Given the enthusiasm for application of behavioral economics to antitrust analysis from some corners of the Commission and the academy, I found this remark from Alison Oldale at the Federal Trade Commission interesting (Antitrust Source):

Behavioral economists are clearly correct in saying that people and firms are not the perfect decision makers using perfect information that they are portrayed to be in many economic models. But alternative models that incorporate better assumptions about behavior and which give us useful ways to understand the likely effects of mergers, or particular types of conduct, aren’t there yet. And in the meantime our existing models give us workable approximations. So we haven’t done much yet, but we’ll keep watching developments.

For myself, I wonder whether the first place behavioral economic analysis might be brought to bear on antitrust enforcement will be in areas like coordinated effects or exchange of information. These are areas where our existing theories are not very helpful. For example when looking at coordinated effects in merger control the standard approach focuses a lot on incentives to coordinate. But there are lots and lots of markets where firms have an incentive to coordinate but they don’t seem to be doing so. So it seems there is a big piece of the puzzle that we are missing, and perhaps behavioral economics will be able to tell us something about what to look at in order to get a better handle when coordination is likely in practice.

I certainly agree with the conclusion that the behavioral economics models are not yet ready for primetime.  See, for example, my work with Judd Stone in Misbehavioral Economics: The Case Against Behavioral Antitrust or my series of posts on “Nudging Antitrust” (here and here).

Filed under: antitrust, behavioral economics, behavioral economics, economics, federal trade commission

Louis Kaplow’s Why (Ever) Define Markets? in the Harvard Law Review was one of the most provocative papers in the antitrust literature over the past few years.  We’ve discussed it here.  I wrote:

Kaplow provocatively argues that the entire “market definition/ market share” paradigm of antitrust is misguided and beyond repair.  Kaplow describes the exclusive role of market definition in that paradigm as generating inferences about market power, argues that market definition is incapable of generating reasonable inferences for that purpose as a matter of basic economic principles primarily because one must have a “best estimate” of market power previous to market definition, and concludes that antitrust ought to do away with market definition entirely.  As my description of the paper suggests, and Kaplow recognizes, it is certainly an “immodest” claim.  But it is a paper that has evoked much discussion in antitrust circles, especially in light of the recent shift in the 2010 HMGs toward analysis of competitive effects and away from market definition.

Many economists were inclined to agree with the basic conceptual shift toward direct analysis of competitive effects.  Much of that agreement was had on the basis that the market definition exercise aimed to do a number of things directed toward identifying the potential competitive effects of a merger (identifying market power is certainly one of those things), and that if we had tools allowing for direct inferences we ought to use those instead.  Kaplow’s attack on market definition, however, was by far the most aggressive critique.

Kaplow’s analysis prompted responses from antitrust scholars, including most notably Greg Werden (DOJ).  I discuss Werden’s critique here.

In my view, the debating over the proper scope and function of market definition in antitrust – and in particular the proper relationship between the market definition inquiry and competitive effects analysis – is ongoing.  Thus, it was interesting for me to see Richard Markovits’ (Texas) latest entry on SSRN (HT: Danny Sokol), which appears to attempt to shift the debate from whether market definition should be killed, to whom the credit should be attributed for its execution.  Markovits’ piece, Why One Should Never Define Markets or Use Market-Oriented Approaches to Analyze the Legality of Business Conduct Under U.S. Antitrust Law, argues – well – what the title says.   And in particular, he defends his earlier work against Kaplow’s dismissal of it in footnote – claiming his it is own analysis, not Kaplow’s, that should be credited with the rejection of market definition based approaches (in fact, Markovits’ claim is much broader).  From the abstract:

In 2010, Professor Louis Kaplow published an article Why Ever Define Markets? that argues for the proposition that one should never define markets for the purpose of measuring a firm’s economic power, which is a corollary of the conclusion that I established in 1978. Kaplow’s article includes a lengthy footnote that — after stating that my 1978 article constitutes a “particularly harsh attack on market definition” — denigrates it on a number of accounts. The article I am posting (1) delineates slightly-improved versions of my 1978 arguments against the use of market-oriented approaches to analyzing the legality of business practices under U.S. antitrust law, (2) explains why those arguments and the “idiosyncratic” (Kaplow’s accurate if pejorative characterization) conceptual systems and competition theories they employ imply that Kaplow’s more limited conclusion is correct, (3) delineates and criticizes Kaplow’s “arguments” for his conclusion (the most relevant of which is a correct assertion of a proposition that is an analog to the conclusion of my second argument for the claim my 1978 article establishes — an assertion he does not and cannot justify because he does not develop and use any counterpart to my idiosyncratic conceptual systems and theories, which play a critical role in the justificatory argument), (4) demonstrates that all of Kaplow’s criticisms of my 1978 article are either incorrect or unjustified, and (5) asserts that at least some of the errors Kaplow makes when criticizing my article are important because they are made by others as well and militate against the correct analysis of the legality of various types of business conduct under U.S. antitrust law.

