FTC v. Staples is a seminal case in modern antitrust analysis of horizontal mergers.  Judge Posner has described it as the economic “coming of age” of merger analysis.   It is also a landmark decision in the development of unilateral effects theories.  Despite the fact that Judge Hogan did not explicitly rely upon the econometric evidence presented to demonstrate that a post-merger combination of Staples and Office Depot would be able to increase prices, it is also often discussed as having particular importance for the role of econometrics in antitrust analysis.  As Jonathan Baker observes:

Judge Hogan’s hidden opinion supports the government’s use of econometric evidence, though the court did not trumpet doing so. The opinion never uses the term, presumably in a conscious effort to downplay novelty in order to avoid creating an issue for appeal. Yet Judge Hogan demonstrably relied on econometric evidence in one instance,(14) when he stated that “in this case the defendants have projected a pass through rate of two-thirds of the savings while the evidence shows that, historically, Staples has passed through only 15-17%.”(15) The sole basis in the record for the 15-17% figure is the testimony of the FTC’s econometric expert as to the conclusions of his statistical analysis of the pass-through rate.

The district court was persuaded by the FTC’s pricing evidence, and evidence that entry would not timely, likely and sufficient to counter any price increase.  Part of that entry analysis was rejecting the defendant’s claim that firms like Walmart would discipline any attempt to increase prices.  In any interesting turn of events, nearly 15 years later, it looks like we are heading toward another significant merger between office superstores:

Office Depot Inc. (ODP) and OfficeMax Inc. (OMX) may need to merge after heightened competition for office-supply sales and a 26-year high in the U.S. unemployment rate helped wipe out almost $13 billion of shareholder value.

Office Depot, the second-largest U.S. office-supply chain, has plunged 90 percent to $1.16 billion in the last five years, more than any American retailer that still has a market value greater than $500 million, according to data compiled by Bloomberg. OfficeMax was valued at $664 million yesterday after plummeting 78 percent, the third-steepest drop. Both trade at 10 cents or less per dollar of sales — one-tenth of the industry average and ranking in the bottom five of 126 retailers.

Interestingly, competitive pressure from Wal-Mart and Target, among others, appears to have developed into a significant force in the market.

With businesses spending less on paper and printers as the U.S. jobless rate hovers at 9 percent, combining Office Depot with OfficeMax may reduce costs by almost $500 million, said KeyBanc Capital Markets Inc. Regulatory approval won’t be a hurdle because of more competition from Wal-Mart Stores Inc. (WMT) and Target Corp. (TGT) since Staples Inc. (SPLS) was blocked from buying Office Depot in 1997, said BB&T Capital Markets. Money-losing Office Depot of Boca Raton, Florida, hired interim Chief Executive Officer Neil Austrian in May after a seven-month search.

“Office Depot needs OfficeMax,” said Anthony Chukumba, an analyst with BB&T in New York. “They need to combine so they can scale up to better compete with Staples. For them to bring in a guy who’s been on the board forever and who has been CEO twice before on an interim basis, that just smacked of them saying, ‘We’re going to try to sell the company.’”

Of course, the ex post expansion of Wal-Mart and others into this territory does not mean that the FTC or Judge Hogan were wrong ex ante.  Indeed, the strength of the economic evidence in the case suggested that entry would be difficult — and indeed, perhaps it was.  Nonetheless, a merger of the the second and third largest office superstores is surely to attract some attention at the agencies.  Indeed, it may well be the case that the sale of consumable office supplies through office superstores in no longer a relevant antitrust product market.  However, the markets have changed in ways other than the emergence of significant pricing discipline from Wal-Mart and others.  The story notes that Office Depot’s market value has decreased by over $10,3 billion ($2.3 billion for OfficeMax since June 2006).

Given the growth of Wal-Mart and others, I suspect that even a replay of the Staples-Office Depot transaction of the late 1990s would have a significantly better chance of approval today than it did then.  Those in the industry appear to be expecting a merger announcement, but describe government approval as “certainly not a given.”  In any event, a Office Depot – Office Max merger will provide a good opportunity to go back and look at the predictions of the agencies at the time, to evaluate those predictions against the development of the market, and perhaps to learn something useful about competitive dynamics and entry in the retail sector.

