Abstract

The Federal Communications Commission’s Network Neutrality Order regulates how broadband networks explain their services to customers, mandates that subscribers be permitted to deploy whatever computers, mobile devices, or applications they like for use with the network access service they purchase, imposes a prohibition upon unreasonable discrimination in network management such that Internet Service Provider efforts to maintain service quality (e.g. mitigation congestion) or to price and package their services do not burden rival applications.

This paper offers legal and economic critique of the new Network Neutrality policy and particularly the no blocking and no discrimination rules. While we argue the FCC‘s rules are likely to be declared beyond the scope of the agency’s charter, we focus upon the economic impact of net neutrality regulations. It is beyond paradoxical that the FCC argues that it is imposing new regulations so as to preserve the Internet’s current economic structure; that structure has developed in an unregulated environment where firms are free to experiment with business models – and vertical integration – at will. We demonstrate that Network Neutrality goes far further than existing law, categorically prohibiting various forms of economic integration in a manner equivalent to antitrust’s per se rule, properly reserved for conduct that is so likely to cause competitive harm that the marginal benefit of a fact-intensive analysis cannot be justified. Economic analysis demonstrates that Network Neutrality cannot be justified upon consumer welfare grounds. Further, the Commission’s attempt to justify its new policy simply ignores compelling evidence that “open access” regulations have distorted broadband build-out in the United States, visibly reducing subscriber growth when imposed and visibly increasing subscriber growth when repealed. On the other, the FCC manages to cite just one study – not of the broadband market – to support its claims of widespread foreclosure threats. This empirical study, upon closer scrutiny than the Commission appears to have given it, actually shows no evidence of anti-competitive foreclosure. This fatal analytical flaw constitutes a smoking gun in the FCC’s economic analysis of net neutrality.

Abstract

In its recent report entitled “The Evolving IP Marketplace,” the Federal Trade Commission (FTC) advances a far-reaching regulatory approach (Proposal) whose likely effect would be to distort the operation of the intellectual property (IP) marketplace in ways that will hamper the innovation and commercialization of new technologies. The gist of the FTC Proposal is to rely on highly non-standard and misguided definitions of economic terms of art such as “ex ante” and “hold-up,” while urging new inefficient rules for calculating damages for patent infringement. Stripped of the technicalities, the FTC Proposal would so reduce the costs of infringement by downstream users that the rate of infringement would unduly increase, as potential infringers find it in their interest to abandon the voluntary market in favor of a more attractive system of judicial pricing. As the number of nonmarket transactions increases, the courts will play an ever larger role in deciding the terms on which the patents of one party may be used by another party. The adverse effects of this new trend will do more than reduce the incentives for innovation; it will upset the current set of well-functioning private coordination activities in the IP marketplace that are needed to accomplish the commercialization of new technologies. Such a trend would seriously undermine capital formation, job growth, competition, and the consumer welfare the FTC seeks to promote.

In this paper, we examine how these consequences play out in the context of standard-setting organizations (SSOs), whose activities are key to bringing standardized technologies to market. If the FTC’s proposed definitions of “reasonable royalties” and “incremental damages” become the rules for calculating damages in patent infringement cases, the stage will be set to allow the FTC and private actors to attack, after the fact, all standard pricing methods through some combination of antitrust litigation or direct regulation on the ground that such time-honored royalty arrangements involve the use of monopoly power by patent licensors. In consequence, the FTC’s Proposal, if adopted, could well encourage potential licensees to adopt the very holdout strategies the FTC purports to address and that well-organized SSOs routinely counteract today. Simply put, the FTC’s proposal for regulating IP by limiting the freedom of SSOs to set their own terms would replace private coordination with government hold-up. The FTC should instead abandon its preliminary recommendations and support the current set of licensing tools that have fueled effective innovation and dissemination in the IP marketplace. FTC forbearance from its unwise Proposal will improve bargaining incentives, reduce administrative costs, and remove unnecessary elements of legal uncertainty in the IP system, thereby allowing effective marketplace transactions to advance consumer welfare.

Summary

The regulation of innovation and the optimal design of legal institutions in an environment of uncertainty are two of the most important policy challenges of the twenty-first century. Innovation is critical to economic growth. Regulatory design decisions, and, in particular, competition policy and intellectual property regimes, can have profound consequences for economic growth. However, remarkably little is known about the relationship between innovation, competition, and regulatory policy.

Any legal regime must attempt to assess the tradeoffs associated with rules that will affect incentives to innovate, allocative efficiency, competition, and freedom of economic actors to commercialize the fruits of their innovative labors. The essays in this book approach this critical set of problems from an economic perspective, relying on the tools of microeconomics, quantitative analysis, and comparative institutional analysis to explore and begin to provide answers to the myriad challenges facing policymakers.

Available from Cambridge University Press

Abstract

The recent increase in the demand for expert economic analysis in antitrust litigation has improved the welfare of economists; however, the law and economics literature is silent on the effects of economic complexity or judges’ economic training on judicial decision-making. We use a unique data set on antitrust litigation in federal district and administrative courts during 1996-2006 to examine whether economic complexity impacts antitrust decisions, and provide a novel test of the hypothesis that antitrust analysis has become too complex for generalist judges. We also examine the impact of basic economic training by judges. We find that decisions involving the evaluation of complex economic evidence are significantly more likely to be appealed, and decisions of judges trained in basic economics are significantly less likely to be appealed than are decisions by their untrained counterparts. Our analysis supports the hypothesis that some antitrust cases are too complicated for generalist judges.

