Antitrust & Competition Policy Blog

First Degree Price Discrimination Using Big Data

Benjamin Reed Shiller (Brandeis University) describes First Degree Price Discrimination Using Big Data.

ABSTRACT: Second and 3rd degree price discrimination (PD) receive far more attention than 1st degree PD, i.e. person-specific pricing, because the latter requires previously unobtainable information on individuals’ willingness to pay. I show modern web behavior data reasonably predict Netflix subscription, far outperforming data available in the past. I then present a model to estimate demand and simulate outcomes had 1st degree PD been implemented. The model is structural, derived from canonical theory models, but resembles an ordered Probit, allowing methods for handling massive datasets. Simulations show using demographics alone to tailor prices raises pro?ts by 0.14%. Including web browsing data increases pro?ts by much more, 1.4%, increasingly the appeal of tailored pricing, and resulting in some consumers paying twice as much as others do for the exact same product.

Anticompetitive Marketing in the Context of Pharmaceutical Switching in Europe

Bengt Domeij, Uppsala University - Faculty of Law explores Anticompetitive Marketing in the Context of Pharmaceutical Switching in Europe.

ABSTRACT: The article deals with the intersection between competition law rules on abuse of a dominant position and switching strategies employed by pharmaceutical originator companies. Switching is also known as ever-greening, product hopping or product life cycle strategies. It is one of the most topical issues in the patent-antitrust intersection today and consists in launching a slightly modified, second generation pharmaceutical, 1-2 years before the patent exclusivity expires for a first generation product. In this window originators try to migrate patients to a reformulated product. If successful, this will shield the originator from the effects of generic substitution for the first generation product. In the AstraZeneca-case the EU General Court held that a selective redrawal of marketing authorizations for a first generation product was an abuse of a dominant position under article 102 TFEU. This article focuses on other components in a switching strategy, especially the timing and content of marketing efforts by an originator company. Marketing is pro-competitive in almost all cases, but due to the special regulatory context in the pharmaceutical industry, marketing by an originator company can be used in an excluding fashion in the pharmaceutical industry. The conclusion is reached that casting the quality or price of the originator’s first generation product in a bad light, in comparison with the second generation product during exclusivity for the first generation product, may be an abuse by a dominant firm falling foul of article 102 TFEU. It is in effect equivalent to negative comparative advertising messages concerning a competitor’s soon to be launched product.

Was the Crisis in Antitrust a Trojan Horse?

Barak Orbach (Arizona) asks Was the Crisis in Antitrust a Trojan Horse?

ABSTRACT: The Trojan Horse Hypothesis, an unwritten antitrust myth, states that, through the purposeful use of confusing terminology, Robert Bork was able to disguise his conservative agenda as a pro-consumer policy, enlist people who disagreed with or did not endorse this agenda to promote it, and turn it into the law of the land. The hypothesis attempts to explain Robert Bork’s remarkable success in changing the course of antitrust despite the fact that his antitrust philosophy rested on two flawed propositions: (1) that Congress enacted the Sherman Act as “a consumer welfare prescription,” and (2) that “competition must be understood as the maximization of consumer welfare or, if you prefer, economic efficiency.” This Essay examines the foundation of the hypothesis and its relevance to present antitrust policy. It argues that, while Bork’s mistakes were human, their enduring persistence in law and theory is puzzling and disturbing, and in some ways proves Bork’s critique of antitrust.

Obstruction of Investigation in EU Competition Law: Issues and Developments in the European Commission's Approach

Maurits Ter Haar, De Brauw Blackstone Westbroek N.V. explores Obstruction of Investigation in EU Competition Law: Issues and Developments in the European Commission's Approach.

ABSTRACT: This article examines the practice of the European Commission in fining undertakings for the obstruction of the Commission’s investigation. For years, the Commission has fined such procedural infringements by qualifying them as an aggravating circumstance in the decision in the substantive case. In recent years, however, the Commission has increased its attention to cases of obstruction of investigation and has started fining them as autonomous infringements in standalone decisions. The Commission has, in the past few years, adopted three such decisions: "E.ON Energie" and "Suez Environnement", both concerning the breach of a seal, and "EPH and others" concerning an IT-related infringement. In the appeal of "E.ON Energie", the Court of Justice recently upheld the Commission’s approach.

