Search Results For RPM

FTC RPM Workshops This Week

Josh Wright —  15 February 2009

Tuesday and Thursday this week the FTC will be hosting the first two in a series of workshops on Resale Price Maintenance.  Presentation materials, slides, and papers are available on the website.

I’ve been reading the papers for the FTC RPM Workshops, though I cannot attend.  On the procompetitive side, I especially recommend Ben Klein’s explanation of how RPM facilitates the supply of promotional services in the absence of dealer free-riding.  Critics of RPM, in my view, generally do not understand the fundamental economic point that retailer competition alone is not sufficient to guarantee the supply of promotional services because of incentive conflicts between manufacturers and retailers.  Klein and Wright (JLE, 2007) explains this incentive conflict in great detail, and how fixed per unit time payments (slotting contracts) can be used to solve this common incentive problem and are part of the normal competitive process.  Klein’s newest RPM explains how RPM contracts can be used to achieve the same effect, that is, solving the incentive conflict between manufacturers and retailers to facilitate the supply of efficient promotional services.

The most common argument raised by defenders of the Dr. Miles rule, including Justice Breyer in Leegin, is that Telser’s (1960) classic discount dealer free-riding story for RPM (RPM solves the problem of consumption of promotional services at the full service retailer before buying the product at the discounter — and thus unraveling the supply of services in equilibrium) does not apply to a number of products where we observe RPM used.  This is where Klein & Murphy’s (1988) seminal explanation comes into play, documenting how the incentive conflict is a real economic problem solved by these vertical restraints, and part of the normal competitive process.  The Klein’s RPM Workshop piece builds on and updates that analysis.

One of the other issues that I’ve been keeping my eye on during the hearings is the evaluation of the current empirical evidence.  I’ve written before that in my own evaluation of the evidence, “the evidence overwhelmingly shows (see also here) [that RPM agreements] are highly likely to make consumers better off in practice.”  I also wrote that I hoped the RPM Workshops would take a hands on and rigorous approach to evaluating the state of evidence in order to design appropriate antitrust enforcement approaches to RPM and vertical restraints generally:

In my view, while there is still a lot to learn about precisely how RPM works, when and by whom it is adopted, and to what effect, there is simply no empirical evidence that its effects warrant per se illegality…. Its my sincere hope that the policy debate to be had on RPM with the pending legislation and FTC Workshops upcoming will be fought on this margin rather than on marketing.

In this light, it caught my eye that Patrick Rey’s slides and paper, which offers yet another possibility theorem of how RPM “could” result in anticompetitive outcomes.   The possibility theorem paper is nothing new in the sense that there are a ton of these around.  But the claim of empirical support is.  Indeed, my views on this matter are well known that there is not much empirical support at all for the anticompetitive theories of vertical restraints including RPM (see also the Lafontaine & Slade and Cooper et al literatuer surveys).  So I did some digging.  Here’s the claim from Rey’s paper with Thibaud Verge:

Our analysis supports this claim and shows that RPM can actually eliminate competition, not only among competing fascias, but also among competing brands. This possibility has been validated by recent empirical studies. Using data about retail prices of food products in French retail chains during the period 1994-1999, Biscourp, Boutin and Vergé (2008) find that the correlation between retail prices and the concentration of local retail markets was important before 1997 and no longer significant after that date. This suggests that the price increases that occurred after 1997 were indeed due to the impact of the new legislation on intrabrand competition.

So what does the Biscourp et al. study actually analyze?  You might think from the context that BBV (2008) studies Minimum RPM contracts.  But you would be wrong.  What did they actually study?  Get this: a set of French laws that make it illegal for retailers to sell “below cost.”  The Loi Galland came into force in 1997 and clarified a pre-existing ban on below-cost sales.  In other words, the Loi Galland set mandatory government enforced minimum price floors that apply to all retailers.  Boutin & Guerrero provide some details on the 1996 Loi Galland:

The Loi Galland gave a simple, precise definition of the actual purchase price and hence of the below-cost retail price floor: `The actual purchase price is the unit price stated on the invoice plus taxes on sales, specific taxes applied to the resale, and transportation costs.’  Since 1997, the definition of purchase price has thus been restricted to the price stated on the invoice, with no deductions such as year-end discounts. The Act also tightened official verification and raised fines. Only the margins formally applied at the invoice date and shown on the invoice the “upfront margins” can be passed on to final consumers through reductions in the final selling price. By contrast, all other discounts are described as “hidden margins” and therefore excluded from the below-cost retail price floor. Examples include margins linked to an annual sales volume, to the retailer’s display of the product on a minimum shelf length, to business cooperation, or simply to the respect of mutual commitments over a certain period. Consequently, hidden margins can in no way be passed on to consumers.

