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UNITED STATES FEDERAL TRADE COMMISSION
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and
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UNITED STATES DEPARTMENT OF JUSTICE
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SHERMAN ACT SECTION 2 JOINT HEARING
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UNDERSTANDING SINGLE-FIRM BEHAVIOR:
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MONOPOLY POWER SESSION
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THURSDAY MARCH 8, 2007
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HELD AT:
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UNITED STATES FEDERAL TRADE COMMISSION
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601 NEW JERSEY AVENUE, N.W.
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WASHINGTON, D.C.
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9:30 A.M. TO 4:30 P.M.
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24 Reported and transcribed by:
25 Susanne Bergling, RMR-CLR

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1 MODERATORS:
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THOMAS J. KLOTZ
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Attorney, Policy Studies
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Office of the General Counsel, Federal Trade Commission
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and
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GREGORY J. WERDEN
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Senior Economic Counsel
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Antitrust Division, Department of Justice
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10 PANELISTS:
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Andrew Chin
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Robert H. Lande
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Richard Schmalensee
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Alan H. Silberman
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Michael A. Williams
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1 C O N T E N T S
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3 Introduction
4 Presentations:
5     Andrew Chin
6     Robert H. Lande
7     Richard Schmalensee
8     Alan H. Silberman
9     Michael A. Williams
10 Moderated Discussion
11 Conclusion
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P R O C E E D I N G S
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- - - - -
3     MR. KLOTZ: Good morning. I am Tom Klotz, an
4 attorney in the Office of General Counsel at the Federal
5 Trade Commission, and I am one of the moderators for
6 this morning. My co-moderator is Greg Werden, Senior
7 Economic Counsel at the Antitrust Division of the
8 Department of Justice.
9     Before we get into the substance of the program,
10 I want to go through a couple of preliminaries. First,
11 I want to thank our colleagues at the Department of
12 Justice for jointly presenting this program, and on
13 behalf of the Federal Trade Commission, I would like to
14 thank each of the panelists for agreeing to participate
15 with us today.
16     As I cover a couple of housekeeping matters, I
17 would ask first of all that you turn off any cell
18 phones, BlackBerries or other devices that would make
19 noise and that would interrupt our panel. Second, the
20 restrooms are outside the double doors. Just go across
21 the lobby, and there are signs that will help direct you
22 to the appropriate place.
23     Third, particularly for visitors, in the
24 unlikely event that the building alarms go off, we ask
25 that you please proceed calmly and quickly as

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1 instructed. If we leave the building, we will go out
2 the exit on New Jersey Avenue, past the guard's desk,
3 and just follow the group of people across the street to
4 await further instructions.
5     Finally, given the format of the program, we ask
6 that you not make comments or ask questions during the
7 session, and we will proceed from there.
8     Yesterday, we began the program on monopoly
9 power and market definition, and today we are going to
10 continue that discussion, and at this point, I will turn
11 things over to Greg Werden.
12     DR. WERDEN: Thank you.
13     This is the last of our three sessions on
14 monopoly power. This session is focused in particular
15 on technology markets, with all the possible meanings of
16 that term, and single-brand markets. I want to join my
17 FTC colleague in thanking the panelists for appearing
18 here today and to thank the staffs of the two agencies
19 for doing quite a bit of work in organizing these
20 sessions.
21     These are sessions in a continuing process of
22 hearings that the Antitrust Division and the Federal
23 Trade Commission began last June on the law and policy
24 concerning single-firm conduct addressed under Section 2
25 of the Sherman Act. The materials from these hearings

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1 are being made available on the agencies' web sites.
2 Submissions of panelists, their slides, and ultimately
3 transcripts, although they run a little behind, are
4 being made available. The sessions are being also
5 videotaped. I am not sure whether they will be
6 available for sale or not, but you might want to put
7 your orders in.
8     Our panelists today, in the order that they will
9 be speaking, are first Richard Schmalensee, who is the
10 John C. Head, III Dean and Professor of Economics and
11 Management at Sloan School at MIT. I am sure everybody
12 is very familiar with Dick's contributions to industrial
13 organization and antitrust policy, and he will speak
14 with particular experience from some work that he has
15 done in technology markets in recent decades.
16     Second, we have Mike Williams, director of ERS
17 Group, formerly, a long time ago, a colleague of mine at
18 the Antitrust Division at the Department of Justice.
19     If he arrives, we will then have third Andrew
20 Chin, Associate Professor of Law at the University of
21 North Carolina, who worked a little bit with Judge
22 Jackson on the Microsoft case, a little behind the
23 scenes, we learned about that recently.
24     Then Bob Lande, Venable Professor of Law at the
25 University of Baltimore School of law, frequent

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1 commentator on antitrust policy issues and long ago with
2 the Federal Trade Commission.
3     And finally, Alan Silberman, a partner at
4 Sonnenschein Nath & Rosenthal, LLP, a long-time
5 practitioner of antitrust law who will be bringing the
6 practitioner perspective to these issues.
7     With that, I will add that we unreasonably
8 refuse to allow audience participation in any way, shape
9 or form, but we will allow people to submit written
10 comments for the record if they want.
11     I now turn it over to Dick Schmalensee.
12     DR. SCHMALENSEE: Okay, thanks, Greg, and thank
13 you for having me. This is a set of semi-disconnected
14 comments on markets that are experiencing or could be
15 experiencing rapid technological change.
16     Now, there are a number of basic features of
17 in these markets. Greg pointed out that occasionally
18 witnesses in these hearings go over well-known ground,
19 and I am going to do a little bit of that today, but I
20 think we do that to make sure everybody remembers that
21 this is well-known ground.
22     In markets with rapid technological change, you
23 expect to see market power because that is the reward to
24 innovation. So, you would be surprised in a market
25 where there is a lot of innovation going on if you did

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1 not see some market power, because that is the return
2 for the investment. To find monopoly power, the issue
3 is typically durability of that market power. Is this
4 the blink of an eye in a Schumpeterian world, or is this
5 something that is likely to endure long enough to be an
6 issue?
7     Typically we address the issue of durability by
8 looking at entry barriers, but entry barriers usually
9 involve me-too entry, of a similar product. The hard
10 part -- and it is a hard part, though I am not making a
11 pitch that it is ubiquitous or inevitable is that in
12 markets with rapid technological change, entry may take
13 a rather different form than the incumbent's product
14 even if matching the incumbent's product is difficult.
15 So, in markets like that, when rapid technological
16 change is possible, the key to market performance is
17 competition to innovate, is competition on technology or
18 dynamic competition.
19     Unfortunately, I do not have any solutions to
20 this. This is a cautionary tale. If you ignore the
21 special features of these markets, you will tend to find
22 monopoly power where, in fact, it is relatively
23 transient. If you exaggerate those features, you will
24 tend to think it is transient when it is not. And there
25 are no bright lines that I can think of for reasons I

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1 will discuss.
2     So, I am going to focus on three issues. The
3 first is, the difficulty of thinking about whether rapid
4 technological change is of the disruptive sort. Let me
5 be clear that technological change comes in various
6 flavors. If you think about microprocessors, there has
7 been enormous technical change, but nothing truly
8 disruptive for some time; very rapid increases in
9 performance, but incremental change; no one innovation
10 has radically disrupted things. Other markets have been
11 marked by rapid, disruptive change. Both pose problems,
12 and the tricky part is predicting whether disruptive
13 change is likely.
14     Then I want to talk about network effects
15 briefly. This is, I think, relatively well-understood
16 stuff. Finally, then I want to say a little bit about
17 something have been interested in for the last several
18 years: Two-sided businesses, which I do not think of as
19 two-sided markets. I will spend a little time on that.
20     So, if there is Schumpeterian competition,
21 competition for the market, the kind of competition that
22 in the Microsoft case we noted had occurred with some
23 regularity in the early years of PC software when
24 dominant products losted their positions, then short-run
25 market power is less of a concern. You still worry,

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1 properly, about an incumbent's ability to use short-run
2 power to stifle that dynamic competition, but if
3 competition is healthy, the fact that a software product
4 sells for well over its marginal cost is not
5 problematic.
6     The problem is that that kind of competition
7 often comes in bursts. If you look at the automobile
8 industry early on, it is really quite extraordinary,
9 right? You had steam, you had electric, you had the
10 invention of the starter, you had the innovation of the
11 closed body, you had all kinds of things going on, and
12 then quiet. There is a great quote in Alfred P. Sloan's
13 book, My Years with General Motors, to the effect that
14 by the mid-1920s, the automobile and the industry were
15 set, and that is about right. Sloan was writing in the
16 late fifties.
17     You could argue that was an industry with rapid
18 technological change for a time and then it was not.
19 There was innovation after the 1920s: Engines got
20 better as did many other things, but nothing disruptive
21 happened. So, if you were trying to make policy in the
22 auto industry in 1910, you would have this question of
23 how long will this healthy dynamic competition continue,
24 and there would have been no easy answer.
25     It is also hard -- and this is troubling in

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1 these markets -- by the nature of disruptive innovation
2 to predict its direction and source. Most of us, I
3 hope, can remember when the Walkman owned the carrying
4 around music business. It was wiped out not by somebody
5 who did anything with tape but by a very different
6 approach based on disk drives. The difficulty with
7 looking at who is spending what on innovation, which I
8 think is a useful thing to do, is that it may miss the
9 radical, the novel.
10     Now, again, this is a call for skepticism.
11 There are two possible errors. One is ignoring the
12 disruptive that is being developed over here in the next
13 room out of sight of the industry players, and the other
14 is reading my alma mater's alumni publication Technology
15 Review, too closely and becoming convinced that every
16 technology they talk about is going to come to market
17 tomorrow and disrupt its industry. Both are wrong, and
18 finding the truth is hard. Ignoring the potential for
19 disruptive innovation, however, gives you the bias of
20 assuming the status quo is forever.
21     In a number of markets marked by rapid
22 technological change, network effects can lead some
23 firms to high shares. If you have a snapshot in which
24 network effects have led to a dominant position, that
25 snapshot is consistent with a world of vigorous

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1 Schumpeterian competition, in which the next hot product
2 may displace the leader. Think word processors in the
3 early days. WordStar dominates; WordPerfect comes along
4 and is better, and wham, WordPerfect owns the market.
5 Why? Network effects. So, a snapshot in which
6 WordPerfect owns the market is consistent with vigorous
7 Schumpeterian competition. It is also consistent with
8 its absence. So, just looking at the leader's share,
9 just looking at its apparent dominance, just looking at
10 the network effect, does not tell you whether there is
11 dynamic competition in the market. You have to look
12 beyond the snapshot.
13     One important thing that I would point out is
14 that network effects build large shares, build
15 apparently dominant positions, through expectations.
16 You can have a large share because everyone expects you
17 to have a large share. PCs wiped out Wang word
18 processors very quickly. WordPerfect took over from
19 WordStar very quickly, and Word took over from
20 WordPerfect very quickly. These things happened
21 rapidly, but -- and again, I will come back to my
22 cautionary note -- it is hard to predict the pace of
23 that kind of change.
24     There was discussion in the Microsoft trial of
25 software as a network-based service. This idea was in

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1 the air then, it was being discussed by the engineers,
2 but it has taken a long time to happen. Could you know
3 it was going to take a long time to happen? Maybe;
4 maybe not. But that seemed to me to be a relevant
5 question. Google now has an online service offering
6 that may actually be serious. There has not been
7 anything terribly serious until now.
8     Finally, let me talk about multi-sided
9 businesses, my third topic. There are a whole set of
10 businesses that fit this two-sided market paradigm. If
11 you think of businesses that bring different customer
12 groups together, there are indirect network effects, and
13 the Coase theorem fails. This means that a wheat market
14 that brings buyers and sellers together really does not
15 quite do this if it is just buyers and sellers, because
16 you know that the price structure does not matter,
17 right? You can tax the buyer; you can tax the seller;
18 the end result is the same.
19     An important point here is that the term
20 "two-sided markets" is, a misnomer, because it is not
21 necessarily a characteristic of a market; it is a
22 characteristic of a business model. This is a strategy.
23 You could have some firms competing with two-sided
24 models with firms that do not. Two-sided medels apply,
25 as Rochet and Tirole pointed out, to a wide variety of

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1 businesses: Obviously marriage brokers; media bring
2 eyeballs and advertisers; shopping malls bring customers
3 and stores.
4     In case of securities exchanges, one thinks of
5 the group as buyers and sellers, but, in fact, if you
6 look closely, it is providers and consumers of
7 liquidity. A number of exchanges have what are called
8 "maker-taker" models where, in fact, if you post a
9 standing order and somebody comes in and takes you up on
10 it, you are paid. So, it is a more complicated thing
11 than buyers and sellers. And payment cards, of course,
12 connect merchants and consumers.
13     This class of business strategies has become
14 more important recently because software platforms are
15 in a number of settings a natural way to build a
16 business like this. The Windows platform is an obvious
17 one. It links applications developers, not all of whom
18 work for Microsoft, and end users. The firm that has
19 the platform, Microsoft or Apple, needs to court its
20 developers, and its end users.
21     I want to make a few points about these business
22 models, based in part of a book David Evans and I have
23 coming out from the Harvard Business School Press this
24 spring. First, one of the surprising features is how
25 often in practice pricing is quite asymmetric; that is

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1 to say, all the money is made from one of the groups.
2 Theory does not predict this.
3     In credit cards, if you pay on time and do not
4 have an annual fee, you do not pay anything to use a
5 credit card. The merchant pays. But, of course, for
6 any two-sided business, all the groups it deals with
7 need to be treated as customers, even if they are not
8 directly the source of profits.
9     One can have competition involving firms with
10 the same business model; that would be overlapping
11 platforms. One can have a platform competing with a
12 single-sided business, i.e., a business that targets
13 only one customer group, or one can have a competition
14 involving intersecting platforms that target only some
15 groups in common. This would happen if I target groups
16 A and B, and you target groups B and C. These potential
17 patterns of competition, complicate assessment of market
18 power.
19     The business in these cases is not just sales to
20 the profitable side. So, if you think about the
21 business that the credit card companies are in as sales
22 to merchants, you fundamentally misunderstand what is
23 going on. The money is directly made on the merchant
24 side, but, in fact, the consumer who carries the card is
25 just as important as the merchant that takes the card.

