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Use and abuse of bargaining models in antitrust: AT&T/Time-Warner and FTC v. Qualcomm

Ginsburg & Wright —  14 March 2019

[TOTM: The following is the second in a series of posts by TOTM guests and authors on the FTC v. Qualcomm case, currently awaiting decision by Judge Lucy Koh in the Northern District of California. The first post, by Luke Froeb, Michael Doane & Mikhael Shor is here.

This post is authored by Douglas H. Ginsburg, Professor of Law, Antonin Scalia Law School at George Mason University; Senior Judge, United States Court of Appeals for the District of Columbia Circuit; and former Assistant Attorney General in charge of the Antitrust Division of the U.S. Department of Justice; and Joshua D. Wright, University Professor, Antonin Scalia Law School at George Mason University; Executive Director, Global Antitrust Institute; former U.S. Federal Trade Commissioner from 2013-15; and one of the founding bloggers at Truth on the Market.]

[Ginsburg & Wright: Professor Wright is recused from participation in the FTC litigation against Qualcomm, but has provided counseling advice to Qualcomm concerning other regulatory and competition matters. The views expressed here are our own and neither author received financial support.]

The Department of Justice Antitrust Division (DOJ) and Federal Trade Commission (FTC) have spent a significant amount of time in federal court litigating major cases premised upon an anticompetitive foreclosure theory of harm. Bargaining models, a tool used commonly in foreclosure cases, have been essential to the government’s theory of harm in these cases. In vertical merger or conduct cases, the core theory of harm is usually a variant of the claim that the transaction (or conduct) strengthens the firm’s incentives to engage in anticompetitive strategies that depend on negotiations with input suppliers. Bargaining models are a key element of the agency’s attempt to establish those claims and to predict whether and how firm incentives will affect negotiations with input suppliers, and, ultimately, the impact on equilibrium prices and output. Application of bargaining models played a key role in evaluating the anticompetitive foreclosure theories in the DOJ’s litigation to block the proposed merger of AT&T and Time Warner Cable. A similar model is at the center of the FTC’s antitrust claims against Qualcomm and its patent licensing business model.

Modern antitrust analysis does not condemn business practices as anticompetitive without solid economic evidence of an actual or likely harm to competition. This cautious approach was developed in the courts for two reasons. The first is that the difficulty of distinguishing between procompetitive and anticompetitive explanations for the same conduct suggests there is a high risk of error. The second is that those errors are more likely to be false positives than false negatives because empirical evidence and judicial learning have established that unilateral conduct is usually either procompetitive or competitively neutral. In other words, while the risk of anticompetitive foreclosure is real, courts have sensibly responded by requiring plaintiffs to substantiate their claims with more than just theory or scant evidence that rivals have been harmed.

An economic model can help establish the likelihood and/or magnitude of competitive harm when the model carefully captures the key institutional features of the competition it attempts to explain. Naturally, this tends to mean that the economic theories and models proffered by dueling economic experts to predict competitive effects take center stage in antitrust disputes. The persuasiveness of an economic model turns on the robustness of its assumptions about the underlying market. Model predictions that are inconsistent with actual market evidence give one serious pause before accepting the results as reliable.

For example, many industries are characterized by bargaining between providers and distributors. The Nash bargaining framework can be used to predict the outcomes of bilateral negotiations based upon each party’s bargaining leverage. The model assumes that both parties are better off if an agreement is reached, but that as the utility of one party’s outside option increases relative to the bargain, it will capture an increasing share of the surplus. Courts have had to reconcile these seemingly complicated economic models with prior case law and, in some cases, with direct evidence that is apparently inconsistent with the results of the model.

Indeed, Professor Carl Shapiro recently used bargaining models to analyze harm to competition in two prominent cases alleging anticompetitive foreclosure—one initiated by the DOJ and one by the FTC—in which he served as the government’s expert economist. In United States v. AT&T Inc., Dr. Shapiro testified that the proposed transaction between AT&T and Time Warner would give the vertically integrated company leverage to extract higher prices for content from AT&T’s rival, Dish Network. Soon after, Dr. Shapiro presented a similar bargaining model in FTC v. Qualcomm Inc. He testified that Qualcomm leveraged its monopoly power over chipsets to extract higher royalty rates from smartphone OEMs, such as Apple, wishing to license its standard essential patents (SEPs). In each case, Dr. Shapiro’s models were criticized heavily by the defendants’ expert economists for ignoring market realities that play an important role in determining whether the challenged conduct was likely to harm competition.

Judge Leon’s opinion in AT&T/Time Warner—recently upheld on appeal—concluded that Dr. Shapiro’s application of the bargaining model was significantly flawed, based upon unreliable inputs, and undermined by evidence about actual market performance presented by defendant’s expert, Dr. Dennis Carlton. Dr. Shapiro’s theory of harm posited that the combined company would increase its bargaining leverage and extract greater affiliate fees for Turner content from AT&T’s distributor rivals. The increase in bargaining leverage was made possible by the threat of a post-merger blackout of Turner content for AT&T’s rivals. This theory rested on the assumption that the combined firm would have reduced financial exposure from a long-term blackout of Turner content and would therefore have more leverage to threaten a blackout in content negotiations. The purpose of his bargaining model was to quantify how much AT&T could extract from competitors subjected to a long-term blackout of Turner content.

Judge Leon highlighted a number of reasons for rejecting the DOJ’s argument. First, Dr. Shapiro’s model failed to account for existing long-term affiliate contracts, post-litigation offers of arbitration agreements, and the increasing competitiveness of the video programming and distribution industry. Second, Dr. Carlton had demonstrated persuasively that previous vertical integration in the video programming and distribution industry did not have a significant effect on content prices. Finally, Dr. Shapiro’s model primarily relied upon three inputs: (1) the total number of subscribers the unaffiliated distributor would lose in the event of a long-term blackout of Turner content, (2) the percentage of the distributor’s lost subscribers who would switch to AT&T as a result of the blackout, and (3) the profit margin AT&T would derive from the subscribers it gained from the blackout. Many of Dr. Shapiro’s inputs necessarily relied on critical assumptions and/or third-party sources. Judge Leon considered and discredited each input in turn. 

The parties in Qualcomm are, as of the time of this posting, still awaiting a ruling. Dr. Shapiro’s model in that case attempts to predict the effect of Qualcomm’s alleged “no license, no chips” policy. He compared the gains from trade OEMs receive when they purchase a chip from Qualcomm and pay Qualcomm a FRAND royalty to license its SEPs with the gains from trade OEMs receive when they purchase a chip from a rival manufacturer and pay a “royalty surcharge” to Qualcomm to license its SEPs. In other words, the FTC’s theory of harm is based upon the premise that Qualcomm is charging a supra-FRAND rate for its SEPs (the“royalty surcharge”) that squeezes the margins of OEMs. That margin squeeze, the FTC alleges, prevents rival chipset suppliers from obtaining a sufficient return when negotiating with OEMs. The FTC predicts the end result is a reduction in competition and an increase in the price of devices to consumers.

Qualcomm, like Judge Leon in AT&T, questioned the robustness of Dr. Shapiro’s model and its predictions in light of conflicting market realities. For example, Dr. Shapiro, argued that the

leverage that Qualcomm brought to bear on the chips shifted the licensing negotiations substantially in Qualcomm’s favor and led to a significantly higher royalty than Qualcomm would otherwise have been able to achieve.

Yet, on cross-examination, Dr. Shapiro declined to move from theory to empirics when asked if he had quantified the effects of Qualcomm’s practice on any other chip makers. Instead, Dr. Shapiro responded that he had not, but he had “reason to believe that the royalty surcharge was substantial” and had “inevitable consequences.” Under Dr. Shapiro’s theory, one would predict that royalty rates were higher after Qualcomm obtained market power.

