Antitrust & Competition Policy Blog

The Empirics of Antitrust in Two-Sided Markets

Posted by D. Daniel Sokol

Marc Rysman of Boston University - Department of Economics has a new article that appears in Competition Policy International on two sided markets, an issue that has received an increasing amunt of attention, such as with payments systems (which I am teaching for the first time this coming spring) or computer software.  His article is entitled The Empirics of Antitrust in Two-Sided Markets.

ABSTRACT: Recent theoretical research on the implications of two-sided markets is gaining recognition for its implications inantitrust. However, the role of empirical analysis in antitrust cases for two-sided markets has been unexplored thus far. Empirical tools of economics are playing an increasingly large role in antitrust litigation. At the same time, there have been several recent attempts to bring empirical analysis to two-sided markets. To the extent that this empirical work on two-sided markets bares similarities to common empirical tools of antitrust, it can provide a template for how the empirics of antitrust cases will proceed in two-sided markets.

This paper studies several issues in which empirical contributions can impact antitrust in the context of two-sided markets. For each issue, I discuss recent empirical research that exemplifies my point. The first issue I discuss is the implementation of market simulations. Market simulations have an important role in determining relevant markets and the price effects of horizontal coordination.

25 Years Later - Does the FTAIA Matter?

Posted by D. Daniel Sokol

In a post Empagran world and with AMC recommendations on international antitrust, how does (and how should) the Foreign Trade Antitrust Improvements Act matter?  Max Huffman of the University of Cincinnati - College of Law provides a historical retrospective in his forthcoming article A Retrospective on Twenty-Five Years of the Foreign Trade Antitrust Improvements Act.

ABSTRACT: Now twenty-five years after the Foreign Trade Antitrust Improvements Act (FTAIA) was enacted as part of the Export Trading Company Act of 1982, the once-ignored statute has come fully into the fore. The FTAIA is inelegantly phrased; its opaque language has resulted in further confusion in an area of the law that was already confused and unsettled. The FTAIA is nonetheless massively important. Commentators and judges uniformly have noted the explosion in cross-border implications of U.S. antitrust enforcement. Since the mid-1990s, when the FTAIA was resurrected by foreign plaintiffs seeking the protection of U.S. antitrust laws and plaintiff-friendly procedures, numerous suits seeking billions of dollars in damages for harm suffered world-wide have been filed and consolidated into multi-district litigation proceedings. Litigation has occurred in federal courts at all levels, with the Supreme Court finally addressing the FTAIA directly in 2004 in F. Hoffman-LaRoche Ltd. v. Empagran S.A. And recently, the Antitrust Modernization Commission has considered the statute, declining to recommend it be amended, but noting the need for further clarity.

Court Slams FTC as Western-Giant Merger Allowed to Proceed

Posted by D. Daniel Sokol

The district court for the district of New Mexico just came out with a decision in the Western-Giant proposed merger, which the FTC attempted to block.  The case is available below.
Download opinion.pdf

Key language from the opinion (which I suspect that the FTC will not appeal) includes the following:

By acquiring Giant’s New Mexico refining, terminaling, and marketing assets, Western will not be eliminating an important restraint on its ability to raise prices and increase margins. Other firms can replace the competitive void -- if any -- left by Giant’s elimination. Western’s position in relatively concentrated markets does not significantly increase the likelihood that Western has achieved, or will be able to exercise, market power, either in coordination with other firms or unilaterally... The effect of the merger will not likely be to increase prices. Entry is likely if prices move up, and withdrawal is likely if prices move down... The merger will not dramatically increase concentration in the relevant market.

Ten Things to do About Patent Holdup of Standards (and One Not to Do)

Posted by D. Daniel Sokol

Another interesting paper on issues of competition in IP is worth a read.  Mark Lemley of Stanford Law School has written Ten Things to do About Patent Holdup of Standards (and One Not To).

ABSTRACT: Congress, the courts, scholars, and the press have focused more and more attention on what is shaping up to be the central public policy problem in intellectual property law today: the problem of holdup by patent owners, particularly but not exclusively in the context of standard setting. I will suggest ten things we might do to deal with this problem, and at least one thing we probably ought not to do.

Antitrust Enforcement in the Electricity and Gas Industries

Posted by D. Daniel Sokol

Regulated industries present particularly difficult problems for antitrust because in addition of the usual questions of when and how to intervene, antitrust must also ask whether to leave intervention to promote competition to sector regulators over antitrust enforcers.  François Lévêque of the Ecole des Mines de Paris - Centre d'Economie Industrielle (CERNA) discusses these issues in his paper Antitrust Enforcement in the Electricity and Gas Industries: Problems and Solutions for the EU.