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1 That is an obvious mistake one would not make in this
2 setting, but it is less obvious elsewhere.
3     Think about video game console makers. They
4 also have to court game developers, because if there are
5 not games for the consoles, the consoles do not sell.
6 So, they are in the business of dealing with both
7 groups, not just selling consoles. And, in fact,
8 consoles, as we know, are not the source of profit in
9 that business.
10     A two-sided business also has to worry about
11 competition from different business models. Satellite
12 radio is a single-sided business by and large. I mean,
13 it is not heavily advertising-dependent, yet it deals
14 with the same listeners that broadcast FM deals with.
15 Broadcast radio deals with those listeners with
16 two-sided models, advertisers and consumers; satellite
17 radio, consumers only.
18     Google and magazines compete for advertisers,
19 but they do it in different ways. Magazines use content
20 to assemble eyeballs; Google uses search to assemble
21 eyeballs or, better, to assemble focused eyeballs.
22 Craig's List has kind of wiped out newspaper want-ads;
23 it is again, a very different model.
24     The price-cost margin is pretty useless in
25 assessing the market power of two-sided businesses

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1 because of asymmetric pricing, how do you compute the
2 price-cost margin? Think about a video game console
3 maker. Video game consoles are sold at a loss or at
4 break-even, depending on the maker and the year, but
5 that is not where the money comes from. The money comes
6 typically from sales of games you make yourself and
7 license fees from independent people like Electronic
8 Arts that make games to run on your console.
9     So, what is the price-cost margin? It is not
10 the loss on the consoles, and as to the royalties, there
11 is no cost or a very tiny cost associated with the
12 royalties you get from Electronic Arts. So, it is very
13 hard to figure out how to do a price-cost margin with
14 these businesses, and if you leap into some calculation,
15 it will likely be misleading.
16     As to market definition, the Guidelines approach
17 can be hard to adapt. The problem is multiple groups
18 and different models. In video games, the money is made
19 from the games. In contrast, in games that run on PCs,
20 the PC software platform vendor, does not make anything
21 from the game developers. So, games are not a source of
22 profits in the PC gaming, but they are the source of
23 profits for consoles. How do you think about a price
24 reduction or a price increase for purpose of market
25 definition -- which price?

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1     Another problem is posed by feedback effects.
2 If you sell to A and B, you go through a hypothetical
3 price increase to A that reduces demand from A, but, of
4 course, if there are indirect network effects, that will
5 make the platform less attractive to B. There will be a
6 reduction of demand on the B side, which in turn will
7 make the platform less attractive to A, and so on.
8     Now, it is not hard to write down the
9 mathematics. It is just hard to think about how you
10 would do the calculation correctly in practice. The
11 existence of this sort of feedback effect does not mean
12 there is a death spiral with quantities driven to zero
13 -- things converge typically. The point is just that
14 you have to be very careful, and the typical Guidelines
15 approach is not well-suited to market definition in
16 these contexts, nor do we have data that lets us measure
17 those kinds of externalities.
18     Finally, and this is a cute feature of these
19 businesses, you must have both groups. The simplest
20 case is singles bars. For a heterosexual singles bar,
21 you really have to get both men and women in the door,
22 and if you have to spend a lot of money to persuade one
23 group or the other to come, it does not matter if you
24 have dominance, so to speak, on the other side.
25 Competition for the patronage of men or the patronage of

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1 women, depending on the market, can eliminate profits.
2 So, you have to look at both sides, because again, the
3 key to these businesses is the need to balance, and the
4 need to balance means competition on either side can
5 dissipate profits.
6     Now, this is not obviously a presentation that
7 gives you answers, but I have tried at least to pose
8 some important questions. I wish I could be more
9 upbeat, but sometimes life is hard.
10     Thank you very much.
11     (Applause.)
12     DR. WERDEN: Mike Williams.
13     MR. WILLIAMS: Okay, thanks a lot, Greg.
14     So, I am going to talk about technology markets
15 in a different sense than Dick just talked about them.
16 I am going to talk about technology markets as they are
17 defined in the FTC and DOJ IP Guidelines, and those
18 technology markets are really literally markets for
19 ideas. So, they are markets for intellectual property.
20 They are not markets for widgets or even software. They
21 are markets for intellectual property.
22     I will start with just a few of the more
23 prominent cases. I think the main take-away from this
24 overview slide is some of the bigger cases is just that,
25 number one, there have been a number of them. Number

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1 two, economists always get in trouble for making
2 predictions, but I think it is a fairly safe prediction
3 that there is going to be more, and probably
4 disproportionately more, as obviously intellectual
5 property is so critical to future markets.
6     Another quick take-away from this is that I have
7 put in quotes after each case what the technology was
8 that was being disputed, and I think another thing to
9 draw from this is that there are certainly a lot of
10 examples where the technology in question was
11 intellectual property for what we would traditionally
12 call high technology industries, but there is also
13 intellectual property for very mundane things.
14     For example, the DOJ versus American National
15 Can case, the laminated tube-making was -- at least in
16 part the intellectual property was the patents that
17 protected a certain way of making toothpaste tubes. So,
18 you can have intellectual property for high technology
19 things and intellectual property for very ordinary
20 things.
21     I will not spend a lot of time on this slide.
22 This is literally just the language right out of the IP
23 Guidelines. So, what is a technology market? It
24 consists of intellectual property that is licensed and
25 its close substitutes; that is, the technologies or

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1 goods that are close enough substitutes significantly to
2 constrain the exercise of market power. So, the main
3 thing to take away there is certainly sort of the
4 primary intellectual property that we are thinking of is
5 generally patents, but you may have a circumstance where
6 other technology -- and by "other technology," it could
7 just be know-how, it does not necessarily have to be
8 patented -- and then goods. You can certainly imagine a
9 circumstance where there is an allegation that somebody
10 has market power over a certain kind of intellectual
11 property embodied in patents, but there may be a
12 physical product that is a good substitute for that
13 technology.
14     So, three general points that I just want to
15 touch on in this short talk. What are some of the
16 challenges that you face when you try to define the
17 markets? What are some of the challenges you face when
18 you try to assign market shares? And what are some of
19 the challenges you face when you try to determine
20 whether or not a firm has market or monopoly power in a
21 technology market?
22     So, the first thing to recognize is that these
23 are all derived demands. Nobody wants to license
24 intellectual property just for the heck of it. You want
25 to license it to do something with it, to make a product

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1 that can then be sold. So, you can obviously, going
2 back all the way to the 19th Century, Alfred Marshall's
3 Four Laws of Derived Demand can help you organize your
4 thoughts about when a putative market for intellectual
5 property may or may not qualify in terms of actually
6 meeting the Horizontal Merger Guidelines test for an
7 actual antitrust market.
8     Again, it really boils down to, is the demand
9 for this intellectual property inelastic? Is it
10 inelastic enough that a hypothetical monopolist would
11 find it profitable to raise price? And I should mention
12 that the Intellectual Property Guidelines are quite
13 clear that even though the idea of a market for patents
14 or a market for intellectual property is a new
15 construct, the basic market definition methodology in
16 the Horizontal Merger Guidelines is still quite
17 applicable.
18     So, what are some of the practical problems you
19 face when you try to define a technology market in this
20 sense? One is that firms generally do not license their
21 patents one at a time. They will generally license
22 their entire portfolio. A portfolio generally has a lot
23 of complementary technologies within it. As I am sure
24 you are aware, a lot of big companies have hundreds if
25 not thousands of patents. The patents generally are

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1 not -- I mean, you would be surprised if they were
2 substitutes, right? I mean, the whole point that they
3 are patenting different things, and they tend to be
4 complements, but they tend not to be sold one at a time.
5     Another way to think about it is, I have often
6 found a good way to organize your thoughts when you are
7 asking kind of what data are available, what do I have,
8 is to ask, what is the perfect data set? What would I
9 really like to have, and then what can I actually get?
10 So, if you said, "Well, what is the perfect data set for
11 thinking about technology markets," what you would
12 really like to see is each patent licensed separately so
13 you could look at the patents across portfolios,
14 across -- in other words, suppliers of intellectual
15 property -- and each patent licensed at an explicit
16 price.
17     So, you could use the royalty revenues, but in
18 most circumstances, we do not have either one of those
19 things. They generally get licensed in a bundle, in a
20 portfolio, that has substitutes and complements all
21 mixed together, and they generally do not have their
22 license revenues broken out certainly by patent or even
23 in many circumstances -- I will get to this in a
24 minute -- in many circumstances, no money changes hands,
25 because many companies do these in royalty-free

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1 exchanges. So, those are challenges that you face when
2 you try to think about how to define these markets.
3     Assuming that you have managed to define a
4 technology market in this sense, now we face the
5 challenge of assigning market shares. So, you are in a
6 world where, I guess the first thing to say is, what is
7 the principle? What is it we are trying to accomplish
8 when we assign market shares? Going back to the
9 Horizontal Merger Guidelines, the answer, of course, is
10 we are looking for a statistic that gives us the best
11 indicator of a firm's future competitive significance.
12 That is what a market share is supposed to tell us.
13     So, I mentioned earlier that you do not have
14 royalty payments generally, so what are the normal ways
15 in which we would think about assigning market shares?
16 You might do it on the basis of output, you might do it
17 on the basis of revenues, sales and so on, but most of
18 the time we do not have royalty payments, because, for
19 example, like cross-licensing, we do not have the
20 ability to disentangle all of the IP within a portfolio
21 because they were packaged as a portfolio and sold as a
22 portfolio.
23     Of course, unfortunately, the whole notion of a
24 capacity or a shipment does not make any sense in this
25 context. There is no capacity constraint to an idea.

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1 So, those are challenges.
2     So, what have people done to try and assign
3 market shares in technology markets? I think there is
4 basically two approaches that have been offered. One is
5 sort of what your Bayesian priority would be if you had
6 a really diffuse knowledge, which would just be I really
7 am not sure what to do, I am just going to say it is
8 1/N. Now, I say that is an advantage because it is
9 simple to compute, because that is conditional on
10 agreeing what N is, and, of course, reasonable people in
11 any particular case might have fundamental disagreements
12 about what N is, because again, think about N can be
13 patents, it can be just know-how, and it can be physical
14 products that arguably compete in the same technology
15 market.
16     When would 1/N be a good statistic? When would
17 it tell you the likely future competitive significance
18 of a given firm in a technology market, the answer would
19 be -- and this quoted out of the IP Guidelines -- is
20 does 1/N give you a good estimate for the ability of
21 firms to produce close substitutes at comparable costs?
22     So, another way to say it is, suppose for the
23 sake of argument we had four different patent
24 portfolios, four different providers of intellectual
25 property. If each of those patent portfolios provided

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1 the downstream manufacturers that were actually going to
2 bend the metal and make a product with the intellectual
3 property, do each of those four patent portfolios give
4 the downstream manufacturers the ability to produce
5 close substitutes at comparable costs?
6     If you thought that was right, then 1/N probably
7 would be a good statistic, because you are saying that
8 each of those four patent portfolios is reasonably equal
9 in terms of what their probable future competitive
10 significance is, because they all seem to be about
11 equally valuable in the sense that if they were
12 purchased by one of these downstream manufacturers, the
13 downstream manufacturer, arguably in this hypothetical,
14 would be somewhat indifferent between which of the four
15 patent portfolios it used, because each of them, by
16 hypothesis, is reasonably good at enabling the
17 downstream manufacturer to produce close substitutes at
18 comparable costs.
19     There are some disadvantages to the 1/N method,
20 namely, the flip side, which is, what if the four patent
21 portfolios are not equally valuable to the downstream
22 manufacturers? Of course, that is -- at least that is
23 what my prior is, is that these patent portfolios are
24 very heterogenous animals. You know, one firm has got
25 200 patents; one has got one. Of course, in principle,

