Monday, January 19, 2015
The American Antitrust Institute is pleased to receive requests for information about internships. We will likely limit the number of interns at any one time to no more than four.
What We Offer It is our intention to expose all interns and research fellows to a variety of substantive antitrust issues, procedures, institutions, and personalities. They will work on a variety of assignments under the supervision of an experienced lawyer and/or economist. They will be offered opportunities to attend conferences and symposia as well as a weekly breakfast with the AAI president and various leaders of the antitrust community. They will be on the AAI listserv for its Advisory Board, which allows them to participate in the on-going exchanges of some of the world’s most highly respected experts. We offer a job title, respected experience, and a path for entry into the antitrust world. The range of topics and projects that we are involved in may be sampled by browsing our website, www.antitrustinstitute.org.
What We Expect from Interns Interns and research fellows are not paid by the AAI. Generally, interns and research fellows will reside during the internship in metropolitan Washington, DC. AAI does not have an office, but is a virtual network of experts. We therefore cannot promise an office, but often are able to arrange for space for an intern, if desired, in a downtown law firm. A Memorandum of Understanding will be entered into, stipulating the duration of the internship and minimum hours per week. Summer Research Fellows will commit to a minimum of 90 days full time work. Research Fellows will commit to a minimum of six months full time or one year either half or full time, with full time definitely preferred. A sample MOU may be found here.
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Harold Houba, VU University Amsterdam - Department of Econometrics; Tinbergen Institute, Evgenia Motchenkova, VU University Amsterdam - Department of Economics; TILEC, and Quan Wen, University of Washington explore The Effects of Leniency on Cartel Pricing.
ABSTRACT: We analyze how leniency affects cartel pricing in an infinitely-repeated oligopoly model where the fine rates are linked to illegal gains and detection probabilities depend on the degree of collusion. A novel aspect of this study is that we focus on the worst possible outcome. We investigate the maximal cartel price, the largest price for which the conditions for sustainability hold. We analyze how the maximal cartel price supported by different cartel strategies adjusts in response to the introduction of (ex-ante and ex-post) leniency programs. We disentangle the effects of traditional antitrust enforcement, leniency, and cartel strategies on the maximal cartel price. Ex-ante leniency cannot reduce the maximal cartel price below the price under antitrust without leniency. On the other hand, for ex-post leniency, improvement is possible and granting full immunity to single-reporting firms achieves the largest reduction in the maximal cartel price. To reduce adverse effects under both leniency programs, fine reductions to multiple-reporting firms should be moderate or absent. Finally, ex-post leniency should provide less generous fine reductions to multiple-reporting firms, which is supported by the current practice in the US and the EU.
Nicolas Petit, Liege has an interesting paper on GE/Alstom, Economic Patriotism and State-Created Barriers to Exit.
ABSTRACT: This paper seeks to understand the competitive impact of State interferences on M&A transactions that involve national champions. To that end, it offers a case study of the proposed acquisition of the French company Alstom by the US conglomerate General Electric ("GE") in 2014, and of the measures adopted by the French Government to discourage it. It shows that despite what has been written in the press, the actual changes brought to the initial transaction by the French Government remain marginal. GE will acquire whole and sole control of Alstom’s core energy activities. The much celebrated Government fabricated "alliance" of equals between GE and Alstom is no more than transactional "make-up" that seeks to win the face-saving battle before the public opinion. From a competitive standpoint, however, things are different. In reshaping the initial offer, the Government may have restricted the competitiveness of both firms. This is interesting, because it suggests that the problem with State restrictions to FDI may not be where the literature on "competitive neutrality" believes it is, ie advantaging the local firm at the expense of the foreign one. Rather, in stylized terms, the Government intervention may just have been neutrally anticompetitive, by degrading competitiveness across the board. The paper explores this issue from a theoretical perspective, by reviewing the industrial organization and business strategy literature on exit barriers. From this, it comes to the view that the main effect of the French Government intervention has been to raise exit and mobility barriers both for Alstom and for GE. It then argues that those State-created exit barriers may be as problematic as the entry-adverse effect of Government restrictions of FDI, because Governments have a very poor track record at closing down failed industrial proiects.
Iain Cockburn, Jean O. Lanjouw and Mark Schankerman analyze Patents and the Global Diffusion of New Drugs.
ABSTRACT: This paper studies how patent rights and price regulation affect how fast new drugs are launched in different countries, using newly constructed data on launches of 642 new drugs in 76 countries for the period 1983-2002, and information on the duration and content of patent and price control regimes. Price regulation strongly delays launch, while longer and more extensive patent protection accelerates it. Health policy institutions, and economic and demographic factors that make markets more profitable, also speed up diffusion. The effects are robust to using instruments to control for endogeneity of policy regimes. The results point to an important role for patents and other policy choices in driving the diffusion of new innovations. This project was initiated by Jean (Jenny) Lanjouw. Tragically, Jenny died in late 2005, but had asked us to complete the project. This took much longer than expected because it involved complete reconstruction of the data set and empirical work. It is essentially a new paper in its current form, but it remains an important part of Jenny's legacy and a topic to which she devoted much of her intellectual and policy efforts. We hope she would be satisfied with our work which, for us, was a labor of love.
Christos Genakos, Pantelis Koutroumpis, Mario Pagliero describe The Impact of Maximum Markup Regulation on Prices.
ABSTRACT: We study the repeal of a regulation that imposed maximum wholesale and retail markups for all but five fresh fruits and vegetables. We compare the prices of products affected by regulation before and after the policy change and use the unregulated products as a control group. We find that abolishing regulation led to a significant decrease in both retail and wholesale prices. However, markup regulation affected wholesalers directly and retailers only indirectly. The results are consistent with markup ceilings providing a focal point for collusion among wholesalers.
Friday, January 16, 2015
Emmanuel Dhyne (NBB, UMons), Amil Petrin (U. Minnesota), Valerie Smeets (Aarhus U.) and Frederic Warzynski (Aarhus U.) examine Import competition, productivity and multi-product firms.
