Antitrust & Competition Policy Blog

Antitrust in the Energy Sector Symposium Issue

Posted by D. Daniel Sokol

The Oil Gas Energy Law Intelligence Journal has published its symposium Antitrust in the Energy Sector.

Antitrust in the Energy Sector

Editorial

• OGEL Special Issue - Antitrust in the Energy Sector N. Petit, University of Liège

Antitrust in the Energy Sector

• Two New Precedents in the EU Natural Gas Markets - EU Competition Law and Network Foreclosure K. Talus, UCL School of Energy and Resources, Australia (UCL SERAus)

• Security of Supply Argument in the Context of EU Competition Law K. Talus, UCL School of Energy and Resources, Australia (UCL SERAus)

• Relationship Between General Competition Laws and Sector Specific Energy Regulation K. Talus, UCL School of Energy and Resources, Australia (UCL SERAus)
  P. Kuoppamäki, Nokia

• Sharing Data in the Energy Sector: What Companies Can, Cannot and Should Do Under Competition Law W. Vandenberghe, DLA Piper UK LLP (Brussels)

• The Emerging Strategy of the European Commission on Long-term Energy Supply Contracts: Is the New Methodology truly 'More Economic'? A. de Hauteclocque, Florence School of Regulation, European University Institute RSCAS

• Waiting for the Polish Trinko A. Stawicki, WKB Wiercinski, Kwiecinski, Baehr

• A Review of the Italian Competition Authority Commitment Decisions Regarding the Energy Sector M. Giannino, Desogus Law Office

• Key issues for the energy sector in the coordinated defence of parallel US/UK/international antitrust proceedings R.S. Lambert, Fulbright & Jaworski L.L.P.
  L.E. Kruse, Fulbright & Jaworski L.L.P.

• Nopec Goes Bananas: How the Supreme Court Will Thwart Congress's Attempt to Extend U.S. Antitrust Law's Extraterritorial Reach S. Looper, Dewey & LeBoeuf LLP

• The U.S. Petroleum Price Manipulation Rules: Cause for Concern? T.J. Cornell, Clifford Chance

• The More Things Change, The More they Stay the Same? Merger Review, the Canadian Oil and Gas Industry and the Year of Change A.S. Goodman, Heenan Blaikie
  C. Pigott, Heenan Blaikie

• Impact of Recent U.S. Competition Law Decisions on the Conduct of International Business Operations in the Energy Sector D. Anderson, Fulbright & Jaworski L.L.P
  J.B. Mitchell, Fulbright & Jaworski L.L.P

• Third-party Access Rights in the Energy Sector: A Competition Law Perspective A. Kotlowski, Faculty of Law, University of Oxford

• Interconnection Investment under the Competitive Electricity Market: The Case of Japan I. Matsukawa, Faculty of Economics, Musashi University

Did We Avoid Historical Failures of Antitrust Enforcement During the 2008-09 Financial Crisis?

Posted by D. Daniel Sokol

Dan Crane (Michigan Law) has posted Did We Avoid Historical Failures of Antitrust Enforcement During the 2008-09 Financial Crisis?

ABSTRACT: This introductory essay for a symposium on antitrust enforcement during economic crises provides a brief historical overview of the failures of antitrust enforcement during major economic crises and wars in the first half of the twentieth century. It then considers the reasons that historical narrative breaks off in the second half of the twentieth century and asks whether there is evidence of its revival during the recent economic crisis.

The Economics of Railroad “Captive Shipper” Legislation

Posted by D. Daniel Sokol

Russ Pittman (DOJ) has an interesting new work on The Economics of Railroad “Captive Shipper” Legislation.

ABSTRACT: Recent rate increases by U.S. freight railroads have refocused attention on regulation, deregulation, and regulatory reforms in the railroad industry. Legislation introduced into Congress would render a variety of railroad behavior newly subject to the jurisdiction of the antitrust statutes, with potential enforcement by the Antitrust Division and the FTC and through lawsuits brought by state attorneys general or private parties. This paper considers the economic issues raised by legislation and the likely impacts on competition and welfare.  

