Antitrust & Competition Policy Blog

Innovation and Competition in Generation and Retail Power Markets

Posted by D. Daniel Sokol

Elizabeth Hooper and Catherine Waddams (both UEA) describe Innovation and Competition in Generation and Retail Power Markets.

Competition within Strategic Networks

Posted by D. Daniel Sokol

Heike Nolte, University of Puget Sound, University of Applied Sciences Emden-Leer addresses Competition within Strategic Networks.

ABSTRACT: Strategic networks originate from the access to additional resources without purchasing them. But don’t these kinds of cooperation imply risks for the involved firms, esp. for those to whose resources cooperating firms have access? This article aims to show the limitations of integration of resources into a strategic network for competition reasons.

This topic has gained importance due to the fact that revelation of internal business information is directly related to strategic networks and thereby might endanger the sustainability of the competitive position of an enterprise. Moreover, it is to question if each partner is interested in revealing its resources to the same extent. The analysis of this problem is based on the resource oriented approach of strategic management as well as on considerations of transaction costs. The issue is presented in three hypothesises which lead to the “Dilemma of Strategic Networks.”

Ethics, Disclosure and Economists

Posted by D. Daniel Sokol

The NY Times has an interesting story about the American Economics Association creating an ethics code that would include disclosure of conflicts of interest.

For some time, I have suggested an ethics guide of sorts for antitrust.  If the DOJ and/or FTC have a hearing and invite someone to testify, that person should disclose any party whom they are billing or will bill for their testimony.  The Antitrust Law Journal requires disclosure if you have represented a party in an article that you write or if you have any other financial interests at stake in the article.  The agencies should do the same.

Solving the Drug Settlement Problem: The Legislative Approach

Posted by D. Daniel Sokol

Michael A. Carrier, Rutgers, The State University of New Jersey - School of Law-Camden suggests Solving the Drug Settlement Problem: The Legislative Approach.

ABSTRACT: This short symposium article examines proposed congressional legislation addressing settlements in the pharmaceutical industry. Brand-name drug companies have paid generic firms to settle patent litigation and delay entering the market. In recent years, appellate courts have blessed these agreements. And as the Supreme Court has sat on the sidelines, it is becoming ever more apparent that Congress will play a crucial role in addressing this problem.

This article explores the three pieces of legislation that have been introduced to address this problem.

The first targets payments from brands to generics in exchange for delayed entry into the market. A strong version of such "reverse-payments" legislation would reach the most egregiously anticompetitive agreements, those in which the brand pays millions (if not hundreds of millions) of dollars to the generic to delay entering the market.

The second addresses the introduction of authorized generics within the exclusivity period reserved for the first generic that challenges a brand firm’s patent. Prohibiting authorized generics during the exclusivity period would prevent brands from employing this tool to block patent challenges by generics.

The third expands the exclusivity period from the first firm to challenge the patent to embrace other parties. Such a change would recalibrate Hatch Waxman to encourage market entry and the litigation - rather than settlement - of patent challenges. Although it is not perfect, it would encourage patent challenges more than any other potential mechanism.

In sum, the three bills offer discrete, non-overlapping attempts to address some of the most glaring deficiencies with drug patent settlements today. To be sure, factors of political economy make it unlikely that all three bills would be enacted. Each nonetheless offers benefits in addressing a crucial antitrust problem with dramatic consequences for the U.S. health-care system.

Competition and Consumer Protection: Strange Bedfellows or Best Friends?

Posted by D. Daniel Sokol

Julie Brill (FTC) reviews the different ways in which competition and consumer protection principles have interacted in cases before the FTC and observes how the FTC is poised to deal with both sets of principles in the context of Section 5 litigation and consumer privacy issues in Competition and Consumer Protection: Strange Bedfellows or Best Friends?

Exclusionary Minimum Resale Price Maintenance

Posted by D. Daniel Sokol

John Asker (NYU - Stern School of Business) and Heski Bar-Isaacz (NYU - Stern School of Business) discuss Exclusionary Minimum Resale Price Maintenance.

