• My former FTC colleague David Wales joins Jones Day
  
• The CATO “New Course for Antitrust” video is now available for your viewing pleasure
• Microsoft on the release of Windows 7 in Europe without IE
• The FTC issues its interim report on authorized generics and Chairman Leibowitz claims that reverse payment settlements (based on a Bureau of Economics analysis)  cost consumers at least $35 billion over 10 years

I’ve just returned from Sydney where I was at the ICANN meetings giving a presentation (with Steve Salop of Georgetown Law) and participating in a Q&A on the potential economic consequences of vertical integration between registries and registrars.  I had a great time on the panel, but the highlight for me was spending talking to the various industry and ICANN representatives.  This is a fascinating and dynamic space with more interesting legal and economic issues than one can imagine.  I’m thrilled that I was able to go and learned a lot.

Note to graduate students studying economics, industrial organization, regulation, public and law and economics: this is a field ripe for dissertation topics and in need of both theoretical and empirical contributions.

Tomorrow at Cato at noon, Carl Shapiro (Deputy Assistant Attorney General for Economics at the Antitrust Division) will be giving some remarks on the Obama administration’s antitrust agenda.  I’ll be giving some brief remarks in response and participating in a discussion including Shapiro and Edwin Rockefeller and moderated by Douglas Ginsburg.  Details are available here.

UPDATE: It was a great event and well attended (including plenty of representation from the agencies).  I want to thank Roger Pilon and the folks at Cato for putting on a wonderful program as well as Doug Ginsburg for moderating.  I really had a great time.  I’m told that you should be able to watch it in a day or two at this link.  My remarks focused on the ambitious monopolization enforcement agenda at the “new” DOJ and the withdraw of the Section 2 Report.  Carl Shapiro, who gave a very thoughtful and interesting opening talk, and I have a few fun exchanges about the DOJ’s views on the existence of false positives.

Economic theory is essential to antitrust law.  It is economic analysis that constrains antitrust law and harnesses it so that it is used to protect consumers rather than competitors.  And the relationship between economics and antitrust is responsible for the successful evolution of antitrust from its economically incoherent origins to its present state.  In my view, which I’ve expressed in greater detail elsewhere, the fundamental challenge for antitrust is one that is created by having “too many theories” without methodological commitments from regulators and courts on how to select between them.  The proliferation of economic models that came along with the rise of Post-Chicago economics and integration of game theory into industrial organization has led to a state of affairs where a regulator or court has a broad spectrum of models to choose from when analyzing an antitrust issue.

This may have been a positive development for economic science.  This is not the place to have that debate.  But for law and economics the proliferation of theoretical models without attention paid to empirical testing of models, combined with the above-mentioned “model selection” issue allow regulators and courts significant degrees of freedom to select any model they like — why not the one that matches their ideological prior beliefs or policy preferences?  Taken to the extreme, this model selection problem threatens to strip the disciplining force that economics has placed on antitrust law that was a key part of the successful evolution of that body of law over the last fifty years.   The stakes involved in appropriately specifying the link between economic theory and antitrust law, and understanding the role of empirical evidence in that relationship, are high.

The importance of the issue is why I have criticized both what I view to be a trend toward reducing the role of economics and economists in antitrust, as well as those who turn the issue of model selection into an ideological debate rather than one driven by economic theory and evidence.  Readers of TOTM will know that I have, on occasion, criticized Commissioner Rosch on these grounds.  Well — apparently he was reading (see n.3) and has devoted some time in a recent speech to “dispelling a misconception about how I view economics and economists, attributable I fear to not making my views clear.”

I applaud Commissioner Rosch for recognizing the confusion that some of his views on economics may have caused and further applaud him for attempting to set them straight in a public forum.  Transparency is useful in contexts such as these precisely because it allows these views to be strained and tested by those who disagree (and also because it puts the antitrust and business communities on notice).  Here is what the Commissioner had to say about his critics:

More specifically, critics – overwhelmingly Chicago School apologists – have suggested that I am anti-economics and anti-economist and, indeed, that I doubt that economics should play a role in antitrust law enforcement.  Those are not my views. My views are as follows….

If one follows n.3 in that speech, despite the use of the plural, the reference is apparently one that is exclusive to me and this series of posts on Commissioner Rosch’s treatment of economics, economists, and the role of economic theory in antitrust:

Commissioner Rosch on the Smaller Role of Economists in Antitrust Litigation

Inter-Agency Scuffling Over Section 2: What Role for Economists and Economics at the FTC and DOJ?

Commissioner Rosch v. Economics Again

And here are a few that the Commissioner didn’t cite for the sake of completeness:

No Ovation for the FTCs Latest Enforcement Theory

Is the Chicago School Really Dead?  How Do You Know?

“One Thing is Clear to Me: The orthodox and unvarnished Chicago School of economic theory is on life support, if not dead”

In a later speech on the “Redemption of a Republican,” in which the punchline is that the “confessions of sin” from Posner and George Osborne in the UK redeem Rosch’s views and might even save us from clinging to “bankrupt” economics, the Commissioner refers to his “orthodox Chicago School critics” without identification or citation, writing that:

The orthodox Chicago School economist community has been especially dumbfounded. Some economists have denounced my remarks questioning the use of economic formulae as reflecting a general bias against economists. With specific reference to my January remarks, they have both asserted, on the one hand, that the current economic crisis says nothing about microeconomics as opposed to macroeconomics and at the same time have denied that any Chicago School economist has ever asserted that markets are perfect or self-correcting or that businesspeople are rational. They have also asserted that most of the decent post-Chicago School economics thinking has come from orthodox Chicago School economists.  After all of this criticism, I was starting to question whether I really was a loyal Republican.