Merger Remedies Versus Efficiency Defence: An Analysis of Merging Parties’ Litigation Strategy in EC Merger Cases

Posted by D. Daniel Sokol

Peter L. Ormosi, ESRC Centre for Competition Policy, University of East Anglia, has a paper on Merger Remedies Versus Efficiency Defence: An Analysis of Merging Parties’ Litigation Strategy in EC Merger Cases.

ABSTRACT: This paper contributes to the understanding of entrepreneurial motives in merger litigation by looking at how merging parties construct their litigation strategy in European Community merger procedures, given the environment determined by relevant merger legislations and the European Commission’s practice. The main focus of the paper is on two major questions in merger litigation strategy: whether to reveal efficiency related evidence to the Commission, and – if a remedy is offered – when to make that offer. As the regulatory framework and the Commission’s decision together determine the payoffs that any combination of litigation strategy leads to, companies are expected to design their strategy that helps them in achieving as early an approval as possible. Put differently, the paper is a test of how the Commission’s signals affect merging parties’ behaviour with regards to their decisions on remedy offers and efficiency claims. By analysing the Commission’s practice between 1999 and 2008, the paper examines empirically the determinants of the strategy that parties follow in individual merger cases.

 

Wrap up of Competition in Agriculture Blog Symposium

Posted by D. Daniel Sokol

I want to thank our contributors.  Below are links to the various posts:

Andy Novakovic (Cornell - Agriculture and Applied Economics)
Kyle Stiegert (University of Wisconsin, Agriculture and Applied Economics)
Scott Kieff (GW Law), Geoff Manne (Lewis & Clark Law), and Josh Wright (George Mason Law)
Peter Carstensen (University of Wisconsin Law)
Mike Sykuta (Agricultural and Applied Economics, University of Missouri-Columbia)
Jeff Harrison(University of Florida Levin College of Law)
Ron Cass (Chairman, Center for the Rule of Law and Dean Emeritus, Boston University School of Law)

Competition in Agriculture Symposium: Comments of Andy Novakovic

Posted by Andy Novakovic (Cornell - Agriculture and Applied Economics)

The nature of competition the market for farm milk has been the subject of discussion and dispute from the earliest formation of modern dairy markets in the 1800s. Between about 1880 and 1910, the balance of market power had clearly shifted to buyers. Prior to the Clayton Act, there were few regulatory tools available to restrain collusive and other anti-competitive behaviors. Cooperative marketing was promoted as the best available tool in an oligopsonistic market. Dairy farmers felt particularly vulnerable because they harvested their highly perishable and bulky product twice a day. These fundamental product characteristics made it expensive to search for alternative buyers and created a real sense of urgency to sell a product whose value deteriorated to zero in about one day.

Successes of dairy cooperatives around WWI were eroded by rent-seeking behavior among farmers as well as subtle counter moves by buyers. The Great Depression presented too big a problem for private solutions and gave rise to cooperatives as a political entity. An era of public regulation was conceived in the 1930s, blossomed into the 1950s, dominated market behavior through the 1990s, and is only now showing signs of fatigue.

Most of the fundamental, underlying economic characteristics of farm level markets seem to endure, largely unchanged since the early 20th Century. Farmers continue to feel disadvantaged in bargaining with buyers, whether this bargaining is conducted individually, in small cooperative organizations, or in nation-spanning cooperatives having thousands of members.

A particularly interesting current issue is the extent to which very large regional and national cooperatives operate in the interests of their owner-members vs responding to some other agenda that leads them to behave more like an investor or privately owned buyer. Even this concern has antecedents in the 1920s and 1960s. While much of the discussion about competition in agricultural markets parallels concerns in other sectors of the economy, there are special policy issues that arise from the nature of cooperative exemptions under Capper-Volstead and USDA’s responsibility to both promote cooperatives and regulate their behavior.

Competition in Agriculture Symposium: Comments of Kyle Stiegert

Posted by Kyle Stiegert (University of Wisconsin, Agriculture and Applied Economics)

Over just 15 years, the development of seeds for corn, soybean, and cotton farmers have changed from a traditional breeding approach to a system that involves breeding with the insertion of numerous combinations of genetically modified seed traits that offer specific on-board services to the plant.  These traits are patented by just a few biotech firms, which have accessed the seed sector through both vertical integration contracting.  

