Archives For monopolization

On April 17, the Federal Trade Commission (FTC) voted three-to-two to enter into a consent agreement In the Matter of Cardinal Health, Inc., requiring Cardinal Health to disgorge funds as part of the settlement in this monopolization case.  As ably explained by dissenting Commissioners Josh Wright and Maureen Ohlhausen, the U.S. Federal Trade Commission (FTC) wrongly required the disgorgement of funds in this case.  The settlement reflects an overzealous application of antitrust enforcement to unilateral conduct that may well be efficient.  It also manifests a highly inappropriate application of antitrust monetary relief that stands to increase private uncertainty, to the detriment of economic welfare.

The basic facts and allegations in this matter, drawn from the FTC’s statement accompanying the settlement, are as follows.  Through separate acquisitions in 2003 and 2004, Cardinal Health became the largest operator of radiopharmacies in the United States and the sole radiopharmacy operator in 25 relevant markets addressed by this settlement.  Radiopharmacies distribute and sell radiopharmaceuticals, which are drugs containing radioactive isotopes, used by hospitals and clinics to diagnose and treat diseases.  Notably, they typically derive at least of 60% of their revenues from the sale of heart perfusion agents (“HPAs”), a type of radiopharmaceutical that healthcare providers use to conduct heart stress tests.  A practical consequence is that radiopharmacies cannot operate a financially viable and competitive business without access to an HPA.  Between 2003 and 2008, Cardinal allegedly employed various tactics to induce the only two manufacturers of HPAs in the United States, BMS and GEAmersham, to withhold HPA distribution rights from would-be radiopharmacy market entrants in violation of Section 2 of the Sherman Act.  Through these tactics Cardinal allegedly maintained exclusive dealing rights, denied its customers the benefits of competition, and profited from the monopoly prices it charged for all radiopharmaceuticals, including HPAs, in the relevant markets.  Importantly, according to the FTC, there was no efficiency benefit or legitimate business justification for Cardinal simultaneously maintaining exclusive distribution rights to the only two HPAs then available in the relevant markets.

This settlement raises two types of problems.

First, this was a single firm conduct exclusive dealing case involving (at best) questionable anticompetitive effectsAs Josh Wright (citing the economics literature) pointed out in his dissent, “there are numerous plausible efficiency justifications for such [exclusive dealing] restraints.”  (Moreover, as Josh Wright and I stressed in an article on tying and exclusive dealing, “[e]xisting empirical evidence of the impact of exclusive dealing is scarce but generally favors the view that exclusive dealing is output‐enhancing”, suggesting that a (rebuttable) presumption of legality would be appropriate in this area.)  Indeed, in this case, Commissioner Wright explained that “[t]he tactics the Commission challenges could have been output-enhancing” in various markets.  Furthermore, Commissioner Wright emphasized that the data analysis showing that Cardinal charged higher prices in monopoly markets was “very fragile.  The data show that the impact of a second competitor on Cardinal’s prices is small, borderline statistically significant, and not robust to minor changes in specification.”  Commissioner Ohlhausen’s dissent reinforced Commissioner Wright’s critique of the majority’s exclusive dealing theory.  As she put it:

“[E]even if the Commission could establish that Cardinal achieved some type of de facto exclusivity with both Bristol-Myers Squibb and General Electric Co. during the relevant time period (and that is less than clear), it is entirely unclear that such exclusivity – rather than, for example, insufficient demand for more than one radiopharmacy – caused the lack of entry within each of the relevant markets. That alternative explanation seems especially likely in the six relevant markets in which ‘Cardinal remains the sole or dominant radiopharmacy,’ notwithstanding the fact that whatever exclusivity Cardinal may have achieved admittedly expired in early 2008.  The complaint provides no basis for the assertion that Cardinal’s conduct during the 2003-2008 period has caused the lack of entry in those six markets during the past seven years.”

