Antitrust & Competition Policy Blog

SMP vs. Dominance: Divergence Out of Convergence

Posted by D. Daniel Sokol

Liyang Hou of the Katholieke Universiteit Leuven's Interdisciplinary Centre for Law and ICT addresses treaty-wide dimensions of competition policy in his paper SMP vs. Dominance: Divergence Out of Convergence.

ABSTRACT: This paper aims to compare the concept of significant market power (SMP) within Article 14 of Framework Directive with that of Dominance under Article 82 of EC Treaty. According the European Commission's guideline on the assessment of SMP, the concept of SMP is equivalent to that of dominance. However, the Commission does indicate a difference between the two concepts that the former should be assessed on a forward-looking approach and the latter on a backward-looking approach. Nevertheless, the Commission does not further specify how this difference will affect the assessment of SMP. Recently the first round of market review process has almost been finished. Therefore, it is a good time to examine the Commission decisions under Article 7 procedure to see what the difference should be. This paper will base on those decisions to find out the difference between SMP and dominace.

In the following a summary of each part of this paper is provided.

1. In the first part, a different starting point between EC competition law and regulation is identified. It is that competition law is not based on the existence of dominance whereas the electronic communications regulation is based on the existence of SMP.

2. The second part will look at the relationship between market definition and SMP designation. In order to define relevant markets for the electronic communications regulation, the Commission advocates a three-criterion test: (i) the existence of high and non-transitory entry barriers, (ii) absence of dynamic competition behind entry barriers and (iii) insufficiency of EC competition law remedies alone. The report considers that the first two criteria are overlapped with the criteria of assessing SMP and should be deleted. Furthermore, some thoughts on the insufficiency of EC competition remedies are provided.

3. The third part is to examine how the single SMP is assessed. In this part, it is first investigated that a very high market share is evidence of SMP save in exceptional circumstances. The threshold of such a very high market share is above 50% recommended by the Commission. Nevertheless, I find that in practice the threshold is much higher, i.e. above 65%. Subsequently, since the market share is not the decisive criterion for SMP assessment the other criteria are also discussed. With regard to the assessment of the other criteria, the major problem is identified that the Commission does not attach specific values to each of the other criteria. In order solve this problem, this report divides the 12 other criteria into three category, (i) decisive criteria, (ii) other important criteria and (iii) non-important criteria. The criteria in the first category include (1) control of infrastructure that is not easily replicated, (2) potential/dynamic competition and (3) countervailing buying power. A further examination of the three criteria are followed.

4. The fourth part is concerned with joint SMP. This part first looks at the overlap of single SMP and joint SMP; and then it finds that this overlap is significant to the electronic communications regulation. Following it, it gives out a picture how the joint SMP is assessed in practice.

5. The fifth part is to discuss the leverage of SMP, i.e. that an undertaking is regarded as having SMP on a market when it already holds SMP in another closely related market. It concludes that this concept has added value for EC competition law, however it has little added value for the electronic communications regulation. 6. The last part offers some points to compare SMP with dominance. Nevertheless, this part has not been fully explored and will be developed in a later stage.

Some Economics on Abuse of Dominance

Posted by D. Daniel Sokol

John Vickers of the University of Oxford's Department of Economics has written the very helpful and insightful Some Economics on Abuse of Dominance.  He begins his paper with what I believe to be the best analysis of the state of Article 82 jurisprudence, "European competition law and policy towards mergers and anti-competitive agreements have become much more soundly based in economic principles over the past decade. The law on abuse of dominance has not."

