9/12/2012. Brennan: Exclusionary Conduct. 2. By way of introduction. Personal backgroundMost experience US rather than Canada, references often to US law8 yrs full-time with US Antitrust Division;
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1. Exclusionary Conduct: Structuring an Approach to Monopolization Cases Tim Brennan
2006: T.D. MacDonald Chair in Industrial Economics Competition Bureau, Industry Canada
Permanent: Professor, Public Policy and Economics University of Maryland, Baltimore County
Senior Fellow, Resources for the Future, Washington, DC
[email protected], [email protected]
Office of Fair Trading London, England
19 June 2006
2. 9/13/2012 Brennan: Exclusionary Conduct 2 By way of introduction Personal background
Most experience US rather than Canada, references often to US law
8 yrs full-time with US Antitrust Division; “on call” for about 13 more
Staff consultant to FTC, 2003-2005
Disclaimer: views not necessarily those of Competition Bureau
Views on how law should work, not necessarily how it does work
Both US and CA; not as familiar with EU
But these ideas do show up in the strongest, clearest cases
Special features of US law
Common law vs. (relatively) detailed statute
Many cases; long history of jurisprudence
Extensive rights of private action (not necessarily helpful)
Integrated legal staff vs. separate investigative units
3. 9/13/2012 Brennan: Exclusionary Conduct 3 Important UK contributions on abuse, exclusion From legal formalism to economic effect
Classification of three categories of antitrust
Collusion, mergers, abuse of dominance
Recognizing problems with Article 82
Not just “market distortion”, but “consumer welfare” focus
Problems implementing cost-based tests
Difficulties of establishing dominance
Market share not enough
Questioning “collective dominance”
Distinguishing abuse categories (crucial here)
“Predation-type” vs. “RRC abuses”
Impropriety of profit sacrifice for the latter
4. 9/13/2012 Brennan: Exclusionary Conduct 4 Still, issues on the table Is there more than distinguishing between “exclusionary” and pro-competitive” behavior?
“Rivals” focus, distinguishing only between revenues and costs?
Role of prior market power, dominance?
Quest for a uniform standard, “consistency of approach”?
Do we want an equally efficient competitor test in all cases?
Role of intent, willfulness?
Are rebates, bundles bad because they are predatory?
What cost-based tests should be used for bundles?
Should there always “be a gap between the thresholds … relating to abuse of dominance and to mergers”? [Vickers, 2003]
5. 9/13/2012 Brennan: Exclusionary Conduct 5 With that, what to take away Why monopolization, abuse controversial, difficult: Rival focus
Recognize exclusion fundamentally different from predation
Ask, “Are initial effects bad (exclusion) or good (predation)?”
Predation should be hard, but exclusion more like mergers
Exclusion, barriers to entry, RRC entail acquiring control over a complement market to raise effective price
Apply empirical merger techniques to complement markets
Reject predation-based profit sacrifice, equally efficient competitor, prior dominance screens
Applications to bundling, e.g., Canada Pipe
New options for remedies
Focus on creating new monopoly, not maintaining old ones
6. 9/13/2012 Brennan: Exclusionary Conduct 6 Two competition areas relatively uncontroversial Horizontal collusion; US Sherman §1, CA S.45-49, UK CA Ch. I
Fact-based, like criminal investigations
Rule of reason vs. per se boundary
Entry as mitigating factor; need for policy (libertarian critique)
Horizontal mergers; US Clayton §7, CA S.91-103, UK EA02
Market delineation empirical core of cases
Entry as mitigating factor, even with large share
Critical loss/elasticities debate
Use of differentiated product empirical models, simulations
Necessity of market definition under unilateral effects
Efficiency defenses, consumer vs. total vs. weighted welfare
However, little dispute on theory, conceptual foundations
7. 9/13/2012 Brennan: Exclusionary Conduct 7 Troublesome #3: Monopolization in its many forms Sherman §2 in U.S. law, S. 75, 77-79 Canada Competition Act
Abuse of dominance
“Raising rivals’ costs”
Chapter II of 1998 Competition Act, Article 82 in EU
Imposing “unfair” prices or “trading conditions”
“Limiting production, markets or technical development”
“Applying dissimilar conditions to equivalent transactions”
Conditioning contracts on obligations “with no connection”
8. 9/13/2012 Brennan: Exclusionary Conduct 8 Persistently controversial Market power presumably horizontal, not vertical
Practices reduce demand for monopolist’s product
Too much competition: Low prices, more products
Does monopolization law protect competitors, not competition?
