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One of the more significant papers in antitrust of late has been Professor Kaplow’s Why (Ever) Define Markets?  Kaplow provocatively argues that the entire “market definition/ market share” paradigm of antitrust is misguided and beyond repair.  Kaplow describes the exclusive role of market definition in that paradigm as generating inferences about market power, argues that market definition is incapable of generating reasonable inferences for that purpose as a matter of basic economic principles primarily because one must have a “best estimate” of market power previous to market definition, and concludes that antitrust ought to do away with market definition entirely.  As my description of the paper suggests, and Kaplow recognizes, it is certainly an “immodest” claim.  But it is a paper that has evoked much discussion in antitrust circles, especially in light of the recent shift in the 2010 HMGs toward analysis of competitive effects and away from market definition.

Many economists were inclined to agree with the basic conceptual shift toward direct analysis of competitive effects.  Much of that agreement was had on the basis that the market definition exercise aimed to do a number of things directed toward identifying the potential competitive effects of a merger (identifying market power is certainly one of those things), and that if we had tools allowing for direct inferences we ought to use those instead.  Kaplow’s attack on market definition, however, was by far the most aggressive critique.

Greg Werden has now posted an excellent paper in response, “Why (Ever) Define Markets?  An Answer to Professor Kaplow.”  Here is the abstract:

Professor Louis Kaplow has argued that market delineation in antitrust should be abandoned because it is not useful in assessing market power or evaluating competitive effects. This article takes issue with that view, explaining that market delineation serves purposes overlooked by Professor Kaplow. Most importantly, market delineation separates active forces of competition from those in the background. This separation is significant in the application of economic models and in the narrative of presenting an antitrust case. This article also explains why Professor Kaplow’s proposed analyses dispensing with market delineation would break down in important circumstances.

The entire paper is worth reading.  It provides an important perspective on the debate over the value of market definition not only from an economic perspective, but also with respect to the role of market definition in the law.  I summarize a few of the key points and basic arguments of the paper for readers.

Werden first begins by attacking the presumption in Kaplow’s argument that the exclusive purpose of market definition in the modern antitrust paradigm is to infer market power from market share.  For example, Kaplow claims that “the entire rationale for the market definition process is to enable an inference about market power.”  Werden claims, I think correctly, that Kaplow’s premise is incorrect.  While Werden makes the point that courts use market definition to infer market power even in the absence of market shares, the more important argument is that courts have long recognized the high shares themselves do not establish market power — indeed, the law requires the market power be “durable.”  The durability requirement, in turn, requires some analysis of entry conditions before a court can infer market power and, as Werden points out, market delineation is a useful tool for understanding which products — upon entry — would be sufficiently close substitutes as to preclude a firm from charging supra-competitive prices.  Similarly, of course, courts use market definition to cabin where the relevant antitrust injury might occur.

Keith Hylton makes a related, but distinct, argument about the value of market definition in his paper on the 2010 HMGs published in a symposium in the Review of Industrial Organization (note: Professor Kaplow has a shorter article in the Review of IO symposium previewing his arguments in the longer Harvard Law Review piece; I also have an article (with Judd Stone) on the new Guidelines’ treatment of efficiencies in the same issue).  Hylton objects to the change in focus in the new HMGs on the grounds that courts have used the market definition exercise for a number of valuable functions involving the trading off of error concerns in merger analysis:

In implementing the discretionary test of Brown Shoe, courts have traditionally required a definition of the relevant market. In order to determine whether competition appears to be structurally or operationally intense, or whether entry is easy, courts first have to define a relevant market. The definition of a relevant market has involved a fact intensive inquiry that trades off many concerns, in addition to the strict concern of finding a market which could be monopolized by the defendant (through an acquisition or through some anticompetitive conduct). When courts determine a relevant market, they are taking into account the consequences of that decision for the competitive process itself. If defining a market too narrowly will lead to the replacement of the market process of industrial rationalization with an administrative process, or discourage innovation incentives, courts are likely to take those costs into account. They are aware of the possibility that they could err in the decision, and will therefore tend toward a market definition that minimizes the costs of errors.36 The FTC’s standard would relegate the market definition component of a merger dispute to a lesser status. In so doing, it would constrain the ability of courts to make the tradeoffs that currently go into a market definition finding.37

Werden acknowledges that market definition can be avoided in some cases, such as consummated mergers with evidence of actual anticompetitive effects after the acquisition, or in some cases involving unilateral price effects.  Note that while Werden would likely dispense with market definition in some of these cases, the role Hylton ascribes to market definition as applied by the courts would still provide value in both of these types of cases.  Werden also makes the key point that Kaplow’s “direct” analysis of market power assumes that “all of the competitive action is confined to a single homogenous good, and his analysis goes awry when the sellers of the good have a significant strategic interaction with the sellers of close substitutes.”

A related point is that Kaplow’s analysis implicitly uses perfect competition as a competitive benchmark for inferring market power.  Indeed, the analysis presumes that all sellers other than the producer at issue “behave as price-takers.”   As Werden points out, the direct analysis of market power Kaplow prefers establishes market power as a matter of degree measured by the Lerner Index (i.e. the price – cost margin).  For a number of reasons, setting perfect competition as a competitive benchmark can be problematic; but for present purposes, note that to the extent that courts use the market definition inquiry to incorporate considerations wherein a firm might have high margins but yet face intense competition rendering it incapable of harming the competitive process, this would be yet another valuable function of that market definition inquiry.