Seeds are developed to perform within different regional agro-climactic zones.  When a biotech firm owns a downstream seed subsidiary, the strategic considerations of the spatially differentiated market become quite complex.  For example, perhaps the biotech firm wants to control a regional market in which they own a high-performing seed with their own GM traits.  To achieve success, the GM firm could just work hard to fairly market the seed while licensing their GM traits to any other firm that would in turn produce a strong competing seed.  Alternatively they could:

• control which combinations of GM traits are allowed in competitor seeds,

• limit how their GM traits are stacked with competitor GM traits.
• limit the use of their GM traits in higher performing competitor seeds
• set the technology fee on licensed traits high enough that their subsidiary seed company has a price advantage in the final goods market.

 

These and other possible strategies open the door to many legal and economic questions about limits of patent rights, abuse of dominance, and market foreclosure.  I expect that the DOJ/USDA hearings will begin to unravel many of the complex issues involving GM technologies and their evolving markets.  I believe we need to look at the welfare effects on farm producers in this case and not on consumers.  Consumer welfare effects would be extremely difficult to measure with any accuracy. 

Competition Policies in Latin America Blog

Posted by D. Daniel Sokol

The blog "Derecho de la Competencia" has migrated to a new domain, www.lalibrecompetencia.com. Furthermore the blog has a new design and its name has been reformulated as "Competition policies in Latin America" ("Políticas de Libre Competencia en América Latina"). 

Competition in Agriculture Symposium: Comments of Scott Kieff, Geoff Manne, and Josh Wright

Posted by Scott Kieff (GW Law), Geoff Manne (Lewis & Clark Law), and Josh Wright (George Mason Law)

Regarding firm size and integration, it must be kept in mind that the agriculture industry in the U.S. has, for good reasons, moved beyond the historic, pastoral image of small family farms operating in quiet isolation, devoid of big business and modern technologies. The genetic traits that give modern seeds their value—traits that confer resistance to herbicide and high yields, for example—are often developed through processes that are technologically-advanced, time- and money-intensive, risky investments, and subject to various layers of regulation.  It doesn’t take expertise in industrial organization to imagine why at least for some participants in this market these processes are likely to be more efficiently and effectively conducted within large agribusiness companies having enormous research and development budgets and significant expertise in managing complex business and legal operations, than they are by the somber couple depicted in the famous 1930 Grant Wood painting, “American Gothic.” Nor is such expertise required to imagine why complex contracting across firms, of any size, is likely to be of significant help in supporting the specialization and division of labor that is useful in allowing some businesses (even a small family farm is a business) to be good at planting and harvesting while others are good at inventing, investing, managing, developing, testing, manufacturing, marketing, and distributing the next wave of innovative crop technologies.  This requires on the one hand that the government give reliable enforcement to contracts and property rights whether tangible or intangible (extremely important in this industry are patents, trade secrets, and even trademarks), while on the other hand it allows firms wide flexibility to decide for themselves which of these contracts and property rights they would like to enter into or obtain pursuant to the applicable bodies of contract and property law. 

When courts and regulatory agencies like the DOJ Antitrust Division adopt special approaches to the body of antitrust law to address concerns that may arise from these property rights and contracts, they run the risk of crafting doctrines that inappropriately override well-established bodies of law that are informed by longstanding judicial and scholarly thought and consideration of each area, and creating the potential to reduce innovation and economic growth.  A central countervailing concern is that the putative antitrust injuries that might arise are rooted in stylized economic models that are heavily dependent on a narrow set of assumptions, leaving significant room for erroneous antitrust enforcement.  A modest but fundamental safeguard to protect against this concern of “false positives,” is an approach to antitrust that requires a strong demonstration of actual anticompetitive effect as a precondition for a monopolization violation. 

Not only are patents not presumptive proof of market power in any static sense, but patents can also meaningfully improve both competition and access to patented technologies over time, in the dynamic sense.  From the public record it appears that the driver of much of today’s antitrust enforcement in the agricultural industry  boils down to intervention into business disputes between large and sophisticated parties.  The inherent uncertainty regarding the economic consequences of specific conduct, coupled with competitors’ poor incentives and the huge costs of error, counsel strongly against antitrust intervention without strong empirical evidence that the conduct has reduced competition and harmed consumers in the form of higher prices, lower quality, or reduced innovation.