Recent observation on US, EU:
This branch [of antitrust] has been confused since its inception, and has become a vehicle of suppressing, not promoting, competition in the marketplace—an unfortunate fact of U.S. antitrust law and even more so of European competition law.
Ronald Cass, former US ITC vice chair
Comment during FTC presentation: “Why would you want to save Section 2?”
9. 9/13/2012 Brennan: Exclusionary Conduct 9 Questions Why is monopolization different from collusion, merger?
Is monopolization about economic welfare or something else (competitor protection, intent)?
Is there any way to harmonize monopolization law with principles underlying collusion, merger law?
What are the practical implications of the lack of harmony?
Do predation “screens” make sense for exclusion case?
Would other screens better sort good conduct from bad?
What can vertical aspects usefully contribute to exclusionary conduct analysis?
Is there a simple way to change monopolization doctrine to reconcile it with its antitrust cousins?
Can we make exclusionary conduct cases simpler, easier, clearer?
10. 9/13/2012 Brennan: Exclusionary Conduct 10 Why?: The fallacious Section 2 “rivalry” syllogism Premise 1: Section 2 cases about hurting rivals
Dominant firm abusing the little guys still animating vision
Premise 2: Because competition hurts rivals, the burden in cases based on rival injury should be very high (insurmountable)
Conclusion: Section 2 cases should bear a very high (insurmountable) burden
Debate so far about Premise 2, not Premise 1
“Chicago school” sceptics accepts both premises, conclusion
Post-Chicago/populist activist side
Reject conclusion by rejecting second premise
Protect competition by protecting competitors
But both sides accept Premise 1!
11. 9/13/2012 Brennan: Exclusionary Conduct 11 Implications of the present standpoint Consensus has proven difficult
Familiar Type I error of false positives: Inconsequential or beneficial practices attacked
But don’t forget Type II error: Harmful practices may be ignored
Using inappropriate screens
Monopolization ignored because firm didn’t look big enough
Misidentifying the relevant upstream market
Encourage “anything can happen” non-robust theory
Game theory can make evaluating practices more difficult
Canceling theorists making litigation harder, especially for new, smaller agencies and courts
Can courts handle hard theory? (Microsoft example)
Benefits of possible precision vs. costs of error, process abuse
12. 9/13/2012 Brennan: Exclusionary Conduct 12 Why not reject Premise 1? Emphasis on rivalry has made monopolization cases harder to bring and justify
Focus not on rivalry in primary market but on cornering previously competitive complement market
Complement market monopolization (CMM) hallmark of exclusion
Use horizontal, not predatory screens to assess that monopolization
Possible approach to bundling cases
Rescue good vertical cases in regulated sectors
U.S v. AT&T (1982) contrasted with Verizon v. Trinko (2004)
Regulation as evidence of risk, not excuse to walk away
Bring much of monopolization law in line with less problematic collusion, merger law
13. 9/13/2012 Brennan: Exclusionary Conduct 13 Not all monopolization cases are the same Exclusion different from predation cases
Unnecessary, spurious screens invoked because of anti-rival focus
Exclusion cases may be too hard to bring
Exclusion cases involve monopolizing a new market
Raising entry barriers means the cost of something needed to enter goes up
That’s where the relevant market is!
Market power not the ability to exclude from X
That requires market power over something outside X needed to enter, supply, and compete in X!
Don’t try to find common standard with predation cases – the effects are not the same
But how to tell the easy cases from the controversial cases?
