Wednesday, May 15, 2019
Back to the Future of Antitrust
Review of The Antitrust Paradigm
post by Jason Furman
Draft: May 14, 2019
Although many lament the increasing monopolization of the economy, one admittedly narrow market is defying this trend: books about the monopolization of the economy. The last year has seen excellent contributions to the topic including by Steven Pearlstein, Eric Posner and Glen Weyl, Jonathan Tepper and Tim Wu. We can now add Jonathan Baker’s The Antitrust Paradigm to the list. The competition for books about monopoly may not have resulted in lower prices, but it is ample testimony to the ways that competition can benefit consumers through variety and quality.
The Antitrust Paradigm is about as passionate and readable as a book with 976 footnotes can be. Nine reasons to believe market power has increased? Check. Rebuttals of nine Chicago-school style arguments against more vigorous antitrust enforcement? Check. Five high-level exclusionary behaviors by platforms, with four subsets of exclusionary behavior just under the heading of “exclusivity through vertical merger and exclusive dealing”? Check. Five proposed new rebuttable presumptions or rules? Check.
Just about every argument made in The Antitrust Paradigm could, or at least should, hold up in a court of law. This is to be expected given Baker’s combination of academic economics, law, and substantial experience in government (including as the Director of the Bureau of Economics at the Federal Trade Commission as well as stints at the Department of Justice, the Federal Communications Commission and the Council of Economic Advisers).
All of these specific arguments are embedded in a broader theme, that antitrust emerged as a “centrist” alternative to laissez faire and regulation, culminating in the “structural” period of antitrust that began around 1950 but has (partially) ended with rise of the Chicago School. Baker argues that this intellectual revolution has been invalidated by the outcome it has contributed to: increased concentration in the economy, slower productivity growth, and, in a particularly detailed analysis, reduced innovation.
Baker does accept the Chicago School premise that antitrust should be grounded in economics but shows that modern economics justifies a tougher approach both to mergers and enforcement against existing businesses. He further argues that best way to step up enforcement in an efficient and administrable manner would be to rely on the types of presumptions that have guided antitrust, but to reformulate these in a manner that is more consistent with the modern economic literature and more pro-competition. Although Baker does not explicitly frame his arguments against the renewed “neo-Brandesian” or “structuralist” approach to antitrust advanced by people like Tim Wu, Lina Kahn, and Barry Lynn, there are enough stray references to it that you can tell that he finds its arguments somewhat wanting and also unnecessary in building the case for more vigorous action.
If forced to quibble with The Antitrust Paradigm, I would cite two places where Baker’s deep grounding may come at the cost of his contributing to expanding the broader policy debate. The first is his (de facto) argument that we do not need to change the law but just its application. As Baker writes, “I have therefore emphasized the sort of arguments that can convince the [Supreme] Court: economic ones... the justices will be most responsive to economic arguments and evidence concerning competition and welfare.” For someone sitting at the FTC, this is the right approach. Given the challenges to changing the Court’s attitude, however, changes in the law itself may be warranted and I would love to know what Baker thinks those changes should be and how he would widen the debate to make them more acceptable in the future.
The second quibble is that Baker focuses almost exclusively on competition policy and dismisses regulation. At times Baker’s exclusive reliance on competition policy seemed like a carpenter with a hammer for whom everything looks like a nail. But not everything is a nail and in some cases regulation may be warranted. This is certainly the case for natural monopolies where utility-style regulation may be warranted. I do not believe the natural monopoly designation applies to the leading digital platforms, but in that area there is also substantial scope for pro-competition regulation to facilitate entry and switching, as I outlined in recommendations for the UK government.
These quibbles reflect more a desire to hear more from Baker and see him expand the debate further, not a disagreement with any of his analysis or ideas. And his analysis and ideas are so rigorously and carefully argued that The Antitrust Paradigm will be the standard text on a revived economic approach to antitrust for some time to come.
Tommaso M. Valletti, Imperial College Business School; Centre for Economic Policy Research (CEPR) and Hans Zenger, European Union - Directorate General for Competition have a new a paper on Increasing Market Power and Merger Control.
