Thom’s excellent post covers most of the important points in Leegin and offers a fairly comprehensive critique of what I deemed to be a surprisingly weak dissent from Justice Breyer. As we’ve noted over and over here at TOTM, the death of Dr. Miles is clearly the right outcome judged based upon the underlying antitrust fundamentals. As Thom and I have pointed out in various posts on RPM here at TOTM, the evidence overwhelmingly suggests that anticompetitive RPM is much talked about but rarely observed or documented. Given that the bulk of the contemporary evidence on RPM suggests that it is largely pro-competitive, I must admit that I was surprised by Tyler Cowen’s “casual guess” in a post at the VC that >50% of RPM are associated with attempts to collude.

In any event, I want to add a few of my own reactions to the Leegin decision to Thom’s analysis. I will primarily focus on the economic analysis in the majority opinion and some glaring deficiencies in the Breyer dissent and incorporate by reference Thom’s discussion of the stare decisis arguments which he discusses in great detail.

Kennedy’s Economic Analyis

Kennedy gets the economic analysis absolutely correct in large part because the opinion mirrors the structure and content of the Economists’ Brief. Part III.A of the opinion begins by recognizing that “the economics literature is replete with procompetitive justifications for RPM” and spelling out those justifications with citations to the literature. Part III.B goes on to note the possible anticompetitive effects of RPM and Part III.C follows with what has always been the punchline for the case against per se treatment of RPM: “it cannot be stated with any degree of confidence that RPM ‘always or almost always tends to restrict competition and decrease output.’”

The straightforward adoption of the Economists’ Brief analysis of RPM, in my view, is a good thing. For all of Justice Breyer’s complaints regarding the Court following the whims of economists who sometimes disagree with each other — there is virtually zero disagreement between economists concerning whether RPM always or almost always reduces output. Virtually every economist agrees that the answer is “NO.” Justice Breyer’s insinuation that economists disagree about RPM is misleading.  The disagreement is over the weight that different explanations of RPM should be given.  There simply is not disagreement over whether the collusion explanation meets the always or almost always standard.  None.

The fundamental question which requires an answer in order to establish whether minimum RPM meets the “always or almost always” standard is “how often does RPM lead to anticompetitive effects in the real world?” The answer obviously requires reliance on empirical evidence. A fundamental divide between the majority and dissenting minority in Leegin is the view of the state of empirical evidence. I will return to this point below.

Recognition of the Role of Vertical Restraints in Facilitating Promotional Services Without Inter-Dealer Free-Riding

There is one particularly interesting point that I was thrilled to see recognized by the majority. As I have noted here before, the argument that “discount dealer” free-riding (a la Lester Telser) is the primary motivation for RPM has been a distraction. Since Klein and Murphy’s seminal 1988 JLE article on Vertical Restraints as Contract Enforcement Mechanisms, it has been accepted in the economics literature that RPM and other vertical restraints play a role in solving incentive incompatabilities between manufacturers and retailers over promotional services even in the absence of a inter-retailer free-riding problem. This point has long been ignored in antitrust cases, in my view, to the extreme detriment of the analytical coherence of our vertical restraints doctrine. Fortunately, again following the guidance of the Economists’ Brief, Part III.A notes that “RPM can also increase interbrand competition by encouraging retailer services that would not be provided even absent free-riding” (citing Klein & Murphy and Mathewson & Winter).

This point was not critical to reaching the correct decision in Leegin, but helps bring some economic clarity to vertical restraints doctrine that has been missing while the discussion incorrectly focuses on the famous “discount dealer” problem that probably describes a very small fraction of actual RPM usage. Discussion of RPM and other vertical restraints has been hampered by the inclination to try to fit a square peg in a round hole by forcing the “discount dealer” explanation into places where it simply doesn’t fit. Pitofsky noted this very early in his critique of this defense of RPM. Understanding the fundamental nature of the use of vertical restraints to enforce contracts over promotional services is critical to understanding a number of other contracting practices that attract antitrust scrutiny, e.g. slotting allowances, category management, and exclusive dealing. I hope that this portion of the opinion does not go unnoticed.

The Role of Empiricism

As I allluded to above, the critical question here is empirical and does not revolve around theoretical explanations of RPM. How often is RPM anticompetitive? Is it anticompetitive in the form of reducing output often enough to meet the “always or almost always” standard required to deviate from the rule of reason default? Kennedy’s majority opinion mentions the Overstreet and Ippolito studies which both suggest that anticompetitive RPM is rare. Breyer takes a shot at these studies in the dissent, noting that they focus on allegations of collusion rather than actual collusion, but this seems like a weak objection to me for several reasons. First, the burden of proof to show anticompetitive effects is on Breyer. Second, that allegations of collusion in antitrust cases rarely occurred in cases involving RPM may not be perfect evidence, but it is probative of the fundamental question. There are other more recent studies that support the pro-competitive RPM explanations that Kennedy does not cite, unfortunately.

