Antitrust & Competition Policy Blog

Editor: D. Daniel Sokol
University of Florida
Levin College of Law

A Member of the Law Professor Blogs Network

Saturday, September 27, 2008

CARICOM Competition Commission Active by Next Year?

Posted by D. Daniel Sokol

Maybe the CARICOM Competition will have some life to it after all.  Stewart Stephenson, one of the seven Commissioners on the CARICOM Competition Commission says that the Commission might become active by February 2009.

September 27, 2008 | Permalink | Comments (0) | TrackBack (0)

Friday, September 26, 2008

FTC Seeks Comments on Proposed Amendments to its Rules of Practice Regarding Adjudicative Proceedings

Posted by D. Daniel Sokol

According to a FTC press release:

The Federal Trade Commission today issued a Notice of Proposed Rulemaking (NPRM) seeking public comment on proposed rule revisions that would amend Parts 3 and 4 of the agency’s Rules of Practice, with the goal of further expediting its adjudicative proceedings, improving the quality of adjudicative decision-making, and clarifying the respective roles of the Administrative Law Judge (ALJ) and the Commission in Part 3 proceedings. The FTC currently is seeking public comment on the proposed amendments as part of the rulemaking process.

September 26, 2008 | Permalink | Comments (0) | TrackBack (0)

Separating Pro-Competitive from Anti-Competitive Loyalty Rebates: A Conceptual Framework

Posted by D. Daniel Sokol

Damien Geradin, Tilburg University - Tilburg Law and Economics Center (TILEC) and College of Europe  has produced a worthwhile read - Separating Pro-Competitive from Anti-Competitive Loyalty Rebates: A Conceptual Framework.

ABSTRACT:  In its submission to the recent OECD Roundtable on Bundled and Loyalty Discounts and Rebates (the "OECD Roundtable on rebates"), Korea observed that "loyalty discounts are getting growing attention both academically and practically" and that "this issue was now on top of the agendas of many seminars and workshops on competition law, with many papers devoted to the theme." It then explained that this trend was attributable to the fact that loyalty discounts has become an important marketing tool, which raised several competition issues in the process.

While discounts or rebates - this paper will generally refer to rebates - have been used by businesses for centuries to sell greater amounts of products to customers, it is true that the compatibility of rebates with competition law has become a particularly acute issue in recent years. There are several reasons for this. These last few years have witnessed several major court judgments in the European Union (the "EU") and the United States (the "US"), which have been abundantly commented upon, hence explaining the large number of papers and seminars devoted to the subject. But, more generally, the assessment of rebates seems to be one of the most unsettled areas of competition law.

In the EU, for instance, the decisional practice of the European Commission and the case-law of the Community courts have been harshly criticized as being unnecessarily strict, following a form-based approach that is poorly in line with economics. While these decisions have been sometimes misinterpreted, it is true that they were generally unhelpful in large part due to the fact they focused on the wrong questions. As a response to such criticisms (and more general criticisms about the manner in which Article 82 EC was implemented), the European Commission published in December 2005 a Discussion Paper, which promotes an effects-based approach to the assessment of rebates. While US courts have generally applied an effects-based approach to the assessment of rebates, the case-law is still unsettled, notably in the area of bundled rebates. This certainly led Korea to conclude its OECD submission by stating that "even in jurisdictions such as the US or the EU which have accumulated a considerable amount of enforcement experience regarding loyalty discounting often do not have a clear analysis method regarding this practice."

While this observation is in many ways true, there are, however, encouraging signs that EU and US law are converging, and will increasingly do so, around a set of sound legal and economic principles to assess guidelines. Both the EU and the US contributions to the recent OECD Roundtable on rebates emphasize the importance of relying on objective economic criteria for the assessment of rebates. While the views of the European Commission and the US antitrust agencies still diverge on some issues, there seems to be a consensus that a price-cost test should play an important role in screening rebates that can (i.e., are able to) foreclose a dominant firms' rivals to supply one or several customers. There is also a consensus that such tests should only be a component of a broader test that should also determine whether the rebates in question substantially foreclose the relevant market and, in such cases, whether the foreclosure effect can be compensated by efficiencies. While price-cost tests help determining whether the rebates granted can have the effect of foreclosing competitors because the dominant firm's customers cannot turn to alternative suppliers without incurring substantial switching costs, it should also be demonstrated that these customers represent a substantial share of the market to which equally efficient rivals can turn, depriving them of the possibility to profitably enter and/or expand. Moreover, both EU and US law recognize the importance of taking into account in the assessment process the various efficiencies that can be generated by loyalty rebates and the extent to which they can counterbalance foreclosure effects.

