Archives For antitrust

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!

On March 14, the U.S. Chamber of Commerce released a report “by an independent group of experts it commissioned to consider U.S. responses to the inappropriate use of antitrust enforcement actions worldwide to achieve industrial policy outcomes.”  (See here and here.)  I served as rapporteur for the report, which represents the views of the experts (leading academics, practitioners, and former senior officials who specialize in antitrust and international trade), not the position of the Chamber.  In particular, the report calls for the formation of a new White House-led working group.  The working group would oversee development of a strategy for dealing with the misuse of competition policy by other nations that impede international trade and competition and harm U.S. companies.  The denial of fundamental due process rights and the inappropriate extraterritorial application of competition remedies by foreign governments also would be within the purview of the working group.

The Chamber will hold a program on April 10 with members of the experts group to discuss the report and its conclusions.  The letter transmitting the report to the President and congressional leadership states as follows:

Today, nearly every nation in the world has some form of antitrust or competition law regulating business activities occurring within or substantially affecting its territory. The United States has long championed the promotion of global competition as the best way to ensure that businesses have a strong incentive to operate efficiently and innovate, and this approach has helped to fuel a strong and vibrant U.S. economy. But competition laws are not always applied in a transparent, accurate and impartial manner, and they can have significant adverse impacts far outside a country’s own borders. Certain of our major trading partners appear to have used their laws to actually harm competition by U.S. companies, protecting their own markets from foreign competition, promoting national champions, forcing technology transfers and, in some cases, denying U.S. companies fundamental due process.

Up to now, the United States has had some, but limited, success in addressing this problem. For that reason, in August of 2016, the U.S. Chamber of Commerce convened an independent, bi-partisan group of experts in trade and competition law and economics to take a fresh look and develop recommendations for a potentially more effective and better-integrated international trade and competition law strategy.

As explained by the U.S. Chamber in announcing the formation of this group,

The United States has been, and should continue to be, a global leader in the development and implementation of sound competition law and policy. . . . When competition law is applied in a discriminatory manner or relies upon non-competition factors to engineer outcomes in support of national champions or industrial policy objectives, the impact of such instances arguably goes beyond the role of U.S. antitrust agencies. The Chamber believes it is critical for the United States to develop a coordinated trade and competition law approach to international economic policy.

The International Competition Policy Expert Group (“ICPEG”) was encouraged to develop “practical and actionable steps forward that will serve to advance sound trade and competition policy.”

The Report accompanying this letter is the result of ICPEG’s work. Although the U.S. Chamber suggested the project and recruited participants, it made no effort to steer the content of ICPEG’s recommendations.

The Report is addressed specifically to the interaction of competition law and international trade law and proposes greater coordination and cooperation between them in the formulation and implementation of U.S. international trade policy. It focuses on the use of international trade and other appropriate tools to address problems in the application of foreign competition policies through 12 concrete recommendations.

Recommendations 1 through 6 urge the Trump Administration to prioritize the coordination of international competition policy through a new, cabinet-level White House working group (the “Working Group”) to be chaired by an Assistant to the President. Among other things, the Working Group would:

  • set a government-wide, high-level strategy for articulating and promoting policies to address the misuse of competition law by other nations that impede international trade and competition and harm U.S. companies;
  • undertake a 90-day review of existing and potential new trade policy tools available to address the challenge, culminating in a recommended “action list” for the President and Congress; and
  • address not only broader substantive concerns regarding the abuse of competition policy for protectionist and discriminatory purposes, but also the denial of fundamental process rights and the extraterritorial imposition of remedies that are not necessary to protect a country’s legitimate competition law objectives.

Recommendations 7 through 12 focus on steps that should be taken with international organizations and bilateral initiatives. For example, the United States should consider:

  • the feasibility and value of expanding the World Trade Organization’s regular assessment of each member government by the Trade Policy Review Body to include national competition policies and encourage the Organisation for Economic Cooperation and Development (OECD) to undertake specific peer reviews of national procedural or substantive policies, including of non-OECD countries;
  • encouraging the OECD and/or other multilateral bodies to adopt a code enumerating transparent, accurate, and impartial procedures; and
  • promoting the application of agreements under which nations would cooperate with and take into account legitimate interests of other nations affected by a competition investigation.

The competition and trade law issues addressed in the Report are complex and the consequences of taking any particular action vis-a-vis another country must be carefully considered in light of a number of factors beyond the scope of this Report. ICPEG does not take a view on the actions of any particular country nor propose specific steps with respect to any actual dispute or matter. In addition, reasonable minds can differ on ICPEG’s assessment and recommendations. But we hope that this Report will prompt appropriate prioritization of the issues it addresses and serve as the basis for the further development of a successful policy and action plan and improved coordination and cooperation between U.S. competition and trade agencies.

The antitrust industry never sleeps – it is always hard at work seeking new business practices to scrutinize, eagerly latching on to any novel theory of anticompetitive harm that holds out the prospect of future investigations.  In so doing, antitrust entrepreneurs choose, of course, to ignore Nobel Laureate Ronald Coase’s warning that “[i]f an economist finds something . . . that he does not understand, he looks for a monopoly explanation.  And as in this field we are rather ignorant, the number of ununderstandable practices tends to be rather large, and the reliance on monopoly explanations frequent.”  Ambitious antitrusters also generally appear oblivious to the fact that since antitrust is an administrative system subject to substantial error and transaction costs in application (see here), decision theory counsels that enforcers should proceed with great caution before adopting novel untested theories of competitive harm.

The latest example of this regrettable phenomenon is the popular new theory that institutional investors’ common ownership of minority shares in competing firms may pose serious threats to vigorous market competition (see here, for example).  If such investors’ shareholdings are insufficient to control or substantially influence the strategies employed by the competing firms, what is the precise mechanism by which this occurs?  At the very least, this question should give enforcers pause (and cause them to carefully examine both the theoretical and empirical underpinnings of the common ownership story) before they charge ahead as knights errant seeking to vanquish new financial foes.  Yet it appears that at least some antitrust enforcers have been wasting no time in seeking to factor common ownership concerns into their modes of analysis.  (For example, The European Commission in at least one case presented a modified Herfindahl-Hirschman Index (MHHI) analysis to account for the effects of common shareholding by institutional investors, as part of a statement of objections to a proposed merger, see here.)

