Bill Northey, IA Ag Sec’y, sounds a bit like an economist (ah, turns out he has a degree in ag business and an MBA . . . ).  Yes, price of seeds has gone up, but so has yield, and so has overall value.  The issue, he says, is how to divide the surplus, and he suggests that it’s dividing the pie that drives farmer concerns.  That’s not at all a surprise, but it’s also not much of an antitrust issue.  Unless the pie could be bigger absent, say, Monsanto’s huge investment in seeds and the resulting relatively-concentrated market structure (and basing enforcement on the theoretical possibility of that counter-factual is a perilous enterprise, as Josh and I have suggested many times), this is just a question of pecuniary transfers.  Sure, they matter a lot to the parties involved and there’s always an incentive to deputize the government to put a thumb on the scale of that dispute, but that’s not a matter of allocative efficiency, and not a matter for the antitrust laws.

Now we hear Iowa AG Miller pushing for the development of “the non-antitrust laws to deal with concentration.”  By which he means the Packers and Stockyards Act.  Maybe the DOJ has their Section 5 after all!

As if on cue, AG Miller trots out the pendulum story of antitrust enforcement–”how to bring the antitrust law back to the middle.”  This is not really an accurate description, unfortunately.  Even worse, it’s not an economically-sensible concept, and measuring the efficiency of antitrust enforcement by counting enforcement actions (or looking at rhetoric) is usually just flimsy cover for an essentially-political determination.  Combine that with Miller’s suggestion that the P&S Act’s “unfair practices” language should be enlisted in the service of dealing with concentration, and the risk of false positives is much magnified.  Which, of course, is a perfect lead-in for Christine Varney.

Varney:

“Biotech:  Patents have been used to maintain or extend monopolies.  We will look very closely at any attempt to maintain or extend a monopoly through the patent laws.”

“What can antitrust really do?  When we see mergers, we look closely at the resulting concentration from a merger [she mentions the depradations of Dean Foods.  I really need to blog on that case . . . ]”

“We will continue to scrutinize every merger that comes before us.  Those mergers that don’t increase efficiency, we will stop.  They will not go through in this administration.”

“Big is not bad, but with big comes an awful lot of responsibility.”

“When you have large market share, you must engage in behavior that keeps markets open.  You cannot engage in conduct to maintain or extend your monopoly.” [No--there is no such thing as false positives].

“We have criminal authority, and it is illegal for competitors to sit down together to fix prices.  We will, wherever we find price fixing, prosecute that criminally.”

“Make sure everyone’s making a decent wage and consumers have food on the their tables that is safe and healthy at a decent price.”

Holder sums up by saying “our overriding concern at the DOJ is fairness.”  He’s probably telling the truth–and that’s the problem.  Varney finishes her remarks talking about decent wages and healthy food.  “Decent” and “healthy” are not antitrust-relevant concepts, and the antitrust laws don’t really contemplate their protection.

This is why this event is so problematic–and so politicized.  You can’t talk about farmers in the US without talking about these things, but you shouldn’t be talking about these things when talking about antitrust.  And when the AAG for antitrust suggests that concentration may threaten these attributes in a way that antitrust should address, alarm bells go off.  And although the courts should be a bulwark against this–and someone here even mentioned that the jurisprudence might present a problem for the effort–there are errors, and there are ways around the courts (Section 5 of the FTC Act, and now, apparently, the Packers and Stockyards Act).

UPDATE:  Trying to find the right hash tag for the event, I’ve changed the title of this post and we’ll follow the convention for our live blogging today–posts from the Workshop will all have “#agworkshop” in the title.

Later this week Mike Sykuta and I will be winging our way to Iowa on behalf of the ICLE to attend the first of the year-long series of DOJ/USDA Workshops on Agriculture and Antitrust Enforcement Issues.  You can find the agenda for the first workshop, to be held Friday, March 12 in Ankeny, Iowa, here.  Intrepid reporters, we, our plan is to “live blog” the event for those of you unable to attend.  This first workshop, in addition to introducing the series, will focus on farming, which means seeds, which means the dispute between DuPont and Monsanto over licensing terms and everyone’s perennial favorite: industry concentration.

The agenda clearly reflects the highly-politicized nature of the issues under discussion, and, for example, a few news reports have suggested that the agenda has changed in response to pressure from Iowa Senator Tom Harkin.  Regardless, we expect a lively and interesting discussion.

For ease of reference all of our blogs from the workshop will be categorized under “ag/antitrust workshop,” and each post will have “DOJ/USDA Workshop” in the title.

TOTM is no stranger to the issues, and Mike and I have blogged a few times about the antitrust/licensing issues involved.  See:

Competition in Agriculture Redux (Manne, Kieff and Wright)

Competition in Agriculture (Sykuta)

Monsanto’s Licensing Case Victory (Manne)

Yet More Evidence Against the DOJ’s Antitrust Plantings (Sykuta)

The Seeds of an Antitrust Disaster (Manne)

DOJ Disconnect: Do We Really Need a Roadshow? (Sykuta)

Together with Scott Kieff and Joshua Wright, we also submitted a comment to the DOJ on the topic, “Comment on Intellectual Property, Concentration and the Limits of Antitrust in the Biotech Seed Industry,” available here (SSRN) or here (if you prefer to get it directly from the DOJ website).

The news has also been covering the seed industry antitrust issues, the DOJ/USDA workshops and agricultural antitrust issues more generally, and you can find a host of relevant news articles here.

We’re looking forward to the workshops and to your comments on the day’s events.

Thanks to Peter Klein over at O&M for bringing attention to this image created by a group of California design students showing the network of suppliers necessary to produce the taco enjoyed at their favorite local taco truck.

While the purpose of their picture is to illustrate the ecological footprint (”tacoshed”) of their favorite tacos, the image illustrates just how complex is the nature of the food supply system.  It also illustrates why agribusiness firms (and other suppliers to the food system) have comprised a larger share of the average food dollar over the past several decades (relative to the farm level), as supply chains have lengthened to various corners of the globe.

In light of the DOJ/USDA antitrust workshops that begin later this week in Ankeny, IA, this picture illustrates what many participants in the program will likely ignore: the US food system is intricately intertwined with international markets and linked together by the same (large) agribusinesses that are under attack by populist farmer groups. While that is not a defense against competition concerns, it does suggest the nature of competition is much more complex (and hence more complicated to understand) than the simple “big is bad” finger pointing promised by the composition of the DOJ’s “discussion” panels.

