I’m very pleased to announce that my first book editing project (along with my colleague Lloyd Cohen), Pioneers of Law and Economics, is available on-line from Edward Elgar Publishing.  The book includes a series of specially commissioned essays designed to honor the founders of the law and economics enterprise.  From the book:

The editors of the volume embrace a view of the field that is inclusive not only of a broad range of issues, but also of economic methods. Celebrated here are the founders of law and economics as well as economic theorists, public choice scholars, lawyers and judges who applied economic insights to the law and legal institutions. They include: Ronald Coase, Aaron Director, George Stigler, Armen Alchian, Harold Demsetz, Benjamin Klein, James Buchanan, Gordon Tullock, Henry Manne, Richard Posner, Gary Becker, William Landes, Richard Epstein, Guido Calabresi, Frank Easterbrook, Daniel Fischel, Steven Shavell and A. Mitchell Polinsky. Contributors to the volume include other pioneers, former students and clerks, colleagues, and influential scholars in the field.

Scholars and students working in the tradition of law and economics, as well as those in the fields of economics, law and public policy will find the book an essential reference for this important area of scholarship.

Many thanks to the excellent list of contributors who devoted their time and energy into this project!

1. Ronald H. Coase
Thomas W. Hazlett

2. Aaron Director Remembered
Stephen M. Stigler

3. Aaron Director’s Influence on Antitrust Policy
Sam Peltzman

4. George J. Stigler and his Contributions to Law and Economics
Harold Demsetz

5. The Enduring Contributions of Armen Alchian
Susan Woodward

6. Harold Demsetz
Mark F. Grady

7. Benjamin Klein’s Contributions to Law and Economics
Joshua D. Wright

8. Buchanan and Tullock on Law and Economics
Robert D. Tollison

9. Henry Manne
Larry E. Ribstein

10. Gary Becker’s Contributions to Law and Economics
John F. Pfaff

11. Pioneers of Law and Economics: William M. Landes and Richard A. Posner
Thomas S. Ulen

12. Putting Law First: Richard Epstein’s Contribution to Law and Economics
Andrew P. Morriss

13. Calabresi’s Influence of Law and Economics
Keith N. Hylton

14. Easterbrook and Fischel
Katherine V. Litvak

15. The Path Breaking Contributions of A. Mitchell Polinsky and Steven Shavell to Law and Economics
Nuno Garoupa and Fernando Gomez-Pomar

If you are a student, teacher, producer or consumer of law and economics scholarship this is a great volume for you.  With the exceptions of the Peltzman and Stigler essays on Aaron Director from the recent Journal of Law and Economics tribute Buy the book, these are all original essays written for the purposes of this collection.  You can buy the book here.

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

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

Available here.  An excerpt:

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

David Evans is Head, Global Competition Policy Practice, LECG; Executive Director, Jevons Institute for Competition Law and Economics, and Visiting Professor, University College London; and Lecturer, University of Chicago.

I’d like to propose a contest for the greatest intellectual embarrassment of antitrust. Let me name the first contestant—tying, which some of you know has been one of my favorite for years. Here’s why. First, there is no persuasive theoretical or empirical evidence that tying is a business practice that is likely to harm consumers.  (This is not the blog to deal with Professor Elhauge’s provocative paper except to say that it does not alter this view.)  There is work that says it could be, under stringent conditions, and one can point to cases where maybe the practice has been used in a harmful way.  Yet the courts have put tying in the same antitrust category as price fixing when done by a firm with some market power.   Second, the courts, lacking any analytical framework for detecting bad behavior, have developed a mechanical test for tying that doesn’t have any connection whatsoever to any of the plausible theories of when and why tying might be bad.  The test leads to false positives almost by design.  Third, tying has led to one of the most ridiculous antitrust remedies of all time—namely the  European Commission’s insistence that Microsoft expend effort creating and offering a product–a version of Windows that didn’t include Microsoft’s media player technology—that no one wants. Now, I understand that others will have their own candidates. But to beat mine your challenge is you must show a complete lack of theoretical or empirical support; a really bad legal test; and a remedy that better demonstrates the bankruptcy of the law.   The challenge is on.

