Archives For truth on the market

  1. Introduction

The International Competition Network (ICN), a “virtual” organization comprised of most of the world’s competition (antitrust) agencies and expert non-governmental advisors (NGAs), held its Sixteenth Annual Conference in Porto, Portugal from May 10-12. (I attended this Conference as an NGA.) Now that the ICN has turned “sweet sixteen,” a stocktaking is appropriate. The ICN can point to some significant accomplishments, but faces major future challenges. After describing those challenges, I advance four recommendations for U.S.-led initiatives to enhance the future effectiveness of the ICN.

  1. ICN Background and Successes

The ICN, whose key objective is to promote “soft convergence” among competition law regimes, has much to celebrate. It has gone from a small core of competition authorities focused on a limited set of issues to a collection of 135 agencies from 122 far-flung jurisdictions, plus a large cadre of NGA lawyers and economists who provide practical and theoretical advice. The ICN’s nature and initiatives are concisely summarized on its website:

The ICN provides competition authorities with a specialized yet informal venue for maintaining regular contacts and addressing practical competition concerns. This allows for a dynamic dialogue that serves to build consensus and convergence towards sound competition policy principles across the global antitrust community.

The ICN is unique as it is the only international body devoted exclusively to competition law enforcement and its members represent national and multinational competition authorities. Members produce work products through their involvement in flexible project-oriented and results-based working groups. Working group members work together largely by Internet, telephone, teleseminars and webinars.

Annual conferences and workshops provide opportunities to discuss working group projects and their implications for enforcement. The ICN does not exercise any rule-making function. Where the ICN reaches consensus on recommendations, or “best practices”, arising from the projects, individual competition authorities decide whether and how to implement the recommendations, through unilateral, bilateral or multilateral arrangements, as appropriate.

The Porto Conference highlighted the extent of the ICN’s influence. Representatives from key international organizations that focus on economic growth and development (and at one time were viewed as ICN “rivals”), including the OECD, the World Bank, and UNCTAD, participated in the Conference. A feature in recent years, the one-day “Pre-ICN” Forum jointly sponsored by the World Bank, the International Chamber of Commerce, and the International Bar Association, this year shared the spotlight with other “sidebar” events (for example, an antitrust symposium cosponsored by UNCTAD and the Japan Fair Trade Commission, an “African Competition Forum,” and a roundtable of former senior officials and academics sponsored by a journal). The Porto Conference formally adopted an impressive array of documents generated over the past year by the ICN’s various Working Groups (the Advocacy, Agency Effectiveness, Cartel, Merger, and Unilateral Conduct Working Groups) (see here and here). This work product focuses on offering practical advice to agencies, rather than theoretical academic speculation. If recent history is in any indication, a substantial portion of this advice will be incorporated within some national laws, and various agencies guidance documents, and strategic plans.

In sum, the ICN is an increasingly influential organization. More importantly, it has, on balance, been a force for the promotion of sound policies on such issues as pre-merger notifications and cartel enforcement – policies that reduce transaction costs for the private sector and tend to improve the quality of antitrust enforcement. It has produced valuable training materials for agencies. Furthermore, the ICN’s Advocacy Working Group, buoyed by a growing amount of academic research (some of it supported by the World Bank), increasingly has highlighted the costs of anticompetitive government laws and regulations, and provided a template for assessing and critiquing regulatory schemes that undermine the competitive process. Most recently, the revised chapter on the “analytical framework for evaluating unilateral exclusionary conduct” issued at the 2017 Porto Conference did a solid job of describing the nature of harm to the competitive process and the need to consider error costs in evaluating such conduct. Other examples of welfare-enhancing ICN proposals abound.

  1. Grounds for Caution Going Forward

Nevertheless, despite its generally good record, one must be cautious in evaluating the ICN’s long-term prospects, for at least five reasons.

First, as the ICN tackles increasingly contentious issues (such as the assessment of vertical restraints, which are part of the 2017-2018 ICN Work Plan, and “dominant” single firm “platforms,” cited specifically by ICN Chairman Andreas Mundt in Porto), the possibility for controversy and difficulty in crafting recommendations rises.

Second, most ICN members have adopted heavily administrative competition law frameworks that draw upon an inquisitorial civil law model, as opposed to the common law adversarial legal system in which independent courts conduct full legal reviews of agency conclusions. Public choice analysis (not to mention casual empiricism and common sense) indicates that as they become established, administrative agencies will have a strong incentive to “do something” in order to expand their authority. Generally speaking, sound economic analysis (bolstered by large staffs of economists) that stresses consumer welfare has been incorporated into U.S. federal antitrust enforcement decisions and federal antitrust jurisprudence – but that is not the case in large parts of the world. As its newer member agencies grow in size and influence, the ICN may be challenged by those authorities to address “novel” practices that stray beyond well-understood competition law categories. As a result, innovative welfare-enhancing business innovations could be given unwarranted scrutiny and thereby discouraged.

Third, as various informed commentators in Porto noted, many competition laws explicitly permit consideration of non-economic welfare-based goals, such as “industrial policy” (including promotion of “national champion” competitors), “fairness,” and general “public policy.” Such ill-defined statutory goals allow competition agencies (and, of course, politicians who may exercise influence over those agencies) to apply competition statutes in an unpredictable manner that has nothing to do with (indeed, may be antithetical to) promotion of a vigorous competitive process and consumer welfare. With the proliferation of international commerce, the costly uncertainty injected into business decision-making by malleable antitrust statutes becomes increasingly significant. The ICN, which issues non-binding recommendations and advice and relies on voluntary interagency cooperation, may have little practical ability to fend off such welfare-inimical politicization of antitrust.

Fourth, for nearly a decade United States antitrust agencies have expressed concern in international forums about lack of due process in competition enforcement. Commendably, in 2015 the ICN did issue guidance regarding “key investigative principles and practices important to effective and fair investigative process”, but this guidance did not address administrative hearings and enforcement actions, which remain particularly serious concerns. The ICN’s ability to drive a “due process improvements” agenda may be inherently limited, due to differences among ICN members’ legal systems and sensitivities regarding the second-guessing of national enforcement norms associated with the concept of “due process.”

Fifth, there is “the elephant outside the room.” One major jurisdiction, China, still has not joined the ICN. Given China’s size, importance in the global economy, and vigorous enforcement of its completion law, China’s “absence from “the table” is a significant limitation on the ICN’s ability to promote economically meaningful global policy convergence. (Since Hong Kong, a “special administrative region” of China, has joined the ICN, one may hope that China itself will consider opting for ICN membership in the not too distant future.)

  1. What Should the U.S. Antitrust Agencies Do?

Despite the notes of caution regarding the ICN’s future initiatives and effectiveness, the ICN will remain for the foreseeable future a useful forum for “nudging” members toward improvements in their competition law systems, particularly in key areas such as cartel enforcement, merger review, and agency effectiveness (internal improvements in agency management may improve the quality of enforcement and advocacy initiatives). Thus, the U.S. federal antitrust agencies, the Justice Department’s Antitrust Division (DOJ) and the Federal Trade Commission (FTC), should (and undoubtedly will) remain fully engaged with the ICN. DOJ and the FTC not only should remain fully engaged in the ICN’s Working Groups, they should also develop a strategy for minimizing the negative effects of the ICN’s limitations and capitalizing on its strengths. What should such a strategy entail? Four key elements come to mind.

