Antitrust & Competition Policy Blog

An Explanation of Market Dominances

Posted by D. Daniel Sokol

Massimiliano Vatiero Law and Economics, University of Siena (PhD Student) offers An Explanation of Market Dominances.

ABSTRACT: This paper tries to formulate an original description of notion of abusive dominant position. A dominant position is a common market structure, where there is more than one competitor (hence, it is not a monopoly), but where one firm (or a group of firms, but not all) has some kind of market significance (thus, it is not a perfect atomistic competition context). To understand dominant position dynamics, we have to depart from the idea of imperfect competition in order to relax the assumption that price contains any information and to regard strategic rationality by agents. In particular we focus on the meaning of joint dominance. We illustrate by the notion of conjectural variations economic links involved in a joint dominance and we distinguish different forms of joint dominance deriving from the notion of Commonsian transaction.

The Role of Competition Policy in the Promotion of Economic Growth

Posted by D. Daniel Sokol

Lawrence J. White (Leonard N. Stern School of Business - Department of Economics) offers thoughts on The Role of Competition Policy in the Promotion of Economic Growth.

ABSTRACT: This essay discusses the role that competition policy can play in promoting economic growth. The essay begins by outlining the main components of modern antitrust policy. The essay then discusses the major aspects of an economy that contribute to economic growth and shows the ways that competition policy can favorably influence economic growth. Next the essay discusses industrial policy, as a set of policies that are in contradiction to competition policy and describes the tensions between them. Finally, the paper discusses the role of economics and economists in the development of competition policy in the U.S. and highlights some major advances in U.S. competition policy (to which economics and economists have contributed), which have made competition policy more consonant with economic efficiency (and economic growth); in addition, some potential improvements that could promote the effectiveness of competition policy even further are proposed.

Leniency Promotion Movie

Posted by D. Daniel Sokol

The Dutch Competition Authority has produced a film to promote leniency in the fight against cartels.   

June 18 Update

There is now an English subtitled version.

Technology Standards, Patents and Antitrust

Posted by D. Daniel Sokol

Francois Leveque (Ecole des Mines de Paris - Centre d'Économie Industrielle (CERNA)) and Yann Ménière (Ecole des Mines ParisTech; Catholic University of Louvain) have a nice piece on Technology Standards, Patents and Antitrust.

ABSTRACT:  From the perspective of antitrust authorities, the multiplication of patents embodied in technology standards is a source of concerns. Certainly it is necessary and efficient that patents owners derive a revenue from the use of the standard. Yet by their function - ensuring compatibility between different products by promoting a common technology platform in a particular industry - standards generate potential for market power far beyond the legal protection conferred by patents. Patent holders may thus be tempted to leverage their position to make illegal profits. Such concerns arise in two different cases that have fueled antitrust debates and economic research during the last decade. On the one hand, patent owners may be tempted to collude by coordinating their licensing policies. The difficulty here is that some coordination between them within a patent pool may actually be pro-competitive. After a brief introduction, we explain in the first part why, and on what conditions, patent pools should be accepted by antitrust authorities. On the other hand, patent owners may be tempted to manipulate the standard setting process by waiting for the wide adoption of the standard before charging excessive royalties to its users. We present this hold-up problem in the second part, and show how appropriate rules for standard setting processes can help mitigate it.

Electricity Restructuring in China: The Elusive Quest for Competition

Posted by D. Daniel Sokol

Russell Pittman (DOJ) and Vanessa Yanhua Zhang (LECG) post on Electricity Restructuring in China: The Elusive Quest for Competition.

ABSTRACT: The continuation of China's remarkable economic growth will depend on continued increases in electricity supply. China has commenced a program of electricity sector restructuring, with the announced aim of relying on markets and competition to provide incentives for attracting private investment and encouraging efficiency. However, a close examination of the generation markets being created suggests that truly free wholesale prices are likely to be both high and volatile. This may be the reason that these prices have not yet been freed - and it may not bode well for true market liberalization in the future.

The Flawed Institutional Design of U.S. Merger Review: Stacking the Deck Against Enforcement

Posted by D. Daniel Sokol

Lawrence Frankel of DOJ Antitrust has an interesting piece on The Flawed Institutional Design of U.S. Merger Review: Stacking the Deck Against Enforcement.