ABSTRACT: Antitrust enforcement in the electricity and gas industries raises specific problems that call for specific solutions. Among the issues: How can the anticompetitive effects of mergers be assessed in a changing regulatory environment? Should long-term agreements in energy purchasing be prohibited? What are the benefits of preventive action such as competition advocacy and market surveillance committees? Should Article 82 (a) of the EC Treaty be used to curb excessive pricing?

Kovacic on Single Firm Conduct

Posted by D. Daniel Sokol

FTC Commissioner Bill Kovacic provides a nuanced and informative understanding of the evolution of U.S. antitrust in the area of monopolization in "The Intellectual DNA of Modern U.S. Competition Law for Dominant Firm Conduct: The Chicago/Harvard Double Helix," which appears in the 2007 Columbia Buisiness Law Review.  In a departure from previous work, Kovacic stresses that we should recast antitrust history from a Chicago/Post-Chicago dialectic to oen that utilizes a Chicago/Harvard "double helix."  Kovacic describes this double helix as follows:

Two closely related presumptions embedded in the Chicago/Harvard double helix stand out. First, the double helix assumes that overinclusive applications of antitrust law to control dominant firm conduct pose greater hazards to economic performance than underinclusive applications. This presumption assumes that the likelihood that entry and adaptability by competitors, customers, and suppliers more often than not will blunt dominant firm efforts to exercise market power...

The second critical presumption of the Chicago/Harvard double helix is grounded in concerns about institutional design and capacity. To understand the Chicago/Harvard concern with the implementation of antitrust policy is to see how perceptions about the quality of institutional design and capacity have affected substantive outcomes in U.S. antitrust law and policy. The permissiveness of the Chicago/Harvard approach to dominant firms, including the emphasis on administrable rules that tend to exculpate, hinges crucially upon doubts about the capabilities of enforcement agencies and courts and antipathy toward what is posited to be an unduly expansive system of private rights of action. Through the lens of the Chicago/Harvard double helix, Post-Chicago scholars often falter because they make unduly hopeful assumptions about the capacity of the key implementing institutions of the antitrust system to apply the insights of Post-Chicago analysis skillfully.253 By this view, non-interventionist presumptions are endorsed not because they inevitably make sound assumptions about the harms of specific forms of business behavior, but instead because they make more accurate assumptions about the limitations of courts and enforcement agencies.254 (pp. 70-72).

Download CBLR_2007_Kovacic_Final_Version.pdf

Report on the Seventh Annual Trans-Atlantic Antitrust Dialogue

Posted by D. Daniel Sokol

A summary of the proceedings of the Seventh Annual Trans-Atlantic Antitrust Dialogue held by the Competition Law Forum of the British Institute of International and Comparative Law on 1 to 2 May 2007 are now available.

On the topic of BIICL, it is in the process of searching for a new Director to run the institute.  The Institute, the UK’s leading centre for the advancement of the understanding and practical application of international law, will celebrate its 50th Anniversary in 2008. The present Director, Professor Gillian Triggs, will be returning to Australia shortly to take up the post of Dean of the Law School at the University of Sydney, and the Institute is now seeking a dynamic individual with global vision as her successor.

Difference in Differences Analysis in Antitrust

Posted by D. Daniel Sokol

John Simpson and David Schmidt of the Federal Trade Commission have a new paper that asks the question Difference in Differences Analysis in Antitrust: What Does it Really Measure? on retrospective merger analysis.

ABSTRACT: Merger retrospectives often use a difference in differences (DID) approach to measure the price effects of mergers. As used in these studies, this approach implicitly assumes that the price in the control market fully controls for supply and demand shocks in the treatment market if the two markets experience the same demand and supply shocks. In this paper, we first show that this is only true if the parameters that determine how supply and demand shocks affect price are the same in the two markets. We then show that in many plausible circumstances the DID approach could either overestimate or underestimate the price effects of a merger.

State Aid Reform

Posted by D. Daniel Sokol

Neelie Kroes  spoke earlier this week at the European State Aid Law Institute Conference in Brussels.  In her speech, she outlined four guiding principles have underpinned state aid reform:

• less and better targeted State Aid
• a refined economic approach
• more effective procedures, better enforcement, higher predictability and enhanced transparency and
• a shared responsibility between the Commission and Member States.

The priority for DG Competition this coming year, according to Kroes, is the General Block Exemption, which will be adopted by mid-next year.  Let us hope for a system in which the principles set out above are realized.

