The August 24th draft is available in Chinese and English here.  HT: Danny Sokol.

Here’s a taste of the reaction of former FTC Bureau of Economics Director Luke Froeb to some of the economic analysis in the recent Whole Foods merger case:

The heavily redacted court documents refer to entry “experiments” to determine the degree of substitution between the two merging stores. We found the following on the Whole Foods website,

If we [close the Wild Oats Store right across the street], we believe approximately 50% of the volume their store does will transfer to our store, with the other 50% migrating to our other competitors (these estimates are based on our past experience with similar situations).

It is hard to believe that the diversion ratio could be this big. But if it is, then simple models of competition would predict a big enough post-merger price increase to put the two stores into a relevant market by themselves.

Go read the whole thing here. There are links there to the relevant public (redacted) versions of the expert reports.

WSJ has a fascinating story this morning about a group of restaurants in Utah, Washington, Colorado and other places adopting a completely voluntary pricing system. No registers. No prices. No “suggested” prices and no tips. The business model is essentially to provide food and allow customers to put whatever they want in a lock box at the front of the store. This is similar to the former economist turned Bagel Man in Freakonomics who delivered bagels to DC area offices on a quasi-honor system. There are some obvious potential benefits to this strategy in the retail setting: avoiding credit card system fees, not having to pay somebody to run the register (though somebody presumably still has to count the money to calculate taxes), and potentially differentiating one’s offering from competitors who still believe in the whole “prices” thing.

But my sense is that, neighborhood lemonade stands aside, long term profitability with voluntary pricing in any sort of retail setting would not be likely. The Bagel Man found that approximately 13% of office workers were “stealing” bagels. I doubt that the rate would be much lower in a local cafe or coffee shop than it would be in the cafe setting because the former, it seems to me, would involve greater reputational and informal sanctions for “cheating” the implicit agreement to pay fair value. However, these types of shops also seem likely to have a small group of loyal and repeat customers and so it may be possible that such an environment comes close to replicating these sanctions (this is consistent with the Bagel Man’s findings that theft rates were lower in smaller offices). This seems like a substantial number of non-paying customers in a setting where margins are typically very small and barriers to entry are low. The hope, of course, is that some customers will subsidize the free-riders. But in the retail setting, especially over time, one would expect that the inflow of free-riders would be substantial and difficult to control because retailers do not observe which customers are free-riders and which are subsidizers and thus cannot exclude them. Consistent with this view, the article does suggest that these restaurants, with some exceptions in both directions, are largely breaking even.

It looks like, according to this report, the long-awaited Chinese Anti-Monopoly law will be passed next week and take effect August 1, 2008.  See here for my recent post on the Chinese antitrust law with links to relevant scholarship, and here for Geoff’s earlier post while visiting the Conglomerate a while back.  See also the China Business Law Blog on the NDRC’s successful challenge against the China Ramen Noodle Association under the Price Law.

UPDATE: Danny Sokol points us to Paul Jones’ translation of a Chinese newspaper report (here is a link for our Chinese readership) on the highlights of the Chinese Law.  Though I sincerely hope that something has been lost in translation here, it appears there is a prohibition on “restricting the purchase of new technology, new equipment or restrictions on the development of new technologies.”

The FDA, it seems, is rejecting more new drugs. The agency approved only 61 percent of 2007 drug applications through mid-August, down from 73 percent in the same period last year. A new report by James Kumpel of Friedman, Billings, Ramsey & Co. shows that FDA approvals of drugs made from new chemical compounds are at their lowest level in a decade.

This should not be surprising. The FDA is still taking heat for its approval of Vioxx, which manufacturer Merck voluntarily withdrew from the market. The agency is thus flexing its protective biceps, being extra careful not to approve overly risky drugs.

The problem is, federal law forces all of us to live according to the FDA’s risk/benefit preferences, even though they may not mirror our own. Until the FDA determines that a newly discovered drug is, in its view, safe and effective — a process that takes, on average, 14.2 years — the rest of us aren’t allowed to have it.