Furthermore, Commissioner Ohlhausen underscored Commissioner Wright’s critique of the empirical evidence in this case:  “[T]he evidence of anticompetitive effects in the relevant markets at issue is significantly lacking.  It is largely based on non-market-specific documentary evidence. The market-specific empirical evidence we do have implies very small (i.e. low single-digit) and often statistically insignificant price increases or no price increases at all.”

Second, the FTC’s requirement that Cardinal Health disgorge $26.8 million into a fund for allegedly injured consumers is unmeritorious and inappropriately chills potentially procompetitive behavior.  Commissioner Ohlhausen focused on how this case ran afoul of the FTC’s 2003 Policy Statement on Monetary Equitable Remedies in Competition Cases (Policy Statement) (withdrawn by the FTC in 2012, over Commissioner Ohlhausen’s dissent), which reserves disgorgement for cases in which the underlying violation is clear and there is a reasonable basis for calculating the amount of a remedial payment.  As Ohlhausen explained, this case violates those principles because (1) it does not involve a clear violation of the antitrust laws (see above) and, given the lack of anticompetitive effects evidence (see above), (2) there is no reasonable basis for calculating the disgorgement amount (indeed, there is “the real possibility of no ill-gotten gains for Cardinal”).  Furthermore:

“The lack of guidance from the Commission on the use of its disgorgement authority [following withdrawal of the Policy Statement] makes any such use inherently unpredictable and thus unfair. . . .  The Commission therefore ought to   reinstate the Policy Statement – either in its original form or in some modified form that the current Commissioners can agree on – or provide some additional guidance on when it plans to seek the extraordinary remedy of disgorgement in antitrust cases.”

In his critique of disgorgement, Commissioner Wright deployed law and economics analysis (and, in particular, optimal deterrence theory).  He explained that regulators should be primarily concerned with over-deterrence in single-firm conduct cases such as this one, which raise the possibility of private treble damage actions.  Wright stressed:

“I would . . . pursue disgorgement only against naked price fixing agreements among competitors or, in the case of single-firm conduct, only if the monopolist’s conduct violates the Sherman Act and has no plausible efficiency justification. . . .  This case does not belong in that category. Declining to pursue disgorgement in most cases involving vertical restraints has the virtue of taking the remedy off the table – and thus reducing the risk of over-deterrence – in the cases that present the most difficulty in distinguishing between anticompetitive conduct that harms consumers and procompetitive conduct that benefits them, such as the present case.”

Commissioner Wright also shared Commissioner Ohlhausen’s concern about the lack of meaningful FTC guidance regarding when and whether it will seek disgorgement, and agreed with her that the FTC should reinstate the Policy Statement or provide new specific guidance in this area.  (See my 2012 ABA Antitrust Source article for a more fulsome critique of the antitrust error costs, chilling effects, and harmful international ramifications associated with the withdrawal of the Policy Statement.)

In sum, one may hope that in the future the FTC:  (1) will be more attentive to the potential efficiencies of exclusive dealing; (2) will proceed far more cautiously before proposing an enforcement action in the exclusive dealing area; (3) will avoid applying disgorgement in exclusive dealing cases; and (4) will promulgate a new disgorgement policy statement that reserves disgorgement for unequivocally illegal antitrust offenses in which economic harm can readily be calculated with a high degree of certainty.

Today comes news that Senator Kohl has sent a letter to the DOJ urging “careful review” of the proposed Google/ITA merger.  Underlying his concerns (or rather the “concerns raised by a number of industry participants and consumer advocates that I believe warrant careful review”) is this:

Many of ITA’s customers believe that access to ITA’s technology is critical to competition in online air travel search because it cannot be matched by other players in the travel search industry.  They claim that ITA’s superior access to information and superior technology enables it to provide faster and better results to consumers.  As a result, some of these industry participants and independent experts fear that the current high level of competition among online travel agents and metasearch providers could be undermined if Google were to acquire ITA and start its own OTA or metasearch service.  If this were to happen, they argue, consumers would lose the benefits of a robustly competitive online air travel market.

For several reasons, these complaints are without merit and a challenge to the Google/ITA merger would be premature at best—and a costly mistake at worst.