Against this background, this paper aims at providing a framework - based on sound legal and economic principles - designed to help competition authorities and courts to separate pro-competitive loyalty rebates from anti-competitive ones. It starts with the widely acknowledged view that in the vast majority of cases dominant firms grant rebates to their customers for legitimate reasons, i.e. not to exclude competitors but to engage in legitimate forms of price competition and to realize a variety of efficiencies, as discussed below. In fact, rebates are not only used by dominant firms, but also by firms without any market power and thus unable to exclude competitors. This paper also takes as a starting point the view - which is recognized in the vast majority of antitrust regimes - that the goal of competition law is not the protection of competitors, but the protection of competition. Hence, rebates that cause less efficient firms to lose market share should not be banned as they lack anti-competitive effects. As will be seen below, these rebates enhance consumer welfare as they ensure that customers are served by the most efficient firms and benefit from their more competitive offers.

September 26, 2008 | Permalink | Comments (0) | TrackBack (0)

Assessing the Efficacy of Structural Merger Remedies: Choosing between Theories of Harm?

Posted by D. Daniel Sokol

An interesting new paper comes from Stephen Davies and Matt Olczak, both of the University of East Anglia Competition Law Centre, titled Assessing the Efficacy of Structural Merger Remedies: Choosing between Theories of Harm?

ABSTRACT: Previous empirical assessments of the effectiveness of structural merger remedies have focused mainly on the subsequent viability of the divested assets. Here, we take a different approach by examining how competitive are the market structures which result from the divestments. We employ a tightly specified sample of markets in which the European Commission (EC) has imposed structural merger remedies. It has two key features: (i) it includes all mergers in which the EC appears to have seriously considered, simultaneously, the possibility of collective dominance, as well as single dominance; (ii) in a previous paper, for the same sample, we estimated a model which proved very successful in predicting the Commission's merger decisions, in terms of the market shares of the leading firms. The former allows us to explore the choices between alternative theories of harm, and the latter provides a yardstick for evaluating whether markets are competitive or not - at least in the eyes of the Commission.

Running the hypothetical post-remedy market shares through the model, we can predict whether the EC would have judged the markets concerned to be competitive, had they been the result of a merger rather than a remedy. We find that a significant proportion were not competitive in this sense. One explanation is that the EC has simply been inconsistent - using different criteria for assessing remedies from those for assessing the mergers in the first place. However, a more sympathetic - and in our opinion, more likely - explanation is that the Commission is severely constrained by the pre-merger market structures in many markets. We show that, typically, divestment remedies return the market to the same structure as existed before the proposed merger. Indeed, one can argue that any competition authority should never do more than this. Crucially, however, we find that this pre-merger structure is often itself not competitive. We also observe an analogous picture in a number of markets where the Commission chose not to intervene: while the post-merger structure was not competitive, nor was the pre-merger structure. In those cases, however, the Commission preferred the former to the latter. In effect, in both scenarios, the EC was faced with a no-win decision.

This immediately raises a follow-up question: why did the EC intervene for some, but not for others - given that in all these cases, some sort of anticompetitive structure would prevail? We show that, in this sample at least, the answer is often tied to the prospective rank of the merged firm post-merger. In particular, in those markets where the merged firm would not be the largest post-merger, we find a reluctance to intervene even where the resulting market structure is likely to be conducive to collective dominance. We explain this by a willingness to tolerate an outcome which may be conducive to tacit collusion if the alternative is the possibility of an enhanced position of single dominance by the market leader.

Finally, because the sample is confined to cases brought under the 'old' EC Merger Regulation, we go on to consider how, if at all, these conclusions require qualification following the 2004 revisions, which, amongst other things, made interventions for non-coordinated behaviour possible without requiring that the merged firm be a dominant market leader. Our main conclusions here are that the Commission appears to have been less inclined to intervene in general, but particularly for Collective Dominance (or 'coordinated effects' as it is now known in Europe as well as the US.) Moreover, perhaps contrary to expectation, where the merged firm is #2, the Commission has to date rarely made a unilateral effects decision and never made a coordinated effects decision.