Filed under: antitrust, economics, market definition

From Bloomberg:

The U.S. Supreme Court said it will decide whether states can block antitrust scrutiny of hospital mergers such as Phoebe Putney Health System Inc.’s acquisition of Palmyra Park Hospital in Georgia.

The justices today said they will hear the Federal Trade Commission’s appeal of a U.S. appellate court ruling that the proposed purchase of HCA Inc.-owned Palmyra, based in Albany, Georgia, could be carried out over the agency’s objections.

The Atlanta-based 11th U.S. Circuit Court of Appeals said the Georgia state legislature granted antitrust immunity to the deal, trumping the FTC’s assertion that the acquisition would result in too few health-care options for Albany residents.

“We are pleased that the Supreme Court will consider the Phoebe Putney matter in the coming term,” FTC Chairman Jon Leibowitz said in an e-mailed statement. “This case is important to consumers, who benefit from a competitive health care marketplace. It also may provide crucial guidance on the boundaries of the state action doctrine.”

The State Action doctrine has long been in some need of guidance; see the FTC State Action Report or the Antitrust Modernization Commission Report – both which call for increased guidance and clarity on the contours of the state action doctrine – for details.  As the AMC Report observes:

The lower courts have not always properly implemented Supreme Court precedents outlining what is required to satisfy the clear articulation prong. In Town of Hallie v. City of Eau Claire the Supreme Court held the clear articulation standard was satisfied where the allegedly anticompetitive conduct was a “foreseeable result” of a state law.52 Following Town of Hallie, however, some courts have applied a standard of “foreseeability” (and thus immunity) wherever a state authorizes conduct that does not necessarily, but might, have an anticompetitive effect. 53  To say that anticompetitive effects are a possible result of a statute, however, is not the same as finding “a deliberate and intended state policy” to replace competition with regulation, as the Court subsequently required in FTC v. Ticor Title Insurance Co.54

There are a number of areas within the state action doctrine that could use some attention.  I’m sure we’ll have more discussion of the case here in the weeks to come.

Filed under: antitrust, federal trade commission

I am very pleased to report that Kevin Murphy – economist extraordinaire, recipient of the MacArthur Fellowship, Bates Clark Medal winner, and of course, fellow UCLA Bruin — has agreed to join Charles River Associates as a Senior Consultant beginning May 2013 when his contract with Navigant Economics expires.  As a fellow Senior Consultant at CRA, and a fan of Murphy’s academic and expert work, I’m very pleased that he will be joining the firm.

From the CRA press release:

Charles River Associates (NASDAQ: CRAI), a worldwide leader in providing economic, financial, and management consulting services, today announced that Kevin M. Murphy, the George J. Stigler Distinguished Service Professor of Economics, Department of Economics and Booth School of Business, University of Chicago, has entered into an agreement to become a senior consultant to CRA’s Antitrust & Competition Economics Practice. Professor Murphy is expected to begin working with CRA in May 2013.

“Kevin Murphy is widely regarded as one of the smartest economists in the world and we are honored and thrilled about his decision to become a senior consultant to Charles River Associates,” said CRA’s President and Chief Executive Officer Paul Maleh. “Professor Murphy has an outstanding reputation as an extremely effective expert in numerous antitrust, labor and other engagements. In his academic research, Professor Murphy has developed leading theories and analyses that explain how economic incentives influence social phenomena, such as addiction, and determine economic outcomes, including wage inequality, unemployment, and the economic value of health and medical research. Professor Murphy has a reputation for being exceptionally creative, asking the questions not being asked, and developing innovative and informative economic models. Simply put—he is an economist in a league of his own. We look forward to working with Professor Murphy and continuing CRA’s tradition of teaming our highly-talented consulting professionals with renowned academics and economists to best serve clients.”

Dr. Steven C. Salop, a Senior Consultant to CRA and Professor of Economics and Law at Georgetown University Law Center, said, “We are very excited to have Kevin Murphy joining CRA. Besides being one of the most creative economists of his generation, Kevin is both articulate and down to earth. We are looking forward to having him as a colleague and a leader.”

Congratulations to Dr. Murphy and Charles River Associates.

DISCLOSURE: As mentioned, I am a Senior Consultant to CRA.

Filed under: antitrust, economics

Competition Policy International has published an interview with Judge Douglas Ginsburg and me following up on our 2010 article “Antitrust Sanctions.”  The interview ranges from topics such as whether the Occupy movements impact our proposal for use of debarment as an antitrust sanction in the United States to fairness concerns and global trends in antitrust penalties.  I believe one must be a subscriber to read the interview or listen to the audio.   The issue also contains an interview with Don Klawiter discussing the relationship between the evolution of executive penalties in antitrust, the Ginsburg & Wright proposal, and compliance programs.  Check it out.

