In April 2000, the FTC issued a Complaint against women’s shoe distributor Nine West, claiming that Nine West had engaged in minimum resale price maintenance (RPM) (i.e., the setting of minimum prices that retailers could charge for its shoes). Apparently, Nine West was providing retailers with lists of “off limits” or “non-promote” shoes that weren’t to be promoted except during defined periods. Because Nine West sought acquiescence in those policies by threatening to terminate offending dealers, the FTC maintained that it had engaged in a minimum RPM agreement. At that time, such agreements were deemed to be per se unreasonable–and thus automatically illegal–restraints of trade. Nine West ultimately agreed to a broadly worded Consent Order requiring it to refrain from (among other things) fixing prices at which its retailers may sell, advertise, or promote its products; “otherwise pressuring” its dealers to adhere to resale prices; and “[s]ecuring or attempting to secure any commitment or assurance from any dealer concerning the resale price at which the dealer may advertise, promote, offer for sale or sell any Nine West Products.”

In last summer’s Leegin decision, the Supreme Court overruled Dr. Miles, the 1911 decision that had declared RPM agreements per se illegal. The Court reasoned that such agreements are frequently procompetitive and should not be condemned unless they are shown to violate the Rule of Reason (a fairly fact-intensive balancing test that considers the likely competitive effects of a restraint of trade in light of market structure so as to determine whether the restraint is, on balance, pro- or anti-competitive). In light of Leegin, which clearly undermined both the FTC’s Complaint against Nine West and its Consent Order, Nine West petitioned for modification of the Order to eliminate the prohibitions discussed above. Nine West reasoned that the Order unfairly placed it at a competitive disadvantage since its rivals now may engage in RPM and their RPM agreements cannot be successfully challenged absent a showing of actual competitive harm.

This all makes sense. The FTC’s Complaint and Order were based on an old (and much maligned) precedent holding that all minimum RPM agreements are automatically unreasonable and illegal. That precedent has been squarely overruled. Ergo, the Order should be revised to permit Nine West to engage in a business practice the Supreme Court has (correctly) concluded is usually pro-competitive. Seems pretty open and shut, right?

Think again. In an eighteen-page opinion released Tuesday (May 6), the FTC only partially granted Nine West’s request for modification and required Nine West to justify its use of RPM to the Commissioners by filing regular reports showing that its use of the practice is, in fact, pro-competitive.

Now one might wonder how a Supreme Court decision holding that minimum RPM is not presumptively unreasonable could support an order requiring Nine West to continually justify (i.e., to prove the reasonableness of) its use of the practice. Indeed, wasn’t the point of Leegin to put the burden of establishing the unreasonableness of any instance of RPM on the party complaining about the practice? The FTC says no. It maintains that the Rule of Reason applicable to RPM should presume that any instance of the practice is anti-competitive unless the defendant makes some showing otherwise.

To reach this rather odd conclusion, the FTC latches on to the Leegin Court’s observation that:

[a]s courts gain experience considering the effects of these restraints by applying the rule of reason over the course of decisions, they can establish the litigation structure to ensure that the rule operates to eliminate anticompetitive restraints from the market and to provide more guidance to businesses. Courts can, for example, devise rules over time for offering proof, or even presumptions where justified, to make the rule of reason a fair and efficient way to prohibit anticompetitive restraints and to promote competitive ones.

By this remark, the FTC contends, the Supreme Court directed the lower courts and regulatory agencies to adopt “the analytical approach that the D.C. Circuit endorsed in Polygram Holdings” [a.k.a. the “Three Tenors” case]. Under that approach, which builds on the “quick look” or truncated Rule of Reason the Supreme Court began to apply in 1978 in the Professional Engineers case, an antitrust tribunal considering a practice that is “inherently suspect,” though not per se illegal, may presume the practice unreasonable unless the defendant “either identif[ies] some reason the restraint is unlikely to harm consumers, or identif[ies] some competitive benefit that plausibly offsets the apparent or anticipated harm.” Minimum RPM, the FTC argues, is “inherently suspect” because it bears a “close family resemblance” to “‘another practice that already stands convicted in the court of consumer welfare’ – horizontal price-fixing.” Thus, the FTC concludes, Leegin, properly interpreted, presumes the unreasonableness of minimum RPM unless the defendant establishes that anticompetitive harm is unlikely by showing, for example, that the manufacturer engaging in RPM lacks market power, that the impetus for the RPM arrangement is the manufacturer rather than its retailers, and that there is no dominant retailer that might be responsible for the RPM agreement. While Nine West made such a showing (which is why the FTC begrudgingly agreed to modify the order so as to permit RPM), “the circumstances in the market could change” (which is why the Commission required Nine West to continually justify its use of the practice).

