Saturday, September 22, 2007
Posted by D. Daniel Sokol
To coincide with the Chicago Marathon in two weeks will be the the Chicago Antitrust Marathon. On Friday October 5th , the Institute for Consumer Antitrust Studies at the Loyola University of Chicago School of Law is co-sponsoring The Antitrust Marathon with the Competition Law Forum (CLF) of the British Institute of International and Comparative Law. The Antitrust Marathon is a half day round table discussion of single firm dominance from a comparative perspective. The discussion will be based on the monopolization portion of the recent report of the Antitrust Modernization and a series of short issue papers about the purpose of monopolization law, defining market power, what is or should be a violation, remedies, and private enforcement. An edited transcript will appear in the Loyola Consumer Law Review.
The Antitrust Marathon takes place the Friday
before the Chicago Marathon which a number of participants will run and
will continue on April 11,2008 in the London half of the program, yes
the Friday before the London marathon. Among those attending include:
George Addy, Davies Ward Phillips & Vineberg, Toronto, Canada (former head of Canadian Competition Bureau)
Simon Baker, RBB Economics, London
Joe Bauer, Notre Dame Law School
David Braun, Drinker Biddle
Steve Calkins, Wayne State University Law School
Peter Carstensen, Wisconsin Law School
Richard Cudahy, United States Court of Appeals for the Seventh Circuit
Kenneth Davidson, Washington, D.C.
Beth Farmer, Penn State School of Law
Bert Foer, American Antitrust Institute
David Gerber, IIT/Chicago Kent College of Law
Hillary Greene, University of Connecticut Law School
Michael Jacobs, DePaul College of Law
Robert Joseph, Sonnenschein Nath & Rosenthal
Christopher Leslie, IIT/Chicago Kent College of Law
Adrian Majumdaer, RBB Economics, London
Philip Marsden, British Institute of International and Comparative Law
Carlos Orci, Mexico City
Steve Shadowen, Hangley Aronchick Segal & Pudlin, Harrisburg, Pa.
Danny Sokol, University of Missouri School of Law
Paul Stancil, University of Illinois College of Law
Maurice Stucke, University of Tennessee School of Law
Mike Walker, CRA London
Spencer Weber Waller, Loyola University Chicago School of Law
Antitrust Marathon Agenda
|9:30 AM||Registration and Continental Breakfast|
Welcome and Introduction
Professor Waller and Dr. Marsden
|10:00 AM||The Role of Monopolization/Abuse of Dominance in Competition Law|
|10:40 AM||Defining and Measuring Power / Assessing Consumer Harm in Abuse Cases|
|11:20 AM||Coffee Break|
|11:30 AM||The Monopolization/ Abuse Offense: Microsoft as Case Study|
|1:30 PM||Private Enforcement|
Dr. Marsden and Professor Waller
Reading Material for the Roundtable Discussion
Antitrust Modernization Commission Report and Recommendations
Section 1C Exclusionary Conduct
|Issues Paper:||The Role of Monopolization/Abuse of Dominance in Competition Law|
|Issues Paper:||Defining and Measuring Power / Assessing Consumer Harm in Abuse Cases|
|Issues Paper:||The Monopolization/ Abuse Offense: Microsoft as Case Study|
|Issues Paper:||Private Enforcement|
Limited spots are available to participate in both halves of the Antitrust Marathon. For more information, please contact either Spencer Weber Waller, Professor and Director, Institute for Consumer Antitrust Studies, Loyola University Chicago School of Law at firstname.lastname@example.org or Dr. Philip Marsden, Competition Law Forum, British Institute of International and Comparative Law at email@example.com.
Everyone will have a chance to edit or revise their remarks before anything is posted on-line. In addition, the Loyola Consumer Antitrust Review will publish an edited version of the transcript where you will have additional opportunity to review your remarks before they appear in print.
Posted by D. Daniel Sokol
Today is Yom Kipur, the holiest day of the year in Judaism. It is a day that we Jews think of atonement and repentance for the sins that we have committed both knowingly and unknowingly. To focus on this solemn day, Jews fast from sundown to sundown. Jews around the world will attend services today, even if it is the only time this year that they will attend services. Invariably, the Rabbi will give a sermon. Sometimes this sermon may touch on issues of repentance. In other cases it may concern the threats that Jews around the world face - existential threats of violence such as Iran's president threat to wipe Israel off the map or instances of anti-Semitism or other forms of intolerance in the local community. In other cases, the sermon will focus on tikun olam, a Hebrew term that refers to "repairing the world" through our actions. The kabalists suggest that when God created the world, it was unstable and resulted in imperfection. Through our good deeds and through following God's commandments, we can help to repair the world.
Jews around the world have taken tikun olam to heart and historically we have been at the forefront of social movements far disproportionate to our small numbers. So what does this have to do with antitrust? I would suggest that antitrust at its most fundamental level is about making life better for consumers. In its own way, it seeks to repair the world from the abuse of monopoly power and other anti-competitive actions. I think about this in part because as someone teaching a law and economics course semester, I think back to one of the founders of the law and economics movement - Henry Manne. One of Manne's many great accomplishments was to introduce law and economics to a wider audience of law professors and practitioners. It seems to me, based on years of hearing sermons from various Rabbis, that the Rabbinate in general could use some law and economics training. Most sermons lack any semblance of understanding of economics, particularly those that address issues of tikun olam. I would love for Manne to come out of his Florida retirement to conduct law and economics workshops for clergy. Law and economics training could help Rabbis to understand how economic incentives work and how these incentives help to shape law and policy and vice versa. Overall, law and economics training would improve the quality of the sermons just as law and economics training has improved the analysis of judges, lawyers and politicians. Certainly, Jews are no strangers to economics, as 38 percent of all Nobel prize winners in the field are Jewish. If we in the antitrust community think that understanding economics is important, shouldn't we want a Rabbinate that is better informed about economic analysis?