Filed under: antitrust, cartels, doj, economics

Judge Douglas Ginsburg (D.C. Circuit Court of Appeals; NYU Law) and I have posted “Dynamic Antitrust and the Limits of Antitrust Institutions” to SSRN.  Our article is forthcoming in Volume 78 (2) of the Antitrust Law Journal.  We offer a cautionary note – from an institutional perspective – concerning the ever-increasing and influential calls for greater incorporation of models of dynamic competition and innovation into antitrust analysis by courts and agencies.

Here is the abstract:

The static model of competition, which dominates modern antitrust analysis, has served antitrust law well.  Nonetheless, as commentators have observed, the static model ignores the impact that competitive (or anti-competitive) activities undertaken today will have upon future market conditions.  An increased focus upon dynamic competition surely has the potential to improve antitrust analysis and, thus, to benefit consumers.  The practical value of proposals to increase the use of dynamic analysis must, however, be evaluated with an eye to the institutional limitations that antitrust agencies and courts face when engaged in predictive fact-finding.  We explain and evaluate both the current state of dynamic antitrust analysis and some recent proposals that agencies and courts incorporate dynamic considerations more deeply into their analyses.  We show antitrust analysis is not willfully ignorant of the limitations of static analysis; on the contrary, when reasonably confident predictions can be made, they are readily incorporated into the analysis.  We also argue agencies and courts should view current proposals for a more dynamic approach with caution because the theories underpinning those proposals lie outside the agencies’ expertise in industrial organization economics, do not consistently yield determinate results, and would place significant demands upon reviewing courts to question predictions based upon those theories.  Considering the current state of economic theory and empirical knowledge, we conclude that competition agencies and courts have appropriately refrained from incorporating dynamic features into antitrust analysis to make predictions beyond what can be supported by a fact-intensive analysis.

You can download the paper here.

Filed under: antitrust, doj, economics, entrepreneurship, error costs, exclusionary conduct, federal trade commission, merger guidelines, mergers & acquisitions, monopolization, settlements, technology

Recently, the FTC announced that Howard Shelanksi would be taking charge of the Bureau of Economics on July 1st.  Now comes news that DOJ economist Ken Heyer (and UCLA Bruin!) — longtime Economics Director at the Division — will be moving over to the Commission as Deputy Director for Antitrust.  Leemore Dafny (Northwestern) will also come to the Commission to serve in a newly created role as Deputy Director for Health Care.

From the FTC press release:

“I am very pleased that we will have two such distinguished economists joining the Bureau,” said Howard Shelanski, who was named Director of the Bureau last month and is slated to assume the position on July 1. “Ken’s skill and wealth of experience will be invaluable to our competition mission, and Leemore will bring cutting-edge expertise to our antitrust enforcement in health care markets and more broadly as well. I am also very thankful to Alison Oldale, who Ken replaces, for her expert guidance of the Bureau’s antitrust mission during her year as Deputy on detail from the UK Competition Commission.”

Heyer has held a variety of management positions since joining the DOJ’s Antitrust Division in 1982. Most recently, he was Chief of the Economic Analysis Group’s Competition Policy Section, and from 2001 to 2010 he served as the Division’s Economics Director, the highest position held by a career economist in DOJ’s Antitrust Division. Prior to being promoted to management, he had worked at the Division for many years as a staff economist. In 1999 Heyer received the Antitrust Division’s first William F. Baxter Award for outstanding contributions in the area of economic analysis. Heyer holds a Ph.D. in Economics from U.C.L.A., and a B.A. from Queens College, CUNY.

Dafny is an Associate Professor of Management and Strategy, and the Herman Smith Research Professor in Hospital and Health Services at the Kellogg School of Management at Northwestern University, where she has served on the faculty since 2002. She is a microeconomist whose research focuses on competition in healthcare markets. Her work has appeared in the American Economic Review, the Journal of Law and Economics, and the New England Journal of Medicine. Dafny graduated summa cum laude from Harvard College and earned her Ph.D. in Economics from the Massachusetts Institute of Technology. From 1995-1997, she worked as a consultant with McKinsey & Company in Washington, DC. She is a Research Associate of the National Bureau of Economic Research, a Faculty Associate of the Institute for Policy Research, and a Faculty Affiliate of the Center for the Study of Industrial Organization at Northwestern.

Filed under: antitrust, economics, federal trade commission, health care

Yale Law Journal has published my article on “The Antitrust/ Consumer Protection Paradox: Two Policies At War With One Another.”  The hat tip to Robert Bork’s classic “Antitrust Paradox” in the title will be apparent to many readers.  The primary purpose of the article is to identify an emerging and serious conflict between antitrust and consumer protection law arising out of a sharp divergence in the economic approaches embedded within antitrust law with its deep attachment to rational choice economics on the one hand, and the new behavioral economics approach of the Consumer Financial Protection Bureau.  This intellectual rift brings with it serious – and detrimental – consumer welfare consequences.  After identifying the causes and consequences of that emerging rift, I explore the economic, legal, and political forces supporting the rift.