ABSTRACT: Using detailed firm-product level quarterly data, we develop an estimation framework of a Multi-Product Production Function (MPPF) and analyse firm-product level TFP estimations at various levels (industries, products). After documenting our estimation results, we relate productivity estimates with import competition, using firm and product level measures of import competition. We find that if productivity at the firm level tends to positively react to increased import competition, the multi-product firms response varies according to the relative importance of the product that faces stronger import competition in the firm’s product portfolio. When import competition associated to the main product of! a firm increases, the firm tend to increase its efficiency in producing that core product, in which it has a productivity advantage. However, when the degree of foreign competition increases for non core products of a firm, it tends to lower its efficiency in producing those goods.
Christopher T. Conlon (Department of Economics, Columbia University) and Julie Holland Mortimer (Boston College) offer An Experimental Approach to Merger Evaluation.
ABSTRACT: The 2010 Department of Justice and Federal Trade Commission Horizontal Merger Guidelines lay out a new standard for assessing proposed mergers in markets with differentiated products. This new standard is based on a measure of "upward pricing pressure," (UPP) and the calculation of a "gross upward pricing pressure index" (GUPPI) in turn relies on a "diversion ratio," which measures the fraction of consumers of one product that switch to another product when the price of the first product increases. One way to calculate a diversion ratio is to estimate own- and cross-price elasticities. An alternative (and more direct) way to gain insight into diversion is to exogenously remove a product from the market and observe the set of products to which consumers actually switch. In the past, economists have rarely had the ability to experiment in this way, but more recently, the growth of digital and online markets, combined with enhanced IT, has improved our ability to conduct such experiments. In this paper, we analyze the snack food market, in which mergers and acquisitions have been especially active in recent years. We exogenously remove six top-selling products (either singly or in pairs) from vending machines and analyze subsequent changes in consumers' purchasing patterns, firm profits, diversion ratios, and upward pricing pressure. Using both nonparametric analyses and structural demand estimation, we find significant diversion to remaining products. Both diversion and the implied upward pricing pressure differ significantly across manufacturers, and we identify cases in which the GUPPI would imply increased regulatory scrutiny of a proposed merger.
Flavio Delbono, University of Bologna and Luca Lambertini, University of Bologna suggest Nationalization as credible threat against tacit collusion.
ABSTRACT: Within a simple model of differentiated oligopoly, we show that tacit collusion may be prevented by the threat of nationalising a private firm coupled with the appropriate choice of the weight given to private profits in the maxim and of the nationalised company. We characterise the properties of such a threat and prove that it may allow to credibly deter tacit collusion.
Thursday, January 15, 2015
Catarina Marvao (Trinity College Dublin) explores Heterogeneous Penalties and Private Information.
ABSTRACT: The theoretical framework of the adequacy or otherwise of ! fine reductions under the EU and US Leniency Programmes has been explored widely. However, the characteristics of the reporting cartel members remain unexplained. This is the first paper to develop a model where cartel members are heterogeneous in terms of the cartel fine and have private information on the probability of conviction. It is shown that firms which receive higher fines, have a lower equilibrium threshold for reporting. To validate this result and analyze the sources of fine heterogeneity, data for EU and US cartels are used. Being the first reporter is shown to be correlated with recidivism, leadership and reductions received outside the Leniency Programme. Some characteristics of the cartels where reporting occurred are also unveiled. Identifying the characteristics of the reporting firms is vital to dissolve and dissuade cartels and the wider policy implications of these findings are discussed in the paper.
Edmond Baranes (LAMETA-CNRS and Labex Entreprendre, Faculte d'Economie, Universite de Montpellier) and Andreea Cosnita-Langlais (EconomiX-CNRS, Universite Paris Ouest Nanterre La Defense) ask Merger control on two-sided markets: is there need for an efficinecy defense?
ABSTRACT: We study horizontal mergers on two-sided markets between horizontally differentiated platforms. We provide a theoretical analysis of the merger's price effect based on the amount of cost savings it generates, the behavior of outsider platforms, and the size of cross-group network effects. We point out differences as compared with the standard, one-sided merger analysis, and also discuss the merger control policy implications.
Catarina Marvao (Trinity College Dublin) has written on The EU Leniency Programme and Recidivism.
ABSTRACT: The EU Leniency Programme (LP) aims to encourage the dissolution of existing cartels and the deterrence of future cartels, through spontaneous reporting and/or significant cooperation by cartel members during an investigation. However, the European Commission guidelines are rather vague in terms of the factors that influence the granting and scale of fine reductions. As expected, the results shown that the first reporting or cooperating firm receives generous fine reductions. More importantly, there is some evidence that firms can “learn how to play the leniency game”, either learning how to cheat or how to report, as the reductions given to multiple offenders (and their cartel partners) are substantially higher. These results have an ambiguous impact on firms’ incentives and major implications for policy making.
Posted by Matthew Lane
(Author’s note: This article assumes that DIPF is a separate product market for simplicity. However, this issue is in contention on appeal.)
What makes the McWane case so interesting is that the issues defy all attempts to simplify them into something that is easily dispositive. A prime example of this is the appeal to market structure. The FTC and its supporters would like to argue that the market structure shows that McWane was the monopoly manufacturer of domestic pipe fittings with near 100% market share and that Star was the only likely entrant. Under this structure, they argue, precedents like Dentsply and Microsoft apply because exclusive dealing by monopolists are treated differently. However, this oversimplification fails to address key issues in the domestic iron pipe fitting (“DIPF”) market.
Re-opening the Pandora’s Box of Market Structure
In the myth, Pandora opened a jar releasing all the evils in the world. Realizing what she had done, she quickly closed it trapping the last remaining inhabitant – hope. Unfortunately, it is the exact opposite that is missing from the above analysis of the DIPF market structure.