A more detailed version of this comment was filed with the Department of Justice Antitrust Division on December 31, 2009, as Comments Regarding Agriculture and Antitrust Enforcement Issues in Our 21st Century Economy, by F. Scott Kieff, Geoffrey A. Manne, Michael E. Sykuta, and Joshua D. Wright, and should be available for download from the DOJ webpage when the public comments are posted.  A copy is also available here(www.laweconcenter.org), and comments are most welcome at gmanne@laweconcenter.org.

Competition in Agriculture Symposium: Comments of Peter Carstensen

Posted by Peter Carstensen (University of Wisconsin Law)

I have elsewhere commented on issues related to agricultural markets (available at http://ssrn.com/abstract=1537191).  Two antitrust exemptions apply to farmers: Capper-Volstead Act and the Agricultural Marketing Agreement Act (AMAA).  Capper-Volstead immunizes agreements between a cooperative and its members as well as agreements among cooperatives, but not for agreements with non-cooperatives.  The exemption provides no immunity for coercive or exclusionary conduct by a cooperative and denies immunity to any cooperative with a non-farmer members.  Because of their usual obligation to take all output of members, Cooperatives have limited capacity to suppress output; moreover, entry barriers to most types of agricultural production are low.  Thus, standing alone, Capper-Volstead does not create serious competitive concerns. 

In contrast, the AMAA authorizes producers to create federally enforced market orders (with the approval of the USDA and all covered producers) that can restrict output of all covered participants.  It applies only to a few commodities, and past USDA actions have reduced the number of highly anticompetitive terms in orders generally. The most important orders govern milk. The milk order system gives premiums for milk used as fluid, but farmers must have access to a fluid milk processor to share in that premium.  The current pricing system is vulnerable to manipulation by both large cooperatives and buyers.  Moreover, exclusive fluid supply agreements in many areas compel farmers to join the favored cooperative which in turn has significant discretion to allocate access and control actual payments to the farmers.  The result is an inefficient and discriminatory system.  The AMAA confers on the cooperative the right to cast its members votes on the order thus denying farmer-members any say in approving order terms. A fuller account is in the ABA Antitrust Section’s  Federal Statutory Exemptions from Antitrust Law, Monograph 24 , 2007, Chap. 4.

Barnett Discusses Varney in Interview

Posted by D. Daniel Sokol

Tom Barnett has an interesting Q&A about his tenure at DOJ Antitrust and what he thinks about the current DOJ Antitrust leadership.  See here.

Competition in Agriculture Symposium: Comments of Mike Sykuta

Posted by Mike Sykuta (Agricultural and Applied Economics, University of Missouri-Columbia)

Learn from history, don’t repeat it.

Antitrust laws originated in Midwest state like Missouri in the late 1880s when small farmers banded together in the face of falling agricultural commodity prices to stand against the competitive pressures of larger, more efficient farming operations. Over a century later, it is, as Yogi Berra said, “déjà vu all over again.”

Of the almost 2.2 million farms in the USDA’s 2008 Agricultural Resource Management Survey, the 1.8 million smallest farms lost money on their farming operations (on average) even after accounting for government program payments. These farms represent only 10% of the value of agricultural production in the US, yet received roughly 28% of government payments.

In addition, these small-scale farmers are less likely than their larger competitors to shop beyond the nearest town for key inputs, to shop for the best price from suppliers, to negotiate price discounts, or to lock in prices for inputs. Small-scale farmers are also much less likely to market their products using contracts or to use market-based risk management tools. In short, small-scale farmers fail to (or are simply unable to) take advantage of market opportunities that larger, more efficient farms do. That large farms do engage in these activities suggest a very competitive agricultural economy.

Although antitrust has long been used as an anticompetitive club by economically inefficient competitors, such applications do more harm than good. The agriculture sector would be better served by eliminating the subsidies that sustain marginal producers than by using antitrust to penalize more efficient, better managed farming operations and other firms along the rest of the food value chain. DOJ’s antitrust inquiry will, at best, simply perpetuate the inefficient industry fringe or, more likely, inhibit the kinds of technological and market innovations that have provided US consumers and the world with a safe, reliable food supply.

