worry about the AAI project.

Throughout its history, AAI has shown little regard for the inherent limits of antitrust.  Those limits arise because the antitrust laws (1) embody somewhat vague standards that factfinders must flesh out ex post (e.g., they forbid “unreasonable” restraints of trade and “unreasonably” exclusionary conduct by monopolists) and (2) are privately enforceable in lawsuits giving rise to treble damages.  The former feature ensures that courts, regulators, and business planners face difficulty in evaluating the legality of business practices.  The latter guarantees that they’re regularly called upon to do so.  It also discourages borderline practices that might wrongly be deemed, after the fact, to be anticompetitive.  Antitrust therefore creates significant “decision costs” (in both adjudication and counseling) and “error costs” (in the form of either market power resulting from improper acquittals or foregone efficiencies resulting from improper convictions and the chilling of procompetitive conduct).  Those decision and error costs constitute the limits of antitrust and are inexorable:

  • you can’t decrease decision costs (by simplifying a liability rule) without increasing error costs (incorrect judgments and enhanced chilling effect);
  • you can’t decrease error costs (by making the rule more nuanced in order to better separate pro- from anticompetitive conduct) without increasing decision costs; 
  • you can’t reduce false acquittals (by easing the plaintiff’s proof burden or cutting back on affirmative defenses) without increasing false convictions, and vice-versa.

In light of this unhappy situation, antitrust liability standards should be crafted so as to minimize the sum of decision and error costs.  As I have recently explained, the Roberts Court has taken this tack in its eight major antitrust decisions.

AAI, by contrast, has shown little concern for false positives and seems to equate an effective antitrust regime with one that produces more liability.  Time and again, the Institute has advocated “pro-plaintiff” liability rules that threaten high error costs in the form of false convictions (and the chilling effect that follows).  In all but one of the Roberts Court’s antitrust decisions (which, as noted, are consistent with a “decision-theoretic” framework that would help minimize the sum of decision and error costs), AAI has advocated a pro-plaintiff position that the Supreme Court ultimately rejected.  (See AAI’s positions in Twombly, Leegin, Credit Suisse, Dagher, Weyerhaeuser, LinkLine, and Independent Ink.)  This is a stunningly bad record. 

Moreover, AAI remains out of antitrust’s mainstream (which now acknowledges antitrust’s inherent limits and the need to constrain error costs) on practices involving somewhat unsettled liability rules.  Consider, for example, AAI’s views on: 

  • Resale Price Maintenance (RPM).  Even after Leegin abrogated the per se rule against minimum RPM, AAI urged courts to adopt a rule of reason that would burden a defendant with “justifying” any instance of RPM that results in an increase in consumer prices.  Such an approach is likely to generate excessive liability because all instances of RPM — even those aimed at such procompetitive effects as the elimination of free-riding, the facilitation of new entry, or encouraging “non-free-rideable” demand-enhancing services — involve an increase in consumer prices.  AAI’s preferred rule essentially amounts to a presumption of illegality for RPM.  As I explained in this article, such an approach would involve huge error costs (and certainly wouldn’t minimize the sum of decision and error costs).
     
  • Loyalty Rebates.  Efficiency-minded antitrust scholars have generally concluded that there should be a safe harbor for single-product loyalty rebates resulting in an above-cost discounted price for the product at issue.  The leading case on loyalty rebates, the Eight Circuit’s Concord Boat decision, agrees.  The thinking behind such a safe harbor is that any equally efficient rival could match a defendant’s loyalty rebate that resulted in an above-cost discounted price; permitting liability on the basis of such a rebate would chill discounting and create a price umbrella for relatively inefficient rivals.  AAI, however, has urged courts to reject the safe harbor approved in Concord Boat.
     
  • Bundled Discounts.   Efficiency-minded antitrust scholars have also approved a safe harbor for some sorts of multi-product or “bundled”
     discounts: such a discount should be legal if each product in the bundle is priced above cost when the entire amount of the bundled discount is attributed to that single product.  The Ninth Circuit approved this safe harbor in its PeaceHealth decision.  Again, the rationale behind the safe harbor is that an equally efficient, single-product rival could meet any bundled discount resulting an above-cost pricing under this so-called “discount attribution” test.  And again, AAI has opposed this safe harbor.

These are but a few examples of AAI’s wildly pro-plaintiff view of antitrust—a view that ultimately injures consumers by ignoring the error costs (e.g., thwarted procompetitive business practices) associated with false convictions.  So in the end, I’m a bit worried about AAI’s jury instruction project.  If the Institute can simply provide clarity without pushing substantive liability standards in its preferred, pro-plaintiff (error cost-insensitive) direction, antitrust will be better off because of its efforts.  But I’m not optimistic.

I’ve just finished a draft of a paper for an upcoming conference on the Roberts Court’s business law decisions. Volokh blogger Jonathan Adler, who directs the Center for Business Law and Regulation at Case Western, is organizing the conference. The other presenters are Adam Pritchard from Michigan (covering the Court’s securities decisions), Brian Fitzpatrick from Vanderbilt (covering pleading standards), and Matt Bodie from St. Louis University (covering labor and employment). My paper discusses the Roberts Court’s antitrust decisions.

