Cartels Portrayed 1.6.09

“>This presentation pulls together a wealth of empirical data on cartels, their economic effects, and cartel prosecution statistics. Essential reading.

The LinkLine holding is not particularly surprising. Trinko applies at the wholesale level and Brooke Group at the retail level.

1. Wholesale — If there is no antitrust duty to deal in the first place, then the upstream firm may charge whatever price it wants. In fact, Roberts is pretty clear about the fact that the upstream firm can put the downstream competitor out of business in a number of ways: stop selling, higher prices, crummy service, etc. It all depends on whether there is an antitrust duty to deal. Here, there isn’t. (See FN.2)
2. Retail — Downstream pricing can only be an antitrust violation if it satisfies the (i) below cost and (ii) recoupment prongs of Brooke Group, which LinkLine doesn’t.

What’s interesting about LinkLine is not so much what it says (aside from some very quotable language), but what it doesn’t address. Unlike Scalia in Trinko who went out of his way to address and limit the application of essential facilities and duties to deal in general, LinkLine is silent on what exactly constitutes the all important duty to deal. Roberts cites Aspen as one source of a duty to deal, and then quotes Areeda’s “Epithet” article but only for the limited and rather uncontroversial proposition that “court’s shouldn’t be rate regulators, etc.”, which he then proceeds to discuss for about a page and a half.

So LinkLine (unlike Trinko) is a rather disciplined and limited decision, only applying (a moderate interpretation of) Trinko and Brooke Group to a set of facts that involves both elements. The only “novelty” is the disaggregation of a price squeeze claim in an upstream duty to deal and a downstream predatory pricing claim. The key question, however, has been left open: What constitutes a duty to deal?

A somewhat different question is whether Roberts’ consistent application of the “lesser included” argument, i.e., if you don’t have to sell at all, then whatever else you do to your buyer (price, quality, delay, etc.) can’t be an antitrust violation, may turn out to be a slippery slope. This line of reasoning is, of course, prominent in the IP context. As long as a firm stays within the scope and duration of the patent grant, it is all but immune from antitrust challenge (Fed. Cir, DOJ). I wonder what this will do, over time, to tying. In a tying case, one almost never has a duty to deal in the first place. The offense is conditioning the sale on the purchase of other stuff. In fact, the “lesser included” reasoning may well be extended to vertical restraints in general, all of which have some form of conditioning attached to them (I’ll sell you my stuff, but only if (i) you don’t resell it in California; (ii) you don’t sell anyone else’s stuff, etc.). Extrapolating from LinkLine, one might argue that as long as one can refuse to sell in the first place, there is little that one can do to downstream buyers that could run afoul of the antitrust laws.

Here are the print and the screen versions of my essential facilities presentations at the ABA IP and Antitrust Conference in Berkeley earlier this February.

Here are some (draft) slides and materials from my course in International Antitrust and Policy at U.C. Berkeley.

• Segment 1: Introduction
• Segment 2: Horizontal Agreements in the U.S. and the EU
• Segment 3: International cartels at work

As always, everything is licensed under a Creative Commons attribution only license. The (ever evolving) syllabus is here. By the way, weary as I am of the cloud for privacy and policy reasons (I like to control my tools, not vice versa), Google Docs is one great app that just keeps getting better.

Here is an updated version of my Primer in Antitrust Law and Policy, released under a Creative Commons Attribution Only (i.e., CC-BY) license. As always, comments and suggestions are welcome.

David Friedman notes that:

There is no antitrust law in WoW, which makes it a good place to observe collusive behavior by sellers. My wife, who spends more time in the auction house buying ad selling than I do, has observed both an attempt to corner a market and an attempt, at least partly successful, to form a cartel—a cartel she was invited to join. Her refusal was met by a threat to drive her out of the market by underselling her. The organizer of the cartel had apparently not read Aaron Director’s analysis, reflected in McGee’s classic article on the myth of predatory pricing; it had not occurred to him that if he was selling, at an artificially low price, ten times as many gems as the interloper, he was also losing money ten times as fast. It took only a few days for him to discover the flaw in the strategy and abandon it.

For a dose of reality regarding cartels, any of John Connor’s recent articles will do.

This is truly remarkable. NIN’s album

Ghosts I-IV is ranked the best selling MP3 album of 2008 on Amazon’s MP3 store. Take a moment and think about that. NIN fans could have gone to any file sharing network to download the entire CC-BY-NC-SA album legally. Many did, and thousands will continue to do so. So why would fans bother buying files that were identical to the ones on the file sharing networks? One explanation is the convenience and ease of use of NIN and Amazon’s MP3 stores. But another is that fans understood that purchasing MP3s would directly support the music and career of a musician they liked. The next time someone tries to convince you that releasing music under CC will cannibalize digital sales, remember that Ghosts I-IV broke that rule, and point them here.