ABSTRACT: The aim of this paper is to appraise from an economic perspective selected aspects of current law and policy on Article 82 (see box) concerning exclusionary abuse of dominance. The topic of exploitative abuse, important though it is, lies beyond its scope. Ideally, especially at a conference celebrating fifty years of the Treaty, the paper would trace the evolution of lines of case law on Article 82 (formerly 86) but here too I will be selective, and focus on three cases on which judgment has been given this year. Since, quite unlike the US, the evolution of EC law on abuse of dominance has been rather limited, history will not be lost from view.  Two of the exclusionary abuses to be discussed involve pricing. Section 4 below looks at predatory pricing from the perspective of the Wanadoo case.3 Section 5 concerns discounts and rebates, which were at issue in British Airways.4 The Microsoft case concerned the "non-price" abuses of refusal to supply and tying and bundling, which are considered in section 6. As will be seen, "non-price" abuses often involve prices especially when it comes to remedies. The discussion of these abuses is preceded, in Section 3, by a quick tour of the economics of anti-competitive exclusion. However, since there is no abuse without market dominance, a word on that is due first.

Download VickersIESE.pdf

The Genesis of Cartel Investigations: Some Insights from Examining the Dynamic Interrelationships between U.S. Civil and Criminal Antitrust Investigations

Posted by D. Daniel Sokol

Vivek Ghosal of Georgia Tech (School of Economics) has written the fascinating The Genesis of Cartel Investigations: Some Insights from Examining the Dynamic Interrelationships between U.S. Civil and Criminal Antitrust Investigations.  The article has important policy implications regarding cartel detection.

ABSTRACT: The U.S. Department of Justice has prosecuted over 1600 criminal antitrust (price-fixing and related) cases since 1970. Yet we know precious little about the true genesis of these investigations. This paper uses the vector-autoregression methodology to examine the dynamic interrelationships between the various criminal and civil antitrust enforcement variables. A key result is that the number of criminal prosecutions increases in the years immediately following an increase in the number of civil cases, suggesting that merger reviews and other civil investigations may alert the antitrust authorities to criminal antitrust activities. To the best of my knowledge, this is the first econometric analysis that demonstrates the quantitative size of this effect and the time lags in the relationship. Other findings include important dynamic interrelationships between grand jury investigations, the number of individuals and corporations prosecuted, and criminal cases, indicating that information unearthed during a given criminal investigation and prosecution often reveals information about other conspiracies leading to future investigations and prosecutions. Finally, the number of criminal cases prosecuted increases following an economic downturn. We relate this increase to the literature, which points to cartel instability during economic downturns.

Experts' Guide to the Best Antitrust Articles and Books of 2007

Posted by Shubha Ghosh and D. Daniel Sokol

This year we are starting the tradition of assembling a group of experts to pick the best antitrust scholarship of the year.  We have two categories- best book and best article.  We construe both of these categories liberally.  By article we mean something published as an accepted paper or working paper in 2007 including essays, articles and book chapters.  By book we include anything that is hardback or softback- edited volume, treatise, monograph, government report, or textbook.  If trees died in the publication process, we count it.

To assist us in the selection process, we called upon an All-Star cast of competition law and economics specialists from around the world.  Our All-Stars include (in alphabetical order):

Stephen Calkins, Wayne State University Law School
John Connor, Purdue University Department of Agricultural Economics
Einer Elhauge, Harvard Law School
Michal Gal, University of Haifa Faculty of Law
Alberto Heimler, Italian Competition Authority (Autorita Garante della Concorrenza e del Mercato)
Geoff Manne, Lewis and Clark Law School
Ioannis Lianos, University College London Faculty of Law*
Nicolas Petit, University of Liege Faculty of Law
John Vickers, University of Oxford Faculty of Economics
Josh Wright, George Mason University Law School

* Ioannis picked three articles in lieu of one article and one book.

The picks are available in the document below.  Enjoy!

Download antitrust_picks_word_version1.2.doc

The Political Economy of Antitrust

Posted by D. Daniel Sokol

Out this year is a new and excellent book edited by Vivek Ghosal of Georgia Tech's School of Economics titled  The Political Economy of Antitrust.