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

From the WSJ:

The Department of Health and Human Services this month notified Howard Solomon of Forest Laboratories Inc. that it intends to exclude him from doing business with the federal government. This, in turn, could prevent Forest from selling its drugs to Medicare, Medicaid and the Veterans Administration. If the government implements its ban, Forest would have to dump Mr. Solomon, now 83 years old, in order to protect its corporate revenue. No drug company, large or small, can afford to lose out on sales to the federal government, a major customer.

….

The Health and Human Services department startled drug makers last year when the agency said it would start invoking a little-used administrative policy under the Social Security Act against pharmaceutical executives. This policy allows officials to bar corporate leaders from health-industry companies doing business with the government, if a drug company is guilty of criminal misconduct. The agency said a chief executive or other leader can be banned even if he or she had no knowledge of a company’s criminal actions. Retaining a banned executive can trigger a company’s exclusion from government business.

Debarment is obviously a very serious remedy.  The increased use of debarment in this context has been controversial, especially in cases in which the executive has not demonstrated that the debarred individual is actually complicit.  The WSJ story discusses the Forest Laboratories example along these lines in more detail:

According to Mr. Westling, “It would be a mistake to see this as solely a health-care industry issue. The use of sanctions such as exclusion and debarment to punish individuals where the government is unable to prove a direct legal or regulatory violation could have wide-ranging impact.” An exclusion penalty could be more costly than a Justice Department prosecution.

He said that the Defense Department and the Environmental Protection Agency, for example, have debarment powers similar to the HHS exclusion authority.

The Forest case has its origins in an investigation into the company’s marketing of its big-selling antidepressants Celexa and Lexapro. Last September, Forest made a plea agreement with the government, under which it is paying $313 million in criminal and civil penalties over sales-related misconduct.

A federal court made the deal final in March. Forest Labs representatives said they were shocked when the intent-to-ban notice was received a few weeks later, because Mr. Solomon wasn’t accused by the government of misconduct.

Forest is sticking by its chief. “No one has ever alleged that Mr. Solomon did anything wrong, and excluding him [from the industry] is unjustified,” said general counsel Herschel Weinstein. “It would also set an extremely troubling precedent that would create uncertainty throughout the industry and discourage regulatory settlements.”

The issue of debarment also arises in the antitrust context as a weapon in the toolkit of antitrust enforcement agencies prosecuting cartels.  Judge Ginsburg and I have argued, in Antitrust Sanctions, that the debarment remedy in that context, along with a shift toward individual responsibility and away from ever-increasing corporate fines, would result in a shift toward efficient deterrence.   In our case, we discuss debarment for the executive actually engaged in the price-fixing as well as officers and directors who negligently supervise the price-fixers (e.g., with failure to institute an antitrust compliance program).   Without safeguards to ensure that debarment is imposed in cases of actual wrongdoing or negligent supervision, and also in the cases of settlement, that there is a factual basis for debarment, imposition of these penalties runs the risk that enforcement agencies will have arbitrary power to banish executives that are disfavored for whatever reason.  If its application is properly constrained, however, debarment can be a more effective tool in prosecuting antitrust offenses and potentially other white-collar crime than ever-increasing corporate fines which are largely borne by shareholders.  I’ll refer interested readers to the Ginsburg & Wright link above for the more detailed case in favor of adding debarment to the cartel-enforcement toolkit, including a discussion of its application in the antitrust context in a variety of other countries as well as non-antitrust settings in the U.S.

Filed under: antitrust, corporate crime, corporate law, economics

Josh, Berin Szoka and I have a new op-ed up at CNET on why the lessons of Microsoft suggest the FTC’s action against Google might be misguided.  A taste:

Ten years ago this week, an appeals court upheld Microsoft’s conviction for monopolizing the PC operating system market. The decision became a key legal precedent for U.S. antitrust enforcement. It also cemented the government’s confidence in its ability to pick winners and losers in fast-moving technology markets–a confidence not borne out by subsequent events.

Now this sad history seems to be repeating itself: By uncanny coincidence, news broke just last Friday that the FTC had begun an antitrust investigation into Google’s business practices. Unfortunately, there’s no reason to expect the outcome to be any better for consumers this time around.

There is, in fact, no evidence that the case against Microsoft or its settlement contributed to the spectacular innovation in the IT sector over the last decade. Indeed, they may even have solidified Microsoft’s role as the perennial also-ran in this latest wave of technological progress, as the company struggled to keep innovating under the threat of constant antitrust scrutiny in the U.S. and abroad.