I am not the first to analyze the Roberts Court’s antitrust jurisprudence. Both Josh and Einer Elhauge have written terrific papers on the themes underlying the Court’s antitrust decisions. Josh has argued that the Court’s antitrust jurisprudence reflects Chicago School thinking; Elhauge contends that it’s more aligned with the Harvard School. While I’d probably side with Josh in that debate (mainly because I think the “new” Harvard School, having correctly jettisoned the old Structure-Conduct-Performance paradigm, moved so starkly in Chicago’s direction that it should really be called Chicago-Lite), I need not take sides. That’s because the unifying theme I identify in the Roberts Court’s antitrust decisions, one acknowledged by both Josh and Elhauge, is common to both the Chicago and Harvard schools. That theme is a recognition by the Court that antitrust is an inherently limited body of law that must be constrained in its reach — even to the point of allowing some undesirable conduct — if it is to do more good than harm.

Lots of folks are upset by the constraints the Roberts Court has imposed on antitrust. As Josh noted on this blog, Erwin Chemerinsky has complained that the Court’s antitrust decisions exemplify a “sharp turn to the right” and systematically “favor[] business over consumers.” Chemerinsky, of course, is no antitrust expert. But even well-respected members of the antitrust community have sounded a similar refrain. For example, William Kolasky, a former Deputy Assistant Attorney General in the Antitrust Division of the U.S. Department of Justice and an associate editor of the ABA’s Antitrust Magazine, recently (though before the Court’s most recent antitrust decision) wrote that “Our Supreme Court, especially under the leadership of Chief Justice John Roberts, seems equally intent on cutting back on private enforcement. … This record led Antitrust to ask in its last issue whether the Supreme Court’s recent antitrust decisions represent ‘The End of Antitrust as We Know It?'”

In my paper, “The Roberts Court and the Limits of Antitrust,” I argue that anti-consumer/pro-business/”radical shift” meme the Chemerinskies and Kolaskies of the world assert is wrong and reflects a fundamental misunderstanding of the inherent limits of the antitrust enterprise. Below the fold, I describe the paper. Continue Reading…

Danny Sokol makes some predictions about Post-Obama antitrust, and about my disappointment in what he perceives to be the likely direction of antitrust policy in the Obama administration:

1. increased challenges of mergers and monopolization cases, especially at DOJ

2. more consumer protection work at the FTC with a push to more expansive consumer rights

3. less language by US enforcers internationally about “convergence” and more on “harmonization”

4. a move away from cartels as the supreme evil of antitrust to more holistic approach that elevates unilateral conduct (if I am right, Josh Wright must be beside himself in terms of what this means under an error/cost framework)

Interesting. Though I agree with 1, 3, and 4 more than 2. I think the right place to start if we’re going to predict what an Obama antitrust regime will look like is what the President-elect has said he will do. There are other sources as well. Many have made much, far too much in my view, of Obama’s ties to the Chicago School, the Harvard School via Professor Elhauge who is an advisor, or behavioral economics via Cass Sunstein. But that seems like a reasonable place to start. So, here’s Obama’s Policy Statement on Antitrust to the American Antitrust Institute, which I’ve commented on previously.

Let’s start with what Obama says he’s going to do:

  1. Bring more cases. “Regrettably, the current administration has what may be the weakest record of antitrust enforcement of any administration in the last half century. Between 1996 and 2000, the FTC and DOJ together challenged on average more than 70 mergers per year on the grounds that they would harm consumer welfare. In contrast, between 2001 and 2006, the FTC and DOJ on average only challenged 33. And in seven years, the Bush Justice Department has not brought a single monopolization case. The consequences of lax enforcement for consumers are clear.”
  2. Aggressive enforcement against international cartels. “My administration will take aggressive action to curb the growth of international cartels”
  3. Prosecute Against Pharmaceutical Settlements that Prevent Generic Entry. “An Obama administration will ensure that the law effectively prevents anticompetitive agreements that artificially retard the entry of generic pharmaceuticals onto the market, while preserving the incentives to innovate that drive firms to invent life-saving
    medications.”
  4. Prevent Insurance and Drug Companies from “Abusing Monopoly Power.” “My administration will also ensure that insurance and drug companies are not abusing their monopoly power through unjustified price increases – whether on premiums for the insured or on malpractice insurance rates for physicians.”
  5. Relatedly, Introduce legislation to repeal the antitrust exemption for malpractice insurance with respect to price-fixing claims. “I have introduced legislation in the Senate that would repeal the longstanding antitrust exemption for medical malpractice insurance. This narrow bill would do so only for the most egregious cases of price fixing, bid rigging, and market allocation. As president, I will sign this bill into law.”
  6. Competition Advocacy in the U.S. and Internationally. “My administration will strengthen the antitrust authorities’ competition advocacy programs to ensure that special interests do not use regulation to insulate themselves from the competitive process. Finally, my administration will strengthen competition advocacy in the international community as well as domestically. It will take steps to ensure that antitrust law is not
    used as a tool to interfere with robust competition or undermine efficiency to the detriment of US consumers and businesses. It will do so by improving the administration of those laws in the US and by working with foreign governments to change unsound competition laws and to avoid needless duplication and conflict in multinational
    enforcement of those laws.

Two of these proposals are specific and easy to evaluate: prosecuting patent settlements that prevent generic entry and legislation to repeal the antitrust exemption for medical malpractice insurance. The fourth, standing alone, doesn’t make much sense. I’m not sure whether this is referring to prosecuting monopolists for charging monopoly prices (which he cannot do under current law) or something else. The next sentence in the statement is refers to this exemption bill, so perhaps that is what he is referring to. The statement about patent settlements in the pharmaceutical industry, however, could signal a major change to the extent that the FTC/DOJ rift on patent settlements disappears.