As with Dr. Carlton’s testimony inviting Judge Leon to square the DOJ’s theory with conflicting historical facts in the industry, Qualcomm’s economic expert, Dr. Aviv Nevo, provided an analysis of Qualcomm’s royalty agreements from 1990-2017, confirming that there was no economic and meaningful difference between the royalty rates during the time frame when Qualcomm was alleged to have market power and the royalty rates outside of that time frame. He also presented evidence that ex ante royalty rates did not increase upon implementation of the CDMA standard or the LTE standard. Moreover, Dr.Nevo testified that the industry itself was characterized by declining prices and increasing output and quality.

Dr. Shapiro’s model in Qualcomm appears to suffer from many of the same flaws that ultimately discredited his model in AT&T/Time Warner: It is based upon assumptions that are contrary to real-world evidence and it does not robustly or persuasively identify anticompetitive effects. Some observers, including our Scalia Law School colleague and former FTC Chairman, Tim Muris, would apparently find it sufficient merely to allege a theoretical “ability to manipulate the marketplace.” But antitrust cases require actual evidence of harm. We think Professor Muris instead captured the appropriate standard in his important article rejecting attempts by the FTC to shortcut its requirement of proof in monopolization cases:

This article does reject, however, the FTC’s attempt to make it easier for the government to prevail in Section 2 litigation. Although the case law is hardly a model of clarity, one point that is settled is that injury to competitors by itself is not a sufficient basis to assume injury to competition …. Inferences of competitive injury are, of course, the heart of per se condemnation under the rule of reason. Although long a staple of Section 1, such truncation has never been a part of Section 2. In an economy as dynamic as ours, now is hardly the time to short-circuit Section 2 cases. The long, and often sorry, history of monopolization in the courts reveals far too many mistakes even without truncation.

Timothy J. Muris, The FTC and the Law of Monopolization, 67 Antitrust L. J. 693 (2000)

We agree. Proof of actual anticompetitive effects rather than speculation derived from models that are not robust to market realities are an important safeguard to ensure that Section 2 protects competition and not merely individual competitors.

The future of bargaining models in antitrust remains to be seen. Judge Leon certainly did not question the proposition that they could play an important role in other cases. Judge Leon closely dissected the testimony and models presented by both experts in AT&T/Time Warner. His opinion serves as an important reminder. As complex economic evidence like bargaining models become more common in antitrust litigation, judges must carefully engage with the experts on both sides to determine whether there is direct evidence on the likely competitive effects of the challenged conduct. Where “real-world evidence,” as Judge Leon called it, contradicts the predictions of a bargaining model, judges should reject the model rather than the reality. Bargaining models have many potentially important antitrust applications including horizontal mergers involving a bargaining component – such as hospital mergers, vertical mergers, and licensing disputes. The analysis of those models by the Ninth and D.C. Circuits will have important implications for how they will be deployed by the agencies and parties moving forward.

In antitrust, antitrust division, economics, exclusionary conduct, federal trade commission, ftc, law and economics, mergers & acquisitions, Patents, technology, television, wireless , , , ,
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Calling into Question the FTC’s Theory of the Case in FTC v. Qualcomm

Luke Froeb —  5 March 2019

[TOTM: The following is the first in a series of posts by TOTM guests and authors on the FTC v. Qualcomm case, currently awaiting decision by Judge Lucy Koh in the Northern District of California.

This post is authored by Luke Froeb (William C. Oehmig Chair in Free Enterprise and Entrepreneurship at the Owen Graduate School of Management at Vanderbilt University; former chief economist at the Antitrust Division of the US Department of Justice and the Federal Trade Commission), Michael Doane (Competition Economics, LLC) & Mikhael Shor (Associate Professor of Economics, University of Connecticut).]

[Froeb, Doane & Shor: This post does not attempt to answer the question of what the court should decide in FTC v. Qualcomm because we do not have access to the information that would allow us to make such a determination. Rather, we focus on economic issues confronting the court by drawing heavily from our writings in this area: Gregory Werden & Luke Froeb, Why Patent Hold-Up Does Not Violate Antitrust Law; Luke Froeb & Mikhael Shor, Innovators, Implementors and Two-sided Hold-up; Bernard Ganglmair, Luke Froeb & Gregory Werden, Patent Hold Up and Antitrust: How a Well-Intentioned Rule Could Retard Innovation.]

Not everything is “hold-up”

It is not uncommon—in fact it is expected—that parties to a negotiation would have different opinions about the reasonableness of any deal. Every buyer asks for a price as low as possible, and sellers naturally request prices at which buyers (feign to) balk. A recent movement among some lawyers and economists has been to label such disagreements in the context of standard-essential patents not as a natural part of bargaining, but as dispositive proof of “hold-up,” or the innovator’s purported abuse of newly gained market power to extort implementers. We have four primary issues with this hold-up fad.

First, such claims of “hold-up” are trotted out whenever an innovator’s royalty request offends the commentator’s sensibilities, and usually with reference to a theoretical hold-up possibility rather than any matter-specific evidence that hold-up is actually present. Second, as we have argued elsewhere, such arguments usually ignore the fact that implementers of innovations often possess significant countervailing power to “hold-out” as well. This is especially true as implementers have successfully pushed to curtail injunctive relief in standard-essential patent cases. Third, as Greg Werden and Froeb have recently argued, it is not clear why patent holdup—even where it might exist—need implicate antitrust law rather than be adequately handled as a contractual dispute. Lastly, it is certainly not the case that every disagreement over the value of an innovation is an exercise in hold-up, as even economists and lawyers have not reached anything resembling a consensus on the correct interpretation of a “fair” royalty.

At the heart of this case (and many recent cases) is (1) an indictment of Qualcomm’s desire to charge royalties to the maker of consumer devices based on the value of its technology and (2) a lack (to the best of our knowledge from public documents) of well vetted theoretical models that can provide the underpinning for the theory of the case. We discuss these in turn.

The smallest component “principle”

In arguing that “Qualcomm’s royalties are disproportionately high relative to the value contributed by its patented inventions,” (Complaint, ¶ 77) a key issue is whether Qualcomm can calculate royalties as a percentage of the price of a device, rather than a small percentage of the price of a chip. (Complaint, ¶¶ 61-76).

So what is wrong with basing a royalty on the price of the final product? A fixed portion of the price is not a perfect proxy for the value of embedded intellectual property, but it is a reasonable first approximation, much like retailers use fixed markups for products rather than optimizing the price of each SKU if the cost of individual determinations negate any benefits to doing so. The FTC’s main issue appears to be that the price of a smartphone reflects “many features in addition to the cellular connectivity and associated voice and text capabilities provided by early feature phones.” (Complaint, ¶ 26). This completely misses the point. What would the value of an iPhone be if it contained all of those “many features” but without the phone’s communication abilities? We have some idea, as Apple has for years marketed its iPod Touch for a quarter of the price of its iPhone line. Yet, “[f]or most users, the choice between an iPhone 5s and an iPod touch will be a no-brainer: Being always connected is one of the key reasons anyone owns a smartphone.”

What the FTC and proponents of the smallest component principle miss is that some of the value of all components of a smartphone are derived directly from the phone’s communication ability. Smartphones didn’t initially replace small portable cameras because they were better at photography (in fact, smartphone cameras were and often continue to be much worse than devoted cameras). The value of a smartphone camera is that it combines picture taking with immediate sharing over text or through social media. Thus, unlike the FTC’s claim that most of the value of a smartphone comes from features that are not communication, many features on a smartphone derive much of their value from the communication powers of the phone.

In the alternative, what the FTC wants is for the royalty not to reflect the value of the intellectual property but instead to be a small portion of the cost of some chipset—akin to an author of a paperback negotiating royalties based on the cost of plain white paper. As a matter of economics, a single chipset royalty cannot allow an innovator to capture the value of its innovation. This, in turn, implies that innovators underinvest in future technologies. As we have previously written:

For example, imagine that the same component (incorporating the same essential patent) is used to help stabilize flight of both commercial airplanes and toy airplanes. Clearly, these industries are likely to have different values for the patent. By negotiating over a single royalty rate based on the component price, the innovator would either fail to realize the added value of its patent to commercial airlines, or (in the case that the component is targeted primary to the commercial airlines) would not realize the incremental market potential from the patent’s use in toy airplanes. In either case, the innovator will not be negotiating over the entirety of the value it creates, leading to too little innovation.