27
1 the one patent could be more valuable than the 200
2 patents, you just do not know, but you would be
3 surprised if each of the four patent portfolios in my
4 simple little example were equally valuable to the
5 downstream firms.
6     I mean, I think going into it, at least my prior
7 is it is more likely that they are highly differentiated
8 in terms of their fundamental value to downstream firms
9 in terms of making the products that can then be sold.
10 So, the patent portfolios are highly differentiated.
11     Another aspect that comes up in this is that if
12 you think about the IP suppliers, there is actually two
13 things that they do. They provide ideas, they provide
14 patented technology, but they also work with the firms
15 that bend the metal, and so if you think, for example,
16 about firms that license technology to make memory
17 chips, for example, they license the idea, but they also
18 work closely with the companies that try to actually
19 make the computer chips, because if you think about it,
20 they are the ones who in some sense know more about how
21 the product is supposed to work.
22     Now, they may not have the same engineering
23 expertise that the downstream manufacturer has, but a
24 complementary service that they are offering is, how do
25 you actually implement my idea? Of course, the IP

28
1 suppliers could differ quite generally in their ability
2 to work with the downstream manufacturers; their ability
3 to actually get their ideas implemented. So, even
4 though you might have four equally valuable patent
5 portfolios, one of the firms might be much better at
6 working with the downstream firms to turn their ideas
7 into real products.
8     The last bullet, I will not really go over, it
9 frankly, it just takes too long to explain, and
10 colleague of mine and I have -- Ashish Nayyar -- an
11 article that is just devoted to that particular subject,
12 but I do not have time to get into that just now. So,
13 1/N is one approach.
14     A second approach is to say I am going to look
15 at in some sense how manufacturers have voted with their
16 dollars. In other words, if I cannot directly observe
17 and assign market shares based because I do not have
18 royalties, the patents are not licensed individually, I
19 am going to look at how manufacturers have voted with
20 their dollars to pick amongst, for example, these four
21 patent portfolios.
22     If I look at what the manufacturers have picked,
23 who has been successful in the marketplace? Has one
24 manufacturer been much more successful than the other
25 manufacturers because it used firm one's patent

29
1 portfolio instead of firm two's? So, if you think about
2 it, that is kind of the mirror image of what we are
3 trying to observe, that is kind of the mirror image of
4 how that technology has played out in the marketplace.
5 Has one technology proven, based on the choices of
6 manufacturers and ultimately the choices of consumers,
7 to be more valuable than another set of technology?
8     So, an advantage to that is that it arguably
9 captures the differentiated nature of the portfolios,
10 because one will probably be better than another, but as
11 with all these things, there is some disadvantages to
12 it. Suppose you have -- and this is common -- suppose
13 you have a manufacturer deciding that he needs to
14 license technology from two of the intellectual property
15 providers. Well, now, how are you going to assign
16 shares now? You have got two of the four, in my
17 example, patent portfolio providers. Both of their
18 technologies are being purchased by one manufacturing
19 firm to produce one product. Well, now you have a
20 problem. How are you going to sign, using this kind of
21 mirror image approach, how are you going to assign those
22 sales to one of the two patent portfolio providers or to
23 the firms competing in the technology market?
24     Finally we get to really the last question,
25 which is how are we going to measure monopoly power in a

30
1 technology market? As with most instances in antitrust
2 economics, there is kind of two ways to think about
3 monopoly power or how we would investigate monopoly
4 power. One is structural, and one is performance.
5     So, from a structural perspective, remember, by
6 this point we have defined a market as best we could, we
7 have assigned shares as best we could, given all these
8 problems that I have talked about, and you are going to
9 get some measure of market concentration. Now, it might
10 be an interesting statistic, you might view it with a
11 lot of skepticism, but you will have some measure of
12 market concentration, and then you would look at, again,
13 kind of a traditional factor, barriers to entry.
14     Now, the barriers to entry tend to take kind of
15 a different nature in a technology market. There is
16 different kinds of things that firms have to do, invent
17 around the IP, defend against patent infringement
18 claims. If you are an entrant into a technology market,
19 one of the things you might well have to do is indemnify
20 people buying your technology against patent
21 infringement claims from, say, an incumbent provider of
22 technology. So, that gives you kind of a structural way
23 to think about how one might study the existence of
24 monopoly power in technology markets.
25     Then finally, a different way to think about it

31
1 is, can I study the performance of these markets and
2 gain any insight as to whether or not these firms or one
3 firm seems to have monopoly power? I think in some
4 circumstances it might be possible to look at changes in
5 royalty rates. I wrote in the parenthetical, "assume
6 marginal costs are not possible to measure but
7 constant." So, it is very difficult to know what the
8 marginal cost of a patent is.
9     I mean, in one sense, on a forward-looking
10 basis, really the marginal cost of a patent is the cost
11 of enforcing it, because the costs of coming up with it
12 are all sunk, so we may not know what the marginal costs
13 are, but if we are willing to make perhaps a rogue
14 assumption that those costs are constant, then changes
15 or increases in royalty rates might be informative.
16     Then finally, there are certain circumstances
17 where IP gets licensed with what are called tie-ins or
18 tie-outs or in some circumstances -- and this falls back
19 to a bit more traditional perspective -- if you are
20 familiar with, for example, the patent misuse law,
21 patent misuse occurs when a firm has arguably expanded
22 the temporal or the product aspect of what they are
23 trying to enforce beyond the four square corners of the
24 patent. So, sometimes firms will actually ask for, when
25 they are licensing their IP, they will ask for long-term

32
1 contracts that exceed the length of the patent life, and
2 so that arguably is a performance indication that maybe
3 this firm does have some substantial market or monopoly
4 power.
5     So, thank you very much.
6     (Applause.)
7     DR. WERDEN: Andrew Chin.
8     DR. CHIN: Thank you. Here is a picture from
9 the last time I saw Dean Schmalensee in the Microsoft
10 case.
11     My name is Andrew Chin. My web site is
12 andrewchin.com. You can get two of my recent articles I
13 will be talking about on that web site, recently
14 published, and the title of my talk is Defining Software
15 Product Markets.
16     There is time for just one main point, and that
17 is that relevant software product markets can be
18 correctly delineated using the existing techniques that
19 are described in the Merger Guidelines. By "correctly,"
20 I mean that the resulting market that you find is
21 appropriate, is an appropriate subject for antitrust
22 concern.
23     There is one tricky aspect to this, and that is
24 what I am focusing on today, is that the key to doing
25 this correctly is describing software products

33
1 accurately and at the right level of abstraction to
2 perform the analysis, because here is what can happen if
3 you get it wrong.
4     The conclusions of law of the District Court in
5 Microsoft grounded the liability for attempted
6 monopolization in a market for "platform level browsing
7 software for Windows." On appeal, the D.C. Circuit
8 found this description of the market to be varying and
9 imprecise and as a consequence reversed the attempted
10 monopolization liability and remanded the tying claim
11 for a rule of reason analysis under which the plaintiff
12 would have one hand tied behind their back. They would
13 be barred from more careful approaches to market
14 definition.
15     The approach of defining the browser software
16 product market in this way, though, was doomed to
17 failure because it defined the software product as "code
18 and nothing else," as essentially adopting the position
19 taken by Microsoft throughout the trial, that a software
20 product consists of code and nothing else.
21     Consider whether Microsoft would have taken the
22 same litigation position in a copyright infringement
23 suit. Had I purchased Office XP and made several copies
24 and sold those, put them on eBay, I doubt that a defense
25 that I had bought the code and therefore could do

34
1 anything I wanted with it would avail me very much in a
2 copyright infringement suit. So, the absurdity of that
3 position percolates throughout the D.C. Circuit's tying
4 analyses, both in the consent decree case and in the
5 appeals decision. I have argued in my Wake Forest Law
6 Review piece that throughout the D.C. Circuit's
7 analysis, it relies on this fallacy, and then go into
8 some of the consequences of relying on that fallacy in
9 that article.
10     Well, another approach was available to the D.C.
11 Circuit and to the District Court in the conclusions of
12 law, and that was kind of buried in the findings of
13 fact, but there was a discussion of a "market for web
14 browsing functionality," essentially defining the web
15 browser software product in terms of what it does. It
16 enables a user to browse the web; in short, to select,
17 retrieve and perceive web resources.
18     The conclusions of law did not cite this
19 finding. The D.C. Circuit followed suit and did not
20 cite it either but said as to the combined opinions of
21 the District Court that it failed to enter "detailed
22 findings defining what a browser is or what products
23 might constitute substitutes."
24     From that I take two points: One, that
25 antitrust analysis requires description in detailed

35
1 terms as to what a software product is and in explicit
2 terms. Tell us what it is, not what it does. Well, at
3 one level of abstraction, a fairly high level, you can
4 just define what it is as the set of legal rights and
5 technological capabilities that enable a user to select,
6 retrieve and perceive web resources. You get two clues
7 as to what those rights and capabilities are, and they
8 come in the box.
9     They come in the box in the form of software
10 code on some tangible medium, such as a CD-ROM, and
11 accompanying documentation. Microsoft holds the
12 copyright on both the code on the medium and on the
13 documentation, so you do not own those, but the legal
14 rights and technological capabilities are defined by
15 reference to those accompaniments.
16     More detail is available but entirely
17 unnecessary; however, they are available. I describe
18 them fully in my Harvard Journal on Technology piece to
19 give comfort to those who may not be convinced that
20 these are well-defined concepts, and also, to address
21 the misconception that arises from viewing these
22 products as code that, for example, these are integrated
23 by virtue of being supported by the same body of code.
24 So, this addresses the product integration rhetoric that
25 came throughout the case.

36
1     Now, so, why do we not need that level of
2 detail? Because all that antitrust analysis requires is
3 in the language of Dupont, is first to identify
4 reasonably interchangeable software products from the
5 user perspective for performing the same purposes or
6 supporting the same user purposes. So, here is an
7 example. Here is an example of two products that
8 support the same user purpose at some level of
9 abstraction.
10     Converting binary to BCD. For those of you with
11 patent law backgrounds, this is the algorithm that was
12 found to be non-patentable in Gotshall versus Benson by
13 the Supreme Court. So, it is an historically
14 interesting example. You do not need to know what BCD
15 is, but this is a DOS program that will take a base 2
16 number and convert it to BCD.
17     Another way of doing this is create a Windows
18 application, a calculator with a bin-to-BCD button on
19 it. You type in the number, you click the button, and
20 it performs the same calculation. At some level we know
21 that these two applications serve the same user purpose.
22     So, if we run through the Merger Guidelines
23 analysis, we can look on the demand substitution side,
24 we see they are functionally interchangeable insofar as
25 they support the same user purpose; however, if we dig

37
1 deeper, they run on different code. How important is
2 that? Well, maybe if the user notices that one set of
3 code runs more slowly than the other, that might factor
4 into their preferences. The different user interfaces,
5 one might appeal more to some sets of consumers than
6 others. They run on different operating systems. So,
7 there is different platform preconditions for both
8 pieces of software, both software programs to operate,
9 but there is high overlap. Basically all modern Windows
10 applications have a DOS shell that you can go out to and
11 run the DOS program with. So, there is a high overlap,
12 but all of these can factor into the reasonable
13 substitutability or reasonable interchangeability
14 calculus.
15     Then on the supply side, you can identify
16 structural barriers to entry. For example, if a firm
17 with market power controls some of the preconditions for
18 either of these programs to operate.
19     But what we might need more structure on -- all
20 of these inquiries are fairly familiar, and whether you
21 are analyzing flexible wrapping materials or software
22 products, these are familiar modes of analysis to us
23 except possibly for the user purpose. How do you define
24 the user purpose for which a software product is used?
25 What is the appropriate level of abstraction?