Numbers 1 and 6 are less specific: bring more cases and strengthen competition advocacy programs. Without particulars on competition advocacy, a program that is strongly supported by the current Chairman, I’m not sure if there is anything to evaluate here.

I’ve criticized the idea that merely bringing more cases strengthens or reinvigorates antitrust enforcement in any meaningful sense or from a consumer welfare perspective. I don’t think it does without a clear showing that the marginal case is going to improve consumer welfare. That may or may not be the case at current levels of enforcement. I’m not sure. But I haven’t seen any compelling evidence that this is true. As I’ve noted previously:

As a general matter, I do not find “more is better” arguments (see, e.g., here) causally linking agency activity to the quality of antitrust policy to be very persuasive. All of these claims should be taken with a grain of salt or two. It is one thing to make observations about trends in public antitrust enforcement over time….

All of this can be quite productive in terms of generating dialogue concerning potential improvements in antitrust policy. However, it is quite another thing to assert that such data are capable of establishing a causal link between enforcement activity level and the “quality” of antitrust enforcement and/or consumer welfare. I should be incredibly clear here: I do not read Baker & Shapiro to be claiming to have demonstrated such a link empirically (though it is clear from the article that they believe more enforcement would be a good thing) and am not making this point in response to their article. Rather, I am responding to appeals to evidence on activity levels alone to suggest that “more” or “less” enforcement would bring about positive changes for consumers. Maybe such a link would be useful if we were talking about dramatic changes in the rate of enforcement (say, abruptly plummeting to zero or increasing tenfold).

But one should be very cautious about making inferences about consumer welfare from small changes in aggregate enforcement data or anecdotal evidence from a handful of cases. I offer this word of caution in the spirit of the current season when these types of claims are quite popular with the politicians and journalists: while it may be true that the most active antitrust agency is the most influential for a number of reasons, there is simply no theoretical or empirical basis to suggest that the most active agency produces the greatest benefits for consumers.

And let’s not forget that “more antitrust enforcement” depends on what type of enforcement actions we are talking about. That brings me back to Danny Sokol’s point about the mix of cases in an Obama regime shifting away from cartels and toward monopolization on the margin. I suspect he is right in some sense. But we should note that a movement toward monopolization cases, where we know the least about the likely consumer welfare consequences of particular forms of single firm conduct, the marginal case is less likely to have a positive impact for consumers.

All of that said, let me take a stab at some predictions about antitrust in the Obama regime:

  1. Monopolization Enforcement will Increase, but Moderately. There will be a prominent monopolization case or two filed during the first four years. I don’t think we’ll see much of a shift toward monopolization cases.  So, I’m not quite “beside myself” about what this means in terms of the error-cost framework which I believe should guide antitrust policy decisions.   But I’m not optimistic either.  While the FTC or DOJ might want to bring these cases, current law makes single firm conduct cases (especially those involving pricing conduct, e.g. Intel) extremely difficult to win. And whatever impact Obama does have on the antitrust enforcement agencies, I suspect that loss aversion is relatively stable across political administrations. So, look for a few big name monopolization suits in prominent industries: health care, pharmaceuticals, microprocessors. I suspect that Post-Chicagoans hoping that the Obama administration is their chance to pursue a lot of monopolization cases are going to be a little bit disappointed.
  2. Reverse Payments. This is relatively low hanging fruit. The inter-agency tensions concerning the right approach to reverse payment settlements is going to go away with the new DOJ. The agencies will join together and successfully petition the Supreme Court to grant cert and apply per se/ inherently suspect analysis to patent settlements that delay generic entry. This, to some extent, overlaps with my first prediction. So let me note that I predict at least one, but probably not more than two, major monopolization suits excluding reverse payment cases.
  3. Competition Policy Advocacy. Nothing will change. Except perhaps, as Danny Sokol predicts, there will be much more talk about harmonization and much less about convergence. I do wonder how aggressive competition policy advocacy under the Obama administration will be against international antitrust efforts against U.S. firms that have been occasionally criticized as protectionist.
  4. Minimum RPM is Per Se Illegal Again. Dr. Miles was dead, but will come back to life via proposed federal legislation sponsored by Senators Clinton, Kohl and Biden. Empirical economists everywhere will be disappointed as the opportunity to exploit state variation in the legal status of RPM to identify its competitive consequences will disappear.
  5. Increased Merger Activity. Again, this is what President Obama said about his plans for antitrust enforcement if elected and I have no reason to believe it is not true. Whether this is good or bad for consumers depends a great deal on case selection and, even more so, the mix of mergers presented to the agencies during the next four years. Given that economic conditions have changed substantially, there is no doubt that the mix of cases will be substantially different than those under the second term of G.W. Bush. This will be interesting to watch.
  6. Patent Holdup. This one involves conjecture on my part and does not derive specifically from anything in the Obama statement. But I would be willing to bet that President Obama will strongly support both the FTC patent holdup agenda, as well as using the antitrust laws and FTC Act Section 5 to pursue cases like N-Data. I suspect we are likely to see an expansion of the patent holdup / conduct before SSO enforcement agenda. For my views on this subject (along with co-author Bruce Kobayashi, see here). This point also ties into the likely monopolization agenda. I think one might observe the expansion in monopolization enforcement linked to cases involving patent holdup and/or other forms of so-called “regulatory gaming,” e.g. pharmaceutical settlements and product hopping cases. The advantage of these cases is that they circumvent the problem of case law that makes it very difficult to win traditional pricing / discounting cases and that they usually involve big-name industries and firms.
  7. Network Neutrality legislation. I’m going to count this as an antitrust issue.

