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Consumer Welfare-Based Antitrust Enforcement is the Superior Means to Deal with Large Digital-Platform Competition Issues

Alden Abbott — 2 November 2021

There has been a rapid proliferation of proposals in recent years to closely regulate competition among large digital platforms. The European Union’s Digital Markets Act (DMA, which will become effective in 2023) imposes a variety of data-use, interoperability, and non-self-preferencing obligations on digital “gatekeeper” firms. A host of other regulatory schemes are being considered in Australia, France, Germany, and Japan, among other countries (for example, see here). The United Kingdom has established a Digital Markets Unit “to operationalise the future pro-competition regime for digital markets.” Recently introduced U.S. Senate and House Bills—although touted as “antitrust reform” legislation—effectively amount to “regulation in disguise” of disfavored business activities by very large companies, including the major digital platforms (see here and here).

Sorely missing from these regulatory proposals is any sense of the fallibility of regulation. Indeed, proponents of new regulatory proposals seem to implicitly assume that government regulation of platforms will enhance welfare, ignoring real-life regulatory costs and regulatory failures (see here, for example). Without evidence, new regulatory initiatives are put forth as superior to long-established, consumer-based antitrust law enforcement.

The hope that new regulatory tools will somehow “solve” digital market competitive “problems” stems from the untested assumption that established consumer welfare-based antitrust enforcement is “not up to the task.” Untested assumptions, however, are an unsound guide to public policy decisions. Rather, in order to optimize welfare, all proposed government interventions in the economy, including regulation and antitrust, should be subject to decision-theoretic analysis that is designed to minimize the sum of error and decision costs (see here). What might such an analysis reveal?

Wonder no more. In a just-released Mercatus Center Working Paper, Professor Thom Lambert has conducted a decision-theoretic analysis that evaluates the relative merits of U.S. consumer welfare-based antitrust, ex ante regulation, and ongoing agency oversight in addressing the market power of large digital platforms. While explaining that antitrust and its alternatives have their respective costs and benefits, Lambert concludes that antitrust is the welfare-superior approach to dealing with platform competition issues. According to Lambert:

This paper provides a comparative institutional analysis of the leading approaches to addressing the market power of large digital platforms: (1) the traditional US antitrust approach; (2) imposition of ex ante conduct rules such as those in the EU’s Digital Markets Act and several bills recently advanced by the Judiciary Committee of the US House of Representatives; and (3) ongoing agency oversight, exemplified by the UK’s newly established “Digital Markets Unit.” After identifying the advantages and disadvantages of each approach, this paper examines how they might play out in the context of digital platforms. It first examines whether antitrust is too slow and indeterminate to tackle market power concerns arising from digital platforms. It next considers possible error costs resulting from the most prominent proposed conduct rules. It then shows how three features of the agency oversight model—its broad focus, political susceptibility, and perpetual control—render it particularly vulnerable to rent-seeking efforts and agency capture. The paper concludes that antitrust’s downsides (relative indeterminacy and slowness) are likely to be less significant than those of ex ante conduct rules (large error costs resulting from high informational requirements) and ongoing agency oversight (rent-seeking and agency capture).

Lambert’s analysis should be carefully consulted by American legislators and potential rule-makers (including at the Federal Trade Commission) before they institute digital platform regulation. One also hopes that enlightened foreign competition officials will also take note of Professor Lambert’s well-reasoned study.

Single Firm Conduct: European Competition Policy, the European Court of Justice, and Brexit

Alden Abbott — 28 September 2017

In recent years, the European Union’s (EU) administrative body, the European Commission (EC), increasingly has applied European competition law in a manner that undermines free market dynamics. In particular, its approach to “dominant” firm conduct disincentivizes highly successful companies from introducing product and service innovations that enhance consumer welfare and benefit the economy – merely because they threaten to harm less efficient competitors.

For example, the EC fined Microsoft 561 million euros in 2013 for its failure to adhere to an order that it offer a version of its Window software suite that did not include its popular Windows Media Player (WMP) – despite the lack of consumer demand for a “dumbed down” Windows without WMP. This EC intrusion into software design has been described as a regulatory “quagmire.”

In June 2017 the EC fined Google 2.42 billion euros for allegedly favoring its own comparison shopping service over others favored in displaying Google search results – ignoring economic research that shows Google’s search policies benefit consumers. Google also faces potentially higher EC antitrust fines due to alleged abuses involving android software (bundling of popular Google search and Chrome apps), a product that has helped spur dynamic smartphone innovations and foster new markets.

Furthermore, other highly innovative single firms, such as Apple and Amazon (favorable treatment deemed “state aids”), Qualcomm (alleged anticompetitive discounts), and Facebook (in connection with its WhatsApp acquisition), face substantial EC competition law penalties.

Underlying the EC’s current enforcement philosophy is an implicit presumption that innovations by dominant firms violate competition law if they in any way appear to disadvantage competitors. That presumption forgoes considering the actual effects on the competitive process of dominant firm activities. This is a recipe for reduced innovation, as successful firms “pull their competitive punches” to avoid onerous penalties.

The European Court of Justice (ECJ) implicitly recognized this problem in its September 6, 2017 decision setting aside the European General Court’s affirmance of the EC’s 2009 1.06 billion euro fine against Intel. Intel involved allegedly anticompetitive “loyalty rebates” by Intel, which allowed buyers to achieve cost savings in Intel chip purchases. In remanding the Intel case to the General Court for further legal and factual analysis, the ECJ’s opinion stressed that the EC needed to do more than find a dominant position and categorize the rebates in order to hold Intel liable. The EC also needed to assess the “capacity of [Intel’s] . . . practice to foreclose competitors which are at least as efficient” and whether any exclusionary effect was outweighed by efficiencies that also benefit consumers. In short, evidence-based antitrust analysis was required. Mere reliance on presumptions was not enough. Why? Because competition on the merits is centered on the recognition that the departure of less efficient competitors is part and parcel of consumer welfare-based competition on the merits. As the ECJ cogently put it:

[I]t must be borne in mind that it is in no way the purpose of Article 102 TFEU [which prohibits abuse of a dominant position] to prevent an undertaking from acquiring, on its own merits, the dominant position on a market. Nor does that provision seek to ensure that competitors less efficient than the undertaking with the dominant position should remain on the market . . . . [N]ot every exclusionary effect is necessarily detrimental to competition. Competition on the merits may, by definition, lead to the departure from the market or the marginalisation of competitors that are less efficient and so less attractive to consumers from the point of view of, among other things, price, choice, quality or innovation[.]