Here is the abstract:

The potential complementarities between antitrust and consumer protection law— collectively, “consumer law”—are well known. The rise of the newly established Consumer Financial Protection Bureau (CFPB) portends a deep rift in the intellectual infrastructure of consumer law that threatens the consumer-welfare oriented development of both bodies of law. This Feature describes the emerging paradox that rift has created: a body of consumer law at war with itself. The CFPB’s behavioral approach to consumer protection rejects revealed preference— the core economic link between consumer choice and economic welfare and the fundamental building block of the rational choice approach underlying antitrust law. This Feature analyzes the economic, legal, and political institutions underlying the potential rise of an incoherent consumer law and concludes that, unfortunately, there are several reasons to believe the intellectual rift shaping the development of antitrust and consumer protection will continue for some time.

Go read the whole thing.

Filed under: antitrust, behavioral economics, bundled discounts, consumer financial protection bureau, consumer protection, economics, federal trade commission

Judge Posner’s decision to appoint a expert in the patent dispute before him in the Seventh Circuit between Apple and Motorola has received some attention.  ABA Journal

Though Posner is an appeals judge with the Chicago-based 7th U.S. Circuit Court of Appeals, he likes to volunteer for trials, the Chicago Tribune reports. In a speech at the 7th Circuit Bar Association on Monday, Posner said the court-appointed experts could explain unclear scientific terms to jurors in the case.

“The idea of expert witness who are not beholden to the parties who can provide information to judges and juries on technical issues, I think is a terrific opportunity worth exploring,” Posner said.

In a March 10 court order (PDF), Posner endorsed another idea—a special blue-ribbon jury—to help decipher difficult patent claims in the case, the Patent Lawyer Blog has reported. Posner told lawyers he wanted the claim constructions to be “in ordinary English intelligible to persons having no scientific or technical background” since lay jurors would be deciding the case.

“There is no point in giving jurors stuff they won’t understand,” he wrote. “The jury (actual juries) will not consist of patent lawyers and computer scientists or engineers unless the parties stipulate to a ‘blue ribbon’ jury; I would welcome their doing so but am not optimistic.”

This is not a surprise.  Judge Posner has long advocated the use of court-appointed experts in his writing.  I suspect this move — a judge appointing an expert for the purpose of claim construction in a patent case — is not too unusual, but is receiving quite a bit of attention both because it is Judge Posner and because it is a high profile patent case.  John Wiley (my antitrust law professor) has an excellent article on the use of court appointed experts and other strategies for “taming scary patent cases.”

But this got me thinking about how relatively rare court appointment in antitrust cases is.  There are a handful of of anecdotal examples to be sure.  They are very familiar in the antitrust community — Alfred Kahn in New York v. Kraft General Foods, Carl Kaysen as law clerk in United Shoe Machinery — in part because of how rare a phenomenon it is.   A 2006 ABA Task Force memo discusses the pros and cons a bit, but does not reach a conclusion.  Moreover, most of the cons are generally costs of using court appointed experts: identifying a witness both parties agree to might be difficult, witnesses might not be “true neutrals,” judges might give too much deference to the opinion of the expert.  Tad Lipsky analyzes the potential for court appointed experts and other possible solutions to the increasing complexity of economic testimony in antitrust cases here.  Yet, if I’m right that this happens much more often in patent cases than it does in antitrust cases — another area of law relying upon outside disciplines (whether a technological field or economics and statistics) — it raises an interesting question as to why?  I admit I might be wrong about the empirical premise.  But it is certainly the case that court appointment is very rare in antitrust cases.

Here are a few hypotheses to explain the higher judicial demand for outside expertise in patent cases:

• Appeal and reversal rates are higher in patent claim construction cases and reversal-averse judges want the help.
• Judges — rightly or wrongly — have greater confidence in their ability to understand the underlying economics in a complex antitrust case than in their ability to tangle in a “hard science” discipline — is it more embarrassing to “ask for directions” in an antitrust case?
• Closer substitutes are available for economic training for judges (e.g. the LEC Economic Institute) than for the hard science disciplines involved in patent cases
• Other Institutional reasons: does Daubert work differently in antitrust cases than patent cases?

I’m sure there are others.  But it seems to be a potentially interesting puzzle that I’ve been thinking about for awhile.  I know we’ve got some experienced antitrust litigators and consulting economists reading.  I’d be very interested in hearing thoughts on what might explain the judicial reluctance — relative to patent cases, assume I’m right about that (and I think I am) — to appoint their own experts.

Filed under: antitrust, economics