The role of economics

Modern antitrust practice is to use economic models to explain how one gets from the evidence presented in a case to an anticompetitive conclusion. As Froeb, et al. have discussed, by laying out a mapping from the evidence to the effects, the legal argument is made clear, and gains credibility because it becomes falsifiable. The FTC complaint hypothesizes that “Qualcomm has excluded competitors and harmed competition through a set of interrelated policies and practices.” (Complaint, ¶ 3). Although Qualcomm explains how each of these policies and practices, by themselves, have clear business justifications, the FTC claims that combining them leads to an anticompetitive outcome.

Without providing a formal mapping from the evidence to an effect, it becomes much more difficult for a court to determine whether the theory of harm is correct or how to weigh the evidence that feeds the conclusion. Without a model telling it “what matters, why it matters, and how much it matters,” it is much more difficult for a tribunal to evaluate the “interrelated policies and practices.” In previous work, we have modeled the bilateral bargaining between patentees and licensees and have shown that when bilateral patent contracts are subject to review by an antitrust court, bargaining in the shadow of such a court can reduce the incentive to invest and thereby reduce welfare.

Concluding policy thoughts

What the FTC makes sound nefarious seems like a simple policy: requiring companies to seek licenses to Qualcomm’s intellectual property independent of any hardware that those companies purchase, and basing the royalty of that intellectual property on (an admittedly crude measure of) the value the IP contributes to that product. High prices alone do not constitute harm to competition. The FTC must clearly explain why their complaint is not simply about the “fairness” of the outcome or its desire that Qualcomm employ different bargaining paradigms, but rather how Qualcomm’s behavior harms the process of competition.

In the late 1950s, Nobel Laureate Robert Solow attributed about seven-eighths of the growth in U.S. GDP to technical progress. As Solow later commented: “Adding a couple of tenths of a percentage point to the growth rate is an achievement that eventually dwarfs in welfare significance any of the standard goals of economic policy.” While he did not have antitrust in mind, the import of his comment is clear: whatever static gains antitrust litigation may achieve, they are likely dwarfed by the dynamic gains represented by innovation.

Patent law is designed to maintain a careful balance between the costs of short-term static losses and the benefits of long-term gains that result from new technology. The FTC should present a sound theoretical or empirical basis for believing that the proposed relief sufficiently rewards inventors and allows them to capture a reasonable share of the whole value their innovations bring to consumers, lest such antitrust intervention deter investments in innovation.

In antitrust, economics, exclusionary conduct, federal trade commission, intellectual property, law and economics, monopolization, patent, technology, vertical restraints , , , , , , , ,
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More Evidence Against the Common Ownership Problem

Michael Sykuta —  14 September 2018

I posted this originally on my own blog, but decided to cross-post here since Thom and I have been blogging on this topic.

“The U.S. stock market is having another solid year. You wouldn’t know it by looking at the shares of companies that manage money.”

That’s the lead from Charles Stein on Bloomberg’s Markets’ page today. Stein goes on to offer three possible explanations: 1) a weary bull market, 2) a move toward more active stock-picking by individual investors, and 3) increasing pressure on fees.

So what has any of that to do with the common ownership issue? A few things.

First, it shows that large institutional investors must not be very good at harvesting the benefits of the non-competitive behavior they encourage among the firms the invest in–if you believe they actually do that in the first place. In other words, if you believe common ownership is a problem because CEOs are enriching institutional investors by softening competition, you must admit they’re doing a pretty lousy job of capturing that value.

Second, and more importantly–as well as more relevant–the pressure on fees has led money managers to emphasis low-cost passive index funds. Indeed, among the firms doing well according to the article is BlackRock, “whose iShares exchange-traded fund business tracks indexes, won $20 billion.” In an aggressive move, Fidelity has introduced a total of four zero-fee index funds as a way to draw fee-conscious investors. These index tracking funds are exactly the type of inter-industry diversified funds that negate any incentive for competition softening in any one industry.

Finally, this also illustrates the cost to the investing public of the limits on common ownership proposed by the likes of Einer Elhague, Eric Posner, and Glen Weyl. Were these types of proposals in place, investment managers could not offer diversified index funds that include more than one firm’s stock from any industry with even a moderate level of market concentration. Given competitive forces are pushing investment companies to increase the offerings of such low-cost index funds, any regulatory proposal that precludes those possibilities is sure to harm the investing public.

Just one more piece of real evidence that common ownership is not only not a problem, but that the proposed “fixes” are.

In common ownerhsip, competition advocacy, corporate governance, ftc, mutual funds, truth on the market , , ,
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What To Make of MHHI? A policy problem

Michael Sykuta —  27 August 2018

At the heart of the common ownership issue in the current antitrust debate is an empirical measure, the Modified Herfindahl-Hirschmann Index, researchers have used to correlate patterns of common ownership with measures of firm behavior and performance. In an accompanying post, Thom Lambert provides a great summary of just what the MHHI, and more specifically the MHHIΔ, is and how it can be calculated. I’m going to free-ride off Thom’s effort, so if you’re not very familiar with the measure, I suggest you start here and here.

There are multiple problems with the common ownership story and with the empirical evidence proponents of stricter antitrust enforcement point to in order to justify their calls to action. Thom and I address a number of those problems in our recent paper on “The Case for Doing Nothing About Institutional Investors’ Common Ownership of Small Stakes in Competing Firms.” However, one problem we don’t take on in that paper is the nature of the MHHIΔ itself. More specifically, what is one to make of it and how should it be interpreted, especially from a policy perspective?

The Policy Benchmark

The benchmark for discussion is the original Herfindahl-Hirschmann Index (HHI), which has been part of antitrust for decades. The HHI is calculated by summing the squared value of each firm’s market share. Depending on whether you use percents or percentages, the value of the sum may be multiplied by 10,000. For instance, for two firms that split the market evenly, the HHI could be calculated either as:

HHI = 502 + 502 = 5.000, or
HHI = (.502 + .502)*10,000 = 5,000

It’s a pretty simple exercise to see that one of the useful properties of HHI is that it is naturally bounded between 0 and 10,000. In the case of a pure monopoly that commands the entire market, the value of HHI is 10,000 (1002). As the number of firms increases and market shares approach very small fractions, the value of HHI asymptotically approaches 0. For a market with 10 firms firms that evenly share the market, for instance, HHI is 1,000; for 100 identical firms, HHI is 100; for 1,000 identical firms, HHI is 1. As a result, we know that when HHI is close to 10,000, the industry is highly concentrated in one firm; and when the HHI is close to zero, there is no meaningful concentration at all. Indeed, the Department of Justice’s Horizontal Merger Guidelines make use of this property of the HHI:

Based on their experience, the Agencies generally classify markets into three types:

  • Unconcentrated Markets: HHI below 1500
  • Moderately Concentrated Markets: HHI between 1500 and 2500
  • Highly Concentrated Markets: HHI above 2500

The Agencies employ the following general standards for the relevant markets they have defined:

  • Small Change in Concentration: Mergers involving an increase in the HHI of less than 100 points are unlikely to have adverse competitive effects and ordinarily require no further analysis.
  • Unconcentrated Markets: Mergers resulting in unconcentrated markets are unlikely to have adverse competitive effects and ordinarily require no further analysis.
  • Moderately Concentrated Markets: Mergers resulting in moderately concentrated markets that involve an increase in the HHI of more than 100 points potentially raise significant competitive concerns and often warrant scrutiny.
  • Highly Concentrated Markets: Mergers resulting in highly concentrated markets that involve an increase in the HHI of between 100 points and 200 points potentially raise significant competitive concerns and often warrant scrutiny. Mergers resulting in highly concentrated markets that involve an increase in the HHI of more than 200 points will be presumed to be likely to enhance market power. The presumption may be rebutted by persuasive evidence showing that the merger is unlikely to enhance market power.

