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Page 1

Anticompetitive Overbuying

Steven C. Salop
Georgetown University Law Center
CRA International

FTC Hearings
June 21, 2006


Page 2

Anticompetitive Exclusion

  • Two distinct exclusion paradigms

    • Predatory pricing (on seller side)

    • Raising rivals’ costs (“RRC”) (non-price predation)

  • RRC raises greater antitrust concerns
    More likely to succeed and harm consumers

    • No need to induce competitors to exit

    • No need for short-run profit sacrifice

    • No inherent short-run consumer benefit

      • RRC can cause immediate consumer harm


Page 3

Anticompetitive Overbuying

  • Two distinct overbuying allegations

    • Predatory overbuying (predatory bidding)

    • Raising rivals’ costs (“RRC”) overbuying

  • Allegations correspond analytically to the two anticompetitive paradigms


Page 4

Antitrust Evaluation: Predatory Overbuyinig

  • Goal: Buyer-side mkt power in input (upstream) market

  • 4-step legal standard

    • Buyer power and artificially inflated input purchasing

      • Is increased purchasing “artificial”

      • “Warehousing” inputs raises greatest concerns

      • Require proof of purchasing to point where output price below-cost (i.e., MRP < input price)(Brooke Group)

    • Exit or permanent capacity reduction by input market competitors

    • Recoupment thru buyer-side monopsony power in input market

    • Net consumer harm on balance over entire time frame (predatory + recoupment periods)


Page 5

Antitrust Evaluation: RRC Overbuying

  • Goal: Seller-side mkt power in output (downstream) market

  • 4-step legal standard

    • Buyer power and artificially inflated input purchasing

      • Is increased purchasing “artificial”

      • “Naked” purchasing and “Warehousing” inputs raise greatest concerns

      • Do not require proof of purchasing to point where output price below-cost (i.e., MRP < input price)

    • Raising rivals costs (harm to competitors)

    • Downstream mkt power over price (harm to competition)

    • Net consumer harm: Benefits to consumers from procompetitive benefits do not outweigh consumer harms from market power

  • Step-1 standard for RRC overbuying is more interventionist because of greater competitive concerns than for predatory overbuying

  • “Consumer harm” means true consumer welfare standard


Page 6

Economic Welfare Standards

  • True consumer welfare standard

    • Consumer surplus

  • Total welfare standard

    • Total surplus

    • Bork’s deception? or just confusion?

  • Why use true consumer welfare standard?

    • Does not permit competitor injuryto trump consumer benefits

      • But, total welfare standard does --Did Bork know?

    • Consistent with precedent

    • Simpler to evaluate (price and output)

    • Induces efficient conduct

      • Firm can marginally restructure transaction in efficient way to eliminate consumer harm

        • Offsets inability of courts/agencies to rigorously apply less restrictive alternative std or gain full information about potential alternatives, thereby preventing inefficiencies

      • Supports innovation


Page 7

Innovation Incentives

Consider impact on innovation incentiveswhen standards focus on short-run effects

  • Consumer welfare standard supports greater overallinnovation incentives

    • TW std allows dominant firm to destroy higher cost rivals thatwould innovate, thereby reducing innovation

    • TW std allows mergers that eliminate competition, leadingmerged firm to have less incentive to innovate

    • These harms likely are larger than any efficiency benefits from allowing mergers or exclusionary conduct that modestlyreduce costs, while leading to higher prices to consumers

  • Thus, using the consumer welfare std leads to higher long-run total welfare, plus higher long-run consumer welfare.