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Popular Media In our recent blog symposium on Section 5 of the FTC Act, Latham & Watkins partner Tad Lipsky exposed one of antitrust’s dark little secrets: . . .
In our recent blog symposium on Section 5 of the FTC Act, Latham & Watkins partner Tad Lipsky exposed one of antitrust’s dark little secrets: Nobody really knows what Sherman Act Section 2 forbids. The provision bans monopolization, attempted monopolization, and conspiracies to monopolize, and courts have articulated formal elements for each claim. But the element common to the two unilateral offenses—“exclusionary conduct”—remains essentially undefined. Lipsky writes:
123 years of Section 2 enforcement and the best our Supreme Court can do is the Grinnell standard, defining [exclusionary conduct] as the “willful acquisition or maintenance of [monopoly] power as distinguished from growth or development as a consequence of a superior product, business acumen, or historic accident.” Is this Grinnell definition that much better than [Section 5’s reference to] “unfair methods of competition”?
No, it’s not. Nor are any of the other commonly cited judicial definitions of exclusionary conduct, such as “competition not on the merits.” As Einer Elhauge has observed, such judicial definitions are not just vague but vacuous.
This is problematic because business planners need clarity. On some specific unilateral practices—straightforward price cuts and aggressive input-bidding, for example—courts have provided clear liability rules and safe harbors. But in a dynamic economy, business people are constantly coming up with new ideas for sales-enhancing practices that might have the effect of disadvantaging rivals, of “excluding” them from the market. Absent some general understanding of what constitutes an “unreasonably exclusionary” act, business people are likely to forego novel but efficient sales-enhancing practices, to the detriment of consumers.
In the last decade or so, commentators have proposed four generally applicable definitions of unreasonably exclusionary conduct. Judge Posner suggested that such conduct be defined as acts that could exclude an “equally efficient rival” from the perpetrator’s market (the “EER” approach). Post-Chicago theorists would equate unreasonably exclusionary conduct with unjustifiably “raising rivals’ costs” (the “RRC” approach). The Areeda-Hovenkamp treatise prescribes a balancing of the “consumer welfare effects” resulting from the practice at issue (“CWE-balancing”). And the U.S. Department of Justice has called for defining unreasonably exclusionary conduct as that which would make “no economic sense” apart from its tendency to enhance market power (the “NES” test, or “NEST”).
Each of these approaches, it turns out, is troubling. The EER approach is underdeterrent in that it fails to condemn practices that cause rivals to be less efficient than the perpetrator. The RRC, CWE-balancing, and NEST approaches turn out to be difficult to apply—and largely indeterminate—for any exclusion-causing conduct involving “degrees.” For example, a 15% loyalty rebate conditioned upon purchasing 70% of one’s requirements from the defendant requires a certain “degree” of loyalty and provides a certain “degree” of price reduction. It might well turn out that some degree of required loyalty (e.g., the increment from 60% to 70%) or some degree of discount (e.g., the increment from 10% to 15%) either (1) raised rivals’ costs unjustifiably (RRC) or (2) created greater consumer harm than benefit (CWE-balancing) or (3) made no economic sense but for its ability to enhance market power (NEST). Because the RRC, CWE-balancing, and NEST approaches appear to require marginal analysis of exclusion-causing conduct, they become fairly inadministrable and indeterminate when applied to conduct involving degrees, a category that includes most of the novel conduct for which a generally applicable exclusionary conduct definition would be useful. Because they provide little guidance and no reliable safe harbors, the RRC, CWE-balancing, and NEST approaches are likely to overdeter efficient, but novel, business practices.
In light of these and other difficulties with the proposed exclusionary conduct definitions, a number of scholars now advocate abandoning the search for a generally applicable definition and applying different liability standards to different types of behavior. Eschewal of universal standards, though, is also troubling. To the extent non-universalists are saying that there is no single definition of unreasonably exclusionary conduct—no common thread that runs through all instances of unreasonable exclusion—their position seems to violate rule of law norms. After all, the Court has told us that unreasonably exclusionary conduct is an element of monopolization and attempted monopolization. That means that the exclusionary conduct component of all Section 2 offenses must share something in common; otherwise, the “element” would consist of a non-exhaustive menu of unrelated features and would cease to be an element.
A less extreme “non-universalist” approach would concede that there is a single definition of unreasonably exclusionary conduct—that which reduces overall consumer welfare—but hold that there should be no universal test for identifying when a particular practice runs afoul of the definition. This more defensible position resembles “rule utilitarianism” in ethical theory. Rule utilitarians concede that morality is ultimately concerned with utility-maximization, but they would judge the morality of any particular act not on the basis of its actual consequences but instead according to whether it complies with a rule selected to maximize utility. Similarly, “soft” non-universalists would select liability tests for particular business practices on the basis of whether those tests maximize overall consumer welfare, but they would evaluate particular instances of exclusion-causing behavior on the basis of whether they comply with applicable liability tests, not whether they actually enhance consumer welfare.