Just by way of reference, an HHI of 2500 could reflect four firms sharing the market equally (i.e., 25% each), or it could be one firm with roughly 49% of the market and 51 identical small firms sharing the rest evenly.

Injecting MHHIΔ Into the Mix

MHHI is intended to account for both the product market concentration among firms captured by the HHI, and the common ownership concentration across firms in the market measured by the MHHIΔ. In short, MHHI = HHI + MHHIΔ.

As Thom explains in great detail, MHHIΔ attempts to measure the combined effects of the relative influence of shareholders that own positions across competing firms on management’s strategic decision-making and the combined market shares of the commonly-owned firms. MHHIΔ is the measure used in the various empirical studies allegedly demonstrating a causal relationship between common ownership (higher MHHIΔs) and the supposed anti-competitive behavior of choice.

Some common ownership critics, such as Einer Elhague, have taken those results and suggested modifying antitrust rules to incorporate the MHHIΔ in the HHI guidelines above. For instance, Elhague writes (p 1303):

Accordingly, the federal agencies can and should challenge any stock acquisitions that have produced, or are likely to produce, anti-competitive horizontal shareholdings. Given their own guidelines and the empirical results summarized in Part I, they should investigate any horizontal stock acquisitions that have created, or would create, a ΔMHHI of over 200 in a market with an MHHI over 2500, in order to determine whether those horizontal stock acquisitions raised prices or are likely to do so.

Elhague, like many others, couch their discussion of MHHI and MHHIΔ in the context of HHI values as though the additive nature of MHHI means such a context make sense. And if the examples are carefully chosen, the numbers even seem to make sense. For instance, even in our paper (page 30), we give a few examples to illustrate some of the endogeneity problems with MHHIΔ:

For example, suppose again that five institutional investors hold equal stakes (say, 3%) of each airline servicing a market and that the airlines have no other significant shareholders.  If there are two airlines servicing the market and their market shares are equivalent, HHI will be 5000, MHHI∆ will be 5000, and MHHI (HHI + MHHI∆) will be 10000.  If a third airline enters and grows so that the three airlines have equal market shares, HHI will drop to 3333, MHHI∆ will rise to 6667, and MHHI will remain constant at 10000.  If a fourth airline enters and the airlines split the market evenly, HHI will fall to 2500, MHHI∆ will rise further to 7500, and MHHI will again total 10000.

But do MHHI and MHHI∆ really fit so neatly into the HHI framework? Sadly–and worringly–no, not at all.

The Policy Problem

There seems to be a significant problem with simply imposing MHHIΔ into the HHI framework. Unlike HHI, from which we can infer something about the market based on the nominal value of the measure, MHHIΔ has no established intuitive or theoretical grounding. In fact, MHHIΔ has no intuitively meaningful mathematical boundaries from which to draw inferences about “how big is big?”, a fundamental problem for antitrust policy.

This is especially true within the range of cross-shareholding values we’re talking about in the common ownership debate. To illustrate just how big a problem this is, consider a constrained optimization of MHHI based on parameters that are not at all unreasonable relative to hypothetical examples cited in the literature:

  • Four competing firms in the market, each of which is constrained to having at least 5% market share, and their collective sum must equal 1 (or 100%).
  • Five institutional investors each of which can own no more than 5% of the outstanding shares of any individual airline, with no restrictions across airlines.
  • The remaining outstanding shares are assumed to be diffusely owned (i.e., no other large shareholder in any firm).

With only these modest restrictions on market share and common ownership, what’s the maximum potential value of MHHI? A mere 26,864,516,491, with an MHHI∆ of 26,864,513,774 and HHI of 2,717.

That’s right, over 26.8 billion. To reach such an astronomical number, what are the parameter values? The four firms split the market with 33, 31.7, 18.3, and 17% shares, respectively. Investor 1 owns 2.6% of the largest firm (by market share) while Investors 2-5 each own between 4.5 and 5% of the largest firm. Investors 1 and 2 own 5% of the smallest firm, while Investors 3 and 4 own 3.9% and Investor 5 owns a minuscule (0.0006%) share. Investor 2 is the only investor with any holdings (a tiny 0.0000004% each) in the two middling firms. These are not unreasonable numbers by any means, but the MHHI∆ surely is–especially from a policy perspective.

So if MHHI∆ can range from near zero to as much as 28.6 billion within reasonable ranges of market share and shareholdings, what should we make of Elhague’s proposal that mergers be scrutinized for increasing MHHI∆ by 200 points if the MHHI is 2,500 or more? We argue that such an arbitrary policy model is not only unfounded empirically, but is completely void of substantive reason or relevance.

The DOJ’s Horizontal Merger Guidelines above indicate that antitrust agencies adopted the HHI benchmarks for review “[b]ased on their experience”.  In the 1982 and 1984 Guidelines, the agencies adopted HHI standards 1,000 and 1,800, compared to the current 1,500 and 2,500 levels, in determining whether the industry is concentrated and a merger deserves additional scrutiny. These changes reflect decades of case reviews relating market structure to likely competitive behavior and consumer harm.

We simply do not know enough yet empirically about the relation between MHHI∆ and benchmarks of competitive behavior and consumer welfare to make any intelligent policies based on that metric–even if the underlying argument had any substantive theoretical basis, which we doubt. This is just one more reason we believe the best response to the common ownership problem is to do nothing, at least until we have a theoretically, and empirically, sound basis on which to make intelligent and informed policy decisions and frameworks.

In antitrust, common ownerhsip, common ownership, doj, federal trade commission, mergers & acquisitions , , , , ,
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FCC-FTC Plans for Welfare-Enhancing Cooperation on Online Consumer Protection

Alden Abbott —  12 December 2017

As the Federal Communications (FCC) prepares to revoke its economically harmful “net neutrality” order and replace it with a free market-oriented “Restoring Internet Freedom Order,” the FCC and the Federal Trade Commission (FTC) commendably have announced a joint policy for cooperation on online consumer protection.  According to a December 11 FTC press release:

The Federal Trade Commission and Federal Communications Commission (FCC) announced their intent to enter into a Memorandum of Understanding (MOU) under which the two agencies would coordinate online consumer protection efforts following the adoption of the Restoring Internet Freedom Order.

“The Memorandum of Understanding will be a critical benefit for online consumers because it outlines the robust process by which the FCC and FTC will safeguard the public interest,” said FCC Chairman Ajit Pai. “Instead of saddling the Internet with heavy-handed regulations, we will work together to take targeted action against bad actors. This approach protected a free and open Internet for many years prior to the FCC’s 2015 Title II Order and it will once again following the adoption of the Restoring Internet Freedom Order.”

“The FTC is committed to ensuring that Internet service providers live up to the promises they make to consumers,” said Acting FTC Chairman Maureen K. Ohlhausen. “The MOU we are developing with the FCC, in addition to the decades of FTC law enforcement experience in this area, will help us carry out this important work.”

The draft MOU, which is being released today, outlines a number of ways in which the FCC and FTC will work together to protect consumers, including:

The FCC will review informal complaints concerning the compliance of Internet service providers (ISPs) with the disclosure obligations set forth in the new transparency rule. Those obligations include publicly providing information concerning an ISP’s practices with respect to blocking, throttling, paid prioritization, and congestion management. Should an ISP fail to make the required disclosures—either in whole or in part—the FCC will take enforcement action.

The FTC will investigate and take enforcement action as appropriate against ISPs concerning the accuracy of those disclosures, as well as other deceptive or unfair acts or practices involving their broadband services.

The FCC and the FTC will broadly share legal and technical expertise, including the secure sharing of informal complaints regarding the subject matter of the Restoring Internet Freedom Order. The two agencies also will collaborate on consumer and industry outreach and education.

The FCC’s proposed Restoring Internet Freedom Order, which the agency is expected to vote on at its December 14 meeting, would reverse a 2015 agency decision to reclassify broadband Internet access service as a Title II common carrier service. This previous decision stripped the FTC of its authority to protect consumers and promote competition with respect to Internet service providers because the FTC does not have jurisdiction over common carrier activities.