TradeComet’s antitrust suit against Google has been dismissed by the S.D.N.Y. Court in which the case was being heard.  The opinion is available here.

The holding:

Google has now moved to dismiss the complaint pursuant to Federal Rule of Civil Procedure 12(b)(1) and 12(b)(3) for improper venue based on a forum selection clause in the parties’ advertising contracts. Because TradeComet’s claims fall within the scope of the relevant forum selection clause that requires that this action be brought in California, and because enforcing that clause would be neither unreasonable nor unjust, Google’s motion to dismiss is granted.

Of course this does nothing to the substantive claims, but it does require that they be brought–if they are brought again at all–in Santa Clara County, CA (as the forum selection clause dictates).

Of more interest to law . . talking . . guys may be the following:

TradeComet contends that the forum selection clause is unconscionable because—it claims—Google enforces it selectively, it is found within a contract of adhesion, and it would force TradeComet to litigate its claims in Google’s “backyard.”

To me these claims are meritless on their face.  The court also had no trouble dismissing them and here–citations omitted–is the court’s complete response to the claims:

However, TradeComet offers neither evidence to support its allegation of selective prosecution nor legal authority indicating that such behavior—if true—would make a forum selection clause unconscionable and thus unenforceable. Additionally, the fact that the August 2006 Agreement may or may not be a contract of adhesion does not invalidate its forum selection provision.  Finally, although litigating these claims in California rather than New York likely will be more burdensome for TradeComet, which has its principal place of business in New York, there is no suggestion that it would be so difficult as to deprive TradeComet of a fair opportunity to litigate its claims.

I only wish the court had pointed out that Google enters into an incredible number of these agreements.  Whatever burden ex post it places on each of Google’s counterparties that the terms be identical between the contracts and that they specify Google’s “backyard” as the venue for any litigation, the magnitude of the burden it would impose on Google to separately negotiate and track terms for each advertiser and to litigate each agreement in a different court is several orders of magnitude larger.  I can see no reason whatever that a court should ever entertain an argument to invalidate such terms.  The unconscionability argument is, well, unconscionable.

UPDATE:  Aruna Viswanatha at Main Justice is also on the case, as it were.

The WSJ implies that the answer is yes in an interesting article describing the Obama administration’s changing views on behavioral economics and regulation.  The theme of the article is that the Obama administration has eschewed the “soft paternalism” based “nudge” approach endorsed by the behavioral economics crowd and that received so much attention in the blogs — especially as it related to Cass Sunstein’s appointment to OIRA, the Consumer Financial Protection Agency and a few other issues — in favor of harder paternalism and “shoves” including recent proposals for “regulating health-insurance rate increases, separating commercial banking from investing on behalf of their own bottom lines, and prohibiting commercial banks from owning or investing in private-equity firms or hedge funds.”  The article also points to a proposal for new regulations (that I had not heard of prior), that “would require retirement counselors to base their advice on computer models that have been certified as independent” as a precondition that must be satisfied before advisers can push funds with which they are affiliated.

A few observations.

First, is anybody really shocked to see behavioral economics-based proposals give way to harder forms of paternalism?  Though I take Rizzo and Whitman to be focusing on a different slope towards old paternalism, the idea that the behavioral economics nudge approaches reveal policy preferences consistent with hard paternalism is one that has been discussed frequently in this context.  Perhaps the surprising thing is how quickly the shift has occurred?

Second, given the buzz around behavioral economics in antitrust, and especially the misguided notion that the financial crisis has taught us that the baseline assumption for antitrust analysis should that firms are irrational, I was pleased to see Peter Orszag recognizing that “Institutional decision-making is much closer to a rational economics than individual decision-making, no question.”

Third, and cutting to the chase a little bit, its unclear to me that the Administration was ever really interested in behavioral economics as an intellectual guiding force as a “new” approach to regulation.  For example, little attention has been paid to areas where behavioral economics implies less regulation.  Regulators of all sorts want intellectual support for what they are doing.  That is not a criticism.  But was there really ever anything there?  Has anybody seen anything that has come out of OIRA with the signature of behavioral economics?  On this score, TOTM readers may recall that, since early on, I have expressed skepticism about claims that the Obama administration had made any real commitments to behavioral economics:

The second issue is that I’m not convinced that Obama’s policies have much to do with a behavioral economics-based platform. Leonhardt raises Obama’s savings plan (opt-out 401(k)’s), broad based tax cuts for the middle class, and opposition to a health care “mandate” as examples of policies informed by behavioral economics. I understand the the connection between the 401k default policy and behavioral economics. But the second two examples don’t strike me as have much do with with the insights of behavioral economics per se. The link between tax cuts and the lessons of behavioral economics, in this context, is tenuous at best. And as Ezra Klein notes while taking the position that he doesn’t see much behavioral economics in Obama’s positions either, one might suspect that a health care mandate would be more in line with the teachings of behavioral economics rather than Obama’s plan.

Fourth, and finally, I can’t help but note that some agreement on what counts as a behavioral economics-informed policy choice might be helpful in order to make progress.  I’ve been fairly critical of those, especially in the law review literature, who invoke the terms like irrationality and endowment effect willy-nilly, wave their hands around quickly while saying something about market failure (usually this section of the paper also has the term “orthodox neoclassical theory” in it somewhere), and move on to discuss regulatory proposals on the assumption that they will be costless.   But if we are going to be keeping a scorecard here, we should at least agree on what counts as a nudge.  The WSJ shares an example that it says is consistent with what is left of the Administration’s commitment to behavioral economics:

Landlords, for instance, have no incentive to replace a 40-year-old refrigerator if the tenants are paying the utility bills. So the Department of Housing and Urban Development, the Small Business Administration and the Energy Department are looking for ways to give property owners more incentives to save energy, possibly through loan discounts or guarantees offered through mortgage brokers. In October, Mr. Biden unveiled a pilot Property Assessed Clean Energy financing program to try it out.