This is hogwash.

As an initial matter, the quoted remark from Leegin contemplates a structured Rule of Reason, not the sort of truncated inquiry approved in Professional Engineers and its progeny. The Court was simply saying that as courts accumulate experience evaluating minimum RPM, they will be able to articulate the precise factors that should be considered in determining the legality of any particular instance. Courts have done this sort of thing with other practices that are subject to the Rule of Reason. Horizontal data exchanges, for example, are evaluated by considering specific aspects of the structure of the market in which the participants compete and the nature of the information exchange (see Todd v. Exxon). The Rule of Reason applicable to exclusive dealing practices involves a structured “qualitative foreclosure” inquiry (see Tampa Electric). As courts gain experience with minimum RPM, they will similarly set forth a structured inquiry that is both easier to apply and more predictable than the “kitchen sink” Rule of Reason first set forth by Justice Brandeis in the Chicago Board of Trade decision.

In addition, the FTC erred in concluding that minimum RPM is “inherently suspect” and thus presumptively unreasonable. The Polygram Holdings (Three Tenors) decision itself sets forth the standard for inherently suspect, but not per se illegal, restraints:

If, based upon economic learning and the experience of the market, it is obvious that a restraint of trade likely impairs competition, then the restraint of trade is presumed unlawful and, in order to avoid liability, the defendant must either identify some reason the restraint is unlikely to harm consumers or identify some competitive benefit that plausibly offsets the apparent or anticipated harm.

It is simply not the case that “economic learning” and “the experience of the market” have made it “obvious” that minimum RPM “likely impairs competition.” The Leegin Court was crystal clear on that point.

Presumably realizing as much, the FTC latches onto another statement from Polygram Holdings – the observation that a restraint may be inherently suspicious because of “the close family resemblance between the suspect practice and another practice that already stands convicted in the court of consumer welfare.” The Commission maintains that vertical RPM bears that sort of resemblance to horizontal price-fixing.

But that’s just crazy. While horizontal and vertical price-fixing (minimum RPM) both involve the fixing of prices, there are hugely important differences between the two practices. Most notably, minimum RPM usually cannot benefit the price-fixer (the manufacturer) unless it increases sales at the retail level, generally by motivating point-of-sale services that make the product at issue more desirable to consumers. By contrast, horizontal price-fixing benefits the price-fixers by decreasing output to consumers. Thus, saying that the two practices bear a close family resemblance because they both involve price-fixing is like saying that Gary Coleman and Heidi Klum resemble each other because they both have legs.

As we’ve previously explained (and as the FTC well knows), it’s really hard to use RPM to accomplish anti-competitive ends. Pro-competitive rationales undoubtedly explain most instances of minimum RPM, and for that reason, the burden should be on the party challenging an RPM practice to prove his less plausible story.

The FTC’s May 6 opinion seems to be coated with the fingerprints of Commissioner Pamela Jones Harbour, who has made no secret of her affection for Dr. Miles. At this point, though, it’s getting a little embarrassing. While we all know how hard it can be to say goodbye, it’s time to let the Good Doctor go.

Harvard’s Einer Elhauge answers the titular question in the newest issue of Competition Policy International, in response to a review of his new textbook Global Antitrust Law and Economics (with Damien Geradin) at the newly revamped Global Competition Policy website.   The response essay is less about the particulars of the book than it is about what the fundamental goals of modern competition law courses are and should be.  The debate takes the form of teaching doctrine and procedure vs. economic analysis with Elhauge defending the latter.  Here’s an excerpt from Elhauge driving home the point:

I inserted the bolded portion.  This is a lesson I try to impart to my antitrust students and one that I hope that they take to heart by the time the semester is over.  I think Elhauge has this exactly right.  Check out the essay.