Friday, September 21, 2007
Posted by Bill Page
It is probably a sign of progress that all sides in the Microsoft litigation, both here and in Europe, seem to agree that the relevant goal of antitrust enforcement is to benefit consumers. The CFI’s Microsoft decision, for example, mentions consumers well over 100 times, usually in the context of considering whether practices affect “consumer welfare,” “consumer choice,” or the like. But the simple fact that the opposing sides with such fundamental differences can invoke the same interest in support of their positions suggest that we need further clarification of what the consumer interest means and how best to advance it.
I suggest that an appropriate starting point is to ask: what is the immediate and obvious effect of the challenged practice on consumers? If the immediate effect is to benefit consumers, then the plaintiff should face a heavier burden to show (by a coherent theory and supporting evidence) that the long-run or net effect will actually be to harm consumers. If the immediate effect is to harm consumers, then the defense should face a heavier burden to show that the long-run effects will be positive. This approach recognizes that future market events, especially innovations, are difficult to predict, and courts have a dubious track record in their efforts to do so. Something like this idea may explain the many hurdles the Supreme Court (in Matsushita and Brooke Group) has placed in the path of predatory pricing claims, because price cutting undoubtedly benefits consumers immediately. The idea also may explain why the Court took so long to overrule Dr. Miles: resale price maintenance undoubtedly raises retail prices; the Court decided (in Leegin, just last term) that per se illegality was inappropriate only after the Court was convinced that consumers may nevertheless benefit from valuable services that the higher prices elicit.
In the U.S. Microsoft case, the D.C. Circuit properly took this approach to reverse several of Judge Jackson’s holdings that had condemned Microsoft for offering better products (e.g., the Windows-specific version of Java) or free services. It wrote “The rare case of price predation aside, the antitrust laws do not condemn even a monopolist for offering its product at an attractive price, and we therefore have no warrant to condemn Microsoft for offering either [Internet Explorer] or the [Internet Explorer Access Kit] free of charge or even at a negative price. Likewise, as we said above, a monopolist does not violate the Sherman Act simply by developing an attractive product.” The D.C. Circuit also, however, upheld liability for various forms of integration of Microsoft’s browser with the Windows operating system. In these parts of the opinion, we have argued, the court gave insufficient weight to the immediate benefits of integration to consumers, and undue weight to speculation about possible long-term harms.
The CFI has made the same error in its analysis of Microsoft’s tie of Windows and Windows Media Player. The Commission’s decision rested on the theory that Microsoft harmed consumers by not offering them a choice of Windows without Media Player. Thus, it was OK for Microsoft to combine the media player and Windows, so long as it gave OEMs and ultimately consumers the option of buying a version of Windows without Media Player. The EC’s theory, of course, has been decisively refuted by the failure in the market of “Windows XP N,” the stripped version of Windows that Microsoft developed to satisfy the Commission’s order. Consumers didn’t want the stripped version, even though OEMs could have installed a non-Microsoft media player in place of WMP—that was evidently not an adequate substitute, despite the EC’s contentions to the contrary (¶ 923). The CFI insisted (¶ 943) that it could not consider the failure of XP N because is required to decide the case based upon the facts and law at the time of the commission decision. But it should have been obvious to the EC from the outset that no one would want a version of Windows with less functionality at the same price. Consumers (and OEMs) understandably view Microsoft’s provision of a media player along with Windows an immediate and unalloyed benefit. The fact that other, competitive OS vendors like Apple also provide media players along with the OS confirms this obvious point.
Under the approach I am suggesting, recognition of this immediate consumer benefit should have triggered a substantially higher burden to show that the action would harm competition. The fact that Microsoft gains an “advantage” by providing an obvious benefit should not make its actions unlawful, in the absence of a coherent theory, supported by evidence, that the practice will harm consumers in the long run. I suggest that the EC did not meet this heightened burden. Some ties can reduce competition. But, contrary to the CFI’s findings (¶¶ 967-70), I submit that bundling a product that is free in every channel of distribution and that does not otherwise prevent installation of rival products is not seriously exclusionary. OEMs and users can and do freely install other media players and content providers can and do encode their video in multiple formats.
The CFI accepted the EC’s finding that Microsoft’s bundling gave it an “unparalleled advantage” over rival producers that altered the incentives of OEMs and content providers in ways that and “inevitably had significant consequences for the structure of competition” (¶ 1054). These effects raised a “reasonable likelihood” that “an effective competition structure would not be ensured in the foreseeable future” (¶ 1089). But any harm to consumers, as opposed to rivals, from these predicted developments are speculative.
The EC emphasized, of course, that it did not want to prevent Microsoft from bundling, only to require it to sell an unbundled version. This aspect of the remedy certainly limits the costs of the EC’s order, but at the expense of making it ineffective in achieving any competitive benefit.
