Today at 12:30 at the Capitol Visitor Center, TechFreedom is hosting a discussion on the regulation of search engines:  “Search Engine Regulation: A Solution in Search of a Problem?”

The basics:

Allegations of “search bias” have led to increased scrutiny of Google, including active investigations in the European Union and Texas, a possible FTC investigation, and sharply-worded inquiries from members of Congress. But what does “search bias” really mean? Does it demand preemptive “search neutrality” regulation, requiring government oversight of how search results are ranked? Is antitrust intervention required to protect competition? Or can market forces deal with these concerns?

A panel of leading thinkers on Internet law will explore these questions at a luncheon hosted by TechFreedom, a new digital policy think tank. The event will take place at the Capitol Visitor Center room SVC-210/212 onTuesday, June 14 from 12:30 to 2:30pm, and include a complimentary lunch. CNET’s Declan McCullagh, a veteran tech policy journalist, will moderate a panel of four legal experts:

• Prof. Frank Pasquale, Seton Hall University School of Law, author of Federal Search Commission? Access, Fairness and Accountability in the Law of Search
• Prof. Geoffrey Manne, Lewis & Clark Law School, TechFreedom Adjunct Fellow, and Director of the International Center for Law & Economics, author of If Search Neutrality Is the Answer, What’s the Question?
• Prof. James Grimmelman, New York Law School, author of The Structure of Search Engine Law
• Prof. Eric Goldman, Santa Clara University School of Law, author of Search Engine Bias and the Demise of Search Engine Utopianism

More details are here, and the event will be streaming live from that link as well.  If all goes well, it will also be accessible right here:

http://www.ustream.tv/flash/viewer.swf

Live Broadcasting by Ustream

Filed under: administrative, announcements, essential facilities, google, law and economics, monopolization, regulation, technology Tagged: Declan McCullagh, Eric Goldman, frank pasquale, geoffrey manne, google, james grimmelmann, techfreedom, Web search engine

The Henry G. Manne Program in Law & Economics Studies and Google present a conference on The Law and Economics of Search Engines and Online Advertising to be held at George Mason University School of Law, Thursday, June 16th, 2011. The conference will run from 8:30 A.M. to 5:00 P.M.

OVERVIEW:

This conference is organized by Henry N. Butler, Executive Director of the Law & Economics Center and George Mason Foundation Professor of Law at George Mason University School of Law, and Joshua D. Wright, Associate Professor of Law at George Mason University School of Law.

Search and online advertising are important parts of the economy. They are also young industries. As such, understanding both the way in which search and online advertising operate as well as how these markets may evolve is fundamental to any economic and policy discussion. A deep understanding of the technology and economics of search, network effects, the antitrust economics of market definition, and the relationship between search and online advertising are required to facilitate sensible policies in this area. This conference seeks to address these issues by inviting experts in the field to present their views and engage with each other about the economic realities of search and online advertising.

REGISTRATION:

Attendance for this conference is by invitation only. To receive an invitation, please send a message with your name, affiliation, and full contact information to:

Contact: Jeff Smith
Email: [email protected]

AGENDA:

Thursday, June 16, 2011:

7:30 – 8:20 A.M.: Registration and breakfast

8:30 – 10:00 A.M.:  PANEL 1: What Role Do Network Effects Play In the Search Market?

Network effects often play an important role in analyzing competition in high-tech markets. Network effects present opportunities for enhanced consumer welfare, but also can create the potential for competitive harms. Potential network effects must be examined in a market and technology specific-context in order to understand their likely effects. This panel takes up this question by re-examining what network externalities and network effects are and analyzing whether they are present in search and related technologies. Panelists:

• Michael L. Katz, Sarin Chair in Strategy and Leadership, University of California, Berkeley
• Geoffrey A. Manne, Executive Director, International Center for Law & Economics
• Stanley J. Liebowitz, Ashbel Smith Professor of Economics, University of Texas at Dallas
• William H. Page, Marshall M. Criser Eminent Scholar, University of Florida Levin College of Law (moderator)