Werden ends the paper by offering up some examples of the differences between the “conventional” approach and Kaplow’s analysis that are helpful.  You can go to the paper to read them — but Werden’s key point, as I read the paper, is that market definition is useful not only for allowing the assignment of market shares, but also for separating the important elements of the competitive story of a proposed merger (for example) from unimportant elements.   The distinction between those important and unimportant elements can inform modeling choices in unilateral effects cases, or the likelihood of post-merger coordination, and focuses courts on the competitive process to be investigated for potential harm.  His conclusion in response to Kaplow is direct:

Placing less emphasis on market delineation and market shares would be for the best in many antitrust cases, but market delineation serves analytical and narrative purposes not served by other tools.  Professor Kaplow’s proposal to abandon market definition would bring chaos to antitrust litigation.

Please go do read the whole thing.  There is some narrow sense in which I find the debate trivial.  Courts are highly unlikely to adopt Professor Kaplow’s proposal.  There are a number of barriers to eliminating market definition and there is no demand to do so from courts or agencies.  But that would be far too narrow a viewpoint on the issues raised by the paper.  The debate over market definition in the 2010 HMGs, and now spurred by Kaplow’s provocative and well argued paper, is very useful in helping us understand exactly what we aim to achieve through market definition.  The role of market definition in antitrust analysis is much more flexible under the new Guidelines — even if all agree that the agencies must define markets.  How flexible courts and agencies are and should be with respect to market definition does depend precisely upon the answer to the questions Werden tangles with in his paper, i.e. what does market definition accomplish, how well does it accomplish it, and when might we rely upon other tools to accomplish those ends?

Filed under: antitrust, economics, merger guidelines, mergers & acquisitions

Back in September, the Senate Judiciary Committee’s Antitrust Subcommittee held a hearing on “The Power of Google: Serving Consumers or Threatening Competition?” Given the harsh questioning from the Subcommittee’s Chairman Herb Kohl (D-WI) and Ranking Member Mike Lee (R-UT), no one should have been surprised by the letter they sent yesterday to the Federal Trade Commission asking for a “thorough investigation” of the company. At least this time the danger is somewhat limited: by calling for the FTC to investigate Google, the senators are thus urging the agency to do . . . exactly what it’s already doing.

Read the full piece here.

AT&T’s proposed acquisition of T-Mobile presents an opportunity for judicial scrutiny of the newest iteration of the Department of Justice (“DOJ”) and Federal Trade Commission’s (FTC’s) Horizontal Merger Guidelines (“2010 Guidelines”). The Agencies revised the 2010 Guidelines with an eye toward increasing transparency and predictability by conforming them to actual agency analysis. The 2010 Guidelines highlight the Agencies’ adoption of a more economically sound analytical approach focusing directly upon the competitive effects of proposed mergers and de-emphasizing the importance of market definition and competitive inferences from market structure. But, oddly, the DOJ’s complaint reverts to its pre-revision approach, emphasizing a remarkable focus upon market definition and structural analysis. The structure-heavy approach the DOJ adopts in its complaint runs afoul of the standards it espouses in the Guidelines, raising the risk of undermining their continued success as measured by judicial adoption.

https://www.competitionpolicyinternational.com/will-the-2010-merger-guidelines-survive-the-doj-s-complaint-in-u-s-v-at-t

The NY Times starts its op-ed against the AT&T / T-Mobile transaction with a false proposition about antitrust analysis of mergers: “The analysis begins with a mathematical formula for calculating the deal’s effect on competition.”  Any antitrust lawyer or economist will recognize the error.  A major change from the 1997 Horizontal Merger Guidelines to the 2010 version is that the former observes that agency analysis must begin with market definition and evaluation of concentration:

First, the Agency assesses whether the merger would significantly increase concentration and result in a concentrated market, properly defined and measured

However, the it is widely recognized that the 2010 Guidelines shed the cookie cutter, algorithmic approach to merger analysis in favor of a fact-intensive analysis involving multiple tools of which market definition and calculating market shares and evaluating concentration levels and changes is just one.  Indeed, the 2010 Guidelines expressly state:

The Agencies’ analysis need not start with market definition.

This is not trivial detail; these changes were at the very core of the changes in the new Guidelines promulgated by the Obama administration’s antitrust enforcement agencies.  The NYT analysis simultaneously relies exclusively upon market concentration statistics while appealing to the 2010 Guidelines which rejected that approach as authority.  Odd.  But not unsurprising.

What is more surprising is Professor Hovenkamp’s quote, whom we certainly can expect more from than the NYT.  Hovenkamp observes:

“It’s only a slight overstatement to say that if they weren’t going to block this one, the Justice Department might as well just throw the antitrust guidelines out the window,” said Herbert Hovenkamp, professor of law at the University of Iowa, who is considered by many to be the dean of American antitrust law. “This merger clearly seems to violate them.” …

“It was becoming legendary that the Bush administration wasn’t enforcing the old guidelines,” Mr. Hovenkamp said. “What good is a guideline that doesn’t provide any guidance? The Obama administration conceded that perhaps the old guidelines were too strict. So it made it easier, but at the same time said, ‘We’re going to enforce this.’ ”

I’ve got to believe Hovenkamp was quoted out of context here because, frankly, this doesn’t make much sense.  I doubt Hovenkamp would argue that the Guidelines’ thresholds were treated as gospel by any administration regardless of political ideology.   But what is absent from Hovenkamp’s discussion is the primary reason why the Guidelines expressly shifted away from concentration and toward direct analysis of competitive effects.  The answer doesn’t lie in politics.  Put simply, antitrust economists and lawyers at the agencies and elsewhere simply do not believe the HHI thresholds in the Guidelines provide a useful predictor for competitive effects.  The persistence of the HHI thresholds are at least somewhat a result of path dependency; despite some prodding, it proved too tempting for the agencies to keep the thresholds in given their appeal and general acceptance in merger precedent emerging in the 1960s and 70s.  But that was the age when those types of market structure arguments were in fact the economic state of art.  That is no longer true — and rejection of that general approach is a key (if not they key) component of the Guidelines’ evolution toward the current approach.