First, the FTC and DOJ should strongly advocate against an ICN focus on expansive theories of liability for unilateral conduct (particularly involving such areas as popular Internet “platforms” (e.g., Google, Facebook, and Amazon, among others) and vertical restraints), not tied to showings of harm to the competitive process. The proliferation of cases based on such theories could chill economically desirable business innovations. In countering such novel and expansive condemnations of unilateral conduct, the U.S. agencies could draw upon the extensive law and economics literature on efficiencies and unilateral conduct in speeches, publications, and presentations to ICN Working Groups. To provide further support for their advocacy, the FTC and DOJ should also consider issuing a new joint statement of unilateral conduct enforcement principles, inspired by the general lines of the 2008 DOJ Report on Single Firm Conduct Under Section 2 of the Sherman Act (regrettably withdrawn by the Obama Administration DOJ in 2009). Relatedly, the FTC and DOJ should advocate the right of intellectual property (IP) holders legitimately to maximize returns on their holdings. The U.S. agencies also should be prepared to argue against novel theories of antitrust liability untethered from traditional concepts of antitrust harm, based on the unilateral exploitation of IP rights (see here, here, here, and here).

Second, the U.S. agencies should promote a special ICN project on decision theory and competition law enforcement (see my Heritage Foundation commentary here), under the aegis of the ICN’s Agency Effectiveness Working Group. A decision-theoretic framework aims to minimize the costs of antitrust administration and enforcement error, in order to promote cost-beneficial enforcement outcomes. ICN guidance on decision theory (which would stress the primacy of empirical analysis and the need for easily administrable rules) hopefully would encourage competition agencies to focus on clearly welfare-inimical practices, and avoid pursuing fanciful new theories of antitrust violations unmoored from robust theories of competitive harm. The FTC and DOJ should also work to inculcate decision theory into the work of the core ICN Cartel and Merger Working Groups (see here).

Third, the U.S. agencies should also encourage the ICN’s Agency Effectiveness Working Group to pursue a comprehensive “due process” initiative, focused on guaranteeing fundamental fairness to parties at all stages of a competition law proceeding.  An emphasis on basic universal notions of fairness would transcend the differences inherent in civil law and common law administrative processes. It would suggest a path forward whereby agencies could agree on the nature of basic rights owed litigants, while still preserving differences among administrative enforcement models. Administrative procedure recommendations developed by the American Bar Association’s Antitrust Section in 2015 (see here) offer a good template for consideration, and 2012 OECD deliberations on fairness and transparency (see here) yield valuable background analysis. Consistent with these materials, the U.S. agencies could stress that due process reforms to protect basic rights would not only improve the quality of competition authority decision-making, it would also enhance economic welfare and encourage firms from around the world to do business in reforming jurisdictions. (As discussed above, due process raises major sensitivities, and thus the push for due process improvements should be viewed as a long-term project that will have to be pursued vigorously and very patiently.)

Fourth, working through the ICN’s Advocacy Working Group, the FTC and DOJ should push to substantially raise the profile of competition advocacy at the ICN. A growing body of economic research reveals the enormous economic gains that could be unlocked within individual countries by the removal of anticompetitive laws and rules, particularly those that create artificial barriers to entry and distort trade (see, for example, here and here). The U.S. agencies should emphasize the negative consequences for poorer consumers, reduced innovation, and foregone national income due to many of these anticompetitive barriers, drawing upon research by World Bank and OECD scholars (see here). (Fortunately, the ICN already works with the World Bank to promote an annual contest that showcases economic “success stories” due to agency advocacy.) The FTC and DOJ should also use the ICN as a forum to recommend that national competition authorities accord competition advocacy aimed at domestic regulatory reform relatively more resources and attention, particularly compared to investigations of vertical restraints and novel unilateral conduct. It should also work within the ICN’s guidance and oversight body, the “Steering Group,” to make far-reaching competition advocacy initiatives a top ICN priority.

  1. Conclusion

The ICN is a worthwhile international organization that stands at a crossroads. Having no permanent bureaucracy (its website is maintained by the Canadian Competition Bureau), and relying in large part on online communications among agency staff and NGAs to carry out its work, the ICN represents a very good investment of scare resources by the U.S. Government. Absent thoughtful guidance, however, there is a danger that it could drift and become less effective at promoting welfare-enhancing competition law improvements around the world. To avert such an outcome, U.S. antitrust enforcement agencies (joined by like-minded ICN members from other jurisdictions) should proactively seek to have the ICN take up new projects that hold out the promise for substantive and process-based improvements in competition policy worldwide, including far-reaching regulatory reform. A positive ICN response to such initiatives would enhance the quality of competition policy. Moreover, it could contribute in no small fashion to increased economic welfare and innovation in those jurisdictions that adopted reforms in response to the ICN’s call. American businesses operating internationally also would benefit from improvements in the global competition climate generated by ICN-incentivized reforms.

 

 

 

It’s fitting that FCC Chairman Ajit Pai recently compared his predecessor’s jettisoning of the FCC’s light touch framework for Internet access regulation without hard evidence to the Oklahoma City Thunder’s James Harden trade. That infamous deal broke up a young nucleus of three of the best players in the NBA in 2012 because keeping all three might someday create salary cap concerns. What few saw coming was a new TV deal in 2015 that sent the salary cap soaring.

If it’s hard to predict how the market will evolve in the closed world of professional basketball, predictions about the path of Internet innovation are an order of magnitude harder — especially for those making crucial decisions with a lot of money at stake.

The FCC’s answer for what it considered to be the dangerous unpredictability of Internet innovation was to write itself a blank check of authority to regulate ISPs in the 2015 Open Internet Order (OIO), embodied in what is referred to as the “Internet conduct standard.” This standard expanded the scope of Internet access regulation well beyond the core principle of preserving openness (i.e., ensuring that any legal content can be accessed by all users) by granting the FCC the unbounded, discretionary authority to define and address “new and novel threats to the Internet.”

When asked about what the standard meant (not long after writing it), former Chairman Tom Wheeler replied,

We don’t really know. We don’t know where things will go next. We have created a playing field where there are known rules, and the FCC will sit there as a referee and will throw the flag.

Somehow, former Chairman Wheeler would have us believe that an amorphous standard that means whatever the agency (or its Enforcement Bureau) says it means created a playing field with “known rules.” But claiming such broad authority is hardly the light-touch approach marketed to the public. Instead, this ill-conceived standard allows the FCC to wade as deeply as it chooses into how an ISP organizes its business and how it manages its network traffic.

Such an approach is destined to undermine, rather than further, the objectives of Internet openness, as embodied in Chairman Powell’s 2005 Internet Policy Statement:

To foster creation, adoption and use of Internet broadband content, applications, services and attachments, and to ensure consumers benefit from the innovation that comes from competition.