September 25 Update: For more confusion about how to help consumers by antitrust enforcement, see Unbundling Microsoft Windows, published by a Brussels think tank. The authors argue that it would benefit consumers to require that computers and operating systems (except Macs) be sold separately. Thus, consumers would have to buy the hardware and software separately and install the software themselves. This "would have a significant effect on the market share of Windows, providing the competitive marketplace that Ms Kroes has called for." For an expert refutation of this logic, see http://arstechnica.com/news.ars/post/20070924-eu-group-calls-for-end-to-windows-tax.html
Posted by John Lopatka
In thinking about the decision of the Court of First Instance (CFI) in the European Microsoft case, it’s easy to confuse the economic theory of the European case with that of the United States DOJ case. After all, both have to do with the relationship between Microsoft’s dominant Windows PC operating system and related software products, both involve conduct by Microsoft that disadvantaged competing software producers, and both seem to have a lot to do with network effects. In the DOJ case, the principal theory was that Microsoft monopolized the PC operating system market by preventing Netscape and Java from developing products that would have rendered all operating systems fungible. The theory of the European case, however, was quite different. I focus here on the “interoperability” part of the case.
The European Commission claimed, and the CFI agreed, that Microsoft refused to provide and authorize the use of sufficient information about the interoperability of Windows PC operating systems and work group server operating systems to permit competing producers of server operating systems to remain in the market. A related claim was that Microsoft withheld needed information about interaction among servers. The behavior alleged constitutes a kind of tying arrangement: users of the Windows operating system on a network of client PCs effectively must use the Microsoft server operating system because alternative server operating systems are inferior. In this story, the Windows PC operating system is the tying product, the work group server operating system is the tied product, and the economic motivation for the tie is to leverage monopoly power in the PC operating system market into the server operating system market.
Network effects have little to do with this story. Indirect network effects are the source of monopoly power in the tying product market, but the story would not change materially if Microsoft instead dominated the PC operating system market because of patents, trade secrets, or ingenuity. This story does not assert that work group server operating systems are themselves subject to indirect (or direct) network effects. For example, it does not depend on the assumption that server applications will be written to the dominant server operating system. Contrast this with the DOJ case, in which the principal theory was that Microsoft monopolized the PC operating system market by artificially maintaining the network effects that protect its monopoly. The European case is based on a conventional theory of monopoly leverage.
The original Chicago School criticism of the leverage theory is that a monopolist of one product has no economic incentive to acquire a monopoly of a complementary product. It is not that tying is logically impossible, therefore, but that it is economically irrational. Later analysis demonstrates that in various settings tying for the purpose of leveraging is rational, and specifically, Dennis Carlton and Michael Waldman offer a sophisticated, dynamic model to explain the DOJ case against Microsoft: the monopolist squashes a superior complementary product in period one to prevent the supplier of that product from developing a competing tying product in period two that would eliminate the tying product monopoly. Bill Page and I argue in our book (pages 156-58) that the model does not fit the facts of Microsoft, but at least it is a coherent theory that could explain tying in the appropriate setting. By contrast, the European case lacks an economic foundation. There is no claim that excluded server operating system producers would eventually develop competing PC operating systems if not hampered by the tying arrangement. There is no claim that some users of server operating systems use them without any client operating systems, a condition which if it existed could explain leveraging under Michael Whinston’s classic model. On the surface, therefore, the monopolist would appear to benefit by facilitating the use of a competitor’s superior complementary product, because that conduct would increase the demand for the tying product, however marginally. And as applied to Microsoft, the evidence is compelling that Microsoft primarily strives to earn its revenue from the licensing of Windows. If the European authorities perceive a threat to economic welfare, it would seem to be that tying prevents rivals from developing superior server operating systems over time, but they offer no rigorous proof of just why that result should be anticipated.
An alternative explanation of Microsoft’s conduct, of course, is that it was not tying at all. Maybe all of the interoperability information that a competitor needed was available, and if users opted for Microsoft’s server operating system, the reason is that Microsoft offered a better product. Certainly a monopolist has an economic incentive to supply a better complementary product than its competitors do, again because that would increase the demand for the monopoly product. On this score, the dispute between the European authorities and Microsoft is not a matter of theory, but of fact – very technical fact – and the two sides seem to be talking past one another. Microsoft contends that the European Commission insists on the disclosure of enough information to allow competitors to clone its product. The CFI disagrees, drawing a critical distinction between specifications and implementations. In the CFI’s view, the Commission requires Microsoft to supply only information about the specifications related to interaction between work group server operating systems on the one hand and Windows PCs and other work group servers on the other. That information is not sufficient to permit rivals to clone the Microsoft server operating system, and indeed the implementation, which depends upon source code that need not be divulged, will vary across vendors. The CFI likens specifications to the vocabulary and syntax of a language, and the implementation in this analogy is the concrete expression of an idea in that language.
Certainly there is a distinction in software design between a specification and an implementation. But the issue is its significance in this context. Suppose a monopolist produces an unpatented toaster that cannot be reverse engineered. Specifications might explain how bread must be exposed to a heating element for a limited period of time, then ejected. The monopolist’s implementation has two slots and a handle on one side. The specifications may enable a competitor to design a toaster with four slots and handles on both sides. The rival’s implementation is different, but the disclosure of the specifications enabled the rival to appropriate the value of the invention – no specifications, no toaster. It is not a sufficient response to Microsoft’s argument, therefore, to say that implementations will differ if only specifications are disclosed. The question is whether disclosure of the specifications will enable competitors to free ride on Microsoft’s investment in developing its server operating system, and if it does, the incentives to innovate decline.