The theme of the NY Times article and the omission of any sense at all that the shift at the agency level has been the polar opposite of what is claimed — that is, away from treating HHI thresholds as gospel or even related to analysis of competitive effects and toward an analysis more directly focused upon competitive effects — I’m left puzzled by a few things in Hovekamp’s quote.  When the agencies have screamed from the rooftops that competitive effects and not market structure and market definition is what matters in merger analysis, the idea that not blocking a merger that nominally crosses otherwise meaningless thresholds in agency Guidelines threatens the rule of law or means that we ought not have Guidelines is at the very least overstated.  Of course, one could interpret the statement as a critique of leaving the thresholds in the Guidelines at all if one is not going to enforce them.  I agree with that.  But they’ve always been there and often been ignored when the agencies’ analysis concluded the merger would not harm consumers.

And of course, that interpretation is difficult to square with the statement that this “merger clearly seems to violate them.”    Violate them?  The Guidelines do not have the force of law.  If this merely means something like “the merger appears to be one that the agencies’ analytical framework articulated in the Guidelines indicates that they will challenge” — that’s fine.  But, that statement suffers the same analytical flaws described above. Violating the Guidelines would require a showing that the merger was likely to create market power and produce anticompetitive effects — to do so under the new Guidelines requires more than a simply counting the number of firms.  That type of analysis no longer passes muster in antitrust analysis at the agencies.  To claim a merger “clearly seems to violate” the Guidelines  by sole reference to the HHI thresholds at the same time the agencies have distanced themselves from them(in favor of more fact-intensive and direct analysis of competitive effects) is not consistent with the economic letter or spirit of the new Guidelines.

Filed under: antitrust, economics, merger guidelines, mergers & acquisitions, technology, telecommunications, wireless

I don’t think so.

Let’s start from the beginning.  In my last post, I pointed out that simple economic theory generates some pretty clear predictions concerning the impact of a merger on rival stock prices.  If a merger is results in a more efficient competitor, and more intense post-merger competition, rivals are made worse off while consumers benefit.  On the other hand, if a merger is is likely to result in collusion or a unilateral price increase, the rivals firms are made better off while consumers suffer.

I pointed to this graph of Sprint and Clearwire stock prices increasing dramatically upon announcement of the merger to illustrate the point that it appears rivals are doing quite well:

The WSJ reports the increases at 5.9% and 11.5%, respectively.  In reaction to the WSJ and other stories highlighting this market reaction to the DOJ complaint, I asked what I think is an important set of questions:

How many of the statements in the DOJ complaint, press release and analysis are consistent with this market reaction?  If the post-merger market would be less competitive than the status quo, as the DOJ complaint hypothesizes, why would the market reward Sprint and Clearwire for an increased likelihood of facing greater competition in the future?

A few of our always excellent commenters argued that the analysis above was either incomplete or incorrect.  My claim was that the dramatic increase in stock market prices of Sprint and Clearwire were more consistent with a procompetitive merger than the theories in the DOJ complaint.

Commenters raised three important points and I appreciate their thoughtful responses.

First, the procompetitive theory does not explain the change in all stock market prices.  For example, readers pointed out that Verizon’s stock barely ticked downward, while smaller carriers MetroPCS and Leap both fell (.8% and 2.3%, respectively, according to the WSJ).  The procompetitive theory, the commenters argued, implies that Verizon and these other rivals should move upward.

Second, they argue that perhaps an exclusionary theory of the merger better explains these stock price reactions.  Indeed, the new 2010 Horizontal Merger Guidelines included (not without controversy) potential exclusionary effects (“Enhanced market power may also make it more likely that the merged entity can profitably and effectively engage in exclusionary conduct. “).  Rick Brunell of AAI writes:

Although the smaller carriers may gain in the short run due from a merger that raises prices, they also may lose in the long run due to its exclusionary effects, a theory that was front and center of Sprint’s opposition (and the smaller carriers’). Notably Verizon, which has no reason to fear exclusion and would have the most to lose if the merger were actually efficient, has not opposed the merger.”

Similarly, Matt Bodie writes:

Why wouldn’t the market’s reaction be a sign of this: (a) the AT&T/T-Mobile merger will give the new entity strong market power, (b) there are strong anticompetitive as well as efficiency gains from being bigger and having more market size, (c) the newly merged company would use that power to crush its weakest competitors, i.e. Sprint? After all, isn’t there a traditional story where monopolists cut prices to drive other competitors out, but then gradually raise price once their market power allows it, especially in industries with high barriers to entry?”