Instead, the Internet conduct standard is emblematic of how an off-the-rails quest to heavily regulate one specific component of the complex Internet ecosystem results in arbitrary regulatory imbalances — e.g., between ISPs and over-the-top (OTT) or edge providers that offer similar services such as video streaming or voice calling.

As Boston College Law Professor, Dan Lyons, puts it:

While many might assume that, in theory, what’s good for Netflix is good for consumers, the reality is more complex. To protect innovation at the edge of the Internet ecosystem, the Commission’s sweeping rules reduce the opportunity for consumer-friendly innovation elsewhere, namely by facilities-based broadband providers.

This is no recipe for innovation, nor does it coherently distinguish between practices that might impede competition and innovation on the Internet and those that are merely politically disfavored, for any reason or no reason at all.

Free data madness

The Internet conduct standard’s unholy combination of unfettered discretion and the impulse to micromanage can (and will) be deployed without credible justification to the detriment of consumers and innovation. Nowhere has this been more evident than in the confusion surrounding the regulation of “free data.”

Free data, like T-Mobile’s Binge On program, is data consumed by a user that has been subsidized by a mobile operator or a content provider. The vertical arrangements between operators and content providers creating the free data offerings provide many benefits to consumers, including enabling subscribers to consume more data (or, for low-income users, to consume data in the first place), facilitating product differentiation by mobile operators that offer a variety of free data plans (including allowing smaller operators the chance to get a leg up on competitors by assembling a market-share-winning plan), increasing the overall consumption of content, and reducing users’ cost of obtaining information. It’s also fundamentally about experimentation. As the International Center for Law & Economics (ICLE) recently explained:

Offering some services at subsidized or zero prices frees up resources (and, where applicable, data under a user’s data cap) enabling users to experiment with new, less-familiar alternatives. Where a user might not find it worthwhile to spend his marginal dollar on an unfamiliar or less-preferred service, differentiated pricing loosens the user’s budget constraint, and may make him more, not less, likely to use alternative services.

In December 2015 then-Chairman Tom Wheeler used his newfound discretion to launch a 13-month “inquiry” into free data practices before preliminarily finding some to be in violation of the standard. Without identifying any actual harm, Wheeler concluded that free data plans “may raise” economic and public policy issues that “may harm consumers and competition.”

After assuming the reins at the FCC, Chairman Pai swiftly put an end to that nonsense, saying that the Commission had better things to do (like removing barriers to broadband deployment) than denying free data plans that expand Internet access and are immensely popular, especially among low-income Americans.

The global morass of free data regulation

But as long as the Internet conduct standard remains on the books, it implicitly grants the US’s imprimatur to harmful policies and regulatory capriciousness in other countries that look to the US for persuasive authority. While Chairman Pai’s decisive intervention resolved the free data debate in the US (at least for now), other countries are still grappling with whether to prohibit the practice, allow it, or allow it with various restrictions.

In Europe, the 2016 EC guidelines left the decision of whether to allow the practice in the hands of national regulators. Consequently, some regulators — in Hungary, Sweden, and the Netherlands (although there the ban was recently overturned in court) — have banned free data practices  while others — in Denmark, Germany, Spain, Poland, the United Kingdom, and Ukraine — have not. And whether or not they allow the practice, regulators (e.g., Norway’s Nkom and the UK’s Ofcom) have lamented the lack of regulatory certainty surrounding free data programs, a state of affairs that is compounded by a lack of data on the consequences of various approaches to their regulation.

In Canada this year, the CRTC issued a decision adopting restrictive criteria under which to evaluate free data plans. The criteria include assessing the degree to which the treatment of data is agnostic, whether the free data offer is exclusive to certain customers or certain content providers, the impact on Internet openness and innovation, and whether there is financial compensation involved. The standard is open-ended, and free data plans as they are offered in the US would “likely raise concerns.”

Other regulators are contributing to the confusion through ambiguously framed rules, such as that of the Chilean regulator, Subtel. In a 2014 decision, it found that a free data offer of specific social network apps was in breach of Chile’s Internet rules. In contrast to what is commonly reported, however, Subtel did not ban free data. Instead, it required mobile operators to change how they promote such services, requiring them to state that access to Facebook, Twitter and WhatsApp were offered “without discounting the user’s balance” instead of “at no cost.” It also required them to disclose the amount of time the offer would be available, but imposed no mandatory limit.

In addition to this confusing regulatory make-work governing how operators market free data plans, the Chilean measures also require that mobile operators offer free data to subscribers who pay for a data plan, in order to ensure free data isn’t the only option users have to access the Internet.

The result is that in Chile today free data plans are widely offered by Movistar, Claro, and Entel and include access to apps such as Facebook, WhatsApp, Twitter, Instagram, Pokemon Go, Waze, Snapchat, Apple Music, Spotify, Netflix or YouTube — even though Subtel has nominally declared such plans to be in violation of Chile’s net neutrality rules.

Other regulators are searching for palatable alternatives to both flex their regulatory muscle to govern Internet access, while simultaneously making free data work. The Indian regulator, TRAI, famously banned free data in February 2016. But the story doesn’t end there. After seeing the potential value of free data in unserved and underserved, low-income areas, TRAI proposed implementing government-sanctioned free data. The proposed scheme would provide rural subscribers with 100 MB of free data per month, funded through the country’s universal service fund. To ensure that there would be no vertical agreements between content providers and mobile operators, TRAI recommended introducing third parties, referred to as “aggregators,” that would facilitate mobile-operator-agnostic arrangements.

The result is a nonsensical, if vaguely well-intentioned, threading of the needle between the perceived need to (over-)regulate access providers and the determination to expand access. Notwithstanding the Indian government’s awareness that free data will help to close the digital divide and enhance Internet access, in other words, it nonetheless banned private markets from employing private capital to achieve that very result, preferring instead non-market processes which are unlikely to be nearly as nimble or as effective — and yet still ultimately offer “non-neutral” options for consumers.

Thinking globally, acting locally (by ditching the Internet conduct standard)

Where it is permitted, free data is undergoing explosive adoption among mobile operators. Currently in the US, for example, all major mobile operators offer some form of free data or unlimited plan to subscribers. And, as a result, free data is proving itself as a business model for users’ early stage experimentation and adoption of augmented reality, virtual reality and other cutting-edge technologies that represent the Internet’s next wave — but that also use vast amounts of data. Were the US to cut off free data at the legs under the OIO absent hard evidence of harm, it would substantially undermine this innovation.

The application of the nebulous Internet conduct standard to free data is a microcosm of the current incoherence: It is a rule rife with a parade of uncertainties and only theoretical problems, needlessly saddling companies with enforcement risk, all in the name of preserving and promoting innovation and openness. As even some of the staunchest proponents of net neutrality have recognized, only companies that can afford years of litigation can be expected to thrive in such an environment.

In the face of confusion and uncertainty globally, the US is now poised to provide leadership grounded in sound policy that promotes innovation. As ICLE noted last month, Chairman Pai took a crucial step toward re-imposing economic rigor and the rule of law at the FCC by questioning the unprecedented and ill-supported expansion of FCC authority that undergirds the OIO in general and the Internet conduct standard in particular. Today the agency will take the next step by voting on Chairman Pai’s proposed rulemaking. Wherever the new proceeding leads, it’s a welcome opportunity to analyze the issues with a degree of rigor that has thus far been appallingly absent.