38
1     Well, software engineering provides us a tool
2 for identifying the user purpose for a software product
3 at what I believe is the right level of abstraction.
4 So, if you look at this, this is called the essential
5 use case, and this is a way of describing the
6 functionality of a software product in terms of what the
7 user intends the system to do and how the system
8 responds to that intention. Does it meet its
9 responsibilities?
10     So, there are many ways of describing a web
11 browser. You could operate it, you could select items
12 with a mouse, you could use a trackball, you could use
13 voice. At this level of abstraction, those design
14 choices do not matter. The code that supports those
15 designs and implementations do not matter. All that
16 matters is what from the user's point of view is the
17 purpose supported. The precondition matters, and the
18 user intention system responsibilities matter. So, that
19 is the appropriate level of abstraction.
20     So, what I argue is that the box containing the
21 software and documentation, this Windows 98 item that
22 Microsoft markets, competes in at least two relevant
23 product markets, and both of the relevant product
24 markets that were described in the tying analysis, and
25 those are technically end use segments, one of which is

39
1 providing platform software that can be pre-installed to
2 meet the preconditions to run the Windows 98
3 applications; the other is providing legal and
4 technological support for performing web transactions in
5 the manner that I have described.
6     The best analogy to this is not self-repairing
7 copiers or cameras but two services provided through one
8 facility. Just as in Jefferson Parish,
9 anesthesiological and operating surgical services are
10 provided on the same operating table but the patient
11 does not own the operating table, the same facility, the
12 code on the CD-ROM, is the same facility through which
13 those services are provided. So, in a very real sense,
14 the service conception of software products is already
15 here even though, as Dean Schmalensee says, this sort of
16 network-centric approach is not quite with us yet.
17     So, these end use segments are properly
18 conceptualized in terms of the Guidelines as price
19 discrimination markets. As former Chairman Pitofsky
20 points out, Cellophane was probably not susceptible to
21 captive end use segments for -- the end use segment for
22 wrapping cigarettes was probably not captive because of
23 arbitrage; however, DRM in the area of software is very
24 powerful in preventing arbitrage, and in particular, as
25 Professor Felton showed during the trial, the end use

40
1 segment for web browsing was particularly captive
2 because DRM was available to reduce the quality or
3 eliminate that functionality altogether.
4     So, we can extend this idea of a price
5 discrimination market, of course, to quality-adjusted
6 price discrimination markets, and that brings in
7 Professor Felton's analysis.
8     So, what are the benefits of this approach?
9 Well, I claim that if we define markets in this way,
10 what we end up with is competition recognized to design
11 the product that best supports each software
12 functionality for which a market exists. We come up
13 with the competition to support a given essential use
14 case, to make the system responsibility best meet the
15 user intentions, and this is a classic definition of
16 usability of products in general and of software
17 usability specifically, and the human-centric vision of
18 Michael Dertouzos, another witness in Microsoft.
19     In particular, in markets characterized by
20 strong network effects, this leads to the recognition of
21 harms to competition in the form of foreshortening of
22 the already limited competitive windows that are
23 available for product competition. It leads to a
24 software developer-centric understanding of freedom to
25 innovate, another slogan from the Microsoft trial, in

41
1 that each software developer is free to use the code
2 that is to be executed when a user chooses its software
3 product for a particular purpose, and design choices are
4 made by the software developer, not by courts or
5 monopolists. So, there is further reading on my web
6 site if you are interested.
7     Thank you.
8     (Applause.)
9     DR. WERDEN: Bob Lande.
10     DR. LANDE: Thank you very much, Greg.
11     The title of my remarks is Market Power Without
12 a Large Market Share: The Role of Imperfect Information
13 and Other Consumer Protection Market Failures.
14     There actually are two very different sources of
15 market power in antitrust cases. The first is
16 traditional market share-based market power. Market
17 power in antitrust cases can also come, however, from
18 significantly imperfect information, deception,
19 asymmetric information, or other sources of market
20 failure that are more commonly associated with consumer
21 protection violations.
22     In antitrust cases, these consumer protection
23 market failures are present, and market power can rise
24 even if no firm has a market share large enough for a
25 finding of traditional market share-based market power.

42
1     However, instead of traditional end use
2 consumers being victimized, the victims of this
3 deception or imperfect information are businesses.
4 Since this can result in harm to competition in entire
5 markets, including higher prices, and these harms will
6 not be prevented by competition in the relevant market,
7 they quite properly give rise to antitrust violations.
8     Now, the consumer protection types of market
9 power have in theory been part of mainstream antitrust
10 for decades, and it certainly is used from time to time
11 in current antitrust cases. The purpose of my talk
12 today, however, is to urge that it play an even larger
13 role in the day-to-day world of antitrust, perhaps
14 almost as prominent a role as this type of market
15 failure plays in consumer protection cases.
16     At the end, I will discuss some of the
17 implications that could arise for antitrust, and if we
18 grant this source of market power the attention it
19 deserves, in addition to having an effect on how we
20 assess market power, it also could have important
21 effects on related antitrust areas as market definition
22 and entry analysis.
23     To begin with, all market power requires a
24 market failure. Now, this is true for market power that
25 comes from having a large market share. In the

43
1 antitrust world, when we say "market power," we almost
2 always mean market share-based market power that gives a
3 firm the power to raise price, and, of course, a firm
4 can only have a traditionally defined market power if it
5 has a market share of 60 percent or 90 percent or
6 whatever percentage you think is large enough.
7     Of course, even if it has such a large enough
8 critical market share, it only has the power to raise
9 price for a significant period of time if entry is
10 difficult and certain other conditions are met. Even a
11 large market share, in other words, only gives a firm
12 the power to raise price when there is a significant
13 market failure. Imperfections in the marketplace
14 involving the role of capital or time lags and other
15 market failures can give a firm the power to charge
16 super-competitive prices for a significant period of
17 time.
18     In addition to that traditional market power, a
19 firm can attain the ability to raise prices from the
20 types of market failures usually associated with
21 consumer protection violations. The most common of
22 these are coercion, undue influence, deception,
23 incomplete or asymmetric information, or unreliable,
24 uncertain or overly complicated information.
25     Now, this list of what I am calling consumer

44
1 protection market failures is really not all that
2 different from the type of market failures that protects
3 a firm's monopoly market share; however, consumer
4 protection problems occur inside the head of the
5 ultimate consumers. That is, the consumer protection
6 problems from deception, et cetera, indeed do occur
7 inside the heads of the ultimate consumers of these
8 products.
9     However, by contrast, corporate officials also
10 can be victimized by deception or imperfect information.
11 Sometimes this will affect only that corporation, but
12 sometimes it can hurt competition in an entire market.
13 It is crucial to note that these violations can occur
14 even if the firm committing the act in question does not
15 have a monopoly market share. We, of course, prosecute
16 a firm for fraud even if it is not a monopoly. We, of
17 course, prosecute firms for fraud even if 80 percent of
18 the companies in that particular market are honest. The
19 same thing should be done, and sometimes is done, when
20 these consumer protection market failures give rise to
21 antitrust violations. This can happen even if the firms
22 in question do not have a traditionally large market
23 share at the time of the alleged violation.
24     To show how this is, in fact, a part of
25 mainstream antitrust, I am going to very briefly discuss

45
1 three very well-known antitrust cases, Kodak, Rambus and
2 Jefferson Parish. Each involved an alleged antitrust
3 violation by a firm that did not before the violation
4 have a monopoly market share as traditionally defined.
5 Each case alleged, however, a market failure that is
6 more often than not associated with a consumer
7 protection violation, such as overly complicated
8 information, a mistake or unexpected change in corporate
9 policy, third-party payments or deception. Each
10 presented allegations which, if true, could have
11 resulted in antitrust harm.
12     Let me start with Kodak, because it is almost
13 certainly the antitrust case that most prominently
14 stands for the proposition that market power can arise
15 from information that is imperfect or overly
16 complicated. As most of you know, Kodak involved that
17 firm's requirement that its customers purchase a firm's
18 maintenance service in order to obtain its spare parts.
19 Kodak's tying is of special interest because it had only
20 20 to 23 percent of the market for sales of copier
21 machines and thus would not be considered to have market
22 power under traditional standards.
23     The key to the court's decision, of course, was
24 its concern over a possible change in Kodak's policy
25 that had been unanticipated by its customers. Another

46
1 important issue is the customers' inability to calculate
2 the life cycle pricing of their copier repairs and spare
3 parts. As you know, due to a lock-in caused by the
4 transaction cost of shifting to different copiers,
5 purchasers became vulnerable to exploitation from
6 Kodak's tying arrangements.
7     This case is significant because it reminds us
8 that it was possible for purchasers that were
9 businesses, no traditional end use consumers, to be
10 vulnerable to information imperfections. Just because
11 businesses are involved, we should not assume they
12 always will possess information perfect enough to ensure
13 a competitive outcome, or that a market that seems to be
14 competitive would assist in terms of traditional market
15 shares inevitably will supply the necessary information
16 to the marketplace in a timely manner.
17     My second example is Rambus and similar cases
18 alleging the deception of standard-setting
19 organizations, and I promise, Tom, to be very general
20 about this and say the word "alleged" a lot, okay? Two
21 minutes of "alleged."
22     A firm that has secured or knows it is about to
23 secure a patent on the intellectual property covered by
24 a standard might be able to misrepresent to a
25 standard-setting organization that no such patent

47
1 exists. This could induce the adoption of technology
2 that relies on the patent and thereby greatly increases
3 its value. The firm might be able to wait until the
4 industry has committed itself to the standard and then
5 to assert its patent rights.
6     The FTC's case in Rambus involved essentially
7 these allegations. The FTC alleged, in effect, that
8 Rambus was guilty of illegally monopolizing the relevant
9 markets even though the company might have had no market
10 power before the deception was made if market power were
11 traditionally defined as requiring a huge market share
12 of a rigorously defined market.
13     Moreover, it would have been very difficult to
14 determine defendant's market share at the time of the
15 alleged deception -- Dr. Williams talked about some of
16 these issues -- because at the time of its alleged
17 deceptions, its patents, or perhaps some other firm's
18 patents, could have become crucial or could have become
19 worth very little depending upon the actions of the
20 standard-setting organizations.
21     But even if Rambus' pre-deception market power
22 was uncertain if assessed under a conventional approach,
23 the FTC alleged that it had the power to deceive the
24 standard-setting organization in a manner that gave
25 itself post-deception monopoly power.

48
1     Finally, I will talk for just a minute about
2 Jefferson Parish, because this case raised the
3 possibility that market power that can flow from what I
4 am calling consumer protection violations can come from
5 market failures other than imperfect or deceptive
6 information. Now, Jefferson Parish did reject a finding
7 of market power by a firm with 30 percent of the market.
8 It held this was insufficient despite the existence of
9 market imperfections such as high transaction costs, the
10 cost of patients getting to different hospitals, and the
11 prevalence of third-party payments.
12     So, this case maybe stands for the proposition
13 that there is a 30 percent safe harbor, at least among
14 sellers, in these cases, but it also established that
15 market failures other than imperfect or deceptive
16 information can be crucial to a court's market power
17 determination.
18     Since I have given you three cases, now let me
19 give you three implications of results that might arise
20 if the antitrust world takes these ideas a bit more
21 seriously.
22     Imperfect information and all these other
23 transaction costs are everywhere. A crucial issue,
24 however, is how significant they have to be before they
25 constitute a market failure that should affect antitrust

49
1 decision-making. These are extremely difficult
2 evaluations, as is the assessment of traditional market
3 share-based market power. If antitrust were to take
4 these principles more seriously than it does today,
5 however, they would have profound effects on the
6 analysis of market power and also the related areas of
7 market definition and entry.
8     First, market share requirements for market
9 power can change. As I said, Kodak only had 20 to 23
10 percent of its relevant market. In today's antitrust
11 world, of course, it is almost inconceivable that a firm
12 with double this market share would be found to have
13 traditionally defined market power, yet if the
14 allegations in Kodak were true, competition in the
15 market did not protect consumers adequately, and the
16 harms to consumers were serious.
17     A similar implication is that we should be more
18 cautious about establishing substantial market
19 share-based safe harbors in the Merger Guidelines and
20 Joint Venture Guidelines and consider using the existing
21 market share screens more strictly.
22     A second implication is that markets should be
23 defined differently, sometimes more narrowly. Imperfect
24 information can cause more narrowly defined relevant
25 markets because it could effectively prevent customers

50
1 from turning to certain potential substitutes. Some
2 customers might not know of an option's existence. If a
3 significant percentage of potential consumers of plastic
4 conduits, student loans, nonfluorescent light bulbs, you
5 name the product, were unaware of the existence of a
6 close substitute, perhaps a close substitute should not
7 be considered to be within the same relevant product
8 market.
9     Moreover, some customers might not realize that
10 a certain product is a cost-effective substitute, and
11 for other customers, the transaction costs of finding
12 another choice or customers' beliefs about the size of
13 these transaction costs might be so large that the firm
14 in question has some degree of pricing freedom. To
15 investigate these questions, we should attempt to
16 ascertain the information about the products in question
17 that was actually in the minds of potential customers,
18 rivals and entrants. This will tell us whether products
19 could effectively work as substitutes.
20     All this could lead to markets being defined
21 more narrowly and to larger shares being imputed to the
22 firms within these markets. This could sometimes have
23 the effect of making it more likely that a firm will be
24 found to have market power.
25     The final implication is that entry analysis

51
1 also could be affected significantly. Currently, entry
2 that takes place within two years is considered easy and
3 short term; however, when we compute this period, we
4 should not assume that the would-be entrants quickly
5 spot the profit opportunity and instantly make the
6 corporate decision to enter. This certainly is not
7 always true, yet these factors are not discussed in the
8 Merger Guidelines.
9     Moreover, the 5 to 10 percent test for entry and
10 market definition would have to be modified, because
11 potential entry and customer reactions to a price rise
12 should only count if they knew the rise was due to
13 market power. By contrast, perceptions if prices rose
14 due to increased costs would allow firms to increase
15 prices without as much fear of entry.
16     Suppose potentially entering firms did not
17 realize that prices rose due to an increase in market
18 power but instead believe that prices rose due to cost
19 increases. How sure will potential entrants be that
20 there will be super-competitive profits to be earned in
21 that market? If they believe the entire price increase
22 might well have been due to cost increases, they would
23 be very reluctant to enter. So, these market
24 imperfections could mean that a price increase due to
25 increased market power would not cause entry; thus, the

