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    antitrust

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    8 views27 pages

    Antitrust Revolution+ 2

    Uploaded by

    Swarnali
    antitrust

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    © All Rights Reserved
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    of 27
    The Economic and Legal Context Markets may be structured in a wide variety of ways, but purely structural concems in antitrust arise in the cases of monopolies and oligopolies. Since the monopoly model is at the heart of almost all antitrust analysis, we will ‘begin with a discussion of monopoly and then move on to oligopoly. MONOPOLY Economics ‘The micrveconomic theory of monopoly is steaightforward: A single veer of a good or service, for which (ata price that would just yield normal prof- its) there are no good substitutes and for which entry is difficult, will be able to take advantage of its market power. Ifthe seller can sell only at a single price to all buyers (Le, it eannot practice price discrimination), then its pursuit of maximum profits will lead it to sella smaller output and main- tain a higher price than would an otherwise similar competitive industry.! Figure I-1 portrays this outcome. As the figure indicates, the maximiz~ ing price will not be at “the sky's the limit” levels but instead willbe related to the demand curve (via the derived marginal revenue) for the monopo- list’s output and the monopolist’s marginal costs An immediately impor- tant point is that the demand curve—which expresses the empirical reality that at higher prices customers generally buy less—dloes limit the extent to ‘which the monopolist’s price can exceed competitive levels. ‘This monopoly outcome is socially less efficient than the competitive outcome because of allocative inefficiency: The monopolist produces too "a sina argument applies to monoptony single bayer ina market, which en ain by baying less and ata lower price than f cmpetiion among bayers preva 2 The fia formula or profit maximization ie P= MCI + VE), where Es the (agave) lasicity of demand. Once Py hasbeen determined he onopli's ep (Q,) canbe ceived from the demand relationship. ‘The Economic and Legal Context FIGURE I-1_A Comparison of Monopoly and Competition 3 ‘Monopoly profits (overcharge: transfer of, ‘consumers’ surplus from buyers Deadweight loss of consumers’ surplus ‘because of monopoly Pe Q.= monopoly quantity litde; equivalently, there are buyers who are willing to buy at prices that are above marginal costs (and who would be able to buy from a competitive industry) but who are not willing to bay at the higher monopoly price (and who buy other, less desirable things instead). The lost consumer sueplus of the buyers, portrayed in Figure -1, is frequently described as a “deadweight loss triangle” ‘The higher price (which is the cause of the allocative inefficiency) also yields the higher profits or “overcharge” of the monopolist (which is sometimes ‘described as “monopoly rents”) This overcharge is largely aransfer from buy- rs to the monopolist and is represented by a rectangle in Figure F-1 2 Sine the monopolist should be willing to spend aa excunt up othe sizeof the rectangle to sfend its monopoly, some ofthis rectangle maybe "burned wp incom efforts (eg, poical Jobbing. sing bates to entry) to protects postion. Such ellos epreent socially wate ‘se of resources and dus a othe deadmght loss of monopoly: see Posner (1975), Also, the absence of comgetiive pressures muy induce less than Tully efficient prodicion processes (Xineteiney/ and thereby ado deadweight los; so Lelbennten (1968), ‘THE ANTITRUST REVOLUTION Any monopoly seller would like to be able to practice price discrimi- nation, thereby segmenting the firm's market on the basis of the buyers’ willingness to pay. In oder for price discrimination to occur successfully (Q) There must be buyers with different levels of willingness to pay:* (@) The firm must be able to identify who they are (or have some mecha- nism that will cause them to reveal themselves); and (3) The firm must be able to provent arbitrage (ie., prevent the buyers who receive low prices from reselling to the buyers who would otherwise receive high prices). If the seller could identify each buyer and make an all-or-nothing offer to that bayer at the latter's maximum willingness to pay, this would constitute “perfect” price discrimination (frequently described as “frst-degree" price discrimination).