Archives For collusion

Patent Pools, Innovation, and Antitrust Policy

Alden Abbott —  7 December 2022

Late last month, 25 former judges and government officials, legal academics and economists who are experts in antitrust and intellectual property law submitted a letter to Assistant Attorney General Jonathan Kanter in support of the U.S. Justice Department’s (DOJ) July 2020 Avanci business-review letter (ABRL) dealing with patent pools. The pro-Avanci letter was offered in response to an October 2022 letter to Kanter from ABRL critics that called for reconsideration of the ABRL. A good summary account of the “battle of the scholarly letters” may be found here.

The University of Pennsylvania’s Herbert Hovenkamp defines a patent pool as “an arrangement under which patent holders in a common technology or market commit their patents to a single holder, who then licenses them out to the original patentees and perhaps to outsiders.” Although the U.S. antitrust treatment of patent pools might appear a rather arcane topic, it has major implications for U.S. innovation. As AAG Kanter ponders whether to dive into patent-pool policy, a brief review of this timely topic is in order. That review reveals that Kanter should reject the anti-Avanci letter and reaffirm the ABRL.

Background on Patent Pool Analysis

The 2017 DOJ-FTC IP Licensing Guidelines

Section 5.5 of joint DOJ-Federal Trade Commission (FTC) Antitrust Guidelines for the Licensing of Intellectual Property (2017 Guidelines, which revised a prior 1995 version) provides an overview of the agencies’ competitive assessment of patent pools. The 2017 Guidelines explain that, depending on how pools are designed and operated, they may have procompetitive (and efficiency-enhancing) or anticompetitive features.

On the positive side of the ledger, Section 5.5 states:

Cross-licensing and pooling arrangements are agreements of two or more owners of different items of intellectual property to license one another or third parties. These arrangements may provide procompetitive benefits by integrating complementary technologies, reducing transaction costs, clearing blocking positions, and avoiding costly infringement litigation. By promoting the dissemination of technology, cross-licensing and pooling arrangements are often procompetitive.

On the negative side of the ledger, Section 5.5 states (citations omitted):

Cross-licensing and pooling arrangements can have anticompetitive effects in certain circumstances. For example, collective price or output restraints in pooling arrangements, such as the joint marketing of pooled intellectual property rights with collective price setting or coordinated output restrictions, may be deemed unlawful if they do not contribute to an efficiency-enhancing integration of economic activity among the participants. When cross-licensing or pooling arrangements are mechanisms to accomplish naked price-fixing or market division, they are subject to challenge under the per se rule.

Other aspects of pool behavior may be either procompetitive or anticompetitive, depending upon the circumstances, as Section 5.5 explains. The antitrust rule of reason would apply to pool restraints that may have both procompetitive and anticompetitive features.  

For example, requirements that pool members grant licenses to each other for current and future technology at minimal cost could disincentivize research and development. Such requirements, however, could also promote competition by exploiting economies of scale and integrating complementary capabilities of the pool members. According to the 2017 Guidelines, such requirements are likely to cause competitive problems only when they include a large fraction of the potential research and development in an R&D market.

Section 5.5 also applies rule-of-reason case-specific treatment to exclusion from pools. It notes that, although pooling arrangements generally need not be open to all who wish to join (indeed, exclusion of certain parties may be designed to prevent potential free riding), they may be anticompetitive under certain circumstances (citations omitted):

[E]xclusion from a pooling or cross-licensing arrangement among competing technologies is unlikely to have anticompetitive effects unless (1) excluded firms cannot effectively compete in the relevant market for the good incorporating the licensed technologies and (2) the pool participants collectively possess market power in the relevant market. If these circumstances exist, the [federal antitrust] [a]gencies will evaluate whether the arrangement’s limitations on participation are reasonably related to the efficient development and exploitation of the pooled technologies and will assess the net effect of those limitations in the relevant market.

The 2017 Guidelines are informed by the analysis of prior agency-enforcement actions and prior DOJ business-review letters. Through the business-review-letter procedure, an organization may submit a proposed action to the DOJ Antitrust Division and receive a statement as to whether the Division currently intends to challenge the action under the antitrust laws, based on the information provided. Historically, DOJ has used these letters as a vehicle to discuss current agency thinking about safeguards that may be included in particular forms of business arrangements to alleviate DOJ competitive concerns.