And we should not forget that there’s a direct solution to these ambiguities that would avoid the undulations of subsequent FCC policy fights: Congress could (and should) pass legislation implementing a regulatory framework grounded in sound economics and empirical evidence that allows for consumers to benefit from the vast number of procompetitive vertical agreements (such as free data plans), while still facilitating a means for policing conduct that may actually harm consumers.

The Golden State Warriors are the heavy odds-on favorite to win another NBA Championship this summer, led by former OKC player Kevin Durant. And James Harden is a contender for league MVP. We can’t always turn back the clock on a terrible decision, hastily made before enough evidence has been gathered, but Chairman Pai’s efforts present a rare opportunity to do so.

The indefatigable (and highly talented) scriveners at the Scalia Law School’s Global Antitrust Institute (GAI) once again have offered a trenchant law and economics assessment that, if followed, would greatly improve a foreign jurisdiction’s competition law guidance. This latest assessment, which is compelling and highly persuasive, is embodied in a May 4 GAI Commentary on the Japan Fair Trade Commission’s (JFTC’s) consultation on its Draft Guidelines Concerning Distribution Systems and Business Practices Under the Antimonopoly Act (Draft Guidelines). In particular, the Commentary highlights four major concerns with the Draft Guidelines’ antitrust analysis dealing with conduct involving multi-sided platforms, resale price maintenance (RPM), refusals to deal, tying, and other vertical restraints. It also offers guidance on the appropriate analysis of network effects in multi-sided platforms. After summarizing these five key points, I offer some concluding observations on the potential benefit for competition policy worldwide offered by the GAI’s commentaries on foreign jurisdictions’ antitrust guidance.

  1. Resale price maintenance. Though the Draft Guidelines appear to apply a “rule of reason” or effects-based approach to most vertical restraints, Part I.3 and Part I, Chapter 1 carve out resale price maintenance (RPM) practices on the ground that they “usually have significant anticompetitive effects and, as a general rule, they tend to impede fair competition.” Given the economic theory and empirical evidence showing that vertical restraints, including RPM, rarely harm competition and often benefit consumers, the Commentary urges the JFTC to reconsider its approach and instead apply a rule of reason or effects-based analysis to all vertical restraints, including RPM, under which restraints are condemned only if any anticompetitive harm they cause outweighs any procompetitive benefits they create.
  2. Effects of vertical restraints. The Draft Guidelines identify two types of effects of vertical non-price restraints, “foreclosures effects” and “price maintenance effects.” The Commentary urges the JFTC to require proof of actual anticompetitive effects for both competition and unfair trade practice violations, just as it requires proof of procompetitive effects. It also recommends that the agency take cognizance only of substantial foreclosure effects, that is, “foreclosure of a sufficient share of distribution so that a manufacturer’s rivals are forced to operate at a significant cost disadvantage for a significant period of time.” The Commentary explains that a “consensus has emerged that a necessary condition for anticompetitive harm arising from allegedly exclusionary agreements is that the contracts foreclose rivals from a share of distribution sufficient to achieve minimum efficient scale.” The Commentary notes that “the critical market share foreclosure rate should depend upon the minimum efficient scale of production. Unless there are very large economies of scale in manufacturing, the minimum foreclosure of distribution necessary for an anticompetitive effect in most cases would be substantially greater than 40 percent. Therefore, 40 percent should be thought of as a useful screening device or ‘safe harbor,’ not an indication that anticompetitive effects are likely to exist above this level.”

The Commentary also strongly urges the JFTC to include an analysis of the counterfactual world, i.e., to identify “the difference between the percentage share of distribution foreclosed by the allegedly exclusionary agreements or conduct and the share of distribution in the absence of such an agreement.” It explains that such an approach to assessing foreclosure isolates any true competitive effect of the allegedly exclusionary agreement from other factors.

The Commentary also recommends that the JFTC explicitly recognize that evidence of new or expanded entry during the period of the alleged abuse can be a strong indication that the restraint at issue did not foreclose competition or have an anticompetitive effect. It stresses that, with respect to price increases, it is important to recognize and consider other factors (including changes in the product and changes in demand) that may explain higher prices.

  1. Unilateral refusals to deal and forced sharing. Part II, Chapter 3 of the Draft Guidelines would impose unfair trade practice liability for unilateral refusals to deal that “tend to make it difficult for the refused competitor to carry on normal business activities.” The Commentary strongly urges the JFTC to reconsider this vague and unclear approach and instead recognize the numerous significant concerns with forced sharing.

For example, while a firm’s competitors may want to use a particular good or technology in their own products, there are few situations, if any, in which access to a particular good is necessary to compete in a market. Indeed, one of the main reasons not to impose liability for unilateral, unconditional refusals to deal is “pragmatic in nature and concerns the limited abilities of competition authorities and courts to decide whether a facility is truly non-replicable or merely a competitive advantage.” For one thing, there are “no reliable economic or evidential techniques for testing whether a facility can be duplicated,” and it is often “difficult to distinguish situations in which customers simply have a strong preference for one facility from situations in which objective considerations render their choice unavoidable.”

Furthermore, the Commentary notes that forced competition based on several firms using the same inputs may actually preserve monopolies by removing the requesting party’s incentive to develop its own inputs. Consumer welfare is not enhanced only by price competition; it may be significantly improved by the development of new products for which there is an unsatisfied demand. If all competitors share the same facilities this will occur much less quickly if at all. In addition, if competitors can anticipate that they will be allowed to share the same facilities and technologies, the incentives to develop new products is diminished. Also, sharing of a monopoly among several competitors does not in itself increase competition unless it leads to improvements in price and output, i.e., nothing is achieved in terms of enhancing consumer welfare. Competition would be improved only if the terms upon which access is offered allow the requesting party to effectively compete with the dominant firm on the relevant downstream market. This raises the issue of whether the dominant firm is entitled to charge a monopoly rate or whether, in addition to granting access, there is a duty to offer terms that allow efficient rivals to make a profit.