ABSTRACT: The institutional design of federal merger review in the United States leads to systematic underenforcement of merger law. This is so even though substantive merger law is relatively well settled, most mergers are not anticompetitive, and the review process properly permits them to proceed without challenge. However, with regard to the small number of mergers that raise significant competitive issues, and where the analysis of the merger's likely consequences turns on highly fact-specific, complex, information-intensive economic assessments based on imperfect data, two fundamental aspects of institutional design create systematic underenforcement. First is the asymmetric availability of judicial review: A determination by the antitrust agency that a merger is anticompetitive is subject to court challenge and judicial review, but a contrary determination is not. Thus, an agency's false positive (erroneous condemnation of a merger as anticompetitive) may be corrected in court, but its false negative (erroneous clearance of a merger as not anticompetitive) is almost always final. Second is the particular nature of judicial review: Because a court's evaluation of an agency determination that a merger is anticompetitive is non-deferential even though the court has less information, less expertise, and fewer resources than the agency and because the agency bears the overall burden of proof in a situation that involves considerable inherent uncertainty, courts will reject the agency's determination more often than they should. Thus, judicial review may correct most false positives, but it will also create additional false negatives. Together, these structural design elements likely lead to significantly more false negatives than false positives and a higher overall error rate than might be produced by various alternative systems. This institutional design might be appropriate if false positives were inherently more harmful than false negatives, but that is unlikely in the context of modern merger control. Thus, the system probably leads to approval of (or suboptimal relief for) an inefficiently large number of anticompetitive mergers. Examination of other advanced merger review systems may yield important insights including ways to correct this problem.

The Use of Settlements in Public Antitrust Enforcement: Objectives and Principles

Posted by D. Daniel Sokol

Wouter Wils of the European Commission discusses The Use of Settlements in Public Antitrust Enforcement: Objectives and Principles in his latest article.

ABSTRACT:  This paper discusses two general questions concerning the use of settlements in public antitrust enforcement, namely under which conditions the use of settlements contributes to optimal antitrust enforcement, and under which conditions self-incrimination and waivers of procedural rights by settlement candidates are compatible with fundamental rights of defence. The discussion of these general questions will be illustrated with the specific example of the two settlement procedures for the enforcement by the European Commission of the antitrust prohibitions contained in Articles 81 and 82 EC, namely the commitment procedure under Article 9 of Regulation 1/2003, and the proposed new settlement procedure in cartel cases.

Determinants of a Digital Divide in Sub-Saharan Africa: A Spatial Econometric Analysis of Cell Phone Coverage

Posted by D. Daniel Sokol

It turns out that competition policy plays an important role in the telecom sector in sub-Saharan Africa.  In a new study titled Determinants of a Digital Divide in Sub-Saharan Africa: A Spatial Econometric Analysis of Cell Phone Coverage by Piet Buys, Susmita Dasgupta, Tim Thomas and David Wheeler, all of the World Bank, "Simulations based on the econometric results suggest that a generalized improvement in competition policy to a level that currently characterizes the best-performing states in Sub-Saharan Africa could lead to huge improvements in cell-phone area coverage for many states currently with poor policy performance, and an overall coverage increase of nearly 100 percent."

ABSTRACT: Most discussions of the digital divide treat it as a "North-South" issue, but the conventional dichotomy doesn't apply to cell phones in Sub-Saharan Africa. Although almost all Sub-Saharan countries are poor by international standards, they exhibit great disparities in coverage by cell telephone systems. Buys, Dasgupta, Thomas and Wheeler investigate the determinants of these disparities with a spatially-disaggregated model that employs locational information for cell-phone towers across over 990,000 4.6-km grid squares in Sub-Saharan Africa. Using probit techniques, a probability model with adjustments for spatial autocorrelation has been estimated that relates the likelihood of cell-tower location within a grid square to potential market size (proximate population); installation and maintenance cost factors related to accessibility (elevation, slope, distance from a main road, distance from the nearest large city); and national competition policy. Probit estimates indicate strong, significant results for the supply-demand variables, and very strong results for the competition policy index. Simulations based on the econometric results suggest that a generalized improvement in competition policy to a level that currently characterizes the best-performing states in Sub-Saharan Africa could lead to huge improvements in cell-phone area coverage for many states currently with poor policy performance, and an overall coverage increase of nearly 100 percent.

Antitrust, Innovation, and Uncertain Property Rights: Some Practical Considerations

Posted by D. Daniel Sokol

Dean Williamson of DOJ Antitrust offers some thoughts on Antitrust, Innovation, and Uncertain Property Rights: Some Practical Considerations.