I suspect I’m also the dumbfounded denouncer  —  though I refer readers to this post to see what I actually said (see also here) because it differs substantially from Rosch’s characterization (if indeed it purports to summarize my positions).  Suffice it so say that one can read very closely and there is no claim there about what Chicago School economists have said or not said about businesspeople being rational.

As for the “assertion” that most of the decent post-Chicago thinking has come from orthodox Chicago School economists — again, this is simply untrue and misleading.  Instead, the claim is that folks like Aaron Director anticipated many of the economic insights of the raising rivals’ cost models, that Chicagoans such as Ben Klein and Tom Hazlett are responsible for some of the leading empirical examples of Post-Chicago phenomena, and that Dennis Carlton (Chicago GSB) extended some of the theoretical work (for more on this, see here).  Don’t, however, take it from a Chicago School apologist.  Instead, here it is straight from the leading thinker of the Post-Chicago economic movement: “it is important to recognize that [the Post-Chicago] approach has its root in the economic analysis of Chicago School commentators.” See Steven C. Salop, Economic Analysis of Exclusionary Vertical Conduct: Where Chicago Has Overshot the Mark, in OVERSHOT THE MARK, at 144. Similarly, try to talk about coordinated effects without invoking Stigler (1968).

This is why the prefix “orthodox” in front of Chicago School is misleading — though perhaps an effective rhetorical device.  Chicagoans have done important empirical work on market failures and helped to develop and test Post-Chicago models.  By what meaningful definition does this constitute “orthodoxy”?  Nevermind the persistent use of the term orthodox to imply a static, monolithic body of economic knowledge.  This term by colloquial implication glosses over important differences between the work and approaches of, for example, Alchian, Klein and Oliver Williamson and in understanding how asset specifity and opportunism influence firm behavior, or between Klein, Telser and Marvel on vertical restraints, or between Demsetz and Coase on the theory of the firm.  The label both misleads, errs as a matter of economic history, and favors ideology and shorthand labels over substance.  None of this, of course, is new to political rhetoric.  To some, to invoke the term Chicago School is not to reference a broad intellectual movement but to utilize a heuristic to describe a reflexively anti-interventionist position that typically involves (in the eyes of the evoker) irrational disdain for government regulation. While current financial times make it somewhat fashionable for journalists and casual observers to toss around without regard to accuracy or evidence caricatured versions of entire schools of economic thought (to which serious scholars have devoted decades of intellectual energy), antitrust experts have generally carefully avoided such style of commentary in favor of careful analysis of competing theories and evidence.

One more quick — but related — about misrepresenting views.  Rosch describes George Stigler’s work on oligopoly theory as follows:

Nobel Prize winning economist George Stigler’s 1964 article “A Theory of Oligopoly” in which he explained that it was improper to assume that firms in an oligopolistic market would find a way to agree to raise prices above competitive levels.

This is wrong.  Stigler said it was wrong to assume that firms would inevitably collude.  Rather, he proposed a framework for analyzing the factors that would affect their ability to do so.  That framework provides the basis for much of our modern antitrust understanding on collusion and coordinated effects.  It is simply wrong to insinuate that Stigler thought it was impossible for oligopolists to collude successfully.

Ultimately, I’m far more concerned with the misrepresentation of ideas, theories and evidence than Commissioner Rosch’s description of me as a “Chicago apologist.”  The label Commissioner Rosch assigns to me or others does not resolve the substantive merits of the “model selection” problem or the fundamental question here of whether Rosch’s ideas on the relationship between economics and antitrust are sensible.  It’s true that I’ve written as a positive matter that the Roberts Court’s antitrust jurisprudence is more Chicago than Harvard.  I’ve criticized those who have caricatured and Chicago School scholars and ideas and avoided taking on the substantive merits of those economic ideas in favor of ideological labels.  I’ve also argued that the appropriate way to settle intellectual battles in antitrust between competing models is with reference to the empirical evidence — and that attempts to explain the persistence of Chicago School economics in antitrust jurisprudence without rejecting the hypothesis that it is the body of economic theory that is most consistent with the available empirical evidence is unlikely to lead to good antitrust policy.

In short, an analysis of the existing theory and evidence that suggests that the Chicago School’s contributions to antitrust economics hold up quite well relative to competing theories when the contest is run with reference to empirical data rather than who shouts the loudest is not an apology as I understand the word.  I therefore conclude that I am no Chicago School apologist.  Commissioner Rosch obviously disagrees.   In this context, this is a rhetorical and political term not an economic one, so I don’t have much else to say about it — well, maybe one thing.  Apologist is not a neutral word. I point this out because the use of the term “apologist” contradicts the Commissioner’s anecdotal introduction to his speech wherein he analogizes the intellectual debates in antitrust to the scientific debates over quantum mechanics and general relativity in characterizing the relationship between atoms and sub-atomic particles.  The analogy appears to hint that the Commissioner endorses an approach grounded in the scientific method to settle these disputes.  But the use of rhetoric like “apologists” to describe critics that have taken on the substance of ideas and evaluated the evidence in a manner consistent with social science methodology dispels that notion and suggests mostly interest in superficial labels and t-shirt slogans rather than serious engagement with ideas and evidence.  Its use does not imply that Commissioner Rosch and I simply have different views on the relevant economics that we can debate on the substantive merits.  Rather, it implies that I know that the competing economic approaches he advocates are superior, but I am in a state of denial or perhaps that I am just being intellectually dishonest about the Chicagoans losing the war of ideas in antitrust economics.  I do not read the term as a neutral one.  It’s important, however, not to get too distracted by name calling.  As name calling is a tactic typically relied upon to avoid delving deeply into the substantive merits of an issue, its use signals that it is especially important to ignore it here.  But I will say that, given its use, I’ve granted myself permission in this post to treat the Commissioner as a hostile witness, as it were.