If we assume that Microsoft has an economic incentive to leverage, the difficulty in this case is that the quality of the toaster depends upon – really, is defined by – its interaction with another product. The whole purpose of a work group server operating system is to permit a network of client PCs and other servers to interact efficiently. The appropriate competitive contest is between work group server operating systems based on their intrinsic merit, and Microsoft claims that it gives competitors all of the information needed for competitors to engage in that contest. If customers choose Microsoft’s product, it is because its product is intrinsically superior. But suppose the performance of the toaster depends upon the amount of electricity entering the appliance, and the toaster manufacturer has no toaster monopoly but does have a monopoly over electrical outlets. The manufacturer discloses enough information to allow competitors to design toasters that use only 70% of the power available through an outlet, and as a result, its toaster toasts 30% faster. The fact that specifications permit rivals to make toasters that toast bread does not tell us whether the manufacturer exploited an advantage it held because of its outlet monopoly. On the face of it, we could not tell whether Microsoft succeeds in the server operating system market because of the intrinsic quality of its product – all toasters have access to 100% of the power coming from an outlet, and Microsoft’s toaster just has a better heating element – or because Microsoft withholds critical interoperability information from its competitors. That is a factual issue the resolution of which requires technical expertise. But an appropriate resolution is critical, because compulsory disclosure of information that pertains only to the intrinsic quality of a product will inevitably chill innovation.
Posted by D. Daniel Sokol
The team over at eCCP has collected a number of insightful early comments on Microsoft from a distinguished group: Nicholas Economides of NYU's Stern School of Business, Luke Froeb of Vanderbilt University's Owen School of Management (and permanent guest blogger here at the Antitrust and Competition Policy Blog), Robert O'Donoghue, a Barrister with Brick Court Chambers and Daniel Spulber of Northwestern's Kellogg School of Management.
Posted by D. Daniel Sokol
One of the defining characteristics of the last 10-15 years of international antitrust has been a "golden age" of cartel enforcement around the world. How effective this enforcement has been has remained until now mostly unquantified. In another in his series of excellent papers on international cartels, John Connor of Purdue University's Department of Agricultural Economics provides us an import answer to this question in Effectiveness of Antitrust Sanctions on Modern International Cartels. It seems that overall, enforcers around the world continue to under-deter international cartels.
ABSTRACT: This paper assesses the antitrust fines and private penalties imposed on the participants of 260 international cartels discovered during 1990-2005, using four indicators of enforcement effectiveness. First, the United States is almost always the first to investigate and sanction international cartels, and its investigations are about seven times faster than EU probes. Second, U.S. investigations were more likely to be kept confidential than those in Europe, but the gap nearly disappeared since 2000. Third, median government antitrust fines average less than 10% of affected commerce, but rises to about 35% in the case of multi-continental conspiracies. Civil settlements in jurisdictions where they are permitted are typically 6 to 12% of sales. Canadian and U.S. fines and settlements imposed higher penalties than other jurisdictions. Fourth, fines on cartels that operated in Europe averaged a bit more than half of their estimated overcharges; those prosecuted only in North America paid civil and criminal sanctions of roughly single damages; and global cartels prosecuted in both jurisdictions typically paid less than single damages.
Thursday, September 20, 2007
Posted by D. Daniel Sokol
Lost this week in the discussion of Microsoft is that both the US and EU antitrust enforcers have made pushes to introduce competition into the energy sector. In the EU, there is a draft Directive that calls for increased competition through the separation of production and supply from transmission networks for both electricity and gas. See here. In the United States, the FTC in its competition advocacy role just submitted comments on wholesale electricity market competition. According to the FTC summary on its website:
The FTC’s comment proposes a range of ways in which FERC might strengthen the role of competition in electric power markets, including a deeper acknowledgment of the costs and benefits of DR policies and, as DR grows, a greater reliance on DR (rather than wholesale price caps) to prevent the exercise of market power by electricity generators. The comment also encourages FERC to develop incentives for efficiency and improved customer service in organized electric power markets.
Posted by D. Daniel Sokol
The Economic Analysis Group of the DOJ's Antitrust Division has announced its fall seminar schedule, which you can download below.
