Tuesday, February 8, 2011
Posted by D. Daniel Sokol
Rabah Amir (University of Luxembourg and University of Arizona) and Natalia Lazzati (University of Arizona) describe Network Effects, Market Structure and Industry Performance.
ABSTRACT: This paper provides a thorough analysis of oligopolistic markets with positive demand-side network externalities and perfect compatibility. The minimal structure imposed on the model primitives is such that industry output increases in a firmr's rivals' total output as well as in the expected network size. This leads to a generalized equilibrium existence treatment that includes guarantees for a nontrivial equilibrium, and some insight into possible multiplicity of equilibria. We formalize the concept of industry viability and show that it is always enhanced by having more firms in the market and/or by technological improvements. We also characterize the e¤ects of market structure on industry performance, with an emphasis on departures from standard markets. The approach relies on lattice-theoretic methods, which allow for a unified treatment of various general results in the literature on network goods. Several illustr! ative examples with closed-form solutions are also provided.
Legal and Economic Approach to Tying and Other Potentially Unfair and Anticompetitive Commercial Practices: Focus on Financial Services
Posted by D. Daniel Sokol
Diego Valiante, Centre for European Policy Studies and Andrea Renda, Centre for European Policy Studies (CEPS), Libera Università degli Studi Sociali (LUISS) Guido Carli have written on Legal and Economic Approach to Tying and Other Potentially Unfair and Anticompetitive Commercial Practices: Focus on Financial Services.
ABSTRACT: This paper analyses the economic and legal aspects related to practices such as tying, bundling and other potentially unfair commercial practices widely used in the financial services industry. Authors draw special attention to the European financial services market. Their law and economics approach aims at illustrating the rationales for applying both antitrust and consumer protection legislation to the practices subject to analysis in this paper and observed in the retail financial services market. The author explores the main findings of the legal and economic theory as regards the applicability of antitrust rules to the practices at hand, and the possibility to treat new commercial practices under antitrust law. The paper then illustrates the economics of tying, bundling and other unfair commercial practices from a consumer policy perspective, and reports some empirical data on switching costs and patterns of consumer behaviour in retail financial services and in other sectors of the economy. Cognitive biases that may cause irrational behaviours in judgement and decision-making processes of a retail consumer are widely assessed. Finally, the author proposes a new multi-stage test for the joint assessment of selling practices under competition and consumer policy.
Posted by D. Daniel Sokol
Nicolas Petit, University of Liege and David Henry, Howrey describe Vertical Restraints under EU Competition Law: Conceptual Foundations and Practical Framework.
ABSTRACT: The purpose of this paper is to provide a full account of the new European rules on distribution agreements adopted in April 2010, i.e. Regulation 330/2010 and its concomitant Guidelines on Vertical Restraints. In doing so the paper covers all aspects of the law in this field - with the notable exception of agency agreements - and discusses the development of the law since the 1960s to the present day. Such development is principally characterised by an increased focus on the economic effects produced by vertical restraints and a movement away from a strict form-based approach. The paper is divided into five sections. Following a short introduction, section II sets out the different types of vertical restraint commonly found in commercial contracts of a vertical nature and the theories of harm (such as risks of foreclosure and collusion) and pro-competitive effects ascribed to them under EU competition law. Section II discusses not only those types of vertical restraint that one may traditionally come across - such as resale price maintenance clauses - but also discusses two novel areas, namely upfront access payments and category management agreements which relate to the issue of buyer power. Section III offers a step-by-step overview of the method that in our eyes ought ideally be followed by agencies, firms and their legal counsels when engaging in a self asssessment - in the post notification era - of vertical agreements under Article 101 TFEU. Section IV deals with the issue of online distribution, which sparked intense controversy during the stakeholder consultation process. In line with commercial reality and the ubiquity of online commerce it is in our opinion entirely appropariate that the new law on vertical restraints now provides extensive guidance on the issue. Finally a brief conclusion is provided in section V.
