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William & Mary’s Alan Meese has posted a terrific tribute to Robert Bork, who passed away this week.  Most of the major obituaries, Alan observes, have largely ignored the key role
Bork played in rationalizing antitrust, a body of law that veered sharply off course in the middle of the last century.  Indeed, Bork began his 1978 book, The Antitrust Paradox, by comparing the then-prevailing antitrust regime to the sheriff of a frontier town:  “He did not sift the evidence, distinguish between suspects, and solve crimes, but merely walked the main street and every so often pistol-whipped a few people.”  Bork went on to explain how antitrust, if focused on consumer welfare (which equated with allocative efficiency), could be reconceived in a coherent fashion.

It is difficult to overstate the significance of Bork’s book and his earlier writings on which it was based.  Chastened by Bork’s observations, the Supreme Court began correcting its antitrust mistakes in the mid-1970s.  The trend began with the 1977 Sylvania decision, which overruled a precedent making it per se illegal for manufacturers to restrict the territories in which their dealers could operate.  (Manufacturers seeking to enhance sales of their brand may wish to give dealers exclusive sales territories to protect them against “free-riding” on their demand-enhancing customer services; pre-Sylvania precedent made it hard for manufacturers to do this.)  Sylvania was followed by:

• Professional Engineers (1978), which helpfully clarified that antitrust’s theretofore unwieldy “Rule of Reason” must be focused exclusively on competition;
• Broadcast Music, Inc. (1979), which held that competitors’ price-tampering arrangements that reduce costs and enhance output may be legal;
• NCAA (1984), which recognized that trade restraints among competitors may be necessary to create new products and services and thereby made it easier for competitors to enter into output-enhancing joint ventures;
• Khan (1997), which abolished the ludicrous per se rule against maximum resale price maintenance;
• Trinko (2004), which recognized that some monopoly pricing may aid consumers in the long run (by enhancing the incentive to innovate) and narrowly circumscribed the situations in which a firm has a duty to assist its rivals; and
• Leegin (2007), which overruled a 96 year-old precedent declaring minimum resale price maintenance–a practice with numerous potential procompetitive benefits–to be per se illegal.

Bork’s fingerprints are all over these decisions.  Alan’s terrific post discusses several of them and provides further detail on Bork’s influence.

And while you’re checking out Alan’s Bork tribute, take a look at his recent post discussing my musings on the AALS hiring cartel.  Alan observes that AALS’s collusive tendencies reach beyond the lateral hiring context.  Who’d have guessed?

Filed under: antitrust, cartels, law and economics, legal scholarship, markets, monopolization, regulation, resale price maintenance, Supreme Court

In light of Barclays and other recent events, The Economist focuses on increasing corporate fines in response to price-fixing violations.

That some firms behave badly is nothing new, but the response of the authorities has changed recently. Take cartels. Internationally, fines rose by a factor of one thousand between the 1990s and 2000s. Data from America suggest this is not because there are more cartel cases, which have shown no upward trend since the late 1980s. Rather, the average level of fines has risen (see left-hand chart). Recent penalties have smashed records. The Barclays fine includes the largest ever levied by Britain’s financial regulator and America’s Commodity Futures Trading Commission, for instance. Even so, are fines high enough to work?

The article goes on to discuss the Becker optimal sanction framework.  It also makes some important mistakes in framing the debate.  For example, it describes the Chicago School approach has rejecting corporate or individual fines in lieu of the reputational costs antitrust violators will bear.  The article reaches an unsurprising conclusion consistent with the historical approach of U.S. antitrust and with conventional wisdom: what is needed is more increases in corporate fines.

To deter bad behaviour fines need to rise. The watchdogs are biting, but some need sharper teeth.

For reasons described in my article with Judge Ginsburg (D.C. Circuit Court of Appeals; NYU Law), Antitrust Sanctions, I’m skeptical ever-increasing corporate fines are the appropriate prescription for improving deterrence of hard core cartel activity.   Competition Policy International (who published the original article) interviews Judge Ginsburg and I here.  We discuss existing evidence on the effectiveness of criminal antitrust sanctions and propose adding to the mix debarment for individuals responsible for cartel activity.