The relevant question is not whether Commissioner Rosch’s  views on economics and antitrust law and whether they do in fact, or do not, have those qualities that I’ve criticized in previous posts.  I’ll focus on that issue in this post, and will argue that Rosch’s attempt to clarify his views on the role of economics and economists on antitrust was unsuccessful in the sense that 1) those views remain unclear in many instances, 2) are a primary example of the “model selection” problem described above, 3) will lead to overly aggressive antitrust enforcement, and 4) thus I conclude are likely to result in significant potential to harm consumers if they express agency enforcement priorities or policies.

Read the rest of this entry »

George Priest has an excellent op-ed in the WSJ correctly calling out the Justice Department’s new Assistant Attorney General Christine Varney for attributing the financial crisis to a lack of antitrust enforcement:

Assistant Attorney General for Antitrust Christine Varney claims that the Justice Department can aid economic recovery by prosecuting businesses that have been successful in gaining large market shares. In her announcement last month she argued that “many observers agree” that our current recession reflects “a failure of antitrust” and “inadequate antitrust oversight.”

This is news to most economists. The cause of the recession is not easy money by the Fed, or the bursting of the housing bubble, or excessive risk-taking through complicated financial instruments? It’s insufficient antitrust prosecution? The claim is hardly plausible. Prosecuting successful businesses will help the recovery? Again, hard to believe.

Priest raises similar issues to those Keith Hylton, Geoff and I discussed in our Forbes piece.  One of those issues is that it is misleading to characterize the Section 2 Report as  a “right wing” political document, rather the product of hearings that consulted the views of hundreds of witnesses, including those enforcement agency officials, practitioners, academics and the business community over two years.  Professor Priest makes the point as follows:

It’s fair enough for a succeeding administration to reject policies of its predecessor. But the Justice Department report was not authored by John Yoo or Alberto Gonzales. It was the work of a year-long study that considered recommendations from 29 panels and 119 witnesses, most of them critical of the minimalist Chicago School approach to antitrust law. The report’s conclusions basically track Supreme Court law with modest extensions in areas where the Supreme Court has not ruled. Ms. Varney denounced the report in its entirety.

But the real punchline of Priest’s op-ed is the confident and interesting conclusion that despite the strong will of the DOJ to reinvigorate Section 2 enforcement, the “new” antitrust agenda will be thwarted by existing Section 2 law:

The saving grace here is that, unlike her European counterpart Neelie Kroes (who is antitrust prosecutor and judge at once), Ms. Varney is only the director of an administrative agency. She and her department can prosecute cases but they cannot convict. The positions put forth in the now-rejected 2008 Justice Department study derive largely from opinions of the Supreme Court. And in the last three monopolization cases considered by the Supreme Court (spanning over a decade) there were no dissenting opinions. Even if President Obama makes the court more liberal the court’s antitrust opinions are secure.  Ms. Varney’s proposed change in direction of antitrust policy may impose extraordinary litigation costs on the government and on her targets. It is unlikely to have a significant effect on U.S. antitrust law.

Professors Hylton, Manne and Wright make a related point about the prospects under existing Supreme Court monopolization doctrine:

The new strategy, so far as one can tell, seeks to pressure the courts to change the law in order to meet the desires of the new administration. In the end, either the Antitrust Division will fail, or the courts will bend in a way that unsettles the law. But either way, this week’s events in Europe and the U.S. portend a tough road ahead for the world’s most successful companies.

I do wonder how confident one can be that the new agenda will fail?  It is true that it will be tough for the DOJ to win Section 2 cases such as the ones favored by the EU, e.g. Intel and Microsoft.  Section 2 law certainly does place significant constraints on the ability to force convergence with the European approach.  But there are limits to these constraints.  One is that firms have to be willing to engage in high stakes and costly litigation to force the agencies into court and win.  Another is, at least at the FTC, the use of Section 5 to circumvent those constraints.  And of course, much of Section 2 law was borne out of private litigation rather than public enforcement.  At the end of the day, however, I do think it’s correct to say that the agencies are going to have a very tough time winning monopolization cases because the law is, as Priest says, essentially as the Section 2 Report describes it.

Jeff Toobin has an interesting profile on John Roberts in the New Yorker (HT: Jonathan Adler who also takes issue with Toobin’s description of Leegin, but goes on to challenge Toobin’s general account of Roberts as a “stealth nominee”).   Toobin’s column has very little to do with antitrust.  with the exception of one sentence describing the Leegin decision where he writes:

That same day, the Justices overturned a ninety-six-year-old precedent in antitrust law and thus made it harder to prove collusion by corporations.

