The treatment of unilateral conduct remains an intellectual and policy mess as we finish out the first decade of the 21^st century. There were signs of hope a few years ago. The European Commission embarked on an effort to adopt an effects-based approach to unilateral conduct and to move away from the analytically-empty, object-based approach developed by the European Courts.  Meanwhile the Federal Trade Commission and the U.S. Department of Justice embarked on a series of hearings on unilateral conduct that brought the best thinkers together and hoped to achieve some consensus.  Hopes were dashed in 2008.  The Justice Department and the FTC splintered. The DOJ issued a lengthy report that for all intents and purposes argued for significantly limiting the circumstances under which a business practice could be found to constitute anticompetitive unilateral conduct. Three of the four sitting Federal Trade Commissioners quickly asserted their fundamental disagreement. Towards the end of the year the European Commission finally issued a document that adopted an effects-based approach, sort of, but only for guidance for its prosecutorial discretion over which cases it would focus its resources on.  I say “sort of” because although much of the framework it adopts is quite sensible, the Commission places virtually insurmountable obstacles to considering efficiencies. (For a comparative review of the EC and DOJ reports see my article here.)

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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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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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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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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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A new law in Maryland will take effect on October 1 and will re-instate the Dr. Miles rule for minimum RPM. The Wall Street Journal reports that it is a “move that could lead to lower prices for consumers across the country.” I doubt it. There are quite a few reasons to believe that shifts back to Dr. Miles will not result in lower retail prices, much less higher output (recall that the price effects are less interesting here from a consumer welfare perspective because both cartel theories and pro-competitive theories under which RPM facilitates demand-enhancing promotional services predict upward price movement). For instance, the most likely outcome of the move to per se illegality (whether at the state or federal level through legislation) is that firms contract around the rule with more costly contractual arrangements or vertical integration. To the extent that these alternative arrangements are indeed less efficient, those costs will be passed on to consumers. And of course, the empirical evidence tells us that RPM is generally output-enhancing, not anticompetitive.

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My colleague Adam Mossoff is blogging over at the Volokh Conspiracy on his fascinating paper, A Stitch in Time: The Rise and Fall of the Sewing Machine Patent Thicket. Here’s an excerpt from the first post…

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