Here are links to some of the papers:
October 9, Ciliberto
October 17, Asker
October 23, Yang
November 1, Kuhn
November 6, Harrington
December 4, Campbell
Posted by D. Daniel Sokol
With all the discussion this week about Microsoft, I thought it would be worthwhile to mention that there is an excellent new edited volume out by Cambridge University Press edited by Steven D. Anderman of the University of Essex titled The Interface Between Intellectual Property Rights and Competition Policy. The table of contents is as follows:
|1||The competition law/IP ‘interface’: an introductory note 1|
STEVEN D. ANDERMAN
|PART I Intellectual property rights and competition law in the major trading blocks 35|
|2||EC competition policy and IPRs 37|
STEVEN D. ANDERMAN AND HEDVIG SCHMIDT
|3||Competition policy and its implications for intellectual property rights in the United States 125|
RUDOLPH J. R. PERITZ
|4||The interface between competition law and intellectual property in Japan 250|
|PART II Intellectual property rights and competition law in smaller and medium sized open economies 313|
|5||Intellectual property rights and competition in Australia 315|
|6||Irish competition law and IP rights 348|
|7||The interface between intellectual property law and competition law in Singapore 375|
|PART III Issues related to the interface between intellectual property rights and competition law 427|
|8||Parallel imports 429|
MIRANDA FORSYTH AND WARWICK A. ROTHNIE
|9||Technology transfer 466|
|10||The relationship between intellectual property law and competition law: an economic approach 505|
PIERRE RÉGIBEAU AND KATHARINE ROCKETT
Wednesday, September 19, 2007
Posted by Bill Page and John Lopatka
I’ve had something to say about the CFI decision, but I should post something more directly about our new book, The Microsoft Case: Antitrust, High Technology, and Consumer Welfare. Much of the analysis in the book is relevant to the issues raised in the European case. Chapter 4 of our book, for example, addresses the problem of integration in the U.S. case, particularly how the D.C. Circuit approached the question of integration of the browser and the Windows operating system (the OS). We first examine the court’s analysis of the short-run effects of three levels of integration on consumers. We then examine its treatment of the long-term effects of integration—that is, whether Microsoft’s integration of the browser and the OS actually caused a reduction in competition by preventing Netscape’s browser (with or without Java) from developing into a rival platform that might have reduced the network effects (the “applications barrier to entry”) that protect the Windows monopoly.
1. Short-Run Effects on Consumers
The three levels of integration we discuss are (1) simple bundling of the browser and the OS; (2) preventing computer manufacturers (OEMs) or users from removing visible means of access to browsing functionality (icons, etc.); and (3) commingling browser and OS code. We suggest that none of these forms of integration harms consumers so long as all browsers are free and OEMs and end users are able to install rival browsers. (Both of those conditions are necessary for the analysis.) Microsoft may gain an advantage over rivals by bundling its browser with the OS, but only to the extent consumers benefit by receiving a free browser pre-installed. We see no reason to think allowing OEMs to delete access to the pre-installed browser would benefit consumers significantly; the greater consumer benefit would be for the OEM to pre-install a rival browser and allow the user to choose between them. (The notion that consumers would be confused by the sight of two browser icons is not plausible.) Indeed, OEMs might delete Microsoft’s browser as part of an exclusive deal with a rival browser producer, not to benefit consumers. One might argue that consumers will benefit if the rival outbids Microsoft for exclusivity on the desktop; the rival can pay more than Microsoft only if consumers prefer the rival’s product. But Microsoft was not allowed to participate in such an auction – it could not obtain exclusive placement. All of that said, we so no real harm in the eventual remedy of allowing end users flexibility to delete visible means of access the browser or to set their own preferred defaults, unless there are good technical reasons to override those choices.
Commingling browser and OS code does not harm consumers in a
relevant way for all the same reasons, and with the same qualifications. Requiring deletion of browser-only code, on
the other had, could potentially harm consumers by fragmenting the Windows API
set, as the courts found in the
2. Long-Run Effects on Consumers
The court of appeals held that the government did not have to prove Netscape’s browser would really have become a rival platform and eroded the applications barrier to entry. It was enough that the browser was a “nascent” rival and was viewed as such by Microsoft. We argue, however, that the government should have at least been required to offer a coherent theory showing how Microsoft’s actions in the browser market could have reduced competition in the OS market, where Netscape did not compete. We further argue that the government’s failure to prove there was a browser market doomed the most plausible scenarios under which the browser might have become a rival platform. Finally, we argue that the fact (and it was a fact) that Microsoft viewed Netscape as nascent competitor should not have been sufficient to condemn the actions it took against Netscape. Just as the plaintiff in a predatory pricing case must prove that the defendant will likely recoup its losses after the predatory campaign (that is, that competition will really be reduced) the government in Microsoft should have been required to show that the middleware threat was more than a mirage.
Posted by D. Daniel Sokol
Just as I feared. One impact of the Microsoft judgment has been to strain the relations across the Atlantic. According to the story, "It is totally unacceptable that a representative of the U.S. administration criticized an independent court of law outside its jurisdiction," Kroes told reporters referring to DOJ comments on the Microsoft case.
Posted by D. Daniel Sokol
In the latest issue of the American Economic Review, Volker Nocke of the Department of Economics at Oxford University and Lucy White of Harvard Business School ask Do Vertical Mergers Facilitate Upstream Collusion?
ABSTRACT: We investigate the impact of vertical mergers on upstream firms' ability to collude when selling to downstream firms in a repeated game. We show that vertical mergers give rise to an outlets effect: the deviation profits of cheating unintegrated firms are reduced as these firms can no longer profitably sell to the downstream affiliates of their integrated rivals. Vertical mergers also result in an opposing punishment effect: integrated firms typically make more profit in the punishment phase than unintegrated upstream firms. The net result of these effects in an unintegrated industry is to facilitate upstream collusion. We provide conditions under which further vertical integration also facilitates collusion.
Is the Difference Between US and European Monopolization One Based on Chicago/Post Chicago Economics?
Posted by D. Daniel Sokol
With apologies to Einer Elhague (the US approach is Harvard ), Herb Hovenkamp (the US approach is new Harvard), and Bill Kovacic (the US approach is a Chicago-Harvard Double Helix), Commissioner Tom Rosch suggests that the US approach is Chicago School and the EU approach is post-Chicago School, at least as it relates to monopolization/abuse of dominance. See Commissioner Rosch's speech I say Monopoly, You say Dominance: The Continuing Divide on the Treatment of Dominant Firms, is it the Economics? Hat tip to antitrust guru and all around nice guy David Balto for brining this to my attention.