A recent draft paper by Bates White economists Daniel P. O’Brien and Keith Waehrer raises major questions about recent much heralded research (reported in three studies dealing with executive compensation, airlines, and banking) that has been cited to raise concerns about common minority shareholdings’ effects on competition.  The draft paper’s abstract argues that the theory underlying these concerns is insufficiently developed, and that there are serious statistical flaws in the empirical work that purports to show a relationship between price and common ownership:

“Recent empirical research purports to show that common ownership by institutional investors harms competition even when all financial holdings are minority interests. This research has received a great deal of attention, leading to both calls for and actual changes in antitrust policy. This paper examines the research on this subject to date and finds that its conclusions regarding the effects of minority shareholdings on competition are not well established. Without prejudging what more rigorous empirical work might show, we conclude that researchers and policy authorities are getting well ahead of themselves in drawing policy conclusions from the research to date. The theory of partial ownership does not yield a specific relationship between price and the MHHI. In addition, the key explanatory variable in the emerging research – the MHHI – is an endogenous measure of concentration that depends on both common ownership and market shares. Factors other than common ownership affect both price and the MHHI, so the relationship between price and the MHHI need not reflect the relationship between price and common ownership. Thus, regressions of price on the MHHI are likely to show a relationship even if common ownership has no actual causal effect on price. The instrumental variable approaches employed in this literature are not sufficient to remedy this issue. We explain these points with reference to the economic theory of partial ownership and suggest avenues for further research.”

In addition to pinpointing deficiencies in existing research, O’Brien and Waehrer also summarize serious negative implications for the financial sector that could stem from the aggressive antitrust pursuit of partial ownership for the financial sector – a new approach that would be at odds with longstanding antitrust practice (footnote citations deleted):

“While it is widely accepted that common ownership can have anticompetitive effects when the owners have control over at least one of the firms they own (a complete merger is a special case), antitrust authorities historically have taken limited interest in common ownership by minority shareholders whose control seems to be limited to voting rights. Thus, if the empirical findings and conclusions in the emerging research are correct and robust, they could have dramatic implications for the antitrust analysis of mergers and acquisitions. The findings could be interpreted to suggest that antitrust authorities should scrutinize not only situations in which a common owner of competing firms control at least one of the entities it owns, but also situations in which all of the common owner’s shareholdings are small minority positions. As [previously] noted, . . . such a policy shift is already occurring.

Institutional investors (e.g., mutual funds) frequently take positions in multiple firms in an industry in order to offer diversified portfolios to retail investors at low transaction costs. A change in antitrust or regulatory policy toward these investments could have significant negative implications for the types of investments currently available to retail investors. In particular, a recent proposal to step up antitrust enforcement in this area would seem to require significant changes to the size or composition of many investment funds that are currently offered.

Given the potential policy implications of this research and the less than obvious connections between small minority ownership interests and anticompetitive price effects, it is important to be particularly confident in the analysis and empirical findings before drawing strong policy conclusions. In our view, this requires a valid empirical test that permits causal inferences about the effects of common ownership on price. In addition, the empirical findings and their interpretation should be consistent with the observed behavior of firms and investors in the economic and legal environments in which they operate.

We find that the airline, banking, and compensation papers [that deal with minority shareholding] fall short of these criteria.”

In sum, at the very least, a substantial amount of further work is called for before significant enforcement resources are directed to common minority shareholder investigations, lest competitively non-problematic investment holdings be chilled.  More generally, the trendy antitrust pursuit of common minority shareholdings threatens to interfere inappropriately in investment decisions of institutional investors and thereby undermine efficiency.  Given the great significance of institutional investment for vibrant capital markets and a growing, dynamic economy, the negative economic welfare consequences of such unwarranted meddling would likely swamp any benefits that might accrue from an occasional meritorious prosecution.  One may hope that the Trump Administration will seriously weigh those potential consequences as it examines the minority shareholding issue, in deciding upon its antitrust policy priorities.

  1. Overview

A‌merica’s antitrust laws have long held a special status in the ‌federal statutory hierarchy.  The Supreme Court of the United States, for example, famously stated that the “[a]ntitrust laws in general, and the Sherman Act in particular, are the Magna Carta of free enterprise.”  Thus, when considering the qualifications of a nominee to the U.S. Supreme Court, the nominee’s views (if any) on antitrust are unquestionably of interest.  Such an assessment is particularly significant today, given the fact that the Court has had only one remaining antitrust expert (Justice Breyer, who taught antitrust at Harvard), since the sad demise of Justice Scalia (author of the landmark Trinko opinion on the limits of monopolization law).

Fortunately, we know a great deal about the antitrust perspective of Judge Neil Gorsuch, President Trump’s first nominee to the Supreme Court.  Judge Gorsuch authored several well-reasoned and highly persuasive antitrust opinions as a Tenth Circuit judge, which show him to be respectful of Supreme Court precedent and fully aware of the nuances of modern antitrust analysis.  This is not surprising, since Judge Gorsuch in recent years has taught antitrust law at the University of Colorado Law School.  In addition, he had exposure to antitrust matters as Principal Deputy Associate Attorney General during the George W. Bush Administration.  What’s more, he worked on major antitrust cases as an associate and then a partner at the Kellogg Huber law firm (see here).  Recent commentaries by highly respected antitrust lawyers on Judge Gorsuch’s antitrust jurisprudence manifest great respect for his mastery of the field (see, for example, here and here) – and put to shame a non-antitrust lawyer’s jejeune and misleading “hit piece” on Judge Gorsuch’s antitrust record (see here) that displays a woeful ignorance of the nature of antitrust analysis (see, for example, Ed Whelan’s devastating critique of that screed, here).

