In recent years, antitrust scholars have largely agreed on a couple of propositions involving tying and bundled discounting. With respect to tying (selling one’s monopoly “tying” product only on the condition that buyers also purchase another “tied” product), scholars from both the Chicago and Harvard Schools of antitrust analysis have generally concluded that there should be no antitrust liability unless the tie-in results in substantial foreclosure of marketing opportunities in the tied product market. Absent such foreclosure, scholars have reasoned, truly anticompetitive harm is unlikely to occur. The prevailing liability rule, however, condemns tie-ins without regard to whether they occasion substantial tied market foreclosure.

With respect to bundled discounting (selling a package of products for less than the aggregate price of the products if purchased separately), scholars have generally concluded that there should be no antitrust liability if the discount at issue could be matched by an equally efficient single-product rival of the discounter. That will be the case if each product in the bundle is priced above cost after the entire bundled discount is attributed to that product. Antitrust scholars have therefore generally endorsed a safe harbor for bundled discounts that are “above cost” under a “discount attribution test.”

In an article appearing in the December 2009 Harvard Law Review, Harvard law professor Einer Elhauge challenged each of these near-consensus propositions. According to Elhauge, the conclusion that significant tied market foreclosure should be a prerequisite to tying liability stems from scholars’ naïve acceptance of the Chicago School’s “single monopoly profit” theory. Elhauge insists that the theory is infirm and that instances of tying may occasion anticompetitive “power” (i.e., price discrimination) effects even if they do not involve substantial tied market foreclosure. He maintains that the Supreme Court has deemed such effects to be anticompetitive and that it was right to do so.

With respect to bundled discounting, Elhauge calls for courts to forego price-cost comparisons in favor of a rule that asks whether the defendant seller has “coerced” consumers into buying the bundle by first raising its unbundled monopoly (“linking”) product price above the “but-for” level that would prevail absent the bundled discounting scheme and then offering a discount from that inflated level.

I have just posted to SSRN an article criticizing Elhauge’s conclusions on both tying and bundled discounting. On tying, the article argues, Elhauge makes both descriptive and normative mistakes. As a descriptive matter, Supreme Court precedent does not deem the so-called power effects (each of which was well-known to Chicago School scholars) to be anticompetitive. As a normative matter, such effects should not be regulated because they tend to enhance total social welfare, especially when one accounts for dynamic efficiency effects. Because tying can create truly anticompetitive effect only when it involves substantial tied market foreclosure, such foreclosure should be a prerequisite to liability.

On bundled discounting, I argue, Elhauge’s proposed rule would be a disaster. The rule fails to account for the fact that bundled discounts may create immediate consumer benefit even if the seller has increased unbundled linking prices above but-for levels. It is utterly inadministrable and would chill procompetitive instances of bundled discounting. It is motivated by a desire to prevent “power” effects that are not anticompetitive under governing Supreme Court precedent (and should not be deemed so). Accordingly, courts should reject Elhauge’s proposed rule in favor of an approach that first focuses on the genuine prerequisite to discount-induced anticompetitive harm—“linked” market foreclosure—and then asks whether any such foreclosure is anticompetitive in that it could not be avoided by a determined competitive rival. To implement such a rule, courts would need to apply the discount attribution test.

The paper is a work-in-progress. Herbert Hovenkamp has already given me a number of helpful comments, which I plan to incorporate shortly. In the meantime, I’d love to hear what TOTM readers think.

Filed under: antitrust, bundled discounts, economics, error costs, exclusionary conduct, law and economics, price discrimination, regulation, SSRN, tying

I have submitted a comment to the Federal Reserve Board concerning Regulation II, along with the American Enterprise Institute’s Alex Brill, Christopher DeMuth, Alex J. Pollock, and Peter Wallison, as well as my George Mason colleague Todd Zywicki.  Regulation II implements the interchange fee provisions of the Dodd-Frank Act.