Most fittings used in the United States were manufactured domestically until just a few decades ago. Importers began to successfully take business from U.S. manufacturers starting in the mid-1980s. This process accelerated and in 2003 the U.S. International Trade Commission (“ITC”) found that cheap imports were causing market disruption and material injury to the U.S. iron pipe fitting market. Other manufacturers either cut domestic production or exited the market. McWane became the last domestic manufacturer standing with a full line of iron pipe fittings. McWane closed one of its two iron pipe manufacturing plants and the last remaining plant was not running at full capacity. In 2007, McWane booked $7 million in idle plant losses.
The reason behind McWane’s high market share is very important to fully understanding the structure of the market. As has been noted, “[e]ven a firm that produces 100 per cent of the available supply may lack monopoly power: it may be the last survivor of a dying industry or the first-comer into a field that can be and will be entered with no difficulty by numerous others.” Spectrofuge Corp. v. Beckman Instruments, Inc., 575 F. 2d 256, 282 (5th Cir. 1978) (quoting Edwards, Control of the Single Firm: Its Place in Antitrust Policy, 30 Law & Contemporary Prob. 465, 466 (1965)).
Is DIPF a dying market? After all “[a] dying market . . . does not attract new entries,” and there were two companies – Star and Sigma – that were looking to enter the DIPF market. See EI Du Pont de Nemours & Co. v. FTC, 729 F. 2d 128, 141 (2d Cir. 1984). The explanation behind this is the American Recovery and Reinvestment Act of 2009 (“ARRA”), which provided more than $6 billion to fund water infrastructure projects conditioned on the use of American made products.
No company made any attempts to enter the market prior to ARRA’s passage and both parties, McWane and the FTC, seem to agree that the motivation behind Star and Sigma’s entries was to take advantage of the ARRA funds. The main problem with ARRA motivating new entry is the temporary nature of ARRA’s stimulus package. The FTC’s administrative law judge found that ARRA had a short-term impact on demand, for about six months, after which demand returned to normal. This normal demand is the same level of demand that caused the other DIPF manufacturers to leave and motivated no new entry.
Tough Questions in Light of Full Examination of Market Structure
The FTC is going to have a tough time relying on market structure to convince the Eleventh Circuit to decide the case based on Dentsply and Microsoft. This is because Dentsply and Microsoft were strong companies in successful industries that were easily shown to have market power (not just market share). The DIPF market shares none of the characteristics of the markets in Dentsply and Microsoft. This “dying market” distinction has been found to be important in at least one other case - EI Du Pont de Nemours & Co. v. FTC, 729 F. 2d 128 (2d Cir. 1984) – where the court vacated the FTC’s order finding a violation of Section 5 for challenged practices that were alleged to have significantly lessened competition. While the branding of “American made” is certainly important to a select few customers, the higher costs of producing iron pipe fittings in the U.S. have created a stagnant, if not endangered, market.
This structure of the market makes the intentions of the market entrants relevant to the ultimate inquiry of whether competition was harmed. After all, the FTC rests a lot of its case on the argument that harm to Star is harm to competition as Star is the only likely entrant. (Sigma decided, perhaps wisely, to become a McWane distributor after examining its options for market entry). A judge concerned about the structure of the DIPF market’s effects on the case would consider the following questions:
- McWane’s challenged actions did not lock up customers for lengths of time, but instead forced them to choose among full line suppliers. Couldn’t Star simply have invested in producing a full line and taken McWane’s customers – especially those unhappy with McWane’s rebate policy?
- The FTC accuses McWane of driving up Star’s costs of entry. But the costs concerned here are primarily fixed costs – the costs of acquiring a foundry – not variable costs, which would ultimately be reduced by the acquisition of a foundry. Why should we place importance on Star’s fixed costs of entry?
- How can we be sure that Star was seeking to enter the DIPF market long term, and thus provide meaningful competition that would lower prices, rather than simply taking advantage of the short term ARRA funds? If Star’s primary motivation in entering the DIPF market was ARRA, wouldn’t it make more sense to not purchase a foundry?
- Is there any indication that total demand for DIPF could grow if prices were lowered? Is there enough demand to support two foundries, one owned by Star and one owned by McWane?
Wasn’t the effect of McWane’s challenged activities to force Star into making the same investment in producing a full line of DIPF that McWane had already made? Given the importance to many distributors of access to a full line, how was this anticompetit
Posted by David Balto
(Author’s note: I will assume that DIPF is a separate market for the purposes of this article. However, this issue is in contention on appeal.)
One subject that is sure to be discussed in tomorrow’s oral arguments is whether competition was actually foreclosed by McWane’s challenged conduct. Central to this debate is Star’s successful entry. McWane rightly points out in its briefs that Star was able to enter the domestic iron pipe fitting market and grow from 0% to 10% market share in two years during and after the challenged activity occurred. Commissioner Wright also noted this in his dissenting opinion, stating that the challenged activity “had almost no impact on Star’s ability to enter and grow its business, which, under the case law, strongly counsels against holding that McWane’s conduct was exclusionary.” Indeed, this successful entry does seem difficult for the FTC’s case.
The manner in which the Commission solves this problem should be of interest to antitrust scholars and practitioners. The Commission begins on solid ground by quoting Dentsply: ““it is not necessary that all competition be removed from the market. The test is not total foreclosure, but whether the challenged practices bar a substantial number of rivals or severely restrict the market’s ambit.” United States v. Dentsply Int’l, Inc., 399 F.3d 181, 191 (3d Cir. 2005). However, the commission then adds its own modification to the standard. “Moreover, growth and market share alone is not the relevant benchmark. The appropriate comparison is growth that would have occurred absent the Full Support Program.” Opinion at 29.
McWane spends a good deal of space in its briefs arguing why this modified standard is wrong under the case law. But perhaps the more interesting question to antitrust scholars and practitioners is whether this modified standard for exclusion is workable. What are the benefits of the modified standard? Is this modified standard easy to apply in practice? What are the risks?
