Antitrust & Competition Policy Blog

Reassessing Tying Arrangements at the End of At&T's iPhone Exclusivity

Posted by D. Daniel Sokol

Jeffrey Paul Jarosch, Searle Center on Law, Regulation, and Economic Growth, Northwestern University School of Law is Reassessing Tying Arrangements at the End of At&T's iPhone Exclusivity.

ABSTRACT: Tying arrangements are common in the wireless telecommunications industry. Wireless networks compete for exclusive contracts to offer popular mobile devices. In January 2011, one of the most notorious exclusivity contracts ended when Apple announced that the iPhone would be available on the Verizon network, ending four years of iPhone exclusivity on AT&T. This long-anticipated move has been hailed as progress for consumer choice and competition in the industry. Such enthusiasm is rooted in the Supreme Court’s enduring stance against tying arrangements - a position that is based on unreasonable goals and illusory harms. This Article examines the Supreme Court’s tying jurisprudence in order to understand the harms that the Court seeks to combat. It then applies that understanding to a context-specific analysis of tying arrangements in the wireless telecommunications industry. In finding that AT&T’s iPhone exclusivity has had significant pro-competitive effects and has fostered innovation in the industry, the Article exposes the misguided basis of the Court’s tying doctrine and argues that it is time to reform the Court’s stance against tying.

Comments of Richard Brunell on At&t/T-Mobile Merger

Posted by Richard Brunell

The relevant geographic market may be an important consideration in evaluating the merger because if there is anational market for wireless services, then the merger reduces the number of players from 4 to 3[1] – suggesting a fairly strong presumption of illegality – and the potential remedy of divestitures to local or regional carriers in certain local markets would be ineffective because it would not replace the loss of a national competitor.

The relevant geographic markets are likely to be both local and national. While some competition for wireless services is local, other competition (among the national carriers) is primarily national, as illustrated by the billions of dollars spent in national advertising. In its acquisition of the regional carrier Centennial, AT&T claimed that “the predominant forces driving competition operate at the national level. . . . AT&T establishes its rate plans and pricing on a national basis . . . in response to competitive conditions and offerings at the national levels – primarily the plans offered by the other national carriers.”[2] AT&T explained that its plans were uniform throughout the country for efficiency and marketing reasons, and that “[v]ery infrequently,” it may offer a local promotion.[3] In contrast, in its current application to acquire T-Mobile, AT&T emphasizes the “the local nature of this marketplace,” but does not suggest that pricing of its service plans is done on anything other than a national basis. Rather, any local promotions appear to be limited to handsets and peripheral devices.[4]

In the past, the DOJ and FCC have considered only local geographic markets in wireless mergers, but that is because they have not previously reviewed a merger between two national carriers. Indeed, in recent wireless mergers, the DOJ has emphasized that “[t]he existence of local markets does not preclude the possibility of competitive effects in a broader geographic area, such as a regional or national area . . . .”[5] Insofar as competitive effects may occur on a national level, it is appropriate to define a relevant market that is national in scope. This is consistent with the revised Horizontal Merger Guidelines, which provide that “The hypothetical monopolist test . . . does not lead to a single relevant market. The Agencies may evaluate a merger in any relevant market satisfying the test, guided by the overarching principle that the purpose of defining the market and measuring market shares is to illuminate the evaluation of competitive effects.” U.S. Dept of Justice & Fed. Trade Comm’n, Horizontal Merger Guidelines § 4.1.1 (Aug. 19, 2010). It is also consistent with United States v. Grinnell Corp., 384 U.S. 563, 575-76 (1966), in which the Supreme Court held that the relevant geographic market for accredited central station protection services was national because it “reflect[ed] the reality of the way in which” the business was built and operated, even though the service was provided on a local basis.

