Antitrust & Competition Policy Blog

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

A Member of the Law Professor Blogs Network

Monday, August 15, 2011

Market Definition and the Merger Guidelines

Posted by D. Daniel Sokol

Louis Kaplow, Harvard Law School, National Bureau of Economic Research (NBER) has posted the very interesting Market Definition and the Merger Guidelines.

ABSTRACT: The recently issued revision of the U.S. Horizontal Merger Guidelines, like its predecessors and mirrored by similar guidelines throughout the world, devotes substantial attention to the market definition process and the implications of market shares in the market that is selected. Nevertheless, some controversy concerning the revised Guidelines questions their increased openness toward more direct, economically based methods of predicting the competitive effects of mergers. This article suggests that, as a matter of economic logic, the Guidelines revision can only be criticized for its timidity. Indeed, economic principles unambiguously favor elimination of the market definition process altogether. Accordingly, the 2010 revision is best viewed as a moderate, incremental, pragmatic step toward rationality, its caution being plausible only because of legal systems’ resistance to sharp change.

August 15, 2011 | Permalink | Comments (0) | TrackBack (0)

Theories of Broadband Competition

Posted by D. Daniel Sokol

Jeffrey A. Eisenach, Navigant Economics LLC, George Mason University School of Law offers Theories of Broadband Competition.

ABSTRACT: Like the other information technology (IT) markets that comprise the Internet ecosystem, markets for broadband communications services are characterized by rapid innovation, declining costs, product differentiation and the potential for competitive price discrimination, network effects, and “multi-sidedness.” Broadband ISPs make large, sunk cost investments and seek to differentiate their products in order to be able to earn economic returns on those investments. They seek to assemble and/or participate in systems that create new value for consumers, and do so by picking and choosing both the platforms in which they participate and the products with which they interconnect. They experience both supply-side economies of scale and scope and demand-side externalities that create powerful incentives to increase volumes by maximizing system openness, but, as with other IT firms, these incentives do not always outweigh the costs of interoperability.

This paper examines the competitive dynamics of broadband through the lens of the economic literature on competition in IT markets. It concludes that broadband markets are shaped by three sets of characteristics that distinguish competition in IT markets from competition in more traditional ones. Like other IT markets, broadband: (1) is characterized by high sunk costs, declining costs, and rapid innovation (dynamism); (2) functions as a complementary component in modular platforms (modularity); (3) is subject to demand-side economies of scope and scale (network effects). It is generally agreed that these characteristics have important implications for competition analysis, including increased focus on market dynamics and on “vertical” relationships among market participants, reduced emphasis on traditional structural presumptions, and the need to assess efficiency and competitive effects of various forms of conduct on a case-by-case basis.

One implication of this analysis is that the central metaphor used in the analysis of communications markets today – the notion that broadband networks are uniquely at the “core” of the Internet while content, applications and devices are at the “edge” – is at best misleading, and in any case does not justify differential policy treatment. To the contrary, for purposes of competition analysis, it is no longer possible to distinguish meaningfully between the competitive characteristics of broadband markets and other IT markets. Accordingly, there is no basis for asymmetric regulatory treatment – for ex ante regulation of broadband services and ex post antitrust scrutiny of other IT markets. The unavoidable conclusion is that competition oversight of broadband markets should be conformed to modern antitrust principles.

August 15, 2011 | Permalink | Comments (0) | TrackBack (0)

Google/Motorola?

Posted by D. Daniel Sokol

Larry Page of Google has announced that Google will acquire Motorola Mobility.  This is a huge deal that probably will result in a vertical consent decree.  Recall that just last week the FTC expanded the Google investigation into Android.  This is a big deal.

August 15, 2011 | Permalink | Comments (1) | TrackBack (0)

Cartel Criminalisation: The Role of the Media in the 'Battle for Hearts and Minds'

Posted by D. Daniel Sokol

Andreas Stephan, University of East Anglia (UEA) - Centre for Competition Policy has posted Cartel Criminalisation: The Role of the Media in the 'Battle for Hearts and Minds'.

ABSTRACT: Media coverage of law enforcement has the power to educate and influence people’s beliefs, values and reactions to a given behaviour. Reporting of cartel cases has the potential to expose the nature and effects of practices such as price fixing, helping to bridge the gap between how cartels are treated in law and how they are popularly perceived. If the imposition of high fines on firms and jail terms on individuals is to succeed in the long run in securing compliance, strong public support is of central importance. It lends legitimacy to these laws and strengthens government commitment to enforcement efforts, in terms of maintaining sufficient investigative resources and countering lobbying for soft enforcement. Media dissemination of the nature and effects of cartel practices can create a social stigma towards price fixing and encourage a culture of compliance within the business community.

