Antitrust & Competition Policy Blog

Rosh Hashana and Antitrust

Posted by D. Daniel Sokol

As Walter Sobchak (John Goodman) says in the new classic The Big Lebowski, "Three thousand years of beautiful tradition, from Moses to Sandy Koufax."  Sandy Koufax (pictured left) did not play baseball for the Dodgers on Rosh Hashana or Yom Kippur.  Out of respect for this beautiful tradition, I will not post messages from sundown tonight till sundown on Wednesday night as I will be at services welcoming in the Jewish New Year.*  For all of our Jewish and non-Jewish readers, let me wish you a  new year filled with peace, prosperity and good health.  L'Shana Tova!

* For those of you unfamiliar with Judaism, Rosh Hashana is not like secular new year with champagne and confetti.  Rather, Wikipedia describes it as:

Rosh Hashanah is the first of the High Holidays or Yamim Noraim ("Days of Awe"), or Asseret Yemei Teshuva (The Ten Days of Repentance) which are days specifically set aside to focus on repentance that conclude with the holiday of Yom Kippur.

We Jews reflect on what we have done in the previous year and ask repentance for our sins. 

Against Antitrust Functionalism: Reconsidering China's Antimonopoly Law

Posted by D. Daniel Sokol

Salil Mehra, Temple University - James E. Beasley School of Law and Yanbei Meng, Renmin University of China have forthcoming Against Antitrust Functionalism: Reconsidering China's Antimonopoly Law.

ABSTRACT: China's new Antimonopoly Law (AML) has been predominantly greeted with doubt about its practical enforceability. In particular, numerous commentators have questioned how the AML can effect change in the government-backed anticompetitive restraints that it targets. However, these doubts are in part the product of a kind of "antitrust functionalism," in which it is assumed that antitrust goals are uniform across nations and that mechanisms for enforcement must also be universal. We argue that China's plan for dealing with so-called "administrative monopolies," especially local and regional trade barriers, may have surprise successes. In part, the AML provides the possibility of an internal free trade agreement - albeit one with exit options closed. By creating a regulatory space for discussion on internal barriers, the AML could help foster a cooperative solution to the "prisoner's dilemma" of beggar-thy-neighbor local and regional government action. The potential dynamic could resemble the self-enforcing nature of international trade liberalization. Additionally, the AML can help spark a "competition culture" that may lead to greater consideration of the anticompetitive effects of government action at all levels, including the central government. That is not to say that the AML will be perfect; however, it could well be a significant step in the right direction.

Waiting to Merge

Posted by D. Daniel Sokol

Eileen Fumagalli, IEFE, Bocconi University and Tore Nilssen, University of Oslo - Department of Economicshave a new paper titled Waiting to Merge.

ABSTRACT: We set up a sequential merger game to study a firm's incentives to pass up on an opportunity to merge with another firm. We find that such incentives may exist when there are efficiency gains from a merger, firms are of different sizes, there is an antitrust authority present to approve mergers, and there is a sufficient alignment of interests between the antitrust authority and the firms. We point out three distinct motives for not merging: the external-effect motive, the bargaining-power motive, and the pill-sweetening motive.

'Consumer Welfar' and Article 82 EC: Practice and Rhetoric

Posted by D. Daniel Sokol

Pinar Akman, ESRC Centre for Competition Policy and Norwich Law School, University of East Anglia has written on ‘Consumer Welfare’ and Article 82 EC: Practice and Rhetoric.

ABSTRACT: This paper questions whether the objective of Article 82EC is indeed enhancing ‘consumer welfare’ as suggested by the EC Commission when one examines the application of the provision thus far. It critically analyses the case law of the EC Commission and Courts to show that there is great dissonance between the practice and the policy declarations on the provision. When one considers the practice alongside the rhetoric, Article 82EC appears as a provision enforced without a clear standard of harm leading to doubts about the legitimacy of enforcement. The article suggests that without a properly defined standard applied in actual decisions by the EC Commission and upheld by the EC Courts, the modernisation of Article 82EC cannot succeed.