Those are my thoughts. My personal views on these are that 4, 5 and 7 are likely to make consumers worse off. Collectively, 1, 2 and 6 each depend on the types of cases that are brought. While I have less strong views about a more aggressive agenda pursuing some patent settlements, I think an expansion of the patent holdup enforcement agenda as represented by N-Data would harm consumers as well. I also believe monopolization enforcement under Section 2 in pricing cases involving loyalty or bundled discounts are not likely to improve consumer welfare — though I suspect these are not winners in federal court. I don’t suspect 3 will change much, and so I don’t suspect there will be any large changes on the margin here. One question I have is whether the Obama administration will prioritize competition research and development and take an economic and empirical approach to addressing current unknowns? That remains to be seen. The FTC Microeconomics conference and FTC at 100 events, I think, have been and will be productive endeavors in this area and ones that I hope will continue over the next four years.

wrightJosh Wright is a Professor of Law at George Mason Law School, a former FTC Scholar in Residence and a regular contributor to Truth on the Market.

The primary anticompetitive concern with exclusive dealing contracts is that a monopolist might be able to utilize exclusivity to fortify its market position, raise rivals’ costs of distribution, and ultimately harm consumers.  The unifying economic logic of these anticompetitive models of exclusivity is that the potential entrant (or current rival) must attract a sufficient mass of retailers to cover its fixed costs of entry, but that the monopolist’s exclusive contracts with retailers prevent the potential entrant from doing so.   However, the exclusionary equilibrium in these models are relatively fragile, and the models also often generate multiple equilibria in which buyers reject exclusivity. At the exclusive dealing hearings where I testified, a sensible consensus view emerged that a necessary condition for exclusive dealing or de facto exclusive contracts such as market-share discounts or loyalty discounts to cause competitive harm is that they deprive rivals of the opportunity to compete for access to distribution sufficient to achieve minimum efficient scale.  The Report (p. 137) reflects this consensus:

In particular, exclusive dealing may be harmful when it deprives rivals “of the necessary scale to achieve efficiencies, even though, absent the exclusivity,” more than one firm “would . . . be large enough to achieve efficiency.”68 In other words, exclusive dealing can be a way that a firm acquires or maintains monopoly power by impairing the ability of rivals to grow into effective competitors that erode the firm’s position. As one panelist put it, “the exclusive dealing case that you ought to worry about” is where exclusivity deprives rivals of the ability to obtain economies of scale.

The Report also goes on to note the competitive justifications for exclusive dealing, ranging from the variety of ways in which exclusive dealing can prevent free-riding, facilitate relationship-specific investments, and intensify manufacturer competition for scarce retailer shelf space or access to distribution with the benefits of that intensified competition passed on to consumers in the form of lower prices or higher quality.

The situation antitrust enforcers find themselves in with respect to exclusive dealing is not unfamiliar.  On the one hand, there are a set of possibility theorems which indicate that exclusive dealing and de facto exclusives can lead to anticompetitive outcomes under some specified conditions, including substantial economies of scale or scope.  On the other, there are a set of sensible and economically rigorous pro-competitive justifications for the practice.  On top of that is the casual empiricism that we observe exclusive dealing contracts in competitive markets and adopted by firms without significant market power.  As David Evans noted on the first day of our symposium, quite a bit can be learned about the relative probabilities of anticompetitive and pro-competitive uses of certain types of business behavior by understanding the incidence of use by competitive firms.  Exclusive dealing is no different.

Still, we find ourselves between battling theories.  The standard error cost approach to this problem, an approach discussed by many in this symposium as a powerful tool to ensure that our liability rules do not do not needlessly harm consumers by overdeterring pro-competitive conduct or under-deterring anticompetitive conduct, is to turn to the evidence.  What do we know about the incidences of anticompetitive exclusive dealing and de facto exclusive dealing contracts?  The question is not one of the logical validity of any of the competing theories.  It is one of their empirical (and therefore policy) relevance.  A sensible approach to designing antitrust liability rules for exclusive dealing would be to design a conduct-specific standard sensitive to the particular relative risks of Type I and Type II errors informed by the best available existing evidence.  Of course, it should be noted that more evidence is always better and there is certainly a need for more empirical research about single firm conduct.  But the limited nature of the evidence does not mean we have zero information to update our priors on the critical policy question.

So what does the evidence say?  What approach would it lead to?  And how does that approach compare with that endorsed in the Section 2 Report?  I’ll focus on those issues in the remainder of the post. Continue Reading…

Thom answers this question in the affirmative in his excellent post about the Ninth Circuit’s analysis in Masimo and is disappointed that the Ninth Circuit rejected the discount attribution standard as the sole test for Section 2 in favor of a separate inquiry as to whether the bundled discount arrangement resulted in a substantial foreclosure of distribution and competitive harm.  Thom describes this reasoning as “sorely disappointing.”  I’m tentatively not convinced things are as bad as Thom sees them and want to explain why.  Maybe Thom can persuade me that I ought to be more upset about Masimo than I am.

Let me start with two preliminary points.

First, I agree that bundled discounts are generally pro-competitive for all of the reasons Thom states as well as some others.  While there is some empirical evidence that bundled discounting appears in highly competitive markets where anticompetitive theories do not apply, suggesting pro-competitive efficiencies, but little empirical verification of a high likelihood of competitive harms.