The law in other words, is similar to sales below costs laws i the US that are designed to anticompetitive raise prices, are binding on all sellers, and enforced by the government with significant fines.  Unsurprisingly, a law designed to prevent price-cutting achieves its intended effect and is found to have an anticompetitive effect.  But I’m frankly lost as to how Rey & Verge claim from this study of government imposed sales below cost laws that there is empirical support for the proposition that voluntary, privately negotiated RPM contracts are likely to be anticompetitive.  Note that Lafontaine & Slade’s leading survey of the literature argues that this distinction is quite important — concluding that mandatory restraints are far more likely to generate anticompetitive outcomes.

There is more.

Rey and Verge also claim that another paper from Bonnet and Dubois (2008) “supports his analysis of RPM.”  Curious, I took a closer look at this paper.  Does this second paper actually study RPM agreements?  Again, the answer is no.  B&D (2008) do something different: (1) they get retail prices and quantities for branded and unbranded bottles of water, (2) estimate a random coefficients logit model for the demand for bottled water (no data on costs or markups except for general input price indices), (3) infer wholesale and retail markups under a variety of assumptions about the nature of wholesale and retail competition which amount to 12 different models, and (4) from these estimated markups, estimate marginal costs (e.g. 12 different cost equations).  From these cost equations, they conduct a series of non-nested hypothesis tests, comparing the 12 different models against each other (table7, p. 34 at link above).  The authors conclude that “the results finally show that the best model appears to be model 10, that is the case where manufacturers use two part tariffs with resale price maintenance.”  From this series of assumptions and steps, the authors conclude that the branded water sellers are actually using RPM and two-part tariffs (“Our empirical analysis allows it to be concluded that manufacturers and retailers use nonlinear pricing
contracts and in particular two part tariff contracts with resale price maintenance.”)!  Further, the authors simulate the effect of moving from model 10 to other models of pricing and find that pricing is lower in other models and therefore conclude that RPM has anticompetitive effects.

There are some problems with this analysis.  First, suffice it to say that it is difficult to make confident policy statements about the effects of RPM contracts without studying actual RPM contracts.  There is no actual evidence that the water sellers are using RPM.  Indeed, RPM is illegal in France.  The inference is generated because the non-nested hypothesis test (which is notoriously weak) implies the model best fits the data.   Second, my understanding of merger simulations at the FTC is that when marginal costs are inferred from equilibrium conditions, attempts are made to verify the validity of the inference by comparing the inferred level to some actual measure (so that the model can be tossed if they don’t correspond to one another).

Evaluating the empirical evidence in favor of the various pro- and anti-competitive theories is an incredibly important step in the process of identifying the appropriate legal test to apply to resale price maintenance (and other vertical restraints). While the Rey & Verge piece offers an interesting theoretical effect of RPM, the key issue identified by Justice Breyer’s Leegin dissent is understanding how RPM contracts work in practice. In my view, Rey & Verge’s claim that there is empirical support for their model is unfounded. To the contrary, neither the BBV or BD papers add any empirical contribution to the debate over the appropriate antitrust treatment of privately and voluntarily adopted RPM contracts.

Varney on RPM

Josh Wright —  4 March 2009

I just saw this very good piece in The Deal from Sean Gates and Tej

During her tenure at the FTC, Varney advocated greater enforcement against vertical restraints. In a speech before the American Bar Association in early 1995, she explained her thoughts on resale price maintenance cases: “Our enforcement agenda today is that resale price maintenance agreements are unlawful per se and the commission will enforce the law in this area.” This was a clear change from Reagan administration antitrust enforcement. Even though the Supreme Court had long held RPM to be per se unlawful, the Reagan administration enforcers did not challenge these types of restraints. In fact, they did not bring a single pure vertical restraint challenge.

True to her word, Varney joined in several important RPM challenges, including cases that expanded the scope of the per se rule in RPM cases. In a case against American Cyanamid, Varney joined the majority in inferring the existence of a per se illegal RPM agreement despite the fact that the defendants had never announced resale prices nor sought a commitment from distributors to sell at or above a certain price level. In a case against Reebok, Varney joined the Commission in condemning an RPM policy, enjoining Reebok from using “structured terminations” to effect RPM even though such terminations “falls into the ‘gray’ area of RPM jurisprudence.” Varney also joined in a number of other cases challenging vertical price fixing agreements.

The Bush administration, however, did not bring a single challenge to an RPM policy. Instead, the Bush administration urged the Supreme Court to overturn the per se rule against RPM, which the Court did in Leegin Creative Products v. PSKS Inc. Since then, there has been much speculation regarding when, under a rule of reason analysis, RPM is unlawful. Given her prior positions in this area, Varney’s antitrust division may lead the charge in testing the boundaries set in Leegin by bringing challenges to vertical price restraints.