Econometrics and Antitrust Law - A Conceptual Clarification

Posted by D. Daniel Sokol

Nicolas Petit, University of Liege Law and Ermano Fegatilli, University of Liege Law discuss Econometrics and Antitrust Law - A Conceptual Clarification in their latest working paper.

ABSTRACT: The present paper reviews in a plain language and with only limited statistical formalization, the virtues of econometrics in the field of competition law. Following a brief introduction to the origins of econometrics, we explain first that econometrics provides assistance to decision-making in a variety of fields (merger control, abuse of dominance, etc.). Second, we show that econometrics also constitute a decision-reading instrument, which may assist competition agencies, courts, firms and their counsels in understanding the content of the law. The econometric models discussed in the paper are illustrated by examples coming from well-known legal cases. Our conclusion is that in light of the novel sophisticated issues arising in antitrust enforcement (damages estimation, etc.), the nascent "econometrics of competition law" exhibit promising features.

Exclusionary Abuses of Dominance - the European Commission’s Enforcement Priorities

Posted by D. Daniel Sokol

Neelie Kroes (DG Comp) speech on at Fordham's annual International Antitrust symposium on Exclusionary Abuses of Dominance - the European Commission’s Enforcement Priorities is now available.

CARICOM Competition Commission Active by Next Year?

Posted by D. Daniel Sokol

Maybe the CARICOM Competition will have some life to it after all.  Stewart Stephenson, one of the seven Commissioners on the CARICOM Competition Commission says that the Commission might become active by February 2009.

FTC Seeks Comments on Proposed Amendments to its Rules of Practice Regarding Adjudicative Proceedings

Posted by D. Daniel Sokol

According to a FTC press release:

The Federal Trade Commission today issued a Notice of Proposed Rulemaking (NPRM) seeking public comment on proposed rule revisions that would amend Parts 3 and 4 of the agency’s Rules of Practice, with the goal of further expediting its adjudicative proceedings, improving the quality of adjudicative decision-making, and clarifying the respective roles of the Administrative Law Judge (ALJ) and the Commission in Part 3 proceedings. The FTC currently is seeking public comment on the proposed amendments as part of the rulemaking process.

Separating Pro-Competitive from Anti-Competitive Loyalty Rebates: A Conceptual Framework

Posted by D. Daniel Sokol

Damien Geradin, Tilburg University - Tilburg Law and Economics Center (TILEC) and College of Europe  has produced a worthwhile read - Separating Pro-Competitive from Anti-Competitive Loyalty Rebates: A Conceptual Framework.

ABSTRACT:  In its submission to the recent OECD Roundtable on Bundled and Loyalty Discounts and Rebates (the "OECD Roundtable on rebates"), Korea observed that "loyalty discounts are getting growing attention both academically and practically" and that "this issue was now on top of the agendas of many seminars and workshops on competition law, with many papers devoted to the theme." It then explained that this trend was attributable to the fact that loyalty discounts has become an important marketing tool, which raised several competition issues in the process.

While discounts or rebates - this paper will generally refer to rebates - have been used by businesses for centuries to sell greater amounts of products to customers, it is true that the compatibility of rebates with competition law has become a particularly acute issue in recent years. There are several reasons for this. These last few years have witnessed several major court judgments in the European Union (the "EU") and the United States (the "US"), which have been abundantly commented upon, hence explaining the large number of papers and seminars devoted to the subject. But, more generally, the assessment of rebates seems to be one of the most unsettled areas of competition law.

