Abstract

How should a technology firm adjust resource allocation between external and internal R&D in response to stronger patent protection? External R&D provides the firm with another channel of earnings to mitigate diminishing returns to internal R&D, but yields the firm only a fraction of the additional profit generated. Theoretically, if the marginal return to external R&D diminishes more slowly than the marginal return to internal R&D, the firm should increase external R&D more than internal R&D. Exploiting regional differences in the strengthening of patent protection due to the U.S. Court of Appeals for the Federal Circuit (CAFC), we find that the CAFC was associated with 35 percent more external R&D vis-a-vis 20 percent more internal R&D. The difference was more pronounced in industries where patents were less effective in the appropriability of product inventions and among firms more specialized in technology.

Emergence of the ‘Neo-Brandeisians’

Thus, matters unfolded until the curtain began to descend on the second Obama term in 2016. In the midst of presidential primary season, a targeted political challenge to the prevailing economic approach to antitrust first came to light. No one has yet clearly identified who was doing the targeting, but the March 26, 2016 edition of The Economist magazine included an article that suggested U.S. firms were earning excessive profits because new entry was blocked by monopoly abuses and by “lobbying” to obstruct competition. The Economist suggested scrutiny of U.S. antitrust policy as one item on a broad list of suggested remedies.

Read the full piece here.

Interest of Amicus Curiae

Amici curiae are economists and antitrust scholars who write to share their perspective with the Court.[1] The names of the signatories appear in the attached Addendum.

We have an interest in ensuring the proper application of antitrust doctrine and that it reflects current economic principles.[2]

We think that the District Court followed the law and sound economic principles in reviewing the FTC’s challenge to the vertical merger between a platform provider (Microsoft) and a content creator (Activision).

Summary of the Argument

The FTC proceeded against the proposed Microsoft-Activision merger with a prospective theory based on the FTC’s predicted economic incentives of Microsoft to foreclose Activision’s first-person shooter video game, Call of Duty—a 20-year, multi-platform franchise—from all rivals in three proposed markets: high performance consoles, cloud streaming, and library subscription services. After the parties submitted extensive factual and expert evidence, the District Court concluded that the FTC had not shown a likelihood that it would prevail on its claim that this vertical merger may substantially lessen competition.

The District Court followed the proper framework for reviewing the merger given the FTC’s vertical theory of harm. First, a court must consider whether the combination has the ability and the incentive to foreclose the input from rivals. If the court determines both ability and incentive exist, the court must decide what effect, if any, such a foreclosure will have on competition.

Accepting the FTC’s narrow high-performance-console market for Rule 13(b) purposes, the District Court concluded that Microsoft lacked an economic incentive to foreclose Call of Duty from Sony, the dominant player in the FTC’s market. In so doing, the District Court rejected the FTC’s theory that Microsoft’s commitment to Sony to continue offering Call of Duty on PlayStation was a “proposed remedy” unworthy of consideration under Rule 13(b).

The District Court also concluded that the merger would expand access to Call of Duty to the benefit of gamers. With respect to the nascent cloud-streaming market, the District Court found that, pre-merger, Activision had not made Call of Duty available to any cloud-streaming providers and was unlikely to do so based on a long-held view that doing it was not in its interest. Microsoft’s plan to add Call of Duty to its streaming service represented an output-expanding product of the merger. Moreover, Microsoft had reached agreements with five (5) cloud-streaming providers to allow them to stream the game as well, which the District Court concluded would result in the merger creating more (not less) Call of Duty availability. And the District Court’s consideration of these agreements—including with sophisticated providers like Nvidia—countered the FTC’s central theory that Microsoft would limit the availability of Call of Duty to its own platform.