This would be troubling enough if the FDA’s risk preferences mirrored those of the average person on the street. In reality, the FDA tends to be significantly more risk-averse than the general population. That’s because the consequences of FDA misjudgments are incommensurate. If the FDA approves a drug that’s “too risky” and people are hurt, the media are all over it and there’s a huge public outcry. By contrast, if the FDA errs in the direction of conservatism (i.e., it fails to approve a relatively safe and effective drug, thereby preventing currently sick people from getting drugs that could help them), there’s usually not much of a news story. (See here for a good explanation of the FDA’s incentives.)

And what about terminally ill people whose only hope is a drug the FDA has not yet approved? Too bad, so sad. The D.C. Circuit recently held that the Constitution does not protect those folks’ right to obtain even those drugs that have passed the first (but not all) stages of FDA approval. In the court’s words, there is no constitutional right for “a terminally ill patient with no remaining approved treatment options to decide, in consultation with his or her own doctor, whether to seek access to investigational medicines that the FDA concedes are safe and promising enough for human testing.”

I must say, I agree with Judge Rogers (and Judge Ginsburg) that

it is startling that the oft-limited rights to marry, to fornicate, to have children, to control the education and upbringing of children, to perform varied sexual acts in private, and to control one’s own body even if it results in one’s own death or the death of a fetus have all been deemed rights covered, although not always protected, by the Due Process Clause, but the right to try to save one’s life is left out in the cold despite its textual anchor in the right to life.

But such is our system — a system that diligently seeks to prevent market failure, with no apparent concern for government failure.

On behalf of everyone here at TOTM, please join me in welcoming Robert T. Miller as our newest permanent blogger. Robert is an assistant professor at Villanova University School of Law. Prior to joining the faculty at Villanova, Robert was an associate with Wachtell, Lipton, Rosen & Katz and a visiting assistant professor at Cardozo Law School.  Robert teaches Business Organizations, Mergers and Acquisitions, Economic Analysis of Law, and Antitrust.  In addition to his expertise in these areas, he is interested in philosophy of law, moral philosophy and the philosophy of language.  He is also a regular contributor to On the Square, the blog of firstthings.com.

We look forward to Robert’s posts and hope you enjoy them!

See here.

At least they bothered to show up at the meeting.

I’m not one to gloat.  Ok, yes i am.  As Thom indicated, the court reached what I believe is the right result in the Whole Foods case yesterday.  I’ve been beating this drum since the merger challenge was announced (I won’t bother linking, yet again, to the series of posts.  Search for “Whole Foods” up there in the top left corner, if you’re interested).  The court’s order indicates that we can expect a redacted (93 page) decision sometime soon.  I very much look forward to it.

Just to hedge my bets a little bit, let me note, if I haven’t already, that Kevin M. Murphy was the expert economist for the government.  He is believed by some to be the Smartest Economist in the World.  His participation in the case on the FTC’s behalf gives me pause.  Kevin Murphy doesn’t espouse positions, even for money, that he hasn’t applied his copious analytical skills to evaluating first.  If he saw some merit in the case, there was probably some merit in the case.  It will be quite interesting to see the court’s decision, and to get a glimpse into the econometric data and analysis brought to bear.

One final note: Clearly, despite John Mackey’s belief to the contrary, there was detailed pricing data available to the government.  I suggested, following Mackey’s claim that the FTC didn’t likely have such data, that bringing this case in the absence of pricing data would be “astounding.”  Apparently we need not be astounded; at trial it became quite clear that Kevin Murphy was working with detailed data.   

One more final note:  As this article notes (at the very end), the last time the FTC was successful in blocking a merger in court was when it blocked the Libbey Glass/Anchor-Hocking merger.  There is definitely some Schadenfreude in this latest setback, since I worked (for Libbey; not the FTC) on the Libbey merger and have been disappointed in the outcome ever since.  Actually, there are some interesting parallels between the cases, some of which I discussed in my posts on this case.  I hope that we see the court challenging the FTC’s reliance on distribution-channel-delineated relevant markets.  This is what the court got wrong (IMHO) in the Libbey case.

