Antitrust & Competition Policy Blog

Hovenkamp on The Harvard and Chicago Schools and the Dominant Firm

Posted by D. Daniel Sokol

When Herb Hovenkamp writes, we should all take notice.  His latest piece is The Harvard and Chicago Schools and the Dominant Firm.

ABSTRACT: The Chicago School has produced many significant contributions to the antitrust literature of the last half century. Thanks in part to Chicago School efforts today we have an antitrust policy that is more rigorously economic, less concerned with protecting noneconomic values that are impossible to identify and weigh, and more confident that markets will correct themselves without government intervention. This Chicago School revolution came at the expense of the Harvard structural school, which flourished from the 1930s through the 1950s. That school rested on a fairly rigid theory of Cournot oligopoly, exaggerated notions about barriers and impediments to entry, and a belief that certain types of anticompetitive conduct were more-or-less inevitable given a particular market structure. However, the chastised Harvard School that emerged in the late 1970s in the writings of Phillip E. Areeda and a converted Donald F. Turner were much less ambitious about the goals of antitrust, more concerned with conduct as such, and significantly more skeptical about the benefits of aggressive judicial intervention.

This story of a victorious Chicago School and a humbled and disciplined Harvard School is incomplete, however. The antitrust case law reveals something quite different. On most of the important issues this chastised Harvard School has captured antitrust decision making in the courts, and largely in the enforcement agencies. This paper explores these differences, focusing mainly on dominant firm practices.

Canadian Law and Economics

Posted by D. Daniel Sokol

Tomorrow Shubha and I will both be at the annual meeting for the Canadian Law and Economics Association annual meeting.  There will be an excellent group of people from around the world with whom to discuss antitrust and related issues.  I will be presenting my working paper Why is this Chapter Different from All the Others? An Examination of Why Countries Enter into Non-Enforceable Competition Policy Chapters in Free Trade Agreements.  I have a slide of Moses parting the Red Sea for those that didn't get the Passover reference in the title.

An Antitrust Analysis of Google’s Proposed Acquisition of DoubleClick

Posted by D. Daniel Sokol

Robert Hahn of Brookings and Hal Singer of Criterion Economics have a new working paper out titled An Antitrust Analysis of Google’s Proposed Acquisition of DoubleClick.

ABSTRACT: By serving as a key revenue source for online content providers, online advertising has been instrumental in the development of innovative websites. Continued innovation among content providers, however, depends critically on the competitive provision of online advertising. Suppliers of online advertising provide three primary inputs—(1) advertiser tools, (2) intermediation services, and (3) publisher tools. Certain suppliers such as Google provide a platform that combines the inputs into one integrated service. In this paper, we focus on the overlapping products sold to advertisers by Google and DoubleClick—namely, the supply of advertiser tools. Because the supply of advertiser tools is highly concentrated, Google's proposed acquisition of DoubleClick raises important questions for antitrust authorities. Proponents of this acquisition argue that Google and DoubleClick do not compete—that is, buyers of search-based or contextual-based advertising (the two advertising channels in which Google participates) do not perceive graphic-based advertising (the advertising channel in which DoubleClick participates) to be substitutes. Thus, they conclude that the proposed acquisition would not lead to higher prices.

In this paper, we examine economic evidence and legal precedent to help identify the relevant antitrust product market for Google's proposed acquisition of DoubleClick. According to the Federal Trade Commission and Department of Justice Horizontal Merger Guidelines, product markets are defined by the response of buyers to relative changes in prices. To inform how buyers—in this case, online advertisers—would respond to relative changes in price across the three online advertising channels (search, contextual, and display), we analyze the results of a survey of online retailers. The survey suggests that (1) a significant share of online advertisers would substitute among the three channels in response to relative changes in prices, and (2) a significant share of DoubleClick customers would turn to Google before any other supplier in response to an increase in the price of DoubleClick's advertiser tools. In particular, the survey indicates that a combined Google-DoubleClick would likely have a greater incentive to increase the price of DoubleClick's advertiser tools relative to a stand-alone DoubleClick offering.

Global Antitrust Enforcement

Posted by D. Daniel Sokol

Tom Barnett gave a speech yesterday on Global Antitrust Enforcement at the Georgetown Law Global Antitrust Enforcement Symposium.

