Earlier today, the Department of Justice (without the FTC) released a massive, 215 page, report that, in DOJ’s own words “examines whether and when specific types of single-firm conduct may or may not violate Section 2 of the Sherman Act by harming competition and consumer welfare.”  It will take us (and everyone else) some time to digest all 215 pages but DOJ’s press release included these “observations” from the report:

• No single test for determining whether conduct is anticompetitive­such as the effects-balancing, profit-sacrifice, no-economic-sense, equally efficient competitor, or disproportionality tests­works well in all cases. The Department encourages the continuing development of conduct-specific tests and safe harbors;

Vague or overly inclusive prohibitions against single-firm conduct are particularly likely to undermine economic growth and to harm consumers.

In contrast, Section 2 prohibitions that are based on clear and objective criteria, and that are carefully tailored to conduct likely to harm the competitive process, are likely to increase economic growth and to benefit consumers. Businesses are better able to comply with the law and avoid violations; antitrust enforcers can more easily identify and prove violations; effective and administrable remedies are more likely to be available; and aggressive but beneficial competition is less likely to be deterred;

The appropriate measure of cost in relation to predatory-pricing claims should identify loss-creating sales that could force an equally efficient rival out of the market, and such a measure should be administrable by businesses and the courts. In most cases, the best cost measure likely will be average avoidable cost;

The historical hostility of the law to the practice of tying is unjustified, and the qualified rule of per se illegality applicable to tying is inconsistent with the U.S. Supreme Court’s modern antitrust decisions and should be abandoned;

Bundled discounting, although a common practice that frequently benefits consumers, can potentially harm competition in two different ways. Accordingly, depending on particular facts, either an analysis similar to predatory pricing is appropriate or an analysis similar to tying is appropriate;

Antitrust liability for mere unilateral, unconditional refusals to deal with rivals should not play a meaningful role in Section 2 enforcement because compelling access is likely to harm long-term competition and courts are ill suited to be market regulators;

Exclusive-dealing arrangements foreclosing less than 30 percent of existing customers or effective distribution should not be illegal ….

The report (pdf) is here.

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In his latest article on the subject, Herbert Hovenkamp expands his argument about the role of antitrust in the context of technology markets. Innovation requires:

1. a public domain of ideas and expressions; and
2. some protection for new ideas.

The former is a necessary condition for innovation, the latter is not. Note that the second requirement, as Hovenkamp frames it, is not “some incentive to produce new ideas.” That would be a necessary condition. But since the IP laws have chosen the way of propertization for creating the necessary incentives, Hovenkamp’s focus is appropriate.

The problem that this raises of course is that the size of the public domain and the scope of IP protection are inversely related. Every grant of an IP right reduces the size of the public domain, and the broader the IP right the greater the reduction. An optimal IP policy tries to find the spot that maximizes the net gains from the incremental social value of increased exclusivity less the loss of social value from the reduced public domain as well as the administrative and litigation costs of running the IP system. By contrast, the giving of IP rights which do nothing to enlarge the ex ante incentive to innovate reduces the size of the public domain without giving anything in return.

In Hovenkamps view, which I share, the IP laws have gone too far in terms of protecting “new” ideas at the expense of the commons.

I believe that antitrust should not be too defensive about asserting a broader role in IP/competition disputes. This is so for two reasons. First, the extent of special interest capture is significantly greater in IP law than in antitrust, although today patent is experiencing some important reforms. Second, antitrust has profited greatly from its period in the wilderness, something that the IP laws have yet to experience.

Specifically, Hovenkamp proposes greater antitrust scrutiny for:

• IP settlements with reverse payments;
• Acquisition of patents by firms with pre-existing market power; and
• Certain tying arrangements that do, in fact, foreclose in the tied product market (under a rule of reason).

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While everyone else is waiting in line to check out Kristen’s MySpace page, we at the Antitrust Review keep offering wholesome nerd fare such as Paul Krugman’s 1978 Theory of Interstellar Trade. (HT: /.) The paper

extends interplanetary trade theory to an interstellar setting. It is chiefly concerned with the following question: how should interest charges on goods in transit be computed when the goods travel at close to the speed of light? This is a problem because the time taken in transit will appear less to an observer traveling with the goods than to a stationary observer. A solution is derived from economic theory, and two useless but true theorems are derived. … It should be noted that while the subject of this paper is silly, the analysis actually does make sense. This paper, then, is a serious analysis of a ridiculous subject, which is of course the opposite of what is usual in economics.