Although the ECJ’s recent decision is commendable, it does not negate the fact that Intel had to wait eight years to have its straightforward arguments receive attention – and the saga is far from over, since the General Court has to address this matter once again. These sorts of long-term delays, during which firms face great uncertainty (and the threat of further EC investigations and fines), are antithetical to innovative activity by enterprises deemed dominant. In short, unless and until the EC changes its competition policy perspective on dominant firm conduct (and there are no indications that such a change is imminent), innovation and economic dynamism will suffer.

Even if the EC dithers, the United Kingdom’s (UK) imminent withdrawal from the EU (Brexit) provides it with a unique opportunity to blaze a new competition policy trail – and perhaps in so doing influence other jurisdictions.

In particular, Brexit will enable the UK’s antitrust enforcer, the Competition and Markets Authority (CMA), to adopt an outlook on competition policy in general – and on single firm conduct in particular – that is more sensitive to innovation and economic dynamism. What might such a CMA enforcement policy look like? It should reject the EC’s current approach. It should focus instead on the actual effects of competitive activity. In particular, it should incorporate the insights of decision theory (see here, for example) and place great weight on efficiencies (see here, for example).

Let us hope that the CMA acts boldly – carpe diem. Such action, combined with other regulatory reforms, could contribute substantially to the economic success of Brexit (see here).

The Present State and Future Prospects of the International Competition Network (ICN)

Alden Abbott — 19 May 2017

Introduction

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

ICN Background and Successes

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

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

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

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

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

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

Grounds for Caution Going Forward

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

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

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

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

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

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

What Should the U.S. Antitrust Agencies Do?

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

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

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

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

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

Conclusion

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

Common Ownership by Institutional Investors: Beware Antitrust Overreach

Alden Abbott — 13 March 2017

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

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

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

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

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

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

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

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

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

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

In Antitrust & Competition, Banking, Corporate & Securities Law, Economic Theory, European Union, Financial Regulation, International, Truth on the Market antitrust, common ownership, decision theory, executive compensation, institutional investors, minority shareholding, mutual funds, Ronald Coase

Judge Gorsuch’s Distinguished Antitrust Record

Alden Abbott — 10 March 2017

Overview

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

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

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

Judge Gorsuch’s Antitrust Opinions

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

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

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

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

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

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

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

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

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

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

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

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

Conclusion

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

In Antitrust & Competition, Economic Theory, Federalism, Truth on the Market, Tying antitrust, decision theory, Gorsuch, Supreme Court of the United States

Global Antitrust Institute Comments on Chinese Draft Antitrust Guidelines Regarding Disgorgement and Fines Have Broader Implications for Sound Antitrust Enforcement Policy

Alden Abbott — 12 July 2016

The Global Antitrust Institute (GAI) at George Mason University Law School (officially the “Antonin Scalia Law School at George Mason University” as of July 1^st) is doing an outstanding job at providing sound law and economics-centered advice to foreign governments regarding their proposed antitrust laws and guidelines.

The GAI’s latest inspired filing, released on July 9 (July 9 Comment), concerns guidelines on the disgorgement of illegal gains and punitive fines for antitrust violations proposed by China’s National Development and Reform Commission (NDRC) – a powerful agency that has broad planning and administrative authority over the Chinese economy. With respect to antitrust, the NDRC is charged with investigating price-related anticompetitive behavior and abuses of dominance. (China has two other antitrust agencies, the State Administration of Industry and Commerce (SAIC) that investigates non-price-related monopolistic behavior, and the Ministry of Foreign Commerce (MOFCOM) that reviews mergers.) The July 9 Comment stresses that the NDRC’s proposed Guidelines call for Chinese antitrust enforcers to impose punitive financial sanctions on conduct that is not necessarily anticompetitive and may be efficiency-enhancing – an approach that is contrary to sound economics. In so doing, the July 9 Comment summarizes the economics of penalties, recommends that the NDRD employ economic analysis in considering sanctions, and provides specific suggested changes to the NDRC’s draft. The July 9 Comment provides a helpful summary of its analysis:

We respectfully recommend that the Draft Guidelines be revised to limit the application of disgorgement (or the confiscating of illegal gain) and punitive fines to matters in which: (1) the antitrust violation is clear (i.e., if measured at the time the conduct is undertaken, and based on existing laws, rules, and regulations, a reasonable party should expect that the conduct at issue would likely be found to be illegal) and without any plausible efficiency justifications; (2) it is feasible to articulate and calculate the harm caused by the violation; (3) the measure of harm calculated is the basis for any fines or penalties imposed; and (4) there are no alternative remedies that would adequately deter future violations of the law. In the alternative, and at the very least, we strongly urge the NDRC to expand the circumstances under which the Anti-Monopoly Enforcement Agencies (AMEAs) will not seek punitive sanctions such as disgorgement or fines to include two conduct categories that are widely recognized as having efficiency justifications: unilateral conduct such as refusals to deal and discriminatory dealing and vertical restraints such as exclusive dealing, tying and bundling, and resale price maintenance.

We also urge the NDRC to clarify how the total penalty, including disgorgement and fines, relate to the specific harm at issue and the theoretical optimal penalty. As explained below, the economic analysis determines the total optimal penalties, which includes any disgorgement and fines. When fines are calculated consistent with the optimal penalty framework, disgorgement should be a component of the total fine as opposed to an additional penalty on top of an optimal fine. If disgorgement is an additional penalty, then any fines should be reduced relative to the optimal penalty.

Lastly, we respectfully recommend that the AMEAs rely on economic analysis to determine the harm caused by any violation. When using proxies for the harm caused by the violation, such as using the illegal gains from the violations as the basis for fines or disgorgement, such calculations should be limited to those costs and revenues that are directly attributable to a clear violation. This should be done in order to ensure that the resulting fines or disgorgement track the harms caused by the violation. To that end, we recommend that the Draft Guidelines explicitly state that the AMEAs will use economic analysis to determine the but-for world, and will rely wherever possible on relevant market data. When the calculation of illegal gain is unclear due to a lack of relevant information, we strongly recommend that the AMEAs refrain from seeking disgorgement.

The lack of careful economic analysis of the implications of disgorgement (which is really a financial penalty, viewed through an economic lens) is not confined to Chinese antitrust enforcers. In recent years, the U.S. Federal Trade Commission (FTC) has shown an interest in more broadly employing disgorgement as an antitrust remedy, without fully weighing considerations of error costs and the deterrence of efficient business practices (see, for example, here and here). Relatedly, the U.S. Department of Justice’s Antitrust Division has determined that disgorgement may be invoked as a remedy for a Sherman Antitrust Act violation, a position confirmed by a lower court (see, for example, here). The general principles informing the thoughtful analysis delineated in the July 9 Comment could profitably be consulted by FTC and DOJ policy officials should they choose to reexamine their approach to disgorgement and other financial penalties.