September 26, 2008 | Permalink | Comments (0) | TrackBack (0)

Thursday, September 25, 2008

The FTC on Small Business Competition Policy: Are Markets Open for Entrepreneurs?

Posted by D. Daniel Sokol

Chairman Kovacic of the FTC has a worthwhile read in his comments that were part of his testimony on Small Business Competition Policy: Are Markets Open for Entrepreneurs? 

September 25, 2008 | Permalink | Comments (0) | TrackBack (0)

United States Courts and the Optimal Deterrence of International Cartels: A Welfarist Perspective on Empagran

Posted by D. Daniel Sokol

Alvin Klevorick (Yale Law) discusses United States Courts and the Optimal Deterrence of International Cartels: A Welfarist Perspective on Empagran.

ABSTRACT: E. Hoffmann-La Roche Ltd. v. Empagran S.A. concerned a private antitrust suit for damages against a global vitamins cartel. The central issue in the litigation was whether foreign plaintiffs injured by the cartel's conduct abroad could bring suit in U.S. court, an issue that was ultimately resolved in the negative. We take a welfarist perspective on this issue and inquire whether optimal deterrence requires U.S. courts to take subject matter jurisdiction under U.S. law for claims such as those in Empagran. Our analysis considers, in particular, the arguments of various economist amici in favor of jurisdiction and arguments of the U.S. and foreign government amici against jurisdiction. We explain why the issue is difficult to resolve, and identify several economic concerns that the amici do not address, which may counsel against jurisdiction. We also analyze the legal standard enunciated by the Supreme Court and applied on remand by the D.C. Circuit, and we argue that its focus on independent harms and proximate causation is problematic and does not provide an adequate economic foundation for resolving the underlying legal issues.

September 25, 2008 | Permalink | Comments (0) | TrackBack (0)

Small Business Competition Policy: Are Markets Open for Entrepreneurs

Posted by D. Daniel Sokol

Jonathan Rubin (Patton Boggs) testified on behalf of the American Antitrust Institute before the United States House of Representatives, Committee on Small Business.  His testimony is available below.

Download jr_testimonyfinalbis3_1.pdf

September 25, 2008 | Permalink | Comments (0) | TrackBack (0)

Estimating Market Power with Economic Profits

Posted by D. Daniel Sokol

Kevin Kreitzman and Michael A. Williams (both of ERS Group) write on Estimating Market Power with Economic Profits.

ABSTRACT: A firm's market power is embodied in its cash flows. Economic profits, the excess return on investment over the cost of capital, can be measured using the discounted cash flow approach for firm valuation developed by Miller and Modigliani. The information required to provide a dynamic estimate of economic profits related to the operations of a firm in a given market is contained in its transaction records. When a firm's transaction records are unavailable, they can be derived, in part, by adjusting and recategorizing the publicly available information contained in its financial accounting records. Although accounting measures differ fundamentally from economic profits, the published accounting statements also contain transaction information since they are a consolidated summary of a firm's transaction records. The degree of a firm's market power can be measured by its economic profits and economic rate of return. Adjustments to the firm's economic profits may be required to remove sources of profit not associated with the exercise of market power, e.g., exogenous increases in the market value of its assets.

September 25, 2008 | Permalink | Comments (0) | TrackBack (0)

Navigating Scylla and Charybdis: Three Stages in the Journey to Effective Section 2 Enforcement

Posted by D. Daniel Sokol

Tom Barnett (DOJ Antitrust) spoke on Navigating Scylla and Charybdis: Three Stages in the Journey to Effective Section 2 Enforcement at Georgetown University Law Center on September 23, 2008.

September 25, 2008 | Permalink | Comments (0) | TrackBack (0)

Wednesday, September 24, 2008

Interview with Chairman Kovacic

Posted by D. Daniel Sokol

Concurrences, the online site for European competition policy has an interview with FTC Chairman Kovacic that is worth examining.