And a quiz:  Anyone know the source for the title of this post?

UPDATE:  My “One final note” above is seemingly inaccurate.  I have it on good authority that we should, in fact, be astounded.  It is true, as I noted above, that Murphy was working with detailed pricing data at the hearing. But it is not necessarily the case, of course, that the detailed data was available when the complaint was filed.  It does seem to be the case that, as Mackey noted in the blog post I reference above, that the data was not available to the FTC until later.  Which does seem astounding to me.  Even if Murphy ultimately pulled together a solid and supportive analysis, if the FTC didn’t have that analysis before bringing the complaint — if, that is, the whole thing was built on a foundation of hot docs — the case should simply never have been brought.  It will be very interesting to see if the judge was at all moved by the FTC’s inflammatory documents . . . .

Geoff made all the right arguments on the FTC’s embarrassing effort to thwart the Whole Foods/Wild Oats merger. Indeed, he was one of the first to do so and thereby earned an honored link on Whole Foods’ website.

Judge Paul Friedman of the United States District Court for the District of Columbia just denied the FTC’s request for a preliminary injunction. Unfortunately, the judge’s 93-page opinion was issued under seal. My guess is that the opinion credits most of Geoff’s arguments (see also here, here, and here), and hopefully a few of mine.

While the antitrust nerds of the world (including yours truly) have been all atwitter over Leegin’s renunciation of Dr. Miles, another antitrust decision from October Term 2006 may turn out to be more significant in the long run. I’m speaking of Weyerhaeuser Co. v. Ross-Simmons Hardwood Lumber Co., in which the Supreme Court considered whether predatory bidding plaintiffs must make the same two-part showing as predatory pricing plaintiffs (i.e., that the conduct at issue resulted in a below-cost price for the defendant’s products and that there was a dangerous probability that the defendant could recoup its short-term losses by exercising market power once rivals were vanquished). In answering that seemingly narrow question in the affirmative, the Court appears to have taken sides in antitrust’s greatest debate: how to define “exclusionary conduct” under Section 2 of the Sherman Act.

Some background for the uninitiated. Section 2 of the Sherman Act prohibits monopolization, which the Supreme Court has defined to consist of two elements: (1) the possession of monopoly power and (2) exclusionary conduct designed to acquire, maintain, or enlarge such power. The problem here is that all sorts of procompetitive, consumer-friendly conduct is literally exclusionary. If Acme Inc. builds a better mousetrap than its rivals or lowers its price relative to their’s, it will usurp business from those rivals, thereby “excluding” them from the market. Surely, though, price-cuts and quality improvements — even those by a monopolist — should not be condemned. Thus, courts have struggled to articulate a standard for unreasonably exclusionary conduct.

The leading judicial definition of exclusionary conduct is from the Grinnell case, in which the Court defined exclusionary conduct as “the willful acquisition or maintenance of [monopoly] power as distinguished from growth or development as a consequence of a superior product, business acumen, or historic accident.” But what is “willful” acquisition of monopoly power? Practically every firm “wills” to beat out its rivals and thereby attain monopoly power. Recognizing as much, courts have sometimes referred to exclusionary conduct as conduct other than “competition on the merits.” But what exactly is that? As Einer Elhauge has argued, these verbal formulae are simply vacuous.

For that reason, a generalized definition of exclusionary conduct has become the Holy Grail for antitrust scholars. So far, four contenders have emerged as most promising: (1) Judge Posner’s “equally efficient rival” test, (2) Post-Chicago theorists’ “raising rivals costs unjustifiably” approach, (3) the Areeda-Hovenkamp treatise’s consumer welfare balancing approach, and (4) the Justice Department’s “profit sacrifice” or “no economic sense” approach. [Note that these attributions are not exclusive; other theorists besides those mentioned have crafted and/or endorsed these various definitions of exclusionary conduct.]

In a paper I’ve written for the Cato Supreme Court Review and will post to SSRN presently, I argue that Weyerhaeuser takes sides in the debate over a generalized definition of exclusionary conduct under Section 2. Specifically, I contend (1) that the Weyerhaeuser Court implicitly endorsed Judge Posner’s “equally efficient rival” definition of exclusionary conduct and rejected the other leading contenders and (2) that this is a salutary development.