The basics of the exclusionary theory of the merger is that the anticompetitive harm is not coordination or unilateral price increases from the direct acquisition of market power, i.e. the elimination of competition from a close rival.  Rather, the exclusionary theory posits that the post-merger firm will have sufficient market power to exclude rivals from access to a critical input (e.g. backhaul) and, as Matt has it, “crush its weakest competitors.”  So to Matt, yes, there is that theory in antitrust.  But note that the post-merger share of the combined entity here would be nowhere close to traditional monopoly power standards required to make out a monopolization claim under Section 2 of the Sherman Act.  The new Guidelines do quasi-endorse the possibility of a Minority-Report like merger enforcement search for exclusion that doesn’t reach Section 2 standards post-merger, but might someday, but also needs to be stopped now.  But it is decidedly not standard in merger analysis. And this case is probably not a good test case for that theory; at least the DOJ thinks so.  But no, I don’t think the market reaction is reflecting concerns about exclusion.  More on that in a second.  But for now note that this is not simply a legal point.  While the law requires the demonstration of monopoly power for a Section 2 claim, the economic literature focusing upon exclusion also considers market power a necessary but not sufficient condition for competitive harm.  For the same reasons the exclusion claim would be rejected post-merger on legal grounds if we accept the market definition alleged by the DOJ, exclusion is unlikely as a matter of economics.

Put simply, the exclusionary theory’s proponents argue that it can explain the increase in Sprint’s stock price (reduced likelihood of future exclusion because of the DOJ challenge) and Verizon’s inconsequential reaction (it has “no reason to fear exclusion”).

Just so everybody is seeing the same thing — here is a chart with 5 days of trading including Verizon, Sprint, Clearwire, MetroPCS, Leap and the S&P 500.

Third, commenters argue that this simple analysis doesn’t account for other important factors.  NB writes:

Why did you choose Sprint particularly? Verizon, a larger and far more significant competitor, had its stock drop sharply in that same period you show Sprint “surging”. MetroPCS’s stock also dropped.

So what does it mean when a weak competitor’s stock jumps but two other competitors who are doing well have their stock drop? Other than that there are clearly more factors in play here?

Enough questions; time for answers.

Why Didn’t I Include the Exclusionary Theory of Harm?

I plead guilty.  Or at least guilty with an explanation.  I didn’t discuss the possibility of exclusion and whether it would better explain these market reactions than the theory that the merger is efficient or anticompetitive because it will facilitate coordination or unilateral price increases.  As it turns out, however, the reason is that the post was motivated by the following question:

How many of the statements in the DOJ complaint, press release and analysis are consistent with this market reaction?

Turns out, I’m in pretty good company in omitting this theory.  The DOJ didn’t allege it either.  As discussed above, the DOJ specifically alleged that the merger would result in coordinated effects in the national market and/or unilateral price increases.  Rick Brunell accurately points out that Sprint and AAI have both made these arguments.  Indeed, when I testified in the House on the merger, there were a lot of questions raised about exclusionary concerns.   But the bottom line is that they are not in the Complaint.  Apparently, those arguments did not persuade the Justice Department.  I have no intention on running from the interesting question posed by the commenters that the exclusion theory does a better job of explaining market price reactions.  That’s next.  But for now, let me say that I think there is a good reason the DOJ did not accept the Sprint / AAI invitation to adopt the exclusion theory.

Does Exclusion Do A Better Job of Explaining Verizon’s Non-Movement or Slight Fall? 

I think proponents of the exclusion theory of the merger have a tough task here.  Notice that the prediction of the exclusionary theory is NOT that Verizon’s stock price will stay put or fall.  Instead, it is that it will increase post-merger.  While Brunell observes that Verizon need not fear post-merger exclusion itself, it would certainly be happy to free-ride on the allegedly imminent exclusionary efforts of the newly merged firm.  Post-Chicagoans often invoke the argument that “competition is a public good” when explaining why a downstream input provider has reason to go along with an upstream firm’s attempt to monopolize.   Bork argued that the downstream firm had no reason to engage in a contract with the upstream provider that would increase the likelihood that he would be facing an upstream monopolist (and thus worse terms of trade) tomorrow.  The classic Post-Chicago response is that each downstream firm doesn’t take into account the impact of his private decision to enter into such a contract with the would-be monopolist — that is, competition is a public good.  The flip side of this argument is that exclusion is a public good too!   To put it more concretely, if the post-merger combination of AT&T / T-Mobile were able to successfully exclude Sprint and smaller carriers such as MetroPCS and Leap, and thereby reduce competition, the clear implication of this theory is that Verizon would benefit.

The relevant economics here are not limited to the possibility that post-merger AT&T would successfully exclude Verizon.  Think about it: both Verizon and the post-merger firm would benefit from the exclusionary efforts and reduced competition.  However, Verizon would stand to gain even more!  After all, it isn’t paying the $39 billion purchase price for the acquisition (or any of the other costs of implementing an expensive exclusion campaign).  Thus, an announcement to block the would-be exclusionary merger — the one that would allow Verizon to outsource the exclusion of its rivals to AT&T on the cheap — wouldn’t happen.  Verizon stock should fall relative to the market in response to this lost opportunity.  The unilateral and coordinated effects theories in the DOJ complaint are at significant tension with the stock market reactions of firms like Sprint (and its affiliated venture, Clearwire).  The exclusion theory predicts a large decrease in stock price for Verizon with the announcement.   None of these comfortably fit the facts.  Verizon more or less tracks the S&P with a slight drop.  What about the smaller carriers?  Take a look at the chart.  MetroPCS barely moved relative to the market (in fact, may have increased relative to the market over the relevant time period); Leap is down a bit more than the market.   Here, with the smaller carriers there is not a lot of movement in any direction.  But, contra NB’s comment (“Verizon, a larger and far more significant competitor, had its stock drop sharply in that same period you show Sprint “surging”. MetroPCS’s stock also dropped.”), Verizon’s small fall relative to the market is nowhere near the magnitude of the positive effect on Sprint and Clearwire.