The high-tech market is innovative and dynamic. Goods and services that were once inconceivable are now indispensable, and competition has improved the quality of technology while driving down its costs. But as the market continues to change, antitrust interventions are stuck using a static regulatory framework. As the government develops a strategy for regulating competition in the digital marketplace, it must tread carefully—excessive intervention will stifle innovation, harm consumers, and prevent growth.  And given the link between innovation and economic growth, the stakes of “getting it right” are high. The individual nature of every decision, however, makes errors in antitrust enforcement inevitable. Some conduct that is bad for competition will be allowed to go on while some conduct that is good for competition will be blocked by intervention.

But prosecuting pro-competitive conduct is almost certainly more costly than mistakenly allowing anticompetitive conduct because mechanisms are in place to mitigate the latter but not the former. The cost of erroneous intervention is the loss to consumers directly and a deterrent effect on innovation—for fear of intervention, companies may not take large risks. Meanwhile, allowing conduct to persist amidst uncertainty allows the potential benefits of conduct to materialize while maintaining checks against practices that are bad for consumers: both the competitive marketplace and future enforcers have the power to mitigate specific anticompetitive outcomes that may arise. Unfortunately, current antitrust enforcement—abetted by influential congressmen like Senator Kohl—is more, rather than less, aggressive against innovative companies in high-tech industries. This aggression threatens to stifle growth and deter future innovation in a market with incredible potential.

Google has become a primary target of this scrutiny, and the company’s proposed acquisition of ITA, a software company that compiles and processes travel data, is a good example of aggressive scrutiny threatening to stifle growth.

Google’s acquisition of ITA is a straightforward merger where one company has decided to purchase another outright (instead of merely purchasing its services through contract). There are good reasons for integration. Most notably, Google gets to exercise direct control over ITA’s talented engineers if it owns ITA—influence that it would not have if the company simply signed a contract with ITA. If Google is correct that it can manage ITA’s resources better than ITA’s current management, then integration makes sense and is valuable for consumers.

The primary concern raised over Google’s proposed acquisition of ITA is that acquisition would “leverage” Google’s alleged dominance into another market—the online travel search market—and permit Google to prevent its competitors from accessing ITA’s high-quality analysis of flights and fares.

There are a few problems with this.

  • First, ITA does not provide or own the underlying data (this comes from the airlines themselves); rather it works only to analyze and process it—processing that other companies can and do undertake.  It may have developed superior technology to engage in this processing, but that is precisely why it (and consumers) should not be penalized by its competitors’ efforts to hamstring it.  Remember—although most of the hand-wringing surrounding this deal concerns Google, it is first and foremost the innovative entrepreneurs at ITA who would be prevented from capitalizing on their success if the deal is stopped.
  • Second, it is hard to see why, under the facts as alleged by the deal’s naysayers, consumers would be worse off if Google owns ITA than if ITA stands on its own.  The claims seem to turn on ITA’s indispensability to the online travel industry.  But if ITA is so indispensable—if it possesses such market power, in other words—it’s hard to see how its incentives to capitalize on that market power would change simply by virtue of a change in its management.  Either ITA possesses market power and is already taking advantage of it (or else its managers are leaving money on the table and it most certainly should be taken over by another set of managers) or else it does not actually possess this market power and its combination with Google, even if Google were to keep all of ITA’s technology for itself, will do little to harm the rest of the industry as its competitors step up and step in to take its place.
  • Third and related to these is the simple repugnance of hamstringing successful entrepreneurs because of the exhortations of their competitors, and the implication that a successful company’s work product (like ITA’s “superior technology”) must be rendered widely-available, by government force if necessary.
  • Meanwhile, Google does not seem to have any interest in selling airline tickets or making airline reservations (just as it doesn’t sell the retail goods one can search for using its site). Instead, its interest is in providing its users easy access to airline flight and pricing data and giving online travel agencies the ability to bid on the sale of tickets to Google users looking to buy. The availability of this information via Google search will lower search costs for consumers and the expected bidding should increase competition and drive down travel costs for consumers.  It is easy to see why companies like Kayak and Bing Travel and Expedia and Travelocity might be unhappy about this, but far more difficult to see how their woes should be a problem for the antitrust enforcers (or Congress, for that matter).