Regional and local wireless carriers are not participants in the national market because they do not offer services on a national basis. (They offer national roaming but that does not mean a person located in a roaming area can become a subscriber.) Moreover, their local offerings do not appear to affect the national post-paid plans offered by the national carriers. Indeed, the regional carriers like MetroPCS and Leap/Cricket offer a different product and serve different market segments. They offer only pre-paid, non-contract services, and tend to serve customers with poor credit histories; they do not market to businesses. Further, smaller and regional carriers are limited in the competition they can provide to the national carriers because they lack brand names like those of the national carriers built up by years of intensive advertising, lack the array of smartphones offered by the national carriers, their networks are perceived to be of inferior quality, and they must depend on expensive roaming agreements with the national carriers. Accordingly, even if geographic markets are defined as local, the competitive significance of the local and regional carriers on the AT&T/T-Mobile combination is probably minimal.

-------------------------------------------------------------------------------- [1] Or, as the American Antitrust Institute (AAI) said, “more realistically, [from 4 to] 2 1/2, since the merger may have the effect of marginalizing Sprint as a competitor.” Letter from the American Antitrust Institute to Chairman Herb Kohl, May 16, 2011, available at http://www.antitrustinstitute.org/sites/default/files/AAI%20Letter%20on%20ATTTMobile.pdf. [2] Merger of AT&T Inc. and Centennial Comm’cns Corp., Description of Transaction, Public Interest Showing and Related Demonstrations 28-29 (Nov. 21, 2008). AT&T stated it “focuses on the other national carriers in its competitive decision-making and does not consider Centennial in deciding on pricing and service offerings.” Id. at 37. AT&T made a similar claim when it acquired the regional carrier Dobson in 2007, explaining, “Where national competitive forces determine prices and the same products are offered nationwide at the same price, the relevant geographic market is national, rather than local.” Merger of AT&T Inc. and Dobson Comm’cns Corp., Description of Transaction, Public Interest Showing and Related Demonstrations 19 n.74 (July 13, 2007). [3] Description of AT&T/Centennial Transaction, Declaration of David Christopher Chief Marketing Officer ¶ 6. [4] See Acquisition of T-Mobile USA, Inc. by AT&T Inc., Description of Transaction, Public Interest Showing and Related Demonstrations 74 (April 21, 2011). [5] United States et al. v. Verizon Commc’ns Inc. and Alltel Corp., No. 1:08-cv-01878, Competitive Impact Statement at 7 n.2 (Oct. 30, 2008); United States et al. v. AT&T and Centennial Commc’ns Corp., No. 1:09-cv-01932, Competitive Impact Statement at 6 n.2 (Oct. 13, 2009) (same).

Intellectual Property Rights, Institutional Quality and Economic Growth

Posted by D. Daniel Sokol

Irem Demirkan, International Business and Strategy Group, College of Business Administration, Northeastern University Sebahattin Demirkan, Bentley University - Department of Accountancy address Intellectual Property Rights, Institutional Quality and Economic Growth.

ABSTRACT: We consider the role of intellectual property rights (IPRs) in a Schumpeterian growth model in which patent holders face the threats of profit loss due to imitation and complete replacement due to successful outside innovation. In this setting stronger IPR enforcement has both imitation and innovating deterring effects. We disaggregate IPR policies by distinguishing between two features of IPRs protection. The first is the intensity of IPR enforcement, which is determined by the fraction of resources allocated to innovation and imitation deterrence. The second is the quality of the IPR regime, which reflects the ability of the IPR regime to shift enforcement resources away from innovation deterrence and towards imitation deterrence. We find that an increase in the quality of the IPR regime unambiguously promotes growth. However, an increase in the intensity of IPR enforcement increases growth if and only if the threat of imitation is above a threshold level. We show that there exists a growth-maximizing level of IPR enforcement intensity, which is decreasing in institutional quality. We also show that countries with sufficiently low quality institutions will be trapped in a no-growth boundary equilibrium, regardless of the intensity of IPR enforcement. Simulation exercises indicate that welfare-maximizing policies follow patterns similar to growth-maximization policies. The economy can have too much or too little IPR enforcement intensity. For countries with sufficiently low institutional quality, welfare is maximized by completely foregoing IPR protection and eliminating monopolistic markets, even though positive growth may be feasible with appropriate intensity of IPR enforcement.