More broadly, emphasizing the importantance of optimal sanctions and the economic analysis of business conduct, the July 9 Comment is in line with a cost-benefit framework for antitrust enforcement policy, rooted in decision theory – an approach that all antitrust agencies (including United States enforcers) should seek to adopt (see also here for an evaluation of the implicit decision-theoretic approach to antitrust employed by the U.S. Supreme Court under Chief Justice John Roberts). Let us hope that DOJ, the FTC, and other government antitrust authorities around the world take to heart the benefits of decision-theoretic antitrust policy in evaluating (and, as appropriate, reforming) their enforcement norms. Doing so would promote beneficial international convergence toward better enforcement policy and redound to the economic benefit of both producers and consumers.

Reflections on the International Competition Network (ICN) at 15: Steady Progress and Major Long-Term Challenges

Alden Abbott — 10 May 2016

Introduction

In my role as a “non-governmental advisor” (NGA), I was privileged to attend and participate actively in the 15^th Annual ICN Conference, held in Singapore from April 26-29. (I have blogged previously on ICN annual conferences and policy initiatives, see here, here, and here.) As a virtual network of national competition law agencies (“national competition authorities,” or NCAs, such as the U.S. Federal Trade Commission (FTC) and the U.S. Justice Department’s Antitrust Division (DOJ)) and expert NGAs from around the world, the ICN supports convergence toward consensus-based “best practices” in competition law enforcement and policy:

Since its founding in 2001, the ICN has evolved from a small club of fifteen agencies and a few NGAs (mainly from North America and Europe) to a robust organization comprising over 130 NCAs and numerous NGAs from around the world (although admittedly the majority of NGAs continue to come from developed countries). Due to its lack of a centralized bureaucracy and the absence of top-down control by national governments, the ICN has been able to tackle concrete issues in a pragmatic and incremental fashion, drawing upon the insights of leading scholars as well as former and current NCA heads.

Summary Assessment of ICN Achievements

As the ICN turns fifteen, a bit of stock-taking is in order. Here are some of my observations, based upon my decade-long involvement with the ICN:

The ICN has significantly promoted the reduction of transactions costs involved in merger filings, through its recommended practices for merger notification and review procedures. This tangible benefit has gained importance with the proliferation of merger filing requirements around the world. Although many regimes have yet to fully adopt the recommended practices, their influence has grown steadily. Furthermore, the ICN’s Merger Working Group has leveraged this success to promote greater cooperation among NCAs in merger evaluation and a greater acceptance of economics-based merger analysis principles – factors which may also be expected to reduce transactions and error costs.

The ICN’s Cartel Working Group has done an impressive job in promoting cooperation among NCAs in the detection, investigation, and prosecution of international cartels. Hard core cartel agreements involve the one type of business arrangement that unequivocally diminishes economic welfare, and therefore merits condemnation. ICN work products related to cartel enforcement, including detection, punishment, investigative techniques, and information sharing (supplemented by hands-on workshops), continue to raise the quality of anti-cartel cooperation and new agency involvement in cartel enforcement. Future challenges for this Working Group include the strengthening of corporate compliance programs worldwide to deter cartel activity, and dealing with private enforcement as a supplement to public anti-cartel efforts (European Union nations and other jurisdictions are beginning to introduce private competition law enforcement).

The ICN has developed taped training modules and related documentary resources, centered on case-specific hypotheticals and economic analysis, that may over time raise the quality of substantive antitrust analyses carried out by NCAs, especially new and inexperienced ones. Although the influence of these materials may only be gradually felt over time, and cannot be quantified, discussion at the Singapore Conference suggests that they are being consulted more frequently. These materials ideally will help reduce error costs in enforcement by dissuading enforcers from adopting economically irrational approaches to case analysis (although the materials cannot, of course, guarantee against the possible interjection of non-economic policy factors and extraneous political considerations in the assessment of particular matters).

The ICN’s Working Group on Agency Effectiveness holds real promise for enhancement of the quality and efficiency of NCA decision-making. In particular, the Working Group’s recently developed ICN Guidance on Investigative Process provides useful guidance on investigative transparency and due process that, if followed, would help reduce widespread concerns about lack of procedural fairness in competition investigations, particularly those carried out by inexperienced NCAs. Nevertheless, it must be recognized that calls for increased attention to due process in such investigations, by DOJ, the FTC, and corporate representatives, have met with limited success at best. This may partly reflect the different view of due process found in civil law systems, which rely on inquisitorial proceedings guided by government officials rather than the common law adversary process. It may also reflect concerns about having the nature of agency decision-making exposed to too much “sunshine,” particularly in young NCAs that have limited resources and inexperienced staff. Improvements in procedural fairness thus may be expected to proceed slowly. Even recognizing this, however, the Agency Effectiveness Group is engaging proactively in such issues as strategic planning and prioritization that could lead to improved substantive NCA outcomes from an economic welfare point of view, quite apart from due process issues.

The ICN’s Advocacy Working Group (AWG) is expanding its efforts to enable NCAs to better assess the anticompetitive potential of government laws and regulations. This AWG has over the years produced excellent and succinct sets of Recommended Practices on Competition Assessment, centered on identifying features of proposed regulations and laws that prevent competitive forces from operating effectively, such as barriers to entry by new businesses. The Working Group has also done valuable work on inculcating public support for procompetitive government policies (featuring release of a “competition culture” report in 2015). Recently, the AWG has also worked closely with other multinational organizations involved in promoting international economic cooperation and development, including in particular the World Bank and the Organization for Economic Cooperation and Development (OECD). The AWG has adapted analysis from the OECD’s Competition Assessment Toolkit (methodologies for identifying anticompetitive government actions) in its recommended practices and has involved OECD Competition Committee experts in its work. Moreover, for several years now the World Bank has held one-day programs immediately preceding the ICN Annual Conference, which have highlighted how regulations and legislation that undermine competition greatly reduce economic growth potential in developing countries. Starting in 2015, the World Bank and ICN AWG cooperated in launching annual “competition advocacy contests” in which NCAs compete in presenting case studies on how their successful public advocacy initiatives have enhanced competition and raised economic welfare within their jurisdictions. The Working Group has also launched a web-based “Benefits Platform,” which “seeks to provide ICN members with knowledge, strategies and arguments for explaining the benefits of competition to support their competition advocacy efforts with government and non-government stakeholders, as well as in the evaluation of competition interventions.” All told, among all of the ICN’s initiatives, the AWG’s projects hold out the greatest potential for enhancing economic welfare, since government interference in competitive processes tend to be far more serious, distortive, and long-lasting than mere private restraints. (In a related vein, Shanker Singham and I have authored a Heritage Foundation essay on how procompetitive regulatory reform can advance both economic freedom and prosperity.) The greatest limitation on the utility of AWG guidance is, of course, political opposition to regulatory reform from private rent seekers and their government allies.