Posted by D. Daniel Sokol
C. Scott Hemphill, Columbia University - Law School and Mark A. Lemley, Stanford Law School have an interesting new paper on Earning Exclusivity: Generic Drug Incentives and the Hatch-Waxman Act. This paper is very interesting and I recommend a download of it.
ABSTRACT: “Reverse” or “exclusion” payments to settle pharmaceutical patent lawsuits are facilitated because the Hatch-Waxman Act has been interpreted to give 180 days of generic exclusivity to the first generic company to file for FDA approval, whether or not that company succeeds in invalidating the patent or finding a way to avoid infringement. As a result, the patentee can “buy off” the first generic entrant, paying them to delay their entry into the market while still offering them the valuable period of generic exclusivity. And if that first generic is entitled to its 180 days, no one else can enter until after the exclusivity period has expired or been forfeited. The result is that the 180-day exclusivity period is not serving its purpose of eliminating weak patents. True, it is encouraging lots of challenges to those patents. But it is encouraging the challengers to accept compensation to drop those challenges, rather than taking them to judgment and benefiting the rest of the world.
We propose a change to the Hatch-Waxman statutory scheme. Our alternative is straightforward: first-filing generic drug companies should be entitled to 180 days of exclusivity only if they successfully defeat the patent owner, for example, by invalidating the patent or by proving that they did not infringe that patent. The point of 180-day exclusivity was to encourage challenges to patents because the invalidation of bad patents benefits society as a whole. Society doesn’t benefit from a private deal to drop a challenge. That doesn’t mean settlement is never a good idea; it is a commonplace in our legal system. But it seems bizarre to insulate a company from competition just because it settles the case. Indeed, we expect that our proposal, if implemented, would facilitate more rational settlements, in which the settlements that result accurately reflect the likelihood of success in litigation.
Monday, February 7, 2011
Posted by D. Daniel Sokol
Horizontal Market Power: The Evolving Law and Economics of Mergers and Cartels
Wednesday, February 9, 2011
8:00 a.m. – 12:15 p.m.
Willard InterContinental Washington
The Willard Room
1401 Pennsylvania Avenue, N.W.
Washington, D.C. 20004
|8:00 a.m.||Registration & Continental Breakfast|
Daniel D. Polsby, Dean and Professor of Law, George Mason University School of Law
Jeffrey A. Eisenach, Managing Director and Principal, Navigant Economics and Adjunct Professor, George Mason University School of Law
Introduction of Commissioner Rosch
Ian Simmons, Partner, O’Melveny & Myers LLP
|J. Thomas Rosch, Commissioner, Federal Trade Commission|
|9:30 a.m.||Panel One | The Impact of the 2010 Horizontal Merger Guidelines on the Litigation of Merger Cases|
|Alden F. Abbott, Deputy Director for Special Projects, Office of International Affairs, Federal Trade Commission and Adjunct Professor, George Mason University School of Law|
|Jeffrey Brennan, Partner, Dechert LLP
Kevin M. Murphy, George J. Stigler Distinguished Service Professor of Economics, Booth School of Business and Department of Economics at the University of Chicago
David T. Scheffman, Director, Berkeley Research Group LLC
Howard Shelanski, Deputy Director for Antitrust, Bureau of Economics, Federal Trade Commission
Our first panel will address the impact of the 2010 Horizontal Merger Guidelines on the litigation of merger cases. Panelists will discuss (a) the Guidelines’ shift from evaluating competitive effects through a focus on market definition and step-by-step merger analysis to emphasizing diversion analysis and upward pricing pressure analysis; (b) how the Courts will respond, if at all, to changes in the Guidelines; and (c) how the new Guidelines change the Government’s burden of proof in suing to oppose a merger, and the type of evidence that the parties can provide to rebut the Government’s allegations.