Technology, Business Models and Network Structure in the Airline Industry

Posted by D. Daniel Sokol

Xavier Fageda, University of Barcelona - Department of Economic Policy and Ricardo Flores-Fillol, Universitat Rovira i Virgili (URV) describes Technology, Business Models and Network Structure in the Airline Industry.

ABSTRACT: Network airlines have increasingly focused their operations on hub airports through the exploitation of connecting traffic. This has allowed them to take advantage of economies of traffic density, the existence of which is beyond dispute in the airline industry. Less attention has been devoted to airlines' decisions on thin point-to-point routes, which can be served using different aircraft technologies and different business models. This paper examines, both theoretically and empirically, the impact on airlines' networks of the two major innovations in the airline industry of the last two decades: regional jet technology, and the low-cost business model. We show that, under certain circumstances, direct services on thin point-to-point routes can be viable, and that as a result airlinesmay be interested in diverting passengers away from the hub.

Comments of Allen Grunes and Maurice Stucke on the AT&t/T-Mobile Proposed Merger

Editor's Note. I asked Maurice for around 800 words on the merger. Maurice responded that he and Allen would write something a bit longer. I received a 29 page article from them. I love Maurice. The link to the entire are is here. I have excerpted a portion of the article below.

Posted by Allen Grunes and Maurice Stucke

THIS MERGER IS PRESUMPTIVELY ANTI-COMPETITIVE

Under well-established U.S. law, there is a strong presumption of illegality when the merging firms’ market shares are significant in an industry with high entry barriers. As the Supreme Court said, “a merger which produces a firm controlling an undue percentage share of the relevant market, and results in a significant increase in the concentration of firms in that market is so inherently likely to lessen competition substantially that it must be enjoined in the absence of evidence clearly showing that the merger is not likely to have such anticompetitive effects.”5 Consistent with the legislative intent of the Clayton Act, courts have regarded a transaction that would lead to further concentration in an already highly concentrated market as presumptively illegal under Section 7.6 In United States v. Philadelphia National Bank, the Court held that a merger resulting in a single firm controlling 30 percent of a market trending toward concentration in which four firms controlled 70 percent of the sales was presumptively illegal.7 Unless the merging parties “meet their burden of rebutting this presumption, the merger must be enjoined.”8 That presumption applies to the AT&T/T-Mobile merger in an already highly concentrated industry with high entry barriers,

A. AT&T’s Post-Merger Market Share Would Exceed 40 Percent The likely candidate product market is the market for “mobile wireless telecommunications services.” This was the market definition used in prior DOJ cases such as U.S. v. AT&T and Dobson Communications (2007)9 and U.S. v. Verizon and Rural Cellular (2008).10 In those cases, DOJ noted that there were no cost-effective alternatives to mobile wireless telecommunications services, and it is unlikely that a sufficient number of customers would switch away from mobile wireless telecommunications services to make a small but significant non-transitory price increase in those services unprofitable.

This candidate product market includes voice, text messaging and data services. The data component of mobile wireless services has been rapidly growing in the past few years. There has been a high smartphone adoption and upgrade rate (close to 50% in 2009 according to the FCC’s latest Mobile Wireless Competition Report11). There has also been an expansion in the number of non-smartphone handsets that are subject to mandatory data plans. Data plans for mobile phones are typically sold as part of a bundle. At the end of the day, the DOJ’s likely product market candidate, which includes voice, messaging and data, is defensible.

The candidate geographic markets potentially include both local and national markets. Historically, viewed from the consumer perspective, geographic markets were local. This was because consumers purchasing mobile wireless telecommunications services chose among the providers that offered services where they lived, worked and traveled on a regular basis. Historically, providers offered different promotions, discounts, calling plans, and equipment subsidies in different geographic areas, varying the price for customers by geographic area.

However, by the end of 2008, there were four facilities-based mobile wireless service providers that industry observers typically described as “nationwide”: AT&T, Sprint Nextel, T-Mobile, and Verizon Wireless.12 In 2008, unlimited national flat-rate calling plans were launched by all the nationwide operators.13 Consumers increasingly have shifted away from restricted plans that included separate roaming charges and into these unlimited service options, and the focus of price competition has shifted accordingly.14 It now appears that pricing is for the most part set nationally by the four nationwide carriers, and regional and local competitors do not act as significant constraints on national pricing.