  1. Fair and free competition. The Draft JFTC Guidelines refer throughout to the goal of promoting “fair and free competition.” Part I.3 in particular provides that “[i]f a vertical restraint tends to impede fair competition, such restraint is prohibited as an unfair trade practice.” The Commentary urges the JFTC to adopt an effects-based approach similar to that adopted by the U.S. Federal Trade Commission in its 2015 Policy Statement on Unfair Methods of Competition. Tying unfairness to antitrust principles ensures the alignment of unfairness with the economic principles underlying competition laws. Enforcement of unfair methods of competition statutes should focus on harm to competition, while taking into account possible efficiencies and business justifications. In short, while unfairness can be a useful tool in reaching conduct that harms competition but is not within the scope of the antitrust laws, it is imperative that unfairness be linked to the fundamental goals of the antitrust laws.
  2. Network effects in multi-sided platforms. With respect to multi-sided platforms in particular, the Commentary urges that the JFTC avoid any presumption that network effects create either market power or barriers to entry. In lieu of such a presumption, the Commentary recommends a fact-specific case-by-case analysis with empirical backing on the presence and effect of any network effects. Network effects occur when the value of a good or service increases as the number of people who use it grows. Network effects are generally beneficial. While there is some dispute over whether and under what conditions they might also raise exclusionary concerns, the Commentary notes that “transactions involving complementary products (indirect network effects) fully internalize the benefits of consuming complementary goods and do not present an exclusionary concern.” The Commentary explains that, “[a]s in all analysis of network effects, the standard assumption that quantity alone determines the strength of the effect is likely mistaken.” Rather, to the extent that advertisers, for example, care about end users, they care about many of their characteristics. An increase in the number of users who are looking only for information and never to purchase goods may be of little value to advertisers. “Assessing network or scale effects is extremely difficult in search engine advertising [for example], and scale may not even correlate with increased value over some ranges of size.”
  3. Concluding thoughts. Implicit in the overall approach of this latest GAI Commentary, and in many other GAI assessments of foreign jurisdictions’ proposed antitrust guidance, is the need for regulatory humility, sound empiricism, and a focus on consumer welfare. Antitrust enforcement policies that blandly accept esoteric theories of anticompetitive behavior and ignore actual economic effects are welfare reducing, not welfare enhancing. The very good analytical work carried out by GAI helps competition authorities keep this reality in mind, and merits close attention.

The Scalia Law School’s Global Antitrust Institute (GAI) has once again penned a trenchant law and economics-based critique of a foreign jurisdiction’s competition policy pronouncement.  On April 28, the GAI posted a comment (GAI Comment) in response to a “Communication from the [European] Commission (EC) on Standard Essential Patents (SEPs) for a European Digitalised Economy” (EC Communication).  The EC Communication centers on the regulation of SEPs, patents which cover standards that enable mobile wireless technologies (in particular, smartphones), in the context of the development and implementation of the 5th generation or “5G” broadband wireless standard.

The GAI Comment expresses two major concerns with the EC’s Communication.

  1. The Communication’s Ill-Considered Opposition to Competition in Standards Development

First, the Comment notes that the EC Communication appears to view variation in intellectual property rights (IPR) policies among standard-development organizations (SDOs) as a potential problem that may benefit from best practice recommendations.  The GAI Comment strongly urges the EC to reconsider this approach.  It argues that the EC instead should embrace the procompetitive benefits of variation among SDO policies, and avoid one-size fits all best practice recommendations that may interfere with or unduly influence choices regarding specific rules that best fit the needs of individual SDOs and their members.

  1. The Communication’s Failure to Address the Question of Market Imperfections

Second, the Comment points out that the EC Communication refers to the need for “better regulation,” without providing evidence of an identifiable market imperfection, which is a necessary but not sufficient basis for economic regulation.  The Comment stresses that the smartphone market, which is both standard and patent intensive, has experienced exponential output growth, falling market concentration, and a decrease in wireless service prices relative to the overall consumer price index.  These indicators, although not proof of causation, do suggest caution prior to potentially disrupting the carefully balanced fair, reasonable, and non-discriminatory (FRAND) ecosystem that has emerged organically.

With respect to the three specific areas identified in the Communication (i.e., best practice recommendations on (1) “increased transparency on SEP exposure,” including “more precision and rigour into the essentiality declaration system in particular for critical standards”; (2) boundaries of FRAND and core valuation principles; and (3) enforcement in areas such as mutual obligations in licensing negotiations before recourse to injunctive relief, portfolio licensing, and the role of alternative dispute resolution mechanisms), the Comment recommends that the EC broaden the scope of its consultation to elicit specific evidence of identifiable market imperfections.

The GAI Comment also points out that, in some cases, specific concerns mentioned in the Consultation seem to be contradicted by the EC’s own published research.  For example, with respect to the asserted problems arising from over-declaration of essential patents, the EC recently published research noting the lack of “any reliable evidence that licensing costs increase significantly if SEP owners over-declare,” and concluding “that, per se the negative impact of over-declaration is likely to be minimal.”  Even assuming there is an identifiable market imperfection in this area, it is important to consider that determining essentiality is a resource and time-intensive exercise and there are likely significant transaction-cost savings from the use of blanket declarations, which also serve to avoid liability for patent-ambush (i.e., deceptive failure to disclose essential patents during the standard-setting process).

  1. Concluding Thoughts

The GAI Comment implicitly highlights a flaw inherent in the EC’s efforts to promote high tech innovation in Europe through its “Digital Agenda,” characterized as a pillar of the Europe “2020 Strategy” that sets objectives for the growth of the European Union by 2020.  The EC’s strategy emphasizes government-centric “growth through regulatory oversight,” rather than reliance on untrammeled competition.  This emphasis is at odds with the fact that detailed regulatory oversight has been associated with sluggish economic growth within the European Union.  It also ignores the fact that some of the most dynamic, innovative industries in recent decades have been those enabled by the Internet, which until recently has largely avoided significant regulation.  The EC may want to rethink its approach, if it truly wants to generate the innovation and economic gains long-promised to its consumers and producers.

Government subsidies that selectively favor a particular firm or firms may substantially distort competition within an industry, thereby skewing trading terms, reducing efficiency, and harming consumer welfare.  To its credit, the European Union (EU) seeks to stamp out distortive state aid, as explained by the EU’s administrative and law enforcement arm, the European Commission (EC):

A company which receives government support gains an advantage over its competitors. Therefore, the Treaty [governing the EU] generally prohibits State aid unless it is justified by reasons of general economic development.  To ensure that this prohibition is respected and exemptions are applied equally across the European Union, the European Commission is in charge of ensuring that State aid complies with EU rules. . . .

State aid is defined as an advantage in any form whatsoever conferred on a selective basis to undertakings [businesses] by national public authorities.  Therefore, subsidies granted to individuals or general measures open to all enterprises are not covered by this prohibition and do not constitute State aid (examples include general taxation measures or employment legislation).

A nation’s tax preferences that selectively advantage a specific firm or firms may constitute a form of state aid, and in recent years the EC has challenged various member states’ corporate tax rules that allegedly have such a preferential effect.   Particular attention has focused on an August 2016 EC finding that Apple, Inc. owed roughly $14.5 billion in back taxes to Ireland, due to an Irish tax ruling that granted the company a preferential corporate tax rate in violation of EC state aid principles.

This EC finding, which is opposed by the Irish and U.S Governments and has been appealed to the European courts, is the subject of an April 27 Heritage Foundation “Backgrounder” essay, co-authored by Heritage Senior Fellow David Burton and me.  In our essay, we point out that, whatever the legal merits of this particular holding, the EC’s recent “crusade” against low corporate taxes achieved through various national preferences raises the broader issue of “tax competition” among jurisdictions that may beneficially constrain the size of government.  Our article’s findings and policy recommendations are as follows:

High taxes, especially high marginal income tax rates, have an adverse impact on economic growth, and tax competition among governments imposes a limit on how high governments can raise tax rates and burden the private sector.  Efforts to suppress tax competition or to harmonize taxes are generally an effort to create a “tax cartel” among likeminded governments to keep taxes high. The European Union’s Apple ruling, similar to other recent EU investigations of tax reductions, may have the effect of discouraging beneficial tax competition among European nations.  The United States should reject calls by the Organisation for Economic Co-operation and Development and other multinational bodies to promote “tax harmonization,” which tends to promote overly high tax burdens that discourage economic growth.   The United States also should lead by example, reducing its economically harmful tax burdens and encouraging other countries to do likewise. 