|11:00a.m.||Panel Two | Current Trends in Criminal Cartel Enforcement|
|Ian Simmons, Partner, O’Melveny & Myers LLP|
Barry Boss, Office Managing Partner, Cozen O’Connor
Steve Bunnell, Partner, O’Melveny & Myers LLP
James Langenfeld, Managing Director and Principal, Navigant Economics and Adjunct Professor, Loyola University Chicago School of Law
Lisa M. Phelan, Chief, National Criminal Enforcement Section, Department of Justice (Antitrust Division)
Our second panel will address current trends in criminal cartel enforcement. Panelists will discuss (a) the converging and diverging interests of company counsel and individual counsel; (b) the “volume of commerce” analysis under the post-Booker U.S. Sentencing Guidelines; and (c) whether economic damages analyses are useful in measuring “volume of commerce”.
Registration: Click here to register for the 2011 Symposium.
General Admission – $345
Government/Academic – $150
Student – $50
2.5 hours of CLE (pending approval by the Virginia State Bar)
George Mason Foundation Federal Tax ID Number 54-1603842
Isaac Post, Symposium Editor
George Mason Law Review
3301 Fairfax Drive
Arlington, Virginia 22201-4498
Posted by D. Daniel Sokol
Jan Boone, Tilburg University - Center for Economic Research (CentER) and Michiel van Leuvensteijn, CPB Netherlands Bureau of Economic Policy Analysis address Measuring Competition Using the Profit Elasticity: American Sugar Industry, 1890-1914.
ABSTRACT: The Profit Elasticity (PE) is a new competition measure introduced in Boone (2008). So far, there was no direct proof that this measure can identify regimes of competition empirically. This paper focuses on this issue using data of Genesove and Mullin (1998) in which different regimes of competition are identified. We derive a version of PE suitable for this data set. This competition measure correctly classifies the monopoly/cartel regime as being less competitive than both the price war regime and break-up of cartel regime.
Posted by D. Daniel Sokol
Randy Stutz, AAI and Richard Brunell, AAI provide an Analysis of the FTC's Decision Not to Block Google’s Acquisition of AdMob.
ABSTRACT: On May 21, 2010, after months of investigation, the Federal Trade Commission (FTC) announced that it would not challenge Google’s $750 million acquisition of AdMob, a mobile advertising network and mobile ad solutions and services provider. In this white paper, we present AAI’s analysis of the FTC’s decision.
The FTC found that, but for recent developments concerning Apple, the acquisition “appeared likely to lead to a substantial lessening of competition in violation of Section 7 of the Clayton Act.” According to the FTC, Google and AdMob “currently are the two leading mobile advertising networks, and the Commission was concerned about the loss of head-to-head competition between them.” The companies “generate the most revenue among mobile advertising networks, and both companies are particularly strong in ... performance ad networks,” i.e. those networks that sell advertising by auction on a “per click” or other direct response basis. Without necessarily defining a relevant market, the Commission apparently saw a likelihood of unilateral anticompetitive effects, as it found “each of the merging parties viewed the other as its primary competitor, and that each firm made business decisions in direct response to this perceived competitive threat.”
Yet, Apple’s acquisition of the third largest mobile ad network, Quattro Wireless, in December 2009, and its introduction of its own mobile advertising network, iAd, as part of its iPhone applications package, convinced the FTC that the anticompetitive effects of the acquisition “should [be] mitigate[d].” The Commission “ha[d] reason to believe that Apple quickly will become a strong mobile advertising network competitor” because of its relationships with applications developers and users, and ability to offer targeted ads “by leveraging proprietary user data gleaned from users of Apple mobile devices.” Indeed, the FTC concluded that “Apple’s ownership of the iPhone software development tools, and its control over the developers’ license agreement, gives Apple the unique ability to define how competition among ad networks on the iPhone will occur and evolve.” As result, AdMob’s current market share, which is derived largely from the iPhone platform, was “unlikely to be an accurate predictor of [its] competitive significance going forward.”