Alden Abbott is Associate Director, Bureau of Competition, Federal Trade Commission. The views expressed below are solely attributable to the author. They do not necessarily represent the views of the Federal Trade Commission or of any individual Federal Trade Commissioner.

As I indicated in my prior blog entry, U.S. competition policy vis-à-vis single firm conduct (”SFC”) is best viewed not in isolation, but, rather, in the context of other jurisdictions’ SFC enforcement philosophies, and efforts to promote greater SFC policy convergence worldwide.  Given the proliferation of competition law regimes, firms that do business in multiple jurisdictions either may have to:  (1) tailor their business plans (marketing and distributional arrangements, joint ventures, pricing policies, etc.) nation-by-nation to satisfy differences in national competition laws (an approach rife with transactions costs); or (2) adopt a single set of policies that meets the competition law requirements of the “most restrictive” jurisdiction (an approach that could yield selection of a “less than optimally efficient” business plan).  A further complication is caused by transactions whose effects spill across jurisdictional boundaries; a transaction that found favor in one jurisdiction may not find favor in other jurisdictions.  To add to the policy complexity, as private rights of action proliferate around the globe, difficult jurisdictional questions and conflict of law issues may be posed in the future; the greater the divergence among antitrust regimes, the higher will be the costs imposed on businesses associated with (ideally) avoiding and (if necessary) ironing out such complications.  Thus, even though there may be good policy justifications (associated with differences among nations in procedure, private enforcement, and other local factors) for some continued differentiation among national competition regimes – reasons that David Evans (see http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1342797) and others have ably expounded upon – there is a sound basis for efforts (rooted in business efficiency and transactions cost avoidance) to promote gradual convergence and thereby avoid the greatest burdens arising from multinational disharmony in this field. Read the rest of this entry »

William Page is a Marshall M. Criser Eminent Scholar in Electronic Communications and Administrative Law at the University of Florida, Levin College of Law.

The DOJ’s Section 2 Report speaks in general terms about the costs and benefits of various remedies for monopolization. It prefers “prohibitory” remedies, but holds open the possibility of “additional relief,” including “affirmative-obligation remedies. The Report specifically mentions the protocol-licensing requirement of the Microsoft final judgments (§ III.E, entered in November 2002) as an example of a challenging and controversial affirmative-obligation remedy. In this post, I’d like to comment on the protocol-licensing program and its implementation. In doing so, I draw on my previous work with Jeff Childers, particularly Software Development as an Antitrust Remedy: Lessons from the Enforcement of the Microsoft Communications Protocol Licensing Requirement, and Measuring Compliance with Compulsory Licensing Remedies in the American Microsoft Case.

Section III.E requires Microsoft to “make available” to software developers the communications protocols that Windows client operating systems use to interoperate “natively” with Microsoft’s server operating systems in corporate networks or on the Internet. The short-term goal of the provision is to allow developers to write applications for non-Microsoft server operating systems that can interoperate as easily with Windows client computers as can software written for Microsoft’s server operating systems. The long-term goal is to preserve, in the network context, the “middleware threat” to the Windows monopoly. The idea is that middleware applications running on non-Microsoft servers might become a rival platform that could erode the “applications barrier to entry” as Netscape and Java had threatened to do.

Judge Kollar-Kotelly placed special emphasis on this provision as the “most forward-looking” one in the final judgments. It was, she believed, necessary to assure that the other provisions do not become “prematurely obsolete” as computing moves to corporate networks and the Internet. In practice, however, the provision has done little to advance the goals of the decree. Equally important, as I explain below, its implementation (by two sets of plaintiffs, with the aid of a Technical Committee and technical consultant) has been Kafkaesque. Read the rest of this entry »

Tim Brennan is a professor of public policy and economics at UMBC and a senior fellow with Resources for the Future (RFF).