Competition in Agriculture Symposium: Comments of Jeff Harrison

Posted by Jeff Harrison (University of Florida Levin College of Law)

There seems to be little doubt that buyers in many sectors of agricultural markets possess monopsony power.  A typical scenario is one in which growers make substantial investments in their productive facilities and find themselves faced with one or a handful of buyers.  This means lower prices for their output and, unless the buyers are able to push the sellers onto an “all or none” supply curve, decreased output. In short, as with monopolies there are both allocative and distributive consequences. Two problems are probably most responsible for the plight of sellers.

Unless less the monopsony power is actually possessed by an oligopsony involving collusion, an important factor complicates the measures that can be taken to relieve sellers. As with monopolies, monopsonies are not illegal. As Justice Hand noted, monopolization is different from simply being a monopolist. Monopolization requires some actions that undermine competition without off setting benefits. That seems to have evolved into the requirement of a predatory action. Similarly, monopsonization must be regarded as something other being a monopsonist. This requires the identification of the “bad acts” that are off limits to buyers vis a vis other buyers. And, if the law of monopsonization is to track that of monopolization, those acts should be of a predatory nature. That is, they should make no sense unless the firm’s primarily or only goal is to eliminate a competing buyer. The barriers to a lawsuit in this type of situation are formatable.

Sellers, whether selling to monopsonies or oligopsonies, are faced with another problem. The issue here is at what  time does the existence of monopsony power count. A good way to think about it is to consider the Kodak tying case of the early 90s. In that case the buyers were arguably “locked in.” The Court stressed switching costs and information costs as the causes of the lock in. But what happens if you lock yourself in? That is, before signing on the dotted line or making a significant investment in productive facilities, you know that there are only one or a few buyers in the market.  This characterizes many of the instances in which sellers of agricultural commodities find themselves selling to those with monopsony power and the buying power they contend with can be viewed as something opted into.  

THE DIGITAL BROADBAND MIGRATION AND THE FEDERAL TRADE COMMISSION: BUILDING THE COMPETITION AND CONSUMER PROTECTION AGENCY OF THE FUTURE

Posted by D. Daniel Sokol

Bill Kovacic (FTC) has an important new article on THE DIGITAL BROADBAND MIGRATION AND THE FEDERAL TRADE COMMISSION: BUILDING THE COMPETITION AND CONSUMER PROTECTION AGENCY OF THE FUTURE.

Download JTHTLv8i1_Kovacic[1]

Competition in Agriculture Syposium Post: Comments of Ron Cass

Posted by Ron Cass (Chairman, Center for the Rule of Law and Dean Emeritus, Boston University School of Law)

USDA and DOJ inquiries into competition in agriculture could recast antitrust law as substantially contrary to patent law. A prominent contribution to the inquiries argues that the seed industry needs regulation because one firm (Monsanto) dominates competition for seed types based on that company’s own patented innovation. That is, looking at competition only among seeds based on Monsanto’s patents, Monsanto is too dominant. Taken seriously, the argument would make antitrust a vehicle for eliminating patent holder exclusivity, instead requiring patent licensing on an open basis, as if each patent conferred the equivalent of an essential facility. That approach is destructive of IP rights and also at odds with the basic thrust of antitrust laws, which don’t proscribe every impediment to unrestrained competition in inputs and outputs but instead prohibit specific practices that tend to undermine competition and harm consumers. Those aren’t serious concerns here.

The seed industry is highly competitive. Farmers choose seeds each year (no lock-in problem). Hundreds of firms produce and sell seeds. Other major firms (including firms far larger than Monsanto) invest heavily in developing their own competing seeds and seed traits. In fact, the primary push for regulation here comes from DuPont (a larger firm with a roughly equal share of the overall seed market – but not of every segment of the seed market), along with those looking for short-term reductions in seed costs and professional antitrust advocates interested in expanding the ambit of antitrust law. That should give pause to officials considering intervening in this sector.

The pro-regulatory argument would replace IP-sensitive law like Independent Ink with a version of Terminal Railway on steroids. Terminal Railway is something of a sport, debatable even when limited to its facts. Hopefully, officials at Agriculture and Justice will not make it a template for revising IP laws under antitrust guise.

Competition in Agriculture Blog Symposium Begins Today

Posted by D. Daniel Sokol

Day 1 of what promises to be an excellent symposium on Competition in Agriculture (I have already read the posts) is today.  Stay tuned.