In any event, it is worth noting that this attachment to empiricism in antitrust cases appears to be a trend in recent cases. The Court expressed a great desire to reconcile antitrust law with the empirical reality that patents do not confer market power in Independent Ink, and now in Leegin again affirmed its desire to square doctrine with empirical reality and economic theory.

Analytical Weaknesses in Breyer’s Dissent

I was truly surprised by what I take to be a rather weak dissent by Justice Breyer, a man who genuinely understands antitrust economics and principles.  In fact, Justice Breyer begins his dissent by recognizing the “always or almost always” standard that must be satisfied in order to apply the per se rule (in the absence of overriding stare decisis concerns).  Holding aside the stare decisis argument, Justice Breyer’s analysis of RPM and assessment of the evidence just doesn’t make economic sense. The dissent would have made a great deal more sense if Breyer would have just hung his hat on the stare decisis point and called it a day.  He didn’t and it weakened the argument substantially.

Let’s start with the evidence. Justice Breyer’s discussion of the empirical evidence here strikes me as disingenuous. At page 5, Breyer discusses the incidence of anticompetitive RPM and hangs his hat on a thirty year old study that compared retail prices across states after the repeal of the Miller-Tydings Fair Trade Act which found that retail prices were higher by 19-27%. First, as discussed in the Economists Brief’ and elsewhere, these studies do not control for anything. And as discussed above, there is better evidence available.

Second, there is another glaring weakness in a study purporting to identify anticompetitive RPM that looks only at retail prices: BOTH procompetitive and anticompetitive theories of RPM predict higher prices!!! The key question is whether RPM reduces market output. A study that looks at retail prices simply cannot disentangle the competing theories. These are issues that were raised in oral argument and in the briefs and that Justice Breyer is well aware of and far too savvy an antitrust thinker to ignore.

Third, Breyer minimizes the import of the Overstreet and Ippolito studies because the identify only allegations of collusion & RPM rather than actual instances. Again, I note here that this is a rather weak objection. The burden is to present evidence that RPM always or almost always is anticompetitive. The argument that studies that show collusion is rarely alleged in antitrust cases involving RPM may reduce the weight one would like to give this evidence, but does nothing to further the case that RPM meets the per se standard.

The 1975 study that Breyer points to cannot alone meet this standard. As noted, a study only looking at retail prices that does not control for any differences between states is not capable of doing so. Unfortunately, Breyer treats the study as sufficient to meet this standard. This doesn’t meet the laugh test.

The second analytical weakness of Breyer’s dissent involves his economic analysis of RPM in the first instance. Breyer, starting at page 9 of the dissent, responds to the “discount dealer” free-riding argument by repeating the mantra that Pitofsky made famous: the free-riding justification is of limited utility because it doesn’t explain a number of the cases and we don’t know how often it occurs. This is well and good. But the justifications for RPM are not limited to that explanation, as noted in the majority opinion (and by extension, the FTC/ DOJ Brief and the Economists’ Brief). As noted above, a key explanation for the use of RPM is the Klein & Murphy explanation that RPM may be used to enforce efficient contracts involving promotional services or other non-contractible elements of performance. Here is Breyer’s response:

“The one arguable exception consists of the majority’s claim that ‘even absent free-riding,’ RPM ‘may be the most efficient way to expand the manufacturer’s market share by inducing the retailer’s performance and allowing it to use its own initiative and experience in providing valuable services.’ I cannot count this as an exception, however, because I do not understand how, in the absence of free-riding (and assuming competitiveness), an established producer would need RPM. Why … would a dealer not expand its market share as best that dealer sees fit, obtaining appropriate payment from consumers in the process? There may be an answer to this question. But I have not seen it.”

I don’t know whether this portion of the opinion is disingenuous or refreshingly honest. Maybe Justice Breyer doesn’t “get” the explanation offered in the Economists’ Brief and in the majority opinion articulating the use of RPM to induce promotional services. It’s complicated. But he hasn’t seen the explanation? I doubt it. The majority cites the Klein & Murphy and Mathewson and Winter articles as explaining the mechanism by which RPM induces promotional services without free-riding. The Economists’ Brief explains the basic economic mechanism at work in those articles in an accessible manner. That RPM and other vertical restraints can be used in this manner has been a well accepted portion of economic knowledge for 20 years! In any event, I am quite pleased that the majority did “get it” because this is a fundamental economic point. But I admit that I am surprised that Justice Breyer rejected an efficiency explanation for RPM that is well accepted in the economics literature on these grounds.

I see in Leegin a desire by the Court to square economic theory and empiricism with outdated antitrust doctrine. This is an excellent development and I am hopeful it will continue and spread to other incoherent areas of antitrust in the years to come. Finally, it will be interesting to watch the aftermath of Leegin in the states and perhaps in Congress. Dr. Miles may be dead. But it is a bit early to say goodbye to the per se rule against RPM altogether!

is here, over at eCCP, and differs somewhat from Thom’s.