Filed under: antitrust, cartels, 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

Apple has filed its response to the DOJ Complaint in the e-books case.  Here is the first paragraph of the Answer:

The Government’s Complaint against Apple is fundamentally flawed as a matter of fact and law. Apple has not “conspired” with anyone, was not aware of any alleged “conspiracy” by others, and never “fixed prices.” Apple individually negotiated bilateral agreements with book publishers that allowed it to enter and compete in a new market segment – eBooks. The iBookstore offered its customers a new outstanding, innovative eBook reading experience, an expansion of categories and titles of eBooks, and competitive prices.

And the last paragraph of the Answer’s introduction:

The Supreme Court has made clear that the antitrust laws are not a vehicle for Government intervention in the economy to impose its view of the “best” competitive outcome, or the “optimal” means of competition, but rather to address anticompetitive conduct. Apple’s entry into eBook distribution is classic procompetitive conduct, and for Apple to be subject to hindsight legal attack for a business strategy well-recognized as perfectly proper sends the wrong message to the market, and will discourage competitive entry and innovation and harm consumers.

A theme that runs throughout the Answer is that the “pre-Apple” world of e-books was characterized by little or no competition and that the agency agreements were necessary for its entry, which in turn has resulted in a dramatic increase in output.  The Answer is available here.  While commentary has focused primarily upon the important question of the competitive effects of the move to the agency model, including Geoff’s post here, my hunch is that if the case is litigated its legacy will be as an “agreement” case rather than what it contributes to rule of reason analysis.  In other words, if Apple gets to the rule of reason, the DOJ (like most plaintiffs in rule of reason cases) are likely to lose — especially in light of at least preliminary evidence of dramatic increases in output.  The critical question — I suspect — will be about proof of an actual naked price fixing agreement among publishers and Apple, and as a legal matter, what evidence is sufficient to establish that agreement for the purposes of Section 1 of the Sherman Act.  The Complaint sets forth the evidence the DOJ purports to have on this score.  But my hunch — and it is no more than that — is that this portion of the case will prove more important than any battle between economic experts on the relevant competitive effects.

Filed under: antitrust, business, cartels, contracts, doj, e-books, economics, error costs, law and economics, litigation, MFNs, monopolization, resale price maintenance, settlements, technology, vertical restraints Tagged: agency model, Amazon, antitrust, Apple, doj, e-books, iBookstore, major publishers, MFN, most favored nations clause, per se, price-fixing, publishing industry, Rule of reason, vertical restraints

From the WSJ:

Publishers argue that the agency model promotes competition by allowing more booksellers to thrive. They say Amazon had sold e-books below cost and that agency pricing saved book publishers from the fate suffered by record companies.

But the Justice Department believes it has a strong case that Apple and the five publishers colluded to raise the price of e-books, people familiar with the matter say.

Apple and the publishers deny that.

The Justice Department isn’t taking aim at agency pricing itself. The department objects to, people familiar with the case say, coordination among companies that simultaneously decided to change their pricing policies.

“We don’t pick business models—that’s not our job,” Ms. Pozen says, without mentioning the case explicitly. “But when you see collusive behavior at the highest levels of companies, you know something’s wrong. And you’ve got to do something about it.”

For related posts, see here.  The case increasingly appears to focus on whether the DOJ can prove coordination among rivals with respect to the shift to the agency model and e-book prices.

Filed under: antitrust, cartels, contracts, doj, e-books, economics, error costs, law and economics, litigation, MFNs, monopolization, resale price maintenance, technology, vertical restraints Tagged: agency model, Amazon, antitrust, Apple, doj, e-books, iBookstore, major publishers, MFN, most favored nations clause, per se, price-fixing, publishing industry, Rule of reason, vertical restraints

From a pure antitrust perspective, the real story behind the DOJ’s Apple e-book investigation is the Division’s deep commitment to the view that Most-Favored-Nation (MFN) clauses are anticompetitive (see also here), no doubt spurred on at least in part by Chief Economist Fiona Scott-Morton’s interesting work on the topic.