The ICN’s Unilateral Conduct Working Group (UCWG) has done solid and generally sound work on state-created monopolies and predatory pricing, and on the assessment of dominance/substantial market power, and is turning now to a broader policy initiative. In particular, the UCWG merits praise for recommending that competition analysis not treat state-owned enterprises more favorably than their private competitors (although the feasibility of true “neutrality” analysis may be questioned given the array of implicit benefits that state-supported enterprises may enjoy). The UCWG is now developing a potentially ambitious “workbook” on the general analysis of unilateral conduct, which holds out both promise and risk. Unilateral conduct analysis is particularly prone to high error costs, because procompetitive and anticompetitive conduct often look the same. Given that fact, and the importance of aggressive unilateral initiatives to a vibrant competitive process, there is good reason to err on the side of caution in evaluating the competitive ramifications of unilateral conduct. DOJ’s 2008 Report on Single-Firm Conduct Under Section 2 of the Sherman Act presents an excellent template for unilateral conduct analysis, which could profitably be adopted by the UCWG. Regrettably, however, there are those who believe that unilateral conduct analysis should rely heavily on sophisticated theoretical models of potential competitive harm. Such models typically ignore the problem of decision theory and error costs (see here), and threaten to condemn particular instances (if not broad categories) of single firm business initiatives that are welfare-enhancing. What’s worse, such condemnations have the tendency to chill efficient unilateral actions by other firms, which fear that the efficiencies underlying their actions would be misunderstood or ignored by competition law enforcers. The members of the UCWG should keep these considerations in mind in drafting the workbook, and rely on decision theory and error cost analysis in deriving their recommendations.

Conclusion

In sum, the ICN has done a commendable job in promoting sensible procedural and substantive principles in competition law analysis around the world. Although its achievements inevitably have been and will continue to be constrained by the differences among national legal regimes (particularly the civil law and common law divide) and political limitations that individual NCAs face, there is every reason to believe that it has enhanced overall economic welfare through its efforts. Accordingly, continued support for the ICN by the United States antitrust agencies and American antitrust scholars is clearly warranted. It is to be hoped that active participants in ICN initiatives will continue to rely on sound economic analysis as their lodestar – and, in particular, that UCWG members will employ appropriate caution and a decision-theoretic template in developing future recommendations.

Ignoring Decision Theory, the European Commission Continues to Waste Competition Enforcement Resources on Investigations of (Almost Certainly) Efficient Conduct

Alden Abbott — 4 December 2015

This blurb published yesterday by Competition Policy International nicely illustrates the problem with the growing focus on unilateral conduct investigations by the European Commission (EC) and other leading competition agencies:

“EU: Qualcomm to face antitrust complaint on predatory pricing

Dec 03, 2015

The European Union is preparing an antitrust complaint against Qualcomm Inc. over suspected predatory pricing tactics that could hobble smaller rivals, according to three people familiar with the probe.

Regulators are in the final stages of preparing a so-called statement of objections, based on a complaint by a unit of Nvidia Corp., that asked the EU to act against predatory pricing for mobile-phone chips, the people said. Qualcomm designs chipsets that power most of the world’s smartphones, licensing its technology across the industry.

Qualcomm would add to a growing list of U.S. technology companies to face EU antitrust action, following probes into Google, Microsoft Corp. and Intel Corp. A statement of objections may lead to fines, capped at 10 percent of yearly global revenue, which can be avoided if a company agrees to make changes to business behavior.

Regulators are less advanced with another probe into whether the company grants payments, rebates or other financial incentives to customers in returning for buying Qualcomm chipsets. Another case that focused on complaints that the company was charging excessive royalties on patents was dropped in 2009.”

“Predatory pricing” complaints by competitors of successful innovators are typically aimed at hobbling efficient rivals and reducing aggressive competition. If and when successful, such rent-seeking complaints attenuate competitive vigor (thereby disincentivizing innovation) and tend to raise prices to consumers – a result inimical with antitrust’s overarching goal, consumer welfare promotion. Although I admittedly am not privy to the facts at issue in the Qualcomm predatory pricing investigation, Nvidia is not a firm that fits the model of a rival being decimated by economic predation (given its overall success and its rapid growth and high profitability in smartchip markets). In this competitive and dynamic industry, the likelihood that Qualcomm could recoup short-term losses from predation through sustainable monopoly pricing following Nvidia’s exit from the market would seem to be infinitesimally small or non-existent (even assuming pricing below average variable cost or average avoidable cost could be shown). Thus, there is good reason to doubt the wisdom of the EC’s apparent decision to issue a statement of objections to Qualcomm regarding predatory pricing for mobile phone chips.

The investigation of (presumably loyalty) payments and rebates to buyers of Qualcomm chipsets also is unlikely to enhance consumer welfare. As a general matter, such financial incentives lower costs to loyal customers, and may promote efficiencies such as guaranteed purchase volumes under favorable terms. Although theoretically loyalty payments might be structured to effectuate anticompetitive exclusion of competitors under very special circumstances, as a general matter such payments – which like alleged “predatory” pricing typically benefit consumers – should not be a high priority for investigation by competition agencies. This conclusion applies in spades to chipset markets, which are characterized by vigorous competition among successful firms. Rebate schemes in dynamic markets of this sort are almost certainly a symptom of creative, welfare-enhancing competitive vigor, rather than inefficient exclusionary behavior.

A pattern of investigating price reductions and discounting plans in highly dynamic and innovative industries, exemplified by the EC’s Qualcomm investigations summarized above, is troubling in at least two respects.

First, it creates regulatory disincentives to aggressive welfare-enhancing competition aimed at capturing the customer’s favor. Companies like Qualcomm, after being suitably chastised, may well “take the cue” and decide to avoid future trouble by “playing nice” and avoiding innovative discounting, to the detriment of future consumers and industry efficiency.

Second, the dedication of enforcement resources to investigating discounting practices by successful firms that (based on first principles and industry conditions) are highly likely to be procompetitive points to a severe misallocation of resources by the responsible competition agencies. Such agencies should seek to optimize the use of their scarce resources by allocating them to the highest-valued targets in welfare terms, such as anticompetitive government restraints on competition and hard-core cartel conduct. Spending any resources on chasing down what is almost certainly efficient unilateral pricing conduct not only sends a bad signal to industry (see point one), it suggests that agency priorities are badly misplaced. (Admittedly, a problem faced by the EC and many other competition authorities is that they are required to respond to third party complaints, but the nature of that response and the resources allocated could be better calibrated to the likely merit of such complaints. Whether the law should be changed to grant such competition authorities broad prosecutorial discretion to ignore clearly non-meritorious complaints (such as the wide discretion enjoyed by U.S. antitrust enforcers) is beyond the scope of this commentary, and merits separate treatment.)

