One of the most important changes in the antitrust laws over the past 40 years has been the diminished reliance of rules of per se illegality in favor of a rule of reason analysis. With the Court’s recent rulings in Leegin (eliminating per se rule for minimum RPM) and Independent Ink (eliminating the per se rule against intellectual property tying), the evolution of the antitrust laws has left only tying (under a “modified” per se rule) and horizontal price fixing under per se rules of illegality. This movement reflects advances in law and economics that recognize that vertical restraints, once condemned as per se illegal when used by firms with antitrust market power, can be procompetitive. It also reflects the judgment that declaring such practices pre se illegal produced high type I error costs (the false condemnation and deterrence of pro competitive practices).

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Much ink has been spilled concerning the policy split revealed by the Justice Department’s September 2008 Report on Single Firm Conduct (“SFC”) and the Federal Trade Commission’s swift and rather critical rejoinder (issued by three of the four FTC Commissioners). (By “SFC” I refer to actions taken by a “dominant” firm or by an actual or aspiring monopolist.) Among the concerns raised is that the lack of U.S. interagency consensus on SFC enforcement standards may undermine the ability of the United States to influence the development of international norms in this area, and, in particular, to promote convergence toward desirable best practices. These concerns, while understandable, are greatly overblown, in my opinion. As I will explain, work on SFC by leading scholars and agencies world-wide has greatly enhanced understanding of SFC practices in recent years. The September 2008 FTC-DOJ contretemps is a mere “bump in the road” and will not seriously detract from enforcers’ efforts to promote convergence in the SFC area. (However, the pace and direction of convergence efforts, and the desirability of particular SFC enforcements standards, are questions beyond the scope of this blog entry.)

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The “error cost” or “decision theory” approach to Section 2 legal standards emphasizes the probabilities and costs of errors in monopolization decisions.  Two types of error, and two associated types of cost are examined.  One type of error is that of a false acquittal, or false negative.  The other type of error is that of a false conviction, or false positive.  Under the error cost approach to legal standards, a legal standard should be chosen that minimizes the total expected costs of errors.

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In the wake of Bork and Posner, and Baxter and the Reagan Revolution, a consensus emerged that big could be bad, but the harm that dominant firms could do needed to be demonstrated, not simply assumed in consequence of their sheer size. Moreover, the demonstration required harm to competition. The consensus held through the Clinton Administration, buoyed by the talented economists that it attracted. The Section 2 Report is controversial in drawing lines about where harm to competition begins, but it is not hard to imagine all sides of the debate agreeing with this from the report: “Competition is ill-served by insisting that firms pull their competitive punches so as to avoid the degree of marketplace success that gives them monopoly power or by demanding that winning firms, once they achieve such power, ‘lie down and play dead.’ ” (Report, p.8)

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I must confess that my basic reaction to the Section 2 report was disappointment.  It’s not that I find much fault with the report itself–a few quibbles yes, but generally I find it quite satisfactory–but that after all of the time and effort put into the joint hearings by the FTC, the FTC wasn’t able to join the report.  Moreover, the shrill dissenting statement by three commissioners will probably prevent the report from playing influencing judicial decisions or legislation.

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Given the embarrassing outcome of the FTC/DOJ single-firm conduct hearings, it is worth revisiting what the organizers of the hearings were attempting to accomplish.  The Federal Register notice announcing the hearings provides some key insights.  It read, in part…

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When the Justice Department issued its Unilateral Conduct Report last September, it became an instant sensation not primarily because of its content, but because of a strident public critique issued by three FTC Commissioners, including now-Chairman Leibowitz. The three (Harbour, Leibowitz and Rosch, hereinafter “HLR”) accused the Antitrust Division of placing “a thumb on the scales in favor of firms with monopoly . . . power”, and of adopting “drastic changes” comprising “a legal regime [that places] . . . the interests of firms that enjoy monopoly or near monopoly power . . .ahead of the interests of consumers”. Thundering on, HLR savaged the DOJ Report as a “blueprint for radically weakened enforcement of Section 2”, accusing DOJ of “seriously overstat[ing] the level of . . . consensus” on Section 2, and of improperly glorifying economics as “tantamount to the law itself”. Although signed by three of the four Commission members, the Statement was not presented as a position of the FTC, leaving observers to wonder about the internal process that produced the HLR statement and what it reflected about the views of the various Bureaus and other key Commission staff. For FTC/DOJ relations, already rocked by a long series of public disagreements over a string of antitrust issues (reverse-payment Hatch-Waxman settlements, price squeezes), this was a new low, unprecedented in the living memory of the antitrust bar.

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Abstract

This chapter surveys the legal and economic literatures on the antitrust analysis of tying arrangements and exclusive dealing contracts. We review the analytical framework applied under U.S. antitrust law to tying, bundling and exclusive dealing arrangements as well as the existing theoretical and empirical literatures.