Competition Law and Copyright Misuse

Posted by D. Daniel Sokol

To stay on the theme of the Antitrust-IP interface, I found a new working paper by John Cross of the University of Louisville and Peter Yu of Michigan State University.  They explore copyright issues in their article entitled Competition Law and Copyright Misuse. 

ABSTRACT:  In the past decade, copyright protection throughout the world has been greatly expanded to respond to challenges posed by new communications technologies and copyrightable subject matters. As protection increases, the growing power of copyright owners has also led to market abuses that stifle competition and innovation. Thus, courts, litigants, policy makers, and commentators have increasingly embraced competition law, copyright misuse, the unclean hands doctrine, and other tort law concepts to reduce abuse by copyright owners. This article discusses the different types of abuse and the various legal doctrines that Canadian and U.S. courts have used to resolve these abuse cases.

The first section discusses the limited monopolies of copyright owners and the various safeguards that have been built into the copyright system. Using four recent cases in the United States, this section highlights the growing abuse of copyright by its owners in recent years. The second section discusses the uneasy relationship between copyright and monopoly laws. It explores four categories of abuse cases and how monopoly law has been applied to deal with each of these types. The final section examines legal doctrines that lie outside competition law, but yet have been used to deal with copyright abuse. In particular, this section discusses copyright misuse, the doctrine of unclean hands, and claims of abuse of process and of tortuous interference.

More Thoughts on Twombly

Posted by D. Daniel Sokol

Richard Epstein, James Parker Hall Distinguished Service Professor of Law at the University of Chicago law School has an op-ed in today's Wall Street Journal in which he provides some thoughts on Twobley entitled Legal Santiy Discovered (subscription required).   From the title, you can imagine that he is doing hand stands in his Hyde Park office as a result of the Supreme Court's decision.  One question that Epstein asks is "whether Twombly's healthy skepticism carries over, for example, to class-action claims in securities or antidiscrimination cases."  I tend to keep my comments limited to antitrust but if any readers want to share thoughts, feel free to do so.   

Strategic Behavior in Standard-Setting Organizations

Posted by D. Daniel Sokol

In the Antitrust-IP interface, one area in which we find a the potential for anti-competitive conduct is standard setting (e.g., Rambus).    A team of researchers from Harvard including  Brian J. DeLacey, Kerry Herman , David Kiron and Josh Lerner have just published a working paper entitled Strategic Behavior in Standard-Setting Organizations, which is worth a read.

ABSTRACT: This paper seeks to better understand the competitive behavior of firms in  standard-setting organizations by examining two case studies. We examine the development of mobile Internet standards by the Institute of Electrical and Electronics Engineers (IEEE); and the development of DSL standards. The case studies highlight that standard-setting bodies play critical roles in these industries. Because innovations are typically not promulgated by a single firm, but rather draw together technologies developed in multiple firms, the coordination role played by these organizations is critical. And certainly in some cases, particularly where parties commit in advance to a formal process (such as the xDSL one), the standardization process can lead to a dispassionate selection of a superior technology as a standard.

But as the IEEE 802.11 case suggests, the situation is often more complex. For in many cases, the selection of a technological standard has very substantial economic implications for the firms participating in the process. As a result, the standardization process can become side-tracked as warring factions seek to promote their own agenda. The process can be very much delayed as a result. Rules of standard-setting bodies that were originally intended to insure a fair process can be manipulated by firms to promote their own agenda or even to delay the project indefinitely. As a result, firms may be tempted to by-pass formal standards development organizations, and instead reach a private agreement with like-minded peers.

Examining the Performance of Competition Policy Enforcement Agencies

Posted by D. Daniel Sokol

Measuring the capabilities and effectiveness of antitrust agencies has proved to be a difficult task.  It seems that objective measures have significant limitations.  Measure the total number of cases brought and you may reward agencies for brining small cases, even if they are not good cases.  Measure based on success rate of enforcement and you penalize agencies that bring difficult cases that are close.  One method is to measure the quality of the agency based on perceptions by international antitrust practitioners and international businesspeople.  In the first cross country analysis of agency effectiveness, Armando Rodriguez of the University of New Haven and Lesley DeNardis of Sacred Heart University measure the effectiveness of antitrust agencies by this third approach in their paper Examining the Performance of Competition Policy Enforcement Agencies: A Cross-Country Comparison. 

ABSTRACT: An examination of a cross-section of 102 nations reveals marked differences in the performance of their competition policy enforcement agencies. Likely explanatory factors considered include gross domestic product per capita, the intensity of competition, physical size, the level of corruption, national experience with a modern antitrust law and whether the common law prevails.