While the move from circumstantial to standalone fining is commendable in itself, these standalone fines are set in a "black box" that allows the Commission too much discretionary leeway. This raises issues of arbitrariness, proportionality and legal certainty. Therefore, it is submitted that the adoption by the Commission of fining guidelines for obstruction of investigation cases is warranted.

INNOVATION AND OPTIMAL PUNISHMENT, WITH ANTITRUST APPLICATIONS

Keith N. Hylton (Boston University) and Haizhen Lin (Indiana University) discuss INNOVATION AND OPTIMAL PUNISHMENT, WITH ANTITRUST APPLICATIONS.

ABSTRACT: This article modifies the optimal punishment analysis by incorporating investment incentives with external benefits. In the models examined, the recommendation that the optimal penalty should internalize the marginal social harm is no longer valid. We focus on antitrust applications. In light of the benefits from innovation, the optimal policy will punish monopolizing firms more leniently than suggested in the standard static model. It may be optimal not to punish the monopolizing firm at all, or to reward the firm rather than punish it. We examine the precise balance between penalty and reward in the optimal punishment scheme.

IS THE GOOGLE PLATFORM A TWO-SIDED MARKET?

Giacomo Luchetta, The Centre for European Policy Studies asks IS THE GOOGLE PLATFORM A TWO-SIDED MARKET?

ABSTRACT: Probably not, is the short answer to that question. Unlike other platforms, such as operating systems, credit cards, or even nightclubs, where a single transaction is performed via the platform, two different transactions take place on Google. Users perform searches in exchange for personal data, while advertisers seek users' attention—to be matched with the “right” user. Whereas operating systems, credit cards, and nightclubs would cease to exist if either of the two sides were missing, search engines (rather like TV or newspapers) can exist under different market configurations. Indeed, in search engines, network externalities run only from the number of users to advertisers, not the other way around. Building upon this analysis, a non-bilateral construction of the relevant market where Google operates is proposed. Google operates as a retailer of users' personal information. In the upstream market, it buys users' personal information from large retailers and final consumers in exchange for search services, or upon monetary payment. It then uses the personal information collected to sell targeted advertising to advertisers in the downstream market. Based on this market construction, the allegations against Google are analyzed as alleged violations of competition law along this vertical chain.

METHODS FOR QUANTIFYING ANTITRUST DAMAGES: THE PASTA CARTEL IN ITALY

Giovanni Notaro (Autorita Garante della Concorrenza e del Mercato) discusses METHODS FOR QUANTIFYING ANTITRUST DAMAGES: THE PASTA CARTEL IN ITALY. Mama mia!

ABSTRACT: This article contributes to the ongoing debate on the quantification of the damages caused by anticompetitive conduct by applying a number of empirical methods to the pasta cartel in Italy, which was discovered by the Autorità Garante della Concorrenza e del Mercato (Italian Competition Authority, or AGCM) in 2007. These methods include the dummy variable approach, the dynamic treatment effects (DTE) method, and the so-called straight-line methods. The key results show that both the dummy variable and the DTE methods perform better than the straight-line methods. Moreover, the last should not be used when the underlying cost and demand drivers over the cartel period are substantially different from those prevailing before or after. The dummy variable approach and the DTE method provide very similar estimates of the cartel overcharge, though there is no reason to expect that this would always be the case. Finally, this article contributes to the ongoing debate on “optimal fines” and on the societal benefits of having a proper antitrust enforcement by showing that that the fines levied by the AGCM in this particular case were below “optimal” levels, and that the benefits from this intervention of the AGCM are roughly seven times its annual budget.

Aluminum Market Dislocation: Evidence, Incentives and Reform

Rosa Abrantes-Metz (Global Economics Group and NYU) has posted Aluminum Market Dislocation: Evidence, Incentives and Reform.

ABSTRACT: Are major aluminum players colluding to drive up the price of this metal, crucial to the production of everything from beer cans to airplanes? A first look at the empirical evidence, combined with an analysis of the structure and incentives in this market, suggests that this possibility is worth the authorities’ attention. At the least, reform in this market seems to be in order.

The Paradox of Australian Competition Policy: Contextualising the Coexistence of Economic Efficiency and Public Benefit

Vijaya L. Nagarajan, Macquarie University explains The Paradox of Australian Competition Policy: Contextualising the Coexistence of Economic Efficiency and Public Benefit.