10:30 A.M. – 12:00 P.M.: PANEL 2: Competition and Online Advertising

Defining online markets is a complex and difficult task. Are advertising markets the same across web properties? What is the relationship between online and offline properties or text ads and display ads? Is the ad market for search services and content services different? This panel explores competition and online advertising. Panelists:

• Damien Geradin, Professor of Competition Law and Economics, Tilburg University
• Daniel L. Rubinfeld, Robert L. Bridges Professor of Law and Professor of Economics, University of California, Berkeley
• Catherine Tucker, Douglas Drane Career Development Professor in IT and Management and Assistant Professor of Marketing, MIT Sloan School of Management
• Michael R. Baye, Bert Elwart Professor of Business and Professor of Business Economics & Public Policy, Indiana University Kelley School of Business (moderator)

12:00 – 1:30 P.M.: LUNCH and KEYNOTE:

Engineering Search – Mark Paskin, Software Engineer, Search Quality, Google,Inc.

1:30 – 3:30 P.M.: PANEL 3: Competition and Search Markets

Much of the policy discussion on competition and search has centered on firms who participate in the search market in the traditional sense, such as Bing, Yahoo!, Blekko, Google, and others. However, the Internet provides many other ways for users to engage with and take advantage of its benefits. Vertical search markets such as Amazon or travel sites present examples of competition in search. Social media platforms (e.g., Facebook and Twitter) and the rise of mobile apps also present a competitive challenge for search. Furthermore, news sites, direct navigation, and offline information relate to our understanding of the proper market definition in search. This panel examines how platforms compete against search and the implications of that competition. Panelists:

• Benjamin G. Edelman, Assistant Professor of Business Administration, Harvard Business School
• Randal C. Picker, Leffman Professor of Commercial Law, University of Chicago Law School
• Paul Liu, Senior Economist, Google, Inc.
• Thomas M. Lenard, President and Senior Fellow, Technology Policy Institute (moderator)

3:30 – 5:00 P.M.: PANEL 4: The Potential Costs and Benefits of Search Regulation

Some commentators have raised the question of whether search providers are sufficiently “neutral” in presenting results, which begs the question of whether concepts such as “objectivity” and “neutrality” are desirable or even achievable in the search industry. This panel will examine these questions and explore what impact regulatory efforts to impose “neutrality” principles might have on consumer welfare and on the innovation being driven by companies like Google, Bing, and Facebook. Panelists:

• Eric Goldman, Associate Professor of Law and Director of the High Tech Law Institute, Santa Clara University School of Law
• David Balto, Senior Fellow, Center for American Progress
• Frank Pasquale, Schering-Plough Professor in Health Care Regulation and Enforcement, Seton Hall University School of Law
• Joshua D. Wright, Associate Professor of Law, George Mason University School of Law (moderator)

VENUE:

George Mason University School of Law
3301 Fairfax Drive
Arlington, VA 22201

CONFERENCE HOTEL:

The Westin Arlington Gateway
801 North Glebe Road
Arlington, VA 22203
(703) 717-6200

FURTHER INFORMATION:

For more information regarding this conference or other initiatives of the Law & Economics Center, please visit MasonLEC.org.

 

Filed under: antitrust, economics, google, technology

In a recent Dealbook post, Steven M. Davidoff complains that Delaware’s business judgment rule is too lenient.  Davidoff contends that “[a] Delaware court is not going to find [directors] liable no matter how stupid their decisions are. Instead, a Delaware court will find them liable only if they intentionally acted wrongfully or were so oblivious that it was essentially the same thing.”  He then asserts that a commonly heard justification for this lenient approach — that it is required in order to induce qualified individuals to serve as directors — is “laughable.”