Competition policy agencies operate poorly in jurisdictions characterized by corruption and poor competitive intensity. In fact, differences in levels of corruption and variations in the intensity of competition account for approximately 78 percent of the observed variance in agency performance. Group characteristics, however, vary by region and have varying impact on the observed performance gap. Rather than a generalized approach to the promotion and diffusion of competition policies, our results suggest that distinct policies for each region are likely to be more successful.

Download jbes_rdenfinal.pdf

FTC Litigation at the Antitrust/Intellectual Property Interface

Posted by D. Daniel Sokol

On the FTC website, FTC Commissioner Tom Rousch has a thoughtful presentation on FTC Litigation at the Antitrust/Intellectual Property Interface in which he discusses branded and generic drug firms settlements and abuses of intellectual property rights outside the patent settlement context. 

Some Thoughts on Twombly

Posted by Shubha Ghosh

Thanks to my co-blogger for being so prompt in posting on Twombly.  I just finished my first read of the opinion, and the opinion seems consistent with the Court's 2004 decision in Trinko: it's darn hard, and perhaps frankly impossible, to challenge the RBOC's under the antitrust laws.   Trinko forecloses Section Two challenges, for the most part, and now the proof of agreement required after Twombly for a Section One claim seems insurmountable given how the Court understands the Telecommunications industry.  Danny cited the appropriate language about the legal standard.  Here is a telling passage about how the Court applies that standard to telecom:

"[Twombly's complaint] was not suggestive of conspiracy, not if history teaches anything.  In a traditionally regulated industry with low barriers to entry, sparse competition among large firms dominating separate geographical segments of the market could very well signify illegal agreement, but here we have an obvious alternative explanation.  In the decade preceding the 1996 Act and well before that, monoply was the norm in telecommunications, not the exception."

Hence, the Court goes on, the lack of entry into a neighbor's market is consistent with the regional Bells accepting the status quo ante the 1996 Act and does not necessarily provide a basis to claim an agreement as required under Section One.  In effect, the Court adopts the district court's view of the pleadings: if there is an explanation of the pleaded facts consistent with unilateral action, then the Section One claim is dismissed.

But how about this interpretation of events, from a decidedly public choice perspective: the 1996 Act itself is the agreeement to not compete on each other's territory?   That theory requires a facial challenge to the statute itself under the antitrust laws and seems to be foreclosed by Trinko as well as today's decision in Twombly.

More on this later...

Twombly is Out - Supreme Court Reverses 2nd Circuit

Posted by D. Daniel Sokol

The Supreme Court decision in Twombly just came out.  I cannot say that I am surprised by the decision nor do I disagree with it.  We don't want to allow for unnecessary fishing expeditions in our court system.  If there is a good case, there should be evidence to support it. 

The important quote is the following:

In applying these general standards to a §1 claim, we hold that stating such a claim requires a complaint with enough factual matter (taken as true) to suggest that an agreement was made. Asking for plausible grounds to infer an agreement does not impose a probability requirement at the pleading stage; it simply calls for enough fact to raise a reasonable expectation that discovery will reveal evidence of illegal agreement... It makes sense to say, therefore, that an allegation of parallel conduct and a bare assertion of conspiracy will not suffice. Without more, parallel conduct does not suggest conspiracy, and a conclusory allegation of agreement at some unidentified point does not supply facts adequate to show illegality. Hence, when allegations of parallel conduct are set out in order to make a §1 claim, they must  be placed in a context that raises a suggestion of a preceding agreement, not merely parallel conduct that could just as well be independent action.

You can download the decision below.
Download Twombly2007.pdf

Priceless? The Competitive Costs of Credit Card Merchant Restraints

Posted by D. Daniel Sokol

An article that I have been meaning to post on for quite some time (both because it is really good and because as I will be teaching payment systems in spring 2008, I am focusing on the intersection of commercial law with competition issues) is Adam Levitin's Priceless? The Competitive Costs of Credit Card Merchant Restraints.  Levitin is an assistant professor at Georgetown Law Center.   
    
ABSTRACT: Credit card transactions cost American merchants six times as much as cash transactions. Why, then, do consumers pay the same price for purchases, regardless of the means of payment?

The answer lies in a set of credit card network rules known as merchant restraints. Merchant restraints forbid merchants from surcharging for credit and discounting for non-cash payments, while the framing effect, a well-documented cognitive bias, makes discounting for cash ineffective. Merchant restraints thus prevent merchants from pricing according to consumers' payment method and from signaling to consumers the costs of different payment methods. Accordingly, consumers never internalize the costs of their choice of payment system.