Wait.  So, the landlord has less than optimal incentives to make investments in refrigerators when the tenant plays the bills because he doesn’t internalize the benefits of the investments.  I hate to be a stickler, but I’m pretty sure standard economics can do this one.   Transacting parties reach agreements to economize on agency costs and incentive conflicts.   The fact that the landlord’s private decision process is different when he owns the refrigerator than when he doesn’t imply irrationality!  Nor is any regulatory shove to get individuals to act closer to the what the regulators think is “optimal” decision-making based on behavioral economics simply by invoking the term.

But if the WSJ is right, maybe this debate about behavioral economics is old news anyway.  Shove is the new nudge and all that.

It turns out that the Girl Scouts price discriminate, i.e. they charge different prices for the same product in different parts of the country (HT: Knowledge Problem).   Rumor has it that demand for Thin Mints varies by region.  While the Girl Scouts concede that the introduction of the price discrimination scheme results, when coupled with  Girl Scout marketing efforts,  is tantamount to the evading pricing constraints imposed by current demand conditions.  No word on whether the Girl Scouts have hired antitrust counsel in light of the Commission’s pushing of this definition of actionable antitrust conduct in N-Data and Ovation (amongst other cases).  Of course, Girl Scout Cookie consumers need not fear Commission intervention because, at least under Section 5, the Girl Scouts will not also face private rights of action for treble damages all over the country, well, that is unless the plaintiffs bar figures out that it can use state consumer protection acts instead.   But that seems unlikely, right?  And really, the case for Commission action under Section 5 is fairly clear.   The welfare effects of price discrimination are notoriously difficult to measure empirically and, I mean, price discrimination sounds so bad doesn’t it?  This seems like the perfect case to rely on the Commission’s expertise in divining the anticompetitive effect imposed on consumers in the high demand regions and keep such a decision out of the hands of lay juries and generalist judges.  No doubt, the expertise will be required to interpret the “hot document” evidence like internal Girl Scout videos which teach the Scouts to sell more cookies and crush rivals with enthusiastic energy and persuasive sales techniques.  Antitrust experts are split on whether the scheme would also violate Section 2, but there is widespread consensus that a rumored sale of the Girl Scout Cookie business to a pharmaceutical firm would certainly violate Section 7.

Today, the Commission announced a consent decree with Transitions Optical in an exclusionary conduct case.  Here’s the FTC description:

Transitions Optical, Inc., the nation’s leading manufacturer of photochromic treatments that darken corrective lenses used in eyeglasses, has agreed to stop using allegedly anticompetitive practices to maintain its monopoly and increase prices, under a settlement with the Federal Trade Commission announced today. Photochromic treatments are applied to eyeglass lenses to protect the eyes from harmful ultraviolet (UV) light. Treated lenses darken when exposed to UV light and fade back to clear when the UV light diminishes….

The FTC charges that the company illegally maintained its monopoly by engaging in exclusive dealing at nearly every level of the photochromic lens distribution chain. First, Transitions refused to deal with manufacturers of corrective lenses, known as “lens casters,” if they sold a competing photochromic lens. Further down the supply chain, Transitions used exclusive and other agreements with optical retail chains and wholesale optical labs that restricted their ability to sell competing lenses.  According to the FTC’s complaint, Transitions’ exclusionary tactics locked out rivals from approximately 85 percent of the lens caster market, and partially or completely locked out rivals from up to 40 percent or more of the retailer and wholesale lab market.

In settling the agency’s charges, Transitions has agreed to a range of restrictions, including an agreement to stop all exclusive dealing practices that pose a threat to competition. These provisions will end its allegedly anticompetitive conduct and make it easier for competitors to enter the market.

The Complaint is here.   And the analysis to aid public comment is available here.  A few quick observations and reactions, with the obvious caveat that these comments have only the benefit of the public information linked above and not more.

1. In light of a certain high-profile loyalty / market-share discount case that the Commission has on its plate, the analysis here is interesting not only on its own merits, but to the extent it might inform about how the Commission would pursue other cases involving similar conduct, i.e. exclusive dealing and discounts conditioned on full or partial exclusivity or threshold purchase requirements.   I note, for example, that the order prohibits Transitions from both exclusive dealing and partial exclusives/ loyalty discounts.  It will be interesting to see if the Commission adopts a similar approach of bearing the burden of demonstrating substantial foreclosure as a necessary but not sufficient condition in other cases involving allegedly exclusionary contracts aimed at depriving rivals of access to distribution sufficient to achieve minimum efficient scale.

2. The alleged foreclosure percentages are very high, over 85 percent with lens casters and “as much as 40 percent or more” with retailers and wholesale labs.  Under a straight Section 2 analysis, which the Commission discusses in the aid to public comment, and assuming the accuracy of these calculations, these foreclosure levels are likely to raise significant concerns where monopoly power is present and the contracts are difficult to terminate (both are alleged).

3. I found one passage in the aid to public comment troublesome, and in my view, incorrect.  With respect to pro-competitive efficiencies flowing from the arrangement, the Commission appears to be taking an overly narrow stance about cognizable justifications. Here’s what the FTC says about efficiencies from exclusives:

No procompetitive efficiencies justify Transitions’ exclusionary and anticompetitive conduct. Transitions cannot show that the exclusive arrangements were reasonably necessary to achieve a procompetitive benefit, such as protecting Transitions’ intellectual property or technical know-how, or preventing interbrand free-riding.5 Transitions does not transfer substantial intellectual property or technical know-how to its customers, and even if it did, any such transfer would likely be protected by existing confidentiality agreements. A concern about interbrand free-riding also does not justify the substantial anticompetitive effects found here. The vast majority of Transitions’ promotional efforts are brand specific, reducing the significance of any free-riding concern.6 While Transitions’ marketing efforts may generate some consumer interest in the product category as a whole – and not just in Transitions’ own products – this is a part of the natural competitive process. This type of consumer response does not raise a free-riding concern sufficient to justify the substantial anticompetitive effects found here.

As a conceptual matter, the Commission at least appears to reject the idea of distributional / promotional efficiencies in the absence of inter-retailer free-riding.  Footnote 6 of the analysis seems to support that conclusion.   As readers of this blog will know, I’ve done some work in this area arguing that this interbrand free-riding conception is too narrow and does not reflect the benefits of vertical restraints in resolving pervasive incentive conflicts between manufacturers and retailers even in the absence of free-riding.