Indeed, in its FCC public interest statements in the both the Dobson15 and Centennial16 acquisitions, AT&T acknowledged that the geographic market is national precisely for these reasons. As AT&T wrote in its Centennial statement, supported by a declaration from its Chief Marketing Officer, “[i]n the mainland U.S., AT&T establishes its rate plans and pricing on a national basis, without reference to market structure at the CMA [Cellular Market Area] level.”17 AT&T’s statement continues: “One of AT&T’s objectives is to develop its rate plans, features and prices in response to competitive conditions and offerings at the national levels [sic] – primarily the plans offered by the other national carriers.”18

Although pricing by the four nationwide operators appears to be largely national, there may be promotions or discounts (e.g. of handsets) that occur on a local basis. How much of these promotions and discounts are driven by competition, and how big a factor they play in the overall pricing picture, needs to be looked at. For example, if a 2-year wireless plan costs $1200/year, but there is a $50 discount available in some cities on a new phone, that would amount to about a 2% discount over 2 years and would probably be small enough not to undercut the overall national pricing picture.

Viewed from the standpoint of business customers, the same conclusion appears likely: the geographic market is national. Similarly, viewed from the standpoint of suppliers (e.g., handset manufacturers), the geographic market is undoubtedly national. It is interesting to note that, according to an AT&T executive, Apple apparently approached Verizon, Sprint, AT&T and T-Mobile about the original iPhone.19 Consequently, under this proposed market definition, the merging parties will have a significant market share. As Senator Herb Kohl observed at the recent hearings on this merger, “The proposed merger between AT&T and T-Mobile will bring together two of the four remaining national cell phone carriers to create the nation’s largest cell phone network, with an estimated 43 percent market share. Should this deal be approved, AT&T and Verizon will control close to 80 percent of the national cell phone market.”20

Comments of Roger Noll on the Proposed AT&T/T-Mobile Merger

Posted by Roger Noll

Superficially, the proposed acquisition appears to run seriously afoul of the merger policy of the antitrust enforcement agencies. The first step in merger analysis is typically to measure concentration—an indicator of the extent of competition. The standard measure of concentration is the Hirschman- Herfindahl Index (HHI), which is the sum of the squares of the market shares of the sellers in the market. According to the Federal Trade Commission and Antitrust Division Merger Guidelines, if the post-acquisition HHI exceeds 2500, an acquisition that causes the HHI to increase by more than 200 is likely to cause a significant reduction in competition if the market also has substantial barriers to entry. At present, nationwide concentration in wireless telecommunications services is roughly equal to the 2500 threshold, and the acquisition would increase the HHI by more than 600. These numbers probably understate the effective concentration in the industry for two reasons. First, only the four major carriers can serve customers who seek mobile access in most of the nation. For connections outside their service territories, smaller carriers often resell Sprint’s service. Second, the available data do not distinguish between mobile voice service, which is more competitive, and high-speed data service, which is more concentrated. Based on the high concentration of the industry, the Antitrust Division will try to determine if the merger would cause an increase in consumer prices. Agency staff will examine the degree of competition between AT&T and T-Mobile. T-Mobile generally charges lower prices than the other major carriers. Whether T-Mobile’s low-price strategy is disciplining the prices and service offerings of the other major carriers is an empirical question. For example, if AT&T serves mostly high-end consumers and competes most intensively with Verizon, while T-Mobile serves low-end consumers and competes most intensively with Metro PCS and other smaller carriers, the merger would not be viewed as having the same anticompetitive effects as it would if AT&T and T-Mobile compete intensively for the same customers. Because wireless carriers provide numerous products, determining how and why customers switch from one provider to another seemingly is difficult; however, due to number portability, most customers who switch providers keep their wireless numbers. As a result, it may be possible to estimate empirically and precisely the competition between AT&T and T-Mobile because the Antitrust Division will have access to data about customer switching behavior between carriers. Another concern of the Antitrust Division will be the effect of acquisition on competition in specific local markets. While several carriers operate in major metropolitan areas, smaller cities generally have fewer carriers. The nationwide concentration of the industry reflects an average between less concentrated major markets and more concentrated small towns and rural areas. In the past, the Antitrust Division has approved some wireless mergers only after requiring divestiture of one party’s assets in local markets where the merging firms have high market shares. For example, in its acquisition of Alltel, Verizon agreed to spin off assets in 85 markets in which the two companies overlapped. This kind of compromise is less likely for the AT&T/T-Mobile deal because, as discussed elsewhere, the principal rationale for the deal is to enable AT&T to obtain more spectrum in areas where it currently has capacity constraints.