Prof. Davidoff’s pithy summary of the Delaware business judgment rule seems accurate, and I share his skepticism toward the argument that the rule is justified as a means of inducing highly qualified directors to serve.  I disagree, though, with his insinuation that the Delaware approach is unjustified.  The rule makes a great deal of sense as a means of aligning the incentives of directors (and officers) with those of shareholders.

Under Delaware’s business judgment rule, courts will abstain from second-guessing the merits of a business decision — even one that appears, in retrospect, to have been substantively unreasonable — as long as the directors acted honestly, in good faith, without any conflict of interest, and on a reasonably informed basis (i.e., they weren’t “grossly negligent” in informing themselves prior to making the decision at issue).  Courts treat the rule as quasi-jurisdictional, insisting that they simply will not hear complaints about the substantive reasonableness of a decision as long as the prerequisites to BJR protection are satisfied. 

One frequently hears two justifications for this deferential approach.  First, courts sometimes seek to justify it on grounds that they are not business experts.  Second, as Prof. Davidoff observes, directors and officers often defend it on grounds that it’s needed to prevent qualified directors from being scared off by the prospect of huge liability for good faith business decisions that turn out poorly.  

Neither justification works very well.  Courts routinely second-guess the substance of decisions in areas where they lack expertise and might, by imposing liability, dissuade qualified individuals from offering their services.  Consider, for example, medical malpractice.  Courts aren’t medical experts, yet they routinely second-guess the substance of good faith, reasonably informed treatment decisions.  And they do this with full knowledge that malpractice judgments dissuade qualified doctors from providing their services.  (Remember President Bush’s concern that malpractice verdicts were dissuading gynecologists from “practic[ing] their love with women all across this country”?)  There must be something more to the story.

Indeed, there is.  By insulating directors from liability for good faith, informed business decisions that turn out poorly, the business judgment rule encourages directors to take greater business risks.  This is a good thing, because directors and officers tend to be more risk averse than their principals, the shareholders.  I previously explained that point in criticizing Mark Cuban’s claim that shareholders and CEOs “have completely different agendas: Most chief executives want to hit a ‘home run’ — taking big risks for potentially big payoffs — while most mom-and-pop shareholders simply hope not to ‘strike out’ and lose their nest egg.”  I wrote:

… Stockholders would normally prefer corporate managers to take more, not less, business risk.

When it comes to managerial decision-making, rational stockholders prefer greater risk-taking (which is associated with higher potential rewards) for a number of reasons. First, stockholders have limited liability, which means that if a business venture totally tanks and creates liabilities in excess of the corporation’s assets, the stockholders are off the hook for the excess. Since stockholders are able to externalize some of the downside of business risks, they’ll tend to be risk-preferring. Moreover, stockholders are the “residual claimants” of a corporation — they don’t get paid until obligations to all other corporate constituents (creditors, employees, preferred stockholders, etc.) have been satisfied. In other words, they get nothing if the corporation breaks even, and they therefore would prefer that managers pursue business ventures likely to do more than break even. Finally, stockholders are able to eliminate firm-specific, “unsystematic” risk from their investment portfolios by owning a diversified collection of stocks. They therefore do not care about such risk (although they do demand compensation for bearing non-diversifiable, “systematic” risk). …

Compared to equity investors, corporate managers (including CEOs) tend to be relatively risk-averse. Unlike shareholders, they get paid even if the corporation breaks even, so high-risk/high-reward ventures are less attractive to them. In addition, they cannot diversify their labor “investment” so as to eliminate firm-specific risk (one can generally work only one job, after all). Managers therefore tend to prefer “safer” business ventures.