DOJ patent-pool letters, in particular, have prompted DOJ to highlight specific sorts of provisions in pool agreements that forestalled competitive problems. To this point, DOJ has never commented favorably on patent-pool safeguards in a letter and then subsequently reversed course to find the safeguards inadequate.

Subsequent to issuance of the 2017 Guidelines, DOJ issued two business-review letters on patent pools: the July 2020 ABRL letter and the January 2021 University Technology Licensing Program business-review letter (UTLP letter). Those two letters favorably discussed competitive safeguards proffered by the entities requesting favorable DOJ reviews.

ABRL Letter

The ABRL letter explains (citations omitted):

[Avanci] proposed [a] joint patent-licensing pool . . . to . . . license patent claims that have been declared “essential” to implementing 5G cellular wireless standards for use in automobile vehicles and distribute royalty income among the Platform’s licensors. Avanci currently operates a licensing platform related to 4G cellular standards and offers licenses to 2G, 3G, and 4G standards-essential patents used in vehicles and smart meters.

After consulting telecommunications and automobile-industry stakeholders, conducing an independent review, and considering prior guidance to other patent pools, “DOJ conclude[d] that, on balance, Avanci’s proposed 5G Platform is unlikely to harm competition.” As such, DOJ announced it had no present intention to challenge the platform.

The DOJ press release accompanying the ABRL letter provides additional valuable information on Avanci’s potential procompetitive efficiencies; its plan to charge fair, reasonable, and non-discriminatory (FRAND) rates; and its proposed safeguards:

Avanci’s 5G Platform may make licensing standard essential patents related to vehicle connectivity more efficient by providing automakers with a “one stop shop” for licensing 5G technology. The Platform also has the potential to reduce patent infringement and ensure that patent owners who have made significant contributions to the development of 5G “Release 15” specifications are compensated for their innovation. Avanci represents that the Platform will charge FRAND rates for the patented technologies, with input from both licensors and licensees.

In addition, Avanci has incorporated a number of safeguards into its 5G Platform that can help protect competition, including licensing only technically essential patents; providing for independent evaluation of essential patents; permitting licensing outside the Platform, including in other fields of use, bilateral or multi-lateral licensing by pool members, and the formation of other pools at levels of the automotive supply chain; and by including mechanisms to prevent the sharing of competitively sensitive information.  The Department’s review found that the Platform’s essentiality review may help automakers license the patents they actually need to make connected vehicles.  In addition, the Platform license includes “Have Made” rights that creates new access to cellular standard essential patents for licensed automakers’ third-party component suppliers, permitting them to make non-infringing components for 5G connected vehicles.

UTLP Letter

The United Technology Licensing Program business-review letter (issued less than a year after the ABRL letter, at the end of the Trump administration) discussed a proposal by participating universities to offer licenses to their physical-science patents relating to specified emerging technologies. According to DOJ:

[Fifteen universities agreed to cooperate] in licensing certain complementary patents through UTLP, which will be organized into curated portfolios relating to specific technology applications for autonomous vehicles, the “Internet of Things,” and “Big Data.”  The overarching goal of UTLP is to centralize the administrative costs associated with commercializing university research and help participating universities to overcome the budget, institutional relationship, and other constraints that make licensing in these areas particularly challenging for them.

The UTLP letter concluded, based on representations made in UTLP’s letter request, that the pool was on balance unlikely to harm competition. Specifically:

UTLP has incorporated a number of safeguards into its program to help protect competition, including admitting only non-substitutable patents, with a “safety valve” if a patent to accomplish a particular task is inadvertently included in a portfolio with another, substitutable patent. The program also will allow potential sublicensees to choose an individual patent, a group of patents, or UTLP’s entire portfolio, thereby mitigating the risk that a licensee will be required to license more technology than it needs. The department’s letter notes that UTLP is a mechanism that is intended to address licensing inefficiencies and institutional challenges unique to universities in the physical science context, and makes no assessment about whether this mechanism if set up in another context would have similar procompetitive benefits.

Patent-Pool Guidance in Context

DOJ and FTC patent-pool guidance has been bipartisan. It has remained generally consistent in character from the mid-1990s (when the first 1995 IP licensing guidelines were issued) to early 2021 (the end of the Trump administration, when the UTLP letter was issued). The overarching concern expressed in agency guidance has been to prevent a pool from facilitating collusion among competitors, from discouraging innovation, and from inefficiently excluding competitors.