52
1 likely test for entry would be affected as well as the
2 timely test.
3     Now, in conclusion, we all understand that no
4 plaintiff has won an antitrust case at the Supreme Court
5 in more than a decade. Also, the expansionist portions
6 of some of the cases I have cited were mostly discussed
7 only as possibilities, and even those possibilities have
8 been largely ignored by many recent court decisions.
9 Nevertheless, it is true that consumer protection laws'
10 assumptions about consumers' capabilities,
11 vulnerabilities, and needs sometimes should apply to
12 businesses as well. These ideas' potential has not been
13 forgotten, of course, as Rambus and related cases
14 demonstrate, and the more serious consideration would
15 also be consistent with the way that we approach
16 potential consumer protection violations.
17     It also would be sound public policy to take the
18 potential of this form of market power more seriously.
19 Deception, imperfect information, and other consumer
20 protection problems, when they have market-wide effects
21 and are not likely to be prevented by competition in the
22 relevant market, should give rise to antitrust
23 violations. This is in part because they can cause harm
24 in addition to higher prices, including allocated
25 inefficiency and umbrella effects. Antitrust remedies,

53
1 including treble damages, are, indeed, appropriate for
2 these situations.
3     For these reasons, as the agencies contemplate
4 future dominant firm cases, they should give more
5 attention to the possibility that so-called consumer
6 protection market failures might create market power
7 even in relatively unconcentrated markets and by
8 defendants with a relatively modest market share.
9     Thank you.
10     (Applause.)
11     DR. WERDEN: Alan Silberman.
12     MR. SILBERMAN: Good morning.
13     Having listened to the last four presentations
14 closely, I am now fully convinced that I am a thorn
15 among the lilies, and I will start with an obvious
16 disclaimer. I am not an economist, I am not an
17 academic, I do not do research, because at that point,
18 all my biases would be able to be tested against the
19 facts, and it would also, of course, limit my ability to
20 represent inconsistent views for different clients, so I
21 am left to focus truly as a practicing lawyer,
22 particularly a practicing lawyer who deals with problems
23 of distribution, distribution systems, franchise systems
24 and related after-markets.
25     In that capacity, I confront a repeated

54
1 challenge. I look at Section 2 cases, both complaints
2 and interim opinions and final dispositions by
3 particularly district courts but also sometimes courts
4 of appeal and perhaps more in the great heartland of the
5 country, that is, the area between the Delaware Water
6 Gap and the Pacific Coast where there is perhaps a
7 little more mischief or misunderstanding, let's say,
8 about antitrust than there is in Washington. I look at
9 those cases, and I have a sense, particularly in private
10 antitrust litigation, that labels and key words that are
11 used in Section 2 of the Sherman Act are being used and
12 misused in ways that I find problematic and that the
13 result is both cost to litigants and overall cost to the
14 system, because we are using the judicial resources
15 excessively for matters that really do not necessarily
16 fit or should not fit within Section 2 private
17 litigation.
18     The sense I have is that we are in this problem
19 because all of our high-level discussion of
20 monopolization, market share, market power, fails to get
21 put inside a coherent structure that can be understood
22 with a high degree of confidence by ordinary people.
23 Now, perhaps that has just excluded everyone in the
24 room, but I believe that that is a key public policy
25 goal, and the ordinary perception of monopolization is

55
1 simply you are too big and you do bad things, there must
2 be something wrong with that. Clearly that is not what
3 the last four speakers exactly have been talking about,
4 Bob Lande perhaps to the contrary.
5     Let me give you some examples of what troubles
6 me, and I confess at the beginning that I focus on
7 things, you know, in an excessively simple way. There
8 are cases that I see that involve unfairness deception
9 that have exclusionary effects. That is sort of what
10 Bob was just talking about. Conwood is a perfectly good
11 example of that. It is terrible behavior. Nobody
12 doubts that it is terrible behavior. The question is,
13 was that a Section 2 case or was it an unfair practice
14 case? Was it a case that the Federal Trade Commission
15 should have taken up under Section 5? There are all
16 sorts of other possibilities other than monopolization.
17     That is not to say that you cannot have a good
18 Section 2 case where you also have bad behavior.
19 Certainly you can. But if you look at the facts of
20 Conwood, you see extraordinary things where market share
21 is increasing, where there is no exit, where all sorts
22 of data support the conclusion that competition was
23 still ongoing, but you had extraordinary bad behavior.
24 I find myself troubled by those kinds of cases.
25     The second category, cases where, as we have

56
1 already noted, market share does not always indicate
2 that there is exercisable market power. I will give you
3 some examples of things that I encounter. One very
4 simple one is the problem in the distribution system of
5 the wholesaler. The wholesaler represents two, three,
6 four competitors but distributes products to like
7 outlets, so the wholesaler does a wonderful job. The
8 wholesaler has 95 percent of all the sales in a
9 geographic area. In fact, the wholesaler acts to
10 exclude his remaining competition, buys up the other 5
11 percent or says to the suppliers -- each individually,
12 of course -- says, "I want an exclusive." Now he has
13 got 100 percent market share, but is there market power?
14     I will give you two answers for that. One is
15 the minute that that wholesaler begins to try to follow
16 strategies of raising price and reducing output and
17 thereby reducing the sales of his principal, he is out
18 of business, because the principal has options. There
19 are no barriers to prevent manufacturers from creating
20 relatively quickly ways around that wholesaler,
21 notwithstanding the fact that he has 100 percent market
22 share. Now, if you have that situation, you do not have
23 market power. The market share there is simply an
24 indication of good performance by the wholesaler.
25     Another example that is not a wholesale

57
1 situation, where there is no barrier to entry, entry is
2 possible within six months. Customers for this product
3 are largely big companies, the Office Max, Office Depot,
4 Staples, this category. The company selling the product
5 does a wonderful job. The customers like it, end users
6 like it, and so on. There is no entry. Entry is
7 possible, but there is no entry, and, indeed, given the
8 performance, even price might even increase a bit. If
9 we look at this purely in terms of numbers, we would
10 say, well, is there a problem there? And yet we all
11 know there is no problem there, because there is some
12 other factor that will ultimately discipline the
13 exercise of market power. So, we have to keep
14 remembering that there are those situations and that
15 they are real world -- they are not econometric
16 models -- they are real world situations.
17     The third example involves situations where you
18 are challenging conduct as of today when, in fact, the
19 competitive forces that we expect to have had in play
20 were ones that played out a year before, six years
21 before, some other period. Let me give you the simplest
22 example. The franchise situation where for years we
23 went through this discussion, particularly in
24 franchising but in other areas, too, of lock-in as a
25 substitute for market power, but lock-in is nothing more

58
1 than relational power created by the contract, and the
2 question then is, was the formation of the contract
3 subject to appropriate competitive forces? And if it
4 was, then we shouldn't have had to worry about what
5 today's market power perception is.
6     An example of that, you know, go back to Kodak,
7 because in Kodak, Kodak is not able to say that my
8 initial transaction was subject to market power, not
9 only because of problems of life cycle pricing and
10 information failure and so on, but because Kodak did not
11 tell anybody that -- maybe they did not know -- but they
12 did not tell anybody that downstream, we are going to
13 some years later decide that we are going to get rid of
14 the independent service organizations.
15     So, Kodak is in a position where it is hoist on
16 its own guitar. It cannot argue that, "Well, the time
17 for looking at the proper exercise of market power was
18 back when we first made these contracts." It tries to
19 do that by saying, "Look, I was subject to competition
20 with others," but that was complicated by their own
21 failure. But if you look at post-Kodak cases, like PSI
22 and then the franchise cases like Queen City and Wilson
23 versus Mobil Oil, you find that the courts are saying
24 very clearly, if the information was disclosed at the
25 beginning of the transaction, even to the point where it

59
1 is very general -- because in both Queen City and in
2 Wilson versus Mobil Oil, which is Judge Vance in New
3 Orleans, there was the smallest amount of information.
4 There was no projection that said, "Well, you know,
5 because of these restrictions that you are agreeing to
6 and the relations that are created, we will be able to
7 raise price three years later." It just said, recognize
8 this is -- this is the situation.
9     Now, number four, confusion about relevant
10 markets in measuring monopoly power. I got onto this
11 one in two ways. One is similar to the franchise
12 discussion we have been having where when a franchise is
13 first issued, what is the competitive market that we
14 should be looking at? We should be looking at all
15 alternatives that the individual had for capital,
16 personal time, et cetera. The fact that they bought a
17 widget franchise does not mean that the market is
18 widgets, and the fact that the widget franchisor has 83
19 percent, 22 percent, 99 percent of a market, is
20 irrelevant to the decision. In fact, that is a good
21 example potentially of a 1/N market where you just take
22 all the various alternatives and treat them all equally.
23 You do not necessarily measure that issue by looking at
24 the market share of the franchisor, because what you
25 really should be asking is a question of what are the

60
1 constraints that affect the formation of the contract.
2     This is just a sidebar on that, if you go to the
3 EU, you see that what they want to do, in single-brand
4 distribution systems, they want to aggregate all the
5 sales at the retail level. That is possibly reasonable
6 in some situations in measuring market share, but it is
7 certainly not reasonable in situations where the
8 retailer or wholesaler or both have the ability to
9 control output and price, and therefore, can actually
10 alter the consolidated market share by their own
11 tactics, and there is no point to impute that upstream.
12     Again, what is the question that is being missed
13 in all of these situations? The question is, what
14 constraint are we relying on in order to measure
15 monopoly power? And that is really the burden of my
16 entire pitch.
17     Number one, if we are going to have a coherent
18 way of organizing this, we ought to begin at the
19 threshold by recognizing that there is a semi-safe
20 harbor that we always need, semi-safe because it never
21 excludes the possibility of reasoned inquiry through
22 study and possible action by an administrative agency,
23 but we are not going to have public resources used,
24 particularly in private litigation.
25     Second, we need to identify and articulate the

61
1 constraints that we rely on in each set of
2 circumstances. That is the starting point. What is it
3 that we expect will prevent the undue exercise of power
4 in the future? Once we have articulated that, we can
5 then test whether the conduct at issue affects that
6 constraint. If it does not affect that constraint, as
7 in the wholesale case or a couple of the other ones that
8 I mentioned, we just do not have an issue.
9     What that leads to, the third point, is what
10 practicing lawyers and businesspeople need, as a crying
11 need, is a decision tree that they can look at that will
12 help them understand a rational sequence of a Section 2
13 analysis and the points at which certain types of
14 behavior can be ruled out, at least from the standpoint
15 of private antitrust litigation.
16     Last, I believe that going along with this is a
17 need for continued and if not increased competition
18 advocacy by the agencies, which means not only being
19 able to guide courts and counsel in terms of where there
20 are problems, where there are not problems, and the
21 methods by which we test that, but also considering
22 amicus briefs in district courts, helping to guide
23 courts in dealing with problems that are plenty
24 complicated, as you obviously know from the last four
25 presentations, and even to the point of recognizing that

62
1 there may be cases for primary jurisdiction where
2 district courts ought to be taking Section 2 claims and
3 referring them to the Federal Trade Commission and
4 asking the Federal Trade Commission to parse certain
5 basic questions. That will obviously require increased
6 funding, increased personnel, but I think is a direction
7 we ought to be considering.
8     Now, please understand, I do not want to chill
9 or limit the scope or depth of any of the inquiry that
10 the other speakers have suggested. What I do suggest
11 that we do is take one step back and try to frame our
12 discussion of Section 2 of the Sherman Act with plain
13 speaking and commonly understood language if not also
14 common sense.
15     Thank you.
16     (Applause.)
17     DR. WERDEN: All right, we are going to take a
18 let's say 10-minute break right now, then we will come
19 back for a discussion among our panelists.
20     (A brief recess was taken.)
21     DR. WERDEN: Okay, let's get started. We are
22 going to spend just a few minutes, I hope, giving the
23 speakers the opportunity to say anything that they are
24 just aching to say given the remarks of any of the other
25 speakers. I know at least one of our panelists is

63
1 aching to say a couple of things about the Microsoft
2 case.
3     DR. SCHMALENSEE: Let me just say a word, if I
4 may. Andrew is, of course, right. The way to define
5 software products is functionality and rights. I find
6 it interesting that Microsoft is blamed for being "it is
7 only code" since the number of times I was told, "Do not
8 call Internet Explorer a browser, it is the browsing
9 functionality in the Windows software product," which,
10 of course, no one ever said out loud.
11     In that case, I would say both sides were
12 inconsistent as between code and functionality, and I do
13 not think that is why there was not a market, a
14 satisfactory browser market, introduced. The Government
15 just did not bother to put up a witness who said, "This
16 is the browser market." Had they done that, I think
17 despite the confusion, there would have been a market.
18 In any case, the whole tying analysis and the question
19 of removal of code and the commingling error that was
20 made was because of the confusion between code and
21 functionality.
22     The proper question was, was it a violation of
23 tying browser functionality to this product, regardless
24 of how you did it, and should Microsoft have provided a
25 way for consumers easily to have disabled the

