Antitrust & Competition Policy Blog

New Canadian Competition Bureau Merger Enforcement Guidelines

Posted by D. Daniel Sokol

The Canadian Competition Bureau has published new Merger Enforcement Guidelines.

The Specter of Cartelization: Alcoa’s Effects Test and the Export of Antitrust

Posted by D. Daniel Sokol

Benjamin Kagan Brady, University of Virginia, Corcoran Department of History has written on The Specter of Cartelization: Alcoa’s Effects Test and the Export of Antitrust.

ABSTRACT: This Article examines Judge Learned Hand’s 1945 decision in United States v. Aluminum Co. of America (Alcoa) and its relationship to the politics of World War II and the early Cold War. According to the standard narrative, Hand’s opinion ushered in a new era of extraterritorial jurisdiction. By abandoning rigid formalism in favor of an “effects test,” Hand transformed conventional views about the territoriality of law and thereby introduced an important mechanism for forcing other nations to come to terms with (and ultimately embrace) U.S. notions of competition.

Yet scholars have also puzzled over why Hand (a mere appellate judge) rejected established Supreme Court precedent that restricted antitrust law within the territorial boundaries of the United States. Moreover, historians have argued that U.S. antitrust law declined in importance during this period, but the Alcoa narrative centers on its dramatic extension overseas.

I argue that scholars have misread Hand’s opinion. Rather than rejecting established precedent, Hand sought to apply existing conflicts of law principles in a difficult and novel context. Indeed, the concern for comity that underlay existing law was at the center of his opinion. I also situate Alcoa within a Justice Department campaign to link the danger of cartels to totalitarianism. By recasting antitrust law as part of the war effort, the Antitrust Division hoped to counteract its increasing marginalization. Nonetheless, corporate lawyers and law professors began to question this attempt, arguing that onerous enforcement actually undermined U.S. foreign policy goals. In this struggle, Hand’s care to limit Alcoa’s scope was forgotten, and the case came to stand for legal overreaching. Ultimately, attempts to extend antitrust law overseas failed to reinvigorate it at home.

Indirect Information Exchange: The Constituent Elements of Hub and Spoke Collusion

Posted by D. Daniel Sokol

Okeoghene Odudu (Cambrudge Law) has published Indirect Information Exchange: The Constituent Elements of Hub and Spoke Collusion.

ABSTRACT: Attempts by competition authorities to control the information an undertaking can receive about its competitors-not from the competing undertaking directly, but via a common trading partner-have caused some uncertainty. In the Guidelines on horizontal co-operation the European Commission draw attention to the exchange of information "indirectly through a common agency (for example, a trade association) or a third party such as a market research organisation or through the companies' suppliers or retailers." With little elaboration, the Commission cautions that exchanges via such intermediaries may well infringe competition law. The aim of this paper is to consider the response developed by the United Kingdom competition authority, the Office of Fair Trading, to address the indirect flow of strategic information between competitors via their common trading partner.

Learning from Seller Experiments in Online Markets

Posted by D. Daniel Sokol

Liran Einav (Stanford), Theresa Kuchler (Stanford), Jonathan Levin (Stanford) and Neel Sundaresan (EBay) have an interesting paper on Learning from Seller Experiments in Online Markets.

ABSTRACT: The internet has dramatically reduced the cost of varying prices, dis- plays and information provided to consumers, facilitating both active and passive experimentation. We document the prevalence of targeted pricing and auction design variation on eBay, and identify hundreds of thousands of experiments con- ducted by sellers across a wide array of retail products. We show how this type of data can be used to address questions about consumer behavior and market outcomes, and provide illustrative results on price dispersion, the frequency of over-bidding, the choice of reserve prices, “buy now”options and other auction design parameters, and on consumer sensitivity to shipping fees. We argue that leveraging the experiments of market participants takes advantage of the scale and heterogeneity of online markets and can be a powerful approach for testing and measurement.