In short, Judge Gorsuch is extremely well-versed in antitrust and thus ideally positioned to make important contributions to the Supreme Court’s antitrust jurisprudence, should he be confirmed.  A quick evaluation of Judge Gorsuch’s decisions in antitrust cases confirms this conclusion.

  1. Judge Gorsuch’s Antitrust Opinions

Let’s take a look at three antitrust opinions authored by Judge Gorsuch, two of which deal with refusals to deal, and one of which concerns municipal antitrust immunity.  All three decisions show an appreciation for the underlying economic efficiency rationale that undergirds modern mainstream antitrust analysis, consistent with Supreme Court case law pronouncements.

a.  Four Corners Nephrology, Associates, PC v. Mercy Medical Center of Durango, 582 F.3d 1216 (10th 2009). To provide Durango, Colorado, residents and Southern Ute Indian tribe members with greater access to kidney dialysis and other nephrology services, Mercy Medical Center, a non-profit hospital, together with the tribe, sought to entice Dr. Mark Bevan to join the hospital’s active staff.  When Dr. Bevan declined, the hospital hired somebody else.  To convince that physician and others to settle in Durango, and aware that starting a nephrology practice was likely to prove unprofitable for the foreseeable future, the hospital and tribe agreed to underwrite up to $2.5 million in losses they expected the practice to incur.  To protect its investment, Mercy made its new practice the exclusive provider of nephrology services at the hospital.

Dr. Bevan sued, contending that Mercy’s refusal to deal with other nephrologists, including himself, amounted to the monopolization, or attempted monopolization, of the market for physician nephrology services in the Durango area.  The district court granted summary judgment to the hospital.

Judge Gorsuch’s Sixth Circuit panel opinion affirmed, for two reasons.  First, he held that the hospital had no antitrust duty to share its facilities with Dr. Bevan at the expense of its own nephrology practice.  It stressed that in demanding access to Mercy’s facilities, Dr. Bevan sought to share, not to undo, the hospital’s putative monopoly.  According to Judge Gorsuch, that is not what the antitrust laws are about:  they seek to advance competition, not advantage competitors.  Judge Gorsuch deftly distinguished the Supreme Court’s 1985 Aspen Skiing decision, which upheld a Sherman Act Section 2 refusal to deal claim based on a monopolist ski resort’s discontinuation of a joint ticketing arrangement with a smaller resort (a decision deemed “at or near the outer boundary of §2 liability” in Justice Scalia’s Trinko opinion).  He noted that defendant terminated a profitable long-term contractual relationship in Aspen Skiing, in order to achieve long-term anticompetitive goals.  In the instant case, however, the hospital was seeking to avoid an unprofitable short-term relationship with the plaintiff doctor – an action consistent with legal competition on the merits, as in TrinkoSecond, Judge Gorsuch held that plaintiff had suffered no antitrust injury, because it was seeking to share in monopoly profits, not to undo a monopoly and thereby benefit consumers.

Judge Gorsuch’s careful reasoning in Four Corners adroitly cabined Aspen Skiing’s problematic reasoning.  Future courts could benefit from his approach to help rein in inappropriate antitrust attacks on refusals to deal that manifest competition on the merits.

b.  Novell, Inc. v. Microsoft Corporation, 731 F.3d 1064 (10th 2013).  Novell produced office software, including WordPerfect, Microsoft Word’s leading rival in word processing applications.  Microsoft initially gave independent software vendors, including Novell, pre-release access to design information which would enable them to produce applications for Windows 95.  Microsoft subsequently changed its policy, however, denying such access prior to the release of Windows 95.  This decision significantly delayed, but did not preclude, third party companies from developing Windows 95 applications.  Novell sued Microsoft, alleging that Microsoft’s actions helped it maintain its monopoly in the market for Intel-compatible personal computer operating systems.  The district court granted judgment for Microsoft as a matter of law, and the Tenth Circuit affirmed.

In his opinion, Judge Gorsuch framed the standard of liability for illegal monopolization under Section 2 of the Sherman Act in a decision-theoretic manner that would gladden the hearts of law and economics mavens:  “the question . . . is whether, based on the evidence and experience derived from past cases, the conduct at issue before us has little or no value beyond the capacity to protect the monopolist’s market power—bearing in mind the risk of false positives (and negatives) any determination on the question of liability might invite, and the limits on the administrative capacities of courts to police market terms and transactions.”

Applying this set of general principles in light of the case law and the facts presented, Judge Gorsuch ably dissected and rejected Novell’s theories of antitrust harm, explaining that Novell’s claims did not squeeze “through the narrow needle of [antitrust] refusal to deal doctrine.”  Specifically, Microsoft’s actions failed to pass Aspen Skiing muster.  Even though “[a] voluntary and profitable relationship clearly existed between Microsoft and Novell[,]. . . Novell . . .  presented no evidence from which a reasonable jury could infer that Microsoft’s discontinuation of this arrangement suggested a willingness to sacrifice short-term profits, let alone in a manner that was irrational but for its tendency to harm competition.”  The court also rejected Novell’s alternative claim of an antitrust violation based on an “affirmative” act of interference with a rival rather than on a refusal to deal.  As Judge Gorsuch explained, “neither Trinko nor Aspen Skiing suggested this is enough to evade their profit sacrifice test, and we refuse to do so either.  Whether one chooses to call a monopolist’s refusal to deal with a rival an act or omission, interference or withdrawal of assistance, the substance is the same”.  Finally, Novell’s third theory, that Microsoft acted deceptively when it gave pretextual reasons for withdrawing key compatibility information from Novell, similarly proved unavailing.  According to Judge Gorsuch, “[deception] . . . wasn’t the cause of Novell’s injury or any possible harm to consumers—Microsoft’s refusal to deal was. . . .  Even if Microsoft had behaved [non-deceptively,] just as Novell sa[id] it should have, it would have helped Novell not at all.”