14. 9/13/2012 Brennan: Exclusionary Conduct 14 A solution? First, classifying business practices
15. 9/13/2012 Brennan: Exclusionary Conduct 15 Second, antitrust-related examples
16. 9/13/2012 Brennan: Exclusionary Conduct 16 Third, subdividing monopolization cases
17. 9/13/2012 Brennan: Exclusionary Conduct 17 Failure to distinguish, and its costs US: Treat PBDB like PGDB, focus on minimizing Type I error
Cases far too difficult
The fallacious syllogism
EU: Treat PGDB like PBDB, focus on minimizing Type II error
Presumption of bad behavior even with proximate goods
Dominance => abuse?
Willingness to consider “efficiency offenses”
Quest for the “holy grail” of a single monopolization standard
Treating all cases alike fails to minimize error costs
Take distinction between exclusion and predation seriously
Customize screens to the two different situations
18. 9/13/2012 Brennan: Exclusionary Conduct 18 Complementary market monopolization (CMM) To exclude, must raise complement prices
=> Acquiring market power over an complement, e.g., an input
“Exclusion,” “foreclosure” as tying up the market for the complement
Retailing, distribution, shelf space, typical examples
Input example: Beer company signs exclusives with networks for TV ads
Barriers to entry raised outside the market, not within the market
Complementary market monopolization like mergers
What would happen if contracted complement providers merged?
E.g., those who had signed exclusive dealing contracts?
The key to reconciling exclusion with merger, collusion law
19. 9/13/2012 Brennan: Exclusionary Conduct 19 Using merger-based effects tests Allows application of merger frameworks, empirical techniques!!
E.g., US Horizontal Merger Guidelines (HMGs)
Relevant market is the complement, not the upstream product
Apply “SSNIP” standards for market delineation
Treat conduct “as if” merger among complements suppliers
Share of complement mkt. controlled, e.g., via exclusionary contracts
Is that market easy to enter?
Carlton’s idea of the “shadow price”
CMM comes up indirectly in cases–make it the prime focus
Use instead of predation based tests!!
Profit sacrifice, equally efficient competitor, prior dominance
Appropriate for high burdens, but not for PBDB exclusion
20. 9/13/2012 Brennan: Exclusionary Conduct 20 Finesse (in part) market delineation for monopoly Monopolization, abuse of dominance currently requires finding of a monopoly (dominance) that is then abused
No good answer on how to do that
Different from mergers, with “make matters worse” counterfactual
Everybody has a little market power in a differentiated product world
Cellophane fallacy: observed substitution doesn’t answer question
“Monopoly” profits could come from inframarginal rent
Overall cost coverage requires lifetime data
So complicated that much of U.S. v Microsoft was about whether MS had a monopoly in which operating system market
CMM approach avoids problem
Use HMGs approach: Does practice make complement market worse?
Problem still needs to be solved, but for regulation, not antitrust
[Aside for later?: A “hypothetical regulator” test?]
21. 9/13/2012 Brennan: Exclusionary Conduct 21 Vertical irrelevance and relevance Irrelevance
Complement, input market power necessary, sufficient for concern
Why should the identity of the monopolizer of that market matter?
Don’t dismiss because the monopolizer too small in primary market
Market delineation: Like using buyer information in a merger
Derived demand: Are affected buyers a relevant market?
Flesh out “unilateral” story: Can X% firm raise input price?
How much does price have to go up to have significant effect?
A small margin can create a huge competitive advantage
Still need model to assess effects
But predation-based tests still should not be used!
22. 9/13/2012 Brennan: Exclusionary Conduct 22 Questionable test #1: Profit sacrifice, “but for” test Sometimes called “no business sense”; essentially the same idea
Any investment has positive opportunity cost, so need something relevant to competition concerns
Why give primacy to welfare of alleged perpetrator?
If complement market monopolized, why does price paid matter?
