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lipsky

Tad Lipsky is a partner in the Washington, D.C. office of Latham & Watkins and a former Deputy Assistant Attorney General with the Department of Justice.

When the Justice Department issued its Unilateral Conduct Report last September, it became an instant sensation not primarily because of its content, but because of a strident public critique issued by three FTC Commissioners, including now-Chairman Leibowitz. The three (Harbour, Leibowitz and Rosch, hereinafter “HLR”) accused the Antitrust Division of placing “a thumb on the scales in favor of firms with monopoly . . . power”, and of adopting “drastic changes” comprising “a legal regime [that places] . . . the interests of firms that enjoy monopoly or near monopoly power . . .ahead of the interests of consumers”. Thundering on, HLR savaged the DOJ Report as a “blueprint for radically weakened enforcement of Section 2”, accusing DOJ of “seriously overstat[ing] the level of . . . consensus” on Section 2, and of improperly glorifying economics as “tantamount to the law itself”. Although signed by three of the four Commission members, the Statement was not presented as a position of the FTC, leaving observers to wonder about the internal process that produced the HLR statement and what it reflected about the views of the various Bureaus and other key Commission staff. For FTC/DOJ relations, already rocked by a long series of public disagreements over a string of antitrust issues (reverse-payment Hatch-Waxman settlements, price squeezes), this was a new low, unprecedented in the living memory of the antitrust bar.

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

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

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

Here are a three comments I found the most interesting:

1.  Varney on Google as An Emerging Antitrust Threat.

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

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

2.  On The Non-Existence of False Positives.

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

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

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

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

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

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

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

Its the time for end of the year lists. In conjunction with Danny Sokol’s survey of nominations for article of the year in 2008 (here are last year’s entries and here’s my list of the top 10 from last year), and without further ado, here are my personal, idiosyncratic, completely non-scientifically derived top 10 antitrust articles for 2008 (in alphabetical order):

  1. Michael R. Baye, Market Definition and Unilateral Competitive Effects in Online Retail Markets, 4 Journal of Competition Law and Economics 639 (2008).
  2. Dennis W. Carlton & Ken Heyer, Extraction vs. Extension: The Basis for Formulating Antitrust Policy Toward Single Firm Conduct, 4(2) Competition Policy International 285 (2008).
  3. Department of Justice, Competition and Monopoly: Single Firm Conduct Under Section 2 of the Sherman Act
  4. Joseph Farrell & Carl Shapiro, Antitrust Evaluation of Horizontal Mergers: An Economic Alternative to Market Definition (working paper, 2008)
  5. Thomas W. Hazlett & Anil Caliskan, Natural Experiments in Broadband Regulation, 7 (4) Review of Network Economics (2008).
  6. Keith N. Hylton & David S. Evans, The Lawful Acquisition and Exercise of Monopoly Power and Its Implications for the Objectives of Antitrust, 4 (2) Competition Policy International 203 (2008)
  7. Benjamin Klein and Kevin M. Murphy, Exclusive Dealing Intensifies Competition for Distribution, 75 (2) Antitrust Law Journal 433 (2008).
  8. William E. Kovacic, Competition Policy in the European Union and the United States: Convergence or Divergence?
  9. Thomas A. Lambert, Dr. Miles is Dead, Now What? Structuring a Rule of Reason for Evaluating Minimum Resale Price Maintenance (William and Mary Law Rev., forthcoming)
  10. Timothy J. Muris & Vernon Smith, Antitrust and Bundled Discounts: An Experimental Analysis, 75 (2) Antitrust Law Journal 399 (2008)

So, which is the article of the year? And the winner is …. (my lame attempt at drama means you must hit beneath the fold to find out)

UPDATE: Danny Sokol has got the whole set of nominations posted at ACP Blog.  There is some overlap with my list, and a few articles I was unaware of but am now looking forward to reading.  Lots of variance in the list.  No article is listed twice.  Head over there to see the full list.

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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.

Global Competition Policy has a new issue out focusing on the antitrust analysis of single product rebates and bundled discounts in the United States and Europe, including articles from:

  • H.E. Frech (UCSB)
  • Benjamin Klein (UCLA and LECG)
  • Jonathan Rubin (Patton Boggs)
  • M. Laurence Popofsky
  • Renato Nazzini (University of Southampton)
  • Johanne Peyre & Laurent Geelhand (Michelin Group)
  • Christian Roques (Court of First Instance)

If you haven’t checked out the GCP website, go over there and look around.  The site has moved to a subscription-based model.  The upside is that there is some great content (including the GCP Online Magazine as well as the academic journal Competition Policy International) delivered on consistent (and frequent) basis that should be of interest to all facets of the antitrust community: academics, practitioners and industry representatives.