Contents include:

Chapter 1:  Issues in Antitrust Enforcement,  Vivek Ghosal (Georgia Institute of Technology), Joseph Harrington (Johns Hopkins University) and Johan Stennek (Research Institute for Industrial Economics, Stockholm). Chapter 2:  Remembrance of Things Past: Antitrust, Ideology, and the Development of Industrial Economics.  Stephen Martin (Purdue University). Chapter 3:  The Impact of the Corporate Leniency Program on Cartel Formation and the Cartel Price Path.  Joe Chen (University of Tokyo) and Joseph Harrington (Johns Hopkins University). Chapter 4:  Optimal Fines in the Era of Whistleblowers: Should Price Fixers Still go to Prison   Paolo Buccirossi (Laboratory of Economics, Antitrust and Regulation, Rome) and Giancarlo Spagnolo (Stockholm School of Economics). Chapter 5:  Instruments for Cartel Deterrence, and Conflicts of Interests.  Cecile Aubert (Universite Paris IX Dauphine). Chapter 6:  Lessons for Competition Policy from the Vitamins Cartel.  William Kovacic (George Washington University), Robert Marshall (Pennsylvania State University), Leslie Marx (Duke University) and Matthew Raiff (Bates White). Chapter 7:  Effectiveness of Antitrust Sanctions on Modern International Cartels  John Connor (Purdue University). Chapter 8:  The Economics of Tacit Collusion in Merger Analysis.  Marc Ivaldi, Bruno Jullien, Patrick Rey, Paul Seabright and Jean Tirole (University of Toulouse). Chapter 9:  The Economics and Politics of International Merger Enforcement: A Case Study of the GE/Honeywell Merger.  Jay Pil Choi (Michigan State University). Chapter 10:  The Political Economy of EU Merger Control: Small versus Large Member State Interests.  Henrik Horn (Institute for International Economic Studies, Stockholm) and Johan Stennek (Research Institute for Industrial Economics, Stockholm). Chapter 11:  A Consumers  Surplus Defense in Merger Control.  Sven-Olof Fridolfsson (Research Institute for Industrial Economics, Stockholm). Chapter 12:  EU Merger Remedies: A Preliminary Empirical Assessment.  Tomaso Duso (Humboldt University and WZB), Klaus Gugler (University of Vienna) and Burcin Yurtoglu (University of Vienna). Chapter 13:  The Significant Impediment of Effective Competition Test in the New European Merger Regulation: In Theory and Practice.  Jerome Foncel (GREMARS, University of Lille), Marc Ivaldi (University of Toulouse) and Valerie Rabassa (DG Competition, European Commission). Chapter 14:  Vertical Restraints and the Effects of Upstream Horizontal Mergers.  Luke Froeb (Vanderbilt University), Steven Schantz (Vanderbilt University) and Gregory Werden (U.S. Department of Justice). Chapter 15:  Political Stabilization by an Independent Regulator.  Antoine Faure-Grimaud (London School of Economics) and David Martimort (University of Toulouse). Chapter 16:  Saving Section 2: Reframing U.S. Monopolization Law.  Timothy Brennan (University of Maryland, Baltimore). Chapter 17:  Private Antitrust Litigation: Procompetitive or Anticompetitive   Preston McAfee (California Institute of Technology), Hugo Mialon (Emory University) and Sue Mialon (University of North Dakota). Chapter 18:  Antitrust in Open Economies.  Joseph Francois (Tinbergen Institute) Henrik Horn (Institute for International Economic Studies, Stockholm).

Imperfect Legal Unbundling of Monopolistic Bottlenecks

Posted by D. Daniel Sokol

Addressing issues of how to best increase competition in liberalized utilities is a rather difficult undertaking.  Felix Höffler of the Max Planck Institute of Research on Collective Goods and Sebastian Kranz of University of Bonn Department of Economics may have an answer- "consumers may benefit most from legal unbundling with strong regulation and parts of ownership given to a minority outside shareholder."  Read their paper Imperfect Legal Unbundling of Monopolistic Bottlenecks for more details.