The point is not that we know that Google—or any other high-tech company’s—conduct is pro-competitive, but rather that the very uncertainty surrounding it counsels caution, not aggression. As the technology, usage and market structure change, so do the strategies of the various businesses that build up around them. These new strategies present unknown and unprecedented challenges to regulators, and these new challenges call for a deferential approach. New conduct is not necessarily anticompetitive conduct, and if our antitrust regulation does not accept this, we all lose.

I’ve recently finished reading Jonathan Baker’s Preserving a Political Bargain: The Political Economy of the Non-Interventionist Challenge to Monopolization Enforcement, forthcoming in the Antitrust Law Journal.

Baker’s central thesis in Preserving a Political Bargain builds on earlier work concerning competition policy as an implicit political bargain that was reached during the 1940s between the more extreme positions of laissez-faire on the one hand and regulation on the other.  The new piece tries to explain what Baker describes as the “non-interventionist” critique of monopolization enforcement within this framework.  The piece is motivated, at least in part, by the Section 2 Report debates.  Baker’s basic story is fairly straightforward.  Under Baker’s account, competition policy is the outcome of the political bargaining process described above.  The “competition policy bargain” was then successfully modified in the 1980s in response to the Chicago School critique.  According to Baker, during the 1970s and 80s, “the Supreme Court revised many if not most of aspects of antitrust law along the lines suggested by legal and economic commentators loosely associated with the University of Chicago,” though this revolution changed the antitrust laws “dramatically but not fundamentally” and reflected a “bipartisan consensus in favor of reforming antitrust rules to enhance the efficiency gains arising from competition policy.”

Baker applies his “political bargain” framework to argue that the “modern non-interventionist critique,” unlike the successful attempt to modify the “terms” of the bargain in the 1980s, is highly likely to fail.  Baker defines the non-interventionist critique as relying on a particular series of legal and economic arguments.  For example, Baker describes the economic arguments deployed by the non-interventionists as that “markets are self-correcting,” “monopoly fosters economic growth,” “there is a single monopoly profit,” “excluded fringe rivals may not matter competitively,” “courts cannot reliably identify monopolization,” and so on.  Animated by the Section 2 Hearings, Report, its withdrawal, and the subsequent controversy, Baker begins from the assumption the non-interventionists are trying to modify an existing bargain, since non-interventionists are “the primary source of recent criticism of monopolization standards.”  From there, Baker argues that this concerted effort to modify the competition bargain in favor of less intervention is unlikely to succeed because such an attempted modification is unlikely to mobilize broader political support in the current social environment.

Let me start by saying that I agree entirely with the ultimate conclusion in so far as I don’t think there is any doubt that, in the current environment,  it is unlikely that the implicit “policy bargain” will be modified in a way that makes it more difficult for monopolization plaintiffs.  I have much more trouble with the premise of the exercise, and on how one knows a deviation from the current policy bargain when he sees one, and so will focus my critique on those issues.

Baker paints the picture of a dramatic and fundamental attack by non-interventionists on monopolization enforcement.  My response to the premise of the paper was: What non-interventionist effort to further relax monopolization standards?” To be sure, there are plenty of folks who have cautioned against expansive use of Section 2.  It strikes me that the fundamental weakness in Baker’s analysis is that his starting point – the “terms” of the current political bargain — derives from  assumptions that don’t seem to square with reality.    In other words, rather than envisioning the current debates around Section 2 as an assault by non-interventionists, there is a much more compelling case that it is the interventionists attempting to “deviate” from whatever implicit political bargain exists with respect to competition policy.  Christine Varney’s declaration that there is “no such thing as a false positive” – the presence of such being a seminal observation since The Limits of Antitrust (in 1984, no less) immediately leaps to mind.  I will turn to making the case that it is the interventionists making the offer for modification below.