The FCC’s Restoring Internet Freedom Order would return jurisdiction to the FTC to police the conduct of ISPs, including with respect to their privacy practices. Once adopted, the order will also require broadband Internet access service providers to disclose their network management practices, performance, and commercial terms of service. As the nation’s top consumer protection agency, the FTC will be responsible for holding these providers to the promises they make to consumers.

Particularly noteworthy is the suggestion that the FCC and FTC will work to curb regulatory duplication and competitive empire building – a boon to Internet-related businesses that would be harmed by regulatory excess and uncertainty.  Stay tuned for future developments.

In advertising, consumer protection, data security, federal communications commission, federal trade commission, privacy, truth on the market , , , ,
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An ambitious AG, a disgruntled competitor, and the contrived antitrust case against Google in Missouri

Geoffrey Manne —  30 November 2017

The populists are on the march, and as the 2018 campaign season gets rolling we’re witnessing more examples of political opportunism bolstered by economic illiteracy aimed at increasingly unpopular big tech firms.

The latest example comes in the form of a new investigation of Google opened by Missouri’s Attorney General, Josh Hawley. Mr. Hawley — a Republican who, not coincidentally, is running for Senate in 2018 — alleges various consumer protection violations and unfair competition practices.

But while Hawley’s investigation may jump start his campaign and help a few vocal Google rivals intent on mobilizing the machinery of the state against the company, it is unlikely to enhance consumer welfare — in Missouri or anywhere else.  

According to the press release issued by the AG’s office:

[T]he investigation will seek to determine if Google has violated the Missouri Merchandising Practices Act—Missouri’s principal consumer-protection statute—and Missouri’s antitrust laws.  

The business practices in question are Google’s collection, use, and disclosure of information about Google users and their online activities; Google’s alleged misappropriation of online content from the websites of its competitors; and Google’s alleged manipulation of search results to preference websites owned by Google and to demote websites that compete with Google.

Mr. Hawley’s justification for his investigation is a flourish of populist rhetoric:

We should not just accept the word of these corporate giants that they have our best interests at heart. We need to make sure that they are actually following the law, we need to make sure that consumers are protected, and we need to hold them accountable.

But Hawley’s “strong” concern is based on tired retreads of the same faulty arguments that Google’s competitors (Yelp chief among them), have been plying for the better part of a decade. In fact, all of his apparent grievances against Google were exhaustively scrutinized by the FTC and ultimately rejected or settled in separate federal investigations in 2012 and 2013.

The antitrust issues

To begin with, AG Hawley references the EU antitrust investigation as evidence that

this is not the first-time Google’s business practices have come into question. In June, the European Union issued Google a record $2.7 billion antitrust fine.

True enough — and yet, misleadingly incomplete. Missing from Hawley’s recitation of Google’s antitrust rap sheet are the following investigations, which were closed without any finding of liability related to Google Search, Android, Google’s advertising practices, etc.:

  • United States FTC, 2013. The FTC found no basis to pursue a case after a two-year investigation: “Challenging Google’s product design decisions in this case would require the Commission — or a court — to second-guess a firm’s product design decisions where plausible procompetitive justifications have been offered, and where those justifications are supported by ample evidence.” The investigation did result in a consent order regarding patent licensing unrelated in any way to search and a voluntary commitment by Google not to engage in certain search-advertising-related conduct.
  • South Korea FTC, 2013. The KFTC cleared Google after a two-year investigation. It opened a new investigation in 2016, but, as I have discussed, “[i]f anything, the economic conditions supporting [the KFTC’s 2013] conclusion have only gotten stronger since.”
  • Canada Competition Bureau, 2016. The CCB closed a three-year long investigation into Google’s search practices without taking any action.

Similar investigations have been closed without findings of liability (or simply lie fallow) in a handful of other countries (e.g., Taiwan and Brazil) and even several states (e.g., Ohio and Texas). In fact, of all the jurisdictions that have investigated Google, only the EU and Russia have actually assessed liability.

As Beth Wilkinson, outside counsel to the FTC during the Google antitrust investigation, noted upon closing the case:

Undoubtedly, Google took aggressive actions to gain advantage over rival search providers. However, the FTC’s mission is to protect competition, and not individual competitors. The evidence did not demonstrate that Google’s actions in this area stifled competition in violation of U.S. law.

The CCB was similarly unequivocal in its dismissal of the very same antitrust claims Missouri’s AG seems intent on pursuing against Google:

The Bureau sought evidence of the harm allegedly caused to market participants in Canada as a result of any alleged preferential treatment of Google’s services. The Bureau did not find adequate evidence to support the conclusion that this conduct has had an exclusionary effect on rivals, or that it has resulted in a substantial lessening or prevention of competition in a market.

Unfortunately, rather than follow the lead of these agencies, Missouri’s investigation appears to have more in common with Russia’s effort to prop up a favored competitor (Yandex) at the expense of consumer welfare.

The Yelp Claim

Take Mr. Hawley’s focus on “Google’s alleged misappropriation of online content from the websites of its competitors,” for example, which cleaves closely to what should become known henceforth as “The Yelp Claim.”

While the sordid history of Yelp’s regulatory crusade against Google is too long to canvas in its entirety here, the primary elements are these:

Once upon a time (in 2005), Google licensed Yelp’s content for inclusion in its local search results. In 2007 Yelp ended the deal. By 2010, and without a license from Yelp (asserting fair use), Google displayed small snippets of Yelp’s reviews that, if clicked on, led to Yelp’s site. Even though Yelp received more user traffic from those links as a result, Yelp complained, and Google removed Yelp snippets from its local results.

In its 2013 agreement with the FTC, Google guaranteed that Yelp could opt-out of having even snippets displayed in local search results by committing Google to:

make available a web-based notice form that provides website owners with the option to opt out from display on Google’s Covered Webpages of content from their website that has been crawled by Google. When a website owner exercises this option, Google will cease displaying crawled content from the domain name designated by the website owner….

The commitments also ensured that websites (like Yelp) that opt out would nevertheless remain in Google’s general index.

Ironically, Yelp now claims in a recent study that Google should show not only snippets of Yelp reviews, but even more of Yelp’s content. (For those interested, my colleagues and I have a paper explaining why the study’s claims are spurious).

The key bit here, of course, is that Google stopped pulling content from Yelp’s pages to use in its local search results, and that it implemented a simple mechanism for any other site wishing to opt out of the practice to do so.

It’s difficult to imagine why Missouri’s citizens might require more than this to redress alleged anticompetitive harms arising from the practice.

Perhaps AG Hawley thinks consumers would be better served by an opt-in mechanism? Of course, this is absurd, particularly if any of Missouri’s citizens — and their businesses — have websites. Most websites want at least some of their content to appear on Google’s search results pages as prominently as possible — see this and this, for example — and making this information more accessible to users is why Google exists.

To be sure, some websites may take issue with how much of their content Google features and where it places that content. But the easy opt out enables them to prevent Google from showing their content in a manner they disapprove of. Yelp is an outlier in this regard because it views Google as a direct competitor, especially to the extent it enables users to read some of Yelp’s reviews without visiting Yelp’s pages.

For Yelp and a few similarly situated companies the opt out suffices. But for almost everyone else the opt out is presumably rarely exercised, and any more-burdensome requirement would just impose unnecessary costs, harming instead of helping their websites.

The privacy issues

The Missouri investigation also applies to “Google’s collection, use, and disclosure of information about Google users and their online activities.” More pointedly, Hawley claims that “Google may be collecting more information from users than the company was telling consumers….”

Presumably this would come as news to the FTC, which, with a much larger staff and far greater expertise, currently has Google under a 20 year consent order (with some 15 years left to go) governing its privacy disclosures and information-sharing practices, thus ensuring that the agency engages in continual — and well-informed — oversight of precisely these issues.