If past is prologue, Varney’s appointment suggests that Obama is looking to make good on his campaign promise to pursue a more aggressive and active antitrust enforcement agenda.

Varney’s speeches are available here. And I’ve previously noted my disappointment about a recent statement from the future AAG that “there is no such thing as a false positive.” Here is a speech from 1996 on vertical restraints. It is difficult to know what to make of the speech in terms of predictive power since it was made during the Dr. Miles era. Though my own view is that P(Dr. Miles Return) = .53. But it will be interesting to watch. As readers of the TOTM know, my own view on RPM is that the theoretical and empirical evidence do not warrant an aggressive antitrust enforcement approach.

A new law in Maryland will take effect on October 1 and will re-instate the Dr. Miles rule for minimum RPM. The Wall Street Journal reports that it is a “move that could lead to lower prices for consumers across the country.” I doubt it. There are quite a few reasons to believe that shifts back to Dr. Miles will not result in lower retail prices, much less higher output (recall that the price effects are less interesting here from a consumer welfare perspective because both cartel theories and pro-competitive theories under which RPM facilitates demand-enhancing promotional services predict upward price movement). For instance, the most likely outcome of the move to per se illegality (whether at the state or federal level through legislation) is that firms contract around the rule with more costly contractual arrangements or vertical integration. To the extent that these alternative arrangements are indeed less efficient, those costs will be passed on to consumers. And of course, the empirical evidence tells us that RPM is generally output-enhancing, not anticompetitive.

Nonetheless, I suspect the WSJ article is right that we will see a number of states moving this direction. When the dust settles, and the state and federal legislation passes, I’d be willing to wager that the evidence will continue to show that prohibitions on RPM do not generate lower prices or higher output. Coincidentally, I will be a panelist at the May 21st FTC Hearings on Resale Price Maintenance discussing rule of reason analysis of RPM post-Leegin along with a representative of the Maryland State AG’s office amongst others.

Ill preview my prepared remarks here a few days in advance.

RPM Workshop Testimony

Josh Wright —  20 May 2009

I’ll be testifying tomorrow at the Federal Trade Commission hearings on Resale Price Maintenance.   My panel will focus on rule of reason analysis of RPM Post-Leegin.  There is a bit of awkwardness testifying about different modes of rule of reason analysis with legislation that would restore the Dr. Miles per se rule pending, but it strikes me as a valuable exercise nonetheless.  The early afternoon panel looks very interesting and focuses on the legal and business history of RPM.   I do not have a written statement for my prepared remarks, but you can see my slides here.

UPDATE: In response to Thom’s query in the comments, I thought the panel went pretty well.  It was fun, anyway.  The panel split time discussion the merits of the pending legislation that would restore the per se rule and whether some “inherently suspect” truncated liability approach placing the burden on defendants to justify their use of minimum RPM was appropriate.  Five of the eight panelists were in favor of the per se rule with three dissenting for various reasons, including my own view that economic learning in the form of theoretical and empirical knowledge about vertical restraints and RPM more specifically simply did not satisfy the standard that the restraint always or almost always reduces output or harms competition.  Much of the discussion of the underlying economics, in my view, revealed a general suspicion not just of RPM but of the promotional services it is designed to induce.  In other words, a few panelists argued that even if RPM did facilitate the supply of promotional services by resolving incentive conflicts (I’m not sure how well the proponents of the per se rule understand the Klein & Murphy model), we should be skeptical of any sort of promotion that manufacturers have to pay for.  Taken seriously, that view would be fairly dangerous and easily expanded to per se rules for exclusive territories, advertising, slotting contracts, and other forms of promotion.  All in all, it was a fun panel and a lively discussion.  I largely stuck to the same mantra: the theory and evidence does not support application of the per se rule, and to the extent that one believes that we know even less than the literature suggests or does not trust the results in the literature, that is not an argument in favor of per se treatment.

The law and economics of RPM have been a frequent topic of discussion here for Thom and I especially, ranging from the empirical evidence on RPM, to competitive resale price maintenance without free riding, to the inappropriate use of the term “price-fixing” by journalists some who should know better to describe RPM,  to the Commission’s recent musical instruments investigation, and of course, Leegin.

Thom’s latest entry into the RPM wars deserves a close read by all who are interested in this subject.  Dr. Miles Is Dead, Now What?  Structuring a Rule of Reason for Minimum Resale Price Maintenance is now available in published form in the William and Mary Law Review (SSRN version available here).  Thom crafts a rule of reason approach to for evaluating RPM in a Post-Leegin (for now!) world.  Thom, I hope that you’ll be submitting this for the record to the FTC hearings.  My testimony at the FTC hearings took an approach very similar to Thom’s in attempting to structure a rule of reason inquiry around the available theory and evidence on competitive effects of vertical restraints and RPM specifically.