In the EU, for instance, the decisional practice of the European Commission and the case-law of the Community courts have been harshly criticized as being unnecessarily strict, following a form-based approach that is poorly in line with economics. While these decisions have been sometimes misinterpreted, it is true that they were generally unhelpful in large part due to the fact they focused on the wrong questions. As a response to such criticisms (and more general criticisms about the manner in which Article 82 EC was implemented), the European Commission published in December 2005 a Discussion Paper, which promotes an effects-based approach to the assessment of rebates. While US courts have generally applied an effects-based approach to the assessment of rebates, the case-law is still unsettled, notably in the area of bundled rebates. This certainly led Korea to conclude its OECD submission by stating that "even in jurisdictions such as the US or the EU which have accumulated a considerable amount of enforcement experience regarding loyalty discounting often do not have a clear analysis method regarding this practice."

While this observation is in many ways true, there are, however, encouraging signs that EU and US law are converging, and will increasingly do so, around a set of sound legal and economic principles to assess guidelines. Both the EU and the US contributions to the recent OECD Roundtable on rebates emphasize the importance of relying on objective economic criteria for the assessment of rebates. While the views of the European Commission and the US antitrust agencies still diverge on some issues, there seems to be a consensus that a price-cost test should play an important role in screening rebates that can (i.e., are able to) foreclose a dominant firms' rivals to supply one or several customers. There is also a consensus that such tests should only be a component of a broader test that should also determine whether the rebates in question substantially foreclose the relevant market and, in such cases, whether the foreclosure effect can be compensated by efficiencies. While price-cost tests help determining whether the rebates granted can have the effect of foreclosing competitors because the dominant firm's customers cannot turn to alternative suppliers without incurring substantial switching costs, it should also be demonstrated that these customers represent a substantial share of the market to which equally efficient rivals can turn, depriving them of the possibility to profitably enter and/or expand. Moreover, both EU and US law recognize the importance of taking into account in the assessment process the various efficiencies that can be generated by loyalty rebates and the extent to which they can counterbalance foreclosure effects.

Against this background, this paper aims at providing a framework - based on sound legal and economic principles - designed to help competition authorities and courts to separate pro-competitive loyalty rebates from anti-competitive ones. It starts with the widely acknowledged view that in the vast majority of cases dominant firms grant rebates to their customers for legitimate reasons, i.e. not to exclude competitors but to engage in legitimate forms of price competition and to realize a variety of efficiencies, as discussed below. In fact, rebates are not only used by dominant firms, but also by firms without any market power and thus unable to exclude competitors. This paper also takes as a starting point the view - which is recognized in the vast majority of antitrust regimes - that the goal of competition law is not the protection of competitors, but the protection of competition. Hence, rebates that cause less efficient firms to lose market share should not be banned as they lack anti-competitive effects. As will be seen below, these rebates enhance consumer welfare as they ensure that customers are served by the most efficient firms and benefit from their more competitive offers.

Assessing the Efficacy of Structural Merger Remedies: Choosing between Theories of Harm?

Posted by D. Daniel Sokol

An interesting new paper comes from Stephen Davies and Matt Olczak, both of the University of East Anglia Competition Law Centre, titled Assessing the Efficacy of Structural Merger Remedies: Choosing between Theories of Harm?

ABSTRACT: Previous empirical assessments of the effectiveness of structural merger remedies have focused mainly on the subsequent viability of the divested assets. Here, we take a different approach by examining how competitive are the market structures which result from the divestments. We employ a tightly specified sample of markets in which the European Commission (EC) has imposed structural merger remedies. It has two key features: (i) it includes all mergers in which the EC appears to have seriously considered, simultaneously, the possibility of collective dominance, as well as single dominance; (ii) in a previous paper, for the same sample, we estimated a model which proved very successful in predicting the Commission's merger decisions, in terms of the market shares of the leading firms. The former allows us to explore the choices between alternative theories of harm, and the latter provides a yardstick for evaluating whether markets are competitive or not - at least in the eyes of the Commission.