ABSTRACT:An upstream manufacturer can use minimum retail price maintenance

(RPM) to exclude potential competitors.  RPM lets the incumbent manufacturer transfer profits to retailers.  If entry is accommodated, upstream competition leads to fierce down- stream competition and the breakdown of RPM.  Hence, via RPM, retailers internalize the effect of accommodating entry on the incumbent's profits.  Retailers may prefer not to accommodate entry; and, if entry requires downstream accommodation, entry can be deterred.  We investigate when an incumbent would prefer to exclude, rather than collude with, the entrant and the effect of a retailer cartel.    We also consider the effect of imperfect competition.  Empirical and policy implications are discussed.

Standardization of Standard-Form Contracts: Competition and Contract Implications

Posted by D. Daniel Sokol

Mark Patterson (Fordham Law) has written on Standardization of Standard-Form Contracts: Competition and Contract Implications. 

Standard-form contracts are a common feature of commercial relationships because they offer the advantage of lower transaction costs. This advantage of standard contracts is increased when there is a second layer of standardization under which multiple firms agree on a standard contract. Trade associations and similar entities often effect standardization of this kind through collective agreement on a standard contract, sometimes under the aegis of state actors. Multifirm contract standardization can provide not only the usual transaction-cost advantages of standard-form contracts, but also increased competition among firms, because a standard contract makes comparison among firms’ offerings easier. But standardization among firms also eliminates competition on the standardized standardization occurs and discussing the implications of different means of negotiation. Third, the Article considers the possibilities both of voluntary adoption of contracts and of adoption incentives created by private organizations and by the state. The Article then draws on these discussions to suggest some analytical approaches to contract standardization.

Refusal to License Intellectual Property Rights Under Article 82 EC in Light of Standardization Context

Posted by D. Daniel Sokol

Liguo Zhang, University of Helsinki - IPR University Center explores Refusal to License Intellectual Property Rights Under Article 82 EC in Light of Standardization Context.

ABSTRACT: This paper examines whether the current EU competition law regarding refusal to license intellectual property rights can effectively deal with access to industry common standards that may embrace proprietary intellectual property rights. It finds even though intellectual property rights as such do not confer dominant position to their owners in the market, industry standards that embrace technologies covered by IPRs may add substantial value to these IPRs. The combination of industry standards and IPRs may create a dominant position in the market. The paper suggests that the approach based on the complementary interaction between intellectual property law and competition law be introduced to address the refusal to license IPRs problems in terms of industry standards, especially the over-exploiting intellectual property should be taken into account when to determine the existence of abuse of dominant position.

Counterfactual Tests in Competition Law

Posted by D. Daniel Sokol

Cento Veljanovski, Case Associates, Institute of Economic Affairs, Centre for Regulation and Market Analysis (CRMA) discusses Counterfactual Tests in Competition Law.

ABSTRACT: This article looks at the growing use of the counterfactual approach in European and UK competition laws. The term counterfactual has not been a feature of European competition law, with the exception of merger control, to date. However, with the move to an effects-based approach, counterfactuals are being used occasionally, hesitantly and with mixed results. The article examines the use of counterfactuals in 'behavioural' competition law investigations based on a review of UK and EC competition guidelines, decisions, and several leading UK cases.

The Capper-Volstead Act, Agricultural Cooperatives, and Antitrust Immunity

Posted by D. Daniel Sokol

Christine Varney (DOJ) reviews the history of the immunity granted to agricultural cooperatives, the policies behind it, and recent private suits challenging cooperatives' conduct in The Capper-Volstead Act, Agricultural Cooperatives, and Antitrust Immunity.

A Retrospective Analysis of the Clinical Quality Effects of the Acquisition of Highland Park Hospital by Evanston Northwestern Healthcare

Posted by D. Daniel Sokol

David J. Balan, U.S. Federal Trade Commission and Patrick Romano, University of California, Davis Division of General Medicine provide A Retrospective Analysis of the Clinical Quality Effects of the Acquisition of Highland Park Hospital by Evanston Northwestern Healthcare.

