Antitrust & Competition Policy Blog

2008 Compass Lexecon Prize

Posted by D. Daniel Sokol

The winners of the 2008 Compass Lexecon Prize have been announced.  According to the press release:

The Compass Lexecon Prize Selection Committee is pleased to announce the winner of the second annual Compass Lexecon Prize. The Compass Lexecon Prize is awarded to a published or forthcoming paper in a peer-reviewed journal that, in the opinion of the Selection Committee, makes the most significant contribution to the understanding and implementation of competition policy. The 2008 winner, whose authors will share $10,000, is:

Ilya Segal of Stanford University and Michael Whinston of Northwestern University, for their paper, published in the American Economic Review, entitled “Antitrust in Innovative Industries”

“Antitrust in Innovative Industries,” by Ilya Segal and Michael Whinston, is a seminal paper that provides, for the first time, an analytic framework for studying the static and dynamic impacts of antitrust policy towards innovative industries in an integrated fashion. The framework developed by Segal and Whinston fosters coherent approaches to the age-old and much debated question whether competitive concerns about static efficiency should give way to the perceived needs of dynamic entry and investment. The authors introduce elegant representations of antitrust policy into growth models where successful entrants become continuing incumbents that must in turn grapple with new generations of innovative entrants. Here, the effects of antitrust policy on innovation incentives result from the policy’s net impact on an innovator's profits both when it is a new entrant and when it is subsequently an incumbent.

FTC For Kids

Posted by D. Daniel Sokol

The FTC has created a special website for kids.

Competition Can Harm Consumers

Posted by D. Daniel Sokol

Simon Cowan, University of Oxford - Department of Economics and Xiangkang Yin, La Trobe University - Department of Economics and Finance suggest that Competition Can Harm Consumers.

ABSTRACT: Duopolists selling differentiated products can generate less consumer surplus than a monopoly selling one of the products. In a Hotelling-type model where a monopoly supplies more than half of potential consumers, but not all, entry by a rival leads to a duopoly price that is higher than the monopoly price. Consumers in aggregate will be made worse off by such entry when the effect of the price increase outweighs the benefit of extra variety. When consumers have continuous demand functions and firms use two-part tariffs, duopoly can also result in lower aggregate consumer surplus than monopoly.

Competition Commission Innagurated in the Gambia

Posted by D. Daniel Sokol

The Gambia has inaugurated its Competition Commission.  Welcome to the world of competition policy and remember which blog provides the greatest coverage of antitrust scholarship in the world.

Schumpeterian Competition and Antitrust

Posted by D. Daniel Sokol

Herb Hovenkamp,University of Iowa College of Law, has a wonderful new piece (as so many of Herb's are) on Schumpeterian Competition and Antitrust.

ABSTRACT: Joseph Schumpeter's vision of competition saw it as a destructive process in which effort, assets and fortunes were continuously destroyed by innovation. One possible implication is that antitrust's attention on short-run price and output issues is myopic: what seems at first glance to be a monopolistic exclusionary practice might really be an innovative enterprise with enormous payoffs in the long run. While this may be the case, three qualifications are critical. First, one must not confuse the prospect of innovation with the scope of the intellectual property laws; their excesses and special interest capture cast serious doubt on the proposition that they are any better at fostering innovation than antitrust is. Second, for many antitrust practices positive innovation effects are difficult to foresee even on Schumpeter's own expansive and nonmathematical terms. Third, many antitrust violations serve to restrain rather than promote innovation.

Innocent Until Proven Guilty -- Or Not: An Economic Review of Market Power and Price Fixing Allegations for Text Messaging Services

Posted by D. Daniel Sokol

Christian Dippon,(NERA) has written Innocent Until Proven Guilty -- Or Not: An Economic Review of Market Power and Price Fixing Allegations for Text Messaging Services.

ABSTRACT: A fundamental shift in the US telecommunications industry's legal environment is underway. As US regulators take an increasingly hands-off approach to telecommunications matters, legal and policy disputes have moved into state and federal courts, typically in the form of consumer action lawsuits. Major litigation already surrounds issues like early termination fees (ETFs). Initially only levied against the wireless industry, claiming that wireless term contracts and the associated ETFs were unfair and unreasonable, similar lawsuits have now been filed against providers of other communication services, such as satellite TV and broadband Internet service. Consumer class action lawsuits also surround Apple's iPhone, ranging from complaints about the life of the phone's battery to allegations that the device should be portable from AT&T Mobile's network to other competing networks.