> Other forms of price discrimination can involve block pricing (‘second-degree price discrimination), segmenting buyers by ‘geography or by customer type (“thitd-degree” price discrimination), bun- dling (Adams and Yellen 1976), and tying (Burstein 1960). ° Instances of truc monopoly can be found in the U.S. economy, although they collectively account for only a small fraction of U.S, GDP. Examples include local residential (Landline) telephone service (in some geographic areas), local electricity distribution, local natural gas distribution, postal service for first-class and bulk mail, the single hardware store (or gesoline station, or pharmacy) in an isolated crossroads town, and firms producing ‘unique products that are protected by patents (e.g., those patented phactna- ccenticals for which there are no good substitutes). Over time, technological advances tend to erode existing monopolies (e.g., by producing substitutes snd by expanding market boundaries through reduced telecommunications ‘and transportation casts), hut alsa to create new ones. Iisa short conceptual leap from the single seller to the dominant frm: a firm of uniquely large size but one that also faces a “fringe” of smaller competitors. Though technically not a monopoly, the dominant firm will still be able to enjoy the fruits ofits market power. The extent of its enjoy- ‘ment will be determined by its costs relative to those of smaller firms, the elasticity of the demand for the product, the elasticity of supply by the fringe, and the ease or difficulty of entry.* Historical examples of such mar- ket structures include U.S. Steel in steel, Alcoa in aluminum, IBM in main- frame computers, Xerox in photocopying, and Kodak in cameras and film, atleast for some time periods. More recent examples include Microsoft in “This conition i cea satised bya monopoly: itis als satisted by any frm that aces negie tivety sloped demand carve Ge, that sels a ditferentated produc), #0 rie dstiminatien ean tise under monopisic compton or diferente ligooly as wel One paradoxial consequence of such perfec price discrimination i hat the allocative ine ency ofthe monopolist disappears, even while the taser othe monopolist increases * See Stile (1940), Saving (1970, and Landes and Posner (1981) Though the dominos fia ‘models sualy presente in terms ofa commodity predut wher the rng irs” disadvantages lie in ther inferior production tecnelogy the model readily extends the cave ofa iirc ated rout, whete he ings firms isadvantages Iie nthe inferior baad eceptanes 10 ‘The Economic and Legal Context personal computer operating systems,” Intel in microprocessors,® and United Parcel Service for small package delivery services. Monopoly can arise in four ways: First, economies of scale may indicate that a single firm is the most efficient structure for serving the entire market, In essence, the technology of production may be such that unit costs decline over the relevant range of production, Its important to ‘ote that this “natural” monopoly outcome is dependent on both the ‘ature of the technology and the size of the market. Thus, where markets are small, monopoly may be more likely, whereas larger markets may be able to accommodate multiple efficient producers (if unit costs do not ‘continue to fall at relatively high volumes, or if product differentiation is important to buyers)? Also, although “rule-of-thumb” engineering rel tionships often indicate unlimited economies of scale, the real-world dif ficulties of managing a larger enterprise may yield higher rather than lower unit costs at higher volumes. Second, incumbent firms may merge to create a monopoly ot a domi- nant firm. Historically, the merger wave of 1887-1904 yielded a large num- ber ‘of such consolidations, including U.S. Stcel (steel), Standard Oil (petroleum), American Tobacco (cigarettes), American Can (tin cans), Kodak (cameras and films), DuPont (explosives), and more than 60 other monopolies or dominant firms (Markham 1955; Nelson 1959; Scherer and Roxs 1990, ch, 5). As will be discussed below, an important goal of modern antitrust policy is to prevent the creation of market power through mergers (of which a merger-to-monopoly would be the limiting case). ‘Third, a firm may own @ unique and advantageous input into produc- ‘ion, For example, market puwer may arise from the ownership of a unique natural resource (¢.g,, metallic ores) or the ownership of