Thom has a great post on this summarizing Ben Klein’s work on RPM which is in a similar vein.  But the fundamental economic facts are that under a set of conditions frequently satisfied in conventional differentiated products markets (manufacturer margins > retailer margins; manufacturer-specific retailer promotional efforts lack significant inter-retailer effects), manufacturers will have to compensate retailers for promotional effort.  These payments can take a lot of different forms: discounts, RPM, slotting contracts, etc.  The promotional sales generated are output increasing and so, from an antitrust perspective, vertical restraints resolving these incentive conflicts provide an important efficiency justification for restraints such as RPM, as I note here, and as the majority in Leegin recognizes.  Or see Ben Klein’s latest on RPM for an excellent explanation of the economics at work here, extending the analysis in Klein and Murphy (1988).

The next key step, and the one relevant for exclusive dealing, is that the very fact that dealers are compensated by manufacturers for supplying promotion on the basis of all their sales also opens the door to a type of free-riding that might undermine these promotional efforts that does not involve switching sales to a rival.  The manufacturer and dealer can be thought of as having an implicit contact to supply the contracted-for level of promotional services, with the manufacturer paying a premium for this performance and monitoring its retailers, terminating for non-performance where necessary.   However, dealers can free-ride by taking the compensation but reducing costly promotional effort.  Even if inter-brand free-riding is not possible, the vertical chain faces this incentive conflict.  Exclusive dealing and reduce the incentive to free-ride and facilitate performance by increasing the incentives for the retailer to perform.

Klein and Lerner (2007) present this analysis is significant detail and readers are referred there.  The fundamental point is that, as the authors write:

In particular, the presence of free-rideable manufacturer investments and dealer switching, the conditions focused upon by the court in Dentsply, are not necessary conditions for determining whether a prevention of free-riding justification for exclusive dealing makes economic sense. All that is required for exclusive dealing to be used to prevent dealer free-riding is that dealers have a significant economic role in the promotion of the manufacturer’s product, that manufacturers are compensating dealers for the supply of additional promotion and that exclusive dealing encourages such extra dealer promotion by facilitating manufacturer enforcement of its implicit contract for dealer promotion.

Note that I am not arguing that these potential efficiencies were present in Transitions as a factual matter.  Rather, I am just saying that to the extent that the passage endorses the position that exclusive dealing cannot prevent free-riding in the absence of free-rideable investments by the manufacturer, it is overly restrictive.  I should also note that my view is not only consistent with much of the case law recognizing a “dealer loyalty” explanation for exclusive dealing, it is also the case that Commission itself has discussed this type of efficiency in the past!  See, for example, this advocacy filing (signed by BC, BE and OPP) concerning potential legislation restricting vertical restaints in the wine industry.  The filing (and there are others), signed ecognizes that in addition to preventing inter-brand free-riding (and citing Klein) “exclusive dealing can be used to assure that suppliers receive the sales-generating effort that they have bargained for from distributors (e.g., through direct payment or through increased revenue that comes with exclusive territories), rather than distributors focusing their efforts on competing brands.”

Because the Commission makes reference only to the inter-brand free-riding, and does not discuss other free-riding justifications, this seemed worth comment.  Of course, even if such a pro-competitive justification fit the facts, it also does not mean it would outweigh any potential anticompetitive effects, but I do find the omission at least mildly troublesome.

The EU has launched its preliminary investigation of Google’s search engine and search advertising businesses.  From the Financial Times:

According to Google, one of the three complaints was from rival Microsoft. That protest, from an online service called Ciao that was recently bought by the software company, echoes a complaint that had already been lodged with regulators in Germany.

The Commission added that it had asked Google to comment on the complaints and that it was co-operating closely with national competition authorities. This procedure is standard practice when complaints are received in Brussels, and it can take some time – often months – before a decision is made either to begin a formal probe or to drop the matter.

Here is Google’s Blog Response, pretty squarely laying blame for the preliminary investigation at the feet of Microsoft:

The European Commission has notified us that it has received complaints from three companies: a UK price comparison site, Foundem, a French legal search engine called ejustice.fr, and Microsoft’s Ciao! from Bing. While we will be providing feedback and additional information on these complaints, we are confident that our business operates in the interests of users and partners, as well as in line with European competition law.

Given that these complaints will generate interest in the media, we wanted to provide some background to them. First, search. Foundem – a member of an organisation called ICOMP which is funded partly by Microsoft – argues that our algorithms demote their site in our results because they are a vertical search engine and so a direct competitor to Google. ejustice.fr’s complaint seems to echo these concerns….

Regarding Ciao!, they were a long-time AdSense partner of Google’s, with whom we always had a good relationship. However, after Microsoft acquired Ciao! in 2008 (renaming it Ciao! from Bing) we started receiving complaints about our standard terms and conditions. They initially took their case to the German competition authority, but it now has been transferred to Brussels.

Though each case raises slightly different issues, the question they ultimately pose is whether Google is doing anything to choke off competition or hurt our users and partners. This is not the case. We always try to listen carefully if someone has a real concern and we work hard to put our users’ interests first and to compete fair and square in the market. We believe our business practices reflect those commitments.

As it so happens, Geoff and I are just getting ready to send out a law review piece analyzing a potential monopolization/ abuse of dominance cases against Google through the lens of an error-cost, evidence-based antitrust framework.   So the timing is perfect!  We’ll blog about that piece in the very near future (and get it posted to SSRN).

Dick Langlois’ post on Carl Kaysen’s role in the United Machinery antitrust case reminded me of a question I’ve been meaning to blog about.  Langlois writes:

Obituaries praise Kaysen for his role as a policy intellectual of great scope, especially in the area of nuclear non-proliferation. But they either fail to mention, or mention with considerable approval, Kaysen’s pivotal role in the famous 1954 United Shoe Machinery case. Kaysen’s view of the case, and of the role of economic analysis in antitrust, is a key example of what Williamson calls the “inhospitality tradition” — that any kind of contract we don’t understand must therefore be anticompetitive. In the eyes of many present-day economists, Kaysen is implicated in having destroyed the American shoe machinery industry and with it the American shoe industry. (The post-mortem is by Masten and Snyder.) Not exactly McNamara in Vietnam, but worth mentioning amid the hagiography of Kaysen, not to mention the reawakened culture of elitist decision-making in Washington.