A proper application of decision theory and its error cost approach could help the EC and other competition enforcers avoid the problem of inefficiently chasing down procompetitive unilateral conduct. Such an approach would focus intensively on highly welfare inimical conduct that lacks credible efficiencies (thus minimizing false positives in enforcement) that can be pursued with a relatively low expenditure of administrative costs (given the lack of credible efficiency justifications that need to be evaluated). As indicated above, a substantial allocation of resources to hard core cartel conduct, bid rigging, and anticompetitive government-imposed market distortions (including poorly designed regulations and state aids) would be consistent with such an approach. Relatedly, investigating single firm conduct, which is central to spurring a dynamic competitive process and is often misdiagnosed as anticompetitive (thereby imposing false positive costs), should be deemphasized. (Obviously, even under a decision-theoretic framework, certain agency resources would continue to be devoted to mandatory merger reviews and other core legally required agency functions.)

In Antitrust & Competition, Economic Theory, European Union, Google, Intellectual Property, International, Patent, Platforms, Truth on the Market anticompetitive market distortions, decision theory, error costs, European Commission, predatory pricing

Competition Among Competition Regimes: Recent Developments in Europe and Welfare Implications

Alden Abbott — 10 September 2015

A basic premise of antitrust law (also called competition law) is that competition among private entities enhances economic welfare by reducing costs, increasing efficiency, and spurring innovation. Government competition agencies around the world also compete, by devising different substantive and procedural rules to constrain private conduct in the name of promoting competition. The welfare implications of that form of inter-jurisdictional competition are, however, ambiguous. Public choice considerations suggest that self-interested competition agency staff have a strong incentive to promote rules that spawn many investigations and cases, in order to increase their budgets and influence. Indeed, an agency may measure its success, both domestically and on the world stage, by the size of its budget and staff and the amount of enforcement activity it generates. That activity, however, imposes costs on the private sector, and may produce restrictive rules that deter vigorous, welfare-enhancing competition. Furthermore, and relatedly, it may generate substantial costs due to “false positives” – agency challenges to efficient conduct that should not have been brought. (There are also costs stemming from “false negatives,” the failure to bring welfare-enhancing enforcement actions. Decision theory indicates an agency should seek to minimize the sum of costs due to false positives and false negatives.) Private enforcement of competition laws, until recently largely relegated to the United States, brings additional costs and complications, to the extent it yields ill-advised lawsuits. Thus one should cast a wary eye at any increase in the scope of enforcement authority within a jurisdiction, and not assume automatically that it is desirable on public policy grounds.

These considerations should be brought to bear in assessing the implications of the 2014 European Union (EU) Damages Actions Directive (Directive), which is expected to yield a dramatic increase in private competition law enforcement in the EU. The Directive establishes standards EU nations must adopt for the bringing of private competition lawsuits, including class actions. The 28 EU member states have until December 27, 2016 to adopt national laws, regulations, and administrative provisions that implement the Directive. In short, the Directive (1) makes it easier for private plaintiffs to have access to evidence; (2) gives a final finding of violation by a national competition agency conclusive effect in private actions brought in national courts and prima facie presumptive effect in private actions brought in other EU nations; (3) establishes clear and uniform statutes of limitation; (4) allows both direct and indirect purchasers of overpriced goods to bring private actions; (5) clarifies that private victims are entitled to full compensation for losses suffered, including compensation for actual loss and for loss of profit, plus interest; (6) establishes a rebuttable presumption that cartels cause harm; and (7) provides for joint and several liability (any participant in a competition law infringement will be responsible towards the victims for the whole harm caused by the infringement, but may seek contribution from other infringers).

By facilitating the bringing of lawsuits for cartel overcharges by both direct and indirect purchasers (see here), the Directive should substantially expand private cartel litigation in Europe. (It may also redirect some cartel-related litigation from United States tribunals, which up to now have been the favorite venues for such actions. Potential treble damages recoveries still make U.S. antitrust courts an attractive venue, but limitations on indirect purchaser suits and Sherman Act jurisdictional constraints requiring a “direct, substantial and reasonably foreseeable effect” effect on U.S. commerce create complications for foreign plaintiffs.) Given the fact that cartels have no redeeming features, this feature may be expected to increase disincentives for cartel conduct and thereby raise welfare. (The degree of welfare enhancement depends on the extent to which legitimate activity may be misidentified as cartel conduct, yielding “false positive” damage actions.)

The outlook is less sanguine for non-cartel cases, however. The Directive applies equally to vertical restraints and abuse of dominance cases, which are far more likely to yield false positives. In my experience, EU enforcers are more comfortable than U.S. enforcers at pursuing cases based on attenuated theories of exclusionary conduct that have a weak empirical basis. (The EU’s continued investigation of Google, based on economically inappropriate theories that were rejected by the U.S. FTC, is a prime example.) In particular, the implementation of the Directive will raise the financial risks for “dominant” or “potentially dominant” firms operating in Europe, who may be further disincentivized from undertaking novel welfare-enhancing business practices that preserve or raise their market share. This could further harm the vitality of the European business sector.

Hopefully, individual EU states will seek to implement the Directive in a manner that takes into account the serious risk of false positives in non-cartel cases. The welfare implications of the Directive’s implementation are well worth further competition law scholarship.

In Antitrust & Competition, Cartels, Economic Theory, European Union, Exclusionary Conduct, Facebook, International, Jurisdictional Competition, Platforms, Regulation, Vertical Restraints antitrust, decision theory, European Commission, law enforcement, private antitrust litigation

Josh Wright, Commissioner-Provocateur

Alden Abbott — 25 August 2015

Much ink will be spilled at this site lauding Commissioner Joshua (Josh) Wright’s many contributions to the Federal Trade Commission (FTC), and justly so. I will focus narrowly on Josh Wright as a law and economics “provocateur,” who used his writings and speeches to “stir the pot” and subject the FTC’s actions to a law and economics spotlight. In particular, Josh highlighted the importance of decision theory, which teaches that bureaucratic agencies (such as the FTC) are inherently subject to error and high administrative costs, and should adopt procedures and rules of decision accordingly. Thus, to maximize welfare, an agency should adopt “optimal” rules, directed at minimizing the sum of false positives, false negatives, and administrative costs. In that regard, the FTC should pay particular attention to empirical evidence of actual harm, and not bring cases based on mere theoretical models of possible harm – models that are inherently likely to generate substantial false positives (predictions of consumer harm) and thereby run counter to a well-run decision-theoretical regime.