My favorite quote:

"In 1979, nobody envisioned that competition policy would be a concern beyond a relatively small number of countries with well established market economies."

September 24, 2008 | Permalink | Comments (0) | TrackBack (0)

Continuity and Change in the Supreme Court: Antitrust as a Case Study

Posted by D. Daniel Sokol

In what looks to be a an excellent event, the American Enterprise Institute's 2008 Gauer Distinguished Lecture will be given by the Honorable Douglas H. Ginsburg, U.S. Court of Appeals for the District of Columbia Circuit.  The lecture will be held on Tuesday, September 23, 2008 with the lecture titled "Continuity and Change in the Supreme Court: Antitrust as a Case Study."

September 24, 2008 | Permalink | Comments (2) | TrackBack (0)

Reject the Highmark/Blue Cross Merger

Posted by D. Daniel Sokol

David Balto provided testimony before the Pennsylvania Senate Banking and Insurance Committee to Reject the Highmark/Blue Cross Merger.

September 24, 2008 | Permalink | Comments (0) | TrackBack (0)

Tying as Price Discrimination in Antitrust Law

Posted by D. Daniel Sokol

Sahin Ardiyok of Bilgi University (Law) and Bilkent University (Law) has an analysis of Tying as Price Discrimination in Antitrust Law.

ABSTRACT: This paper focuses on the question of whether the task of distributing the welfare between producers and consumers is in the domain or jurisprudence of courts or antitrust agencies. Indeed, these foundations are far away from the understanding introduced by Chicago school when the matter in hand is about price discrimination. But contrary to this, public choice framework outlines the allocation of tasks about distributing the welfare by means of macro economic measures such as taxing. So it is paradoxical to accept certain kinds of price discrimination are illegal even if they were proved to increase efficiency and total welfare.

In this paper, I give the definition of price discrimination and tying by using economic approach. Types of tying practices which is not deemed to be price discrimination are also presented. In addition the case law about tying as price discrimination is a part of the study. And essentially, antitrust policy choices in order to distinguish tying arrangements which are efficient and social welfare practices are discussed.

September 24, 2008 | Permalink | Comments (0) | TrackBack (0)

Tuesday, September 23, 2008

Standard-Setting, Innovation Specialists, and Competition Policy

Posted by D. Daniel Sokol

Schmalen Richard Schmalensee, Sloan School of Management, MIT, discusses Standard-Setting, Innovation Specialists, and Competition Policy in his latest working paper.

ABSTRACT: This paper investigates several competition policy questions related to standard-setting organizations (SSOs). Are compatibility standards agreed upon by competitors generally in the public interest? Should competition policy generally favor patent-holders who practice their patents against innovation specialists who do not? Should SSOs be encouraged - or even required - to conduct auctions among patent-holders before standards are set in order to determine post-standard royalty rates? Alternatively, should antitrust policy allow or encourage collective negotiation of royalty rates?

September 23, 2008 | Permalink | Comments (0) | TrackBack (0)

Collusion in US Agriculture - DOJ Investigates Potential Cartels

Posted by D. Daniel Sokol

The WSJ has an article in today's paper on a DOJ investigation into egg producers and California tomato processors.  Collusion in agriculture is not surprising given high concentration in the industry and low levels of substitutability of products, among other reasons. 

  One big takeaway of agriculture issues in antitrust is that competition policy affects the way firms in agricultural production behave as much as how they relate to other sectors in the economy, and may prove to be an important tool in helping develop a dynamic agricultural sector.

September 23, 2008 | Permalink | Comments (0) | TrackBack (0)

The Antitrust Economics (and Law) of Surcharging Credit Card Transactions

Posted by D. Daniel Sokol

Steven Semeraro, Thomas Jefferson School of Law, offers some thoughts on The Antitrust Economics (and Law) of Surcharging Credit Card Transactions.

ABSTRACT: When a customer uses a credit card, the merchant pays a small percentage of the purchase price to the bank that issued the card. This cost of card acceptance, known as the interchange fee, adds up to big money . . . really big. This year, the credit card companies anticipate that interchange fees will total $48 billion, an increase of nearly 300% since 2001. Merchants can do little to influence these fees, because credit cards are critical to their businesses and the systems' rules prohibit surcharging.