*Disclosure: I am a member of GCP’s Advisory Board.

Josh had a characteristically thoughtful post last week on safe harbors for loyalty and bundled discounts. I didn’t comment on the post, with which I generally agree, because I was busy writing an amicus brief (also signed by Dan Crane, Richard Epstein, Tom Morgan, and Danny Sokol) in an attempt to preserve a different safe harbor for bundled discounts. That’s the safe harbor created by the Ninth Circuit’s recent PeaceHealth decision (discussed here). PeaceHealth held that

To prove a bundled discount was exclusionary or predatory for the purposes of a monopolization or attempted monopolization claim under Section 2 of the Sherman Act, the plaintiff must establish that, after allocating the discount given by the defendant on the entire bundle of products to the competitive product or products, the defendant sold the competitive product or products below its average variable cost of producing them.

That is an eminently sensible holding. Bundled discounts — discounts conditioned upon purchasing a group of different products from the discounter (think meal deals, Internet/phone/cable bundles) — are pervasive, involve an immediate consumer benefit (lower prices), and are usually procompetitive. Like other price cuts, they should be condemned only when they have the potential to drive equally efficient rivals from the discounter’s market. With single-product discounts, we identify price-cuts that have such anticompetitive potential by asking whether they result in prices below the discounter’s cost of production; if not, they could be matched by any equally efficient rival willing to engage in aggressive price competition.

With bundled (or package) discounts, we may need to look a little harder. In theory at least, a bundled discount that results in above-cost pricing (for the whole bundle) may exclude equally efficient rivals that sell a narrower line of products. Consider, for example, a manufacturer (“MultiCo”) that sells both shampoo and conditioner and competes against another manufacturer (“SingleCo”) that sells only shampoo. SingleCo, the more efficient shampoo manufacturer, can produce a bottle of shampoo for $1.25. It costs MultiCo $1.50 to produce a bottle of shampoo and $2.50 to produce a bottle of conditioner. If purchased separately, MultiCo charges $2.00 for shampoo and $4.00 for conditioner ($6.00 total), but if the consumer purchases both products at once, MultiCo will sell the combination for $5.00. That $1.00 bundled discount results in a price that is $1.00 greater than MultiCo’s cost for the two products ($4.00). Nonetheless, the above-cost bundled discount could exclude SingleCo. SingleCo could stay in the market only if it charged no more than $1.00 for shampoo (so that a consumer’s total price of SingleCo’s shampoo and MultiCo’s conditioner would not exceed $5.00, MultiCo’s package price), but SingleCo’s marginal cost of producing shampoo is $1.25. Accordingly, MultiCo’s bundled discount could eliminate SingleCo as a competitor even though (1) SingleCo is the more efficient producer and (2) MultiCo’s discounted price is above its cost of producing the bundle. The upshot is that we may underdeter if we immunize all bundled discounts that result in an above-cost price for the entire bundle.

But there’s no way the more conservative safe harbor announced in PeaceHealth could immunize anticompetitive discounts. If a challenged bundled discount doesn’t result in below-cost pricing after the entire amount of the bundled discount is attributed to the product or products the defendant discounter sells in competition with the plaintiff, then the plaintiff — if it’s as efficient as the defendant — could meet the defendant’s discount by lowering its price to some above-cost level (or to cost). For example, if MultiCo were to sell its shampoo/conditioner package for $5.50 (50 cents less than the aggregate price of the products sold separately), any equally efficient shampoo producer (producing at $1.50 per bottle) could compete by lowering its price to its cost: A customer could buy that company’s shampoo ($1.50) and MultiCo’s conditioner ($4.00) for the same total price as MultiCo’s bundle.

In short, any plaintiff driven out of business by a discount that passes muster under PeaceHealth’s “discount attribution” test would have to be either (1) less efficient than the discounter, or (2) unwilling to engage in vigorous price competition. Antitrust shouldn’t thwart consumer-friendly discounts in order to create price umbrellas for inefficient competitors or to indulge rivals that won’t lower price to the level of cost. Accordingly, no plaintiff should prevail on a bundled discount challenge unless it can make the discount attribution showing required by PeaceHealth.