Second, despite our agreement about the generally efficiency of bundled discounting, Thom’s claim that a bundled discount distribution arrangement cannot result in anticompetitive effect is overstated as a matter of economic theory.  My basic point is that it is possible, as a matter of economic theory, for distribution arrangements involving bundled discounts that satisfy the PeaceHealth safe harbor to result in anticompetitive effects.  Despite this economic point, I’m not sure that Thom and I disagree on the ultimate appropriate legal treatment of bundled discounting.  I’ll get back to that.

Now, to defend my claim.

Let’s start with Thom’s position that, contra the Ninth Circuit, a bundled discount scheme that satisfies PeaceHealth’s discount attribution test (i.e. prices are still above cost after the discount is fully attributed to the competitive product in the bundle) should be immune from Section 2 liability even if the arrangement results in the “foreclosure” of a sufficient share of distribution to deprive rivals of the opportunity to have access to a critical input (such as shelf space) required to achieve minimum efficient scale.

What is the anticompetitive story in these “bundled discount as de facto exclusive dealing” set of cases?  Put simply, the anticompetitive theories are based on the notion that the monopolist’s distribution arrangement will deprive the rival of the opportunity to reach minimum efficient scale through the foreclosure of access to some critical input do not depend on offering distributors a price that fails the discount attribution standard.  A broad set of “exclusionary distribution” cases allege that various forms of marketing arrangements between manufacturers and retailers result in a situation where the monopolist is purchasing exclusion + distribution rather than just distribution.

The economic literature giving rise to these anticompetitive theories of exclusive dealing as “raising rival’s costs” is about the conditions under which manufacturers will be able to purchase exclusion from downstream firms and the price that they will have to pay to do so.  Manufacturers make payments to distributors for access to shelf space in a lot of ways: lump sum payments such as slotting fees, rebates, loyalty discounts, bundled discounts, RPM, cooperative marketing dollars, trade promotions, and more.  But the key question should not turn on the form of those payments.  It should turn on whether the contracts satisfy the conditions necessary for anticompetitive harm: are rivals foreclosed from a sufficient share of distribution that they cannot achieve minimum efficient scale?

This begs the question: is a price that fails the discount attribution test a necessary condition for the above set of theories to operate?  I don’t think so as a matter of theory.  One can think of the raising rivals’ costs theories of distribution as the manufacturer paying a set of distributors to join the manufacturer’s cartel.  What payment would be sufficient to sustain that agreement without defection (distributors would all have the standard incentive to cheat)?  The answer to that question depends on a lot of things: upstream and downstream entry conditions, switching costs, number of distributors, the existence and magnitude of economies of scale or scope, etc.  But I don’t think that there is any reason to believe that economic theory provides a linkage between passing the discount attribution test and failure to satisfy the necessary conditions for standard raising rivals’ cost-based exclusion theories.  Thus, in theory one suspects that there are distribution arrangements that could logically survive PeaceHealth but also potentially create anticompetitive effects because they satisfy the conditions of the exclusion theories.  Let’s call that set of agreements X.

The existence of X doesn’t necessary mean that I disagree with Thom about the appropriate legal rule.  If X is very small such that it would be more costly to identify these agreements and prosecute them, one could justify Thom’s rule on those grounds.  If enforcement actions against X would lead to substantially greater error costs than Thom’s rule, one could also justify his position on those grounds.  The existing empirical evidence, to my knowledge, is insufficient to make such fine grained determinations.  However, the same evidence also tells us that manufacturer arrangements to pay for distribution and promotion are incredibly common, provide benefits to consumers, and occur in competitive markets.  Indeed, I’ve written a great deal about the set of conditions under which the normal competitive process generates payments for distribution. As such, I agree with Thom that it is incredibly important to establish workable and broad safe harbors in this area that minimize error costs. What I reject is the strong economic claim that appears in Thom’s post:

When it comes to bundled discounts, which generally reflect (or promote) cost-savings and which provide an immediate benefit to consumers, there can be no anticompetitive harm in the form of predation, unreasonable exclusion, or foreclosure if the competitive product is priced above the defendant’s cost once the entire discount is attributed to that product.

If the plaintiff is making a predation claim involving bundled discounts, I think the PeaceHealth standard is workable and useful and we should keep it.  A potential case might even be made, as discussed, to justify PeaceHealth as the universal standard for bundled discount claims even when they alleged exclusionary deprivation of scale because we think X is sufficiently small or unimportant or especially susceptible to Type I error.  But I don’t read Thom as making that case.  Perhaps he is and I hope he’ll clarify.

To repeat: I just don’t think that there is any reason to believe that exclusion in the sense defined here is not theoretically possible as a matter of economics because we observe a price that passes PeaceHealth.  As such, I don’t want to throw out foreclosure analysis as an important and relevant part of the antitrust inquiry.  Let me end with a few words in defense of foreclosure analysis which I think gets a bad rap nowadays.

There are costs to keeping the foreclosure analysis, and having two standards for two different allegations of anticompetitive harm.  Beyond that, of course, foreclosure analysis is full of its own complications, e.g. foreclosure of what? does duration of contract matter? what about staggered expiration dates?  But despite its complications and the potential for abuse, the foreclosure analysis asks the right question in deprivation of scale questions and the one that we know is explicitly linked to an important necessary condition of a very large set of the theories of harm alleged in monopolization cases.  Getting a legal standard reasonably tied to the necessary conditions for anticompetitive harm, as Thom knows from his important work in the RPM area, is not always an easy thing to do in antitrust.