The FTC’s decision not to challenge Google’s acquisition of AdMob is understandable given the nascent and changing nature of the mobile advertising market and Apple’s emergence as a likely formidable competitor in this market. The FTC’s conclusion is well taken that, particularly as a result of Apple’s recent actions, current market shares are unlikely to be an accurate predictor of future market shares or whether the Google/AdMob combination will be able to exercise market power.
However, it is not clear that Apple’s emergence will mitigate competitive concerns with respect to advertising on mobile web sites, as opposed to advertising on mobile applications, which is iAd’s exclusive focus. Moreover, a market dominated by two mobile advertising networks – Google and Apple – is unlikely to provide adequate competition to protect application developers and advertisers, particularly insofar as those networks hold mutually exclusive “inventory.” The Commission apparently believes that other advertising networks may emerge, including self-supplied networks created by other mobile platform providers. We hope the Commission is correct, but there are reasons to be skeptical. Certainly, smaller mobile advertising networks do exist, some of which are controlled by well-established companies. But, if application inventory on the iPhone platform cannot be sold using non-Apple ad networks, then other ad networks may be deterred from entering the market or expanding.
It is not clear how deeply the FTC investigated the possibility that Apple’s license agreements with developers may unreasonably foreclose rival ad networks. Presumably, Apple will be a formidable competitor with or without such restrictions. But Apple should not be permitted to dominate advertising on the iPhone through exclusionary means, and nothing in the FTC’s Google/AdMob decision precludes a review by the FTC (or DOJ) of Apple’s conduct.
Posted by D. Daniel Sokol
Diana L. Moss, American Antitrust Institute has posted Airline Mergers at a Crossroads: Southwest Airlines and Airtran Airways.
ABSTRACT: The proposed merger of Southwest/AirTran could meet with relatively little antitrust enforcement resistance based on the Department of Justice’s (DOJ) public statements in recent airline mergers. For example, claimed efficiencies are likely to get significant weight. Moreover, concerns over eliminating competition on Southwest/AirTran overlap routes could be mitigated because the number of routes is relatively small, there is rivalry (from low-cost carriers (LCCs) and legacies) on some of those routes, and entry may be relatively easy at some affected airports.
However, the proposed merger of Southwest and AirTran – the first major merger of LCCs – raises novel issues that may not be captured by analysis that focuses mainly on overlaps between the merging partners in city-pair or airport-pair markets. These novel issues include how the merger could potentially result in: (1) a transition from a point-to- point/hybrid system to a hub-and-spoke network model; (2) changes in the two LCCs’ price discounting strategies; (3) changes in entry or expansion patterns in new and existing markets; and (4) changes in short-term output and/or longer-term capacity decisions. These questions deserve attention in an antitrust review of the proposed merger.
For example, combining the Southwest and AirTran systems may stretch the limits of Southwest’s model, pushing the merged company away from a point-to-point or hybrid system and more toward a hub-and-spoke model. If so, then the combined company may be less able to inject the competitive discipline through lower fares, more choice, and entry and expansion than each LCC alone has brought to the industry. With the ranks of the LCCs reduced through a Southwest/AirTran merger, it is also important to consider how effective the rivalry offered by the remaining LCCs will be.
Eliminating AirTran also means removing from the market the second largest LCC (based on its presence as a low fare carrier on top routes) and the source of some of the most aggressive price discounting and market entry. Combining the maverick-like AirTran with Southwest could change incentives for the merged company to discount. And because Southwest and AirTran, as LCCs, are closer competitors to each other than to the legacy airlines, potential post-merger price increases (or smaller discounts) may not be captured by standard market share and concentration analysis.
Finally, post-merger output restrictions and/or capacity reductions are demonstrated effects of airline mergers that have been largely overlooked in antitrust reviews. Not only do they raise fares, but they reduce choice for consumers. Well-publicized cutbacks at Cincinnati after Delta/Northwest and conditions imposed on United/Continental at Cleveland by the state of Ohio indicate the gravity of these effects. Mergers of LCCs should be no exception to an examination of the potential for post-merger output and capacity reductions. This is particularly true if the merger eliminates competition on routes/airports and the carriers are adept at managing capacity – as is the case in Southwest/AirTran.