Alleged price fixing in mobile text messaging (SMS) is emerging as the next wave in telecommunications litigation. Last month, the Chairman of the Subcommittee on Antitrust, Competition Policy, and Consumer Rights of the US Senate's Judiciary Committee, Senator Herb Kohl, wrote to the CEOs of the four largest US mobile carriers demanding an explanation for price increases for mobile text messaging. Within a few weeks of Senator Kohl's letter, more than 20 consumer class action lawsuits had been filed against firms in the US wireless industry, alleging collusion and price fixing for text messaging services.

In this increasingly litigious environment, it is critical to look at the issues swirling around the telecommunications industry from an economic perspective, and evaluate them using rigorous economics. In this paper, NERA Vice President Christian Dippon takes a hard look at the economics of the text messaging issue. Based on information publicly available through mid-October 2008, the paper concludes that the claims of price fixing among the leading mobile carriers are incomplete, counterfactual, and unfounded. Competition in the US wireless industry seems to be healthy, and carriers compete on all aspects of their service offerings, including text messaging.

Antitrust and Competition Center in Chile

Posted by D. Daniel Sokol

Though already in existence for three years, let me introduce to a worldwide readership the Antitrust and Competition Center of the Universidad Catolica de Chile.  It is the only center of its kind in Chile and in its brief existence it has become the leading academic institution about this topic in the country. The Center organizes several activities: conferences, courses, publications and research about antitrust.  It recently signed an agreement with the Fiscalía (the antitrust agency of Chile) to undertake joint research work on competition advocacy.  Last Friday they received a delegation from the OECD to talk about the state of antitrust in Chile.  Given the antitrust talent in Chile and at the Center, I hope that our readers take an interest in the Center's future development.

Some Potential Issues in Delta/Northwestern To Consider

Posted by Darren Bush

Can someone help me out here?   There might be compelling reasons for the merger.  Don’t get me wrong.  The most compelling case I have heard is from a former student of mine.  Kristina McQuaid, Delta & Northwest File for Bankruptcy: Is It Time To Ground A Major Airline?, 29 Hous. J. Int'l L. 663 (2007).The article is quite prophetic.

But when I testified in Senate Judiciary with the CEOs, they pretty much swore no one was going to get laid off, that no hubs would be closed, and that the efficiencies gained would be derived from fuel cost savings at a time when jet fuel prices were quite high (you know, unlike now). I’m not really sure how those efficiencies will translate in a world where jet fuel prices are no longer off the charts.

The press release states that there is competition on the ”vast majority” of nonstop routes?  So allowing a merger in which there are routes in which there is no competition is totally fine because there aren’t so many of them?   By the same token, suppose two firms offer 100 different products, overlapping in many of them, but only creating a 2 to 1 scenario in only four markets. 

Should we ignore the anticompetitive effects in those markets if someone, somewhere is better off?  That isn’t what Philadelphia National Bank says. The DOJ’s press release in Northwest/Delta reads in stark contrast to its United/U.S. Airways press release.  The United/U.S. Airways press release demonstrated a much more sophisticated understanding of the market, being far less cursory in the analysis offered to the public.   Which leads me to wonder what types of pressure, either political or economic, might have been placed on our stalwart antitrust enforcement officials (by which I mean the staff).

The largest problem is that efficiencies now appears as a trump card in mergers.  No matter what the Guidelines state, it appears that so long as you have efficiencies somewhere, it doesn’t matter if there is an anticompetitive effect somewhere.  Good for some consumers and to heck with the rest.  I’m used to that mindset in Section 1 rule of reason cases, but find it disgruntling in a Section 7 context.

EU Competition Enforcement And Human Rights

Posted by D. Daniel Sokol

In a new book Arianna Andreangeli, Liverpool Law School, University of Liverpool brings together two topics that generally do not get much discussion among competition policy types in her book EU Competition Enforcement And Human Rights.

BOOK ABSTRACT: This book discusses the procedural rights enjoyed by those being investigated under Articles 81 and 82 of the EC Treaty and of the Merger Control Regulation and their right to challenge the Commission's decision in the Community Courts. It further assesses how their rights to ‘due process’ in competition proceedings before the European Commission comply with the notion of ‘administrative fairness’ enshrined in the European Convention on Human Rights, in accordance with the case law of the European Court of Human Rights.

DOJ Gives Blessing to Delta/Northwestern Merger

Posted by D. Daniel Sokol

DOJ has released a Statement of the Department of Justice’s Antitrust Division on Its Decision to Close Its Investigation of the Merger of Delta Air Lines Inc. and Northwest Airlines Corporation.  In short, the merger is kosher.  As the release states:

After a thorough, six-month investigation, during which the Division obtained extensive information from a wide range of market participants –including the companies, other airlines, corporate customers and travel agents –the Division has determined that the proposed merger between Delta and Northwest is likely to produce substantial and credible efficiencies that will benefit U.S. consumers and is not likely to substantially lessen competition.