ABSTRACT: A significant body of empirical research has documented a structural increase in margins across a wide range of industries and countries. This article analyses the potential implications of this trend for merger control. We argue that structural increases in firms’ pricing power call for a pro-active assessment of potential competition cases and increased vigilance when reviewing horizontal concentrations more generally.
Ajay Agrawal, University of Toronto - Rotman School of Management; National Bureau of Economic Research (NBER), Joshua S. Gans, University of Toronto - Rotman School of Management; NBER, and Avi Goldfarb, University of Toronto - Rotman School of Management discuss Artificial Intelligence: The Ambiguous Labor Market Impact of Automating Prediction.
ABSTRACT: Recent advances in artificial intelligence are primarily driven by machine learning, a prediction technology. Prediction is useful because it is an input into decision-making. In order to appreciate the impact of artificial intelligence on jobs, it is important to understand the relative roles of prediction and decision tasks. We describe and provide examples of how artificial intelligence will affect labor, emphasizing differences between when automating prediction leads to automating decisions versus enhancing decision-making by humans.
Stephane Ciriani, Orange, François Jeanjean, Orange addresses Competition, Technological Change and Productivity Gains: A Sectoral Analysis.
ABSTRACT: This paper addresses the empirical relationship between the level of competition and the rate of productivity growth across thirty sectors of the French production system during the period 1978-2015. It shows that there exists an optimal level of competition for each sector that is defined by the mark-up that maximizes the growth rate of labor productivity. The persistence of nonoptimal mark-ups in French sectors is associated with a 0.4% loss in aggregate average annual labor productivity growth during the period (1.86%). Hence, long-term productivity growth could have reached 2.25% if mark-ups had been at their optimal level. There is a strong significant positive correlation between the optimal mark-up and the rate of Hicks-neutral technical progress in each sector. This finding implies that sectors with high technical progress require higher mark-ups to maximize their rate of labor productivity growth. Overall, the aggregate economy would benefit from a decrease in the gap between nonoptimal and optimal mark-ups, as such an alignment would foster productivity growth.
Francisco Gomez-Martinez, Universidad Carlos III Madrid, Sander Onderstal, University of Amsterdam; Tinbergen Institute, and Maarten Pieter Schinkel, University of Amsterdam - Department of Economics; Tinbergen Institute - Tinbergen Institute Amsterdam (TIA) ask Can Collusion Promote Corporate Social Responsibility? Evidence from the Lab.
ABSTRACT: Competition has been argued to erode socially responsible behavior in markets, suggesting that allowing cartel agreements among firms may promote public interest objectives. We test this idea in a laboratory experiment. Participants playing the role of firms choose between offering a ‘fair’ and an ‘unfair’ good to a consumer participant. When the unfair good is traded, a negative externality is imposed on a third party. We vary whether or not the firms are allowed to coordinate on the type of good they sell. We find that the opportunity to coordinate has no significant impact on the fraction of fair goods traded on the market, but polarizes: more of the same good, fair or unfair, is offered. Consumer surplus and profit are, on average, not affected. Irrespective of whether coordination between firms is allowed, participants are more likely to trade the fair good, the stronger their third-party preferences are. These findings suggest that both consumer and managerial values are more important drivers of socially responsible behavior than opportunities for firms to coordinate their CSR activities. We highlight implications for competition policy, where cartels may be exempted on CSR grounds.
Christopher Jon Arup, Monash University is Planning the ACT Supermarket Competition Policy.
ABSTRACT: This study examines the Australian Capital Territory (ACT) government's navigation of its land-use planning law to implement a supermarket competition policy. It shows how big issues of competition and planning worked through the particulars and processes of legal regulation. The study tests whether local planning law might balance economic diversity and urban amenity with the competitive strengths of the major supermarket chains, especially when they are supported by national competition policy. It provides insights into ACT planning law.
Tuesday, May 14, 2019
Pauline Affeldt, German Institute for Economic Research (DIW Berlin); Technische Universität Berlin (TU Berlin), Tomaso Duso, German Institute for Economic Research (DIW Berlin); TU Berlin- Faculty of Economics and Management - Empirical Industrial Organization, and Florian Szücs, Vienna University of Economics and Business offer a retrospective of 25 Years of European Merger Control. Worth reading!