ABSTRACT: Although competition law is viewed as being focussed on fostering competition, there is more depth to it. Australian competition policy has been designed to provide space for public benefits, whereby prima facie anticompetitive conducts that eventually result in a public benefit can continue. This is a unique feature which reveals the importance of having flexibility in legislative design and the benefits of case by case approach.

The objective of this article is to identify the types of public benefits that have been recognised through the authorisation process in Australian competition law. The article uses an innovative methodology to study 244 authorisation determinations made between 1976 and 2010 and analyses them in their economic and social context. This study demonstrates that the authorisation process has been a valuable one which has allowed competition policy to operate effectively while accommodating many wider concerns. Conducts that promote competition or encourage cost savings have been recognised alongside those which enhance product safety or encourages environmental protection, demonstrating the complexity and breadth of competition law in practice. This type of decision making can be explained as a triumph of practice.

The ACCC Immunity Policy for Cartel Conduct: Due for Review

Caron Beaton-Wells, Melbourne Law School argues The ACCC Immunity Policy for Cartel Conduct: Due for Review.

ABSTRACT: The Australian Competition and Consumer Commission’s Immunity Policy for Cartel Conduct is seen as a vital tool in detecting, stopping, prosecuting and deterring cartel conduct. In May 2013 the ACCC announced that it is conducting a review of the policy. The review is significant because, amongst other things, it will examine the way in which dual civil/criminal applications for immunity are being handled in a process involving the Commonwealth Director of Public Prosecutions, introduced in 2009. Drawing on a broader research project relating to immunity (leniency) policies, this paper raises a series of questions that should be treated as relevant to the ACCC’s review, including questions relating to the operation and interpretation of the policy, its effectiveness in meeting its stated objectives and its role and effects in the overall system of enforcement and compliance.

On the Challenges Facing Patent Pooling in Biotechnology

Thomas D. Jeitschko, Michigan State University - Department of Economics and Nanyun Zhang, Independent Project Analysis, Inc provide thoughts On the Challenges Facing Patent Pooling in Biotechnology.

ABSTRACT: The effect of patents and patent law on innovation has of late gained considerable attention in the US and elsewhere as public policy concerns have been raised as to whether the patent system is broken and tends to stifle, rather than foster innovation. In addition to these concerns there are international aspects as to how protection of intellectual property can be effectively assured across borders, on the one hand, and how the benefits of innovation and advance, especially in medicine, can be made to benefit those in poorer countries.

Michael Whinston Joins Bates White

First Whinston leaves the Windy City for Boston (I am guessing because the quality of baseball is better) as part of a Northwestern for MIT swap. Now Whinston has joined Bates White.

The Distribution of Pay Television in the United States: Let an Unshackled Marketplace Decide

Warren S. Grimes,Southwestern Law School argues The Distribution of Pay Television in the United States: Let an Unshackled Marketplace Decide.

ABSTRACT: Aiming at what Senator John McCain has called an “injustice...inflicted on the American people,” antitrust litigation has taken aim at powerful television programmers who force large and unwieldy bundles of TV channels on distributors and the ultimate consumer, with overpayments that are tens of billions of dollars each year. The unwieldy and expensive bundles deny consumers meaningful choice and deter many from subscribing to pay TV. The paper focuses on one unsuccessful consumer class action suit dismissed in the lower courts, but also describes another pending suit brought against a programmer. An antitrust remedy could eliminate the bundling restraints, freeing the distributors to allow competition, not costly or intrusive regulation, to bring choice and lower cost options to television consumers. The article also analyzes commentary supportive of the dismissal of the earlier litigation, criticizing that commentary and arguing that a better outcome would have been consistent with the purposes of the Sherman Act and demonstrate the Act's continued relevance in a high tech world. The offered economic analysis is relevant not only to future antitrust litigation, but also to possible FCC regulatory action or proposed legislation pending in the Congress dealing with television distribution.

The Comparative Law and Economics of Standard-Essential Patents and FRAND Royalties

Thomas F. Cotter, University of Minnesota Law School has written on The Comparative Law and Economics of Standard-Essential Patents and FRAND Royalties.