We’ve discussed a similar, albeit much less radical experiment by Radiohead in an earlier post.

According to the band, 800,000 transactions generated $1.6 million in sales revenue in the first week of the album’s availability, despite the fact that the 36-song version of the album is widely available on torrent sites.

I am very much looking forward to the ABA 2009 Antitrust Intellectual Property Conference in my new hometown Berkeley, where I will be on a panel about different approaches toward “forced access” to IP in the US and in the EU. My remarks will focus on the exciting contributions that infrastructure theory has made to our understanding of what properly constitutes an essential facility.

Here are my slides. Happy New Year!

UPDATE: Here’s the link to the registration page.

Here are some initial reactions to the Commission Guidance to Article 82 in no particular order.

• The Commission confirms that exclusion is a derivative antitrust offense. There is only one type of harm to competition, namely consumer exploitation. Exclusion is relevant only if and to the extent it leads to exploitation. (Para. 19) Antitrust conservatives will like this. However, as the Commission giveth it taketh away, namely with a hair trigger standard for exploitation. Consumer harm is recognized at all levels (FN. 15), and in both the short and the long run. Moreover, consumers may be harmed by a loss in innovation, market dynamism, and variety of choice. Even a loss of business rivalry as such may harm consumers, so that “the protection of rivalry and the competitive process outweighs possible efficiency gains.” (Para. 29) The Commission thus reclaims the consumer welfare concept, the favorite meme of antitrust conservatives in paring back the reach of the antitrust laws, as a foundation for a progressive antitrust policy. This proves what commentators have observed all along, namely that the consumer welfare paradigm is not necessarily a rule of non-intervention.
• Technological tying, in the eyes of the Commission, is worse than contractual tying, because it makes a “tying or bundling strategy a lasting one.” (Para. 52) Here, the Commission also includes a negative externality of technological tying in the anticompetitive calculus, namely that “technological tying … reduces the opportunities for resale of individual components.” (Id.) The latter is very much in keeping with recent policy statements in favor of modularization and open systems.
• Cross-subsidies may qualify as predatory, even if the firm is not dominant in the predation market. Tucked away in FN. 39 is the following statement.

  The Commission may also pursue predatory practices by dominant undertakings on secondary markets on which they are not yet dominant. … While the dominant firm does not need to predate to protect its dominant position in the market protected by legal monopoly, it may use the profits gained in the monopoly market to cross-subsidize its activities in another market and thereby threaten to eliminate effective competition in that other market.

  This seems to say that a firm that is lawfully dominant in the market for product A could be liable under Art. 82 for using its profits to subsidize predatory pricing in the market for product B, in which it is not (yet) dominant and where A and B are unrelated.
• The Commission does not like Trinko. Really. For a refusal to deal “it is not necessary that there is actual refusal on the part of a dominant undertaking; ‘constructive refusal’ is sufficient. Constructive refusal could, for example, take the form of unduly delaying or otherwise degrading the supply of the product or involve the imposition of unreasonable conditions in return for the supply.” (Para. 23). Moreover, having obtained a dominant position as a result of previous legislative protection from competition and now being under regulatory compulsion to grant access to essential facilities is an argument for, not against, imposing an antitrust duty to deal. A dominant firm can’t complain about a duty to share

  where regulation compatible with Community law already imposes an obligation to supply on the dominant undertaking and it is clear, from the considerations underlying such regulation, that the necessary balancing of incentives has already been made by the public authority when imposing such an obligation to supply. This could also be the case where the upstream market position of the dominant undertaking has been developed under the protection of special or exclusive rights or has been financed by state resources. In such specific cases there is no reason for the Commission to deviate from its general enforcement standard and it may show likely anticompetitive foreclosure without considering whether the above three cumulative circumstances are present.

The Commission Guidance is clearly a response to the DOJ’s recent report on single firm conduct. Time to check the FTC’s website.

Here’s a set of slides discussing horizontal agreements under U.S. law. Eventually, this set will grow to encompass the EU and other jurisdictions.

I recently updated my slides on Antitrust and IP law and the ever popular Microsoft cheat sheet. Note that the slides are now available under a Creative Commons attribution only license (aka cc-BY), which is a more permissive license than the prior attribution-only, non-commercial license. We are, in fact, in the process of relicensing this entire blog under cc-BY, mainly because we got lots of questions whether using our stuff in presentations is commercial or non-commercial use. We don’t think it is, but the new license should put an end to any concerns.

Head over to Truth on the Market for the latest.