Novell, like Kay Electric, reflects Judge Gorsuch’s understanding of the importance of curtailing inappropriate antitrust attacks on the right not to deal with competitors.  It also manifests his keen appreciation for protecting a successful firm’s market-driven economic incentives from being undermined by antitrust attacks.  Finally, and most significantly, this decision highlights Judge Gorsuch’s understanding that decision theory is of central importance in administering a rules-based antitrust legal system (see here for a discussion of the role of decision theory in Roberts Court antitrust decisions).

c.  Kay Electric Cooperative v. City of Newkirk, Oklahoma, 647 F.3d 1039 (10th 2011). In this case, the Tenth Circuit, per Judge Gorsuch, reversed and remanded a district court’s dismissal of an antitrust suit filed against a municipal electricity provider.  Kay, an Oklahoma rural electric cooperative, offered to provide electricity to a new jail being built in an area just outside the city boundaries of Newkirk.  The City of Newkirk responded by annexing the area and issuing its own service offer.  As Judge Gorsuch pithily explained, “Kay’s offer was much the better but the jail still elected to buy electricity from Newkirk.  Why?  Because Newkirk is the only provider of sewage services in the area and it refused to provide any sewage services to the jail – that is, unless the jail also bought the city’s electricity.  Finding themselves stuck between a rock and a pile of sewage, the operators of the jail reluctantly went with the city’s package deal.”  Kay responded by suing Newkirk for unlawful tying and attempted monopolization in violation of the Sherman Antitrust Act.  The district court found Newkirk “immune” from liability as a matter of law, and Kay appealed.

Judge Gorsuch surveyed the Supreme Court’s confusing case law on state action antitrust immunity, which shields state-sanctioned restraints of trade from Sherman Act scrutiny.  He noted that “though it’s hard to see a way to reconcile all of the [Supreme] Court’s competing statements in this area, we can say with certainty this much – a municipality surely lacks antitrust ‘immunity’ unless it can bear the burden of showing that its challenged conduct was at least a foreseeable (if not explicit) result of state legislation [emphasis in the original].”  The judge brilliantly parsed the “muddled” jurisprudence and found three “bright lines” that were “enough to allow us to dispose of this appeal with confidence.”  First, “a state’s grant of a traditional corporate chapter to a municipality isn’t enough to make the municipality’s subsequent anticompetitive conduct foreseeable.”  Second, “the fact that a state may have authorized some forms of municipal anticompetitive conduct isn’t enough to make all forms of anticompetitive conduct foreseeable [emphasis in the original].”  Third, “when asking whether the state has authorized the municipality’s anticompetitive conduct we look to and preference the most specific direction issued by the state legislature on the subject.”  Applying these rules to the facts at hand (including relevant Oklahoma statutes), the judge concluded “that it quickly becomes clear that Newkirk enjoys no immunity.”

Judge Gorsuch’s Kay Electric opinion displays great facility in reconciling respect for antitrust federalism with the Sherman Act’s goal of rooting out unreasonable constraints on free market competition.  His concise ruling ably cuts through the complexities of the opaque (to be generous) antitrust state action doctrine decisions to identify clear administrable principles that, if broadly adopted, would reduce uncertainty regarding the legal status of anticompetitive municipal conduct.  In short, if Kay Electric is any indication, Judge Gorsuch may be just the jurist needed to bring greater (and badly needed) clarity to the Supreme Court’s treatment of state action controversies.

  1. Conclusion

In sum, Judge Gorsuch’s antitrust opinions reflect a sound grounding in law and economics and decision theory, combined with a respect for Supreme Court precedent, careful attention to traditional judicial craftsmanship, and a respect for the appropriate contours of antitrust federalism.  Accordingly, the Supreme Court’s antitrust jurisprudence would unquestionably benefit by having Judge Gorsuch join the Court.  For this and for so many other reasons (see, for example, here), Judge Gorsuch merits swift confirmation by the Senate.

I just posted a new ICLE white paper, co-authored with former ICLE Associate Director, Ben Sperry:

When Past Is Not Prologue: The Weakness of the Economic Evidence Against Health Insurance Mergers.

Yesterday the hearing in the DOJ’s challenge to stop the Aetna-Humana merger got underway, and last week phase 1 of the Cigna-Anthem merger trial came to a close.

The DOJ’s challenge in both cases is fundamentally rooted in a timeworn structural analysis: More consolidation in the market (where “the market” is a hotly-contested issue, of course) means less competition and higher premiums for consumers.

Following the traditional structural playbook, the DOJ argues that the Aetna-Humana merger (to pick one) would result in presumptively anticompetitive levels of concentration, and that neither new entry not divestiture would suffice to introduce sufficient competition. It does not (in its pretrial brief, at least) consider other market dynamics (including especially the complex and evolving regulatory environment) that would constrain the firm’s ability to charge supracompetitive prices.

Aetna & Humana, for their part, contend that things are a bit more complicated than the government suggests, that the government defines the relevant market incorrectly, and that

the evidence will show that there is no correlation between the number of [Medicare Advantage organizations] in a county (or their shares) and Medicare Advantage pricing—a fundamental fact that the Government’s theories of harm cannot overcome.

The trial will, of course, feature expert economic evidence from both sides. But until we see that evidence, or read the inevitable papers derived from it, we are stuck evaluating the basic outlines of the economic arguments based on the existing literature.

A host of antitrust commentators, politicians, and other interested parties have determined that the literature condemns the mergers, based largely on a small set of papers purporting to demonstrate that an increase of premiums, without corresponding benefit, inexorably follows health insurance “consolidation.” In fact, virtually all of these critics base their claims on a 2012 case study of a 1999 merger (between Aetna and Prudential) by economists Leemore Dafny, Mark Duggan, and Subramaniam Ramanarayanan, Paying a Premium on Your Premium? Consolidation in the U.S. Health Insurance Industry, as well as associated testimony by Prof. Dafny, along with a small number of other papers by her (and a couple others).

Our paper challenges these claims. As we summarize:

This white paper counsels extreme caution in the use of past statistical studies of the purported effects of health insurance company mergers to infer that today’s proposed mergers—between Aetna/Humana and Anthem/Cigna—will likely have similar effects. Focusing on one influential study—Paying a Premium on Your Premium…—as a jumping off point, we highlight some of the many reasons that past is not prologue.

