This document is available in two formats: this web page (for browsing content) and PDF (comparable to original document formatting). To view the PDF you will need Acrobat Reader, which may be downloaded from the Adobe site. For an official signed copy, please contact the Antitrust Documents Group.

Slide 1

The Strategic Abuse
of the
Antitrust Laws

R. Preston McAfee
Dec 6, 2006


Slide 2

VeriSign

  • Official registrar of .com and .net
  • Sep 2003: redirects mistyped addresses to its own advertising site (sitefinder.com)
  • ISPs object, ask ICANN to stop.
  • VeriSign sued, contending ICANN’s decision was an illegal conspiracy
  • Judge: so deficient not to merit a trial


Slide 3

The VeriSign Plot Thickens

  • Popular Enterprises buys expired domains and redirects them to its own advertising site
  • Popular sued alleging the existence of sitefinder.com violated the antitrust laws
  • Suit is continuing


Slide 4

Roadmap

  • Examples
  • Purposes
  • Incentives to sue
  • Government as strategic player


Slide 5

Colorado Chiropractic Council

  • Sent 30 hospitals requests for privileges
    • Threat of lawsuit
  • Nine did not admit CCCN
  • These hospitals sued for restraint of trade
  • Judge: “Completely without merit…completely lacking substance as the basis of an antitrust claim.”

Slide 6

Next Generation Realty

  • Entrant in Iowa real estateEntrant in Iowa real estate
  • Sought commission--sharing from incumbent Iowa Realty
    • But Next Gen itself did not share
  • Iowa Realty refused as not reciprocal
  • Next Gen filed antitrust suit
  • Iowa Supreme Court: “without merit”


Slide 7

Private Action

  • Outnumber government suits nine to one
  • Both Sherman Act (1890, sec 7) and Clayton Act (1914, sec 4) permit private antitrust suits
    • Treble damages
  • Canada’s 1889 Combines Investigation Acts didn’t permit private litigation until 1976
    • Single damages
    • Rare


Slide 8

General Idea

  • Incentives for private antitrust litigation are not guided by consumer welfare
  • What are the motives of firms engaged in private antitrust litigation?
  • How can law be used strategically?
  • How can the antitrust laws be crafted to minimize damage?


Slide 9

Strategic Use

  • Antitrust can be used to
    • Harass
    • Harm
    • Extort
  • Harassment and harm can be used to induce cooperation
    • Often cheaper to sue than to defend
  • Extortion reduces returns to investment


Slide 10

Reasons for Private Litigation

  • Extort funds from a successful rival
    • Walmart vs MC, Visa,
    • Microsoft
  • Change the terms of the contract
    • Texaco & price discrimination
  • Punish non--cooperative behavior


Slide 11

Reasons for Private Litigation

  • Respond to an existing lawsuit
  • Prevent a hostile takeover
    • Service Corp v. Loewen
  • Discourage the entry of a rival
    • Utah Pie
  • Prevent a successful firm from competing vigorously
    • ISOs


Slide 12

Prevent Vigorous Competition: Digital v. Intel

  • Digital Alpha versus Intel Pentium
  • Market dominance of Pentium
  • Digital threatened litigation, labeling Intel a monopoly
  • FTC starts inquiry
  • Intel purchases Digital facilities, provides advantageous terms for Pentium


Slide 13

Who Profits?

  • Actions can be either
    • pro--competitive (cost reducing) or
    • anti--competitive (rival’s cost raising)
  • Examine incentive to sue in an economic model


Slide 11

Main Result

  • Gain from preventing a pro--competitive action is larger than preventing an anti--competitive actions if
    • Firm has a smaller share
    • Market is dispersed
  • Loss from pro--competitive rival action is increasing in number of firms
  • Loss from anti--competitive action is decreasing in number of firms


Slide 11

Conclusion

  • Antitrust laws often distorted to reduce competition
    • Very undesirable side effect
  • Outright ban on private antitrust litigation would solve that problem
    • At cost of stopping some legitimate suits
    • Encouraging more anti--competitive behavior


Slide 11

Conclusion, Continued

  • Alternative models may provide best of both worlds
  • Agency “gate--keeper” for private litigation
  • Agency amicus curiae for private litigation
  • Private financial support for agency litigation
  • Decoupling damages and awards
  • Providing experts to courts to reduce uncertainty