Kaysen was retained by Judge Wyzanski in United Machinery.  Kaysen sat in court with the judge, examined the evidence, and briefed the court — though the brief was apparently not available to either side.  In another famous example, economist Alfred Kahn was appointed in New York v. Kraft General Foods pursuant to Federal Rule of Evidence 706.  Judge Posner has long urged that district courts make greater use of court-appointed experts.  We recently discussed Judge Sarin’s reliance on economist Orley Ashenfelter to help resolve a Daubert dispute.  Michael Baye and I discuss judicial training in basic economics as one method of mitigating problems arising out of economic complexity in antitrust cases, and provide some empirical evidence suggesting positive returns to this approach in less complex cases.

The reason the Kaysen and Kahn cases are so frequently discussed, of course, is because the examples in antitrust are few and far between.  As I understand it, judicial use of court-appointed “neutral” experts or special masters is very rare in antitrust.  Casual empiricism and a little bit of digging suggest that it is much more common procedure in, for example, appointment of experts with specialized knowledge in science in patent cases involving claim construction.  Turns out, the lack of court appointed experts appears to be a real phenomenon, and one that doesn’t get much attention in part because it happens so infrequently. But the problem is at least perceived to be a big one in antitrust.  24 percent of economists in the ABA Task Force survey opined that judges don’t understand the general economic issues in modern antitrust litigation.

So, why is it that federal judges don’t use court appointed economists more often?  Is it that judges are more comfortable relying on experts in hard sciences but there is some stigma in admitting one needs “help” to understand economic testimony?  Are the outcomes in areas where courts do use court appointed experts more frequently positive?  Do they reduce appeal and reversal rates for district court judges?  If the stylized fact that court appointed experts are used much more frequently in some areas of the law than others, this seems like a neat puzzle to try to both document and explain.  Any thoughts?

A few years back, my colleague Royce Barondes and I wrote an essay entitled Should Antitrust Education Be Mandatory (for Law School Administrators)? The essay, whose title was intended to be tongue-in-cheek, argued that the members of the Association of American Law Schools were engaged in an illegal conspiracy to limit competition for professor talent. The focus of our criticism was an AALS “good practice” under which the law schools agree not to extend offers of employment to professors at competing law schools after March 1.

Law school administrators maintain that their agreement not to compete is justifiable because unbridled competition for professor talent causes them inconvenience (e.g., having to reschedule the fall semester courses of a professor who gets hired away during the spring or summer). But law schools could always rely on non-collusive, unilateral means of avoiding these difficulties. They could, for example, execute employment contracts that preclude professors from departing after some particular date and specify some amount of liquidated damages as a remedy for breach. In any event, the Supreme Court has made clear that the law schools’ argument — “Competition for professor talent is just too hard!” — amounts to a frontal assault on the Sherman Act and is entitled to no weight. (See Professional Engineers.)

Perhaps Royce and I should have included law firm recruiters and law school placement directors in our proposed antitrust education program. A few weeks back, a prominent group of those folks — acting through the National Association for Law Placement, or “NALP” — proposed a similarly collusive agreement not to compete for legal talent. The centerpiece of the proposed scheme is a pact among law firms, which currently interview law students whenever they want and make offers on a rolling basis, to refuse to extend offers of summer employment to second-year law students before a set date in January. The law schools, then, agree to punish gun-jumping firms (which the NALP proposal revealingly terms “cheaters”) by barring them from on-campus recruiting. NALP attempts to justify this law school-policed collusion among employers on grounds that it (1) allows firms to make staffing decisions when they have a better idea of their employment needs (i.e., after their year-end accounting); (2) enables firms to utilize better, but more time-consuming, interview methods (tests, simulations, “McKinsey-style group projects,” etc.); and (3) prevents firms from having to interview law students in the late summer and early fall, when lawyers like to vacation. (I’m serious. Read the proposal linked above.)

This agreement among law firms to limit competition in entry-level hiring is a bad idea for a number of reasons. For example, do the firms really want to extend the wining and dining period until January? Do they really want to replace the current system of rolling offers, in which the timing of an offer doesn’t reveal much information, with a system that signals to second-round offerees that they were not first choice? Relative to the current rolling offer system, won’t a scheme that encourages firms to make all or most of their offers at once (lest they lose attractive candidates to other firms) exacerbate, rather than alleviate, the difficulty of managing yield?

Most importantly, though, this agreement is a bad idea because it constitutes an illegal restraint of trade among competitors. A group of competitors has effectively said: “We don’t like having to make quick hiring decisions to catch the best talent, so we’re going to agree to limit competition amongst ourselves, and we’re going to enlist the law schools, who desperately want us to hire their grads, to act as our policemen.” That, my friends, is a naked restraint of trade. It seeks to level the playing field by removing an advantage from those well-managed law firms that are good at identifying and wooing talent and that can confidently predict their future business prospects, and it doesn’t create notable efficiencies (e.g., transaction cost reductions) or enable the creation of a new product or service.

Moreover, its purported justifications fail. The agreement isn’t necessary to achieve the first two putative benefits — enabling firms to make hiring decisions when they have a better idea of future labor needs and permitting them to utilize more time-consuming interview methods. Under the current system, firms are free to delay making offers until they get year-end accounting data, and they can take as long as they want to evaluate job candidates. While they might find that they lose candidates to employers who are more confident about future needs and who are speedier evaluators, no one’s stopping them from taking their sweet time if they want to. As for the third purported benefit — less need to interrupt attorneys’ late summer vacations, etc. — courts have not looked favorably on the “But competition makes us work too hard!” defense.

Fortunately, one prominent law firm — Jones Day — has objected to the NALP recommendations on grounds similar to those set forth above. Perhaps we should put that firm’s excellent antitrust lawyers in charge of our mandatory antitrust education program for law school administrators and law firm recruiters.

Readers may recall we highlighted the Vizio v. Funai complaint about a year ago, in large part because it involved antitrust and standard setting issues.  The case involves allegations that Funai breached a FRAND commitment, and thus, is an important decision in the debate over the appropriate scope of Section 2 in cases involving alleged breach of obligations made in the standard setting context (a subject I’ve written on with Bruce Kobayashi here and here, with former student Aubrey Stuempfle here, and on my own in partial defense of the D.C. Circuit’s Rambus decision here ).