When I first started working in antitrust at the Justice Department over thirty years ago—there’s a hard reality to accept—the Antitrust Division was then embroiled in an effort to reform the regulation of oil pipelines. The argument on this now obscure issue was that effective prevention of the exercise of market power by natural monopoly pipelines required both clear pricing standards and effective separation of control of the pipeline capacity from the shippers who often owned the pipeline as well. Among other things, this led the Division to take an active role in the proceeding to set the rates to send oil through the Trans-Alaska Pipeline.

This largely forgotten issue had a much more consequential successor—the AT&T divestiture in 1984, settling an antitrust case filed a decade before. That case took the hard line that to prevent anticompetitive abuses, regulated monopolies and competitive services that rely upon them should rest in completely separate companies. Although the 1996 Telecommunications Act superseded that settlement, the principle of separating control of regulated assets from firms that compete in services that use those assets survives. The prominent example is electricity. Many state regulators ordered local distribution utilities to divest power plants, and federal regulators require that power transmission be supplied by regional organizations independent of the control of the competing generators that use them.

When Assistant Attorney General William Baxter announced the AT&T divestiture in 1982, he also announced that he was dropping, with prejudice, the even older antitrust case against IBM. The distinction was that AT&T operated in both regulated and unregulated sectors, while IBM did not. AT&T had an incentive to evade regulatory price constraints by creating an artificial competitive advantage by impeding its competitive market rivals’ access to its local service monopolies (“discrimination”). Moreover, depending on the form that regulation might take, the ability to shift costs from unregulated to regulated sectors may allow cost shifting enable a regulated firm may to make predatory threats credible (“cross-subsidization”). In the old AT&T case, this was called “pricing without regard to cost”.

Mr. Baxter’s distinction rested on the crucial point that regulation is a complement to antitrust, not a substitute. Absent regulation, refusals to deal are not presumptively harmful, and may be beneficial, while predatory threats are notoriously difficult to validate. This is why Mr. Baxter, no great hero to antitrust activists, famously pledged to litigate U.S. v. AT&T “to the eyeballs.” Read the rest of this entry »

William Kolasky is a partner in WilmerHale’s Regulatory and Government Affairs Department, a member of the firm’s Antitrust and Competition Practice Group, and a former Deputy Assistant Attorney General in the Antitrust Division at the Department of Justice.

The market power section of the Department’s Single Firm Conduct report is one of the strongest sections of the report.  It provides an exceptionally clear discussion of the market power element under Section 2.  It recognizes, in particular, that a violation of Section 2 requires more than mere market power, but rather a finding of substantial and durable market power – “an extreme degree of market power” as the Fifth Circuit expressed it in Beauville v. Federated Dep’t Stores.

In addition, the report make a persuasive argument that agencies and courts should rely principally on market shares and entry conditions as the primary means of evaluating whether a firm has monopoly power or a dangerous probability of achieving it.  As the report notes, courts often say that monopoly power can also be shown through direct evidence, but when one examines those decisions, one finds that courts almost never (and perhaps never) find monopoly power or a dangerous probability in section 2 cases without first finding that the firm has a very large market share.  Even in section 1 cases, while the Supreme Court held in NCAA and Indiana Federation that market power can be shown by direct evidence “without a detailed market analysis,” in both cases the defendants’ market shares of the likely relevant market were very high.

The report explains quite persuasively the problems with relying on direct evidence as a basis for finding monopoly power.  One type of direct evidence that is frequently mentioned are large price-cost margins, but as the report notes the economics literature raises serious doubt as to whether one can infer anything about the presence or absence of monopoly profits from a company’s profits as reported in its accounting records.  Similarly, while some have suggested that the presence of price discrimination might be used to infer monopoly power, most economists now recognize that price discrimination is common in markets in which firms do not have durable, long-run monopoly power.