Irrelevance of ability of complement suppliers to extract profits
Like ascertaining crime by looking at criminal rather than victim
“But for” test need doesn’t imply economic harm or benefit
“Free” innovations can reduce welfare; even though would’ve been undertaken even without exit
Induce exit by less efficient competitor; price goes up
Some beneficial innovations may not be profitable unless rivals exit
23. 9/13/2012 Brennan: Exclusionary Conduct 23 Additional “profit sacrifice” considerations Wrong answer in regulatory evasion, network externality cases
Refusal to interconnect immediately profitable
Maintain network monopoly to evade regulation
Exclusion via bundling isn’t predation
Absolute exclusion shouldn’t be the test
“Raising rivals’ cost” contribution: The lack of need for a profit sacrifice
Tantamount to absolute efficiency defense
No profit sacrifice implies practice has a penny of efficiency
Makes conduct immune if even trivially efficient
24. 9/13/2012 Brennan: Exclusionary Conduct 24 The “? sacrifice” irony – indicator of efficiency! Recall the Chicago argument regarding vertical restraints
E.g., Telser, “Free trade” with RPM
Vertical practices involve profit sacrifice
Tying reduces demand for the monopolist’s product
Upstream monopolist wants lower retail price, given wholesale price
Avoid cost of dealing with regional monopolist
Pay retailers more to be exclusive dealers
Dominant firm ostensibly better off with complement competition
“Chicago” inference: Profit sacrifice => unrecognized efficiencies
Solving principle-agent problems with incomplete contracting
How do we know if …
We aren’t repeating 100 year old US AT mistakes?
When our accounting of profits is complete?
25. 9/13/2012 Brennan: Exclusionary Conduct 25 Questionable test #2: Equally efficient competitor Inefficient competitors are competitively relevant
Bertrand homogeneous products
Dominant firm, competitive fringe
All have prices below the monopoly price
Dubious standard even for predation
Justification as test for competing too hard
Would allow above costs tests to exclude
Predating against less efficient competitors could reduce welfare
Elhauge: Equally efficient where? Everywhere? At the margin?
Lesson: Type I, Type II errors different for exclusion, predation cases
26. 9/13/2012 Brennan: Exclusionary Conduct 26 Questionable test #3: Prior dominance Focus is on the wrong market
Dominance neither sufficient (EU) nor necessary (US)
Excuses actions by firms that don’t have prior monopoly, yet tie up complement
Inherent contradiction in litigation
To establish prior monopoly, show high barriers, etc.
But if entry that hard, does practice at issue matter?
U.S. v. Microsoft example
Microsoft dominance: Lock-in, scale economies, network effects
But then what’s the threat to application platform monopoly?
Posner’s “fragile monopoly” a useful concept:
If monopoly secure, efficiency likely motive
The “but for” test: would monopoly exist if practice banned?
27. 9/13/2012 Brennan: Exclusionary Conduct 27 Dominance a defense, not condition of guilt? Large size in one market suggests large involvement upstream
Restraints commensurate with scale
Improve coordination with similar size of input market
Disproportionality would warrant concern
Marginal harm from upstream monopolization not great
Even if “single monopoly profit” special case, more profit taken at one stage, less to be taken at others
Exceptions may enhance welfare (price discrimination, more efficient input mix)
Place burden of showing no effect from CMM on defendant
Eliminating double marginalization not quite on point
Applies only if market power inevitable at both stages
CMM assumes (more or less) competition in complement
28. 9/13/2012 Brennan: Exclusionary Conduct 28 Reality check: Should screens apply to mergers? Profit sacrifice?
Block only mergers unprofitable but for the exercise of market power?
Not just total welfare, but absolute efficiency defense
Equally efficient competitor?
Defend any merger if one party less efficient than another
Allow most efficient firm to buy up all less efficient competitors
Even prior dominance
Some market share matters, of course
But with very large market share, harder to tell that the merger will make matters worse
Relevance: View CMM as “as if” merger in complement market
Same points for collusion:
Screens irrelevant, even if effects matter (e.g., CA “undue” SLC)
29. 9/13/2012 Brennan: Exclusionary Conduct 29 Applications to some exclusion cases Heinz (Canada)
Alleged monopolization: Baby food companies sign contracts for carriages, prime display at retail
Real monopolization: Market for retail display
Focus: Ease of entry into complement market, e.g., “shelf space”
Alleged: Artificial teeth via exclusive contract with dealers
Real monopolization: Market for distributing teeth to dental labs
Focus: Entry into distribution market, including self-provision
U.S. v Microsoft
Alleged monopolization: “Intel-based PC operating systems”
Real monop.: Browser distribution via PC inclusion, ISP promotion
Focus: Could Netscape get its browser out effectively?