ABSTRACT:  The intersection of antitrust and intellectual property circumscribes two century-long debates. The first pertains to questions about how antitrust law and intellectual property law interact, and the second pertains to questions about how parties can exploit property rights, including intellectual property rights, to exclude competitors. In this paper I finesse these questions and turn to practical considerations about how innovation and intellectual property can impinge antitrust enforcement. I develop two propositions. First, collaborative research and development has often been unwittingly misunderstood and remains poorly understood, but what is understood about it is consistent with the long-standing observation that antitrust has rarely interfered with collaborative ventures. Second, shifting focus from intellectual property rights to uncertain property rights makes it easier to understand what innovation and intellectual property imply for enforcement processes. Both intellectual property and tangible assets imply the same processes, but the boundaries of intellectual properties may be uncertain and may, in turn, allow parties to game enforcement processes in ways that would not be feasible in antitrust matters that principally feature tangible assets. Even so, uncertain property rights might not frustrate enforcement processes as the antitrust authorities may yet be able to factor parties' strategic behaviors into the design of antitrust remedies. I illustrate these propositions with examples.

Antitrust in Wonderland: Regulating Markets of Innovation

Posted by D. Daniel Sokol

Antitrust in Wonderland: Regulating Markets of Innovation is the cute title of Sunny Woan's (Santa Clara University Law School) latest work.

ABSTRACT:  This article examines the intersection of antitrust and intellectual property law, critiquing the government's approach and proposing amendments to current standards. In particular, this article focuses on the U.S. Department of Justice and Federal Trade Commission's treatment of innovation effects as a factor in antitrust analyses. While the government characterizes innovation effects as fundamental to Antitrust-IP law, the Guidelines set forth by the government in its present state renders the innovation effects factor as nugatory and, in the long run, will hinder technological research and development in this country. Thus, this article proposes amendments to the Guidelines so that innovation effects may be given greater weight. This article revisits the history of antitrust law applied to the New Economy, explains why current standards are flawed, and suggests amendments to the Guidelines that would offer more potency to the innovation effects factor.

Lucky Trip? Perspectives from a Foreign Advisor on Competition Policy, Development and Technical Assistance

Posted by D. Daniel Sokol

The godfather of antitrust technical assistance, Chairman William Kovacic of the FTC, has written a must read critique of antitrust technical assistance titled Lucky Trip? Perspectives from a Foreign Advisor on Competition Policy, Development and Technical Assistance.

ABSTRACT:  This article considers how the global community of donor organizations and technical assistance providers is using the opportunity at hand to foster lasting acceptance of economic liberalization in regimes that, not long ago, seemed firmly committed to variants of central economic planning. I am convinced that efforts to promote this economic transformation, and to encourage the political liberalization that is necessary to sustain it, have immense value for developing and developed economies alike. At the same time, I am far less confident that developed economies with the means to facilitate economic and political reforms have either the will to stay at it for the long run or the wisdom to select strategies that are likely to succeed. On the worst days, I fear that inadequate commitments or clumsy implementation will forfeit the possibilities that emerged in the late twentieth century and will haunt us for decades to come.

Choices made in the coming few years will determine whether the pursuit of economic law reform has been a successful journey or an irretrievable disappointment. My theme is that good outcomes require more than mere luck.

The Ties That Bind: When is Retaliation Effective and Credible for Tacit Collusion?

Posted by D. Daniel Sokol

Oxera has a briefing paper on tacit collusion titled When is Retaliation Effective and Credible for Tacit Collusion?

ABSTRACT: Retaliation against cheaters is an important condition for tacit collusion or coordination between rival companies to be sustainable. The assessment of retaliation mechanisms is therefore a key stage in testing for coordinated effects in merger inquiries or other types of competition investigation where tacit collusion decisions may be of concern. In what circumstances are these mechanisms effective and credible?

The Reasonableness of Resale Price Maintenance

Posted by D. Daniel Sokol

Abdullah Hussain (Luthra & Luthra Law Offices) provides a comparative India-US analysis of RPM in his article The Reasonableness of Resale Price Maintenance.

ABSTRACT: The treatment of vertical agreements in the United States, relating to both price and non-price restraints, has seen its fair share of controversy since inception. Judgments of the U.S. Supreme Court have been followed by pages of growing economic and jurisprudential criticism. The Court itself has been divided in its decisions with regard to the suitable standard to be applied to resale price maintenance (RPM). Barring State Oil v. Khan, the landmark decisions have consistently seen dissenting opinions, including in the most recent one (Leegin) quoted at the start of this paper, in which the Court reached its conclusion by a margin of five to four.