Running the hypothetical post-remedy market shares through the model, we can predict whether the EC would have judged the markets concerned to be competitive, had they been the result of a merger rather than a remedy. We find that a significant proportion were not competitive in this sense. One explanation is that the EC has simply been inconsistent - using different criteria for assessing remedies from those for assessing the mergers in the first place. However, a more sympathetic - and in our opinion, more likely - explanation is that the Commission is severely constrained by the pre-merger market structures in many markets. We show that, typically, divestment remedies return the market to the same structure as existed before the proposed merger. Indeed, one can argue that any competition authority should never do more than this. Crucially, however, we find that this pre-merger structure is often itself not competitive. We also observe an analogous picture in a number of markets where the Commission chose not to intervene: while the post-merger structure was not competitive, nor was the pre-merger structure. In those cases, however, the Commission preferred the former to the latter. In effect, in both scenarios, the EC was faced with a no-win decision.

This immediately raises a follow-up question: why did the EC intervene for some, but not for others - given that in all these cases, some sort of anticompetitive structure would prevail? We show that, in this sample at least, the answer is often tied to the prospective rank of the merged firm post-merger. In particular, in those markets where the merged firm would not be the largest post-merger, we find a reluctance to intervene even where the resulting market structure is likely to be conducive to collective dominance. We explain this by a willingness to tolerate an outcome which may be conducive to tacit collusion if the alternative is the possibility of an enhanced position of single dominance by the market leader.

Finally, because the sample is confined to cases brought under the 'old' EC Merger Regulation, we go on to consider how, if at all, these conclusions require qualification following the 2004 revisions, which, amongst other things, made interventions for non-coordinated behaviour possible without requiring that the merged firm be a dominant market leader. Our main conclusions here are that the Commission appears to have been less inclined to intervene in general, but particularly for Collective Dominance (or 'coordinated effects' as it is now known in Europe as well as the US.) Moreover, perhaps contrary to expectation, where the merged firm is #2, the Commission has to date rarely made a unilateral effects decision and never made a coordinated effects decision.

The FTC on Small Business Competition Policy: Are Markets Open for Entrepreneurs?

Posted by D. Daniel Sokol

Chairman Kovacic of the FTC has a worthwhile read in his comments that were part of his testimony on Small Business Competition Policy: Are Markets Open for Entrepreneurs? 

United States Courts and the Optimal Deterrence of International Cartels: A Welfarist Perspective on Empagran

Posted by D. Daniel Sokol

Alvin Klevorick (Yale Law) discusses United States Courts and the Optimal Deterrence of International Cartels: A Welfarist Perspective on Empagran.

ABSTRACT: E. Hoffmann-La Roche Ltd. v. Empagran S.A. concerned a private antitrust suit for damages against a global vitamins cartel. The central issue in the litigation was whether foreign plaintiffs injured by the cartel's conduct abroad could bring suit in U.S. court, an issue that was ultimately resolved in the negative. We take a welfarist perspective on this issue and inquire whether optimal deterrence requires U.S. courts to take subject matter jurisdiction under U.S. law for claims such as those in Empagran. Our analysis considers, in particular, the arguments of various economist amici in favor of jurisdiction and arguments of the U.S. and foreign government amici against jurisdiction. We explain why the issue is difficult to resolve, and identify several economic concerns that the amici do not address, which may counsel against jurisdiction. We also analyze the legal standard enunciated by the Supreme Court and applied on remand by the D.C. Circuit, and we argue that its focus on independent harms and proximate causation is problematic and does not provide an adequate economic foundation for resolving the underlying legal issues.

Small Business Competition Policy: Are Markets Open for Entrepreneurs

Posted by D. Daniel Sokol

Jonathan Rubin (Patton Boggs) testified on behalf of the American Antitrust Institute before the United States House of Representatives, Committee on Small Business.  His testimony is available below.

Download jr_testimonyfinalbis3_1.pdf

Estimating Market Power with Economic Profits

Posted by D. Daniel Sokol

Kevin Kreitzman and Michael A. Williams (both of ERS Group) write on Estimating Market Power with Economic Profits.