Posted by D. Daniel Sokol
The British Institute of International and Comparative Law has one of the first post-judgment conference and therefore, it is definately worth attending (see also the first comment to this post which includes another must attend conference).
The Microsoft Judgment
Tuesday 25 September 2007 10:00 to 17:00
British Institute of International and Comparative Law, Council Chamber, Charles Clore House, 17 Russell Square, London, WC1B 5JP
A conference in the immediate aftermath of the Microsoft judgment of the Court of First Instance: leading experts and representatives of the parties will gather in the days following the decision to review it, and its ramifications.
Convenor: Dr Philip Marsden, Competition Law Forum
James Flynn QC, Brick Court Chambers
Jean-Francois Bellis, Van Bael & Bellis
Dr Helen Jenkins, OXERA
Bill Bishop, CRA International
James Killick, White & Case LLP
Thomas Vinje, Clifford Chance LLP
Jean-Yves Art, Microsoft
Dieter Paemen, Clifford Chance LLP
Frances Murphy, Mayer, Brown, Rowe & Maw LLP
Stephen Kinsella, Sidley Austin LLP
David Hull, Covington & Burling
Professor David Evans, LECG and UCL
Antonio Bavasso, Allen & Overy LLP and UCL
Nicholas Banasevic, DG Comp, European Commission
Per Hellstrom, DG Comp, European Commission
- Ramifications for Intellectual Property Rights and Innovation
- Ramifications for Antitrust Law and Policy
- the bundling of fines; periodic penalty payments; remedial powers
- other Microsoft cases; other abuse cases
- possible improvements to the enforcement of EU competition law (role of the Commission and the European courts; length of proceedings)
- the enforcement of competition law in the international context (comity).
Tuesday, September 18, 2007
Posted by Bill Page
The CFI decision requiring Microsoft to disclose interoperability information for workgroup servers requires what amounts to a transfer of Microsoft’s intellectual property to its rivals in ways that the American Microsoft decisions have generally rejected. This post focuses on three features of the CFI decision that make this implication clear: its definition of interoperability, its treatment of Microsoft’s Active Directory, and its treatment of so-called “pure” server/server protocols. In each instance, the CFI claims not to require Microsoft to allow cloning of its software, but in practical terms, it does. In this post, I have relied heavily on analysis by my student and co-author, Seldon Childers, who was a software developer and management consultant for many years. (I apologize for the length of the post, but then it’s a very long opinion.)
In interpreting the CFI decision’s requirements, it is helpful to keep in mind what is meant by “disclosure” of communications protocols. One might think that a protocol is simply some lines of code that can be revealed along with a few pages of technical information. But the obligation of disclosure extends to assuring that rivals can achieve full interoperability. No disclosure is adequate until others (regulators and rivals) can use the disclosure to achieve interoperability. In practice, even in the implementation of the relatively limited U.S. communications protocol licensing requirement, this obligation entails extensive technical support, individual account managers, and one-on-one tutorials for licensees in how to implement the technology. Far more protocols are covered by the EC order. In implementing that order, a great deal of Microsoft’s expertise will be transferred to the licensees, including rivals. The net effect will be to facilitate cloning, in the sense of replicating (at much reduced expense) the proprietary functionality that Microsoft achieved through its R&D expenditures.
1. The Definition of Interoperability
This is the CFI’s description of the “range” of interoperability required (emphasis ours):
139. The Commission also recognises that there is a whole range of possible degrees of interoperability between PCs running Windows and work group server operating systems and that ‘some interoperability’ with the Windows domain architecture is already possible. It did not fix a priori a given level of interoperability which is indispensable to the maintenance of effective competition on the market but, following its investigation, it established that the degree of interoperability that competitors could achieve using the available methods was too low to enable them to remain viably on the market. . . .
140. In the rejoinder, the Commission contends that, in the contested decision, it does not conclude that it is indispensable that Microsoft's competitors be allowed to reproduce its 'interoperability solutions'. What matters is that they are able to achieve an equivalent degree of interoperability by their own innovative efforts.
In practice, however, the test is whether the rival can achieve the requisite degree of interoperability regardless of how much it has to innovate. The test is “functional equivalence”:
140. [T]he Commission stated at the hearing that it was necessary to distinguish the concept of 'functional equivalent' from that of 'functional clone'. A 'functional equivalent' is not a system operating identically to the Windows work group server operating system which it replaces but rather a system that can provide the appropriate response to a specific request under the same conditions as that Windows operating system and can make a Windows client PC or server react to its messages in the same way as if they came from that Windows operating system.
This is apparently also what the commission and the CFI mean by “two-way” interoperability (¶ 226)—the disclosure must be sufficient to allow the licensee’s product not only to do what it was designed to do within a network, but everything that Microsoft’s products do. In later passages, the CFI describes and endorses the commission’s distinction between “specifications” and “implementations.” (¶¶ 199-200). Thus, Microsoft need only disclose the specifications of the functionality that the protocol permits, not its own implementation of that functionality. The licensee, then, must use the specifications to “innovate” and create its own implementation.