64
1 functionality? You can get to the core questions
2 without the code confusion, and Andrew has the right way
3 to put it, clearly. It is about functionality.
4     Apple's operating system and Windows both
5 provided browser functionality out of the box. They did
6 it in different ways to the end user. It shouldn't
7 matter.
8     DR. WERDEN: Anybody else dying to say
9 something?
10     Okay, Bob Lande.
11     DR. LANDE: Sure. I would like to take a
12 challenge to step back for a second, ask the larger
13 question, hopefully express it in easy-to-understand
14 terms.
15     What is antitrust? What is consumer protection?
16 That is, you have got cases like Conwood where there was
17 coercion, and is that an antitrust issue or should we
18 let some other area of law deal with it? How about a
19 case like Kodak? Is that antitrust or should we say,
20 "No, this is not antitrust, let consumer protection law
21 or something else deal with it"?
22     I will give you a proposal for how we tell the
23 difference between antitrust law and consumer protection
24 law, and this a plug for this article which I will sell
25 you at marginal cost, I think, or marginal -- whatever,

65
1 you can have a copy for free if you want it.
2     We propose that antitrust is about distorting
3 options in the marketplace, an artificial distortion of
4 the options that competition otherwise would have
5 presented, whereas a consumer protection violation
6 detrimentally affects consumers' inability to choose
7 from among the options presented by the marketplace.
8     So, in a case like Conwood, if the torts were
9 bad enough to affect competition in the marketplace,
10 that is, they did not just destroy a couple of racks of
11 a, you know, competing brand of cigarettes or smokeless
12 tobacco, but it was enough to affect competition in the
13 marketplace, then it is going to be affecting choices in
14 the marketplace, and it certainly belongs in the world
15 of antitrust.
16     Tying is sort of right on the border. It
17 affects choice in the marketplace, because it says, if
18 you want to buy one product, you have got to buy the
19 other product. On the other hand, the Kodak-like
20 violations certainly are consumer protection as well.
21 So, tying is right in the middle, but something like
22 Conwood certainly belongs in the antitrust world.
23     DR. WERDEN: Okay, thank you.
24     We are now going to have a round of questions to
25 the panelists which the other panelists are invited to

66
1 comment on as well and on the answers given thereto, and
2 we will go down the line here starting with Dick.
3     I enjoyed and pretty much agreed with everything
4 you said on assessing the competitive effects, but
5 mostly what you have told us is this is tricky. That is
6 true. You implied, if not actually said, that error
7 costs can be high and that errors are likely because it
8 is all pretty tricky.
9     If I have got you right, then, I am wondering,
10 so, what do we do about it? And I will put to you, is
11 what we do about it to minimize the extent to which
12 judges and juries have to actually figure out tricky
13 questions by structuring a process to minimize the need
14 to do that, for example, with market share safe harbors,
15 conduct-based safe harbors, and burden-shifting
16 approaches, in order to put off as much as possible as
17 much tricky analysis as you can put off?
18     DR. SCHMALENSEE: I live in fear of unstructured
19 rule of reason proceedings because they do put you into
20 coin-flip country, so I am a fan of either clear rules
21 or putting structure on the inquiry where we know how to
22 do it. My comments pointed to some of the areas in
23 which I do not know how to do it. If you say that the
24 real question is, "Boy, this is a bubbling caldron of
25 technological competition, there is a lot of innovation

67
1 going on, will it continue? Can you count on that
2 happening to discipline short-term power over the next
3 five-ten years?"
4     There are things I would look at. I would look
5 at spending. Are people spending money to try to
6 displace the leader? Unfortunately, those data are not
7 always available. I do not know how to compute
8 meaningful shares. People make mistakes. Not all
9 technologies succeed.
10     Yes, I would like rules and I would like
11 structure on the analysis where possible. There are
12 some areas where I am not sure I know how to impose good
13 rules, and I am afraid in those areas, you have to let
14 dueling advocates duel. It does not make me
15 comfortable, and I hasten to add, the recipe is not that
16 the Antitrust Division and the Federal Trade Commission
17 should avoid intervention, because that is wrong, too.
18     DR. WERDEN: Okay. Well, it seems to me the way
19 people actually do these things is when the facts are so
20 hard they cannot figure stuff out, it all comes back to
21 what they believed before they looked at the facts, and
22 if you read judicial decisions, I think that is what
23 they are all saying, too. So, when you have one of
24 these bubbling caldrons of technology, are you supposed
25 to believe that the market will fix itself or are you

68
1 not supposed to believe the market will fix itself?
2     DR. SCHMALENSEE: I think the easiest thing and
3 the most plausible thing for judges to do -- and this
4 was certainly done in Microsoft -- is to say, "This is
5 all hypothetical. You are telling me that things might
6 happen, but I am going to make the assumption that the
7 world as I see it will persist. Absent, evidence that
8 entry barriers are low, this is what it looks like, and
9 I am going to deal with it on its face."
10     That is probably better on average as an
11 assumption than the opposite, which is, "I assume that
12 these are just fleeting bubbles of market power that
13 will soon go away because they have gone away in the
14 past." As I say, bursts of innovation do tend to be
15 limited in time, but, of course, an assumption that they
16 will be short lived will occasionally be quite wrong.
17     DR. WERDEN: Thanks.
18     Any other panelists want to comment on that?
19     MR. SILBERMAN: Yeah, let me just go back to
20 dueling advocates first. Dueling advocates is a bad
21 model, because in litigation, when two advocates duel,
22 they do not get hurt. The ones who get hurt are the
23 clients and perhaps the economy. The advocates love it.
24 I enjoy dueling, but I think -- and I was with you up to
25 the point where you said minimize the need for tricky

69
1 analysis and then say but now we should do that by safe
2 harbors and presumptions.
3     I know this requires major change, but I think
4 you have to structure it by, A, getting a whole set of
5 questions that are too tricky and too difficult and too
6 uncertain out of the courts. You have to make the
7 standard for Section 2 violation a higher degree of
8 certainty and then leave open the remaining inquiry.
9 Some issues, like functionality, where it is clear that
10 something is an effort to improve functionality of a
11 product, I think we just cancel the inquiry.
12     I mean, you know, Henry Ford originally did not
13 put headlights on the Model T, and then he put
14 headlights on the Model T and made a design decision
15 that was integral to the car. Now, I guess we could
16 have applied a tying analysis to that, but we were all
17 convinced I think that that was integral to the
18 function. Microsoft was probably less convinced, but
19 that does not mean that we should be turning judges and
20 juries loose on that very difficult question.
21     DR. WERDEN: I would only comment that what you
22 are describing there is precisely what I mean by a
23 conduct-based safe harbor. The conduct of putting
24 headlights on the Model T is conduct we could place in a
25 safe harbor and never inquire as to whether that is a

70
1 good thing or a bad thing for consumers.
2     MR. SILBERMAN: That one I would agree with, and
3 that would avoid also the semantic gamesmanship of
4 having to -- how you describe it. I mean, we did that
5 years ago with McDonald's and the alleged tie of the
6 real estate and the franchise, so we taught everybody to
7 say, you are not offering a trademarked franchise and
8 then requiring that they rent real estate. You are
9 offering an operating rights contract in which, of
10 course, in order to operate, you need to have both real
11 estate and intellectual property rights.
12     Okay, that was creative, but it is a waste of
13 resources for lawyers and clients to be devoting their
14 time to that kind of wordsmanship. So, I agree with you
15 on some things, yes.
16     DR. WERDEN: Okay. Dick has a look of
17 bemusement. Do you wish to comment?
18     DR. SCHMALENSEE: Well, I am just bemused that
19 you know for certainty that adding headlights to cars or
20 perhaps air conditioners to cars or perhaps
21 spellcheckers to word processors or graphics features to
22 spreadsheets are procompetitive, but adding browsing
23 functionality to Windows was anticompetitive. I think
24 competitive effects are a little bit hard to determine.
25     DR. WERDEN: Well, if your point is it is hard

71
1 to know how to draw these lines, you are absolutely
2 right. It is a hard problem.
3     DR. SCHMALENSEE: Then we are in agreement.
4     MR. SILBERMAN: Okay.
5     MR. WILLIAMS: So, what is a conduct safe harbor
6 then? I mean, if Microsoft -- I know that they
7 contemplated -- I do not want to speak for Dick, but I
8 know they at least contemplated putting virus protection
9 into the -- and my guess is, I am not -- I do not work
10 for Microsoft, but my guess is they decided not to do it
11 because they probably thought they would have an
12 antitrust case on their desk the next day.
13     DR. WERDEN: In some countries.
14     DR. SCHMALENSEE: They would have had a private
15 case.
16     MR. WILLIAMS: They would have had a private
17 case certainly. Again, I do not work for Symantec, I do
18 not work for Microsoft, but I am just going to take a
19 wild guess that Symantec would have sued.
20     DR. WERDEN: Well, the Microsoft Court of
21 Appeals in the en banc opinion drew a distinction which
22 is not easy to draw but can be drawn between entirely
23 new products and product design issues. It said, right
24 or wrong, that the issues that it had with Microsoft
25 were about product design, not about new products, and

72
1 while this is a tricky line to draw, it could be drawn,
2 and then you would end up litigating about which side of
3 the line you were on rather than something else. Is
4 that a productive exercise or an unproductive exercise?
5 That is the question.
6     DR. SCHMALENSEE: That is a tricky line.
7     MR. WILLIAMS: So, what did the safe harbor buy
8 you?
9     DR. WERDEN: I just told you what it bought you.
10 It bought you litigating about which side of the line
11 you were on rather than about whether consumers were
12 better off because Microsoft did X, Y and Z, which would
13 be hard to figure out, of course.
14     MR. WILLIAMS: Yeah.
15     DR. SCHMALENSEE: But I do not understand the
16 distinction between -- well, I would have to go back and
17 read the Court of Appeals' opinion, but I thought the
18 Court of Appeals in its first opinion basically said
19 product improvement is not a violation.
20     DR. LANDE: Right.
21     DR. WERDEN: Well, let's not talk about what the
22 Court of Appeals said in Microsoft.
23     Mike, question for you.
24     MR. WILLIAMS: Sure.
25     DR. WERDEN: I see that we get antitrust issues

73
1 in technology markets with some frequency, but I am not
2 so sure I see that we need to assign market shares to
3 analyze these things. So, can you give us something
4 more specific, what you have in mind about why a court
5 would feel the need to figure out what the market shares
6 would be in order to assess a competitive issue in a
7 technology market?
8     MR. WILLIAMS: Well, I can give you -- I would
9 like to give you a good one from the Rambus case, but
10 ERS was -- we were the consulting experts for the
11 Complaint Counsel, so I probably shouldn't talk about
12 that.
13     MR. KLOTZ: Can you illustrate it with UNOCAL?
14     MR. WILLIAMS: Well, I do not know -- the short
15 answer is no.
16     DR. WERDEN: Was not UNOCAL's share 100 percent?
17     MR. WILLIAMS: Well, no, I think that is right.
18 I think UNOCAL's share was 100 percent.
19     DR. WERDEN: Then an easy question.
20     MR. WILLIAMS: Okay, well, assuming there are
21 examples where -- for example, again, by way of full
22 disclosure, I probably should have said on the
23 Gemstar/Echostar case, I along with David Sibley and
24 Roger Noel were the experts for Echostar, Pioneer and
25 Scientific Atlanta. That was a circumstance where

74
1 Gemstar at least allegedly had monopolized the
2 technology for interactive program guides, but they
3 certainly did not have a 100 percent market share.
4     Now, there was -- Janusz Ordover was Gemstar's
5 expert. There was a big debate about what their market
6 share was. He thought it was maybe one-third of the
7 market, I thought it was closer to two-thirds, but it
8 certainly was not black and white. It certainly was not
9 a circumstance where anyone could look at it and say it
10 was 100 percent. I mean, even the plaintiffs did not
11 allege it was 100 percent. It was a more traditional
12 fight about whether it was one-third or was it
13 two-thirds.
14     DR. WERDEN: Are you talking about our case now?
15     MR. WILLIAMS: No, no, no, no, I am not talking
16 about the -- I am talking about the private case between
17 Gemstar, Echostar, Pioneer and Scientific Atlanta, where
18 Gemstar sued on patent grounds, those three companies
19 countersued on antitrust grounds, and there was a fight.
20 Does Gemstar have a monopoly position in the IP
21 technology market? And everyone agreed that they did
22 not have 100 percent. So, then it was a fight, what was
23 their share?
24     DR. WERDEN: It seems to me in cases like that
25 one and others, the really hard problem is one that you

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1 did not really talk about, and it is that you do not
2 know exactly what the intellectual property right means.
3 That has not been decided yet. You do not know, for
4 example, whether some other technology is infringing.
5     MR. WILLIAMS: Well, that is right, and, I mean,
6 again, not to focus too narrowly on the Gemstar case,
7 but in that case, Gemstar had sued every company that
8 had come out with a rival interactive program guide.
9 They actually had lost all the cases, but they announced
10 that they had over 200 patents and they were going to
11 keep suing people one at a time, and --
12     DR. WERDEN: And if I recollect, there was
13 considerable doubt about whether they were right in all
14 of this.
15     MR. WILLIAMS: It depends on who you ask, I
16 suppose, but --
17     DR. WERDEN: It always does.
18     MR. WILLIAMS: -- you are right. I mean, at the
19 level of, you know, what exactly was their technology
20 protecting, if Janusz was here, he would say there was a
21 big fight, for example, Gemstar did or did not have
22 blocking patents, okay, and they took a very fine line
23 and said, "We do not have blocking patents, but it is
24 impossible to make a commercially operational IPG
25 without violating our patents." That was their