Josh became a Commissioner almost three years ago, so there are many of his writings to comment upon. Nevertheless, he is so prolific that a very good understanding of his law and economics approach may be gleaned merely by a perusal of his 2015 contributions. I will selectively focus upon a few representative examples of wisdom drawn from Josh Wright’s (hereinafter JW) 2015 writings, going in reverse chronological order. (A fuller and more detailed exposition of his approach over the years would warrant a long law review article.)

Earlier this month, in commenting on the importance of granting FTC economists (housed in the FTC’s Bureau of Economics (BE)) a greater public role in the framing of FTC decisions, JW honed in on the misuse of consent decrees to impose constraints on private sector behavior without hard evidence of consumer harm:

One [unfortunate] phenomenon is the so‐called “compromise recommendation,” that is, a BE staff economist might recommend the FTC accept a consent decree rather than litigate or challenge a proposed merger when the underlying economic analysis reveals very little actual economic support for liability. In my experience, it is not uncommon for a BE staff analysis to convincingly demonstrate that competitive harm is possible but unlikely, but for BE staff to recommend against litigation on those grounds, but in favor of a consent order. The problem with this compromise approach is, of course, that a recommendation to enter into a consent order must also require economic evidence sufficient to give the Commission reason to believe that competitive harm is likely. . . . [What, then, is the solution?] Requiring BE to make public its economic rationale for supporting or rejecting a consent decree voted out by the Commission could offer a number of benefits at little cost. First, it offers BE a public avenue to communicate its findings to the public. Second, it reinforces the independent nature of the recommendation that BE offers. Third, it breaks the agency monopoly the FTC lawyers currently enjoy in terms of framing a particular matter to the public. The internal leverage BE gains by the ability to publish such a document may increase conflict between bureaus on the margin in close cases, but it will also provide BE a greater role in the consent process and a mechanism to discipline consents that are not supported by sound economics. I believe this would go a long ways towards minimizing the “compromise” recommendation that is most problematic in matters involving consent decrees.

In various writings, JW has cautioned that the FTC should apply an “evidence-based” approach to adjudication, and not lightly presume that particular conduct is anticompetitive – including in the area of patents. JW’s most recent pronouncement regarding an evidence-based approach is found in his July 2015 statement with fellow Commissioner Maureen Ohlhausen filed with the U.S. International Trade Commission (ITC), recommending that the ITC apply an “evidence-based” approach in deciding (on public interest grounds) whether to exclude imports that infringe “standard essential patents” (SEPs):

There is no empirical evidence to support the theory that patent holdup is a common problem in real world markets. The theory that patent holdup is prevalent predicts that the threat of injunction leads to higher prices, reduced output, and lower rates of innovation. These are all testable implications. Contrary to these predictions, the empirical evidence is not consistent with the theory that patent holdup has resulted in a reduction of competition. . . . An evidence-based approach to the public interest inquiry, i.e., one that requires proof that holdup actually occurred in a particular case, protects incentives to participate in standard setting by allowing SEP holders to seek and obtain exclusion orders when permitted by the SSO agreement at issue and in the absence of a showing of any improper use. In contrast, any proposal that would require the ITC to presume the existence of holdup and shift the burden of proof to SEP holders to show unwillingness threatens to deter participation in standard setting, particularly if an accused infringer can prove willingness simply by agreeing to be bound by terms determined by neutral adjudication.

In such matters as Cephalon (May 2015) and Cardinal Health (April 2015), JW teamed up with Commissioner Ohlhausen to caution that disgorgement of profits as an FTC remedy in competition cases should not be lightly pursued, and indeed should be subject to a policy statement that limits FTC discretion, in order to reduce costly business uncertainty and enforcement error.

JW also brought to bear decision-theoretic insights on consumer protection matters. For example, in his April 2015 dissent in Nomi Technologies, he castigated the FTC for entering into a consent decree when the evidence of consumer harm was exceedingly weak (suggesting a high probability of a false positive, in decision-theoretic terms):

The Commission’s decision to issue a complaint and accept a consent order for public comment in this matter is problematic for both legal and policy reasons. Section 5(b) of the FTC Act requires us, before issuing any complaint, to establish “reason to believe that [a violation has occurred]” and that an enforcement action would “be to the interest of the public.” While the Act does not set forth a separate standard for accepting a consent decree, I believe that threshold should be at least as high as for bringing the initial complaint. The Commission has not met the relatively low “reason to believe” bar because its complaint does not meet the basic requirements of the Commission’s 1983 Deception Policy Statement. Further, the complaint and proposed settlement risk significant harm to consumers by deterring industry participants from adopting business practices that benefit consumers.

Consistent with public choice insights, JW stated in an April 2015 speech that greater emphasis should be placed on public advocacy efforts aimed at opposing government-imposed restraints of trade, which have a greater potential for harm than purely private restraints. Thus, welfare would be enhanced by a reallocation of agency resources toward greater advocacy and less private enforcement:

[P]ublic restraints are especially pernicious for consumers and an especially worthy target for antitrust agencies. I am quite confident that a significant shift of agency resources away from enforcement efforts aimed at taming private restraints of trade and instead toward fighting public restraints would improve consumer welfare.

In March 2015 congressional testimony, JW explained his opposition to Federal Communications Commission (FCC) net neutrality regulation, honing in on the low likelihood of harm from private conduct (and thus implicitly the high risk of costly error and unwarranted regulatory costs) in this area:

Today I will discuss my belief that the FCC’s newest regulation does not make sense from an economic perspective. By this I mean that the FCC’s decision to regulate broadband providers as common carriers under Title II of the Communications Act of 1934 will make consumers of broadband internet service worse off, rather than better off. Central to my conclusion that the FCC’s attempts to regulate so-called “net neutrality” in the broadband industry will ultimately do more harm than good for consumers is that the FCC and commentators have failed to identify a problem worthy of regulation, much less cumbersome public-utility-style regulation under Title II.

At the same time, JW’s testimony also explained that in the face of hard evidence of actual consumer harm, the FTC could take – and indeed has taken on several instances – case-specific enforcement action.

Also in March 2015, in his dissent in Par Petroleum, JW further developed the theme that the FTC should not enter into a consent decree unless it has hard evidence of competitive harm – a mere theory does not suffice:

Prior to entering into a consent agreement with the merging parties, the Commission must first find reason to believe that a merger likely will substantially lessen competition under Section 7 of the Clayton Act. The fact that the Commission believes the proposed consent order is costless is not relevant to this determination. A plausible theory may be sufficient to establish the mere possibility of competitive harm, but that theory must be supported by record evidence to establish reason to believe its likelihood. Modern economic analysis supplies a variety of tools to assess rigorously the likelihood of competitive harm. These tools are particularly important where, as here, the conduct underlying the theory of harm – that is, vertical integration – is empirically established to be procompetitive more often than not. Here, to the extent those tools were used, they uncovered evidence that, consistent with the record as a whole, is insufficient to support a reason to believe the proposed transaction is likely to harm competition. Thus, I respectfully dissent and believe the Commission should close the investigation and allow the parties to complete the merger without imposing a remedy.

