Journal of Competition Law and Economics - recent issues

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.

HOW LOYALTY DISCOUNTS CAN PERVERSELY DISCOURAGE DISCOUNTING

Elhauge, E. — Mon, 25 May 2009 06:37:15 PDT

Loyalty discounts are agreements to sell at a lower price to buyers who buy all or most of their purchases from the seller. This article proves that loyalty discounts can create anticompetitive effects, not only because they can impair rival efficiency, but also because loyalty discounts can perversely discourage discounting even when they have no effect on rival efficiency. The essential reason, missed in prior work, is that firms using loyalty discounts have less incentive to compete for free buyers, because any price reduction to win sales to free buyers will, given the loyalty discount, also lower prices to loyal buyers. This in turn reduces the incentive of rivals to cut prices, because there will exist an above-cost price that rivals can charge to free buyers without being undercut by the firm using loyalty discounts. These anticompetitive effects occur even if buyers can breach or terminate commitments, and even if the loyalty conditions require no buyer commitments and less than 100 percent loyalty. These anticompetitive effects also differ from those created by most-favored-nation or price-matching clauses, neither of which requires the seller to commit to maintain a price difference between loyal and disloyal buyers. Further, I prove that these anticompetitive effects are exacerbated if multiple sellers use loyalty discounts. None of the results depend on switching costs, market differentiation, imperfect competition, or whether the loyalty discount bundles contestable and incontestable demand. Contrary to commonly held views, I prove that these anticompetitive effects exist even (1) when all prices are above seller or rival costs, (2) buyers voluntarily agree to the conditions, and (3) discount and foreclosure levels are low, although such low levels do lower the likelihood that buyers would agree to anticompetitive loyalty discounts. I also derive formulas for calculating the inflated price levels in each situation. However, because loyalty discounts can have efficiencies, rule of reason analysis remains appropriate.

THE ROLE OF FIXED COST SAVINGS IN MERGER ANALYSIS

Rubinovitz, R. — Mon, 25 May 2009 06:37:15 PDT

Among the many motivations for mergers, clearly one of the more important considerations is the extent to which the merger will generate cost savings for the firms involved. Standard economic models demonstrate that a decrease in marginal cost leads to a lower price, whereas a decrease in fixed costs does not necessarily have this effect. Thus, from the Antitrust Agencies' perspective, in a merger analysis, emphasis should be placed on marginal cost savings because these efficiencies will create short-run benefits for consumers, in terms of lower price and higher output, and should be given the most weight. Of late, increasing attention has been given to how fixed cost savings can improve consumer welfare. One key insight is that demonstrating the direct effects of fixed cost savings on consumer welfare may require a longer time horizon than marginal cost savings or may require embedding these savings in a dynamic context. This paper exhibits an approach that provides straightforward predictions on the relationship between fixed costs, prices, and consumer welfare. When the fixed cost of producing quality decreases, it is shown that consumer welfare increases. The clear implication of this model is that fixed cost savings should be given weight in the analysis of the potential effects of a merger on consumer welfare.

ARE EXCESSIVE PRICES REALLY SELF-CORRECTING?

Ezrachi, A., Gilo, D. — Mon, 25 May 2009 06:37:15 PDT

Excessive pricing by a dominant firm is considered as one of the most blatant forms of abuse. Despite this, competition authorities frequently refrain from intervening against excessive prices. The non-interventionist approach is based, among others, on the premise that high prices encourage new entry and thereby should be feared less. According to this view, in many cases, excessive prices are likely to be competed away and make intervention redundant. This paper questions this conventional view and reconsiders whether excessive prices are indeed self-correcting. It illustrates how, in the majority of cases, excessive prices will not attract new entry of viable competitors, whether entry barriers are high or low. Furthermore, it shows how, at times, the prohibition of excessive prices may encourage, rather than discourage, entry. By doing so, this paper narrows and focuses the arguments against intervention. Accordingly, it concludes that if excessive pricing is not to be prohibited, it should not be because it is thought to be "self-correcting," but rather for reasons such as the need to stimulate investment or difficulties of implementation, which should be assessed on a case by case basis.

OPTIMAL LEGAL STANDARDS FOR REFUSALS TO LICENSE INTELLECTUAL PROPERTY: A WELFARE-BASED ANALYSIS

Katsoulacos, Y. S. — Mon, 25 May 2009 06:37:15 PDT

This article adopts a welfare-based, in contrast to a decision-theoretic (DT), approach to the choice of legal standards for refusals to license intellectual property. It is shown that if the presumption of legality is not strong, as was the European Commission's point of view in the Microsoft interoperability information case, DT considerations are not helpful for deciding which type of standard is superior. Indeed, a "low false-acquittals" rule, such as the Microsoft rule, may be equally effective as a "low false-convictions" rule, such as the "exceptional circumstances" rule, in reducing the costs of decision errors. However, it is also shown that the latter rule may well be welfare superior to the former rule because of its welfare-improving deterrence effects. Further, it is shown that when the presumption of legality is strong, both of these rules are likely to be welfare-inferior to per se legality (the standard chosen in Xerox), even though the "exceptional circumstances" test may be superior in decision error terms.

