Journal of Competition Law and Economics - current issue

THE GOOGLE BOOK SEARCH SETTLEMENT: A NEW ORPHAN-WORKS MONOPOLY?

Picker, R. C. — Mon, 07 Sep 2009 08:30:56 PDT

This paper considers the proposed settlement agreement between Google and the Authors Guild relating to Google Book Search (GBS). I focus on three issues that raise antitrust and competition policy concerns. First, the agreement calls for Google to act as agent for rightsholders in setting the price of online access to consumers. Google is tasked with developing a pricing algorithm that will maximize revenues for each of those works. Direct competition among rightsholders would push prices towards some measure of costs and would not be designed to maximize revenues. The consumer access pricing provision might very well fail a challenge under Section 1 of the Sherman Act. Second, and much more centrally to the settlement agreement, the opt-out class action will make it possible for Google to include orphan works in its book search service. Orphan works are works as to which the rightsholder cannot be identified or found. The opt-out class action is the vehicle for large-scale collective action by active rightsholders. Active rightsholders have little incentive to compete with themselves by granting multiple licenses of their works or of the orphan works. Plus under the terms of the settlement agreement, active rightsholders benefit directly from the revenues attributable to orphan works used in GBS. We can mitigate the market power that will otherwise arise through the settlement by expanding the number of rights licenses available under the settlement agreement. To do that, we should take the step of unbundling the orphan works deal from the overall settlement agreement and create a separate license to use those works. All of that will undoubtedly add more complexity to what is already a large piece of work, and it may make sense to push out the new licenses to the future. That would mean ensuring now that the court retains jurisdiction to do that and/or giving the new registry created in the settlement the power to do this sort of licensing. Third, there is a risk that approval by the court of the settlement could cause antitrust immunities to attach to the arrangements created by the settlement agreement. As it is highly unlikely that the fairness hearing will undertake a meaningful antitrust analysis of those arrangements, if the district court approves the settlement, the court should include a clause—call this a no Noerr clause—in the order approving the settlement providing that no antitrust immunities attach from the court's approval.

GOOGLE AND THE PROPER ANTITRUST SCRUTINY OF ORPHAN BOOKS

Hausman, J. A., Sidak, J. G. — Mon, 07 Sep 2009 08:30:56 PDT

We examine the consumer-welfare implications of Google's project to scan a large proportion of the world's books into digital form and to make these works accessible to consumers through Google Book Search (GBS). In response to a class action alleging copyright infringement, Google has agreed to a settlement with the plaintiffs, which include the Authors Guild and the Association of American Publishers. A federal district court must approve the settlement for it to take effect. Various individuals and organizations have advocated modification or rejection of the settlement, based in part on concerns regarding Google's claimed ability to exercise market power. The Antitrust Division has confirmed that it is investigating the settlement. We address concerns of Professor Randal Picker and others, especially concerns over the increased access to "orphan books," which are books that retain their copyright but for which the copyright holders are unknown or cannot be found. The increased accessibility of orphan books under GBS involves the creation of a new product, which entails large gains in consumer welfare. We consider it unlikely that Google could exercise market power over orphan books. We consider it remote that the static efficiency losses claimed by critics of the settlement could outweigh the consumer welfare gains from the creation of a valuable new service for expanding access to orphan books. We therefore conclude that neither antitrust intervention nor price regulation of access to orphan books under GBS would be justified on economic grounds.

TWOMBLY AND COMMUNICATION: THE EMERGING DEFINITION OF CONCERTED ACTION UNDER THE NEW PLEADING STANDARDS

Page, W. H. — Mon, 07 Sep 2009 08:30:56 PDT

After the Supreme Court's 2007 decision in Bell Atlantic Corp. v. Twombly, an antitrust plaintiff who tries to plead an agreement in restraint of trade under Section 1 of the Sherman Act must allege more than parallel conduct and an undefined "conspiracy." Now, the complaint must include "enough factual matter (taken as true) to suggest that an agreement was made." Although the Court insisted it was not imposing a heightened pleading standard, it did require antitrust plaintiffs to provide enough details to make the claimed agreement plausible. In this article, I examine an important substantive consequence of Twombly's pleading regime. In more than twenty reported cases, federal courts have applied the new pleading standard to complaints alleging horizontal concerted action under Section 1 of the Sherman Act. In doing so, the courts have had to address a crucial defect in the substantive law of agreement: the Supreme Court's traditional definitions of agreement, which Twombly itself simply repeated, are too vague to help litigants and courts distinguish between consciously parallel conduct and concerted action. In the course of applying Twombly, however, the lower courts have adopted a more meaningful definition, one that requires that the parties have communicated to each other in ways that facilitate the parallel conduct. This clarification of the standard has important implications for the role of discovery in pleading and resolving claims of concerted action.