By the way, I think that my objection here survives Thom’s “Hydra critique” that the mode of antitrust analysis should be a function of economic substance rather than form.  I agree that the critical question is whether the conduct is likely to impair the competitive process to the detriment of consumers.   The point here is that the the deprivation of scale claims are or at least can be, as a matter of economic substance, different than pure price predation claims.

The critical economic point is that the set of distribution arrangements must, as the literature says, raise a rival’s cost of operating or impair his ability to exist.  Those arrangements that do not should not trigger antitrust violations.  And of course, those that do not satisfied a necessary but not sufficient condition for competitive harm.  The key point is that in cases involving allegations of deprivation of scale, the economic consensus is that those claims require allegations of exclusion require foreclosure sufficient to deprive rivals the opportunity to compete for minimum efficient scale.  If we are ready to accept that this is the state of economic consensus, then we ought to explicitly include this showing in the part of the plaintiff’s burden.  The antitrust law currently attempts to get at this inquiry through foreclosure analysis, requiring something around 40 percent foreclosure share in de facto exclusionary cases.  That seems sensible to me.

Antitrust can handle different standards.  If the plaintiff is alleging deprivation of scale, lets make substantial foreclosure a necessary (but not sufficient) condition.  If the plaintiff is alleging a price predation argument that does not depend on deprivation of scale, PeaceHealth is a safe harbor.  Would that be so bad?  And one more question for discussion purposes, if Thom is right about PeaceHealth in the context of bundled discounts, doesn’t this also apply to any payment distribution?  For example, I think the logic clearly applies that single product loyalty discounts ought to be analyzed the same way, i.e. we should use discount attribution to apply the discount on so-called non-contestable units to the contestable ones and apply the same filter.  But if that’s true, exclusive dealing with discounts is a loyalty discount where the threshold volume is set to 100% of the distributor purchases.  If that’s right, Thom are you arguing that we should get rid of all exclusive dealing law whenever there is a discount scheme?

Dan Crane and Thom (who has promised more remarks!) have now both posted their prepared remarks for the Section 2 hearings panel on bundled discounts. Both call for bright-line, administrable liability rules for all forms of unilateral exclusionary conduct, and have important things to say about designing antitrust rules for bundled discounts. Both are worth reading in their entirety. Administrable rules that sensibly balance Type I and II errors are certainly an indisputably admirable goal for antitrust analysis and bundled discounts have proven to be a particularly tricky form of conduct for Section 2 analysis. Despite all of the agreement around here between Thom, Dan and I on the design of antitrust rules in a world of costly Type I errors, I think I have found a topic upon which I can at least offer a mild dissent (or at least a different perspective) regarding the usefulness of the analogy of various anticompetitive theories of bundled discounting practices to exclusive dealing.

The overlap between exclusive dealing and bundled/ loyalty discounts is frequently addressed by commentators, and is a topic of newfound interest in what has become the quest for a “holy grail’, one size fits all standard for Section 2 analysis of exclusionary conduct. At times, I detect a tension between the analysis of bundled discounts and exclusive dealing contracts which both purport to exclude exclude by depriving rivals from the opportunity to compete for distribution sufficient to support minimum efficient scale. For example, I discuss what I perceive to be a tension in Professor Hovenkamp’s very sensible analysis of bundled discounts and exclusive dealing in this post:

Hovenkamp concludes that adminstrative costs justify a predatory pricing-type rule in the context of for bundled discounts where the anticompetitive mechanism is de facto “foreclosure” or deprivation from distribution resources (i.e. shelf space) that would prevent rivals from achieving minimum efficient scale and extend the duration of monopoly by increasing barriers to entry. One would think that it would follow from Hovenkamp’s position that a predatory pricing-type rule would also be sensible for exclusive dealing and tying arrangements where the anticompetitive mechanism is the economic equivalent. To the contrary, Hovenkamp advocates rule of reason analysis (p. 201) for exclusive dealing and tying, noting that “foreclosure concerns can be assessed meaningfully only via the rule of reason” and that “the antitrust law of exclusive dealing,” which generally requires proof of substantial foreclosure as a necessary condition of competitive harm, “seems to be on the right track.”

The basic tension here is that the anticompetitive theories underlying both forms of conduct require foreclosure of a rival sufficient to deprive the opportunity to compete for minimum efficient scale. Of course, the pro-competitive side of the ledger differs. One might sensibly believe that the standard for the two forms of exclusion should be different because lower prices are inherently pro-competitive whereas exclusive dealing may not invoke the same immediate consumer benefits. This is certainly a sensible position. But it only suggests that the standard for bundled discounts ought to be more difficult to satisfy than the exclusive dealing standard given equal administrative costs and the same anticompetitive mechanism. This point is not sufficient to render the exclusive dealing analogy fruitless. I offer below some tentative thoughts on the usefulness of the exclusive dealing analogy to bundled discounts.

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Dr. Miles (1911-2007)

Thom Lambert —  29 June 2007

So Dr. Miles is dead. May he rest in peace.

No great surprises in the majority opinion in Leegin. Justice Kennedy, quite rightly, emphasized points we have asserted numerous times on this blog. Most notably:

The per se rule should be reserved for practices that are always, or almost always, anticompetitive. The common law nature of Sherman Act jurisprudence contemplates that courts will grow in their knowledge of the economic effects of various practices. When substantial experience reveals that a practice is almost always anticompetitive, application of the per se rule to that practice is warranted. By the same token, when experience and our developing understanding of economics indicates that a previously condemned practice frequently has procompetitive effects, a more probing method of analysis (i.e., some version of the rule of reason) is appropriate. The rule should be allowed to change in both directions: from rule of reason to per se and from per se to rule of reason. We said that here and here.