Because it reduces to a version of CWE-balancing (though at the rule level rather than the act level), “soft” non-universalism is subject to the same criticisms as CWE-balancing in general: it is difficult to apply and indeterminate. Indeed, under a soft non-universal approach, a business planner considering a novel but efficient exclusion-causing practice would first have to predict the liability rule a reviewing court would adopt for the practice under consideration and then apply that rule. Talk about a lack of clarity and reliable safe harbors!
I have recently authored a paper that critiques the proposed definitions of unreasonably exclusionary conduct as well as the non-universalist approaches discussed above and, finding each position deficient, proposes an alternative approach. My approach would deem conduct to be unreasonably exclusionary if it would likely exclude from the perpetrator’s market a “competitive rival,” defined as a rival that is both as determined as the perpetrator and capable, at minimum efficient scale, of matching the perpetrator’s efficiency. This “exclusion of a competitive rival” approach, the paper demonstrates, identifies a common thread running through instances of unreasonable exclusion, comports with prevailing intuitions about what constitutes appropriate competition, generates clear guidance and reliable safe harbors, and would minimize the sum of decision and error costs resulting from monopolization doctrine.
A draft of the paper, which is slated to appear as an article in the North Carolina Law Review, is available on SSRN. Please download, and let me know if you have any comments.
Filed under: antitrust, exclusionary conduct, law and economics, monopolization, regulation
Popular Media Regulating the Regulators: Guidance for the FTC’s Section 5 Unfair Methods of Competition Authority August 1, 2013 Truthonthemarket.com We’ve had a great day considering the possibility, and . . .
We’ve had a great day considering the possibility, and potential contours, of guidelines for implementing the FTC’s “unfair methods of competition” (UMC) authority. Many thanks to our invited participants and to TOTM readers who took the time to follow today’s posts. There’s lots of great stuff here, so be sure to read anything you missed. And please continue to comment on posts. A great thing about a blog symposium is that the discussion need not end immediately. We hope to continue the conversation over the next few days.
I’m tempted to make some observations about general themes, points of (near) consensus, open questions, etc., but I won’t do that because we’re not quite finished. We’re expecting to receive an additional post or two tomorrow, and to hear a response from Commissioner Josh Wright. We hope you’ll join us tomorrow for final posts and Commissioner Wright’s response.
Here are links to the posts so far:
Filed under: announcements, antitrust, federal trade commission, section 5 Tagged: Competition law, Efficiencies, Federal Trade Commission, ftc, Harm to Competition, UMC
Popular Media Thom Lambert is Wall Family Foundation Chair in Corporate Law & Governance and Professor of Law at University of Missouri School of Law In the last . . .
Thom Lambert is Wall Family Foundation Chair in Corporate Law & Governance and Professor of Law at University of Missouri School of Law
In the last few weeks, two members of the FTC—Commissioners Josh Wright and Maureen Ohlhausen—have staked largely consistent positions on guidelines for implementation of the Commission’s “unfair methods of competition” (UMC) authority. Their statements make two points that are, in my opinion, no-brainers. Where the statements conflict, they raise an issue worthy of significant contemplation. I’ll be interested to hear others’ thoughts on that matter.
First, the no-brainers.
No-Brainer #1: We Need Guidance on the Scope of the FTC’s UMC Authority.
Ours is a government of laws and not of men. That means, in the words of F. A. Hayek, “that government in all its actions [must be] bound by rules fixed and announced beforehand—rules which make it possible to foresee with fair certainty how the authority will use its coercive powers in given circumstances and to plan one’s individual affairs on the basis of this knowledge.” According to the classic statement by A.V. Dicey, the “Rule of Law” means “the absolute supremacy or predominance of regular law as opposed to arbitrary power, and excludes the existence of arbitrariness, of prerogative, or even of wide discretionary authority on the part of government.” As it stands, Section 5’s prohibition of “unfair methods of competition” is so indeterminate and discretionary that it can hardly constitute law. The text itself is woefully deficient for, as the Second Circuit observed in analyzing the provision, “[t]he term ‘unfair’ is an elusive concept, often depending upon the eye of the beholder.” Nor has the caselaw on Section 5 developed in way that lets business planners know what they must and must not do to avoid liability. The sort of guidance Commissioners Wright and Ohlhausen are proposing, then, is badly needed.
No-Brainer #2: The FTC Should Not Challenge a Practice Under Its UMC Authority Unless Doing So Is Necessary to Avert an Actual or Likely Harm to Competition.