100 Academic Blogs Every Professional Investor Should Read...

includes this one:

http://http://www.currencytrading.net/2007/top-100-academic-blogs-every-professional-investor-should-read/

(posted by Shubha Ghosh)

The End of the Microsoft Case?

Posted by D. Daniel Sokol

THE END OF THE MICROSOFT ANTITRUST CASE? PUBLIC POLICY CONFERENCE

The Searle Center at Northwestern University School of Law
November 15th (11:30 AM)-16th (3:30 PM) 2007

Most of the historic Microsoft Antitrust Consent Decree expires on November 12, 2007. This is an appropriate occasion for a retrospective on the government's case against Microsoft in light of rapidly evolving markets, refinements in economic theories of technology, and the increasing challenges of operating a global business under multiple antitrust regimes.

CONFIRMED SPEAKERS:
George Bittlingmayer, University of Kansas
Nicholas Economides, New York University, Stern School of Business
David Evans, LECG Europe
Shane Greenstein, Northwestern University, Kellogg School of Management
David A. Heiner, Microsoft Corporation
Renata B. Hesse, Wilson Sonsini Goodrich & Rosati, Washington
Thomas N. Hubbard, Northwestern University, Kellogg School of Management
Keith Hylton, Boston University School of Law
Marco Iansiti, Harvard Business School
F. Scott Kieff, Washington University School of Law
William E. Kovacic, Federal Trade Commission
Pierre Larouche, Tilburg University, The Netherlands
Stan Liebowitz, University of Texas at Dallas
Abbott (Tad) B. Lipsky, Latham & Watkins LLP, Washington
John E. Lopatka, Penn State University, Dickinson School of Law
Fred S. McChesney, Northwestern University School of Law
William H. Page, University of Florida, Levin College of Law
Randall C. Picker, University of Chicago Law School
Robert Porter, Northwestern University, Department of Economics
George L. Priest, Yale Law School
J. Robert Robertson, Kirkland & Ellis, Chicago
William Rogerson, Northwestern University, Department of Economics
Gregory Sidak, Georgetown University School of Law
James B. Speta, Northwestern University School of Law
Daniel Spulber, Northwestern University, Kellogg School of Management
Michael D. Whinston, Northwestern University
Joshua Wright, George Mason University School of Law

REGISTRATION:

Space is limited. Please register no later than November 5th. Checks should be made payable to Northwestern University.  The conference registration fee is $495, but will be waived for academic affiliates and government employees who work on antitrust issues. To reserve a space at this event, you must send a message with name, affiliation and contact information to:

Email: [email protected]

Tel: (312) 503-1811

Postal: The Searle Center
Northwestern University School of Law
357 E. Chicago Avenue
Chicago, IL 60611

Amendments to the Mexico' Law of Economic Competition and the Economics of the Anticompetitive Use of Monopolistic Practices Lawsuits

Posted by D. Daniel Sokol

Ramiro Tovar Landa of Instituto Tecnológico Autónomo de México (ITAM) has an informative new working paper concerning Mexico's competition law system Amendments to the Mexico' Law of Economic Competition and the Economics of the Anticompetitive Use of Monopolistic Practices Lawsuits.

ABSTRACT: One of the main characteristics of the amendments to the Federal Law of Economic Competition (LFCE, as per its abbreviation in Spanish) is that it includes, in explicit manner, several unilateral conducts of the economic agents, broadening the catalogue of relative monopolist practice. Some of these practices were only established in the LFCE Regulations or Guidelines and, as such low legal ranking level, the sanctioning capacity was obstructed by unconstitutionality in its application. Now, at statute level, there is a broad array of practices that are easily seen in markets and that, generally, have an economic justification since they generate efficiencies in the competition process. There is consensus that the existence or magnitude of such efficiencies are not conditioned to the fact that the agent that carries them out has or does not have substantial market power. Consequently, the analysis needed to distinguish between practices that have an anticompetitive effect, from those which have a pro-competitive effect is complex and, therefore, are subject to error. In this case, the Mexican Federal Competition Commission (CFC, as per its abbreviation in Spanish) operates as a regulator and, like any other regulator; it operates with inherently imperfect information.