The need to reconcile risk preferences among corporate managers (directors and officers) and their principals (the shareholders) provides a compelling justification for Delaware’s business judgment rule.  Chancellor Allen clearly articulated this point in footnote 18 of the 1996 Caremark opinion:

Where review of board functioning is involved, courts leave behind as a relevant point of reference the decisions of the hypothetical “reasonable person”, who typically supplies the test for negligence liability. It is doubtful that we want business men and women to be encouraged to make decisions as hypothetical persons of ordinary judgment and prudence might. The corporate form gets its utility in large part from its ability to allow diversified investors to accept greater investment risk. If those in charge of the corporation are to be adjudged personally liable for losses on the basis of a substantive judgment based upon what persons of ordinary or average judgment and average risk assessment talent regard as “prudent” “sensible” or even “rational”, such persons will have a strong incentive at the margin to authorize less risky investment projects.

As Geoff has often reminded us, the optimal level of business risk is not zero.

Filed under: business, corporate governance, corporate law, law and economics

There’s been a lot of chatter around Washington about federal antitrust regulators’ interest in investigating Google, including stories about an apparent tug of war between agencies. But this interest may be motivated by expanding the agencies’ authority, rather than by any legitimate concern about Google’s behavior.

Last month in an interview with Global Competition Review, FTC Chairman Jon Leibowitz was asked whether the agency was “investigating the online search market” and he made this startling revelation:

“What I can say is that one of the commission’s priorities is to find a pure Section Five case under unfair methods of competition. Everyone acknowledges that Congress gave us much more jurisdiction than just antitrust. And I go back to this because at some point if and when, say, a large technology company acknowledges an investigation by the FTC, we can use both our unfair or deceptive acts or practice authority and our unfair methods of competition authority to investigate the same or similar unfair competitive behavior . . . . ”

“Section Five” refers to Section Five of the Federal Trade Commission Act. Exercising its antitrust authority, the FTC can directly enforce the Clayton Act but can enforce the Sherman Act only via the FTC Act, challenging as “unfair methods of competition” conduct that would otherwise violate the Sherman Act. Following Sherman Act jurisprudence, traditionally the FTC has interpreted Section Five to require demonstrable consumer harm to apply.

But more recently the commission—and especially Commissioners Rosch and Leibowitz—has been pursuing an interpretation of Section Five that would give the agency unprecedented and largely-unchecked authority. In particular, the definition of “unfair” competition wouldn’t be confined to the traditional measures–reduction in output or increase in price–but could expand to, well, just about whatever the agency deems improper.

Commissioner Rosch has claimed that Section Five could address conduct that has the effect of “reducing consumer choice”—an effect that a very few commentators support without requiring any evidence that the conduct actually reduces consumer welfare. Troublingly, “reducing consumer choice” seems to be a euphemism for “harm to competitors, not competition,” where the reduction in choice is the reduction of choice of competitors who may be put out of business by competitive behavior.

The U.S. has a long tradition of resisting enforcement based on harm to competitors without requiring a commensurate, strong showing of harm to consumers–an economically-sensible tradition aimed squarely at minimizing the likelihood of erroneous enforcement. The FTC’s invigorated interest in Section Five contemplates just such wrong-headed enforcement, however, to the inevitable detriment of the very consumers the agency is tasked with protecting.

In fact, the theoretical case against Google depends entirely on the ways it may have harmed certain competitors rather than on any evidence of actual harm to consumers (and in the face of ample evidence of significant consumer benefits).

Google has faced these claims at a number of levels. Many of the complaints against Google originate from Microsoft (Bing), Google’s largest competitor. Other sites have argued that that Google impairs the placement in its search results of certain competing websites, thereby reducing these sites’ ability easily to access Google’s users to advertise their competing products. Other sites that offer content like maps and videos complain that Google’s integration of these products into its search results has impaired their attractiveness to users.

In each of these cases, the problem is that the claimed harm to competitors does not demonstrably translate into harm to consumers.

For example, Google’s integration of maps into its search results unquestionably offers users an extremely helpful presentation of these results, particularly for users of mobile phones. That this integration might be harmful to MapQuest’s bottom line is not surprising—but nor is it a cause for concern if the harm flows from a strong consumer preference for Google’s improved, innovative product. The same is true of the other claims; harm to competitors is at least as consistent with pro-competitive as with anti-competitive conduct, and simply counting the number of firms offering competing choices to consumers is no way to infer actual consumer harm.