In its appeal, Masimo is arguing that the court should permit it to attack Tyco’s bundled discounts on a de facto exclusive dealing theory even though it can’t prove that Tyco engaged in below-cost pricing under PeaceHealth’s discount attribution test. Masimo (along with supporting amici the Consumer Federation of America and the Medical Device Manufacturers Association) contends that PeaceHealth’s safe harbor applies only in “price competition” cases, not in cases involving de facto exclusive dealing.

That makes no sense. Masimo’s de facto exclusive dealing theory is that Tyco’s bundled discounts — though involving no express promises of exclusivity (otherwise the exclusive dealing wouldn’t be “de facto”) — were so successful that they had the effect of inducing purchasers to buy exclusively from Tyco, thereby foreclosing Masimo from the market. But this just means that Tyco succeeded in attracting customers (usurping them from Masimo, among others) via low prices. Because low pricing is the very mechanism by which any “exclusivity” (and, hence, any market foreclosure) is achieved in a de facto exclusive dealing claim based on bundled discounts, every such claim is ultimately a “price competition” claim, falling squarely within PeaceHealth’s ambit.

The Ninth Circuit did the right thing in PeaceHealth. It provided businesses with much-needed guidance by recognizing a conservative safe harbor from which anticompetitive harm cannot flow. Masimo’s position threatens that safe harbor. It would allow plaintiffs to evade the procompetitive protections of PeaceHealth by attaching a new legal label (de facto exclusive dealing, de facto tying, unspecified “exclusionary conduct”) to challenge otherwise indistinguishable conduct. Potential defendants, knowing that plaintiffs may be able to avoid summary disposition of bundled discount claims by creative labeling, would likely respond by avoiding otherwise procompetitive bundled discounts (and the prospects of an adverse treble damages verdict) altogether. Consumers, who generally benefit from bundled discounts, would suffer.

If antitrust is to be a sensible enterprise, the question should not be “What label has plaintiff affixed to its claim?”, but rather “Is the behavior of which plaintiff complains likely to impair competition?” 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 if there are no express exclusionary covenants and the competitive product is priced above the defendant’s cost once the entire discount is attributed to that product. Accordingly, the Ninth Circuit should decline Masimo’s invitation to turn the law of bundled discounting into the antitrust version of Greek mythology’s many-headed Hydra. Doing so would simply chill bundled discounts, to the detriment of consumers.

Dennis Carlton and Michael Waldman have posted an insightful DOJ working paper on antitrust safe harbors for unilateral conduct involving quantity discounts and bundling. The discussion is very timely in light of the Microsoft CFI decision, AMC Report, Section 2 Hearings, and various monopolization cases in the United States, EU, and other antitrust jurisdictions. The Carlton & Waldman paper is short, very accessible, and makes several very important points about the benefits of safe harbors to guide antitrust policy in this area generally and some weaknesses in the proposed AMC approach to bundling. Anybody interested in single firm conduct issues in antitrust should read this paper.

The issue they raise — safe harbors for single firm conduct — is one I’ve written about quite a bit. And I want to test out some thoughts on it here that I’ve sketched out partially in some academic writing and blog posts with respect to safe harbors for quantity discounts, loyalty rebates, exclusive dealing and competition for distribution more generally. I am on record defending two very specific safe harbors (one for short-term contracts and another for contracts that foreclose < 40% of the distribution market). I’ll return to the issue of a foreclosure safe harbor in a moment, and that will be the focus of the post, but for now, let me start with Carlton & Waldman’s framing of the antitrust problem of exclusion:

An antitrust claim involving exclusion requires that there be harm to a rival, harm to consumers and a linkage between the harm to the rival and the harm to consumers … This reasoning suggests that all mechanisms of exclusionary pricing conduct that do not alter a rival’s costs of operating or impair his ability to exist should not trigger an antitrust violation. In particular, this means that if there are no such effects, as for example occurs when the production technology is constant returns to scale, then there can be no anticompetitive harm. This does not mean that the rival’s business is unaffected nor that consumers are unaffected by a new pricing policy, but simply that the mechanism of harm, if there is one, has nothing to do with excluding a rival.

Carlton & Waldman focus in on the key issue for antitrust policy related to competition for distribution in the form of discounting conduct: the question of whether the defendant’s conduct has deprived a rival of scale to a degree that it is foreclosed from profitable access to the market altogether, or to a sufficient degree that its competitive constraint on the exercise of the defendant’s monopoly power is reduced, and competition is harmed.