ABSTRACT: We study an industry with a monopolistic bottleneck (e.g. a transmission network) supplying an essential input to several downstream firms. Under legal unbundling the bottleneck must be operated by a legally independent upstream firm, which may be partly or fully owned by an incumbent active in downstream markets. Access prices are regulated but the upstream firm can perform non-tariff discrimination. Under perfect legal unbundling the upstream firm maximizes only own profits; with imperfections it considers to some extend also the profits of its downstream mother. We find that reducing imperfections in legal unbundling (keeping ownership fixed) generally increases total output. Increasing the incumbent's ownership share increases total output if imperfections are sufficiently small, otherwise the effects are ambiguous. Surprisingly, higher ownership shares of the downstream incumbent may sometimes lead to lower degrees of imperfections. Our analysis suggests that consumers may benefit most from legal unbundling with strong regulation and parts of ownership given to a minority outside shareholder.

OECD Competition Division Openings in Mexico City

Posted by D. Daniel Sokol

The OECD has announced hiring needs of two competition specialists to be based in Mexico City.  Details are available here.  Below are some highlights from the posting.

• TWO PROJECT POSTS – FIXED TERM APPOINTMENTS OF ONE TO TWO YEARS (with possibility of extension)
• We are looking for two Senior Experts with substantial experience in competition policy analysis, regulation and the application of competition policy to regulations. As part of a co-operative project between the OECD and the Mexican government, they will be key members of a 12-person team of experts associated with Mexico’s independent competition authority, the Federal Competition Commission (CFC). The team will work directly with the Chairman of the CFC to develop proposals to eliminate unnecessary restrictions of competition in various laws and regulations. The CFC’s proposals will be at the core of a Presidential effort to develop new policies to increase the competitiveness of the Mexican economy. A variety of sectors will be covered.
• In addition, the Senior Experts will be responsible for using their experience to revise, update and improve the OECD’s Competition Assessment Toolkit, an important element of the Competition Committee’s programme of work. They will also prepare reports for relevant OECD committees.
• The staff members will be based at the OECD Center in Mexico City under the supervision of the Paris-based Head of Competition Division (http://www.oecd.org/competition) in the Directorate for Financial and Enterprise Affairs (DAF).

Tying, Bundling, Loyalty Rebates and Exclusive Dealing in US Antitrust: What Can Australia Learn?

Posted by D. Daniel Sokol

Can the Australian competition policy regime learn lessons from its US counterpart?  So think Natasha Blycha of Monash University and John Duns of Monash University's Faculty of Law in their work Tying, Bundling, Loyalty Rebates and Exclusive Dealing in US Antitrust: What Can Australia Learn?

ABSTRACT: Despite the fact that non-price vertical restraints are part of everyday commercial life, Australian courts have had few occasions on which to assess their anti-competitiveness. Relevant US antitrust jurisprudence is, by contrast, far richer. Two Australian reform bodies have recommended that the non-price vertical restraint provisions of the Australian legislation be amended, which would bring the Australian provisions more into line with those in the United States. Whatever the fate of these reforms, US law will inevitably influence Australian developments. Accordingly, the object of this article is to analyse US jurisprudence on non-price vertical restraints in order to determine what it has to offer Australian law.

Christmas Day- Chinese Food, a Movie... and Antitrust?

Posted by D. Daniel Sokol

The Sokol tradition in the United States on Christmas day, like that of many Jews, is to go eat Chinese Food and see a movie.*  Today's movie, by request of my two year old daughter will be Alvin and the Chipmunks.  What does this have to do with antitrust?  Thinking about movies has reminded me that in the pipeline is what I believe will be an excellent book that addresses antitrust issues in the motion picture industry.  Barak Orbach of the University of Arizona Rogers College of Law is writing Reel Law:  A Legal History of the American Motion Picture Industry (Yale University Press, forthcoming).

In terms of issues of competition in Chinese food, why is it that unlike Italian food, which is equally ubiquitous  in the United States, the market for Chinese food remains so fragmented without any national chains? 