Majoras Before the Antitrust Task Force of the Committee on the Judiciary, United States House of Representatives

Posted by D. Daniel Sokol

Today, Chairman Majoras of the FTC provided U.S. House with overview of recent Antitrust activities.  Some highlights from her statement include:

"Through 11 months of fiscal year 2007, the agencies have received 1967 premerger filings, an increase of 23 percent from the same time period of fiscal year 2006... Thus far in fiscal year 2007, there have been 21 mergers in which the Commission brought merger enforcement actions to preserve competition or the parties abandoned proposed mergers after Commission staff expressed concerns about anticompetitive harm."

Issues covereed included: health care, energy, real estate, technology and defense, retail and other industries, merger review process improvements, competition advocacy, amicus briefs, hearings, conferences, workshops, reports, international coordination and technical assistance, and outreach innitiatives.

Third Annual ForoCompetencia Conference

Posted by D. Daniel Sokol

The third annual ForoCompetencia Conference will be held on November 2 in Pilar, Argentina (near Buenos Aires).  The conference details are available below.

Download 3er_coloquio_forocompetencia.doc

EC Competition Law

Posted by D. Daniel Sokol

The Microsoft ruling has prompted many on this side of the Atlantic to wonder about the structure and development of EC Competition Law.  Filling the knowledge gap in this area is the new book EC Competition Law by Giorgio Monti, published by Cambridge University Press.

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The development of competition law in the EU can be explored through three interrelated perspectives: the extent to which controversies in economic thinking affect the design of the law; how changing political visions about the objectives of competition law have caused shifts in the interpretation of the rules; and the institution in charge of applying the rules. The economic and political debates on competition law show that it is a contested terrain, and the way courts and competition authorities apply the law reflects their responses to the objectives and economics of competition law. By characterising the application of competition law as a continuous response to policy and economic debates, the author casts fresh perspectives on the subject. Written with competition law students in mind, Monti sets out economic concepts in a non-technical manner and explores the policy dimension of competition law by referring to key cases and contemporary policy initiatives.

• Non-technical reviews of the relevant economic literature allow all readers to participate fully in the discussion of competition law • Detailed case studies illustrate the operation of rules in specific circumstances, as well as their general application for a fuller understanding • The introduction of new topics for study gives the student the broadest possible perspective on the subject

Contents

1. Competition law - policy perspectives; 2. The core values of EC competition law in flux; 3. Economics and competition law; 4. Competition law and public policy; 5. Market power; 6. Abuse of a dominant position: anticompetitive exclusion; 7. Abuse of a dominant position: from competition policy to sector-specific regulation; 8. Merger policy; 9. Oligopoly markets; 10. Distribution agreements; 11. Institutions: who enforces competition law?; 12: Competition law and liberalisation; 13. Conclusions.

American University Lecture on the New Chinese Antimonopoly Law

Posted by D. Daniel Sokol

American University Washington College of Law Presents
The International and Comparative Antitrust Law Lecture Series

China’s Recently Enacted Antimonopoly Law 

Tuesday September 25, 2007

5:30 pm – 7:30 pm

American University Washington College of Law
Room 603
4801 Massachusetts Avenue, NW

Download china_lect_publicity_9_25.pdf

AAI - In Defense of the EU's Microsoft Ruling

Posted by D. Daniel Sokol

Lest you think that the blog does not cover a diversity of viewpoints on various antitrust matters, this morning I read the American Antitrust Institutes' comments on the Microsoft decision.  The AAI  defends the decision and lambastes AAG Tom Barnett's comments on the EU.  Highlights of the AAI paper include the following statements:

On the DOJ Press Release
"[O]ne might think that it was the DOJ that had been found guilty and that it is the DOJ that will handle the appeal for Microsoft (if there is one) to the European Court of Justice."

On the Remedy
"Frankly, neither the US remedy nor the European remedy has proven to be very effective. It may be necessary at some point for the Europeans to impose even stronger remedies against Microsoft, such as the break-up originally contemplated by our government."

On the DOJ
"Thus, Barnett’s statement smacks of remorse that the US government did anything at all to stop Microsoft’s exclusionary practices."

On the EC
"The EC’s position, upheld now on appeal, shows the proper concern for practices by dominant firms that eliminate both actual and potential competition which could benefit consumers. The EC has appropriately targeted strategies that would have the effect of deterring investment in innovations that might lead to a reduction of the monopolist’s power and new benefits for consumers."