ABSTRACT: We study the evolution of the EC’s merger decision procedure over the first 25 years of European competition policy. Using a novel dataset constructed at the level of the relevant markets and containing all merger cases over the 1990-2014 period, we evaluate how consistently arguments related to structural market parameters were applied over time. Using non-parametric machine learning techniques, we find that the importance of market shares and concentration measures has declined while the importance of barriers to entry and the risk of foreclosure has increased in the EC’s merger assessment following the 2004 merger policy reform.
Michael A. Carrier, Rutgers Law School, and Marc Edelman, City University of New York - Baruch College, Zicklin School of Business describe College Athletics: The Chink in the Seventh Circuit's 'Law and Economics' Armor.
ABSTRACT: If any court is linked to the “law and economics” movement, it is the Seventh Circuit, home of former Judge Richard Posner, the “Chicago School,” and analysis based on markets and economics. It thus comes as a surprise that in college-athletics cases, the court has replaced economic analysis with legal formalisms. In adopting a deferential approach that would uphold nearly every rule the NCAA claims is related to amateurism, the court recalls the pre-Chicago School era, in which courts aggressively applied “per se” illegality based on a restraint’s form, rather than substance. While the Seventh Circuit’s detour of deference has taken several stops, this Essay focuses on the most recent, the 2018 decision in Deppe v. NCAA.
In Deppe, a college football punter who believed he would receive an athletic scholarship transferred after learning that he would not. Pursuant to the NCAA’s “year in residence” rule, the punter was forced to sit out for one year before he could play for his new school. The punter claimed that the NCAA’s rule violated antitrust law. But the district court dismissed the claim, and the Seventh Circuit affirmed, finding that the rule was “presumptively procompetitive.”
The Seventh Circuit’s ruling suffered from four critical flaws. First, the court misread antitrust precedent, relying on dicta from a decades-old Supreme Court case addressing a different issue to manufacture a wholly new analytical framework. Second, the court misconstrued antitrust law by neglecting the longstanding “Rule of Reason” analysis that involves burden shifting and emphasizes consumer welfare. Third, the Seventh Circuit ignored the procedural setting of a motion to dismiss, making up facts benefiting the defendant rather than — as hornbook law makes clear — applying facts in the light most favorable to the plaintiff. And fourth, the court neglected the economics that would have shown the anticompetitive nature of the year-in-residence restriction on student-athletes’ movement between schools.
In short, the court upheld a restraint that could harm student-athletes, colleges, and sports fans by applying unsupported rigid rules rather than considering a market’s economic realities. The Seventh Circuit would benefit from returning to its law and economics roots.
Wouter P. J. Wils, European Commission examines the Independence of Competition Authorities: The Example of the EU and its Member States.
ABSTRACT: At the end of 2018, the European Parliament and Council adopted Directive (EU) 2019/1, often referred to as the 'ECN+ Directive', which, among other things, contains provisions ensuring the independence of the competition authorities of the EU Member States (national competition authorities or NCAs), which are, together with the European Commission, responsible for the enforcement of the EU antitrust rules laid down in Articles 101 and 102 TFEU. In early 2019, the European Commission visibly showed its own independence by prohibiting Siemens' takeover of Alstom's rail transport business, a proposed merger publicly backed by the German and French governments. This paper gives an overview of the independence guarantees in EU law and discusses more in general the notion of independence of competition authorities and its rationale.
Roman Inderst, Goethe University Frankfurt and João Montez, Centre for Economic Policy Research (CEPR) model Buyer Power and Mutual Dependency in a Model of Negotiations.
ABSTRACT: Abstract: We study bilateral bargaining between several buyers and sellers in a framework that allowsboth sides, in case of a bilateral disagreement, flexibility to adjust trade with each of their othertrading partners and receive the gross benefit generated by each adjustment. A larger buyer paysa higher per-unit price when buyers' bargaining power in bilateral negotiations is sufficientlylow, and a lower price otherwise. An analogous result holds for sellers. These predictions, andthe implications of different technologies, are explained by the fact that size is a source of mutualdependency and not an unequivocal source of power.