So far so good. This economic insight is at the heart of the “foreclosure” requirement that appears in exclusive dealing cases that involve analytically identical claims concerning exclusion. Carlton & Waldman address claims of exclusion involving single product pricing in a predatory pricing framework and make the following statement about the “recoupment” requirement of the standard two pronged Brooke Group analysis:

[The recoupment prong] is a reflection of the principle that with constant returns to scale rivals will always constrain price and there can be no recoupement. The reason is that with no fixed costs, entry is always possible and guarantees that there is a competitive constraint on price. [The recoupment requirement] is phrased more practically to cover deviations from constant returns to scale that are not so large as to allow recoupment. With no possibility of recoupment, there is no reason to incur the initial loses associated with pricing below cost.

This is very interesting, and perhaps optimistic, understanding of courts are doing when the apply the recoupment requirement. My preliminary reaction is that most single product predatory pricing cases involve an analysis of barriers to entry at the recoupment stage as if the court was answering the question: “can the monopolist increase prices for a sustained period of time without attracting entry and therefore, recoup the losses associated with its period 1 prices?” I don’t think the courts explicitly conceptualize the recoupment prong in the way Carlton & Waldman describe here as it relates to scale. Rather, my tentative view is that analysis concerning the potential to deprive rivals of scale, the presence of substantial economies of scale, and even foreclosure are generally missing from these single product predatory pricing cases.

To be clear, thats not to say that courts are not analyzing in the recoupment prong the issue of whether the pricing scheme is likely to exclude rivals in some sense. But I think this sort of scale and foreclosure analysis that is typically present in exclusive dealing cases is generally absent in single product pricing cases. Now, I do believe that the recoupment requirement in these cases should be applied in the manner Carlton & Waldman suggest it already is. In fact, that is basically where I am going with this post. Keep reading and I’ll explain why I think this would be a good idea.

Continue Reading…

A pair of interesting antitrust appellate decisions have been released over the past few days involving single firm conduct and Section 2: Cascade Health Solutions v. PeaceHealth (9th Cir.) and Broadcom v. Qualcomm (3rd Cir.).

First, the Ninth Circuit’s decision in Cascade Health Solutions v. PeaceHealth reversed the district court’s Lepage’s based jury instruction in a multi-product bundled discount case and adopted (largely) the AMC recommendation for evaluating such cases.  The AMC Report and Recommendation argued in favor of the following test:

Courts should adopt a three-part test to determine whether bundled discounts or rebates violate Section 2 of the Sherman Act. To prove a violation of Section 2, a plaintiff should be required to show each one of the following elements (as well as other elements of a Section 2 claim): (1) after allocating all discounts and rebates attributable to the entire bundle of products to the competitive product, the defendant sold the competitive product below its incremental cost for the competitive product; (2) the defendant is likely to recoup these short-term losses; and (3) the bundled discount or rebate program has had or is likely to have an adverse effect on competition.

The Ninth Circuit adopts the first prong of this “discount attribution” test but views the second and third prongs as unnecessary because short-term losses are not necessary in a multi-product discount scheme and because it views the third prong as duplicative of the antitrust injury requirement imposed on private plaintiffs generally. 

A few quick reactions on PeaceHealth.  First, the Ninth Circuit’s rejection of the LePage’s standard is an unequivocally good thing and worthy of applause in its own right.  Second, most commentators agree that there are problems with the AMC standard but its widespread adoption would represent significant improvement over Lepage’s.  Third, the Ninth Circuit decision here may be sufficient to produce a circuit split on this issue and persuade the SCOTUS (which has proven its willingness to tangle with tricky antitrust issues) to grant certiorari sooner rather than later.  Fourth, the Ninth Circuit rejected the Ortho standard (which examines whether the plaintiff was an equally efficient producer of the competitive product but could not operate profitably because of the defendant’s pricing) in favor of the “hypothetical” equally efficient competitor standard partially on the grounds that the Ortho rule “might encourage more antitrust litigation than is reasonably necessary to ferret out anticompetitive practices” and was therefore in tension with the Supreme Court’s teachings in Twombly.  Fifth, I must admit that I’ve always had a conceptual problem with the idea that a firm producing goods A & B could exclude a hypothetically equally efficient competitor who was only producing A.  If the rival firm was truly equally efficient, why not produce both goods or for that matter contract with another competitor to produce a bundle?  Sounds like a rather fragile hypothetical rival to me.  And last but certainly not least — it should be noted that TOTM’s own Thom Lambert’s work on bundled discounts is cited throughout the opinion.  Good work Thom!  Of course, they could have also cited your excellent blog posts on the topic!  See, e.g., here here and here.