As technology has advanced over the last quarter century, U.S. antitrust enforcers—and, in particular, DOJ, through a series of business-review letters beginning in 1997 (see the pro-Avanci letter at pages 9-10)—consistently have emphasized the procompetitive efficiencies that pools can generate, while also noting the importance of avoiding anticompetitive harms.

Those letters have “given a pass” to pools whose rules contained safeguards against collusion among pool members (e.g., by limiting pool patents to complementary, not substitute, technologies) and against anticompetitive exclusion (e.g., by protecting pool members’ independence of action outside the pool). In assessing safeguards, DOJ has paid attention to the particular market context in which a pool arises.

Notably, economic research generally supports the conclusion that, in recent decades, patent pools have been an important factor in promoting procompetitive welfare-enhancing innovation and technology diffusion.

For example, a 2015 study by Justus Baron and Tim Pohlmann found that a significant number of pools were created following antitrust authorities’ “more permissive stance toward pooling of patents” beginning in the late 1990s. Studying these new pools, they found “a significant increase in patenting rates after pool announcement” that was “primarily attributable to future members of the pool”.

A 2009 analysis by Richard Gilbert of the University of California, Berkeley (who served as chief economist of the DOJ Antitrust Division during the Clinton administration) concluded that (consistent with the approach adopted in DOJ business-review letters) “antitrust authorities and the courts should encourage policies that promote the formation and durability of beneficial pools that combine complementary patents.”

In a 2014 assessment of the role of patent pools in combatting “patent thickets,” Jonathan Barnett of the USC Gould School of Law concluded:

Using network visualization software, I show that information and communication technology markets rely on patent pools and other cross-licensing structures to mitigate or avoid patent thickets and associated inefficiencies. Based on the composition, structure, terms and pricing of selected leading patent pools in the ICT market, I argue that those pools are best understood as mechanisms by which vertically integrated firms mitigate transactional frictions and reduce the cost of accessing technology inputs.

Admittedly, a few studies of some old patents pools (e.g., the 19th century sewing-machine pool and certain early 20th century New Deal pools) found them to be associated with a decline in patenting. Setting aside possible questions of those studies’ methodologies, the old pooling arrangements bear little resemblance to the carefully crafted pool structures today. In particular, unlike the old pools, the more recent pools embody competitive safeguards (the old pools may have combined substitute patents, for example).   

Business-review letters dealing with pools have provided a degree of legal certainty that has helped encourage their formation, to the benefit of innovation in key industries. The anti-Avanci letter ignores that salient fact, focusing instead on allegedly “abusive” SEP-licensing tactics by the Avanci 5G pool—such as refusal to automatically grant a license to all comers—without considering that the pool may have had legitimate reasons not to license particular parties (who may, for instance, have made bad faith unreasonable licensing demands). In sum, this blinkered approach is wrong as a matter of SEP law and policy (as explained in the pro-Avanci letter) and wrong in its implicit undermining of the socially beneficial patent-pool business-review process.   

The pro-Avanci letter ably describes the serious potential harm generated by the anti-Avanci letter:

In evaluating the carefully crafted Avanci pool structure, the 2020 business review letter appropriately concluded that the pool’s design conformed to the well-established, fact-intensive inquiry concerning actual market practices and efficiencies set forth in previous business review letters. Any reconsideration of the 2020 business review letter, as proposed in the October 17 letter, would give rise to significant uncertainty concerning the Antitrust Division’s commitment to the aforementioned sequence of business review letters that have been issued concerning other patent pools in the information technology industry, as well as the larger group of patent pools that did not specifically seek guidance through the business review letter process but relied on the legal template that had been set forth in those previously issued letters.

This is a point of great consequence. Pooling arrangements in the information technology industry have provided an efficient market-driven solution to the transaction costs that are inherent to patent-intensive industries and, when structured appropriately in light of agency guidance and applicable case law, do not raise undue antitrust concerns. Thanks to pooling and related collective licensing arrangements, the innovations embodied in tens of thousands of patents have been made available to hundreds of device producers and other intermediate users, while innovators have been able to earn a commensurate return on the costs and risks that they undertook to develop new technologies that have transformed entire fields and industries to the benefit of consumers.