Monday, May 13, 2019
Roman Inderst, Goethe University Frankfurt offers An 'Image Theory' of RPM.
ABSTRACT: We show how a brand manufacturer's control over retail prices can lead to efficiencies when consumers rely on prices as a signal of quality. For this we first show how higher prices can be associated with both higher quality perception as well as higher actual quality. We next identify a conflict of interest between retailers and manufactures. Retailers do not internalize the ensuing reputation spill-over that higher prices have on demand at all outlets. And they have less incentives to support brand image through higher prices as this erodes their own position in negotiations while increasing that of the manufacturer. Our efficiency defence for RPM thus applies even when retailers need not be incentivized to undertake non-contractible activities, as in our model the key opportunism problem, with respect to quality provision, lies between the manufacturer and consumers.
Jihong Lee, Seoul National University and Hyunkyeong Lim, Seoul National University - School of Economics investigate Market Value of Patents: Evidence from the US, 1976-2017.
ABSTRACT: Since the 1980s, the US has experienced a surge in patenting and R&D. To better understand the phenomena, we explore the evolution of the market value of knowledge capital with a novel firm-level dataset. While the importance of R&D has steadily declined, the market value of patents made a large and sustained gain in the new millennium. An additional patent per million dollars of R&D is associated with improvement of firm value by 11% in the latest decade compared to 3% three decades ago. Our observations are driven largely by young firms, suggesting disproportionate impact of the US patent system on these entities.
Thibault Schrepel, Utrecht University School of Law; University Paris 1 Panthéon-Sorbonne analyzes Collusion by Blockchain and Smart Contracts.
ABSTRACT: Blockchain may transform transactions the same way Internet altered the dissemination and nature of information. If that were to be the case, all relationships between companies would change, including prohibited ones such as collusive agreements. For that reason, the stakes are fundamental and the absence of academic studies entirely dedicated to the issue must be remedied.
To this end, this article introduces the first taxonomy of collusion on blockchain. The discussion then moves on to explore their functioning, their robustness and their limits through the three fundamental stages of the existence of collusive agreements: their birth, life and death. The article further highlights how companies may use smart contracts and sophisticated algorithms to collude in the blockchain environment, thus contributing to the literature solely focused on algorithms.
Using empirical studies, economic analyses and existing case law, we draw legal conclusions that we extend beyond the sole blockchain technology. Along the way, we propose methods of action for antitrust and competition agencies.
Germain Gaudin, European Commission - Directorate General for Competition; Telecom ParisTech and Alexander White, Tsinghua University - School of Economics & Management discuss Vertical Agreements and User Access.
ABSTRACT: Platforms acting as sales channels for producers often charge users for access, via a subscription fee or a markup on hardware. We compare two common forms of vertical pricing agreement that platforms use with sellers: per-unit and proportional fees. In particular, we analyze the critical role that user access plays on equilibrium prices and profits under both forms of agreement. We characterize this role and show how it potentially overturns standard results saying that proportional fees lead to lower prices and higher profits.
Friday, May 10, 2019
Assistant Attorney General Makan Delrahim Delivers Remarks at the American Bar Association in Buenos Aires
Coty, Hoffmann-La Roche II, EAEPC, Commission SEP Communication and others: A Survey of Developments at the Intersection between Competition Law and IP Law in the Past Year
Significant preliminary rulings on issues of concern for IP owners, including distribution of luxury branded goods, patent licensing and price discrimination, were given this year by the CJEU (Coty Germany; Hoffmann-La Roche; MEO).
The European Commission published an important Communication on Standard Essential Patents; two of its decisions to reject complaints were upheld by the European Courts (Agria Polska in the CJEU and GSK/EAEPC in the General Court).
The Commission took a decision on the IP-rich merger between Qualcomm and NXP.
From the MIT obituary:
Franklin M. Fisher, the Jane Berkowitz Carlton and Dennis William Carlton Professor of Microeconomics, emeritus, died on April 29 at the age of 84.