The two airlines currently compete with a number of other legacy and low cost airlines in the provision of scheduled air passenger service on the vast majority of nonstop and connecting routes where they compete with each other. In addition, the merger likely will result in efficiencies such as cost savings in airport operations, information technology, supply chain economics, and fleet optimization that will benefit consumers. Consumers are also likely to benefit from improved service made possible by combining under single ownership the complementary aspects of the airlines’ networks.

Data Security Handbook

Posted by D. Daniel Sokol

The ABA Antitrust Section has produced a Data Security Handbook.

ABSTRACT: The purpose of the Data Security Handbook is to provide legal practitioners and information technology specialists with a concise, practical guide that summarizes common information security vulnerabilities and how to manage them; legal and industry information security safeguard requirements and recommended practices; the legal obligations that apply when an organization has incurred a data breach; factors that contribute to a compliant information security program; and potential legal theories in actions involving the alleged misuse or compromise of personal information.

The Lawful Acquisition and Exercise of Monopoly Power and its Implications for the Objectives of Antitrust

Posted by D. Daniel Sokol

David Evans of UCL Law and LECG and Keith Hylton of BU Law School and provide a fascinating examination of The Lawful Acquisition and Exercise of Monopoly Power and its Implications for the Objectives of Antitrust.

ABSTRACT: The antitrust laws of the United States have, from their inception, allowed firms to acquire significant market power, to charge prices that reflect that market power, and to enjoy supra-competitive returns. This article shows that this policy, which was established by the U.S. Congress and affirmed repeatedly by the U.S. courts, reflects a tradeoff between the dynamic benefits that society realizes from allowing firms to secure significant rewards, including monopoly profits, from making risky investments and engaging in innovation; and the static costs that society incurs when firms with significant market power raise price and curtail output. That tradeoff results in antitrust laws that allow competition in the market and for the market, even if that rivalry results in a single firm emerging as a monopoly, but that prevent firms from engaging in practices that go out of bounds. The antitrust laws ultimately regulate the "boundaries" of the "game of competition." Three implications follow. First, the antitrust laws and intellectual property laws are based on similar policy tradeoffs between static and dynamic effects. Second, the antitrust rules have, all along, been based on this tradeoff and not on the effects of business practices on static consumer welfare in relevant antitrust markets. Third, one unintended consequence of the increased role of economics in antitrust analysis is to overemphasize static considerations which the almost the sole focus of the economics literature that courts and competition authorities consider.

Optimal Legal Standards for Refusals to License IP: An Welfare Based Analysis

Posted by D. Daniel Sokol

Yannis S. Katsoulacos, Professor of Economics at the Department of Economic Science of the Athens University of Economics and Business has a forthcoming article on Optimal Legal Standards for Refusals to License IP: An Welfare Based Analysis.

ABSTRACT: This article adopts a welfare-based, in contrast to a decision-theoretic (DT), approach to the choice of legal standards for refusals to license intellectual property. It is shown that if the presumption of legality is not strong, as was the European Commission's point of view in the Microsoft interoperability information case, DT considerations are not helpful for deciding which type of standard is superior. Indeed, a "low false-acquittals" rule, such as the Microsoft rule, may be equally effective as a "low false-convictions" rule, such as the "exceptional circumstances" rule, in reducing the costs of decision errors. However, it is also shown that the latter rule may well be welfare superior to the former rule because of its welfare-improving deterrence effects. Further, it is shown that when the presumption of legality is strong, both of these rules are likely to be welfare-inferior to per se legality (the standard chosen in Xerox), even though the "exceptional circumstances" test may be superior in decision error terms.

State Aid: What is Possible Under EU Rules – An Overview

Posted by D. Daniel Sokol

The EU has posted a memo on its website State Aid: What is Possible Under EU Rules – An Overview.

State Antitrust Enforcement Handbook, Second Edition

Posted by D. Daniel Sokol

The prolific ABA Antitrust Section has published the State Antitrust Enforcement Handbook, Second Edition.

ABSTRACT: State antitrust law and state attorneys general have become increasingly prominent parts of the antitrust landscape. State Antitrust Enforcement Handbook, Second Edition focuses on how state attorneys general exercise their rights to investigate antitrust concerns and to secure remedies for antitrust violations.