The true lesson of the Microsoft case is this: antitrust intervention in information technology has a poor track record of serving consumers. Even Harvard law professor Lawrence Lessig, who was a court-appointed Special Master in that case and has since championed government tinkering with the Internet, finally admitted in 2007 that he “blew it on Microsoft” by underestimating the potential for innovation and market forces to dethrone Microsoft, particularly through the rise of open-source software (which now in part powers Apple’s popular iOS).

Filed under: antitrust, business, error costs, exclusionary conduct, federal trade commission, law and economics, monopolization, technology, tying

Excerpt

Ten years ago this week, an appeals court upheld Microsoft’s conviction for monopolizing the PC operating system market. The decision became a key legal precedent for U.S. antitrust enforcement. It also cemented the government’s confidence in its ability to pick winners and losers in fast-moving technology markets–a confidence not borne out by subsequent events.

Now this sad history seems to be repeating itself: By uncanny coincidence, news broke just last Friday that the FTC had begun an antitrust investigation into Google’s business practices. Unfortunately, there’s no reason to expect the outcome to be any better for consumers this time around.

There is, in fact, no evidence that the case against Microsoft or its settlement contributed to the spectacular innovation in the IT sector over the last decade. Indeed, they may even have solidified Microsoft’s role as the perennial also-ran in this latest wave of technological progress, as the company struggled to keep innovating under the threat of constant antitrust scrutiny in the U.S. and abroad.

The true lesson of the Microsoft case is this: antitrust intervention in information technology has a poor track record of serving consumers. Even Harvard law professor Lawrence Lessig, who was a court-appointed Special Master in that case and has since championed government tinkering with the Internet, finally admitted in 2007 that he “blew it on Microsoft” by underestimating the potential for innovation and market forces to dethrone Microsoft, particularly through the rise of open-source software (which now in part powers Apple’s popular iOS).

Continue reading on C-NET

In a much anticipated move, the Federal Trade Commission has started a formal monopolization investigation of Google . Because of its dominance in the search market, Google has been in the antitrust crosshairs for some time now, both in the U.S. and in Europe. U.S. antitrust enforcers blocked a proposed joint venture with Yahoo in 2008, and more recently barely cleared the acquisition of travel site software company ITA. The E.U. is already investigating Google over allegations it has abused its dominant position in online search.

I did not intend for this to become a series (Part I), but I underestimated the supply of analysis simultaneously invoking “search bias” as an antitrust concept while waving it about untethered from antitrust’s institutional commitment to protecting consumer welfare.  Harvard Business School Professor Ben Edelman offers the latest iteration in this genre.  We’ve criticized his claims regarding search bias and antitrust on precisely these grounds.

For those who have not been following the Google antitrust saga, Google’s critics allege Google’s algorithmic search results “favor” its own services and products over those of rivals in some indefinite, often unspecified, improper manner.  In particular, Professor Edelman and others — including Google’s business rivals — have argued that Google’s “bias” discriminates most harshly against vertical search engine rivals, i.e. rivals offering search specialized search services.   In framing the theory that “search bias” can be a form of anticompetitive exclusion, Edelman writes:

Search bias is a mechanism whereby Google can leverage its dominance in search, in order to achieve dominance in other sectors.  So for example, if Google wants to be dominant in restaurant reviews, Google can adjust search results, so whenever you search for restaurants, you get a Google reviews page, instead of a Chowhound or Yelp page. That’s good for Google, but it might not be in users’ best interests, particularly if the other services have better information, since they’ve specialized in exactly this area and have been doing it for years.

I’ve wondered what model of antitrust-relevant conduct Professor Edelman, an economist, has in mind.  It is certainly well known in both the theoretical and empirical antitrust economics literature that “bias” is neither necessary nor sufficient for a theory of consumer harm; further, it is fairly obvious as a matter of economics that vertical integration can be, and typically is, both efficient and pro-consumer.  Still further, the bulk of economic theory and evidence on these contracts suggest that they are generally efficient and a normal part of the competitive process generating consumer benefits.  Vertically integrated firms may “bias” their own content in ways that increase output; the relevant point is that self-promoting incentives in a vertical relationship can be either efficient or anticompetitive depending on the circumstances of the situation.  The empirical literature suggests that such relationships are mostly pro-competitive and that restrictions upon firms’ ability to enter them generally reduce consumer welfare.  Edelman is an economist, with a Ph.D. from Harvard no less, and so I find it a bit odd that he has framed the “bias” debate outside of this framework, without regard to consumer welfare, and without reference to any of this literature or perhaps even an awareness of it.  Edelman’s approach appears to be a declaration that a search engine’s placement of its own content, algorithmically or otherwise, constitutes an antitrust harm because it may harm rivals — regardless of the consequences for consumers.  Antitrust observers might parallel this view to the antiquated “harm to competitors is harm to competition” approach of antitrust dating back to the 1960s and prior.  These parallels would be accurate.  Edelman’s view is flatly inconsistent with conventional theories of anticompetitive exclusion presently enforced in modern competition agencies or antitrust courts.