Of course, there are other important stories here (see Matt Yglesias’ excellent post), like “how much should a digital book cost?” And as Yglesias writes, whether “the Justice Department’s notion that we should fear a book publishers’ cartel is borderline absurd, on par with worrying about price-fixing in the horse-and-buggy market.”

I can’t help but notice another angle here.  For those not familiar, the current dispute over e-books emerges over a shift in business models from a traditional one in which publishers sold at wholesale prices to bookstores who would, in turn, set the prices they desired — sometimes below the book’s cover price — and sell to consumers at retail.  Much of the dispute arises out of the incentive conflict between publishers and retailers with respect to the profit-maximizing price.  The WSJ describes the recent iteration of the conflict:

To build its early lead in e-books, Amazon Inc. AMZN +0.19% sold many new best sellers at $9.99 to encourage consumers to buy its Kindle electronic readers. But publishers deeply disliked the strategy, fearing consumers would grow accustomed to inexpensive e-books and limit publishers’ ability to sell pricier titles.

Apple’s proposed solution was a move to what is described as an “agency model,” in which Apple takes a 30% share of the revenues and the publisher sets the price — readers may recognize that this essentially amounts to resale price maintenance — an oft-discussed topic at TOTM.  The move to the agency-RPM model also entailed the introduction of an MFN clause stipulating that publishers could not sell to rivals at a lower price.

Whether Apple facilitated a collusive agreement among publishers or whether this industry-wide move to the agency-model is an efficient and consumer-welfare enhancing method of solving the incentive conflict between publishers and retailers remains to be seen.  What is somewhat new in this dispute about book distribution is the technology involved; but the underlying economics of vertical incentive conflict between publishers and retailers is not!

Many economists are aware Alfred Marshall’s Principles of Economics textbook was apparently the first commodity sold in the United States under an RPM agreement!  (HT: William Breit)  The practice apparently has deeper roots in Germany.  The RPM experiment was thought up by (later to become Sir) Frederick Macmillan.  Perhaps this will sound familiar:

In 1890 Frederick Macmillan of the Macmillan Company was casting about for a book with which to conduct an experiment in resale price maintenance.  For years it had been the practice in Great Britain for the bookselllers to give their customers discounts off the list prices; i.e. price cutting had become the general practice.  In March, 1890, Mr. Macmilan had written to The Bookseller suggesting a change from the current discount system and had inserted a form to be filled out by the dealers.

Experimentation with business models to align the incentives of publishers and sellers is nothing new; it is only wonderful coincidence that the examples involve a seminal economics text published as the Sherman Act was enacted.  Nonetheless, an interesting historical parallel and one that suggests caution in interpreting the relevant facts without understanding the pervasive nature of incentive conflicts within this particular product line between publishers and sellers.  One does not want to discourage experimentation with business models aimed at solving those incentive conflicts.  What remains to be seen is whether and why the move to the new arrangement was executed through express coordination rather than unilateral action.

Filed under: antitrust, cartels, contracts, doj, e-books, economics, error costs, law and economics, litigation, MFNs, monopolization, resale price maintenance, technology, vertical restraints Tagged: agency model, Amazon, antitrust, Apple, doj, e-books, iBookstore, major publishers, MFN, most favored nations clause, per se, price-fixing, publishing industry, Rule of reason, vertical restraints

Last week I posted about the regulatory barriers facing an ice cream shop in San Francisco.  A student passes along a story that hits a bit closer to home: the sale of beer right here in Arlington County.  Apparently, the owner of the Westover Beer Garden has had enough:

It’s been a contentious couple of weeks for the Westover Market and Beer Garden. Upon receiving a warning from Arlington County, it suddenly declared the beer garden would shut down until April 1. Today, the saga continues as management has decided to re-open the beer gardenagainst the County’s wishes.

Owner Devin Hicks said he’s tried working with the county on the matter but his efforts have not been successful. Now he’s going to do what he believes Westover Market is entitled to do by law — operate a year-round patio area.