• James Pethokoukis at US News reports on interviews with chief economic advisers Austan Goolsbee and Douglas Holtz-Eakin.
• Brian Leiter is pleased to point out a study showing that while both groups are in the top 3, Philosophy majors outperform Economics majors on the LSAT.  Leiter also gets in a playful dig, noting that the study “corresponds exactly to the natural intellectual hierarchy evident throughout the legal academy.” Ouch. Hmmm. We’ll see Brian’s study and raise him this one suggesting that economics, unlike some other high performing undergraduate majors, actually translates beyond LSAT performance into higher earnings.
• The Federal Trade Commission has announced its First Annual Microeconomics Conference
• Gary Becker on why the airlines are so bad
• Quantifying the Colbert Bump (HT: Tyler Cowen)

The D.C. Circuit’s opinion is available here.  Here is one of the key passages explaining the D.C. Circuit’s logic:

To the extent that the ruling (which simply reversed a grant of dismissal) rested on the argument that deceit lured the SSO away from non-proprietary technology, see id., it cannot help the Commission in view of its inability to find that Rambus’s behavior caused JEDEC’s choice; to the extent that it may have rested on a supposition that there is a cognizable violation of the Sherman Act when a lawful monopolist’s deceit has the effect of raising prices (without an effect on competitive structure), it conflicts with NYNEX.

More on this later.  My preliminary reaction is that the opinion contains some fairly broad-sweeping language that should make the patent holdup landscape fairly interesting in the near future, especially when contrasted to cases like Broadcom and N-Data.

The new issue of the Journal of Law & Economics is available online. This is an exciting development for me because the issue includes my paper with Ben Klein on The Economics of Slotting Contracts (SSRN version available here), and because it has been a very long wait to see the paper in final form (note the new release is of the August 2007 issue of JLE). The primary contribution of the paper is to explain the incidence of shelf space contracts as a consequence of the normal competitive process and examine the conditions under which those contracts will take the form of a lump sum per-unit time payment rather than a wholesale price or volume discount. We also have provide some empirical evidence that is consistent with the time series and cross-sectional incidence of slotting across product categories (see also here).

Readers with an interest in antitrust might want to also check out the Duso, Neven & Roller event study analysis of EU merger decisions and Taylor’s analysis of NIRA cartel performance. And to be filed under the category of “law of unintended consequences,” Jonathan Klick and Thomas Strattman also have a very interesting empirical piece demonstrating that state mandates requiring coverage of diabetes treatments have resulted in offsetting behavioral changes and higher Body Mass Index after the mandates.

The Klein and Wright abstract is below the fold:

(more…)

Amit Gandhi, Luke Froeb, Steven Tschantz and Gregory Werden have published “Post-Merger Product Repositioning” in the Journal of Industrial Economics.  (HT: Luke).  The critical insight is that the conventional unilateral effect incentive to raise prices post-merger is offset by the incentive to “separate” in product space.  Here is the abstract:

This paper analyzes the effects of mergers between firms competing by simultaneously choosing price and location.  Products combined by a merger are repositioned in away from each other to reduce cannibalization, and non-merging substitutes are, in response, repositioned between the merged products.  This repositioning greatly reduces the merged firm’s incentive to raise prices and thus substantially mitigates the anticompetitive effects of the merger.  Computation of, and selection among, equilibria is done with a novel technique known as stochastic response dynamic, which does not require computation of first-order conditions.

That is what Judge Posner has to say about Leegin in his new book, How Judges Think.   I’m only a few chapters in, but so far, its a fascinating read.  I’ll probably blog some more about parts of the book later.  In particular, I’ve been thinking recently about how the complexity of substantive antitrust analysis affects judicial decision-making.  But for now I wanted to just post an excerpt from the book containing Posner’s description of Leegin (TOTM posts on Leegin are here):

The earlier case [ed: Dr. Miles]  had held that agreements by which a manufacturer places a floor under his distributors’ resale price are a per se violation of the Sherman Act, on the ground that they have the same effect as if the retailers had gotten together and decided to fix a minimum price at which to sell the good.  That was wrong as a matter of economics, because a manufacturer has no interesting in allowing his distributors to cartelize distribution, thus restricting his access to his customers.  If the manufacturer places a floor under his retailers’ prices, it is because the floor serves his interest in competing more effectively against other manufacturers, as by encouraging the retailers to provide presale services to customers for the manufacturer’s good.  So Dr. Miles was rightly overruled.  But the overruling, and its rightness, owed nothing to legalist thinking.  A venerable precedent was overruled because it was bad economics.  Leegin is a triumph of pragmatism.