Commissioners Wright and Ohlhausen agree that for the FTC to bring a “stand-alone” Section 5 action (i.e., one not simply alleging behavior that violates the Sherman Act), the challenged practice must result in, or likely result in, significant harm to competition. Such harm consists of a reduction in overall market output, usually evinced by an increase in price. It does not result from mere harm to competitors. Thus, doing a terrible, horrible, no good, very bad thing to your competitor—while perhaps tortious—would not constitute an unfair method of competition if the action did not, and was not likely to, reduce overall market output.
The reason for this requirement, which may sound harsh and extreme to non-antitrusters, is simple: Business conduct that hurts competitors without reducing overall market output does not usually leave market output unchanged; rather, it usually enhances market output and thereby benefits consumers. If the FTC seeks to condemn competitor-harming conduct that doesn’t harm competition, it will likely end up hurting consumers. In the Brown Shoe case, for example, the FTC condemned exclusive dealing by a shoe manufacturer where harm to competition was unrealistic but competitors were injured. The effect was to shut down more efficient distribution practices and thereby hurt consumers. If the FTC is to remain a consumer protection agency, it must limit its UMC challenges to acts causing or threatening significant competitive injury.
That brings us to a somewhat difficult policy question.
The Contestable Issue: How Broad Should the Safe Harbor for Efficiency-Creating Conduct Be?
Commissioner Wright has taken the position that a second prerequisite to a stand-alone UMC challenge should be that the practice at issue lacks any cognizable efficiencies. Commissioner Ohlhausen, by contrast, would permit a challenge (assuming her other pre-requisites, which are largely subsumed in Commissioner Wright’s first pre-requisite, are satisfied) when the practice at issue either creates no cognizable efficiencies or “results in harm to competition that is disproportionate to its benefits to consumers and to the economic benefits to the defendant, exclusive of the benefits that may accrue from reduced competition.” Ohlhausen is careful to emphasize that she is not proposing “to balance precisely” procompetitive versus anticompetitive effects. Instead, the latter prong of her disjunctive pre-requisite is satisfied only if the surplus lost from reduced output significantly outweighs the efficiencies created by the practice.
As a practical matter, the dispute here may reduce to, “What must a firm show to come within a safe harbor from stand-alone UMC liability?” According to Commissioner Wright, establishing cognizable efficiencies from the practice at issue will keep you safe. Commissioner Ohlhausen would require a firm to establish such efficiencies and show that they are not significantly outweighed by lost surplus from reduced output.
So whose approach is better? I’ll confess that I’ve gone back and forth on that question over the last few days. On the one hand, Commissioner Wright’s position seems awfully pro-defendant: a tiny increase in productive efficiency stemming from a practice could insulate the practice even if it occasioned huge allocative inefficiencies. Do we really need so expansive a safe harbor here, given that UMC judgments occasion only injunctive relief (cease and desist orders) and cannot give rise to follow-on private treble damages actions? On the other hand, Commissioner Ohlhausen’s safe harbor seems pretty unreliable—after-the-fact balancing of competitive effects is always tricky—and there are reasons to worry about follow-on private litigation and the chilling effect it may create. (For example, as Commissioner Kovacic observed in his N-Data dissent, many states have “little FTC Acts,” a number of which are privately enforceable in treble damages actions.)
At this point, I’m inclined to side with Commissioner Wright on the scope of the safe harbor. There are few practices that occasion genuine harm to competition but are not covered by the Sherman and Clayton Acts, and most of those—e.g., attempts to collude, market power-creating naked acts of exclusion by firms previously lacking market power—occasion no efficiencies and thus would not come within Commissioner Wright’s broader safe harbor. See Wright’s Examples 2, 3, 4, 5, 7, 8. I can think of only one obvious category of conduct that (1) harms competition, (2) is not covered by the Sherman or Clayton Act, and (3) would fall within Commissioner Wright’s, but not Commissioner Ohlhausen’s, safe harbor: oligopolistic coordination using facilitating devices that were adopted unilaterally. Several prominent antitrust scholars have argued that such conduct should be illegal, see, e.g., Richard A. Posner, Oligopoly and the Antitrust Laws: A Suggested Approach, 21 Stan. L. Rev. 1562 (1969); Herbert Hovenkamp, The Antitrust Enterprise 32-35, 128-34 (2005), and Professor Hovenkamp has argued that it should be policed under the FTC’s UMC authority. See Herbert Hovenkamp, The Federal Trade Commission and the Sherman Act, 62 Fla. L. Rev. 871, 879-82 (2010). In light of the judicial hostility toward that approach as evidenced in cases such as Ethyl and Boise Cascade, however, I would not be inclined to exchange Commissioner Wright’s broader safe harbor for Commissioner Ohlhausen’s narrower one in the hopes of pursuing such facilitating devices.