But, given the definition of interoperability that the commission and the CFI adopt, this requirement amounts to a requirement that Microsoft facilitate cloning. As a practical matter, Microsoft will be required to assure that the user achieves “interoperability” in the sense of duplicate functionality, and this will only be possible by reverse engineering based on the disclosures. The rival may also innovate, but with the advantage of Microsoft’s investment and tutorials. If the rival fails to innovate, the implication will be that the level of disclosure is too low.
2. Active Directory
Under the CFI decision, Microsoft must disclose the interoperability information required to make full use of Microsoft’s “Kerberos” Active Directory services. Active Directory is the security protocol used to verify user access to files and network resources. This function is critical because of the importance of security in general and because of the technical problems posed by larger networks that include multiple servers which have to negotiate with each other while only requiring the user to login a single time. Novell Netware had one solution, and Microsoft (presumably with enormous investment) came up with Active Directory, which is an arguably superior technology. The Active Directory technology represents Microsoft’s main innovation in server technology and what distinguishes its server software from, including the open-source (free) Samba project, which does everything but a full implementation of Active Directory.
Here are a few paragraphs of the opinion on the Directory Services issue. Notice that the CFI dismisses Microsoft’s proprietary interests in its own product.
190. . . . Microsoft itself observes in the reply that on that market 'the directory service is a key competitive feature responsible in large part for the success of particular products' and emphasises, in particular, that 'Active Directory is ... at the heart of Windows server operating systems', after stating that '[f]or both file and print services and user and group administration services, it [is] important to know with precision which user [is] entitled to access which network resources'.
191. Active Directory logs all network object information and allows it to be administered centrally. It fully integrates administration and user authentication and access control functionalities and thus ensures the security of the information. In addition, Active Directory uses the multi-master replication mechanism.
. . .
195. Thus, in Article 1(1) of the contested decision, [the commission] defines 'interoperability information' as 'the complete and accurate specifications for all the protocols [that are] implemented in Windows work group server operating systems and that are used by Windows work group servers to deliver file and print services and group and user administration services, including the Windows domain controller services, Active Directory services and Group Policy services, to Windows work group networks'.
233. In the light of those various factors, the Commission maintains, in particular, that a server running a non-Microsoft work group server operating system must be capable of acting as a domain controller, and not merely as a member server, within a Windows domain using Active Directory and, accordingly, be capable of participating in the multimaster replication mechanism with the other domain controllers.
234. The Court finds that, contrary to Microsoft's claim, it cannot be inferred from the degree of interoperability thus required by the Commission that the Commission intends in reality that non-Microsoft server operating systems must function in every respect like a Windows server operating system and, accordingly, that Microsoft's competitors must be in a position to clone' or 'reproduce' its products or certain features of those products.
But for Microsoft to assure that a rival’s server can act as a domain controller using Active directory, it will be required to assist the rival in cloning that functionality.
Microsoft argued (¶ 262) that “in order for a domain control running under a non-Microsoft work group server operating system to be capable of being placed in a 'blue bubble' composed of domain controllers using a Windows work group server operating system employing Active Directory, those different operating systems must share the same internal logic.” The court responded:
263. First, Microsoft fails to demonstrate that, in order to function together within the 'blue bubble', its work group server operating systems and those of its competitors must necessarily have the same internal logic.
264. Second, the applicant also fails to demonstrate that even if such identity of internal logic were required, this would necessarily mean that Microsoft had to communicate to its competitors information relating to the internal mechanisms of its products and, in particular, to the algorithms. . . .
265. Third, as regards the 'Intersite Topology' algorithm which Microsoft mentioned specifically at the hearing, it is quite possible that, as the Commission also submitted at the hearing, competitors need only be in a position to implement an algorithm giving the same result as that algorithm. In other words, Microsoft would not be required to give any information about the implementation of that algorithm in its work group server operating systems, but could merely give a general description of that algorithm, leaving it to its competitors to develop their own implementation of it.
This is cloning. The CFI’s logic fails to recognize that Microsoft’s disclosures and “descriptions” will be considered inadequate until the competitors have reverse engineered the algorithm.
3. “Pure” Server/Server Protocols
The CFI opinion requires Microsoft to disclose pure server/server protocols.
220. In the Windows work group server networks, client/server and server/server interoperability are closely interlinked and, in order that full interoperability can be achieved between a Windows client PC and a non-Microsoft server operating system, Microsoft must give access both to the client/server communication protocols and to the server/server communication protocols (recitals 177 to 182 and 689 to the contested decision), including those which are 'pure' server/server protocols, that is to say, protocols which are not implemented on the client PC which are but 'functionally related to the client PC’ (recitals 277, 567 and 690 to the contested decision).
221. The Commission denies that the contested decision envisages that Microsoft's competitors should develop products functioning in all respects like a Windows server operating system. In fact, the decision is intended to enable 'competing products [to] be created that w[ould] function differently, whilst being able to understand the messages conveyed by Microsoft's relevant products'. Thus, the interoperability information at issue will be used by Microsoft's competitors not to develop exactly the same products as Microsoft's, but to develop improved products, with 'added value'.
It is entirely possible that Microsoft’s competitors will be able to add value. But they will be enabled to do so by disclosures that reveal Microsoft’s innovative efforts. The court adds the following remarkable assurance:
242. Furthermore, as will also be explained in greater detail at paragraph 658 below, when the Court examines the circumstance relating to the new product, Microsoft's competitors would have no interest in developing exactly the same work group server operating systems as Microsoft's.