In short: extrapolated, long-term, cumulative, average effects drawn from 17-year-old data may grab headlines, but they really don’t tell us much of anything about the likely effects of a particular merger today, or about the effects of increased concentration in any particular product or geographic market.

While our analysis doesn’t necessarily undermine the paper’s limited, historical conclusions, it does counsel extreme caution for inferring the study’s applicability to today’s proposed mergers.

By way of reference, Dafny, et al. found average premium price increases from the 1999 Aetna/Prudential merger of only 0.25 percent per year for two years following the merger in the geographic markets they studied. “Health Insurance Mergers May Lead to 0.25 Percent Price Increases!” isn’t quite as compelling a claim as what critics have been saying, but it’s arguably more accurate (and more relevant) than the 7 percent price increase purportedly based on the paper that merger critics like to throw around.

Moreover, different markets and a changed regulatory environment alone aren’t the only things suggesting that past is not prologue. When we delve into the paper more closely we find even more significant limitations on the paper’s support for the claims made in its name, and its relevance to the current proposed mergers.

The full paper is available here.

As Truth on the Market readers prepare to enjoy their Thanksgiving dinners, let me offer some (hopefully palatable) “food for thought” on a competition policy for the new Trump Administration.  In referring to competition policy, I refer not just to lawsuits directed against private anticompetitive conduct, but more broadly to efforts aimed at curbing government regulatory barriers that undermine the competitive process.

Public regulatory barriers are a huge problem.  Their costs have been highlighted by prestigious international research bodies such as the OECD and World Bank, and considered by the International Competition Network’s Advocacy Working Group.  Government-imposed restrictions on competition benefit powerful incumbents and stymie entry by innovative new competitors.  (One manifestation of this that is particularly harmful for American workers and denies job opportunities to millions of lower-income Americans is occupational licensing, whose increasing burdens are delineated in a substantial body of research – see, for example, a 2015 Obama Administration White House Report and a 2016 Heritage Foundation Commentary that explore the topic.)  Federal Trade Commission (FTC) and Justice Department (DOJ) antitrust officials should consider emphasizing “state action” lawsuits aimed at displacing entry barriers and other unwarranted competitive burdens imposed by self-interested state regulatory boards.  When the legal prerequisites for such enforcement actions are not met, the FTC and the DOJ should ramp up their “competition advocacy” efforts, with the aim of convincing state regulators to avoid adopting new restraints on competition – and, where feasible, eliminating or curbing existing restraints.

The FTC and DOJ also should be authorized by the White House to pursue advocacy initiatives whose goal is to dismantle or lessen the burden of excessive federal regulations (such advocacy played a role in furthering federal regulatory reform during the Ford and Carter Administrations).  To bolster those initiatives, the Trump Administration should consider establishing a high-level federal task force on procompetitive regulatory reform, in the spirit of previous reform initiatives.  The task force would report to the president and include senior level representatives from all federal agencies with regulatory responsibilities.  The task force could examine all major regulatory and statutory schemes overseen by Executive Branch and independent agencies, and develop a list of specific reforms designed to reduce federal regulatory impediments to robust competition.  Those reforms could be implemented through specific regulatory changes or legislative proposals, as the case might require.  The task force would have ample material to work with – for example, anticompetitive cartel-like output restrictions, such as those allowed under federal agricultural orders, are especially pernicious.  In addition to specific cartel-like programs, scores of regulatory regimes administered by individual federal agencies impose huge costs and merit particular attention, as documented in the Heritage Foundation’s annual “Red Tape Rising” reports that document the growing burden of federal regulation (see, for example, the 2016 edition of Red Tape Rising).

With respect to traditional antitrust enforcement, the Trump Administration should emphasize sound, empirically-based economic analysis in merger and non-merger enforcement.  They should also adopt a “decision-theoretic” approach to enforcement, to the greatest extent feasible.  Specifically, in developing their enforcement priorities, in considering case selection criteria, and in assessing possible new (or amended) antitrust guidelines, DOJ and FTC antitrust enforcers should recall that antitrust is, like all administrative systems, inevitably subject to error costs.  Accordingly, Trump Administration enforcers should be mindful of the outstanding insights provide by Judge (and Professor) Frank Easterbrook on the harm from false positives in enforcement (which are more easily corrected by market forces than false negatives), and by Justice (and Professor) Stephen Breyer on the value of bright line rules and safe harbors, supported by sound economic analysis.  As to specifics, the DOJ and FTC should issue clear statements of policy on the great respect that should be accorded the exercise of intellectual property rights, to correct Obama antitrust enforcers’ poor record on intellectual property protection (see, for example, here).  The DOJ and the FTC should also accord greater respect to the efficiencies associated with unilateral conduct by firms possessing market power, and should consider reissuing an updated and revised version of the 2008 DOJ Report on Single Firm Conduct).

With regard to international competition policy, procedural issues should be accorded high priority.  Full and fair consideration by enforcers of all relevant evidence (especially economic evidence) and the views of all concerned parties ensures that sound analysis is brought to bear in enforcement proceedings and, thus, that errors in antitrust enforcement are minimized.  Regrettably, a lack of due process in foreign antitrust enforcement has become a matter of growing concern to the United States, as foreign competition agencies proliferate and increasingly bring actions against American companies.  Thus, the Trump Administration should make due process problems in antitrust a major enforcement priority.  White House-level support (ensuring the backing of other key Executive Branch departments engaged in foreign economic policy) for this priority may be essential, in order to strengthen the U.S. Government’s hand in negotiations and consultations with foreign governments on process-related concerns.

Finally, other international competition policy matters also merit close scrutiny by the new Administration.  These include such issues as the inappropriate imposition of extraterritorial remedies on American companies by foreign competition agencies; the harmful impact of anticompetitive foreign regulations on American businesses; and inappropriate attacks on the legitimate exercise of intellectual property by American firms (in particular, American patent holders).  As in the case of process-related concerns, White House attention and broad U.S. Government involvement in dealing with these problems may be essential.

That’s all for now, folks.  May you all enjoy your turkey and have a blessed Thanksgiving with friends and family.