This White Paper by the American Antitrust Institute (AAI) is the first of what is intended to be a series by the AAI on competition in the U.S. airline industry. It is based on publicly available information – no confidential information was provided to the AAI in the course of preparing this analysis. While we do not make a recommendation as to the legality of the proposed Southwest/Air Tran merger, the paper raises important questions that deserve investigation before a decision is made.
Posted by D. Daniel Sokol
ABSTRACT: Consumers and business entities at the bottom of a chain of distribution - i.e., those who cannot “pass on” overcharges - often bear the full financial brunt of antitcompetitive activity. Unless they purchased goods or services directly from the alleged antitrust violators, however, they are “indirect purchasers” who lack standing to bring suit for damages under the federal antitrust laws. Illinois Brick Co. v. Illinois, 431 U.S. 720 (1977). In California v. ARC America Corp., 490 U.S. 93 (1989), the Supreme Court held that Illinois Brick interpreted federal antitrust law only and states could allow indirect purchasers to seek damages under state law. Several states and the District of Columbia reaffirmed an indirect purchaser’s right to recover damages by passing “Illinois Brick repealer” statutes that expressly allow for indirect purchaser actions. Even where no “repealer” statute has been enacted, some state courts have interpreted their state’s antitrust laws to allow for indirect purchaser standing. See, e.g., Comes v. Microsoft Corp., 646 N.W.2d 440 (Iowa 2002); Bunker's Glass Co. v. Pilkington PLC, 75 P.3d 99 (Ariz. 2003). State law indirect purchaser actions are an important component of antitrust enforcement, especially in cases where direct purchasers’ continuing business relationship with the antitrust violators blunts any incentive to bring suit. Moreover, utilizing class action procedures, indirect purchaser class actions can provide redress to the targeted victims of unlawful conduct.
The purpose of this paper is to compile a comprehensive list of indirect purchaser class action settlements, including the amount of money (or other consideration) recovered for classes. This project began in 2005 at the request of counsel for the Antitrust Modernization Commission and was intended to respond to the contentions made by corporate interests that indirect purchaser antitrust actions benefited only plaintiffs’ attorneys and resulted in, at best, cy pres recoveries for the indirect benefit of the class members. Accordingly, this listing attempts to include both the method of distribution of settlement proceeds and the amount of attorneys’ fees awarded. While cy pres distributions are sometimes necessary, many cases (especially in the area of pharmaceuticals) provide for cash distributions to class members. The settlements listed below have recovered an aggregate value $4,363,237,265 since the mid-1990s. This total consists of $2,069,252,500 in cash, $163,464,000 worth of product (i.e., infant formula and prescription drugs) and $2,130,520,765 in Microsoft vouchers.
One development since 2005 is worthy of comment: the Class Action Fairness Act of 2005, Pub. L. No. 109-2, 119 Stat. 4 (2005), which became effective February 18, 2005, greatly expanded federal jurisdiction over state law class actions. As class actions are the primary avenue for assertion of indirect purchaser antitrust claims, opportunities for state courts to interpret their own states’ antitrust statutes will likely be few and far between. This development may impede - or at least freeze in place - judicial development of indirect purchaser antitrust law.
This list was compiled with assistance from attorneys Bernard Persky (Labaton Sucharow LLP) and Daniel Gustafson (Gustafson and Gluek PLLC) and includes: (1) cases in which one or more of our firms appeared as counsel; (2) cases that we have discerned from public sources (such as the Internet and legal research databases); and (3) information received from other practitioners. Where possible, we have sorted state court cases according to common underlying facts. While the information on the list is accurate to the best of our knowledge, information and belief, we are certain that we have not captured many cases, especially in California which has a long-standing history of indirect purchaser antitrust class actions. See, e.g., B.W.I. Custom Kitchen v. Owens-Illinois, Inc., 191 Cal. App. 3d 1341 (Cal. Ct. App. 1987).