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

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

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

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

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

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

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

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

This is hogwash.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

From the WSJ Online:

The transaction had faced stiff opposition in Brussels from Google rivals including Microsoft Corp. and Yahoo Inc., as well as privacy advocates who fretted that a combined company would control a vast storehouse of data on Web users and their surfing habits. But European Commission antitrust officials early on ruled out examining the privacy implications of the deal, resulting in a conventional merger analysis that left fewer ways for the deal to be blocked. In the end, the EU concluded that the still-nascent online-advertising market is changing quickly enough and has enough competitors that a combined Google-DoubleClick wouldn’t be able to shut out rivals. The purchase “would be unlikely to have harmful effects on consumers,” the EU said in a statement. The EU’s approval had been expected. The U.S. Federal Trade Commission gave its blessing, in a 4-1 vote, in December.

UPDATE: Here is more from Google’s Eric Schmidt and a few excerpts from the EC’s Press Release:

The Commission’s in-depth market investigation found that Google and DoubleClick were not exerting major competitive constraints on each other’s activities and could, therefore, not be considered as competitors at the moment. Even if DoubleClick could become an effective competitor in online intermediation services, it is likely that other competitors would continue to exert sufficient competitive pressure after the merger. The Commission therefore concluded that the elimination of DoubleClick as a potential competitor would not have an adverse impact on competition in the online intermediation advertising services market.

And with respect to non-horizontal issues the Commission:

found that the merged entity would not have the ability to engage in strategies aimed at marginalising Google’s competitors, mainly because of the presence of credible ad serving alternatives to which customers (publishers/advertisers/ad networks) can switch, in particular vertically integrated companies such as Microsoft, Yahoo! and AOL. The market investigation also found that the merged entity would not have the incentive to close off access for competitors in the ad serving market, mainly because such strategies would be unlikely to be profitable.

The FTC has filed its primary appellate brief in the Whole Foods case. In essence, the brief asserts two claims: that the district court evaluated the Commission’s request for a preliminary injunction under an overly stringent legal standard, and that the court improperly discounted the Commission’s evidence that a Whole Foods/Wild Oats merger would reduce competition and harm consumers. While the Commission is wrong on both points, this appeal might be a good thing — it could provide the courts (maybe even the Supreme Court!) with an opportunity to do some much-needed house cleaning on merger policy.

Under the FTC Act, the Commission may seek a preliminary injunction whenever it has reason to believe “(1) that any person, partnership, or corporation is violating, or is about to violate, any provision of law enforced by the Federal Trade Commission, and (2) that the enjoining thereof pending … [judicial resolution of a formal complaint] would be in the interest of the public.” (Because the FTC enforces the Clayton Act’s ban on mergers that “may substantially lessen competition,” the Commission may seek to preliminarily enjoin such mergers.) The statute goes on to say that the petitioned court may grant the preliminary injunction “[u]pon a proper showing that, weighing the equities and considering the Commission’s likelihood of ultimate success, such action would be in the public interest….”

The FTC contends, quite correctly, that this standard is more liberal than the traditional equitable standard for awarding a preliminary injunction. But the district court recognized as much. Cutting quotation marks, citations, and parentheticals, here’s how the court construed the FTC’s proof burden (pp. 5-6):

In contrast to the four-part equity standard for the granting of a preliminary injunction in other contexts, in deciding whether to grant preliminary injunctive relief under section 13(b), the court evaluates whether it is in the public interest to enjoin the proposed merger. This standard is broader than the traditional equity standard that is normally applicable to requests for injunctive relief and is consistent with Congress’ intention that injunctive relief be broadly available to the FTC. The FTC is not required to establish that the proposed merger would in fact violate section 7 of the Clayton Act. It is required only to show that it is “likely” to succeed in showing under Section 7 of the Clayton Act that the proposed merger “may substantially lessen competition” or “tend to create a monopoly.” The FTC must show a “reasonable probability” that the proposed merger may substantially lessen competition in the future. The FTC’s burden is not insubstantial, and a showing of fair or tenable chance of success on the merits will not suffice for injunctive relief. To meet its burden to establish its likelihood of success on the merits, the FTC may raise questions going to the merits so serious, substantial, difficult and doubtful as to make them fair ground for thorough investigation, study, deliberation and determination by the FTC in the first instance and ultimately by the Court of Appeals. The FTC does not have to prove that the proposed merger will in fact violate Section 7 of the Clayton Act because the Congress used the words may be substantially to lessen competition to indicate that its concern was with probabilities, not certainties.

That’s a pretty darn deferential standard. The Commission is required to show only that it is “likely” to be able to show that the proposed merger “may” substantially reduce competition.

So suppose a merger proposal presents four equally plausible scenarios — one in which competition is substantially reduced, two in which competition is enhanced (say, because of enhanced economies of scale), and one in which there’s no noticeable change in competition. Suppose, though, that it’s hard to tell the productive efficiencies story — either the theory is hard to follow or the data establishing the likely efficiency gains are hard to produce. In light of this difficulty, there’s a 50% chance that the ultimate factfinder will altogether discount the two enhanced competition scenarios. That means there’s a 50% chance the factfinder will conclude that there are two equally plausible outcomes: one in which competition is substantially reduced, and one in which there’s no noticeable effect on competition. Under these facts, the FTC should win; it has shown that it is “likely” to succeed in showing that the proposed merger “may” substantially reduce competition. Thus, the merger would be barred even though the actual likelihood of anticompetitive effect is only 25%. The district court’s proof standard endorses this FTC-friendly outcome.