But what about competition?  Isn’t it true that if the merger was procompetitive a challenge announcement would likely mean less competition for Verizon and also predict an increase in stock price?  AAI’s comment tries to have this both ways.  If Verizon’s price stays still, its because it has nothing to fear from exclusion (contra the economics above); if it goes down, the DOJ announcement has decreased the likelihood of those coordinated effects Sprint and AAI argued were so likely (but then there is Sprint’s big jump); and if Verizon prices increase then it just means that we weren’t right in the first instance than they were safe from exclusion.  One is reminded of Tom Smith and his incredible bread machine.   But this leads to an interesting point.  Brunell and AAI (and perhaps other proponents of the DOJ challenge), as pointed out in the comments, appear to agree with me that stock market reactions are probative evidence of competitive effects.  Perhaps they believe that the exclusionary theory is a better explanation of the facts — I obviously don’t think so.  But we are where we are.  That theory is not alleged.  Now that we’ve observed the quite significant stock market reaction of Sprint to the challenge announcement.  Do we at least agree those facts are in tension with the coordinated effects theory made so prominent in the DOJ complaint???

Couldn’t There Be Other Important Factors Explaining Stock Price Movements Unrelated to the Competitive Implications of the DOJ’s Challenge?

To write the question is to answer it.  You bet there could be.  And indeed, I wrote in the first post that while the fairly dramatic stock price reactions of Sprint and Clearwire were probative, the post was not a full-blown event study that would account for those events, formulate a market model, and test for the abnormal returns surrounding the announcement controlling for other important events.  Further, not all competitors are created equal.  Under the efficiency story, the distribution of benefits will accrue proportionately to the rivals who were most likely to face increased competition post-merger (and now are more likely not to).  I certainly agree with Rick Brunell’s summary comment that the stock price evidence is somewhat “mixed.”  There are small and relatively ambiguous effects — once one includes the market performance — on the stock prices of Metro and Verizon.  Leap is more clearly down, even if by a small amount relative to the market.   There may well be a variety of factors unrelated to the announcement confounding effects here.  This is the reason we do real event studies in practice and why I do not believe the simple collection of evidence here warrants sweeping conclusions about the merits of the merger.

However, the DOJ complaint tells us that the important competitive players in the market — the “Big Four” — are AT&T, T-Mobile, Sprint, and Verizon.  Focusing upon the non-merging big 4, we see Sprint’s price going up dramatically and Verizon’s staying put.  The former is simply more consistent with procompetitive theories than the coordinated effects and unilateral effects theories alleged in the DOJ complaint.  One might expect an announcement to block a procompetitive merger to have a greater positive impact on Verizon stock.  But, as many have observed in the press, the impact of the merger upon Verizon is complicated by a number of factors, not the least of which is that the challenge announcement increases the likelihood that the DOJ is committed to challenging any future attempts to merger by Verizon.  Unless spectrum capacity is increased dramatically (see this excellent Adam Thierer post on this score) in the very near future it is difficult to see how the reduced ability to exercise that significant and valuable option would not also impact Verizon.  Thus, while not a slam dunk by any means, the procompetitive theory of the merger does a pretty decent job on the Big Four.   It certainly beats the coordination theory trumpeted in the Complaint.  As for the attempt of AAI and Sprint to salvage the DOJ complaint with the exclusionary theory — perhaps it is not too late to amend, but it isn’t there now and I’d warn the DOJ against including it.  With respect to the DOJ’s Big Four, the exclusionary theory is not only new and relatively controversial in the Guidelines, but also makes a strong prediction concerning a Verizon stock price increase that is inconsistent with the data.

There will certainly be more data as we move along.  And it should interesting to watch how things unfold both in the market and between the DOJ and FCC as well.  For now, however, color me unconvinced by the heavy reliance upon the structural, “Big 4 collusion” story leading the Complaint and the attempts to save it with exclusionary theories.

Filed under: antitrust, business, economics, exclusionary conduct, merger guidelines, mergers & acquisitions, monopolization, technology, telecommunications, wireless

Here’s the decision; here is my prior post concerning the district court decision.  I suspect the FTC was fairly confident it would succeed in persuading the panel to reverse.  The appeal turns on whether the district court was clearly erroneous in ruling that the FTC had failed to properly define a relevant market, and in turn, whether evidence of switching between the two drugs (Indocin IV and NeoProfen) by neonatologists (and/or hospitals) supported the a product market that encompassed both drugs.  The Eighth Circuit concluded the district court’s findings were not clearly erroneous, and thus, affirmed its judgment.