Mr. Toobin clearly did not get this memo.  Descriptions of resale price maintenance agreements between manufacturers and retailers are not collusion in the antitrust sense, a label that connotes horizontal price-fixing between competitors.   Toobin’s explanation implies that what the Roberts court did was make it more difficult to prove a price-fixing agreement that harms consumers.  In the United States where the difference is not only economic but also legal, there is simply no excuse to use the words “cartel” or “price-fixing” to describe RPM.  Yes, a vertical agreement “fixes prices” but this is a fairly transparent attempt to obfuscate the economic issues (empirically RPM generally increases consumer welfare and does not have cartel-like effects) by analogizing it to a cartel.  If one was not paying attention, or knew nothing about antitrust economics, they could take the wrong impression from Toobin’s description that the Court reached an anti-consumer and pro-business result.  That’s a silly way to think about RPM as discussed here.

UPDATE: A reader reminds me that the Antitrust Section at the American Bar Association, which I don’t believe can fairly be characterized as a “conservative” (if that’s a useful label at all in this context) antitrust group, has made an official statement in support of the Roberts Court’s analysis in Leegin:

The ABA supports the position that under the federal antitrust laws—and analogous state and territorial antitrust law—agreements between a buyer and seller setting the price at which the buyer may resell a product or service purchased from the seller should not be illegal per se. Instead, these agreements should be analyzed under a rule of reason analysis. The ABA also believes that the Supreme Court’s recent decision in Leegin is consistent with that position.

The FTC joined the DOJ brief in American Needle v. National Football League arguing that the Supreme Court should deny certiorari.  The brief characterizes the question presented as:

Whether NFLP, the NFL, and the teams functioned as a “single entity” when granting the company an exclusive headwear license and therefore could not violate Section 1 of the Sherman Act, 15 U.S.C. 1, which requires proof of collective action involving “separate entities,” Copperweld Corp. v. Independence Tube Corp., 467 U.S. 752, 768 (1984).

Here’s the FTC announcement:

The Federal Trade Commission has joined the U.S. Department of Justice in filing an amicus brief in the U.S. Supreme Court in the matter of American Needle, Inc. v. National Football League, No. 08-661 (U.S. S. Ct.). The case involves allegations that the NFL’s exclusive licensing agreement restrained trade, in violation of Section 1 of the Sherman Act, and unlawfully monopolized trade, in violation of Section 2 of the Sherman Act.

The joint amicus brief, which can be found on the FTC’s Web site and as a link to this press release, urges the Supreme Court to deny certiorari in this case, in which the U.S. Court of Appeals for the Seventh Circuit upheld a district court’s summary judgment in favor of the NFL and its separately owned teams on the ground that they function as a “single entity” when licensing and marketing their logos and trademarks under an exclusive licensing agreement with Reebok International Ltd. The brief concludes that the case does not merit Supreme Court review because of an absence of a split among the courts of appeals and because it does not present an appropriate vehicle for ruling generally whether a sports league and its member teams should be deemed to function as “single entity.”

The law and economics of RPM have been a frequent topic of discussion here for Thom and I especially, ranging from the empirical evidence on RPM, to competitive resale price maintenance without free riding, to the inappropriate use of the term “price-fixing” by journalists some who should know better to describe RPM,  to the Commission’s recent musical instruments investigation, and of course, Leegin.

Thom’s latest entry into the RPM wars deserves a close read by all who are interested in this subject.  Dr. Miles Is Dead, Now What?  Structuring a Rule of Reason for Minimum Resale Price Maintenance is now available in published form in the William and Mary Law Review (SSRN version available here).  Thom crafts a rule of reason approach to for evaluating RPM in a Post-Leegin (for now!) world.  Thom, I hope that you’ll be submitting this for the record to the FTC hearings.  My testimony at the FTC hearings took an approach very similar to Thom’s in attempting to structure a rule of reason inquiry around the available theory and evidence on competitive effects of vertical restraints and RPM specifically.

In any event, as the RPM battles rages on (and I hope it does, as the consumer welfare upside for the pending legislation is likely negative in my view), Thom’s article is worth the investment.

Available here.  An excerpt:

But wholesale rejection of the document — the most complete statement to date on the law and economics of Section 2 — because of disagreement with some of its positions is irresponsible and premature. And the rejection of specific conclusions from among the range of possibilities discussed in the report without any discussion of which other policy positions the DOJ would support, and why, severely undermines the intellectual efforts that the DOJ and FTC staffs put into the original report by summarily dismissing them. Instead, Varney asserts that the report “loses sight of an ultimate goal of antitrust laws — the protection of consumer welfare” — but cites no evidence. (And the report, for its part, mentions “consumer welfare” 31 times.) Meanwhile, the mere reference in Varney’s speech to the idea of returning to “tried and true” principles of Section 2 enforcement is meaningless, since no one knows what those are, and the whole point of the report was to define them. It is difficult to avoid the conclusion that the announcement dismisses the report and its intellectual bases simply because it was inconvenient to the agenda upon which the DOJ’s antitrust division is about to embark.

The NYT ran an unsigned editorial on “Intel and Competition” that, quite frankly, doesn’t make much sense to us.  It offers two basic arguments: (1) that the Bush administration DOJ is responsible for the state of Section 2 law requirement that plaintiffs demonstrate actual consumer harm, and (2) that foreign antitrust jurisdictions’ pursuit of enforcement actions against Intel’s loyalty rebates suggests that the failure of the Federal Trade Commission to do so is a failure of the Bush administration to enforce the antitrust laws to protect consumers.

Both arguments are wrong, but the first is either especially disingenuous or very confused.