The First Fundamental Theorem of Interstellar Trade is:

When trade takes place between two planets in a common inertial frame, the interest costs on goods in transit should be calculated using time measured by clocks in the common frame, and not by clocks in the frames of trading spacecraft.

Indeed. For further elaboration I suggest that the reader turn to Alastair Reynolds Revelation Space universe and to Ken MacLeod’s Engines of Light trilogy. Frank Herbert, on the other hand, cheated his way out of the problem with FTL travel, which Krugman rightly dismisses.

That brings us to the Second Fundamental Theorem of Interstellar Trade:

If sentient beings may hold assets on two planets in the same inertial frame, competition will equalize the interest rates on the two planets.

The upshot is that interstellar trade can be viewed as long-term investments, similar to 17th Century merchant capitalism. Interestingly, Krugman remarks that:

Recent progress in the technology of space travel … raise[s] the distinct possibility that we may eventually discover or construct a world to which orthodox economic theory applies.

But what if the rate of innovation within the inertial frame makes any estimate of the value of goods in transit a wild guess? In that case, interstellar trade might not be trade in new goods but rather in antiques, a possibility that Cory Doctorow considers in his short story Craphound.

Technorati Tags: economics, SF, interstellar trade

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Merger analysis works best in markets with unchanging, undifferentiated products, and costs that are affected more by scale than by changes in production methods. This is mainly because merger analysis is forward looking and the more tomorrow will look like today, the more reliable our prognosis. However (fortunately!) few markets that I have dealt with fall into this category. Katz’ and Shelanski’s excellent paper on mergers and innovation deals with the twofold effects that “innovation” has on merger analysis:

1. Innovation disrupts market definition and competitive effects prognosis; and
2. Innovation may be threatened directly by the merger.

The first effect they refer to as “innovation impact,” the second as “innovation incentives.”

Innovation impact

As long as the technology that forms the backdrop of today’s products and thus market boundaries doesn’t change much, there is a robust positive correlation between the number of rivals, the intensity of competition, and consumer welfare gains. More rivals, more intense competition, lower prices. That’s the tried and true structure-conduct-performance or concentration-competition-welfare paradigm. But what if technology changes or is about to change? Disruptive innovation:

• Severs the continuity between pre- and post-merger market definition;
• Makes pre-merger market shares both less reliable and less significant, which, in practice, suggests that new customer sales or license revenues are often more telling than share of installed base;
• Makes it much harder to identify competitors and entrants;
• Renders the SSNIP test pretty much useless, because where innovation rules, “price” (of what?) is often not a useful reflection of value.

Innovation incentives

Here, the concern is that the merger itself might change the nature, pace, and direction of innovation itself. Consider the acquisition of a small electric car maker by a traditional gasoline car manufacturer. The small company has every incentive to disrupt the market and steal share. The large company has to balance incremental profits from electric cars against potential losses from selling fewer gasoline-powered cars and, more importantly, undermining the market itself. Cannibalization can therefore be a significant disincentive to radical innovation. Redeploying the small company assets to make better car batteries and starters might thus be the more “civilized” approach to innovation. (Here are slides from my antitrust/ip course, discussing the replacement effect.)

Katz and Shelanski discuss the two traditional approaches to “innovation incentives,” that courts and agencies have taken in the past.

1. Extension of the static rivals-competition-welfare model to innovation cases, assuming that more rivals lead to more intense competition for innovation, resulting in increased consumer welfare.
2. Schumpeterian competition, with a three phase model of monopoly, creative destruction through disruptive innovation, and a subsequent race to monopoly, repeated over and over.

The authors find that there is only a weak correlation between increased concentration and less R&D, except in cases of mergers to monopoly, and a somewhat weakened connection between R&D and welfare, considering that some R&D races are wasteful. For example, spending an incremental $1 billion to beat a competitor in a paten race by one day. The incremental day is hardly worth $1 billion to society.

Efficiencies

In “innovation cases,” companies often make claims as to increased post-merger innovation. Katz and Shelanski identify the following:

1. Combination of complementary IP and R&D assets
2. Better R&D funding through risk-spreading; and
3. Higher margins, which will allow greater R&D funding.

Personally, I have never heard anyone make argument (3), for obvious reasons. As to the other claims, Katz and Shelanski find (2) unpersuasive because of cannibalization and because there is no evidence that a larger firm invests in qualitatively better R&D. In contrast (1) is plausible, provided that the parties can show that cooperative R&D is more promising than parallel, competitive R&D. In my view, (2) is not per se unpersuasive. It all depends on whether and to what extent the acquired potential for innovation competes with the buyer’s present capabilities and its valuation of its present market position going forward. A large buyer looking to displace the status quo may well be a more powerful disruptive force than a small firm, for example, because customers are more likely to adopt a radically new technology if it is backed by a blue chip corporation.