In any event, as the RPM battles rages on (and I hope it does, as the consumer welfare upside for the pending legislation is likely negative in my view), Thom’s article is worth the investment.

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?

Geoff recently highlighted AAG Christine Varney’s closing remarks at the Horizontal Merger Guidelines workshop and was fairly critical.   Thom intervened to suggest that we at TOTM, while fairly critical of the agencies from time to time, also give credit where it is due — highlighting AAG Varney’s RPM article.  OK, that’s enough credit for now.

Now, I’d like to highlight another portion of the speech Geoff mentioned that, as Commissioner Rosch has done in earlier remarks of his own, takes a shot at the Chicago School in order to justify greater intervention and a “reinvigorated” antitrust enterprise.  On the one hand, it sure is nice to see convergence between the agencies compared to the days when Commissioner Kovacic described the sister agencies as “an archipelago of policy makers with very inadequate ferry service between the islands” and “too many instances when you go to visit those islands the inhabitants come out with sticks and torches and try to chase you away.”  Ah.  Nothing like attacking a vaunted enemy of interventionist antitrust policy like the Chicago School bogeyman to create warm feelings between the agencies.   On the other hand, convergence would seem like a less impressive feat if what is converged upon is an embarrassing error that demonstrates a lack of understanding about the Chicago School in the first instance, and even still less impressive if the error is bootstrapped into justifications for policy changes.

What is all this about?  In leveraging discussion of the financial crisis as the basis of an argument that microeconomic theory that forms the basis of industrial organization economics has been turned on its head, the chiefs of both antitrust agencies have now made the same error.  I’ve criticized Commissioner’s Rosch’s error in declaring the Chicago School “on life support, if not dead” in great detail elsewhere.  Antitrust is getting a little bit depressing.  While the US enforcement agencies would have the Chicagoans on life support, or at least retired, of course, Professor Elhauge goes the whole way to “death of the single monopoly profit theorem.”  All this talk about the Chicago School’s death, retirement, general malaise and otherwise fragile state and one almost forgets the state of Supreme Court jurisprudence, much less the actual empirical evidence.

Let’s turn to AAG Varney’s statement:

The evolution of antitrust law needs to keep pace with the advancement of economic thinking. Judge Posner convincingly made this case for reassessing economic beliefs in his recent, thought-provoking piece entitled “How I Became a Keynesian: Second Thoughts in a Recession,” wherein he questioned some of the theoretical assumptions that had previously guided his work. In an even more recent interview, he is quoted to say that “‘the term “Chicago School” should be retired.'” Theoretical assumptions that market forces naturally and inevitably correct for market failures clearly need to be reconsidered. In the context of the Horizontal Merger Guidelines, the most relevant aspect of this reassessment involves explicit or implicit assumptions that entry will erode market power otherwise enhanced by a merger.

Here’s the link to the interview.  Varney clearly wants to use Posner’s quote about the retirement of the Chicago School to support the next sentence, that is, that we ought to reconsider our priors about markets working and reevaluate antitrust priorities in a way that supports greater intervention.  I mean, if Chicago’s own Richard Posner says the Chicago School should be retired — well, I leave the rest of the proof as an exercise for the reader.

So did Posner And here’s what Posner actually said:

Ronald (Coase) is alive, but he’s very, very old. He’s not active. Stigler is dead. Friedman is dead. There’s Gary (Becker) of course. But I’m not sure there’s a distinctive Chicago School anymore. Except there are probably a higher percentage of conservative people here, but not all. Jim Heckman—not particularly conservative at all. He’s very distinguished. Steve Levitt—he’s very famous. I don’t think he’s conservative. You’ve got people like (Richard) Thaler. So probably the term “Chicago School” should be retired.

There were people—people like Stigler and Coase, Harold Demsetz, Reuben Kessel, and people at other schools like Armen Alchian. They were people rebelling against the very liberal economics of the nineteen-fifties—very Keynesian, very regulatory, very aggressive anti-trust, little faith in the self-regulating nature of markets. Francis Bator, who’s a very distinguished Harvard economist, he wrote a famous essay entitled “The Anatomy of Market Failure.” And he gave so many examples of market failure that you couldn’t believe a market could exist. You have to have an infinite number of competitors, full information, you can’t have any economies of scale, and so on. It was too austere. That was what the Chicago people, with their more informal approach, rebelled against. So we had our moment in the sun, but by the nineteen-eighties the basic insights of the Chicago School had been accepted pretty much worldwide.