Of course, I may be overlooking other categories of anticompetitive conduct that are not covered by the Sherman and Clayton Acts and would be condemned under Commissioner Ohlhausen’s, but not Commissioner Wright’s, approach. If anyone can think of something obvious, please let me know.
Regardless of how we resolve the controversy over the scope of any “efficiencies safe harbor,” Commissioners Wright and Ohlhausen deserve our thanks and admiration for pressing a long overdue issue and working to improve the state of American competition law. I look forward to hearing others’ thoughts on the commissioners’ proposals.
Filed under: antitrust, federal trade commission, section 5, UMC symposium Tagged: antitrust, Competition law, Federal Trade Commission, ftc, section 5, UMC
Popular Media In the last few weeks, two members of the FTC—Commissioners Josh Wright and Maureen Ohlhausen—have staked largely consistent positions on guidelines for implementation of the Commission’s “unfair methods of competition” (UMC) authority. Their statements make two points that are, in my opinion, no-brainers.
The reason for this requirement, which may sound harsh and extreme to non-antitrusters, is simple: Business conduct that hurts competitors without reducing overall market output does not usually leave market output unchanged; rather, it usually enhances market output and thereby benefits consumers. If the FTC seeks to condemn competitor-harming conduct that doesn’t harm competition, it will likely end up hurting consumers. In the Brown Shoecase, for example, the FTC condemned exclusive dealing by a shoe manufacturer where harm to competition was unrealistic but competitors were injured. The effect was to shut down more efficient distribution practices and thereby hurt consumers. If the FTC is to remain a consumer protection agency, it must limit its UMC challenges to acts causing or threatening significant competitive injury.
Commissioner Wright has taken the position that a second prerequisite to a stand-alone UMC challenge should be that the practice at issue lacks any cognizable efficiencies. Commissioner Ohlhausen, by contrast, would permit a challenge (assuming her other pre-requisites, which are largely subsumed in Commissioner Wright’s first pre-requisite, are satisfied) when the practice at issue either creates no cognizable efficiencies or “results in harm to competition that is disproportionate to its benefits to consumers and to the economic benefits to the defendant, exclusive of the benefits that may accrue from reduced competition.” Ohlhausen is careful to emphasize that she is not proposing “to balance precisely” procompetitive versus anticompetitive effects. Instead, the latter prong of her disjunctive pre-requisite is satisfied only if the surplus lost from reduced output significantlyoutweighs the efficiencies created by the practice.
At this point, I’m inclined to side with Commissioner Wright on the scope of the safe harbor. There are few practices that occasion genuine harm to competition but are not covered by the Sherman and Clayton Acts, and most of those—e.g., attempts to collude, market power-creating naked acts of exclusion by firms previously lacking market power—occasion no efficiencies and thus would not come within Commissioner Wright’s broader safe harbor. SeeWright’s Examples 2, 3, 4, 5, 7, 8. I can think of only one obvious category of conduct that (1) harms competition, (2) is not covered by the Sherman or Clayton Act, and (3) would fall within Commissioner Wright’s, but not Commissioner Ohlhausen’s, safe harbor: oligopolistic coordination using facilitating devices that were adopted unilaterally. Several prominent antitrust scholars have argued that such conduct should be illegal, see, e.g., Richard A. Posner, Oligopoly and the Antitrust Laws: A Suggested Approach, 21 Stan. L. Rev. 1562 (1969); Herbert Hovenkamp, The Antitrust Enterprise 32-35, 128-34 (2005), and Professor Hovenkamp has argued that it should be policed under the FTC’s UMC authority. SeeHerbert Hovenkamp, The Federal Trade Commission and the Sherman Act, 62 Fla. L. Rev. 871, 879-82 (2010). In light of the judicial hostility toward that approach as evidenced in cases such as Ethyl and Boise Cascade, however, I would not be inclined to exchange Commissioner Wright’s broader safe harbor for Commissioner Ohlhausen’s narrower one in the hopes of pursuing such facilitating devices.
TOTM Section 5 of the FTC Act permits the agency to take enforcement actions against companies that use “unfair or deceptive acts or practices” or that . . .
Section 5 of the FTC Act permits the agency to take enforcement actions against companies that use “unfair or deceptive acts or practices” or that employ “unfair methods of competition.” The Act doesn’t specify what these terms mean, instead leaving that determination to the FTC itself. In the 1980s, under intense pressure from Congress, the Commission established limiting principles for its unfairness and deception authorities. But today, coming up on 100 years since the creation of the FTC, the agency still hasn’t defined the scope of its unfair methods of competition (UMC) authority, instead pursuing enforcement actions without any significant judicial, congressional or even self-imposed limits. And in recent years the Commission has seemingly expanded its interpretation of its UMC authority, bringing a string of standalone Section 5 cases (including against Intel, Rambus, N-Data, Google and others), alleging traditional antitrust injury but avoiding the difficulties of pursuing such actions under the Sherman Act.