But does Edelman present anything more than just a pre-New Learning-era bias against vertical integration?  I’m beginning to have my doubts.  In an interview in Politico (login required), Professor Edelman offers two quotes that illuminate the search-bias antitrust theory — unfavorably.  Professor Edelman begins with what he describes as a “simple” solution to the search bias problem:

I don’t think it’s out of the question given the complexity of what Google has built and its persistence in entering adjacent, ancillary markets. A much simpler approach, if you like things that are simple, would be to disallow Google from entering these adjacent markets. OK, you want to be dominant in search? Stay out of the vertical business, stay out of content.

The problems here should be obvious.  Yes, a per se prohibition on vertical integration by Google into other economic activities would be quite simple; simple and thoroughly destructive.  The mildly more interesting inquiry is what Edelman proposes Google ought provide.  May, under Edelman’s view of a proper regulatory regime, Google answer address search queries by providing a map?  May Google answer product queries with shopping results?  Is the answer to those questions “yes” if and only if Google serves up some one else’s shopping results or map?  What if consumers prefer Google’s shopping result or map because it is more responsive to the query.  Note once again that Edelman’s answers do not turn on consumer welfare.  His answers are a function of the anticipated impact of Google’s choices to engage in those activities upon rival vertical search engines.  Consumer welfare is not the center of Edelman’s analysis; indeed, it is unclear what role consumer welfare plays in Edelman’s analysis at all.  Edelman simply applies his prior presumption that Google’s conduct, even if it produces real gains for consumers, is or should be actionable as an antitrust claim upon a demonstration that Google’s own services are ranked highly on its own search engine — even if Google-affiliated content is ranked highly by other search engines!  (See Danny Sullivan making that point nicely in this post).  Edelman’s proscription ignores the efficiencies of vertical integration and the benefits to consumers entirely.  It may be possible to articulate a coherent anticompetitive theory involving so-called search bias that could then be tested against the real world evidence.  Edelman has not.

Professor Edelman’s other quotation from the profile of the “academic wunderkind” that drew my attention was the following answer in response to the question “which search engine do you use?”  After explaining that he probably uses Google and Bing in proportion to their market shares, Professor Edelman is quoted as saying:

If your house is on fire and you forgot the number for the fire department, I’d encourage you to use Google. When it counts, if Google is one percent better for one percent of searches and both options are free, you’d be crazy not to use it. But if everyone makes that decision, we head towards a monopoly and all the problems experience reveals when a company controls too much.

By my lights, there is no clearer example of the sacrifice of consumer welfare in Edelman’s approach to analyzing whether and how search engines and their results should be regulated.  Note the core of Professor Edelman’s position: if Google offers a superior product favored by all consumers, and if Google gains substantial market share because of this success as determined by consumers, we are collectively headed for serious problems redressable by regulation.  In these circumstances, given the (1) lack of consumer lock-in for search engine use, (2) the overwhelming evidence that vertical integration is generally pro-competitive, and (3) the fact that consumers are generally enjoying the use of free services — one might think that any consumer-minded regulatory approach would carefully attempt to identify and distinguish potentially anticompetitive conduct so as to minimize the burden to consumers from inevitable false positives.  With credit to antitrust and its hard-earned economic discipline, this is the approach suggested by modern antitrust doctrine.  U.S. antitrust law requires a demonstration that consumers will be harmed by a challenged practice — not merely rivals.  It is odd and troubling when an economist abandons the consumer welfare approach; it is yet more peculiar that an economist not only abandons the consumer welfare lodestar but also argues for (or at least presents an unequivocal willingness to accept) an ex ante prohibition on vertical integration altogether in this space.