In a February 2015 speech on the need for greater clarity with respect to “unfair methods of competition” under Section 5 of the FTC Act, JW emphasized the problem of uncertainty generated by the FTC’s failure to adequately define unfair methods of competition:

The lack of institutional commitment to a stable definition of what constitutes an “unfair method of competition” leads to two sources of problematic variation in the agency’s interpretation of Section 5. One is that the agency’s interpretation of the statute in different cases need not be consistent even when the individual Commissioners remain constant. Another is that as the members of the Commission change over time, so does the agency’s Section 5 enforcement policy, leading to wide variations in how the Commission prosecutes “unfair methods of competition” over time. In short, the scope of the Commission’s Section 5 authority today is as broad or as narrow as a majority of commissioners believes it is.

Focusing on the empirical record, JW offered a sharp critique of FTC administrative adjudication (and the value of the FTC’s non-adjudicative research function) in another February 2015 speech:

The data show three things with significant implications for those important questions. The first is that, despite modest but important achievements in administrative adjudication, it can offer in its defense only a mediocre substantive record and a dubious one when it comes to process. The second is that the FTC can and does influence antitrust law and competition policy through its unique research-and-reporting function. The third is, as measured by appeal and reversal rates, generalist courts get a fairly bad wrap relative to the performance of expert agencies like the FTC.

In the same speech, JW endorsed proposed congressional reforms to the FTC’s exercise of jurisdiction over mergers, embodied in the draft “Standard Merger and Acquisition Reviews Through Equal Rules (SMARTER) Act.” Those reforms include harmonizing the FTC and Justice Department’s preliminary injunction standards, and divesting the FTC of its authority to initiate and pursue administrative challenges to unconsummated mergers, thus requiring the agency to challenge those deals in federal court.

Finally, JW dissented from the FTC’s publication of an FTC staff report (based on an FTC workshop) on the “Internet of Things,” in light of the report’s failure to impose a cost-benefit framework on the recommendations it set forth:

[T]he Commission and our staff must actually engage in a rigorous cost-benefit analysis prior to disseminating best practices or legislative recommendations, given the real world consequences for the consumers we are obligated to protect. Acknowledging in passing, as the Workshop Report does, that various courses of actions related to the Internet of Things may well have some potential costs and benefits does not come close to passing muster as cost-benefit analysis. The Workshop Report does not perform any actual analysis whatsoever to ensure that, or even to give a rough sense of the likelihood that the benefits of the staff’s various proposals exceed their attendant costs. Instead, the Workshop Report merely relies upon its own assertions and various surveys that are not necessarily representative and, in any event, do not shed much light on actual consumer preferences as revealed by conduct in the marketplace. This is simply not good enough; there is too much at stake for consumers as the Digital Revolution begins to transform their homes, vehicles, and other aspects of daily life. Paying lip service to the obvious fact that the various best practices and proposals discussed in the Workshop Report might have both costs and benefits, without in fact performing such an analysis, does nothing to inform the recommendations made in the Workshop Report.

To conclude, FTC Commissioner Josh Wright went beyond merely emphasizing the application of economic theory to individual FTC cases, by explaining the need to focus economic thinking on FTC policy formulation – in other words, viewing FTC administrative processes and decision-making from an economics-based, decision-theoretical perspective, with hard facts (not mere theory) a key consideration. If the FTC is to be true to its goal of advancing consumer welfare, it should fully adopt such a perspective on a going-forward basis. One may only hope that current and future FTC Commissioners will heed this teaching.

CONDITIONAL PRICING PRACTICES AND THE LIMITS OF ANTITRUST

Alden Abbott — 24 July 2014

The Federal Trade Commission’s (FTC) June 23 Workshop on Conditional Pricing Practices featured a broad airing of views on loyalty discounts and bundled pricing, popular vertical business practices that recently have caused much ink to be spilled by the antitrust commentariat. In addition to predictable academic analyses featuring alternative theoretical anticompetitive effects stories, the Workshop commendably included presentations by Benjamin Klein that featured procompetitive efficiency explanations for loyalty programs and by Daniel Crane that stressed the importance of (1) treating discounts hospitably and (2) requiring proof of harmful foreclosure. On balance, however, the Workshop provided additional fuel for enforcers who are enthused about applying new anticompetitive effects models to bring “problematic” discounting and bundling to heel.

Before U.S. antitrust enforcement agencies launch a new crusade against novel vertical discounting and bundling contracts, however, they may wish to ponder a few salient factors not emphasized in the Workshop.

First, the United States has the most efficient marketing and distribution system in the world, and it has been growing more efficient in recent decades (this is the one part of the American economy that has been a bright spot). Consumers have benefited from more shopping convenience and higher quality/lower priced offerings due to the advent of “big box” superstores, Internet sales engines (and e-commerce in general), and other improvements in both on-line and “bricks and mortar” sales methods.

Second, and relatedly, the Supreme Court’s recognition of vertical contractual efficiencies in GTE-Sylvania (1977) ushered in a period of greatly reduced potential liability for vertical restraints, undoubtedly encouraging economically beneficial marketing improvements. A new government emphasis on investigating and litigating the merits of novel vertical practices (particularly practices that emphasize discounting, which presumptively benefits consumers) could inject costly new uncertainty into the marketing side of business planning, spawn risk aversion, and deter marketing innovations that reduce costs, thereby harming welfare. These harms would mushroom to the extent courts mistakenly “bought into” new theories and incorrectly struck down efficient practices.