Arlington County has a website devoted the Westover Beer Garden and its regulation thereof.  The heart of the dispute appears to be whether a parking requirement imposed by the county is optional or mandatory.

On the page, it states that establishments with outdoor patios must have ample parking for the number of people being served, but that parking requirement is reduced if the establishment is near a Metro stop. The County allows establishments to get around the parking rule by becoming “seasonal” and closing for three or more months each year.

Because the Westover beer garden isn’t deemed as having enough parking, it’s supposed to be seasonal. However, Hicks points out the rule is technically a “guideline” and not an actual “ordinance.” He believes the county has been enforcing a measure that was never officially put in the books.

The County’s web page for Westover Market links to another County page, titled “Guidelines for Outdoor Cafes.” On that document it states: “Unless otherwise required by the County Board, outdoor cafes shall be exempt from any parking requirement.” It goes on to say: “There is no explicit requirement in the Zoning Ordinance that requires them to be temporary or seasonal.”

Of his long-running trouble with the county, Hicks said relations have improved over the past year or so, but he believes he’s currently being unfairly targeted with the enforcement of the seasonal rule.

“We’re just going to go ahead and do what’s legally right,” Hicks said. “There’s nothing in the rules that says it has to be seasonal.”

As I mentioned in the post on the bay area ice cream shop, I suspect the pernicious economic effects of local barriers to entry, rather than those at the state or federal level, are much larger than generally presumed.

Filed under: antitrust, barriers to entry, business, cartels, economics

The NCAA recently denied Todd O’Brien’s appeal to make use of the Grad Student Transfer Exception — which would allow O’Brien, who graduated St. Joseph’s with a degree in economics, to continue playing basketball while pursuing a graduate degree in Public Administration at University of Alabama-Birmingham.  St. Joe’s, apparently at the behest of a college basketball coach who appears to have has lost sight the purpose of college athletics, refused to allow O’Brien the exemption.  Its permission is required (and has apparently never been withheld in these circumstances).

O’Brien tells his story in a recent column at CNN-Sports Illustrated:

My name is Todd O’Brien. I’m 22 years old. In 2007, I became the first person from Garden Spot High (located in Lancaster County in New Holland, Pa.) to earn a Division I basketball scholarship. I attended Bucknell University from 2007 to 2008, where I made the Patriot League All-Rookie team. After the season, I decided the school and its basketball program weren’t the right fit for me. I wanted to follow the footsteps of my uncle Bruce Frank, a former Penn player, and play in the Big 5. I transferred and was given a full scholarship to play basketball at St. Joe’s for coach Phil Martelli. After sitting out in 2008-2009, I earned the starting center spot for the 2009-2010 season. Though our team struggled, I was able to start 28 games and led the team in rebounding. I also was the recipient of the team’s Academic Achievement award for my work in the classroom.

Entering the next season, I had aspirations of keeping my starting role, increasing my productivity on the court, and most importantly — winning more games. Off the court my goal was to continue getting good grades and to position myself to earn my degree studying Economics.

As the season went on things did not improve much, but on a brighter note I entered my last semester as an undergrad. On top of my regular classes, I had picked up an independent study internship at the Delaware County Municipal Building, where the focus of my study was on local economics.Though I still needed to pass three summer courses to officially earn my degree, I was allowed to walk in graduation that May. At the urging of my parents, my Economics advisor and other family friends, I began looking at graduate programs for the fall semester.

I met with Coach Martelli to inform him that I would not be returning. I had hoped he would be understanding; just a few weeks before, we had stood next to each other at graduation as my parents snapped photo. Unfortunately, he did not take it well. After calling me a few choice words, he informed me that he would make some calls so that I would be dropped from my summer class and would no longer graduate. He also said that he was going to sue me. When he asked if I still planned on leaving, I was at a loss for words. He calmed down a bit and said we should think this over then meet again in a few days. I left his office angry and worried he would make me drop the classes.