Chicago (Antitrust) Marathon

Posted by D. Daniel Sokol

To coincide with the Chicago Marathon in two weeks will be the the Chicago Antitrust Marathon.  On Friday October 5^th , the Institute for Consumer Antitrust Studies at the Loyola University of Chicago School of Law is co-sponsoring The Antitrust Marathon with the Competition Law Forum (CLF) of the British Institute of International and Comparative Law.  The Antitrust Marathon is a half day round table discussion of single firm dominance from a comparative perspective.  The discussion will be based on the monopolization portion of the recent report of the Antitrust Modernization and a series of short issue papers about the purpose of monopolization law, defining market power, what is or should be a violation, remedies, and private enforcement.  An edited transcript will appear in the Loyola Consumer Law Review.

The Antitrust Marathon takes place the Friday before the Chicago Marathon which a number of participants will run and will continue on April 11,2008 in the London half of the program, yes the Friday before the London marathon.  Among those attending include:

George Addy, Davies Ward Phillips & Vineberg, Toronto, Canada (former head of Canadian Competition Bureau)

Simon Baker, RBB Economics, London

Joe Bauer, Notre Dame Law School

David Braun, Drinker Biddle

Steve Calkins, Wayne State University Law School

Peter Carstensen, Wisconsin Law School

Richard Cudahy, United States Court of Appeals for the Seventh Circuit

Kenneth Davidson, Washington, D.C.

Beth Farmer, Penn State School of Law

Bert Foer, American Antitrust Institute

David Gerber, IIT/Chicago Kent College of Law

Hillary Greene, University of Connecticut Law School

Michael Jacobs, DePaul College of Law

Robert Joseph, Sonnenschein Nath & Rosenthal

Christopher Leslie, IIT/Chicago Kent College of Law

Adrian Majumdaer, RBB Economics, London

Philip Marsden, British Institute of International and Comparative Law

Carlos Orci, Mexico City

Steve Shadowen, Hangley Aronchick Segal & Pudlin, Harrisburg, Pa.

Danny Sokol, University of Missouri School of Law

Paul Stancil, University of Illinois College of Law

Maurice Stucke, University of Tennessee School of Law

Mike Walker, CRA London

Spencer Weber Waller, Loyola University Chicago School of Law

 

Antitrust Marathon Agenda

 

9:30  AM	Registration and Continental Breakfast
9:50  AM	Welcome and Introduction Professor Waller and Dr. Marsden
10:00 AM	The Role of Monopolization/Abuse of Dominance in Competition Law
10:40 AM	Defining and Measuring Power / Assessing Consumer Harm in Abuse Cases
11:20 AM	Coffee Break
11:30 AM	The Monopolization/ Abuse Offense: Microsoft as Case Study
12:10 PM	Lunch
12:40 PM	Remedies
1:30  PM	Private Enforcement
2:00 PM	Concluding Remarks Dr. Marsden and Professor Waller

 

Reading Material for the Roundtable Discussion

 

Antitrust Modernization Commission Report and Recommendations

Section 1C Exclusionary Conduct

 

Issues Paper:	The Role of Monopolization/Abuse of Dominance in Competition Law
Issues Paper:	Defining and Measuring Power / Assessing Consumer Harm in Abuse Cases
Issues Paper:	The Monopolization/ Abuse Offense: Microsoft as Case Study
Issues Paper:	Remedies
Issues Paper:	Private Enforcement

 

Limited spots are available to participate in both halves of the Antitrust Marathon.  For more information, please contact either Spencer Weber Waller, Professor and Director, Institute for Consumer Antitrust Studies, Loyola University Chicago School of Law at [email protected] or Dr. Philip Marsden, Competition Law Forum, British Institute of International and Comparative Law at [email protected].

 

Everyone will have a chance to edit or revise their remarks before anything is posted on-line.  In addition, the Loyola Consumer Antitrust Review will publish an edited version of the transcript where you will have additional opportunity to review your remarks before they appear in print.