In the absence of evidence of Google’s harm to consumers, then, Leibowitz appears more interested in using Google as a tool in his and Rosch’s efforts to expand the FTC’s footprint. Advancing the commission’s “priority” to “find a pure Section Five case” seems to be more important than the question of whether Google is actually doing anything harmful.

When economic sense takes a back seat to political aggrandizement, we should worry about the effect on markets, innovation and the overall health of the economy.

Cross-posted from MainJustice

The South Korea Fair Trade Commission has begun an investigation of the Hyundai Motor Group surrounding allegations that Hyundai has, as the WSJ reports, “forced its auto parts suppliers to lower product prices.”   The story comes on the heels of a related fine of 1.6 trillion won ($1.48 billion).    What really jumps out in the WSJ story is the following:

The antitrust watchdog’s latest move comes as the government is expected to place more emphasis on supporting small and midsize companies, many of which continue to experience tough times even as the nation’s conglomerates power the country out of the 2007-2008 global financial crisis.

With South Korea recovering quickly from the crisis, President Lee Myung-bak, whose five-year single term ends in early 2013, has urged South Korea’s conglomerates to try to share the “warmth of the economic recovery” with their smaller peers and prosper together with them.

For the original reference, see here.

Quite a far cry from modern application of antitrust principles in the United States — in the courts anyway.  However, compare President Lee Myung-bak’s language with the Obama administration’s  White Paper on innovation:

Protect small businesses from unfair business practices. In many industries, small companies are critical innovators, bringing enormous benefits to consumers while putting competitive pressure on incumbent firms. The Obama Administration is committed to enforcing the antitrust laws to insure that innovative entrepreneurs are not excluded from the market by anti-competitive conduct. The Department of Justice actively investigates allegations of exclusionary conduct as part of its law enforcement mission to keep markets open and competitive.

See here for earlier discussion on TOTM.

 

 

Filed under: antitrust

Its a Bruin.  Marius Schwartz will replace Jonathan Baker as the new Chief Economist at the FCC.  From the press release:

Schwartz’s teaching and research specialties are in industrial organization, competition and regulation. Before joining Georgetown University, Schwartz served as Economics Director of Enforcement at the Antitrust Division of the U.S. Department of Justice and as Acting Deputy Assistant Attorney General for Economics. He also served the President’s Council of Economic Advisers as the Senior Economist for industrial organization matters. Schwartz holds a B.Sc. degree from the London School of Economics and
a Ph.D. from UCLA, also in economics.

Casebook co-author, and previous TOTM contributor (see, e.g. here) Jonathan Baker will be heading back to American University.  However, the press release also notes that both Baker and Gregory Rosston will work on the AT&T – T-Mobile deal:

Outgoing Chief Economist Jonathan Baker and Gregory Rosston will both serve as Senior Economists for Transactions to work on the Commission’s reviews of the AT&T-T-Mobile and AT&T-Qualcomm transactions.

The Rosston appointment is interesting for those following the AT&T deal (more TOTM commentary here and here; my testimony is available here) because Rosston (with Roger Noll) has already publicly opined rather strongly on the merger.  In the short note, Rosston & Noll write that “the justifications for the acquisition do not seem particularly strong, and anticompetitive effects appear to be plausible,” and that “Superficially, the proposed acquisition appears to run seriously afoul of the merger policy of the antitrust enforcement agencies.”

Congratulations to Professor Schwartz, and to outgoing Chief Economist Baker.

Filed under: antitrust, economics, federal communications commission, mergers & acquisitions, wireless

The Ninth Circuit recently issued a decision that pushes the doctrine governing tying in the right direction.  If appealed, the decision could provide the Roberts Court with an opportunity to do for tying what its Leegin decision did for resale price maintenance:  reduce error costs by bringing an overly prohibitory liability rule in line with economic learning.  First, some background on the law and economics of tying.  Then, a little about the Ninth Circuit’s decision.  