Comments of Harry First of Proposed AT&T/T-Mobile Merger

Posted by Harry First

Four Things For Antitrust Enforcers To Keep In Mind for the AT&T/T-Mobile Merger

As we all know, modern merger enforcement is a fact-intensive effort, involving the ins-and-outs of specific (sometimes arcane) markets, an understanding of the technology of the industry involved, and some appreciation of the economic models that will be used to predict competitive effects. Without access to all the relevant information, outside observers are at a disadvantage in making enforcement calls. It’s easy to opine on legality of a merger, harder to be sure you are right. Rather than opining, I’ll make four general suggestions for the antitrust enforcers who are taking up this effort. And here I include the FCC as an “antitrust enforcer,” for I take the decision to hire a top-rate antitrust lawyer as Senior Counsel to the Chairman to mean that the FCC may prefer antitrust enforcement to a version of one of my favorite TV programs, “Let’s Make A Deal.”

First: You Can Say No. Enforcement of Section 7—which used to be called an “antimerger law”—has basically turned into a regulatory exercise in which most mergers are approved. Some mergers get challenged, of course. The Department is now challenging a chicken processor merger in the Shenandoah Valley, a 3-2 merger if the Shenandoah Valley really is a properly defined market. Chicken feed, you might say. But the very real threat to challenge NASDAQ’s bid for the NYSE, a merger to monopoly according to the Department, was not chicken feed. So, government enforcers can say no, they just need to say it more often. Relying on regulatory decrees, particularly ones that require continuing supervision, is not antitrust’s first-best approach to remedies. If a merger gives the merged firms incentives to engage in anticompetitive conduct, a fix that doesn’t alter those incentives is good only until the fix expires, five years in some cases. The promise to behave nicely lasts only so long.

Second: This Is Not A Supermarket Merger. According to the Wall Street Journal, AT&T’s CEO had his lawyers do a “market-by-market” analysis of where the overlap with T-Mobile was largest. He concluded that the antitrust risk was “bearable” because AT&T was willing to make “substantial” divestitures in local markets, presumably of subscribers. This is how supermarket mergers get done. The lawyers come in with maps of overlaps in small geographic areas and then offer to divest as many overlapping stores as is necessary. These divestitures not only don’t leave competition as healthy as it was before, they also miss the point that not all competition is local when networks are involved. Even more so for wireless. Competition certainly takes place on a local level. But it also takes place on the level of national networks. A big challenge for enforcers is to move past the fixation on local markets and look at the obvious here: how competition takes place nationally. And if competition is national, that would mean a merger producing two firms with roughly 75 percent of all subscribers in the U.S. Surely that’s a problem.

Third. Don’t Forget Handsets. Complementary products are very important for innovation in telecommunications and maybe the most important one today is smartphones. Wireless carriers distribute them on a variety of price and product quality terms. This competition not only produces a product that is better for consumers (lower priced and with increased functionality) but also affects the “subsidy” the carriers pay to the handset makers for the handsets themselves—a form of buyer power. If we really want innovation in handsets, attention needs to be paid to how the loss of T-Mobile as a distributor/buyer will affect not only consumer pricing but also the incentives for handset-maker innovation. Remember POTS (plain-old-telephone-service)? The last time that AT&T controlled handsets (through its ownership of Western Electric) all we had were black rotary-dial phones. A turquoise Princess phone was considered an innovation. We really can’t have a 21st Century version of this type of market control.