So what’s the Commission’s beef with the district court’s proof standard? I suppose the Commission is upset over the statement that “[t]he FTC’s burden is not insubstantial, and a showing of fair or tenable chance of success on the merits will not suffice for injunctive relief.” But surely the Court of Appeals shouldn’t endorse a standard that permits the FTC to prevail as long as it discharges an “insubstantial” burden and demonstrates only that it has a “fair or tenable” chance of showing that competition may be reduced. In the merger context, “preliminary” injunctions are final in fact (the merging parties walk away from the deal if a PI is granted), and most mergers offer at least some good news for consumers in the form of enhanced productive efficiencies (from economies of scale, etc.). Thus, we shouldn’t make it too easy for the FTC to squelch a merger.

Moroever, lowering the PI proof standard from that which the district court employed would create further divergence between the rules applicable to the FTC and those applicable to the other agency charged with pre-merger review, the Department of Justice. Because of some statutory quirks, mergers challenged by the DOJ cannot be effectively thwarted on so slight a showing. The bipartisan Antitrust Modernization Commission recently observed that differences between the two agencies’ pre-merger reviews “can undermine the public’s confidence that the antitrust agencies are reviewing mergers efficiently and fairly.” The AMC recommended (Rec. #26, pp. 141-42) that the standard for granting injunctive relief to the FTC be raised to mirror that applicable to DOJ requests. Any ruling that lowered the FTC’s proof standard below that utilized by the trial court in the Whole Foods case would effect precisely the opposite result.

So how about the FTC’s claim that the district court misevaluated the evidence of likely anticompetitive effect? Wrong again. One of the FTC’s primary assertions here is that the court failed to give credit to various internal documents suggesting that the merger would have an anticompetitive effect. The main such “hot document” was an email Whole Foods CEO John Mackey sent to the board of directors, arguing that the merger would “avoid nasty price wars” in certain markets and would deny conventional grocers the “springboard” they’d need to get into Whole Foods’ market space. Other internal documents suggested, the FTC maintains, that Whole Foods considered itself so unique that it did not compete in the same market as conventional grocery stores. The district court’s 90+ page opinion did not discuss most of this evidence, leading the FTC to charge that the court committed reversible error in discounting “the gold standard of probative evidence” on the merger’s competitive effects.

In fact, it was entirely appropriate for the district court to discount internal hot docs in favor of the cold hard economic data, which showed that there is substantial competitive interaction between Whole Foods and conventional grocery stores and that Wild Oats does not provide a unique constraint on Whole Foods’ pricing. (As the district court explained, the data showed that “Whole Foods prices are essentially the same at all the stores in its region, regardless of whether there is a Wild Oats store nearby.”)

The FTC’s claim that internal documents are “the gold standard of probative evidence” on market definition or a merger’s likely effects is just wrong. Business people routinely make puffing claims about the uniqueness of the product or service they are selling, and it would be naïve to infer from such self-serving claims that the products or services at issue really are so unique that the seller could raise prices above competitive levels without causing buyers to substitute toward alternatives. Whole Foods’ claim to be a “lifestyle retailer” offering “a unique shopping environment” says next to nothing about whether shoppers would really refrain from substituting to, say, a Safeway Lifestyle Market in response to a price increase. Similarly, aggressive “fighting words” in internal communications generally say little about the real purpose of planned conduct — much less the likely effect of such conduct. For example, the inflammatory “avoid nasty price wars” language quoted at the beginning of the FTC’s complaint appeared in a last-minute e-mail that was designed to drum up board support for the Wild Oats merger. One could not infer the true purpose of the merger from this out-of-context snippet and, even if one could, it is effect — not purpose — that really matters. Divining likely effect requires a hard look at economic data rather than consideration of statements lifted out of context.

My esteemed co-blogger, Geoff (along with Marc Williamson) has persuasively criticized the use of “hot docs vs. cold economics” in antitrust enforcement. Manne and Williamson observe that accounting documents, market definition documents, and documents containing “fighting words” frequently give rise to economically inaccurate inferences. They explain:

Business people will often characterize information from a business perspective, and these characterizations may seem to have economic implications. However, business actors are subject to numerous forces that influence the rhetoric they use and the conclusions they draw. These factors include salesmanship; self-promotion; the need to take credit for successes and deny responsibility for failures; the need to develop consensus; and the desire to win support for an initiative or to neutralize its opponents. . . . Simply put, the words and procedures used by business people do not necessarily reflect “economic realities,” and the effort to integrate them further into antitrust analysis is misdirected.

Thus, it was entirely appropriate for the district court to focus on hard economic data — the real gold standard of probative evidence — rather than inflammatory hot docs.

