Section 2 Symposium: Michael Salinger on Framing the Debate
Michael A. Salinger is a managing director in LECG’s Cambridge office and a professor of economics at the Boston University School of Management, where he has served as chairman of the department of finance and economics. He is a former Director of the Bureau of Economics at the FTC.
Given the embarrassing outcome of the FTC/DOJ single-firm conduct hearings, it is worth revisiting what the organizers of the hearings were attempting to accomplish. The Federal Register notice announcing the hearings provides some key insights. It read, in part:
The Agencies expect to focus on legal doctrines and jurisprudence, economic research, and business and consumer experiences. To begin, the Agencies are soliciting public comment from lawyers, economists, the business community, consumer groups, academics (including business historians), and other interested parties on two general subjects: (1) The legal and economic principles relevant to the application of section 2, including the administrability of current or potential antitrust rules for section 2, and (2) the types of business practices that the Agencies should examine in the upcoming Hearings, including examples of real-world conduct that potentially raise issues under section 2. With respect to the Agencies’ request for examples of real-world conduct, the Agencies are soliciting discussions of the business reasons for, and the actual or likely competitive effects of, such conduct, including actual or likely efficiencies and the theoretical underpinnings that inform the decision of whether the conduct had or has pro-or anticompetitive effects….
The Agencies encourage submissions from business persons from a variety of unregulated and regulated markets, recognizing that market participants can offer unique insight into how competition works and that the implications of various business practices may differ depending on the industry context and market structure. The Agencies seek this practical input to provide a real-world foundation of knowledge from which to draw as the Hearings progress. Respondents are encouraged to respond on the basis of their actual experiences.
Particularly with the outreach to business historians and to the business community, the notice reflected a desire to get input from more than the “usual suspects” (i.e., former agency officials, prominent members of the antitrust bar, and antitrust scholars) to gather evidence about the rationale for the single-firm conduct that can be subject to antitrust scrutiny.
Rational antitrust doctrine necessarily rests on decision theory (or relative error cost analysis). This point is not merely an economist’s perspective. It is Supreme Court doctrine (in, for example, Matsushita). An indication of the wide acceptance of this principle within the antitrust community is that the terms like “Type I” and “Type II” errors, “false positive” and “false negative” are sprinkled liberally throughout the hearings transcripts as well as the DOJ report.
The problem is that despite general agreement that decision theory should in principle form the foundation of antitrust doctrine, the necessary inputs into the analysis are not readily available. Formulating doctrine on, say, predatory pricing or tying requires knowing the relative frequency of pro- and anti-competitive instances (or potential instances) of the practice, the magnitudes of the benefits and harm (which determine the costs of false positives and false negatives), and the availability and quality of screens to distinguish between pro- and anti-competitive instances of the practices. There is remarkably little solid evidence about these inputs into the analysis. The rationale for reaching beyond “the usual suspects” was to gather such evidence.
The hearings yielded some but not much of this sort of evidence. One of the challenges in finding “false positives” is that, because they include actions firms do not take for fear of antitrust liability, they are inherently hard to observe. An example of the type of information the organizers were hoping to elicit came out in the business history session. The Alcoa Board had as a central concern that it avoid liability for predatory pricing. This concern both occupied the board’s time and resulted in higher prices than Alcoa otherwise would have charged. This bit of evidence was rare, however. Despite the outreach, companies were not forthcoming with testimony like, “We would like to have exclusive deals; we do not do so for fear of antitrust liability; the additional costs we bear because we cannot pursue our preferred strategy is $x/year.” Perhaps such testimony did not materialize because the antitrust laws are not a significant constraint. More likely, companies perceive little private benefit from sharing their deliberations on strategy in a public hearing. Arguably, this should have come as no surprise. However, in light of the sharp divides across the Atlantic with respect to single-firm conduct, it was worth a shot.
Absent objective measures of the necessary inputs into the decision analysis of antitrust standards, positions necessarily rest on subjective estimates. In this symposium, I believe it would be useful for commenters to articulate as best they can what they believe about the frequency of pro- and anti-competitive uses of practices, the benefits from the competitive uses and costs of the anticompetitive uses, and the quality of the available screens to distinguish between the competing hypotheses. It would also be useful to examine what the foundations of those beliefs are. In particular, to what extent are the beliefs based on evidence and to what extent are they based on the plausibility of underlying theory.