Read the full piece here.
Popular Media It’s not often that I disagree with my friend and co-author, FTC Commissioner Josh Wright, on an antitrust matter. But when it comes to the . . .
It’s not often that I disagree with my friend and co-author, FTC Commissioner Josh Wright, on an antitrust matter. But when it comes to the proper legal treatment of loyalty discounts, the Commish and I just don’t see eye to eye.
In a speech this past Monday evening, Commissioner Wright rejected the view that there should be a safe harbor for single-product loyalty discounts resulting in an above-cost price for the product at issue. A number of antitrust scholars—including Herb Hovenkamp, Dan Crane, and yours truly—recently urged the Supreme Court to grant cert and overturn a Third Circuit decision refusing to recognize such a safe harbor. Commissioner Wright thinks we’re wrong.
A single-product loyalty discount occurs when a seller conditions a price cut (either an ex ante discount or an ex post rebate) on a buyer’s purchasing some quantity of a single product from the seller. The purchase target is often set as a percentage of the buyer’s requirements, as when a medical device manufacturer offers to pay a 20% rebate on all of a hospital’s purchases of the manufacturer’s device if the hospital buys at least 70% of its requirements of that type of device from the manufacturer. Because a loyalty discount tends to encourage distributors to carry more of the discounting manufacturer’s brand and less of the brands of the discounter’s rivals, such a discount may tend to “foreclose” those rivals from available distribution outlets. If the degree of foreclose is so great that rivals have to cut their output below minimum efficient scale (the minimum output level required to achieve all economies of scale), then the discount may “raise rivals’ costs” relative to those of the discounter and thereby harm consumers.
On all these points, Commissioner Wright and I are in agreement. Where we differ is on the question of whether a loyalty discount resulting in a discounted price that is above the discounter’s own cost should give rise to antitrust liability. I say no. I take that position because such an “above-cost loyalty discount” could be matched by any rival that is as efficient a producer as the discounter. If, for example, a manufacturer normally charges $1.00 for widgets it produces for $.79 each but offers a 20% loyalty discount to retailers that buy 70% of their widget requirements from the manufacturer, any competitor that could produce a widget for $.79 (i.e., any equally efficient rival) could stay in business by lowering its price to the level of its incremental cost. Thus, any rival that loses sales because of a manufacturer’s above-cost loyalty discount must be either less efficient than the manufacturer (so it can’t match the manufacturer’s discounted price) or unwilling to lower its price to the level of its cost. In either case, the rival is unworthy of antitrust’s protection, where that protection amounts to prohibiting price cuts that provide consumers with immediate benefits.
Commissioner Wright disputes (I think?) the view that equally efficient rivals could match all above-cost loyalty discounts. He maintains that loyalty discounts may be structured so that
[a] distributor’s purchase of an additional unit from a rival supplier beyond the threshold level can result in a loss of rebates large enough to render rival suppliers unable to attract a distributor to purchase the marginal unit at prices at or above the marginal cost of producing the good.
While I’m not entirely certain what Commissioner Wright means by this remark, I think he’s making the point that a loyalty discounter’s equally efficient rival might not be able to attract purchases by matching the discounter’s above-cost loyalty rebate if the rival’s “regular” base of sales is substantially smaller than that of the discounter.
If that is indeed what Commissioner Wright is saying, he has a point. Suppose, for example, that the market for tennis balls consists of two brands, Penn and Wilson, that current market shares, reflective of consumer demand, are 60% for the Penn and 40% for Wilson, and that retailers typically stock the two brands in those proportions. Assume also that it costs each manufacturer $.90 to produce a can of tennis balls, that each sells to retailers for $1 per can, and that minimum efficient scale in this market occurs at a level of production equal to 35% of market demand. Suppose, then, that Penn, the dominant manufacturer, offers retailers a 10% loyalty rebate on all purchases made within a year if they buy 70% of their requirements for the year from Penn. The $.90 per unit discounted price is not below Penn’s cost, so the loyalty discount would come within my safe harbor.
Nevertheless, the loyalty discount could have the effect of driving Wilson from the market. After implementation of the rebate scheme, a typical retailer that previously purchased sixty cans of Penn for $60 and forty cans of Wilson for $40 could save $7 on its 100-can tennis ball requirements by spending $63 to obtain seventy Penn cans and $30 to obtain thirty Wilson cans. The retailer and others like it would thus have a strong incentive to shift purchases from Wilson to Penn. To prevent a loss of market share that would drive it below minimum efficient scale (35% of market demand), Wilson would need to lower its price to provide retailers with the same total dollar discount, but on a smaller base of sales (40% of a typical retailer’s requirements rather than 60%). This would require it to lower its price below cost. For example, Wilson could match Penn’s $7 discount to the retailer described above only by reducing its $1 per-unit price by 17.5 cents ($7.00/40 = $.175), which would require it to price below its cost of $.90 per unit. Viewed statically, then, it seems that even an above-cost loyalty discount could occasion competitive harm by causing rivals to be less efficient, so that they could not match the discounter’s price.