Even the criminalising of an activity neither ensures that activity is taken more seriously, nor that the existence of a criminal offence is communicated to the wider public or business community. The UK’s cartel offence is one of over 3,000 new criminal offences introduced in the UK since 1997. The tendency for 'over-criminalisation' has come about because the threat of criminal sanction is used as a quick fix in curbing behaviour seen as harmful or undesirable. It is a way for government to be seen to be doing something about a problem. Many of the young criminal offences in the UK concern seemingly trivial or obscure behaviour, raising the criticism that the criminal law has lost its bite. It may also raise the danger of a defendant genuinely having no idea (and no reasonable way of knowing) that their behaviour would constitute an offence – although this would be no defence in law. This makes the need to raise the profile of cartel cases all the more pressing, especially as we are principally concerned with securing compliance and desistance.

The main way in which media reports can enhance cartel enforcement is through the dissemination of information on the infringements themselves. Survey work in the UK construction industry was commissioned by the OFT before and after fines for bid rigging were imposed in 2009. Of the construction firms who had heard of the OFT decision four months later, 80% cited media reports as their main source of information. This appears to have significantly exceeded traditional industry channels such as trade associations. Indeed, only 18% were aware of recently adopted codes of conduct in relation to competition, even though 30% claimed to be members of trade bodies who recently adopted such codes.

Communicating the harm of cartels is particularly important and is considered by many to constitute a central underpinning of the decision to legitimately sanction or criminalise a given activity. The problem, as noted by Steven Box is that, "The public understands more easily what it means for an old lady to have £5 snatched from her purse than to grasp the financial significance of corporate crime." Alleged corporate criminals, such as Ian Norris or the NatWest Three, do not fit our preconceptions of what criminals look like (young, usually wearing a hoody?), not helped by the media being invited into the homes of the NatWest Three to interview them around their children. Consequently the reporting of such cases typically gets sidelined by a more populist issue or is turned on its head entirely. Thus the Ian Norris case became more about the long and unfair reach of US law enforcement, with the Confederation of British Industry supporting a protest march of company directors to parliament. In relation to the NatWest Three (not a competition law case), Levi notes how the press even made comparisons between the three defendants and gross miscarriages of justice such as the, "Birmingham Six," and, "Guilford Four." In other cases of white-collar crime the media coverage becomes obsessed with the defendant’s fall from grace, turning the reporting of wrongdoing into a form of celebrity scandal. Examples of this include the reporting of Nick Leason’s £830 million fraud at Bearings Bank and more recently Bernar Madoff’s US$65 billion fraud.

So what is the problem? Crucially, the media focus on the victim and the harm when reporting illegal acts, both of which are difficult to identify in cases of price fixing. It is for this reason that the media are disproportionately preoccupied by crimes of a violent, sexual or interpersonal nature, especially incidents which are apparently random. Readers and viewers immediately understand the harm involved in such cases, and feel in immediate fear of it. The typical perpetrator here also fits their preconceptions of what a wrongdoer should look like, rather than the faceless corporation or the smartly dressed businessman who perhaps looks a little too much like a, "normal," person. In most cartel cases the harm is remote and dispersed. Price fixing of an upstream product can cause enormous harm to the economy as a whole, as the extra cost is passed down the chain of production, but is likely to be dispersed among a large number of final consumers, each of whom may have paid only a little extra for the given product. This means there is no critical mass of harm (compare with an individual victim who has been mugged). While competition authorities and academics have sought to estimate the harm caused by cartels, this exercise always involves a set of assumptions as to the counterfactual; how prices would have behaved had a cartel not formed. This is compounded by the tendency for cartelists to admit guilt but deny the infringement had any effect on price (not least to protect themselves from private enforcement). Even if we were to reliably estimate cartel harm, the smoke-filled room provides journalists with a poor alternative to the sex, violence and graphic imagery of conventional crime reporting.

Even where a cartel case is effectively reported, the objectionable nature of cartel practices can be lost in media coverage, where this is inconsistent with the statements and behaviour of politicians. When supermarkets and dairy firms were investigated by the OFT for price-fixing in 2003, the firms pointed out that they were responding to pressure from parts of the UK government to raise the price of milk and other products, in order to help farmers. The reporting of cartels as objectionable acts is also at odds with other policy areas such as trade. For example, 'export cartels' are generally tolerated, as are collusive agreements between governments; most notably the oil cartel, OPEC. For some, these contradictions reinforce a view that practices such as price fixing are simply part of the system; an inevitable consequence of a free market in which the pursuit of higher profits is central to everything.

All this leaves competition authorities with the unenviable task of maintaining an effective level of enforcement, while at the same time having to promote their activities through mainstream media channels. Lessons from the US (where cartel enforcement only really took off in the late 1980s) suggest that media coverage can be maximised through careful case selection; at first targeting cartels directly affecting final consumers and those involving bid-rigging in public procurement. Early cases which particularly struck a chord with the US media included the bid-rigging of contracts to supply milk to schoolchildren and equipment to the military.