Some Background on the Law and Economics of Tying

Tying (or a “tie-in”) occurs when a monopolist sells its monopoly “tying” product on the condition that the buyer also purchase some “tied” product.  Under prevailing doctrine, tying  is per se illegal if: (1) the tie-in involves two truly separate products (e.g., a patented printer and unpatented ink, not a left shoe and a right shoe), (2) the seller possesses monopoly power over the tying product, and (3) the tie-in affects a “not insubstantial” dollar volume (not share) of commerce in the tied product market (e.g., $50,000 or so will suffice). 

Scholars from both the Chicago and Harvard Schools of antitrust analysis (including yours truly) have argued that this rule is too prohibitory and that tie-ins should be condemned only when they foreclose a substantial percentage of sales opportunities in the tied product market.  This sort of rule of reason approach, we maintain, would prevent liability for tie-ins that could not possibly be anticompetitive and would align tying doctrine with the liability rule governing tying’s close cousin, exclusive dealing.  The governing per se rule, we contend, is a relic of the days when courts believed that a monopolist could immediately earn two monopoly profits by tying in a separate product and charging both a supracompetitive price for that tied product and the monopoly price for its monopoly product.  This so-called leverage theory has been debunked.  (Consumers will view the supracompetitive tied product price as an increase in the price of the tying product, which will push the tying product price above the profit-maximizing level and cause the seller to lose profits.  In short, there is only one monopoly profit to exploit, and the seller can do so by charging its profit-maximizing monopoly price for the monopoly product alone.) 

A couple of years ago, Harvard Law’s Einer Elhauge published a much-discussed article arguing that we critics of current tying doctrine are wrong.  Prevailing doctrine, Elhauge argued, is appropriate because tie-ins can cause anticompetitive effects even if they do not occasion substantial tied market foreclosure.  In particular, a tie-in can permit a seller to price discriminate among consumers and thereby extract a greater proportion of the trade surplus for itself.  For example, in a variable proportion tie-in (one where there is no fixed ratio between the number of tying and tied units purchased, as when a buyer of a printer is required to purchase all his ink requirements from the printer seller), the seller can price discriminate by tying in a complement (ink) whose consumption corresponds to the degree to which consumers value the tying product (e.g., consumers who most value the printer likely buy lots of ink).  By lowering the price of the tying product (the printer) from monopoly levels and charging a supracompetitive price for the tied product (the ink), the seller can effectively charge higher prices to consumers who value the tying product more, thereby capturing more surplus for itself.  Elhauge argues (incorrectly, as I show in this article) that this is an anticompetitive effect.

A second form of “anticompetitive” price discrimination, Elhauge contends, may result from fixed proportion tie-ins of products for which demand is not positively correlated.  George Stigler provided the classic example of this dynamic in his discussion of the Loew’s case, which involved the block booking of feature films (i.e., selling the films only in packages). 

Suppose, for example, that a firm has two customers, A and B; that A values product X at $8,000 and product Y at $2,500; and that B values product X at $7,000 and product Y at $3,000.  (For simplicity’s sake, assume that the marginal cost of both products is zero.)  If the firm were to sell the products separately, it would charge $7,000 for X and $2,500 for Y, and it would earn profits of $19,000 ($9,500 x 2).  By tying the products together and selling them as a bundle, the seller can charge a total of $10,000 per customer, an amount less than or equal to each customer’s reservation price for the package, thereby earning profits of $20,000.  While each consumer is charged the same amount for the package, the pricing is in some sense discriminatory, for the seller effectively discriminates against A, the low-elasticity X buyer, on A’s purchase of X and against B, the low-elasticity Y buyer, on B’s purchase of Y.  (This is because, absent the tying of X and Y, A would have enjoyed surplus of $1,000 on X but no surplus on Y, and B would have enjoyed surplus of $500 on Y but no surplus on X.)  By engaging in this sort of price discrimination, the seller may enhance its profits for, as Judge Posner explains, “When the products are priced separately, the price is depressed by the buyer who values each one less than the other buyer does; the bundling eliminates this effect.”