Posner did not make the point that the Chicago School ought to be retired because it is outdated, incorrect, or led to antitrust policy that provided inadequate protection for consumers because of misguided notions about market failures.  Posner was making the point, as he has made elsewhere time and time again, that the Chicago School as applied to regulation, antitrust, and industrial organization economics, had been so broadly adopted into mainstream economic thought that it no longer made sense to describe a distinctive “Chicago School.”  This is the point he also makes in the speech.   Posner, actually goes so far as to reject the assertion Varney invites the reader to make, i.e. that the financial crisis should undermine faith in markets in a sense relevant to regulation and antitrust generally.

When asked “Has the financial crisis undermined your faith in markets and the price system outside of the financial sector?”

Here is Judge Posner’s answer:

No. But of course one of the more significant Chicago (positions) was in favor of deregulation, based on the notion that markets are basically self-regulating. That’s fine. The mistake was to ignore externalities in banking. Everyone knew there were pollution externalities. That was fine. I don’t think we realized there were banking externalities, and that the riskiness of banking could facilitate a global financial crisis. That was a big oversight. It doesn’t make me feel any different about the deregulation of telecommunications, or oil pipelines, or what have you.

It really can’t be made more clear than that can it?  I understand that it is tempting to use figures like Greenspan and Posner to play “gotcha.”  I’m quite sure its even an effective rhetorical device at times with those who do not follow the debates closely or do not read the language carefully.  But in both cases, the AAG and the Commissioner do a disservice to those lawyers and economists in their agencies who are dedicated to getting the answer right by hard economic analysis and not by sloganeering.  For a serious and intellectually powerful discussion from a public antitrust enforcement official discussing the Chicago School’s role, along with contributions from Harvard, in forming the intellectual basis of modern antitrust jurisprudence, see Commissioner and former Chairman Kovacic’s seminal article on the subject.

As I’ve written on this topic previously:, at that time motivated by the declaration out of the Federal Trade Commission that the Chicago School was either on life support or dead:

I had always thought that the “Chicago School” stood for the proposition that microeconomic theory should be applied rigorously, with care and attention to institutional detail, and with an eye towards producing testable implications.  These are qualities, especially empiricism, that do not lend themselves to a reflexive “faith” that markets will produce only efficient behavior.  That faith, where it exists, is earned by persuasive theory and evidence.

And with all due respect to the Commissioner, an intellectually honest survey of the state of evidence concerning the actual competitive effects of antitrust-relevant business practices reveals that the Chicago School isn’t close to dead.  In fact, Chicago School principles are alive as ever in the Supreme Court’s jurisprudence.  Perhaps this disappoints the Commissioner and others who might like economics (and particularly Chicago School antitrust economics) to be a lesser constraint on antitrust enforcement decisions.  But it’s the state of play in both the federal courts and in the empirical antitrust literature.  The debate over whether to deviate from the state of play should be determined by the quality of theory and evidence.   A rigorous review of the empirical evidence suggests not only that the Chicago School of antitrust is alive, but in my view, that it is the “best available” mode of analysis for understanding many business practices relevant to antitrust enforcement.

The search for evidence-based antitrust cannot be conducted by assertion.  Instead, if it is to be fruitful, it must take a more scientific approach.

If the Chicago School’s influence on antitrust policy is going to be defeated — let it be by strong theoretical and empirical evidence that its insights give less predictive power than alternative theories and result in policies that provide fewer benefits to consumers than alternatives.  T-shirt slogans are not going to reverse Supreme Court decisions or win Section 2 cases — though perhaps acts of Congress and expanded use of Section 5 will leave a dent.  Still, here’s to authorities and leading voices in the antitrust community, and particular those at the antitrust enforcement agencies, using their podiums to encourage productive and intellectually honest debate and not cheap, deceptive, and misleading rhetorical tricks.

Speaking of, let’s have new Section 2 hearings!

I was recently reading Dean Chemerinsky (Irvine Law) on the Roberts Court at Age 3. One of Chemerinsky’s standard takes when he talks about the Roberts Court is that the Court’s pro-business stance is one of its defining characteristics. Readers of the blog will know that I’ve been critical of Chemerinsky for his superficial antitrust commentary. For example, in this California Bar Journal piece, under the heading “Favoring Businesses over Consumers and Employees,” Chemerinsky argues that the Roberts Court antitrust decisions favored businesses over consumers by overturning Dr. Miles, “make it more difficult to sue business for antitrust violations” in Credit Suisse, and, in Twombly, made it “harder for plaintiff to get into court.”