Third, in applying new theories of competitive harm, the antitrust enforcers should be mindful of Ronald Coase’s admonition that “if an economist finds something—a business practice of one sort or other—that he does not understand, he looks for a monopoly explanation. And as in this field we are very ignorant, the number of ununderstandable practices tends to be rather large, and the reliance on a monopoly explanation, frequent.” Competition is a discovery procedure. Entrepreneurial businesses constantly seek improvements not just in productive efficiency, but in distribution and marketing efficiencies, in order to eclipse their rivals. As such, entrepreneurs may experiment with new contractual forms (such as bundling and loyalty discounts) in an effort to expand their market shares and grow their firms. Business persons may not know ex ante which particular forms will work. They may try out alternatives, sticking with those that succeed and discarding those that fail, without necessarily being able to articulate precisely the reasons for success or failure. Real results in the market, rather than arcane economic theorems, may be expected to drive their decision-making. Distribution and marketing methods that are successful will be emulated by others and spread. Seen in this light (and relatedly, in light of transaction cost economics explanations for “non-standard” contracts), widespread adoption of new vertical contractual devices most likely indicates that they are efficient (they improve distribution, and imitation is the sincerest form of flattery), not that they represent some new competitive threat. Since an economic model almost always can be ginned up to explain why some new practice may reduce consumer welfare in theory, enforcers should instead focus on hard empirical evidence that output and quality have been reduced due to a restraint before acting. Unfortunately, the mere threat of costly misbegotten investigations may chill businesses’ interest in experimenting with new and potentially beneficial vertical contractual arrangements, reducing innovation and slowing welfare enhancement (consistent with point two, above).

Fourth, decision theoretic considerations should make enforcers particularly wary of pursuing conditional pricing contracts cases. Consistent with decision theory, optimal antitrust enforcement should adopt an error cost framework that seeks to minimize the sum of the costs attributable to false positives, false negatives, antitrust administrative costs, and disincentive costs imposed on third parties (the latter may also be viewed as a subset of false positives). Given the significant potential efficiencies flowing from vertical restraints, and the lack of empirical showing that they are harmful, antitrust enforcers should exercise extreme caution in entertaining proposals to challenge new vertical arrangements, such as conditional pricing mechanisms. In particular, they should carefully assess the cumulative weight of the high risk of false positives in this area, the significant administrative costs that attend investigations and prosecutions, and the disincentives toward efficient business arrangements (see points two and three above). Taken together, these factors strongly suggest that the aggressive pursuit of conditional pricing practice investigations would flunk a reasonable cost-benefit calculus.

Fifth, a new U.S. antitrust enforcement crusade against conditional pricing could be used by foreign competition agencies to justify further attacks on efficient vertical practices. This could add to the harm suffered by companies (including, of course, U.S.-based multinationals) which would be deterred from maintaining and creating new welfare-beneficial distribution methods. Foreign consumers, of course, would suffer as well.

My caveats should not be read to suggest that the FTC should refrain from pursuing new economic learning on loyalty discounting and bundled pricing, nor on other novel business practices. Nor should it necessarily eschew all enforcement in the vertical restraints area – although that might not be such a bad idea, given error cost and resource constraint issues. (Vertical restraints that are part of a cartel enforcement scheme should be treated as cartel conduct, and, as such, should be fair game, of course.) In order optimally to allocate scarce resources, however, the FTC might benefit by devoting relatively greater attention to the most welfare-inimical competitive abuses – namely, anticompetitive arrangements instigated, shielded, or maintained by government authority. (Hard core private cartel activity is best left to the Justice Department, which can deploy powerful criminal law tools against such schemes.)

In Antitrust & Competition, Apple, Economic Theory, Federal Trade Commission, Justice Department, Law & Economics, Platforms, Vertical Restraints contracts, decision theory, iTunes, Ronald Coase

Antitrust Enforcers’ Stealth Undermining of Patent Rights – Shedding Light on a Recent and Troubling Phenomenon

Alden Abbott — 30 June 2014

In recent years, antitrust enforcers in Europe and the United States have made public pronouncements and pursued enforcement initiatives that undermine the ability of patentees to earn maximum profits through the unilateral exercise of rights within the scope of their patents, as discussed in separate recent articles by me and by Professor Nicolas Petit of the University of Liege. (Similar sorts of concerns have been raised by Federal Trade Commissioner Joshua Wright.) This represents a change in emphasis away from restraints on competition among purveyors of rival patented technologies and toward the alleged “exploitation” of a patentee’s particular patented technology. It is manifested, for example, in enforcers’ rising enthusiasm for limiting patent royalties (based on hypothetical ex ante comparisons to “next best” technologies, or the existence of standards on which patents “read”), for imposing compulsory licensing remedies, and for constraining the terms of private patent litigation settlements involving a single patented technology. (Not surprisingly, given its broader legal mandate to attack abuses of dominant positions, the European Commission has been more aggressive than United States antitrust agencies.) This development has troubling implications for long-term economic welfare and innovation, and merits far greater attention than it has received thus far.

What explains this phenomenon? Public enforcers are motivated by research that purports to demonstrate fundamental flaws in the workings of the patent system (including patent litigation) and the poor quality of many patents, as described, for example, in 2003 and 2011 U.S. Federal Trade Commission (FTC) Reports. Central to this scholarship is the notion that patents are “highly uncertain” and merely “probabilistic” (read “second class”) property rights that should be deemed to convey only a right to try to exclude. This type of thinking justifies a greater role for prosecutors to “look inside” the patent “black box” and use antitrust to “correct” perceived patent “abuses,” including supposed litigation excesses.

This perspective is problematic, to say the least. Government patent agencies, not antitrust enforcers, are best positioned to (and have taken steps to) rein in litigation excesses and improve patent quality, and the Supreme Court continues to issue rulings clarifying patent coverage. More fundamentally, as Professor Petit and I explain, this new patent-specific interventionist trend ignores a robust and growing law and economics literature that highlights the benefits of the patent system in enabling technology commercialization, signaling value to capital markets and innovators, and reducing information and transaction costs. It also fails to confront empirical studies that by and large suggest stronger patent regimes are associated with faster economic growth and innovation. Furthermore, decision theory and error cost considerations indicate that antitrust agencies are ill-equipped to second guess unilateral exercises of property rights that fall within the scope of a patent. Finally, other antitrust jurisdictions, such as China, are all too likely to cite new United States and European constraints on unilateral patent right assertions as justifications for even more intrusive limitations on patent rights.

What, then, should the U.S. antitrust enforcement agencies do? Ideally, they should announce that they are redirecting their emphasis to prosecuting inefficient competitive restraints involving rival patented technologies, the central thrust of the 1995 FTC-U.S. Justice Department Patent-Antitrust Licensing Guidelines. In so doing, they should state publicly that an individual patentee should be entitled to the full legitimate returns flowing from the legal scope of its patent, free from antitrust threat. (The creation of patent-specific market power through deception or fraud is not a legitimate return on patent rights, of course, and should be subject to antitrust prosecution when found.) One would hope that eventually the European Commission (and, dare we suggest, other antitrust authorities as well) would be inspired to adopt a similar program. Additional empirical research documenting the economy-wide benefits of encouraging robust unilateral patent assertions could prove helpful in this regard.

In Antitrust & Competition, China, Economic Theory, European Union, Federal Trade Commission, Intellectual Property, International, Justice Department, Law & Economics, Patent commercialization, decision theory, international competition, nicolas petit, settlements

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