I’ve no doubt that there are more sophisticated theories of which creative antitrust economists can conceive that come closer to satisfying the requirements of modern antitrust economics by focusing upon consumer welfare.  Certainly, the economists who identify those theories will have their shot at convincing the FTC.  Indeed, Section 5 might even open the door to theories ever-so slightly more creative and more open-ended that those that would be taken seriously in a Sherman Act inquiry.  However, antitrust economists can and should remain intensely focused upon the impact of the conduct at issue — in this case, prominent algorithmic placement of Google’s own affiliated content its rankings — on consumer welfare.  Because Professor Edelman’s views harken to the infamous days of antitrust that cast a pall over any business practice unpleasant for rivals — even if the practice delivered what consumers wanted.  Edelman’s theory is an offer to jeopardize consumers and protect rivals, and to brush the dust off antiquated antitrust theories and standards and apply them to today’s innovative online markets.  Modern antitrust has come a long way in its thinking over the past 50 years — too far to accept these competitor-centric theories of harm.

Filed under: antitrust, economics, federal trade commission, google, technology

No surprise here.  The WSJ announced it was coming yesterday, and today Google publicly acknowledged that it has received subpoenas related to the Commission’s investigation.  Amit Singhal of Google acknowledged the FTC subpoenas at the Google Public Policy Blog…

Read the full piece here.

Allegations of “search bias” have led to increased scrutiny of Google, including active investigations in the European Union and Texas, a possible FTC investigation, and sharply-worded inquiries from members of Congress. But what does “search bias” really mean? Does it demand preemptive “search neutrality” regulation, requiring government oversight of how search results are ranked? Is antitrust intervention required to protect competition? Or can market forces deal with these concerns?

Panelists:
* Declan McCullagh (Moderator), Chief Political Correspondent for CNET, part of CBS Corporation
* Prof. Frank Pasquale, Seton Hall University School of Law, author of “Federal Search Commission? Access, Fairness and Accountability in the Law of Search”
* Prof. Geoffrey Manne, Lewis & Clark Law School, TechFreedom Adjunct Fellow, and Director of the International Center for Law & Economics, author of “If Search Neutrality Is the Answer, What’s the Question?”
* Prof. James Grimmelman, New York Law School, author of “The Structure of Search Engine Law”
* Prof. Eric Goldman, Santa Clara University School of Law, author of “Search Engine Bias and the Demise of Search Engine Utopianism”

More information on this event can be found at http://techfreedom.org/event/search-engine-regulation-solution-search-problem

View the conference

In the Huffington Post, Marcus Baram warns against those who claim to be concerned about over-regulation on Wall Street and in the consumer protection sphere.  Baram writes:

Today, Wall Street is again on the attack against a regulatory overhaul that includes more stringent investor and consumer protections. Though the financial landscape is far different and the details of the proposals have changed since 1912, the industry is using much of the same alarmist rhetoric to oppose new regulations and rules.

JPMorgan chairman Jamie Dimon recently complained that proposed rules on derivatives, capital buffers and too-big-to-fail banks are bad for America. Wall Street could lose customers to European banks, he said.

Baram includes economist, and my co-author, David S. Evans in his list of those “crying wolf” over over-regulation:

At a congressional hearing on the Consumer Financial Protection Bureau, banking consultant David S. Evans attacked the “hard paternalism” of its interim director Elizabeth Warren. He cautioned that the bureau “could make it harder and more expensive for consumers to borrow money.”

Such Cassandra-like warnings are common in the history of financial regulation.

I think Baram might want to have this one back if given the chance.  His point is that the Dimon and David Evans and others are concerned about imposing an enormous regulatory burden are wrong.  Of course, I am no scholar of Greek mythology, but I seem to recall that Cassandra was right!  Her curse was that nobody believed her accurate predictions about the future.  Baram may have stumbled upon something here.

But more seriously, at a time when the unemployment rate is over 9%, when the intellectual architects of the CFPB were quite frank about favoring a regulatory approach that would restrict access to consumer credit (see here), and when the flow of credit is critical to economic growth and recovery, one has to be pretty deeply committed to the cause to so brazenly ignore predictions that massive regulatory structure just might hold the economy back.

Evans’ testimony at the House Hearing on the CFPB is available here.

Filed under: consumer financial protection bureau, consumer protection, economics, regulation