Conclusion

President Joe Biden’s 2021 Executive Order on Competition commits the Biden administration to “the promotion of competition and innovation by firms small and large, at home and worldwide.” One factor in promoting competition and innovation has been the legal certainty flowing from well-reasoned DOJ business-review letters on patent pools, issued on a bipartisan basis for more than a quarter of a century.

A DOJ decision to reconsider (in other words, to withdraw) the sound guidance embodied in the ABRL would detract from this certainty and thereby threaten to undermine innovation promoted by patent pools. Accordingly, AAG Kanter should reject the advice proffered by the anti-Avanci letter and publicly reaffirm his support for the ABRL—and, more generally, for the DOJ business-review process.

In Antitrust & Competition, Exclusionary Conduct, Intellectual Property, Patent, Truth on the Market , , , , , , , , , , , , ,
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Cooperation, Competition, and COVID-19

John Newman —  15 April 2020

[TOTM: The following is part of a blog series by TOTM guests and authors on the law, economics, and policy of the ongoing COVID-19 pandemic. The entire series of posts is available here.

This post is authored by John Newman, Associate Professor, University of Miami School of Law; Advisory Board Member, American Antitrust Institute; Affiliated Fellow, Thurman Arnold Project, Yale; Former Trial Attorney, DOJ Antitrust Division.)] 

Cooperation is the basis of productivity. The war of all against all is not a good model for any economy.

Who said it—a rose-emoji Twitter Marxist, or a card-carrying member of the laissez faire Chicago School of economics? If you guessed the latter, you’d be right. Frank Easterbrook penned these words in an antitrust decision written shortly after he left the University of Chicago to become a federal judge. Easterbrook’s opinion, now a textbook staple, wholeheartedly endorsed a cooperative agreement between two business owners not to compete with each another.

But other enforcers and judges have taken a far less favorable view of cooperation—particularly when workers are the ones cooperating. A few years ago, in an increasingly rare example of interagency agreement, the DOJ and FTC teamed up to argue against a Seattle ordinance that would have permitted drivers to cooperatively bargain with Uber and Lyft. Why the hostility from enforcers? “Competition is the lynchpin of the U.S. economy,” explained Acting FTC Chairman Maureen Ohlhausen.

Should workers be able to cooperate to counter concentrated corporate power? Or is bellum omnium contra omnes truly the “lynchpin” of our industrial policy?

The coronavirus pandemic has thrown this question into sharper relief than ever before. Low-income workers—many of them classified as independent contractors—have launched multiple coordinated boycotts in an effort to improve working conditions. The antitrust agencies, once quick to condemn similar actions by Uber and Lyft drivers, have fallen conspicuously silent.

Why? Why should workers be allowed to negotiate cooperatively for a healthier workplace, yet not for a living wage? In a society largely organized around paying for basic social services, money is health—and even life itself.

Unraveling the Double Standard

Antitrust law, like the rest of industrial policy, involves difficult questions over which members of society can cooperate with one another. These laws allocate “coordination rights”. Before the coronavirus pandemic, industrial policy seemed generally to favor allocating these rights to corporations, while simultaneously denying them to workers and class-action plaintiffs. But, as the antitrust agencies’ apparent about-face on workplace organizing suggests, the times may be a-changing.

Some of today’s most existential threats to societal welfare—pandemics, climate change, pollution—will best be addressed via cooperation, not atomistic rivalry. On-the-ground stakeholders certainly seem to think so. Absent a coherent, unified federal policy to deal with the coronavirus pandemic, state governors have reportedly begun to consider cooperating to provide a coordinated regional response. Last year, a group of auto manufacturers voluntarily agreed to increase fuel-efficiency standards and reduce emissions. They did attract an antitrust investigation, but it was subsequently dropped—a triumph for pro-social cooperation. It was perhaps also a reminder that corporations, each of which is itself a cooperative enterprise, can still play the role they were historically assigned: serving the public interest.

Going forward, policy-makers should give careful thought to how their actions and inactions encourage or stifle cooperation. Judge Easterbrook praised an agreement between business owners because it “promoted enterprise”. What counts as legitimate “enterprise”, though, is an eminently contestable proposition.