Remedy: DOJ settled primarily on eliminating exclusive contracts
30. 9/13/2012 Brennan: Exclusionary Conduct 30 Some lessons from those cases Core issues: Share, entry into relevant complement market
Monopolization of that complement market (e.g. distribution)
If distribution not affected, competitors can’t be excluded
Look at how exclusive contracts tie up market, “as if” merged
Profit sacrifice, equally efficient competitor not relevant
Monopolization paradox: Having monopoly in order to monopolize
Microsoft OS dominance (lock-in, scale economies, network effects)
Denstply in teeth, Heinz in baby food
But then what’s the problem?
Dominance as defense?
Have dental distribution share match upstream market
Incentive to develop “middleware” by capturing rents
Avoid double marginalization (e.g., browser + OS monopolies)
31. 9/13/2012 Brennan: Exclusionary Conduct 31 Bundling, discounts, rebates, etc. Dominant topic in antitrust debate
Is the relevant test a predation-based standard?
Does discount lead to pricing below cost?
Does/would it exclude equally efficient competitor?
State of U.S. law
SmithKline v. Eli Lilly: Bundle price need not be below variable cost
LePages v. 3M won at divided Third Circuit Court of Appeal; Supreme Court denied review
DOJ, FTC: Review would be “premature”; issues “novel and difficult”
Focus of recent models
Nalebuff: Bundling exclusionary entry barrier
Greenlee, Reitman, Sibley: Bundling reduces welfare if stand-alone prices rise
32. 9/13/2012 Brennan: Exclusionary Conduct 32 Limitations of models Nalebuff
Bundling increases consumer and total welfare in all equilibria
Would allow competitors to agree not to enter each other’s markets
Limits of other bundling models
Rent extraction, but welfare often up (GRS like 2 part-tariff)
Like price disc., results depend on unobservable correlations
Whinston – tie hardens output commitment, but ever observed?
Consumers buy in models, but cases about intermediate markets
Concord Boat v. Brunswick (engine discounts to manufacturers)
LePages v. 3M (discounts for carrying 3M’s house brand tape)
Ortho Diagnostic Systems v. Abbott Laboratories (Abbott discounted virus screening tests but legal as above Ortho’s costs)
SmithKline v. Eli Lilly (Lilly bundled antibiotics in sales to hospitals)
CA Canada Pipe (full line discounts to cast iron pipe distributors)
Use CMM exclusion approach, not predation
33. 9/13/2012 Brennan: Exclusionary Conduct 33 Canadian pioneering: Canada Pipe Allegations (from initial Bureau notice of application)
Canada Pipe holds monopoly in relevant market in cast iron drain pipe
Instituted “Stocking Distributor Program” provides rebates (up to 20%) for distributors who purchase exclusively from Canada Pipe
Equivalent to exclusive dealing, forecloses distribution
Lost at trial (from Tribunal decision)
SDP exclusive, but with no anticompetitive effects; not “predatory, exclusionary, or disciplinary”
Found some entry from imports and a new manufacturer
No switching costs; SDP not contractual, distributors could leave at any time
Key argument control over distribution of pipe
Currently under appeal – should total exclusion be necessary?
34. 9/13/2012 Brennan: Exclusionary Conduct 34 Bundle discounts via CMM: A first screen Issue fundamentally static upstream monopolization
Not tying for rent extraction (Nalebuff, Sibley et al.)
Nor commitment (Whinston)
Intermediate good (CM) focus
First screen: Whether bundling ties up complement market
Reach of the bundle
Necessary and sufficient condition
HMGs approach to market definition, informed by “buyer” market
Outlets needed to sell unbranded tape
Distributors of false teeth to denture labs
Distributors of cast-iron drain pipe
35. 9/13/2012 Brennan: Exclusionary Conduct 35 Second tentative screen Resemblance to exclusive dealing: Is loss of discount from carrying competitor equivalent to payment for breach of exclusive dealing contract?