Over the last two years, the Scalia Law School’s Global Antitrust Institute (GAI) has taken a leadership role in promoting sound antitrust analysis of intellectual property rights (IPRs), through its insightful analysis of IP-antitrust guidance proffered by governments around the world (including by the United States antitrust agencies).  Key concepts that inform the GAI’s IP commentaries are that IP rights are full-fledged property rights, and should be treated as such; that IP licensing typically is procompetitive and often generates substantial efficiencies; that antitrust agencies should compare the competitive effects of IP licensing restrictions against what would have happened in the “but for” world in which there is no license; and that special limiting rules should not be applied to patents that cover technologies essential to the implementation of standards (“standard-essential patents”).  The overarching theme of the GAI submissions is that IP licensing generally enhances economic welfare and promotes innovation.

On April 13, the GAI once again turned its eye to IP licensing issues, in commenting on the Draft Anti-Monopoly Guidelines on the Abuse of Intellectual Property Rights (Draft Guidelines) propounded by the Chinese Government’s State Council (see here).  This commentary is particularly timely and important, given the vast scale of the Chinese economy and the large number of major companies involved in IP licensing in China.  While the April 13 GAI commentary praises the Draft Guidelines’ stated intent of condemning only those acts that “have the effect of excluding or restricting competition,” it explains that various Draft Guidelines provisions would nevertheless undermine that desirable goal.  Specifically, the commentary makes five key points:

  1. First, the Draft Guidelines do not explicitly recognize an IPR holder’s core right to exclude. The right to exclude is a central feature of IPRs, and economic theory and empirical evidence show that IPRs incentivize the creation of inventions, ideas, and original works.  Relatedly, the Draft Guidelines also do not incorporate throughout the well-accepted methodological principle that, when assessing the possible competitive effects of the use of IPRs, agencies should compare the competitive effect of the IPR use against what would have happened in the “but for” world in which there is no license.  This important analytical approach, which has been used by the U.S. antitrust agencies for the last 20 years, is absent from the Draft Guidelines.
  2. Second, the Draft Guidelines do not incorporate throughout the point that licensing is generally procompetitive. This modern economic understanding of licensing has informed the approach of the U.S. agencies, for example, for more than 20 years. The result is an approach that, with the exception of naked restraints such as price fixing, requires an effects-based analysis under which licensing restraints will be condemned only when any anticompetitive effects outweigh any procompetitive benefits.
  3. Third, and relatedly, the Draft Guidelines appear to create a number of presumptions that certain conduct (such as charging for expired or invalid patents and prohibiting a licensee from challenging the validity of its IPR) will, or is likely to, eliminate or restrict competition. Thus the State Council would be well advised to eliminate such presumptions and to adopt instead an effects-based approach.  This approach would benefit Chinese consumers because presumptions that are not appropriately calibrated are likely to capture conduct that is procompetitive, which is likely to have a chilling effect on potentially beneficial conduct.  Adopting an approach that incorporates these revisions would best serve competition and consumers, as well as China’s goal of becoming an innovation society.
  4. Fourth, the Draft Guidelines appear to create special rules for conduct involving standard-essential patents (SEPs). The State Council would be wise to reconsider this approach.  Instead, antitrust enforcers should ask whether particular conduct involving SEPs, including evasion of a FRAND assurance, has net anticompetitive effects, and should apply the same case-by-case, fact-specific analysis that is employed for non-SEPs.  Imposing special rules for SEPs, including creating presumptions of harm based on breach of contractual commitments such as a FRAND assurance, is not only unwarranted as a matter of competition policy, but also likely to deter participation in standard setting.
  5. Lastly, the State Council should adopt a more compliance-based approach that sets forth basic principles that would allow parties to self-advise. The Draft Guidelines instead set forth a list of factors that the Chinese competition agencies will consider when analyzing specific conduct, yet do not explain the significance of each of the factors or how they will be weighed in the competition agencies’ overall decision-making process.  This approach allows the agencies broad discretion in enforcement decision-making without providing the guidance stakeholders need to protect incentives to innovate and transfer technology that could be subject to Chinese antitrust jurisdiction.  To this end, the GAI’s commentary recommends that the State Council include throughout the Guidelines examples similar to those found in other guidelines, for example the U.S. antitrust agencies’ recently updated 2017 Antitrust Guidelines for the Licensing of Intellectual Property and the Canadian Bureau of Competition’s Intellectual Property Enforcement Guidelines.  Inclusion of illustrative examples will help IP holders understand how the Chinese agencies will apply the basic principles.

In sum, the Chinese Government would be well advised to adopt the April 13 commentary’s recommendations in finalizing its Guidelines.  Acceptance of the GAI’s recommendations would benefit consumers and producers, and promote innovation in the Chinese economy.  Once again (as one would expect), a GAI antitrust commentary is spot on.

On Thursday, March 30, Friday March 31, and Monday April 3, Truth on the Market and the International Center for Law and Economics presented a blog symposium — Agricultural and Biotech Mergers: Implications for Antitrust Law and Economics in Innovative Industries — discussing three proposed agricultural/biotech industry mergers awaiting judgment by antitrust authorities around the globe. These proposed mergers — Bayer/Monsanto, Dow/DuPont and ChemChina/Syngenta — present a host of fascinating issues, many of which go to the core of merger enforcement in innovative industries — and antitrust law and economics more broadly.

The big issue for the symposium participants was innovation (as it was for the European Commission, which cleared the Dow/DuPont merger last week, subject to conditions, one of which related to the firms’ R&D activities).

Critics of the mergers, as currently proposed, asserted that the increased concentration arising from the “Big 6” Ag-biotech firms consolidating into the Big 4 could reduce innovation competition by (1) eliminating parallel paths of research and development (Moss); (2) creating highly integrated technology/traits/seeds/chemicals platforms that erect barriers to new entry platforms (Moss); (3) exploiting eventual network effects that may result from the shift towards data-driven agriculture to block new entry in input markets (Lianos); or (4) increasing incentives to refuse to license, impose discriminatory restrictions in technology licensing agreements, or tacitly “agree” not to compete (Moss).

Rather than fixating on horizontal market share, proponents of the mergers argued that innovative industries are often marked by disruptions and that investment in innovation is an important signal of competition (Manne). An evaluation of the overall level of innovation should include not only the additional economies of scale and scope of the merged firms, but also advancements made by more nimble, less risk-averse biotech companies and smaller firms, whose innovations the larger firms can incentivize through licensing or M&A (Shepherd). In fact, increased efficiency created by economies of scale and scope can make funds available to source innovation outside of the large firms (Shepherd).

In addition, innovation analysis must also account for the intricately interwoven nature of agricultural technology across seeds and traits, crop protection, and, now, digital farming (Sykuta). Combined product portfolios generate more data to analyze, resulting in increased data-driven value for farmers and more efficiently targeted R&D resources (Sykuta).