THE RELEVANT MARKET: A CONCEPT STILL IN SEARCH OF A DEFINITION

ten Kate, A., Niels, G. — Mon, 25 May 2009 06:37:15 PDT

We identify some shortcomings of the hypothetical monopolist definition (HMD) of the relevant market as set out in the 1992 U.S. Merger Guidelines and followed by competition regimes worldwide, and propose a rephrased version to give the HMD a greater scientific rigor. It is shown that market boundaries under the HMD depend significantly on supply-related factors (such as pre-merger competitive interaction and the shape of cost functions), contrary to the claim in the Guidelines that market definition focuses solely on demand substitution factors. We formulate two alternative definitions of relevant market that build on the same logic as the HMD but do depend only on demand factors.

REGULATING JOINT BIDDING IN PUBLIC PROCUREMENT

Albano, G. L., Spagnolo, G., Zanza, M. — Mon, 25 May 2009 06:37:15 PDT

Joint bidding is the practice of two or more independent suppliers submitting a single bid, a widespread practice in private and public procurement. This practice may generate efficiencies through synergies and information sharing, but may also be abused to reduce the number of competitors or—even worse—to facilitate or enforce collusion among them; therefore, it is often regulated. In this paper, we first present results from a survey on the regulation of joint bidding in European public procurement, documenting how the existence and the type of regulation differ across countries, and that—where present—regulation is often related to the ability of an individual firm to be admitted as a solo bidder. Borrowing from the theories of joint bidding in auctions and of horizontal mergers and joint ventures in oligopoly, we then review the basic economics of bidding consortia and the effects that these can have in terms of bidding competition, coordination among firms, risk management, exploitation of other synergies, and entry. Finally, we assess the relative degrees of restrictiveness of several practical criteria that could be used to create consistent regulatory requirements for bidding consortia in public procurement. The only strong conclusion that we can draw is that there is an urgent need for further theoretical and empirical or experimental research on this very important issue for public procurement.

FACTORS INFLUENCING THE MAGNITUDE OF CARTEL OVERCHARGES: AN EMPIRICAL ANALYSIS OF THE U.S. MARKET

Bolotova, Y., Connor, J. M., Miller, D. J. — Mon, 25 May 2009 06:37:15 PDT

Using the overcharge estimates for 333 cartel episodes, we evaluate the effect of cartel characteristics and changes in the market and legal environment on the magnitude of overcharges imposed by private cartels in the United States and other geographic markets as early as the eighteenth century. The median overcharge attained by cartels represented in our sample is 18 percent of selling price. International cartels imposed higher overcharges than domestic cartels. Longer cartel episodes generated higher overcharges. Overcharges achieved in the United States and European markets were lower than overcharges imposed in the Asian markets and in the rest of the world. Overcharges tended to decline as antitrust enforcement became stricter. Higher overcharges were associated with markets where cartels had high market shares and with markets characterized by high levels of fixed costs.

BUNDLES OF JOY: THE UBIQUITY AND EFFICIENCY OF BUNDLES IN NEW TECHNOLOGY MARKETS

Liebowitz, S. J., Margolis, S. E. — Fri, 06 Mar 2009 05:26:33 PST

This paper examines the economic logic underlying bundles and tie-in sales and uses the lessons learned from that examination to analyze seven specific instances of bundling that have been the subject of antitrust scrutiny or other policy initiatives. Of particular interest are products that are nonrivalrous in consumption, making all-you-can-eat pricing a viable candidate for efficiency. The main economic points are the following: À-la-carte pricing may populate economic models, but most products are bundles. They are bundles because bundles are generally more efficient. Tie-in sales are much less common and often not properly understood in textbook discussions. Market foreclosure, the principal efficiency concern with tying and bundling, is likely to be exceedingly rare. The seven instances of bundling (ties) examined in the paper are: cable television; patent pools; blanket licenses; iPods and iTunes; telephones; music albums and songs; operating systems and component programs.

NEXT STEPS IN THE EVOLUTION OF ANTITRUST LAW: WHAT TO EXPECT FROM THE ROBERTS COURT

Werden, G. J. — Fri, 06 Mar 2009 05:26:33 PST

Under the leadership of Chief Justice John G. Roberts, Jr., the Supreme Court has demonstrated a willingness to cast aside the Court's prior antitrust decisions. The qualified per se rule applicable to tying surely will not survive much longer, but what else might be in store is more speculative. This essay identifies four decisions relating to competitor collaboration in which the Court's prior application of the per se rule does not comport with its modern decisions. In two of the cases, the conduct likely would be found lawful today; while in the other two, the conduct most likely still would be condemned but only after an abbreviated application of the rule of reason. This essay also identifies three legal doctrines ready for retirement. They are the absolute requirement of market delineation as a predicate for merger analysis, the outmoded approach to market delineation of Brown Shoe, and the unhelpful formulation of the monopolization offense in Grinnell.