Thanks to a TOTM reader, we’ve got some new information on the latest developments in Judge Matz’s opinion granting Funai’s motion to dismiss the Sherman Act Section 2 claims.  I think the opinion is an interesting addition to the growing body of case law on Section 2 and standard setting.  The entire opinion is available here.

For a brief primer for those interested, I’ll lay out some of the basic facts as they appear in the Complaint.  Thomson held a number of patents related to the transmission, receipt and use of specific program information in a digital broadcast signal.  In 1997, the Advanced TV Systems Committee (ATSC), an SSO, adopted a standard for digital TV broadcast signals and Thomson designated several patents as essential to the standard.  Thomson made FRAND commitments to ATSC, and subsequently, the FCC adopted major elements of the ATSC standard.   In September 2007, Thomson assigned the rights to two of the relevant patents to Funai, and retained the rights to another.  Vizio alleges that before selling some of its patents to Funai, Thomson licensed the bundle of relevant patents to licensees who needed only to deal Thomson, whose monopoly power was restrained by the FRAND commitment it made to the ATSC.  Vizio now alleges that its Funai charges prices much higher than those charged by Thomson, and that Funai and Thomson conspired to evade the FRAND commitment and split profits.

Right off the top, readers will recognize hints of both N-Data and Ovation, two FTC cases I’ve criticized for expanding the notion that exclusionary conduct might be defined as any business decision that “evades a pricing constraint.”   As I’ve written:

The implicit answer [adopted by the Commission] is that the antitrust laws condemn evasion of pricing constraints.  This answer is getting more and more familiar at the current Commission.  Let’s follow the pattern.  First, Rambus is based on the concept that evasion of patent disclosure rules in the standard setting context violation Section 2 and Section 5.  Second, N-Data is based on the concept that evasion of a contractual pricing constraint in the form of a RAND commitment is a violation of at least section 5 even when the monopoly power is lawfully acquired.  Third, Ovation now adds to the list the evasion of reputational constraints on pricing as the genesis of actionable antitrust conduct.

This case invokes some of the some basic ideas.  At least one of the underlying theories is that Thomson evaded the pricing constraint by transferring its patents to Funai, i.e. does transferring the patent from Thomson to Funai, who is unconstrained by the FRAND commitment, constitute exclusionary conduct under Section 2?

Here’s an excerpt of Judge Matz’s analysis of the Section 2 allegations:

Nor does the allegation that Funai repudiated Thomson’s FRAND commitments constitute a harm to competition. Vizio cites to the Broadcom and Research in Motion cases for the proposition that deceiving a standard setting organization and then evading FRAND commitments can qualify as anticompetitive conduct and can constitute harm to competition. See Broadcom Corp. v. Qualcomm, Inc., 501 F.3d 297, 313-14 (3d Cir. 2007) (holding that a patent holder’s intentionally false promise to license essential proprietary technology on FRAND terms, coupled with a standard setting organization’s reliance on that promise, and the patent holder’s subsequent breach of that promise, constitutes actionable anticompetitive conduct); Research in Motion Ltd. v. Motorola, Inc., 2008 WL 5191922 at *4-7 (N.D. Tex. Dec. 11, 2008) (holding that a refusal to license on agreed-to FRAND terms constitutes a harm to competition). However, other courts have reached the opposite conclusion. See Rambus v. Federal Trade Commission, 522 F.3d 456, 467 (D.C. Cir. 2008) (holding that deceiving a standard-setting organization, thereby avoiding FRAND (there called “RAND”) limits on licensing fees, did not constitute a harm to competition under the Sherman Act). The court in Rambus explained that, even in the context of FRAND licensing agreements, “an otherwise lawful monopolist’s end-run around price constraints, even when deceptive or fraudulent, does not alone present a harm to competition in the monopolized marked.” Rambus, 522 F.3d at 466. The Rambus court cited NYNEX v. Discon, supra, for that proposition, after observing previously that “to the extent [the Broadcom ruling] 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.” Id. (citing NYNEX, 525 U.S. 128). As discussed above, Vizio has not explained how the mere transfer of a valid patent from Thomson to Funai created an unlawful monopoly, and so its alleged conduct does not constitute a harm to competition.

Moreover, in both Broadcom and Research in Motion the antitrust defendant itself had entered into a FRAND obligation with the standard setting organization. Here, Vizio’s only allegation that suggests that Funai has any obligations to the ATSC is its conclusory statement that “[w]hen Funai acquired Thomson’s rights to the ’074 patent, specific encumbrances attached to that patent, including Thomson’s obligation to license the ’074 patent to implementers of the ATSC standards, such as Vizio, on a FRAND basis.” FAC ¶ 30. However, Thomson—not Funai—participated in the standard-setting process and entered into the FRAND agreement with the ATSC. FAC ¶¶ 14, 16, 18-19, Ex. C. And, as the FAC alleges, the ATSC Patent Policy requires only that participants provide a written agreement to license on FRAND terms. FAC ¶ 16. Although the allegations might suffice to state an antitrust claim against Thomson under the holding in Broadcom, they do not against Funai. Based on this analysis, Vizio’s claims of unlawful monopolization under Section 2 of the Sherman Act—claims three through five—and unlawful acquisition under Section 7 of the Clayton Act—claim one—must fail.

The next to last sentence is pretty interesting when read along with the first paragraph.  On the one hand, the court notes that the allegations might state a valid Section 2 claim against Thomson under the holding in Broadcom, suggesting that the evasion of constraint theory in Broadcom lives so long as the plaintiff has also alleged that Thomson’s promise as intentionally false at the time it was made to the ATSC, that there was reliance on that promise, and it was subsequently breached.  On the other hand, the first paragraph seems to at least weakly suggest that the court is aligning itself with the D.C. Circuit’s Rambus holding under which even an intentionally false promise or deceptive cannot constitute a Section 2 problem unless the plaintiff also can survive muster under NYNEX, i.e. prove that the defendant is not simply exercising its lawfully acquired ex ante monopoly power.  I don’t mean to suggest these two excerpts are contradictory.  The court is correctly pointing out that even under less restrictive standard in Broadcom, the Section 2 claim against Funai must fail.