The comment makes a rather straightforward and simple point:

We write to express our concern that the Federal Reserve Board has not to date taken the prudent and, importantly, legally required step of conducting a competitive impact analysis of Regulation II, which implements the interchange fee provisions of section 1075 of the Dodd-Frank Act (Pub L. 111-203). We consider this to be one of the most significant legal changes to the payment system’s competitive landscape since the Electronic Funds Transfer Act in 1978. This dramatic statutory and subsequent regulatory change will undoubtedly trigger a complex set of consequences for all firms participating in the payment system as well as for consumers purchasing both retail goods and financial services. The Federal Reserve’s obligation to conduct a competitive impact analysis of Regulation II is an appropriate and prudent safeguard against legal change with potentially pernicious consequences for the economy and consumers. Given the Board’s own well-crafted standards, we do not believe it is appropriate for the Board to move forward in implementing Regulation II without the required competitive impact analysis.

The rest of the comment appears below the fold.

The Board’s bulletin setting forth its role in the payments system lays out the policy that the Fed is supposed to follow “when considering … a legal change … if that change would have a direct and material adverse effect on the ability of other service providers to compete effectively with the Federal Reserve in providing similar services due to differing legal powers or constraints or due to a dominant marketing position deriving from such legal differences.” The bulletin explicitly promises that “[a]ll operational or legal changes having a substantial effect on payments system participants will be subject to a
competitive-impact analysis even if the competitive effects are not apparent on the face of the proposal.”

There is little doubt that Regulation II qualifies for the required competitive impact analysis by this standard as it will likely have a “substantial effect on payment system participants.” Further, several aspects of the proposal impose “differing constraints” on different institutions. The proposal, for example, exempts Fed-sponsored payment systems such as the A C H system from the scope of the regulation while sweeping in alternate payment providers, even though such provider systems are functionally indistinguishable in relevant respect.

The bulletin goes on to provide details of the required competitive impact analysis. For example, the Board must “first determine whether the proposal has a direct and material adverse effect on the ability of other service providers to compete effectively with the Federal Reserve in providing similar services.” If so, the Board must then “ascertain whether the adverse effect is due to legal differences or due to a dominant market position deriving from such legal differences.” If legal differences or a dominant market position deriving from those legal differences are detected, the analysis must then turn to assessing the benefits of the proposed legal change and determining whether those benefits could be “reasonably achieved with a lesser or no adverse competitive impact.” Indeed, the bulletin indicates that “the Board would then either modify the proposal to lessen or eliminate the adverse impact on competitors’ ability to compete or determine that the payments system objectives may not be reasonably achieved if the proposal were modified.” As the bulletin anticipates, such a detailed and careful analysis is fully appropriate to better understand the competitive impact of a significant legal change in the payment system before it is implemented.

As Federal Reserve Board Governor Sarah Bloom Raskin observed in recent Congressional testimony, “Commenters also have differing perspectives on the potential effect of the statute and the proposed rule on consumers,” and “the magnitude of the ultimate effect is not clear and will depend on the behavior of various participants in the debit card networks.”

We agree with Governor Raskin’s observations and conclude that an economic impact analysis of the competitive effects of Regulation II, while a complex endeavor, is a critical one to protect competition in the payment system and consumers. We urge the Board to conduct an impact analysis of Regulation II and to make this analysis available for public comment before implementation of Regulation II.

Interesting readers can search for other comments here.

 

Filed under: banking, consumer financial protection bureau, consumer protection, credit cards, economics, regulation

Congressman Waxman shares that the news that the DOJ Antitrust Division told him that cable or phone companies violating net neutrality principles with exclusive or discriminatory deals are not violating the antitrust laws:

Waxman said during a net neutrality hearing Wednesday that Justice officials informed his office that existing competition laws cannot be used to prevent cable and phone companies from blocking Web traffic.

“DoJ told us that … antitrust does not stop a phone or cable company from blocking websites that don’t pay for access,” said Waxman, the top Democrat on the Energy and Commerce Committee.

“According to DoJ, favoring websites that pay high fees and degrading websites that don’t is perfectly legal under the antitrust laws as long as the phone or cable company isn’t in direct competition with the websites being degraded.”