Fisher was born in New York City and received both his undergraduate degree and his PhD from Harvard University. He joined the MIT faculty in 1960, after a one-year post-PhD stint as an assistant professor at the University of Chicago. Fisher spent the rest of his career at MIT. In 2000, he was appointed the inaugural holder of the Jane Berkowitz Carlton and Dennis William Carlton Professorship of Microeconomics. He became a professor emeritus in 2004.
Fisher was a versatile economist who made important contributions to economic theory, econometric methods, and the empirical analysis of firm and industry behavior. He was best known for his research on aggregation theory, estimation of simultaneous equation models, and the measurement and consequences of industry concentration. His contributions were widely celebrated. In 1973, he received the John Bates Clark Medal from the American Economic Association, an award then presented every other year to the American economist under the age of 40 who is judged to have made the most significant contributions to economic thought and knowledge. He served as president of the Econometric Society, was a fellow of the American Academy of Arts and Sciences, and held an honorary degree from the Hebrew University in Jerusalem.
Fisher was actively involved in antitrust policy. He served as the lead economic expert for IBM in the 1970s, when the U.S. Department of Justice sued the firm for anticompetitive behavior. After the case was settled in the early 1980s, he and co-authors John McGowan and Joen Greenwood published "Folded, Spindled and Mutilated," a comprehensive analysis of the economic issues in the case. Several years later, Fisher served as the lead expert for the Department of Justice in another high-profile antitrust case, U.S. v. Microsoft.
Late in his career, Fisher’s interests shifted to the economics of water distribution in the Middle East, leading a team to model water resources and identify opportunities for gains from cross-border water trading.
Fisher was a very popular teacher and an active dissertation adviser. He served as the primary adviser for 47 doctoral students, and as the secondary adviser (committee member) for dozens more. Five of his advisees are current MIT faculty members, including Nancy L. Rose ’85, the current department head for Economics.
“Frank was a wonderful mentor whose lectures combined technical rigor with a rich interest in applied questions," Rose says. "He was in high demand as a dissertation supervisor, where his advice ranged from econometric specifications to the craft of writing.”
Fisher was active in a broad range of outside pursuits. He was a silver life master of duplicate bridge and an avid sailor. His work with numerous nonprofit organizations included presidencies of American Friends of Peace Now, the New Israel Fund, and the American Jewish Congress New England Region.
He is survived by his wife, Ellen Paradise Fisher of Cambridge, Massachusetts; three children: Abraham and Abigail of Belmont, Massachusetts, and Naomi of Ann Arbor, Michigan, and their spouses; and eight grandchildren.
The Acquisitions of the Chinese State-Owned Enterprises under the National Merger Control Regimes of the EU Member States: Searching for a Coherent Approach
Alexandr Svetlicinii, University of Macau - Faculty of Law describes The Acquisitions of the Chinese State-Owned Enterprises under the National Merger Control Regimes of the EU Member States: Searching for a Coherent Approach.
ABSTRACT: With the rapidly unfolding China’s Belt and Road Initiative (BRI) and the ongoing reform of the State-owned enterprises (SOEs), the number of overseas acquisitions by the Chinese SOEs in various industrial and services sectors is gradually on the rise. These transactions have raised a number of questions in terms of the assessment of the economic concentrations’ potential impact on competition and challenged the traditional assessment tools employed by the merger control regimes. The paper examines the evolving experience of Chinese SOEs’ acquisitions in the European Union (EU), which are subject to ex ante assessment under both EU and national merger control regimes. The analysis of the merger assessment practice of the EU Commission culminating in the recent conditional approval of the ChemChina/Syngenta merger indicates that the traditional assessment tools, when applied to the acquisitions by Chinese SOEs, may no longer be adequate to grasp the essence of their corporate governance and decision-making. The review of the merger control practice of the national competition authorities (NCAs) also demonstrates the absence of a coherent assessment approach to the cases involving Chinese SOEs, which may lead to the inconsistent enforcement and strengthening of the foreign investment screening on grounds other than market competition.