To be sure, the FTC also goes after the district court’s analysis of the economic data. It argues, for example, that the court ignored evidence that “the presence of Wild Oats in a market reduced Whole Foods’ profit margins by .7 percent, storewide.” Come again? This is the sort of evidence that’s supposed to justify the court’s thwarting of a merger in an industry in which scale economies are substantial (so that a larger merged firm can exploit otherwise unavailable productive efficiencies)? First, the relevant consideration is effect on prices, not profit margins; an increase in profit margins can occur when per-unit costs decrease, and one might well expect a “busy” Whole Foods in a non-Wild Oats area to have greater efficiencies (less wasted perishables, etc.) than a less active Whole Foods in an area with a Wild Oats. In addition, the market power-induced price increases leading to a 0.7 percent increase in profit margins are probably really small. In a merger of Whole Foods and Wild Oats, the enhanced market power resulting in these tiny price increases would be accompanied by productive efficiencies (scale economies, etc.) that would likely dwarf the market power-induced price hikes. The net effect (a small increase in market power with a more sizeable increase in productive efficiency) would almost certainly benefit consumers.

And speaking of productive efficiencies, they are never mentioned in the FTC’s appeal or in Prof. Murphy’s expert report. Indeed, Prof. Murphy begins his expert report with the list of questions the FTC asked him to consider (p. 7, par. 21), and nowhere on that list is any consideration of offsetting productive efficiencies — an almost certain result of the merger at issue and a matter the FTC, pursuant to its own merger guidelines, is supposed to consider. In light of this glaring oversight, should the courts be more deferential to the Commission, as it now contends?

It seems, then, that the FTC is wrong all around. Still, I’m glad it’s pursuing this appeal. Merger appeals are rare. When regulators lose a merger challenge, they generally don’t appeal because mergers usually close shortly after the district court rules, and most consummated mergers are quite difficult to undo. When the parties to a merger agreement lose, they usually give up because they know they probably can’t hold the merger agreement together for the duration of an appeal. The result has been a dearth of Supreme Court merger decisions; the last significant one was United States v. General Dynamics Corp., decided in 1974.

There is a good chance the current Supreme Court would agree to hear an appeal of this case if it were to proceed that far. Unlike the Rehnquist Court it succeeded, the Roberts Court has shown significant interest in antitrust matters. Indeed, in the last two terms, the Court decided seven antitrust cases, compared to an average of less than one per year in the 15 years prior to the 2003–2004 term. An appeal of the Whole Foods case would present the Court with the opportunity to do some much-needed house-cleaning on merger analysis. Most notably, the Court could correct some of the unfortunate vestiges of its Brown Shoe decision, which stated that “submarkets” could be defined, in part, according to such “practical indicia” as “industry or public recognition of the []market as a separate economic entity, the product’s peculiar characteristics and uses, unique production facilities, distinct customers, distinct prices, sensitivity to price changes, and specialized vendors.” This unfortunate statement invited litigants and regulators to scour business documents for market characterizations that suit their end. Unfortunately, those characterizations are frequently inaccurate, and, as this case well shows, reliance on business documents rather than econometric evidence often leads to mistakes.

My esteemed co-blogger, Josh, has recently opined that the Roberts Court will hear an appeal of a merger challenge (p. 55 of this article). Whole Foods just could be the case.

New York Attorney General Andrew Cuomo has issued a subpoena to Intel Corp. as part of an investigation into whether Intel’s discounting practices violate federal or state antitrust laws. According to Cuomo’s press release, the subpoena

seeks documents and information concerning Intel’s pricing practices and possible attempt to exclude competitors through its market domination. The information sought is relevant to whether Intel, among other things:

Penalized its customers, primarily computer manufacturers, for purchasing x86 computer processing units (CPU) from competitors;

Improperly paid customers for exclusivity;

Illegally cut off competitors from distribution channels.

This is not very specific, but, given that the press release refers favorably to Intel investigations by the European Commission and Korean and Japanese antitrust regulators, we can assume Cuomo is concerned about the behavior that troubled those foreign regulators. That purportedly troubling conduct is really just loyalty discounts — giving computer manufacturers a price-break, either an up-front discount or a rebate, if they agree to take the bulk of their requirements from Intel rather than from its competitors.

Cuomo’s characterization of these discounts is dysphemistic: computer manufacturers are “penalized” for purchasing competitors’ products only in the sense that doing so deprives them of a cheaper price from Intel; customers are “paid for exclusivity” only in the sense that Intel is giving discounts and rebates conditioned on loyalty and will thus end up charging the lowest per-unit prices to customers who buy from it exclusively; competitors are “cut off from distribution channels” only to the extent they can’t or won’t match Intel’s discounts and thereby maintain or expand their customer bases. Assuming Intel’s discounted prices are above its costs of production, any equally efficient producer could match Intel’s discounted pricing, so the only competitors destined to lose business because of Intel’s discounts are those that are either less efficient than Intel or unwilling to compete as aggressively on price.

[Note that there have been some accusations that Intel’s discounted prices are below-cost. That would change the competitive dynamic and might justify government intervention here (an equally efficient rival cannot meet a below-cost price and thus could be excluded by such pricing). But below-cost pricing is not the focus of Attorney General Cuomo’s investigation. Moreover, it is highly unlikely that Intel’s discounted prices are below its marginal or average variable cost of production; the variable costs of producing the sort of high-tech devices Intel sells are incredibly low.]