Ever since Socrates demolished Gorgias to lasting effect, the universalism vs. relativism debate has had a prominent place in moral theory, in law, and (with some delay) in the natural sciences, too. In stark contrast, much of modern price theory proceeds in a strictly Platonic fashion. The rational actor is an abstraction liberated from the contraints of time and place, so is the firm and the idea of the market itself. The perfectly competitive market with its infinite number of atomistic buyers and sellers, each reacting to aggregated forces outside of their control but to which they each unwittingly contribute, trading perfectly homogenous goods in exchange for an ideal currency with constant marginal value, exists in a parallel universe of ideal forms. We observe its various more or less imperfect instantiations in the real world. The closer the real world approximates the ideal, the better. The implication is that basic economic laws are universal, and that there are thus objective normative criteria by which to judge economic systems, irrespective of their time and place. That belief in economics as a process for discovering universal laws of human action, either through mathematical formalization (”nature obeys mathematics”) or through the observation of a quasi-evolutionary process in which those real-world economies survive that better approximate the ideal, is a driving intellectual force behind the neo-conservative faith in the power of free markets, unlocking human potential everywhere.

The real world, however, does not reflect this hopeful (or plainly ideological) Platonism. As Max Weber pointed out, economic institutions and the theories reflecting them, are largely the product of political history, religion, and geography. For example, French and to a somewhat lesser extent German competition law still clearly reflect the administrative tradition, which has a longer history in centralized France than in decentralized Germany, where an expert government bureaucracy ensures that capitalistic enterprise remains alinged with the public good. Given the a priori embeddedness of the market in the broader body politic, the market never comes into view as a fully separate, autonomous system. As a result, there is no real need for a theory of the market as a self-regulating and self-stabilizing process, which is the defining feature of the perfect competition model. The perfect competition model describes, above all, a stable dynamic, a process moving towards equilibrium without any outside intervention. It is the theoretical justification for laissez faire, for why governments can, in fact, afford to leave businesses (and, not coincidentally, the rich) alone. The perfect competition model is expressly designed to explain why ideal free markets simply cannot spiral out of control.

In France and Germany, the market has always been (at least in part) a tool to be deployed by the state in furtherance of public good (however determined). The market is not an end in itself, as it contains no universal truth about human affairs, or at least no truth that, normatively, the body politic should necessarily encourage or embrace. Rather, the ends of the market process are expressly defined in political, not economic terms, and they include competing values beyond productive efficiency, such as predictable growth, limited inflation, and full employment. (Obviously, having those goals is one thing, achieving them is quite a different matter.) Similarly, competition as a key ingredient of the market process is “managed competition,” as opposed to unlimited competition in a hypothetical natural state. The same is true for property in rivalrous goods, another necessary ingredient of the market process. Property in critical sociatal infrastructure such as transportation, energy, and telecommunication, has never been an entirely private affair, irrespective of who created, planned, or financed the infrastructure, which is reflected both in the constitutional definitions of property (e.g., in Germany) and, in practice, in the still significant state ownership of such industries.

In other words, economic institutions and the building blocks of economic theory reflect in significant part the political structure of the society of which the economic system is a part. In the history of philosophy, countless Platonisms have turned out to be little more than theoretical universalizations of unquestioned contingent beliefs. Antitrust economics would greatly benefit from a more explicit historic and comparative perspective. Competition law certainly has.

One of the undercurrents driving the movement that led to Obama’s landslide victory is that people have finally started to reject en masse a public policy that by and large conceived of them only in the most limited, reductionist, and anemic way possible: as private, rational actors, pursuing primarily their own (usually material) advantage. Yesterday, people asserted their roles as citoyens, as political beings concerned not only with themselves but also with the public good. One of the hallmarks of Obama’s campaign was to ask people to do something, to get involved. Not just to contribute financially, but to reach out, organize house parties, call battleground states, take time off for poll watch, all of which meant doing things together with others, i.e., organizing. The message of change thus implies a belief in the possibility of politically meaningful choice, a notion that has been conspicuously absent for a long time, and which is categorically different from consumer choice. How will this re-assertion of the person over the individual play out in the legal world and the antitrust world in particular? I expect a gradual re-evaluation of how the legal system and economic scholarship relate to each other. The normative principle of law is justice. That of economics is efficiency. Taking rights seriously requires that judges and lawyers adopt an internal point of view and put justice first. Of course, this is not to deny that the legal system should import efficiency considerations here and there. For market regulation and marketplace design rules such as antitrust, efficiency is indeed the right default choice. Fortunately, over a wide range of issues, efficiency and justice are not in conflict with one another. It is, however, meant as a reminder that the legal system is fundamentally independent from economics. Normatively, the legal system belongs to a different domain, and in a democracy the legal system does not take orders from the economic system. The latter may very well constrain or enable actions of the former, but factual obstacles are very much unlike normative constraints.

From John Ralston Saul:

[I]f you can take a number a statistics and you can either halve it or double it and it’s still shocking then you can use it.