Vertical resale price maintenance (VRPM) is not always or almost always anticompetitive. There are lots of procompetitive justifications for the practice — e.g., encouragement of point-of-sale services by avoiding free-riding among dealers, facilitating entry of a new firm/brand by allowing manufacturers to induce retailers with a guaranteed mark-up, encouraging output-enhancing retailer services when it’s difficult for the manufacturer to draft and enforce contracts that would require performance of those services. We said that here and here.

While VRPM may be anticompetitive, anticompetitive effect is unlikely, and it’s fairly easy to identify those instances of VRPM that are likely to cause anticompetitive harm. For example, facilitation of dealer cartels — probably the biggest anticompetitive threat posed by VRPM — cannot occur unless (1) dealers are likely to seek a VRPM policy (a condition that will occur only if there aren’t lots of producers of the product at issue or all, or most of the producers impose VRPM), and (2) producers are likely to give in to dealers’ requests for a VRPM policy (a condition that will occur only if the retailers seeking VRPM have market power, and vertical integration into the retail market is impracticable for the producers). Because anticompetitive effect is unlikely and can occur only when certain easy-to-identify market structures exist, rule of reason treatment is appropriate. We said that here.

Evidence purporting to show that VRPM increases retail prices is not determinative. Putting aside the strength of the evidence (which is pretty weak), it is unpersuasive because antitrust is concerned with maximizing consumer welfare, not just minimizing prices. If the higher prices are accompanied by enhanced services that consumers value more than the incremental price increase, then consumer welfare is enhanced despite the higher prices. We said that here.

The 1975 Consumer Goods Pricing Act, which repealed a 1937 statute permitting states to authorize VRPM, does not indicate a congressional intent to retain the per se rule. The 1937 statute effectively permitted states to provide per se legality for VRPM schemes. In repealing the Act, the 1975 Congress again subjected RPM to antitrust scrutiny, but it did not mandate a particular standard to govern such scrutiny. Instead, it contemplated that the standard would evolve with judicial understanding of the practice. Had Congress desired to permanently enshrine the per se rule for VRPM, it could have done so. We said that here and here.

***

OK, enough with the obnoxious “We called its.” What of Justice Breyer’s dissent?

I’m so disappointed. I’ve always liked Breyer on regulatory matters. His 1982 book, Regulation and Its Reform, is a classic. It introduced the notion of “regulatory mismatch” — the idea that regulators frequently respond to particular market failures with regulatory interventions that are better suited to other types of market failure (e.g., they impose bans, which might be appropriate for externality-causing conduct, to remedy information asymmetries, which are better addressed via disclosure rules). It also emphasized the importance of adopting the least restrictive regulatory alternative and leaving things, as much as possible, to private ordering.

Breyer’s incredibly unpersuasive opinion (e.g., “The Consumer Federation of America tells us that large low-price retailers would not exist without Dr. Miles” — Dump your Wal-Mart stock!) basically makes three points: (1) VRPM can be anticompetitive, and we’re not sure how often it’s procompetitive; (2) it’s too hard for courts to separate the procompetitive sheep from the anticompetitive goats, so an easy-to-administer per se rule is appropriate; and (3) stare decisis concerns call for adherence to a precedent as old as the good Doctor.

These are not cogent arguments.

With respect to the first, no one denies that VRPM can be anticompetitive (Justice Kennedy admits as much). The question is not whether it’s anticompetitive more often than it’s procompetitive. Instead, the question is whether it’s always or almost always anticompetitive. No honest and competent economist believes that’s the case. In stating that he “can find no economic consensus” on how often VRPM’s procompetitive benefits “occur in practice,” Justice Breyer is putting the burden on rule of reason advocates to produce rigorous empirical studies documenting various procompetitive effects. That’s backward. The rule of reason is the default analysis for trade restraints, so the burden should be on per se advocates to prove that VRPM is always or almost always anticompetitive. There’s no way they could discharge that burden, and Breyer knows it.

Moreover, even if there’s “no economic consensus” on precisely how often various procompetitive effects occur, there’s consensus (or near consensus) on the following points: (1) manufacturers want to sell as much of their stuff as they can; (2) all else being equal, high retail mark-ups will lead to fewer sales (and thus less profit for manufacturers); (3) manufacturers don’t get to keep retail mark-ups — those go into the retailers’ pockets; (4) ergo, a manufacturer generally will not want high retail mark-ups unless the dealer conduct they generate makes the manufacturer’s product more attractive to consumers, and that enhanced attractiveness is enough to offset the higher price the consumer must pay; and (5) the conditions under which a mandated resale price could facilitate a dealer or manufacturer cartel are narrow, infrequent, and easy to identify. (See here for more explanation of that last point.) Surely this is enough to warrant a conclusion that VRPM is usually procompetitive — a conclusion that’s well beyond what’s necessary to justify rule of reason treatment.

As for Breyer’s second point about administrability, we see courts engage in more probing analyses all the time. With respect to other “mixed bag” practices (i.e., practices that can have both pro- and anti-competitive effects), courts have developed easily administrable, “structured” rule of reason analyses. Consider, for example, data exchanges among competitors. Rule of reason adjudication has produced a relatively simple analysis that determines legality on the basis of the structure of the market at issue and the nature of the information exchanged. This easy-to-administer analysis has evolved because courts have had the freedom to develop a common law analysis that is rooted in economic realities. Affording rule of reason treatment to VRPM will permit courts to develop a similar economically informed, structured rule of reason analysis for that practice. Indeed, Justice Kennedy’s decision highlights a number of discrete factors that will undoubtedly become a part of the structured rule of reason that eventually emerges.