The first mistake is evidenced by this confusing statement about the relationship between the tough standards imposed on plaintiffs under Section 2 and the Bush administration DOJ’s Section 2 Report:

In the Bush administration’s view, to get in trouble a monopolist must do worse than use unfair methods to undermine a competitor. Regulators must usually prove that consumers were directly hurt, typically through high prices. When the wrongdoing is to offer a client conditional rebates — meaning lower prices — that can be especially hard to prove.  That view of consumer harm is too restrictive. It often seems to ignore the fact that a dominant firm that uses unfair tactics to marginalize its rivals deprives consumers of choice, another form of harm. Without competitors there is no competition. Without competition there is no incentive for innovation, or to reduce prices.

The Obama administration has a different view. The Justice Department’s antitrust division has rescinded Bush administration guidelines intended to shield monopolies from antitrust accusations. The F.T.C. is also likely to be more active under its new chairman, Jon Leibowitz. He is already considering pursuing future antitrust cases with a little-used provision of antitrust law that directly outlaws unfair methods of competition. The American economy cannot thrive without antitrust laws. It is time to start enforcing them.

First, lets begin with the obvious point that “that view” of consumer harm is not just the Bush administration’s view bent to help out its monopolist buddies; its the law, developed over years, many of those years transcending the Bush administration and much of that development at the hands of Supreme Court and lower court judges from appointed by presidents from both parties.

Next, lets turn to another disturbing tension in this argument.  Lets get this straight: the NYT simultaneously laments the Bush DOJ’s failure to bring Section 2 cases (indeed, to enforce the antitrust laws altogether) and yet blames it for the state of Section 2 law.  Huh?  If they didn’t bring any cases, and didn’t move the law in any particular direction by inviting federal courts to interpret Section 2, how can the Bush DOJ be responsible for the state of the law?  The truth is that the Section 2 law that the NYT op-ed complains about is pretty well established doctrine and the DOJ has very little to do with its evolution in the federal courts which has largely been driven by suits from private plaintiffs.

This isn’t just a rhetorical point.  A fundamental issue underlying the new administration’s desire to bring monopolization cases is that the agencies will run into the tough standards in Section 2 which have evolved over time in federal courts.  Whatever one thinks about the portions of the Section 2 Report where the DOJ endorses various tests over other alternatives, it is more than fair to say that the Report offers a comprehensive and accurate summary of Section 2 law.  If that point is overlooked by the agencies, and it won’t be, because both agencies are interested in winning cases not just bringing them, they may quickly learn about the difference between activity level and success.

But the bottom line is that it is a nonsensical argument to assign either the credit or blame for the state of Section 2 law to the outgoing Antitrust Division.

On a related note, the NYT also claims that the Intel case provides the FTC an opportunity to finally enforce the antitrust laws that they’ve ignored over the last eight years.  I imagine that the folks at the FTC will be surprised to learn that they’ve been asleep behind the wheel for nearly a decade.  But more importantly, it should be noted that the Commission has had the votes to bring the Intel case if they so please for quite some time.   But they haven’t.  I suspect the state of Section 2 law on discounting and exclusive dealing has something to do with that.  Now, I’m on the record here as saying that I believe the EU enforcement action does make it more likely that the FTC will get involved with Intel in one way or another.   I’ll stand by that largely because I think the current Commission and DOJ, with various statements and commitments made in speeches and such, have committed themselves to bringing some high profile Section 2 cases.  But if this case was a no-brainer under Section 2 law, the complaint would already be filed.  Of course, the Commission has been talking quite a bit about Section 5 as a route to avoid the rigorous proof requirement of monopolization law….

The second mistake, pointing to decisions in foreign jurisdictions to bring cases under completely different antitrust standards, is an example of conflating activity level with success in an especially peculiar way.  Moreover, counting jurisdictions is an especially analytically lazy approach to identifying desirable monopolization enforcement because analyzing the welfare effects of single firm conduct is an especially difficult problem that deserves a more serious approach.  If one is to believe it is sound policy to sacrifice the obvious benefits that accrue to consumers from lower prices created by loyalty rebates in exchange for future gains associated with preventing higher prices tomorrow, consumers who are losing those gains today deserve a more rigorous explanation than “other jurisdictions are doing it,” don’t they?  But, one might ask, doesn’t evidence that foreign jurisdictions have found something wrong with Intel’s loyalty rebates provide some probative value for whether that conduct is illegal under Section 2 law?  The answer is no.  Antitrust analysis in those jurisdictions, while sometimes peppered with language about consumer welfare and effects-based methodologies, is quite different than under US law where the proof requirement of consumer harm is much more rigorous.  This is not merely a difference of degree.  It is a difference in mode of analysis.  The fact that other jurisdictions have brought suits is inapposite when it comes to an appropriate antitrust analysis of Intel or any other single firm conduct case in the U.S.

Competition Policy International has announced its next Webinar, featuring Professors Bajari and Abrantes-Metz on the economic and legal analysis of collusion.  I’ve had a blast doing these lectures the last couple of weeks teaching Antitrust Economics 101, and will be finishing up the third lecture this week (after covering basic demand side and supply side issues in the first two weeks) with examples and applications.  It really is a nice set up and a fun way to teach and I hope to do some more of it in the near future with some more advanced topics, i.e. law and economics of vertical restraints, and perhaps one lecture sessions on patent holdup and loyalty rebates/ exclusive dealing.

Here’s the course announcement for the Collusion Webinar:

This course will provide a current and concise summary of collusion, using simple economic models, case studies, and an overview of enforcement activity. The course was primarily designed for lawyers and antitrust professionals; we will address ideas at the forefront of economics in such a way that the material is clear and accessible to non-economists. Familiarity with microeconomics at the level of an introductory college level course will be presumed.
This series will be presented over CPI’s Global Learning Platform which delivers lectures globally in real time. The only technology required is a computer with a flash player and a telephone.