As I point out here, I do not believe that Broadcom and Rambus create a circuit split because they turn on the court’s assessment of the defendant’s possession of ex ante monopoly power.  In Broadcom, at the pleading stage, the Third Circuit accepted the allegation as true that the defendant acquired monopoly power as the result of its deceptive conduct; in Rambus, the D.C. Circuit correctly held under NYNEX that the plaintiff faced the burden of proving that the price-increasing deception was also exclusionary, i.e. allowed the defendant to acquire or maintain monopoly power, and ruled that the FTC failed to carry that burden on the facts.

Antitrust & Competition Policy Blog is hosting a symposium on Competition in Agriculture.  Mike’s post from yesterday is available here.   So far in the symposium there are also posts by Ron Cass (BU Law), Jeff Harrison (Florida Law), Peter Carstensen (Wisconsin Law), and Kyle Stiegert (Wisconsin Applied Econ).  Additional posts should be forthcoming from Christina Bohannan (Iowa Law), Andrew Novakovic (Cornell Applied Economics), and the great George Priest (Yale Law), who I hope gets the blogging bug.

Josh, Scott Kieff and I have posted a short comment based on our submission to the DOJ/USDA Workshops on Agricultural Competition, co-authored by us and Mike. The comment should be available for download from the DOJ webpage when the public comments are posted (someday . . . ).  A copy is also available here (www.laweconcenter.org), and comments are most welcome at gmanne@laweconcenter.org Please leave comments on this post over at the A&CP Blog.

Regarding firm size and integration, it must be kept in mind that the agriculture industry in the U.S. has, for good reasons, moved beyond the historic, pastoral image of small family farms operating in quiet isolation, devoid of big business and modern technologies. The genetic traits that give modern seeds their value—traits that confer resistance to herbicide and high yields, for example—are often developed through processes that are technologically-advanced, time- and money-intensive, risky investments, and subject to various layers of regulation. It doesn’t take expertise in industrial organization to imagine why at least for some participants in this market these processes are likely to be more efficiently and effectively conducted within large agribusiness companies having enormous research and development budgets and significant expertise in managing complex business and legal operations, than they are by the somber couple depicted in the famous 1930 Grant Wood painting, “American Gothic.” Nor is such expertise required to imagine why complex contracting across firms, of any size, is likely to be of significant help in supporting the specialization and division of labor that is useful in allowing some businesses (even a small family farm is a business) to be good at planting and harvesting while others are good at inventing, investing, managing, developing, testing, manufacturing, marketing, and distributing the next wave of innovative crop technologies. This requires on the one hand that the government give reliable enforcement to contracts and property rights whether tangible or intangible (extremely important in this industry are patents, trade secrets, and even trademarks), while on the other hand it allows firms wide flexibility to decide for themselves which of these contracts and property rights they would like to enter into or obtain pursuant to the applicable bodies of contract and property law.

When courts and regulatory agencies like the DOJ Antitrust Division adopt special approaches to the body of antitrust law to address concerns that may arise from these property rights and contracts, they run the risk of crafting doctrines that inappropriately override well-established bodies of law that are informed by longstanding judicial and scholarly thought and consideration of each area, and creating the potential to reduce innovation and economic growth. A central countervailing concern is that the putative antitrust injuries that might arise are rooted in stylized economic models that are heavily dependent on a narrow set of assumptions, leaving significant room for erroneous antitrust enforcement. A modest but fundamental safeguard to protect against this concern of “false positives,” is an approach to antitrust that requires a strong demonstration of actual anticompetitive effect as a precondition for a monopolization violation.

Not only are patents not presumptive proof of market power in any static sense, but patents can also meaningfully improve both competition and access to patented technologies over time, in the dynamic sense. From the public record it appears that the driver of much of today’s antitrust enforcement in the agricultural industry boils down to intervention into business disputes between large and sophisticated parties. The inherent uncertainty regarding the economic consequences of specific conduct, coupled with competitors’ poor incentives and the huge costs of error, counsel strongly against antitrust intervention without strong empirical evidence that the conduct has reduced competition and harmed consumers in the form of higher prices, lower quality, or reduced innovation.

Antitrust & Competition Policy Blog is hosting a symposium on Competition in Agriculture. So far today, there are posts by Ron Cass (BU Law), Jeff Harrison (U of Florida Law), and me.  Additional posts should be forthcoming from Christina Bohannan (U. Iowa Law), Scott Kieff (GW Law), Andrew Novakovic (Cornell Applied Economics), George Priest (Yale Law), Kyle Stiegert (U. Wisconsin Agricultural and Applied Economics), and Josh Wright (George Mason Law). My contribution is reproduced below.  Please leave comments over at the A&CP Blog.

Learn from history, don’t repeat it.

Antitrust laws originated in Midwest states like Missouri in the late 1880s when small farmers banded together in the face of falling agricultural commodity prices to stand against the competitive pressures of larger, more efficient farming operations. Over a century later, it is, as Yogi Berra said, “déjà vu all over again.”

Of the almost 2.2 million farms in the USDA’s 2008 Agricultural Resource Management Survey, the 1.8 million smallest farms lost money on their farming operations (on average) even after accounting for government program payments. These farms represent only 10% of the value of agricultural production in the US, yet received roughly 28% of government payments.

In addition, these small-scale farmers are less likely than their larger competitors to shop beyond the nearest town for key inputs, to shop for the best price from suppliers, to negotiate price discounts, or to lock in prices for inputs. Small-scale farmers are also much less likely to market their products using contracts or to use market-based risk management tools. In short, small-scale farmers fail to (or are simply unable to) take advantage of market opportunities that larger, more efficient farms do. That large farms do engage in these activities suggest a very competitive agricultural economy.

Although antitrust has long been used as an anticompetitive club by economically inefficient competitors, such applications do more harm than good. The agriculture sector would be better served by eliminating the subsidies that sustain marginal producers than by using antitrust to penalize more efficient, better managed farming operations and other firms along the rest of the food value chain. DOJ’s antitrust inquiry will, at best, simply perpetuate the inefficient industry fringe or, more likely, inhibit the kinds of technological and market innovations that have provided US consumers and the world with a safe, reliable food supply.