August 15, 2011 | Permalink | Comments (0) | TrackBack (0)

The Affordable Care Act and Competition: Antidote or Placebo?

Posted by D. Daniel Sokol

Tim Greaney (St. Louis Law) explains The Affordable Care Act and Competition: Antidote or Placebo?

ABSTRACT: In the run-up to its enactment, the Patient Protection and Affordable Care Act (ACA) elicited howls of protest from opponents who claimed the federal government was, “taking over,” the American healthcare system, “micromanaging,” medicine, and generally exposing the nation to the bête noire of, “socialized medicine.” Hyperbole, misrepresentation and chauvinism aside, these sound bites suffer from a deeper flaw: They mischaracterize the fundamental thrust of the new law. Though the law establishes significant new regulatory authority, this is neither a new development (indeed it can be faulted for preserving pre-existing regulatory regimes) nor does it impair market competition. To the contrary, much of the law aims at improving conditions conducive to effective competition. However, it is far from clear that market competition will work out as scripted by theorists and proponents of the new law. Myriad market imperfections still complicate market interactions and regulation needs to be carefully tailored to assure effective implementation and minimize unintended consequences. Of even greater concern are the problematic market structures that pervade provider and payer markets. Concentration, embedded practices and professional norms may cause markets to operate suboptimally even if reform is implemented smoothly. Further, the ACA’s effectiveness in achieving its goals depends on the executive branch maintaining a steady hand in countless regulatory determinations required under the new law. This article surveys some of the misconceptions about health reform and the challenges it confronts in realizing proponents’ goals.

August 15, 2011 | Permalink | Comments (0) | TrackBack (0)

Sunday, August 14, 2011

FTC Proposal for Regulating IP Will Harm Consumers

Posted by D. Daniel Sokol

Richard A. Epstein (Chicago and NYU), F. Scott Kieff (GW) & Daniel Spulber (Northwestern) argue that the FTC Proposal for Regulating IP Will Harm Consumers.

August 14, 2011 | Permalink | Comments (0) | TrackBack (0)

Brussels School of Competition Accepting LLM Applications

Posted by D. Daniel Sokol

The Brussels School of Competition was established under the aegis of the Federation of Enterprises in Belgium ("FEB")  in 2010 to foster education, compliance and research in the field of competition law and economics.  As part of its educational purpose, the BSC organises a high-profile course in EU competition law and economics.

In its inaugural year, 2010-2011, the course attracted more than 100 participants from diverse professional backgrounds: lawyers, in-house counsel, civil servants, economic consultants and former Masters students.

The BSC’s LL.M. programme provides (i) a comprehensive and structured teaching curriculum (+ periodic assessments); (ii) a multidisciplinary approach, with courses in both competition law and economics taught by leading experts; and (iii) a schedule that is fully compatible with the requirements of professional practice.

This year, the programme has new features, including:

  • Three clinical seminars designed to provide cutting-edge practical training on topics, such as dawn raids and compliance programmes;
  • Several new professors, including high level officials from the EU Commission and national competition authorities.

The LL.M. boasts an impressive faculty, comprising lawyers and economists, officials and private practitioners, who are all acknowledged experts in their fields. For more information on the programme, please visit www.brusselsschoolofcompetition.eu or send us an e-mail: [email protected].

(The brochure of the programme can be accessed via the follwing web-link: http://issuu.com/triptyque/docs/brochure_bsc_2011/1.)

August 14, 2011 | Permalink | Comments (0) | TrackBack (0)

The Sixth Circuit's Application of the Rule of Reason in Realcomp II—Less About the Rule's Reasonableness than the Reason for the Rule

Posted by D. Daniel Sokol

David Meyer (MoFo) explores The Sixth Circuit's Application of the Rule of Reason in Realcomp II—Less About the Rule's Reasonableness than the Reason for the Rule.

ABSTRACT: The Federal Trade Commission scored a significant victory when the Sixth Circuit applied the rule of reason to uphold the FTC’s order in the Realcomp II case.1 The FTC had found that a real estate multiple listing service (MLS) violated Section 1 of the Sherman Act by adopting and enforcing a “website policy” that allegedly restricted the dissemination of certain kinds of MLS content via third-party websites. The decision offers some important lessons about the way courts approach rule of reason analysis, particularly because it is one of relatively few recent decisions reaching the merits in a rule of reason challenge.2 One key lesson is that the lack of a cognizable procompetitive justification— or evidence of actual procompetitive benefits—will tend to lower the burden plaintiffs bear in making a threshold showing (often called a prima facie case) of unreasonableness. The Sixth Circuit’s decision is also noteworthy for the question it did not reach—namely, whether the FTC properly applied its “inherently suspect” variant of the quick-look doctrine to the restraint at issue in the case.

August 14, 2011 | Permalink | Comments (0) | TrackBack (0)