The takeway excerpt is:

Credit Suisse has important implications for antitrust practice. The decision’s effect is to narrow the scope of antitrust law and to invite efforts by regulated industries to narrow it still further. The court’s “clearly incompatible” standard is new and (though it purports not to) seems to water down considerably the old “plain repugnancy” test of Gordon v. New York Stock Exchange, Inc. 422 U.S. 659, 682 (1975). Under the new incompatibility standard, there no longer has to be an actual conflict between antitrust and other federal law for antitrust implicitly not to apply. Even a mere regulatory overlap may now be sufficient to trigger antitrust immunity. (Recall that in Credit Suisse the Court assumed that both antitrust and the SEC disapproved of the tying and other practices in question, and yet the Court still considered the two bodies of law incompatible on account of the regulatory overlap.) ….

Going forward, the Court will need to tighten the rule in Credit Suisse if it wants antitrust to continue to operate as Congress intended it to in conjunction with the compartmentalized maze of federal regulatory law. No one thinks that securities firms should be exempt from the legal obligations that generally flow from non-securities law (antitrust aside). If we expect to hold securities and other regulated firms accountable for torts and breaches of contract, or for crimes and discrimination, then why not also hold them accountable for antitrust violations? If Congress says otherwise, that is one thing. But if Congress is silent on the question, a federal agency should not have have any more power than a state to confer antitrust immunity upon those that it regulates. Of states we require a clearly articulated policy that presents an actual conflict, not merely the possibility of future potential incompatibility. From federal agencies we should not expect any less.

Just yesterday, in its historic decision in Leegin, the Court strongly reaffirmed its confidence in the Rule of Reason’s workability by overturning Dr. Miles and extending the rule’s reach to vertical RPM. That workability should make us equally confident that antitrust can peacefully coexist with the reguatory state.

So Dr. Miles is dead. May he rest in peace.

No great surprises in the majority opinion in Leegin. Justice Kennedy, quite rightly, emphasized points we have asserted numerous times on this blog. Most notably:

The per se rule should be reserved for practices that are always, or almost always, anticompetitive. The common law nature of Sherman Act jurisprudence contemplates that courts will grow in their knowledge of the economic effects of various practices. When substantial experience reveals that a practice is almost always anticompetitive, application of the per se rule to that practice is warranted. By the same token, when experience and our developing understanding of economics indicates that a previously condemned practice frequently has procompetitive effects, a more probing method of analysis (i.e., some version of the rule of reason) is appropriate. The rule should be allowed to change in both directions: from rule of reason to per se and from per se to rule of reason. We said that here and here.

Vertical resale price maintenance (VRPM) is not always or almost always anticompetitive. There are lots of procompetitive justifications for the practice — e.g., encouragement of point-of-sale services by avoiding free-riding among dealers, facilitating entry of a new firm/brand by allowing manufacturers to induce retailers with a guaranteed mark-up, encouraging output-enhancing retailer services when it’s difficult for the manufacturer to draft and enforce contracts that would require performance of those services. We said that here and here.

While VRPM may be anticompetitive, anticompetitive effect is unlikely, and it’s fairly easy to identify those instances of VRPM that are likely to cause anticompetitive harm. For example, facilitation of dealer cartels — probably the biggest anticompetitive threat posed by VRPM — cannot occur unless (1) dealers are likely to seek a VRPM policy (a condition that will occur only if there aren’t lots of producers of the product at issue or all, or most of the producers impose VRPM), and (2) producers are likely to give in to dealers’ requests for a VRPM policy (a condition that will occur only if the retailers seeking VRPM have market power, and vertical integration into the retail market is impracticable for the producers). Because anticompetitive effect is unlikely and can occur only when certain easy-to-identify market structures exist, rule of reason treatment is appropriate. We said that here.

Evidence purporting to show that VRPM increases retail prices is not determinative. Putting aside the strength of the evidence (which is pretty weak), it is unpersuasive because antitrust is concerned with maximizing consumer welfare, not just minimizing prices. If the higher prices are accompanied by enhanced services that consumers value more than the incremental price increase, then consumer welfare is enhanced despite the higher prices. We said that here.

The 1975 Consumer Goods Pricing Act, which repealed a 1937 statute permitting states to authorize VRPM, does not indicate a congressional intent to retain the per se rule. The 1937 statute effectively permitted states to provide per se legality for VRPM schemes. In repealing the Act, the 1975 Congress again subjected RPM to antitrust scrutiny, but it did not mandate a particular standard to govern such scrutiny. Instead, it contemplated that the standard would evolve with judicial understanding of the practice. Had Congress desired to permanently enshrine the per se rule for VRPM, it could have done so. We said that here and here.

***

OK, enough with the obnoxious “We called its.” What of Justice Breyer’s dissent?