This paper describes the circumstances precipitating the ruling that overturned a 96-year-old principal laid down by the Supreme Court of the United States, which had made the setting of minimum resale prices unlawful per se, and examines the position with respect to RPM in Indian jurisprudence. Section I of this paper describes the evolution of the jurisprudence from Dr. Miles in 1911 up until State Oil in 1997, when the per se approach was rejected with regard to maximum resale price-fixing, and ending, of course, with Leegin, albeit briefly. Section II describes the legal position in India both under the Monopolies and Restrictive Trade Practices Act of 1969 and the revamped Competition Act of 2002. Section III analyzes the justifications put forth on both sides of the debate and the Leegin judgment, and is followed by observations for suitable standards for the United States and India in conclusion.

Tenth Annual Sedona Conference on Antitrust Law & Litigation

Posted by D. Daniel Sokol

The Tenth Annual Sedona Conference on Antitrust Law & Litigation will be held in the beautiful red hills of Firenze to tackle extremely timely & important issues surrounding the Globalisation of Antitrust Enforcement, including

(1) The Future of Private Enforcement in the EU
(2) Criminal Antitrust Enforcement in Europe
(3) Impact for Antitrust of the 2008 Presidential Election
(4) The Antitrust/IP Interface

Details are available here.

The Antitrust of Reputation Mechanisms: Institutional Economics and Concerted Refusals to Deal

Posted by D. Daniel Sokol

Barak Richman of Duke University Law School weighs in on  The Antitrust of Reputation Mechanisms: Institutional Economics and Concerted Refusals to Deal.

ABSTRACT:  An agreement among competitors to refuse to deal with another party is traditionally per se illegal under the antitrust laws. But coordinated refusals to deal are often necessary to punish wrongdoers, and thus to deter undesirable behavior, that state sponsored courts cannot reach. When viewed as a mechanism to govern transactions and induce socially desirable cooperative behavior, coordinated refusals to deal can sustain valuable reputation mechanisms. This paper employs institutional economics to understand the role of coordinated refusals to deal in merchant circles and to evaluate the economic desirability of permitting such coordinated actions among competitors. It concludes that if the objective of antitrust law is to promote economic welfare, then per se treatment - or any heightened presumption of illegality - of reputation mechanisms with coordinated punishments is misplaced.

Margin Squeeze After Deutsche Telekom

Posted by D. Daniel Sokol

Simon Genevaz (Conseil de la concurrence) provides some thoughts on Margin Squeeze After Deutsche Telekom.

ABSTRACT: Margin squeeze practices occur in industries where incumbent companies operate at two levels of trade, both selling an input at wholesale and acting as retail suppliers. In these situations, because the upstream input sold by the incumbent is used to make the downstream product, the incumbent’s customers at the upstream level are also its competitors at the downstream level. In instances where downstream rivals are unable to obtain viable alternatives to the incumbent’s wholesale products, the vertically integrated firm can “squeeze” its rivals’ profit margins by setting a high wholesale price and/or a low retail price.

In a series of cases involving these fact patterns, the European Commission and the Court of First Instance have considered that an insufficient spread between the price charged by a vertically integrated dominant firm for wholesale supplies of an input and that firm’s own retail price could impede downstream rivals’ ability to compete, and can therefore be considered abusive under Article 82 of the EC Treaty.

Yet the determination of the precise circumstances in which such conduct, known as “margin squeeze,” should give rise to antitrust liability raises two types of questions. The first type has to do with the definition of the applicable test. In essence, the competition authorities and courts ask when, exactly, does the spread become so small as to be considered exclusionary in the antitrust sense (i.e., to exclude competitors on some basis other than the dominant firm’s merits)? The second type of questions relate to the fact that landmark margin squeeze cases have taken place in regulated industries. In this circumstance, the competition authorities and courts ask whether the concurrent application of a specific regulatory scheme leaves room for antitrust liability. The purpose of this paper is to examine the lessons from Deutsche Telekom and the CFI’s responses to these two types of questions. Section I of this paper shows that tackling margin squeeze abuses has proven a powerful liberalization tool in European telecommunications and energy sectors. The importance of Deutsche Telekom-type analysis in proceedings brought since the Commission’s decision shows how significant an impact this case has made in European competition law enforcement. Section II examines the test established in Deutsche Telekom for assessing whether a margin squeeze is exclusionary and argues that recent critics of European enforcement mischaracterize the state of the law. In addition, section II argues that while the CFI’s judgment usefully confirmed important aspects of the case law, it also questionably relied on regulatory objectives in isolation from actual market conditions. Section III examines the test used by the CFI for determining whether the existence of price regulation under sector-specific rules precludes a margin squeeze claim under competition law. Section III explains that conservative approaches to antitrust enforcement understate the benefits of the parallel application of sector-specific regulation and competition law. Section IV concludes.