AAI 5th Annual Future of Private Antitrust Enforcement Conference

Posted by D. Daniel Sokol

AAI will host its 5th Annual Future of Private Antitrust Enforcement Conference on Wednesday, December 7, 2011 at the National Press Club in DC. See here for details.

How to Catch a Thief—Corporate Leniency and the Irrepressible Challenge of Cartel Detection; Finding a Better Way

Posted by D. Daniel Sokol

Gordon Schnell & Rick Dumas-Eymard (Constantine Cannon) address How to Catch a Thief—Corporate Leniency and the Irrepressible Challenge of Cartel Detection; Finding a Better Way.

ABSTRACT: So is the much heralded, universally adopted, corporate leniency program really the best way to get us there? There is little question that these programs have had some success. For the past decade and more, numerous corporations around the world have lined up with their mea culpas to avail themselves of these regulatory absolutions. And the lines seem to be getting longer all the time. But do these programs go far enough, and are they worth the cost? Or are they more of an albatross, getting in our way, diverting us from other avenues that depend less on the complicity of the wrongdoers and more on the exertions of the victims or, better yet, those tasked with protecting us from this blight. Perhaps it is time to take a step back and reconsider where we are in cartel detection and reassess what has up until now been the unquestioned primacy of corporate leniency in the competition enforcement scheme.

The Application of EU Competition Law in the Pharmaceutical Sector

Posted by D. Daniel Sokol

David Hull (Covington) describes The Application of EU Competition Law in the Pharmaceutical Sector.

ABSTRACT: This article surveys EU competition law developments in the pharmaceutical sector during the period between 1 July 2010 and 30 June 2011.

Retail Gasoline Price Ceilings and Regulatory Capture: Evidence from Canada

Posted by D. Daniel Sokol

Anindya Sen (University of Waterloo), Anthony Clemente ( Independent Electricity Supply Operator), and Linda Jonker ( McMaster University) explore Retail Gasoline Price Ceilings and Regulatory Capture: Evidence from Canada.

ABSTRACT: We evaluate the efficacy of price ceiling legislation by employing weekly data on retail gasoline prices for eight cities in Eastern Canada between 1999 and 2007. The use of these data allows us to pool “treatment” cities in the Atlantic provinces with “control” cities in Ontario and Quebec. Ordinary least squares and instrumental variables estimates demonstrate that the enactment of such regulation is significantly correlated with higher prices. A potential explanation for these results is that price ceilings act as “focal points” enabling firms to set higher prices, thus suggesting the possibility of regulatory capture.

Cartel Recidivism in the Mirror of EU Case Law

Posted by D. Daniel Sokol

Marc Barennes and Gunnar Wolf address Cartel Recidivism in the Mirror of EU Case Law.

ABSTRACT: Recidivism is an aggravating circumstance that the Commission has taken into consideration when increasing the basic amount of the fine in more than 40 % of the cartel decisions that it has adopted over the past five years. This article shows that the legal framework and the requirements for a finding of cartel recidivism as well as the principles guiding the determination of a fine increase have now been extensively defined in EU case-law. Some issues, such as the precise time limit after which a prior infringement may no longer be taken into consideration or the GC's unlimited jurisdiction to review the rate in the fine increase, remain nonetheless open for debate.

Brazil Competition Institutional Design Finally Moving Forward

Posted by D. Daniel Sokol

I received a note yesterday from my friends Barbara Rosenberg and Sandra Terepins at Brazilian competition law powerhouse Barbosa Mussnich:

We would like to inform you that the House of Representatives has finally passed the Bill no. 06/2009, which brings very important changes to the Brazilian Competition Laws. These changes, as you might be aware of, involve both merger review and anticompetitive conducts' investigation rules.

In respect to merger review, the law introduces a suspensory regime (i.e., the competition authority decision becomes a condition for closing the transaction, as it is currently done in the US and the EU) and modifies the notification thresholds. In terms of rules pertaining the investigation of potentially anticompetitive conducts, changes will be made in relation to the leniency program, as well as in settlements and criminal liability.