I’m so disappointed. I’ve always liked Breyer on regulatory matters. His 1982 book, Regulation and Its Reform, is a classic. It introduced the notion of “regulatory mismatch” — the idea that regulators frequently respond to particular market failures with regulatory interventions that are better suited to other types of market failure (e.g., they impose bans, which might be appropriate for externality-causing conduct, to remedy information asymmetries, which are better addressed via disclosure rules). It also emphasized the importance of adopting the least restrictive regulatory alternative and leaving things, as much as possible, to private ordering.

Breyer’s incredibly unpersuasive opinion (e.g., “The Consumer Federation of America tells us that large low-price retailers would not exist without Dr. Miles” — Dump your Wal-Mart stock!) basically makes three points: (1) VRPM can be anticompetitive, and we’re not sure how often it’s procompetitive; (2) it’s too hard for courts to separate the procompetitive sheep from the anticompetitive goats, so an easy-to-administer per se rule is appropriate; and (3) stare decisis concerns call for adherence to a precedent as old as the good Doctor.

These are not cogent arguments.

With respect to the first, no one denies that VRPM can be anticompetitive (Justice Kennedy admits as much). The question is not whether it’s anticompetitive more often than it’s procompetitive. Instead, the question is whether it’s always or almost always anticompetitive. No honest and competent economist believes that’s the case. In stating that he “can find no economic consensus” on how often VRPM’s procompetitive benefits “occur in practice,” Justice Breyer is putting the burden on rule of reason advocates to produce rigorous empirical studies documenting various procompetitive effects. That’s backward. The rule of reason is the default analysis for trade restraints, so the burden should be on per se advocates to prove that VRPM is always or almost always anticompetitive. There’s no way they could discharge that burden, and Breyer knows it.

Moreover, even if there’s “no economic consensus” on precisely how often various procompetitive effects occur, there’s consensus (or near consensus) on the following points: (1) manufacturers want to sell as much of their stuff as they can; (2) all else being equal, high retail mark-ups will lead to fewer sales (and thus less profit for manufacturers); (3) manufacturers don’t get to keep retail mark-ups — those go into the retailers’ pockets; (4) ergo, a manufacturer generally will not want high retail mark-ups unless the dealer conduct they generate makes the manufacturer’s product more attractive to consumers, and that enhanced attractiveness is enough to offset the higher price the consumer must pay; and (5) the conditions under which a mandated resale price could facilitate a dealer or manufacturer cartel are narrow, infrequent, and easy to identify. (See here for more explanation of that last point.) Surely this is enough to warrant a conclusion that VRPM is usually procompetitive — a conclusion that’s well beyond what’s necessary to justify rule of reason treatment.

As for Breyer’s second point about administrability, we see courts engage in more probing analyses all the time. With respect to other “mixed bag” practices (i.e., practices that can have both pro- and anti-competitive effects), courts have developed easily administrable, “structured” rule of reason analyses. Consider, for example, data exchanges among competitors. Rule of reason adjudication has produced a relatively simple analysis that determines legality on the basis of the structure of the market at issue and the nature of the information exchanged. This easy-to-administer analysis has evolved because courts have had the freedom to develop a common law analysis that is rooted in economic realities. Affording rule of reason treatment to VRPM will permit courts to develop a similar economically informed, structured rule of reason analysis for that practice. Indeed, Justice Kennedy’s decision highlights a number of discrete factors that will undoubtedly become a part of the structured rule of reason that eventually emerges.

Finally, stare decisis concerns do not justify continued adherence to Dr. Miles’s outmoded rule. First, this is not a typical “statutory” case. Justice Breyer emphasizes that stare decisis is particularly important for statutory precedents because Congress can change outcomes it doesn’t like. While that’s true, Congress has made clear from the get-go that the Sherman Act is, in essence, a delegation to the courts to craft a common law of trade restraints. You can see this from the language of the statute itself — it’s ridiculously short, it fails to define any of the key terms (e.g., it helpfully defines “person” but not “combination in the form of trust or otherwise,” “restraint of trade,” or “monopolize”), and it uses terms from the then-existing common law (e.g., “restraint of trade”). Because Congress has really delegated to the courts the task of defining trade restraints (and monopolization) stare decisis should play the role it plays in common law cases.

Second, as noted above and here, the very nature of Section 1 jurisprudence contemplates a more limited role for stare decisis: Courts first analyze trade restraints using the rule of reason, and when they have enough experience with a restraint to see that it’s almost always anti-competitive, they adopt an administratively efficient per se rule and are not hindered by prior decisions applying the rule of reason. By the same token, stare decisis should not prohibit movement in the opposite direction — i.e., from per se to rule of reason. Otherwise, we end up with an undesirable “ratchet effect.” As Herbert Hovenkamp recently explained in The Antitrust Enterprise: Principle and Execution (p. 118-19):

[K]nowledge about the competitive effects of business practices must be regarded as a two-way street. Just as increased judicial experience with a practice can lead judges to conclude that it is virtually always anti-competitive and can be disapproved after a truncated inquiry, judicial experience can also reveal the opposite.