Yom Kipur, Antitrust and the Use of Economic Analysis in Religion

Posted by D. Daniel Sokol

Today is Yom Kipur, the holiest day of the year in Judaism.  It is a day that we Jews think of atonement and repentance for the sins that we have committed both knowingly and unknowingly.   To focus on this solemn day, Jews fast from sundown to sundown.  Jews around the world will attend services today, even if it is the only time this year that they will attend services.  Invariably, the Rabbi will give a sermon.  Sometimes this sermon may touch on issues of repentance.  In other cases it may concern the threats that Jews around the world face - existential threats of violence such as Iran's president threat to wipe Israel off the map or instances of anti-Semitism or other forms of intolerance in the local community.  In other cases, the sermon will focus on tikun olam, a Hebrew term that refers to "repairing the world" through our actions.  The kabalists suggest that when God created the world, it was unstable and resulted in imperfection.  Through our good deeds and through following God's commandments, we can help to repair the world. 

Jews around the world have taken tikun olam to heart and historically we have been at the forefront of social movements far disproportionate to our small numbers.  So what does this have to do with antitrust?  I would suggest that antitrust at its most fundamental level is about making life better for consumers.  In its own way, it seeks to repair the world from the abuse of monopoly power and other anti-competitive actions.  I think about this in part because as someone teaching a law and economics course semester, I think back to one of the founders of the law and economics movement - Henry Manne.  One of Manne's many great accomplishments was to introduce law and economics to a wider audience of law professors and practitioners.  It seems to me, based on years of hearing sermons from various Rabbis, that the Rabbinate in general could use some law and economics training.  Most sermons lack any semblance of understanding of economics, particularly those that address issues of tikun olam.  I would love for Manne to come out of his Florida retirement to conduct law and economics workshops for clergy.  Law and economics training could help Rabbis to understand how economic incentives work and how these incentives help to shape law and policy and vice versa.  Overall, law and economics training would improve the quality of the sermons just as law and economics training has improved the analysis of judges, lawyers and politicians.  Certainly, Jews are no strangers to economics, as 38 percent of all Nobel prize winners in the field are Jewish.  If we in the antitrust community think that understanding economics is important, shouldn't we want a Rabbinate that is better informed about economic analysis?

Thanks to Guest Bloggers Bill Page and John Lopatka

Posted by D. Daniel Sokol

Thanks again to Bill Page and John Lopatka for their insights this week on Microsoft cases in the EU and US.

What is the Consumer Interest in Antitrust Enforcement?

Posted by Bill Page

It is probably a sign of progress that all sides in the Microsoft litigation, both here and in Europe, seem to agree that the relevant goal of antitrust enforcement is to benefit consumers.  The CFI’s Microsoft decision, for example, mentions consumers well over 100 times, usually in the context of considering whether practices affect “consumer welfare,” “consumer choice,” or the like.  But the simple fact that the opposing sides with such fundamental differences can invoke the same interest in support of their positions suggest that we need further clarification of what the consumer interest means and how best to advance it. 

I suggest that an appropriate starting point is to ask:  what is the immediate and obvious effect of the challenged practice on consumers?  If the immediate effect is to benefit consumers, then the plaintiff should face a heavier burden to show (by a coherent theory and supporting evidence) that the long-run or net effect will actually be to harm consumers.  If the immediate effect is to harm consumers, then the defense should face a heavier burden to show that the long-run effects will be positive. This approach recognizes that future market events, especially innovations, are difficult to predict, and courts have a dubious track record in their efforts to do so. Something like this idea may explain the many hurdles the Supreme Court (in Matsushita and Brooke Group) has placed in the path of predatory pricing claims, because price cutting undoubtedly benefits consumers immediately.  The idea also may explain why the Court took so long to overrule Dr. Miles:  resale price maintenance undoubtedly raises retail prices; the Court decided (in Leegin, just last term) that per se illegality was inappropriate only after the Court was convinced that consumers may nevertheless benefit from valuable services that the higher prices elicit.

In the U.S. Microsoft case, the D.C. Circuit properly took this approach to reverse several of Judge Jackson’s holdings that had condemned Microsoft for offering better products (e.g., the Windows-specific version of Java) or free services.  It wrote “The rare case of price predation aside, the antitrust laws do not condemn even a monopolist for offering its product at an attractive price, and we therefore have no warrant to condemn Microsoft for offering either [Internet Explorer] or the [Internet Explorer Access Kit] free of charge or even at a negative price.  Likewise, as we said above, a monopolist does not violate the Sherman Act simply by developing an attractive product.”  The D.C. Circuit also, however, upheld liability for various forms of integration of Microsoft’s browser with the Windows operating system.  In these parts of the opinion, we have argued, the court gave insufficient weight to the immediate benefits of integration to consumers, and undue weight to speculation about possible long-term harms. 