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1 position.
2     So, now you ask, well, what exactly are they
3 protecting? Well, the plaintiff's position certainly
4 was that they monopolized a market for the provision of
5 intellectual property, the only intellectual property
6 that can be used to actually make a functioning IPG.
7     DR. WERDEN: Okay, thank you. Any panelists,
8 anyone have any comment on any of that? No? That is
9 fine.
10     Andrew, I am not sure where your analysis is
11 actually taking us. The concept of a price
12 discrimination market, of course, is at least a quarter
13 century old, and it does not get applied all that much,
14 but it certainly is applied by the agencies in merger
15 analysis quite a bit. So, when it comes to monopoly
16 cases, I took your suggestion to be that it applies in
17 exactly the same way, but would a court be a little more
18 skeptical about a price discrimination market in a
19 Section 2 case?
20     DR. CHIN: Well, my point on market definition
21 based on price discrimination was to ground this in the
22 existing approach. The agency guidelines do support the
23 definition of price discrimination markets, and by
24 extension, quality-adjusted price discrimination
25 markets, and this should counter the intuition that it

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1 might be seen as improper to see the same item, the same
2 box of Windows 98 participating in two distinguishable
3 relevant product markets, as I argue it actually did.
4     So, on the substantive point of where this is
5 taking us, if I could sort of return to our discussion
6 of the line-drawing, one special feature of the web
7 browser software product market -- or actually, there
8 are two. One is sort of its ancillarity. The features
9 that a consumer would be interested in in getting a
10 desirable web browser were very different than the
11 considerations that would apply to the choice of an
12 operating system, particularly if you are considering
13 when the installed base was formed several years before
14 the existence of the web. So, that ancillarity speaks
15 to the kinds of information deficiencies in the market
16 that, you know, result in the installed base opportunism
17 that really was attacked by the tying claim.
18     The other feature -- and this is a special
19 feature of the browser market, in particular -- is its
20 role in providing meta information about all the content
21 on the web, which include viruses and everything from
22 viruses to immensely valuable information products, and
23 to the extent that the computer scientists refer to it
24 as a web agent, it really does stand in the position of
25 an agent in terms of providing that meta information

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1 about the value of transactions that a user might
2 participate in on the web.
3     So, that is very specific to the web browser
4 sorts of information imperfection that I think pushes
5 browsers towards one side of the line, but it is things
6 like that, it is things like whether there is temporal
7 deferment of the purchase of the tied product, these
8 sorts of things that might provide some guidance as to
9 where to draw the line.
10     DR. WERDEN: Dick?
11     DR. SCHMALENSEE: Just a quick response.
12     I think this points in large part to the
13 absurdity that is now generally recognized of having a
14 per se tying law, particularly when it applies to
15 product design. We could have this argument all day
16 long. I would counter that every other operating system
17 provided a web browser; they just did it differently.
18 So, it is hard to say that it is inessential in any
19 commercial sense.
20     Its a general matter I am very nervous about,
21 using the tying law or any other law as a way to let
22 courts at product design decisions except in extreme
23 cases. There certainly are cases where product design
24 has been used as an exclusionary device, and I am not
25 saying one would never want to get at design decisions,

79
1 but boy, is tying law ever a blunt instrument for this.
2 "Have market power and you cannot add a feature" is not
3 a good way to address issues that are occasionally posed
4 by product design, and I would emphasize "occasionally."
5     DR. WERDEN: Of course, the Court of Appeals saw
6 things pretty much the way you do on this question, did
7 not affirm liability on the tying claim, held that the
8 per se rule would not apply in this case, and said you
9 guys figure this out, and it died.
10     DR. SCHMALENSEE: But it remanded in a way that
11 the Government could not effectively pursue the claim,
12 because it said you can do tying, but you cannot define
13 a market for the tied product. How could that work?
14     I think we still have this issue in tying law
15 that there is not a distinction between product design
16 that puts two features together and bundling by
17 contract, so to speak, and to my mind, that is a very
18 important distinction.
19     MR. KLOTZ: But how do we tie that back to our
20 issue today, to our issue of market power and market
21 definition?
22     DR. SCHMALENSEE: I am not sure we do, but it
23 came up.
24     DR. WERDEN: Bob, did you want to make a
25 comment?

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1     DR. LANDE: It was a bit overtaken by the
2 remarks, but I just wanted to say that it was the
3 exclusionary features of Microsoft that bothered some of
4 us.
5     DR. SCHMALENSEE: No, that is the issue.
6     DR. LANDE: Exclusive dealing arrangement, a
7 very different issue, of course.
8     DR. WERDEN: Yes, okay. While you are up, Bob,
9 a question for you.
10     DR. LANDE: Sure.
11     DR. WERDEN: Your discussion, unless I missed
12 it, never drew any distinction between market power and
13 monopoly power between Section 1 cases and Section 2
14 cases. Do you believe that the kind of market power you
15 were talking about is sufficiently durable to constitute
16 monopoly power and to give rise to a Section 2
17 violation?
18     DR. LANDE: Sure.
19     DR. WERDEN: You can stop there if you want.
20     DR. LANDE: Okay, okay.
21     DR. WERDEN: Okay.
22     DR. LANDE: Yeah. In other words, for antitrust
23 to worry about market power or monopoly power, it has to
24 be durable, and we could quibble over do you mean two
25 years, do you mean some other figure, but whatever the

81
1 relevant figure is, if it is not at least that figure,
2 then it is de minimus and trivial and we do not worry
3 about it, of course. Can imperfect information,
4 deception, give rise to that kind of a problem? Sure.
5     DR. WERDEN: Do you think it --
6     DR. LANDE: Oh, in your Section 1 versus Section
7 2, I only talked about Section 2 because that is what I
8 thought we were supposed to talk about, but --
9     DR. WERDEN: It was.
10     DR. LANDE: -- in Section 1, it happens all the
11 time. Think of the advertising restriction cases.
12 Lawyers cannot advertise, dentists cannot advertise, all
13 that kind of thing, durable problems in those markets
14 created by information problems.
15     MR. KLOTZ: But does that analysis enter the
16 question when the court is looking at does the firm have
17 monopoly power or does that monopoly power, as you are
18 defining it, enter in the competitive effects analysis?
19     DR. LANDE: If we are trying to figure out
20 whether other products, other firms compete with the
21 products in question, and how long does it take to enter
22 the market, then I think these issues of deception, in
23 the case of Conwood coercion, imperfect information,
24 would play a role in how long does it take firms to
25 enter the market, what competes with what, what do

82
1 consumers think competes with what, that should all be
2 part of the process.
3     DR. WERDEN: Anybody --
4     DR. SCHMALENSEE: Just a quick reaction.
5     I think it is worthwhile thinking about
6 information, but I think you cannot paint with too broad
7 a brush. I mean, it is well known that all consumers do
8 not have to be informed for prices to be affected.
9 Depending on the situation, it may be adequate for a
10 small number of informed customers to switch patronage
11 and drive prices into alignment.
12     That said, it may be possible to discriminate
13 against ignorant customers for a long time, and one may
14 want to worry about that. It is an interesting
15 phenomenon that when generics enter the market, the
16 prices of brand name, formerly patented drugs, tend to
17 go up, not down, suggesting power against uninformed
18 buyers, but I guess my sense is that these are probably
19 not typically phenomena that give rise to the level of
20 power that one talks about for a Section 2 case.
21     All of the Rambus allegations sound like
22 something that, could potentially give rise to Section 2
23 levels of power. I am not involved with the case, and I
24 am not familiar with it. I am not a fan of the Kodak
25 decision, and, I am glad it has not had the impact many

83
1 of us feared. So, I think by and large, these things do
2 not get you to the Section 2 level of monopoly power,
3 but, you know, one wants to keep an open mind.
4     DR. WERDEN: All right. Let me turn to Alan
5 Silberman.
6     You mentioned franchising several times and
7 mentioned a line of franchising cases which almost
8 uniformly have found for the defendant franchisors in
9 these tying and other scenarios, and it seems to me that
10 the courts have generally said, "The contract defined
11 the rights and responsibilities, you knew what the deal
12 was when you signed the contract, and if you got
13 exploited, it was your own fault, you should have
14 negotiated your way around that." It seemed to me that
15 these courts were saying that this might be different
16 from other cases because there was a formal contract
17 defining all these rights and responsibilities.
18     Do you have a similar view, or do you think that
19 there is nothing different about the franchise cases
20 than about other lock-in type scenarios?
21     MR. SILBERMAN: Number one, they got it right in
22 those cases with the possible add-on that it may not
23 have been the contract, it may have been also the
24 disclosures made at the beginning coupled with the
25 contract, but they got it right. So, there is no reason

84
1 to think about lock-in theory as a source of market
2 power in franchising or other distribution relations.
3     Then the question is, can that analysis carry
4 you into other kinds of cases and can you then say,
5 "Well, if, in fact, we are dealing with relational power
6 where we have a sense that there was a competitive
7 process, shouldn't we stop there and not worry about the
8 alleged anticompetitive effect today and simply direct
9 people to deal with these issues at the inception of
10 relationships?"
11     There I think there is room to take that line of
12 thinking and apply it more clearly in other cases, and
13 certainly I think lock-in theory, I do not encounter
14 people, you know, really arguing lock-ins anymore as a
15 source of market power, but essentially to stop the
16 anticompetitive rhetoric in cases that is purely based
17 on, well, either look what you are doing today or a
18 plaintiff claiming I have a civil right to be in
19 business for some segment of your business. In other
20 words, you have designed the product in a certain way,
21 you have succeeded, and now I want to claw back a little
22 part of it for myself.
23     In all those situations, we should be simply
24 responding the way the franchise cases do and say, "The
25 transaction was properly subject to competitive factors,

85
1 they were not impaired at the time the relationships
2 were established, and therefore, end of inquiry."
3     DR. WERDEN: Anybody have another view to add?
4 No?
5     Okay, we are going to do, as we sometimes do in
6 these cases, put up a couple of simple propositions.
7     Okay, we are going to start off simple. Since
8 we talked a lot about technology, and we like to start
9 with things we can agree on and then move from there --
10 consensus is good -- so we start off with the
11 proposition, "Innovation is a powerful force in
12 enhancing the well-being of consumers," and I doubt that
13 we are going to get a dissent on this, but we can
14 quickly move on if we do not.
15     Okay, not hearing any dissent, so, now what?
16 So, it seems to follow that antitrust analysis in the
17 Section 2 area should be concerned about protecting the
18 innovation process. Can we all agree on that as well?
19 Okay, good.
20     Okay, then the question is, well, how do you do
21 that? That is the hard one, okay, and, of course, this
22 line of logic leads some people to say, well, that means
23 you need to intervene a lot, and it leads other people
24 to say, no, no, no, that means you should hardly ever
25 intervene. Anybody care to weigh in on that debate?

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1     Yes, Alan?
2     MR. SILBERMAN: No, you do not put barriers in
3 front of people who are attempting to innovate by later
4 saying, "Well, you know, you guessed wrong," or, "It did
5 not really specifically enhance the well-being of a
6 consumer." It is the process. So, the principle ought
7 to be that where the evidence is that you are trying to
8 innovate and you are trying to, in effect, build a
9 better mousetrap, you are doing what we expect
10 competitors to do, and if you succeed, you should get
11 the reward, and if it turns out that you were somewhat
12 mistaken and there was not a direct consumer benefit,
13 the only time we should be very concerned about it is if
14 there is some collateral effect from what you are doing
15 that prevents some other kind of competition.
16     DR. SCHMALENSEE: Yeah, I think the issue is not
17 intervene a lot or intervene a little; it is intervene
18 with care, because this is a process we do not
19 understand terribly well, and avoid obvious pitfalls.
20 The most obvious pitfall is "the competitor, having been
21 urged to compete, must not be turned upon when he wins."
22 That is a natural impulse and is to be resisted not in
23 the face of any possible conduct but is to be resisted
24 since the reward for innovation and major innovation is
25 typically monopoly power for a time.