To register: Visit our website at https://www.competitionpolicyinternational.com/course_main.html.

The fee for all three classes, with CLE credit, is $355; without CLE credit the cost is $129. Discounts for multiple users from the same organization and courtesy admissions for competition authorities are available.

This course is approved for CLE in PA, as CPI is an Approved Provider of Distance Learning Courses in PA. Under the approved jurisdiction policy, New York attorneys may apply Pennsylvania CLE credit toward fulfilling their New York CLE requirement. For complete information regarding discounts and the availability of CLE credit in other states, special registration needs, or for any other questions, contact us at LearningCenter@competitionpolicyinternational.com.  

The CPI Learning Center presents: An Economic and Legal Analysis of Collusion
 
Session 1: Economic and Legal Analysis of Collusion – Wednesday, June 3, 2009 at 12 pm E.D.T.

Topics include: empirical regularities that have been found in known cases of collusion; an economic model of how a cartel determines output; a summary of efficiency losses from collusion; and the behavior of international cartels.  

Session 2: Case Studies of Collusion – Wednesday, June 10, 2009 at 12 pm E.D.T.

Topics include: Collusion in the railroad industry in the 1880’s; Bidding Behavior in Spectrum auctions used by the FCC to privatize the airwaves, including the changes made by the FCC to make tacit collusion more difficult; and two cases of bid rigging in the New York City construction industry and the Ohio School milk markets.

Session 3: Antitrust Enforcement & Screening for Collusion – June, 17, 2009 at 12 pm E.D.T.

Topics include: The use of empirical screens to detect conspiracies; a discussion, including examples, of screen use by both competition authorities and private parties; and leniency programs.
About the Instructors:

Patrick Bajari is a Professor of Economics at the University of Minnesota where he completed his PhD in 1997.  Prior to his return to Minnesota, he taught in economics departments at Harvard, Stanford, Duke, and Michigan.  Professor Bajari has authored 40 academic papers, many of which were published in leading economics journals.  He has done research on the economics of collusion and bid rigging, the empirical analysis of auctions and public sector procurement, the economics of housing markets, and mortgage default and econometric methods for analyzing strategic interaction.  Professor Bajari has served on the editorial boards of a number of leading economics journals.  Currently, he is the managing editor of the International Journal of Industrial Organization and an associate editor for the Journal of Business and Economics Statistics and Quantitative Marketing and Economics.

Rosa Abrantes-Metz is an Adjunct Associate Professor at Leonard N. Stern School of Business, New York University, and a principal with LECG’s antitrust and securities practices based in New York City. Prior to consulting, she was a staff economist at the Federal Trade Commission and has also taught at the University of Chicago and at Universidade Catolica Portuguesa in Lisbon, Portugal. She has published in both peer-reviewed journals as well as trade publications. Both at the FTC and as a consultant, Rosa has worked on a variety of cases including alleged conspiracies and manipulations including bid rigging and price fixing cartels, commodities and stock prices manipulations and revenues management, among others, and has co-developed several empirical screens to detect such anti-competitive behaviors. She is also a co-author of one of the most popular econometric models used by pharmaceutical industry analysts to value the R&D pipeline. Rosa received her Ph.D. in Economics from the University of Chicago in 2002.

About the CPI Learning Center:

The CPI Learning Center brings together leading global scholars in the fields of competition law and economics with agency officials, practitioners, judges, and corporate counsels. The Learning Center offers a convenient and user-friendly way to acquire the latest thinking on world-wide competition policy and provides access to experts who are at the cutting edge of the field. Lectures are presented by leading professors, scholars, and practitioners of competition policy from around the world, including scholars from Harvard University, University of Chicago, University College London, Singapore University, Hong Kong Polytechnic University and the Chinese Academy of Social Science.

Lectures are presented over CPI’s Global Learning Platform which relies on state-of-the art web technology to deliver lectures globally both in real time as well as and on-demand. CPI is an Approved Provider of Distance Learning Courses in PA. CLE credit also is available to New York attorneys for completion of CPI’s programs.  Under the approved jurisdiction policy, New York attorneys may apply Pennsylvania CLE credit toward fulfilling their New York CLE requirement. CPI Learning Center also applies for CLE credit in additional states; please contact us for further information.

I’ll be testifying tomorrow at the Federal Trade Commission hearings on Resale Price Maintenance.   My panel will focus on rule of reason analysis of RPM Post-Leegin.  There is a bit of awkwardness testifying about different modes of rule of reason analysis with legislation that would restore the Dr. Miles per se rule pending, but it strikes me as a valuable exercise nonetheless.  The early afternoon panel looks very interesting and focuses on the legal and business history of RPM.   I do not have a written statement for my prepared remarks, but you can see my slides here.