Filed under: antitrust, net neutrality, technology

Ed Whelan chimes in on the perennial debate with the most recent data:

Those sneaky “corporatist” justices are at it again, cleverly disguising their biases by ruling in favor of employees and/or against corporations in two Supreme Court decisions issued today:

1. In Staub v. Proctor Hospital, the Court, reversing the Seventh Circuit, ruled unanimously that an employer could be held liable for employment discrimination based on the discriminatory animus of an employee who influenced, but did not make, the ultimate employment decision. Justice Scalia wrote the lead opinion.

2. In FCC v. AT&T, the Court, in a unanimous opinion by Chief Justice Roberts, ruled that corporations do not have “personal privacy” for purposes of a Freedom of Information Act exemption. The ruling reversed a Third Circuit decision.

In the third decision rendered today, Henderson v. Shinseki, the Court also ruled unanimously for the “little guy,” as it held, in an opinion by Justice Alito, that a 120-day deadline for a veteran to appeal an administrative denial of benefits did not amount to an absolute jurisdictional bar. The Court reversed a contrary ruling by the Federal Circuit.

(Justice Kagan did not take part in any of these cases.)

I’ve discussed the analytical incoherence of these “pro-business bias” claims in the antitrust context here and here; in that context, the argument is commonly raised but usually avoid serious claims that any specific decision was wrongly decided.

In somewhat related news, the Supreme Court denied cert in another patent settlement case, Louisiana Wholesale Drug Co., Inc., et al. v. Bayer AG, et al.  WSJ has more.

Filed under: antitrust, Supreme Court

The Supreme Court denied cert in both S&M Brands v. Caldwell and Wine Country Gift Baskets v. Steen.  I had participated in drafting amicus briefs, along with my colleague Todd Zywicki, supporting certiorari in each.  The briefs are available here and here.  Maybe I’ll have better luck next year.

Filed under: 21st amendment, alcohol, antitrust, cartels, Supreme Court, wine

Joshua Gans has an interesting post examining potential antitrust issues involving Apple, an issue we’ve discussed here and here.  Gans focuses in on the two most relevant issues:

There are two aspects that might raise antitrust concern: (i) Apple’s exclusivity-like requirement that no external payment links be permitted in apps and (ii) Apple’s most-favored customer clause preventing discounting on other platforms. Let’s examine each in turn.

In my earlier post, I emphasized that a potential plaintiff would have a difficult time demonstrating that Apple has monopoly power in any relevant market for the purposes of antitrust analysis.  Both exclusivity arrangements and most-favored customer clauses can generate efficiencies and improve consumer outcomes; they pose little threat to competition and consumers in the absence of durable monopoly power.  I suggested that this was the largest obstacle to any antitrust analysis involving Apple’s subscription model:

The most often discussed bar to an antitrust action against Apple is the one many regulators simply assume into existence: Apple must have market power in an antitrust-relevant market.  While Apple’s share of the smartphone market is only 16% or so, its share of the tablet computing market is much larger.  The WSJ, for example, reports that Apple accounts for about three-fourths of tablet computer sales.  I’ve noted before in the smartphone context that this requirement should not be consider a bar to FTC suit, given the availability of Section 5; however, as the WSJ explains, market definition must be a critical issue in any Apple investigation or lawsuit:

Publishers, for example, might claim that Apple dominates the market for consumer tablet computers and that it has allegedly used that commanding position to restrict competition. Apple, in turn, might define the market to include all digital and print media, and counter that any publisher not happy with Apple’s terms is free to still reach its customers through many other print and digital outlets.

One must conduct a proper, empirically-grounded analysis of the relevant data to speak with confidence; however, it suffices to say that I am skeptical that tablet sales would constitute a relevant market.

Gans agrees, also suggesting that lack of monopoly power undercuts any potential antitrust case against Apple.