some patents—<.., Polaroid’s early patents on self-developing film, Xerox's early patents on photocopying, pharmaceutical companies’ patents on unique drugs, and Intel's patents on its microprocessors. However, most patents convey lite ‘or no market power: All are intended to encourage investment in new ideas ‘and their implementation by creating property rights that prevent quick and easy free-riding on the efforts of innovators. It is this aspect of patents that Jeads to their description as “intellectual property." Fourth, government policy can be the source of monopoly. Historically, exclusive goverment franchises—for rail, air, and trucking service (between some city pairs); local and long-distance telephone service; local cable television service; local banking; and postal service—have yielded monopolies, along with government regulation to deal with them. With the ‘advent ofthe deregulation movement of the mid-1970s and after, such gov- See Cibert (199) and Case 20 by Daniel Rubinfeld in Part TV ofthis book. # See Shapiro (2004) and Case 13 by Joshua Gan in Par ° For imporan discussions of thee fev, se Sutton (1991; 1998). ‘THE ANTITRUST REVOLUTION emment-protected monopolies have become more rare, though not wholly extinct. ‘A monopoly o a dominant firm may be able to entrench or enhance its position by raising barriers to entry or raising the costs of its rivals (Salop and Scheffiman 1983, 1987). Such efforts will be the subject of discussion in many of the cases in Patts I I, and IV of this book. Antitrust ‘The primary efforts of government to deal with monopoly have been through explicit regulation—for example, through formal regulatory com missions or boards—or through goverment ownership. But from its begin- rings in 1890, antitrust law has tried to address monopoly issues. Section 2 of the Sherman Act creates a felony offense for “every person who shall monopolize, or attempt to monopolize, or combine or conspire with any ‘ther person or persons, to monopolize ....” ‘The antitrust approach to horizontal structural issues, however, has not been especially potent, at least since 1920. Two important Supreme Court ‘cases in 1911—Standard Oil! and American Tobacco!'—yielded govern- ment victories and the structural dissolution of dominant firms in the petro- Jeum and tobacco industries, and similar government victories followed for the next nine years. The Courts reasoning in those cases, however, estab- lished a “rule of reason" that applies to monopolization cases: Courts should consider hehavier and intent and efficiencies, as well as just monopoly structure.!® This approach led to the government's loss in 1920 in U.S. Steei,! after which the government became wary of bringing such cases. ‘A renewed vigor in antitrust enforcement in the late 1930s led to a suit against Alcoa, yielding a final appellate decision’ that was perhaps the high-water mark in emphgsis on structare—but also the turing point Declaring that Alcoa's 90 percent market share of aluminum clearly repre- sented monopoly, the court appeared to stand ready to infer monopoly from its high share. Yet the court also went on to state other reasons why Alcoa should be convicted, and those reasons were in essence its bad acts. The ambiguity over whether structure or conduct was key was not resolved until the Grinnell" case, in which the Supreme Court stated that a violation of Section 2 required two factors: possession of monopoly power and wilful acts to acquire or maintain such power. "BUS. v Standard Ol Co of New Jerey eal, 228 US. 1(191))- US. American Tobacco Co, 221 US. 106 (1911) "Sec, 2, afer al, condernasthe effort "manopaliza” othe suture of monopoly, "9S. «United States Ste! Corp, 251 US. 417 (1920). 5. Alumnon Company of America, 148 24416 (1949), 1 US. 2 Grinnell Corp, 364 US. 563 (1966) ‘The Economic and Legal Context ‘The effect ofthis language was to require detailed examination of acts and practices of monopoly firms for their effects, perhaps for intent, and for alternative explanations, All of these have rendered most such proceedings extremely long, complex, and too often unclear. Together with judicial reluctance to tamper with firm structures, this has resulted in few subse~ ‘quent cases where the government has sought structural relief, and still fewer successes.!