The federal antitrust agencies’ anti-worker stance in particular seems ripe for revisiting. Its modern origins date back to the 1980s, when President Reagan’s FTC challenged a coordinated boycott among D.C.-area criminal-defense attorneys. The boycott was a strike of sorts, intended to pressure the city into increasing court-appointed fees to a level that would allow for adequate representation. (The mayor’s office, despite being responsible for paying the fees, actually encouraged the boycott.) As the sole buyer of this particular type of service, the government wielded substantial power in the marketplace. A coordinated front was needed to counter it. Nonetheless, the FTC condemned the attorneys’ strike as per se illegal—a label supposedly reserved for the worst possible anticompetitive behavior—and the U.S. Supreme Court ultimately agreed.

Reviving Cooperation

In the short run, the federal antitrust agencies should formally reverse this anti-labor course. When workers cooperate in an attempt to counter employers’ power, antitrust intervention is, at best, a misallocation of scarce agency resources. Surely there are (much) bigger fish to fry. At worst, hostility to such cooperation directly contravenes Congress’ vision for the antitrust laws. These laws were intended to protect workers from concentrated downstream power, not to force their exposure to it—as the federal agencies themselves have recognized elsewhere.

In the longer run, congressional action may be needed. Supreme Court antitrust case law condemning worker coordination should be legislatively overruled. And, in a sharp departure from the current trend, we should be making it easier, not harder, for workers to form cooperative unions. Capital can be combined into a legal corporation in just a few hours, while it takes more than a month to create an effective labor union. None of this is to say that competition should be abandoned—much the opposite, in fact. A market that pits individual workers against highly concentrated cooperative entities is hardly “competitive”.

Thinking more broadly, antitrust and industrial policy may need to allow—or even encourage—cooperation in a number of sectors. Automakers’ and other manufacturers’ voluntary efforts to fight climate change should be lauded and protected, not investigated. Where cooperation is already shielded and even incentivized, as is the case with corporations, affirmative steps may be needed to ensure that the public interest is being furthered.

The current moment is without precedent. Industrial policy is destined, and has already begun, to change. Although competition has its place, it cannot serve as the sole lynchpin for a just economy. Now more than ever, a revival of cooperation is needed.

In Amazon, Antitrust & Competition, Antitrust Division, COVID-19, Exemptions, Federal Trade Commission, International, International Trade, Justice Department, Platforms, Symposia, The Law, Economics, and Policy of the COVID-19 Pandemic, Truth on the Market, Twitter , , , , , , , , , , , ,
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The Upsides of Collusion and Concentration

Eric Fruits —  24 January 2020

Conspiracies and collusion often (always?) get a bad rap. Adam Smith famously derided “people of the same trade” for their inclination to conspire against the public or contrive to raise prices. Today, such conspiracies and contrivances are per se illegal and felonies punishable under the Sherman Act.

It is well known and widely accepted that collusion to suppress competition is associated with an increase in price, a transfer of consumer surplus to producers, and a deadweight loss. It seems that nothing good comes from anticompetitive collusion.

But what if there was some good from a conspiracy in restraint of trade?

Using data from the formation and breakup of illegal cartels, Hyo Kang finds higher levels of innovation—measured by patents and R&D spending—during the cartel period than in the period before the formation of the cartel or the period after the breakup of the cartel. 

By Kang’s measures, during the cartel period, colluding firms increased the annual number of patent applications by about 50% or more and their R&D expenditures by more than 20% relative to the pre-cartel period. After the breakup of the cartel, patent applications and R&D spending return to approximately pre-cartel levels.

These findings are consistent with ICLE’s review of research on four-to-three mergers in the telecom industry. The review found that, of those studies that considered the effect on investment in four-to-three mergers, all of them demonstrated that capital expenditures, a proxy for investment, increased post-merger.

If Kang’s conclusions are correct they contradict John Hicks’ quip that “the best of all monopoly profits is a quiet life.” Instead of silently collecting the profits of price fixing and other forms of collusion, cartel conspirators seem to be aggressively innovating. So what gives?

Kang’s paper points to Joseph Schumpeter, who argued that some degree of market power can promote innovation by providing firms with the financial resources and predictability required for innovative activities:

Thus it is true that there is or may be an element of genuine monopoly gain in those entrepreneurial profits which are the prizes offered by capitalist society to the successful innovator. But the quantitative importance of that clement, its volatile nature and its function in the process in which it emerges put it in a class by itself. The main value to a concern of a single seller position that is secured by patent or monopolistic strategy does not consist so much in the opportunity to behave temporarily according to the monopolist schema, as in the protection it affords against temporary disorganization of the market and the space it secures for long-range planning.