Fourth. Don’t Forget The Systemic Effect of Merger Enforcement. When the Clayton Act was amended in 1950 there was much talk about the “triggering effect” that mergers can have. If we let two firms in an industry merge, then the next two will want to merge, then the next two, and so on. The 21st Century version of this is no longer restricted to the industry involved in the merger. It’s more systemic, involving a general sense of the appropriate scale and size of business enterprises today plus a prediction of enforcement response. Press reports indicate that AT&T was “encouraged” by the approval of the NBC/Comcast merger, “because it felt regulators weren’t about to blanket-ban big mergers.” True, these systemic effects may be hard to quantify or predict—deterrence always is—and may be harder to work into a legal theory under Section 7. But if enforcers are on the line about whether to bring suit, it’s certainly appropriate to let this factor tip the prosecutorial scales to a “no.”

A Simple Model of Health Insurance Competition

Posted by D. Daniel Sokol

Alexander Kemnitz, Dresden University of Technology - Faculty of Economics and Business Management suggests A Simple Model of Health Insurance Competition.

ABSTRACT: This paper investigates competition between health insurance companies under different financing regulations. We consider two alternatives advanced in recent German health care reform discussions: competition by contribution rates (health contributions) and by fees (health premia). We find that contribution rate competition yields lower company profits and higher consumer welfare than premia competition when switching between insurance companies is costly.

Antitrust in Hi-Tech Industries May 29-30, 2011, University of Haifa

Posted by D. Daniel Sokol

The revised program is below.

Download Program_2011update[1]

Early Settlements and Errors in Merger Control

Posted by D. Daniel Sokol

Luke Garrod and Bruce Lyons (University of East Anglia) address Early Settlements and Errors in Merger Control.

ABSTRACT: We develop a model of remedy offers made to an expert agency which has powers to act before any harm is experienced and is required to decide on the basis of tangible evidence. The model provides a relationship between the factors determining the probability of delay and the type of error in early settlements (i.e. insufficient versus excessive remedy). We apply the model using data from European Commission merger settlements. Our econometric analysis confirms the importance of delay costs and the uncertainty associated with the agency’s findings. Our results are also consistent with the prediction that delay is not systematically related to the inherent competitive harm of the merger proposal. We use our results to identify specific cases of insufficient remedy in early settlements.

This Week on the Blog - AT&T/T-Mobile Symposium and Part II of Criminilising Cartels Symposium

Posted by D. Daniel Sokol

This week we have two interesting symposia:

First, we have a symposium on the proposed A&T/T-Mobile. Later in the week we will conclude the symposium book review Criminalising Cartels.

Reassessing Tying Arrangements at the End of At&T's iPhone Exclusivity

Posted by D. Daniel Sokol

Jeffrey Paul Jarosch, Searle Center on Law, Regulation, and Economic Growth, Northwestern University School of Law is Reassessing Tying Arrangements at the End of At&T's iPhone Exclusivity.

ABSTRACT: Tying arrangements are common in the wireless telecommunications industry. Wireless networks compete for exclusive contracts to offer popular mobile devices. In January 2011, one of the most notorious exclusivity contracts ended when Apple announced that the iPhone would be available on the Verizon network, ending four years of iPhone exclusivity on AT&T. This long-anticipated move has been hailed as progress for consumer choice and competition in the industry. Such enthusiasm is rooted in the Supreme Court’s enduring stance against tying arrangements - a position that is based on unreasonable goals and illusory harms. This Article examines the Supreme Court’s tying jurisprudence in order to understand the harms that the Court seeks to combat. It then applies that understanding to a context-specific analysis of tying arrangements in the wireless telecommunications industry. In finding that AT&T’s iPhone exclusivity has had significant pro-competitive effects and has fostered innovation in the industry, the Article exposes the misguided basis of the Court’s tying doctrine and argues that it is time to reform the Court’s stance against tying.

Paradise is a Walled Garden? Trust, Antitrust and User Dynamism

Posted by D. Daniel Sokol

Salil K. Mehra, Temple University - James E. Beasley School of Law discusses Paradise is a Walled Garden? Trust, Antitrust and User Dynamism.