ABSTRACT: A firm's market power is embodied in its cash flows. Economic profits, the excess return on investment over the cost of capital, can be measured using the discounted cash flow approach for firm valuation developed by Miller and Modigliani. The information required to provide a dynamic estimate of economic profits related to the operations of a firm in a given market is contained in its transaction records. When a firm's transaction records are unavailable, they can be derived, in part, by adjusting and recategorizing the publicly available information contained in its financial accounting records. Although accounting measures differ fundamentally from economic profits, the published accounting statements also contain transaction information since they are a consolidated summary of a firm's transaction records. The degree of a firm's market power can be measured by its economic profits and economic rate of return. Adjustments to the firm's economic profits may be required to remove sources of profit not associated with the exercise of market power, e.g., exogenous increases in the market value of its assets.

Navigating Scylla and Charybdis: Three Stages in the Journey to Effective Section 2 Enforcement

Posted by D. Daniel Sokol

Tom Barnett (DOJ Antitrust) spoke on Navigating Scylla and Charybdis: Three Stages in the Journey to Effective Section 2 Enforcement at Georgetown University Law Center on September 23, 2008.

Interview with Chairman Kovacic

Posted by D. Daniel Sokol

Concurrences, the online site for European competition policy has an interview with FTC Chairman Kovacic that is worth examining.

My favorite quote:

"In 1979, nobody envisioned that competition policy would be a concern beyond a relatively small number of countries with well established market economies."

Continuity and Change in the Supreme Court: Antitrust as a Case Study

Posted by D. Daniel Sokol

In what looks to be a an excellent event, the American Enterprise Institute's 2008 Gauer Distinguished Lecture will be given by the Honorable Douglas H. Ginsburg, U.S. Court of Appeals for the District of Columbia Circuit.  The lecture will be held on Tuesday, September 23, 2008 with the lecture titled "Continuity and Change in the Supreme Court: Antitrust as a Case Study."

Reject the Highmark/Blue Cross Merger

Posted by D. Daniel Sokol

David Balto provided testimony before the Pennsylvania Senate Banking and Insurance Committee to Reject the Highmark/Blue Cross Merger.

Tying as Price Discrimination in Antitrust Law

Posted by D. Daniel Sokol

Sahin Ardiyok of Bilgi University (Law) and Bilkent University (Law) has an analysis of Tying as Price Discrimination in Antitrust Law.

ABSTRACT: This paper focuses on the question of whether the task of distributing the welfare between producers and consumers is in the domain or jurisprudence of courts or antitrust agencies. Indeed, these foundations are far away from the understanding introduced by Chicago school when the matter in hand is about price discrimination. But contrary to this, public choice framework outlines the allocation of tasks about distributing the welfare by means of macro economic measures such as taxing. So it is paradoxical to accept certain kinds of price discrimination are illegal even if they were proved to increase efficiency and total welfare.

In this paper, I give the definition of price discrimination and tying by using economic approach. Types of tying practices which is not deemed to be price discrimination are also presented. In addition the case law about tying as price discrimination is a part of the study. And essentially, antitrust policy choices in order to distinguish tying arrangements which are efficient and social welfare practices are discussed.

Standard-Setting, Innovation Specialists, and Competition Policy

Posted by D. Daniel Sokol

Richard Schmalensee, Sloan School of Management, MIT, discusses Standard-Setting, Innovation Specialists, and Competition Policy in his latest working paper.

ABSTRACT: This paper investigates several competition policy questions related to standard-setting organizations (SSOs). Are compatibility standards agreed upon by competitors generally in the public interest? Should competition policy generally favor patent-holders who practice their patents against innovation specialists who do not? Should SSOs be encouraged - or even required - to conduct auctions among patent-holders before standards are set in order to determine post-standard royalty rates? Alternatively, should antitrust policy allow or encourage collective negotiation of royalty rates?