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Section 2 Symposium: Herbert Hovenkamp on Patents and Exclusionary Practices

TOTM One interesting aspect of the DOJ Report on Section 2 is the scant, episodic treatment of IP issues. The Report rejects the presumption of market power for . . .

One interesting aspect of the DOJ Report on Section 2 is the scant, episodic treatment of IP issues. The Report rejects the presumption of market power for patent ties (p. 81); has a very brief discussion of refusal to license patented parts in which it properly rejects the reasoning of the Ninth Circuit’s Kodak decision and aligns itself with the Federal Circuit’s Xerox decision (p. 121-122). The Walker Process case, which held that an infringement action based on an improperly acquired and unenforceable patent could violate §2, is cited in a footnote, and only for the proposition that market power is required in a §2 case (p. 25 n. 53). Finally, the Report contains a brief discussion of the presence of intellectual property in measuring incremental cost for purposes of analyzing predatory pricing (p. 63).

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Intellectual Property & Licensing

Section 2 Symposium: Bill Kolasky on Proving Market Power

TOTM The market power section of the Department’s Single Firm Conduct report is one of the strongest sections of the report.  It provides an exceptionally clear discussion of . . .

The market power section of the Department’s Single Firm Conduct report is one of the strongest sections of the report.  It provides an exceptionally clear discussion of the market power element under Section 2.  It recognizes, in particular, that a violation of Section 2 requires more than mere market power, but rather a finding of substantial and durable market power – “an extreme degree of market power” as the Fifth Circuit expressed it in Beauville v. Federated Dep’t Stores.

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Antitrust & Consumer Protection

Section 2 Symposium: Tim Brennan on Predation, Exclusion, and Complement Market Monopolization

TOTM As evidenced by this on-line symposium, the handling of cases under the rubrics “monopolization,” “single firm conduct”, or “abuse of dominance” continues to be debated . . .

As evidenced by this on-line symposium, the handling of cases under the rubrics “monopolization,” “single firm conduct”, or “abuse of dominance” continues to be debated by the competition policy community. This debate, as evidenced by the Antitrust Division’s Sept. 2008 single firm conduct report and the FTC responses, is not restricted within the U.S. The European Union has published “Guidance Papers” on standards for exclusionary conduct under Article 82, and the Canadian Competition Bureau recently issued draft guidelines for prosecuting conduct under the abuse of dominance provisions of Sec. 79 of its Competition Act.

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Antitrust & Consumer Protection

Section 2 Symposium: Howard Marvel on Safe Harbors for Short Term Exclusive Dealing Contracts

TOTM Exclusive dealing prevents the bait-and-switch behavior by dealers who convert customers drawn by one brand to the products of its rivals. Despite the red flag . . .

Exclusive dealing prevents the bait-and-switch behavior by dealers who convert customers drawn by one brand to the products of its rivals. Despite the red flag of “exclusive” in its title, the practice is ordinarily uncontroversial, indeed innocuous. Automobile manufacturers often pay incentives to encourage dealers to deal exclusively in their vehicles. Business format franchising ensures that large swathes of distribution are exclusive. And when exclusive dealing is denied to suppliers, the results can be catastrophic, as when the FTC massacred those manufacturers of hearing instruments that relied on exclusive dealers. The FTC sued five such firms for exclusive dealing, four of which agreed to drop it, and promptly died.

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Antitrust & Consumer Protection

Section 2 Symposium: Dan Crane on Buyer-Instigated Bundled Discounts

TOTM Bundled discounts have been one of the hottest monopolization topics of the last decade. Much of the trouble began with the Third Circuit’s en banc . . .

Bundled discounts have been one of the hottest monopolization topics of the last decade. Much of the trouble began with the Third Circuit’s en banc decision in LePage’s v. 3M, which reversed an earlier 2-1 panel decision which in turn had overturned a plaintiff’s jury verdict largely based on 3M’s bundled discounts. After the Solicitor General’s amicus curiae brief asked the Supreme Court to deny cert on the grounds that there wasn’t sufficient scholarship on bundled discounts, there was a flurry of legal and economic scholarship, the overwhelming majority of which was highly critical of LePage’s.

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Antitrust & Consumer Protection

Section 2 Symposium: Herbert Hovenkamp on Predatory Pricing and Bundled Discounts

TOTM The baseline for testing predatory pricing in the Section 2 Report is average avoidable cost (AAC), together with recoupment as a structural test (Report, p. . . .

The baseline for testing predatory pricing in the Section 2 Report is average avoidable cost (AAC), together with recoupment as a structural test (Report, p. 65). The AAC test or reasonably close variations, such as average variable cost or short-run marginal cost, seems about right. However, differences among them can become very technical and fine. The Report correctly includes in AAC those fixed costs that “were incurred only because of the predatory strategy, for example, as a result of expanding capacity to enable the predatory sales.” (Report, pp. xiv, 64-65) Such a strategy would make some sense for a predator if the fixed costs in question are easily re-deployed once the predation has succeeded – for example, in the case of an airline whose planes can be shifted to a different route. The test virtually guarantees that in industries that require heavy investment in production capacity that cannot be redployed the test will approach strict average variable cost. In cases where fixed costs are relatively high, an investment of this nature that lasted only through the predatory period and became excess capacity thereafter would not be worth it. Further, if fixed costs are low the market is almost certainly not prone to monopoly to begin with. AVC is probably underdeterrent, but it is also probably the best we can do without chilling procompetitive behavior.

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Antitrust & Consumer Protection

Section 2 Symposium: Bruce Kobayashi on Predatory Pricing and the Relevant Measure of Cost

TOTM Dimming the Court’s Brooke Group Bright Line Administrable Rule? As noted in my earlier post, the Supreme Court’s Brooke Group rule is held out as the primary example of an . . .

Dimming the Court’s Brooke Group Bright Line Administrable Rule?

As noted in my earlier post, the Supreme Court’s Brooke Group rule is held out as the primary example of an administrable bright line rule aimed at controlling the costs of type I error. In practice, the Brooke Group above cost rule is not as bright as one might wish. The Achilles heel of the Brooke Group cost based rule is the failure to clarify what the relevant cost is.

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Antitrust & Consumer Protection

Section 2 Symposium: Thom Lambert on Defining and Identifying Exclusionary Conduct

TOTM There’s a fundamental problem with Section 2 of the Sherman Act: nobody really knows what it means. More specifically, we don’t have a very precise . . .

There’s a fundamental problem with Section 2 of the Sherman Act: nobody really knows what it means. More specifically, we don’t have a very precise definition for “exclusionary conduct,” the second element of a Section 2 claim. The classic definition from the Supreme Court’s Grinnell decision — “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” — provides little guidance. The same goes for vacuous statements that exclusionary conduct is something besides “competition on the merits.” Accordingly, a generalized test for exclusionary conduct has become a sort of Holy Grail for antitrust scholars and regulators.

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Antitrust & Consumer Protection

Section 2 Symposium: Keith Hylton on The Error Cost Approach and the Case for ‘Substantial Disproportionality’

TOTM The “error cost” or “decision theory” approach to Section 2 legal standards emphasizes the probabilities and costs of errors in monopolization decisions.  Two types of . . .

The “error cost” or “decision theory” approach to Section 2 legal standards emphasizes the probabilities and costs of errors in monopolization decisions.  Two types of error, and two associated types of cost are examined.  One type of error is that of a false acquittal, or false negative.  The other type of error is that of a false conviction, or false positive.  Under the error cost approach to legal standards, a legal standard should be chosen that minimizes the total expected costs of errors.

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Antitrust & Consumer Protection