* When I lived in England as a graduate student at Oxford, not only were the movie theaters closed on Christmas Day but they were also closed the following day for Boxing Day.  Chinese restaurants were also closed on December 25 and 26, so Christmas felt particularly strange in the UK because it seemed like there was nothing to do.

A New Kid on the Block: Korean Competition Law, Policy, and Economics

Posted by D. Daniel Sokol

To better understand changes in Korean competition policy, Sang-Seung Yi (Professor of Economics at Seoul National University) & Youngjin Jung (partner at Yulchon) provide an overview with their article A New Kid on the Block: Korean Competition Law, Policy, and Economics.

ABSTRACT: This paper provides two authors’ perspectives on the achievements, shortcomings, controversies, and challenges ahead for Korean competition law and policy. The Korean Competition Law, formally known as the Monopoly Regulation and Fair Trade Act (MRFTA), was enacted on the last day of 1980.1 In the past quarter-century, since its establishment in 1981 as the principal enforcer of the MRFTA, the Korea Fair Trade Commission (KFTC) has achieved significant successes, especially in the area of cartel enforcement and competition advocacy. In recent years, it has accepted economic analysis as the proper basis for determining antitrust violations and has established an economic analysis unit.

Competition Policy in Hong Kong: Present Conditions and Future Prospects

Posted by D. Daniel Sokol

With a competition law in the works, Hong Kong is ripe for the sort of competition policy analysis that Mark Williams of the School of Accounting and Finance of The Hong Kong Polytechnic University undertakes in his article Competition Policy in Hong Kong: Present Conditions and Future Prospects.

ABSTRACT: Hong Kong has a reputation for being a free and open economy. Historically, the government has maintained that the economic environment is business-friendly, with a small public sector and that competition is the bedrock of sustained growth. The rule of law provides security of property rights and the light-touch regulatory environment allows the invisible hand of competition to work effectively. Unfortunately, this characterization is not an accurate representation of competition conditions in the domestic, non-traded sector of the economy. The government monopoly of the supply of land has facilitated the development of dominant, family-owned conglomerates that extract monopoly rents in many business sectors. Private monopolies in gas and electricity supply, a duopoly in the supermarket sector, tight oligopolies in port services and oil supply, and numerous well-known cartels are prominent features of the local economy. The government now recognizes that the traditional laissez-faire policy needs reconsideration and has announced that a comprehensive competition law will be promulgated. This article outlines the development of competition policy in Hong Kong and examines whether the new ordinance will effectively resolve its entrenched competition problems.

First Annual Best Antitrust Books and Articles of 2007 -- Coming December 28

Posted by D. Daniel Sokol

We have invited a group of experts from around the world in both antitrust law and economics for our first annual Best Antitrust Books and Articles Roundtable.  Our experts will provide their favorite articles and books of 2007 on December 28th.  Tune in for the list of what you should have read this year.

European Cartel Enforcement and the Possible Implications for Japanese Companies

Posted by D. Daniel Sokol

Ariel Ezrachi of the Faculty of Law at Oxford has written on European Cartel Enforcement and the Possible Implications for Japanese Companies.

ABSTRACT: Cartel activities, including, price fixing, market sharing, output limitation and bid rigging have adverse effects on the economy. By artificially limiting the competition that would normally prevail on the market, cartel members are shielded from the competitive pressures that would otherwise lead them to innovate, both in terms of product development and the introduction of more efficient production methods. Such practices hinder efficiency and ultimately result in artificial prices and reduced choice for consumers. In the long term, they lead to a loss of competitiveness and reduced employment opportunities. This paper explores the European competition law regime, its application to cartel activities, and more specifically its application in cases involving Japanese companies. It starts by looking at the substantive law and describing the nature of anticompetitive activities which may be caught under European Competition law. Following this, in what contains the main part of this paper, it considers the enforcement of competition law and the fight against cartels in Europe. Special attention is given to the European Leniency Programme and Notice on the Imposition of Fines. In addition the wider range of deterrents is considered to provide a comprehensive picture of cartel enforcement in Europe. Throughout the paper, references are made to the European enforcement regime's impact on foreign companies to illustrate the possible implications for Japanese companies. The paper concludes with examples of such past and current cases.