ABSTRACT: In the worlds of technology and cyberlaw, the term “walled garden” has become an epithet to epitomize a proprietary, controlled – and likely sterile – platform, community, or standard. This dystopian view of closed, proprietary communities is presented most clearly by Zittrain (2008), who casts the choice facing society as between sterile but safe examples of “information appliances” such as the iPhone and “networks of control” such as Facebook – and on the other hand, vulnerable but malleable personal computers (PCs) and a “generative” Internet, that is, information technology that fosters greater creativity among users.

But can a “walled garden” in fact be a kind of creative paradise? If so, what sort of policy steps would foster such a result? The platforms in question, that is networks, devices and online communities, often find themselves at the intersection of network effects, standard-setting and user-generated content and innovation. Commentators suggest a variety of approaches, including antitrust intervention, direct government regulation, or taking no action based on the perceived strength of market solutions.

This Article makes several claims. First, that we cannot yet appreciate the potential importance of user-created content and innovation. This Article is the first to apply the EVLN (exit-voice-loyalty-neglect) model introduced by Albert Hirschmann (and since extended and broadened) to understand the economic considerations of user choices. Second, the error-cost framework developed in antitrust over the past several decades can help inform policy choices aimed at promoting user dynamism within walled gardens. Perhaps counterintuitively, this Article explains how the error costs argue for action rather than passivity. In fact, the Federal Trade Commission’s recent patent-ambush standard setting cases implicate concerns that are analogous to those surrounding user dynamism in walled gardens. Finally, while neither antitrust nor regulation may offer a perfect solution, this Article proposes consumer protection-style enforcement of hosts’ ex ante commitments to users in order to foster trust and thereby stimulate user creation and innovation.

Antitrust Economics of Free

Posted by D. Daniel Sokol

David S. Evans, University of Chicago Law School, University College London has an interesting article on Antitrust Economics of Free.

ABSTRACT: This article examines antitrust analysis when one of the possible subject products of an antitrust or merger is ordinarily offered at a zero price. It shows that businesses often offer a product for free because it increases the overall profits they can earn from selling the free product and a companion product to either the same customer or different customers. The companion product may be a complement, a premium version of the free product, or the product on the other side of a two-sided market. The article then shows how antitrust and merger analysis should proceed when the subject is either the free product or the companion product. A key point is that the existence of a free good signals that there is a companion good, that firms consider both products simultaneously in maximizing profit, and that commonly used methods of antitrust analysis, including market definition, probably need to be adjusted to properly analyze two inextricably linked products. When antitrust or merger analysis involves a free product, the analysis of consumer welfare and injury also needs to account for customers of both the free product and its companion product since any change in market conditions for customers of one product affects the customers of the other product. Much of the analysis of the article is also relevant to other common situations in which price is set less than marginal cost.

A Framework for Analyzing Market Manipulation

Posted by D. Daniel Sokol

Shaun D. Ledgerwood, The Brattle Group, Georgetown University - Public Policy Institute (GPPI) and Paul Carpenter, The Brattle Group provide A Framework for Analyzing Market Manipulation.

ABSTRACT: Market manipulation is a poorly understood phenomenon, due in part to difficulties in applying conventional antitrust tools to explain loss-based opportunism. Because trading to intentionally incur losses violates assumptions concerning the self-interest hypothesis and the need for market power to move prices, traditional tools need revisions to explain manipulative behavior. In this paper, we assist this process by developing a framework to explain manipulation as the intentional loss of money on price-making transactions to benefit the value of related price-taking positions. This framework could simultaneously improve liquidity and compliance by providing definitional and analytic certainty concerning what behavior constitutes manipulation.

The Effects of Non-Assertion of Patents Provisions: R&D Incentives in Vertical Relationships

Posted by D. Daniel Sokol

Noriaki Matsushima, Osaka University - Institute of Social and Economic Research, Koki Arai, JFTC, Ikuo Ishibashi, Ayoba, and Fumio Sensui, Kobe University discuss The Effects of Non-Assertion of Patents Provisions: R&D Incentives in Vertical Relationships.