Abstract

Antitrust is back in vogue at the U.S. Supreme Court. Whereas the Rehnquist Court decided few antitrust cases in its latter years (only one from 1993 to 1995, one each year from 1996 through 1999, and none from 2000 to 2003), the Roberts Court issued seven antitrust decisions in its first two years alone. Numerous commentators have characterized the Roberts Court’s antitrust decisions as radical departures that betray a pro-business, anti-consumer bias. While some of the decisions do represent significant changes from past practice (see, e.g., Leegin, which overruled the 1911 Dr. Miles rule of per se illegality for minimum resale price maintenance, and Twombly, which abrogated the infamous “no set of facts” pleading standard set forth in the 1957 Conley v. Gibson decision), the “pro-business/anti-consumer” characterization of the Roberts Court’s antitrust decisions is inaccurate. The characterization – caricature, really – fails to appreciate the fundamental limits of antitrust, a body of law that requires judges and juries to make fine distinctions between procompetitive and anticompetitive behaviors that frequently resemble each other. While false acquittals of anticompetitive conduct may harm consumers, so may false convictions of procompetitive actions. And efforts to eliminate errors in liability judgments are themselves costly. Optimal antitrust rules will therefore aim to minimize the sum of decision costs (the costs of reaching a liability decision) and expected error costs (the social losses from false convictions and false acquittals). Each of the Roberts Court’s antitrust decisions can be defended in light of this “decision-theoretic” approach, an approach calculated to maximize the effectiveness of the antitrust enterprise, to the ultimate benefit of consumers. This Article first describes the fundamental limits of antitrust and the decision-theoretic approach such limits inspire. It then analyzes the Roberts Court’s antitrust decisions, explaining how each coheres with the decision-theoretic model. Finally, it predicts how the Court will address three issues likely to come before it in the future: tying, loyalty rebates, and bundled discounts.

Abstract

Antitrust observers and football fans alike awaited the Supreme Court’s decision in American Needle v. National Football League for months – inspiring over a dozen articles, and even one from the quarterback of the defending champion New Orleans Saints. Yet the implications of the Court’s decision, effectively narrowing the scope of the “intra-enterprise immunity” doctrine to firms with a complete “unity of interests,” are unclear. While some depict the decision as a schism from the last several decades of antitrust law, we explain why this interpretation is meritless and discuss the practical impact of the Court’s holding. The Court’s antitrust jurisprudence over the past several decades, including that of the Roberts Court and American Needle, has broadly embraced rules that are both relatively easy to administer as well as conscious of the error costs of deterring pro-competitive conduct. Intra-enterprise immunity potentially provided such a “filter” that enabled judges to dismiss a non-trivial subset of meritless claims prior to costly discovery. The doctrine, however, proved notoriously difficult to consistently apply in situations involving common organizational structures. Consistent with error-cost principles that have been the lodestar of the Court’s recent antitrust output, American Needle gave the Court an opportunity to effectively abandon intra-enterprise immunity in favor of the Twombly “plausibility” standard. Rather than marking a drastic change in antitrust jurisprudence, therefore, American Needle should be viewed as the Supreme Court substituting an unreliable screening mechanism in favor of a more cost-effective alternative.

Abstract

The market definition analysis endorsed by the 2010 Proposed Horizontal Merger Guidelines (“new HMGs”) tends toward narrower relevant markets. Because the merging parties cannot point to the consumer gains outside of the narrowly defined product market, the new approach could lead to Section 7 liability for mergers that result in net increases in consumer welfare. This “out of market” efficiency problem obviously does not originate with the new HMGs, nor with the HMGs at all. However, the value of diversion approach to market definition is likely to dramatically increase its practical significance. Failure to incorporate “out of market” efficiencies into merger analysis flies in the face of the modern trend in favor of analyzing actual competitive effects rather than adopting simplifying and potentially misleading proxies. Further, the value of diversion approach adopted by the new HMGs is likely to increase the need for guidance on this score. This comment proposed that the new HMGs amend note 11 to make clear that they would not bring enforcement actions where the Agencies can prove anticompetitive effects in a narrower market, but where the evidence also supports the conclusion that out of market efficiencies are sufficient to eliminate consumer harm in the aggregate. A commitment to forbear from challenging mergers where out of market efficiencies outweigh anticompetitive effects merely updates the new HMGs in a manner consistent with the modern intellectual foundation of merger analysis.

Abstract

The Twenty-first Amendment repealed prohibition, but granted the states broad power to regulate the distribution and sale of alcohol to consumers within their borders. Pursuant to this authority, states have established a complex web of regulations that limit the ability of beer, wine, and liquor producers to control the distribution of their product. From a consumer welfare perspective, one of the most potentially harmful state alcohol distribution regulations are “post and hold” laws (“PH laws”). PH laws require that alcohol distributors share future prices with rivals by “posting” them in advance, and then “hold” these prices for a specified period of time. Economic theory would suggest that PH laws reduce unilateral incentives for distributors to reduce prices and may facilitate tacit or explicit collusion, both to the detriment of consumers. Consistent with economic theory, we show that the PH laws reduce consumption by 2-8 percent. We also test whether PH laws provide offsetting benefits in the form of reducing a range of social harms associated with alcohol consumption. We find no evidence of such offsetting benefits. Taken together these results suggest that PH laws are socially harmful and result only in a wealth transfer from marginal alcohol consumers, who are unlikely to exert externalities on society, to wholesalers. These results also suggest a socially beneficial role for antitrust challenges to PH laws and similar anticompetitive state regulation. If states wish to reduce the social ills associated with drinking, our results suggest that increasing taxes and directly targeting social harms are superior policy instruments to PH laws.