On November 1st and 2nd, Cofece, the Mexican Competition Agency, hosted an International Competition Network (ICN) workshop on competition advocacy, featuring presentations from government agency officials, think tanks, and international organizations.  The workshop highlighted the excellent work that the ICN has done in supporting efforts to curb the most serious source of harm to the competitive process worldwide:  government enactment of anticompetitive regulatory schemes and guidance, often at the behest of well-connected, cronyist rent-seeking businesses that seek to protect their privileges by imposing costs on rivals.

The ICN describes the goal of its Advocacy Working Group in the following terms:

The mission of the Advocacy Working Group (AWG) is to undertake projects, to develop practical tools and guidance, and to facilitate experience-sharing among ICN member agencies, in order to improve the effectiveness of ICN members in advocating the dissemination of competition principles and to promote the development of a competition culture within society. Advocacy reinforces the value of competition by educating citizens, businesses and policy-makers. In addition to supporting the efforts of competition agencies in tackling private anti-competitive behaviour, advocacy is an important tool in addressing public restrictions to competition. Competition advocacy in this context refers to those activities conducted by the competition agency, that are related to the promotion of a competitive environment by means of non-enforcement mechanisms, mainly through its relationships with other governmental entities and by increasing public awareness in regard to the benefits of competition.  

At the Cofece workshop, I moderated a panel on “stakeholder engagement in the advocacy process,” featuring presentations by representatives of Cofece, the Japan Fair Trade Commission, and the Organization for Economic Cooperation and Development.  As I emphasized in my panel presentation:

Developing an appropriate competition advocacy strategy is key to successful interventions.  Public officials should be mindful of the relative importance of particular advocacy targets, as well as matter-specific political constraints and competing stakeholder interests.  In particular, a competition authority may greatly benefit by identifying and motivating stakeholders who are directly affected by the competitive restraints that are targeted by advocacy interventions.  The active support of such stakeholders may be key to the success of an advocacy initiative.  More generally, by reaching out to business and consumer stakeholders, a competition authority may build alliances that will strengthen its long-term ability to be effective in promoting a pro-competition agenda. 

The U.S. Federal Trade Commission, the FTC, has developed a well-thought-out approach to building strong relationships with stakeholders.  The FTC holds public publicized workshops highlighting emerging policy issues, in which NGAs and civil society representatives with expertise are invited to participate.  Its personnel (and, in particular, its head) speak before a variety of audiences to inform them of what the FTC is doing and of the opportunities for advocacy filings.  It reaches out to civil society groups and the general public through the media, utilizing the Internet and other sources of public information dissemination.  It is willing to hold informal non-public meetings with NGAs and civil society representatives to hear their candid views and concerns off the record.  It carries out major studies (often following up on information gathered at workshops and from non-government sources) in addition to making advocacy filings.  It interacts closely with substantive FTC enforcers and economists to obtain “leads” that may inform future advocacy projects and to suggest possible lines for substantive investigations, based on the input it has received.  It communicates with other competition authorities on advocacy strategies.  Other competition authorities may wish to note the FTC’s approach in organizing their own advocacy programs.  

Competition authorities would also benefit from consulting the ICN Market Studies Good Practice Handbook, last released in updated form at the April 2016 ICN 15th Annual Conference.  This discussion of the role of stakeholders, though presented in the context of market studies, provides insights that are broadly applicable more generally to the competition advocacy process.  As the Handbook explains, stakeholders are any individuals, groups of individuals, or organizations that have an interest in a particular market or that can be affected by market conditions.  The Handbook explains the crucial inputs that stakeholders can provide a competition authority and how engaging with stakeholders can influence the authority’s reputation.  The Handbook emphasizes that a stakeholder engagement strategy can be used to determine whether particular stakeholders will be influential, supportive, or unsupportive to a particular endeavor; to consider the input expected from the various stakeholders and plan for soliciting and using this input; and to describing how and when the authority will seek to engage stakeholders.  The Handbook provides a long list of categories of stakeholders and suggests ways of reaching out to stakeholders, including through public consultations, open seminars, workshops, and roundtables.  Next, the Handbook presents tactics for engaging with stakeholders.  The Handbook closes by summarizing key good practices, including publicly soliciting broad voluntary stakeholder engagement, developing a stakeholder engagement strategy early in a particular process, and reviewing and updating the engagement strategy as necessary throughout a particular competition authority undertaking.

In sum, properly conducted advocacy initiatives, along with investigations of hard core cartels, are among the highest-valued uses of limited competition agency resources.  To the extent advocacy succeeds in unraveling government-imposed impediments to effective competition, it pays long-run dividends in terms of enhanced consumer welfare, greater economic efficiency, and more robust economic growth.  Let us hope that governments around the world (including, of course, the United States Government) keep this in mind in making resource commitments and setting priorities for their competition agencies.

Public comments on the proposed revision to the joint U.S. Federal Trade Commission (FTC) – U.S. Department of Justice (DOJ) Antitrust-IP Licensing Guidelines have, not surprisingly, focused primarily on fine points of antitrust analysis carried out by those two federal agencies (see, for example, the thoughtful recommendations by the Global Antitrust Institute, here).  In a September 23 submission to the FTC and the DOJ, however, U.S. International Trade Commissioner F. Scott Kieff focused on a broader theme – that patent-antitrust assessments should keep in mind the indirect effects on commercialization that stem from IP (and, in particular, patents).  Kieff argues that antitrust enforcers have employed a public law “rules-based” approach that balances the “incentive to innovate” created when patents prevent copying against the goals of competition.  In contrast, Kieff characterizes the commercialization approach as rooted in the property rights nature of patents and the use of private contracting to bring together complementary assets and facilitate coordination.  As Kieff explains (in italics, footnote citations deleted):

A commercialization approach to IP views IP more in the tradition of private law, rather than public law. It does so by placing greater emphasis on viewing IP as property rights, which in turn is accomplished by greater reliance on interactions among private parties over or around those property rights, including via contracts. Centered on the relationships among private parties, this approach to IP emphasizes a different target and a different mechanism by which IP can operate. Rather than target particular individuals who are likely to respond to IP as incentives to create or invent in particular, this approach targets a broad, diverse set of market actors in general; and it does so indirectly. This broad set of indirectly targeted actors encompasses the creator or inventor of the underlying IP asset as well as all those complementary users of a creation or an invention who can help bring it to market, such as investors (including venture capitalists), entrepreneurs, managers, marketers, developers, laborers, and owners of other key assets, tangible and intangible, including other creations or inventions. Another key difference in this approach to IP lies in the mechanism by which these private actors interact over and around IP assets. This approach sees IP rights as tools for facilitating coordination among these diverse private actors, in furtherance of their own private interests in commercializing the creation or invention.