658. Nor would Microsoft's competitors have any interest in merely reproducing Windows work group server operating systems. Once they are able to use the information communicated to them to develop systems that are sufficiently interoperable with the Windows domain architecture, they will have no other choice, if they wish to take advantage of a competitive advantage over Microsoft and maintain a profitable presence on the market, than to differentiate their products from Microsoft's products with respect to certain parameters and certain features. It must be borne in mind that, as the Commission explains at recitals 719 to 721 to the contested decision, the implementation of specifications is a difficult task which requires significant investment in money and time.
It apparently does not occur to the CFI that competitors, given free access to the fruits of Microsoft’s R&D, would have a very strong incentive to compete with Microsoft on price alone. Because their “significant investment” would not approach Microsoft’s, their cost advantage would be substantial.
September 19 Update:
When I say in this post there is a danger that the remedy will facilitate "cloning," I do not mean an exact, instruction-for-instruction copy of Microsoft's code. I mean the term in the sense Judge Kollar-Kotelly used it in New York v. Microsoft Corp., 224 F. Supp. 2d 76, 175-76 (D.C. Cir. 2002), aff'd sub nom. Massachusetts v. Microsoft Corp., 373 F.3d 1199 (D.C. Cir. 2004):
"By cloning, the Court means the creation of a piece of software which replicates the functions of another piece of software, even if the replication is accomplished by some means other than the literal repetition of the same source code. In most instances, where a clone is created without a copyright violation, the clone emerges from a process of reverse engineering-which consists of the study of functionality in the original product and the attempt to produce a product which accomplishes the same end. The process of cloning the functionality of a competitor's product is usually an expensive and time-consuming undertaking which, if successful, will enable the cloned product to function as a replacement for the original product. To impose a remedy which facilitates the cloning of Microsoft's products-a far simpler task than the creation of a new product-would provide a windfall to Microsoft's competitors."
Posted by D. Daniel Sokol
Law Seminars International will host what looks to be an excellent program on Standards Bodies & Patent Pools on October 11 & 12, 2007, right outside of Washington, DC with top enforcers and practitioners among the seminar faculty.
Posted by D. Daniel Sokol
If you thought it was tough to get class cert in a Sherman Section 1 case, it turns out it is even harder to do so in a Sherman Section 2 case, according to a forthcoming article in the Journal of Competition Law and Economics by John H. Johnson and Gregory K. Leonard of NERA Economic Consulting titled Economics and the Rigorous Analysis of Class Certification in Antitrust Cases.
ABSTRACT: Defendants in Sherman Act Section 1 class action cases have historically faced a low likelihood of success in their attempts to defeat class certification, in part because courts often started from a presumption that all class members were harmed by price-fixing. Recent trends in recent judicial decisions, however, have suggested that courts are starting to take a harder look at whether classes should be certified in Section 1 cases. In this paper, we demonstrate that the presumption of harm on all class members is not justified in many cases. Instead, given the economic characteristics of many industries, a rigorous economic analysis will be required to determine whether antitrust impact for each proposed class member can be established using common proof. What is more, determining whether this condition holds in a given situation generally requires that analyses based on individual data be performed—exactly the outcome that the use of the class action mechanism is intended to avoid. This creates a "common proof paradox" in Section 1 cases. We go on to show that the potential hurdles for class certification are even greater in Sherman Act Section 2 cases.
Monday, September 17, 2007
Posted by D. Daniel Sokol
Here is a link (unofficial) to the Neelie Kroes Microsoft related press conference today. Some of the statements, I hope, are merely over-excitement based on a decisive victory and not her general thoughts on how we should think about EU competition policy. The comments speak for themselves.
Posted by Bill Page
So far, there is little to report of interest other than the result—an endorsement of the commission’s position on every substantive issue. The court’s pattern appears to be, on each point, to repeat the Commission’s 2004 decision, describe the position of the parties in great detail, and then to endorse the Commission’s position. The court emphasizes (¶ 260) that it can only evaluate the 2004 decision based on the “the matters of fact and of law existing at the time when the measure was adopted.” Consequently, the court cannot take account of what we have learned during the commission’s implementation of its decision—the fact, for example, that the version of Windows without Media Player that Microsoft created in response to the 2004 decision has found no market at all. The net effect is that, in my reading so far, this decision teaches us little that we did not know after reading the commission’s decision in 2004, other than that the court now agrees with the commission on just about everything, except the requirement of a monitoring trustee. And all thirteen members of the court apparently agree in every detail.
Thus, the lesson is that EC competition law has now adopted a significantly different position than that of US law on tying and on the obligation of a dominant firm to assist rivals. On that subject, I also noticed this in the New York Times coverage of Neelie Kroes's press conference earlier today:
[Kroes] highlighted the fact that Microsoft has 95 percent of the world market for desktop operating systems and said she would like to see this fall.
“You can’t draw a line and say exactly 50 percent is correct, but a significant drop in market share is what we would like to see,” she said. “Microsoft cannot regulate the market by imposing its products and its services on people.”
Update: The EC has issued a "clarification" of Kroes's remarks. It seems she didn't really mean to say that the EC wants Microsoft's market share to fall, only that, if its abusive practices are removed, the "logical consequence" would be that its market share would fall.