The benefits of the Commission’s modified standard are somewhat difficult to ascertain. Presumably, the Commission is trying to protect against a situation that it believes exists here – a competitor has entered but its entrance was neutered in such a way that an ideal form of competition is not reached. In the McWane case the ideal form of competition outlined by the FTC would be one in which Star has a foundry and thus has a similar cost structure as McWane. What is unclear about the benefits of this standard is whether it offers something above and beyond a more traditional method of solving this problem – like monitoring an industry and bringing an action once the effects of the neutered competition become apparent. What is also unclear is the benefit of attempting to identify a desired market state – the growth that would have occurred – rather than identifying the undesired market state.
This leads to the problem shown in answering the next question: the Commission’s modified standard appears impossible to apply because it is highly speculative in nature. Determining the growth that could have occurred absent a challenged action will undoubtedly involve a lot of assumptions and will likely rely on statements by parties that might be influenced by self-serving interests or hindsight. This is apparent in the McWane case, where the FTC relies heavily on Star testimony that it could have sold more and thus justify buying a foundry absent McWane’s challenged actions.
The Commissions modified standard also specifically discounts the easy to apply benchmarks of growth and market share and invites courts to tread dangerous waters by fixating on an ideal form of entry and subsequent competition. Again, this is readily apparent in the McWane case by the Commission’s fixation on Star obtaining market share sufficient to justify construction of a foundry. This fixation by a court on a specific course of competition is dangerous for a number of reasons, including the basic fact that companies operating in this but-for world may not take the actions assumed in this analysis. Namely, had Star had the market share to justify a foundry it still might not have built a foundry due to risks inherent in such an investment. This line of inquiry puts the court in the position of a company head to decide on a course of action in a but-for world, but here the court is given the goal of maximizing competition rather than maximizing profits.
The modified standard by its very nature improperly puts the focus of analysis on competitors rather than competition by attempting to measure the growth of competitors in a but-for world. It is well established that “[t]he welfare of a particular competitor who may be hurt as the result of some trade practice” is not the concern of federal antitrust laws. Roland Machinery Co. v. Dresser Industries, 749 F. 2d 380, 394 (7th Cir. 1984) (citing Copperweld Corp. v. Independence Tube Corp., 467 U.S. 752, 767 n.14 (1984)). This focus on competitors re-blurs a line between harm to competition and harm to competitors that antitrust jurisprudence has spent a significant amount of time un-blurring. This is why generally “[i]f there is no exclusion of a significant competitor, the [action] cannot possibly harm competition.” Id.
The biggest problem with the Commission’s modified standard, however, is the large risk of over-enforcement. It has long been established that virtually every action taken by businesses restrain trade in a literal sense. E.g. Chicago Board of Trade v. United States, 246 U. S. 231, 238 (1918). The Sherman Antitrust Act is unenforceable if taken literally because all business would be declared illegal. The courts have gotten around this by requiring something additional, such as an inquiry into whether the restraint “may suppress or even destroy competition.” Id. The Commission’s modified standard creates a similar situation where any reaction to a new competitor can fail the standard and thus risk being unlawful. The result raises the same problems as a literal application of the Sherman Antitrust Act and must be further modified before it is even practicable.
Take, for example, what would happen under what the Commission stated as a competitive reaction to Star’s entry – lowering price. This lowering of price by McWane would undoubtedly have restricted Star’s growth. Absent McWane’s lowering of price more growth by Star would have occurred and thus McWane fails the Commission’s modified standard.
The Commission’s modified standard has many issues that were not addressed in the Commission’s opinion. It would be helpful for the Eleventh Circuit to spend some time asking the FTC about this modified standard’s usefulness, whether it was appropriately applied, how the problems identified can be mitigated, and how it would work in application in other cases. This line of inquiry is useful both to antitrust scholars and practitioners, who ultimately have to counsel their clients on how to avoid antitrust liability. Ultimately, it seems that even if this modified standard could find support in case law it is still not worth pursuing.
How Much Success Is Too Much Success?
The Implications Of Star’s Entry And Expansion On
The FTC’s Exclusive Dealing Claim Against McWane
John R. Seward
James W. Attridge
On January 16, 2015, the Eleventh Circuit will hear oral arguments in McWane, Inc.’s appeal of the Federal Trade Commission’s decision finding that the company unlawfully maintained its monopoly position in the domestic pipefitting market through an exclusive dealing arrangement. The McWane case comes in the wake of the February 2009 passage of the American Recovery and Reinvestment Act (“ARRA”), which allocated more than $6 billion to water infrastructure projects. Waterworks projects funded by the ARRA were required to use domestically manufactured pipefittings except in certain situations. According to the Commission’s opinion, McWane held a monopoly share of the domestic pipefitting market at the time the ARRA was enacted. To thwart the entry and growth of new domestic manufacturers, namely Star Pipe Products, Ltd., McWane adopted a distribution policy—the Full Support Program—whereby McWane refused to sell to distributors who purchased competitors’ pipefittings. The Commission found that this exclusive dealing arrangement hindered Star’s ability to compete in the domestic market, thus allowing McWane to preserve its monopoly position.
The exclusive dealing claim is the last remaining claim in a case that started with a seven-count administrative complaint alleging both unlawful collusion and monopolization. From the beginning, the McWane case has elicited strong views on both sides. When the case was brought in January 2012, Commissioner Rosch dissented from the Commission’s decision to include in the administrative complaint the exclusive dealing claim now at issue on appeal, as well as the decision to name Star as a McWane co-conspirator since Star was also the alleged victim of McWane’s exclusive dealing. Following a full administrative trial, the Administrative Law Judge found that Complaint Counsel failed to establish liability on the collusion claims, but held McWane liable on the monopolization claims. After a de novo review, the Commission deadlocked two-to-two on the collusion claims, thus requiring dismissal for lack of a majority. The Commission also dismissed all of the monopolization claims except for the exclusive dealing claim, but even here the decision drew a sharp 52-page dissent from Commissioner Wright.