Finally, there are no serious “reliance” interests at stake here. What resources have been irretrievably committed on the assumption that manufacturers won’t set resale prices? Breyer mentions (1) “massive amounts of advice that lawyers have provided their clients, and untold numbers of business decisions those clients have taken in reliance upon that advice”; (2) investments by discount distributors (and others associated with those distributors — “What about malls built on the assumption that a discount distributor will remain an anchor tenant? What about home buyers who have taken a home’s distance from such a mall into account?”); (3) Congress’s passage of the 1975 Consumer Goods Pricing Act.

Consider each. First, advice by lawyers. Every change in precedent renders past advice moot, so that’s not the sort of reliance interest that should concern courts. (Moreover, the advice-giving itself is a sunk cost, and lawyers are benefited, at least in the short run, from a change in precedent.)

What about “business decisions” such as “investments by discount distributors”? It’s unlikely there will be much sacrifice here. As explained above, manufacturers are going to want higher retail mark-ups, which reduce sales (all else being equal), only if those higher mark-ups lead to point-of-sale services that are worth more to consumers than the incremental price increase. The vast majority of goods sold in discount stores are not the sorts of products where the attractiveness of enhanced point-of-sale services will offset increased prices. The few products that do disappear from the shelves of discount retailers can easily be replaced by other products. Americans like cheap (and manufacturers know that), so there’s little danger discounters are going to run out of things to sell.

Finally, Congress’s “reliance” in 1975. Breyer insists that “enacting major legislation premised upon the existence of [the per se rule against VRPM] constitutes important public reliance upon that rule.” Really? As noted, the 1975 Congress simply said that VRPM should be subject to antitrust scrutiny — as it will be even after Leegin — not that it should be per se illegal. Had Congress intended to mandate a particular mode of antitrust analysis, it certainly could have done so. We can’t really infer “important public reliance” on Dr. Miles’s per se rule from Congress’s decision to remove antitrust immunity from a class of conduct. More importantly, the majority’s ruling can be easily “fixed” if Congress does, in fact, believe VRPM should be condemned absolutely. (And with this Congress, who knows.)

***

In sum (is anyone still reading at this point?!), yesterday was a pretty good day for antitrust and for TOTM. I’m a bit disappointed in my man Breyer, but I still give him credit for injecting a bit of rigor into regulatory analysis. I’m also willing to cut him a little slack because much of his reasoning is based on a concern about the administrability of the antitrust laws — a concern I share. In other contexts (discussions regarding how to evaluate bundled discounts), I have quoted Justice Breyer’s words from Barry Wright:

Unlike economics, law is an administrative system the effects of which depend on the content of rules and precedents only as they are applied by judges and juries in courts and by lawyers advising their clients. Rules that seek to embody every economic complexity and qualification may well, through the vagaries of administration, prove counter-productive, undercutting the very economic ends they seek to serve.

The first sentence of that passage appears almost word for word (and without citation, interestingly enough) in Justice Breyer’s Leegin dissent. Of course, there’s a difference between “seek[ing] to embody every economic complexity and qualification” (which many of the anti-bundling folks do) and seeking to recognize a near economic consensus (as the Leegin majority does). Moreover, it’s likely that the structured rule of reason emerging from Leegin will be relatively easy for judges, juries, and counselors to apply. In addition, there’s a difference between citing excessive complexity and inadministrability as grounds for a liberal policy that defers to private ordering (my position in the bundled discount context) and citing such complexity/inadministrability to justify an overly restrictive approach. Still, though, I admire Justice Breyer’s desire to make antitrust administrable.

And, of course, I’m most pleased that I didn’t have to eat my hat.

Josh, Thom, and I all predicted correctly that Dr. Miles would be overruled. We even predicted the vote count! I had hoped that Justice Breyer would join the majority, but instead he joined with Justices Ginsberg, Souter, and Stevens (as predicted) in dissent.

The opinion is here.

Well we’re coming down to the wire, folks. The Supreme Court is wrapping up its term any day now, and no still no word on Leegin. Tom Goldstein from SCOTUSBLOG tells us the decision’s coming on Thursday. He also predicts that the author will be Justice Stevens, who has an antitrust background and hasn’t written an opinion since March.

Say it ain’t so!

Justice Stevens, you may recall, was one of the two justices who, at oral argument, appeared inclined not to overrule Dr. Miles. (Souter was the other. Breyer was ambiguous.)

I stand by my earlier prediction of a 7-2 (or maybe 6-3) decision overruling Dr. Miles, with a majority opinion by Justice Scalia.

I also reaffirm my earlier promise to eat my hat if Dr. Miles is not overruled. (Mind you, there’s no consideration for that promise, nor (presumably) has there been any justifiable reliance upon it.)