But first note that Baker leaves out of his list of “economic arguments” against Section 2 both error costs and that there is little empirical evidence that aggressive monopolization enforcement generates consumer benefits.  This is, in my view, an important omission since Baker makes the point that all of the other economic arguments have attracted rebuttals.  If there has been a rebuttal of the argument that the empirical evidence suggests that instances of anticompetitive exclusive dealing, RPM, tying and vertical integration are quite rare, or an empirical demonstration that monopolization enforcement has generated consumer welfare gains bet of error and administrative costs, I’d like to see it.  Further, note that the original Chicago School argument, a la Director & Levi, against monopolization enforcement was not that anticompetitive exclusion was impossible, but rather that it was sufficiently rare in the world as an empirical matter as to be irrelevant to policy formation.  Baker ignores this empirical, evidence-based non-interventionist critique, which, for example, has been the core of the position taken by modern academic skeptics of monopolization enforcement like myself, Dan Crane, Tim Muris, Bruce Kobayashi, Luke Froeb, and David Evans.

What is the evidence that there is a non-interventionist attack on the current competition policy bargain as it exists with respect to monopolization? Not much.  The first is that the non-interventionists are the “source of criticism of recent monopolization standards.”  In parts of the paper, Baker equates the non-interventionists with business interests.  But under that formulation, there is not much evidence to support this proposition.  If anything, and as Baker readily acknowledges in a footnote, the headlines seem to tell a story of AMD, Google, Microsoft, Adobe and others expending resources to instigate antitrust enforcement against rivals not to restrict the scope of Section 2.

Baker cites more generally the recent monopolization controversy as driven by the non-interventionist attempt to deviate from the status quo.  But this part of the analysis reads to me as driven entirely by assertion that the competition policy preferences that Baker appears to prefer are in the “political bargain” and deeming opposition to those (interventionist) policies attempted “deviations.”  Perhaps this is a problem of hammers and nails.  Baker’s more interventionist than I and so sees obstacles between his ideal vision of antitrust law and reality as caused by non-interventionists.  But I’ve got a different hammer and see different nails.  For example, I read the Section 2 Report as largely (but not entirely) limited to a description of Section 2 law as it exists and the vigorously dissenting voices coming from the interventionist crowd.  As George Priest has put it:

It’s fair enough for a succeeding administration to reject policies of its predecessor. But the Justice Department report was not authored by John Yoo or Alberto Gonzales. It was the work of a year-long study that considered recommendations from 29 panels and 119 witnesses, most of them critical of the minimalist Chicago School approach to antitrust law. The report’s conclusions basically track Supreme Court law with modest extensions in areas where the Supreme Court has not ruled. Ms. Varney denounced the report in its entirety.

Finding the evidence lacking of some strong non-interventionist attempt to impose dramatic change on Section 2 that deviates from the current political bargain, I offer an alternative hypothesis: it is the interventionists that are attempting to deviate from the current political bargain and propose change.

For starters, I think that Baker and I would agree that there actually is a “stable” competition policy bargain with respect to monopolization that has drawn bipartisan over the last twenty years – at least in the courts.  Note that even restricting attention to decisions during the George W. Bush administration from 2004-08, the total vote count of these decisions was 86-9, with 7 of 11 decisions decided unanimously, and only Leegin attracted more than two votes of dissent (and more likely, as others have pointed out, for its implications with respect to abortion jurisprudence than anything to do with the antitrust analysis of vertical restraints!).  The monopolization-related decisions of the modern era, including Trinko, Linkline, Credit Suisse, and Brooke Group have all made lift more difficult for plaintiffs in one way or another.  But as I’ve written on this blog over and over again, the error-cost analysis embedded in these decisions is a key feature of modern Section 2 jurisprudence that is part of the current bargain.  So as I understand it, these decisions must be part of the current bargain.  It would be difficult, in fact, to find another area of law in which the Court has articulated principles with such overriding unanimity despite persistent attempts by some scholars to advocate for an alternate overarching legal framework.  I think there is a much more compelling story – and one backed by greater evidence than Baker’s narrative — to tell about the modern attempt of the interventionists to renegotiate terms.    Let’s discuss some of the evidence.