© Government initiated monopolization cases have usu- ally focused on behavioral remedies, as have privately initiated monopoli- zation cases." Jn sum, antitrust (atleast since 1920) has not played a large role in dealing with monopoly market structures through horizontal structural relief, Absent a major change in the legal environment, this will likely con- tinue to hold true. OLIGOPOLY Economics ‘The essence of oligopoly is that the number of sellers is small enough so that each seller is aware of the identity of its rivals and aware that its own actions affect their decisions (and that the others probably have similar per- ceptions). This condition is sometimes desctibed as “conjectural interde- pendence.” ‘A wide tange of prive-yuantity outcomes is theoretically possible. At ‘one extreme, a tightly disciplined cartel may be able to maintain prices and ‘quantities that approximate those of monopoly; at the other extreme, if sellers myopically focus on price competition in a commodity industry, only two sellers are necessary to approximate the competitive outcome.' Accordingly, there is no definitive price-quantity “solution” or outcome for ‘an oligopoly market structure (unlike the specific outcomes that can be predicted for a monopoly structure and for perfect competition). ‘As will be discussed more thoroughly in Part IL, economic theory argues that market structure characteristics (e.g, the number and size dis- tribution of sellers, conditions of entry, the characteristics of the sellers and of their products, and the characteristics of buyers) are likely to influence "a sarvey canbe fond in Shere and Ross (1990, ch. 12), The government's sucess in achiev= sng 1982 consent doors tet broke up AT&T fvolved verea tact rele tee Noll and ‘Owen (1994, Silay th goverment short-lived remedy nis victory over Micosotimvolved ‘eral stucrl eli see Case 20 by Daniel Ruined in Part V. © Seo he case cscussions in Pars, and IV of his book Also piv plans legally anoot tin struct elit fom the cout ce Internationa Telephone & Telegraph Corp» Generel Telephone & Electronics Corp, etal, 18®24913 (1975). "8 However, product ifforeniason “toftons" the competion and ratte in alee competitive ‘THE ANTITRUST REVOLUTION the ease or difficulty with which sellers can come to ¢ mutually beneficial understanding with respect to prices or other important dimensions of con- duct. In tur, this will imply differences in market outcomes.!® Thus, there fare important links between oligopoly structure and conduct; oligopoly structure matters—which brings us naturally to the consideration of anti- twust. Antitrust ‘The primary vehicle for a structural antitrust approach to oligopoly”? is Section 7 of the Clayton Act, which instructs the Department of Justice (DOI) nd the Federal Trade Commission (FTC) to prevent mergers “where in any line of commerce or in any activity affecting commerce in any sec- tion of the country the effect of such acquisition may be substantially to lessen competition, or to tend to create a monopoly.” Though the Act was passed in 1914, Section 7 was largely @ dead leter until 1950 because of an unintended loophole.#! The Celler-Kefanver Act of 1950 closed that loop- hole, and Section 7 gained life ‘A series of government challenges to mergers in the 1950s and 1960s Jed to a set of important Supreme Court decisions, beginning with Brown ‘Shoe® in 1962. In those decisions the Court indicated that it was ready to prohibit both horizontal mergers between competitors and vertical mergers between customers and suppliers, even in markets where the merging par- ties” shares were relatively small and entry was easy. The Court expressed concems about competition but wlsv opined that Congress hud intended to halt mergers so as to preserve market structures with large numbers of firms, even atthe sacrifice of some efficiency that might be achieved by a merger. However, the Court backed off from this tough, semi-populist position in two merger decisions in 1974.2 Almost 40 years passed before the next Supreme Court decision on.a government challenge to a merger: FTC v. Phoebe Putney Health Systems, Inc., 133 s.ct.1003 (2013), which was ‘decided in favor of the FTC. Flushed by the favorable Supreme Court decisions of the 1960s, the DOI’s Antitrust Division developed @ set of Merger Guidelines in 1968, 2m adn othe eiscusson in Pat, sete overviews provided by Shap (1989) and, epe- cially wit respect to horizontal mergers, Jaequemin and Side (1989). Pas TI, and TV of thls book wil addess beaviral spproches to addesing oligopoly 2) The 1914 Act forbade merges that were effected tough one company’s purchase of another company’s equity shares, Mesge canddntes quickly reafzed that tbey could easly evade tht ‘eaetion by simply having one company bay ll ofthe undorsing assets ofthe the company. 