Wishing You a Sweet Holiday Season- Unless You Are an Alleged Price-fixer in Chocolates

Posted by D. Daniel Sokol

Investigations of price fixing among chocolate companies has moved south of the border from Canada to the United States.  Today's WSJ reports that DOJ has begun investigating price fixing by chocolate producers.

I have general suggestions for big corporations that sell products to end consumers that might raise significant consumer ire if there were price fixing (people understand very well that cartels rip you off if a bar of chocolate that should cost $1.00 costs $1.20 because of price fixing as opposed to things that most consumers don't understand like lysine and so you will lose lots of goodwill in additional to your civil and criminal sanctions if you price fix):

1. Make sure that you have an antitrust compliance program in place;
2. Make sure that your firm's governance structure facilitates involvement and oversight by your general counsel's office and compliance team;
3. Be the first one to the door at DOJ to ask for leniency; and
4. Make sure that you have Don Klawiter's number in case you get caught.

The Economic Impact of Merger Control: What is Special About Banking?

Posted by D. Daniel Sokol

Elena Carletti (University of Frankfurt - Center for Financial Studies), Philipp Hartmann (European Central Bank) and Steven Ongena (Tilburg University Department of Finance) ask The Economic Impact of Merger Control: What is Special About Banking?

ABSTRACT: There is a long-standing debate about the special nature of banks. Based on a unique dataset of legislative changes in industrial countries, we identify events that strengthen competition policy, analyze their impact on banks and non-financial firms and explain the reactions observed with institutional features that distinguish banking from non-financial sectors. Covering nineteen countries for the period 1987 to 2004, we find that banks are special in that a more competition-oriented regime for merger control increases banks' stock prices, whereas it decreases those of non-financial firms. Moreover, bank merger targets become more profitable and larger. A major determinant of the positive bank returns, after controlling inter alia for the general quality of institutions and individual bank characteristics, is the opaqueness that characterizes the institutional setup for supervisory bank merger reviews. Thus strengthening competition policy in banking may generate positive externalities in the financial system that offset unintended adverse side effects on efficiency introduced through supervisory policies focusing on prudential considerations and financial stability. Legal arrangements governing competition and supervisory control of bank mergers may therefore have important implications for real activity.

Latest Issue of the Antitrust Source is Out

Posted by D. Daniel Sokol

The latest issue of the Antitrust Source is out.  It includes a symposium discussing antitrust issues the Supreme Court has yet to address.

Passing-On Defense and Indirect Purchaser Standing in Actions for Damages Against the Violations of Competition Law: What Can the EC Learn from the US?

Posted by D. Daniel Sokol

PhD student Firat Cengiz of the University of East Anglia - Centre for Competition Policy has written a paper on Passing-On Defense and Indirect Purchaser Standing in Actions for Damages Against the Violations of Competition Law: What Can the EC Learn from the US?

ABSTRACT: This paper analyses the raison d'être of the current initiative for the federal policy change in the US regarding the issues of passing-on defense and indirect purchaser standing in order to draw policy lessons for the EC in the light of the Commission's Green Paper on private enforcement of Community competition law. The paper finds that transatlantic policy learning in the substantive sense does not seem plausible due to the dramatic difference between the American rationale regarding the goals of private enforcement and the European doctrine of direct effect. Nevertheless, the paper argues that the US experience contains important policy lessons regarding the risks brought forward by private enforcement under diverse standards in the lack of effective judicial cooperation mechanisms in a multi-level polity. After analysing the current positions of the Community and national laws from this perspective, the Paper finds that there is substantial room for diversity amongst the national standards. In addition, although existing Community measures provide solid ground for judicial cooperation, those measures should be strengthened in order to avert the litigation chaos which forced a policy change in the US. Consequently, the Paper suggests that the Commission gives substantial weight to the procedural aspects of private enforcement in its forthcoming White Paper which the Green Paper largely overlooked.