ABSTRACT: In 2004, the Federal Trade Commission brought legal action retrospectively challenging the 2000 acquisition of Highland Park Hospital by Evanston Northwestern Healthcare in Evanston, Illinois. A major issue in the case was whether the merger had resulted in improved clinical quality at Highland Park. In this paper, we report the findings of our analysis of that issue. We examined numerous quantitative measures of clinical quality and found little evidence that the merger improved quality. We also describe the conceptual framework in which we evaluated the case-specific evidence, as well as the applicability of that framework to the prospective analysis of unconsummated hospital mergers.

Collusive and Exclusive Settlements of Intellectual Property Litigation

Posted by D. Daniel Sokol

C. Scott Hemphill, Columbia University - Law School analyzes Collusive and Exclusive Settlements of Intellectual Property Litigation.

ABSTRACT: This essay considers antitrust objections to recent settlements of intellectual property litigation. Part I examines the Google Book Search settlement, which resolves a copyright dispute between Google and a class of authors and publishers, including the creators of so-called orphan works. It focuses on one term of the agreement, the license granted to Google to distribute orphan works. Settlement opponents have objected on the ground that rival distributors will find it difficult to secure similar licenses. Proponents, for their part, defend on the ground that “one is better than none” - that this joint venture raises welfare compared to a world without the settlement. Part I evaluates these arguments and explains why neither is a correct approach to the antitrust inquiry.

The debate to this point has assumed that antitrust objections are relevant to the approval of this class-action settlement. As Part I also demonstrates, that premise is doubtful. Under the applicable law, the district judge must determine whether the settlement is “fair, reasonable, and adequate” for class members, not consumers. Even accepting arguendo that the settlement raises the cost of future entry, approval is appropriate if, as seems likely, this effect does no harm to authors and publishers.

Part II considers patent suits in which a brand-name drug maker seeks to prevent entry by a competing generic firm. In some cases, the brand-name firm makes a large payment to the generic firm to induce settlement and delay generic entry. Some courts considering antitrust objections to these settlements have adopted a rule of effective per se legality. As Part II explains, such a rule overstates the exclusionary force of a patent, ignores precedent that encourages judicial tests of patents, and leads to absurd results - for example, by removing the difference between strong and weak patents, since either can delay competitive entry until patent expiration, provided the payment is large enough.

The Role of Competition and State Aid Policy in Financial and Monetary Law

Posted by D. Daniel Sokol

Philip Marsden (BIICL) and Ioannis Kokkoris (University of Redding - Law) describe The Role of Competition and State Aid Policy in Financial and Monetary Law. 

ABSTRACT: During the financial crisis, companies and lenders found themselves in distressed situations. Competition authorities across the globe had to deal with controversial issues such as the application of the ‘failing firm’ defence in merger transactions as well as assessment of emergency aid granted by states. This article considers competition policy in periods of crisis, in particular the failing firm defence in merger control and its state aid policy.

MARKET DELINEATION AND MERGER SIMULATION: A PROPOSED METHODOLOGY WITH AN APPLICATION TO THE ARGENTINE BISCUIT MARKET

Posted by D. Daniel Sokol

Germán Coloma (Universidad CEMA - Econ) analyzes MARKET DELINEATION AND MERGER SIMULATION: A PROPOSED METHODOLOGY WITH AN APPLICATION TO THE ARGENTINE BISCUIT MARKET.

ABSTRACT: This paper develops a methodology for estimating demand systems, calculating critical elasticities to be used in market delineation, and simulating the unilateral effects of horizontal mergers. The whole method is based on the use of estimated long-run price elasticities, and it is essentially the same when used to define relevant markets and when to simulate mergers. The paper also includes an empirical application of the method, which relies on data from the Argentine biscuit market.

THE ANTITRUST CONSUMER WELFARE PARADOX

Posted by D. Daniel Sokol

Barak Orbach (Arizona - Law) has posted the very interesting THE ANTITRUST CONSUMER WELFARE PARADOX.

ABSTRACT: “Consumer welfare” is the only articulated goal of antitrust law in the United States. It became the governing standard following the 1978 publication of Robert Bork's The Antitrust Paradox. The consumer welfare standard has been instrumental to the implementation and enforcement of antitrust laws. Courts believe they understand this standard, although they do not bother to analyze it. Scholars hold various views about the desirable interpretations of the standard and they selectively use random judicial statements to substantiate opposite views.

