This document is available in three formats: this web page (for browsing content), PDF (comparable to original document formatting), and PowerPoint. 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

NERA Economic Consulting logo

      Department of Justice/
     Federal Trade Commission
Image of two men looking at each other thru binoculars superimposed over images of a chess game and mathematical equations

Hearings on Single-Firm Conduct:
Remedies in Section 2 Cases




Dr. Andrew S. Joskow

Senior Vice President



March 28, 2007

How Markets Work - SM


Slide 2

      Section 2 Injunction Relief: Can We
     Learn Anything from the Merger
     Context?
NERA's logo superimposed over image of two men above

  • Injunctive Relief – Structural vs. Behavioral

  • Policy towards remedies well developed in merger context

    • Antitrust Division Policy Guide to Merger Remedies (October 2004)

  • What is different about Section 2 Cases?


Slide 3

      Prohibiting Unlawful Conduct is
     Easy… Not Really
NERA's logo superimposed over image of two men above

  • Restore competition through divestiture or “break up”

    • Possible insurmountable organization design problems – mistakes cannot be remedied.

  • Prohibit unlawful Exclusive Dealing Contracts.

    • Could be easy to prohibit contractually, but what about practices that mimic exclusive dealing?

  • Prohibit the tie.

    • Again could be easy, but mistake may risk loss of substantial integration efficiencies.

  • Prohibit the predatory pricing?

    • Remedy itself could easily be anticompetitive.

  • Cease and desist orders; revision of relationships between customers or competitors.


Slide 4

      Merger RemediesNERA's logo superimposed over image of two men above

  • Single Goal: not to enhance competition, but to restore competition.

  • Structural remedy strongly preferred.

  • Preserves Efficiencies.

         “… restoring competition is the only appropriate
    goal with respect to crafting merger remedies.”

–Antitrust Division Policy Guide to Merger Remedies
(October 2004)


Slide 5

      Structural Remedy In Mergers
     Preferred, Conduct Remedy
     Discouraged
NERA's logo superimposed over image of two men above

  • Preference for structural remedy is stated in terms of problems with conduct remedies:

    • Direct Costs of Monitoring.

    • Indirect Coasts of efforts to evade the spirit of a decree, while not violating its letter.

    • Could constrain procompetitivebehavior.

    • Constrains firms from responding efficiently to changing market conditions.


Slide 6

      Positive case for Structural
     Remedy in Mergers
NERA's logo superimposed over image of two men above

  • Mergers are about changing structure –removing competition between rivals.

  • Competition that leads to lower prices, improved quality, and more innovation is lost.

  • For example, remedies such as price protection cannot reproduce the multiple dimensions over which competition occurs.

    • Benefits of competition not restored; remedy can be easy to evade, and evasion hard to monitor.


Slide 7

      Positive case for Structural
     Remedy in Mergers (Cont.)
NERA's logo superimposed over image of two men above

  • One purpose of HSR is to allow assets to be divested before the “eggs are scrambled.”

  • Preference is for an existing business entity, already well-defined that has both the ability, and incentive to compete.


Slide 8

      There has been a “Market” TestNERA's logo superimposed over image of two men above

  • The organizational design has already been done in may cases.

  • The ability of the assets to compete may have been tested in the pre-merger world.

  • Even so, FTC divestiture study (1999) found significant problems.

    • Divestitures of ongoing business were more successful.


Slide 9

      Removing Existing Monopoly
     Power
NERA's logo superimposed over image of two men above

  • In a single firm conduct case, the conduct often arises from the existing monopoly power.

  • Thus, relief could change the firm’s structure, such that it no longer has the future ability and incentive to restrain competition.

    • Tied to conduct at issue in the case.

  • Does that mean looking for a “But For” market structure?


Slide 10

      Appropriate Divisional Lines
     May Not Exist
NERA's logo superimposed over image of two men above

  • Single firm not necessarily drawn neatly in a way that could satisfy a horizontal divestiture.

    • Necessary assets, including intellectual property, to create an immediate going concern where none existed before is a substantial hurdle. Risk of failure appears higher than in a merger case.

    • Rare cases of horizontal separate operating entities that would allow a divestiture of “hard” assets (Exception: Standard Oil, American Tobacco).

    • Rejected in United Shoe Machinery, later in Microsoft.


Slide 11

      Goal in Some Cases Could be to Create
     Conditions that Change Incentives through
     Vertical Divestiture
NERA's logo superimposed over image of two men above

  • Vertical Divestitures possibly less costly?

  • AT&T (1984) was broken up along operating company lines.

    • Even with structural relief required, substantial ongoing monitoring BOC lines of business and interconnection.

  • Microsoft – not obvious that Operating System and Applications could be split along clear operating unit lines without huge losses in efficiencies.

    • Ongoing monitoring of interaction between divested entities would be required.


Slide 12

      Will the Predicted Market
     Structure Emerge?
NERA's logo superimposed over image of two men above

  • Assumes that the market would create the hoped for new structure that theory would predict.

  • But the market could have easily returned to its existing through acquisition and internal innovation – ultimately the result of network effects.

  • No practical experience (unlike in mergers) regarding what assets are needed to compete effectively.


Slide 13

      Cost/Benefit Balance:
     Section 2 vs. Mergers
NERA's logo superimposed over image of two men above

  • Benefits of structural remedy is high in merger context –a market already exists.

  • Costs are likely to be low as divestiture can often be accomplished while permitting efficiencies. Where efficiencies cannot be retained with divestitures, case for divestiture may be weaker.

  • Absent any experience with competition benefits of divestiture are more uncertain in the case of monopoly.

    • Competitive process is not necessarily enhanced if market could easily revert to monopoly.

  • If “But For” market structure is sought, can be difficult to determine appropriate competitive structure.

  • Costs could be high in terms of undoing efficiencies derived from a firm’s internal structure.

  • May still require ongoing monitoring.


Slide 14

      Behavioral Remedies in
     Section 2
NERA's logo superimposed over image of two men above

  • Biggest problem is recurrence through evasion.

  • Exclusive dealing, tying, bundled discounts, etc. can be prohibited broadly.

  • Focuses on the effect of entry as a less costly remedy.

  • Broad prohibitions may favor rivals (imposing efficiency costs), but cost seems lower relative to uncertain results of divestiture.

    • Favors the competitive process at lower cost by facilitating entry.

    • US vs. Dentsply–prohibition on exclusive contracts.

  • Post-remedy incentives are clear – benefits potentially excluded rivals through enhancing ability to compete.


Slide 15

      Caveat: Predatory PricingNERA's logo superimposed over image of two men above

  • US vs. American Airlines: An irremediable violation?

  • Prohibition on lowering prices seems anticompetitive.

  • Limiting magnitude of price cuts, or require price cuts to be maintained for a certain period, or limit capacity expansions after market entry.

  • Break up the airline? Not clear that hub competition would survive for any length of time.

    • Network effects again.

  • Fines may be the only remaining remedy.

  • If there is no remedy, is there a case?


Slide 16

      ConclusionNERA's logo superimposed over image of two men above

  • Merger remedies guides point to structural remedies as a preferred outcome.

  • The case for divestiture remedies weaker in Section 2 Cases.

  • Incidence of the divestiture remedy has been very limited.