A few days later I again met with Coach Martelli. This time I stopped by athletic director Don DiJulia’s office beforehand to inform him of my decision. I told him I would be applying to grad schools elsewhere. He was very nice and understanding. He wished me the best of luck and said to keep in touch. Relieved that Mr. DiJulia had taken the news well, I went to Coach Martelli’s office. I told him that my mind had not changed, and that I planned on enrolling in grad school elsewhere. I recall his words vividly: “Regardless of what the rule is I’ll never release you. If you’re not playing basketball at St. Joe’s next year, you won’t be playing anywhere.”

With no movement on Saint Joseph’s end, my faith was left in the hands of a five-member NCAA committee. I pleaded my case, stating how St Joe’s was acting in a vindictive manner and how the NCAA must protect its student-athletes. When it was my turn to speak, I talked about how much it would hurt to lose my final season of college basketball, not just for me but for my parents, sisters and all of my relatives who take pride in watching me play. To work so hard for something, waking up at 6 a.m. to run miles on a track, spending countless hours spent in the gym shooting, and to have it all taken away because a head coach felt disrespected that I left in order to further pursue academics? It’s just not right.

Later that day the NCAA contacted UAB to inform the school that my waiver had been denied. The rules state that I needed my release from St. Joe’s, and I didn’t have it. I am the first person to be denied this waiver based on a school’s refusal. I was crestfallen. The NCAA has done a lot for me in life — I’ve gotten a free education, I’ve traveled the country playing basketball, and for all of this I am thankful. But in this instance I think they really dropped the ball. To deny a grad student eligibility to play based on the bitter opinion of a coach? You can’t be afraid to set precedent if it means doing the right thing.

My lawyer continues to plead to St Joe’s to release me, but the school no longer will discuss the issue. When my parents try to contact Coach Martelli, Don Dijulia, or President Smithson, they hide behind their legal counsel. When we try to contact the legal counsel, they hide behind the NCAA. A simple e-mail from any one of them saying they no longer object to me playing would have me suited up in uniform tomorrow, yet they refuse.

So here I am, several states away from home, practicing with the team every day, working hard on the court, in the weight room and in the classroom. I keep the faith that one day (soon, I hope) somebody from St. Joe’s will step up and do the right thing, so if that day comes I’ll be ready. I just finished my first semester of grad classes, and I enjoy it a lot. When somebody asked if I would be leaving to try to play overseas now that I’ve been denied the ability to play here, I said no. I said it before and I’m sticking to it — I’m here to get a graduate degree.

Whenever I get frustrated about the situation, I think back to something my mother told me on the phone one day. “This isn’t the end of basketball. Basketball ends when you want it to, whether that’s next year, in five years, or in 50 years. You control your relationship with the game, and nobody, not St. Joe’s, not the NCAA, can take that away from you.”

But right now, they sure are trying to.

Filed under: cartels, economics, sports

The DOJ has announced that it will close 4 Antitrust Division Field Offices.  From the DOJ press release:

Consolidate Antitrust Division field office space in Atlanta, Cleveland, Dallas and Philadelphia into the Chicago, New York and San Francisco field offices as well as the division’s Washington, D.C.-based section.   Ninety-four positions will be reassigned to the remaining field offices and to the Washington, D.C., section in order to provide additional staffing resources to larger investigations.   A savings of nearly $8 million is expected.

The field offices are a significant part of Division’s criminal enforcement efforts (amongst other things).  While the consolidation plan offers relocation to the 94 lawyers and staff willing to move to Chicago, NY, San Francisco or to Washington, there are quite a few career Division lawyers who have no interest in doing so.   The Washington Post reports:

But career antitrust lawyers affected by the plans said they were caught off guard, and they think the plans will result in de facto layoffs as colleagues decide to quit because they are unable or unwilling to move to another city.  “There aren’t a lot of people who’ve been with the division a long time who can pick up and move,” said an antitrust attorney based in the Philadelphia office. “Many people have families and spouses with jobs where they’re already located. And there’s no assurances that in two years there won’t be further cuts, and then we’ll lose a job we picked up and moved for.”  Veteran antitrust attorneys from all four targeted offices contacted The Federal Eye and asked not to be identified for fear of retribution.

I suspect there will be a lot more written about this in the days and weeks to come.

Filed under: antitrust, cartels, doj