The FTC’s consent order with Google (the result of an investigation into conduct involving Google’s short-lived Buzz social network, allegedly in violation of Google’s privacy policies), requires the company to:

  • “[N]ot misrepresent in any manner, expressly or by implication… the extent to which respondent maintains and protects the privacy and confidentiality of any [user] information…”;
  • “Obtain express affirmative consent from” users “prior to any new or additional sharing… of the Google user’s identified information with any third party” if doing so would in any way deviate from previously disclosed practices;
  • “[E]stablish and implement, and thereafter maintain, a comprehensive privacy program that is reasonably designed to [] address privacy risks related to the development and management of new and existing products and services for consumers, and (2) protect the privacy and confidentiality of [users’] information”; and
  • Along with a laundry list of other reporting requirements, “[submit] biennial assessments and reports [] from a qualified, objective, independent third-party professional…, approved by the [FTC] Associate Director for Enforcement, Bureau of Consumer Protection… in his or her sole discretion.”

What, beyond the incredibly broad scope of the FTC’s consent order, could the Missouri AG’s office possibly hope to obtain from an investigation?

Google is already expressly required to provide privacy reports to the FTC every two years. It must provide several of the items Hawley demands in his CID to the FTC; others are required to be made available to the FTC upon demand. What materials could the Missouri AG collect beyond those the FTC already receives, or has the authority to demand, under its consent order?

And what manpower and expertise could Hawley apply to those materials that would even begin to equal, let alone exceed, those of the FTC?

Lest anyone think the FTC is falling down on the job, a year after it issued that original consent order the Commission fined Google $22.5 million for violating the order in a questionable decision that was signed on to by all of the FTC’s Commissioners (both Republican and Democrat) — except the one who thought it didn’t go far enough.

That penalty is of undeniable import, not only for its amount (at the time it was the largest in FTC history) and for stemming from alleged problems completely unrelated to the issue underlying the initial action, but also because it was so easy to obtain. Having put Google under a 20-year consent order, the FTC need only prove (or threaten to prove) contempt of the consent order, rather than the specific elements of a new violation of the FTC Act, to bring the company to heel. The former is far easier to prove, and comes with the ability to impose (significant) damages.

So what’s really going on in Jefferson City?

While states are, of course, free to enforce their own consumer protection laws to protect their citizens, there is little to be gained — other than cold hard cash, perhaps — from pursuing cases that, at best, duplicate enforcement efforts already undertaken by the federal government (to say nothing of innumerable other jurisdictions).

To take just one relevant example, in 2013 — almost a year to the day following the court’s approval of the settlement in the FTC’s case alleging Google’s violation of the Buzz consent order — 37 states plus DC (not including Missouri) settled their own, follow-on litigation against Google on the same facts. Significantly, the terms of the settlement did not impose upon Google any obligation not already a part of the Buzz consent order or the subsequent FTC settlement — but it did require Google to fork over an additional $17 million.  

Not only is there little to be gained from yet another ill-conceived antitrust campaign, there is much to be lost. Such massive investigations require substantial resources to conduct, and the opportunity cost of doing so may mean real consumer issues go unaddressed. The Consumer Protection Section of the Missouri AG’s office says it receives some 100,000 consumer complaints a year. How many of those will have to be put on the back burner to accommodate an investigation like this one?

Even when not politically motivated, state enforcement of CPAs is not an unalloyed good. In fact, empirical studies of state consumer protection actions like the one contemplated by Mr. Hawley have shown that such actions tend toward overreach — good for lawyers, perhaps, but expensive for taxpayers and often detrimental to consumers. According to a recent study by economists James Cooper and Joanna Shepherd:

[I]n recent decades, this thoughtful balance [between protecting consumers and preventing the proliferation of lawsuits that harm both consumers and businesses] has yielded to damaging legislative and judicial overcorrections at the state level with a common theoretical mistake: the assumption that more CPA litigation automatically yields more consumer protection…. [C]ourts and legislatures gradually have abolished many of the procedural and remedial protections designed to cabin state CPAs to their original purpose: providing consumers with redress for actual harm in instances where tort and contract law may provide insufficient remedies. The result has been an explosion in consumer protection litigation, which serves no social function and for which consumers pay indirectly through higher prices and reduced innovation.

AG Hawley’s investigation seems almost tailored to duplicate the FTC’s extensive efforts — and to score political points. Or perhaps Mr. Hawley is just perturbed that Missouri missed out its share of the $17 million multistate settlement in 2013.

Which raises the spectre of a further problem with the Missouri case: “rent extraction.”

It’s no coincidence that Mr. Hawley’s investigation follows closely on the heels of Yelp’s recent letter to the FTC and every state AG (as well as four members of Congress and the EU’s chief competition enforcer, for good measure) alleging that Google had re-started scraping Yelp’s content, thus violating the terms of its voluntary commitments to the FTC.

It’s also no coincidence that Yelp “notified” Google of the problem only by lodging a complaint with every regulator who might listen rather than by actually notifying Google. But an action like the one Missouri is undertaking — not resolution of the issue — is almost certainly exactly what Yelp intended, and AG Hawley is playing right into Yelp’s hands.  

Google, for its part, strongly disputes Yelp’s allegation, and, indeed, has — even according to Yelp — complied fully with Yelp’s request to keep its content off Google Local and other “vertical” search pages since 18 months before Google entered into its commitments with the FTC. Google claims that the recent scraping was inadvertent, and that it would happily have rectified the problem if only Yelp had actually bothered to inform Google.

Indeed, Yelp’s allegations don’t really pass the smell test: That Google would suddenly change its practices now, in violation of its commitments to the FTC and at a time of extraordinarily heightened scrutiny by the media, politicians of all stripes, competitors like Yelp, the FTC, the EU, and a host of other antitrust or consumer protection authorities, strains belief.

But, again, identifying and resolving an actual commercial dispute was likely never the goal. As a recent, fawning New York Times article on “Yelp’s Six-Year Grudge Against Google” highlights (focusing in particular on Luther Lowe, now Yelp’s VP of Public Policy and the author of the letter):

Yelp elevated Mr. Lowe to the new position of director of government affairs, a job that more or less entails flying around the world trying to sic antitrust regulators on Google. Over the next few years, Yelp hired its first lobbyist and started a political action committee. Recently, it has started filing complaints in Brazil.

Missouri, in other words, may just be carrying Yelp’s water.

The one clear lesson of the decades-long Microsoft antitrust saga is that companies that struggle to compete in the market can profitably tax their rivals by instigating antitrust actions against them. As Milton Friedman admonished, decrying “the business community’s suicidal impulse” to invite regulation:

As a believer in the pursuit of self-interest in a competitive capitalist system, I can’t blame a businessman who goes to Washington [or is it Jefferson City?] and tries to get special privileges for his company.… Blame the rest of us for being so foolish as to let him get away with it.

Taking a tough line on Silicon Valley firms in the midst of today’s anti-tech-company populist resurgence may help with the electioneering in Mr. Hawley’s upcoming bid for a US Senate seat and serve Yelp, but it doesn’t offer any clear, actual benefits to Missourians. As I’ve wondered before: “Exactly when will regulators be a little more skeptical of competitors trying to game the antitrust laws for their own advantage?”

In anticompetitive petitioning, antitrust, consumer protection, exclusionary conduct, federal trade commission, ftc, google, monopolization, political economy, politics, regulation, rent seeking, settlements, technology , , , , , , , , , ,
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The FTC should address how (and whether) it assesses causation as it looks to define “informational injury”

Geoffrey Manne & Kristian Stout —  8 November 2017

The FTC will hold an “Informational Injury Workshop” in December “to examine consumer injury in the context of privacy and data security.” Defining the scope of cognizable harm that may result from the unauthorized use or third-party hacking of consumer information is, to be sure, a crucial inquiry, particularly as ever-more information is stored digitally. But the Commission — rightly — is aiming at more than mere definition. As it notes, the ultimate objective of the workshop is to address questions like:

How do businesses evaluate the benefits, costs, and risks of collecting and using information in light of potential injuries? How do they make tradeoffs? How do they assess the risks of different kinds of data breach? What market and legal incentives do they face, and how do these incentives affect their decisions?