Below the fold, I will briefly summarize my first point, which is essentially descriptive. In a subsequent post, I’ll summarize my normative defense of the Court’s endorsement of the equally efficient rival test. (more…)

In a California Bar Journal, Professor Chemerinsky documents what he describes as the Supreme Court’s “sharp turn to the right.”  Ted Frank describes Chemerinsky’s review of the term as “not especially honest” and discusses a few cases there.  So what does Chemerinsky make of the recent antitrust decisions?  Your hint is that the section is titled: “The Supreme Court favors business over consumers and employees.”  Ted Frank doesn’t like this description at all because “we all know darn well that many “pro-business” legal rules favor consumers and employees as a group ex ante.”   I don’t like the description either and expand on Ted’s theme here a little bit below the fold.

(more…)

David Fischer at Antitrust Review points to a decision out of the Eastern District of Pennsylvania where plaintiffs’ allegations of conspiracy in violation of Section 1 of the Sherman Act survived a motion to dismiss. Recall that Twombly rejected the “any set of facts” or “conceivability” standard set forth in Conley v. Gibson in favor of a “plausibility” standard (see, e.g. Manfred Gabriel’s article in the Antitrust Source exploring Twombly’s implications).

So what sort of activity was alleged in the complaint that allowed the plaintiff class in In Re: OSB Litigation to survive the pleading stage? Judge Diamond points to a few features of the complaint that are worth exploring:

• Plaintiffs explicitly alleged communications between rivals announcing an intention to shutdown North American OSB mills and reduce output
• Plaintiffs detail that the same communication was later repeated by one of the defendants
• Plaintiffs allege communications between competitors followed directly by a reduction in production during a time period when demand was increasing
• Plaintiffs allege that prices increased to a record high level subsequent to these communications and reduction in production
• Importantly, thePlaintiffs also described in detail the mechanism by which the collusion was to take place. Specifically, the complaint contained allegations describing the use of a twice-weekly published price list in an industry periodical which included OSB prices by region and allowed conspirators to monitor competitors and detect cheating

This level of detail of the collusive agreement or conditions conducive to such an agreement are far greater than in Twombly. Specifically, the complaint in OSB features detailed allegations describing who was cartelizing what and how they were doing it appears to be a key feature of the new Twombly standard. The Horizontal Merger Guidelines provide a somewhat useful way to think about information that might describe the mechanism of collusion, and thus help to satisfy the Twombly standard, in Sections 2.11 and 2.12 which describe conditions conducive to both reaching a collusive agreement as well as detecting and punishing deviations — necessary components of a successful conspiracy.

OSB doesn’t appear to be a great test case for the scope of Twombly precisely because the allegations in the complaint are so detailed. A more interesting test case might involve Twombly-type allegations along with a “plus factor” or two. One important issue for district courts to grapple with involves the assignment of relative weights to various plus factors at the pleading stage for the purposes of “plausibility analysis.”

I am also interested to see if the post-Twombly world will involve extensive expert economic testimony at the pleading stage concerning the “plausibility” of collusion given market conditions (such as those described in the Guidelines in the coordinated effects context). There was obviously no such need here given allegations of an explicit agreement — but I would suspect that such expert testimony and economic analysis will likely play a greater role in these cases at the pleading stage.

The application of empirical economic methods in antitrust can and should play an important, even central, role in the development of sound competition policy.  For example, former FTC Chairman Tim Muris explicitly made the case that empirical examination of the economic foundations of antitrust could improve antitrust policy making and undertook efforts to make such an examination a fundamental part of the FTC’s research agenda:

Economics tells us that monopoly can be “bad,” but that is the “easy” part. How do we know when we have a monopoly? How do we know which conduct by a monopolist is “bad?” Even when we know it is “bad,” what can we do about it? The efficient administration of statutes against monopolies, or trusts, requires presumptions, preferably ones with sound empirical support. The contribution of economics in this regard is improving. Especially over the past few decades, economics had a critical role in correctly characterizing the state of competition in the U.S. economy and therefore in guiding the presumptions used in antitrust policy and litigation.