In light of dynamic effects, though, I’m not convinced that examples like this undermine the case for a safe harbor for above-cost loyalty discounts. Had the nondominant rival (Wilson) charged a price equal to its marginal cost prior to Penn’s loyalty rebate, it would have enjoyed a price advantage and likely would have grown its market share to a point at which Penn’s loyalty rebate strategy could not drive it below minimum efficient scale. Moreover, one strategy that would prevent a nondominant but equally efficient firm from being harmed by a dominant rival’s above-cost loyalty rebate would be for the non-dominant firm to give its own volume discounts from the outset, securing up-front commitments from enough buyers (in exchange for discounted prices) to ensure that its production stayed above minimum efficient scale. Such a strategy, which would obviously benefit consumers, would be encouraged by a liability rule that evaluated loyalty discounts under straightforward Brooke Group principles (i.e., that included a safe harbor for above-cost discounts) and thereby signaled to manufacturers that they must take steps to protect themselves from above-cost loyalty discounts.
Commissioner Wright maintains that all this discussion of price-cost comparisons is inapposite because the theoretical harm from loyalty discounts stems from market exclusion (and its ability to raise rivals’ costs), not from predation. He says, for example:
I must confess that I’m baffled by Commissioner Wright’s oddly formalistic pigeonholing. Why must a practice be one or the other—either pricing too low or excluding rivals and thereby raising their costs? That seems like a false dichotomy. Indeed, it seems to me that a problematic loyalty discount is one in which the discounter excludes its rivals from a substantial portion of the distribution network (and thereby raises their costs) via the mechanism of conditional price cuts. It’s “both-and,” not “either-or.” And if that’s the case, then surely it makes sense to limit which price cuts may occasion liability—i.e., only those that could not be matched by equally efficient rivals. [It is important to note here that I don’t advocate a price-cost test as an alternative to a foreclosure-based analysis. Rather, a plaintiff should have to establish below-cost pricing (to show that the plaintiff was deserving of antitrust’s protection via the highly disfavored prohibition of discounts) and demonstrate that the discounting at issue resulted in substantial foreclosure from distribution outlets (the latter showing is necessary to prove harm to competition rather than simply to a competitor).]
Throughout his speech, Commissioner Wright emphasizes that the primary competitive concern presented by loyalty discounts is the possibility of “anticompetitive exclusion.” He writes on page 8, for example, that “[t]he key economic point is that the antitrust concerns potentially arising from loyalty discounts involve anticompetitive exclusion rather than predatory pricing….” On page 12, he reiterates that “to the extent loyalty discounts raise competition concerns, the concerns are about anticompetitive exclusion.” He then apparently assumes that loyalty discount-induced exclusion is “anticompetitive” if it is sufficiently substantial—i.e., if the discounter’s rivals are foreclosed from so many distribution outlets that they are driven below minimum efficient scale so that their costs are raised relative to those of the discounter.
I would dispute the notion that discount-induced exclusion is anticompetitive simply because it’s substantial. Rather, I’d say such exclusion is anticompetitive only if it is substantial and could not have been avoided by aggressive pricing. Omitting the second requirement creates the possibility that antitrust will be used by a laggard rival to prevent a more aggressive rival’s consumer-friendly price competition. (LePage’s anyone?)
Suppose, for example, that there are two producers of widgets, A and B, which both produce widgets at a marginal cost of $.79 and, given their duopoly, charge $1.00 per widget. A, whose market share has hovered around 50%, institutes a loyalty rebate of 20% for retailers that purchase 70% of their requirements from A. If B offers the same deal, or simply cuts its price to $.80, it should lose no market share. But suppose B doesn’t do so, A captures 70% of the market, and B falls below minimum efficient scale. Would we say that B’s exclusion is “anticompetitive” because A’s discount scheme resulted in such substantial foreclosure that it raised B’s costs? Should B be able to collect treble damages for based on its “anticompetitive exclusion”? Surely not.
Commissioner Wright, from whom I have learned more about “error costs” than anyone else, seems oddly unconcerned about the chilling effect his decidedly pro-plaintiff approach to loyalty discounts will produce. Wouldn’t a firm considering a loyalty discount—a price cut, don’t forget!—think twice if it knew its rivals could sit on their hands, claim “exclusion” if the discount successfully moved substantial market share toward the discounter, and collect treble damages? The safe harbor Hovenkamp, Crane, and I have advocated would provide assurance to potential discounters that they will not face liability if they charge above-cost prices, prices that could be matched by equally efficient, aggressive rivals. Isn’t that approach more likely to minimize error costs?