Auction Design and Tacit Collusion in FCC Spectrum Auctions

Posted by D. Daniel Sokol

Patrick Bajari (University of Minnesota - Department of Economics) and Jungwon Yeo (University of Minnesota - Department of Economics graduate student) have written on Auction Design and Tacit Collusion in FCC Spectrum Auctions.

ABSTRACT: The Federal Communications Commission (FCC) has used auctions to award spectrum since 1994. During this time period, the FCC has experimented with a variety of auctions rules including click box bidding and anonymous bidding. These rule changes make the actions of bidders less visible during the auction and also limit the set of bids which can be submitted by a bidder during a particular round. Economic theory suggests that tacit collusion may be more difficult as a result. We examine this proposition using data from 4 auctions: the PCS C Block, Auction 35, the Advanced Wireless Service auction and the 700 Mhz auction. We examine the frequency of jump bids, retaliatory bids and straightforward bids across these auctions. While this simple descriptive exercise has a number of limitations, the data suggests that these rule changes did limit firms' ability to tacitly collude.

Vertical Integration, Raising Rivals' Costs and Upstream Collusion

Posted by D. Daniel Sokol

Hans-Theo Normann (University of London - Department of Economics) writes on Vertical Integration, Raising Rivals' Costs and Upstream Collusion in his latest working paper.

ABSTRACT: This paper analyzes the impact vertical integration has on upstream collusion when the price of the input is linear. As a first step, the paper derives the collusive equilibrium that requires the lowest discount factor in the infinitely repeated game when one firm is vertically integrated. It turns out this is the joint-profit maximum of the colluding firms. The discount factor needed to sustain this equilibrium is then shown to be unambiguously lower than the one needed for collusion in the separated industry. While the previous literature has found it difficult to reconcile raising-rivals-costs strategies following a vertical merger with equilibrium behavior in the static game, they are subgame perfect in the repeated game studied here.

Fighting Cartels in Public Procurement

Posted by D. Daniel Sokol

The OECD has released a policy brief on Fighting Cartels in Public Procurement.

ABSTRACT: Governments devote a large share of taxpayers’ money to public procurement – purchasing goods and services from road building to school textbooks. But how can they be sure that they are getting good value for money, and that companies seeking public contracts are not conspiring to undermine the principle of competitive bidding?

Messenger Model Handbook

Posted by D. Daniel Sokol

The ABA Antitrust Section has published the Messenger Model Handbook.

ABSTRACT: This handbook is intended to provide guidance on the legal analysis applied to messenger models utilized by health care provider networks when they contract with health care payors. It provides the necessary predicate for understanding these issues by exploring the relevant history of managed care in the United States, trends in the formation of provider networks and their negotiations with managed care, and the genesis and evolution of messenger models themselves.

The DOJ's Single-Firm Conduct Report: Promoting Consumer Welfare Through Clearer Standards for Section 2 of the Sherman Act

Posted by D. Daniel Sokol

Thomas O. Barnett and Hill B. Wellford of DOJ advocate for greater certainty in Sherman Section 2 in their support of the DOJ released Single Firm Conduct report.  Their article is The DOJ's Single-Firm Conduct Report: Promoting Consumer Welfare Through Clearer Standards for Section 2 of the Sherman Act.

ABSTRACT: On September 8, 2008, the Department of Justice (the "Department") issued a 213-page report entitled Competition and Monopoly: Single-Firm Conduct Under Section 2 of the Sherman Act (the "Single-Firm Conduct Report" or "Report").(1) The Report examines whether and when certain types of single-firm conduct may violate Section 2 of the Sherman Act by harming competition and consumer welfare. The Report serves three purposes. First, it summarizes and synthesizes views expressed at the joint Department and Federal Trade Commission ("FTC") hearings, recent legal and economic scholarship, and court decisions regarding single-firm conduct. Second, it provides transparency by explaining the Department's enforcement views in this important area of the law. And third, it makes progress toward the goal of developing sound, clear, objective, effective, and administrable standards for Section 2 analysis. Those standards best promote competition and consumer welfare–the goal of the antitrust laws–because they better identify and prohibit conduct that harms the competitive process and avoid interfering with the beneficial competition that drives innovation and economic growth.

The Single-Firm Conduct Report has been greeted with much discussion. The Department offers this article to add to the conversation by describing the background of the report, setting forth some of its key conclusions, and addressing some of the public commentary on the report. What this article does not attempt to do, however, is supplement or substitute for the report itself–the report stands on its own, and the reader is invited to review the report in its entirety or to review at least the report's six-page executive summary.