Any antitrust intervention that sought to protect a discounter’s less efficient or less price-aggressive competitors at the expense of consumers, who reap immediate benefits from loyalty discounts, would be perverse. Antitrust should not sacrifice the bird-in-the-hand of lower prices in order to protect laggard competitors. Thus, as I’ve previously argued, the FTC’s decision not to pursue this matter is entirely appropriate.

So why is Attorney General Cuomo pursuing this European-style, competitor-focused antitrust inquiry? Perhaps he is, as he claims, just looking out for the interests of New Yorkers. But not in their status as computer buyers (where they’d be helped by aggressive price competition). Instead, he’s looking out for their prospects of employment and for his state’s coffers. It seems that Intel’s chief competitor, Advanced Micro Devices (AMD), has promised to build a $3 billion plant in upstate New York. Thus, it makes sense that Mr. Cuomo would jump on the bandwagon led by Senator Charles Schumer and Representative Kirsten Gillibrand (D-NY), both of whom have pushed for a federal inquiry into Intel’s loyalty discounts.

So what we have here is really a protectionist move that may benefit New York’s workers (who may land sweet AMD jobs) and politicians (who’ll have more tax revenue to spend), but at the expense of computer consumers generally. What’s more, other potential discounters will know they might face inquiries from aggressive states like New York, and they may therefore forego consumer-friendly discount arrangements.

It’s bad enough that American businesses have to worry about competitor-focused European regulators. We’re in real trouble if rogue states start acting like antitrust bullies.

Recently, Frank Pasquale at Concurring Opinions wrote a blog post did a drive-by hit on FTC Chairman Majoras supporting her recusal from considering the Google/DoubleClick merger now pending before the FTC.  You really have to read the post to get the full effect of the innuendo and intimation–it’s masterfully subtle.  At the time I commented on his blog:

Ah, muckraking. A time-worn tradition. So, let me see if I get this straight. Majoras is incapable of acting scrupulously in assessing gouging claims because she has, in the past, advised oil companies (among hundreds of other companies). Nevermind the airtight arguments against price gouging by oil companies and the broad and vast company saying the same things as Majoras. And this tenuous, utterly-unsupported (and oh-so-carefully implicit) claim of bias thus supports calls for Majoras to recuse herself from involvement in a wholly-unrelated case, in a different industry entirely, because, something like, “she’s done it before; she’ll do it again!” I see. Yes, very compelling.

Now comes news, not reported by Frank, that the claims in the recusal motion are pretty far from the mark.  Majoras’ statement (and Kovacic’s statement in response to a similar motion) and the statement of the remaining members of the FTC supporting her are here.  The salient parts:

To fully explain why recusal is not required here, I first must correct some key factual errors contained in the Petition. The Petition states that “Petitioners learned on Monday, December 10, 2007 that Doubleclick, has retained the Washington law firm of Jones Day to represent the company before the Federal Trade Commission in the pending merger review.” (Petition, page 1 ¶ 3). . . . Jones Day does not represent DoubleClick before the FTC and, indeed, in dozens of meetings and submissions, has never appeared or even been mentioned.

More importantly, the Petition also incorrectly states that “The Spouse of the FTC Chairman, John M. Majoras, is currently an equity partner with the law firm Jones Day.” (Petition, page 2 ¶ 5). As of January 1, 2006, John Majoras converted from an equity to a non-equity status and became a fixed participation partner in Jones Day. I understand that as a fixed participation partner, his compensation will not be increased or affected by changes in the firm’s income. Further, all benefits my husband receives from Jones Day are the same as those earned by other similarly situated non-equity partners in the firm. Therefore, my husband does not have a financial interest in the firm’s income, and thus I do not have an imputed financial interest.

In 2004 and 2005, when my husband was still an equity partner, I assumed that I would have a financial interest in FTC matters in which Jones Day represented a party and recused myself in such matters, as petitioners note. (Petition, page 3 ¶ 8-12). After my husband relinquished his equity interest in the firm’s income, I began to consider participating in FTC matters in which Jones Day represented a party, in consultation with the FTC’s Ethics Official. FTC staff and I continue to actively monitor FTC filings and public appearances, as well as any public statements that we may see, to determine whether Jones Day is involved in FTC matters.

The final point helps to explain the petitioner’s oh-so-sinister assertion, duly quoted by Frank, that Majoras had recused herself from cases involving Jones Day before, but not this time . . . .

At any rate, I just thought I might keep the record straight for the blawgosphere.

A trio of Federal Trade Commission economists (Christopher Taylor, Paul Zimmerman, & Nicholas Kreisle) have revisited Justine Hastings’ 2004 AER analysis of the ARCO/ Thrifty vertical merger in their paper, “Vertical Relationships and Competition in the Retail Gasoline Market: Comment.”  (HT: Danny Sokol).  Hastings’ analysis is viewed as particularly important because it is one of the few empirical results that suggests that vertical integration is associated with lower retail prices and that regulations restricting vertical integration might improve welfare.

The FTC economists  challenge both the underlying empirical results using a similar differences in differences methodology and also take a closer look at the welfare implications of Hastings’ theoretical model.  Their conclusion:

According to Hastings’ analysis of the W-L data, the ARCO/Thrifty acquisition increased prices at nearby competing stations by $0.05 per gallon, on average. Our analysis of the OPIS data provides a very different estimated price effect of this transaction, suggesting that if there was any price effect, it was an order of magnitude smaller. In a number of instances we cannot reject the hypothesis of no effect at standard levels of significance. While we used a different data set, we have found no reason that would explain this discrepancy. Regardless of which data set more accurately depicts the transaction’s actual impact on prices, our theoretical analysis reveals some difficulties in inferring welfare effects from price changes when consumers attach value to particular brands of gasoline.