Posner also describes Bell Atlantic v. Twombly (p. 53-54) as a pragmatic decision, noting that “nothing in the repertoire of legalism could have decided it, especially in favor of the position in the majority opinion” and concluding that “right or wrong, the decision in Bell Atlantic pragmatic rather than legalist.”  If Leegin is a “triumph of pragmatism,” is the continuing vitality of Jefferson Parish’s “per se” prohibition against tying a failure of pragmatism?  If my prediction is correct, whether pragmatic or otherwise, it won’t be too long before Jefferson Parish joins Dr. Miles.

Northwestern University School of Law’s Searle Center on Law, Regulation and Economic Growth will be holding a conference on Antitrust Economics and Competition Policy on September 26-27th.  From the Call for Papers:

The goal of this Research Symposium is to provide a forum where leading scholars from across the country can gather together with Northwestern’s own distinguished faculty to present and discuss high quality research relevant to antitrust economics and competition policy. Both theoretical and empirical submissions are welcome. Papers in industrial organization or applied microeconomic theory that address issues relevant to antitrust policy are welcome even if they do not directly focus on particular antitrust policy issues or institutions. We hope to involve leading thinkers from the government, non-profit, and private sector, as well as leading academics from economics departments, business schools, law schools and public policy schools. While most of the conference will be devoted to presentation and discussion of original academic research, we also expect to schedule a small number of panels on important current topics or policy issues. If you have questions about the appropriateness of your paper for the symposium, or suggestions for panel subjects, please contact Professor William Rogerson, Research Director, Searle Center Research Project on Competition, Antitrust and Regulation (wrogerson@northwestern.edu)

NOTE: The deadline for abstracts is April 15, 2008!

With all of the recent talk of the “optimal regulatory structure” and proposals about regulatory consolidation and reorganization (here is Glom Blogger David Zaring on the Big Reorg), I wonder if the discussion might carry over into antitrust and the recurring “dual enforcement” question. 

As some of our readers may know, both the DOJ and FTC share the responsibility of enforcing the federal antitrust laws.  This dual agency structure comes under attack from time to time.  As one might expect, the primary critique is that the dual structure creates inconsistent enforcement and other inefficiencies.  However, the consensus view appears to be that the institutions have evolved in ways that mitigate those inefficiencies.  At least, the agencies have reduced these inefficiencies to the point that there is apparently no constituency harmed by them sufficiently to create a large demand for reform.  Judge Posner describes the structure as “peculiar, to say the least … yet pretty harmless.”  The Antitrust Modernization Committee recently took on the issue of dual enforcement (Chapter II.A) and concluded that while “although concentrating enforcement authority in a single agency generally would be a superior institutional structure, the significant costs and disruptions of moving to a single-agency system at this point in time would likely exceed the benefits.”  In other words, if it ain’t broke (or is only broke a little bit) … It should be noted that three AMC Commissioners did recommend consolidation of all antitrust enforcement powers with the DOJ.

The discussion of benefits and costs of regulatory competition and consolidation in antitrust has been largely anecdotal.  For example, Judge Posner draws on his own experiences with state AGs (read: bad ones), though he does marshal some other evidence, in arguing that states should be stripped of their antitrust enforcement powers except for under narrow circumstances.  I think it is a fairly open empirical question whether and to what extent regulatory competition between federal agencies (or federal agencies and the state AGs)  has been a net good or bad for consumer welfare.   If any rigorous empirical work has been done on this question in antitrust, I haven’t seen it or have forgotten it.  My instinct is that the evidence is likely to differ in those two cases with state v. federal overlapping enforcement generating larger and more robust negative effects (and little or no effect as between the federal agencies).

One last issue with respect to ex ante competition and merger analysis.  What if it could be demonstrated convincingly that XM and Sirius payments to automobile manufacturers. The DOJ hints at this possibility in the press release:

XM and Sirius engaged in head-to-head competition for the right to distribute their products and services through each car company. As a result of this competitive process, XM and Sirius have provided car manufacturers with subsidies and other payments that indirectly reduce the equipment prices paid by car buyers to obtain a satellite radio.