John Mackey posts a remarkable public response to the FTC, including the complete text and extended exegesis of one of the inflammatory hot docs that prompted the FTC’s action.  But most amazing of all is this comment:

The claims that the FTC makes in the above two paragraphs [from the FTC press release] are simply astounding because they have ZERO evidence to support several of the statements. Let’s start with the pricing issue: The FTC claims that if we “devour” Wild Oats it will mean “higher prices” and “Whole Foods likely would be able to raise prices unilaterally”. What is so interesting about this statement is that the FTC did not bother to actually gather any pricing information from Whole Foods or Wild Oats. Let me repeat that last statement because it is so important: the FTC did not bother to actually gather any pricing information from Whole Foods or Wild Oats. Why am I emphasizing this by repetition? Because the FTC did not go to the trouble of actually comparing prices in any of our markets. Nor did they ask either Whole Foods or Wild Oats for any pricing information . They asked for 20 million Whole Foods’ documents, but didn’t ask us for any pricing information! Pretty incredible in my opinion!

Now, it is possible that the FTC gathered scanner data from Nielsen or some other source, but I’m not certain that that data would be complete enough for the proper analysis.  If true, I find this ommission astounding.  I’ve been waiting all along for the empirical data to support the FTC’s bluster.  It would be remarkable to find that data absent!

Mackey does note that the FTC (of course) gathered gross profit information for both chains.  But, as I said before and as Mackey’s extended discussion confirms, that data may show nothing more than shifting market share–it does not necessarily tell you anything at all about prices to consumers.

There is much more in Mackey’s blog post, including an interesting discussion of market definition, highlighting these simple and compelling points (emphasis mine):

The fact that Whole Foods has successfully created a distinct retailing strategy and category for ourselves does not give us any kind of “monopoly” or “market dominance” that prevents other food retailers from successfully copying us or competing with us in other ways. The truth, of course, is that supermarkets all over the United States are copying many different aspects of Whole Foods successful retailing strategy—selling more and more natural and organic products, improving customer service, and upgrading the look and feel of their stores.

The creation of a unique business strategy or a unique category doesn’t force consumers to shop with us. Most successful businesses attempt to differentiate themselves from their competitors in various ways. This has certainly been one of Whole Foods competitive strategies. Although Whole Foods has been successful and has created differentiation in the marketplace the simple truth is that very few customers do all of their shopping at our stores. In fact, most of our customers shop at multiple food stores, meeting some of their needs and desires at Whole Foods and various other needs and desires at other stores. Just ask yourself this question: “Do you do all your shopping at Whole Foods or do you shop at different supermarkets”? The answer is obvious: most people shop at a variety of different food stores. Differentiation in the marketplace doesn’t guarantee customer acceptance or success. Successful differentiation also creates imitation and more competition in the future.

There are no legal “barriers to entry” to compete with Whole Foods Market on price, products, quality, service, or store experience. Whole Foods has no technological patents that preclude anyone from competing with us. Whole Foods has been successful primarily because we simply execute in many facets of the retail food business better than most of our competitors do.

Can anyone understand why the FTC brought this case? 

(HT, for the link to Mackey’s blog, Hanno Kaiser and Randy Picker)

In Monday’s Credit Suisse v. Billing decision, the Supreme Court held that the federal securities laws implicitly precluded the application of antitrust law to the defendants’ alleged misconduct. The plaintiffs, buyers of newly issued securities, had accused the defendants, underwriting firms that had collectively marketed and distributed those securities, of violating Section 1 of the Sherman Act by agreeing to sell the securities only on the condition that buyers engage in various other transactions. The underwriter defendants sought dismissal of the complaint on grounds that the federal securities laws impliedly preclude application of the antitrust laws to the conduct in question.

In an opinion authored by Justice Breyer, the Court agreed with the defendants. It held that antitrust was impliedly preempted in this case because (1) the securities laws create regulatory authority to supervise the activities in question, (2) the SEC had exercised that authority, (3) allowing both antitrust law and the securities laws to apply to the conduct at issue could result in “conflicting guidance, requirements, duties, privileges, or standards of conduct,” and (4) the potentially violative conduct “l[ay] squarely within an area of financial market activity that the securities law seeks to regulate.”

My friend and colleague Danny Sokol is not so sure about the decision. He argues that “the choice of sector regulation over antitrust through what is in effect an immunity that could be broadened over time should leave us a bit concerned.” He begins with the quite sensible proposition that “the optimal mix [of authority between antitrust tribunals and sector regulators] depends on the costs and benefits of each institution, its capabilities and effectiveness.” He then highlights a major weakness of sector regulation vis-a-vis antitrust — the potential for agency capture. Danny explains:

Because antitrust is a law of general applicability, it has fewer problems of capture than sector regulators. As sector regulation focuses on a specific industry, agency capture is a potential problem of sector regulation and more severe among sector regulators than at antitrust agencies. Repeat players in sector regulation are those in a particular industry with a vested interest in sector outcomes. This repeat play within a narrow band of interests may make sector regulators more prone to capture than antitrust regulators, whose oversight exposes them to many industries and interest groups.