While critics voiced concerns over such platforms erecting barriers to entry, markets are contestable to the extent that incumbents are incentivized to compete (Russell). It is worth noting that certain industries with high barriers to entry or exit, significant sunk costs, and significant costs disadvantages for new entrants (including automobiles, wireless service, and cable networks) have seen their prices decrease substantially relative to inflation over the last 20 years — even as concentration has increased (Russell). Not coincidentally, product innovation in these industries, as in ag-biotech, has been high.

Ultimately, assessing the likely effects of each merger using static measures of market structure is arguably unreliable or irrelevant in dynamic markets with high levels of innovation (Manne).

Regarding patents, critics were skeptical that combining the patent portfolios of the merging companies would offer benefits beyond those arising from cross-licensing, and would serve to raise rivals’ costs (Ghosh). While this may be true in some cases, IP rights are probabilistic, especially in dynamic markets, as Nicolas Petit noted:

There is no certainty that R&D investments will lead to commercially successful applications; (ii) no guarantee that IP rights will resist to invalidity proceedings in court; (iii) little safety to competition by other product applications which do not practice the IP but provide substitute functionality; and (iv) no inevitability that the environmental, toxicological and regulatory authorization rights that (often) accompany IP rights will not be cancelled when legal requirements change.

In spite of these uncertainties, deals such as the pending ag-biotech mergers provide managers the opportunity to evaluate and reorganize assets to maximize innovation and return on investment in such a way that would not be possible absent a merger (Sykuta). Neither party would fully place its IP and innovation pipeline on the table otherwise.

For a complete rundown of the arguments both for and against, the full archive of symposium posts from our outstanding and diverse group of scholars, practitioners and other experts is available at this link, and individual posts can be easily accessed by clicking on the authors’ names below.

We’d like to thank all of the participants for their excellent contributions!

Allen Gibby is a Senior Fellow at the International Center for Law & Economics

Modern agriculture companies like Monsanto, DuPont, and Syngenta, develop cutting-edge seeds containing genetic traits that make them resistant to insecticides and herbicides. They also  develop crop protection chemicals to use throughout the life of the crop to further safeguard from pests, weeds and grasses, and disease. No single company has a monopoly on all the high-demand seeds and traits or crop protection products. Thus, in order for Company A to produce a variety of corn that is resistant to Company B’s herbicide, it may have to license a trait patented by Company B in order to even begin researching its product, and it may need further licenses (and other inputs) from Company B as its research progresses in unpredictable directions.

While the agriculture industry has a long history of successful cross-licensing arrangements between agricultural input providers, licensing talks can break down (and do so for any number of reasons), potentially thwarting a nascent product before research has even begun — or, possibly worse, well into its development. The cost of such a breakdown isn’t merely the loss of the intended product; it’s also the loss of the other products Company A could have been developing, as well as the costs of negotiation.

To eschew this outcome, as well as avoid other challenges such as waiting years for Company B to fully develop and make available a chemical before it engages in in arm’s length negotiations with Company A, one solution is for Company A and Company B to merge and combine their expertise to design novel seeds and traits and complementary crop protection products.

The potential for this type of integration seems evident in the proposed Dow-DuPont and Bayer-Monsanto deals where, of the companies merging, one earns most of its revenue from seeds and traits (DuPont and Monsanto) and the other from crop protection (Dow and Bayer).

Do the complementary aspects inherent in these deals increase the likelihood that the merged entities will gain the ability and the incentive to prevent entry, foreclose competitors, and thereby harm consumers?  

Diana Moss, who will surely have more to say on this in her post, believes the answer is yes. She recently voiced concerns during a Senate hearing that the Dow-DuPont and Bayer-Monsanto mergers would have negative conglomerate effects. According to Moss’s testimony, the mergers would create:

substantial vertical integration between traits, seeds, and chemicals. The resulting “platforms” will likely be engineered for the purpose of creating exclusive packages of traits, seeds and chemicals for farmers that do not “interoperate” with rival products. This will likely raise barriers for smaller innovators and increase the risk that they are foreclosed from access to technology and other resources to compete effectively.

Decades of antitrust policy and practice present a different perspective, however. While it’s true that the combined entities certainly might offer combined stacks of products to farmers, doing so would enable Dow-DuPont and Bayer-Monsanto to vigorously innovate and compete with each other, a combined ChemChina-Syngenta, and an increasing number of agriculture and biotechnology startups (per AgFunder, investments in such startups totaled $719 million in 2016, representing a 150% increase from 2015’s figure).

More importantly, the complaint assumes that the only, or predominant, effect of such integration would be to erect barriers to entry, rather than to improve product quality, offer expanded choices to consumers, and enhance competition.

Concerns about conglomerate effects making life harder for small businesses are not new. From 1965 to 1975, the United States experienced numerous conglomerate mergers. Among the theories of competitive harm advanced by the courts and antitrust authorities to address their envisioned negative effects was entrenchment. Under this theory, mergers could be blocked if they strengthened an incumbent firm through increased efficiencies not available to other firms, access to a broader line of products, or increased financial muscle to discourage entry.

While a nice theory, for over a decade the DoJ could not identify any conditions under which conglomerate effects would give the merged firm the ability and incentive to raise price and restrict output. The DoJ determined that the harms of foreclosure and barriers to smaller businesses were remote and easily outweighed by the potential benefits, which include

providing infusions of capital, improving management efficiency either through replacement of mediocre executives or reinforcement of good ones with superior financial control and management information systems, transfer of technical and marketing know-how and best practices across traditional industry lines; meshing of research and distribution; increasing ability to ride out economic fluctuations through diversification; and providing owners-managers a market for selling the enterprises they created, thus encouraging entrepreneurship and risk-taking.

Consequently, the DoJ concluded that it should rarely, if ever, interfere to mitigate conglomerate effects in the 1982 Merger Guidelines.

In the Dow-DuPont and Bayer-Monsanto deals, there are no overwhelming factors that would contradict the presumption that the conglomerate effects of improved product quality and expanded choices for farmers outweigh the potential harms.

To find such harms, the DoJ reasoned, would require satisfying a highly attenuated chain of causation that “invites competition authorities to speculate about what the future is likely to bring.” Such speculation — which includes but is not limited to: weighing whether rivals can match the merged firm’s costs, whether rivals will exit, whether firms will not re-enter the market in response to price increases above pre-merger levels, and whether what buyers gain through prices set below pre-merger levels is less than what they later lose through paying higher than pre-merger prices — does not inspire confidence that even the most clairvoyant regulator would properly make trade-offs that would ultimately benefit consumers.

Moss’s argument also presumes that the merger would compel farmers to purchase the potentially “exclusive packages of traits, seeds and chemicals… that do not ‘interoperate’ with rival products.” But while there aren’t a large number of “platform” competitors in agribusiness, there are still enough to provide viable alternatives to any “exclusive packages” and cross-licensed combinations of seeds, traits, and chemicals that Dow-DuPont and Bayer-Monsanto may attempt to sell.