This article argues that credit card merchant restraints lead to an overconsumption of credit cards as a transacting device and distort competition within the credit card industry and among payment systems in general. The article contends that merchant restraints are antitrust violations and demonstrates that the economic justifications for merchant restraints are unfounded. Rather than being a response to an industrial organization problem inherent in networked industries and necessary for the existence of credit card networks, merchant restraint rules are the response to a no-longer extant legal problem and have outlasted any justifiable purpose. Thus, the article proposes regulatory, legislative, or judicial intervention to ban merchant restraint rules.

World Bank/Financial Times $20,000 Essay Competition on Private Sector Development

Posted by D. Daniel Sokol

The International Finance Corporation of the World Bank and the Financial Times are holding their second annual essay competition. The theme for this year's competition is "Private Sector Development: Creating Markets, Transforming Lives."   In previous work, I have argued that antitrust is a policy tool to promote the theme of this year's essay.   

There will be six awards in this year's competition:

Gold Award US$20,000
2 Silver Awards, each US$10,000
3 Bronze Awards, each US$5,000

The Story of Alcoa: The Enduring Questions of Market Power, Conduct, and Remedy in Monopolization Cases

Posted by D. Daniel Sokol

With the possible Alocoa/Alcan merger in the news recently, I thought it might be interesting to review some recent scholarship that reexamines the original Alcoa antitrust case, which is one of the most important in US antitrust history.  Spencer Waller of Loyola University Chicago School of Law recently completed a historical analysis of the case for the forthcoming Antitrust Stories (Eleanor Fox and Dan Crane, eds.) entitled The Story of Alcoa: The Enduring Questions of Market Power, Conduct, and Remedy in Monopolization Cases.

ABSTRACT: This chapter from the forthcoming Antitrust Stories book deals with United States v. Aluminum Company of America which remains one of the standard chestnuts of American antitrust law. It appears in one form or another in virtually every antitrust law casebook and industrial organization economics textbook. Alcoa represents a lens in which we see what we want to see in the area of unilateral conduct, a reasonably efficient and innovative firm that created an entire industry or an aggressive monopolist preserving its position through a web of carefully constructed entry barriers including exclusive contracts, participation in international cartels, relentless expansion, and complete vertical integration. This chapter reviews the history of aluminum, its commercialization in the late 19th century, the colorful cast of players, and the many legal issues that led to nearly fifty years of government antitrust enforcement efforts against Alcoa. Alcoa became one of the first cases to crystallize thinking about Section 2 of the Sherman Act and the hard questions about how to define a market, what conduct of a monopolist should be prohibited, and what remedy should be imposed to best restore competition, questions that all continue to be debated today.

UNCTAD and the Emergence of Global Antitrust

Posted by D. Daniel Sokol

Ioannis Lianos of University College London has a new article on UNCTAD and the Emergence of Global Antitrust entitled The Contribution of the United Nations to the Emergence of Global Antitrust Law.  Given the increasingly high profile role of the ICN, some wonder if UNCTAD even serves a purpose in competition policy.  Ioannis has a thoughtful response.

ABSTRACT: This Article examines the contribution of the United Nations Conference on Trade and Development (UNCTAD) to the emergence of an international framework for antitrust. It is the first systematic analysis of UNCTAD’s contribution to international antitrust since the 1980s—when the Set of Multilaterally Agreed Equitable Principles and Rules for the Control of Restrictive Business Practices (the Set) was adopted. The Set still constitutes the only universally applicable instrument in the area of antitrust and its validity has been constantly reaffirmed by international conferences organized by UNCTAD, the most recent one being held in 2005. However, the Set’s existence has also been shadowed: first, by its weak legal effect and, second, by the emergence of new international fora for competition policy, such as the Word Trade Organization and the International Competition Network (ICN). This Article re-examines the legal effects of the Set, taking into account the evolution of the legal and political context of global antitrust; the adoption of a significant number of international, regional, and bilateral trade agreements containing various aspects of competition law provisions; and numerous antitrust cooperation agreements. It concludes that even if it is unlikely that the Set produces, by itself, any binding effect, it may eventually contribute to the emergence of a customary international norm against restrictive business practices. Nor is the importance of UNCTAD’s Set limited to the issue of its legal effect; by providing a balanced approach to the relationship between competition law and the specific needs of developing countries, the Set may provide a model for a future international agreement on antitrust that could address the interests of both developed and developing countries.
Download un_antitrust_final.pdf