Along this line, Kang argues that the reduced competition afforded by the cartel provides both an incentive to innovate and an ability to innovate. Incentives include the potential for higher returns from innovation and the reduction of duplicative R&D investment. Increased profits from collusion provide increased resources available for R&D, thereby improving a firm’s ability to innovate. In some ways, it can be argued that the cartel arrangement reduces price competition, while increasing competition along other dimensions.

A seemingly unrelated working paper by R. Andrew Butters and Thomas N. Hubbard come to a similar conclusion. They note that over time, hotels have increased competition along nonprice dimensions, trading improved room size and in-room amenities for reduced out-of-room amenities such full-service restaurants, swimming pools, and meeting spaces. 

Butters & Hubbard note that many out-of-room amenities are typified by fixed costs that do not vary (much) with hotel size, while room-size and in-room amenities are largely variable costs with respect to hotel size. With the shift from out-of-room amenities to in-room amenities, the market has shifted from one of larger hotels with many rooms, to smaller hotels with fewer rooms. Thus with the shift in the dimensions of competition, the structure of the industry has shifted along with it.

The research of Kang and Butters & Hubbard raise important issues about competition policy. A single-minded focus on price ignores the other many dimensions across which firms compete. While a cartel’s consumers may face higher prices, they may also benefit from increased innovation. Similarly, while hotel guests may experience reduced price competition among hotels, they are also experiencing a better in-room experience. Although increased concentration and outright collusion may harm consumers along the price dimension, they may also benefit along other dimensions that are not so easily quantified or quantifiable.

In Antitrust & Competition, Cartels, Google, Intellectual Property, Patent, Platforms, Telecommunications, Truth on the Market, Wireless , , ,
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Boom, bust, and collusion: Does it really matter?

Eric Fruits —  22 January 2019

A recent working paper by Hashmat Khan and Matthew Strathearn attempts to empirically link anticompetitive collusion to the boom and bust cycles of the economy.

The level of collusion is higher during a boom relative to a recession as collusion occurs more frequently when demand is increasing (entering into a collusive arrangement is more profitable and deviating from an existing cartel is less profitable). The model predicts that the number of discovered cartels and hence antitrust filings should be procyclical because the level of collusion is procyclical.

The first sentence—a hypothesis that collusion is more likely during a “boom” than in recession—seems reasonable. At the same time, a case can be made that collusion would be more likely during recession. For example, a reduced risk of entry from competitors would reduce the cost of collusion.

The second sentence, however, seems a stretch. Mainly because it doesn’t recognize the time delay between the collusive activity, the date the collusion is discovered by authorities, and the date the case is filed.

Perhaps, more importantly, it doesn’t acknowledge that many collusive arrangement span months, if not years. That span of time could include times of “boom” and times of recession. Thus, it can be argued that the date of the filing has little (or nothing) to do with the span over which the collusive activity occurred.

I did a very lazy man’s test of my criticisms. I looked at six of the filings cited by Khan and Strathearn for the year 2011, a “boom” year with a high number of horizontal price fixing cases filed.

khanstrathearn

My first suspicion was correct. In these six cases, an average of more than three years passed from the date of the last collusive activity and the date the case was filed. Thus, whether the economy is a boom or bust when the case is filed provides no useful information regarding the state of the economy when the collusion occurred.

Nevertheless, my lazy man’s small sample test provides some interesting—and I hope useful—information regarding Khan and Strathearn’s conclusions.

  1. From July 2001 through September 2009, 24 of the 99 months were in recession. In other words, during this period, there was a 24 percent chance the economy was in recession in any given month.
  2. Five of the six collusive arrangements began when the economy was in recovery. Only one began during a recession. This may seem to support their conclusion that collusive activity is more likely during a recovery. However, even if the arrangements began randomly, there would be a 55 percent chance that that five or more began during a recovery. So, you can’t read too much into the observation that most of the collusive agreements began during a “boom.”
  3. In two of the cases, the collusive activity occurred during a span of time that had no recession. The chances of this happening randomly is less than 1 in 20,000, supporting their conclusion regarding collusive activity and the business cycle.

Khan and Strathearn fall short in linking collusive activity to the business cycle but do a good job of linking antitrust enforcement activities to the business cycle. The information they use from the DOJ website is sufficient to determine when the collusive activity occurred—but it’ll take more vigorous “scrubbing” (their word) of the site to get the relevant data.