How do consumers perceive and evaluate the benefits, costs, and risks of sharing information in light of potential injuries? What obstacles do they face in conducting such an evaluation? How do they evaluate tradeoffs?

Understanding how businesses and consumers assess the risk and cost “when information about [consumers] is misused,” and how they conform their conduct to that risk, entails understanding not only the scope of the potential harm, but also the extent to which conduct affects the risk of harm. This, in turn, requires an understanding of the FTC’s approach to evaluating liability under Section 5 of the FTC Act.

The problem, as we discuss in comments submitted by the International Center for Law & Economics to the FTC for the workshop, is that the Commission’s current approach troublingly mixes the required separate analyses of risk and harm, with little elucidation of either.

The core of the problem arises from the Commission’s reliance on what it calls a “reasonableness” standard for its evaluation of data security. By its nature, a standard that assigns liability for only unreasonable conduct should incorporate concepts resembling those of a common law negligence analysis — e.g., establishing a standard of due care, determining causation, evaluating the costs of and benefits of conduct that would mitigate the risk of harm, etc. Unfortunately, the Commission’s approach to reasonableness diverges from the rigor of a negligence analysis. In fact, as it has developed, it operates more like a strict liability regime in which largely inscrutable prosecutorial discretion determines which conduct, which firms, and which outcomes will give rise to liability.

Most troublingly, coupled with the Commission’s untenably lax (read: virtually nonexistent) evidentiary standards, the extremely liberal notion of causation embodied in its “reasonableness” approach means that the mere storage of personal information, even absent any data breach, could amount to an unfair practice under the Act — clearly not a “reasonable” result.

The notion that a breach itself can constitute injury will, we hope, be taken up during the workshop. But even if injury is limited to a particular type of breach — say, one in which sensitive, personal information is exposed to a wide swath of people — unless the Commission’s definition of what it means for conduct to be “likely to cause” harm is fixed, it will virtually always be the case that storage of personal information could conceivably lead to the kind of breach that constitutes injury. In other words, better defining the scope of injury does little to cabin the scope of the agency’s discretion when conduct creating any risk of that injury is actionable.

Our comments elaborate on these issues, as well as providing our thoughts on how the subjective nature of informational injuries can fit into Section 5, with a particular focus on the problem of assessing informational injury given evolving social context, and the need for appropriately assessing benefits in any cost-benefit analysis of conduct leading to informational injury.

ICLE’s full comments are available here.

The comments draw upon our article, When ‘Reasonable’ Isn’t: The FTC’s Standard-Less Data Security Standard, forthcoming in the Journal of Law, Economics and Policy.

In consumer protection, cost-benefit analysis, data security, federal trade commission, ftc, international center for law & economics, law and economics, privacy, regulation, regulatory reform, section 5 , , , , ,
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Strong Patent Protection Promotes Strong Economies

Alden Abbott —  17 October 2017

In her distinguished tenure as a Commissioner and as Acting Chairman of the FTC, Maureen Ohlhausen has done an outstanding job in explaining the tie between robust patent protection and economic growth and innovation (see, for example, her Harvard Journal of Law and Technology article, here).  Her latest public pronouncement on this topic, an October 13 speech entitled “Strong Patent Rights, Strong Economy,” also makes a highly valuable contribution to the patent policy debate.  Ohlhausen’s speech centers on two key points:  “First, strong patent rights are crucial to economic success.  And, second, economically grounded analysis will reveal the right path through thickets of IP [intellectual property] skepticism.”  Ohlhausen concludes with a reaffirmation of the importance of having the United States lead by example on the world stage in defending strong patent rights:

Patents have been at the heart of US innovation since the founding of our country, and respect for patent rights is fundamental to advance innovation.  The United States is more technologically innovative than any other country in the world.  This reality reflects, in part, the property rights that the United States government grants to inventors.  Still, foreign counterparts take or allow the taking of American proprietary technologies without due payment.  For example, emerging competition regimes view “unfairly high royalties” as illegal under antitrust law.  The FTC’s recent policy work offers an important counterweight to this approach, illustrating the important role that patents play in promoting innovation and benefiting consumers.     

In closing, while we may live in an age of patent skepticism, there is hope. Criticism of IP rights frequently does not hold up upon closer examination. Rather, empirical research favors the close tie between strong IP rights and R&D.  This is not to say that changes to the patent system are always unwarranted.  Rather, the key to addressing the U.S. patent system lies in incremental adjustment where necessary based on a firm empirical foundation.  The U.S. economy stands as a shining reminder of everything that American innovation policy has achieved – and intellectual property rights, and patents, are the important cornerstones of those achievements.

Ohlhausen’s remarks are, as always, thoughtful and well worth studying.

In federal trade commission, ftc, intellectual property, patent, patent reform, Patents, truth on the market ,
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Speaking at events next week on privacy/data security and merger enforcement

Geoffrey Manne —  31 May 2017

I’ll be participating in two excellent antitrust/consumer protection events next week in DC, both of which may be of interest to our readers:

5th Annual Public Policy Conference on the Law & Economics of Privacy and Data Security

hosted by the GMU Law & Economics Center’s Program on Economics & Privacy, in partnership with the Future of Privacy Forum, and the Journal of Law, Economics & Policy.

Conference Description:

Data flows are central to an increasingly large share of the economy. A wide array of products and business models—from the sharing economy and artificial intelligence to autonomous vehicles and embedded medical devices—rely on personal data. Consequently, privacy regulation leaves a large economic footprint. As with any regulatory enterprise, the key to sound data policy is striking a balance between competing interests and norms that leaves consumers better off; finding an approach that addresses privacy concerns, but also supports the benefits of technology is an increasingly complex challenge. Not only is technology continuously advancing, but individual attitudes, expectations, and participation vary greatly. New ideas and approaches to privacy must be identified and developed at the same pace and with the same focus as the technologies they address.

This year’s symposium will include panels on Unfairness under Section 5: Unpacking “Substantial Injury”, Conceptualizing the Benefits and Costs from Data Flows, and The Law and Economics of Data Security.

I will be presenting a draft paper, co-authored with Kristian Stout, on the FTC’s reasonableness standard in data security cases following the Commission decision in LabMD, entitled, When “Reasonable” Isn’t: The FTC’s Standard-less Data Security Standard.

Conference Details:

  • Thursday, June 8, 2017
  • 8:00 am to 3:40 pm
  • at George Mason University, Founders Hall (next door to the Law School)
    • 3351 Fairfax Drive, Arlington, VA 22201

Register here

View the full agenda here

 

The State of Antitrust Enforcement

hosted by the Federalist Society.

Panel Description:

Antitrust policy during much of the Obama Administration was a continuation of the Bush Administration’s minimal involvement in the market. However, at the end of President Obama’s term, there was a significant pivot to investigations and blocks of high profile mergers such as Halliburton-Baker Hughes, Comcast-Time Warner Cable, Staples-Office Depot, Sysco-US Foods, and Aetna-Humana and Anthem-Cigna. How will or should the new Administration analyze proposed mergers, including certain high profile deals like Walgreens-Rite Aid, AT&T-Time Warner, Inc., and DraftKings-FanDuel?

Join us for a lively luncheon panel discussion that will cover these topics and the anticipated future of antitrust enforcement.

Speakers:

  • Albert A. Foer, Founder and Senior Fellow, American Antitrust Institute
  • Profesor Geoffrey A. Manne, Executive Director, International Center for Law & Economics
  • Honorable Joshua D. Wright, Professor of Law, George Mason University School of Law
  • Moderator: Honorable Ronald A. Cass, Dean Emeritus, Boston University School of Law and President, Cass & Associates, PC

Panel Details:

  • Friday, June 09, 2017
  • 12:00 pm to 2:00 pm
  • at the National Press Club, MWL Conference Rooms
    • 529 14th Street, NW, Washington, DC 20045

Register here

Hope to see everyone at both events!