In this regard, the Justice Department’s views appear consistent with those of the FTC staff, at least as reflected in the FTC staff reports that the FTC has posted on its website.  What both agencies seem to believe is that direct evidence may be useful in addition to, but not as a substitute for, an examination of market structure and entry conditions.

Josh Wright is a Professor of Law at George Mason Law School, a former FTC Scholar in Residence and a regular contributor to Truth on the Market.

The primary anticompetitive concern with exclusive dealing contracts is that a monopolist might be able to utilize exclusivity to fortify its market position, raise rivals’ costs of distribution, and ultimately harm consumers.  The unifying economic logic of these anticompetitive models of exclusivity is that the potential entrant (or current rival) must attract a sufficient mass of retailers to cover its fixed costs of entry, but that the monopolist’s exclusive contracts with retailers prevent the potential entrant from doing so.   However, the exclusionary equilibrium in these models are relatively fragile, and the models also often generate multiple equilibria in which buyers reject exclusivity. At the exclusive dealing hearings where I testified, a sensible consensus view emerged that a necessary condition for exclusive dealing or de facto exclusive contracts such as market-share discounts or loyalty discounts to cause competitive harm is that they deprive rivals of the opportunity to compete for access to distribution sufficient to achieve minimum efficient scale.  The Report (p. 137) reflects this consensus:

In particular, exclusive dealing may be harmful when it deprives rivals “of the necessary scale to achieve efficiencies, even though, absent the exclusivity,” more than one firm “would . . . be large enough to achieve efficiency.”68 In other words, exclusive dealing can be a way that a firm acquires or maintains monopoly power by impairing the ability of rivals to grow into effective competitors that erode the firm’s position. As one panelist put it, “the exclusive dealing case that you ought to worry about” is where exclusivity deprives rivals of the ability to obtain economies of scale.

The Report also goes on to note the competitive justifications for exclusive dealing, ranging from the variety of ways in which exclusive dealing can prevent free-riding, facilitate relationship-specific investments, and intensify manufacturer competition for scarce retailer shelf space or access to distribution with the benefits of that intensified competition passed on to consumers in the form of lower prices or higher quality.

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

Still, we find ourselves between battling theories.  The standard error cost approach to this problem, an approach discussed by many in this symposium as a powerful tool to ensure that our liability rules do not do not needlessly harm consumers by overdeterring pro-competitive conduct or under-deterring anticompetitive conduct, is to turn to the evidence.  What do we know about the incidences of anticompetitive exclusive dealing and de facto exclusive dealing contracts?  The question is not one of the logical validity of any of the competing theories.  It is one of their empirical (and therefore policy) relevance.  A sensible approach to designing antitrust liability rules for exclusive dealing would be to design a conduct-specific standard sensitive to the particular relative risks of Type I and Type II errors informed by the best available existing evidence.  Of course, it should be noted that more evidence is always better and there is certainly a need for more empirical research about single firm conduct.  But the limited nature of the evidence does not mean we have zero information to update our priors on the critical policy question.

So what does the evidence say?  What approach would it lead to?  And how does that approach compare with that endorsed in the Section 2 Report?  I’ll focus on those issues in the remainder of the post. Read the rest of this entry »

Tim Brennan is a professor of public policy and economics at UMBC and a senior fellow with Resources for the Future (RFF).

As evidenced by this on-line symposium, the handling of cases under the rubrics “monopolization,” “single firm conduct”, or “abuse of dominance” continues to be debated by the competition policy community. This debate, as evidenced by the Antitrust Division’s Sept. 2008 single firm conduct report and the FTC responses, is not restricted within the U.S. The European Union has published “Guidance Papers” on standards for exclusionary conduct under Article 82, and the Canadian Competition Bureau recently issued draft guidelines for prosecuting conduct under the abuse of dominance provisions of Sec. 79 of its Competition Act.