ABSTRACT: Standard setting organizations often require their members to declare which of their patents are essential to the practice of a prospective standard, and to agree to license any such standard-essential patents (SEPs) on "fair, reasonable, and nondiscriminatory" (FRAND) terms. Among the issues that have arisen in recent disputes involving FRAND-encumbered SEPs are (1) whether a FRAND commitment creates a binding contract for the benefit of third parties, obligating the SEP owner to forgo the right to seek injunctive relief for the infringement of the SEP; (2) whether the law of remedies, or other principles of generally applicable civil law such as the doctrine of "abuse of right," can limit the prevailing SEP owner’s ability to obtain injunctive relief; (3) the circustances under which competition law (antitrust) may play a role in resolving these matters; (4) whether the patentee is entitled to relief in the form of ongoing damages, if one or more of these bodies of law eliminates the possibility of an injunction; and (5) if so, how should courts calculate those damages. This article provides both an overview of how courts and other entities have begun to address these questions in the United States and elsewhere, and my analysis of the advantages and disadvantages of different possible approaches. I argue, among other things, first that courts generally should not allow SEP owners to obtain injunctions, but rather only ongoing damages; second, that in principle though perhaps not always in practice, it is preferable to use contract and patent law to achieve this result, as opposed to antitrust; and third, that in awarding monetary relief for the infringement of SEPs courts should apply the same methodology the use to calculate reasonable royalties generally, subject to a few modifications.

Channeling and Contending with Bill Kovacic

Jon Baker (American University) is Channeling and Contending with Bill Kovacic.

ABSTRACT: This essay was written for a festschrift in honor of Professor William E. Kovacic. It discusses Prof. Kovacic’s work on the design of antitrust enforcement institutions, the interplay between the Chicago and Harvard schools in the transformation of antitrust that took place a generation ago, and the extent to which antitrust norms exhibit continuity over time. It will published
in "William E. Kovacic - Liber Amicorum: An Antitrust Tribute - Vol. II," which is scheduled to be released in February 2014 by the Institute of Competition Law.

The Regulatory Revolution at the FTC: A Thirty-Year Perspective on Competition and Consumer Protection

James Cooper (George Mason) has edited The Regulatory Revolution at the FTC: A Thirty-Year Perspective on Competition and Consumer Protection.

BOOK ABSTRACT: In the 1970s, the Federal Trade Commission had embarked on an activist consumer protection and antitrust agenda which resulted in severe public and congressional backlash, including calls to abolish the agency.  Beginning in 1981, under the direction of Chairman James Miller, the FTC started down a new path of economically-oriented policymaking.  This new approach helped save the FTC and laid the groundwork for it to grow into the world-class consumer protection and antritrust agency that it is today.

The Regulatory Revolution at the FTC examines this period of transition in light of continuing debate about the FTC's mission. Editor James Campbell Cooper has assembled contributions from leading economists and scholars, including many of the central figures in the Miller-era Commission and today's FTC, who provide a comprehensive and revealing story about the importance of economic analysis in regulatory decision-making. Together, they foster a crucial understanding of the evolution of the FTC from an agency on the brink of extinction to one widely respected for its performance and economic sophistication.

Standard Setting: Should There Be a Level Playing Field for All FRAND Commitments?

Nadia Soboleva & Lawrence Wu (NERA Economic Consulting) ask Standard Setting: Should There Be a Level Playing Field for All FRAND Commitments?

ABSTRACT: In the past few years, issues related to fair, reasonable, and non-discriminatory licensing rates for patents have garnered considerable attention. The issues most often come up in the context of standard-essential patents. However, some FRAND commitments have been undertaken for patents that have not been formally declared as standard essential. In this paper, we consider the development of FRAND-encumbered patents outside the context of a standard-setting organization and the policy issue of whether injunctive relief should apply equally to owners of both types of FRAND-encumbered patents. For ease of exposition, we will refer to two types of FRAND-encumbered patents-SSO FRAND-encumbered patents and non-SSO FRAND-encumbered patents.

2013 Review of Consumer Protection Law Developments

The ABA has published the 2013 Review of Consumer Protection Law Developments.