In recent years, commentators with growing levels of confidence have suggested that this anticompetitive rumble could be quelled if merchants had the power to surcharge card transactions. And now, fed up with the astonishing increases in interchange fees, merchants have filed more than 50 antitrust suits (now consolidated) against the credit card companies challenging the rules prohibiting surcharging and seeking the power to do it.

This Article contends that permitting surcharging would likely do more harm than good. Under well established economic principles, charging merchants more than necessary to cover the cost of providing card-acceptance services can actually enable consumers to internalize all of the benefits (those flowing to both consumers and merchants) of card use. Just as newspapers efficiently charge readers much less than the cost of producing and delivering the morning paper, and advertisers pay much more than the cost of placing an advertisement, efficient credit card pricing requires that merchants pay more than the direct cost of service, and cardholders pay less. In such a two-sided market, shielding cardholders from merchant acceptance costs through rules prohibiting surcharging serves the pro-competitive purpose of facilitating efficient pricing.

Today, unfortunately, card systems with market power go too far and charge merchants an additional, anticompetitive increment, above what is necessary to an efficient pricing policy. Card issuers may then retain some revenue as supra-competitive profit and wastefully compete some away in pursuit of highly profitable cardholders. Although surcharging potentially could combat this market power, it would be an uncertain and risky response, because merchants could not precisely tailor their schemes to undo only the anticompetitive overcharge. Moreover, retailers in competitive markets would find surcharging difficult because of the costs, particularly in terms of customer resistance. Merchants with market power probably could institute surcharges, but would be unlikely to channel all of the savings to their customers. In sum, the competitive benefits of permitting surcharging are more uncertain, and the losses in terms of consumer welfare more likely, than commentators have suggested. Whether consumers would benefit from the resulting disruption to the current market equilibrium would be, at best, anybody's guess.

This Article proposes an alternative, less risky response that would focus directly on card system market power by relaxing the rule that requires merchants to accept cards from every issuer on the network (the "honor-all-cards" rule). Today, large banks issuing Visa and MasterCard cards effectively set their interchange fees collectively. By forcing these banks to compete for merchants, as American Express and Discover do now, this approach would stimulate competition and move card-acceptance costs toward the efficient level, without a significant risk of inefficiently disrupting the market.

September 23, 2008 | Permalink | Comments (0) | TrackBack (0)

Defining Product Markets in the UK Grocery Industry

Posted by D. Daniel Sokol

Kate Collyer (UK Competition Commission) and Andrew Taylor (UK Competition Commission) provide some insights on Defining Product Markets in the UK Grocery Industry.

ABSTRACT: On April 30, 2008, the UK Competition Commission published the final report of its two year investigation into the supply of groceries in the UK. This article gives a UK perspective on some of the issues covered in the recent Whole Foods decision by the U.S. Court of Appeals for the District of Columbia. It draws out the key market definition findings in the CC’s investigation, with a particular focus on the CC’s decisions and analysis with respect to those grocery retailers offering a somewhat differentiated product from the UK’s mainstream grocery retailers.

The CC’s investigation into the UK groceries sector was a market investigation under the provisions of the Enterprise Act 2002, which requires the CC to decide under s.134(1) whether “any feature … of each relevant market prevents, restricts, or distorts competition in connection with the supply or acquisition of any goods or services in the UK or a part of the UK.” Where the CC identifies such a feature there is said to be an ‘adverse effect on competition’, and the CC then decides on the action, if any, that should be taken by itself or by others to remedy, mitigate, or prevent the AEC.

Defining the product and geographic markets in which grocery stores compete was a key building block for the CC’s groceries market investigation, providing the framework for the CC’s analysis of competition among grocery retailers. The CC’s guidelines state that “the Commission does not regard market definition as an end in itself, but rather as a framework within which to analyze the effects of market features.” Nevertheless, in this case the CC’s market definition findings perhaps have greater significance in that they are likely to influence future Office of Fair Trading inquiries in the sector.

September 23, 2008 | Permalink | Comments (0) | TrackBack (0)

Monday, September 22, 2008

The Audit Industry: World's Weakest Oligopoly?

Posted by D. Daniel Sokol

Bernard Asher of the American Antitrust Institute has written a piece on The Audit Industry: World's Weakest Oligopoly?