The bigger question, however, is the relevance of this research. Naturally, one could argue this line of research indicates that competition authorities should be extra vigilant during a booming economy. Yet, Adam Smith famously noted, “People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices.” This suggests that collusive activity—or the temptation to engage in such activity—is always and everywhere present, regardless of the business cycle.

 

In Antitrust & Competition, Cartels, Justice Department, Truth on the Market , ,
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The antitrust laws are not some meta-legislation authorizing whatever regulation activists want: Labor market edition

Geoffrey Manne —  22 September 2017

In a recent post at the (appallingly misnamed) ProMarket blog (the blog of the Stigler Center at the University of Chicago Booth School of Business — George Stigler is rolling in his grave…), Marshall Steinbaum keeps alive the hipster-antitrust assertion that lax antitrust enforcement — this time in the labor market — is to blame for… well, most? all? of what’s wrong with “the labor market and the broader macroeconomic conditions” in the country.

In this entry, Steinbaum takes particular aim at the US enforcement agencies, which he claims do not consider monopsony power in merger review (and other antitrust enforcement actions) because their current consumer welfare framework somehow doesn’t recognize monopsony as a possible harm.

This will probably come as news to the agencies themselves, whose Horizontal Merger Guidelines devote an entire (albeit brief) section (section 12) to monopsony, noting that:

Mergers of competing buyers can enhance market power on the buying side of the market, just as mergers of competing sellers can enhance market power on the selling side of the market. Buyer market power is sometimes called “monopsony power.”

* * *

Market power on the buying side of the market is not a significant concern if suppliers have numerous attractive outlets for their goods or services. However, when that is not the case, the Agencies may conclude that the merger of competing buyers is likely to lessen competition in a manner harmful to sellers.

Steinbaum fails to mention the HMGs, but he does point to a US submission to the OECD to make his point. In that document, the agencies state that

The U.S. Federal Trade Commission (“FTC”) and the Antitrust Division of the Department of Justice (“DOJ”) [] do not consider employment or other non-competition factors in their antitrust analysis. The antitrust agencies have learned that, while such considerations “may be appropriate policy objectives and worthy goals overall… integrating their consideration into a competition analysis… can lead to poor outcomes to the detriment of both businesses and consumers.” Instead, the antitrust agencies focus on ensuring robust competition that benefits consumers and leave other policies such as employment to other parts of government that may be specifically charged with or better placed to consider such objectives.

Steinbaum, of course, cites only the first sentence. And he uses it as a launching-off point to attack the notion that antitrust is an improper tool for labor market regulation. But if he had just read a little bit further in the (very short) document he cites, Steinbaum might have discovered that the US antitrust agencies have, in fact, challenged the exercise of collusive monopsony power in labor markets. As footnote 19 of the OECD submission notes:

Although employment is not a relevant policy goal in antitrust analysis, anticompetitive conduct affecting terms of employment can violate the Sherman Act. See, e.g., DOJ settlement with eBay Inc. that prevents the company from entering into or maintaining agreements with other companies that restrain employee recruiting or hiring; FTC settlement with ski equipment manufacturers settling charges that companies illegally agreed not to compete for one another’s ski endorsers or employees. (Emphasis added).

And, ironically, while asserting that labor market collusion doesn’t matter to the agencies, Steinbaum himself points to “the Justice Department’s 2010 lawsuit against Silicon Valley employers for colluding not to hire one another’s programmers.”

Steinbaum instead opts for a willful misreading of the first sentence of the OECD submission. But what the OECD document refers to, of course, are situations where two firms merge, no market power is created (either in input or output markets), but people are laid off because the merged firm does not need all of, say, the IT and human resources employees previously employed in the pre-merger world.

Does Steinbaum really think this is grounds for challenging the merger on antitrust grounds?

Actually, his post suggests that he does indeed think so, although he doesn’t come right out and say it. What he does say — as he must in order to bring antitrust enforcement to bear on the low- and unskilled labor markets (e.g., burger flippers; retail cashiers; Uber drivers) he purports to care most about — is that:

Employers can have that control [over employees, as opposed to independent contractors] without first establishing themselves as a monopoly—in fact, reclassification [of workers as independent contractors] is increasingly standard operating procedure in many industries, which means that treating it as a violation of Section 2 of the Sherman Act should not require that outright monopolization must first be shown. (Emphasis added).