The CFI has made the same error in its analysis of Microsoft’s tie of Windows and Windows Media Player.  The Commission’s decision rested on the theory that Microsoft harmed consumers by not offering them a choice of Windows without Media Player.  Thus, it was OK for Microsoft to combine the media player and Windows, so long as it gave OEMs and ultimately consumers the option of buying a version of Windows without Media Player.  The EC’s theory, of course, has been decisively refuted by the failure in the market of “Windows XP N,” the stripped version of Windows that Microsoft developed to satisfy the Commission’s order.  Consumers didn’t want the stripped version, even though OEMs could have installed a non-Microsoft media player in place of WMP—that was evidently not an adequate substitute, despite the EC’s contentions to the contrary (¶ 923).  The CFI insisted (¶ 943) that it could not consider the failure of XP N because is required to decide the case based upon the facts and law at the time of the commission decision.  But it should have been obvious to the EC from the outset that no one would want a version of Windows with less functionality at the same price.  Consumers (and OEMs) understandably view Microsoft’s provision of a media player along with Windows an immediate and unalloyed benefit.  The fact that other, competitive OS vendors like Apple also provide media players along with the OS confirms this obvious point. 

Under the approach I am suggesting, recognition of this immediate consumer benefit should have triggered a substantially higher burden to show that the action would harm competition.  The fact that Microsoft gains an “advantage” by providing an obvious benefit should not make its actions unlawful, in the absence of a coherent theory, supported by evidence, that the practice will harm consumers in the long run.  I suggest that the EC did not meet this heightened burden.  Some ties can reduce competition.  But, contrary to the CFI’s findings (¶¶ 967-70), I submit that bundling a product that is free in every channel of distribution and that does not otherwise prevent installation of rival products is not seriously exclusionary. OEMs and users can and do freely install other media players and content providers can and do encode their video in multiple formats. 

The CFI accepted the EC’s finding that Microsoft’s bundling gave it an “unparalleled advantage” over rival producers that altered the incentives of OEMs and content providers in ways that and “inevitably had significant consequences for the structure of competition” (¶ 1054).  These effects raised a “reasonable likelihood” that “an effective competition structure would not be ensured in the foreseeable future” (¶ 1089).  But any harm to consumers, as opposed to rivals, from these predicted developments are speculative. 

The EC emphasized, of course, that it did not want to prevent Microsoft from bundling, only to require it to sell an unbundled version.  This aspect of the remedy certainly limits the costs of the EC’s order, but at the expense of making it ineffective in achieving any competitive benefit. 

September 25 Update: For more confusion about how to help consumers by antitrust enforcement, see Unbundling Microsoft Windows, published by a Brussels think tank. The authors argue that it would benefit consumers to require that computers and operating systems (except Macs) be sold separately. Thus, consumers would have to buy the hardware and software separately and install the software themselves. This "would have a significant effect on the market share of Windows, providing the competitive marketplace that Ms Kroes has called for." For an expert refutation of this logic, see http://arstechnica.com/news.ars/post/20070924-eu-group-calls-for-end-to-windows-tax.html

Leverage in the CFI’s Microsoft Decision

Posted by John Lopatka

In thinking about the decision of the Court of First Instance (CFI) in the European Microsoft case, it’s easy to confuse the economic theory of the European case with that of the United States DOJ case.  After all, both have to do with the relationship between Microsoft’s dominant Windows PC operating system and related software products, both involve conduct by Microsoft that disadvantaged competing software producers, and both seem to have a lot to do with network effects.  In the DOJ case, the principal theory was that Microsoft monopolized the PC operating system market by preventing Netscape and Java from developing products that would have rendered all operating systems fungible.  The theory of the European case, however, was quite different.  I focus here on the “interoperability” part of the case.