For starters, the strongly-toned dissents from the Section 2 Report from both Agencies after Hearings with witnesses and testimony from all possible sides of debate — even the parts that merely describe the law — suggest dissatisfaction with the terms of the modern bargain Baker describes and that are represented by the monopolization case law created over the past several decades by supermajority Supreme Court decisions.  It is AAG Varney who recently, as Baker acknowledges in the paper, minimized the importance of Trinko under Section 2 in favor of “tried and true” cases like Aspen Skiing.  This is, of course, to say nothing of AAG Varney’s endorsement of an antitrust policy free of error-cost considerations.

Further, it is the interventionists at the Federal Trade Commission that have turned to an expanded vision of Section 5 to evade the constraints imposed by Section 2.  In fact, the Commission has explicitly announced that it does not think that the constraints imposed on plaintiffs under Section 2 should apply to the antitrust agencies!  If this is not an attempt to deviate from the existing political bargain in an interventionist direction, I’m not sure what is.  Put another way, interventionists are currently attempting to re-write existing Section 2 law – the “political bargain” – through Section 5. Given the Complaint in Intel and promised use of Section 5 in broad circumstances previously covered under the Section 2 law envisioned under the “stable” bargain that Baker describes as generating bipartisan support from Democrats and Republicans, surely this is an attempt to deviate from the prior bargain.

It is the interventionists that have provided new economic arguments in favor of greater antitrust enforcement.  For example, the recent trend towards reliance on behavioral economics endorsed by the agencies emerges out of dissatisfaction with Chicago and Post-Chicago School theories that adopt rational actor models and, presumably, inability to get substantial traction in the federal courts from existing interventionist models provided by the Post-Chicago School.

The interventionist assault on the current implicit competition policy bargain goes further than the agencies though.  Congress currently has in front of it pending legislation to take out of the courts the development of a rule of reason standard for minimum RPM, a Twombly-repealer, legislation to make reverse payments in pharmaceutical patent settlements illegal, and legislation to regulate interchange fees.  Every one of these proposals represents an interventionist reaction attempting to overturn a judicial application of current competition law and suggest that perhaps the interventionists do not trust the courts to oversee the political bargain.

The premise of Baker’s analysis (that the non-interventionists are strongly challenging the current status quo) is either false to begin with or practically irrelevant in light of the much more important interventionist challenge.  Note again that Baker’s claim is that the non-interventionists would fail in any attempt to reduce the scope of monopolization enforcement because they will not be able to generate more broad political support in the current environment.  No doubt that is true.  But what about the interventionists chances for success?  Baker’s analysis provides a very interesting lens to analysis evaluate questions like whether the interventionists will be successful in renegotiating the terms of the competition policy bargain.  At the moment, though things may be changing, they seem to have greater political support.  I think the most interesting conflict arising out of Baker’s interesting conception of competition between stakeholders in antitrust policy is that it illuminates what might be a battle for supremacy in governing the bargain between agencies and courts.  As Baker notes, the courts have been a critical part of establishing the terms of the bargain and adjudicating attempts to “re-negotiate” by private plaintiffs and agencies over time.  Recently, interventionists have attempted to shift antitrust (and consumer protection) enforcement away from courts and towards administrative agencies, such as with Section 5 and the proposed CFPA.   To me, these present more important and interesting policy questions than whether non-interventionists will be successful in further shrinking Section 2 law.  I believe that the prediction emerging from Baker’s model depends on what happens with the political environment in the next few years.

My prediction, for what its worth, is that the current policy bargain will certainly hold together in the courts.  The remarkable strength of the current Section 2 status quo is held together by a combination of the intuitive appeal of price theory for generalist judges relative to more interventionist Post-Chicago and Behavioral economic alternatives, the relative explanatory power of the so-called Chicago School theories relative to contenders.  Nothing there has changed.  I have less of a sense about the impact of Congressional changes, judicial nominations, and the rise of the EU as monopolization enforcer have on monopolization in the US.