I am a firm believer in the importance of empirical work to the antitrust mission.  In that light, I was extremely pleased to be a part of the symposium featured in the newest issue of the Antitrust Law Journal (Volume 74, Issue 2) on The Application of Empirical Economics to Antitrust.  The symposium was organized by Keith Hylton and I think the final product is well worth reading (with many thanks to the ALJ editors!).

The symposium features the following articles:

• Keith N. Hylton & Fei Deng, Antitrust Around the World: An Empirical Analysis of the Scope of Competition Laws and Their Effects
• Margaret C. Levinson and Valerie Y. Suslow, The Economic Impact of the U.S. Export Trading Company Act
• Jerry A. Hausman and J. Gregory Sidak, Evaluating Market Power Using Competitive Benchmark Prices Rather than the Herfindahl-Hirschman Index
• Roger D. Blair, James Mak and Carl Bonham, Collusive Duopoly: The Economic Effects of the Aloha and Hawaiian Airlines’ Agreement to Reduce Capacity
• My own article on Slotting Contracts and Consumer Welfare 

I’ve linked to the SSRN versions of these pieces where I could find them for those interested.

Yesterday, Former Brocade CEO Steve Reyes was convicted of all criminal charges brought against him in the Brocade backdating scandal.  (The ten charges included fraud, conspiracy, lying to the SEC, falsifying books, etc.)  I am thrilled.  Professor Larry Ribstein is not.

To remind you, backdating stock options basically means lying and maintaining that stock options were granted on a date that they were not.  Backdating stock options is a bad thing for many reasons, not the least of which is because it usually is contrary to the terms of the stock option plan at issue (the plan approved by stockholders).  Moreover, backdating stock options implies that the options are ultimately not accounted for correctly, such that investors are misled as to the true “cost” (paper or otherwise) of the options and the financial condition of the corporation.  While we could argue about the actual impact backdating has on a corporation’s financial picture, the upshot is that backdating options and accounting for them accordingly is deceitful.

Regarding the Reyes jury verdict, I am thrilled because the jury verdict makes clear to former CEO Reyes and, by example, senior management of corporations in general that lying to investors about matters relevant to their securities is not acceptable.  Moreover, the jury rejected Reyes’s argument that he did not commit fraud because he did not know that backdating was illegal (indeed, there was some speculation that Reyes’s attorney would call Larry Sonsini to the stand to try to point the finger at him for blessing the backdating).  That, to me, is a huge step in tagging corporate executives with the responsibility of actually knowing enough about accurate accounting to be able to actually accurately account.

But, as noted, Professor Larry Ribstein was not similarly elated.  Professor Ribstein opined that that “The thought of more of these misguided criminal prosecutions of backdating is disturbing, to put it mildly.”  Professor Ribstein went on to say “These problems with criminalization of backdating are especially striking in a case like Brocade, where the defendant was trying to maximize shareholder value by recruiting the best people, not line his pockets, and where it’s unlikely any misstatements hurt investors….”  Well, that’s a non sequitur.  Breaking the law is breaking the law.  Who *cares* whether Reyes was trying to benefit himself, the Pope, or the investors?  AAT&T v. Miller, loosely paraphrased:  “Don’t break the law, even if you are doing it to try to benefit the corporation.”  (What if Reyes hired prostitutes or gave out cocaine to entice the best possible people to come work for Brocade?  Would that be acceptable?  Of course not.)

After scary verdicts like these (“scary” meaning even mildly imposing accountability), the big law firms often send out memos to their corporate and management clients, explaining the legal impact or import.  Allow me to draft the memo to clients on this one:

Don’t lie to investors.  Don’t lie to the government.  Don’t lie to the corporate auditors/accountants.  Follow the rules.  Don’t break the law.

******Question for the fed courts wonks out there:  the 29 motion is still open, such that the judge could, in theory, set aside the verdict, yes?