The European Commission claimed, and the CFI agreed, that Microsoft refused to provide and authorize the use of sufficient information about the interoperability of Windows PC operating systems and work group server operating systems to permit competing producers of server operating systems to remain in the market.  A related claim was that Microsoft withheld needed information about interaction among servers.  The behavior alleged constitutes a kind of tying arrangement: users of the Windows operating system on a network of client PCs effectively must use the Microsoft server operating system because alternative server operating systems are inferior.  In this story, the Windows PC operating system is the tying product, the work group server operating system is the tied product, and the economic motivation for the tie is to leverage monopoly power in the PC operating system market into the server operating system market. 

Network effects have little to do with this story.  Indirect network effects are the source of monopoly power in the tying product market, but the story would not change materially if Microsoft instead dominated the PC operating system market because of patents, trade secrets, or ingenuity.  This story does not assert that work group server operating systems are themselves subject to indirect (or direct) network effects.  For example, it does not depend on the assumption that server applications will be written to the dominant server operating system.  Contrast this with the DOJ case, in which the principal theory was that Microsoft monopolized the PC operating system market by artificially maintaining the network effects that protect its monopoly.  The European case is based on a conventional theory of monopoly leverage.

The original Chicago School criticism of the leverage theory is that a monopolist of one product has no economic incentive to acquire a monopoly of a complementary product.  It is not that tying is logically impossible, therefore, but that it is economically irrational.  Later analysis demonstrates that in various settings tying for the purpose of leveraging is rational, and specifically, Dennis Carlton and Michael Waldman offer a sophisticated, dynamic model to explain the DOJ case against Microsoft: the monopolist squashes a superior complementary product in period one to prevent the supplier of that product from developing a competing tying product in period two that would eliminate the tying product monopoly.  Bill Page and I argue in our book (pages 156-58) that the model does not fit the facts of Microsoft, but at least it is a coherent theory that could explain tying in the appropriate setting.  By contrast, the European case lacks an economic foundation.  There is no claim that excluded server operating system producers would eventually develop competing PC operating systems if not hampered by the tying arrangement.  There is no claim that some users of server operating systems use them without any client operating systems, a condition which if it existed could explain leveraging under Michael Whinston’s classic model.  On the surface, therefore, the monopolist would appear to benefit by facilitating the use of a competitor’s superior complementary product, because that conduct would increase the demand for the tying product, however marginally.  And as applied to Microsoft, the evidence is compelling that Microsoft primarily strives to earn its revenue from the licensing of Windows.  If the European authorities perceive a threat to economic welfare, it would seem to be that tying prevents rivals from developing superior server operating systems over time, but they offer no rigorous proof of just why that result should be anticipated.

An alternative explanation of Microsoft’s conduct, of course, is that it was not tying at all.  Maybe all of the interoperability information that a competitor needed was available, and if users opted for Microsoft’s server operating system, the reason is that Microsoft offered a better product.  Certainly a monopolist has an economic incentive to supply a better complementary product than its competitors do, again because that would increase the demand for the monopoly product.  On this score, the dispute between the European authorities and Microsoft is not a matter of theory, but of fact – very technical fact – and the two sides seem to be talking past one another.  Microsoft contends that the European Commission insists on the disclosure of enough information to allow competitors to clone its product.  The CFI disagrees, drawing a critical distinction between specifications and implementations.  In the CFI’s view, the Commission requires Microsoft to supply only information about the specifications related to interaction between work group server operating systems on the one hand and Windows PCs and other work group servers on the other.  That information is not sufficient to permit rivals to clone the Microsoft server operating system, and indeed the implementation, which depends upon source code that need not be divulged, will vary across vendors.  The CFI likens specifications to the vocabulary and syntax of a language, and the implementation in this analogy is the concrete expression of an idea in that language.

Certainly there is a distinction in software design between a specification and an implementation.  But the issue is its significance in this context.  Suppose a monopolist produces an unpatented toaster that cannot be reverse engineered.  Specifications might explain how bread must be exposed to a heating element for a limited period of time, then ejected.  The monopolist’s implementation has two slots and a handle on one side.  The specifications may enable a competitor to design a toaster with four slots and handles on both sides.  The rival’s implementation is different, but the disclosure of the specifications enabled the rival to appropriate the value of the invention – no specifications, no toaster.  It is not a sufficient response to Microsoft’s argument, therefore, to say that implementations will differ if only specifications are disclosed.  The question is whether disclosure of the specifications will enable competitors to free ride on Microsoft’s investment in developing its server operating system, and if it does, the incentives to innovate decline.