How much does exclusive dealing raise complement price?
Exclusive contracts not absolute
Entrant has to compensate distributor for the breach payments.
These will be based on the incumbent’s lost profits (Price – short run marginal cost) from breach of contract, implying …
Entry possible only if it can undercut the incumbent’s marginal cost
Is exclusive dealing breach the right quantitative standard?
Courts may find that short-run marginal cost is very low
Less efficient competitors could knock down price
For intermediate goods, a small price increase can create great competitive disadvantage
36. 9/13/2012 Brennan: Exclusionary Conduct 36 Observations on remedies Exclusive dealing, rebates, bundling not good or bad per se
The harm arises from CMM, but OK short of monopolization
Ideal remedy not “all or nothing”, but share based, like mergers
Identify level of exclusive contracting that is non-threatening
OK to exclude, but only if one does not go beyond X% of the relevant complement market (distribution, retailers)
Effective remedies assume competition in complement market
Prior retail, distribution monopoly perhaps a DM defense
Can an upstream monopolist leave money on the table?
Share of market with money left?
Share-limited remedies may reveal anticompetitive effect, if dropped if they can’t cover the whole market
37. 9/13/2012 Brennan: Exclusionary Conduct 37 Other issues that may arise in exclusion cases Tying, bundling can exclude but need not be anticompetitive
Hurts rival, but consumers may be better off
Add product features, quality control, shopping convenience
Consider “aftermarket” cases (locked-in consumers) as contract breach, consumer protection matters
Predation, dynamic cases may not be reducible to the direct exclusion “complementary market” format
Microsoft as example
Controlling browser, media player distribution vs. preempting future competition in application platforms
Sector regulation need not reduce the need for antitrust
Regulation can make anticompetitive conduct more likely, e.g., U.S. v. AT&T (contrast 2004 USSC Trinko decision)
When can antitrust apply in regulated sectors? [CA “regulated conduct”, US “state action” doctrines, UK CA98 S.10(1)(a)]
38. 9/13/2012 Brennan: Exclusionary Conduct 38 Elhauge’s monopolization test Does a practice by a monopolist discriminate against rivals?
Allows refusals to deal if uniform, but not targeted
Fundamental flaw: Does it work when most needed?
Some inputs are bought only by rivals
Network elements, operations support in telecom markets
Bridge access in Terminal Railroad
Either no discrimination, since only rivals are buyers
Or discrimination an almost certain byproduct of vertical integration, making VI by a monopolist abusive per se
Also, is anything equivalent to price discrimination per se OK? (Carlton, IIOC)
39. 9/13/2012 Brennan: Exclusionary Conduct 39 Exclusion: monopoly creation, not maintenance “Create” focus appropriate for exclusion cases
Has a monopoly/market power been created in a complement market that was not there before?
Look at using familiar merger, collusion horizontal terms, e.g., MEGs
“Maintain” leads to the problems
Sets up entrants, small competitors as targets to be protected
Focuses on inhibiting competition, leading to high if not impossible tests
Looks at the wrong market, introducing error in both directions
Forces establishment of monopoly that’s being maintained
Fits predation cases, perhaps, but not exclusion
Dominance neither necessary nor sufficient
Profit sacrifice as absolute efficiency excuse
May lead to focus on intent rather than effect
Promote monopolization law by reducing its scope?
40. 9/13/2012 Brennan: Exclusionary Conduct 40 Summary Not all monopolization cases are the same: Exclusion distinct from predation
Fallacious syllogism: monopolization led awry by focus on rivals
Those with direct bads, like exclusion, can be addressed as we do mergers, collusion
These involve complementary market monopolization approach which can clarify analysis, remedy in exclusion cases
Profit sacrifice, equally efficient competitor, prior dominance, problematic screens for exclusion cases
Vertical matters to get story straight, as in merger cases
Applies to exclusion cases, perhaps bundling
Focus on “create” monopoly in complement market rather than “maintain” monopoly in primary market