This sort of merger retrospective work is very important for formulating competition policy and regulation that is well grounded in both theory and evidence.  As the FTC authors notes, however, their is still a significant shortage of this type of work.  For those interested in the state of evidence on vertical integration, Francine Lafontaine and Margaret Slade also recently published a survey on the topic in the Journal of Economic Literature (available here).

A few days ago, I posted a comment about Starbucks’ recent disclosure that its average per store traffic has gone down slightly even though overall profits have gone up. I suggested a number of explanations for these phenomena consistent with a story that consumer taste for the Starbucks product has not diminished. One of these explanations was that Starbucks makes its product available to non-Starbucks retailers and that consumers may be turning increasingly to these other retailers. That is, consumers could be shifting away from Starbucks stores rather than away from the Starbucks product. In passing, I observed that Starbucks’ distribution of its product to non-Starbucks stores is proconsumer and belies the accusations of some opportunistic competitors who claim that Starbucks’ business model is anticompetitive.

Yesterday, Stephen Bainbridge helpfully pointed out that Starbucks owns its stores and does not franchise them (correcting my reference to Starbucks “franchisees”). At the same time, Stephen also notes that Starbucks does license holders of otherwise inaccessible real estate to sell Starbucks products, an arrangement that is economically indistinguishable from franchising. I appreciate this clarification from Stephen. But I also should say that the analysis and conclusions in my original post do not turn on the distinction between Starbucks owning or franchising its stores. The important point is that the Starbucks product is available at other places besides Starbucks stores, such as at Barnes & Noble. Whether these alternatives are created by franchise or license is immaterial. Stephen does not dispute my conclusion that the antitrust allegations against Starbucks are without merit. And though he presents the point as “a problem with [my] analysis,” Stephen’s correction is, as Josh explains, really factual rather than analytical.

Leaving aside the issue of why traffic is down at Starbucks stores, Stephen raises (or rather recycles from a superb earlier posting he wrote back in 2003) the important question of why some firms like Starbucks choose to own their own stores (i.e., to vertically integrate) while other firms such as Subway choose to franchise. Many great minds have weighed in on this question over the years, beginning (at least implicitly) with Ronald Coase’s great 1937 essay “The Nature of the Firm” (which uses variation in transaction costs to explain a firm’s choice between internal and external contracting) and continuing most recently with Josh’s and Larry Ribstein’s excellent postings in response to Stephen.

I wish to add here only one point to the analysis. Whatever its economic benefits, vertical integration has the added virtue that it can reduce a firm’s exposure to certain types of antitrust claims. While a franchisor and franchisee can be sued under Section 1 of the Sherman Act for anticompetitive vertical restraints (such as vertical price fixing or other forms of restricted distribution such as territorial restraints), a single firm or a parent and its wholly owned subsidiaries are immune from such suits under the Supreme Court’s Copperweld decision, which held that a firm cannot conspire with itself for purposes of satisfying the conspiracy element of Section 1. At the same time, even while reducing exposure under Section 1, vertical integration by a firm with an already high market share can increase the firm’s exposure to a monopolization (or attempted monopolization) claim under Section 2.

The antitrust factor may well be one explanatory variable in Starbucks’ decision to own its stores rather than franchise them and Subway’s decision to franchise rather than own. Starbucks has a high and growing market share in the market for retail coffee, particularly if one defines the product market narrowly to include only “high end” coffee. It is plausible that a court could find it to have some degree of “market power” (though not “monopoly power”) in this market, which makes it vulnerable to Section 1 claims with respect to its arms’ length, vertical arrangements. Owning its own stores reduces that exposure, and since the stores have been owned from the start rather than acquired later there isn’t an apparent act of monopolization that would increase the firm’s exposure under Section 2. Subway, by contrast, seems much less dominant in its product space and indeed may not even have “market power” at all. If that is right, then Subway would benefit from vertical integration much less than Starbucks does–at least from an antitrust perspective.

Needless to say, other factors may well be at work besides the antitrust factor, as Josh, Larry, and Stephen ably suggest. My point here is only to add antitrust as another variable that may well explain firm franchising behavior in some range of cases.

Traffic at Starbucks shops open for 13 months or more is down one percent. Does this mean that the public is finally losing its appetite for Starbucks? Not necessarily.

While traffic is down, profits are up. Thus a more likely explanation for the new data is the firm’s price increase last summer rather than a change in consumer tastes. Another possibility is that even if demand *per store* is down, overall demand could still be constant or even up, given that Starbucks is always opening new stores whose sales to some extent dilute the revenues of existing stores. A third factor that may explain things, and this is the one that I want to focus on because it is of interest to antitrust lawyers, is that Starbucks stores do not enjoy exclusivity in the sale of Starbucks coffee.