There’s more in this great paper. Download it while it’s hot!

Technorati Tags: innovation, antitrust, mergers

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The December issue of The Antitrust Source is now online.  It includes, among the many excellent articles, Symposium: What’s Next for the Supreme Court? regarding reamining antitrust issues for the Court to adress and an interview with William Blumenthal, General Counsel, Federal Trade Commission.

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Barak Orbach of the University of Arizona is in the process of creating a comprehensive RPM web archive. Orbach’s new paper, Antitrust Vertical Myopia: The Allure of High Prices and Consumer Experiences, provides an in depth discussion of the practice. Here’s the abstract:

Low prices are one of antitrust law’s traditional promises to society. Resale price maintenance (”RPM”), the practice whereby a manufacturer sets pricing rules for retailers, artificially inflates prices and, thus, allegedly runs afoul of antitrust laws. The practice emerged in the last quarter of the nineteenth century with the rise of advertising and has been one of the most controversial antitrust topics ever since. This Essay examines the practice of RPM and argues that courts and scholars have been trapped in the habit of using traditional arguments for and against the practice, overlooking its common uses in markets for premium-brand goods. The Essay argues that manufacturers of premium-brand goods often use RPM to protect the appeal of their products as status goods.

Technorati Tags: antitrust

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Joshua Spivak posted a nice review of Bruce Abramson’s The Secret Circuit over at the The San Francisco Chronicle.

In “The Secret Circuit: The Little-Known Court Where the Rules of the Information Age Unfold,” Bruce Abramson, author of “Digital Phoenix,” a study of the information economy’s collapse and revitalization, pulls back the curtain of American legal and economic policy to provide an engaging discussion of the recent developments and debates that have led to the creation of the country’s strong patent system. Focusing on the relatively obscure U.S. Court of Appeals for the Federal Circuit in Washington, Abramson provides an excellent discussion of how and why America’s politicians decided to strengthen patent protection, what this new arrangement meant for the American economy and whether further reforms need to be undertaken. Though the end of the book gets a little lost in the minutiae of the circuit court’s non-intellectual property caseload, the overall work is sound, providing a great examination of an important engine for America’s economic growth.

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Einer Elhauge speculates that Justice Breyer’s dissent in Leegin might have been motivated by considerations outside the realm of traditional vertical restraints analysis.

So, it seems clear that, under standard Harvard school principles, the majority was right to overrule the per se rule against vertical minimum price-fixing. The puzzle is what provoked a vigorous dissent Justice Breyer, one of the world’s most sophisticated antitrust justices, who has generally been fully within the Harvard school. Part of the reason may be that the majority failed to express the stronger grounds for its conclusion that I have described above. But the fact that Breyer’s dissent referred no less than six times to the stare decisis considerations that were cited in an abortion case made it hard to avoid the conclusion that this case had gotten mixed up with abortion politics. One wonders sometimes whether it would not be better to have a separate Supreme Court of Abortion Law, to prevent abortion issues from mucking up the rest of Supreme Court jurisprudence and from distorting the nomination and confirmation process for justices who spend the lion’s share of their time on unrelated issues.

Here is the link to the article.

Technorati Tags: antitrust, abortion

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Daniel Sokol has the list.

Technorati Tags: antitrust

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The new edition of the Antitrust Source is now available.  This edition includes an article by Marie Fiala and Scott Westrich regarding “how courts are likely to evaluate retail price maintenance cases following the Supreme Court’s Leegin decision” and an article by Andrew Frackman and Brendan Dowd analyzing “the implications of the Supreme Court’s recent decision in Credit Suisse Securities (USA) LLC v. Billing for private antitrust claims challenging securities-related conduct.”

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Congratulations to the winners!

The COMPASS Prize is awarded to published or forthcoming papers in a peer-reviewed journal that, in the opinion of the selection committee, make the most significant contributions to the understanding and implementation of competition policy. The 2007 co-winners, who will share $20,000, are:

• Mark Armstrong of University College London for his paper, published in the RAND Journal of Economics, entitled “Competition in Two-Sided Markets.”
• IgalHendel and Aviv Nevoof Northwestern University for their paper, published in Econometrica, entitled “Measuring the Implications of Sales and Consumer Inventory Behavior.”