Almost any significant antitrust case will engender controversy over the facts, e.g., damages resulting from cartel conduct or market definition for mergers. The controversy over single firm conduct runs deeper. Much of this contention arises because the direct focus of the conduct, harm to rivals, is also the byproduct of vigorous competition. Despite everyone having learned to utter the mantra “protect competition, not competitors,” we find a line drawn between two sides. To caricature the bifurcation only slightly, one side, which I’ll call the skeptics, would set the burden of proof very high, with harms to competitors presumptively competitive. The other, here called the activists finds enforcement lax, is more willing to protect competition by protecting competitors.

I propose to resolve the controversy by positing that both sides are right-but within separate categories of monopolization cases. Read the rest of this entry »

Howard P. Marvel is Professor of Economics in the Department of Economics and Professor of Law in the Moritz College of Law, both at The Ohio State University.

Exclusive dealing prevents the bait-and-switch behavior by dealers who convert customers drawn by one brand to the products of its rivals. Despite the red flag of “exclusive” in its title, the practice is ordinarily uncontroversial, indeed innocuous. Automobile manufacturers often pay incentives to encourage dealers to deal exclusively in their vehicles. Business format franchising ensures that large swathes of distribution are exclusive. And when exclusive dealing is denied to suppliers, the results can be catastrophic, as when the FTC massacred those manufacturers of hearing instruments that relied on exclusive dealers. The FTC sued five such firms for exclusive dealing, four of which agreed to drop it, and promptly died.

When does exclusive dealing represent a problem? When distributors that sign exclusive dealing arrangements are the only way for rival suppliers to get to market.  Thus, the Section 2 Report says that the analysis of exclusive dealing begins with a determination “whether the arrangement has the potential to harm competition and consumers. In situations where competitive harm is implausible-for instance, where other efficient distribution methods are available in sufficient size and number to rivals-courts appropriately uphold the arrangement.” (at 140)

Read the rest of this entry »

Daniel Crane is a Professor of Law at Cardozo Law School (soon to be at University of Michigan Law School).

Bundled discounts have been one of the hottest monopolization topics of the last decade. Much of the trouble began with the Third Circuit’s en banc decision in LePage’s v. 3M, which reversed an earlier 2-1 panel decision which in turn had overturned a plaintiff’s jury verdict largely based on 3M’s bundled discounts. After the Solicitor General’s amicus curiae brief asked the Supreme Court to deny cert on the grounds that there wasn’t sufficient scholarship on bundled discounts, there was a flurry of legal and economic scholarship, the overwhelming majority of which was highly critical of LePage’s.

Over the past five years or so, it seemed that a consensus was emerging that some sort of discount reallocation or attribution test should be used as a screen in bundled discounting cases. There are various formulations of the test, but in general it requires the plaintiff to show that defendant priced the competitive product below cost after the discounts on the non-competitive product are reallocated to the competitive market. Versions of that test have been adopted by a variety of commentators, agencies, and courts, including the DOJ in its Section 2 report, the Antitrust Modernization Commission, the Areeda-Hovenkamp treatise, and the Ninth Circuit’s PeaceHealth decision. I have been—and continue to be—a staunch defender of some formulation of that test.

Just when I thought we were close to reaching a strong majority position on bundled discounts, along comes a significant new article by Einer Elhauge (to be published this coming December in the Harvard Law Review) challenging the entire basis of the theory. Einer argues that bundled discounts manifest anticompetitive “power effects” if the unbundled price for the linking product exceeds the but-for price level (i.e., the price the defendant would charge in the absence of the bundle) and that such bundles should be treated as tie-ins.

Einer’s article is sure to attract lots of attention and give courts and perhaps the agencies pause in adopting the until-now consensus position on bundled discounts. Although I profoundly disagree with much of Einer’s analysis, it is a provocative and important article. Josh Wright and I are planning a full response at a later date. For the moment, let me just preview one responsive angle. Read the rest of this entry »

Thom Lambert is an Associate Professor of Law at University of Missouri Law School and a blogger at Truth on the Market.