Finally, stare decisis concerns do not justify continued adherence to Dr. Miles‘s outmoded rule. First, this is not a typical “statutory” case. Justice Breyer emphasizes that stare decisis is particularly important for statutory precedents because Congress can change outcomes it doesn’t like. While that’s true, Congress has made clear from the get-go that the Sherman Act is, in essence, a delegation to the courts to craft a common law of trade restraints. You can see this from the language of the statute itself — it’s ridiculously short, it fails to define any of the key terms (e.g., it helpfully defines “person” but not “combination in the form of trust or otherwise,” “restraint of trade,” or “monopolize”), and it uses terms from the then-existing common law (e.g., “restraint of trade”). Because Congress has really delegated to the courts the task of defining trade restraints (and monopolization) stare decisis should play the role it plays in common law cases.

Second, as noted above and here, the very nature of Section 1 jurisprudence contemplates a more limited role for stare decisis: Courts first analyze trade restraints using the rule of reason, and when they have enough experience with a restraint to see that it’s almost always anti-competitive, they adopt an administratively efficient per se rule and are not hindered by prior decisions applying the rule of reason. By the same token, stare decisis should not prohibit movement in the opposite direction — i.e., from per se to rule of reason. Otherwise, we end up with an undesirable “ratchet effect.” As Herbert Hovenkamp recently explained in The Antitrust Enterprise: Principle and Execution (p. 118-19):

[K]nowledge about the competitive effects of business practices must be regarded as a two-way street. Just as increased judicial experience with a practice can lead judges to conclude that it is virtually always anti-competitive and can be disapproved after a truncated inquiry, judicial experience can also reveal the opposite.

Finally, there are no serious “reliance” interests at stake here. What resources have been irretrievably committed on the assumption that manufacturers won’t set resale prices? Breyer mentions (1) “massive amounts of advice that lawyers have provided their clients, and untold numbers of business decisions those clients have taken in reliance upon that advice”; (2) investments by discount distributors (and others associated with those distributors — “What about malls built on the assumption that a discount distributor will remain an anchor tenant? What about home buyers who have taken a home’s distance from such a mall into account?”); (3) Congress’s passage of the 1975 Consumer Goods Pricing Act.

Consider each. First, advice by lawyers. Every change in precedent renders past advice moot, so that’s not the sort of reliance interest that should concern courts. (Moreover, the advice-giving itself is a sunk cost, and lawyers are benefited, at least in the short run, from a change in precedent.)

What about “business decisions” such as “investments by discount distributors”? It’s unlikely there will be much sacrifice here. As explained above, manufacturers are going to want higher retail mark-ups, which reduce sales (all else being equal), only if those higher mark-ups lead to point-of-sale services that are worth more to consumers than the incremental price increase. The vast majority of goods sold in discount stores are not the sorts of products where the attractiveness of enhanced point-of-sale services will offset increased prices. The few products that do disappear from the shelves of discount retailers can easily be replaced by other products. Americans like cheap (and manufacturers know that), so there’s little danger discounters are going to run out of things to sell.

Finally, Congress’s “reliance” in 1975. Breyer insists that “enacting major legislation premised upon the existence of [the per se rule against VRPM] constitutes important public reliance upon that rule.” Really? As noted, the 1975 Congress simply said that VRPM should be subject to antitrust scrutiny — as it will be even after Leegin — not that it should be per se illegal. Had Congress intended to mandate a particular mode of antitrust analysis, it certainly could have done so. We can’t really infer “important public reliance” on Dr. Miles‘s per se rule from Congress’s decision to remove antitrust immunity from a class of conduct. More importantly, the majority’s ruling can be easily “fixed” if Congress does, in fact, believe VRPM should be condemned absolutely. (And with this Congress, who knows.)

***

In sum (is anyone still reading at this point?!), yesterday was a pretty good day for antitrust and for TOTM. I’m a bit disappointed in my man Breyer, but I still give him credit for injecting a bit of rigor into regulatory analysis. I’m also willing to cut him a little slack because much of his reasoning is based on a concern about the administrability of the antitrust laws — a concern I share. In other contexts (discussions regarding how to evaluate bundled discounts), I have quoted Justice Breyer’s words from Barry Wright:

Unlike economics, law is an administrative system the effects of which depend on the content of rules and precedents only as they are applied by judges and juries in courts and by lawyers advising their clients. Rules that seek to embody every economic complexity and qualification may well, through the vagaries of administration, prove counter-productive, undercutting the very economic ends they seek to serve.

The first sentence of that passage appears almost word for word (and without citation, interestingly enough) in Justice Breyer’s Leegin dissent. Of course, there’s a difference between “seek[ing] to embody every economic complexity and qualification” (which many of the anti-bundling folks do) and seeking to recognize a near economic consensus (as the Leegin majority does). Moreover, it’s likely that the structured rule of reason emerging from Leegin will be relatively easy for judges, juries, and counselors to apply. In addition, there’s a difference between citing excessive complexity and inadministrability as grounds for a liberal policy that defers to private ordering (my position in the bundled discount context) and citing such complexity/inadministrability to justify an overly restrictive approach. Still, though, I admire Justice Breyer’s desire to make antitrust administrable.

And, of course, I’m most pleased that I didn’t have to eat my hat.