Two closing points. First, despite my disagreement with Commissioner Wright on this issue, I share the widely held view that he is one of the most brilliant antitrust thinkers out there. He’s taught me more about antitrust than anyone (with the possible exception of the uber-prolific Herb Hovenkamp). His questioning of my views on loyalty discounts really makes me wonder if I’m missing something.
Second, to those who think Commissioner Wright has “drifted” or “turned,” let me assure you that he’s long held his views on loyalty discounts. As you can see here, here, and here, we’ve been going round and round on this matter for quite some time.
Perhaps one day one of us will persuade the other.
Filed under: antitrust, economics, error costs, exclusionary conduct, exclusive dealing, federal trade commission, law and economics, monopolization, regulation
TOTM If we’ve learned anything from the pending IRS scandal, it’s that bureaucrats matter. Senate Minority Leader Mitch McConnell apparently thinks so. According to a recent National Review . . .
If we’ve learned anything from the pending IRS scandal, it’s that bureaucrats matter. Senate Minority Leader Mitch McConnell apparently thinks so. According to a recent National Review article, McConnell, unlike most minority leaders, has put a great deal of effort into recommending highly qualified individuals for spots on the more than 100 bipartisan agencies and commissions in the federal bureaucracy. He views his role in recommending appointees as a way to combat regulatory overreach and equip a “farm team” that will be poised to take over the reins of agencies the next time there’s a Republican in the White House.
Popular Media Last Thursday, the FTC settled a challenge to a company’s acquisitions of two key rivals. The two acquisitions, each of which failed to meet the . . .
Last Thursday, the FTC settled a challenge to a company’s acquisitions of two key rivals. The two acquisitions, each of which failed to meet the threshold for required reporting under Hart Scott Rodino, occurred in 2005 and 2008. Because the acquired companies have been fully integrated into the acquirer and all distinct operations have been shut down, it was impossible for the Commission to “unscramble the eggs” by imposing a structural remedy that separates the companies or parts thereof. The Commission therefore opted for a behavioral remedy — i.e., a list of restrictions on how the combined company may operate its business in the future. The purported goal of the behavioral remedy is to enhance consumer welfare by restoring competition that was destroyed by the anticompetitive acquisitions.
Commissioner Josh Wright took exception to a couple of the restrictions in the consent order. In a separate statement, he set forth a principle reflecting his concerns that antitrust implementation be both evidence-based and sensitive to error costs. One hopes that the principle he articulated — a version of the Hippocratic maxim, “First, do no harm” — will influence future FTC decisions on behavioral remedies.
The defendant here was Graco, the leading manufacturer of “fast set equipment” (FSE) used by contractors to apply polyurethane foams and coatings. The two companies it purchased, Gusmer in 2005 and GlasCraft in 2008, were its two closest competitors in the North American market for FSE. Graco’s acquisitions of those companies eliminated almost all market competition. In addition, Graco allegedly coerced and threatened FSE distributors so that they would not carry competitors’ products, and it filed a questionable lawsuit against a rival, Gama/PMC, causing FSE distributors to grow leery of that supplier and drop its products. These post-acquisition actions have helped cement Graco’s market power by denying its actual and potential rivals access to the distribution networks they need to effectively market their products.
In light of Graco’s post-acquisition conduct, the consent order agreed to Thursday prohibits Graco from threatening, coercing, or retaliating against distributors who carry its rivals’ products. It also requires settlement of the lawsuit that was impairing Gama/PMC’s access to distributors, and it forbids Graco from bringing a similar suit in the future.
But the order then goes further. It prohibits Graco from entering into exclusive dealing contracts with distributors, and it places limits on Graco’s freedom to give loyalty discounts to distributors. (Specifically, it limits the purchase and inventory levels upon which Graco may condition distributor discounts.)
The problem, in Commissioner Wright’s view, was that there was no evidence that these forbidden activities – exclusive dealing arrangements and loyalty discounts – contributed to the absence of competition in the FSE market. Because exclusive dealing arrangements and loyalty discounts are usually procompetitive, prohibiting their use by Graco in the absence of evidence that they are responsible for the lack of competition in the market or are likely to be used to effect anticompetitive harm rather than to achieve a procompetitive benefit is more likely to hurt than help consumers.