The general approach of the Merger Guidelines is that efficiencies and consumer welfare benefits in product markets outside the relevant market don’t count for the purposes of Section 7 analysis.  I understand that some arbitrary rules about the scope of the competitive effects analysis must be made in order to make the problem tractable, but I tend to think the exclusion of these benefits from the calculation doesn’t make any sense.

The DOJ leaves open the possibility here that these subsidies would be passed on to consumers in the form of “indirectly” lower prices for the satellite radio equipment and so one might think of these as “in the relevant market.”  But in my analysis of slotting contracts with Ben Klein involving payments to multi-product retailers like supermarkets, we show that one reason why supermarkets prefer to receive lump sum payments rather than wholesale price reductions is that the supermarket is not forced to pass on the payments in the form of lower prices on the particular product.  In other words, a slotting fee on Coca-Cola is not likely to be passed on in the form of lower prices on Coca-Cola. There is little doubt that the payment is ultimately passed on to consumers in the competitive retail environment, however.  Supermarkets pass on these payments in the form of various price and non-price benefits on margins that will have the greatest impact of store traffic and inter-retailer competition.  For example, supermarkets may use payments to subsidize lower prices on staples that drive inter-store substitution or non-price amenities like a deli, longer hours, etc.

The point is that the economics of pass-through of these ex ante payments in the multi-product retailer context is much more complex.  However, the Merger Guidelines limit the complexity by arbitrarily limiting consideration of efficiencies to those within the relevant product market (in my example above, soda) and not including the other benefits accumulated by consumers as a result of the payments.  This is odd from a consumer welfare perspective.  One can understand the 2 year timing limitation as an arbitrary but necessary mechanism for limiting the complexity of antitrust analysis or the operation of some discount rate on future consumers.  I think a reasonable argument can be had about the merits of this approach given our limited ability to make predictions into the future (see generally Katz & Shelanski on the topic of Mergers and Uncertainty).

But I view the limitation on “out of market” consumer welfare benefits as less defensible in the context of multi-product retailers as in this slotting fee situation.  If the payments on Coca-Cola are passed on along some other price or non-price dimension, it is generally the same consumers accumulating the benefits and there is very little doubt that these payments are passed through in competitive retail environments.  To know that economic theory and empirical evidence suggests that these payments are improving consumer welfare — the very same class of consumers in the supermarket — but prevent consideration of those benefits as an efficiency strikes me as both arbitrary and perverse.

Geoff and Paul like the result in XM/ Sirius but are puzzled by the DOJ press release, in particular as it pertains to analyzing ex ante competition, or “competition for the field,” in the form of payments to automobile manufacturers to adopt their services. Geoff thinks the DOJ’s press release contains some funny language appearing to suggest that the existence of exclusive contracts meant that there was not competition. I think the relevant language is in the second sentence of the press release:

The Division reached this conclusion because the evidence did not show that the merger would enable the parties to profitably increase prices to satellite radio customers for several reasons, including: a lack of competition between the parties in important segments even without the merger …

Geoff correctly notes that the press release clarifies the DOJ’s position on ex ante competition a bit. The DOJ appears to understand that competition for the field is important in this market, but concludes that margin of competition has been exhausted until 2012 when the relevant exclusives expire. Paul’s critique of the DOJ press release is of a similar nature: why would the DOJ emphasize that there was a lack of competition between the parties on this margin? I agree with both of them that the press release is a bit odd — but for some reasons not discussed as of yet. I also want to take on Paul’s invitation to discuss the slotting allowance analogy to these payments and highlight some general issues about merger analysis and ex ante competition.

First, the press release. What strikes me as odd about the release is that you have to read pretty far into it to get to the discussion of market definition. And everybody knows the central issue in this case was whether this was a 2-1 merger or other terrestrial and other forms of radio were in. Why did the DOJ lead with the somewhat more fact intensive and complex point about competition for the field, noting the expiration dates of the contracts in 2012, and pointing out that the automobile distribution channel was an increasingly important part of the satellite radio market? A few guesses:

• The DOJ leads with the most fact intensive part of its analysis to demonstrate that it really did its homework here, understands the satellite radio market, how it has changed over time, and the role that these sole source arrangements play in the competition between XM and Sirius.
• Market definition is the more natural lead for obvious reasons. But there just isn’t enough variation in the price data and consumer switching (at least with non-confidential data) to show off the DOJ’s attention to analytical detail with the market definition point. Though note that if one concludes the market definition includes terrestrial radio, the competitive analysis is basically done.
• Another reason one might lead with the competition for the field point is that suggesting that the presence of exclusives means that firms are not competing avoids the critique that the DOJ is reflexively non-interventionist — it is certainly not the standard “Chicago” position on competition for the field

Again, these are all just idle observations. But it does strike me as a conscious choice to design the press release this way instead of leading with the obvious market definition point.