87
1     DR. WERDEN: Bob?
2     DR. LANDE: I agree with everything that both
3 former speakers said, but still, there is a difference
4 between innovating yourself and trying to prevent others
5 from innovating. There is a difference between running
6 faster to race and putting stumbling blocks deliberately
7 in front of competitors, but, of course, if you are just
8 running faster, then God bless you, and that is
9 wonderful with everybody.
10     DR. SCHMALENSEE: I have no dispute with that
11 statement.
12     DR. WERDEN: Before, Mike, you chime in, I think
13 we do all agree with that statement, but the question
14 is, so?
15     DR. LANDE: Right, right.
16     DR. WERDEN: Do you have anything to add?
17     DR. SCHMALENSEE: The answer is yes.
18     DR. WERDEN: So, what do you do about it?
19     MR. SILBERMAN: Be cautious.
20     DR. WERDEN: How do you draw the line?
21     DR. SCHMALENSEE: Carefully.
22     DR. WERDEN: Okay, we have one answer.
23     All right, we will turn it over to Mike.
24     MR. WILLIAMS: Okay, I wanted to suggest one
25 thing that Preston McAfee and I have talked about from

88
1 time to time, and again, I am not going to talk about
2 the Rambus case, but my point is going to be related to
3 the Rambus case, and that is a conduct that is -- so, I
4 am not an attorney, but so far as I understand it, it is
5 perfectly legal, and that is submarine patents, where a
6 company knows it has a or believes it has a patent that
7 covers what another company is about to engage in, stays
8 silent until the sunk costs are made, all the
9 investments are put in place, and then it holds its hand
10 up and says, "A-Ha, I gotcha."
11     Now, from an economist's perspective, that seems
12 at least arguably like anticompetitive conduct. I mean,
13 so far as I know, it is perfectly legal, but it is
14 certainly not procompetitive. In other words, it is
15 just an odd phenomena that somebody can have
16 intellectual property, keep it hidden, not -- well,
17 hidden in the sense that it is public that they have the
18 patent, if somebody, you know, looked hard enough, but
19 it is hard to find everybody's intellectual property.
20     There is I do not know how many millions of
21 patents that are out there. They know that what they
22 are doing is going to cause an enormous disruption of
23 somebody else's business. They keep quiet, they wait
24 until all the investments have been made, and then they
25 cause havoc, and so far as I know, it is perfectly

89
1 legal. So, I just wanted to suggest that to me that is
2 that is just what I would regard as not very
3 procompetitive conduct.
4     DR. WERDEN: I think we might all agree that
5 that is not nice, but I think we probably all agree that
6 is not in the antitrust laws business.
7     MR. SILBERMAN: Right, it is not part of the
8 antitrust laws business, and if we had the right email
9 inside the company that laid out this procedure, I
10 expect that you would have a great tort remedy, and in
11 certain states in this country, you would get to a jury
12 and you would get a punitive damage verdict that would
13 make treble damages look puny.
14     DR. WERDEN: That would be an interesting case.
15 If you have one, then that is nice.
16     DR. SCHMALENSEE: Just using quasi-rents --
17     MR. SILBERMAN: My phone number is...
18     DR. LANDE: You do tort law, too?
19     MR. SILBERMAN: That is all antitrust is, is
20 tort law.
21     DR. LANDE: True.
22     DR. WERDEN: I do not think we are going to all
23 agree on that one.
24     DR. SCHMALENSEE: No, no, we are not.
25     DR. WERDEN: Okay, next -- and last -- of these

90
1 propositions -- we only had two. "A competitive
2 foremarket precludes monopoly power in the aftermarket."
3     This one might be more controversial than the
4 last one. This, of course, was basically what Kodak was
5 saying in the Kodak case, and the Supreme Court sort of
6 kind of said, "No, we don't think so," but a lot of
7 people say the court got that one wrong.
8     DR. LANDE: Well, I mean, Alan and I sort of
9 disagree on this one. We each addressed the issue, and
10 I think we are going to have to agree to disagree on
11 this one.
12     MR. SILBERMAN: Well, I am going to give you a
13 little different view of this, and this is a private and
14 maybe practical analysis, but I believe that the
15 discussion in the opinions was framed, unfortunately, by
16 the way Judge Schwarzer handled the issue in the
17 District Court. That is, Judge Schwarzer, being a great
18 advocate of summary judgment, strong-armed the issue, an
19 issue that should have required proof, and said instead,
20 "No, it can never be. There is no case in which, given
21 a competitive foremarket, there can ever be downstream
22 monopoly power under any circumstances."
23     Well, that is wrong. It was wrong, and had he
24 allowed the parties to develop a record in the trial
25 court on that issue, then the issue I believe thereafter

91
1 would have been clearer, because my guess is that
2 Kodak's position was correct, but it was a position that
3 requires proof.
4     DR. WERDEN: I do not think you mischaracterized
5 what happened, but I would add that on opposing summary
6 judgment, the plaintiff was perfectly permitted to lay
7 out whatever theories he wanted to lay out and stick in
8 whatever economists' affidavits he wanted to stick in
9 and make whatever allegations he wanted to make about
10 market power in copiers and micrographics and kind of
11 passed on all of that.
12     MR. SILBERMAN: Um-hum.
13     DR. WERDEN: But not in the Supreme Court. In
14 the Supreme Court, he had evidence and arguments on all
15 of these points, including, Bob Lande, that Kodak had
16 monopoly power in both copiers and micrographics with a
17 market share of over 70 percent.
18     DR. LANDE: Really?
19     DR. WERDEN: Really.
20     DR. LANDE: I got the 20 and 23 percent. I
21 think I got it from the District Court opinion, but --
22     DR. WERDEN: You may well have.
23     DR. LANDE: -- I could check that, but anyway,
24 so it changed by the time they got to the Supreme Court?
25     DR. WERDEN: Nobody ever decided what the

92
1 relevant markets were.
2     DR. LANDE: Right, right.
3     DR. WERDEN: And the plaintiff, who might have
4 had a live claim that there was a market in which Kodak
5 was a monopoly, chose to make that argument only in the
6 Supreme Court.
7     Anybody else want to weigh in on aftermarkets,
8 any related issues?
9     DR. SCHMALENSEE: I think --
10     DR. WERDEN: I think we have dealt with them --
11     DR. SCHMALENSEE: -- "preclude" may be -- I
12 would almost go there. I would say establishes a very
13 strong presumption, a rebuttable presumption, but a
14 strong presumption. Not market power. When you say
15 market power -- monopoly power, yes. I will give you
16 market power. I do not think it establishes a
17 presumption there, but as to the level and durability of
18 market power that rises to monopoly power level with
19 competition in the foremarket -- it can happen but I
20 think there is a strong presumption of against.
21     MR. KLOTZ: You are suggesting there is a
22 difference between market power and monopoly power.
23 Where are you drawing those lines and where do others
24 draw those lines?
25     DR. SCHMALENSEE: Well, I think it is a

93
1 difference of degree, not of kind, and I do not have a
2 firm doctrine in my head as to where the line should be
3 drawn. I think it has to do with the extent of power
4 over price and the durability of power over price, but
5 they are both about power over price.
6     DR. WERDEN: If the law were as you would have
7 it be, then what is it that a plaintiff would do in
8 opposing summary judgment in one of these cases in order
9 to say, "A-ha, this is the exception"?
10     DR. SCHMALENSEE: Introduce the kind of evidence
11 that would be required to show monopoly power, period.
12 Well, there is a danger in talking when you have not
13 thought through a subject, and this is not one on which
14 I have spent a lot of time, but I think the presumption
15 is that competition in the foremarket makes even
16 considerable short-run power in the aftermarket have
17 less durability than one would want for a Section 2
18 claim.
19     Now, I mean, if the things last 100 years and
20 you are locked in forever you can surely make a
21 durability claim, but a short-lived capital good does
22 not strike me as having that level of durability.
23     DR. WERDEN: And do you have any view you are
24 willing to share about where you draw that durability
25 line? Is it two years? Is it ten years?

94
1     DR. SCHMALENSEE: No.
2     DR. WERDEN: No view you mean?
3     DR. SCHMALENSEE: No -- no thoughtful view, no.
4 I have not thought about it.
5     DR. WERDEN: Anybody want to weigh in on
6 durability?
7     Bob?
8     DR. LANDE: It really comes down to what do we
9 consider de minimus; that is, maybe in the best of all
10 worlds, if we were omniscient intervenors, we would
11 roust every little bit of market power that lasts even
12 for a month, but you say, "Well, look, hey, that is
13 ridiculous. We are imperfect. The world does not work
14 that way." If it is less than two years, forget about
15 it, there is nothing you can do about it given that
16 every case takes five years. You just have to have a de
17 minimis standard and you forget about it.
18     So, if we said 10 percent for two years is de
19 minimus, okay, let's just forget about that as a
20 practical matter. If you think we should draw the line
21 a little different, you know, reasonable people can
22 disagree, but two years, 10 percent, seems like a
23 reasonable de minimus standard to me.
24     DR. WERDEN: Well, is de minimus really the
25 right concept here? We are talking about monopoly power

95
1 now.
2     DR. LANDE: If you were to say do I like it if I
3 have to pay 5 percent more for a month due to a merger?
4 No, I do not like it, but as a practical matter, the
5 world's not perfect, you cannot intervene everywhere, we
6 are never sure, et cetera, et cetera, so if it is less
7 than 10 percent for two years, I am willing to say let's
8 forget it.
9     DR. WERDEN: But my question then is, are you
10 suggesting that the law should view Section 7 and
11 Section 1 and Section 2 all in the same terms, or should
12 the bar be higher in a single-firm conduct case, which
13 the Supreme Court has said that it is higher?
14     DR. LANDE: Now, if you mean a per se
15 violation -- as you know, if you fix prices, we do
16 not --
17     DR. WERDEN: No, I do not.
18     DR. LANDE: Okay. Are you talking about mergers
19 then?
20     DR. WERDEN: Mergers, rule of reason Section 1
21 cases.
22     DR. LANDE: Merger is supposed to be
23 prophylactic. It is supposed to have a lower standard
24 than for monopolization.
25     DR. WERDEN: Okay, forget about mergers then,

96
1 because you have got a point there. So, let's just talk
2 about the Sherman Act. The Supreme Court has said there
3 is a significant difference -- some people say they are
4 wrong, I guess -- between Section 1 and Section 2 on the
5 standards for intervention. They say this is clearly
6 part of the scheme Congress contemplated, and we are
7 going to carry that scheme out.
8     DR. LANDE: But you are not talking about the
9 per se cases?
10     DR. WERDEN: No.
11     DR. LANDE: So it is rule of reason Section 1
12 versus Section 2?
13     DR. WERDEN: Yes.
14     DR. LANDE: Should there be a different standard
15 for market definition, market power, monopoly power?
16     DR. WERDEN: Well, again, we keep coming back to
17 market versus monopoly power, how durable it has to be,
18 and what is the standard for intervention? I think --
19 we will put this to the panel, but I would hope there is
20 a consensus that to be a monopolist, even as the law
21 defines that term, requires a whole lot more than merely
22 to possess the market power that might be required for a
23 threshold showing in a Section 1 case.
24     DR. LANDE: Sure.
25     MR. WILLIAMS: Greg, can I -- the FERC I know

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1 has asserted I believe monopoly power in hourly
2 electricity markets, and that is not very durable.
3     DR. WERDEN: I do not know why they would have
4 any occasion to even use the term, and if they did, it
5 would not really have any consequence, because they are
6 not enforcing Section 2 of the Sherman Act.
7     MR. WILLIAMS: Right, but they certainly have
8 tried to -- they have defined relevant markets that
9 consisted of very short time periods.
10     DR. WERDEN: So have we in the Department of
11 Justice in merger cases defined that, but --
12     MR. WILLIAMS: And if you --
13     DR. WERDEN: -- these are conditions that recur
14 over and over again forever.
15     MR. WILLIAMS: Exactly, exactly, that is the
16 question.
17     DR. SCHMALENSEE: If you always own the peak
18 market in LA for 20 years, the fact that it is of fairly
19 short duration does not matter. It is the long duration
20 of control.
21     DR. WERDEN: And, of course, if it was one hour,
22 then the de minimus standard might kick in, and you say,
23 "One hour? Come on, that is not what we are worried
24 about."
25     DR. SCHMALENSEE: Give me LA for one hour.

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1     DR. WERDEN: I said "might."
2     All right, well, I will give everybody one last
3 chance, and if there is nothing more to be said, then we
4 will call it a day.
5     DR. SCHMALENSEE: Wow.
6     DR. WERDEN: Okay?
7     All right, then we stand adjourned. As I said
8 at the outset, the next round of hearings on remedies
9 issues will be I believe March 25th and 6th -- no, 28th
10 and 9th -- later this month. Look it up. Anyway, later
11 this month. Stay tuned, watch the web sites. About a
12 day before the hearing, we will post something.
13     (Applause.)
14     (Whereupon, at 11:58 a.m., the hearing was
15 adjourned.)
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1 C E R T I F I C A T I O N  O F  R E P O R T E R.
2 DOCKET/FILE NUMBER: P062106
3 CASE TITLE: SECTION 2 HEARING
4 DATE: MARCH 8, 2007
5
6     I HEREBY CERTIFY that the transcript contained
7 herein is a full and accurate transcript of the notes
8 taken by me at the hearing on the above cause before the
9 FEDERAL TRADE COMMISSION to the best of my knowledge and
10 belief.
11
12
DATED: 3/12/2007
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SUSANNE BERGLING, RMR-CLR
17
18 C E R T I F I C A T I O N  O F   P R O O F R E A D E R
19
20     I HEREBY CERTIFY that I proofread the transcript
21 for accuracy in spelling, hyphenation, punctuation and
22 format.
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DIANE QUADE