The second appellate decision is Broadcom v. Qualcomm (WSJ story here).  The Third Circuit overruled a decision from district court in New Jersey granting Qualcomm’s motion to dismiss Broadcom’s antitrust claims (amongst others).   Broadcom did not appeal the rulings on its tying and exclusive dealing claims, but argued that the district court erred in dismissing the monopolization and attempted monopolization counts under Section 2 based on its allegations of abuse of the standard setting process (the Third Circuit also dismissed Broadcom’s monopoly maintenance claim due to lack of standing). 

The heart of the case involves Broadcom’s allegations that Qualcomm promised to license its patents on FRAND terms in order to be included in the UMTS standard and reneged on those promises after its technology was included in the standard, i.e. a “patent hold-up” case.  The Court discusses the FTC actions in Dell, Unocal and Rambus and relies on this set of cases for the proposition that “deceptive conduct” of this type could constitute exclusionary conduct under Section 2 (and Section 5 of the FTC Act).  The key issue was whether Broadcom had stated actionable anticompetitive conduct by alleging that Qualcomm deceived the standard setting bodies into adopting the UMTS standard by commiting to license its WCDMA technology on FRAND terms and subsequently demanding non-FRAND royalties.  Here’s the key paragraph:

We hold that (1) in a consensus-oriented private standard-setting environments, (2) a patent holder’s intentionally false promise to license essential proprietary technology on FRAND terms, (3) coupled with an SDO’s reliance on that promise when including the technology in a standard, and (4) the patent holder’s subsequent breach of that promise, is actionable anticompetitive conduct.

This is a very interesting addition to the “abuse of standard setting” jurisprudence that is beginning to develop and seems to require either deception or an intentionally false promise to license on FRAND terms as part of a “hold up” strategy.  The WSJ story reports that Qualcomm claims to be pleased with the ruling because only two of eight of Broadcom’s claims remain.  Given that the two remaining claims are Section 2 claims with the possibility of treble damages, I am somewhat skeptical of that claim.

Dr. Miles (1911-2007)

Thom Lambert —  29 June 2007

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

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

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

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

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

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

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

***

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

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

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

These are not cogent arguments.

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

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

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

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

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

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

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

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

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

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

***

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

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

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

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

One of the more interesting parts of the November 29 DOJ/FTC hearing on loyalty discounts (where I presented these remarks) was the panelists’ discussion of a number of “propositions” advanced, for purposes of discussion only, by the agencies. Unfortunately, we didn’t have time to discuss all the propositions. I’ve reproduced them below the fold, along with my own thoughts on whether they’re sound. (Please note the agencies’ insistence that “[t]hese propositions are solely for the purpose of discussion and do not necessarily represent the agencies’ views.”) Continue Reading…

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

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

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

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

Continue Reading…

In response to Josh’s gentle nudge, here are my remarks from Wednesday’s DOJ/FTC hearing on loyalty discounts. I focus entirely on bundled discounts (as opposed to single-product loyalty discounts, like volume or market-share discounts). Bundled discounts are discounts (or rebates) that are conditioned upon purchasing separate products from disparate product markets — e.g., “we’ll give you a 25% discount on all your A and B purchases if you buy 70% of your A requirements and 80% of your B requirements from us.”

In my remarks, I attempt to do three things:

(1) explain the primary competitive threat bundled discounts pose;

NUTSHELL: They can exclude equally efficient, but less diversified, rivals.

(2) summarize and critique the six leading proposals for evaluating the legality of bundled discounts;

NUTSHELL: They are (1) a rule of per se legality for above-cost bundled discounts (Josh’s colleague, Tim Muris, advocates that position); (2) a rule condemning bundled discounts that unjustifiably raise rivals’ costs (Harvard’s Einer Elhauge advocates that position); (3) the “rule” adopted in the Third Circuit’s (in)famous LePage’s decision; (4) a rule focusing on whether a complaining rival is equally efficient but excluded because of its narrower product line (the Ortho rule); (5) a rule asking whether a hypothetical equally efficient single-product rival would be excluded (the original Areeda-Hovenkamp rule); and (6) a rule asking whether the bundled discount amounts to a de facto tie-in and then applying a rule of reason analysis (the revised Areeda-Hovenkamp position).

(3) offer an alternative evaluative approach.

NUTSHELL: I propose a prima facie case and a rebuttal opportunity that, taken together, would identify bundled discounts that could exclude “competitive rivals” (those that had exhausted all competitive options and could match the discounter’s efficiency) and lead to consumer harm (because the market at issue is capable of monopolization).

The panel was tons of fun. I’ll post more once I’ve cleared a few things off my plate.