Here, I think, is the key paragraph on the FTC’s argument about behavior of marginal consumers and market definition:

Further attacking the district court’s reliance on consumer preference, the FTC argues that the court ignored the ability of marginal customers to constrain prices.  Whether there are enough marginal consumers to constrain prices is a factual question
that requires analyzing consumer-demand and profit-margins. See Tenet Health Care Corp., 186 F.3d at 1050-51, 1054 (marginal consumer substitution and profit-margins must be supported with more than “common sense.” This court pointed to the “compelling and essentially unrefuted [critical loss analysis] evidence that the switch to another [product] by a small percentage of [consumers] would constrain a price increase” as evidence of marginal consumer’s ability to constrain prices in a broader geographic market); see also United States v. Engelhard Corp., 126 F.3d 1302, 1306 (11th Cir. 1997) (requiring evidence in order to evaluate the possibility that losing marginal customers responsible for high-margin purchases may constrain prices). The FTC offered testimony of one expert explaining that “marginal customers”–neonatologists who are ambivalent between prescribing Indocin IV or NeoProfen–may constrain prices on either drug. Although not addressing this testimony in its fact-findings, the district court did state that it generally found the FTC expert unpersuasive. See Fox v. Dannenberg, 906 F.2d 1253, 1256 (8th Cir. 1990) (“The question of the expert’s credibility and the weight to be accorded the expert testimony are ultimately for the trier of fact to determine.”). Critically, the
district court did credit Lundbeck’s expert who stated that the number of neonatologists willing to switch between the drugs based on price was insufficient to exercise price constraint. See Pioneer Hi-Bred Int’l v. Holden Found. Seeds, Inc., 35 F.3d 1226, 1238 (8th Cir. 1994) (“[This court] will not disturb the district court’s decision to credit the reasonable testimony of one of two competing experts.”).
Lundbeck’s expert was clear that even those neonatologists who might be willing to switch in response to a price difference would do so only if there was a very significant price decrease, indicating that the level of cross-elasticity was low.

The Eighth Circuit panel also quickly dismissed the Commission’s arguments based upon internal documents and apparent functional similarity between the drugs.   On the internal documents, here is the relevant portion of the opinion:

According to Lundbeck’s internal documents, it anticipated that a dramatic price increase of Indocin IV would draw generic competitors into the market. As a result, it ceased promoting Indocin IV, focusing instead on increasing the market share of NeoProfen–as a superior PDA treatment. The FTC argues that this business strategy–to market NeoProfen as better than Indocin IV–means that Lundbeck viewed NeoProfen as a direct competitor to Indocin IV, and thus the drugs must be in the same product market. However, Lundbeck’s strategy to discontinue promoting Indocin IV in favor of NeoProfen can also be interpreted to mean that while Indocin IV was vulnerable to generics, NeoProfen was not, and thus the products are not interchangeable. If there are two permissible views of evidence, the factfinder’s choice between them is not clearly erroneous. Anderson, 470 U.S. at 574.

Judge Kopf offers up an interesting and reluctant concurrence, which appears here in full:

When defining the product market, and considering the issue of cross-elasticity of demand, the district court relied heavily upon the testimony of doctors that they would use Indocin or NeoProfen without regard to price. Admittedly, those doctors had no responsibility to pay for the drugs or otherwise concern themselves with cost. Thus, the doctors had scant incentive to conserve the scarce resources that would be devoted to paying for the medication. Why the able and experienced trial judge relied upon the doctors’ testimony so heavily is perplexing. In an antitrust case, it seems odd to define a product market based upon the actions of actors who eschew rational economic considerations. See, e.g., F.T.C. v. Tenet Health Care Corp., 186 F.3d 1045, 1054 & n.14 (8th Cir. 1999) (observing that “market participants are not always in the best position to assess the market long term” and that is particularly so where their testimony is “contrary to the payers’ economic interests and thus is suspect”).  That oddity seems especially strange where, as here, there is no real dispute that (1) both drugs are effective when used to treat the illness about which the doctors testified
and (2) internal records from the defendant raise an odor of predation. The foregoing having been said, the standard of review carries the day in this case as it does in so many others. As a result, I fully concur in Judge Benton’s excellent opinion.

It will be interesting to see whether the Commission press release on this doubles down on its earlier assertion that “Ovation’s profiteering on the backs of critically ill premature babies is not only immoral, it is illegal.”

Filed under: antitrust, federal trade commission, merger guidelines, mergers & acquisitions

The Henry G. Manne Program in Law & Economics Studies and Google present a conference on The Law and Economics of Search Engines and Online Advertising to be held at George Mason University School of Law, Thursday, June 16th, 2011. The conference will run from 8:30 A.M. to 5:00 P.M.

OVERVIEW:

This conference is organized by Henry N. Butler, Executive Director of the Law & Economics Center and George Mason Foundation Professor of Law at George Mason University School of Law, and Joshua D. Wright, Associate Professor of Law at George Mason University School of Law.

Search and online advertising are important parts of the economy. They are also young industries. As such, understanding both the way in which search and online advertising operate as well as how these markets may evolve is fundamental to any economic and policy discussion. A deep understanding of the technology and economics of search, network effects, the antitrust economics of market definition, and the relationship between search and online advertising are required to facilitate sensible policies in this area. This conference seeks to address these issues by inviting experts in the field to present their views and engage with each other about the economic realities of search and online advertising.

REGISTRATION:

Attendance for this conference is by invitation only. To receive an invitation, please send a message with your name, affiliation, and full contact information to:

Contact: Jeff Smith
Email: [email protected]

AGENDA:

Thursday, June 16, 2011:

7:30 – 8:20 A.M.: Registration and breakfast

8:30 – 10:00 A.M.:  PANEL 1: What Role Do Network Effects Play In the Search Market?