This commercialization approach sees property rights in IP serving a role akin to beacons in the dark, drawing to themselves all of those potential complementary users of the IP-protected-asset to interact with the IP owner and each other. This helps them each explore through the bargaining process the possibility of striking contracts with each other.

Several payoffs can flow from using this commercialization approach. Focusing on such a beacon-and-bargain effect can relieve the governmental side of the IP system of the need to amass the detailed information required to reasonably tailor a direct targeted incentive, such as each actor’s relative interests and contributions, needs, skills, or the like. Not only is amassing all of that information hard for the government to do, but large, established market actors may be better able than smaller market entrants to wield the political influence needed to get the government to act, increasing risk of concerns about political economy, public choice, and fairness. Instead, when governmental bodies closely adhere to a commercialization approach, each private party can bring its own expertise and other assets to the negotiating table while knowing—without necessarily having to reveal to other parties or the government—enough about its own level of interest and capability when it decides whether to strike a deal or not.            

Such successful coordination may help bring new business models, products, and services to market, thereby decreasing anticompetitive concentration of market power. It also can allow IP owners and their contracting parties to appropriate the returns to any of the rival inputs they invested towards developing and commercializing creations or inventions—labor, lab space, capital, and the like. At the same time, the government can avoid having to then go back to evaluate and trace the actual relative contributions that each participant brought to a creation’s or an invention’s successful commercialization—including, again, the cost of obtaining and using that information and the associated risks of political influence—by enforcing the terms of the contracts these parties strike with each other to allocate any value resulting from the creation’s or invention’s commercialization. In addition, significant economic theory and empirical evidence suggests this can all happen while the quality-adjusted prices paid by many end users actually decline and public access is high. In keeping with this commercialization approach, patents can be important antimonopoly devices, helping a smaller “David” come to market and compete against a larger “Goliath.”

A commercialization approach thereby mitigates many of the challenges raised by the tension that is a focus of the other intellectual approaches to IP, as well as by the responses these other approaches have offered to that tension, including some – but not all – types of AT regulation and enforcement. Many of the alternatives to IP that are often suggested by other approaches to IP, such as rewards, tax credits, or detailed rate regulation of royalties by AT enforcers can face significant challenges in facilitating the private sector coordination benefits envisioned by the commercialization approach to IP. While such approaches often are motivated by concerns about rising prices paid by consumers and direct benefits paid to creators and inventors, they may not account for the important cases in which IP rights are associated with declines in quality-adjusted prices paid by consumers and other forms of commercial benefits accrued to the entire IP production team as well as to consumers and third parties, which are emphasized in a commercialization approach. In addition, a commercialization approach can embrace many of the practical checks on the market power of an IP right that are often suggested by other approaches to IP, such as AT review, government takings, and compulsory licensing. At the same time this approach can show the importance of maintaining self-limiting principles within each such check to maintain commercialization benefits and mitigate concerns about dynamic efficiency, public choice, fairness, and the like.

To be sure, a focus on commercialization does not ignore creators or inventors or creations or inventions themselves. For example, a system successful in commercializing inventions can have the collateral benefit of providing positive incentives to those who do invent through the possibility of sharing in the many rewards associated with successful commercialization. Nor does a focus on commercialization guarantee that IP rights cause more help than harm. Significant theoretical and empirical questions remain open about benefits and costs of each approach to IP. And significant room to operate can remain for AT enforcers pursuing their important public mission, including at the IP-AT interface.

Commissioner Kieff’s evaluation is in harmony with other recent scholarly work, including Professor Dan Spulber’s explanation that the actual nature of long-term private contracting arrangements among patent licensors and licensees avoids alleged competitive “imperfections,” such as harmful “patent hold-ups,” “patent thickets,” and “royalty stacking” (see my discussion here).  More generally, Commissioner Kieff’s latest pronouncement is part of a broader and growing theoretical and empirical literature that demonstrates close associations between strong patent systems and economic growth and innovation (see, for example, here).

There is a major lesson here for U.S. (and foreign) antitrust enforcement agencies.  As I have previously pointed out (see, for example, here), in recent years, antitrust enforcers here and abroad have taken positions that tend to weaken patent rights.  Those positions typically are justified by the existence of “patent policy deficiencies” such as those that Professor Spulber’s paper debunks, as well as an alleged epidemic of low quality “probabilistic patents” (see, for example, here) – justifications that ignore the substantial economic benefits patents confer on society through contracting and commercialization.  It is high time for antitrust to accommodate the insights drawn from this new learning.  Specifically, government enforcers should change their approach and begin incorporating private law/contracting/commercialization considerations into patent-antitrust analysis, in order to advance the core goals of antitrust – the promotion of consumer welfare and efficiency.  Better yet, if the FTC and DOJ truly want to maximize the net welfare benefits of antitrust, they should undertake a more general “policy reboot” and adopt a “decision-theoretic” error cost approach to enforcement policy, rooted in cost-benefit analysis (see here) and consistent with the general thrust of Roberts Court antitrust jurisprudence (see here).

The Global Antitrust Institute (GAI) at George Mason University’s Antonin Scalia Law School released today a set of comments on the joint U.S. Department of Justice (DOJ) – Federal Trade Commission (FTC) August 12 Proposed Update to their 1995 Antitrust Guidelines for the Licensing of Intellectual Property (Proposed Update).  As has been the case with previous GAI filings (see here, for example), today’s GAI Comments are thoughtful and on the mark.