2 Brown Shoe Co. US. 31OUS. 294 (198). ® See US. x General Dynamics Corp. et al, 15 US. 486 (1974) and US. % Marine Bancorporation eal, 418 US. 602 (1974), ‘The Economic and Legal Context ‘The Guidelines indicated the circumstances (described in terms of industry fout-firm concentration ratios and the sales shares of the merging firms) in ‘which the DOJ would be likely to challenge mergers, so that the private antitrust bar could provide better guidance to its clients. White those Guidelines reflected the economic and policy understanding of the time, it soon became apparent that they were too restrictive and too rigid. AS a result they fell into disuse during the 1970s, awaiting an effort to revise them in accordance with advances in economics and different views about appropriate policy. ‘The 1968 Guidelines were largely scrapped, and a new set was issued in 1982, Economists played a large role in the development of the new ‘Guidelines and in subsequent revisions in 1984, 1992 (when the FTC joined as an author), and 1997. A major revision to the Guidelines appeared in 2010. ‘These Guidelines have proved inffuential in shaping antitrust lawyers, ‘economists, and eventually judges’ approaches to mergers (Werden 2003). ‘They certainly shaped many of the economic arguments that were devel- ‘oped in the cases discussed in this Part. Accordingly, we next turn to a more detailed discussion of the Guidelines, with most of the attention on the recent 2010 revision." THE HORIZONTAL MERGER GUIDELINES ‘The Horizontal Merger Guidelines stast from the fundamental premise that the antimerger provisions of the Clayton Act are intended to prevent the ‘exercise or enhancement of market power that might atise as a consequence ‘of a merget.™ They thus reject a populist notion that the pure sizes of the merging entities should be a consideration in the evaluation of a merger. ‘Since the Guidelines’ focus is on preventing the creation or enhance- ‘ment of market power through @ merger, the phrase “competitive effects” is found throughout the document. The emphasis is on ascertaining whether— ‘and why and how—a merger may have competitive consequences. 2 Alu, te 1992 ovsion modified the til to Horizontal Merger Gules, % The 2010 Guidelines canbe found at hg/warjstice govlanpalicl guideline. 20) pal A rcest compendium of dscssions of the 2010 Guidelines canbe found inthe Aug ‘Sepeember 2011 issue of the Review ef Industrial Orgonsaion; fr wn intodocson to that epi stu, se Blair 2010) See also Shapiro (2010) and Farell and Shapiro 2010), Discussions of the telice Guidelines can be found in Baker (2003); Kolasky and Dick (2002), Scheffnan, eta (2003); Werden (2003); and Wiliamson (2002). Th enforcement agocis’commentay onthe ales Guldlines can'be found in FTC and DOF (2006). See ako Antkrust Modernization Comision (2007), Baker and Bresnstan (2008), Kuhn (2008), Werden and Froeb (20088, 20060), Collins (2008), and White (2008, 2010). > although mos of the discussion lathe Guidelines addresses the market powe tat could be sercited by sll (Le, “monopoly” power), market power tht ould be exercised by Buyers (Cinonopsony” power i eso covered. ‘THE ANTITRUST REVOLUTION Earlier versions of the Guidelines had been organized primatily around efforts to delineate (define) a relevant market snd then to measure post- ‘merger levels of seller concentration in that relevant market (and the pro forma change in seller concentration that was brought about by the merger) ‘This was a natural follow-through to the prevailing views—at least through the 1970s—of how market power could be exercised by oligopolies: If there Wore a relatively small aumber of sellers of a roughly similar product, they Wore likely to compete less vigorously—recognizing their mutual interde- peadence—than would a larger number of sellers (other things being equal).?” The task of merger policy would be to prevent mergers that could create such small-nambers aggregations of sellers (and thus would cause Post-merger price increases across the market) In the language of today’s ‘merger analyses, this was a focus on “coordinated effects” and was best suited for analyses of mergers in markets with homogeneous products. By the carly 1990s, however, there had been extensive developments in microeconomic theory that had illuminated the behavior of oligopolists in differentiated-products markets and the implications for merget policy.