ABSTRACT: Using a simple downstream duopoly model with vertical relations and downstream R&D, we investigate the effect of non-assertion of patents (NAP) provisions. A monopoly upstream firm decides whether to employ NAP provisions. If it does so, it freely incorporates the R&D outcomes into its inputs. Incorporation improves the efficiency of the downstream firms' production. We have interpreted the introduction of NAP provisions as a source of technology spillover. Using the technologies of two downstream firms is optimal for the upstream firm if and only if the degree of technology spillover is small. In addition, if the ex ante cost difference between the downstream firms is significant, such technology spillovers erode both the profit of the efficient downstream firm and social welfare. We interpret our result in the context of an actual antitrust case related to this model.

Density Versus Differentiation: The Impact of Wal-Mart on the Grocery Industry

Posted by D. Daniel Sokol

Paul B. Ellickson, University of Rochester - William E. Simon Graduate School of Business Administration and Paul L.E. Grieco, Pennsylvania State University - Department of Economics have posted Density Versus Differentiation: The Impact of Wal-Mart on the Grocery Industry.

ABSTRACT: This paper empirically examines the impact of entry by Wal-Mart on competition in the supermarket industry. Using a detailed panel dataset spanning 1994 to 2006, we estimate the impact of Wal-Mart on three key outcome variables (revenue, employment, and store size), controlling for persistent local trends and systematic differences across markets by exploiting the detailed spatial structure of our store-level census. We find that Wal-Mart's impact is highly localized, affecting firms only within a tight, three-mile radius of its location. Within this radius, the bulk of the impact falls on declining firms - entry and expansion by growing firms are essentially unaffected. Moreover, the stores most damaged by Wal-Mart's entry are the outlets of larger chains. This suggests that Wal-Mart's expansion into groceries is quite distinct from its earlier experience in the discount industry, where the primary casualties were single outlet firms and sole proprietorships. This contrast sheds light on the role density economies play in shaping both equilibrium market structure and economic geography. In the case of grocery competition, high travel costs and the perishable nature of the product itself appear to impart sufficient horizontal differentiation to offset the scale economies that Wal-Mart has exploited to the detriment of far-flung competitors so effectively in the past.

Recent RPM Enforcement in NewYork and California

Posted by D. Daniel Sokol

Michael A. Lindsay (Dorsey & Whitney) explores Recent RPM Enforcement in NewYork and California.

ABSTRACT: Two recent enforcement actions in California and New York illustrate the continuing uncertainty that businesses face in designing and implementing resale price maintenance (RPM) programs.1 In People v. Bioelements, Inc., the California Attorney General obtained a consent decree against a Colorado company that had RPM agreements with its independent resellers.2 But in People v. Tempur-Pedic, International Inc., the New York Attorney General sought to enjoin an RPM program— and lost a contested trial court proceeding. What can companies learn from these two enforcement actions?

A Two-Country Game of Competition Policies

Posted by D. Daniel Sokol

Makoto Yano, Keio University - Department of Economics and Takakazu Honryo, Columbia University - Columbia Business School - Economics Department theorize about A Two-Country Game of Competition Policies.

ABSTRACT: Recently a number of studies have recognized that trade policy can be substituted for by competition policy. This study demonstrates, however, that there is a fundamental difference in the working of terms-of-trade effects between competition policy and tariff policy and that if countries optimally set their respective competition policies, it is unlikely to result in a tariff-war-like state in which all countries adopt distortionary policies. Instead, in a Nash equilibrium, one country maintains perfect competition in its domestic service sector while the other country tolerates imperfect competition.

Extradition: The New Sword or the Mouse that Roared?

Posted by D. Daniel Sokol

Jim Wilson discusses Extradition: The New Sword or the Mouse that Roared?

ABSTRACT: Has the Norris extradition changed the landscape for foreign executives facing antitrust charges in the United States? This article asserts that it has not: extradition is likely still to be the exception to the rule, and in most jurisdictions, the executive who chooses not to come to the United States to face charges is not likely to be forced to do so.