Network effects often play an important role in analyzing competition in high-tech markets. Network effects present opportunities for enhanced consumer welfare, but also can create the potential for competitive harms. Potential network effects must be examined in a market and technology specific-context in order to understand their likely effects. This panel takes up this question by re-examining what network externalities and network effects are and analyzing whether they are present in search and related technologies. Panelists:

• Michael L. Katz, Sarin Chair in Strategy and Leadership, University of California, Berkeley
• Geoffrey A. Manne, Executive Director, International Center for Law & Economics
• Stanley J. Liebowitz, Ashbel Smith Professor of Economics, University of Texas at Dallas
• William H. Page, Marshall M. Criser Eminent Scholar, University of Florida Levin College of Law (moderator)

10:30 A.M. – 12:00 P.M.: PANEL 2: Competition and Online Advertising

Defining online markets is a complex and difficult task. Are advertising markets the same across web properties? What is the relationship between online and offline properties or text ads and display ads? Is the ad market for search services and content services different? This panel explores competition and online advertising. Panelists:

• Damien Geradin, Professor of Competition Law and Economics, Tilburg University
• Daniel L. Rubinfeld, Robert L. Bridges Professor of Law and Professor of Economics, University of California, Berkeley
• Catherine Tucker, Douglas Drane Career Development Professor in IT and Management and Assistant Professor of Marketing, MIT Sloan School of Management
• Michael R. Baye, Bert Elwart Professor of Business and Professor of Business Economics & Public Policy, Indiana University Kelley School of Business (moderator)

12:00 – 1:30 P.M.: LUNCH and KEYNOTE:

Engineering Search – Mark Paskin, Software Engineer, Search Quality, Google,Inc.

1:30 – 3:30 P.M.: PANEL 3: Competition and Search Markets

Much of the policy discussion on competition and search has centered on firms who participate in the search market in the traditional sense, such as Bing, Yahoo!, Blekko, Google, and others. However, the Internet provides many other ways for users to engage with and take advantage of its benefits. Vertical search markets such as Amazon or travel sites present examples of competition in search. Social media platforms (e.g., Facebook and Twitter) and the rise of mobile apps also present a competitive challenge for search. Furthermore, news sites, direct navigation, and offline information relate to our understanding of the proper market definition in search. This panel examines how platforms compete against search and the implications of that competition. Panelists:

• Benjamin G. Edelman, Assistant Professor of Business Administration, Harvard Business School
• Randal C. Picker, Leffman Professor of Commercial Law, University of Chicago Law School
• Paul Liu, Senior Economist, Google, Inc.
• Thomas M. Lenard, President and Senior Fellow, Technology Policy Institute (moderator)

3:30 – 5:00 P.M.: PANEL 4: The Potential Costs and Benefits of Search Regulation

Some commentators have raised the question of whether search providers are sufficiently “neutral” in presenting results, which begs the question of whether concepts such as “objectivity” and “neutrality” are desirable or even achievable in the search industry. This panel will examine these questions and explore what impact regulatory efforts to impose “neutrality” principles might have on consumer welfare and on the innovation being driven by companies like Google, Bing, and Facebook. Panelists:

• Eric Goldman, Associate Professor of Law and Director of the High Tech Law Institute, Santa Clara University School of Law
• David Balto, Senior Fellow, Center for American Progress
• Frank Pasquale, Schering-Plough Professor in Health Care Regulation and Enforcement, Seton Hall University School of Law
• Joshua D. Wright, Associate Professor of Law, George Mason University School of Law (moderator)

VENUE:

George Mason University School of Law
3301 Fairfax Drive
Arlington, VA 22201

CONFERENCE HOTEL:

The Westin Arlington Gateway
801 North Glebe Road
Arlington, VA 22203
(703) 717-6200

FURTHER INFORMATION:

For more information regarding this conference or other initiatives of the Law & Economics Center, please visit MasonLEC.org.

 

Filed under: antitrust, economics, google, technology

Do the 2010 Horizontal Merger Guidelines require market definition?  Will the agencies define markets in cases they bring?  Are they required to do so by the Guidelines?  By the Clayton Act?

Here is Commissioner Rosch in the FTC Annual Report (p.18):

“A significant development in 2010 was the issuance of updated Horizontal Merger Guidelines by the federal antitrust agencies. The 2010 Guidelines advance merger analysis by eliminating the need to define a relevant market and determine industry concentration at the outset.”

Compare with Commissioner Rosch’s reported remarks at the Spring Meeting:

“I want to emphasise: I don’t care what the 2010 guidelines say, you can never do away with market definition,” Rosch said.

Does the latter statement assert that the HMGs do not require market definition at all?  If so, the statement in the former that the agencies don’t need to do it first certainly follows.  And why is it an “advance” to eliminate the need to define a market first but seems to be a bad thing to eliminate it altogether in certain cases?   Of course, as DOJ (and, importantly, UCLA Bruin) economist Ken Heyer points on in his remarks at the same Spring Meeting event, and I’ve written about here and here, most expect the agencies to continue defining markets because federal courts expect it, may require it, and failure to do so will harm the agencies’ ability to successfully bring enforcement actions.  Nonetheless, the statements do not provide much clarity on the Commissioner’s (or, for that matter, Commission’s) views with respect to the new HMGs and the role of market definition.

Over at the DOJ, on the other hand, former Chief Economist Carl Shapiro — congratulations to the newly appointed Fiona Scott Morton —  made clear that agencies’ stance on the role of market definition:

“The Division recognizes the necessity of defining a relevant market as part of any merger challenge we bring.”