You can go into a Barnes & Noble and other non-Starbucks stores and find a cafe selling “Starbucks coffee” even though the seller isn’t a Starbucks. The coffee itself and the surrounding atmosphere at such cafes (complete with their wireless hotspots to go with the lowfat lattes) are in many cases close to perfect substitutes for Starbucks stores. Sales at such places, if they are increasing at an ever faster rate, may well be diluting sales at Starbucks stores and hence may well account for the new data.

Starbucks’ willingness to sell its product widely rather than reserve it exclusively for its full-service franchisees suggests to me that the firm is competing aggressively in an “output enhancing,” pro-consumer way, rather than seeking to find ways to reduce output and raise price, as some opportunistic antitrust plaintiffs have erroneously alleged.

All therefore seems well for the Starbucks franchise–even if, as Jackie Mason has quipped, it is a bit much to ask customers both to clean up after themselves and also to leave a tip!

Yet another major airline merger appears to be in the works: United and Delta. This calls for some antitrust analysis. A few months ago, Thom did a thorough job analyzing the antitrust aspects of AirTran’s proposed takeover of Midwest. The key point in Thom’s analysis was that assessment of an airline merger’s economic effects properly centers not on the merging parties’ overall market shares but rather on the extent to which the two firms compete head-to-head.

United and Delta are large carriers, the second and third largest in the industry. If one uses overall industry market shares to calculate HHI in the merger analysis, the transaction would seem presumptively unlawful. But if one looks at the actual routes on which the two airlines compete and the level of competition currently present on those routes from other carriers, the picture may look very different. If it is the case that the two firms now compete head-to-head only (or largely) on routes that are are served by a large number of carriers, then the firms’ high overall market shares may not matter very much.

That said, a note of caution. In a major airline asset acquisition some years ago, American/TWA, the firms argued that the transaction should be permitted on the ground that TWA (then in bankruptcy) was a “failing firm” and that therefore the transaction’s effect on HHI was not dispositive. The enforcement authorities (wrongly) bought into this argument and permitted the transaction, even though TWA’s airplanes would not have “left the industry” (the relevant standard under a failing firm theory) if they had been sold to the second highest bidder rather than to American. Commercial airplanes are a long term, durable capital good that can’t easily be converted into other uses. Sure TWA’s creditors wanted to maximize the value of TWA’s assets. But that’s not a reason to relax the requirements of antitrust law any more than it would be to permit a bankruptcy debtor to violate the Clean Water Act.

As with TWA, neither United’s nor Delta’s planes will disappear from the market if the deal is blocked, nothwithstanding the firms’ recent bankruptcies and the financial woes that chronically plague the industry. The United/Delta deal should be assessed solely on the basis of its competitive effects. The failing firm argument has no place here, and the parties should not assume that the enforcement authorities will treat them as generously as they treated American and TWA.

I’ve done some more thinking about my recent post on the problems associated with claims that infer greater antitrust enforcement quality solely from enforcement activity and come to the conclusion that my post oversimplified matters. I remain rather skeptical about this inference but wanted to highlight some of the nuances in the debate that I skimmed over in the previous post. In the spirit of highlighting some of these issues, and because I’ve always wanted to try one of these posts, here’s a hypothetical dialogue between myself (JW) and an anonymous economist with a more interventionist bent (AE) in the spirit of highlighting some of the complexities of the potential link between enforcement activity and consumer welfare:

JW: The inference that consumers are better off where antitrust activity is higher doesn’t make much sense to me. For starters, there is too much noise in the data. We’re talking about very small changes in aggregate enforcement rates over time and it is difficult to assign meaning to these changes. Also, antitrust enforcers make errors from time to time and those errors can make consumers worse off. I’m especially concerned with false positives and deterring pro-competitive conduct. Fear of antitrust liability, treble damages, and follow-on private litigation can add up to quite a deterrent. So who’s to say that more is better?

AE: I see where you’re going with this. But can you name a Section 2 case that you don’t think is a “false positive”? But more to the point, there’s no avoiding that there is plenty of noise in the data. But there is an even bigger problem with making the move from activity level to quality than that. The mix of conduct and deals the antitrust agencies see over any given time period is endogenous to their enforcement decisions. That is, profit-maximizing firms condition their behavior accordingly to the enforcement standards they observe. This means that we should pretty much always see a constant fraction of cases that require “borderline” judgments with respect to enforcement. If that’s true, deviations from average enforcement levels don’t tell us anything about whether enforcement is high or low in an absolute sense. It only tells us that enforcement is high or low relative to expectations.

JW: So it sounds like you’re agreeing with me that we can’t use activity levels to say that more enforcement is good as a general matter?

AE: Not so fast. You can always use more than the activity level to make that sort of inference. That is exactly what Baker & Shapiro do in the paper you blogged about previously — they use enforcement levels by enforcers with a non-interventionist history and rhetoric to say something about levels as actual enforcement deviates from expectations. So, yes, I agree you cannot use activity level alone, but that doesn’t mean you can’t say anything about whether more enforcement would be a good thing if you can gauge deviations from expectated levels of enforcement.

JW: Ok. That’s fair enough. But I don’t know whether those deviations are good or bad for consumers. Isn’t that what we are really talking about here? For instance, I might agree with you that unexpected deviations toward greater enforcement efforts against hard core cartels would consistently produce consumer welfare benefits. But who says more enforcement means more enforcement against cartels, which we know harm consumers most of the time, rather than more enforcement against single firm conduct, which we know much less about in terms of competitive effects? If more enforcement means a substitution of resources away from cartel enforcement and toward single firm conduct I would think that we might see more false positives and lower consumer welfare as a result. In other words: More enforcement, higher prices.