** ‘This “new learning” was introduced into the 1992 revision of the Guidelines: ‘The “unilateral effects” analysis focused on whether the two merging firms (that sold differentiated products) might find it worthwhile (post-merger) 10 increase the prices of one or more of their products unilaterally, without any coordination or cooperation with other firms that sold similar products, Nevertheless, the tone and structure of the Guidelines remained embedded in the language of coordinated effects, with the immediate emphasis on delineating a relevant market and measuring market shares. The 2010 Guidelines, with its emphasis on “competitive effects”, tries ‘to avoid the rigidity of analysis thatthe coordinated effecis approach seemed to require. The agencies will seek information about the competitive reali- fies of the market or markets in which the two merging firms sell and try early to ascertain atheory (or narrative) of the competitive consequences of ‘the merger and whether (if warranted) the competitive consequences could come through a unilateral effects effort by the merging firms or through @ more general coordinated effects outcome. In addition, the Guidelines extend the coordinated effects analysis explicitly to procurement auctions and other similar arrangements where sellers compete to be the supplier of inputs that are being bought by a “downstream” firm (or government). Also, the Guidelines address non-price competition (e.., issues that are related to quality or variety) and competition with respect to innovation, ‘These analytical efforts necessarily draw on the base of the microeco- nomics of monopoly and oligopoly discussed above and in Part Il Consequently, the Guidelines address six crucial issues: Sr, fo example, Sigler (1964. % See, for example, Wiig (199). ‘The Economic and Legal Context * The delineation/definition of the relevant market for merger analysis, so ‘as to determine whether the merger partners compete with each other and the sizes of their (and other relevant seers") market shares; ** The level of seller concentration in a relevant market that should raise antitrust coneem about a merger; *+ The potential adverse effects of mergers, either through post-merger coordinated behavior among sellers or through the possibility that the ‘merging firms might unilaterally, post-merger, be able to affect prices and output; * The extent and role of entry into the marker; * Other characteristics of market structure that might make the post-merger exercise of market power easier or more difficult; and * The extent to which merger-related cost savings and efficiencies that are promised should be allowed as a defense of a merger that otherwise appears to increase the likelihood of the exercise of market power, and the types of efficiency evidence that should be considered. Each will be discussed in tur, Market Definition The Guidelines start with market definition/delineation because a merger analyst cannot sensibly refer to the “market shares” of the merging parties without first delineating the relevant market.” The Guidelines define a rel- evant market for antitrust merger analysis as a product (or group of prod- ucts) that is sold by a group of sellers who, if they acted in concert (i.., as a “hypothetical monopolist”), could bring about “a small but significant sand nontransitory increase in price” (SSNIP). This is equivalent to defining ‘relevant market as one in which market power can be exercised (or one in which existing market power can be enhanced). The Guidelines indicate that a five percent nontransitory price increase is the likely SSNIP value (and thus the indicator of the exercise of market power) that the enforce- ‘ment agencies will use, The smallest group of sellers that satisfies the SSNIP testis usually selected as the relevant market. These principles apply to the determination of both product markets and geographic markets Under this definition, markets might be as small as @ neighborhood or as large as the entire global economy; the determining factors simply whether Howeve,es wil become clear in the discussion boos ofthe unilateral eects theory of the anticompeve effects from amenper, thee ar serious questions a to het «separate satket

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