Exclusivity can be an issue as it might harm other platforms that might want to sell digital subscriptions. If Apple’s exclusivity means that those platforms cannot generate sales, then a monopoly platform may arise or be sustained. But that is the issue here: where is Apple’s monopoly? It is arguable that Apple has a monopoly over tablet devices and has had that monopoly now for almost 11 months since it first released its iPad. But if a publisher decided not to sell subscriptions for iPad users, it would have other options: particularly the options it had prior to April 2010; web based subscriptions and eReader subscriptions, not to mention physical subscriptions that fall outside of Apple’s terms. It would have to be demonstrated that the iPad was one of the few or the only way to access a particular customer class to believe that publishers were excluded by Apple’s terms. In any case, those terms are not strictly exclusionary as they do not prevent other digital subscription sales – even for iPad access. Instead, they at worst, raise the costs of those other sales. To be sure, raising costs can sometimes be an antitrust violation but the degree of market power a firm would have to possess to make that the case has to be proportionate. Right now, that case appears weak.

Most-favored customer clauses arise when the terms of one supply contract impose conditions on other contracts a party might enter into. Apple is effectively preventing discounting elsewhere. If it did not do this, then that discounting would occur and Apple may be unable to generate as much in sales. Worse than that, Apple may do the hard work of signing consumers up for initial subscriptions only to have those same consumers contacted outside of those arrangements with discounts.

But such clauses can have the effect of raising prices in the market and this is what might concern antitrust authorities. For this to be likely to occur here, Apple must have a requisite degree of power (so that publishers are forced to accept those terms) and it must be the case that prices actually rise. It is too early to tell but if Apple is right and iPad consumers really do purchase more, then it is possible that the price elasticity of demand from iPad consumers is relatively high; that is, charge $10 to an iPad consumer and you generate many more sales than $10 charged for other types of consumers. In this environment, it is not obvious that the iPad will lead to higher digital subscription prices.

My only quibble with Gans’ post is that he appears to describe the “monopoly power” requirement as a problem for antitrust, rather than a sensible requirement that protects consumers from overdeterrence.  For example, Gans writes that “antitrust law, as it currently stands, has difficulty in dealing with industries whereby the path is towards monopoly and how to act prospectively about it.”   Gans does not suggest that the antitrust authorities should bring a case against Apple on these grounds.   But he does seem to imply that antitrust would be more effective if it were more willing to reach business conduct that is not harming consumers, may well be providing significant efficiencies currently, but might generate future harm.   I’m not sure this is what he means or if I’m misinterpreting.  If I’m right, I would have characterized things quite differently, perhaps along the lines of “antitrust law is not willing to sacrifice current gains to consumers for the sake of prohibiting practices that are not currently harming competition and the basis for predicting future harm is speculative, at best.”

Potential minor quibble aside, its a very good post and well worth reading.

Filed under: antitrust, economics, MFNs, monopolization, technology

[UPDATE:  Josh links to a WSJ article telling us that EU antitrust enforcers raided several (unnamed) e-book publishers as part of an apparent antitrust investigation into the agency model and whether it is “improperly restrictive.”  Whatever that means.  Key grafs:

At issue for antitrust regulators is whether agency models are improperly restrictive. Europe, in particular, has strong anticollusion laws that limit the extent to which companies can agree on the prices consumers will eventually be charged.

Amazon, in particular, has vociferously opposed the agency practice, saying it would like to set prices as it sees fit. Publishers, by contrast, resist the notion of online retailers’ deep discounting.

It is unclear whether the animating question is whether the publishers might have agreed to a particular pricing model, or to particular prices within that model.  As a legal matter that distinction probably doesn’t matter at all; as an economic matter it would seem to be more complicated–to be explored further another day . . . .]

