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Unilateral Effects

A Case Study of the
Role of Economics
In
Antitrust Decision Making

Presentation to the
Federal Trade Commission/Antitrust Division Merger Workshop
February 18, 2004
Washington, D.C.

Tad Lipsky
Latham & Watkins LLP
Washington, D.C.




Latham & Watkins' logo - the words Latham & Watkins


Major Themes

  • What are the Economic Issues Relevant to Antitrust Decision Making?

  • Who Decides These Issues?

  • How Effective is the Use of Economics in Antitrust Decision Making?


Facts, Models and Econometrics

  • Facts
    • E.g., it costs $10,000,000 and takes a year to build a widget factory

  • Models
    • E.g., output is lower and price is higher in highly concentrated industries, ceteris paribus

  • Statistical Tests
    • E.g., the evidence justifies the assumption that 4FCR had no effect on the wholesale price of silicon-based widgets in the U.S. from 1Q 1990 to 4Q 2000 (i.e., the data failed to reject the null hypothesis to the relevant degree of confidence)


Seldom-Discussed Points about Models and Statistical Tests

  • The values of the estimated parameters and the validity of the statistical tests are contingent on the truth of the underlying model (I.e., Garbage In/Garbage Out)

  • Example: concentration/price and concentration/profit correlations – powerfully suggested by oligopoly models once regarded as canonical – demonstrated in a host of studies now viewed as discredited

  • Skepticism regarding the model resulted from “better” analytical work (e.g., Caves & Porter) supported by shift in surrounding approaches and attitudes


Economic Issues in Antitrust

  • Decision Makers are Called Upon to Make Specific Findings and Inferences
    • Extent of the Market/Market Power
    • Procompetitive Justifications and Rationales for Conduct

  • Every Litigant Tells a Story, Every Story Has a Model

  • “Model”-Based Decisions of the Post-Sylvania Era
    • Matsushita – long-term predatory conspiracy
    • State Oil v. Kahn – maximum vertical price agreements
    • But see: Brooke Group – “oligopolistic disciplinary pricing”


Economists Don’t Decide

  • Under the law, agency officials, judges and/or juries decide.
  • There is no existing institution that can resolve contending economic explanations on a time scale relevant to litigation
    • Peer reviewed scholarship
    • Long-term belief formation based on collective experience
  • Until all judges become economists, there will be continuing tension between expert assessments and decision making by non-experts


Distant Thunder?

  • Judicial dissatisfaction with advocacy economics
    • Matsushita – expert report rejected
    • Brooke Group – testimony disregarded
  • Daubert Quartet – although none is an antitrust decision, arguably this series is extension of antitrust trend
  • Justice Breyer
    • Remarks to AAAS, AEI regarding need for filtration of expert views – another expression of tension inherent in legal system where ultimate decisions are for non-expert courts
  • Judge Posner
    • HFCS, an explicit plea for use of Rule 706 appointed experts by lower courts
    • Decisions remarking on theory, like Asahi Glass v. Pentech Pharmaceuticals and others too numerous to mention.


Unilateral Effects – A Case Study

  • Foundational insight – customers of A can flee to B. If A merges with B, some A customers need a new escape
  • Modeling real markets – assumptions hold numerous variables constant
  • In any specific case, what econometric evidence would be sufficient to change a view suggested by (informed) intuition?
  • Under what circumstances are non-expert decision-makers qualified to assess whether econometric evidence should be accepted as outcome-determinative?


Lessons of Experience

  • Judgment on economic issues – market definition, market power, entry, competitive dynamics – is interactive (see testimony of Alfred E. Kahn in New York v. Kraft (Nabisco)
  • “ . . . experience is deceptive, reasoning difficult.” – Hippocrates Aphorisms
  • Narrow market definitions, focus on isolated time periods and “super slo-mo” dynamics will support theories of competitive harm in broad class of cases
  • Tendency of positions to go to extremes – trains passing in the front office


Alternatives

  • Enhanced reliance on “neutral” experts
    • Agency consultants – excluded from subsequent advocacy role?
    • Rule 706 – is this any way to earn a living?
  • Peer review
  • Experiments and studies
    • I.O. faculties
    • Federal Judicial Center?


Conclusion

  • United States v. Topco: considering justifications throws antitrust and business planners into “the wilds of economic theory.”
  • Welcome to the “wilds.”