Second, the role of timing. The DOJ goes to great lengths to point out a few timing issues that play a central role in its competitive analysis. For instance, that the exclusive contracts would not expire until 2012 and therefore ex ante competition was exhausted until then. As Paul notes, the inference from the expiration dates on the contracts to the notion that competition was non-existent (or perhaps not significant) on that margin is wrong. It is certainly not the standard approach to competition with exclusives in the single firm context where the duration of the exclusives is a factor in the rule of reason analysis but not even presumptively illegal much less conclusive that competition is absent. As a matter of economics, Paul is absolutely right that this ex ante competition was not absent simply because expiration dates on the contracts were in the future. Firms can breach exclusive contracts. Firms can compete for future customers. Those customers contracts can come up for expiration at different times (were they all up in 2012?). And of course, they can also compete again in anticipation of expiration in 2012. I think the charitable and probably intended reading of the DOJ release is that competition in this margin was largely completed, while existent, but practically insignificant.

Timing comes up again in the context of technological change and entry:

The likely evolution of technology played an important role in the Division’s assessment of competitive effects in the longer term because, for example, consumers are likely to have access to new alternatives, including mobile broadband Internet devices, by the time the current long-term contracts between the parties and car manufacturers expire.

So, while there is no significant competition between XM and Sirius on this margin, it doesn’t really matter because the world is likely to change before 2012 anyway. Fine. But again, if market definition and entry and dispositive, why lead with the ex ante competition point? And as far as entry considerations go, the Merger Guidelines limit consideration of entry to that which is likely to occur within two years. I wonder if that means two years from the time of the closing of the investigation or from the time of the merger proposal in this context given the wait time for a decision?

Third, mergers and ex ante competition generally. There are some interesting issues here about ex ante competition and merger analysis more generally. For example, Paul asks why the DOJ would do so much to emphasize the negligible impact of the competition between XM and Sirius on consumer behavior in the car market and asks whether the agencies would say the same thing about slotting contracts in the grocery retail industry (a subject I’ve written about, e.g. here and here). I don’t think they would. One certainly wouldn’t argue that the fact that consumers don’t switch supermarkets based on what exact allocation of baby food, spices, or frozen foods they carry justifies the inference that there is no relevant ex ante competition between manufacturers in those industries. So I’m not quite sure why so much emphasis on this fact other than to demonstrate that the DOJ investigated this market in great detail.

I can’t seem to get my comment on Geoff’s XM-Sirius post below to go through, so I’ll just post it:

I would still disagree with the DOJ when they say “there is not likely to be significant competition…through the car manufacturer channel for many years.”  As mentioned, the exclusive contract is competition.  Even though they aren’t negotiating new contracts now, the competitively agreed upon prices and rebates are still in effect through 2012.  That doesn’t end competition, it extends it.  In addition, if there was no merger in the future and both companies were still in business when 2012 rolled around, they would again compete for the exclusive contracts.

I think the DOJ made the right decision.  However, I would have said that even though some aspect of competition for auto manufacturers between the two companies would end due to the merger, in general the relevant market is much broader than just satellite radio (which is the most important factor).

Also, why would the DOJ make it seem like it matters that there’s no evidence that competition between XM and Sirius affect’s customer’s choices of which car to buy?  Even if no customer would ever choose one car over another on the basis of its satellite radio, XM and Sirius would still compete for the customers each auto manufacturer “controls” (term used loosely).  This is similar to competition for grocery store shelf-space (either exclusively or non-exclusively) to acquire the consumers each respective store “controls.”  Our resident Mr. Shelf Space, can tell me whether he agrees or disagrees.

The Washington Post is reporting that the long-embattled Sirius/XM merger has received DOJ approval (FCC approval still pending) (HT: David Fischer).  About time, I’d say (it’s been two years).  See all of the ToTM posts on the topic here. 