First, even if a rival fails to offer an equally “good deal” or suffers a loss of sales or market share, it would be illogical, the DoJ concluded, to condemn mergers that promote benefits such as resource savings, more efficient production modes, and efficient bundling (i.e., bundling that benefits customers by offering them improved products, lower prices or lower transactions costs due to the purchase of a combined stack through a “one-stop shop”). As Robert Bork put it, far from “frightening smaller companies into semi-paralysis,” conglomerate mergers that generate greater efficiencies will force smaller competitors to compete more effectively, making consumers better off.

Second, it is highly unlikely these deals will adversely affect the long-standing prevalence of cross-licensing arrangements between agricultural input providers. Agriculture companies have a long history of supplying competitors with products while simultaneously competing with them. For decades, antitrust scholars have been skeptical of claims that firms have incentives to deal unreasonably with providers of complementary products, and the ag-biotech industry seems to bear this out. This is because discriminating anticompetitively against complements often devalues the firm’s own platform. For example, Apple’s App Store is more valuable to iPhone users because it includes messaging apps like WeChat, WhatsApp, and Facebook Messenger, even though they compete directly with iMessage and FaceTime. By excluding these apps, Apple would devalue the iPhone to hundreds of millions of its users who also use these apps.

In the case of the pending mergers, not only would a combined Dow-DuPont and Bayer-Monsanto offer their own combined stacks, their platforms increase in value by providing a broad suite of alternative cross-licensed product combinations. And, of course, the combined stack (independent of whether it’s entirely produced by a Dow-DuPont or Bayer-Monsanto) that offers sufficiently increased value to farmers over other packages or non-packaged alternatives, will — and should — win in the end.

The Dow-DuPont and Bayer-Monsanto mergers are an opportunity to remember why, decades ago, the DoJ concluded that it should rarely, if ever, interfere to mitigate conglomerate effects and an occasion to highlight the incentives that providers of complementary products have to deal reasonably with one another.

 

  1. Introduction

For nearly two years, the Global Antitrust Institute (GAI) at George Mason University’s Scalia Law School has filed an impressive series of comments on foreign competition laws and regulations.  The latest GAI comment, dated March 19 (“March 19 comment”), focuses on proposed revisions to the Anti-Unfair Competition Law (AUCL) of the People’s Republic of China, currently under consideration by China’s national legislature, the National People’s Congress.  The AUCL “coexists” with China’s antitrust statute, the Anti-Monopoly Law (AML).  The key concern raised by the March 19 comment is that the AUCL revisions not undermine the application of sound competition law principles in the analysis of bundling (a seller’s offering of several goods as part of a single package sale).  As such, the March 19 comment notes that the best way to avoid such an outcome would be for the AUCL to avoid condemning bundling as a potential “unfair” practice, leaving bundling practices to be assessed solely under the AML.  Furthermore, the March 19 comment wisely stresses that any antitrust evaluation of bundling, whether under the AML (the preferred option) or under the AUCL, should give weight to the substantial efficiencies that bundling typically engenders.

  1. Highlights of the March 19 Comment

Specifically, the March 19 comment made the following key recommendations:

  • The National People’s Congress should be commended for having deleted Article 6 of an earlier AUCL draft, which prohibited a firm from “taking advantage of its comparative advantage position.” As explained in a March 2016 GAI comment, this provision would have undermined efficient contractual negotiations that could benefited consumer as well as producer welfare.
  • With respect to the remaining draft provisions, any provisions that relate to conduct covered by China’s Anti-Monopoly Law (AML) be omitted entirely.
  • In particular, Article 11 (which provides that “[b]usiness operators selling goods must not bundle the sale of goods against buyers’ wishes, and must not attach other unreasonable conditions”) should be omitted in its entirety, as such conduct is already covered by Article 17(5) of the AML.
  • In the alternative, at the very least, Article 11 should be revised to adopt an effect-based approach under which bundling will be condemned only when: (1) the seller has market power in one of the goods included in the bundle sufficient to enable it to restrain trade in the market(s) for the other goods in the bundle; and (2) the anticompetitive effects outweigh any procompetitive benefits.  Such an approach would be consistent with Article 17(5) of the AML, which provides for an effects-based approach that applies only to firms with a dominant market position.
  • Bundling is ubiquitous and widely used by a variety of firms and for a variety of reasons (see here). In the vast majority of cases, package sales are “easily explained by economies of scope in production or by reductions in transaction and information costs, with an obvious benefit to the seller, the buyer or both.”   Those benefits can include lower prices for consumers, facilitate entry into new markets, reduce conflicting incentives between manufacturers and their distributors, and mitigate retailer free-riding and other types of agency problems.  Indeed (see here), “bundling can serve the same efficiency-enhancing vertical control functions as have been identified in the economic literature on tying, exclusive dealing, and other forms of vertical restraints.”
  • The potential to harm competition and generate anticompetitive effects arises only when bundling is practiced by a firm with market power in one of the goods included in the bundle. As the U.S. Supreme Court explained in Jefferson Parrish v. Hyde (1984), “there is nothing inherently anticompetitive about package sales,” and the fact that “a purchaser is ‘forced’ to buy a product he would not have otherwise bought even from another seller” does not imply an “adverse impact on competition.”  Rather, for bundling to harm competition there would have to be an exclusionary effect on other sellers because bundling thwarts buyers’ desire to purchase substitutes for one or more of the goods in the bundle from those other sellers to an extent that harms competition in the markets for those products (see here).
  • Moreover, because of the widespread procompetitive use of bundling, by firms without and firms with market power, making bundling per se or presumptively unlawful is likely to generate many Type I (false positive) errors which, as the U.S. Supreme Court explained in Verizon v. Trinko (2004), “are especially costly, because they chill the very conduct the antitrust laws are designed to protect.”
  1. Conclusion

In sum, the GAI’s March 19 comment does an outstanding job of highlighting the typically procompetitive nature of bundling, and of calling for an economics-based approach to the antitrust evaluation of bundling in China.  Other competition law authorities (including, for example, the European Competition Commission) could benefit from this comment as well, when they scrutinize bundling arrangements.

TOTM is pleased to welcome guest blogger Nicolas Petit, Professor of Law & Economics at the University of Liege, Belgium.

Nicolas has also recently been named a (non-resident) Senior Scholar at ICLE (joining Joshua Wright, Joanna Shepherd, and Julian Morris).

Nicolas is also (as of March 2017) a Research Professor at the University of South Australia, co-director of the Liege Competition & Innovation Institute and director of the LL.M. program in EU Competition and Intellectual Property Law. He is also a part-time advisor to the Belgian competition authority.

Nicolas is a prolific scholar specializing in competition policy, IP law, and technology regulation. Nicolas Petit is the co-author (with Damien Geradin and Anne Layne-Farrar) of EU Competition Law and Economics (Oxford University Press, 2012) and the author of Droit européen de la concurrence (Domat Montchrestien, 2013), a monograph that was awarded the prize for the best law book of the year at the Constitutional Court in France.

One of his most recent papers, Significant Impediment to Industry Innovation: A Novel Theory of Harm in EU Merger Control?, was recently published as an ICLE Competition Research Program White Paper. His scholarship is available on SSRN and he tweets at @CompetitionProf.

Welcome, Nicolas!