UPDATE: In response to Thom’s query in the comments, I thought the panel went pretty well.  It was fun, anyway.  The panel split time discussion the merits of the pending legislation that would restore the per se rule and whether some “inherently suspect” truncated liability approach placing the burden on defendants to justify their use of minimum RPM was appropriate.  Five of the eight panelists were in favor of the per se rule with three dissenting for various reasons, including my own view that economic learning in the form of theoretical and empirical knowledge about vertical restraints and RPM more specifically simply did not satisfy the standard that the restraint always or almost always reduces output or harms competition.  Much of the discussion of the underlying economics, in my view, revealed a general suspicion not just of RPM but of the promotional services it is designed to induce.  In other words, a few panelists argued that even if RPM did facilitate the supply of promotional services by resolving incentive conflicts (I’m not sure how well the proponents of the per se rule understand the Klein & Murphy model), we should be skeptical of any sort of promotion that manufacturers have to pay for.  Taken seriously, that view would be fairly dangerous and easily expanded to per se rules for exclusive territories, advertising, slotting contracts, and other forms of promotion.  All in all, it was a fun panel and a lively discussion.  I largely stuck to the same mantra: the theory and evidence does not support application of the per se rule, and to the extent that one believes that we know even less than the literature suggests or does not trust the results in the literature, that is not an argument in favor of per se treatment.

Available here.  Here’s an excerpt:

It turns out that it is a very difficult business to identify the few cases when low prices and aggressive competition might perversely end up harming consumers in the long run rather than simply making them better off. And the cost of erroneous antitrust enforcement, such as mistakenly condemning Intel’s discounting practices on the view that they “might” harm competition in the future, can have important negative consequences throughout the economy as other firms learn that aggressive competition might get them a phone call from the Justice Department or the FTC–or a dawn raid from the European Commission.

In announcing a new direction for the administration’s antitrust agenda, Varney was refreshingly explicit in her rationale and made clear that in the new DOJ the existence of possible harm alone would be enough–and that she and her staff will recognize anti-competitive conduct when they see it, without inadvertently deterring beneficial conduct.  One hundred years of legal and economic thinking in antitrust suggests that this task will be much more difficult than Varney and the new Antitrust Division are expecting. Unfortunately, the political harm from deterring what might have been valuable business behavior is negligible, as un-attempted innovation and unrealized efficiencies rarely show up on the political balance sheet.

The irony of the new approach is that it puts the new administration on a collision course with the law. The previous DOJ, whatever its shortcomings, reflected an honest effort to adopt an enforcement strategy that was likely to find success given the existing monopolization law developed independently by the courts. The new strategy, so far as one can tell, seeks to pressure the courts to change the law in order to meet the desires of the new administration. In the end, either the Antitrust Division will fail, or the courts will bend in a way that unsettles the law. But either way, this week’s events in Europe and the U.S. portend a tough road ahead for the world’s most successful companies.

Keith N. Hylton is the Honorable Paul J. Liacos Professor of Law, Boston University. Geoffrey A. Manne is executive director of the International Center for Law and Economics and Lecturer in Law at Lewis and Clark Law School. Joshua D. Wright is co-director of the Antitrust Research Center at the International Center for Law and Economics and assistant professor of law at George Mason University School of Law.

Reacting to the EU fines imposed on Intel, Geoff raises a nice point about the difficulty of constructing the but-for world in antitrust cases generally, but particularly in cases where prices are falling.   This discussion reminded me of Thom’s excellent post responding to the NYT editorial and an AAI working paper and putting theoretical anticompetitive concerns to an empirical test and discussing evidence of falling prices for both Intel and AMD products and increased operating margins for AMD.  So how are we to sensibly evaluate the EU decision?

To make some progress here, let’s all agree for the sake of discussion that there are logically valid anticompetitive theories of loyalty discounts, exclusive dealing contracts, and conditional rebates generally and that there are valid and sensible pro-competitive justifications for these types of distribution contracts as well.  And lets also assume for the sake of analysis that it makes analytical sense to consider the possibility that the loyalty rebates operate like exclusive dealing contracts and that therefore the competitive concern is that the contracts will deprive AMD of the opportunity to compete for distribution sufficent to achieve minimum efficient scale — thus creating the possibility of future harm from a theoretical perspective.  And finally, without making any contentious statements about the empirical literature, lets assume that it is a fair characterization (and I think this is mild) to say that there is evidence both that there is evidence both that firms without market power frequenty use exclusive dealing contracts and or similar loyalty rebate schemes and that evidence of anticompetitive exclusive dealing is scarce.

Given all of the above, lets look at the loyalty rebate problem through the error cost lens.  The Intel case is a perfect example for application of this approach because even the most interventionist antitrust thinkers do not debate the proposition that lower prices have some redeeming competitive qualities and generate consumer benefits.  So it makes sense to think about the tradeoffs here between what we expect to gain from a decision like the EU’s (or here in the US) versus what we expect to lose.  The error cost framework allows us to assess these tradeoffs objectively, relying on existing theory and evidence to inform our estimates.  Here is what I wrote in my post during the Section 2 Symposium on this exact issue:

The situation antitrust enforcers find themselves in with respect to exclusive dealing is not unfamiliar.  On the one hand, there are a set of possibility theorems which indicate that exclusive dealing and de facto exclusives can lead to anticompetitive outcomes under some specified conditions, including substantial economies of scale or scope.  On the other, there are a set of sensible and economically rigorous pro-competitive justifications for the practice.  On top of that is the casual empiricism that we observe exclusive dealing contracts in competitive markets and adopted by firms without significant market power.  As David Evans noted on the first day of our symposium, quite a bit can be learned about the relative probabilities of anticompetitive and pro-competitive uses of certain types of business behavior by understanding the incidence of use by competitive firms.  Exclusive dealing is no different.