For those of you who are pressed for time, the latest GAI comments make these major recommendations (summary in italics):

Standard Essential Patents (SEPs):  The GAI Comments commended the DOJ and the FTC for preserving the principle that the antitrust framework is sufficient to address potential competition issues involving all IPRs—including both SEPs and non-SEPs.  In doing so, the DOJ and the FTC correctly rejected the invitation to adopt a special brand of antitrust analysis for SEPs in which effects-based analysis was replaced with unique presumptions and burdens of proof. 

o   The GAI Comments noted that, as FTC Chairman Edith Ramirez has explained, “the same key enforcement principles [found in the 1995 IP Guidelines] also guide our analysis when standard essential patents are involved.”

o   This is true because SEP holders, like other IP holders, do not necessarily possess market power in the antitrust sense, and conduct by SEP holders, including breach of a voluntary assurance to license its SEP on fair, reasonable, and nondiscriminatory (FRAND) terms, does not necessarily result in harm to the competitive process or to consumers. 

o   Again, as Chairwoman Ramirez has stated, “it is important to recognize that a contractual dispute over royalty terms, whether the rate or the base used, does not in itself raise antitrust concerns.”

Refusals to License:  The GAI Comments expressed concern that the statements regarding refusals to license in Sections 2.1 and 3 of the Proposed Update seem to depart from the general enforcement approach set forth in the 2007 DOJ-FTC IP Report in which those two agencies stated that “[a]ntitrust liability for mere unilateral, unconditional refusals to license patents will not play a meaningful part in the interface between patent rights and antitrust protections.”  The GAI recommended that the DOJ and the FTC incorporate this approach into the final version of their updated IP Guidelines.

“Unreasonable Conduct”:  The GAI Comments recommended that Section 2.2 of the Proposed Update be revised to replace the phrase “unreasonable conduct” with a clear statement that the agencies will only condemn licensing restraints when anticompetitive effects outweigh procompetitive benefits.

R&D Markets:  The GAI Comments urged the DOJ and the FTC to reconsider the inclusion (or, at the very least, substantially limit the use) of research and development (R&D) markets because: (1) the process of innovation is often highly speculative and decentralized, making it impossible to identify all market participants to be; (2) the optimal relationship between R&D and innovation is unknown; (3) the market structure most conducive to innovation is unknown; (4) the capacity to innovate is hard to monopolize given that the components of modern R&D—research scientists, engineers, software developers, laboratories, computer centers, etc.—are continuously available on the market; and (5) anticompetitive conduct can be challenged under the actual potential competition theory or at a later time.

While the GAI Comments are entirely on point, even if their recommendations are all adopted, much more needs to be done.  The Proposed Update, while relatively sound, should be viewed in the larger context of the Obama Administration’s unfortunate use of antitrust policy to weaken patent rights (see my article here, for example).  In addition to strengthening the revised Guidelines, as suggested by the GAI, the DOJ and the FTC should work with other component agencies of the next Administration – including the Patent Office and the White House – to signal enhanced respect for IP rights in general.  In short, a general turnaround in IP policy is called for, in order to spur American innovation, which has been all too lacking in recent years.

Today ICLE released a white paper entitled, A critical assessment of the latest charge of Google’s anticompetitive bias from Yelp and Tim Wu.

The paper is a comprehensive response to a study by Michael Luca, Timothy Wu, Sebastian Couvidat, Daniel Frank, & William Seltzer, entitled, Is Google degrading search? Consumer harm from Universal Search.

The Wu, et al. paper will be one of the main topics of discussion at today’s Capitol Forum and George Washington Institute of Public Policy event on Dominant Platforms Under the Microscope: Policy Approaches in the US and EU, at which I will be speaking — along with a host of luminaries including, inter alia, Josh Wright, Jonathan Kanter, Allen Grunes, Catherine Tucker, and Michael Luca — one of the authors of the Universal Search study.

Follow the link above to register — the event starts at noon today at the National Press Club.

Meanwhile, here’s a brief description of our paper:

Late last year, Tim Wu of Columbia Law School (and now the White House Office of Management and Budget), Michael Luca of Harvard Business School (and a consultant for Yelp), and a group of Yelp data scientists released a study claiming that Google has been purposefully degrading search results from its more-specialized competitors in the area of local search. The authors’ claim is that Google is leveraging its dominant position in general search to thwart competition from specialized search engines by favoring its own, less-popular, less-relevant results over those of its competitors:

To improve the popularity of its specialized search features, Google has used the power of its dominant general search engine. The primary means for doing so is what is called the “universal search” or the “OneBox.”

This is not a new claim, and researchers have been attempting (and failing) to prove Google’s “bias” for some time. Likewise, these critics have drawn consistent policy conclusions from their claims, asserting that antitrust violations lie at the heart of the perceived bias. But the studies are systematically marred by questionable methodology and bad economics.

This latest study by Tim Wu, along with a cadre of researchers employed by Yelp (one of Google’s competitors and one of its chief antitrust provocateurs), fares no better, employing slightly different but equally questionable methodology, bad economics, and a smattering of new, but weak, social science. (For a thorough criticism of the inherent weaknesses of Wu et al.’s basic social science methodology, see Miguel de la Mano, Stephen Lewis, and Andrew Leyden, Focus on the Evidence: A Brief Rebuttal of Wu, Luca, et al (2016), available here).

The basic thesis of the study is that Google purposefully degrades its local searches (e.g., for restaurants, hotels, services, etc.) to the detriment of its specialized search competitors, local businesses, consumers, and even Google’s bottom line — and that this is an actionable antitrust violation.

But in fact the study shows nothing of the kind. Instead, the study is marred by methodological problems that, in the first instance, make it impossible to draw any reliable conclusions. Nor does the study show that Google’s conduct creates any antitrust-relevant problems. Rather, the construction of the study and the analysis of its results reflect a superficial and inherently biased conception of consumer welfare that completely undermines the study’s purported legal and economic conclusions.

Read the whole thing here.