A year ago I wrote about the economics of the e-book publishing market in the context of the dispute between Amazon and some publishers (notably Macmillan) over pricing.  At the time I suggested a few things about how the future might pan out (never a god good idea . . . ):

And that’s really the twist.  Amazon is not ready to be a platform in this business.  The economic conditions are not yet right and it is clearly making a lot of money selling physical books directly to its users.  The Kindle is not ubiquitous and demand for electronic versions of books is not very significant–and thus Amazon does not want to take on the full platform development and distribution risk.  Where seller control over price usually entails a distribution of inventory risk away from suppliers and toward sellers, supplier control over price correspondingly distributes platform development risk toward sellers.  Under the old system Amazon was able to encourage the distribution of the platform (the Kindle) through loss-leader pricing on e-books, ensuring that publishers shared somewhat in the costs of platform distribution (from selling correspondingly fewer physical books) and allowing Amazon to subsidize Kindle sales in a way that helped to encourage consumer familiarity with e-books.  Under the new system it does not have that ability and can only subsidize Kindle use by reducing the price of Kindles–which impedes Amazon from engaging in effective price discrimination for the Kindle, does not tie the subsidy to increased use, and will make widespread distribution of the device more expensive and more risky for Amazon.

This “agency model,” if you recall, is one where, essentially, publishers, rather than Amazon, determine the price for electronic versions of their books sold via Amazon and pay Amazon a percentage.  The problem from Amazon’s point of view, as I mention in the quote above, is that without the ability to control the price of the books it sells, Amazon is limited essentially to fiddling with the price of the reader–the platform–itself in order to encourage more participation on the reader side of the market.  But I surmised (again in the quote above), that fiddling with the price of the platform would be far more blunt and potentially costly than controlling the price of the books themselves, mainly because the latter correlates almost perfectly with usage, and the former does not–and in the end Amazon may end up subsidizing lots of Kindle purchases from which it is then never able to recoup its losses because it accidentally subsidized lots of Kindle purchases by people who had no interest in actually using the devices very much (either because they’re sticking with paper or because Apple has leapfrogged the competition).

It appears, nevertheless, that Amazon has indeed been pursuing this pricing strategy.  According to this post from Kevin Kelly,

In October 2009 John Walkenbach noticed that the price of the Kindle was falling at a consistent rate, lowering almost on a schedule. By June 2010, the rate was so unwavering that he could easily forecast the date at which the Kindle would be free: November 2011.

There’s even a nice graph to go along with it:

So what about the recoupment risk?  Here’s my new theory:  Amazon, having already begun offering free streaming videos for Prime customers, will also begin offering heavily-discounted Kindles and even e-book subsidies–but will also begin rescinding its shipping subsidy and otherwise make the purchase of dead tree books relatively more costly (including by maintaining less inventory–another way to recoup).  It will still face a substantial threat from competing platforms like the iPad but Amazon is at least in a position to affect a good deal of consumer demand for Kindle’s dead tree competitors.

For a take on what’s at stake (here relating to newspapers rather than books, but I’m sure the dynamic is similar), this tidbit linked from one of the comments to Kevin Kelly’s post is eye-opening:

If newspapers switched over to being all online, the cost base would be instantly and permanently transformed. The OECD report puts the cost of printing a typical paper at 28 per cent and the cost of sales and distribution at 24 per cent: so the physical being of the paper absorbs 52 per cent of all costs. (Administration costs another 8 per cent and advertising another 16.) That figure may well be conservative. A persuasive looking analysis in the Business Insider put the cost of printing and distributing the New York Times at $644 million, and then added this: ‘a source with knowledge of the real numbers tells us we’re so low in our estimate of the Times’s printing costs that we’re not even in the ballpark.’ Taking the lower figure, that means that New York Times, if it stopped printing a physical edition of the paper, could afford to give every subscriber a free Kindle. Not the bog-standard Kindle, but the one with free global data access. And not just one Kindle, but four Kindles. And not just once, but every year. And that’s using the low estimate for the costs of printing.

Filed under: antitrust, business, cartels, contracts, doj, e-books, economics, error costs, law and economics, litigation, MFNs, monopolization, resale price maintenance, technology, vertical restraints Tagged: agency model, Amazon, Amazon Kindle, antitrust, Apple, doj, e-book, e-books, iBookstore, Kindle, major publishers, MFN, most favored nations clause, per se, price-fixing, publishing industry, Rule of reason, two-sided markets, vertical restraints

Antitrust investigators continue to see smoke rising around Apple and the App Store.  From the WSJ:

For starters, subscriptions must be sold through Apple’s App Store. For instance, a magazine that wants to publish its content on an iPad cannot include a link in an iPad app that would direct readers to buy subscriptions through the magazine’s website. Apple earns a 30% share of any subscription sold through its App Store. …

A federal official confirmed to The Washington Post that the government is looking at Apple’s subscription service terms for potential antitrust issues but said there is no formal investigation. Speaking on the condition of anonymity because he was not authorized to comment publicly, the official said that the government routinely tracks new commercial initiatives influencing markets.