Honestly, I don’t have any idea what he means. Somehow, because firms hire independent contractors where at one time long ago they might have hired employees… they engage in Sherman Act violations, even if they don’t have market power? Huh?

I get why he needs to try to make this move: As I intimated above, there is probably not a single firm in the world that hires low- or unskilled workers that has anything approaching monopsony power in those labor markets. Even Uber, the example he uses, has nothing like monopsony power, unless perhaps you define the market (completely improperly) as “drivers already working for Uber.” Even then Uber doesn’t have monopsony power: There can be no (or, at best, virtually no) markets in the world where an Uber driver has no other potential employment opportunities but working for Uber.

Moreover, how on earth is hiring independent contractors evidence of anticompetitive behavior? ”Reclassification” is not, in fact, “standard operating procedure.” It is the case that in many industries firms (unilaterally) often decide to contract out the hiring of low- and unskilled workers over whom they do not need to exercise direct oversight to specialized firms, thus not employing those workers directly. That isn’t “reclassification” of existing workers who have no choice but to accept their employer’s terms; it’s a long-term evolution of the economy toward specialization, enabled in part by technology.

And if we’re really concerned about what “employee” and “independent contractor” mean for workers and employment regulation, we should reconsider those outdated categories. Firms are faced with a binary choice: hire workers or independent contractors. Neither really fits many of today’s employment arrangements very well, but that’s the choice firms are given. That they sometimes choose “independent worker” over “employee” is hardly evidence of anticompetitive conduct meriting antitrust enforcement.

The point is: The notion that any of this is evidence of monopsony power, or that the antitrust enforcement agencies don’t care about monopsony power — because, Bork! — is absurd.

Even more absurd is the notion that the antitrust laws should be used to effect Steinbaum’s preferred market regulations — independent of proof of actual anticompetitive effect. I get that it’s hard to convince Congress to pass the precise laws you want all the time. But simply routing around Congress and using the antitrust statutes as a sort of meta-legislation to enact whatever happens to be Marshall Steinbaum’s preferred regulation du jour is ridiculous.

Which is a point the OECD submission made (again, if only Steinbaum had read beyond the first sentence…):

[T]wo difficulties with expanding the scope of antitrust analysis to include employment concerns warrant discussion. First, a full accounting of employment effects would require consideration of short-term effects, such as likely layoffs by the merged firm, but also long-term effects, which could include employment gains elsewhere in the industry or in the economy arising from efficiencies generated by the merger. Measuring these effects would [be extremely difficult.]. Second, unless a clear policy spelling out how the antitrust agency would assess the appropriate weight to give employment effects in relation to the proposed conduct or transaction’s procompetitive and anticompetitive effects could be developed, [such enforcement would be deeply problematic, and essentially arbitrary].

To be sure, the agencies don’t recognize enough that they already face the problem of reconciling multidimensional effects — e.g., short-, medium-, and long-term price effects, innovation effects, product quality effects, etc. But there is no reason to exacerbate the problem by asking them to also consider employment effects. Especially not in Steinbaum’s world in which certain employment effects are problematic even without evidence of market power or even actual anticompetitive harm, just because he says so.

Consider how this might play out:

Suppose that Pepsi, Coca-Cola, Dr. Pepper… and every other soft drink company in the world attempted to merge, creating a monopoly soft drink manufacturer. In what possible employment market would even this merger create a monopsony in which anticompetitive harm could be tied to the merger? In the market for “people who know soft drink secret formulas?” Yet Steinbaum would have the Sherman Act enforced against such a merger not because it might create a product market monopoly, but because the existence of a product market monopoly means the firm must be able to bad things in other markets, as well. For Steinbaum and all the other scolds who see concentration as the source of all evil, the dearth of evidence to support such a claim is no barrier (on which, see, e.g., this recent, content-less NYT article (that, naturally, quotes Steinbaum) on how “big business may be to blame” for the slowing rate of startups).

The point is, monopoly power in a product market does not necessarily have any relationship to monopsony power in the labor market. Simply asserting that it does — and lambasting the enforcement agencies for not just accepting that assertion — is farcical.

The real question, however, is what has happened to the University of Chicago that it continues to provide a platform for such nonsense?

In Antitrust & Competition, Antitrust Division, Federal Trade Commission, Justice Department, Law & Economics, Merger Guidelines, Mergers & Acquisitions, Monopolization, Regulation , , , , , , , , ,
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