Payment scale economies, competition, and pricing

Posted by D. Daniel Sokol

David B. Humphrey (Department of Finance, Florida State University) describes Payment scale economies, competition, and pricing.

ABSTRACT: Payment scale economies affect banking costs, competition in payment services, and pricing. Our scale measure relates operating cost to physical measures of European banking "output", finding large economies. This differs from relating total cost to the value of balance sheet assets (the conventional approach). Interest expenses are excluded since differences here are primarily due to mix, not scale. Also, since standard indicators of competition can give inconsistent results, a revenue-based frontier measure is developed and applied to European banks, with little difference evident across countries. Existing differences in bank prices (EC report) are associated with small differences in competition.

Regulating two-sided markets: an empirical investigation

Posted by D. Daniel Sokol

Santiago Carbó-Valverde (University of Granada, Department of Economic Theory and History), Sujit Chakravorti (Federal Reserve Bank of Chicago), and Francisco Rodríguez Fernández (University of Granada, Department of Economic Theory and History are investigating Regulating two-sided markets: an empirical investigation.

ABSTRACT: We study the effect of government encouraged or mandated interchange fee ceilings on consumer and merchant adoption and usage of payment cards in an economy where card acceptance is far from complete. We believe that we are the first to use bank-level data to study the impact of interchange fee regulation. We find that consumer and merchant welfare improved because of increased consumer and merchant adoption leading to greater usage of payment cards. We also find that bank revenues increased when interchange fees were reduced although these results are critically dependent on merchant acceptance being far from complete at the beginning and during the implementation of interchange fee ceilings. In addition, there is most likely a threshold interchange fee below which social welfare decreases although our data currently does not allow us to quantify it.

Competition Policy and Regulation in Ports and Shipping

Posted by D. Daniel Sokol

Gilberto M. Llanto, Enrico L. Basilio, Leilanie Basilio (Philippine Institute for Development Studies) analyze Competition Policy and Regulation in Ports and Shipping.

ABSTRACT: The Philippines is an archipelago of approximately 7,107 islands. It has a long coastline extending to 235,973 square kilometers which is longer than that of the United States (UNESCAP 2002b). The country’s archipelagic configuration requires an efficient maritime transport infrastructure composed of ports and shipping for growth and socioeconomic integration. The integration of peripheral islands to the urban economic nodes such as Metro Manila, Cebu, Davao and General Santos and the diffusion of investments and economic activities fundamentally count on an efficient road and maritime transport network. This paper examines competition policy and the regulatory framework of the port and shipping sectors. It assesses the policies and programs of the government in promoting competition in these sectors and recommends areas for policy and regulatory reform. After a brief description of the analytical underpinnings of! competition policy and regulation the paper reviews the present state of competition and regulation in Philippine ports and interisland shipping to identify emerging issues that call for policy action. It provides specific recommendations for policy and regulatory reform.

Pricing payment cards

Posted by D. Daniel Sokol

Özlem Bedre-Defolie (Toulouse School of Economics) and Emilio Calvano (Department of Economics, Harvard University have written on Pricing payment cards.

ABSTRACT: In a payment card association such as Visa, each time a consumer pays by card, the bank of the merchant (acquirer) pays an interchange fee (IF) to the bank of the cardholder (issuer) to carry out the transaction. This paper studies the determinants of socially and privately optimal IFs in a card scheme where services are provided by a monopoly issuer and perfectly competitive acquirers to heterogeneous consumers and merchants. Different from the literature, we distinguish card membership from card usage decisions (and fees). In doing so, we reveal the implications of an asymmetry between consumers and merchants: the card usage decision at a point of sale is delegated to cardholders since merchants are not allowed to turn down cards once they are affiliated with a card network. We show that this asymmetry is sufficient to induce the card association to set a higher IF than the socially optimal IF, and thus to distort the ! structure of user fees by leading to too low card usage fees at the expense of too high merchant fees. Hence, cap regulations on IFs can improve the welfare. These qualitative results are robust to imperfect issuer competition, imperfect acquirer competition, and to other factors affecting final demands, such as elastic consumer participation or strategic card acceptance to attract consumers.