The same analysis applies to loyalty rebates:

The key points here from an evidence-based perpsective are both that we have little empirical evidence that loyalty discounts lead to anticompetitive outcomes, but we do know that the discounts are passed on to consumers and increase welfare.  Like exclusive dealing, this state of knowledge ought to lead to a liability rule that places a strong burden on the plaintiff to demonstrate actual competitive harm, and safe harbors based on sound theory and evidence where they can be crafted reasonably.  In this case, since the anticompetitive theories all require foreclosure of a significant share of distribution and substantial economies of scale, it is quite sensible in the case of loyalty discounts to allow defendant’s a safe harbor that would make per se legal loyalty discount programs that foreclose less than a pre-specified share of the retail/distribution market.  I believe the right starting point for such a safe harbor comes from the cases, and could be set at 40 percent.  But building on the DOJ’s analysis, the argument  can and should be made that the exclusive dealing safe harbor logically can and should apply to loyalty discounts as well.

Of course, the EU approach does not make room for such safe harbors.  Not even close.  To describe the EU approach to Intel’s loyalty rebates as either remotely “effects-based” or “evidence-based” would strip both those terms of any useful meaning.  But that’s not an incredibly interesting point.  It does not appear that the EU approach is going to change any time soon.  Nor does it appear that there will be any pressure placed on the Europeans from domestic agencies (in fact, the pressure appears to moving in the opposite direction to “do something”).  By the way, for all the criticism that Tom Barnett at DOJ took for criticizing the EU Microsoft decision a few years back, at least that approach had the benefit of informing US companies that they would not adopt the European approach, and that US law was importantly different because it required a more rigorous form of economic analysis and more substantial evidence of consumer harm rather than speculative possiblity theorems coupled with harm to competitors.  That is a message that I’m quite sure the business community in the United States would be interested in hearing today from the US agencies.  And rightly so.  Thom is right that these developments give antitrust academics a lot to do!  Its a very exciting time for antitrust.

But that’s generally a bad sign for companies in high tech markets with significant market shares who are facing some pretty scary times.  On the one hand, the EU has sent the signal that competitors who can’t quite cut it in product market competition and innovation can get a second bite at the apple by running to the friendliest regulator around for help in tying a competitor’s hand behind its back.  I imagine that another concern is that the messages sent collectively by the FTC and “new” DOJ in repudiating the Section 2 Report and that error costs are hereby assumed out of existence raise the possibility that there will be a competitive dynamic between the EU and US to see who will be the global monopolization policeman — and also between the FTC and DOJ.

But what is more interesting to me is to watch how this will play out in th United States.   Long before the Section 2 Report scuffle I predicted that we might be headed toward a sort of convergence where rather than the EU moving to a more US-based approach, the US went the other way.  That looks like a much more likely possibility today than it did a few weeks ago.  So what’s going to happen in the US?

Nellie Kroes recently made the statement that Intel, after the recent fines, is now “the sponsor of the European taxpayer.”  Cute.  But given the fears that the EU is using antitrust law as a protectionist weapon, this statement was not well advised and I hope catches the attention of the new antitrust regimes in the U.S. (including new AAG Christine Varney, who could have had something like the Intel decision in mind when she described the European approach to monopolization as “much more extreme than I would ever be“).  Bottom line: I wouldn’t quite celebrate the new sponsorship if I were a European taxpayer (nor as an American one) who was planning on buying products with microprocessors any time in the near future.  The most likely consequence of the EU’s action is going to be higher prices.

Take a look at these pictures, which I suspect matter a great deal more in the US than the EU in terms of the antitrust analysis.  Given the complexities of predicting the speculative welfare gains from the EU’s enforcement action against the more certain gains from lower prices, would Kroes really bet against intervention ultimately increasing prices to consumers?  I think the pictures below tell a story that begs the following question of Kroes, and the folks at the AAI who issued a press release prematurely celebrating the EU fines as a victory for consumers and calling for the FTC to get in the action:

(1) How confident are enforcers that the but for world would result in an increase in consumer welfare?  For example, what probability would they assign to the prediction that EU intervention will result in lower prices for consumers?

(2) On what basis is that belief formed? are they consistent with the existing empirical evidence?

(3) What probability to the enforcers assign to the likelihood that the contracts actually are pro-competitive and so the enforcement action will create some consumer losses?

[Ed - Sorry the pictures are fuzzy --- I'll get better ones up.  But suffice it to say for now that the steeply declining yellow line is Intel microprocessor prices and the four lines in the second picture (also declining fairly quickly) are Intel and AMD prices.  Source data from pricescan.com]

This leads me to my last point about what happens now in the US.  I’m quoted in the WSJ as saying that I believe it is much more likely that the US gets involved in the Intel litigation than was the case two weeks ago.  Its hard to avoid that conclusion after reading the combination of statements from the FTC on the repudiation of the Section 2 Report, the new life of Section 5, as well as the competitive pressures placed on that agency from the DOJ’s new agenda and the EU fines.

The problem is that the content of the Section 2 Report was not just policy statements from the Bush administration political appointees about what the Section 2 should be.  It was a serious project with engagement from DOJ and FTC appointees, staffers, the academic community, and business representatives to summarize the existing law and existing evidence as well as generate some guidance on best practices where available.  Turns out that with two years to work on the project and that breadth of resources and diversity of viewpoints, the Section 2 Report really does accurately state the law with respect to exclusive dealing, predatory pricing, loyalty rebates, and such.  And that law isn’t going anywhere.  Perhaps the mission of the new DOJ and FTC will be to change the law?  Or perhaps the FTC will avoid the unfavorable Section 2 law by substituting Section 5 for cases like Intel where they are unlikely to win under a Section 2 theory.  But the Supreme Court and the federal case law under Section 2 remain substantial obstacles to convergence that extends beyond the hallways of the agencies.