This article introduces the antitrust consumer welfare paradox: it shows that, under all present interpretations of the term “consumer welfare,” there are several sets of circumstances in which the application of antitrust laws may hurt consumers and reduce total social welfare.

This article shows that, when Bork used the term “consumer welfare,” he obscured basic concepts in economics. This article clarifies that the antitrust methodology permits only surplus analysis and does not accommodate welfare analysis. It explains the conceptual differences between the terms “surplus” and “welfare” and the relevant implications. This article further explains the differences between two other competing standards—“consumer surplus” and “total surplus”—that presently serve as proposed interpretations for the term “consumer welfare.” Each interpretation has some limitations and the necessary analytical progress calls first for conceptual clarity. This article argues that whatever good ends the “consumer welfare” phrase may have once served, antitrust law should now lay it to rest.

A Brief Introduction to Competition Concerns in 'Pay-for-Delay' Settlement Agreements Between Brand-Name and Generic Drug Companies

Posted by D. Daniel Sokol

Rudolph J.R. Peritz, New York Law School describes A Brief Introduction to Competition Concerns in 'Pay-for-Delay' Settlement Agreements Between Brand-Name and Generic Drug Companies.

ABSTRACT: Antitrust authorities in both the United States and Europe have expressed deep concern over settlements of antitrust cases in the pharmaceutical sector, settlements involving “reverse payments” from plaintiffs to defendants, large sums paid by branded pharmaceutical companies to generic competitors in exchange for promises to stay off the market. Such “pay-for-delay” settlements have proliferated in the United States since Federal Circuit Courts of Appeals have found them unproblematic despite the Federal Trade Commission’s persistently strong position that they violate the antitrust laws.

These cases arise at the intersection of three statutory regimes seeking to promote innovation, three clusters of doctrine and policy that have interacted only to reach impasse: the Patent Act, the 1984 amendment to the Food, Drug, and Cosmetic Act, and finally the Sherman Anti-Trust Act. Antitrust is a late comer to the fierce competition over patented drugs, competition that permeates the approval process in the Food & Drug Administration [the FDA], competition that is restrained by these pay-for-delay settlement agreements. To set the stage, we begin with the Patent Act and its relationship to the FDA approval process. The story of pay-for-delay settlements then proceeds to the settlement agreements and their antitrust implications.

We conclude that the best solution in these antitrust cases would be adoption of the FTC’s approach of presumptive illegality. Together with an amendment proposed to fix the food and drug act, the presumptive illegality of pay-for-delay settlements under the antitrust laws would make the market for pharmaceuticals more price competitive, open weak patents to serious challenge, and as a result save consumers billions of dollars annually without taking from branded drug companies legitimately earned incentives to engage in research and development.

An empirical analysis of the counterfactual: a merger and divestiture in the Australian cigarette industry

Posted by D. Daniel Sokol

Vivienne Pham and David Prentice, La Trobe University describe An empirical analysis of the counterfactual: a merger and divestiture in the Australian cigarette industry.

ABSTRACT: In this paper we empirically analyse two counterfactual situations facing an anti-trust authority following the merger of two of the largest international cigarette companies. First we estimate a nested logit model of demand for cigarettes. The implied elasticity of demand for smoking and implied marginal costs are both broadly consistent with the limited independent estimates available. We then use the model to simulate the proposed merger and the partial divestiture that was accepted by the Australian anti-trust authority. A comparison of the relative price changes predicted by the divestiture simulation with the actual post-divestiture price changes shows the model successfully anticipated the behaviour of the divested brands. This suggests structural econometric analysis using a nested logit may be usefully utilised by anti-trust authorities to assess the welfare implications of proposed mergers and partial divestitures.

Predation in Off-Patent Drug Markets

Posted by D. Daniel Sokol

Laurent Granier (GATE Lyon Saint-Etienne - Groupe d'analyse et de théorie économique - CNRS : UMR5824 - Université Lumière - Lyon II - Ecole Normale Supérieure Lettres et Sciences Humaines) and Sébastien Trinquard (UNOCAM - Union nationale des organismes d'assurance maladie complémentaire - UNOCAM) discuss Predation in Off-Patent Drug Markets.

