I’d like to propose a contest for the greatest intellectual embarrassment of antitrust. Let me name the first contestant—tying, which some of you know has been one of my favorite for years. Here’s why. First, there is no persuasive theoretical or empirical evidence that tying is a business practice that is likely to harm consumers.  (This is not the blog to deal with Professor Elhauge’s provocative paper except to say that it does not alter this view.)  There is work that says it could be, under stringent conditions, and one can point to cases where maybe the practice has been used in a harmful way.  Yet the courts have put tying in the same antitrust category as price fixing when done by a firm with some market power.   Second, the courts, lacking any analytical framework for detecting bad behavior, have developed a mechanical test for tying that doesn’t have any connection whatsoever to any of the plausible theories of when and why tying might be bad.  The test leads to false positives almost by design.  Third, tying has led to one of the most ridiculous antitrust remedies of all time—namely the  European Commission’s insistence that Microsoft expend effort creating and offering a product–a version of Windows that didn’t include Microsoft’s media player technology—that no one wants. Now, I understand that others will have their own candidates. But to beat mine your challenge is you must show a complete lack of theoretical or empirical support; a really bad legal test; and a remedy that better demonstrates the bankruptcy of the law.   The challenge is on.

Read the full piece here.

The DOJ’s Section 2 Report speaks in general terms about the costs and benefits of various remedies for monopolization. It prefers “prohibitory” remedies, but holds open the possibility of “additional relief,” including “affirmative-obligation remedies. The Report specifically mentions the protocol-licensing requirement of the Microsoft final judgments (§ III.E, entered in November 2002) as an example of a challenging and controversial affirmative-obligation remedy. In this post, I’d like to comment on the protocol-licensing program and its implementation. In doing so, I draw on my previous work with Jeff Childers, particularly Software Development as an Antitrust Remedy: Lessons from the Enforcement of the Microsoft Communications Protocol Licensing Requirement, and Measuring Compliance with Compulsory Licensing Remedies in the American Microsoft Case.

Read the full piece here.

The primary anticompetitive concern with exclusive dealing contracts is that a monopolist might be able to utilize exclusivity to fortify its market position, raise rivals’ costs of distribution, and ultimately harm consumers.  The unifying economic logic of these anticompetitive models of exclusivity is that the potential entrant (or current rival) must attract a sufficient mass of retailers to cover its fixed costs of entry, but that the monopolist’s exclusive contracts with retailers prevent the potential entrant from doing so.   However, the exclusionary equilibrium in these models are relatively fragile, and the models also often generate multiple equilibria in which buyers reject exclusivity. At the exclusive dealing hearings where I testified, a sensible consensus view emerged that a necessary condition for exclusive dealing or de facto exclusive contracts such as market-share discounts or loyalty discounts to cause competitive harm is that they deprive rivals of the opportunity to compete for access to distribution sufficient to achieve minimum efficient scale.

Read the full piece here. 

A bundled discount occurs when a seller offers to sell a collection of different goods for a lower price than the aggregate price for which it would sell the constituent products individually. Such discounts pose different competitive risks than single-product discounts because, as I explained in this post, they may have an exclusionary effect even if they result in a price that exceeds the cost of producing the bundle. In particular, even an “above-cost” bundled discount may have the effect of excluding rivals that (1) are more efficient at producing the products that compete with the discounter’s but (2) produce a less extensive product line than the discounter. In other words, bundled discounts may drive equally efficient but less diversified rivals from the market.

Read the full piece here. 

As I indicated in my prior blog entry, U.S. competition policy vis-à-vis single firm conduct (“SFC”) is best viewed not in isolation, but, rather, in the context of other jurisdictions’ SFC enforcement philosophies, and efforts to promote greater SFC policy convergence worldwide.  Given the proliferation of competition law regimes, firms that do business in multiple jurisdictions either may have to:  (1) tailor their business plans (marketing and distributional arrangements, joint ventures, pricing policies, etc.) nation-by-nation to satisfy differences in national competition laws (an approach rife with transactions costs); or (2) adopt a single set of policies that meets the competition law requirements of the “most restrictive” jurisdiction (an approach that could yield selection of a “less than optimally efficient” business plan).  A further complication is caused by transactions whose effects spill across jurisdictional boundaries; a transaction that found favor in one jurisdiction may not find favor in other jurisdictions.  To add to the policy complexity, as private rights of action proliferate around the globe, difficult jurisdictional questions and conflict of law issues may be posed in the future; the greater the divergence among antitrust regimes, the higher will be the costs imposed on businesses associated with (ideally) avoiding and (if necessary) ironing out such complications.  Thus, even though there may be good policy justifications (associated with differences among nations in procedure, private enforcement, and other local factors) for some continued differentiation among national competition regimes – reasons that David Evans (see http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1342797) and others have ably expounded upon – there is a sound basis for efforts (rooted in business efficiency and transactions cost avoidance) to promote gradual convergence and thereby avoid the greatest burdens arising from multinational disharmony in this field.

Read the full piece here.

One interesting aspect of the DOJ Report on Section 2 is the scant, episodic treatment of IP issues. The Report rejects the presumption of market power for patent ties (p. 81); has a very brief discussion of refusal to license patented parts in which it properly rejects the reasoning of the Ninth Circuit’s Kodak decision and aligns itself with the Federal Circuit’s Xerox decision (p. 121-122). The Walker Process case, which held that an infringement action based on an improperly acquired and unenforceable patent could violate §2, is cited in a footnote, and only for the proposition that market power is required in a §2 case (p. 25 n. 53). Finally, the Report contains a brief discussion of the presence of intellectual property in measuring incremental cost for purposes of analyzing predatory pricing (p. 63).

Read the full piece here.

The market power section of the Department’s Single Firm Conduct report is one of the strongest sections of the report.  It provides an exceptionally clear discussion of the market power element under Section 2.  It recognizes, in particular, that a violation of Section 2 requires more than mere market power, but rather a finding of substantial and durable market power – “an extreme degree of market power” as the Fifth Circuit expressed it in Beauville v. Federated Dep’t Stores.

Read the full piece here.

As evidenced by this on-line symposium, the handling of cases under the rubrics “monopolization,” “single firm conduct”, or “abuse of dominance” continues to be debated by the competition policy community. This debate, as evidenced by the Antitrust Division’s Sept. 2008 single firm conduct report and the FTC responses, is not restricted within the U.S. The European Union has published “Guidance Papers” on standards for exclusionary conduct under Article 82, and the Canadian Competition Bureau recently issued draft guidelines for prosecuting conduct under the abuse of dominance provisions of Sec. 79 of its Competition Act.

Read the full piece here.

Exclusive dealing prevents the bait-and-switch behavior by dealers who convert customers drawn by one brand to the products of its rivals. Despite the red flag of “exclusive” in its title, the practice is ordinarily uncontroversial, indeed innocuous. Automobile manufacturers often pay incentives to encourage dealers to deal exclusively in their vehicles. Business format franchising ensures that large swathes of distribution are exclusive. And when exclusive dealing is denied to suppliers, the results can be catastrophic, as when the FTC massacred those manufacturers of hearing instruments that relied on exclusive dealers. The FTC sued five such firms for exclusive dealing, four of which agreed to drop it, and promptly died.

Read the full piece here.