The Bill also unifies in one main body (CADE) the system that is now comprised of three different bodies (SDE, SEAE and CADE). The Bill is now subject to President' sanction, and it is likely to become effective in the near future. If fully approved by the President, changes in the merger control regime will be effective in 180 days after the new Act is published.

Merger Alert: DOJ May Consolidate Regional Offices and Eliminate Offices in Cleveland, Atlanta, Dallas and Philadelphia

Posted by D. Daniel Sokol

The Cleveland Plain Dealer reports that DOJ Antitrust may consolidate regional offices and close its offices in Cleveland, Atlanta, Dallas and Philadelphia to save an estimated $8 million a year.

Ownership Unbundling of Gas Transmission Networks - Empirical Evidence

Posted by D. Daniel Sokol

Christian Growitsch (Energiewirtschaftliches Institut an der Universitaet zu Koeln) and Marcus Stronzik (Energiewirtschaftliches Institut an der Universitaet zu Koeln) analyze Ownership Unbundling of Gas Transmission Networks - Empirical Evidence. ABSTRACT: The European Commission has intensively discussed the mandatory separation of natural gas transmission from production and services. However, economic theory is ambiguous on the price effects of vertical separation. In this paper, we empirically analyse the effect of ownership unbundling of gas transmission networks as the strongest form of vertical separation on the level of end-user prices.

Therefore, we apply different dynamic estimators as system GMM and the bias-corrected least-squares dummy variable or LSDVC estimator on an unbalanced panel out of 18 EU countries over 19 years, allowing us to avoid the endogeneity problem and to estimate the long-run effects of regulation.

We introduce a set of regulatory indicators as market entry regulation, ownership structure, vertical separation and market structure and account for structural and economic country specifics. Among these different estim! ators, we consistently find that ownership unbundling has no impact on natural gas end-user prices, while the more modest legal unbundling reduces them significantly. Furthermore, third-party access, market structure and privatisation show significant influence with the latter leading to higher price levels.

Prohibition of parallel Imports as a hard core Restriction of Article 4 of Block Exception Regulation for Vertical Agreements: European Law and Economics

Posted by D. Daniel Sokol

Nikolaos Zevgolis and Panagiotis Fotis (both Hellenic Competition Commission) describe Prohibition of parallel Imports as a hard core Restriction of Article 4 of Block Exception Regulation for Vertical Agreements: European Law and Economics.

ABSTRACT: This paper attempts, on the one hand, to reveal the main principles of Competition Law (regulatory and case law framework) covering the prevention of parallel trade, mainly the prohibition of parallel imports or exports, and on the other hand to cast light on the main effects of parallel imports prohibition imposed by an upstream supplier on the competitive structure of the downstream market. Especially, the regulatory framework relates Block Exception Regulation 330/2010, (ex Block Exception Regulation 2790/99), with Block Exception Regulation 461/2010 (ex Block Exception Regulation 1400/2002) in order to determine whether prohibition of parallel trade constitutes a hardcore restriction or not, while the economic analysis evaluates it in a geographical vertical market which constitutes an upstream and a downstream market with few suppliers & buyers respectively which sell goods to the final (domestic) consumers. The! results indicate that prohibition of parallel imports by the upstream sellers causes vertical restraints to the domestic customers of the buyers.

The Consistency of Merger Decisions in a Developing Country: The South African Competition Commission

Posted by D. Daniel Sokol

Richard J. Grimbeek (Department of Economics, University of Pretoria) Sunel Grimbeek (Department of Economics, University of Pretoria) and Steven F. Koch (Department of Economics, University of Pretoria) have posted The Consistency of Merger Decisions in a Developing Country: The South African Competition Commission.