ABSTRACT: In 2009, Sanofi-Aventis, whose generic subsidiary is Winthrop, merges with the generic firm, Zentiva. This paper fills the gap in the theoretical literature concerning mergers in pharmaceutical markets. To prevent generic firms from increasing their market share, some brand-name firms produce generics themselves, called pseudo- generics. We develop a Cournot duopoly model by considering the pseudo-generics production as a mergers' catalyst. We show that a brand-name company always has an incentive to purchase its competitor. The key insight of this paper is that the brand-name laboratory can increase its merger gain by producing pseudo-generics beforehand. In some cases, pseudo-generics would not otherwise be produced and this production is then a predatory strategy.

Alfred E. Kahn 1917-2010

Posted by D. Daniel Sokol

It is with great sadness that I post on the passing of one of the greatest economists and public policy experts of the 20th Century.  Alfred E. Kahn, professor emeritus of Cornell dided of cancer yesterday.  He was 93.  The Cornell press release is available here. 

A blurb from the press release on Kahn's policy work:

In 1974, he took a leave from the university when he was appointed by New York Gov. Malcolm Wilson to chair the New York Public Service Commission, which was responsible for the regulation of the electric, gas, telephone and water companies. He was subsequently reappointed to the PSC by Gov. Hugh Carey.

While chairing the CAB in 1977-78, Kahn not only became known as the "father of deregulation" but also created a sensation with his campaign to eliminate "'bureaucratese' or gobbledygook" at the CAB, according to Robert Frank, the Henrietta Johnson Louis Professor of Management at Cornell's Johnson School and a colleague of Kahn. The Washington Post printed a copy of Kahn's memo calling for simpler language and ran an editorial, "The Sayings of Chairman Kahn," a reference to the then-topical Sayings of Chairman Mao. According to Frank, Kahn was subsequently nominated for the presidency by a newspaper in Kansas and for the Nobel Prize in an editorial in the Singapore Strait Times and was appointed to the Usage Panel of The American Heritage Dictionary; his war on bureaucratese was a major feature of his first, full-hour appearance on PBS's "The MacNeil/Lehrer Report" -- for which the demand for copies was greater than for any previous program -- featuring especially his admonition to the CAB staff: "If you can't explain what you're doing in plain English, you're probably doing something wrong."

In October 1978, Kahn was tapped by Carter to serve as adviser to the president on inflation and as chair of the Council on Wage and Price Stability. He appeared with Carter on the cover of Newsweek as the nation's "Inflation Czar."

On his academic work:

He is the author of more than 130 academic papers as well as eight books, including the landmark two-volume "The Economics of Regulation" (John Wiley, 1971; reissued with a postscript by the MIT Press in 1988), which is still considered the pre-eminent work in the field almost four decades later, and most recently of "Whom the Gods Would Destroy, or How Not to Deregulate" (2001) and "Letting Go: Deregulating the Process of Deregulation" (1998), which focuses on deregulation of the electric power and telecommunications industries. His other publications include "Great Britain in the World Economy," "Fair Competition," "The Law and Economics of Antitrust Policy" (co-authored), and "Integration and Competition in the Petroleum Industry" (co-authored). Kahn was one of the four titular subjects of "Prophets of Regulation: Charles Francis Adams, Louis D. Brandeis, James M. Landis, Alfred E. Kahn" by historian Thomas K. McGraw, who won the Pulitzer Prize for history in 1986 for the book.

Evaluating Merger Effects in Cable TV Industry in a Difference in Difference Method

Posted by D. Daniel Sokol

Jung, Hyun-Joon and Nahm, Jae (Department of Economics, Korea University, Seoul, Republic of Korea) explore Evaluating Merger Effects in Cable TV Industry in a Difference in Difference Method.

ABSTRACT: Between 2005 and 2008, there had been active mergers between cable system operators in Korean. By analyzing subscription fees changes between 2004 and 2008 in a panel data set, we evaluate the merger effects. We find that mergers had occurred in relatively low prices areas; the price increase was much higher in areas where merger had occurred than in areas where competition between multiple SO had remained.