On appeal, McWane challenges the key elements of the Commission’s finding of unlawful exclusive dealing, including the evidence used to support a relevant market, whether McWane’s conduct had any effect on Star’s ability to enter the domestic pipefitting market and grow its share, and whether any potential harm to Star was sufficient to constitute harm to competition. McWane and the Commission also sharply differ in their characterizations of the key facts—indeed, in reading the two sides’ appellate briefs, one at times wonders if they address the same case.
Perhaps one of the more interesting issues on appeal is whether McWane’s conduct can properly be considered exclusionary given that Star was able to enter the domestic fittings market and grow its share within a few years. According to McWane, Star achieved a five percent market share within its first year of sales and nearly a ten percent market share by its second year in the market. McWane argues that such “successful entry into the production of domestic fittings affirmatively disproves any allegations that McWane exercised monopoly power and is dispositive here.” Similarly, Commissioner Wright in his dissenting statement found that Star’s growth rate was identical before and after McWane stopped enforcing the Full Support Program. In Commissioner Wright’s view, “[t]he most plausible inference to draw from these particular facts is that the Full Support Program had almost no impact on Star’s ability to enter and grow its business, which, under the case law, strongly counsels against holding that McWane’s conduct was exclusionary.”
While Star’s entry and growth raise important questions about the Full Support Program’s impact on competition, by themselves they are not dispositive of the foreclosure question. Modern economic analysis recognizes two foreclosure mechanisms by which exclusive dealing with distributors can harm competition—“input foreclosure” and “customer foreclosure.” Exclusive dealing can raise the input cost of distribution for one or more rivals by preventing or worsening their access to some or all distributors. Exclusive dealing similarly can reduce one or more rivals’ sales and revenues by constraining their access to distributors and customers. Either way, the foreclosed rivals can have a reduced ability to compete and expand. Exclusive dealing can also involve both types of foreclosure occurring together if the challenged conduct simultaneously raises the foreclosed rivals’ costs and reduces their revenues.
Foreclosure (both input and customer) can injure competitors and harm competition in several ways. Foreclosure can be so severe that the foreclosed firms will exit the market or be deterred from entering. But even if a competing firm is able to enter or remain in the market, foreclosure can weaken that firm and make it a less efficient competitor by raising its costs, unduly limiting its output, or both. Such higher costs or limited output can lessen the ability of the foreclosed firm to compete as effectively as it would absent the challenged conduct. Over time, foreclosure can also reduce a rival’s incentives to invest, thereby relegating it to a niche position where it will provide less of constraint on the pricing of the excluded firm. Thus, even in the absence of “total foreclosure,” raising rivals’ costs or restricting their output can permit a dominant firm or monopolist profitably to raise or maintain supra-competitive prices.
Given the different ways in which foreclosure can harm competition, a narrow focus on the fact that Star was able to enter the domestic pipefitting market and achieve some growth fails to fully trace out the entire causal chain and probable impact of the Full Support Program on Star’s ability to compete effectively. For example, if Star had higher distribution costs because it lacked sufficient access to distributors, or if Star’s output and ability to expand were constrained by lacking access to these distributors, then Star would have placed less competitive price pressure on McWane, even if Star had achieved some level of sales. As a result, the challenged conduct may have enabled McWane to maintain monopoly prices, despite Star being a viable, but limited, competitor. This surely appears to have been McWane’s intended purpose behind the Full Support Program, as reflected in its statement that “‘we need to make sure that [Star does not] reach any critical market mass that will allow them to continue to invest and receive a profitable return.’” And evidence that McWane raised its prices in the face of Star’s entry suggests that the Full Support Program achieved its intended result.
Similarly, the fact that Star’s growth rate remained the same after McWane ended the Full Support Program may not tell the whole story about whether the program was exclusionary. Even though Star did not achieve a higher growth rate after the exclusives ended, there are at least three other explanations for Star’s lack of greater growth that would still be consistent with there being anticompetitive effects during the period of exclusivity.
First, Star’s growth rate and market share after the exclusives ended would depend on McWane’s own post-exclusivity conduct. IfMcWane responded to Star’s potential for greater expansion after the exclusives ended by cutting its own prices below the monopoly level in order to maintain its own market share, that competitive response likely would have reduced Star’s growth.
Second, lack of faster growth by Star after the exclusivity period ended could have been caused by the longer-term adverse effects of the exclusives. In a dynamic market, actions in one period can have longer term effects on competition and output. This outcome could occur if Star’s failure to grow sufficiently during the period of exclusivity constrained its ability to invest subsequently. In fact, one of McWane’s stated goals was to delay Star so that it would not continue to invest.
Third, the period of exclusive dealing may have been a unique window of opportunity for entry afforded by the increased demand resulting from the ARRA. Indeed, as Commissioner Wright noted, ARRA-funded projects had to be under contract or under construction by February 2010, and thereafter demand for domestic pipefittings decreased. If this window passed without Star obtaining sufficient order commitments, the Full Support Program may well have had longer term implications on Star’s ability to expand and compete. This explanation for the lack of faster growth by Star would be consistent with there being anticompetitive effects both during and after the period of exclusivity.
We do not envy the Eleventh Circuit’s task of grappling with the tough legal and factual issues presented on appeal. The law on exclusive dealing remains one of the more challenging areas of antitrust counseling. We look forward to seeing what additional guidance the court may provide in tackling the particularly difficult issues raised by McWane.
 The authors are associates in the Washington, D.C. office of Skadden, Arps, Slate, Meagher & Flom LLP. All opinions are our own and may not reflect the views of our colleagues or clients.
 Brief of Petitioner-Appellant at 43, McWane, Inc. v. Fed. Trade Comm’n, No. 14-11363(7th Cir. June 27, 2014).
 Id. at 42 (citing Brooke Group Ltd. v. Brown & Williamson Tobacco Corp., 509 U.S. 209, 226 (1993)).
 McWane, Inc., Docket No. 9351, at 45 (F.T.C. Jan. 30, 2014) (Dissenting Statement of Commissioner Joshua D. Wright) [hereinafter Dissenting Statement].
 Id. at 46.