ABSTRACT: Merger decisions made by the South African Competition Commission from April 2002 to March 2010 are analyzed to empirically identify the factors, which have historically in uenced prohibition, conditional approval and unconditional approval. The key explanatory variables are linked to provisions of the 1998 Competition Act, as well as the timing of merger notications, such that the analysis provides insight into the consistency of merger decisions with respect to the legal requirements specied in the Act. Although the legislation includes standard economic concerns, it also includes a provision for advancing public interests and development concerns. Initial results point to diering behaviour over the time period, which suggests that the Commission is inconsistent; however, the majority of those inconsistencies are removed, once additional measures of market contestibility are included in the analysis. The final results suggest that the Commission is less likely to approve mergers that they link to markets that are less contestable. Furthermore, in addition to protecting competition, the Commission is simultaneously protecting other public interests. Therefore, our research supports the hypothesis that the Commission consistantly applies its legislative remit.

Endogenous Product Differentiation, Market Size and Prices

Posted by D. Daniel Sokol

Shon Ferguson (Research Institute of Industrial Economics (IFN)) discusses Endogenous Product Differentiation, Market Size and Prices.

ABSTRACT: Recent empirical evidence suggests that prices for some goods and services are higher in larger markets. This paper provides a demand-side explanation for this phenomenon when firms can choose how much to differentiate their products in a model of monopolistic competition with horizontal product differentiation. The model proposes that consumers’ love of variety makes them more sensitive to product differentiation efforts by firms, which leads to higher prices in larger markets. At the same time, endogenous product differentiation modeled in this way can lead to a positive and concave relationship between market size and entry.

Breaking the EU Antitrust Enforcement Deadlock: Re-Empowering the Courts?

Posted by D. Daniel Sokol

Damien Gergard, Louvain University Law discusses Breaking the EU Antitrust Enforcement Deadlock: Re-Empowering the Courts?

ABSTRACT: Over the past decade, the dramatic rise in the amount of fines combined with the increased reliance on negotiated procedures and the modernisation of substantive principles have profoundly modified the EU antitrust enforcement landscape and, indeed, its inner rationality. This article argues that the sustainability of that transformation depends on a rebalancing of the enforcement system by expanding the jurisdiction of the EU Courts in reviewing appeals brought against infringement decisions, so as to carve out a space guaranteeing private parties fair dialectic exchanges over the substance of cases, on an equal footing with the Commission. In particular, it proposes to free the EU Courts from the limits of their annulment jurisdiction by endowing them with unlimited jurisdiction to review the merits of antitrust decisions imposing fines and, consequently, to empower them to operate in that context as courts of full appellate jurisdiction.

Detection and Compliance in Cartel Policy

Posted by D. Daniel Sokol

D. Daniel Sokol (University of Florida) has posted Detection and Compliance in Cartel Policy.

ABSTRACT: In the past few years, companies around the world have spent an increasing amount of resources addressing issues broadly classified as compliance. In the area of bribery there has been significant enforcement with strong financial and behavioral penalties under the U.S. Foreign Corrupt Practices Act ("FCPA"). The United Kingdom has introduced a new anti-bribery regime this year, which has increased companies' awareness of the possible negative impact from breaking the law. Similarly, corporate governance legislative initiatives, such as Sarbanes-Oxley and Dodd-Frank, have transformed the compliance landscape for many companies.

During this same period, there have been significant theoretical and empirical contributions as to the effects on a firm's performance of various corporate governance measures designed to reduce criminal behavior on the part of firms and individual managers. Quite a bit of this literature has focused on improved detection of wrong-doing. Given these changes, it is surprising that U.S. antitrust has not been on the cutting edge of compliance and detection. Antitrust's primary contribution has been the introduction of leniency programs around the world. In many ways leniency is effective in destabilizing existing cartels. However, it may be, in some cases, that leniency may actually strengthen certain cartels. Moreover, leniency may not be going after the right kinds of cartels - the worst offenders in terms of overcharges - and may instead be going after the cartels that are easy to find. Recent work suggests that the U.S. leniency program has not led to optimal deterrence.