While Danny raises a valid concern (I’ve previously posted on the problems of agency capture), I think SCOTUS got this one right.

True, it’s possible that regulatory agencies will become captured by their regulatees and will approve of conduct that’s legitimately anticompetitive. That’s probably not much of a concern if the “losers” at the agency level — those injured by the anticompetitive behavior — constitute a somewhat discrete and insular group; in that case, they’ll likely organize, lobby the agency for a rule change, and, if unsuccessful, generate attention that results in political pressure to change things. If, however, the victims of the anticompetitive conduct are widely dispersed and difficult to organize (e.g., individual investors), capture may be a real possibility. Even then, though, there’s likely to be some political pressure to alter the rule.

Private enforcement by plaintiffs’ lawyers, by contrast, is subject to no political controls. When private plaintiffs and their lawyers are deciding whether to initiate and/or continue a lawsuit, they don’t take account of the public good. Instead, they consider only their expected costs and their expected payoff from a favorable verdict or (more likely) a settlement. In many cases, the conduct that gives rise to a lawsuit will be procompetitive on the whole but will look fishy enough to justify the initial filing of a lawsuit and to survive a motion to dismiss and perhaps even a motion for summary judgment. The objective of the plaintiff’s lawyer is to keep the litigation going as long as possible in the hope of extracting a favorable settlement. Knowing this sort of exploitive litigation is a possibility, private actors may forego conduct that’s genuinely procompetitive but ambiguous enough to support nuisance suits.

So the Supreme Court had to pick a poison: potential agency capture or potential overregulation (of already regulated activity) by politically unaccountable plaintiffs’ lawyers. I, for one, am pleased with its choice.

As Manfred reports over at the Antitrust Review, the judge has unsealed the FTC’s complaint against Whole Foods.  This unredacted version reveals an unhealthy reliance on hot docs by the FTC’s staff.  I won’t belabor the point.  But when you’re looking at marketing materials and reports to the board to identify anticompetitive intent (hmmm.  I didn’t know intent was relevant in merger cases . . . .) through “fighting words” and “smoking guns,” you’re barking up the wrong tree.  It is little or no evidence of likely anticompetitive effect that Whole Food’s outspoken CEO claims that purchasing Wild Oats will remove “forever or almost forever” the threat to Whole Food’s market.  I’m delighted that he believes so strongly in his product and in the strength of his brand.  I think it’s great that he can find ways to differentiate Trader Joe’s, Safeway, Kroger, the local produce stand and Wal-Mart from his stores  (He might also have pointed out that they are all found in different locations, have different names and sell a different mix of products.  Some don’t even offer plastic bags to take your groceries home in.  Now that’s the sort of differnetiation the FTC can make a market out of!).  But this is not antitrust-relevant evidence.  As I said in my last post on this topic–I’m sure there is econometric data, and I anxiously await its revelation.  In the meantime, this complaint reveals the same old market definition pathologies, intent-based arguments (where they have no place), and improper reliance on meaningless hot docs.  As the WSJ said, echoing my earlier post:

In other words, the FTC is again playing “pick your market” to justify a dubious antitrust action. Just as Microsoft makes 100% of operating systems called Windows, Whole Foods controls most of the market segment that consists of stores that look just like Whole Foods. The public-policy principle at work here is that if you define a market narrowly enough, you can find an industry monopolist anywhere.

The FTC argues that Whole Foods and Wild Oats compete for market share.  I have no doubt that’s true.  The question, left unanswered in this complaint, is whether, in a business notorious for razor thin margins, shifting market share injures anyone at all other than the losing competitor.  Likewise, other than John Mackey’s belief to the contrary, the question remains what evidence supports the seemingly crazy contention that the this battle for market share is fought by these two merging companies alone, to the exlcusion of practically everyone else.

Geoff nailed it on the Whole Foods/Wild Oats affair last week. Always a day late and a dollar short, I’ve just written my own short piece on the FTC’s effort to block the merger of these two fancy grocers. My article appears on the website of the eSapience Center for Competition Policy (eCCP). You’ll have to register to read the whole piece, but you should do that anyway — the eCCP site is terrific.

My future colleague, Danny Sokol (who’ll be visiting at Missouri Law next year), is one of the authors of the fantastic Antitrust & Competition Policy Blog. Danny requested that I post the following:

I am surveying countries around the world that are not OECD members and not members of the EU to determine whether and at which universities are antitrust/competition law and/or industrial organization taught.

Please respond to this post rather than email me directly with the following information:
Country
University (specify department- e.g., economics department or law
department)
Course(s).

For example, an entry may look like the following:
Chile
Universidad Diego Portales - law school
Competition law, seminar in competition law and intellectual property

I’m not sure how many non-American antitrusters read this blog, but if you’re out there, Danny would appreciate your participation.