Regarding the proposed library subscription market, the District Court found that, pre-merger, Call of Duty was not currently available to gamers via subscriptions, and that Activision had no plans to offer it to gaming platforms. Moreover, based on current market conditions and Activision’s actions before the merger, the District Court found that, even accepting for preliminary injunction purposes that Microsoft would offer Call of Duty exclusively on its own subscription service, the merger would not represent input foreclosure because the alternative was no access to the game by subscription at all. The District Court rejected the FTC’s economic theory that more availability of an input, even if only via Xbox’s library subscription service, could result in less competition.

Finally, the critical element in the analysis of the effects of the merger is the impact that potential foreclosure would have on competition. The District Court did not reach this ultimate step, having found no incentive to withhold Call of Duty. But the fact that the FTC’s expert economist concluded that, at worst, the transaction would result in a 5.5% share shift from the dominant platform (Sony PlayStation) to the much smaller platform (Xbox), suggests that the transaction is unlikely to harm competition. And it belies the FTC’s other argument that the transaction would increase a trend toward concentration, which in any event is not a proxy for showing harm to competition.

[1] Under Rule 29(a)(4)(E) of the Federal Rules of Appellate Procedure, amici certify that (i) no party’s counsel authored the brief in-whole or in-part; (ii) no party or a party’s counsel contributed money that was intended to fund preparing or submitting the brief; and (iii) no person, other than amici or its counsel, contributed money that was intended to fund preparing or submitting the brief.

[2] All parties have consented to the filing of this brief.

Abstract

This paper addresses a well-worn topic: originalism, the theory that judges should interpret the Constitution in a manner consistent with the intent of its framers. I am interested in the real-world effects of originalism. The primary effect advanced by originalists is the tendency of the approach to constrain the discretion of judges. However, another effect of originalism that I identify is the creation of official histories, a practice that imposes a hidden tax on society. Another question I consider is whether originalism should be considered a methodology of analyzing the law or a perspective on the law. I argue that originalism is closer to a perspective than a methodology.

The Evolution of FTC Antitrust Enforcement – Highlights of Its Origins and Major Trends

1910-1914 – Creation and Launch

The election of 1912, which led to the creation of the Federal Trade Commission (FTC), occurred at the apex of the Progressive Era. Since antebellum times, Grover Cleveland had been the only Democrat elected as president. But a Democratic landslide in the 1910 midterms during the Taft administration substantially reduced the Republicans’ Senate majority and gave the Democrats a huge majority in the House, signaling a major political shift. Spurred by progressive concern that Standard Oil—decided in 1911—signaled judicial leniency toward trusts and monopolies, government control of big business became the leading issue of the 1912 campaign. Both the progressive Democrats and the so-called Republican “insurgents” favored stronger antitrust laws, reduced hours and an antitrust exemption for workers, and closer federal regulation of banking and currency, among other items. Progressive agendas led both Woodrow Wilson’s “New Freedom” platform and the “New Nationalism” of former Republican President Theodore Roosevelt and his Bull Moose Party.

Read the full piece here.

ICLE Academic Affiliate Keith Hylton of Boston University School of Law joined Yahoo Finance Live to discuss the U.S. Justice Department’s recently launched Section 2 antitrust case against Google and how it compares to the case brought against Microsoft in 1998. The full video is embedded below.

Abstract

W. Brian Arthur is the father of complexity economics. He is also known for his work on the nature of technology, his experiments with agent-based modeling, and his entrepreneurial approach to science. This article seeks to explore the reasons why a scholar might identify as an “Arthurian,” with the aspiration of encouraging others to embrace Arthur’s research interests and emulate his approach to science.

Before becoming chair of the Federal Trade Commission (FTC), Lina Khan advocated the use of rulemakings to implement the prohibition on unfair methods of competition (UMC) in Section 5 of the FTC Act. As chair, she proposed a rule, which likely will be finalized in the spring, to ban noncompete clauses in employment contracts. But I expect a court to quash this bold assertion of quasi-legislative power.

Read the full piece here.

ICLE Academic Affiliate John Lopatka appeared as a guest on KCBS Radio in San Francisco to discuss the U.S. Justice Department’s antitrust case against Google. The full audio clip is embedded below.