Of course, this sort of superficial journalist-level analysis of Supreme Court antitrust decisions would not be appropriate for a law prof doing a serious law review piece. And of course, the point is wrong. Previously I wrote:

what gets me about this section is the heading: “Supreme Court favors businesses over consumers.” Is that really what these cases are about? I have read political accounts of the Supreme Court opinions in newspapers and periodicals or blogs that read this way (”The Roberts Court wants to stick it to the consumer — I can prove it: the Defendant won in all 4 cases this term”). But I’ve not heard law professors take this route too often, and never an antitrust commentator. In fact, a reasonable reading of the Court’s antitrust output this year suggests that the issues are much more nuanced than this oversimplified soundbite that pits business against consumers.

Is Leegin a pro-business and anti-consumer decision? I’m not sure I even know what that means in this context. Let’s turn the question on its head for a moment to illustrate its absurdity. Is a decision that prohibits a firm from engaging in some behavior clearly anti-business and pro-consumer? Of course not! It depends on the competitive effects of the conduct at issue and how the antitrust rule will impact firm behavior. Justice Kennedy’s opinion on behalf of the majority does allow manufacturers to engage in behavior that was previously constrained. Perhaps that is a sufficient condition for a pro-business label? On the other hand, the very reason the Court overturned the per se rule was the result of evidence that minimum resale price maintenance made consumers better off! Now, one might think that the Court got it wrong and that RPM actually harms consumers. I disagree and believe Leegin was correctly decided. But to argue that the Court got there by favoring business over consumers is not accurate, and obvious from reading the opinion.

The point here is that the issues are far more nuanced than his misleading characterization of the cases suggests. It is a short article, I know. There is not always room to get in every detail about every case. But these are not minor details. These sorts of misleading descriptions aimed at producing soundbites. That sort of thing should be left to journalists, not law professors.

I was interested in reading the law review length piece to see if Chemerinsky would push harder on his antitrust claim as evidence that the court was too pro-business. Interestingly, to his credit, and I think correctly, he dropped the point. Perhaps he reads the blog. Chemerinsky is not the only law professor, economist, or commentator to argue that the high defendant win rate in antitrust cases is evidence that the Supreme Court is anti-consumer and pro-business (to be distinguished from pro-business and pro-consumer), or to make the related point that we can simply look at the level of enforcement activity levels to figure out how well enforcers are performing (see, e.g. examples we’ve discussed here and here). I’ve also increasingly noticed reliance on the low plaintiff win rate before the SCOTUS in antitrust cases as evidence that antitrust law is moving away from a consumer welfare standard or favoring firms over consumers.

There are at least two major analytical flaws with these arguments that render the evidence irrelevant for the purposes frequently asserted.

The first is that plaintiff win rates do not account for the merits of the underlying case. It doesn’t make much sense to argue that Independent Ink favors businesses over consumers because it makes life more difficult for plaintiffs who must now prove market power in tying cases. There is an economic consensus that market power is required to do competitive harm and that patents are not sufficient to confer such power. The rule in Independent Ink thus eliminates the potential for serious error costs and chilling of pro-competitive tying and is good for consumers. Yes, even though the defendant won. One could conduct a similar analysis of decisions like Leegin where there is simply no evidence that the per se rule for minimum RPM is appropriate or benefits consumers. The important analytical point is that whether an antitrust decision is good or bad for consumers is not obviously related to who wins the case! One must understand the competitive effects of the conduct at issue, and the likelihood and social costs of errors in evaluating the conduct in order to assess a change in the liability rule in this way. Win rates just don’t cut it. This is similar to the point that one can’t just look at merger enforcement activity and make inferences about whether more is better. Rather, one has to have some idea about whether the “marginal”merger enforcement action is likely to increase or decrease consumer welfare. That necessitates a strategy of identifying those marginal merger enforcement decisions and some reliable evidence of their welfare effects. Without out, claims linking activity level to quality of enforcement don’t make any sense.

Second, the cases the Supreme Court selects are endogenously determined not randomly assigned. What types of decisions are they accepting one how might that impact win rates? Judge Douglas Ginsburg (with Leah Brannon in Competition Policy Int’l) recently described the case selection: “the Court, far from indulging in a pro-defendant or anti-antitrust bias, is [instead] methodically re-working antitrust doctrine to bring it into alignment with modern economic understanding.” I make a similar point here, arguing that the Roberts Court’s antitrust jurisprudence has identified low hanging fruit where there is an economic consensus. If the Court is looking for areas to bring modern antitrust law in align with economic theory, relative to the plaintiff friendly law of the 1960s, one would expect systematically that these decisions would come out in favor of defendants. It is no surprise that they do.  Defendant win rates in cases bringing what everybody agrees was a very anti-consumer and anti-business set of laws in the 1960s in step with modern economic theory and evidence is likely to substantially improve consumer outcomes.  Given the body of doctrine from which antitrust is coming from, to argue that defendant wins are evidence of consumer harm strikes me as implausible without some other corroborating evidence.