AE: Yes, it’s certainly possible. But I doubt it. As long as the average enforcement action produces benefits for consumers, more is better even if the mix of cases changes. I think this is probably true for all types of antitrust intervention. You think this is true for cartels, less true for mergers, and probably not true for single firm conduct. That’s the difference. You’re just wrong about the last two.

JW: We’ll at least we both know who is wrong. And I think we’ve identified where we part ways here. But let me raise one more issue. My public choice theorist colleagues at George Mason will be very upset if I don’t also raise the point that there are other factors that are likely to determine where and what types of cases we see if antitrust activity increases. It is not too much of a stretch to imagine that decisions to increase antitrust enforcement might not be based solely on consumer welfare considerations rather than private incentives of those within the agencies, political factors, and other things that may be negatively correlated to consumer outcomes. For examples, the antitrust ambitions of a few presidential candidates who have pinpointed industries of antitrust concern come to mind …

AE: The public choice angle is interesting. But I’m not quite sure it supports your argument that more enforcement means more single firm enforcement and less resources for cartel enforcement. I’ll have to think about that. Two more points that make this a bit more complicated that we haven’t considered yet. You’ve ignored the possibility that there may be increasing returns to scale over the relevant range in antitrust enforcement as agency officials learn better how to detect, prosecute, and remedy violations. Also, current antitrust enforcement appears to be dedicating lots of resources to cartel enforcement and little to single firm enforcement. Doesn’t this mean that the marginal benefit of devoting resources to single firm cases is higher than for cartel cases?

JW: Not if the marginal benefit from cartel cases is greater than zero! I’m kidding. These are both interesting points. But where’s the evidence that there is increasing returns to scale in antitrust enforcement or that single firm enforcement has on average produced consumer welfare gains? Obviously, some good cases exist. We’re talking averages here. But one can easily imagine that any benefits from good single firm cases could be swamped by the social costs imposed by false positives. This seems to be where we part ways on this subject: I worry that the average impact of more enforcement in the single firm category over time might drag the average below zero and make consumers worse off, while you believe that the averages are all positive for all types of intervention and so don’t lose any sleep when the agencies get more active.

AE: That sounds about right. But lets not forget that your assertions about false positives aren’t support by a great deal of empirical evidence either! I know, I know, you it is really hard to measure a reduction in competitive conduct we don’t see. But still, lets agree that we’re both dealing mostly with anecdotal evidence here. So the real question is who has the burden of persuasion here, isn’t it?

JW: Obviously, you do! I guess we’ll have to agree to disagree on that point for now. We’ve got to leave something to talk about next week.

The New York Times isn’t the only one calling for the FTC to go after Intel for its purportedly exclusionary discounting. The reliably interventionist American Antitrust Institute concurs. In a recent letter to the FTC, it wrote:

Based on allegations by AMD [Advanced Micro Devices] in a private U.S. case and on what we have been able to learn about the [European Commission’s] complaint (the details of which are not yet public), not to mention a settlement in Japan and an ongoing investigation in Korea, there seems to be substantial reason to worry about Intel’s rebate policies, in particular, which appear to be fashioned for the purpose of keeping Original Equipment Manufacturers [i.e., computer makers] from switching orders to a chip that, on the merits, they may prefer to purchase from AMD. The U.S. government — especially the FTC — should reclaim its traditional role as the leading antitrust enforcer, especially when it is two U.S. corporations that are involved and the rest of the industrialized world is so concerned.

Let’s unpack this. It seems AAI is saying that the FTC should pursue action against Intel because (a) one of Intel’s competitors sued it under the antitrust laws, and (b) several foreign antitrust authorities have gone after Intel’s rebate policies. AAI apparently assumes that, since others have complained, Intel must have done something wrong in offering its rebates (which are, of course, retroactive price cuts). Or perhaps the AAI subscribes to the view — recently challenged by Josh — that more antitrust intervention equates to better antitrust intervention. Or perhaps both. AAI’s not real clear on why Intel’s rebates are anticompetitive.

Its recent working paper on the Intel matter doesn’t clarify much. In that paper, AAI Senior Fellow Norman Hawker contends that similarities between Intel and Microsoft in terms of market position and conduct establish that Intel’s rebates have harmed competition and injured consumers (just as Microsoft’s conduct purportedly did). Hawker explains:

[1] Intel dominates the PC chip market almost to the same degree that Microsoft dominates the PC operating system (OS) market (many refer to the two companies collectively as “Wintel”). [2] As in the Microsoft case, Intel’s aggressive marketing tactics prevented OEMs from offering rival products to consumers. [3] And like Microsoft, Intel has engaged in this conduct to maintain its existing monopoly. [4] Microsoft’s conduct served as the basis for two antitrust actions by the United States Department of Justice. (It should also be noted that the EU’s Court of First Instance has upheld the European Commission’s decision that Microsoft abused its dominant position by refusing to supply competitors with information needed for interoperability of their products and by tying the Windows Media Player to the Windows OS.) [5] These parallels between Microsoft and Intel suggest that Intel’s anticompetitive practices harm consumers, including American consumers, by denying them access to innovative products at lower prices from rivals.