Opposition to this merger has been rooted in what, to me, is a tortured conception of market definition:  If satellite radio doesn’t compete with terrestrial radio (to say nothing of Internet radio, podcasts and much more), then I’ll eat my hat (a ToTM tradition).

I do want to draw attention to something in the WaPo article, however, which I find quite disturbing (and, I hope, taken out of context).  WaPo reports,  

The Justice Department, in a statement explaining its decision, said the combination of the companies won’t hurt competition because the companies are not competing today. Customers must buy equipment that is exclusive to either XM or Sirius, and subscribers rarely switch providers.

“People just don’t do that,” Assistant Attorney General Thomas Barnett said in a conference call with reporters.

Excuse me?  Did the Assistant AG just seem to say that, because people who subscribe to Sirius rarely switch to XM and vice versa that the two companies don’t compete?  I’m pretty sure this must be a misquote.  Surely Barnett has read Demsetz and knows about “competition for the field.”  Even if no user ever switched between providers, competition between providers for each new user’s allegiance–to say nothing of competition for dominance in a network industry–would exert just as much competitive pressure as if users changed their service regularly. 

I agree with the result here, but if it was reached based on the premise that XM and Sirius simply don’t compete–rather than on the premise that they compete vigorously and with myriad other competitors in a properly-understood market–then it was wrongly decided.   

UPDATE:  Both Josh and David Fischer point me to the DOJ press release, available here.  The press release does clarify matters.  It seems that the DOJ does recognize competition between providers for new users, but still hangs its hat substantially on the notion that ex post competition is unrealistic in the automotive market (one perhaps wonders why the DOJ didn’t divide the markets by channel of distribution, a la the FTC in Whole Foods.  Not that I’m recommending it).  Here’s a sample:

The need for equipment customized to each network means that in order to switch from XM to Sirius, or vice versa, a subscriber would have to purchase new equipment designed for the other service. In the case of a factory-installed car radio, switching satellite radio providers would have the additional disadvantage of requiring an aftermarket radio that would be less integrated into the vehicle’s systems. Data analyzed by the Division confirmed that subscribers rarely switch between XM and Sirius.

Historically, XM and Sirius engaged in head-to-head competition for the right to distribute their products and services through each car company. As a result of this competitive process, XM and Sirius have provided car manufacturers with subsidies and other payments that indirectly reduce the equipment prices paid by car buyers to obtain a satellite radio. However, XM and Sirius have entered into sole-source contracts with all the major automobile manufacturers that fix the amount of these subsidies and other pertinent terms through 2012 or beyond. Moreover, there was no evidence that competition between XM or Sirius beyond the terms of these contracts would affect customers’ choices of which car to buy. As a result, there is not likely to be significant competition between XM and Sirius for satellite radio equipment and service sold through the car manufacturer channel for many years.

[Meanwhile, in the retail market,] The Division found that evidence developed in the investigation did not support defining a market limited to the two satellite radio firms, and similarly did not establish that the combined firm could profitably sustain an increased price to satellite radio consumers.

According to the DOJ, XM and Sirius have locked in sole-source contracts with all of the major car manufacturers through 2012, effectively ending competition in that market.  I’d say that’s fair enough.  The companies did compete for those contracts, and they can be presumed efficient (as the DOJ suggests).  Remaining competition is largely in retail, where a product market definition limited to satellite radio is unsupported.  Sounds about right to me. 

My only caveat:  I’m sure the allegedly high switching costs in the automotive market will come down substantially (and unexpectedly) as technology develops, introducing further competition.  I’m equally sure that the other satellite radio competitors are already, and will become increasingly, important in the automotive market, as well, further limiting any ability to extract monopoly rents.

I’m a bit late to the party on Jeffrey Rosen’s provocative article in the NY Times Magazine claiming that the Supreme Court is biased in favor of businesses. For readers not familiar with Rosen’s claim, the basic assertion is that:

With their pro-business jurisprudence, the justices may be capturing an emerging spirit of agreement among liberal and conservative elites about the value of free markets.

Eric Posner’s insightful response hits the nail on the head in critiquing Rosen’s characterization for lack of evidence and exposing Rosen’s implicit assumption that populist jurisprudence is the “unbiased” baseline. I want to focus in the role of the Roberts Court antitrust cases in Rosen’s claim. Rosen cites to these cases as evidence in favor of his bias claim, noting the significant increase in antitrust activity in the Court in recent years and emphasizing the fact that “the Roberts Court has heard seven [cases] in its first two terms - and all of them were decided in favor of the corporate defendants.”