In administrative, announcements, antitrust, consumer protection, data security, federal trade commission, ftc, george mason university school of law, international center for law & economics, law and economics, mergers & acquisitions, scholarship , , , , , , , , , , , ,
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Why the Federal Trade Commission (not the Consumer Financial Protection Bureau) Should Oversee Consumer Protection in Financial Markets

Alden Abbott —  8 March 2017

On February 28, the Heritage Foundation released Prosperity Unleashed:  Smarter Financial Regulation, a Report that lays bare the heavy and unnecessary burdens imposed on our economy by defective financial regulations, and proposed market-oriented regulatory reforms that would benefit American producers, consumers, and the overall economy.  In a recent Truth on the Market blog commentary, I summarized the key findings and recommendations set forth in the Report’s 23 chapters.  In this commentary, I explore in greater detail chapter 19 of the Report, “How Congress Should Protect Consumers’ Finances,” co-authored by George Mason University Foundation Professor of Law Todd J. Zywicki and me.

Chapter 19 makes the case for legislative reform that would eliminate the U.S. Consumer Financial Protection Bureau’s oversight of consumer protection in financial markets and transfer such authority to the U.S. Federal Trade Commission (key excerpts with footnote references omitted follow):

Free-market competition is key to the efficient provision of the goods and services that consumers desire. More generally, the free market promotes innovation and overall economic welfare. Imperfect information can, however, limit the ability of competition to be effective in benefiting consumers and the economy. In particular, inaccurate information about the quality and attributes of market offerings may lead consumers to make mistaken purchase decisions—in other words, consumers may not get what they think they bargained for. This will lead to the distrust of market processes, as sellers find it harder to differentiate themselves from their competition. The end result is less-effective competition, less consumer satisfaction, and lower economic welfare.

Fraudulent or deceptive statements regarding product or service attributes, and negative features of products or services that become evident only after sale, are prime examples of inaccurate information that undermines trust in competitive firms. Accordingly, the government has a legitimate role in seeking to curb fraud, deception, and related informational problems. Historically, the federal government’s primary consumer protection agency, the U.S. Federal Trade Commission (FTC), has taken the lead in bringing enforcement actions against businesses that distort markets by engaging in “deceptive” or “unfair” practices when marketing their offerings to consumers. In recent decades, the FTC has taken an economics-focused approach in these areas. Specifically, it has limited “deception prosecutions” to cases where consumers acting reasonably were misled and tangibly harmed, and “unfairness prosecutions” to situations involving consumer injury not outweighed by countervailing benefits (a cost-benefit approach). In other words, although the FTC may have erred from time to time in specific cases, its general approach has avoided government overreach and has been conducive to enhancing marketplace efficiency and consumer welfare.

However, Congress has not allowed the FTC to exercise economy-wide oversight over consumer protection, in general, and fraud and deception, in particular. For many years, a hodgepodge of different federal financial service regulators were empowered to regulate the practices of a wide variety of financial industry entities, with the FTC only empowered to oversee consumer financial protection with respect to the narrow category of “non-bank financial institutions.” As part of the 2010 Dodd–Frank financial reform legislation, Congress created a new Consumer Financial Protection Bureau (CFPB), loosely tied to the Federal Reserve Board. While Dodd–Frank mandated shared CFPB–FTC consumer protection jurisdiction over non-bank financial institutions, it transferred all other authority over the many separate consumer financial protection laws to the CFPB alone. The CFPB is simultaneously one of the most powerful and least-accountable regulatory bodies in United States history. In marked contrast to the FTC’s economics-based approach, the CFPB intervenes in financial market consumer-related practices in a heavy-handed arbitrary fashion that ignores sound economics. The upshot is that far from improving market efficiency, the CFPB reduces market efficiency, to the detriment of consumers, producers, and the overall economy. In short, the CFPB’s actions are a prime example of government failure.

The substantive powers of the CFPB are vast and ill-defined. The CFPB has power to regulate the terms and marketing of every consumer credit product in the economy. And, because many small businesses use personal credit to start and grow their businesses (such as personal credit cards, home equity lines of credit, and even products like auto title loans), the CFPB possesses substantial control over much of the allocation of small-business credit as well. The CFPB has the power to take enforcement and regulatory action against “unfair, deceptive, and abusive” consumer credit terms, an authority that the CFPB has exercised with gusto. Moreover, the CFPB has deliberately eschewed regulatory rule-making that would clarify these terms, preferring to engage in case-by-case enforcement actions that undermine predictability and chill vigorous competition and innovation. Yet despite the broad authority granted to the CFPB, its appetite is broader still: The CFPB has taken action to regulate products such as cellphone billing, for-profit career colleges, and even loans made by auto dealers (despite express jurisdictional limits in Dodd–Frank regarding the latter).

The consequences of this unchecked authority have been disastrous for consumers and the economy. Complicated rules with high compliance costs have choked off access to mortgages, credit cards, and other financial products. Overwhelmed by the costs and uncertainty of regulatory compliance, small banks have exited traditional lines of business, such as home mortgages, and feared entering new lines, such as small-dollar loans. Consistent with the general effects of Dodd–Frank, the CFPB has contributed to the consolidation of the American financial sector, making big banks bigger, and forcing consolidation of small banks. By imposing one-size-fits-all bureaucratic underwriting standards on community banks and credit unions, the CFPB has deprived these actors of their traditional model of relationship lending and intimate knowledge of their customers—their lone competitive advantage over megabanks.

Perhaps the most tragic element of the CFPB train wreck is the missed opportunity for reform that it represents. At the time of Dodd–Frank, the system of consumer financial protection was badly in need of modernization: The existing system was cumbersome, incoherent, and ineffective. Fragmented among multiple federal agencies with authority over different providers of financial services, the federal system lacked the ability to lay down a coherent regulatory regime that would promote competition, consumer choice, and consumer protection consistent with the realities of a 21st-century economy and technology. While there is little evidence that the financial crisis resulted from a breakdown of consumer financial protection (as opposed to safety and soundness issues), reform was timely. But Dodd–Frank squandered a once-in-a-generation opportunity to bring about real reform.

In this chapter, we briefly make the case that some degree of reform of the consumer financial protection system was appropriate, in particular, the consolidation of consumer financial protection in one federal agency. However, we challenge the apparatus constructed by Dodd–Frank that created a new unaccountable super-regulator with a tunnel vision focus on a narrow definition of “consumer protection.” Instead, we argue that existing substantive powers were largely sufficient to the task of consumer protection, and that Congress could have achieved better results by acting within the existing institutional framework by simply consolidating authority in the FTC. By working within the existing framework of long-standing substantive authorities and institutional arrangements, Congress could have provided the needed modernization of the federal consumer financial protection system without the unintended consequences that have resulted from the creation of the CFPB. . . .

Consolidating the powers granted to the CFPB in the FTC, which still retains certain regulatory responsibilities with respect to consumer finance, would have a number of advantages over the course chosen in Dodd–Frank.

First, the FTC is a multimember, bipartisan commission. This is an important improvement over the structure of the CFPB, which [is led by a single unaccountable director and] is neither an independent commission nor an executive agency. . . . 

[Second,] [t]he FTC [,unlike the CFPB,] is . . . subject to Congress’s appropriations process, an important check on the agency’s actions. . . .

Finally, the FTC has a large Bureau of Economics, staffed with academically trained economists who would be ideally suited to take into account the regulatory economic policy issues, discussed herein, to which the CFPB has paid no heed. This would make it far more likely that agency regulatory decisions affecting consumer credit markets would be taken in light of the effects of agency actions on consumer welfare and the broader economy. . . .

[In conclusion,] [e]liminating the CFPB’s authority over consumer protection in financial services, and transferring such authority to the FTC, would greatly improve the current sorry state of affairs. Admittedly, the FTC is a less-than-perfect agency, and even a multimember-commission structure does not prevent institutional mistakes from being made and repeated by the majority. All in all, however, as an accountable institution, the FTC is far superior to the CFPB. Consolidating this authority with the FTC—where it should have been in the first place—will better allow free markets to promote innovation and overall economic welfare. Strengthening this legal framework to provide a single, clearly defined, properly limited set of rules will facilitate competition among financial firms, thus protecting consumers and providing them with better choices.

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