The COMPASS Prize in the amount of $5,000 is awarded to the paper written by a Ph.D. candidate that makes the most significant contribution to the understanding and implementation of competition policy. The winner of this year’s Ph.D. award is:

• Nathan Miller of the University of California at Berkeley for his paper, “Can Strategic Leniency Fight Organized Crime? Empirical Evidence from Cartel Enforcement.”

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William Page and Seldon Childers discuss one of the more interesting aspects of the remedies in the Mircosoft case.

An important provision in each of the final judgments in the government’s Microsoft antitrust case requires Microsoft “make available” to software developers the communications protocols that Windows client operating systems use to interoperate “natively” (that is, without adding software) with Microsoft server operating systems in corporate networks or over the Internet. The short-term goal of the provision is to allow licensees of the protocols to write applications for non-Microsoft server operating systems that can interoperate as well with Windows client computers as can applications written for Microsoft servers. The long-term goal is to preserve, in the network context, the “middleware threat” to the Windows monopoly – the possibility that middleware applications running on servers might become a platform that could erode the “applications barrier to entry” as Netscape and Java had threatened to do. The district court singled out this provision as the “most forward-looking” in the final judgments, and as the key to assuring that the other provisions do not become “prematurely obsolete.” The provision has, however, proven to be by far the most difficult to implement. We argue that it has not accomplished its purpose and that courts can draw some hard lessons from the experience.

Thanks to Danny Sokol for the pointer.

Technorati Tags: antitrust, microsoft

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Steve Hannaford, the man behind the Oligopoly Watch blog (a blog with 100% original content, imagine that!), just published a book: Market Domination!: The Impact of Industry Consolidation on Competition, Innovation, and Consumer Choice.

Here’s the Amazon blurb:

An oligopoly (from the Greek, “few sellers”) is a market that is dominated by a few large and powerful players. As Steve Hannaford documents with numerous examples, virtually every industry today–from medical equipment to airlines, toy retailing to oil–is trending in this direction, in the greatest movement toward industry consolidation and concentration since the turn of the 20th century. Everyone who reads the newspapers is aware of the dizzying pace of mergers, acquisitions, buyouts, and alliances, between big companies and small companies in every industry. Such deals, along with the growing social and political clout of the biggest companies, are critical issues for the economy and for our future as consumers. Charting the course of this trend around the world, Hannaford examines the motivations behind consolidation into corporate empires, how companies exert political pressure to their advantage, and how the actions of the most dominant players, such as Coca-Cola, Wal-Mart, Viacom, Dell, ExxonMobil, Citigroup, and others, affect the choices we have at the supermarket, the drugs we are prescribed, and the movies we watch. Considering the implications of industry concentration on competition, technological innovation, business management, strategy, consumer behavior, and politics, Hannaford paints a provocative, but ultimately balanced, picture of big business and its impact on society.

I ordered a copy.

Technorati Tags: antitrust

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No one seriously questions that ideological bias influences judicial decisions. But, as with most things, the interesting question is not whether but how much? Using a modified version of the Segal-Cover ideology scores that have proven highly predictive in civil rights cases, Nancy Staudt, Lee Epstein, and Peter Wiedenbeck analyzed every U.S. Supreme Court case decided between 1940 and 2005 that involves an interpretation of the Internal Revenue Code. Here are the Segal-Cover scores of the Supreme Court justices since 1940.

When the Court is extremely liberal, the probability that the government prevails is 83%; whereas when the Court is at its most conservative, the probability that the government will prevail falls to 47%. A moderate court (i.e. a Court with the median coded as 0) will produce a government win roughly 63% of the time, which is the mean percentage of government wins in our database of all income tax cases. These statistics offer an explanation for why the government won more often in the 1950s and is currently losing corporate tax cases at a high rate: in the 1950s the Court had a Segal-Cover score of +.499, while the current Court has had a score of –.349 since the 2000 term. Although we do not have cases from the 2005 term in our data set, because the Court currently has a score of –.5, our models predict that a corporation has a 54% probability of winning the case—quite a bit higher than the mean rate, which is just 37% over the course of the sixty-four Supreme Court terms we examined.

(HT ELS blog.) Download it while it’s hot.

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The new edition of the Antitrust Source is now online.  In addition to the Roundtable Conference with Enforcement Officials Tom Barnett (Antitrust Division), Bob Hubbard (NAAG), Neelie Kroes (European Commission), and Deborah Majoras (FTC) (from the ABA Spring Meeting), this edition includes a must-read (in this website’s humble opinion) article by Antitrust Review’s own Manfred Gabriel Twombly: A Journey from the Conceivable to the Plausible.

Check it out.

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