 For the distinction between input and customer foreclosure in the context of vertical mergers, see Michael H. Riordan & Steven C. Salop, Evaluating Vertical Mergers: A Post-Chicago Approach, 63 Antitrust L.J. 513 (1995).
 Steven C. Salop, Sharis A. Pozen & John R. Seward, The Appropriate Legal Standard and Sufficient Economic Evidence for Exclusive Dealing Under Section 2: the FTC’s McWane Case, at 7 (Geo. L. Ctr. 2014), available at http://scholarship.law.georgetown.edu/cgi/viewcontent.cgi?article=2376 &context=facpub.
 See, e.g., ZF Meritor, LLC v. Eaton Corp., 696 F.3d 254, 283 (3d Cir. 2012) (“‘[T]otal foreclosure’ is not required for an exclusive dealing arrangement to be unlawful . . . .”) (citation omitted), cert. denied, 133 S. Ct. 2025 (2013); United States v. Dentsply Int’l, 399 F.3d 181, 191 (3d Cir. 2005) (“The test is not total foreclosure, but whether the challenged practices bar a substantial number of rivals or severely restrict the market’s ambit.”); United States v. Microsoft, 253 F.3d 34, 70 (D.C. Cir. 2001) (en banc) (per curiam) (“Microsoft’s exclusive dealing arrangements . . . had substantially excluded Netscape from ‘the most efficient channels for Navigator to achieve browser usage share,’ and had relegated it to more costly and less effective methods”) (citations omitted). For one general application of the theory to exclusive dealing, see Jonathan M. Jacobson, Exclusive Dealing, “Foreclosure,” and Consumer Harm, 70 Antitrust L.J. 311, 360-63 (2002).
 McWane, Inc., Docket No. 9351, at 8 (F.T.C. Jan. 30, 2014) (quoting Mr. Tatman, the Vice President and General Manager of McWane’s fittings business) [hereinafter McWane].
 McWane, Inc., Docket No. 9351, at 380-81, Findings of Fact 1073, 1090 (F.T.C. May 8, 2013) (Chappell, A.L.J.).
 The evidence showed that at the time McWane launched the Full Support Program, Star was in the midst of negotiating to purchase a foundry. After McWane announced its program and distributors began withdrawing their Star orders, Star was forced to abandon its plan to acquire a foundry due to a reduction in expected sales. See McWane at 25.
 See McWaneat 8 (“‘[W]e need to make sure that they don’t reach any critical market mass that will allow them to continue to invest and receive a profitable return.’” (citation omitted)).
 Dissenting Statement at 36 n.43; see also McWane at 7-8 (Construction needed to be contracted or commenced within 12 months of the enactment of the ARRA.).
 In its appellate brief, the FTC argues that the Full Support Program was tantamount to a surgical strike during Star’s window to enter the market and reap benefits of increased demand from the ARRA. See Brief of Petitioner-Appellant at 5, 13-14, 42, McWane, Inc. v. Fed. Trade Comm’n, No. 14-11363(7th Cir. June 27, 2014); see also Microsoft, 253 F.2d at 79 (“[I]t would be inimical to the purpose of the Sherman Act to allow monopolists free reign to squash nascent, albeit unproven competitors at will”).
Takeshi Ebina,Shinshu University, Noriaki Matsushima, Osaka University and Daisuke Shimizu, Gakushuin University explore Product differentiation and entry timing in a continuous time spatial competition model.
ABSTRACT: We extend the well-known spatial competition model (d'Aspremont et al., 1979) to a continuous time model in which two firms compete in each instance. Our focus is on the entry timing decisions of firms and their optimal locations. We demonstrate that the leader has an incentive to locate closer to the centre to delay the follower's entry, leading to a non-maximum differentiation outcome. We also investigate how exogenous parameters affect the leader's location and firms' values and, in particular, numerically show that the profit of the leader changes non-monotonically with an increase in the transport cost parameter.
For some years, there has been a hot debate in the Netherlands on why the mortgage interests rates suddenly rose in the Spring of 2009 to become amongst the highest in Europe. The Dutch competition authority, Central Bank, academics and the government all contributed views. Maarten Pieter Schinkel of the University of Amsterdam edited a bundle of papers by key contributors to the debate, which was published in the latest issue of the Journal of Competition Law and Economics. The bundle brings this ongoing debate to an international forum for the first time. It is a fascinating story about the effects of increased market concentration, risen funding costs, and competition restrictions from crisis regulation.
- Mark A. Dijkstra,
- Fleur Randag,
- and Maarten Pieter Schinkel
HIGH MORTGAGE RATES IN THE LOW COUNTRIES: AN INTRODUCTION
Jnl of Competition Law & Economics (2014) 10 (4): 773-777 first published online November 25, 2014 doi:10.1093/joclec/nhu027
- Bastiaan Overvest and
- Gülbahar Tezel
NOTES ON THE MARGIN: AN OVERVIEW OF NMA'S MORTGAGE MARKET STUDYJnl of Competition Law & Economics (2014) 10 (4): 779-794 first published online November 23, 2014 doi:10.1093/joclec/nhu029
- Machiel Mulder
THE IMPACT OF CONCENTRATION AND REGULATION ON COMPETITION IN THE DUTCH MORTGAGE MARKETJnl of Competition Law & Economics (2014) 10 (4): 795-817 first published online April 4, 2014 doi:10.1093/joclec/nhu008
- Leontine Treur and
- Wim Boonstra
COMPETITION IN THE DUTCH MORTGAGE MARKET: NOTES ON CONCENTRATION, ENTRY, FUNDING, AND MARGINSJnl of Competition Law & Economics (2014) 10 (4): 819-841 first published online March 19, 2014 doi:10.1093/joclec/nhu006
- Mark A. Dijkstra,
- Fleur Randag,
- and Maarten Pieter Schinkel
HIGH MORTGAGE RATES IN THE LOW COUNTRIES: WHAT HAPPENED IN THE SPRING OF 2009?Jnl of Competition Law & Economics (2014) 10 (4): 843-859 first published online November 27, 2014 doi:10.1093/joclec/nhu031
Posted by Thom Lambert
Why the Eleventh Circuit Should Reverse McWane
We know four key things about exclusive dealing.