No such announcement from the FTC.   And Commissioner Rosch’s remarks do not clarify matters.  On the one hand they seem to indicate the FTC will always define markets; on the other, they imply that they do so despite the fact that the Guidelines say they don’t have to.  With Shapiro gone, the DOJ view is unclear at the moment.  Perhaps all of this is much ado about nothing as a practical matter — though I’m not sure of that.  But if the Agencies both consider market definition a “necessity,” why not just say so?  Why not write: “market definition is required by Section 7 of the Clayton Act and the agencies will, at some point in the analysis, define a relevant market”?

Market definition requirement aside, my views on the positive developments in the new Merger Guidelines and the larger problem they present — asymmetrically updating theories of competitive harm without doing so on the efficiencies side — articulated in this forthcoming paper.

Filed under: antitrust, economics Tagged: antitrust, doj, ftc, market definition, merger guidelines

Joshua Gans has an interesting post examining potential antitrust issues involving Apple, an issue we’ve discussed here and here.  Gans focuses in on the two most relevant issues:

There are two aspects that might raise antitrust concern: (i) Apple’s exclusivity-like requirement that no external payment links be permitted in apps and (ii) Apple’s most-favored customer clause preventing discounting on other platforms. Let’s examine each in turn.

In my earlier post, I emphasized that a potential plaintiff would have a difficult time demonstrating that Apple has monopoly power in any relevant market for the purposes of antitrust analysis.  Both exclusivity arrangements and most-favored customer clauses can generate efficiencies and improve consumer outcomes; they pose little threat to competition and consumers in the absence of durable monopoly power.  I suggested that this was the largest obstacle to any antitrust analysis involving Apple’s subscription model:

The most often discussed bar to an antitrust action against Apple is the one many regulators simply assume into existence: Apple must have market power in an antitrust-relevant market.  While Apple’s share of the smartphone market is only 16% or so, its share of the tablet computing market is much larger.  The WSJ, for example, reports that Apple accounts for about three-fourths of tablet computer sales.  I’ve noted before in the smartphone context that this requirement should not be consider a bar to FTC suit, given the availability of Section 5; however, as the WSJ explains, market definition must be a critical issue in any Apple investigation or lawsuit:

Publishers, for example, might claim that Apple dominates the market for consumer tablet computers and that it has allegedly used that commanding position to restrict competition. Apple, in turn, might define the market to include all digital and print media, and counter that any publisher not happy with Apple’s terms is free to still reach its customers through many other print and digital outlets.

One must conduct a proper, empirically-grounded analysis of the relevant data to speak with confidence; however, it suffices to say that I am skeptical that tablet sales would constitute a relevant market.

Gans agrees, also suggesting that lack of monopoly power undercuts any potential antitrust case against Apple.

Exclusivity can be an issue as it might harm other platforms that might want to sell digital subscriptions. If Apple’s exclusivity means that those platforms cannot generate sales, then a monopoly platform may arise or be sustained. But that is the issue here: where is Apple’s monopoly? It is arguable that Apple has a monopoly over tablet devices and has had that monopoly now for almost 11 months since it first released its iPad. But if a publisher decided not to sell subscriptions for iPad users, it would have other options: particularly the options it had prior to April 2010; web based subscriptions and eReader subscriptions, not to mention physical subscriptions that fall outside of Apple’s terms. It would have to be demonstrated that the iPad was one of the few or the only way to access a particular customer class to believe that publishers were excluded by Apple’s terms. In any case, those terms are not strictly exclusionary as they do not prevent other digital subscription sales – even for iPad access. Instead, they at worst, raise the costs of those other sales. To be sure, raising costs can sometimes be an antitrust violation but the degree of market power a firm would have to possess to make that the case has to be proportionate. Right now, that case appears weak.

Most-favored customer clauses arise when the terms of one supply contract impose conditions on other contracts a party might enter into. Apple is effectively preventing discounting elsewhere. If it did not do this, then that discounting would occur and Apple may be unable to generate as much in sales. Worse than that, Apple may do the hard work of signing consumers up for initial subscriptions only to have those same consumers contacted outside of those arrangements with discounts.

But such clauses can have the effect of raising prices in the market and this is what might concern antitrust authorities. For this to be likely to occur here, Apple must have a requisite degree of power (so that publishers are forced to accept those terms) and it must be the case that prices actually rise. It is too early to tell but if Apple is right and iPad consumers really do purchase more, then it is possible that the price elasticity of demand from iPad consumers is relatively high; that is, charge $10 to an iPad consumer and you generate many more sales than $10 charged for other types of consumers. In this environment, it is not obvious that the iPad will lead to higher digital subscription prices.

My only quibble with Gans’ post is that he appears to describe the “monopoly power” requirement as a problem for antitrust, rather than a sensible requirement that protects consumers from overdeterrence.  For example, Gans writes that “antitrust law, as it currently stands, has difficulty in dealing with industries whereby the path is towards monopoly and how to act prospectively about it.”   Gans does not suggest that the antitrust authorities should bring a case against Apple on these grounds.   But he does seem to imply that antitrust would be more effective if it were more willing to reach business conduct that is not harming consumers, may well be providing significant efficiencies currently, but might generate future harm.   I’m not sure this is what he means or if I’m misinterpreting.  If I’m right, I would have characterized things quite differently, perhaps along the lines of “antitrust law is not willing to sacrifice current gains to consumers for the sake of prohibiting practices that are not currently harming competition and the basis for predicting future harm is speculative, at best.”

Potential minor quibble aside, its a very good post and well worth reading.

Filed under: antitrust, economics, MFNs, monopolization, technology