Doctrinal Cross-Dressing in Derivative Aftermarkets: Kodak, Xerox and the Copycat Game

Posted by D. Daniel Sokol

Rudolph J.R. Peritz of New York Law School discusses Doctrinal Cross-Dressing in Derivative Aftermarkets: Kodak, Xerox and the Copycat Game in his latest work.

ABSTRACT: The short essay develops the concept of strategic parallel conduct by filling the old bottle of interdependent conscious parallelism with the new wine of game theory. The conduct underlying the Kodak and Xerox cases is taken as the example of a positive sum game that is better understood and more appropriately litigated under Sherman Act Section One as strategic parallel conduct than under Section Two as monopolization or attempts to monopolize.

International Competition Policy and the WTO

Posted by D. Daniel Sokol

Gary Clyde Hufbauer and and Jisun Kim of the Peterson Institute discuss International Competition Policy and the WTO.

ABSTRACT: Despite seven years of negotiating effort, the Doha Round of multilateral trade negotiations, launched in November 2001 under the auspices of the World Trade Organization (WTO), remains stalled. The agenda spelled out in the Doha Declaration was quite ambitious: It addressed not only traditional trade issues such as tariffs but also new issues such as investment, competition policy, and environment. Unfortunately the breadth of the agenda contributed to disarray in the ensuing negotiations. In hopes of expediting talks, the General Council of the WTO subsequently dropped several controversial issues, among them competition policy, but the Doha talks are still deadlocked.

Even though competition policy was deleted from the Doha agenda, anticompetitive practices continue to attract attention. The covert growth of murky cartels and the well-publicized boom (until the recent financial crisis) in cross-border mergers and acquisitions (M&As) raised concerns about possible negative impacts. While developed countries generally enforce competition policies at the national level, many developing countries do not. Moreover, cross-border practices often escape the scope of national regimes (except perhaps EU and US authorities). Therefore, several international institutions—the Organization for Economic Cooperation and Development (OECD), the International Competition Network (ICN), the United Nations Conference on Trade and Development (UNCTAD), and the WTO—actively discuss the creation of international frameworks to shape competition policy; they also publish relevant studies.

Patent and Antitrust: Differing Shades of Meaning

Posted by D. Daniel Sokol

Robin Cooper Feldman of UC Hastings College of Law discusses Patent and Antitrust: Differing Shades of Meaning in her latest article.

ABSTRACT: The relationship between patent law and antitrust law has challenged legal minds since the emergence of antitrust law in the late 19th century. In reductionist form, the two concepts pose a natural contradiction: One encourages monopoly while the other restricts it. To avoid uncomfortable dissonance, the trend across time has been to try to harmonize patent and antitrust law. In particular, harmonization efforts in recent decades have led Congress and the courts to engage in a series of attempts, some aborted and some half-formed, to graft antitrust doctrines onto patent law. These efforts have failed to resolve the conflicts.

This piece argues that the deviations between patent law and antitrust law run far deeper than courts and commentators recognize. The problem isn't just that one encourages monopoly while the other limits it. Rather, patent law and antitrust law often use the same concepts and terminology with differing meanings and contexts. In other words, it may appear that they are talking about the same things, and yet, they are not.

Our tendency to assume parallel meanings threatens any attempt to reconcile the two bodies of law. Most importantly, ignoring asymmetries can lead to both under protection and overprotection of patent rights, as well as the improper application of antitrust laws. To highlight the problem, this piece explores a number of examples of differing meanings in hopes of promoting a more subtle understanding of the patent/antitrust terrain.

Favoring Dynamic Over Static Competition: Implications for Antitrust Analysis and Policy

Posted by D. Daniel Sokol

Favoring Dynamic over Static Competition: Implications for Antitrust Analysis and Policy is the newest working paper by David Teeece (Berkeley Haas School of Business).

ABSTRACT: This paper asks how competition policy should be shaped if it were to favor Schumpeterian (dynamic) competition over neoclassical (static) competition. Schumpeterian competition is the kind of competition that is engendered by product and process innovation. Such competition not only brings price competition—it tends to overturn the existing order. A framework that favors dynamic over static competition would put less weight on market share and concentration in the assessment of market power, and more weight on assessing potential competition and enterprise level capabilities. By embedding recent developments in evolutionary economics and the behavioral theory of the firm into antitrust analysis, a more robust framework for antitrust economics can be developed. Such a framework is likely to soften remaining tensions between antitrust and intellectual property. It is also likely to lead to less confidence in the standards tools of antitrust economics when the business environment is associated with rapid technological change.