First, exclusive dealing arrangements are ubiquitous. A modern American can hardly go a day without entering into a transaction with some business subject to exclusive dealing or a similar distribution restriction. Nearly every franchisee, for example, has agreed to purchase some product exclusively from its franchisor.
Second, exclusive dealing is a competitive “mixed bag.” Such arrangements may occasion anticompetitive harm (i.e., a reduction in overall market output) if they foreclose the exclusivity-demanding producer’s rivals from so many sales outlets that those rivals are driven below minimum efficient scale (MES) and therefore see their per-unit costs rise. On the other hand, exclusive dealing may secure a number of procompetitive (i.e., output-enhancing) benefits. They may: (1) encourage producers to invest in downstream buyers’ (e.g., retailers’) operations by preventing “interbrand free-riding” by competing producers; (2) reduce consumer prices by intensifying competition among producers for distribution; (3) enhance consumer welfare by reducing the costs associated with uncertain supply and demand; and (4) encourage the production of multi-component systems by protecting producers of complete systems from adverse “cherry picking” by producers of popular, high-margin individual components.
Third, for exclusive dealing to cause anticompetitive harm, several conditions must be satisfied. First, the degree of foreclosure occasioned by the perpetrator’s exclusive dealing must be substantial enough to drive (or hold) at least some rivals below MES. Second, it must be impracticable for foreclosed rivals to bypass the buyers subject to the exclusive dealing arrangements and sell to others by, say, integrating forward into distribution or selling through newly entering distributors. Finally, output-reducing exclusive dealing is unlikely absent significant barriers to entry in the producer market. If market power created by foreclosure-inducing exclusive dealing could be easily undermined by new firms entering the producer market in response to supracompetitive prices, producers (who generally have to “pay” something to induce exclusivity) would be unlikely to attempt monopolization via exclusive dealing, and even if they did so, consumer harm would be unlikely.
Given the degree to which the stars must align for exclusive dealing to occasion anticompetitive harm, the fourth thing we know about exclusive dealing should come as no surprise: Most instances of exclusive dealing enhance, rather than reduce, overall market output. See, e.g., Cooper et al., Vertical Antitrust Policy as a Problem of Inference, 23 Int’l J. Indus. Org. 639, 658 (2005) (observing that although “some studies find evidence consistent with both pro- and anticompetitive effects . . . virtually no studies claim to have identified instances where vertical practices were likely to have harmed competition”); Lafontaine & Slade, Exclusive Contracts and Vertical Restraints: Empirical Evidence and Public Policy in Handbook of Antitrust Economics 391 (Paolo Buccirossi ed., 2008) (“[I]t appears that when manufacturers choose to impose restraints, not only do they make themselves better off but they also typically allow consumers to benefit from higher quality products and better service provision”); O’Brien, The Antitrust Treatment of Vertical Restraints: Beyond the Possibility Theorems in The Pros and Cons of Vertical Restraints 40, 72-73 (2008) (observing that “with few exceptions, the literature does not support the view that [vertical restraints] are used for anticompetitive reasons”); Sass, The Competitive Effects of Exclusive Dealing: Evidence from the U.S. Beer Industry, 23 Int’l J. Indus. Org. 203 (2005) (concluding that exclusive dealing in the beer market increases market output).
The four things we know about exclusive dealing should influence the legal standard governing the practice. Since both theory and evidence suggest that most instances of exclusive dealing are output-enhancing, the presumption should be no liability, and the burden should rest squarely on plaintiffs to show actual or likely harm to competition itself (i.e., to overall market output), not merely injury to a competitor.
That is the approach the Supreme Court ultimately endorsed and the FTC once followed. Whereas the Supreme Court’s 1949 Standard Stations decision condemned exclusive dealing almost per se, the Court eventually instructed that courts should make a fuller inquiry into the actual competitive effect of the challenged exclusive dealing activity. See Tampa Electric Co. v. Nashville Coal Co., 365 U.S. 320, 329 (1961). In Beltone Electronics, 100 F.T.C. 68 (1982), the FTC followed Tampa Electric’s instruction, ultimately concluding that Complaint Counsel had not proven that the exclusive dealing at issues was anticompetitive. First, the Commission concluded that harm to competition had not been established, despite some apparent market foreclosure, because “other firms ha[d] recently entered the market or grown vigorously.” Id. at 210. Moreover, the defendant demonstrated a procompetitive benefit stemming from its exclusive dealing: the arrangement enabled a program in which the defendant producer would generate sales leads from potential customers and pass them along to its distributors without fear that the distributors would then direct the customers to different, higher margin brands. Id. at 216. In sum, the Commission reasoned that exclusive dealing should pass muster, despite some apparent foreclosure, when actual market experience shows continued competition through entry and the exclusive dealing facilitates some sort of output enhancement.
The FTC’s McWane decision substantially departed from the Beltone approach. In that case, the Commission condemned an exclusive dealing arrangement on the basis of a theoretical anticompetitive harm, even though the arrangement had been in place for long enough to generate an anticompetitive effect but had not apparently done so. Complaint counsel claimed that defendant McWane, the dominant producer of domestic iron pipe fittings, had monopolized the market by instituting a “full support policy” under which it would sell its products only to distributors that carried its fittings exclusively. The policy was subject to two exceptions: where McWane products were not available, and where a distributor purchased a McWane rival’s pipe in addition to its fittings. The FTC concluded that the policy caused anticompetitive harm by artificially holding McWane’s rivals below MES, thereby raising their costs and enhancing McWane’s ability to raise its own prices.