FEDERALISM, SUBSTANTIVE PREEMPTION, AND LIMITS ON ANTITRUST: AN APPLICATION TO PATENT HOLDUP

Kobayashi, B. H., Wright, J. D. — Mon, 07 Sep 2009 08:30:56 PDT

In Credit Suisse v. Billing, the Court held that the securities law implicitly precludes the application of the antitrust laws to the conduct alleged in that case. The Court considered several factors, including the availability and competence of other laws to regulate unwanted behavior, and the potential that application of the antitrust laws would result in "unusually serious mistakes." This paper examines whether similar considerations suggest restraint when applying the antitrust laws to conduct that is normally regulated by state and other federal laws. In particular, we examine the use of the antitrust laws to regulate the problem of patent holdup of members of standard setting organizations. Although some have suggested that this conduct illustrates a gap in the current enforcement of the antitrust laws, our analysis finds that such conduct would be better evaluated under the federal patent laws and state contract laws.

THE DOMINANT FIRM REVISITED

Tardiff, T. J., Weisman, D. L. — Mon, 07 Sep 2009 08:30:56 PDT

This paper presents a framework for evaluating whether a firm lacks dominance in a particular market despite manifesting relatively high market shares. We show that demand complementarities and high price–cost margins combine with multi-market participation to reduce the significance of market share in drawing inferences about dominance. We further show the equivalence between this multi-market measure of market power and the critical elasticity for the dominant firm. These findings suggest that the use of traditional (single-market) measures of market power commonly used to infer dominance can lead policymakers to maintain regulatory oversight when market forces are sufficient to provide the requisite degree of "competitive" discipline.

AN EMPIRICAL ASSESSMENT OF THE EUROPEAN LENIENCY NOTICE

Stephan, A. — Mon, 07 Sep 2009 08:30:56 PDT

A study of the Directorate General for Competition's (DG Competition) 1996 "Notice on the non-imposition or reduction of fines in cartel cases" suggests that it largely failed to induce members of active cartels to self-report. Instead, immunity and fine discounts were predominantly awarded in cases where cartels were failing, or had already failed. A majority of leniency cases followed (or were broadly contemporaneous to) equivalent investigations by the U.S. Department of Justice. All but one EU only leniency case had failed before self-reporting occurred. Moreover, nearly half of leniency cases concerned closely related infringements in the chemicals industry. The majority of those U.S.–EU leniency cases had failed (or were failing) at the time of self-reporting. A preliminary analysis of the revised 2002 notice suggests less reliance on U.S. successes, but still more cartels connected to previous infringements in the chemicals industry. A central challenge is preventing the leniency program from providing a way for failed cartelists to tame the end game, or to use leniency as a strategic tool to put former cartel members (now competitors once more) at a disadvantage. Such cases risk overwhelming DG Competition with leniency applications that do little to enhance deterrence.

AN EXACT ARITHMETIC SSNIP TEST FOR ASYMMETRIC PRODUCTS

Daljord, O. — Mon, 07 Sep 2009 08:30:56 PDT

The standard application of critical loss analysis to delineate markets is shown to be incorrect when products are asymmetric. A simple delineating criterion is derived that accounts for asymmetries between products without imposing equilibrium conditions or any specific demand structure.

MARKET POWER IN COMPETITION FOR THE MARKET

Park, S. — Mon, 07 Sep 2009 08:30:56 PDT

In the evaluation of abuse of dominance (or Section 2 cases in the United States), the standard method of proving monopoly power is typically faced with difficulties in measuring the competitive price level and the substantiality of market power. These difficulties are more obvious in industries characterized by R&D competition for the market, where drastic innovation, standardization, or bidding for the entire demand is central figure. On the basis of a simple model of R&D competition for the market, this paper provides the competitive price level and the threshold level of substantiality of market power, showing that the absence of barriers to R&D competition ensures no abuse of dominance in these industries.