According to Elhauge, the sort of price discrimination/surplus extraction occasioned by “Stigler-type” tying, like the price discrimination resulting from a variable proportion “metering” tie-in, is anticompetitive and justifies the prevailing liability rule against tying.  In a subsequent post, I will explain why Elhauge is wrong and why Stigler-type price discrimination is output-enhancing and thus procompetitive.  For now, though, let’s consider the Ninth Circuit’s recent case, which rejected Elhauge’s view.

The Ninth Circuit’s Recent Brantley Decision

Brantley, et al. v. NBC Universal, Inc., et al., involved a challenge by cable television subscribers to T.V. programmers’ practice of selling cable channels only in packages.  The plaintiffs, who preferred to purchase individual channels a la carte, maintained that the programmers’ policy violated Sherman Act Section 1.  As the Ninth Circuit correctly recognized, the arrangement really amounted to tying, for the programmers would sell their “must have” channels only if subscribers would also take other, less desirable channels.  (Indeed, the practice is closely analogous to the block booking at issue in Loew’s, where the distributor required that licensees of popular films also license flops.)

The district court dismissed plaintiffs’ first complaint without prejudice on the ground that plaintiffs failed to allege that their injuries (purportedly higher prices) were caused by an injury to competition.  Plaintiffs then amended their complaint to include an allegation “that Programmers’ practice of selling bundled cable channels foreclosed independent programmers from entering and competing in the upstream market for programming channels.”  In other words, plaintiffs alleged, the tying at issue occasioned substantial tied market foreclosure.

After conducting some discovery, plaintiffs decided to abandon that theory of harm.  They prepared a new complaint that omitted all market foreclosure allegations and asked the court to rule “that plaintiffs did not have to allege that potential competitors were foreclosed from the market in order to defeat a motion to dismiss.”  Defendants again sought to dismiss the complaint.  The district court, reasoning that the plaintiffs had failed to allege any cognizable injury to competition, granted defendants’ motion to dismiss, and plaintiffs appealed.

Given this procedural posture, the Ninth Circuit starkly confronted whether, as Elhauge maintains, the price discrimination/surplus extraction inherent in Stigler-type bundling is an “anticompetitive” effect that warrants liability.  In affirming the district court and holding that plaintiffs’ claims of higher prices were not enough to establish anticompetitive harm, it effectively held, as I and a number of others have urged, that there should be no tying liability absent substantial tied market foreclosure.

This holding, while correct as a policy matter, seems to conflict with the Supreme Court’s quasi-per se rule.  That rule assigns automatic liability if the tie-in involves multiple products (it did here), the seller has monopoly power over the tying product (it did here), and the tie-in involves a not insubstantial dollar volume of commerce in the tied product market (it did here).  Thus, the Ninth Circuit has provided the Supreme Court  with a perfect opportunity to revisit the liability rule governing tying. 

I for one am hoping that the Brantley plaintiffs appeal and that the Supreme Court agrees to take the case and reconsider the prerequisites to tying liability.  If it does so, I predict that it will overrule its Jefferson Parish decision, jettison the quasi-per se rule against tying, and hold that there can be no tying liability absent substantial foreclosure of marketing opportunities in the tied product market.

Filed under: antitrust, economics, error costs, law and economics, markets, price discrimination, regulation, Supreme Court, tying, tying

Although I spend lots of my time these days thinking about business, my interaction with businesses is mostly as a customer. In a former career, I spent time behind the curtain, but as a law professor, I read and profess about business more than I observe it up close and personal. But yesterday, I got a rare treat to see what it is really like to be a small entrepreneur in America.

Read the full piece here.

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