So what are we to make out of these cases? Are the Roberts Court cases really pro-business? Rosen’s “pro-business bias” claim is analytically identical to Erwin Chemerinsky’s take on the Supreme Court cases that I criticized here awhile back (Chemerinsky concluded that the Supreme Court’s antitrust decisions favored “businesses over consumers”). It is also identically incorrect.

Posner gives one excellent reason in his response when he notes that 6 out of the 7 Roberts Court cases involve businesses as both plaintiffs and defendant. Only Twombly involved consumer plaintiffs (and Credit Suisse involved a mixed class of plaintiffs including corporate investors). As Posner notes, it is a bit of a reach to credibly claim “pro-business bias” on this track record where a corporate plaintiff loses in the majority of the cases.

But there is another reason that this “pro-business bias” argument should be dismissed as incorrect with respect to the antitrust cases despite the superficial and soundbyte style argument that a winning streak for defendants is a sufficient condition for anti-consumer bias. I’ve argued elsewhere at length that the Roberts Court’s antitrust jurisprudence can be characterized as embracing the Chicago School tradition of antitrust analysis with its emphasis on theoretical rigor, empirical evidence, and sensitivity to error costs. To the extent that this is consistent with the view that the Roberts Court’s antitrust cases are increasingly “pro-market,” there is an important difference between that statement and the leap to “biased in favor of businesses over consumers!”

The 5-4 decision in to overrule Dr. Miles’ per se prohibition against minimum resale price maintenance in Leegin provides an illustration of that difference in practice. Is Leegin pro-business? Quite obviously, we would need to know something about whether minimum RPM is good or bad for consumers before we concluded that lifting the per se prohibition was a good or bad thing. A Supreme Court interested in consumer welfare analysis (what antitrust does) would be interested in the competitive effects of minimum RPM in order to address the underlying issue: are consumers better or worse off when we allow the practice? A Supreme Court biased in favor of business would have no need at all for that sort of inquiry. But Justice Kennedy’s opinion on behalf of the majority relies extensively on economic theory and empirical evidence that minimum resale price maintenance made consumers better off! Now, one might think that the Court got it wrong, misunderstands the evidence, and that RPM actually harms consumers. For the record, I disagree and believe Leegin was correctly decided. But to argue that the Court got there by favoring business over consumers is not accurate, and obvious from reading the opinion.

What about Twombly? The one case which involves a consumer plaintiff. Is Twombly biased in favor of businesses? It certainly makes it more difficult for plaintiffs to survive a motion to dismiss in a Section 1 case. But is that anti-consumer? Again, only under a superficial analysis of the reasoning in that case. Specifically, the Court is concerned that abuse of the antitrust laws through discovery and frivolous claims exposes firms to the risk of false positives and may chill pro-competitive conduct — which is bad for consumers. One might disagree with these concerns, or believe that the Court misunderstands their magnitude or impact on consumers. But the Court explicitly motivates its analysis with concern about the social costs of abuses of private antitrust enforcement which are passed on to consumers. Similar concerns motivated the Court’s analysis in Credit Suisse. To argue that this conclusion comes from some sort of pro-business bias is a stretch.

We could do this with the rest of the cases. There is clearly a shift in antitrust analysis in the Supreme Court both in terms of activity level and, to a lesser extent, the analytical framework employed. The adoption of the Chicago School of antitrust analysis principles is not properly viewed as a pro-business bias. In fact, it was contributions from that movement in economics that demonstrated why some business practices previously thought to be inefficient actually improved consumer welfare. Subsequent empirical evidence has been overwhelmingly consistent with this approach. I don’t have enough expertise in the other areas of law that Rosen covers to say something about the general claim, though I suspect Posner’s characterization is correct. With respect to the antitrust cases, the Roberts Court decisions have been thoughtful and mindful of the ultimate goal of antitrust: consumer welfare. The conclusion that these cases are biased must rely on some implicit assumption that there is an “unbiased” baseline approach to these cases that does not involve consumer welfare analysis. At least for the past 30 years, and to the benefit of consumers, modern antitrust analysis has rejected alternative approaches that favor small businesses (”small dealers and worthy men”) or non-economic concerns.