The subject of antitrust exemptions has been an oft-discussed topic here at TOTM (see, e.g. here and here).  In the latter of those two links I was somewhat critical of the DOJ for taking a neutral stance on the insurance industry exemption, which has now become rather wrapped up in the health care reform debate. I wrote:

Look, when Harry Reid says that he knows insurance companies are anti-competitive “Because they make more money than any other business in America today,” its pretty hard to refrain from criticizing a political ploy that doesn’t have anything to do with the antitrust merits.  Not to mention that Congress is simultaneously considering passing other antitrust exemptions while its striking down others.  I’m sympathetic.  But just to be clear.  Whatever one thinks about the difficulties of application of the antitrust laws to single firm conduct (I’ve certainly been a critic of much of the modern approach to monopolization), it is worth repeating:  cartels are bad.  They raise price.  They reduce output.  That is not what the economy needs.  There is a substantial economic literature on this.  And I don’t think that any economist who has looked at the literature has or would ever support an industry wide antitrust exemption.  If I’m wrong, I’d love to see some citations.  Maybe there is some evidence out there that I’ve not seen that indicates that exemptions improve consumer welfare in practice.  I doubt it.  But that’s what the comments are for.

As the Antitrust Modernization Committee Report and Recommendation says:

Statutory immunities from the antitrust laws should be disfavored. They should be granted rarely, and only where, and for so long as, a clear case has been made that the conduct in question would subject the actors to antitrust liability and is necessary to satisfy a specific societal goal that trumps the benefit of a free market to consumers and the U.S. economy in general.

And:

to extent that insurance companies engage in anticompetitive collusion, however, then they appropriately would be subject to antitrust liability.

To be absolutely clear, I am NOT saying that I believe that repeal of the federal exemption will do much to lower prices or that I believe there is a high incidence of collusive behavior by the insurance firms.   But that’s not the point.  The point is that we should not be defending the merits of exemptions for prohibitions on cartel activity.  Personally, I believe that state imposed barriers to entry, regulatory constraints and rate regulation are more likely a much bigger problem for consumers than anticompetitive behavior and efforts aimed at increasing competition between the states will have a much bigger bang for the buck for consumers.  But the fact that state regulation is also a problem is not a good argument in favor of an antitrust exemption that allows collusion.

The Competitive Enterprise Institute’s Gregory Conko and Kevin Hiferty offer a defense of the exemption (HT: Washington Times):

There is no evidence that McCarran-Ferguson has resulted in higher premiums or profits, however. So, not only is federal intervention unnecessary for ensuring fair competition, it could actually hurt consumers by eliminating practices that help small insurers compete and drive down costs.  The law gives states the primary role in regulating “the business of insurance,” and exempts insurers from most federal regulation, including antitrust laws, as long as the states have laws governing the same conduct.  But where critics see only dominant market power and higher premiums, a closer look reveals a careful balancing by the states that helps promote competition and keep costs in check. As the Congressional Budget Office concluded in October, repealing the exemption would have little or no effect on insurance premiums because “state laws already bar the activities that would be prohibited under federal law if this bill was enacted.”

It is true that a handful of states have highly concentrated markets. In Hawaii, Rhode Island and Alaska, 95 percent or more of the small-group health insurance market is served by just two insurers. But the McCarran-Ferguson Act only shields activities that are integrally related to providing insurance and unique to the insurance industry, and consolidation isn’t one of them.  Practices that are not inherent to underwriting insurance, such as firm mergers, bundling and tying arrangements, agreements to allocate geographic market shares, and many other allegedly anti-competitive activities are, even under current law, subject to federal antitrust enforcement and actively policed by the Federal Trade Commission. So, additional federal intervention would have no effect on insurance industry consolidation.

What would be newly subject to federal enforcement is a variety of ongoing collaborative practices among health and medical-malpractice insurers that are now permitted by the states because they have pro-competitive effects.  At the state level, insurers actively share loss-experience data and related information through rating bureaus, so that each firm has a large enough pool of information to accurately price risks and set aside reserves. In some states, industry-run rating bureaus aggregate this underwriting data and calculate “target” or “advisory” rates under the supervision of state regulatory authorities. Many states also permit insurers to create joint underwriting associations that help insurers pool difficult-to-manage risks and share in the associated profits or losses.

This kind of collaborative activity tends to lower costs, promote insurance industry solvency, and help small insurers compete with bigger firms. Although the Leahy-Whitehouse bill would permit a limited amount of data sharing, the other practices would be subjected to federal antitrust enforcement. That would, ironically, further strengthen the power of the biggest insurers and disadvantage smaller competitors.  Even aside from these important collaborative practices, federal antitrust law would still be a bad fit for the insurance industry. When faced with a market containing two or three dominant firms, a typical antitrust enforcer’s response is to break up the firms into smaller pieces – think of the dissolution of AT&T’s local service monopoly into seven Baby Bells.

But as Boston University health economist Austin Frakt has noted, limiting the size of insurers would also limit their ability to negotiate down prices with health care providers. On the whole, economics research “supports the notion that recent increased market power of insurers does not lead toward monopolistic pricing, but rather it provides a counterbalance to the power held by hospitals and provider groups.”  There are, however, other ways to promote competition in the health insurance market. One change Congress should consider is to permit individuals and business purchasers of health insurance to buy their policies from any willing provider in any U.S. state.  Under current law, an insurance firm registered in one state may not cover individuals in another without registering in the second state and being subject to all of its taxes and laws. This raises the cost of doing business across state lines and prevents many smaller and midsize companies from entering new markets to compete.

Allowing consumers in Alabama, for example, to escape Blue Cross-Blue Shield’s 83 percent market share in that state by shopping for an insurance policy in neighboring Florida’s highly competitive market would increase competition significantly. And it would do so without jeopardizing important pro-competitive business practices that help keep costs in check.  If congressional Democrats genuinely wanted to help consumers, they would seek ways to reduce burdensome regulations on the insurance industry that raise health premiums. Instead, if their effort to “get tough” on the insurance industry succeeds, they would do more harm to consumers than good.

What do readers think?  The economist cited invokes the countervailing power defense argument raised by Steve Salop.  I’m a strong supporter of the idea of opening sales of insurance across state lines as a measure that could help and would not harm.  But that’s not the issue here.   Is there any evidence that lifting antitrust exemptions helps consumers?  I read this article as largely offering the defense that lifting the exemption just won’t matter much.  Are you convinced?