The Financial Times reports today on a Moody’s study that finds “[a]ctivist hedge funds and other short-term shareholders are almost always bad for the credit quality of their target companies . . . .” (See here for the FT article).

I’m interested in reading the Moody’s study but have been unable to find it online. If anyone has a link, please post it in the comments to this post. Thanks.

I recently posted on SSRN one of the two articles I have committed to write for the Entrepreneurial Business Law Journal. It’s entitled PIPEs (note that I went with a “micro-title” and successfully resisted the urge (at least for now) of being “very punny,” e.g., PIPE bomb, Sewer PIPE, Burst PIPE, Smoking PIPE, PIPEline . . . .). You can download the piece here. Below is the abstract:

The Article examines Private Investments in Public Equity (PIPEs), an important source of financing for small public companies. The Article describes common characteristics of PIPE deals, including the types of securities issued and the basic trading strategy employed by hedge funds, the most common investors in small company PIPEs. The Article argues that by investing in a PIPE and promptly selling short the issuer’s common stock, a hedge fund is essentially underwriting a follow-on public offering while legally avoiding many of the regulations applicable to underwriters. This “regulatory arbitrage” makes it possible for hedge funds to secure the advantageous terms responsible for the market-beating returns they have garnered from PIPE investments. Additionally, the article details securities law compliance issues with respect to PIPE transactions and explores recent SEC PIPE-related enforcement actions and regulatory maneuvers. The Article concludes that a more measured and transparent SEC approach to PIPE regulation is in order.

I’m hoping to have a related piece about reverse mergers up on SSRN next month.

Geoff’s post last week on the FTC’s move to block the Whole Foods/Wild Oats merger poked fun at a stupid pun appearing in the agency’s press release: “If Whole Foods is allowed to devour Wild Oats, it will mean higher prices, reduced quality, and fewer choices for consumers. That is a deal consumers should not be required to swallow.” Geoff called the remark “very punny.” I, too, thought the remark was a bit too cute when I read it last Wednesday on the FTC’s website. A number of news articles on the FTC’s decision (e.g., here, here, and here) quoted the same pun from the press release. One assumes it was formulated as a soundbite for news stories.

This morning, I began writing a short op-ed on the Whole Foods/Wild Oats affair for the eSapience Center for Competition Policy, and I wanted to quote some language from the FTC’s press release. Lo and behold, the goofy “deal consumers should not be required to swallow” language has been excised! How odd. Did the Commission decide its cutesy language was a bit flippant, suggesting that its analysis might have been as well? Who knows.

It appears that the FTC is moving to stop the proposed Whole Foods/Wild Oats merger.  Says the FTC:

If Whole Foods is allowed to devour Wild Oats, it will mean higher prices, reduced quality, and fewer choices for consumers [in the premium natural and organic supermarkets market]. That is a deal consumers should not be required to swallow.

Very punny.  I’d be laughing hysterically if I didn’t find this conception of market definition ludicrous almost beyond belief.  I haven’t seen anything so absurd since the allegation (by the reliably-interventionist AAI, at least; not the DOJ) that front- and top-loading washing machines are in different markets.

I would think that the triumphant entry of Wal-Mart alone into the natural and organic foods market (ooh–but not premium natural and organic! Some people just won’t buy their pesticide-free bok choy at Wal-Mart, you know) would save this merger.

But notice something important.  The FTC doesn’t claim that the relevant market is the market for natural and organic food.  The market is for natural and organic supermarkets.  The agencies have been down this road before, mistaking channels of distribution for relevant markets.  On the same grounds it stopped the Libbey/Anchor-Hocking merger and the Staples/Office Depot merger, to say nothing of a number of other grocery store mergers.  Now, in some cases, it may be that the market is defined by the merging distributors (as many would say was true in the Staples case).  But because economically-relevant market definition turns on demand elasticity among consumers who are often free to purchase products from multiple distribution channels, a myopic focus on a single channel of distribution to the exclusion of others is dangerous.

In other words, there is a serious risk of conflating a “market” for business purposes with an actual antitrust-relevant market.  Whole Foods and Wild Oats may view themselves as operating in a different world than Wal-Mart.  But their self-characterization is largely irrelevant.  What matters is whether customers who shop at Whole Foods would shop elsewhere for substitute products if Whole Food’s prices rose too much.  The implicit notion that the availability of organic foods at Wal-Mart (to say nothing of pretty much every other grocery store in the US today!) exerts little or no competitive pressure on prices at Whole Foods seems facially silly.  

Market definition is thorny, and it has (unfortunately) become the end point, rather than the starting point, of merger analysis at the agencies.  I don’t know what a hard look at the data would show in this case, but my strong suspicion is that the FTC is choking on its organic, locally-grown edamame with this one.   

(By the way–for an extended meditation on these issues, see my article with Marc Williamson, Hot Docs vs. Cold Economics).