BOOK ABSTRACT: Consumer protection laws seek to correct a misimpression that a product or service has a greater value than it actually does and, by doing so, prevent consumer injury. Understanding this objective, however, is a good deal easier than understanding the many federal and state laws designed to accomplish it. Consumer Protection Law Developments, published in 2009 was a complete and detailed perspective on Consumer Protection laws, with emphasis on developments regarding federal, state, and international law, as well as industry self-regulation. This 2011 Supplement updated and summarized developments since the original edition was published, and this new 2013 Review contains all the updates since that edition. The 2013 Review of Consumer Protection Law Developments, provides a comprehensive update on consumer protection issues, including developments in federal and state enforcement, data security, privacy, advertising substantiation and self-regulation, Lanham Act and other private litigation, and international issues. The update also extensively covers changes to the consumer financial laws under Dodd-Frank and the newly-created consumer protection agency, the Consumer Financial Protection Bureau, providing detailed discussion of the CFPBs structure, jurisdiction, remedial powers, rulemaking and guidance, enforcement actions, and judicial review of the agencys actions.

Significant developments that are covered in this edition are:

•The FTCs issuance of the Green Guides for environmental marketing claims

•amendments to the Childrens Online Privacy Protection Rule

•advertising substantiation developments, including developments in the competent and reliable scientific evidence standard

Patently Obvious: Why Seeking Injunctions on Standard-Essential Patents Subject to a FRAND Commitment Can Violate Section 2 of the Sherman Act

Greg Sivinski (Microsoft) discusses Patently Obvious: Why Seeking Injunctions on Standard-Essential Patents Subject to a FRAND Commitment Can Violate Section 2 of the Sherman Act.

ABSTRACT: Technical standards are a necessary exception to a competitive marketplace based upon feature differentiation, but they pose risks because of the market power they confer on holders of standard-essential patents ("SEPs," which generally speaking are technically essential and must be licensed in order to implement the standard). This is particularly true when the standard is widely adopted and there are no reasonable alternatives to its use. In such circumstances, a SEP owner can use the threat of an injunction to extract supracompetitive royalties or exclude competition entirely. This "lock-in" and related market power is what distinguishes SEPs from typical "differentiating patents" that are not incorporated into a formal standard-and is what makes Section 2 of the Sherman Act a powerful and appropriate tool to regulate SEP abuse.

The basic aim of the patent system is to create strong incentives to innovate and compete through feature differentiation, leading to consumer choice and competitive markets. As part of the patent grant, owners of differentiating patents may license their patents for a royalty, or enforce their rights to exclude infringers through an injunction or an action for damages. These rights, on their own, do not confer market power on the owner of a differentiating patent. Free riders (would-be infringers) can choose to work around differentiating patents or license the patented technology if it is available. And when disputes arise and a differentiating patent holder seeks to exercise its right to exclude via an injunction, the usual eBay factors protect the parties' interests. By contrast, standards—which are, after all, the result of concerted action by a group of would-be competitors in a standard-setting organization—effectively end competition among differentiated solutions. They can create tremendous value by allowing competing platforms and devices to interoperate. Innovation and differentiation may migrate and expand from the standardized space to new technologies on top of or adjacent to standardized technology. But when a SEP is adopted into a standard, implementing the standard requires implementing the patented technology. This in turn confers significant market power on the patent and its holder. To deal with this problem - and to avoid antitrust liability, SSOs typically require SEP owners to promise to license to all on fair, reasonable, and non-discriminatory terms. In patent and contract cases, courts have rejected injunctions as violations of the SEP owner's FRAND promise. But SEP injunctions also threaten competition, by raising prices, reducing output, and undermining confidence in standard-setting. Concerns over such harms prompted the FTC to pursue two high-profile cases under Section 5 of the FTC Act, but courts and agencies also should not hesitate to employ Section 2 of the Sherman Act. Section 2 prevents the "willful acquisition or maintenance of [monopoly] power, as distinguished from growth or development as a consequence of a superior product, business acumen, or historical accident." Seeking injunctions on FRAND-encumbered SEPs easily satisfies that standard. The elements of Section 2 and their applicability to SEPs are discussed in more detail below.

ROUNDTABLE ON EX OFFICIO CARTEL INVESTIGATIONS AND THE USE OF SCREENS

Rosa Abrantes Metz (Global Economics Group) has written on ROUNDTABLE ON EX OFFICIO CARTEL INVESTIGATIONS AND THE USE OF SCREENS for the OECD.