Josh Wright of Truth on the Market argues that courts should be less concerned with price discrimination. In Independent Ink, Justice Stevens wrote:

While price discrimination may provide evidence of market power, particularly if buttressed by evidence that the patentee has charged an above-market price for the tied package, it is generally recognized that it also occurs in fully competitive markets. We are not persuaded that the combination of these two factors should give rise to a presumption of market power when neither is sufficient to do so standing alone.

Here is Josh’s analysis.

So what is wrong with this language? First, the language adopts the tone that price discrimination is a bad thing. This is not necessarily so. … The important economic point is that the ability to price discriminate does not arise out of monopoly power (the power to control the market price) but from the power to control one’s own price that is conferred by the downward sloping demand curve faced by virtually all firms in the modern economy. The suggestion that price discrimination + above market prices for the package is evidence of market power is unnecessary. Evidence of supra-competitive market prices is sufficient on this score. The larger problem is that this logic tells us that there is a better economic reason to reject the presumption. Specifically, the court could have rid antitrust law of the inference that price discrimination is anticompetitive in any manner. Benjamin Klein and John Wiley, Jr., for example, have argued that (70 Antitrust LJ 599 (2003)) price discrimination should be a defense. This sounds right to me. This does not mean that all such practices would be immune from antitrust liability totally. Practices that facilitate price discrimination may be happen to injure competition for other reasons, i.e. a tying arrangement may foreclose a rival from sufficient distribution as to achieve minimum efficient scale for a significant period of time, thus raising barriers to entry. But price discrimination adds nothing to that analysis on its own. Justice Stevens’ opinion emphasizes an interest in aligning modern antitrust jurisprudence with the consensus view of economists, but does not finish the job.

I am conflicted on the issue of price discrimination, because price discrimination is direct evidence for the existence of market power. The problem is, of course, that the inference from market power to anticompetitive effects does not always hold true. In fact, in differentiated product markets, that inference is lilkely to be highly unreliable, because product differentiation in itself is an exercise in gaining market power, yet product differentiation provides us with greater product variety, which should properly be counted as promoting consumer welfare.

Technorati Tags: antitrust, Independent Ink, price discrimination, consumer welfare

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