If we assume that Microsoft has an economic incentive to leverage, the difficulty in this case is that the quality of the toaster depends upon – really, is defined by – its interaction with another product.  The whole purpose of a work group server operating system is to permit a network of client PCs and other servers to interact efficiently.  The appropriate competitive contest is between work group server operating systems based on their intrinsic merit, and Microsoft claims that it gives competitors all of the information needed for competitors to engage in that contest.  If customers choose Microsoft’s product, it is because its product is intrinsically superior.  But suppose the performance of the toaster depends upon the amount of electricity entering the appliance, and the toaster manufacturer has no toaster monopoly but does have a monopoly over electrical outlets.  The manufacturer discloses enough information to allow competitors to design toasters that use only 70% of the power available through an outlet, and as a result, its toaster toasts 30% faster.  The fact that specifications permit rivals to make toasters that toast bread does not tell us whether the manufacturer exploited an advantage it held because of its outlet monopoly.  On the face of it, we could not tell whether Microsoft succeeds in the server operating system market because of the intrinsic quality of its product – all toasters have access to 100% of the power coming from an outlet, and Microsoft’s toaster just has a better heating element – or because Microsoft withholds critical interoperability information from its competitors.  That is a factual issue the resolution of which requires technical expertise.  But an appropriate resolution is critical, because compulsory disclosure of information that pertains only to the intrinsic quality of a product will inevitably chill innovation.

Early Reactions to Microsoft

Posted by D. Daniel Sokol

The team over at eCCP has collected a number of insightful early comments on Microsoft from a distinguished group: Nicholas Economides of NYU's Stern School of Business, Luke Froeb of Vanderbilt University's Owen School of Management (and permanent guest blogger here at the Antitrust and Competition Policy Blog), Robert O'Donoghue, a Barrister with Brick Court Chambers and Daniel Spulber of Northwestern's Kellogg School of Management.

Effectiveness of Antitrust Sanctions on Modern International Cartels

Posted by D. Daniel Sokol

One of the defining characteristics of the last 10-15 years of international antitrust has been a "golden age" of cartel enforcement around the world.  How effective this enforcement has been has remained until now mostly unquantified.  In another in his series of excellent papers on international cartels, John Connor of Purdue University's Department of Agricultural Economics provides us an import answer to this question in Effectiveness of Antitrust Sanctions on Modern International Cartels.  It seems that overall, enforcers around the world continue to under-deter international cartels.

ABSTRACT: This paper assesses the antitrust fines and private penalties imposed on the participants of 260 international cartels discovered during 1990-2005, using four indicators of enforcement effectiveness. First, the United States is almost always the first to investigate and sanction international cartels, and its investigations are about seven times faster than EU probes. Second, U.S. investigations were more likely to be kept confidential than those in Europe, but the gap nearly disappeared since 2000. Third, median government antitrust fines average less than 10% of affected commerce, but rises to about 35% in the case of multi-continental conspiracies. Civil settlements in jurisdictions where they are permitted are typically 6 to 12% of sales. Canadian and U.S. fines and settlements imposed higher penalties than other jurisdictions. Fourth, fines on cartels that operated in Europe averaged a bit more than half of their estimated overcharges; those prosecuted only in North America paid civil and criminal sanctions of roughly single damages; and global cartels prosecuted in both jurisdictions typically paid less than single damages.

Competition in the Energy Sector Across the Atlantic

Posted by D. Daniel Sokol

Lost this week in the discussion of Microsoft is that both the US and EU antitrust enforcers have made pushes to introduce competition into the energy sector.  In the EU, there is a draft Directive that calls for increased competition through the separation of production and supply from transmission networks for both electricity and gas. See here.  In the United States, the FTC in its competition advocacy role just submitted comments on wholesale electricity market competition.  According to the FTC summary on its website:

The FTC’s comment proposes a range of ways in which FERC might strengthen the role of competition in electric power markets, including a deeper acknowledgment of the costs and benefits of DR policies and, as DR grows, a greater reliance on DR (rather than wholesale price caps) to prevent the exercise of market power by electricity generators. The comment also encourages FERC to develop incentives for efficiency and improved customer service in organized electric power markets.