ABSTRACT: The world’s audit oligopoly is composed of four accounting firms: PricewaterhouseCoopers, KPMG, Ernst & Young, and Deloitte Touche Komatsu (the Big 4). These firms are in a strong position in that they audit the financial statements of nearly all the global public companies in the world and, arguably, are the only audit firms able to do so. They are huge, privately-owned, international networks with robust revenues, vast resources, and expertise. Yet they are heavily regulated by governments, and they are subject to massive lawsuits when investors and creditors suffer large losses due to fraud or error; these are their major weaknesses. Since the dual shocks of the collapse of Arthur Andersen (reducing the Big 5 to 4) and the enactment of stringent regulations by the U.S. Congress in 2002 in reaction to corporate accounting scandals, there is great concern in the financial community that another company in the oligopoly could be forced out of business, further reducing the choice of auditors for multinational corporations and causing disruptions in the marketplace.

This paper reviews the effects of concentration on competition in the market for audits of major multinational corporations, as well as the effects on audit fees, audit quality, and the regulatory environment. It observes that competition is far less intense than in earlier years and that regulatory authorities are reluctant to take severe disciplinary actions against audit firms, but that the industry remains vulnerable to legal challenge. Global public companies will continue to face limited choice of auditors until smaller competitors or new competitors can build viable networks and reputations for high quality audits. The paper examines barriers to market entry and comments on proposals to promote greater competition, including liability limitations. It also reports on anticompetitive practices of major accounting firms in the past and the need for regulatory authorities to maintain constant vigilance to avoid any recurrence. Finally, responding to the question posed in the title, the paper concludes that considering the industry’s market dominance, the relaxation of punitive actions by regulatory authorities and the availability of some forms of liability limitation, the audit industry may not be the ideal candidate for weakest oligopoly in the world.

September 22, 2008 | Permalink | Comments (0) | TrackBack (0)

Market Definition in Grocery Retailing: The Whole Foods Case

Posted by D. Daniel Sokol

Jgs_3 Jordi Gual of the University of Navarra - IESE Business School and Sandra Jódar-Rosell University of Toulouse Economics (grad student) provide a European view on Market Definition in Grocery Retailing: The Whole Foods Case.

ABSTRACT: As in many other antitrust cases, the delineation of the relevant product market was the critical issue in the Whole Foods and Wild Oats merger. Setting the market boundaries containing the set of products in direct competition with those of the merging parties is a very difficult task in the presence of product differentiation. The varieties produced by each of the firms differ in several dimensions.

Two varieties at the opposite extremes of the differentiation dimension may end up as poor substitutes for each other. In practice, it is very difficult to draw a line in the middle of these two extremes that objectively separates the two product markets.

In an attempt to offer an objective criterion for market definition, the Horizontal Merger Guidelines issued by the U.S. Department of Justice and the Federal Trade Commission (“Guidelines”) state that the antitrust agencies must delineate the product market as a group of products such that, if produced by a hypothetical profit-maximizing monopolist, would be able to profitably impose at least a small but significant and nontransitory increase in price. This approach has been known as the SSNIP test. Although theoretically appealing, in practice a proper assessment of the SSNIP test would be equivalent to a full quantitative evaluation of the merger.

September 22, 2008 | Permalink | Comments (0) | TrackBack (0)

Price Squeeze: Lessons from the Telecom Italia Case

Posted by D. Daniel Sokol

A new article by Michele Polo (Professor of Economics, Bocconi University) discusses Price Squeeze: Lessons from the Telecom Italia Case.

ABSTRACT: This paper analyzes a price squeeze case in the provision of telecommunication services to the Italian Public Administration, in which Telecom Italia, the incumbent company, was condemned for bidding below costs. We develop the analysis of the case highlighting the possible anticompetitive story and the alternative competitive explanation. We then construct a quantitative imputation test to verify the alleged anticompetitive behavior. The methodological issues and the assumptions needed to implement the test are discussed in detail, showing their link to a precise test of the anticompetitive story. We discuss the reasons why the Antitrust Authority and our views diverge over the evaluation of Telecom Italia bidding. The role of judicial review in cases with complex economic arguments is discussed.

September 22, 2008 | Permalink | Comments (0) | TrackBack (0)