Litigation win at the Supreme Court, and enforcement activity levels for that matter, might be interesting for all sorts of reasons. But they are not reliable evidence of the quality of the substantive doctrine, enforcement, or consumer welfare.

Once again displaying its tenacious devotion to old Dr. Miles, the FTC is investigating whether makers of musical instruments and audio equipment have engaged in illegal resale price maintenance (RPM). Yesterday’s WSJ reported that the Commission has issued subpoenas to a number of prominent musical instrument manufacturers, including Fender, Yamaha, and Gibson, as well as to the retailer, Guitar Center, Inc. The Commission is apparently seeking to determine whether the manufacturers’ minimum advertised price (MAP) programs, which forbid retailers from advertising prices below some minimum level, amount to unreasonable vertical restraints of trade. In the post-Leegin world, even those MAP programs that amount to agreements to set retail prices are not automatically illegal. Instead, a challenger must establish their anticompetitive effect.

Most likely, these arrangements are pro- rather than anti-competitive. To see why, consider the possible anti-competitive harms and pro-competitive benefits that may result from RPM agreements and the pre-conditions for their occurrence.

The potential anti-competitive harms stemming from RPM are (1) facilitation of a cartel at the retailer level [i.e., retailers persuade the manufacturer to establish and enforce a retailer cartel by “requiring” them to adhere to minimum resale prices] and (2) facilitation of a cartel at the manufacturer level [i.e., colluding manufacturers all require their retailers to charge minimum resale prices in order to (a) reduce the manufacturers’ individual incentives to cheat on the fixed price they charge retailers, who can’t enhance total sales of the manufacturer’s brand by passing any price cut on to consumers, and (b) enhance price transparency so that their cartel is easier to monitor].

In order for either of these anti-competitive harms to materialize, a number of structural pre-requisites must be present. For RPM to facilitate a dealer-level cartel, the retail market must be capable of cartelization (e.g., it must be fairly concentrated, with significant entry barriers, etc.). Moreover, because manufacturers would normally want retail mark-ups to be as small as possible and would thus tend to resist requests for RPM, the retailers seeking to enlist manufacturers in establishing/policing their cartel must have some power in the retail market. Given the low barriers to entry in retailing, such retailer market power is rare. For RPM to facilitate a manufacturer-level cartel, the manufacturers’ market must be susceptible to cartelization (e.g., concentrated, subject to entry barriers, etc.) and the use of RPM must be fairly widespread among manufacturers comprising a substantial percentage of the market.

It’s unlikely that the structural pre-requisites to either form of anti-competitive harm exist here. With respect to the dealer cartel possibility, the relevant retailer market is unconcentrated, and entry barriers are low. Retailers couldn’t very well cartelize, and if they tried to do so, retailers offering lower mark-ups would enter the market. It’s therefore unlikely that RPM could facilitate a dealer cartel. I don’t know about the structural pre-requisites to the “facilitation of manufacturer cartel” theory, but the fact that the FTC isn’t (to my knowledge) investigating direct collusion among the instrument manufacturers themselves suggests that there’s no basis for supposing that the RPM here is being used to facilitate any such cartel.

So the potential anti-competitive harms of RPM are unlikely to exist here. What about the pro-competitive benefits?

Well one pro-competitive benefit is pretty darn obvious. A musical instrument is the sort of thing whose attractiveness to consumers will be greatly influenced by point-of-sale services. If a customer can try out a brand of an instrument, ask questions of a knowledgeable salesperson, see the various features demonstrated, maybe take a lesson or two, and be assured that he can return the instrument to the store for occasional servicing, the amount he is willing to pay for that brand will increase. A manufacturer thus has an interest in ensuring that these point-of-sale services remain available. If low-overhead retailers (like Internet retailers) can free-ride off the efforts of high-service dealers, then these output-enhancing point-of-sale services will eventually disappear, to the detriment of the manufacturers. The manufacturers thus have an interest in forbidding the advertising — and even the charging — of low prices by low- (or no-)service retailers. Such restrictions are necessary to promote the services that are desired by consumers and will maximize the total output of the manufacturers’ products.

As Josh has noted a number of times, the free-rider explanation is not the only pro-competitive explanation for RPM agreements. In this case, though, the free-rider story seems pretty plausible. The collusion-facilitation stories, not so much.