Wright notes (and the Commission acknowledges), for example, that the market for FSE is precisely the sort market in which exclusive dealing arrangements achieve the procompetitive benefit of avoiding “inter-brand free-riding.” Manufacturers of FSE will enhance total sales if they train distributors on the proper use and various complicated features of FSE. Consumers benefit from (and sales are increased by) such training, because the distributors pass along their learning to end-user purchasers. But if one FSE manufacturer trains a distributor on how to use the equipment, other manufacturers whose product is carried by that distributor won’t need to do so themselves. The possibility that they will “take a free-ride” on the manufacturer providing the training tends to dissuade all manufacturers from providing such training, to the detriment of consumers. Exclusive dealing helps out by preventing free-riding and thereby assuring a manufacturer that it will receive the full benefit of its training efforts. By banning exclusive dealing, then, the Commission’s consent order may cause a consumer injury, and there’s no reason to take that risk absent evidence that exclusive dealing has been used – or is likely to be used in the future – to create anticompetitive harm. First, do no harm!
It is important to note that not including exclusive dealing and loyalty discounts on the list of behaviors prohibited by the consent order would not give Graco free rein to use those practices in a manner that causes anticompetitive foreclosure. The Commission or a competitor could always challenge a future exclusive dealing arrangement or loyalty discount if there were evidence that the practice had caused anticompetitive harm. The remainder of the Commission’s behavioral remedy assures that there will be a viable competitor – Gama/PMC – that is in a position to challenge any such conduct, and, in light of the consent order, the Commission and any reviewing court would take any future complaints quite seriously. Doesn’t it make more sense, then, to limit the behavioral remedy to actions that have contributed to the anticompetitive situation at hand and not ban behaviors that may well inure to the benefit of consumers? As Commissioner Wright put it:
A minimum safeguard to ensure [that] remedial provisions … restore competition rather than inadvertently reduce it is to require evidence that the type of conduct being restricted has been, or is likely to be, used anticompetitively to harm consumers.
I think Wright’s right on this one.
Filed under: antitrust, error costs, exclusive dealing, federal trade commission, mergers & acquisitions, regulation
Popular Media Friday I discussed FTC Commissioner (and TOTM alumnus) Josh Wright’s speech at the Spring Meeting of the ABA’s Antitrust Section. Wright’s speech, What’s Your Agenda?, is now available online. As . . .
Friday I discussed FTC Commissioner (and TOTM alumnus) Josh Wright’s speech at the Spring Meeting of the ABA’s Antitrust Section. Wright’s speech, What’s Your Agenda?, is now available online.
As I mentioned, Commissioner Wright emphasized two matters on which he’d like to see FTC action. First, he hopes the Commission will help fulfill the promise of Section 5 of the FTC Act by articulating an “Unfair Methods Policy Statement” that includes both “guiding principles for Section 5 theories of liability outside the scope of the Sherman and Clayton Acts” and “limiting principles confining the scope of unfair methods claims.” Articulation of such principles would reduce the incidence of market power-enhancing conduct that could be difficult to pursue under the Sherman and Clayton Acts (the “guiding principles” would put firms on notice that such conduct is to be avoided), but they would also avoid chilling procompetitive conduct (the “limiting principles” would create zones of safety). Giving guidance to business planners on what the FTC is likely to pursue — and what it’s not — would thereby enhance the effectiveness of the antitrust enterprise.
Commissioner Wright also stated his intention to utilize the FTC’s powers to pursue public restraints — i.e., output-limiting conduct authorized or required by governmental entities. Wright explained:
An agency sensitive to efficiently executing its competition mission will look for low hanging fruit—in other words, it will identify and bring enforcement actions to prevent conduct that is clearly anticompetitive and thus bring immediate and certain benefits for consumers. Public restraints upon trade represent precisely this type of increasingly rare low hanging fruit and, thus, should be a more central concern of U.S. competition policy. The legal hurdles facing enforcement against public restraints often render policy advocacy the primary weapon for the FTC in this area; and it is a weapon the FTC has wielded effectively and consistently over time. The FTC also has brought enforcement actions to challenge public restraints in recent years in appropriate cases. I support vigorous use of both tools….
An agency sensitive to efficiently executing its competition mission will look for low hanging fruit—in other words, it will identify and bring enforcement actions to prevent conduct that is clearly anticompetitive and thus bring immediate and certain benefits for consumers.
Public restraints upon trade represent precisely this type of increasingly rare low hanging fruit and, thus, should be a more central concern of U.S. competition policy. The legal hurdles facing enforcement against public restraints often render policy advocacy the primary weapon for the FTC in this area; and it is a weapon the FTC has wielded effectively and consistently over time. The FTC also has brought enforcement actions to challenge public restraints in recent years in appropriate cases. I support vigorous use of both tools….
I’m heartened by Commissioner Wright’s leadership on these matters and look forward to seeing how things develop at the Commission.
Filed under: antitrust, error costs, federal trade commission