A bundled discount occurs when a seller offers to sell a collection of different goods for a lower price than the aggregate price for which it would sell the constituent products individually. Such discounts pose different competitive risks than single-product discounts because, as I explained in this post, they may have an exclusionary effect even if they result in a price that exceeds the cost of producing the bundle. In particular, even an “above-cost” bundled discount may have the effect of excluding rivals that (1) are more efficient at producing the products that compete with the discounter’s but (2) produce a less extensive product line than the discounter. In other words, bundled discounts may drive equally efficient but less diversified rivals from the market.

Given that they are a “mixed bag” practice (some immediate benefits, some potential anticompetitive harms) and pose risks beyond those presented by straightforward predatory pricing, courts and commentators have struggled to articulate a legal standard that would prevent unreasonably exclusionary bundled discounts without chilling procompetitive bundling. With the notable exception of the en banc Third Circuit’s LePage’s decision, which is essentially standardless, most of the approaches courts and commentators have articulated for evaluating bundled discounts have involved some sort of test that compares prices and costs. Chapter 6 of the Department of Justice’s Section 2 Report explains the various “price-cost” tests in detail.

Based on the presentations in the Section 2 hearings, the Department reached essentially four conclusions concerning bundled discounts:

Read the rest of this entry »

Herbert Hovenkamp is Professor of Law at The University of Iowa College of Law.

The baseline for testing predatory pricing in the Section 2 Report is average avoidable cost (AAC), together with recoupment as a structural test (Report, p. 65). The AAC test or reasonably close variations, such as average variable cost or short-run marginal cost, seems about right. However, differences among them can become very technical and fine. The Report correctly includes in AAC those fixed costs that “were incurred only because of the predatory strategy, for example, as a result of expanding capacity to enable the predatory sales.” (Report, pp. xiv, 64-65) Such a strategy would make some sense for a predator if the fixed costs in question are easily re-deployed once the predation has succeeded – for example, in the case of an airline whose planes can be shifted to a different route. The test virtually guarantees that in industries that require heavy investment in production capacity that cannot be redployed the test will approach strict average variable cost. In cases where fixed costs are relatively high, an investment of this nature that lasted only through the predatory period and became excess capacity thereafter would not be worth it. Further, if fixed costs are low the market is almost certainly not prone to monopoly to begin with. AVC is probably underdeterrent, but it is also probably the best we can do without chilling procompetitive behavior.

However, when prices are under AVC, then a strict recoupment requirement (see Report, pp. 67-68) is unnecessarily harsh. Proving recoupment requires a prediction about the dominant firm’s prices, costs, and output over a defined future period, which in turn requires a prediction about when new entry will occur, how many firms will enter, and their growth rates. As a result recoupment is much too difficult to prove and does not serve to distinguish aggressive promotional price cuts from those that are anticompetitive. Rather, structural proof should consist of those things that are ordinarily required in a Section 2 case; namely, a dominant share of a properly defined relevant market and high entry barriers. That is, the question should be “is durable monopoly pricing in this market possible,” but not “can predation be predicted to yield a durable period of monopoly pricing with sufficient monopoly returns to pay off the investment in predation.” As a factual matter the former requirement is much more manageable and requires far less speculation. An important additional ingredient is causation in the classical tort sense – namely, can the plaintiff show that the prices below average variable cost were of sufficient magnitude and duration to cause its exit from the market? Sporadic or episodic price drops below AVC are unlikely to meet this requirement.

The biggest concern is with false positives. Are there cases in which prices were below AVC for a substantial length of time to meet the causation requirement and the structural components for monopoly were present, but where we would not want to condemn the conduct because dollars-and-cents proof of recoupment is not possible. I doubt it.

Read the rest of this entry »