If we take these critiques of leniency and cartel detection seriously (especially relative to detection of other types of corporate crimes) antitrust needs to come up with additional ways to promote cartel detection. This article focuses on some suggestions to improve detection and compliance for antitrust with regard to cartels.

Enhancing International Cartel Enforcement: Some Modest Suggestions

Posted by D. Daniel Sokol

Donald C. Klawiter (Sheppard Mullin) describes Enhancing International Cartel Enforcement: Some Modest Suggestions.

ABSTRACT: This brief essay will attempt to answer two important questions that affect the current state of international cartel enforcement: (1) Are individual criminal penalties reaching the tipping point, i.e. the point where non-U.S. executives will not submit to U.S. jurisdiction and U.S. executives will take their chances at trial, thus changing the enforcement calculus considerably; and (2) Is U.S. case selection limited only to a few industries at a time, and does that affect deterrence?

Monopoly versus Competitive Leveraging of Reputation through Umbrella Pricing

Posted by D. Daniel Sokol Eric Bennett Rasmusen, Indiana University Bloomington - Department of Business Economics & Public Policy explains Monopoly versus Competitive Leveraging of Reputation through Umbrella Pricing. ABSTRACT: The Klein-Leffler model explains how the benefit of future reputation can induce firms to produce high quality experience goods, either in a monopoly or an industry with competing firms. We show that reputation can be leveraged across products, but only by a firm with a monopoly on at least one product. Such a firm, however, may be able to capture the market for a competitive product by using umbrella pricing to make higher quality more credible than for firms without a monopoly base. Such monopoly extension increases social welfare, and can even benefit consumers, despite the increase in price. The expanding monopolist does not need to use bundling, and consumers are left better off, but otherwise this looks like classic monopoly leverage.

Patent Exclusions and Antitrust after Therasense

Posted by D. Daniel Sokol

Herbert J. Hovenkamp, University of Iowa - College of Law analyzes Patent Exclusions and Antitrust after Therasense.

ABSTRACT: A patent may be held invalid if it was obtained by “inequitable conduct” before the PTO during the process of patent prosecution. In its Therasense decision the Federal Circuit imposed severe requirements against those attempting to defend against a patent on the basis of inequitable conduct, insisting that inequitable conduct be measured essentially by a subjective test. Objective “reasonable person” tests such as negligence or even gross negligence will not suffice. By contrast, the Supreme Court has insisted that the conduct giving rise to a wrongful infringement action violating the antitrust laws be initially based on an objective test – whether a reasonable person knowing what he knew would have brought this suit under these circumstances. Only after passing this objective screen may an antitrust claimant seek to determine any subjective intent that may be needed for an antitrust claim.

The principal distinction between Therasense and Walker Process antitrust complaints based on improper patent infringement actions pertains to the time of evaluation. “Inequitable conduct” generally refers to actions and state of mind (under Therasense) that occur during the patent prosecution process. By contrast, Walker Process necessarily refers to actions and state of mind at the time a patent infringement action is filed or the patent holder engages in other exclusionary conduct, and this may be many years after issuance. This has several implications.

First, there could be inequitable conduct under Therasense but relative innocence at the time of an infringement suit if (a) the patent has been assigned to an innocent recipient; or (b) the persons within the firm who were guilty of the inequitable conduct are no longer available and the persons who file the later infringement suit are unsuspecting. This is highly likely to be true for firms with thousands of patents, because the kinds of things that would yield inequitable conduct are often not plain from the patent prosecution record. One conceptual difficulty of Therasense is that state of mind refers to persons, but large firms have many persons. Further, those filing an infringement suit on a ten year old patent have little incentive to dig too deeply in order to find out whether now departed applicants and their agents engaged in equitable conduct.

Second, a patent might have been obtained without inequitable conduct, but subsequent evidence of prior art or barring sales or use might emerge, and the person filing the infringement action might have knowledge of these things. In that case a Walker Process antitrust claim should be permitted even though the person prosecuting the patent was innocent of inequitable conduct as Therasense defines it.