So let me get this straight: [1] Both Microsoft and Intel are the biggest players in the markets in which they participate. [2] Both Microsoft and Intel have acted aggressively to get their customers to buy their products. [3] Both Microsoft and Intel have undertaken these aggressive efforts to sell their wares in order to avoid losing business to rivals. [4] Microsoft was sued by U.S. and EU regulators. [5] Ergo, “Intel’s anticompetitive practices harm consumers, including American consumers, by denying them access to innovative products at lower prices from rivals.”

This, my friends, is what we call a non-sequitur.

Just because Microsoft and Intel are both successful and aggressive does not mean that Intel’s “aggressive marketing tactics” — price cuts given to loyal computer manufacturers and passed on to PC buyers — bear any resemblance to Microsoft’s challenged behavior. And if they don’t, the similarities Hawker cites are just irrelevant. Lawyers are familiar with the notion of a distinction without a difference. Well, this the flip-side: similarities without significance. Moreover, a great many of the practices for which Microsoft was sued (e.g., the company’s decision to include in its operating system a media player — something practically all customers want) did not “harm consumers,” the claims of protectionist European regulators notwithstanding. Thus, AAI’s argument by analogy fails.

More importantly, AAI’s position is inconsistent with both theory and evidence. First, theory. AAI’s (and AMD’s) claim is that Intel’s discounts and rebates preclude better, cheaper AMD products from making their way to market. In AAI’s words, Intel’s loyalty discounts “harm consumers, including American consumers, by denying them the access to innovative products at lower prices from rivals.” The claim here is that AMD is a more efficient producer than Intel but is unable to persuade OEMs to use its processors because doing so would cause them to lose out on Intel’s discounts. But if AMD is truly a more efficient producer than Intel, then it ought to be able to match any Intel discount, as long as Intel is still pricing above its own cost. Put simply, an above-cost discount — even one that’s offered in exchange for loyalty — can always be matched by an equally efficient rival. Given the lack of any serious evidence of predation (below-cost pricing) on Intel’s part, AMD ought to be able to compete with Intel’s discounts by lowering its own prices.

And what about the actual evidence on consumer welfare? It would suggest that price competition is vigorous in the market for processors and that Intel’s discounts — far from monopolizing the market and leading to higher prices — are benefiting consumers. Consider, for example, this graph showing price changes on Intel’s Quad Processors. (The graph shows a steep decline during a period of purported monopolization.) How about this one showing the price trend on AMD Athlon 64 Processors (yet another steep price decline). Look here to see some combined AMD / Intel price data (again, downward price trends). And note that, by AMD’s own account (see paragraphs 33 and 34 of its complaint), Intel’s allegedly exclusionary discounting is accompanied by increasing operating margins — an observation that’s inconsistent with any claim that Intel is in the first stage of a predatory pricing scheme. I’m sorry — can you remind me how consumers are being harmed here?

Now obviously this is not a rigorous econometric analysis. It could be that prices would have fallen even faster absent Intel’s loyalty rebates. But in light of these downward trends in prices, the burden would seem to rest on AMD, AAI, and the foreign regulators to point to something solid — empirical evidence, a credible theory about how efficient rivals could be excluded, … something more than some minor similarities between Microsoft and Intel — that would justify government intervention into a discounting program.

The FTC is quite properly staying its hand on this one.

(HT: Danny Sokol)

I just wandered down to the local Panera Bread for lunch and picked up someone’s discarded copy of today’s New York Times. One of today’s editorials, F.T.C. Goes AWOL, claims that the Federal Trade Commission “clearly shares the ’starve the regulators and coddle industry’ philosophy that has driven the Bush administration for seven years.” The evidence? The FTC’s refusal to open a formal investigation into Intel’s loyalty discounts, which are offered to computer makers that minimize the use of processors made by Intel’s rivals.

In the discarded print edition I found at Panera, the editorial complains that “The United States Fair Trade Commission is still holding back from opening a formal inquiry into the company’s practices.” Of course, the United States doesn’t have a “Fair” Trade Commission. Instead, we have a “Federal” Trade Commission. A Fair Trade Commission might well focus its efforts on protecting small competitors, thus restricting aggressive competition by big companies so that little companies can stay in the game. Our Federal Trade Commission, by contrast, keeps its eye on consumers. Given that the complained of behavior here — discounting — offers an immediate benefit to consumers, our Federal Trade Commission is reluctant to intervene. That’s how it should be.

The New York Times worries that big bad Intel could use its discounts to “lock[] out smaller rivals that may have better products with new features or lower prices” — in other words, that Intel’s discounts could foreclose sales opportunities for more efficient rivals. But, assuming the discounts result in prices that exceed Intel’s costs, they could not do so. Any rival that’s as efficient as Intel could match the company’s non-predatory (i.e., above-cost) discounts. Thus, the only reason to stop Intel from lowering its prices in exchange for loyalty would be to protect less efficient rivals who, because of their higher prices and/or inferior quality, could not match Intel’s price cuts. A Fair Trade Commission might take that tack. A consumer-focused Federal Trade Commission would not.

(Note: When I checked the New York Times’ online edition a few minutes ago, the text had been corrected to read “Federal” Trade Commission.)