Christmas Tree Growers Association Charged With Price Fixing

Posted by D. Daniel Sokol

Demonstrating that it is possible to be a modern day Grinch, the Danish Christmas Tree Growers Association has been charged with price fixing.  Since Denmark exports 10 million Christmas trees a year, this alleged cartel has international implications.

Commission Prohibits MasterCard's intra-EEA Multilateral Interchange Fees

Posted by D. Daniel Sokol

The European Commission yesterday decided that MasterCard's intra-EEA Multilateral Interchange Fees violated Article 81.  The WSJ has analysis here.  The Commission press release explains:

The European Commission has decided that MasterCard's multilateral interchange fees (MIF) for cross-border payment card transactions with MasterCard and Maestro branded debit and consumer credit cards in the European Economic Area (EEA) violate EC Treaty rules on restrictive business practices (Article 81). The Commission concluded that MasterCard's MIF, a charge levied on each payment at a retail outlet when the payment is processed, inflated the cost of card acceptance by retailers without leading to proven efficiencies. MasterCard has six months to comply with the Commission's order to withdraw the fees. If MasterCard fails to comply, the Commission may impose daily penalty payments of 3.5% of its daily global turnover in the preceding business year. MIF are not illegal as such. However, a MIF in an open payment card scheme such as MasterCard's is only compatible with EU competition rules if it contributes to technical and economic progress and benefits consumers. In the EU, over 23 billion payments, exceeding a value of €1350 billion, are made every year with payment cards.

When Does an Optional Tariff Not Lead to a Pareto Improvement? The Ambiguous Effects of Self-Selecting Nonlinear Pricing when Demand is Interdependent or Firms Do Not Maximize Profit

Posted by D. Daniel Sokol

With the long title of When Does an Optional Tariff Not Lead to a Pareto Improvement? The Ambiguous Effects of Self-Selecting Nonlinear Pricing when Demand is Interdependent or Firms Do Not Maximize Profit, you know that John Panzar (Northwestern Economics Department) and Greg Sidak (Georgetown Law School) are not hiding the ball about the topic of this article.

ABSTRACT:  Optional or self-selecting tariffs allow customers to choose between an established tariff and an alternative outlay schedule. The possibility of making the vendor and at least one consumer better off, without making any other consumer worse off, makes optional tariffs appealing to both economists and regulators. In economic terms, the introduction of optional tariffs makes possible a Pareto improvement in the allocation of resources. Unfortunately, the presumed desirability of such tariffs depends crucially on assumptions that may not be fulfilled in the case of a state-owned enterprise - in particular, profit-seeking behavior on the part of the monopoly vendor and independence of consumer demand functions. In this Article, we analyze the economic implications and potential consequences, in general, of introducing negotiated rate and service terms available to a sole user into a pre-existing regulatory regime of uniform tariff rates and conditions of service. We identify the conditions under which it is economically desirable to introduce declining-block rates or other rate structures that discriminate among users of the affected services, with or without any basis in identifiable cost differences. We address the specific economic implications and potential consequences of introducing negotiated rate and service terms available to a sole user where the affected service is provided under a monopoly established by federal statute, taking into account that such negotiated arrangements may include preferential pricing terms; that access to the negotiated terms may be limited to a small number of users for administrative or other reasons; and that competition may exist among users of the affected service or services. Finally, we identify and describe regulatory measures that might be taken to accommodate potential concerns regarding the impact of such negotiated rate and service arrangements on fairness in regulation and competition. We conclude that it is not possible to derive sweeping propositions about the efficiency of optional tariff offerings. Instead, the welfare effects of such pricing plans must be evaluated empirically on an individual basis. Our analysis has practical significance for pricing policies in network industries, particularly those industries served by state-owned enterprises that enjoy statutory monopolies.