It will be interesting to see what the FTC finds and how much proof of pro-competitive effect it requires before it acquits the MAP arrangements at issue. Based on its recent action in the Nine West case, I expect that it will scrutinize the arrangements very closely. I, of course, would recommend that it follow the approach set forth in my forthcoming William & Mary Law Review article, Dr. Miles Is Dead. Now What?: Structuring a Rule of Reason for Evaluating Minimum Resale Price Maintenance.

It looks like the FTC is interested in doing more than just investigating RPM (see Thom’s excellent post), as the agency just announced a series of public workshops on the question of how best to distinguish pro-competitive uses of RPM from those that raise competitive concerns. From the announcement:

The FTC is requesting public comment from attorneys, economists, marketing professionals, the business community, consumer groups, law enforcers, academics, and other interested parties on three general subjects:

  1. The legal, economic, and management principles relevant to applying Sections 1 of the Sherman Act and Section 5 of the FTC Act to RPM, including the ability to administer current or potential antitrust or other rules for applying these laws;
  2. The business circumstances regarding the use of RPM that the Commission should examine in the upcoming workshops, including examples of actual conduct; and
  3. Empirical studies or analyses that might provide better guidance and assistance to the business and legal communities regarding RPM enforcement issues.

Thom’s paper offers one proposed test based on the available theoretical and empirical evidence and grounded in the error-cost approach. One of the key virtues of Thom’s test is that he would initially place the burden on the plaintiff to demonstrate an output effect. I’ve written before, as have many others, that all of this talk about RPM and its effect on prices is nothing more than distraction given that both pro-competitive and anti-competitive theories predict a price increase. Thom’s test is nuanced and includes structured rule of reason inquiries for establishing the likelihood of such an effect through circumstantial evidence. You should read the paper if you haven’t already.

In the paper, Thom is a bit too kind to the proponents of proposed tests that would either turn on observing prices before and after the imposition of RPM or would place a burden on the defendant utilizing RPM to first show, without a predicate showing of actual or likely reduction in output, that its use fit some pre-determined justification for RPM. The former tests are wrong on the economics because we want price and not output. We should not entertain price tests as relevant here. We should also dismiss as inconsistent with economic learning tests that do not at least attempt to reconcile burdens with the theoretical and empirical learning on vertical restraints and RPM more specifically. I’ll leave as an exercise to the reader to figure out which tests those might be and which errors they commit.

The latter tests are also wrong on the economics, but in a different way. One of the many advantages to setting the rule of reason as the analytical default for business practices and reserving the per se rule for those practices which we know, through judicial learning or economic experience, “always or almost always reduce output” is that it constrains antitrust enforcers and judges from condemning business practices which look unfamiliar or which we do not understand simply because we do not yet have an efficiency justification. Antitrust has a long history of condemning business practices which we later found out are a normal part of the competitive process. We can tell that story for RPM, vertical mergers, horizontal mergers, exclusive dealing contracts, tying — well, we can tell it about nearly everything within antitrust’s domain. This is what Ronald Coase was warning us about when he wrote:

One important result of this preoccupation with the monopoly problem is that if an economist finds something—a business practice of one sort or other—that he does not understand, he looks for a monopoly
explanation. And as in this field we are very ignorant, the number of ununderstandable practices tends to be rather large, and the reliance on a monopoly explanation, frequent.

Many of the proposed tests which would place substantial burdens on defendants to explain their conduct with reference to some narrowly accepted justifications for RPM, usually based on what I view to be an overly restrictive and erroneous reading of Leegin, come very close to looking like attempts to design structured rule of reason approaches with the goal of circumvent the burden shifting consequence of overturning Dr. Miles. The notion that we know so much about the competitive effects of RPM such as to justify its treatment as “inherently suspect” or worthy of summary condemnation under certain specific and identifiable conditions is both wrong as a matter of economics and empirical evidence and inconsistent with Leegin.

There is a lot that we do know know about precisely how RPM works, when and by whom it is adopted, and to what effect. But both what we do and what we don’t know about RPM can and should cut in favor of adopting burdens which require plaintiffs to show meaningful competitive harm before we condemn a business practice which all agree is efficient most of the time. Precisely how we specify those burdens, presumptions and safe harbors in a way that is consistent with the principles of rule of reason analysis and economic learning is a very important question (Thom’s paper is a step in the right direction toward answering that question) and one that the FTC should be applauded for allocating resources toward in these workshops. I’d also note that while much attention has been paid to developing a sensible structured rule of reason approach for the plaintiff’s prima facie burden in RPM cases, less (but not zero) has been paid to developing safe harbors grounded firmly in economic theory and empirical evidence which would provide firms using RPM to distribute their products some certainty with respect to antitrust exposure.

I’ll have more thoughts on RPM, the economics of vertical restraints, and sensible safe harbors later.

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.