THE STOCHASTIC RELATIONSHIP BETWEEN PATENTS AND ANTITRUST

Devlin, A. — Fri, 06 Mar 2009 05:26:33 PST

This article develops a novel theory by which to construe the interaction between the patent and antitrust laws. The rules of these respective disciplines are often portrayed as conflicting in means, yet harmonious in purpose. Although the intellectual property and antitrust laws have ostensibly divergent views on the role of competition, their interaction is typically limited to one of constraint. More specifically, antitrust rules have been (poorly) designed to limit the exclusivity inherent in a patent grant to the claimed invention alone. This article, however, articulates a new vision for the role of antitrust: it posits that competition rules operate as a stochastic regulator of exclusionary patent rights. The Sherman Act constrains patentees' efforts to positively transform the probabilistic nature of their intellectual property rights through contract. Yet, because the empirical calculation of optimal innovation rates is an elusive, if not Sisyphean, task, the normative desirability of the foregoing fact is abstruse. Nevertheless, policymakers' inability to pinpoint precisely the ex post rewards required to trigger ideal levels of ex ante investment need not bind our hands to inaction. If contemporary rates of innovation are deemed acceptable (even if not necessarily perfect), there may be ways to trigger equivalent levels of ex ante investment with lower social cost. In this regard, it is clear that currently enacted competition rules significantly accentuate the uncertainty surrounding patents' apotropaic effect. Concluding that contracts securing otherwise stochastic rights may be highly desirable, the article calls for the incorporation of this concern into contemporary rules, with modest substantive effect, and further advocates a qualified antitrust immunity for "gold-plated" patents if and when they are introduced.

PATENT HOLDUP AND OLIGOPSONISTIC COLLUSION IN STANDARD-SETTING ORGANIZATIONS

Sidak, J. G. — Fri, 06 Mar 2009 05:26:33 PST

Current controversies over patent policy place standard-setting organizations (SSOs) on a collision course with antitrust law. Recent theoretical research conjectures that, in an SSO, patent owners can "hold up" patent users in the sense of demanding high royalties for a patented input after the SSO has adopted the patented technology as an industry standard and manufacturers within the SSO have incurred sunk costs to design end products that incorporate that standard. Consistent with this conjecture, actual SSOs have recently sought no-action letters from the Antitrust Division for a variety of amendments to SSO rules that would require or request, at the time a standard is under consideration, the ex ante disclosure by the patent owner of the maximum royalty that the patent owner would charge under the regime of fair, reasonable, and nondiscriminatory licensing. This price information—which is characterized as the "cost" of the patented input—would, under at least one recent SSO rule modification, be a permissible topic for potential users of the patent to discuss when deciding whether to select it in lieu of some alternative standard. This exchange of information among horizontal competitors would occur ostensibly because the cost of the patented technology had been characterized as simply one more technical attribute of the standard to be set, albeit an important technical attribute. The Antitrust Division and the Federal Trade Commission have jointly stated that such discussion, by prospective buyers who are competitors in the downstream market, of the price of a patented invention that might become part of an industry standard should be subject to antitrust scrutiny under the rule of reason rather than the rule of per se illegality. The rationale that the antitrust agencies offer for applying the rule of reason to such conduct is that such horizontal collaboration might avert patent holdup. The Antitrust Modernization Commission (AMC) similarly endorsed the view that rule-of-reason analysis is appropriate for ex ante discussion of royalty terms by competing buyers of patented technology. This rule-of-reason approach, however, is problematic because it conflicts with both the body of economic research on bidder collusion and with the antitrust jurisprudence on information exchange and facilitation of collusion. Put differently, because of their concern over the possibility of patent holdup, the U.S. antitrust agencies and the AMC in effect have indicated that they may be willing in at least some circumstances to forgo enforcement actions against practices that facilitate oligopsonistic collusion by encouraging the ex ante exchange of information among competitors concerning the price to be paid for a patented input as an implicit condition of those competitors' endorsement of that particular patented technology for adoption in the industry standard. However, neither the proponents of these SSO policies nor the antitrust agencies and the AMC have offered any theoretical or empirical foundation for their implicit assumption that the expected social cost of patent holdup exceeds the expected social cost of oligopsonistic collusion. This conclusion does not change even if one conjectures that such collusion will benefit consumers by enabling licensees to pass through royalty reductions in their pricing of the downstream product incorporating the patented technology. Proper economic evaluation of the plausibility of the pass-through conjecture will require information about the calculation of royalty payments; the demand and supply elasticities facing the licensees; and the structure of any industries further downstream between the manufacturer and the final consumer. Consequently, the magnitude of this effect will likely be a matter of empirical dispute in every case. Moreover, such a justification for tolerating horizontal price fixing finds no support in antitrust jurisprudence. Given the analytical and factual uncertainty over whether patent holdup is a serious problem, it is foreseeable that antitrust questions of first impression will arise and affect a wide range of high-technology industries that rely on SSOs. However, there is no indication that scholars and policy makers have seriously considered whether oligopsonistic collusion in SSOs is a larger problem than patent holdup.