Investigators certainly suspect Apple of myriad antitrust violations; there is even some absurd talk about breaking up Apple.  There is definitely smoke — but is there fire?

The most often discussed bar to an antitrust action against Apple is the one many regulators simply assume into existence: Apple must have market power in an antitrust-relevant market.  While Apple’s share of the smartphone market is only 16% or so, its share of the tablet computing market is much larger.  The WSJ, for example, reports that Apple accounts for about three-fourths of tablet computer sales.  I’ve noted before in the smartphone context that this requirement should not be consider a bar to FTC suit, given the availability of Section 5; however, as the WSJ explains, market definition must be a critical issue in any Apple investigation or lawsuit:

Publishers, for example, might claim that Apple dominates the market for consumer tablet computers and that it has allegedly used that commanding position to restrict competition. Apple, in turn, might define the market to include all digital and print media, and counter that any publisher not happy with Apple’s terms is free to still reach its customers through many other print and digital outlets.

One must conduct a proper, empirically-grounded analysis of the relevant data to speak with confidence; however, it suffices to say that I am skeptical that tablet sales would constitute a relevant market.

Meanwhile, Google demonstrates the corrective dynamics of markets.  New entry during an investigation period can influence agencies’ decision-making — as it should; Google has recently offered a new service, OnePass, which would allow publishers to keep up to 90% of subscription revenue.  It is unknown — and perhaps unknowable — which business model is “correct;” perhaps both are preferable in their individual contexts.  It appears there is emerging, significant competition in this space, of which regulators should take note.

Finally, in light of Geoff’s recent post, it is also worth discussing whether Tim Wu’s recent appointment to the Commission impacts the likelihood of a suit against Apple.  Geoff thinks it means a likely suit against Google; Professor Wu might bring similar implications for Apple — after all, Professor Wu has described Apple as the company he most fears.  I have no doubt that Professor Wu will spend a good deal of his time at the Commission dealing with issues surrounding both Google and Apple, policy issues concerning both, and potential antitrust theories surrounding business practices such as Apple’s subscription model.  I am skeptical, however, that his presence changes the actual likelihood of a suit: Section 2 law remains a substantial obstacle.  The real value of his creative thinking will be in generating Section 5 claims surrounding these business arrangements — where the Commission must demonstrate substantially less onerous requirements and where the Commission operates within greater legal ambiguities.  In this light, will Professor Wu bring such an aggressive stance to Section 5 so as to make the difference between an Apple challenge or not?  I doubt it — the Commission has already expressed an interpretation of Section 5 that I find unjustifiably aggressive.  The Commission needs no assistance in leveraging Section 5 to intervene in high-tech contexts: just ask Intel.

Predictions are a rough business: that caveat aside, I continue to believe the FTC will file against Apple — and because of the obvious (and likely impassable) hurdles under Section 2, I believe the eventual complaint will be a bare Section 5 suit.

Filed under: antitrust, economics, federal trade commission, monopolization, regulation, technology

The WSJ reports that Carl Shapiro, deputy assistant attorney general for economics in the DOJ’s antitrust division, has been nominated by President Obama to his Council of Economic Advisers.  Also worth noting is that Phil Weiser, also a former deputy assistant attorney general in the antitrust division, is now senior advisor for technology and innovation at the National Economic Council.

Congratulations to both, and I’m delighted to have them out of the DOJ and in the White House where they can do less damage.  Kidding.  Actually, I think both will (and in Phil’s case, already do) offer much-needed and valuable input in the White House.

 

Filed under: announcements, antitrust, economics, politics, technology Tagged: carl shapiro, cea, doj, economists