There are many reasons to question the Commission’s determination that McWane had engaged in anticompetitive exclusionary conduct. First, the evidence on what constituted MES in the relevant market was remarkably thin, consisting entirely of testimony by rival Star Pipe Products, Ltd. (“Star”) that it would face lower average costs if it owned a foundry but could not justify building one given its low (20 percent) market share. Countering that self-serving testimony were a couple of pieces of actual market evidence. First, the second-largest domestic seller of pipe fittings, Sigma Corp., somehow managed to enter the market and capture a 30% share (as opposed to Star’s 20%), without owning any of its own production facilities. Such success suggested that foundry ownership—and, thus, a level of sales sufficient to support foundry construction—may not be necessary for efficient scale in the domestic pipe fittings industry. So did Star’s ownsuccess. Star entered the domestic pipe fittings market in 2009, quickly grew to a 20% market share, and was on pace to continue growth when the McWane action commenced in January 2012. As dissenting Commissioner Josh Wright observed, “for [the Commission’s] view of MES to make sense on the facts that exist in the record, Star would have to be operating below MES, becoming less efficient over time as McWane’s Full Support Program further raised the costs of distribution, and yet remaining in the market and growing its business. Such a position strains credulity.”
In addition to failing to establish what constitutes MES in the domestic pipe fittings industry, the FTC never adequately established the degree of foreclosure occasioned by McWane’s full support program. In particular, the Commission made no effort to quantify the sales made to McWane’s rivals under the two exceptions to McWane’s full support policy. Such sales were obviously not foreclosed to McWane’s rivals, but the Commission essentially ignored them. Absent information on the volume of distributor purchases under exceptions to the full support program, it is simply impossible to assess the degree of foreclosure occasioned by the policy.
Not only did the Commission disregard deficiencies in the affirmative case against McWane, it also ignored several pieces of evidence suggesting that McWane’s exclusive dealing was not anticompetitive. First, the full support program did not require a commitment of exclusivity for any period of time; distributors purchasing from McWane could begin carrying rival brands at any point (though doing so might cause McWane to refuse to sell to them in the future). Courts have often held that short-duration exclusive dealing arrangements are less troubling than longer-term agreements; indeed, a number of courts presume the legality of exclusive dealing contracts of a year or less. See, e.g., Concord Boat Corp. v. Brunswick Corp., 207 F.3d 1039, 1059 (8th Cir. 2000).
Second, entry considerations suggested an absence of anticompetitive harm. If entry into a market is easy, there is little need to worry that exclusionary conduct will produce market power. Once the monopolist begins to exercise its power by reducing output and raising price, new entrants will appear on the scene, driving price and output back to competitive levels. The recent and successful entry of both Star and Sigma, who collectively gained about half the total market within a short period of time, suggested that entry into the domestic pipe fittings market is easy.
Finally, evidence of actual market performance indicated that McWane’s exclusive dealing policies did not generate anticompetitive effect. McWane enforced its full support program for the first year of Star’s participation in the domestic fittings market, but not thereafter. Star’s growth rate, however, was exactly the same during the enforcement of the policy as it was both before the policy was implemented and after it ended. That suggests that the program had no impact on rivals’ ability to enter the market and grow their business, in which case it could not be anticompetitive.
The Commission also virtually ignored a procompetitive justification for McWane’s full support policy. McWane produced a complete “system”—a full line of domestic pipe fittings—comprised of disparate but complementary parts. Both distributors and end-users have an interest in having ready access to all the parts in such a system, and a full support policy could help ensure such access. Because McWane’s fixed costs (e.g., the cost of casting a die) were similar for both rarely used and popular fittings, McWane’s average production cost for a rarely used fitting [i.e., (fixed costs + variable costs)/number of units produced] was higher than its average cost for an oft-used part. That meant that if McWane charged similar prices for technologically similar parts—a pricing practice purchasers often expect—it needed to “subsidize” production of rarely-used fittings with margins earned on popular parts. An equally efficient producer of only popular fittings would not have to engage in such “cross-subsidization” to finance the production of rarely used parts and would be able to sell its popular fittings at lower prices. But if too many buyers purchased their often-used fittings from the partial line producer, McWane could no longer afford to produce rarely used parts, and gaps in product availability would result.
McWane’s Full Support Program offered a solution to this problem. By requiring buyers of its fittings to refrain from handling those of other producers, McWane could prevent the sort of “cherry-picking” that would have rendered its production of obscure parts uneconomical. Because consumers, distributors, and even other producers of domestic iron pipe fittings all benefit from continued production of a full line of fittings, McWane’s full support program was far from an unreasonable form of competition. On the contrary, it was output-enhancing and thus procompetitive.
In the end, then, the FTC’s McWane decision failed to require adequate evidence in support of the articulated theory of anticompetitive harm, ignored actual market evidence suggesting an absence of such harm, and gave short shrift to an important procompetitive benefit of McWane’s exclusive dealing. The Commission’s apparent and unjustified hostility toward exclusive dealing arrangements is likely to discourage their use—despite their general efficiency—and thereby injure consumers. The Eleventh Circuit should reverse.
CORRECTION from Thom Lambert:
The ninth paragraph of this post refers to market shares of Sigma and Star (30% and 20%, respectively). An astute reader questioned whether the factual record supports those high market share figures. In searching for a record cite, I discovered that I had made a mistake on the actual market share figures. Commissioner Wright’s dissent, upon which I relied, redacts the precise market shares, and I now see from others’ posts that the market shares of Sigma and Star were significantly lower than I reported. In drafting the post, I relied on my own notes, which were obviously mistaken. I apologize for the inaccuracy.
Jesper Fredborg Huric Larsen, University of Southern Denmark describes The collusion incentive constraint.
ABSTRACT: The collusion incentive constraint is an important economic measure of cartel stability. It weighs the profits of being in a cartel with those of cheating and punishment of the remaining cartel members. The constraint places no restrictions on firm cartel, cheating and punishment pricing, but is usually considered in a restricted competitive set up characterized by either Cournot or Bertrand competition. This paper examines the constraint under Bertrand competition and homogenous goods when assuming that cartel members have the same market power and then continues to examine if this is not so.